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May 22 2019

Commentary by Eoin Treacy

Franklin Says Aussie Bonds to Rally as RBA May Ease Four Times

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

Overnight swap markets are currently pricing in two RBA cuts by November. Westpac Banking Corp. economist Bill Evans on Tuesday brought forward his forecast for the first reduction in the cash rate to June, with a second to follow in August. Commonwealth Bank of Australia and Royal Bank of Canada expect the same.

JPMorgan Chase & Co. though says two cuts may not be enough. “From where we are today, this is still not sufficient to fully neutralize risks to the RBA staff’s current forecasts, suggesting risks to a sub-1% cash rate,” economist Ben Jarman wrote in a note.

Franklin Templeton’s Canobi expects the RBA to lower borrowing costs three to four times over the next nine to 12 months as tepid inflation weighs. “We never felt that inflation has really had a grip since the RBA started easing in 2016, and it still looks pretty weak,” he said.

Eoin Treacy's view -

Australian mortgages are full recourse and floating rate. The Australian consumer is carrying some of the highest leverage ratios in the world, second only to Canadians in the G7. That’s fine as long as the property market is rising but when it starts to contract pressure starts to build on leverage at even a slight down turn in the ability of consumers to service their debts.



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May 22 2019

Commentary by Eoin Treacy

Email of the day on Brexit

You have probably have had your fill of Brexit but I thought you would find this piece quite insightful in explaining the rise of the Brexit Party. 

The weekend results are going to be far more interesting than we have ever believed an EU election could be.

https://unherd.com/2019/05/how-farage-outflanked-everyone/

Eoin Treacy's view -

Thank you for this article which I agree is a useful primer on the rise of a populist party. The process has been long and drawn out in the UK because people believed that by voting for Brexit, what they were going to receive was change. The failure of incumbents to deliver necessarily requires the rise of a new power which at least promises to deliver.



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May 21 2019

Commentary by Eoin Treacy

Farage's Brexit Party to Trounce May, Sporting Index Says

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

Nigel Farage’s Brexit Party is poised to dominate the upcoming European elections in the U.K., according to spread betting firm Sporting Index.

The anti-EU party will win 28 seats, the firm said. Prime Minister Theresa May’s Conservatives will win seven, while Labour will take 13 and the Liberal Democrats 12, Sporting Index predicted in an email in London on Tuesday.

Sporting Index has had a consistently strong record in predicting some of the key twists and turns of the Brexit saga. Last month, about two hours before the latest vote on May’s Brexit deal, the spread betting firm forecast she’d lose by 60 votes. She was defeated by 58.

“The Tories look set to face the consequences over their handling of Brexit, with the Brexit Party and Liberal Democrats making significant gains due to their clear stance on one of the most polarizing events in British politics,” Sporting Index’s Phill Fairclough said.

On Tuesday, May offered lawmakers a vote on whether her Brexit deal should be subject to a referendum, in a last-ditch bid to save it. Last time MPs voted on a second referendum, there was just a 12- vote difference, with 280 backing a confirmatory vote on a deal and 292 against it.

Eoin Treacy's view -

There is a large contingent of UK voters who thought they would never be voting in a European election again. Presented with the opportunity to stuff the European parliament with Eurosceptics they are likely to leap at the chance.  The UK isn’t the only country where parties at odds with the European union’s aim of further cohesion are likely to gain ground. France, Italy, Austria, Sweden, Denmark and Spain all have room for electoral upsets. Perhaps the greatest irony is from next week the continent will have a more Eurosceptic voice than Westminster.



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May 16 2019

Commentary by Eoin Treacy

Di Maio Says Italy Doesn't Want Debt to Spiral Toward 140%

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

Days after his coalition partner roiled markets by threatening to breach European Union fiscal rules, Deputy Prime Minister Luigi Di Maio of the Five Star Movement said Italy’s government wants to rein in the debt load to avoid it spiraling.

“Nobody wants to go over 140%,” Di Maio said during an event in Florence. “Otherwise, the debt-to-GDP level would be out of control.” He added that some investments could be financed by increasing the deficit level provided that it boosts economic output, limiting the debt ratio.

The country’s debt-GDP level was 132.2% at the end of last year.

"I think that 130% is already a lot," European Commissioner for Economic and Financial Affairs Pierre Moscovici told reporters in Brussels when asked about Italy’s debt.

Eoin Treacy's view -

Italy has a domestic economy that is struggling and a group of high-profile exporters heavily reliant global growth. Trade war worries are weighing on sentiment particularly as the populist government seeks to modestly breech EU fiscal deficit limits.



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May 16 2019

Commentary by Eoin Treacy

Stock Rally Gains Momentum on Risk Bet, Bonds Fall

This article by Randall Jensen and Vildana Hajric for Bloomberg may be of interest. Here is a section:

This has become a pattern where you get a big aggressive statement from the administration that might impact trade and then the market reacts aggressively as it did on Monday and then it seems to back off,” Chicago-based Susan Schmidt, head of U.S. equities at Aviva Investors, said in an interview. “Business is still doing well. I think if the market can stay focused on the facts and the data, then I think the market will hold.”

Strong economic data and earnings, along with hints from the Trump administration that it may be willing to compromise on trade has helped stocks rebound from the battering they took when the tariff battle with China flared. But the headlines have come fast and furiously, most recently President Donald Trump signed an order that’s expected to restrict Chinese telecommunications firms from selling in the U.S.

Eoin Treacy's view -

China’s dependence on global trade is far greater than the USA’s and the market has been voting with its feet by both supporting the Dollar, the bond market and the stock market since the trade war began.



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May 16 2019

Commentary by Eoin Treacy

The future of Emerging Markets

This report from Dimitris Melas for MSCI may be of interest to subscribers. Here is a section:

The rationale for allocating to emerging markets rests on three pillars: Superior economic growth has resulted in positive market returns historically, low correlation within emerging markets and across asset classes has provided diversification benefits, and relative scarcity of information has created opportunities for active portfolio management. Long-term historical data confirms that emerging markets have provided positive long-term risk-adjusted excess returns and enhanced portfolio diversification. Their diversity has led to high cross-sectional return dispersion, both at the country and at the security level, creating opportunities to add value through active country allocation and stock selection. Omitting this equity segment would have introduced a performance drag on global indexed strategies and reduced the investment opportunity set of active strategies. The opening of the domestic Chinese capital market and its integration into international markets is likely to have a transformative effect on the emerging markets equity segment. MSCI introduced domestic Chinese equities (A shares) into the MSCI Emerging Markets Index in June 2018 at a reduced weight. Chinese equities listed in mainland China and Hong Kong currently represent 30% of the index but could grow to over 40% when A shares are included at full weight. The growing size of China within emerging markets raises the prospect for investors of making dedicated allocations to China. Whether investors make separate China allocations or continue to seek opportunities across global emerging markets, the segment likely will remain an essential element of the global equity universe in the future.

Eoin Treacy's view -

China already dominates the emerging markets sector and its influence is likely to further increases with the increased weighting of A-Shares. At 40% of the Index it will become increasingly difficult to invest in emerging markets without gaining at least some exposure to China. That will be either because of direct participation or because of the reliance of some markets on Chinese demand.



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May 15 2019

Commentary by Eoin Treacy

Email of the day - on winners form the trade war:

As you say, the US has many alternative sources of cheap goods but there are limited sources of US technology. China also has no alternative buyers of its products. Round One of the international confrontation will be won by the US.

Eoin Treacy's view -

Buyers can always look elsewhere because there is always someone who is willing to provides services at a lower cost or who can manufacture a copycat item which is “good enough” Sellers have to focus on retaining that competitive edge but often have a hard time replacing lost customers, particularly when they are have already maxed out their growth.



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May 13 2019

Commentary by Eoin Treacy

Funds Flock to Dollar on Bets Markets Underpricing Trade Divide

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

Uncertainty over how the dispute would be resolved in the one-month deadline set by Washington will reinvigorate a hunt for haven assets in a world already hampered by slowing growth.

An easy bet will be to short the expected losers: risk-sensitive currencies from Asia to South America, they say. “To be honest, I thought the dollar would be rising at a much faster pace than this -- markets were pricing in a Goldilocks environment and they were clearly wrong,” said Stephen Miller, an adviser at asset manager GSFM and a former head of fixed income at BlackRock Inc.’s Australian business.

“Right now I’d be long U.S. dollar versus EM currencies, the likes of Argentina and Turkey.” There’s a 60% chance that China and U.S. won’t reach a deal in the coming weeks, according to analysts at Australia and New Zealand Banking Group Ltd., after last week’s talks laid bare divisions including the removal of existing tariffs and a breakdown in trust. While both nations plan to continue negotiations, traders are waiting for Beijing’s retaliation measures after Washington slapped more duties.

Eoin Treacy's view -

The Chinese renminbi has long been used as policy tool and tariffs being imposed on a wider range of goods, there is a clear argument for having a weaker currency. The country is obviously going to experience some difficulties from tariffs imposed on exports to one its largest trading partners but the potential for domestic inflation to spike on the back of a weaker currency is likely to limit the scale of devaluation.



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May 08 2019

Commentary by Eoin Treacy

Why cheap coffee means more migrants at the border

This article by Paul Hicks and Dan McQuillan for the Houston Chronicle may be of interest to subscribers. Here is a section:

In recent years, their challenges have increased. Climate change stretches the dry season, or makes rainfall erratic. Last year some farms went up to 45 days without rain. The farmers watched their maize and bean plants wilt and die. Then they reaped only more debt from their meager coffee harvest.

Eoin Treacy's view -

In normal circumstances when the price of a commodity drops below economic production levels supply dwindles. That eventually contributes to recovery.



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May 08 2019

Commentary by Eoin Treacy

Match Group Beats Estimates as Tinder Popularity Grows Abroad

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

Match, which is owned by billionaire Barry Diller’s IAC/InterActiveCorp, runs dozens of dating sites like Tinder, OKCupid, Plenty of Fish and Hinge. But the bulk of the company’s earnings gains were fueled by Tinder, which lured in more than 384,000 new subscribers in the quarter, boosting direct revenue 38 percent from the year earlier period.

The online dating app, where users swipe right to indicate interest in a potential date, now boasts 4.7 million global subscribers. Overall, Match’s average subscribers increased 16 percent with most of the new users flowing in from outside North America.

“The world is changing," said Mandy Ginsberg, chief executive officer of Match. “I’ve been here a long time and 100 percent of the revenue used to be in the U.S. and now the growth and more revenue is outside of the U.S."

With arranged marriages on the decline in India and the stigma towards online dating eroding in Japan, Ginsberg is concentrating on international expansion. There are more than 400 million single people living outside North America and Europe, two-thirds of whom have not yet tried a dating product, according to Match. Ginsberg recently revamped the company’s leadership team in Asia -- appointing general managers in Tokyo, Seoul and Delhi -- to try and grow Match’s footprint across the continent.

Eoin Treacy's view -

Economic growth in India and the subtle shift towards female empowerment represent major growth opportunities for social media and online dating companies. Narendra Modi’s election five years ago as the first low caste Prime Minister represented a signal that social striation enshrined by the caste system and sustained by the system of arranged marriages may be changing. A more open society would represent a significant change for India which has historically been socially conservative.



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May 07 2019

Commentary by Eoin Treacy

EU Cuts German Growth Outlook, Sees 'Pronounced' Euro-Area Risks

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

Most of the downgrades were less severe than in the previous report in February, apart from Germany, where the 2019 prediction was slashed to just 0.5 percent from 1.1 percent. Officials in Brussels warned that downside risks to the region’s outlook remain “prominent.”

The forecasts reflect more pronounced weakness in the region, which has stumbled due to a slowdown in the global economy, unresolved trade disputes and “exceptional weakness” in manufacturing. Meanwhile sentiment has taken a hit from disruptions in the auto industry, social unrest, and uncertainty related to Brexit.

German carmaker BMW said on Tuesday that the economic backdrop is “increasingly challenging” and business conditions are “expected to remain volatile.”

“As initial deadlines for U.S.-China trade negotiations and Brexit have passed without resolution, various uncertainties continue to loom large,” the European Commission said in its quarterly report. “An escalation of trade tensions could prove to be a major shock.”

Eoin Treacy's view -

The Eurozone is heavily dependent on international trade and Germany’s persistent surpluses are very much tied to export growth. Trade wars and the continued transition of the automotive supply chain towards battery powered vehicles represent significant challenges to both economic output and employment.



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May 02 2019

Commentary by Eoin Treacy

3M Expands Medical-Products Business in Record $4.3 Billion Deal

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

3M Co. agreed to buy medical-products maker Acelity Inc. for about $4.3 billion, its biggest acquisition ever, as new Chief Executive Officer Mike Roman takes a more aggressive approach to expanding the beleaguered company.

The purchase, from a group of funds advised by Apax Partners, is spurring 3M to scale back share repurchases to conserve cash. 3M will cut buybacks to between $1 billion and $1.5 billion this year from a previous expectation of as much as $4 billion, according to a statement Thursday. The company valued the purchase at $6.7 billion including Acelity’s debt, which was $2.4 billion on Dec. 31.

Eoin Treacy's view -

Buying back shares has been the go-to strategy for many companies over the last decade because the cost of borrowing has been so low which has made debt more appealing that equity. The practice helps to improve earnings per share, helps investors avoid paying taxes on dividends received and increases the value of shares owned by senior executives. The one thing buybacks do not do is help with creating new products.



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April 24 2019

Commentary by Eoin Treacy

Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated

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

Eoin Treacy's view -

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

The rise of populism in the world’s major democracies is being seen as a crisis by those most at risk of losing their position. However, it is above all a reflection of the elasticity of democracy, where we have the opportunity to propose solutions to problems of falling living standards. No one is under any illusion this process is easy but it will have long-term benefits for all of society. The fact we can have these kinds of discussions in democracies is a major strength because totalitarian societies have no room for discussion and are therefore more susceptible to collapse.



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April 23 2019

Commentary by Eoin Treacy

Brazil Digital Report

Thanks to a subscriber for this slide deck from Gartner which may be of interest.  Here is a section: 

The Brazilian economy has reached a tipping point ▪ GDP growth has returned ▪ Consumer and industry confidence are high ▪ Inflation and interest rates are at all-decade lows ▪ Country risk is on the decline ▪ Capital markets are active as ever… ▪ …and BOVESPA is at its highest point to date.

But to expand growth and make other advances, the country will need to close gaps with developed and emerging economies: ▪ Productivity has grown very little over the last decade ▪ The demographic and workforce boom is over, meaning that productivity gains will be needed to drive growth ▪ We lack innovation, patents, and a skilled workforce… ▪ … and we have not seen any sign of homegrown tech or innovation giants among our top-performing companies.

Eoin Treacy's view -

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

Corruption is a scourge Brazil has long had to contend with and it is not about to disappear overnight. In any society, the way the elite retain power is to ensure their supporters are well looked after, often at the expense of everyone else. That generally results in government employees receiving attractive pay packages and secured pensions. That is true in every country but represents a particular challenge when it represents an obstacle to recovery which is why pension reform is so important for the long-term health of the Brazilian economy. 



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April 18 2019

Commentary by Eoin Treacy

Mapping the Global Migration of Millionaires

Thanks to a subscriber for this article by Nick Routley for Visual Capitalist. Here is a section:

Time-honored locations – such as Switzerland and the Cayman Islands – continue to attract the world’s wealthy, but no country is experiencing HNWI inflows quite like Australia.

The Land Down Under has a number of attributes that make it an attractive destination for migrating millionaires. The country has a robust economy, and is perceived as being a safe place to raise a family. Even better, Australia has no inheritance tax and a lower cost of health care, which can make it an attractive alternative to the U.S.

In 2018, Australia jumped ahead of both Canada and France to become the seventh largest wealth market in the world.

Greece, which was one of the worst performing wealth markets of the last decade, is finally seeing a modest inflow of millionaires again.

Eoin Treacy's view -

People move for all sorts of reasons but chief among them are to either benefit from the tax and economy of the destination country, to find a better place to rear children and escape an overbearing or overtaxing regime.

Personally, I moved to the USA because of its open welcome for people of all races, the weather, the time zone, the attractive tax structure for businesses as well as my belief that Wall Street is in a secular bull market. I’ve since learned the USA is one of the most attractive tax havens for overseas investors.  



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April 16 2019

Commentary by Eoin Treacy

Big Companies Thought Insurance Covered a Cyberattack. They May Be Wrong

This article by Adam Satariano and Nicole Perlroth for the New York Times may be of interest to subscribers. Here is a section:

Even with teams working around the clock, it was weeks before Mondelez recovered. Once the lost orders were tallied and the computer equipment was replaced, its financial hit was more than $100 million, according to court documents.

After the ordeal, executives at the company took some solace in knowing that insurance would help cover the costs. Or so they thought.

Mondelez’s insurer, Zurich Insurance, said it would not be sending a reimbursement check. It cited a common, but rarely used, clause in insurance contracts: the “war exclusion,” which protects insurers from being saddled with costs related to damage from war.

Mondelez was deemed collateral damage in a cyberwar.

The 2017 attack was a watershed moment for the insurance industry. Since then, insurers have been applying the war exemption to avoid claims related to digital attacks. In addition to Mondelez, the pharmaceutical giant Merck said insurers had denied claims after the NotPetya attack hit its sales research, sales and manufacturing operations, causing nearly $700 million in damage.

When the United States government assigned responsibility for NotPetya to Russia in 2018, insurers were provided with a justification for refusing to cover the damage. Just as they wouldn’t be liable if a bomb blew up a corporate building during an armed conflict, they claim not to be responsible when a state-backed hack strikes a computer network.

The disputes are playing out in court. In a closely watched legal battle, Mondelez sued Zurich Insurance last year for a breach of contract in an Illinois court, and Merck filed a similar suit in New Jersey in August. Merck sued more than 20 insurers that rejected claims related to the NotPetya attack, including several that cited the war exemption. The two cases could take years to resolve.

Eoin Treacy's view -

The threat from cyber crime is both real and obvious but many investors have been disappointed by the performance of the cybersecurity sector. It makes intuitive sense that with so many hacks, ransomware events and industrial espionage that the sector should be among the best performers internationally.



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April 15 2019

Commentary by Eoin Treacy

China Stocks Fall as Better Data Dim Prospects of More Stimulus

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

"The credit data lifted expectations on market liquidity and economic fundamentals," said Wang Jianhui, a Beijing-based analyst with Capital Securities Co. "It provided an excuse for investors who wanted to bottom fish stocks after last week’s correction. But it’s more likely a technical rebound as there hasn’t been any substantial change in fundamentals."

The decline in mainland shares came after some companies issued profit warnings. In Shenzhen, Jiangling Motors Corp. sank by the 10 percent daily limit after it predicted an 84 percent decline in first-quarter net income from a year earlier.

Shandong Chenming Paper Holdings Ltd. slid 8.9 percent after saying its first-quarter profit may plunge 94 percent to 96 percent.

"While the macro numbers suggest a recovering trend, things are still looking weak in the micro segments including corporate profits," said Shen Zhangyang, a Shanghai-based strategist with
Northeast Securities Co.

Eoin Treacy's view -

The catch-22 facing policy makers is if they stimulate too much, they risk a bubble developing but if they don’t do enough, they risk a contraction. That is a clear reflection of the role liquidity has played in the evolution of the bull market over the last decade and how reliant on stimulus it is for continued expansion. They generally err on the side of caution so that is supportive of continued support.



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April 15 2019

Commentary by Eoin Treacy

The Top Economic Challenges Facing Indonesia Election Winner

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

The current account deficit, which last year widened to almost 3 percent of gross domestic product, remains a key vulnerability for the economy. It makes Indonesia reliant on foreign capital to fund its import needs, inflows that can be volatile as investor sentiment swings.

The deficit was one of the main reasons why Indonesia was targeted in an emerging market sell-off last year, triggered by rising U.S. interest rates and a stronger dollar. The rupiah slumped more than 5 percent against the dollar in 2018, dropping to its lowest levels since the Asian financial crisis two decades prior, as investors pulled out of the nation’s stocks and bonds.

The rupiah has bounced back in 2019, helped in part by the central bank’s swift action in raising interest rates by 175 basis points and the U.S. Federal Reserve’s shift away from policy tightening this year. The current account remains a risk though, and the government has imposed a number of measures to curb imports and spur exports to lower the deficit.

Data on Monday showing a second consecutive monthly trade surplus in March suggests the current account deficit probably narrowed in the first quarter. Economists surveyed by Bloomberg had predicted a $177 million trade deficit in the month.

Eoin Treacy's view -

Any politician from a democratic country, with a population of hundreds of millions, the majority of whom are entering the workforce is unlikely to succeed without at least posing as a pro-growth candidate. Both candidates in Indonesia are running on differing platforms aimed at promoting growth. In India, both the BJP and Congress Parties are showing support for small business and credit growth. In Nigeria’s last election last February, more than a few of those who have been holding office for decades lost their seats as the youthful population demand jobs and less graft. Those are all positive stories for the long-term trend of improving standards of governance in emerging markets.



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April 11 2019

Commentary by Eoin Treacy

Made-in-India iPhone X from July 2019

This article by Bharani Vaitheesvaran for ETtech may be of interest to subscribers. Here is a section:

Sustained increase in manufacturing will depend on, among other factors, the continuation of a favourable incentive regime into the next government, the official said. Mails sent to Foxconn and Apple seeking comment remained unanswered.

The company began its India manufacturing journey through another Taiwanese company Wistron, which had started with the iPhone SE from its factory near Bengaluru two years ago and later advanced to iPhone 6S model. Wistron now makes iPhone 7, a sign analysts foresee as a bump-up in local manufacture of multinational technology companies keen on the Indian market. Around 290 million smartphones were assembled in India in 2018 up from 58 million in 2014, according to data from the Indian Cellular and Electronics Association.

"In the short-term, the Differential Duty and the Phased Manufacturing Programme worked as far as import substitution is concerned. Now the challenge is to move from 290 million to 500 million phones and then to one billion by 2025," Pankaj Mohindroo, National president for ICEA, said.

"The National Policy on Electronics, 2019, gives a broad framework, but we will have to put a robust action plan behind it, which will enable exports..."

The ICEA has as its members brands such as Apple, Xiaomi, Vivo, Oppo, and manufacturers such as Flex and Foxconn.

Eoin Treacy's view -

India has the twin advantages of a massive young population and low costs. If we think about how manufacturing generally evolves, it is usually attracted by the presence of a low cost base and regulatory change which incentivises growth. Infrastructure usually comes later but it does need to be built. That is potentially where India is today. It is successfully attracting manufacturers but will need to do what is necessary to ensure they stay.



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April 09 2019

Commentary by Eoin Treacy

Italy Raises Deficit Target, Risking Fresh Conflict With The EU

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

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

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

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

Eoin Treacy's view -

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



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April 09 2019

Commentary by Eoin Treacy

Israeli elections primer: Final polls and what they mean

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

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

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

Eoin Treacy's view -

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



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April 08 2019

Commentary by Eoin Treacy

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

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

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

Eoin Treacy's view -

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



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March 29 2019

Commentary by Eoin Treacy

Erdogan's Real Test Comes Monday When Election Calendar Clears

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

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

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

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

Eoin Treacy's view -

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



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March 22 2019

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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March 20 2019

Commentary by Eoin Treacy

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

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

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

Eoin Treacy's view -

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



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March 18 2019

Commentary by Eoin Treacy

March 12 2019

Commentary by Eoin Treacy

The Sharing Economy Was Always a Scam

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

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

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

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

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

Eoin Treacy's view -

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



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March 11 2019

Commentary by Eoin Treacy

Indonesia's imminent presidential election

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

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

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

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

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

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

Eoin Treacy's view -

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



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March 11 2019

Commentary by Eoin Treacy

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

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

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

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

Eoin Treacy's view -

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



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March 07 2019

Commentary by Eoin Treacy

How a Chinese Exodus is Exacerbating Australia's Property Slump

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

Reserve Bank Governor Philip Lowe noted the withdrawal of foreign buyers in a speech Wednesday as he sought to explain the drivers of Australia’s property slump. The central bank is closely watching the decline, especially as it’s starting to impact household spending and slow the economy.

“Another demand-side factor that has influenced prices is the rise and then decline in demand by non-residents,” said Lowe. “The timing of these shifts in foreign demand has broadly coincided with –- and reinforced –- the shifts in domestic demand.”

While Chinese buyers helped inflate the property bubble, they’re unlikely to return in sufficient numbers to stabilize the market. For one thing, shifting money abroad from China is tougher these days as authorities there are strictly enforcing rules aimed at curbing capital outflows.

There are other domestic factors suggesting prices could keep declining too. Australian banks have turned gun-shy on lending following an inquiry that exposed widespread misconduct in the industry and more homes are coming to the market.

Eoin Treacy's view -

While in Melbourne last April, all anyone wanted to talk about was the impact of the Royal Commission’s inquiry and the price of property. Prices are high relative to incomes and Australia’s private sector debt to GDP is among the highest in the world. With short fixes on mortgage rates and floating rates dominating, the Australian consumer is very interest rate sensitive and has a lot of net worth locked up in property.



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March 05 2019

Commentary by Eoin Treacy

The message behind the Target balances

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

Eoin Treacy's view -

If the European Commission’s preference for a Eurozone suitor for Deutsche Bank rather than a domestic merger candidate is any guide, we can conclude that the Eurozone bureaucracy continues to favour a continued drive towards cohesion and banking union. In fact, if we simply look at the measures which have been taken rather than the bluster of the media, nothing has happened to change the direction of policy in the EU towards further cohesion.



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February 26 2019

Commentary by Eoin Treacy

Your Avocados and Olives Are Pricier Because Fat Is In Fashion

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

The average prices of avocados, butter, olive oil and salmon have climbed as much as 60% since 2013, after stripping out seasonal price patterns and the effects of unusual weather events, according to various sources. Over the same period, prices of corn, soybeans, sugar and wheat either fell or didn’t change significantly.

These changes in fortune reflect the broad dietary shifts of recent years. Many people have switched to eating more foods that are high in natural fats from high-carbohydrate, low-fat diets. And government agencies and nutritionists are recommending that people avoid consuming industrial-made fats and margarines and instead eat more fish, nuts and healthier oils.

Stephan Hubertus Gay, a senior agricultural policy analyst at the Organization for Economic Cooperation and Development, said consumers are eating products that contain fat again. But he said “we were a bit surprised that it came so fast,” referring to the sharp increase in demand.

Eoin Treacy's view -

The write down of goodwill in Kraft Heinz is a clear signal sugar is out of fashion and the foundation of many snack food brands is based on the addictive qualities of the sweetener.

Kraft Heinz remains weak and a clear upward dynamic will be required to check momentum beyond a pause.



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February 25 2019

Commentary by Eoin Treacy

Wild Week Ahead for Trump, Kim, Brexit, Cohen and Fed's Powell

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

After days of buildup, Trump kicked off the week by delaying a threatened increase in U.S. tariffs on Chinese imports and dangling a summit with President Xi Jinping at Mar-a-Lago, his Florida retreat, if “both sides make additional progress.” Along the way, he slapped down Lighthizer on a semantic point. Earlier, the two sides were haggling over how to ensure Beijing lives up to its promise to not weaken the yuan. Trump then reported substantial progress, including on currency.

And

Look for Powell to offer signals on what’s next for the Fed during two days of congressional testimony. When they last met, policy makers broadly backed ending the runoff of the central bank’s balance sheet. Lighthizer, who testifies Wednesday, may give a sense of how likely the U.S. is to impose tariffs on auto imports. The European Union is threatening to hit back. U.S. fourth-quarter gross domestic product, due Thursday, is expected to show 2.5 percent expansion last year, short of the Trump administration’s ambitious goal.

Eoin Treacy's view -

The Shanghai A-Share Index rose 5.95% as investors raced to price in the conclusion the trade war is over. The Index has been trending downwards for more than a year but broke its sequence of lower rally highs two weeks ago and extended that advance today.



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February 22 2019

Commentary by Eoin Treacy

U.S. Bets on China's Special Envoy in Trade Talks

This article by Lingling Wei and Bob Davis for the Wall Street journal may be of interest to subscribers. Here is a section:

While Chinese negotiators offered to stop providing government subsidies that distort prices and put Western rivals at a disadvantage, they haven’t so far produced a list of subsidies they would be willing to eliminate, the people said.

Instead, the Chinese side so far has focused its offer on greater purchases of U.S. agricultural and energy products such as soybeans, crude oil and liquefied natural gas, they said.

Whatever deal is struck, the U.S. is also seeking guarantees it will be enforced and a means to resolve disputes.

“It’s one thing to write something on a piece of paper,” said Secretary of State Mike Pompeo on Fox Business Network on Thursday. “It’s another thing to have enforcement mechanisms. And I know our trade team is hard at work, making sure that the American people get that.”

Eoin Treacy's view -

How likely is it that the USA and China will reach a trade agreement? I think it comes down to two factors. What is it that the USA wants from a deal and what is China willing to give up?



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February 22 2019

Commentary by Eoin Treacy

Walmart's US e-commerce sales up 43% in Q4, thanks to growing online grocery business

This article by Sarah Perez at Techcrunch.com may be of interest to subscribers. Here is a section:

Walmart has also made shipping to your home more affordable. In 2017, Walmart introduced an alternative to Amazon’s pricier Prime membership with free, two-day shipping on orders of $35 or more. This past year, it expanded free, two-day shipping to its marketplace items by working with hundreds of its top sellers and third-party fulfillment providers, like Deliverr.

The company last year also launched a new, more personalized website, which included a revamped Home section, as well as a cleaner, more modern design and sections that showcased items trending in the shoppers’ local area. The redesigned website made it easier to order groceries and reorder favorites, too.

In November, eMarketer noted Walmart had overtaken Apple to become the No. 3 online retailer in the U.S., with Walmart (including its Jet and Sam’s Club brands) poised to capture 4 percent of all online retail by year-end. Amazon, of course, remained No. 1, followed by eBay.

Eoin Treacy's view -

Walmart is making a big push into free 2-day shipping which is effectively the gold standard of online service provision. I sat in on a conference call last week with the company and the CEO of Deliverr, which is offering third party sellers the opportunity to circumvent Walmart’s own criteria for two-day shipping by sending inventory directly to Deliverr’s warehouses. That is an analogue for the Fulfilled by Amazon program which is the foundation of Prime delivery.



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February 13 2019

Commentary by Eoin Treacy

RBNZ Remains On Hold And The Kiwi Strengthen

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

As was widely expected, RBNZ remained on hold at +1.75%, yet may have sounded less dovish than expected. Despite the bank being cautious, its forecasts include the official cash rate remaining at +1.75% for 2019 and implied a rate hike in 2020. The bank also expects the core inflation rate to gradually rise to 2% yoy mid-point which necessitates a continued supportive monetary policy. Analysts pointed out that the bank seems to have time at its side, albeit they expect that as the year progresses growth could undershoot the bank’s projections causing for a more dovish stance. Governor Orr in his press conference stated that the chances of a future rate cut have not increased.

Eoin Treacy's view -

Island nations generally tend to have higher interest rates because of the cost of imports, exports and isolation push up inflation. At 1.75% New Zealand’s rates are unusually low from a long-term perspective reflecting the need for a stimulus following the Christchurch earthquakes and the competitive forces of devaluation where just about every other developed economy in the world is running low interest rates.



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February 13 2019

Commentary by Eoin Treacy

Worst Korean Jobs Figures in Nine Years Undermine Moon's Agenda

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

 

South Korea’s jobless rate hit the highest level in nine years, adding to evidence that President Moon Jae-in’s minimum wage hikes are doing more to harm employment growth than they are to raise incomes.

The seasonally-adjusted unemployment rate reached 4.4 percent in January, the worst figure since January 2010, when it was 4.7 percent. The median forecast of economists was for 3.8 percent. Meanwhile, jobs growth slowed to 19,000, down from 34,000 jobs in December.

Moon’s administration hiked the minimum wage by 11 percent this year, following a 16 percent increase last year.

Eoin Treacy's view -

South Korea is the world’s 11th largest economy so it does not tend to be factored in when analysts talk about synchronised global economic expansion. However, it is often a lead indicator for the global economy because of the nation’s focus on exports like cars and consumer electronics and its proximity to China. South Korea’s slowdown in late 2017 presaged the global slowdown concerns that animated markets for much of 2018.



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February 07 2019

Commentary by Eoin Treacy

Thorburn Quits as National Australia Bank CEO After Inquiry Lashing

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

The yearlong inquiry uncovered a litany of wrongdoing across the industry, from charging dead people fees to advisers pushing customers into bad investments to meet bonus targets. National Australia staff accepted cash bribes to approve fraudulent mortgages and misled the regulator over a fees-for-no-service scandal.

“I acknowledge that the bank has sustained damage as a result of its past practices and comments in the Royal Commission’s final report,” said Thorburn, who will leave Feb. 28. “I recognize there is a desire for change.”

His replacement will have to restore customer trust in the lender and steer it through a tougher landscape of falling earnings, a sinking housing market and rising funding and compliance costs. The nation’s big-four banks also face more muscular regulators intent on punishing wrongdoers in court.

In further fallout from the inquiry, National Australia said it will delay the planned IPO of its MLC wealth management unit as fee income and commissions come under pressure.

Eoin Treacy's view -

David used to say he would not invest in banks on moral grounds. That is a clear reflection on the rather nefarious reputation of the industry to fall victim to its worst impulses to generate profits. Nevertheless, banks are important sources of credit for the economy; in every country. When they are under pressure either from reputational, regulatory or market risk their ability to create credit is inhibited and that represents a challenge for the market. The integral part they play in supplying credit also contributes to their knack of avoiding hefty fines.



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January 31 2019

Commentary by Eoin Treacy

BAT Upgraded to Overweight at Piper; Risks Look Priced In

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

Philip Morris’s patent lawsuit against British American Tobacco in Japan, which is seeking a sales injunction of BAT’s Glo heated tobacco product, is still a risk, but BAT has “several methods of defense” and the earnings impact would probably be modest, Piper Jaffray analyst Michael Lavery writes in a note.

Risk on possible U.S. menthol cigarette ban looks priced in and Piper doesn’t see any operational impact “for years and years”

Also notes that consumers can adapt

Piper doesn’t see any risk to dividend growth, allaying concerns from investors; says BAT’s cash flows don’t seem to be at risk in a way that would hurt the dividend

Upgraded to overweight from neutral; PT kept at GBP30

NOTE: BAT shares down 51% in last 12 months vs 19% drop for Imperial Brands, 31% decline for Philip Morris and 35% fall for Altria

Eoin Treacy's view -

The tobacco sector is not for everyone but it is inherently defensive considering they are selling an addictive product and therefore have reliable cashflows. The performance of defensive sectors is something that is important to monitor in the latter stages of a cyclical bull market because they typically tend to be depressed by disinterest when growth stocks are outperforming but turn to outperformance when investors start to value security.



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January 28 2019

Commentary by Eoin Treacy

GMO Quarterly Letter Q4 2018

Thanks to a subscriber for ths report which may be of interest. Here is a section on the outlook for 2019:

Eoin Treacy's view -

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

There are two particularly pervasive views among institutional investors right now. The first is that emerging markets are due a period of outperformance and are cheap on relative value measures, particularly versus the USA. The second is the Dollar is going down in a big way from here, which of course would boost the prospects for emerging market currencies



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January 25 2019

Commentary by Eoin Treacy

Email of the day on reliable dividend companies

Your copy on global pay-out ride is coming back to earth is timely. The well-regarded fund manager Neil Woodford has given Imperial Brands a significant 8% asset allocation in his flagship income fund. Imperial pays a hefty dividend, growing at 10% rate. It generates good cash, but has huge BBB+ debt outstanding. It has come down quite a bit from its peak, but it’s valued at 17 times earning which may roll back to the 10 times earnings it had around 2000. Is there a case for holding Imperial Brands as primary source for dividends for the long run? I wonder if you could review some good dividend paying companies, net cash global companies with strong balance sheets, that will not get caught in the pending investment grade bond crunch. Thanks!

Eoin Treacy's view -

Thank you for this question which I’m sure is something a number of subscribers are pondering. More than half of all investment grade bonds are rated BBB and approximately $600 billion are up for refinancing this year. Against a background of tightening liquidity conditions that represents a risk some companies are going to have issues sourcing funding at the highly attractive rates which have been on offer for the last decade.
 



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January 25 2019

Commentary by Eoin Treacy

Email of the day on the Rand and governance:

Hello Eoin, First of all I would just like to say I have no problem with the way you have organised your video commentaries. I find them very perceptive and thought provoking. I would hazard a guess that 95% of your subscribers are of the same opinion.

On your comments on South Africa, having spent the past 16 years here, I would advise investors not to hold their breath as regards the new president Cyril Ramaphosa instituting much in the way of improved governance here. Corruption in this country is all pervasive and is now penetrating certain personnel in the judiciary. I know this from various contacts I have with regards to the Rhino poaching problem. The Zuma faction still wields huge influence within the ANC. The black economic empowerment policy has led to totally unsuitable and unqualified people being placed in key positions both in government and in the private sector. Given the current state of the world economy, I would indeed be surprised if the ZAR is not the currency to lose most in value among the emerging markets over the next year.

Eoin Treacy's view -

Thank you for this informative email and your on the ground perspective from South Africa.

The simple conclusion reached by investors is Ramaphosa is better than Zuma which is good news. The monumental challenge of tackling corruption is a long-term challenge and if the trend toward deterioration can be allayed that can be considered progress. It is too early to conclude whether the new administration can make progress on that front but I think everyone is aware of just how difficult that could be.



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January 23 2019

Commentary by Eoin Treacy

The $1.8 Trillion Global Payout Ride Is Coming Back to Earth

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

In the new era of prudence, shareholders who’ve enjoyed fatter and fatter dividend checks can rest easy no longer.

IHS Markit Ltd. last week projected a “significant slowdown” in global dividend growth this year, at 5.9 percent, totaling $1.8 trillion, according to a bottom-up analysis of over 9,500 firms. Thanks in part to mounting geopolitical risks, that’s a shift from the 14.3 percent boom in 2018 and 9.4 percent the year before.

The business-information provider reckons about 11 percent of firms will announce a dividend cut this year -- an uptick of almost 100 names relative to 2018.

“I believe that dividends of leveraged companies can suffer more,” said Willem Sels, a London-based chief market strategist at HSBC Private Bank. “The excessive focus on the shareholder
value at the expense of bondholder value will be more muted.”

Eoin Treacy's view -

2017 represented the best of all possible worlds for investors. The tax cuts had been passed and investors got busy pricing that into the market. There was money for everything from buybacks to dividend increases and it was being paid for with tax savings, repatriated profits from overseas and fresh debt.



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January 23 2019

Commentary by Eoin Treacy

Musings from the Oil Patch January 23rd 2019

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

Eoin Treacy's view -

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

OPEC’s supply cuts and US shale’s continued growth are already in the market. The question of how fast global growth will be, and therefore the demand outlook, is a movable feast but the trajectory of interest rates and the trade war are obviously important factors.



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January 21 2019

Commentary by Eoin Treacy

Asking Prices for London Homes Slump to Lowest Since 2015

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

 

London home asking prices fell to their weakest level in 3 1/2-years in January as sellers spooked by
Brexit held off putting their properties up for sale.

Asking prices in the capital slipped 1.5 percent from December to 593,972 pounds ($765,000), the lowest level since August 2015, according to Rightmove. New listings in the first two weeks of the year were 10 percent lower than in 2018 as owners were deterred by the cost of moving and concern about the political backdrop, the property website said.

After years of outsize gains in home values, London and its surrounding areas have so far borne the brunt of Brexit, with a lack of clarity over the future relationship with Europe causing both households and firms to hold off on investment decisions.

Listing prices in the capital have declined from a peak of almost 650,000 pounds in May 2016, the month before Britons voted to leave the European Union.

Nationally, values rose 0.4 percent to 298,734 pounds, with the biggest gains in the north of England. Rightmove’s data is compiled from 70,068 properties put on sale by agents across the country from Dec. 9 to Jan. 12.

A separate report by Acadata, which incorporates all house transactions, showed national home prices rose 0.6 percent in the year to December. Excluding London and the south east, values climbed 1.4 percent.

Eoin Treacy's view -

There was another news story today on how Citadel Investment Management’s CEO Ken Griffin paid, a discounted £95 million, for 3 Carlton Gardens which is about half a mile of open park land from Buckingham Palace.



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January 21 2019

Commentary by Eoin Treacy

Brazil Is Back in the Game, New Leader Will Tell Davos Investors

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

“Brazil is a hot topic for foreign investors,” said Fabio Alperowitch, portfolio manager and founder of Fama Investimentos, a Sao Paulo-based fund manager. “But no one will change their opinion just because of his speech. Investors’ level of skepticism with emerging markets is still high.”

On his long flight to Davos, Bolsonaro will carry the most crucial plan to tackle a budget deficit that hovers around 7 percent of gross domestic product -- a draft proposal to cut pension outlays and save as much as 1 trillion reais over 10 years. Whether he will attract enough congressional support for the bill when lawmakers reconvene in February will be a make or break moment for his administration.

Eoin Treacy's view -

Bolsonaro will not have to compete for airtime at Davos this year. However, as the above article suggests the big test of whether the enthusiasm which greeted his administration is warranted will be in how successful he is in pushing through reform and combatting corruption.



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January 18 2019

Commentary by Eoin Treacy

Elections in 2019

Eoin Treacy's view -

I’ve been discussing the rise of populism, for two years, as a revolt against the status quo which is leading to a lurch to the fringes of political opinion. The clarion call for people everywhere demanding change is “What about me?” The only way governments know how to placate disaffected people is to give them more money. That is why we have seen so many countries pursuing fiscal stimulus/deficit spending measures.



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January 18 2019

Commentary by Eoin Treacy

China Is Said to Offer Path to Eliminate U.S. Trade Imbalance

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

China has offered to go on a six-year buying spree to ramp up imports from the U.S., in a move that would reconfigure the relationship between the world’s two largest economies, according to officials familiar with the negotiations.

By increasing annual goods imports from the U.S. by a combined value of more than $1 trillion, China would seek to reduce its trade surplus -- which last year stood at $323 billion -- to zero by 2024, one of the people said. The officials asked not to be named as the discussions aren’t public.

The offer, made during talks in Beijing earlier this month, was met with skepticism by U.S. negotiators who nonetheless asked the Chinese to do even better, demanding that the imbalance be cleared in the next two years, the people said.

Economists who’ve studied the trade relationship argue it would be hard to eliminate the gap, which they say is sustained in large part by U.S. demand for Chinese products.

Eoin Treacy's view -

On the face of it this is good news because it at least suggests the USA and China are engaging in productive discussions and some initiatives to end of the impasse are being discussed. The stock market continues to unwind the overextension relative to the trend mean as it prices in optimism that a deal with be struck.



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January 09 2019

Commentary by Eoin Treacy

Outlook for 2019: The Game Has Changed

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

Eoin Treacy's view -

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

The broad global adoption of fiscally stimulative policies is unlikely to be as coordinated as the monetary response to the credit crisis was. The big arbiters of how much liquidity is provided to the global economy and eventually the markets will be in which large countries adopt fiscal stimulus. Germany, China and Brazil are the big additional potential sources of stimulus so it is their political machinations that are most worth watching.



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January 09 2019

Commentary by Eoin Treacy

Philippine Bulls on a Roll as Overseas Stocks Funds Trickle Back

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


 

Philippine bulls are on a roll, and who can blame them? The nation’s equities index has started the year beating many global peers, and foreign fund managers are putting back money in a market that was among Asia’s worst in 2018.

Traders at Rizal Commercial Banking Corp. and AB Capital & Investment Corp. are riding the rally by deploying their cash, rather than cutting their stock holdings as they did last year whenever equities went into high gear. The Philippine Stock Exchange Index has rallied more than 6 percent in the first
trading days of January, including a 2.8 percent gain Wednesday.

It closed at an eight-month high, breaking a key resistance level and moving closer to the 8,000 that traders say it could surpass this quarter.

“It’s a good strategy to ride the prevailing positive mood, even if only for the short term,” said Gerard Abad, who manages $380 million as chief investment officer at AB Capital. “We will see a continuation of the improvement in inflation, and it helps that the U.S. Fed has become dovish. That eases pressure on the central bank to raise rates.”

Eoin Treacy's view -

There is no one talking about a secular bull market in emerging markets anymore and that is a good thing from the perspective of a long-term investor. It means it is not a crowded trade.



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January 08 2019

Commentary by Eoin Treacy

Delay Brexit? Ireland would not stand in the way

This article by Guy Faulconbridge, Conor Humphries for Reuters may be of interest to subscribers. Here is a section:

The Telegraph newspaper cited three unidentified EU sources as saying British officials had been “putting out feelers” and “testing the waters” on an extension of Article 50, which sets out the conditions for leaving the EU.

Brexit Secretary Stephen Barclay denied the report and said London would not seek to extend the divorce while German Foreign Minister Heiko Maas said it was not time to discuss such a course. Ireland, though, said it would not stand in the way if Britain made such a request.

“Certainly from an Irish perspective, if such an ask happens, we won’t be standing in the way on that,” Irish Foreign Minister Simon Coveney told journalists after a meeting with Maas in Dublin.

“If it is the case that at some point in the future that the British government seeks an extension of Article 50, then that is something that will have to get consideration at an EU level,” Coveney said.

Ireland’s economy would be hit hard by a disorderly Brexit and the most contentious part of May’s deal is an insurance plan aimed at preventing a hard border between the Irish Republic and Northern Ireland.

Eoin Treacy's view -

May is said to intend to “move swiftly” if her deal is voted down in parliament, as seems likely. The UK is due to leave the EU on March 29th so 80 days from now. One is reminded of Phileas Fogg’s race around the world but perhaps the more appropriate literary comparison is with Don Quixote and tilting at windmills, but this time in the Low Countries.



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January 07 2019

Commentary by Eoin Treacy

Indonesia Signals Return as Asia's Emerging Market of Choice

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

Indonesia is often seen as an emerging market bellwether with its high yields, strong economic growth and a reformist government, with foreign investors holding about 40 percent of local-currency bonds. The direction of its markets may provide clues as to whether the stress that swept developing nations last year may be coming to an end.

Federal Reserve Chairman Jerome Powell’s comments on Friday indicating a possible pause in rate hikes, an easing in China’s monetary policy, and hopes of improvement in trade tensions between Beijing and America have all combined to boost emerging markets on Monday.

“The rupiah looks to be on that nice catch-down trade given the Goldilocks’ moment that markets are reveling in,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “Fed’s Powell humming all the right notes out of the markets song book has gone a long way” in boosting the rupiah, he said.

Eoin Treacy's view -

Indonesia is a commodity exporter, has a large young population, an evolving manufacturing sector, and while now an energy importer is still an oil producer. With a reform minded administration it has exhibited relative strength this year not least because it got its currency devaluation done in 2015.



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January 03 2019

Commentary by Eoin Treacy

January 03 2019

Commentary by Eoin Treacy

Brazilian Assets Soar as Bolsonaro Starts to Deliver on Promises

This article by Mario Sergio Lima and David Biller for Bloomberg may be of interest to subscribers. Here is a sectionBrazilian Assets Soar as Bolsonaro Starts to Deliver on Promises

In a speech at his swearing-in ceremony in Brasilia on Wednesday, Guedes promised a sweeping overhaul of the country’s state apparatus and business environment to unleash corporate potential and free future generations from debt.

"Private-sector pirates, corrupt bureaucrats and creatures from the political swamp have conspired against the Brazilian people," he said. "Excessive spending has corrupted Brazil." Bolsonaro has tapped Guedes, a graduate of the University of Chicago, to manage economic policy in a country hamstrung by rising debt, a gaping fiscal deficit and slow growth. Bolsonaro won the October election by a wide margin as part of a popular backlash against crime, corruption and economic malaise.

In his comments Wednesday, Guedes highlighted the urgency of the task ahead. "Our business class is chained down by interest rates, high taxes and labor costs," he said, adding that he believed the ideal tax burden would be around 20 percent of gross domestic product, rather than the current rate of 36
percent.

Earlier in the day, the new energy minister, Bento Albuquerque, said Brazil would deliver on plans to capitalize Eletrobras, prompting shares in the state-run company to jump as much as 9.7 percent. He added that he would seek a lower tax burden and few subsidies in the electricity sector.

Eoin Treacy's view -

Markets tend to reward the efforts of right-wing populists because they promise to streamline bureaucracy, cut regulation and boost economic growth; all of which tend to improve sentiment towards asset prices. Bolsonaro’s decision to appoint a University of Chicago economist as his finance minister is a signal, he has growth and employment as his first set of priorities and that is likely to be appreciated by investors.



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December 31 2018

Commentary by Eoin Treacy

Best and Worst of 2018

Eoin Treacy's view -

The big drawdown that began in January represented a major inconsistency for what had previously been an impressively consistent trend. The subsequent ranging belied the churning that was taking place inside the major Wall Street indices as leadership narrowed to focus on the mega-cap technology companies.  Facebook peaked in the summer and Apple in October and that was one of the causal factors in the ensuing sell-off as large cap underperformance weighed on ETFs.



The fact that Advanced Micro Devices was the best performing share on the S&P500 this year is a testament to the extraordinary volatility we have seen in single stock names. The share opened in January at $10.42, peaked in September at $34.14 and closed today close to $18.32.



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December 27 2018

Commentary by Eoin Treacy

To Help Put Recent Economic & Market Moves in Perspective

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

For all of the previously described reasons, the period that we are now in looks a lot like 1937.

Tightenings never work perfectly, so downturns follow.  They are more difficult to reverse in the late stage of the long-term debt cycle because the abilities of central banks to lower interest rates and buy and push up financial assets are then limited.  When they can’t do that anymore, there is the end of the long-term debt cycle.  The proximity to the end can be measured by a) the proximity of interest rates to zero and b) the amount of remaining capacity of central banks to print money and buy assets and the capacity of these assets to rise in price.  

The limitation in the ability to print money and make purchases typically comes about when a) asset prices rise to levels that lower the expected returns of these assets relative to the expected return of cash, b) central banks have bought such a large percentage of what there was to sell that buying more is difficult, or c) political obstacles stand in the way of buying more.  We call the power of central banks to stimulate money and credit growth in these ways “the amount of fuel in the tank.” Right now, the world’s major central banks have the least fuel in their tanks since the late 1930s so are now in the later stages of the long-term debt cycle.  Because the key turning points in the long-term debt cycle come along so infrequently (once in a lifetime), they are typically not well understood and take people by surprise.  For a more complete explanation of the archetypical long-term debt cycle, see Part 1 of “Principles for Navigating Big Debt Crises” (link).

So, it appears to me that we are in the late stages of both the short-term and long-term debt cycles.  In other words, a) we are in the late-cycle phase of the short-term debt cycle when profit and earnings growth are still strong and the tightening of credit is causing asset prices to decline, and b) we are in the late-cycle phase of the long-term debt cycle when asset prices and economies are sensitive to tightenings and when central banks don’t have much power to ease credit.

Eoin Treacy's view -

Both the Dow Jones Industrials and the S&P500 posted large upside key day reversals yesterday to signal lows of at least near-term significance. Neither followed through on the upside today but they did hold the moves. Considering just how much they fell since early this month there is certainly scope for a rebound but the true test of whether more than near-term support has been found will be in the extent to which they hold their lows.



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December 27 2018

Commentary by Eoin Treacy

China says direct trade talks with U.S. in January, pledges more opening

This article by Yawen Chen and Ryan Woo for Reuters may be of interest to subscribers. Here is a section:

China has also said it will suspend additional tariffs on U.S.-made vehicles and auto parts for three months starting on Jan. 1, adding that it hopes both sides can speed up negotiations to remove all additional tariffs on each other’s goods.

Bloomberg, citing two people familiar with the matter, reported on Wednesday that a U.S. trade team will travel to Beijing the week of Jan. 7 for talks.

A person familiar with the matter told Reuters last week that talks were likely in early January.

In yet another reconciliatory sign, China issued on Tuesday a so-called negative list that specifies industries where investors - domestic or foreign - are either restricted or prohibited.

The unified list is seen as another effort to address concern among Western investors that there is no level-playing field in China. Investment in key Chinese sectors, however, is still prohibited.

Gao said China would “comprehensively” remove all market access restrictions for foreign investors by the end of March, in areas not included in a foreign investment “negative” list published in June.

Eoin Treacy's view -

China has a lot more to lose from a trade war than the USA. While it is difficult to get accurate statistics on the health of the economy the simple fact that car sales are declining at a rather rapid pace is a clear signal the Chinese consumer is at least holding off on making purchases. Here is a link to an article from the Wall Street Journal covering the story and here is a section: 

In the frenzy, some companies became complacent, assuming growth would be endless and easy to capture, according to Mr. Gong and other analysts. Then the growth evaporated. Sales grew 3% in 2017 and declined 2% in the first 11 months of 2018.

China now has enough factories to build 43 million cars but will produce fewer than 29 million this year, according to consulting firm PwC. While foreign and domestic auto makers alike find themselves under pressure, the slowdown has hit those that misread the market hardest of all.



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December 21 2018

Commentary by Eoin Treacy

Indian Stock Market Leapfrogs Germany's as Economy Booms

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

India’s ascent on the global stage has claimed another victory after its stock market overtook Germany to become the seventh largest in the world.

The Asian giant edged past the equity market of Europe’s largest economy for the first time in seven years, according to data compiled by Bloomberg. That means, after the U.K. leaves the European Union in March, the bloc would have only one country -- France -- among the seven biggest markets.

The move reflects India’s positive returns this year as companies’ reliance on domestic demand enabled them to avoid the meltdown in other emerging markets spurred by Federal Reserve tightening and a trade war between the U.S. and China. It also highlights the challenges facing the EU, including its future relationship with the U.K., a standoff with Italy over budget allocations and separatist clashes in Spain.
 

Eoin Treacy's view -

India is benefitting right now from the decline in oil and other commodity prices as well as the fact its absence of a big export-oriented manufacturing sector insulates the economy from strife abroad.



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December 19 2018

Commentary by Eoin Treacy

Here is the text of a bulletin from Bloomberg on today's Fed Meeting.

Here are the Key Takeaways from today's FOMC events:

The FOMC hiked rates a fourth time this year to a decade high, ignoring President Trump’s criticism, and lowered its outlook to two hikes from three next year.

Powell specifically endorsed the dots, citing them in his press conference as a guideline for the committee and a useful tool.

The committee tweaked its guidance to ``some further gradual increases’’ -- a more hawkish development compared with the alternative of dropping the guidance.

Powell said all meetings are live for possible moves next year, but gave no strong hints as to when the Fed would raise next.

There was unanimous support for the hike.

Powell said that Trump's comments had no impact on policy and that the Fed is committed to doing what it thinks is best.

Powell said financial conditions caused a slight downgrade in 2019 forecasts but no real change in the outlook.

Markets took FOMC and Powell as hawkish, with the yield curve flattening and stocks falling.

Eoin Treacy's view -

The dot plots suggest two interest rate hikes next year but Jay Powell basically said they are going to be data dependent next year. The one thing that stood out to me from the press conference was that no one asked questions about the pace of balance sheet run off. That says a lot.



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December 19 2018

Commentary by Eoin Treacy

Low Coffee-Bean Prices Brew Trouble for Farmers

This article by Julie Wernau and Robbie Whelan for the Wall Street journal may be of interest to subscribers. Here is a section:

“When the price is good, we have work, but when it isn’t, we have no money to pay the rent, no money for food, no money for the doctor,” said Ms. Poló, 56, standing on the side of the road in Baja California state, where the bus she was riding had broken down about three hours from the border.

Coffee prices have been stuck below the cost of production for the longest stretch since the global financial crisis, leading some producers to abandon crops and some to migrate for new jobs. The shift is being driven by currency fluctuations that are encouraging sales and production in Brazil, the world’s largest coffee producer, spurring a record crop that is driving down prices for other coffee-growing nations.

“We’re now back in real terms to where we were 20 years ago, when farmers abandoned land because they couldn’t make ends meet,” said Paul Rice, president and chief executive of Fair Trade USA, which works with 1 million coffee producers in 42 countries.

A 2017 study by Cornell University for Fair Trade USA placed the average cost of coffee production at $1.40 a pound. Coffee prices have been below that price for 20 straight months, the longest stretch since 2008, according to FactSet data.

Eoin Treacy's view -

When commodity prices fall below the cost of production supply destruction takes place and the lowest cost producer gains market share. For Robusta coffee the question is whether central America can remain competitive with larger producers like Vietnam and Brazil for Arabica.



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December 17 2018

Commentary by Eoin Treacy

The equity chief at $6.3 trillion BlackRock weighs in on the trade war, a possible recession, and offers her best investing advice for a tricky 2019 landscape

This article by Joe Ciolli and Jack Houston for Business Insider may be of interest to subscribers. Here is a section:

Moore: We think we're in the later stage of the cycle. So, let's be clear, our barbell approach doesn't mean just hold an anchor in high quality, which we think you should, and then just swing for the fences and lower quality assets that seem to be de-rated.

That would be great if we didn't have any worries about policy — both the monetary side as well as the trade policy to consider. But what we think people should be focused on are companies that have excellent balance sheets, that have business models, that are sustainable through all parts of the cycle.

That's where we're not expecting to see huge amounts of earnings volatility, even if we continue to have a sequential economic growth slowdown. Although again, still above-trend, so still pretty good.

But also think about what areas of the market, whether it's industries or assets, have really fallen out of favor, like emerging markets this year. Places where the fundamentals haven't deteriorated, and be willing to take a bet on some higher-volatility, slightly riskier assets as well. So, this barbelled approach, don't take risk entirely off. But if you need to sleep at night a little bit better, make sure that there's big quality nut to rest on.

Ciolli: We keep talking about the possibility of an economic recession, but it does not seem like it's in your base case for 2019. However, you do mention that the table may be set for something in 2020. Can you outline your recession view and what, if anything, people can do next year to prepare for that if it does transpire in 2020?

Moore: I think actually it's consensus at this point that 2019 is not the year that we have the US-led recession.

I also just want to note something here. A lot of times when we talk about recession in our outlook, and then also talk about recession in the market, it does tend to be a little US-focused. And that we need to recognize that different regions and countries and markets are at different points in their cycle. I think about this a lot as an equity person. The profit cycle is really different, region from region. And we had seen some profits recessions in non-US markets, even while the US continued to make new highs.

So, that aside, in 2020 and onwards, we think that recession probability increases for the US. Part of that is because we are just at the later stage of the cycle. We also know that it takes some time for tighter monetary policy to really play out in the economy and have an impact. It's possible that we'll see a slowdown in activity at that point, or greater inflationary pressure, frankly, from higher wages feeding through. It's not our base case at this moment, but it's a non-zero probability.

We recognize that investors need to be positioned for that eventual slowdown, well in advance. As you know, equity markets tend to price in these changes in economic growth far before we would actually get the data. We just want to have quality portfolio construction and make that a significant thing that we're focused on in 2019. So that we don't get to 2020, when the economic data starts to soften a little bit, and find ourselves flat-footed.

Eoin Treacy's view -

There has been a clear rotation out of the most aggressively priced portion of the market and into clearly defensive sectors. Talking about the clear benefits of investing in high quality balance sheets is a hard sell when growth stocks are powering ahead. However, when the lustre comes off the shiniest new economy names investors rediscover cashflows and dividend discounting.



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December 17 2018

Commentary by Eoin Treacy

Europe's Retail Apocalypse Spreads to Online From Stores

This article by William Mathis and Katie Linsell for Bloomberg may be of interest to subscribers. Here is a section:

Europe’s retail crisis is spreading from bricks-and-mortar stores to e-commerce as Asos Plc plunged the
most in 4 1/2 years after warning that Christmas shopping got off to a disastrous start.

The gloomy update from a U.K. online retailer that competes with Amazon.com Inc. and has furnished fashions to the likes of Meghan Markle shows that retail weakness is widespread in the runup to the holidays.

Asos fell as much as 43 percent Monday in London, wiping more than 1.4 billion pounds ($1.8 billion) off the market value. The news dragged down other online retailers like Boohoo Group Plc and Zalando SE, as well as store operators like Marks & Spencer Group Plc and Next Plc.

“This goes against the script,” said Stephen Lienert, a credit analyst at Jefferies. “It was supposed to be bricks and mortar that’s dying and online is the future, but that headline gets ripped up today.”

Eoin Treacy's view -

Brick and mortar and online retailers share one common factor. They both rely on consumers to be ready to buy what they are selling. That works well when the economy is doing well but Europe’s economies are under pressure at just the same time the ECB has ended its quantitative easing program.



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December 11 2018

Commentary by Eoin Treacy

Will UK economy be turbocharged by sterling fall?

Thanks to a subscriber for this article by Chris Giles for the FT may be of interest to subscribers. Here is a section:

The impact of sterling’s depreciation has been underwhelming for a few reasons. For one thing, firms are locked into global supply chains and rely heavily on foreign inputs. Half the components in a “British-made” car come from abroad. If exports rise, so do imports.

The economy is also highly geared towards high-value-added stuff like pharmaceuticals. Buyers of these goods and services are insensitive to price changes. Not all industries fit this mould, notably tourism. Dollars buy more rides on the London Eye than before. In June visits by foreigners (including businesspeople) were up by 7% year on year. Yet visitors seem to be economising: their overall spending in real terms is no higher than before.

Optimists maintain that the benefits of a depreciation take a long time to filter through. Firms need to get finance together and seek out new markets to exploit their new competitive advantage.

The case of Dr Fox’s ice-cream industry, however, suggests that exporters are in no rush. Though export revenues have risen, this largely reflects the fact that with a weaker pound a given quantity of foreign-currency sales leads to higher sterling revenues. In the first half of 2017 firms exported about the same quantity of ice cream (600m scoops, by our reckoning) as in the same period the year before. Firms seem to be using sterling’s weakness simply to bank bigger profits, rather than to move into new markets.

It is a similar story across the private sector. Profitability is near record highs yet investment is stalling. Last year non-financial firms stuck an extra £74bn ($96bn) in their bank accounts, by far the largest figure on record. Firms’ tentative behaviour should be a wake-up call for ministers, who expect them to lead the charge of a reorientation of British trade away from the EU after Brexit.

Eoin Treacy's view -

All other factors being equal a depreciating currency boosts the prospects for exporters because they gain competitiveness. The bigger the domestic export sector the more immediate the boost. In the UK’s case the domestic manufacturing sector has been in decline for decades, so not only will it take time to rebuild confidence enough so that entrepreneurs become more ambitious but the devaluation would need to persist.



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December 10 2018

Commentary by Eoin Treacy

The IPO Race for Uber and Lyft Isn't Against Each Other

This article by Shira Ovide for Bloomberg may be of interest to subscribers. Here is a section

After a relative tech IPO dry spell of 2015 and 2016, there’s less of a stock feeding frenzy around each new tech listing now. Snapchat’s valuation has moved from outlandish at its IPO to tame.(1) Most other tech companies that went public in the last couple of years also trade relatively in line with their older peers. That shows investors have grown more discriminating about when to pay a rich price for fast-growing companies. I think that temperance will carry over to IPOs for Lyft and Uber. 

Ultimately, though, Uber and Lyft have more to worry about than IPO order. Uber in particular has yet to prove its basic business model makes sense after 10 years of history. Economic and market conditions are deteriorating. In the U.S., people are openly talking about the “R-Word” — recession. Those are all good reasons to hurry and go public. But Uber and Lyft shouldn’t overthink the advantages of hitting the stock market first.  

Eoin Treacy's view -

At The Chart Seminar we ask this question; when is the best time to sell your company? The answer is simple when you think about it. When you can get more for it than you think it is worth. The founders and early investors in multi-billion Dollar unicorns have a clear incentive to diversify exposure by seeking to sell when the going is good, because it will obviously be a more difficult prospect when the going is bad.



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December 05 2018

Commentary by Eoin Treacy

France Tops OECD Table as Most Taxed Country

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

Economists say such consumption taxes that reduce pollution and other harmful effects are an efficient way for the government to raise revenue. But the planned move sparked the worst riots to hit Paris in decades on Saturday, leaving the city’s shopping and tourist center dotted with burning cars and damaged storefronts. Protesters vandalized the Arc de Triomphe, rattling Mr. Macron’s administration and the country.

The rise in French tax revenues was in line with a longstanding trend across wealthy countries. The average tax take across the organization’s members edged up to 34.2% of GDP in 2017 from 34% in 2016 and 33.8% in 2000 as governments continued efforts to narrow their budget gaps and limit the rise in their debts that followed the global financial crisis.

Of the 34 countries for which 2017 figures are available, 19 saw a rise in tax revenues relative to the size of their economy, with Israel reporting the largest increase. Mexico continued to record the lowest tax take at 16.2% of GDP, down from 16.6% in 2016.

Eoin Treacy's view -

Social democracy is broken when a non-progressive tax like putting duty on fuel is considered a good idea by an administration that is made up of ex-socialists. Transportation is as much a necessity for the majority of people as clothing and food so why should it be singled out for oppressive taxes? The powers that be, will argue it is aimed at cutting pollution but the reality for most people is simply less money left over at the end of every month. Meanwhile, the well-off, who have luxury of having to commute less or can afford electric vehicles don’t pay the tax.



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December 03 2018

Commentary by Eoin Treacy

Email of the day on my central bank total assets chart:

You have mentioned that the graph showing central bank assets is one of the most important. Consequently, I wondered how the fact that they are reducing this tied in with your moderately optimistic views on the stock market. Do you think the US Fed Reserve will continue to reduce its balance sheet given recent market turmoil?

Eoin Treacy's view -

Thank you for this question which I believe is of general interest and is something I have also been pondering. There are two reasons the chart has been contracting since March. The first is because the Federal Reserve is reducing the size of its balance sheet and other central banks are reducing infusions. The second is the strength of the Dollar has flattered the contraction by reducing the relative value of other currencies held on global central bank balance sheets.



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November 30 2018

Commentary by Eoin Treacy

The Big Picture

Thanks to a subscriber for this report from Societe Generale 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. 

By this stage subscribers much be wondering why I am posting so many reports that express a bearish view. The simple fact of the matter is I am reposting these reports in an effort to highlight the fact that the last time my inbox was so filled with bearish reports was in the immediate aftermath of the credit crisis.

It seems that the one thing every analyst has learned from the credit crisis is to be hyper alert to any sign of trouble lest they miss out on calling the next big decline. It occurs to me that the investment community is falling into the trap of fighting the last war all over again, even though we are now in uncharted territory in terms of both monetary policy and the quantity of debt outstanding.



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November 29 2018

Commentary by Eoin Treacy

Morning Tack November 29th 2018

Thanks to a subscriber for this report from Raymond James 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. 

How neutral is neutral is the question Fed watchers are asking this morning. If the ephemeral neutral level is between 2.75% and 3.5% then the middle of the band is over 3% but the lower end of the band is not far from where the rate is set right now and will be even closer after the December hike. That leaves the Fed with the scope to declare “job done” or not as circumstances dictate.



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November 29 2018

Commentary by Eoin Treacy

2019 Outlook - Late Cycle Blues

Thanks to a subscriber for this report from Barclays focusing on European markets which may be of interest to subscribers. Here is a section:

Eoin Treacy's view -

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

As if the Fed’s quantitative tightening were not enough, the Chinese economy which is the destination for a good proportion of Europe’s exports has been slowing. That’s before we even begin to think about the threat represented by the Italian populists or the ongoing Brexit saga. With the ECB ending its quantitative easing program is it any wonder European markets have been underperforming.



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November 29 2018

Commentary by Eoin Treacy

Emerging Markets Retake the Lead

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

Eoin Treacy's view -

A link to the full report and a section from it is posted in the Subscrober's Area. 

Emerging markets have been under the most acute pressure from quantitative tightening not least because of the quantity of US Dollar loans outstanding. The US Dollar has been the key variable in the lack of appetite for emerging market assets. Therefore, any sign of waning demand for the Dollar or increased supply, stemming from a slowing pace of balance sheet run-off would be welcomed by emerging markets. 



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November 29 2018

Commentary by Eoin Treacy

Long-term themes review October 29th 2018

Eoin Treacy's view -

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

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

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities.

2018 has represented a loss of uptrend consistency for the S&P500 following a particularly impressive and persistent advance in 2016 and 2017. Many people are therefore asking whether this is a medium-term correction or a top. There is perhaps no more important question so let’s just focus on that for the moment.



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November 27 2018

Commentary by Eoin Treacy

Email of the day on Europe and the UK

Glad you had a good meeting in London the week before last. Would have been there, but still recovering from breaking a femur in June.

Two things that might interest you.

First, from a John Mauldin letter:

Quick anecdote from my time in Frankfurt. I spoke for fund manager Lupus Alpha to approximately 250 pension fund managers, representing most of Germany’s retirement monies. I asked for a show of hands on whether they liked being part of the European Union. Almost everyone raised their hands. I then asked if they thought participating in the euro was a good thing. Probably 80% raised their hands. When asked who doesn’t like the euro, maybe 10% of the hands went up.

Then the money question. I asked if they would be willing to take Italy’s debt and all the debt of every eurozone member and put it on the European Central Bank balance sheet, with caveats about controlling national budgets. Fewer than 20% of the hands went up.

I then engaged the audience further, saying, the last two questions were essentially the same. If you want to keep the euro, you’ll have to do something about the imbalances between the countries and debts. No monetary union in history has ever survived without becoming a fiscal union as well. Even reminding them that failure to do this might cause the euro to break up and bring back the Deutschmark didn’t seem to change many opinions. I reminded them that a Deutschmark would mean a serious recession/depression in Germany as it would raise the price of all German exports by at least 50%. Mercedes and BMWs are expensive enough for Germany’s customers, let alone at a 50% price hike.

This audience should have easily accepted the argument for putting all European debt on the ECB balance sheet. Imagine if I asked the typical German voter, especially those in rural areas. That tells me Europe could have a bumpier future than I thought.

Second, a piece from the FT (as an attachment) about whether property is still a long-term bet for retirement. Conclusion: it's not.

Thanks for all great recent pieces. I really liked the Ray Dalio discussion.

Have a great Christmas.

Eoin Treacy's view -

Thank you for this informative email and I am delighted you are enjoying the Service. The simplest way to summarise the contradiction at the heart of the Eurozone question is “you can’t be half pregnant” The EU is heading towards federalism or it will break up. The status quo is already being challenged and it will continue to be challenged as a long as millions of people endure lower standards of living.



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November 26 2018

Commentary by Eoin Treacy

RBC Wealth Management 2019 Investment Stance

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

Eoin Treacy's view -

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

US Corporate Profits spent about four years ranging between 2012 and the end of 2016 and then broke out on the upside. The measure is reported in arrears with a one quarter lag so we will not have another reading until the end of this year and that will reflect the third quarter.



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November 26 2018

Commentary by Eoin Treacy

The frontier market that top rival managers agree on

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

Bannan agreed and said the current macro environment is very strong, with high rates of GDP growth, low inflation and a large trade surplus.

‘The government has undertaken a lot of reforms over the last decade to open up the economy and encourage investment in vital infrastructure.

'This has allowed Vietnam to industrialise and attract huge amounts of FDI with a lot of production relocating from Northern Asia to Vietnam,’ said Bannan.

'As the Vietnamese move from virtually subsistence existence in rural areas, where 65% of the population still live, to work at these FDI invested factories there is a monumental shift in household wealth. I have experienced these developments first hand, having spent 5 years living in Saigon.'

Eoin Treacy's view -

Vietnam is a beneficiary of reshoring from China regardless of the outlook for deteriorating trade relationships with the USA because wages are so much cheaper there. The nation’s Communist Party is more akin to China’s thirty years ago than the organisation today and with a large young population Vietnam is hungry for growth.



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November 19 2018

Commentary by Eoin Treacy

Technology Megatrends Leading to the Disruption of Transportation 2020-2030

Thanks to a subscriber for this presentation by Tony Seba which may be of interest.

Eoin Treacy's view -

Perhaps the most interesting part of the discussion focuses on the rate at which the cost of producing batteries is accelerating to almost 20% per annum.
 
That holds out the prospect of batteries becoming commoditised in the same way as solar cells when production comes on lines. For the shares of battery producers that is likely to represent a challenge but not quite yet considering the supply inelasticity argument that still prevails within the market.



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November 09 2018

Commentary by Eoin Treacy

November 08 2018

Commentary by Eoin Treacy

Volvo Cars Rips Up Production Plans, Citing U.S.-China Trade War

This article by Keith Naughton and Gabrielle Coppola for Bloomberg may be of interest to subscribers.

Volvo Cars is shaking up production plans for much of its lineup in an effort to dodge tariffs the U.S. and China have slapped on auto imports.

The Swedish automaker owned by China’s Zhejiang Geely Holding Group Co.has canceled plans to export S60 sedans from its first U.S. plant to China, just months after starting production. Volvo also will stop importing XC60 sport utility vehicles and dramatically reduce shipments of S90 sedans from China to the U.S.

Volvo will pivot to mostly exporting S60s from its factory near Charleston, South Carolina, to focus mostly on supplying the American market, according to Anders Gustafsson, the president of the carmaker’s U.S. unit.

“We’ll go at this change not with a smile, but we know what we need to do,” Gustafsson said. “We have a global manufacturing structure that helps us maneuver in these tough waters.”

Eoin Treacy's view -

Volvo is a Chinese company so the next step will be to deprioritise investment in US based production and to make big decisions about which models to sell where. The automotive industry has long depended on the ease of access to a global supply chain and the ability to manufacture cars in one country and sell them somewhere else. The prospect of the trade war persisting is likely to shape corporate decisions well into the medium term.



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November 07 2018

Commentary by Eoin Treacy

Hermes shakes off China worries with sales rise

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

On a call with reporters, Hermès executive chairman Axel Dumas dismissed fears about a slowdown in China, which analysts and investors are concerned may come from a trade war with the US. “We are still strong all across the board in China,” said Mr Dumas. “We don’t see any change of pace at this stage.” Comparing the slightly slower third-quarter performance of Asia-Pacific to the overall figures for the region in the first nine months of the year, he said that “the differences for me are not material.”

Earlier this month luxury rival LVMH said that Chinese border authorities are stepping up searches on travellers, looking for luxury items brought back from cities like London and Paris. Mr Dumas said he believes that fluctuations in the euro have a greater impact on Chinese tourists shopping in Europe than fears about tighter border controls.

This month Hermès followed in the footsteps of Louis Vuitton and Gucci by launching its own ecommerce website in China, as the group seeks to increase its exposure to the world’s largest and fastest-growing market for luxury sales.

Eoin Treacy's view -

It is interesting that the company has reported it is seeing now lack of demand for its products in China but the price fell anyway. That is a clear example of the market being a discounting mechanism since what investors probably wanted to hear was that demand was growing strongly.



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November 05 2018

Commentary by Eoin Treacy

Which individuals may be impacted by the ALP franking credit proposal?

This article by Dr.Don Hamson for Livewire may be of interest to subscribers. Here is a section:

Mrs H was a fully self-funded retiree, owning a modest home in the outer northern suburbs of a capital city, living off the income from a portfolio of direct shares and some bank deposits. Her assets, other than the home, totalled $650,000, with $50,000 in non-income bearing assets. Of her investments, $500,000 are invested in fully franked dividend paying Australian companies and $100,000 invested in term deposits and cash. Mrs H is ineligible for a part aged pension, since her assets exceed the maximum assets test level (currently $564,000 for a single homeowner).

Mrs H currently has a taxable income of $30,571. The $100,000 in deposits only earns $2,000 in interest, while the share portfolio yielded an average 4% cash dividend providing $20,000. Importantly the dividends were all fully franked, receiving $8,571 in franking credits (these are included in taxable income). With no tax payable due to the Seniors tax offset, Mrs H received a full refund of her franking credits, considerably boosting her cash income from $22,000 to $30,571.

Since Mrs H is not eligible for any pension entitlements, she would no longer receive those franking credits under the ALP proposal. The loss of $8,751 would reduce Mrs H’s income by 28%, reducing her weekly income by $165, from $588 per week to just $423 per week.

This means her income would actually fall below the full aged pension for a single homeowner ($23,889 p.a. or $916.30 per fortnight /$458.15 per week).

Eoin Treacy's view -

Full franking on dividends is the number one topic of conversation that comes up when I have conducted The Chart Seminar in London. It has been one of the primary factors in Australian investors tending to favour their domestic market’s dividend paying stocks. Significant changes to the tax structure for dividends and pension could have a significant knock-on effect for the banks in particular because so many investors own them for income.



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November 01 2018

Commentary by Eoin Treacy

Email of the day on balancing a portfolio

Yesterday’s article in The Wall Street Journal raises an interesting issue that may be interesting for discussion (see attached and the link - https://www.wsj.com/articles/octobers-market-rout-leaves-investors-with-no-place-to-hide-1540978259 ).

“Adding to the stock market’s anxieties has been a rare simultaneous drop in bond prices that has pushed yields near their highest levels in years. The dual breakdown in stock and bond prices has upended investors’ traditional safety tool kit of buying Treasurys during periods of volatility, leaving many with losses.”

Traditional investment portfolios of 60% equities and 40% bonds lost more than 3% in October and are down 1.2% this year, on pace for a rare annual loss that was last seen in 2008, as well as during volatile periods in 1990, 2001 and 2002, said Luca Paolini, chief strategist at Pictet Asset Management, which manages $191 billion. Even investors who are heavier on fixed income would still be in the red, with allocations of 75% bonds and 25% equities falling more than 2% this month to drag their performance down 1.1% for the year… Declines in bond prices, meanwhile, have exacerbated investors’ pain. Annualized losses among U.S. Treasurys and investment-grade bonds are at 9.7% and 4%, respectively, the third-steepest declines since 1970, according to a recent Bank of America Merrill Lynch report.”

Portfolio with 60% equities and 40% bonds allocation has been the most traditional advice for individual investors for decades. But I just thought, those were decades of the secular, almost 40-year bull trend in the bond market. If, as you and David often say, we are now witnessing the beginning of the secular bear market in bonds, then this 60-40 allocation represents troubles ahead. Bonds will probably stop being the same safe haven they were in the past. Yes, they will continue to provide some stability to a portfolio in a sense that they won’t fall 10% as equities but instead of rising in times of turmoil, they will also slump.

If this is the case, how allocation can be changed and where investors will look for safe heavens?

As always, it would be interesting to know your view.

Eoin Treacy's view -

In a period of disinflation or deflation fixing the interest rate you receive works wonderfully because its value increases over time. That has been one of the primary tailwinds for fixed income portfolios for decades. If on the other hand you are looking at a time of rising interest rates and rising yields then floating rate instruments become more attractive.



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October 31 2018

Commentary by Eoin Treacy

The Opportunity in Criss-Border E-Commerce

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

Cross-border e-commerce1 has developed into a large, quickly growing ecosystem – and has become a great success story for many e-tailers, meaning retailers and manufacturers selling their products over the Internet directly to end consumers.

This success can be shown in real numbers: in 2015, the cross-border e-commerce market accounted for USD 300 billion GMV2, about 15% of e-commerce overall. This rapid growth, however, has just begun and will continue: the cross-border market is expected to grow by about 25% annually until 2020 – nearly twice the rate of domestic e-commerce and a growth rate that most traditional retail markets would dream of achieving. In 2020, it is expected to account for about USD 900 billion GMV, translating into a roughly 22% share of the global e-commerce market. This growth momentum yields unrivaled opportunity for retailers and manufacturers. As this report will show, crossborder e-commerce is not an e-commerce giant story – all types of manufacturers and retailers will be able to successfully go global.

Even beyond 2020, all evidence shows that demand for products from abroad is not going to recede. That said, considering the patterns according to which e-commerce companies expand their regional footprint today, one could assume that every e-commerce purchase will eventually become a local purchase. This is mainly due to the higher cost efficiencies that localized fulfilment and the quicker shipments that shorter distances naturally promise at first glance. However, even e-commerce giants such as Amazon, Alibaba, and Zalando, which already operate local distribution centers in several countries, ship a significant part of their sales cross-border. This is driven by, for instance, the enormous number of stock-keeping units (SKUs) offered by some of these players. But having slow-turning SKUs sitting in inventory everywhere – a prerequisite for pure local fulfilment – is much more costly than shipping a certain share of orders cross-border. And in order to fulfill consumers’ wishes for faster delivery, many e-tailers offer premium international shipping options to their customers, e.g., for a surcharge. This is testimony that cross-border is not a passing phase or trend, but rather a significant staple in the e-commerce market that requires premium shipping.

Eoin Treacy's view -

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

The global postage and shipping industry represents a number of competing trends right now. On the one hand you have companies like Amazon which is prevailing on its largest sellers to expand internationally by making their products available in countries like Canada, Mexico, UK, Germany, France and Spain. That requires bulk shipping of inventory to its international fulfilment centres and often requires an increased compliance cost to manage multiple sales tax regimes.



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October 30 2018

Commentary by Eoin Treacy

Brazil Super Minister Shoulders Weight of Bolsonaro Economy

This article by David Biller, Cristiane Lucchesi and Rachel Gamarski for Bloomberg may be of interest to subscribers. Here is a section:

More long nights lie ahead. Brazil’s nascent recovery from the worst recession in history hinges on his success, and the nation’s benchmark index has climbed 13 percent since mid-September -- close to its all-time high -- on optimism Bolsonaro would win, giving Guedes a chance to implement business-friendly policies. They include dozens of privatizations, a massive reform of the pension system and a revamp for the nation’s byzantine tax code.

Bolsonaro, who’s admitted he has only a “superficial understanding” of economics, has said he’s placing full control over the nation’s finances in the hands of Guedes, who was trained at the University of Chicago and founded both a private equity firm and a think tank for liberal economic theories. Yet for all that success, he’s had zero experience in implementing public policy.

“One thing’s for certain: Guedes is the guarantor of Bolsonaro’s alleged conversion to liberalism, and if for any reason he leaves the government, there will be an earthquake in markets,” said Ricardo Lacerda, chief executive officer of Sao Paulo-based boutique investment bank BR Partners.

How big an earthquake? One top market analyst said Brazil’s benchmark stock index could tank as much as 40 percent, reaching levels not seen since the 2016 impeachment of Brazil’s former president, Dilma Rousseff. While that’s probably overstating things, it’s the kind of hyperbole that’s characterized Brazil’s election rhetoric ever since polls made it clear in recent months that Bolsonaro was heading to victory.

 

Eoin Treacy's view -

It’s a truism but the market likes market friendly administrations. The potential for Bolsonaro to tackle engrained corruption, grant the central bank independence and streamline regulations have resulted in the Real rallying to test the region of the trend mean. Investors are probably now likely to wait and see what the new administration’s program for government will be before getting more bullish.



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October 27 2018

Commentary by Eoin Treacy

Kyle Bass Speaks with CNBC's David Faber

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

BASS: You know, the Chinese are in the worst financial situation they’ve been in, in the last 17 years because they operated domestic economy where they control the printing press, they control the press narrative, they control the price level and they control their people as we’ve seen them detain over a million of them in Jingjang for their religious preference. So they can change a lot of things domestically, but their -- the arbiter of the Chinese plan is their cross rate or their exchange rate with the rest of the world. China Inc.’s working capital account is now going South because they’re running what we believe to be a structural and more permanent deficit on the current account. And so, i.e., their working capital, their dollar balance whether it’s dollars, euros, yen or pounds, it’s mostly dollars. And their dollar balances is headed south. And so, the U.S. is in a very particularly interesting negotiating position today. We are in the strongest negotiating position we’ve ever had against China. They’ve kind of leveled the playing field a little bit more with their, let’s say, subversion of WTO rules, their intellectual property theft and basically everything they’ve done to take advantage of the U.S. over the past 15, 17 years.

Eoin Treacy's view -

China has the domestic economy on lock down and has an epic local government debt issue. It also has some of the largest deposits of any banking sector as well as large sovereign reserves. The only clear way to match liabilities with assets while also depreciating the currency, to support the export sector, is to avoid capital flight.



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October 27 2018

Commentary by Eoin Treacy

Argentina Economic Outlook 4Q18

Thanks to a subscriber for this report from BBVA. Here is a section:

The global environment remains positive, although growth is moderating due to the poorer performance of emerging economies. The impact of protectionism is so far limited

In Argentina, a new round of capital flight and currency depreciation in August led to a further fiscal adjustment, the revision of the agreement with the IMF and the abandonment of the inflation target regime, which means an end to the economic program of President Macri’s first two years

The new monetary-exchange rate scheme seeks to control FX volatility by absorbing all surplus liquidity in pesos and targets holding the nominal monetary base constant until June 2019 setting up broad bands within which the FX can float, with limited intervention by the Central Bank outside this band

In 2019 the government will attain primary fiscal equilibrium with spending cuts and a new tax on exports, and the programme with the IMF ensures that the financial programme can be met with limited roll-over

The currency crisis and the new monetary and fiscal tightening lead us to revise our forecast for GDP growth in 2018 and 2019 downwards and our estimates of inflation upwards. The sharp real depreciation of the peso and the recession will result in rapid correction of the current account deficit

Eoin Treacy's view -

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

When is the best time to buy into an emerging market? That is a question I think a lot of people will be contemplating at the moment because emerging markets are trading at a substantial discount to developed markets and particularly Wall Street.



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October 25 2018

Commentary by Eoin Treacy

Long-term themes review October 4th 2018

Eoin Treacy's view -

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

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



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October 19 2018

Commentary by Eoin Treacy

U.K. Is Said to Drop Brexit Demand on Irish Border to Ease Deal

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

The problem for pro-Brexit camp in May’s Cabinet is that what is agreed as a fix for the Irish border could morph into a long-term status quo for the whole U.K. Businesses have long called for the U.K. to remain in the customs union to ease trade with the bloc, an option EU chief negotiator Michel Barnier has repeatedly offered as a way out of the stalemate. In parliament, the main opposition Labour party is also pushing for a customs union.

The thorny question of how to avoid a hard border between the U.K. and the Irish Republic has held up progress in Brexit talks since March. Time is running out for the EU and the U.K. negotiating teams to settle the terms of the divorce and sketch out the future trading arrangements before Britain leaves the bloc on March 29.

A summit of EU leaders in Brussels this week had been billed as the moment when the exit agreement would be struck but instead broke up with major issues still unresolved. The key question remains how to come up with a backstop for the Irish border.

Eoin Treacy's view -

UK business needs have to have some confidence in what its trading relationship with the EU is going to be post Brexit. The EU needs to blunt the threat the UK will set itself up as a freewheeling capitalist enclave that would compete and win inward investment. Therefore, both parties have a clear interest to reach a deal but the result of the negotiations are not going to be what many people thought they were voting for when the approved Brexit.



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October 17 2018

Commentary by Eoin Treacy

Trump Opens New Front in His Battle With China: International Shipping

This article by Glenn Thrush for the New York Times represents a further deterioration in the US/China international relationship. Here is a section:

The withdrawal is part of a concerted push by Mr. Trump to counter China’s dominance and punish it for what the administration says is a pattern of unfair trade practices. The move is expected to be announced on Wednesday, according to senior administration officials.

The Universal Postal Union treaty, first drafted in 1874, sets fees that national postal services charge to deliver mail and small parcels to countries around the world. Since 1969, poor and developing countries — including China — have been assessed lower rates than wealthier countries in Europe and North America.

While the lower rates were intended to foster development in Asia and Africa, Chinese companies now make up about 60 percent of packages shipped into the country, taking advantage of the lower rates to ship clothing, household gadgets and consumer electronics. Many websites now offer free shipping from China, in part because of the cheap postal rates, administration officials say.

Eoin Treacy's view -

Privately-owned Chinese companies are among the largest third-party sellers on major internet venues like eBay and to a lesser extent Amazon. A US based seller pays a minimum of $2.66 for a small package with tracking from the US Postal Service. Sellers from China pay domestic local rates on international shipping. It might take longer to arrive but there is no way to beat Chinese sellers on price and particularly for small-sized goods.



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October 17 2018

Commentary by Eoin Treacy

'Wake 'n Bake,' Plunging Stocks Greet Canada's Legal Pot Debut

This article by Kristine Owram, Doug Alexander and Jen Skerritt for Bloomberg may be of interest to subscribers. Here is a section:

“The eyes of the world are on Canada and Canadians should feel very proud, because people have been fighting for decades to make this moment a reality,” said Brendan Kennedy, chief executive officer of Tilray Inc., the largest cannabis company by market value.

After running up dramatic gains in the lead-up to legalization, cannabis shares failed to join the party Wednesday. Aurora Cannabis Inc. had slumped as much as 15 percent by 10:17 a.m. in Toronto for the worst drop since February, before paring losses. Canopy Growth Corp. was down 3.4 percent at 1:15 p.m. and Tilray Inc., the world’s largest pot company by market value, fell 6 percent.

Medical marijuana has been legal in Canada since 2001 but it’s only been about four years since the first cannabis companies began to list on Canadian exchanges. In that short time, about 140 pot companies have gone public in Canada, with a combined market value of more than C$60 billion ($48 billion).

Eoin Treacy's view -

I’m reminded of Mark Twain’s quip that reports of his death are greatly exaggerated. There was certainly some evidence of buy the rumour, sell the news today as some people took the day of legalisation as an opportunity to realise profits but the declines seen need to be put in the context of the advances seen over the last couple of months and the broad consistency of the medium-term trends.



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October 11 2018

Commentary by Eoin Treacy

J.P. Morgan Early Look at the Market

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

Eoin Treacy's view -

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

There is no one factor that investors can point to that offers a clear reason for why the market pulled back so sharply on Wednesday. Instead a confluence of events triggered stops which has resulted in a significant number of US large cap shares closing what were somewhat overbought conditions relative to their respective trend means.



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October 10 2018

Commentary by Eoin Treacy

Email of the day on Brazil's upcoming Presidential election

Lula, Dilma and the labor party known as Partido Trabalhista PT, ruined Brazil. They robbed state companies and pension funds blind and ruined them. They instituted massive corruption as a means to collect funds in order to stay in power. They used the Development Bank BNDES to finance tin pot dictators in Africa and Latin America so as to be able to siphon off money for the party. PT caused Brazil’s worst recession in history, the highest rate of unemployment ever and a large reduction in GDP per capita. Wide spread corruption in all three branches of government and large scale hiring of public servants for electoral purposes were made a state policy. Public schools and universities were used for ideological purposes. Their quality dropped to astonishing levels, such that students are science ignorant and can neither interpret a text nor think clearly. They are unemployable. Laws were put up for sale. Of 1000 Medidas Provisorias (express approval laws) proposed by PT, 900 correspond to the sale of privileges (exemptions, subsidies, etc) The media was put under control through the tap of state publicity so that PT and sympathizers control TV, newspapers all NGOs and opinion pollsters. PT allied itself with Organized Crime which now controls Rio, is a major threat all over the country and recently tried to murder Bolsonaro. All this has caused a massive revolt, so that the Bolsonaro vote is far more an expression of anti-PT disgust than for the candidate himself. He was the only one to voice matters clearly. By far the least bad choice.

Eoin Treacy's view -

Thank you for this on ground perspective from Sao Paolo. A bull market paves over a lot of cracks in people’s willingness to tolerate declining standards of governance. No one was worried about all of the issues you detail above when commodity prices were surging and there was money for everything. It was only when commodity prices collapsed and funding evaporated that the extent of corruption was revealed. This is about as close to Warren Buffett’s adage “you don’t know who has been swimming naked until the tide goes out”.



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October 09 2018

Commentary by Eoin Treacy

New Evidence of Hacked Supermicro Hardware Found in U.S. Telecom

This article by Jordan Robertson and Michael Riley for Bloomberg may be of interest to subscribers. Here is a section:

The more recent manipulation is different from the one described in the Bloomberg Businessweek report last week, but it shares key characteristics: They’re both designed to give attackers invisible access to data on a computer network in which the server is installed; and the alterations were found to have been made at the factory as the motherboard was being produced by a Supermicro subcontractor in China. 

Based on his inspection of the device, Appleboum determined that the telecom company's server was modified at the factory where it was manufactured. He said that he was told by Western intelligence contacts that the device was made at a Supermicro subcontractor factory in Guangzhou, a port city in southeastern China. Guangzhou is 90 miles upstream from Shenzhen, dubbed the `Silicon Valley of Hardware,’ and home to giants such as Tencent Holdings Ltd. and Huawei Technologies Co. Ltd.

The tampered hardware was found in a facility that had large numbers of Supermicro servers, and the telecommunication company's technicians couldn’t answer what kind of data was pulsing through the infected one, said Appleboum, who accompanied them for a visual inspection of the machine. It's not clear if the telecommunications company contacted the FBI about the discovery. An FBI spokeswoman declined to comment on whether it was aware of the finding.

Eoin Treacy's view -

There is an air of “shutting the barn door after the horse has bolted” to this reporting since the revelations date from earlier this year and whatever data was available has likely already been stolen. It is reasonable to assume that China has as much data about everyone in the West as it could want and that cyberwarfare is certainly going to be a part of any future conflagration.



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October 03 2018

Commentary by Eoin Treacy

Long-term themes review August 15th 2018

Eoin Treacy's view -

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

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

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities. 



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October 02 2018

Commentary by Eoin Treacy

Italy Contagion Fears Bubbling Beneath Surface of Apparent Calm

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

For others, Italy’s euroskeptic government is just the embodiment of the populist sentiment taking root across Europe, which could threaten the bloc’s future and weigh on the euro for the months or even years to come.

Borghi, head of Italy’s lower house budget committee and a well-known euroskeptic, said in an interview on Radio Anch’io that “Italy, with its own currency, would be able to resolve its problems.”

“The comments about Italy having its own currency have touched a sore point,” said Jane Foley, head of foreign-exchange strategy at Rabobank International. “While the return of the lira would be almost impossible and hugely inflationary even if it could happen, the fact that the remarks can be read as anti-EMU sentiment are worrisome.”

Eoin Treacy's view -

The response of the market to the Italian government’s decision to splurge on its budget has been predictable and yields broke out to new recovery highs today. Populist rhetoric has been very vocal in saying they are not afraid of the spread but they have not yet had a taste of what higher borrowing costs will mean for the economy.



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October 01 2018

Commentary by Eoin Treacy

Australia's Property Downturn Chalks Up One-Year Anniversary

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

Australia’s property slump has reached the one-year mark as the nation’s two major cities have become the biggest drag.

National dwelling values dropped 0.5 percent last month, weighed by declines in Sydney and Melbourne, according to CoreLogic Inc. data released Monday. Prices in the two east coast cities, which make up more than half of the national value of housing, have fallen 6.1 percent and 3.4 percent respectively from a year earlier.

“Sydney and Melbourne are now the primary drag on the national housing market performance,” taking over from regions that were impacted by the mining downturn, CoreLogic’s head of research Tim Lawless said. Values have fallen greatest among the most expensive properties as lenders curb their appetite for high debt to income ratio lending, he said.

Eoin Treacy's view -

The RBA has been reticent to raise interest rates because the Australian mortgage market is dominated by floating rate loans. With prices already elevated and private sector debt as a percentage of GDP among the highest of any developed market the fate of the property market is a major arbiter in how well Australia’s economy can be expected to perform.



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September 28 2018

Commentary by Eoin Treacy

Italy's government agrees sharply higher public spending plan

This article by Miles Johnson and Davide Ghiglione for the Financial Times may be of interest to subscribers. Here is a section:

Mr Di Maio hailed the agreement as a “historic day”. “We made it!,” he said as he emerged from a balcony at Rome’s Palazzo Chigi, where the meeting took place.

“Today we have changed Italy! . . . For the first time the state is on the side of the citizens,” he said as ministers and members of parliament from his party hugged each other on the square outside.

Matteo Salvini, leader of the hard right League, part of the coalition and deputy prime minister alongside Mr Di Maio, also welcomed the agreement on spending, saying he was “fully satisfied with the objectives achieved”, which would include his party’s pledges for tax cuts and a reversal of unpopular pension reforms dating back to 2011.

Mr Tria, who is not affiliated with either party and was installed only after Italian president Sergio Mattarella rejected the coalition’s first choice for finance minister, had been pressing for a deficit number as low as 1.6 per cent of GDP going into the meeting.

A 2019 deficit of 2.4 per cent of GDP would represent a significant fiscal expansion from the 1.6 per cent target for this year agreed by the last centre-left government, and would be three times the 0.8 per cent number previously planned for next year.

Eoin Treacy's view -

Italy’s debt is BBB, which is still investment grade, but the yield trades like it is rated BB which is not investment grade. The populist administration has stated they are not afraid of the spread but one wonders if they have any conception what a downgrade to junk would do to demand for Italian debt. Large pension funds which have been gobbling up Italian debt to capture the higher yield would be forced to sell in the event of a downgrade. Meanwhile the ECB is winding down its purchase program so there will be a hole in demand for the bonds.



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September 27 2018

Commentary by Eoin Treacy

H&M Soars Despite Record Inventories as CEO Says Worst Is Over

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

H&M’s inventories have been a persistent problem, rising steadily as the Stockholm-based fast-fashion chain failed to keep up with consumers’ tastes and was struck by logistics woes.

The company says it’s working through the excess stocks and will be able to scale back discounting as a result, even as it irons out its supply problems. “We are in a better position now than we were last year,” CEO Karl-Johan Persson said on a conference call Thursday. “We’re buying less and being smarter about our purchases.”

The shares soared as much as 13 percent in Stockholm trading. Analysts at RBC Capital Markets pointed to H&M’s forecast that fourth-quarter markdowns will be about flat with last year’s, as well as a third-quarter gross margin that beat estimates.

Eoin Treacy's view -

Fast fashion has relied on footfall at its stores but faces the twin challenges of discounters like TJMaxx and Ross Stores as well as the evolution of online sales like Amazon’s own brand goods and Stitch Fix. The challenge for the sector is not simply to ensure they are on trend but to contain prices in order to remain competitive. That has represented a painful challenge for companies like H&M and Inditex.



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September 20 2018

Commentary by Eoin Treacy

S&P, Dow Hit Record Highs as Trade Fears Abate

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

China is said to be planning to cut the average tariff rate it charges on imports from the majority of its trading partners as soon as next month. On Wednesday, Premier Li Keqiang his government wouldn’t devalue the currency in order to boost its exports amid the trade war.

“When we get days where there isn’t trade and tariffs escalation, which is in the news with us every day, market participants can focus more on fundamentals, and fundamental drivers continue to paint a pretty equity picture,” Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, said by phone. “We’re striking a nice balance between good economic news and not becoming concerned yet about inflation.”

Eoin Treacy's view -

The Dow Jones Industrials Average hit a new high and the Dow Jones Transportations Average is trading within striking distance of another new high. While Dow Theory does not tend to get a lot of coverage these days it would be hard to argue that we are presented with anything other than at least a short-term bullish environment.



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September 20 2018

Commentary by Eoin Treacy

Dollar Tumbles to Lowest Level Since July as Euro Surges

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

The market views a 25 basis point Fed rate hike next week as a near certainty, based on fed fund futures. Contracts on Thursday showed more than 45 basis points of total tightening by the end of 2018. Focus is increasingly shifting to the outlook for next year, with investors moving closer to the central bank’s projected path of three rate hikes for 2019.

That won’t be enough to prop up the greenback, according to Noelle Corum, an Atlanta-based portfolio manager in Invesco Ltd.’s fixed-income group. As global growth improves and market participants start to speculate about policy changes from the European Central Bank and Bank of Japan, the dollar’s support from Fed hikes and trade tensions will wear off, she said.

“Going into year-end, we would expect fundamentals will begin to drive markets again, and this will drive the dollar weaker,’’ said Corum, whose group manages $235 billion. She forecasts the greenback will depreciate to $1.20 per euro and weaken to 104 yen per dollar by year-end.

Eoin Treacy's view -

US Treasury yields popping above 3%, not least because of the dearth of demand following the front loading of pension contributions that ended on September 15th, has been a catalyst for both bond and Dollar weakness this week.



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September 18 2018

Commentary by Eoin Treacy

September 18 2018

Commentary by Eoin Treacy

Asia EM Strategy

Thanks to a subscriber for this report from Morgan Stanley. Here is a section on Malaysia:

Eoin Treacy's view -

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

Governance is Everything and this is doubly true in emerging markets. The Mahathir administration has made a point of trying to recoup some of the losses due to graft, not least 1MDB, and is taking a more forthright stand against the debt trap infrastructure projects the last government signed with China. These are positive outcomes and suggest standards of governance are improving.



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