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November 19 2019

Commentary by Eoin Treacy

Video commentary for November 19th 2019

November 19 2019

Commentary by Eoin Treacy

What future? It's the end of Hong Kong as we know it

This article by Alex Lo for the South China Morning Post may be of interest to subscribers. Here is a section from the conclusion:

I get something else, too. If there is no hope, there is only the present. Things you do today will have no consequences. That, actually, can be a liberating realisation. If there is no tomorrow, then anything is possible, nothing is prohibited.

Violence is its own liberation – an ecstatic orgy of destruction alongside your comrades. It’s not a means but an end in and of itself. But you are not doing it because you are fighting for freedom and democracy, or against tyranny. You only say you are.

Maybe we self-serving old-timers have robbed our children of their future. But they are helping us dig our own graves. It’s not: “If we burn, you burn with us.” It’s: “We are all burning together.”

Well, dear young people, you now have your wish: we can all self-destruct together. It’s the end of Hong Kong as we know it, and many local people are fine with it.

Eoin Treacy's view -

Hong Kong is the subject of a major transition. The great Pearl River Delta is the focus on a major industrial hub where Hong Kong has long acted as an interlocutor for international trade. The future as outlined by the central government is that the cities of Shenzhen, Guangzhou, Hong Kong and Macau will form unified trading and financial hub aimed at rivalling the Bay Area in California. For Hong Kong that represents a major change because it is more a marriage of equals at best or at worst it represents the terminal decline of the island economy in preference to the mainland.



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November 19 2019

Commentary by Eoin Treacy

Netherlands Headed For Unprecedented Crisis: Millions Of Retirees Face Pensions Cuts Thanks To The ECB

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

 

In some ways, the Netherlands has one of Europe's most generous retirement systems: at its core, it represents a basic pay-as-you-go state pension as well as employer-run pension scheme which together provide workers with about 80% of their average lifetime wages when they retire. The US and UK have similar systems, but Dutch pension funds are more generous and must use a lower risk-free rate to value their liabilities, forcing them to hold more assets.

Unfortunately, the lower Dutch risk-free rate is not low enough, and as a result about 70 employer-run pension funds with 12.1m members had funding ratios below the statutory minimum at the end of September, according to the Dutch central bank. And here lies the rub: if funds have ratios below the legal minimum for five consecutive years or have no prospect of recovering to a more healthy level, they must cut their payouts. Interest rates have rebounded slightly in recent weeks, but many funds are still facing cuts.

In other words, in making a select handful of European stockholders rich courtesy of NIRP and QE, Mario Draghi is threatening the pensions of hundreds of millions of retired European workers.

So what, if any, is the solution?

Last week, Rabobank reported that the Minister of Social Affairs is supposedly willing to prevent a large part of the pension benefit cuts of 2020, as the government is reportedly willing to lower the minimum coverage ratio from 100% to 90% for one year. This temporary measure can be seen as a pause button, which buys time for:

Pension funds to hopefully recover over the next year. For pension funds, a rise in their risk-free rate term structure which is used to discount their liabilities (EUR 6m swap rates) would be most helpful
Continuing to work out the details of the Pension Reforms announced in June 2019. Unions, employer representatives and the opposition parties were against pension cuts because this would undermine the goals set out in the Pension Reforms.

Eoin Treacy's view -

The logical result of negative yields is the holders of these assets eventually take a loss. Since pensions generally run a ladder of maturities in an attempt to match cashflows with liabilities the proverbial buck stops with them as the yield-to-worst loss is priced in.



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November 19 2019

Commentary by Eoin Treacy

Crispr Surges as Gene Editing Shows Promise in Blood Disease

This article by Bailey Lipschultz and Michelle Fay Cortez for Bloomberg may be of interest to subscribers. Here is a section:

“While the data are early, we are quite excited about what we are seeing,” he said in a telephone interview. “This is a pretty significant milestone, not just for us as a company but for the entire field. This could be an important landmark in medicine, when we saw the first promise for providing cures for a number of diseases using a gene editing approach.”

The early findings may benefit rival companies also studying medicines based on Crispr technology, as they are the first results from publicly traded companies using the platform. Editas Medicine Inc.’s lead drug will be given to its first patient at the start of next year as a treatment for a form of blindness, while Intellia Therapeutics Inc. is on track to file for its first human trial by mid-year.

Eoin Treacy's view -

Gene editing deals in cures rather than treatments. That’s a major challenge for the traditional pharmaceuticals business. Chronic conditions which requite ongoing treatment but have no cure have been massive money spinner for the pharmaceuticals business for decades. Right now, the cost of cures is extraordinarily high because a one-shot solution has to load all of the revenue from a treatment into one bill rather than spacing it out with a chronic condition. However, as the sector moves out of the orphan disease sector and into the mainstream over the next decade the potential for costs to come down is quite compelling.



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November 19 2019

Commentary by Eoin Treacy

Eoin's personal portfolio: precious metals long initiated

Eoin Treacy's view -

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.



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November 18 2019

Commentary by Eoin Treacy

Video commentary for November 18th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: impact of electric vehciles on oil spikes as a lead indicator of recession, Apple and Microsoft's combined market cap exceeds than of Consumer Staples. gold steadies, bonds firm, China steadies, 



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November 18 2019

Commentary by Eoin Treacy

Aramco Failure to Win Foreign Money Makes IPO Local Event

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

Most of the money is likely to be raised from domestic rather than foreign investors. This means that the proceeds won’t be a fresh inflow of foreign capital but an internal transfer from Saudi households and corporates to the government. --Ziad Daoud, Chief Middle East Economist for Bloomberg Economics

So poor is the international appetite for the deal, even at the lower valuation, Saudi Aramco decided at the last minute against marketing the IPO in the U.S., Canada and Japan -- three markets traditionally seen as a must-go destination for any big Wall Street deal. Instead of the planned approach to American investors, using what lawyers and bankers know as the 144A rule of the U.S. Securities Act, Aramco decided on Sunday the tepid interest meant it wasn’t worth the trouble.

Eoin Treacy's view -

Russian and Chinese assets always appear at the top of value screens when sorting for value on a global scale. However, that ignores the geopolitical risk of investing in those areas. The same might now also be true of the Saudi Aramco IPO. The attack on Saudi Aramco’s infrastructure served to highlight how exposed it is to damage from conflict and that alone was probably enough to compress the valuation and deter interest ahead of the IPO.



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November 18 2019

Commentary by Eoin Treacy

Ford Unveils Electric Mustang SUV to Challenge Tesla Dominance

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

The Mach-E will make a profit “on vehicle one,” he said in a Bloomberg TV interview. “That’s surprising a lot of people because electrics have not had a history of making money. This will.”

Hackett said it will turn a profit because the vehicle “creates the passion that follows with Mustang” and prices start in the mid-$30,000 when U.S. subsides on electric cars are factored in. “So it’s attractive to customers.”

Ford is building it in Mexico because it had an open factory there and it needed to be overhauled to build an electric vehicle, Hackett said. “As we start to adopt more electric vehicles — we had capacity down there, we had no capacity in the United States — we’re going to have electric capacity here in the United States. They’ll be building other electric platforms.”

Still, it’s a high-risk gambit. The Mustang is Ford’s signature sports car, having sold more than 10 million units since it debuted in 1964 with simultaneous cover stories in Time and Newsweek. When Ford decided to abandon the traditional passenger-car business last year, it spared only one model: The Mustang.

Eoin Treacy's view -

Sports cars, pickups and SUVs represent the high margin portions of the auto industry. Many traditional manufacturers are racing to get electric SUVs and sedans into the market to compete with Tesla. Today’s Ford announcement is obviously aimed at competing with the Model 3, while Tesla’s debut for its pick-up, on Thursday, is aimed at competing with the F-150. The disruption in the auto sector is forcing massive investment in new manufacturing capacity and not all will survive. From listening to what Jim Hackett had to say about profitability, it sounds there is some creative accounting in making the claim the electric Mustang will be profitable on car one.



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November 18 2019

Commentary by Eoin Treacy

Email of the day - on Brexit In Name Only (BRINO)

Your recent comments that Boris Johnson's Brexit is really a BRINO have left me a bit puzzled. It's true that it's not the best deal, but to characterise it as worse than Theresa May's as some have done seems to me to be wide of the mark. Given the constraints of parliament, deadlines and Ireland - to mention just three - it seems to me that it's pretty good. 

I show a link below from an article by Martin Howe QC who is an informed commentator on Brexit and Chair of Lawyers for Britain. In it, he argues the case that it's not a bad deal which I think is well made. But it all rests on the Conservatives getting a good majority.

https://brexitcentral.com/if-boris-johnson-secures-a-majority-the-transition-period-will-not-be-extended-beyond-next-year/

As always, thanks for your invaluable commentary and insights.

Eoin Treacy's view -

The conditions of the transition agreement are the UK will honour all of its financial commitments with the EU and will not adjust tariffs and regulations to compete directly with the EU. That deal is due to expire at the end of 2020, because when it was originally negotiated there was about two years to run. Instead it is more likely there will be 11 months to negotiate a trade agreement by the time the deal is potentially approved by Parliament following the election. That is of course assuming the Conservatives win re-election with a working majority.



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November 15 2019

Commentary by Eoin Treacy

November 15 2019

Commentary by Eoin Treacy

CECL Symposium Highlights: Still More Questions Than Answers

Thanks to a subscriber for this report from Raymond James which is dated August 6th but makes a number of worthwhile points. Here is a section:

What is CECL?: CECL is a new accounting standard that modifies how companies estimate loan and lease losses, and affects all periods starting after December 15, 2019 (i.e., begins 1Q20). In the midst of the financial crisis in 2008, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) established the Financial Crisis Advisory Group (FCAG). FCAG believes it has identified a “weakness in current GAAP being the delayed recognition of credit losses that results in the potential overstatements of assets,” which ultimately led to its recommendation for this new standard. The new standard requires financial institutions to use a combination of historical information, current conditions and reasonable forecasts to estimate the expected losses over the life of a loan. This is a significant shift from the current methodology, which relies on incurred losses. We note on day one of implementation, there will be a balance sheet adjustment, creating additional general reserves for expected credit losses and negatively impacting capital levels, but implying limited income statement impacts.

Conclusion: We walked away with more questions than answers, and anticipate a significant amount of variability in disclosures amongst the banks given the latitude FASB has provided in the standards. While many questions remain, FASB officials, consultants and management teams alike continue to work through the issues and are refining models as overall understanding of the standards improves. Fortunately, we anticipate regulatory capital relief for the banks as necessary, since capital levels remain elevated and the intent of the new standards was not to increase capital levels at the banks. However, we believe there could be some unintended consequences and potential ripple effects that will create further disruption in the space, potentially shifting assets out of the banking space and into the non-bank space, which has continued to gain share. Ultimately, we remain concerned with the uncertainty around CECL, anticipated volatility around disclosures and capital impacts, as well as potential negative implications on industry demand will serve to provide one more reason for investors to not own the space.

Eoin Treacy's view -

The Current Expected Credit Loss (CECL) regime is another piece of regulation imposed on the banking sector which serves to ensure the overleverage and inappropriate risk management that characterised the industry ahead of the financial crisis is not repeated. One of the primary results of successive waves of regulation has been to pile compliance costs onto the banks but it has also reduced their ability to leverage their balance sheets which has unintended consequences.



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November 15 2019

Commentary by Eoin Treacy

SoftBank Next 30-Year Vision

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

This vision is designed with the time span of 300 years. The next 3 decades is merely the first step

Eoin Treacy's view -

This report contains a number of truly inspiring ideas. Everything from universal happiness, to the power of computers to far exceed the computing power of the human brain, to tripling longevity, to creating a management structure capable of surviving all of this radical change. Some of these promises are still in the realm of the science fiction, some are a lot closer to reality than we might realise.



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November 15 2019

Commentary by Eoin Treacy

Amarin Fish-Oil Heart Drug Will Be Big, Could Be Huge

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

Part of that question was answered Thursday after a panel of experts convened by the Food and Drug Administration reviewed Amarin's data. They voted 16 to 0 that Vascepa was safe and cuts cardiovascular events. The vote doesn’t bind the FDA, but the agency often follows panel recommendations, so it would be a surprise now if the drug isn’t made available to more Americans. That’s big news for Amarin — and for many patients. 

We still don't know exactly how good the news is, however, and won’t until the FDA makes a final decision by the end of the year. There was consensus on the drug’s overall effectiveness. Still, the panelists disagreed about how far that impact extends. Access for millions of additional patients and billions of potential sales are still up the air, which means there’s more volatility ahead for Amarin investors. The market seems focused on the positives for now: Amarin shares surged 7% in early trading Friday after rising more than 20% on Tuesday, when the FDA released briefing documents ahead of the panel that were seen as relatively supportive for the drug.

Eoin Treacy's view -

Mrs. Treacy is genetically predisposed to pancreatitis during pregnancy and has had a couple of episodes in between pregnancies which have required hospitalisation. The cardiologist who implemented a treatment plan to contain her hypolipidemia during her last pregnancy prescribed a massive daily dose of fish oil and it worked. Every time since then she has found fish oil acts as a salve to pancreatic pain which has ensured she has not been hospitalised in six years.  



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November 15 2019

Commentary by Eoin Treacy

November 14 2019

Commentary by Eoin Treacy

Video commentary for November 14th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Wall Street leading on the upside, China the epicentre of risk, industrial commodities and commodity currencies weak, negative rates increase scope for competitive currency devaluation, gold steadies. 



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November 14 2019

Commentary by Eoin Treacy

Sputtering China Growth Underscores Need for Trade Reprieve

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

The investment data shows how cautious private companies have become, with their spending in the first 10 months of the year at the lowest level since 2016. The continued stability in spending by state-owned firms’ is preventing an even stronger drop in the headline data.

Investment in the property market is one bright spot, with spending by the manufacturing sector barely above the record low recorded in September. Infrastructure investment growth continued to bounce along around 4% as it has all year.

“I’m quite concerned with property investment, the only stable element in fixed-asset investment now,” according to Xue Zhou, analyst at Mizuho Securities Asia Ltd in Hong Kong. “Monetary policy needs to be more supportive on economic growth and there should be more cuts to banks’ reserve ratios to help smaller banks.”

Eoin Treacy's view -

The first couple of months of the year are when the Chinese financial system gets its annual quota for lending and generally makes its full allocation by around Chinese New Year. That sends a surge of liquidity into the market in January and February but the broader question is how much of that is already priced in considering it is so predictable.



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November 14 2019

Commentary by Eoin Treacy

Luckin Coffee's Stock Shoots Up After Revenue Rises Above Expectations

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

Shares of Luckin Coffee Inc. (LK) shot up 7.6% in premarket trading Wednesday, after the China-based coffee seller reported wider third-quarter loss but revenue that rose above expectations. The net loss was RMB531.9 million ($74.4 million), or RMB3.60 per American Depository Share, after a loss of RMB484.9 million, or RMB2.24 per ADS a year ago. Excluding non-recurring items, the adjusted per-ADS loss was RMB2.08, compared with the FactSet consensus for loss per ADS was RMB2.75. Revenue rose to RMB1.54 billion ($219.6 million) from RMB240.8 million, to beat expectations of RMB1.47 billion. Average monthly items sold were 44.2 million, up from 7.8 million a year ago, while the average monthly transacting customers grew to 9.3 million from 1.9 million. "During the third quarter, sales from freshly-brewed coffee drinks continued to maintain very strong growth, and we believe we will reach our goal to become the largest coffee player in China by the end of this year," said Chief Executive Jenny Qian. The stock. which went public on May 17, has tumbled 22.7% over the past three months, while the S&P 500 has gained 5.7%.

Eoin Treacy's view -

I wanted to try a Luckin Coffee while in Guangzhou over the summer but I was voted down by my daughters who could not get enough of boba tea. Since they discovered smores frappacinos the two alternatives are more balanced but they will always still choose a boba tea over a trip to Starbucks.



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November 14 2019

Commentary by Eoin Treacy

Wall Street Is Wrong About Negative Interest Rates

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

Finally, there’s little evidence that negative rates have held back lending. A recent ECB working paper shows deposits with commercial lenders have increased since the central bank introduced negative deposit rates. At the same time, companies with large cash holdings have cut their deposits and invested more. That’s exactly the goal of this policy.

In fact, banks that pass on negative rates to customers appear to provide more credit than other lenders. This suggests that, contrary to what those Wall Street titans say, the problem with negative rates is that not enough banks inflict them on their clients.

It’s certainly possible that monetary policy becomes less effective as central banks cut interest rates deeper into negative territory. Gauti Eggertsson of Brown University and Larry Summers of Harvard have looked at Sweden, a pioneer in cutting rates below zero. They concluded that while its first two negative moves reduced lending rates, this wasn’t repeated after two later cuts.

However, similar diminishing returns are seen in other unorthodox measures, including asset purchases. The authors also acknowledge that the rate cuts might have boosted Sweden’s economy via other channels, for example by depreciating the krona, allowing the government to borrow more and boosting asset prices.

Eoin Treacy's view -

Forcing people into speculative activity when asset prices are already at record highs is not exactly a recipe for financial security over the medium to long term. In the short-term it greatly increases bubble risk.



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November 13 2019

Commentary by Eoin Treacy

November 13 2019

Commentary by Eoin Treacy

Photos: Hong Kong police and students are fighting a war in one of the city's top universities

This article by Mary Hui for Quartz may be of interest. Here is a section:

Continuing on from the hours-long siege yesterday (Nov. 11), when police fired tear gas at the school and made arrests on campus, protesters took their positions again this morning as they faced off with police stationed on a bridge just outside the school grounds. Shortly after 3pm local time, riot police charged onto the hilly tree-lined campus, deploying round after round of tear gas continuously for at least a quarter of an hour.

Just after sunset, police finally appeared to retreat as university vice-chancellor Rocky Tuan addressed a crowd after speaking with students and police separately. But tear gas was again fired soon after, breaking the momentary cease fire. Another attempt by pro-vice-chancellor Dennis Ng to broker a deal, with the school official speaking on the phone to the police commander as a student relayed the message in real time over a microphone to the crowd, similarly faltered. Clashes stretched late into the night, as students and police battled it out on a bridge that connects to campus from across a harbor.

Eoin Treacy's view -

There is no sign the protests in Hong Kong are moderating. In fact, the trend is towards further intensification which is obviously a challenge to Beijing’s policy to date of waiting it out. When schools are closed there are tens of thousands of students with nothing to do so many find themselves on the street. In such an emotional volatile situation there is ample scope for further escalation.



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November 13 2019

Commentary by Eoin Treacy

Google Deepens Push for Financial Data With Citigroup Tie-Up

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

“We’re exploring how we can partner with banks and credit unions in the U.S. to offer smart checking accounts through Google Pay, helping their customers benefit from useful insights and budgeting tools,” Google said in an emailed statement, adding that the accounts will carry federally guaranteed insurance.

The move is the latest sign of Silicon Valley’s determination to muscle in on financial firms’ territory, looking to expand their hold on customers and accumulate data on their finances. At the same time, it shows banks are more willing to pair up with technology companies in their quest to avoid getting shut out of the relationship entirely. In the Google arrangement, the financial institutions will handle most of the compliance requirements.

Google has spent years building out its payments capabilities, offering consumers the ability to send money to friends and check out both online and in stores through Google Pay. With the checking accounts, consumers will be able to receive their paychecks and transact solely inside the Google ecosystem.

Eoin Treacy's view -

Apple has teamed up with Goldman Sachs to branch into consumer credit while Amazon, Berkshire Hathaway and JPMorgan are planning on tackling the health care market. Google is partnering with Citigroup on consumer credit but Ascension on patient data. These stories highlight how eager tech companies are to branch into these data-rich sectors, where legacy players are ill-equipped to monetise the value, they have access to.



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November 13 2019

Commentary by Eoin Treacy

The Fed Is Losing Its Grip on U.S. Interest Rates Once Again

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

Last month, the Fed said it would buy Treasury bills to maintain a level of bank reserves at or above levels last seen two months ago.

“These actions are purely technical measures to support the effective implementation of monetary policy as we continue to learn about the appropriate level of reserves,” Powell said. Powell later told lawmakers that he thinks the Fed has contained the problem with the repo market. “I think we have it under control,” he said. “We’re prepared to continue to learn and adjust, but it’s a process and it’s one that doesn’t have implications for the economy or general public.” It appears, he added, that U.S. banking reserves need to be just under $1.5 trillion to maintain the peace.
 

Eoin Treacy's view -

According to some of the research I’ve seen, before the tightening of banking regulation the sector provided in the region of $150 billion in liquidity to the repo market. The removal of that pool of liquidity represents a tightening the Fed has been forced to move in to fill. However so far it has had to add $300 billion to its balance sheet to grease the market. That’s not exactly an ideal scenario.



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November 12 2019

Commentary by Eoin Treacy

Video commentary for November 12th 2019

November 12 2019

Commentary by Eoin Treacy

Some of the World's Richest Brace for a Major Stock Sell-Off -

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

Wealthy people around the globe are hunkering down for a potentially turbulent 2020, according to UBS Global Wealth Management.

A majority of rich investors expect a significant drop in markets before the end of next year, and 25% of their average assets are currently in cash, according to a survey of more than 3,400 global respondents. The U.S.-China trade conflict is their top geopolitical concern, while the upcoming American presidential election is seen as another significant threat to portfolios.

And

Still, it seems that wealthy investor caution is strictly for the short-term. Almost 70% of respondents globally are optimistic about investment returns over the next 10 years.

“The challenge is that they seem to want to respond” to short-term uncertainty “by really shortening their time horizons and shifting to assets like cash that are safe,” said Michael Crook, a managing director on the investment strategy team. Though with many of these people investing on a time horizon across decades and for future generations, that “seems like a mismatch.”

Eoin Treacy's view -

The visceral experience of an almost 20% decline in the fourth quarter last year ensures people are eager to avoid a similar experience this year.



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November 12 2019

Commentary by Eoin Treacy

Email of the day on the outlook for the Pound and the UK

I can never understand the irrationality of the markets (I know, I can hear David's words, "the markets don't care what you or I think" ringing in my ears!) but surely a decisive separation from the EU, if necessary on WTO terms would eliminate uncertainty and settle the issue for good. The notion of a Brexit with the UK still subservient to the EU's protectionist policies and antidemocratic dogma will fester among the majority of the British public causing it to flare up again repeatedly in the years ahead.

Eoin Treacy's view -

Thank you for this note which I believe accurately encompasses the emotional response many of us feel at the creeping slide in ideological purity the solution to success of the Brexit referendum represents.



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November 12 2019

Commentary by Eoin Treacy

CLO Selloff Flashes Warning Sign to Junk Bond Market

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

CLOs resemble the mortgage-backed bonds that imploded in 2008, but very few defaulted in the credit crisis, a key driver of their recent popularity. Prices for their shares and bonds, however, plummeted at the time, and holders who sold out took heavy losses.

Now some CLO bond prices are falling again. That is because the riskier loans the CLOs own are dropping in value as the companies that borrowed them start running out of cash. CLO bonds rated double-B, which are among the riskiest CLO securities, returned about 10% this year through June. But recent declines, especially last month, erased most of the gains, giving holders a roughly 1% return this year through October.

That contrasts sharply with high-yield bonds: Many of the same companies to which CLOs lend issue junk bonds, which returned about 12% this year through October, according to data from S&P Global Market Intelligence.

“If you think that double-B CLOs are giving a warning sign, that says something about high yield,” said David Preston, head of CLO research at Wells Fargo & Co. “It’s hard to see how both markets can be right.”

Eoin Treacy's view -

The energy sector is where the majority of spread expansion has taken place as higher cost, more leveraged, issuers have come under pressure. The relatively stable oil price at present is not high enough to rescue these issuers and the existential crisis gripping Chesapeake Energy is an example of the stress coming to bear on higher cost producers, particularly in a low natural gas price environment.



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November 11 2019

Commentary by Eoin Treacy

November 11 2019

Commentary by Eoin Treacy

Pound Jumps After Farage Promises Not to Contest Tory Seats

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

The currency’s focus on politics above all else was once again on show Monday, as the pound barely reacted to U.K. GDP growth, only to move close to 1% on the political developments. Strategists had said a coalition between the Brexit Party and the ruling Conservatives could have been the worst outcome for the pound, as Farage’s lawmakers would likely seek a more distant relationship with the EU and even push for a no-deal Brexit.

Still, though the news is positive for the U.K. currency, it’s not “a game changer,” according to Rochester. Even if the Conservatives were to keep all of their seats from last time, that would still mean a hung Parliament, and the Brexit Party still plans to stand in seats which were won by the opposition Labour party last time.

Eoin Treacy's view -

Splitting the Conservative vote is the biggest risk to a market friendly outcome to the UK election. With the Brexit Party instead deciding to focus on Labour seats that removes a barrier to a Johnson majority. There is no doubt he is a divisive figure but he is also a personality that many voters can identify with. That increases the potential the next Parliament with deliver a much-needed majority.



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November 11 2019

Commentary by Eoin Treacy

The next 6 months favor Cyclicals: Financials, Energy, Industrials, Tech, Materials

Thanks to a subscriber for this chart illustrated report by Barry Bannister for Stifel which may be of interest.

Eoin Treacy's view -

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

I have some sympathy with the view that when everyone is short, the risk of a short covering rally greatly increases. That’s particularly true if Saudi Arabia succeeds in encouraging OPEC to further reduce supply to bolster the valuation of Saudi Aramco ahead of the IPO.



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November 11 2019

Commentary by Eoin Treacy

Electric cars are changing the cost of driving

This article by Michael J. Coren for Quartz may be of interest to subscribers. Here is a section:

It’s difficult to know how representative this data is of Teslas overall, given that Tesloop’s fleet is small, but it likely includes a large share of the highest-mileage Teslas on the road—several are nearing 500,000 miles. Finding conventional vehicles to compare is virtually impossible since most fleet cars are typically sold off after 100,000 miles.

But the implications could be huge. Every year, corporations and rental car companies add more than 12 million vehicles in Europe and North America to their fleets (pdf). Adding EVs to the mix could see those cars lasting five times longer—costing a fraction of conventional cars over the same period—while feeding a massive new stream of used electric cars into the marketplace. Whether the future of fleets is really electric, however, depends on the data. And that’s still in short supply.  

The promise of EVs
Most commercial vehicle fleets still run on gasoline and diesel, David Hayward, a fleet expert with Deloitte consulting, said. But EVs are top of mind. “Everyone is excited about it and everyone wants it,” he told Quartz. “But there’s trepidation.” The potential savings are huge. Fleet owners’ biggest expenses after depreciation (44%) are fuel (22%) and maintenance and repairs (11%), according to Deloitte.  EVs could slash those by more than half.

Eoin Treacy's view -

The original electric vehicles that entered service about ten years ago have some of the lowest resale values and steepest depreciations of any car. Meanwhile the Tesla Model 3 was the car with the least depreciation of any vehicle this year. That is a function of both supply and built up demand but the success in limiting the erosion of the battery’s charge potential has reversed the economics of the electric vehicle market. If a car can comfortably drive 500,000 miles with little to no maintenance, other than tyres, the only limitation is range. Right now, a Model 3 has about a 300 miles range which more than enough for most people. My SUV will do around 480 miles on the highway to a tank but probably closer to 200 in the stop/go of the city so the range issue is less of an issue today.



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November 08 2019

Commentary by Eoin Treacy

November 08 2019

Commentary by Eoin Treacy

What's Happening to US Shale Production?

Thanks to a subscriber for this report from Geohring & Rozencwajg. Here is a section:

Eoin Treacy's view -

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

The unconventional revolution in oil and gas production took off, the most promising locations were drilled first. The challenge from the beginning with unconventional wells is their prolific initial production followed soon after by an early peak production profile. That requires constant drilling to sustain production growth. If you stop drilling the peaking of existing wells catches up and production falls.



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November 08 2019

Commentary by Eoin Treacy

Inside Amazon's plan for Alexa to run your entire life

This article by Karen Hao for the MIT Technology Review may be of interest to subscribers. Here is a section:

In another scenario, you might ask Alexa through your communal home Echo to send you a notification if your flight is delayed. When it’s time to do so, perhaps you are already driving. Alexa needs to realize (by identifying your voice in your initial request) that you, not a roommate or family member, need the notification—and, based on the last Echo-enabled device you interacted with, that you are now in your car. Therefore, the notification should go to your car rather than your home.

This level of prediction and reasoning will also need to account for video data as more and more Alexa-compatible products include cameras. Let’s say you’re not home, Prasad muses, and a Girl Scout knocks on your door selling cookies. The Alexa on your Amazon Ring, a camera-equipped doorbell, should register (through video and audio input) who is at your door and why, know that you are not home, send you a note on a nearby Alexa device asking how many cookies you want, and order them on your behalf.

To make this possible, Prasad’s team is now testing a new software architecture for processing user commands. It involves filtering audio and visual information through many more layers. First Alexa needs to register which skill the user is trying to access among the roughly 100,000 available. Next it will have to understand the command in the context of who the user is, what device that person is using, and where. Finally it will need to refine the response on the basis of the user’s previously expressed preferences.

“This is what I believe the next few years will be about: reasoning and making it more personal, with more context,” says Prasad. “It’s like bringing everything together to make these massive decisions.”

Eoin Treacy's view -

A year ago Google gave a sample of what its artificial intelligence was capable of when it made a restaurant booking for some users by phoning a restaurant and impersonating a person. The company received a great deal of backlash from the liberal media about how much data it had to collect from a person to make that kind of service available and whether the company could be trusted with the information.



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November 08 2019

Commentary by Eoin Treacy

Brazil Coffee Areas Seen Drier than Normal in Next 5 Days

This note by Manisha Jha for Bloomberg may be of interest. Here it is in full: 

Drier than average conditions are forecast across the Brazilian coffee region over the next five days, particularly in Cerrado, Marex Spectron said in emailed weather report.

Regions of southern Espirito Santo, southeast Minas Gerais and southeast Sao Paulo are forecast to be wetter than average
In the next five days thereafter, the whole Brazilian coffee region is expected to be wetter than average, except for the northern coffee region, which is expected to be slightly drier than normal

VIETNAM

Typhoon Nakri is forecast to weaken to a tropical depression before it makes landfall over central or eastern Vietnam between Nov. 10 and 11

“It is associated with heavy rain and strong, sustained winds”

There is an anomaly of 10 mm predicted across the Central Highland region over the next five days
Drier than average conditions expected in the northern coffee areas
NOTE: Vietnam Coffee Harvest Threatened by Tropical Storm: Maxar

Eoin Treacy's view -

Arabica coffee is particularly affected by weather conditions in Brazil and the price is also influenced by the outlook for the Real. Meanwhile Robusta coffee is much more dependent on growing conditions in the Vietnamese highlands



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November 08 2019

Commentary by Eoin Treacy

November 07 2019

Commentary by Eoin Treacy

Video commentary for November 7th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: Bond yields trending higher, precious metals continue to consolidate, stocks markets steady but somewhat overbought in the short term, commodities have broken their medium-term downtrend, Google hits new high.



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November 07 2019

Commentary by Eoin Treacy

China, U.S. Agree to Tariff Rollback If Trade Deal Reached

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

“If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,” Gao said.

Such an understanding could help provide a road-map to a deal de-escalating the trade war that’s cast a shadow over the world economy. China’s key demand since the start of negotiations has been the removal of punitive tariffs imposed by Trump, which by now apply to the majority of its exports to the U.S.

Eoin Treacy's view -

The US Presidential election is less than a year away. The time to prime the pump so growth is humming by the time people vote is now. China might have suffered more from the tariffs, because it has more to lose, but it is also well aware of the electoral timing the Trump administration is pressured by. That suggests a deal is likely to be signed and it is likely to be valid for at least a year.



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November 07 2019

Commentary by Eoin Treacy

Expedia and TripAdvisor Lead Sharp Sell-Off in Online Travel

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

According to Piper Jaffray, “the most concerning trend” in the quarter was “the reduced efficiency of SEO,” or search engine optimization. Google, part of Alphabet Inc., is favoring its own “Hotel Finder” platform, along with paid links for search results, and this trend could require higher marketing costs.

D.A. Davidson noted that Expedia is exploring alternatives to mitigate its “reliance on search/Google,” but wrote that it sees “no alternatives that will be able to efficiently ‘move the needle’ from a volume perspective anytime soon.” Morgan Stanley wrote that Alphabet is now the “best way to invest in travel.”

TripAdvisor’s adjusted earnings and revenue both missed the lowest analyst estimates. The results “more than disappointed,” Jefferies wrote, reiterating its underperform rating. Analyst Brent Thill added that TripAdvisor’s preliminary 2020 outlook “is not encouraging,” in part because of “continued SEO pressure from Google.”

Eoin Treacy's view -

Third party vendors learned a long time ago that the biggest threat from selling on Amazon is being too successful. When sales move the needle enough to pique the attention of some quant, the risk of Amazon deciding to sell the same product, but cheaper, increases exponentially. The rise of the Amazon Basics line of products is a perfect example.



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November 07 2019

Commentary by Eoin Treacy

Chesapeake's Covenants Could Pinch in 2020

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

The company warned there is doubt about its ability to continue operating. Its shares and bonds have plunged since reporting earnings Nov. 5.

*Based on price assumptions of $55 per barrel for oil and $2.50 per million British thermal units for natural gas as well as no debt reduction, Chesapeake is likely to trip its leverage covenant by the third quarter of next year, if not sooner, CreditSights analysts Jake Leiby and Michael Mistras wrote in
the report.

**They predict Chesapeake will have a free cash flow shortfall of about $50 million in 2020 and finish the year with gross leverage of 4.6 times debt to a measure of earnings, above the 4.25 ratio in its covenant.

Eoin Treacy's view -

Chesapeake dropped significantly over the last couple of days and is now dependent on the kindness of strangers to ease debt covenants if it is to survive. The problem for the company is it is not viable at a shale industry average of $55. Its breakeven might be closer to $70. Meanwhile natural gas prices remain volatile, even after the rebound over the last week which took the price back above $2.50.
 



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November 06 2019

Commentary by Eoin Treacy

Video commentary for November 6th 2019

November 06 2019

Commentary by Eoin Treacy

Brazil's Oil Flop a Warning for Majors and Aramco

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

Offshore oil investment was all the rage among Big Oil during the supercycle, with capital expenditure almost quadrupling in the decade up to 2014. That is the problem. The majors poured money into large, multi-year projects prone to delays and, because of their often bespoke engineering, spiraling budgets. The result: tumbling return on capital and an inability to dial back investment quickly when the oil crash hit in 2014. Roughly 3,000 new offshore projects sanctioned between 2010 and 2014 have either barely generated any value for oil companies or are expected to generate none at all, according to a recent study published by Rystad Energy, a consultancy:

More recent investments score better, mostly because the boom tailed off, with offshore capex falling by more than half between 2014 and 2018. That took the heat out of industry inflation; and, because of the bonfire of returns in the prior decade, oil majors got smarter about such things as standardizing offshore equipment design to cut costs and shorten schedules. The pace of new projects has picked up again after the slump. Exxon, for example, has effectively opened up an entire new offshore zone with its Guyanese fields.

Still, one look at the stock prices of oilfield services firms, especially offshore-focused types such as Transocean Ltd. and Noble Corp. Plc, tells you this investment wave is nothing like the tsunami of yesteryear. Bad memories combined with unease about both near- and long-term oil demand make bold bets on big, multi-year offshore projects a tough sell with investors more interested in payouts. Even Exxon’s success in Guyana gets overshadowed by the fact that the company’s capex bill leaves it borrowing to pay its dividend. And Exxon, like Chevron Corp. and other majors, has swung more of its spending toward shorter-cycle onshore fracking in North America.

Eoin Treacy's view -

Secular bull markets in commodities are defined by a step change in the marginal cost of production. During periods of what can best be described as a status quo the price of oil can range for decades. That reduces investment in new supply and the sector is unable to respond quickly when a new source of demand emerges. The massive investment to bring new supply to market takes time to evolve and that creates a secular bull market as new higher cost sources are brought online. 



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November 06 2019

Commentary by Eoin Treacy

Commerce: a force for good

This admittedly self-serving report from Shopify may be of interest to subscribers. Here is a section:

The success of millions of independent business owners is critical to our world’s economic prosperity. Every new business adds more value to the world. It’s not a zero-sum game, and commerce benefits from more voices rather than fewer. But entrepreneurship is challenging. That’s why we remove barriers and friction for independent business owners. We create tools for anyone, anywhere, to start and grow a business and impact the global community.

Eoin Treacy's view -

A recent article quoted Shopify’s CEO as saying. “Amazon wants to be an empire,” he said. “At Shopify, we are arming the rebels.”  I couldn’t help but smile at that statement. There is no doubt that the software companies like Shopify and Wix.com sell, which allows anyone to create an ecommerce site in a couple of hours, is a major innovation. However, the job of marketing that website so it can find clients is an altogether more involved process.



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November 06 2019

Commentary by Eoin Treacy

On Target November 6th 2019

Thank to Martin Spring for this edition of his letter which may be of interest. Here is a section on the Dollar:

Are we about to see a “currency pact” between the US and China? Investment bank Jefferies’ Hong Kong-based Christopher Wood sees it as a possible significant development in the difficult ongoing trade negotiations between the two countries.

It could give Donald Trump “a face-saving ‘out’ in terms of declaring victory in negotiations, where he has clearly over-estimated his leverage, for the simple reason that the Chinese leader has more tolerance to take pain than does America’s.”

A currency agreement based on a Chinese commitment not to engage in a competitive devaluation of its renminbi makes sense as both Washington and Beijing want the same thing. Neither wants a stronger dollar and a weaker yuan.
Beijing may see such an agreement as a way at least to end an escalation of the trade war or even to end it. It has no desire to see a major devaluation against the dollar. That would encourage accelerating capital outflow – “the Achilles heel of China’s command economy” -- at a time when such pressures are rising because wealthy citizens are keen to achieve international diversification. The outflow reached about $240 billion in the 12 months to the second quarter.

Devaluation would also make Chinese consumers poorer in dollar terms, undermining the policy of seeking to make the economy more driven by domestic consumption. And it would undermine the current successful policy of attracting foreigners to invest in China’s stock and bond markets.

“The last thing China needs right now is a further sharp appreciation of the US dollar – and that also seems the last thing Trump wants.”  

Eoin Treacy's view -

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

China has to manage capital flight risk. The drop below the psychological CNY 7 area earlier this year was a catalyst both for a breakout by the gold price for Chinese investors and the desire to become globally diversified.



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November 05 2019

Commentary by Eoin Treacy

Video commentary for November 5th 2019

November 05 2019

Commentary by Eoin Treacy

Abe, Moon Break Ice After Worst Japan-South Korea Fight in Years

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

Moon and Abe shared the view that the relationship between South Korea and Japan is important and re-affirmed in principle that issues between the two nations should be resolved via dialogue, the presidential office said in a text message. Abe conveyed Japan’s “basic stance” on bilateral issues in his exchange with Moon, the Tokyo-based Kyodo News agency said separately, citing the Japanese foreign ministry.

The brief, 11-minute meeting at the Association of Southeast Asian Nations summit in Bangkok came as a long-simmering feud escalated into a trade-and-security dispute, leading to boycotts of Japanese imports and the decision to scrap an intelligence-sharing pact. The encounter followed a break-through meeting last month between Abe and South Korean Prime Minister Lee Nak-yon.

Moon proposed high-level talks, if needed while Abe said every effort should be made to resolve the feud, Moon’s office said. Abe last met Moon in September 2018 and passed up a chance to meet him for formal talks during Group of 20 events in Osaka in June.

The remarks were the most positive yet since South Korean courts issued a series of rulings last year backing the claims of Koreans forced to work for Japanese companies during the country’s 1910-45 occupation of the Korean Peninsula.

Eoin Treacy's view -

Six weeks ago sentiment was skewing rather negatively towards the opinion that acrimonious disputes between neighbours like Japan and South Korea, the UK and EU and competitors like China and the USA were going to get worse, a lot worse. Today peace seems to be breaking out globally and that is removing a risk premium from markets.



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November 05 2019

Commentary by Eoin Treacy

2020 Vision: An Early Guide to the US Election

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

Divided government outcomes tend toward legislative gridlock. And though divided governments could still influence the outlook through regulatory reinterpretations and resulting impacts to business sentiment, they are unlikely to deliver transformative policy in a macro sense. Hence, divided government is unlikely to deliver policy that counteracts the current late-cycle economic condition.

A more surprising observation might be that we see some symmetry to the potential direction of the macro impact in both unified government scenarios. While far from assured, both open the possibility of fiscal expansion, fueled in part by messaging driven implicitly by ideas such as the Laffer Curve and MMT.

This conclusion appears to cut against investor expectations, at least as it pertains to the "Blue Wave" scenario. Our survey suggests investors see a Democratic White House as both less likely to pursue cycle-extending policies like fiscal stimulus and more likely to coincide with risk-asset weakness. Perhaps it is because investors also see Democrats as more likely to pursue policies that will challenge profitability in key sectors, such as prescription drugs and health insurance.

Eoin Treacy's view -

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

The one thing I see around my neighbourhood in west Los Angeles is the houses that were posting Bernie Sanders signs in 2012 are now supporting Elizabeth Warren. The big question is whether the Democrat’s administrative body will favour anointed conventional candidates like Joe Biden over the progressive wing of the party in the same way it did for Hilary Clinton versus Bernie Sanders.



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November 05 2019

Commentary by Eoin Treacy

One-Shot Drug for Sicily's Rare Blood Disease Costs $2 Million

This article by James Paton and Chiara Albanese for Bloomberg may be of interest to subscribers. Here is a section:

Dozens of gene therapies for a range of devastating illnesses are on their way. These single-dose drugs, tailored to each patient, can potentially deliver a lifetime of benefits.

But that’s reflected in their prices, which are likely to increase pressure on already stretched budgets. To make it easier for government payers to digest Zynteglo, Bluebird plans to spread out the cost over five years, with payments contingent on its success.

As a one-time therapy, Zynteglo could save governments money in the long run by cutting the need for expensive ongoing care. Treating one beta thalassemia patient today can cost as much as €60,000 a year, says Aurelio Maggio, a blood-disease specialist at the Palermo center. That’s €3 million over five decades. With multiple wonder drugs for other conditions set to reach the market soon, the upfront bill could take a heavy toll on Italy’s finances. The price tag for the therapy is twice the $900,000 that SVB Leerink analyst Mani Foroohar expected. Given the large number of patients in the country with the ailment, “the stakes are much higher,” he says.
 

Eoin Treacy's view -

One-shot therapies to genetic conditions represent incredibly exciting solutions to many previously untreatable diseases. The reason we are seeing the kinds of therapies appear for relatively unknown ailments is because they can get accelerated approvals from the FDA because they are treating orphan diseases. The bigger prize is to treat diseases which represent some of the biggest chronic conditions in the market today.



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November 04 2019

Commentary by Eoin Treacy

Video commentary for November 4th 2019

November 04 2019

Commentary by Eoin Treacy

Rates Could Soar or Go Negative as Fed Pause Divides Wall Street

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

The message from the Fed, combined with solid U.S. job creation last month and optimism about U.S.-China trade talks, has pushed expectations for the next rate cut well into 2020. Fed fund futures aren’t penciling in a full quarter point cut until about September.

The yield move London-based Panigirtzoglou envisions would mirror what happened when the Fed engineered a similar three-quarter-point cut in a counter cycle maneuver in 1995. JPMorgan’s U.S.-based rates team is more sanguine, lifting its Treasury yield forecasts to 1.65% for year-end 2019 and 1.85% for mid-2020. That would be little changed from around 1.79% Monday.

Panigirtzoglou did add some big caveats to his bolder prediction. It assumes that the U.S. macro picture remains consistent with a mid-cycle adjustment, with resilience in employment and consumer confidence, as well as a rebound in manufacturing.

Eoin Treacy's view -

These two views are not mutually exclusive. The outlook for rates is quite capable of fulfilling both scenarios, just not at the same time. Right now, the case for a mid-cycle slowdown, like what was seen in the mid ‘90s, is looking increasingly credible as stock markets push new highs and cyclicals return to outperformance. The argument for even lower yields is looking like an increasingly distant possibility.



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November 04 2019

Commentary by Eoin Treacy

Consistency Characteristics

Eoin Treacy's view -

“A consistent trend is a trend in motion” is one of the most important adages from The Chart Seminar. David’s words “If a trend has further to go now, it will sustain the upward break” are ringing in my ears as the primary Wall Street indices and an increasingly number of European indices break out.



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November 04 2019

Commentary by Eoin Treacy

Germany Hopes for Positive Outcome for EU-U.S. Trade Talks

This note by Birgit Jennen for Bloomberg may be of interest: 

Germany is hopeful for a positive outcome in trade talks between the U.S. and the EU, Economy Ministry spokeswoman Katharina Grave says Monday in a regular government press briefing.

“We need less, not more tariffs,” she said
The government has taken note of comments from U.S. Commerce Secretary Wilbur Ross that tariffs may not be levied on autos imported from the EU
NOTE, Nov. 3: U.S. May Not Need to Put Tariffs on European Cars, Ross Says

Eoin Treacy's view -

Europe has been depending on its export sector to soften the impact of fiscal austerity for much of the last decade. That hasn’t worked so well over the last couple of years, with globalisation under threat from the trend towards nationalism and isolationism evident in an increasing number of countries. The prospect of the trade war winding down, at least for now, has the potential to act as a catalyst for investors to take a second look at the region.



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November 01 2019

Commentary by Eoin Treacy

November 01 2019

Commentary by Eoin Treacy

5 Things You Should Know About Trends Investing

This report from Robeco champions the idea of thematic investing and betting on leaders. Here is a section on intangible assets:

Among the business models that are gaining in prominence are the ones that rely on intangible assets – such as intellectual property or reputation – and such models are valued the most by the market. This stands in stark contrast to firms than mostly own tangible assets – whether these are machinery, buildings or land. If we look at the S&P 500’s market value, we see that the share of intangible components in company value has grown from 17% in 1975 to 84% in 2015.

Of the intangible assets, the ones with intellectual capital and consumer trust take center stage as the most valuable. The ability to offer customized and even personalized products and services is becoming a more important way to gain a competitive advantage. Companies that have access to intellectual property such as patents, copyrights and trademarks, as well as software source codes, are well positioned. This is typical for sectors such as biotech, technology and pharmaceuticals.

Networked businesses such as digital networks and digital marketplaces are well positioned, too. This is because a business model involving value networks – those that facilitate commercial and/or social interaction – has proven to be the most disruptive. Examples are virtual marketplaces and peer-to-peer networks and those that rely on the collaborative use of assets as agents of the ‘sharing economy’. These value networks are found primarily in asset-light, information-heavy industries: information technology, financials, media and retailing. These business models have already been successfully rolled out – Skype in telecommunications, PayPal in financial services, Amazon in retailing, Airbnb in lodging and Uber in transportation. And, they have disrupted the existing industries.

Networked businesses and other ventures with intangible and digital assets tend to have a winning business model. Industries with physical assets – buildings, machinery or land – that can either be digitized, digitally knit together into a network or both, are vulnerable to disruption.

Eoin Treacy's view -

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

Thematic investing, identifying leadership and deploying a trending identification and trending running strategy is what this service is dedicated to It has been a niche area of the study for decades but is increasingly gaining traction with investors. The evolution of the most successful companies in the world is clearly based upon their technological prowess and dominance of the benefits delivered from connectivity and data management. That has occurred despite their dominance of different sectors of the market. The only way to explain that is through using themes as a narrative.



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November 01 2019

Commentary by Eoin Treacy

Gold Dips After Traders Weigh Hiring Resilience, Factories Flub

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

“The jobs data was not really inflationary but very good for the stock market,” George Gero, a managing director at RBC Wealth Management, said by phone Friday. “On the other hand, you don’t see any kind of a sell-off because of all the global worries. So now it’s a waiting game to see what will happen with interest rates and the stock market and all the worries.”

Eoin Treacy's view -

I like that expression “all the worries”. It implies the only reason gold can rally is because of worry about something else. There is some accuracy to that statement but the bigger point is a hedge is a risk mitigation strategy. If you are not worried about something as an investor, it is really time to take a close look at one’s portfolio. The best definition of bravery I have heard is “feel the fear and do it anyway”. That’s about as close to the best maxim for investing I have ever seen. When we worry about nothing, and are supremely confident in our convictions, it is usually when we are at most risk.



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November 01 2019

Commentary by Eoin Treacy

State of AI Report 2019

Thanks to a subscriber for this report for stateof.ai which may be of interest. Here is a brief section on robotics:

Certain Chinese industrial companies have automated away 40% of their human workforce over the past 3 years. This could be due in part to China’s annual robot install-base growing 500% since 2012 (vs. 112% in Europe). However, it’s unclear to what extent AI software runs these installed robots or has contributed to their proliferation.

Eoin Treacy's view -

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

The drive to automate manufacturing is one of the most challenging for any company but is also a major consideration in which countries benefit from manufacturing as a large, relatively well-paying employer. Many low-tech businesses have already migrated away from China while higher value-added businesses are under increasingly pressure to increase productivity by adopting technological solutions.



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October 31 2019

Commentary by Eoin Treacy

Video commentary for October 31st 2019

Eoin Treacy's view -

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

Some of the topics discussed include: stocks pause on the last day on the month, Apple reverses earlier decline, Dollar eases, Yen strong, Rand and Chilean Peso weaken, gold firm,  bonds firm, high yield spreads still tight, Ted spread expands.



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October 31 2019

Commentary by Eoin Treacy

China Bans Anti-Blockchain Sentiment As It Prepares For Launch of State Cryptocurrency

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

It is understood that the new law will precede the launch of China's state-backed cryptocurrency, which is expected to be unveiled early next year. No specific dates have been given but in August a senior official at China's central bank said it was "close to being out".

China's interest in the space appears to have had a positive impact on already established cryptocurrencies like bitcoin, which some say add legitimacy to the cryptocurrency industry.

China's plans were accredited for bitcoin's recent price surge that saw its value rise from below $7,500 to above $10,000 in the space of just a few hours. 

“This is a clear signal that the leader of the world’s second-largest economy is moving towards embracing the technology – in which Bitcoin plays a vital part – and therefore taken as a positive boost for the whole digital currencies sector," Nigel Green, CEO of financial advisory firm deVere Group, told The Independent.

“Perhaps quite sensibly, investors could not ignore the comments and sentiment expressed by President Xi and reacted by increasing exposure to bitcoin. It also comes as China is said to be developing its own national digital currency, which is further proof that in some form or another, digital currency is the future."

Eoin Treacy's view -

China is well on the road to completely dispensing with cash. It is now increasingly difficult to use cash in stores and an increasing proportion of business is transacted online. The benefits for a sovereign, of creating a digital currency where it has full control over the issuance, supply and availability but enforces the use, flow and acceptability of transactions are obvious. Quite whether it is beneficial for investors and consumers is an altogether different question.



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October 31 2019

Commentary by Eoin Treacy

Yes Bank Gets Binding Offer for $1.2 Billion Stake Sale

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

“If they are able to raise this capital then it will sustain Yes Bank’s growth for next one year,” said Kranthi Bathini, director at Wealthmills Securities Pvt. “But we need to know the name of the investor, timing of the capital infusion and the Reserve Bank of India’s comfort with this proposal.” Gill said in an interview earlier this month that the share sale will happen “much sooner than the market expects.” The company has been in talks with private equity investors,
technology companies and family offices.

Eoin Treacy's view -

The liquidity crisis in India’s housing finance sector has resulted in many related shares trading down in excess of 80% from their peak values a couple of years ago.  Issues relating to overvaluation of luxury properties and corruption within the boards of companies has come to light over the last year which has been very deleterious to sentiment. The challenge the sector has had was in raising fresh capital to plug holes in balance sheets left by write-offs. 



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October 31 2019

Commentary by Eoin Treacy

Shell Shares Continue Slide After Tense Call With Analysts

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

At one point, van Beurden quipped that the buyback program would be cheaper now because the shares were falling, which invited a terse response from an analyst who said: “I agree.”
“Please help me with my confused state,” said Christopher Kuplent, an analyst at Bank of America Corp., before asking the penultimate question on the call about whether they are
disclosing information in the right way.

Van Beurden responded that they could have avoided the cautionary note about the buybacks completely. He said that people could have done the math that lower oil prices make life more financially challenging for Shell, however, he said it was better to acknowledge a likely stormy year ahead to the market.

Then he offered another mind-bending answer as shares slipped further. “That macro does actually have an effect on our cash flow is obviously a statement of the obvious. So we could also have said: ‘Well that’s hopefully all understood isn’t it?”’ he added. “But not making a statement of the obvious it is also making a statement.”

Eoin Treacy's view -

When CEOs are candid and state the obvious it tends to have unintended consequences. Royal Dutch Shell’s management just told the market they may not have the money to buy back as many shares next year because oil prices are low and are likely to stay that way for the next 12 months. That’s not exactly what investors were expecting to hear.



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October 30 2019

Commentary by Eoin Treacy

October 30 2019

Commentary by Eoin Treacy

Fed Cuts Rates by Quarter Point, Hints It May Be Done for Now

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

Federal Reserve officials reduced interest rates by a quarter-percentage point for the third time this year and hinted they may be done loosening monetary policy, at least for one meeting.

The Federal Open Market Committee altered language in its statement following the two-day meeting Wednesday, dropping its pledge to “act as appropriate to sustain the expansion,” while adding a promise to monitor data as it “assesses the appropriate path of the target range for the federal funds rate.”

As with the September statement, the FOMC cited the implications of global developments in deciding to lower the target range for the central bank’s benchmark rate to 1.5% to 1.75%.

Treasuries weakened on the Fed’s announcement, pushing the 10-year yield up briefly to 1.81% from 1.80%. Stocks were little changed and the U.S. dollar gained. Traders also pared wagers on a fourth consecutive rate cut in December.

Eoin Treacy's view -

The Fed has been of the opinion we are in the midst of a mid-cycle slowdown. I think we can think of that as a best-case scenario which is why there is so much uncertainty about the outlook for rates amid the surge in bond prices. Let’s see what the charts tell us.



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October 30 2019

Commentary by Eoin Treacy

GE Soars as Another Boost to Cash Forecast Buoys Turnaround

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

General Electric Co. surged the most in eight months after the manufacturer raised its 2019 cash-flow forecast for the second straight quarter, giving Chief Executive Officer Larry Culp’s turnaround effort a much-needed boost.

The industrial businesses will generate as much as $2 billion in free cash this year, GE said Wednesday as it reported third-quarter earnings. The company previously projected no more than $1 billion in cash flow.

The revised forecast bolsters “another quarter of progress” as GE also works to improve operations and bring down debt, Culp said. That came despite headwinds from tariffs and a cash strain on the jet-engine business from the grounding of Boeing Co.’s 737 Max.

“There’s still a lot to do, it is a reset year,” he said in an interview. “But net-net, we’re pretty encouraged.”

Eoin Treacy's view -

The story of GE’s demise from bluest of blue chips to near bankruptcy will likely be studied at business schools for generations to come. The hubris of management, selling off the most productive assets to plug holes in the balance sheet, focusing on the industrial sector at the beginning of the trade war and coming to terms with the overvaluation of intangible assets will all be considered in retrospect as huge mistakes but what does the outlook for the future look like?



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October 30 2019

Commentary by Eoin Treacy

U.K.'s Election Battle Begins as Johnson and Corbyn Test Slogans

This article by Jessica Shankleman and Greg Ritchie for Bloomberg may be of interest to subscribes. Here is a section:

Offering a taste of the Conservative Party’s likely message to voters, Johnson launched into an attack on the opposition Labour leader on Wednesday during what’s likely to be their final question session in the Commons before Parliament breaks up for the election.

Johnson accused Corbyn of plotting to ruin what should be a “glorious” year in 2020 with another referendum on Brexit.

“It’s time to differentiate between the politics of protest and the politics of leadership,” Johnson said. He claimed Corbyn would deliver an “economic catastrophe” for Britain. “The time for protest is over.”

Johnson outlined his priorities of delivering Brexit and supporting the police service, health and the economy.

Corbyn hit back, attacking the premier’s record on the country’s beloved National Health Service, accusing him of cutting funds and planning to privatize the institution by offering it up in a future trade deal with the U.S.

“This government is preparing to sell out our NHS,” Corbyn said. “Our health service is in more danger than in any other time in its glorious history because of his government, his attitude and the trade deals he wants to strike.”

Labour’s campaign is expected to continue to focus on the impact of a decade of austerity to the country, while offering a renegotiation of Brexit followed by a second referendum.

Eoin Treacy's view -

Slogans capture the imagination and Labour looks to be going for class warfare in its “people before privilege” catchphrase. They obviously thought that would be more appealing to their base than alternatives like “people before profits”, “people before politicians”, “people before pundits” or “people before pandering to polls”. I wonder how long it will take the “Leninist before Lords” meme to catch on?



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October 29 2019

Commentary by Eoin Treacy

October 29 2019

Commentary by Eoin Treacy

If History Were A Perfect Guide, Stocks Would Be in A World of Trouble Here

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

Eoin Treacy's view -

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

We are at a particularly interesting period in history. First off, no one knows how much of a distortion to historical norms negative rates and negative yielding bonds represent. Second is the fear being expressed by investors as stock markets hit new all-time highs, and not just on Wall Street. Third is censorship by both Google and Facebook precludes anyone who wishes to express a sharply bearish view from acquiring advertising space. 



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October 29 2019

Commentary by Eoin Treacy

Branson's Virgin Galactic Space Venture Jumps in NYSE Debut -

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

Virgin Galactic is one of a trio of billionaire-backed space startups, each tapping different technologies. Branson is using an aircraft to carry a spaceship to high altitudes, where it blasts away. Blue Origin, controlled by Amazon.com Inc. founder Bezos, relies on more-conventional rockets. Musk’s Space Exploration Technologies Corp. deploys reusable launchers.

While transporting satellites has been a focus for SpaceX, Branson is chasing the tourism market, planning a first commercial flight next year. Blue Origin plans to take payloads and tourists to the edge of space on an 11-minute flight, while Musk has pledged to send passengers to the moon, Mars and beyond.

Branson said last week that Virgin Galactic also is interested in developing hypersonic airline flights after Boeing Co.’s future-technologies arm pledged $20 million for a minority stake. That could mean linking U.S. cities in a matter of minutes and, ultimately, the U.S. and U.K. with Australia in just a few hours.

Eoin Treacy's view -

Launch costs are trending lower and that is allowing room for a range of competing business cases to exploit the opportunity represented by the final frontier. If Elon Musk is to believe the jump to space is but a gateway to a myriad of possibilities on the moon and Mars. The only we can be sure of is the confluence of technological innovation and access to abundant cheap credit has made possible ventures that were mere fantasy a decade ago.



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October 29 2019

Commentary by Eoin Treacy

Email of the day on Japanese growth stocks

Several weeks ago, I had the same feeling as you on Japan. For investment purposes I decided to concentrate on Japanese 5G related companies. Ignoring the major telecom co's, I then came up with the following list of companies involved in parts related to the 5G area:

Eoin Treacy's view -

Thank you for this insightful email. One of the factors I believe that is attracting investors to Japan is the fact it has a such a deep pool of companies that provide invaluable components for the growth of the wider global technology sector. The fact they have been underappreciated for so long is justification for investor interest, particularly if global growth is primed for recovery.



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October 28 2019

Commentary by Eoin Treacy

Video commentary for October 28th 2019

October 28 2019

Commentary by Eoin Treacy

Saut Strategy October 28th 2019

Eoin Treacy's view -

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

Deteriorating sentiment about how much of a drag on global growth the trade war has represented has been one of the primary reasons investors have stuck to cash over the last couple of years. The volatility in the last quarter of 2018 and the even faster rebound unsettled a lot of investors with the result a wait and see attitude has been adopted. The big question they will now be raising is whether the breakout can be sustained before jumping back in.



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October 28 2019

Commentary by Eoin Treacy

Email of the day - on celiac disease treatments:

Your commentary on Celiac is of interest as I sufferer from this problem. Do you know who is doing the research, and can I find out any more information please

Eoin Treacy's view -

Thank you for this question which highlights the acute need for a solution to an issue which represents a grave discomfort and inconvenience for large numbers of people. The original company to come up with the treatment is Cour Pharma which I believe is headquartered in Illinois.    



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October 28 2019

Commentary by Eoin Treacy

Yeah, It's Still Water

This article by Ben Hunt for Epsilon Theory may be of interest to subscribers. Here is a section:

Over that same time span, Texas Instruments sold 90.8 million shares to management and board members as they exercised options and restricted stock grants, for a total of $2.5 billion. That works out to an average sale price of $27.51.

The difference in average purchase price and average sale price, multiplied by the number of shares so affected, is the direct monetary benefit for management. This is true whether or not management sells their new shares into the buyback or holds them. That amount works out to be $3.6 billion.

In other words, 40% of TXN’s stock buybacks over this five-year period were used to sterilize stock issuance to senior management and the board of directors.

In other words, senior management and the board of directors received $3.6 BILLION in direct value from these stock buybacks.

But wait, there’s more …As of December 31, 2018, there were still 40 million shares outstanding in the form of options and restricted stock grants to management and directors, at an average weighted exercise price of $55.

At today’s stock price, that means there is an additional $2.6 BILLION in stock-based compensation already awarded to TXN’s executives and directors.

Eoin Treacy's view -

This point about the quantity of shares not declining even through share buybacks have been going on for more than a decade is a topic which is getting increased airplay since Yardeni Research first highlighted it in March. 



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October 28 2019

Commentary by Eoin Treacy

Treasury Prepares Another Debt Deluge as Fed Wades Into Market

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

 

The wild card is how Treasury may address the elephant in the room. Dealers expect comment on last month’s turmoil in funding markets. And to some extent, the Treasury’s borrowing plans this fiscal year will be viewed, and traded, in light of the Fed’s T-bill purchases to replenish bank reserves. The central bank embarked on the program this month, saying it will run “at least into the second quarter” of 2020 at an initial monthly pace of about $60 billion.

 “They’re taking about half of net issuance next year,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities.

Some say the Treasury’s relentless debt sales have contributed to a shortage of reserves in the financial system, which last month forced the Fed to resort to a money-market operation it hadn’t deployed since the financial crisis.

Treasury Secretary Steven Mnuchin has rejected that notion, saying this month that the September upheaval had “nothing to do with our issuance.” But the department is clearly curious about how dealers are coping with growing supply. It sought comment in this month’s survey on “the interaction between primary dealer positions, auction participation, and recent repo market variability.”

Eoin Treacy's view -

The lack of liquidity in the repo market is an anomaly. Whether it is because banks no longer have the liquidity to take advantage of arbitrage opportunities, or because the Treasury’s voracious appetite for funds is soaking up available liquidity, the fact remains there are not enough funds to meet the requirements of the market. That pretty much forces the Fed to step in and provide as much liquidity as required to ensure orderly markets.



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October 25 2019

Commentary by Eoin Treacy

October 25 2019

Commentary by Eoin Treacy

Microsoft Rallies as Results Beat "Virtually Every Metric"

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

Growth in commercial bookings highlight “an impressive start” to the year. The results also featured a strong second-quarter earnings outlook, operating margins that “significantly outperformed,” and “solid” growth with Azure. “Microsoft remains the best positioned name in tech for the emerging Hybrid Cloud architecture, with improving margins sustaining a durable mid-teens total return profile.” Overweight rating, price target raised to $157 from $155.

Bernstein, Mark Moerdler
The company “beat virtually every metric driven by strength in Cloud, Sever & Tools, and Windows Pro.” Outperform rating, price target raised to $167 from $162. The analysts “remain positive & like buying” the stock.

RBC Capital Markets, Alex Zukin
This was “a strong start” to the year, “with bookings strength across the board” and “no macro weakness.” The revenue outlook “was lower than expected but with stronger margins, as gaming is expected to be weak.” Outperform rating, price target raised to $163 from $160.

Eoin Treacy's view -

Microsoft has transformed itself from a software maker to a software as a service company (SaaS). In the process it has transformed its lumpy cyclical cashflows into a steady revenue stream which is much more easily modellable. That allows analysts a much higher degree of comfort with the balance sheet and that generally commands a higher multiple. This subscription business model affords Microsoft and other companies growth rate and margins of a tech company but with the cashflows of a consumer staples company.



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October 25 2019

Commentary by Eoin Treacy

ECB Restarting QE Will Need More Purchase of Private Debt

This note by David Powell for Bloomberg may be of interest.

The European Central Bank is running low on sovereign bonds to buy -- that undermines the credibility of its pledge to keep going until inflation picks up. If inflation takes two years to firm, the ECB could face a shortage of about 60 billion euros ($67 billion) in debt during the next phase of its asset-purchase program. At the present pace, the central bank could run out of bonds in little over a year, according to calculations by Bloomberg Economics. The best way out is to shift the composition of purchases: BE estimates the markets for corporate and covered bonds could easily bridge the gap.

Eoin Treacy's view -

The ECB has self-imposed limits of how many bonds from each sovereign it can buy which are based on the relative size of the bloc’s economies.



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October 25 2019

Commentary by Eoin Treacy

Nanoparticle tech reverses celiac disease in promising human trials

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

This Phase 2 trial is small, involving only 34 patients, but it offers the first evidence of efficacy in human subjects. The prospective treatment involves two intravenous administrations of the nanoparticles, one week apart. Seven days after the second treatment the subjects were challenged with 12 grams (0.4 oz) of gluten per day for three days, and then six grams (0.2 oz) of gluten each day for the next 11 days. The majority of the subjects tolerated the gluten challenge following the nanoparticle treatment, showing an impressive 90 percent reduction in inflammatory markers compared to an untreated control group.

Eoin Treacy's view -

The evolving understanding of the microbiome and its role in both regulating and affecting everything from digestion to immune responses to brain activity and mood is a massive growth field. From an investment perspective it holds the potential to tap into markets that are completely unserved by medicine today.



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October 24 2019

Commentary by Eoin Treacy

Video commentary for October 24th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: precious metals firming within their respecitve ranges, Dollar steady, commodities testing resistance, oil steady Europe firm, Wall Street quiet, bonds susceptible to additional selling pressure. Amazon earnings disappoint.



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October 24 2019

Commentary by Eoin Treacy

Email of the day on Cryptocurrencies and quantum computing from one of Iain Little's clients:

Yep very well thanks, I'd say the Google quantum computing is all FUD, i.e. see here:

Even if quantum came anywhere close to being able to break SHA256's cryptographic hash function, which actually “can’t” happen without a mathematical insight that makes it possible (because it requires too much work or too much luck), then the majority of those running the nodes would just vote for a hard fork by the devs to a stronger format like SHA-3  there would be consequences for old coins that weren't moved but bitcoin would adapt and survive. Also, all current banking, military etc. use this same SHA256 as far as I know so the world would have way more to worry about than bitcoin if it was ever broken.

Here's some more stuff going on if reasons for the current drop in bitcoin's price were needed:

But it could just as easily be normal market volatility, the price is still about double that of the start of the year and bitcoin likes to have these big corrections after making huge and rapid gains.

I'd expect it's a combination of things but still normal market movements and nothing has fundamentally changed that would prevent bitcoin becoming gold2 as it is just better than gold and as people see this it's volatility will decrease as it's market cap increases, I'd imagine.

Though I very much like both asset classes and feel much relieved to have taken so much off the table and into property, art & collectables etc.

Eoin Treacy's view -

Thanks for this instructive email. The time for developers to begin to plan for a security upgrade is now. The pace of innovation in quantum computing is not something that can simply be dismissed. It is not a challenge in the short term but it is something that will become a progressively more important consideration the more successful cryptocurrencies become and not least if a true commercial use case is developed.



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October 24 2019

Commentary by Eoin Treacy

Pence Criticizes China But Seeks Balance as Trade Talks Continue

This article by Jenny Leonard and Justin Sink for Bloomberg may be of interest to subscribers. Here is a section:

Pence’s speech comes at a crucial time in the U.S.-China relationship as the two countries remain locked in a trade war and jostle for military and commercial dominance in the Pacific. White House officials have debated for weeks how critical Pence should be, underscoring the stakes of his remarks, which come just a day before negotiators talk about progress toward agreeing on a phase one agreement over trade.

The vice president was careful to balance his criticism with an olive branch. Rather than “decoupling” the two countries, the U.S. “seeks engagement with China and China’s engagement with the wider world,” he said. “Despite the great power competition that is underway and America’s growing strength, we want better for China.”

Pence’s most stinging criticism of China was indirect, in remarks targeting Nike Inc. and the NBA.

“Nike promotes itself as a so-called ‘social-justice champion,’ but when it comes to Hong Kong, it prefers checking its social conscience at the door,” Pence said.

He accused the NBA of “siding with the Chinese Communist Party and silencing free speech.” The league apologized after an executive of the Houston Rocketsissued a tweet supportive of Hong Kong protesters, outraging Chinese authorities and many NBA fans in the country.

“The NBA is acting like a wholly owned subsidiary of the authoritarian regime,” Pence said.

Eoin Treacy's view -

The reasonably balanced nature of Mike Pence’s speech which was originally slated for June and was expected to be much more explosive is a positive for the trade situation and suggests the USA foreign policy hawks are willing to negotiate. The question of whether a Phase 1 deal will in fact be signed in a few weeks at the Santiago conference remains a source of near-term uncertainty.



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October 24 2019

Commentary by Eoin Treacy

Tesla's Surprise Looks Strangely Familiar

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

Tesla’s free cash flow, meanwhile, was positive for the second quarter in a row, at $371 million. Again, that is positive. Again, the number was flattered by Tesla underspending on its capex budget. Guidance for the year was $1.5 billion to $2 billion. Based on the low spending in the first half, the mid-point of Tesla’s range implied it spending an average of $610 million in the third and fourth quarters. Capex came in $225 million below that level, equivalent to 61% of the free cash flow. Tesla’s capex continues to come in lower than its depreciation expense, which is striking for a company with such expansive ambitions. The company puts this down to rising efficiency.

There is something ludicrous about the stock of a company already priced at $46 billion, or 422 times the 2020 GAAP earnings forecast, surging because it reported a small net profit rather than a small net loss (the consensus estimate was a negative $234 million). Ditto for a few hundred million of free cash flow largely explained by below-guidance capex. Tesla’s own forecast points to positive profits and free cash flow continuing, but which may suffer “temporary exceptions, particularly around the launch and ramp of new products.”

Eoin Treacy's view -

There is no doubt that Tesla is an expensive share but it’s ability to occasionally turn a profit confounds the highly vocal bearish community who point to the company as representing nothing more than a house of cards. At its most basic the company is producing vehicles many people aspire to own which is a positive. The very big question is whether it can continue to do so and make money at the same time.



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October 23 2019

Commentary by Eoin Treacy

Video commentary for October 23rd 2019

Eoin Treacy's view -

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

Some of the topics discussed include: quantum supremacy, bitcoin pulls back, Stocks steady, Dollar eases back gold steady, oil firm, Continuous Commodity Index on the cusp of breaking out, Shenzhen B-Shares weak, India steady, Pound steadies. 
 



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October 23 2019

Commentary by Eoin Treacy

Google Says Quantum Computer Beat 10,000-Year Task in Minutes

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

Alphabet Inc.’s Google said it’s built a computer that’s reached “quantum supremacy,” performing a computation in 200 seconds that would take the fastest supercomputers about 10,000 years.

The results of Google’s tests, which were conducted using a quantum chip it developed in-house, were published Wednesday in the scientific journal Nature.

“This achievement is the result of years of research and the dedication of many people,” Google engineering director Hartmut Neven said in a blogpost. “It’s also the beginning of a new journey: figuring out how to put this technology to work. We’re working with the research community and have open-sourced tools to enable others to work alongside us to identify new applications.”

Eoin Treacy's view -

The question is not whether Google has achieved quantum supremacy or whether IBM will get there first. Rather the point is quantum mechanics has gone from philosophy to practicality in less than a century. Consider that the Greeks hypothesised the existence of the atom thousands of years ago but the nuclear age did not start until about 75 years ago. This is a clear example of the exponential pace of technological innovation.



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October 23 2019

Commentary by Eoin Treacy

California's Gasoline Panic

This article from the Wall Street Journal’s Editorial Board may be of interest to subscribers. Here is a section:

But about 95% of gas stations with convenience stores are independently owned, which includes mom-and-pops that license brand names. Some consumers will pay more for brand-name gas as they will for Prada purses or Starbucks lattes. As gas prices rise, consumers may also burn more money than they save driving in search of the cheapest stations.

Notably, the commission ignores that retail margins include labor costs, utilities, rent and taxes. In 2012 the state increased taxes on high earners, which hit many small businesses. California’s minimum wage has increased by 50% since 2013. According to the Bureau of Labor Statistics, worker wages at California gas stations over the last five years have increased 50% more than nationwide.

Mr. Newsom has threatened legal action against oil companies to “protect the public.” But liberals have long wanted higher gas prices so folks will ditch gas-powered cars. The Governor last month ordered revenue to be redirected from the last gas tax hike, which was supposed to fund highway construction, to projects that “reverse the trend of increased fuel consumption and reduce greenhouse gas emissions.”

So Californians in the future can look forward to paying more to drive on deteriorating roads as they head to homes without electricity due to blackouts. How long will it take California voters to figure out that these are problems made in Sacramento by politicians?

Eoin Treacy's view -

Spikes in crude oil prices are associated with recessions because they represent a tax on consumption. It’s not coincidence that one of the reasons Europe’s economies have subpar growth is because they tax economic output through regulation and carbon trading with the express aim of increasing costs. California is well on the way to achieving the same outcomes.



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October 23 2019

Commentary by Eoin Treacy

Bitcoin Tumbles to 5-Month Low as Libra Hit by U.S. Backlash

This article by Claire Ballentine and Olga Kharif for Bloomberg may be of interest to subscribers. Here is a section:

“The biggest thing behind this is that volumes have been very very low,” said Josh Lim, head of trading strategy at Galaxy Digital in New York. “On the sentiment side of things, the fact that the Libra coalition has faced some major challenges and the Telegram launch was halted by the SEC, it really curtailed investor appetite for crypto broadly.”

Potentially adding to concern is the news that Alphabet Inc.’s Google has built a computer that’s reached “quantum supremacy,” performing a computation in 200 seconds that would take the fastest supercomputers about 10,000 years. Skeptics of cryptocurrencies have noted that advances in computing could make the slower proof of work system used by Bitcoin and other tokens obsolete.

Eoin Treacy's view -

The launch of bitcoin settled futures on the same day that the first whiff of Google’s quantum supremacy news broke in September was responsible for the dynamic break below $10,000. The Congressional debate about Facebook’s Libra project and confirmation of the quantum supremacy story were catalysts for selling pressure today.



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October 22 2019

Commentary by Eoin Treacy

Video commentary for October 22nd 2019

October 22 2019

Commentary by Eoin Treacy

Pound Drops as U.K. Lawmakers Back Brexit Deal, Reject Timetable

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

The pound weakened after U.K. lawmakers rejected Prime Minister Boris Johnson’s plan to fast-track his Brexit accord through parliament.

Britain’s currency dropped against all of its major counterparts, but the losses were contained after the government won an initial vote on the deal. Johnson opened the door to a short extension to his Oct. 31 deadline, saying he would pause legislation and go back to the European Union, after earlier threatening to throw out the deal if lawmakers rejected his plans.

“For now it seems the market is still generally expecting this is a setback, but not a fatal setback, to a negotiated Brexit,” said Jeremy Stretch, head of G-10 currency strategy at Canadian Imperial Bank of Commerce. “There hasn’t been a rapid uptick in no-deal pricing at this point,” he said, referring to a scenario where the U.K. would leave the EU with no divorce deal.

The U.K. currency had rallied more than 8% from September’s low as Johnson secured an agreement with the EU and then lawmakers then forced him to request an extension to the Oct. 31 deadline, reducing that no-deal risk.

Sterling dropped as much as 0.7% after the votes to $1.2869, after rallying Monday to touch $1.3013, the strongest level since May. Against the euro, it fell 0.4% to 86.39 pence.

Eoin Treacy's view -

Parliament today supported the deal which, as expected, excises Northern Ireland economically from the UK. That is not going to be received well by loyalist communities in North Ireland. However, it is likely to be positive for the region’s economy since it will have a toe hold between the UK and the EU and subject to corporate taxes could attract inward investment.



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October 22 2019

Commentary by Eoin Treacy

Normal Yield Curve Doesn't Mean Everything's Normal

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

The more that markets internalize this shifting monetary policy sentiment inside central banks, the more that they will unwind the policy expectations that fueled several forces acting to invert the U.S. yield curve, including indirect ones such as the enormous pressure on foreign investors to flee negative yields in Europe and Japan and go into longer-dated U.S. bonds. Look for this phenomenon to also maintain the yield spread between German and U.S. bonds at its current lower range despite what will continue to be relative economic outperformance by the U.S.

Just as I argued in March that it was unwise to react to the inversion of the Treasury yield curve with extreme anxiety about a U.S. recession, it would be premature to celebrate the recent partial reversion as an indicator of significant strengthening of U.S. economic prospects. Instead, both are reminders of the extent to which traditional economic signals have been distorted by a prolonged period of extraordinary central bank policies. And they should also been seen as just one of the unusual consequences of a monetary stance that, imposed for several years on central banks by the lack of proper policy action elsewhere, will now see the hoped-for benefits give way to a broadening and deepening recognition of the unintended consequences and collateral risks.  

Eoin Treacy's view -

An inverted yield curve has been one of the most readily available lead indicators for a US recession for decades. There is always an argument that this time is different and that it only works for the USA’s economy. It is also worth remembering that no US recession has occurred without an inverted yield curve first but is a very small number of false positives. When considering the history of the measure anyone who is willing to buck the historical trend is betting on the signal giving a false positive.



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October 22 2019

Commentary by Eoin Treacy

Chile Unrest Has a Worrisome Message for the World

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

The first is inequality. The Chicago Boys’ agenda delivered reasonably strong and stable aggregate growth, but Chile remains one of the most unequal countries on earth. It ranks as one of the leaders in inequality among members of the Organization for Economic Cooperation and Development, and, according to the World Bank, remains more unequal than either of its very different neighbors, Argentina and Peru. People are far angrier about a rising cost of living if it comes with a sense of injustice. 

Second, the catalyst was a proposal to raise public transport fares and energy bills. There is ample evidence from across the world that these will incite rebellion like nothing else — a point that those who hope to reduce greenhouse-gas emissions via a carbon tax should bear in mind. The violent protests of the Gilets Jaunes in France were over higher gasoline taxes, which were seen as penalizing car-dependent people in the provinces while favoring metropolitan elites. Mexico in 2017 saw riots and protests against what was known as the “gasolinazo,” a 20% rise in fuel prices that was a part of the government’s partial privatization of Pemex, the  monopoly state oil company. Last year, Brazil was rocked by protests and a strike by truck drivers in response to fuel shortages and a sharp increase in the price of diesel.

Third, Chile lacks a populist movement, or a canny populist caudillo politician. Such a figure might have been able to use public anger for their own purposes, but would also have had a better chance to control it. For example, Mexico’s left-wing populist president Andres Manuel Lopez Obrador frequently led public protests, but successfully persuaded his followers not to resort to violence. In Chile, where conventional politics lacks a party or a personality to channel their grievances, protesters have resorted to self-destructive vandalism. Which is to say, while charismatic Latin American populists understandably tend to make western leaders nervous, Chile shows that they can perform a vital function. 

Eoin Treacy's view -

The Arab Spring originated in Tunisia in a protest over the price of bread. The unrest in Lebanon last week was a response to the proposed tax on WhatsApp users. The Hong Kong unrest probably has its roots in the rising cost of living. Chile’s protests are equally about the cost of living. Does that suggest, within a decade the world has gone from worrying about bread to bigger ticket purchases? The surge in asset price inflation against a background of largely stagnant wages is at least partly to blame for this deterioration in the political status quo.



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October 21 2019

Commentary by Eoin Treacy

October 21 2019

Commentary by Eoin Treacy

Leveraged loans: how much do credit ratings understate the risks?

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

Two of the main arguments against higher loan defaults are lower rates and lack of covenants. On lower rates, we believe the transmission mechanism of lower rates to leveraged loans is comparatively weak. Our recent work has shown that LL yields are little changed year-over-year, in part because wider spreads have offset modest declines in LIBOR rates. Looking ahead, 4 rate cuts in 2020 could help loan issuers but there are likely offsetting factors. One is that this assumes loan spreads do not widen, which we think is unlikely, particularly heading into 1H20 with US GDP growth slowing to 0.3-0.5% in 1H20. Two is if rating agency downgrades persist (as we expect) the future cost of new funding for issuers increases substantially with each rating notch; our analysis shows the current spread differential between a B- and a CCC+ loan is c300bp. Three is that the Fed has less room to stimulate: only 38-52% of the rate relief provided in the last two cycles. 

On lack of covenants, the key driver of defaults historically is not covenant violations but insolvency and illiquidity. One of the more holistic papers compares these factors in triggering defaults and argues that low market asset value to debt is the key driver while, on average, covenants add limited additional information4. We believe lack of covenants will change the event of default, with more distressed exchanges likely. But it is not clear this is a good outcome. Covenants had weakened leading up to the '15-16 energy default cycle, yet default rates were elevated (peak 22%) and many distressed exchanges failed with roughly half of firms re-defaulting. While loan downgrades to CCCs have been lagging those to B-, we are starting to see more evidence of downgrades to CCC. These decisions are primarily driven by weak operating performance, negative cash flow and capital structure unsustainability (even as issuers do not have maturities until 202022). Once a firm is downgraded to CCC, we believe the re-pricing in loan yields makes distressed exchanges likely, particularly in more stressed markets.

Eoin Treacy's view -

The race to secure a competitive yield has resulted in large quantities of debt being issued and the quality of issuers declining relative to the yield on offer. If a rising tide lifts all boats then the potential for shipwrecks to be revealed when the tide goes out is also a risk. Warren Buffett’s swimming naked remark comes to mind.

 



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October 21 2019

Commentary by Eoin Treacy

China Braces for Sub-6% Economic Growth in Key Policy Meetings

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

“They measure the policy scope by looking at the overall debt, by looking at how much risk there is in shadow banking, in the housing sector and in inflation,” Yao said. “Looking at all these things, they judge they actually don’t have much scope from a long-term perspective. So they’re very careful about how to use it and when to use it.”

With few major monetary policy moves in the past month, the Loan Prime Rate, a market gauge of borrowing costs, remained unchanged in October, according to a PBOC release Monday.

In his statement to the IMF’s steering committee at the meetings, Yi said that growth had been stable this year and the “main economic indicators kept within an appropriate range.” While keeping credit growing, the bank should also pay attention to “maintaining a stabilized leverage ratio,” he said.

Yi won support for China’s approach from the IMF, which otherwise has been urging more action to support the global economy. Kenneth Kang, deputy director of the fund’s Asia and Pacific Department, said any support to prop up the Chinese economy should be “contained, calibrated to the shock, it should be temporary in nature and it should be focusing on re-balancing growth down the road.”

Eoin Treacy's view -

China’s administration is worried about the debt mountain which has been accrued over the last decade and are therefore reluctant to pull on the traditional levers for growth in the housing and infrastructure sectors. That is weighing on demand for just about all industrial commodities.



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October 21 2019

Commentary by Eoin Treacy

US military report recommends giving AI autonomous authority to launch nuclear weapons

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

In other words, they want to give an AI the nuclear codes. And yes, as the authors admit, it sure sounds a lot like the “Doomsday Machine” from Stanley Kubrick’s 1964 satire “Dr. Strangelove.”

The “Dead Hand” referenced in the title refers to the Soviet Union’s automated system that would have launched nuclear weapons if certain conditions were met, including the death of the Union’s leader.

This time, though, the AI-powered system suggested by Lowther and McGiffin wouldn’t even wait for a first strike against the US to occur — it would know what to do ahead of time.

“[I]t may be necessary to develop a system based on artificial intelligence, with predetermined response decisions, that detects, decides, and directs strategic forces with such speed that the attack-time compression challenge does not place the United States in an impossible position,” they wrote.

The attack-time compression is the phenomenon that modern technologies, including highly sensitive radar and near instantaneous communication, drastically reduced the time between detection and decision time. The challenge: modern weapon technologies, particularly hypersonic cruise missiles and aircraft, cut the window even further.

Eoin Treacy's view -

The advent of first strike weapons like hypersonic missiles and artificial intelligence “dead man’s switches” represent significant amplification of geopolitical stress.

 



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October 21 2019

Commentary by Eoin Treacy

These Are the World's Best (and Worst) Pension Systems

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

The study comes as policy makers grapple with more people entering retirement, living longer and needing a steady flow of income on which to survive. Almost one-fifth of the world’s
population is forecast to be of retirement age by 2070, up from about 9% this year, United Nations data show.

“Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens,” said David Knox, the report’s author and senior partner at Mercer. “It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the
retirees of the future.”

Eoin Treacy's view -

Raising the age at which citizens become eligible for pension makes economic sense but is one of the thorniest issues to put before voters. Japan obviously has a vital need to urgently replace aging workers and while immigration is now allowed, the program needs to be vastly expanded.



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October 18 2019

Commentary by Eoin Treacy

October 18 2019

Commentary by Eoin Treacy

Mysterious

Thanks to a subscriber for this memo from Howard Marks which may be of interest. Here is a section:

Eoin Treacy's view -

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

I suspect the changes in how the time value of money is considered, resulting from negative interest rates, is one of the most interesting topics in the market today. We are accustomed to thinking about how money loses value through devaluation and inflation but never give any thought to the value of time. Futures and options traders need to consider the time value of money because their contracts pressing maturity profiles. However, when there is no maturity, such as with property, art, collectibles or private equity the time value of money takes on a completely different meaning.



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October 18 2019

Commentary by Eoin Treacy

Cloud Set to Drive a New "Roaring 20s" Defined by Big Productivity Improvements

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

Eoin Treacy's view -

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

I received a service call from Bloomberg this morning while I was reading this report and it occurred to me that I worked for a cloud company all those years ago and didn’t even know it. Back in the early 2000s Bloomberg insisted on dedicated lines before they would install a terminal. The system required the bandwidth to pump real-time prices and calculations through to the end user. Those calculators sat on the company’s servers rather than the desktop which is effectively what cloud computing is.



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October 18 2019

Commentary by Eoin Treacy

Chinese Nuclear Stockpile Clouds Prospects for U.S.-Russia Deal

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

Russian officials say they want the current agreement extended for the allowed five years beyond its 2021 expiration. Foreign Minister Sergey Lavrov told reporters last month that that the U.S. continues to insist China be brought into negotiations, a message he said Secretary of State Michael Pompeo delivered to him at the annual United Nations General Assembly meetings.

But Moscow says time is running out. Negotiations for a new deal would typically take as long as a year. Even settling on an extension would be lengthy.

“We urge our American colleagues not to lose time anymore,” Russian Deputy Foreign Minister Sergei Ryabkov said in an interview with Russia’s International Affairs journal. “There’s almost none left. Simply letting this treaty die would be unforgivable. This will be perceived by the international community as neglecting one of the key pillars of international security.”

Despite American efforts, Beijing has so far balked at trilateral talks, arguing it is far behind Moscow and Washington, which together hold more than 90% of the world’s nuclear weapons.

“China has no interest in participating in a nuclear-arms-reduction negotiation with the U.S. or Russia, given the huge gap between China’s nuclear arsenal and those of the U.S. and Russia,” said Fu Cong, director general of the foreign ministry’s Arms Control Department. “The U.S. and Russia, as the countries possessing the largest and most advanced nuclear arsenals, bear special and primary responsibilities on nuclear disarmament.”

Eoin Treacy's view -

There is a Chinese expression to the effect “when the stork and the clam fight, the fisherman wins”. China is content for the USA and Russia to face off against one another in mutual agreements to curtail development of even more powerful nuclear weapons. Meanwhile the hypersonic missiles it is developing and showing off to the world in parades are an alternative first strike weapon where there are no treaties on containment.



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October 17 2019

Commentary by Eoin Treacy

Video commentary for October 17th 2019

Eoin Treacy's view -

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

Some of the topics discussed include: major markets continue to pause at big round numbers but the relative strength of megacaps is a postive development, Dollar eases which is positive for emerging markets, gold and silver steady, nickel weak, India resurgent. 



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October 17 2019

Commentary by Eoin Treacy

Monthly Economic Bulletin

Thanks to a subscriber for this report from Krungsri Research focusing on South East Asia. Here is a section:

Vietnam’s economy expanded 7.3% YoY in 3Q19, the strongest growth in three quarters. In the nine months to September 2019, the economy expanded 7.0%.

In addition, the central bank recently cut policy interest rate by 25bps to 6.0%, the first cut since October 2017. This would reduce cost of funds, increase liquidity, and support growth in consumption and investment—which together account for around 100% of GDP.

For the rest of the year, the economy will face challenges from a high-base GDP growth rate and rising external pressures from slowing global trade and the US-China trade war. However, Vietnam has resilient domestic demand and authorities have helped to support demand by cutting key interest rates. Hence, we forecast Vietnam’s economic growth at 6.6-6.8% for this year.

Eoin Treacy's view -

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

The trade war between the USA and China represents a clear signal that China is quickly pricing out of the low-end manufacturing sector. This is a trend which has been underway for some time but it is now gathering pace as the both the cost of doing business and the geopolitical risk increase.



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October 17 2019

Commentary by Eoin Treacy

Has Arlene Foster Finally Overplayed Her Hand?

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

The Brexit ultras in Johnson’s party, known as the Spartans, may be unionists, but their interests and those of the DUP have never been fully aligned. The Spartans want the hardest Brexit possible, and that’s their ultimate priority, rather than the exact form of customs arrangements between the mainland U.K. and Northern Ireland and how exactly consent is given for that by the DUP.

Johnson’s deal doesn’t look like it crosses any of the Spartans’ red lines. They haven’t said so far whether they’ll back him, but some of the noises ahead of the deal’s announcement were positive. They realize if a deal doesn’t pass now, there’s a chance Brexit may never happen. Secure their support, and it’s possible Johnson could win enough votes to pass his deal, as Bloomberg’s Rob Hutton outlined on Wednesday.

Much depends too on whether Brexit-supporting Labour MPs back a deal.

It may seem hard to imagine what the DUP gains from its opposition, other than burnishing its own Braveheart reputation by holding out. But the DUP plays a long game. They’re asking themselves whether the new arrangements, which include customs and regulatory checks on the Irish Sea border, will over time make it easier for Northern Ireland to drift toward unification with Ireland. They’re thinking about how unionist voters will regard their support for a deal that doesn’t give them an effective veto over the new arrangements, as Johnson’s original proposal did. 

Eoin Treacy's view -

It is going to be a monumental task to get Boris Johnson’s deal through parliament without the assistance of the DUP. Unfortunately, the machinations of who votes in favour of the deal are unlikely to be purely in the national interest. Everyone knows an election is coming and parliamentarians are keenly aware that how they vote in this weekend’s question will probably come back to haunt them later.



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