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January 10 2018

Commentary by Eoin Treacy

Intel Unveils 'Breakthrough' Quantum Computer

This article by Joel Hruska for Extreme Tech may be of interest to subscribers. Here is a section:

The new system is codenamed Tangle Lake, a reference to an Alaskan lake chain and the tangled state of the electrons themselves. Quantum computers are extremely different from standard (classical) computers, and can tackle problems modern classical machines can’t handle. The reason increasing the number of qubits in the system is important is because it also allows for a significant amount of additional work to be done and for more complex problems to be considered. And according to Intel, the gap between where we are today and where the company thinks we need to be for commercialization of quantum computing is enormous.

“In the quest to deliver a commercially viable quantum computing system, it’s anyone’s game,” said Mike Mayberry, corporate vice president and managing director of Intel Labs. “We expect it will be five to seven years before the industry gets to tackling engineering-scale problems, and it will likely require 1 million or more qubits to achieve commercial relevance.”

Intel is also investigating another type of qubit, spin qubits, to see if they can be implemented in silicon. Spin qubits are much smaller and can potentially be implemented in CMOS and Intel has invented a spin qubit fabrication flow on “300mm process Technology.” This is oddly phrased, but seems to indicate Intel is building these chips on its 300mm wafers as opposed to some new process node.

Eoin Treacy's view -

The fallout from the exposure of vulnerabilities in the vast majority of chips currently in computers all over the world is going to necessitate a rethink of how to deliver the best possible processing speeds at an attractive price. For too long the semiconductor business has paid scant attention to the threat of hacking but with the increasing digitization of the global economy it is an issue that can no longer be simply ignored. 



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January 10 2018

Commentary by Eoin Treacy

World's No.1 Miner Is Building an EV Hub It Doesn't Want to Keep

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

“The investment in Nickel West makes sense regardless,” said James Eginton, an analyst at Sydney-based Tribeca Investments Partners Pty, a BHP shareholder that’s urged the producer to extend its suite of commodities to tap rising battery demand. Efforts to refocus the business will either boost the value of a sale, or lift the unit’s cashflow if the assets are retained, he said.

BHP began building a nickel sulphate plant at Nickel West in recent weeks and is considering a slate of further expansions to make it the largest source of the material and a hub for other battery ingredients. It’s aiming to sell 90 percent of output into the battery supply chain by about 2021, from less than a third at the end of last year. Global nickel demand could more than double by 2050, fueled in part by rising electric vehicle sales, Bloomberg Intelligence said in a June report.

The world’s biggest mining companies are ratcheting up their response to the booming demand for battery raw materials.

Rio Tinto Group is developing a lithium project in Serbia, while Glencore Plc plans to double production of cobalt and is effectively “a one-stop-shop” for investors seeking exposure to EV gains, Sanford C. Bernstein Ltd. said in a note this month.

Eoin Treacy's view -

A measure of just how Technology focused the automotive sector has become is how many CEOs have turned up at the Consumer Electronics Symposium (CES) this year. When I attended two years ago Faraday Futures stole the show but this year Ford and other manufacturers were keen to lay out their electric car ambitions. 



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January 09 2018

Commentary by Eoin Treacy

Email of the day on socially driven inflation

Thanks for your insights as always into the markets.

I didn't fully understand what you meant by 'social media inflation' and wondered whether you could expand on this?

All the best

Eoin Treacy's view -

Thanks for this question which may be of interest to subscribers. I’m pretty sure I said socially driven inflation but in an hour long broadcast I could certainly have been subject to a Freudian slip. The essence of the question is if Technology is inherently deflationary and commodity use represents a fraction of its former influence on the economy, what will be responsible for driving a fresh inflationary cycle? 



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January 08 2018

Commentary by Eoin Treacy

$900M Australian rare earths mine given state approval

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

The company is also looking at a joint venture with OCI Company Ltd. to build a separation plant in South Korea.

According to Arafura the Nolans Bore rare earths-phosphate deposit is "one of the largest and most intensively explored deposits of its kind in the world." The deposit contains a JORC-compliant mineral resource of 56 million tonnes at an average grade of 2.6% TREO that extends to 215 metres below the surface. Two-thirds of the contained rare earths are in the measured and indicated category.

Arafura estimates the project would create an investment of about $900 million in Central Australia, as well as 250 to 300 permanent jobs.

An environmental approval from the Australian government and a final approval from the state government still need to be obtained.

The mine could supply up to 10% of world demand for neodymium and praseodymium, used in the manufacture of magnets for wind turbines, and electric vehicles.

Eoin Treacy's view -

Rare earth metals represent vital parts of the evolving Technology sector and not least for renewable energy, batteries, defence and computing. Since China dominates the sector and has already demonstrated it is willing to use its position as both a geopolitical and economic tool, there are solid arguments for developing more varied sources of supply. 



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January 04 2018

Commentary by Eoin Treacy

Intel, Microsoft Deal With Widespread Computer-Chip Weakness

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

News of the weakness, found last year and reported Tuesday by The Register Technology blog, weighed on shares of Intel, the biggest semiconductor maker, while boosting rivals including Advanced Micro Devices Inc. Intel’s silence for most of Wednesday added to investors’ unease.

Late in the day, Intel, Microsoft, Google and other tech bellwethers issued statements aimed at reassuring customers and shareholders. Intel said its chips weren’t the only ones affected and predicted no material effect on its business, while Microsoft, the largest software maker, said it released a security update to protect users of devices running Intel and other chips. Google, which said the issue affects Intel, AMD and ARM Holdings Plc chips, noted that it updated most of its systems and products with protections from attack. Amazon.com Inc., whose AWS is No. 1 in cloud computing, said most of its affected servers have already been secured.

Eoin Treacy's view -

Every other month we have news of just how porous the devices we rely on for just about everything are to exposing our personal information. This is a significant challenge for the IT sector in all its forms. The argument for increasing reliance on the internet, cloud and Internet of Everything is completely dependent on security, lest the devices we employ be used against us. This represents a cost which both in terms of speed and convenience but potentially also money for consumers and represents a challenge for corporations to keep under control.



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January 03 2018

Commentary by Eoin Treacy

Email of the day on investing in emerging technology themes for a UK investor:

New Year greetings to you and David and all FT members. About a year ago on the site there was a presentation on the new technological revolution, given by Mr. David Brown. It covered AI, robotics, cyber security, bioTechnology, healthcare and the like. It was all wonderful stuff, but how do I deal in the shares and ETF's mentioned? I'm with Barclays - an ISA and spread betting account - and they have little coverage of these areas.

Eoin Treacy's view -

Happy New Year to you and to everyone in the Collective of subscribers Thanks for this question which is sure to be of interest to other subscribers. This article from the Telegraph dated 2014 explains how to invest in overseas shares through your ISA. Here is a section:

A crucial question: can you put your overseas stocks in your Isa or pension? HM Revenue & Customs' rules forbid foreign currency in an Isa, so you have to use the costlier, sterling conversion approach to buy foreign shares in your Isa, converting back to pounds when you sell. The Isa accounts operated by Hargreaves and TD allow foreign stocks to be held in this way.

Disappointingly, Barclays' systems do not allow any overseas stocks to be held within an Isa.

With self-invested pensions, or Sipps, you can hold and trade in foreign currencies. So you can have part of your Sipp denominated in dollars if your broker (such as TD) offers the facility. Hargreaves Lansdown doesn't offer the service and Barclays, again poor in this respect, doesn't allow any overseas stocks within its pension accounts.



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December 28 2017

Commentary by Eoin Treacy

Billionaire Ambani Bails Out Brother by Buying Wireless Assets

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

Billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. agreed to acquire spectrum, mobile-phone towers and fiber assets of his brother Anil Ambani’s Reliance Communications Ltd. helping the younger sibling cut debt at the embattled wireless carrier, the two companies said in separate exchange filings.

Reliance Jio emerged the highest bidder for assets and the sale is expected to be closed in a phased manner between January and March 2018, according to a statement from RCom on Thursday.

The companies didn’t disclose a value for the transaction. The deal will include a cash payment and transfer of deferred spectrum installment payable to India’s Department of Telecommunication.

Mumbai-based RCom is seeking to cut total borrowings by $6 billion by March. RCom posted its first annual loss last March after Jio stormed into the market by offering free calls and data. That escalated a price war that has forced consolidation in the sector. RCom this week said it expects to get about 250 billion rupees ($3.9 billion) from the sale of its spectrum across four frequencies, its optical fiber network, and its more than 40,000 telecom towers. Entire proceeds will be used for repayment of RCom’s debt.

Reliance Jio is only paying for good quality assets that will enhance its depth of network, especially in rural areas, and raise data usage capacity, Shobhit Khare, a co-founder at Inertia Wealth Creators LLP, said via phone.

Eoin Treacy's view -

Reliance Industries spent a great deal of time developing a 4G network (Jio) and is now reaping the benefits. Reliance Communications, by selling its mobile assets, is essentially exiting the mobile telecommunications business. This article from livemint.com details where management see the company focusing next:

RCom will essentially be transformed from a business-to-consumer (B2C) into a business-to-business (B2B) entity, which will provide submarine cable systems that will deliver the latest sub-sea cable Technology to meet growing cloud infrastructure and data capacity demand from global enterprises and over-the-top, or OTT, service providers.

Ambani said the new RCom will be valued at Rs15,000 crore. The business, he said in a presentation, will be based on a capex-light model and will generate sustainable cash flows, with 50% of revenue and 60% of operating profit coming from outside of India.



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December 22 2017

Commentary by Eoin Treacy

Email of the day on an update from Sydney

I have had to attend several business meetings with senior executives in Sydney over the last few months.   The meetings cover senior executive remuneration.  

The City is almost uniformly buoyant and confident.   The Bankers are understandably more cautious and almost certainly earning less.   I was surprised by the benefits the innovation and start-up guys can earn - big numbers.    Despite all this the ASX is climbing that wall of worry.   This does feel more late cycle behaviour.   However, what I think confuses the economic outlook is that the Australian economy is definitely going through profound change. 

Thank you for all your good work. 

Eoin Treacy's view -

Thank you for this illuminating insight and composing this service is greatly enabled by the contribution of so many highly informed subscribers. Your email highlights the transition of interest away from the financial sector and towards information Technology over the past decade. After every crash the epicentre of risk takes a long time to recovery while capital and investor interest migrate to the “new thing”. 



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December 22 2017

Commentary by Eoin Treacy

Bitcoin Tumbles More than 25% as Sharks "Beginning to Circle"

This article by Samuel Potter and Eddie van der Walt for Bloomberg may be of interest to subscribers. Here is a section:

Bitcoin dropped to as low as $10,776. It last traded below $10, 000 on Dec. 1, when the U.S. Commodity Futures Trading Commission agreed to allow trading in bitcoin futures. For the week, the decline is as much as 39 percent. That follows gains of 13 percent, 44 percent and 32 percent in the prior three weeks.

The losses represent a major test for the cryptocurrency industry and the blockchain Technology that underpins it, which have rapidly entered the mainstream in recent weeks. Bears cast doubt on the value of the virtual assets, with UBS Group AG this week calling bitcoin the “biggest speculative bubble in history.” Bulls argue the Technology is a game changer for the world of investment and finance. Both will be closely watching the outcome of the current selloff.

Eoin Treacy's view -

If the history of bubbles tells us anything it is that the pace of innovation occurs largely independently of the price action. Crowds tend to overshoot in both directions and the merits or otherwise of blockchain Technology, as a way of streamlining transactions and verifying contracts, are separate from the vicissitudes of token price action.



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December 15 2017

Commentary by Eoin Treacy

Semiconductors: Technology and Market Primer 10.0

Thanks to a subscriber for this educational 253-page report from Oppenheimer which may be of interest. Here is a section:

A section from the report is posted in the Subscriber's Area. 

Eoin Treacy's view -

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

The most ambitious forecasts for technological innovation which tend to focus on the internet of things, autonomous vehicles, drone deliveries, smart speakers that act more like butlers/lifestyle managers than search engines, smart clothing, smart glasses, smart metering, not to mention artificial intelligence, big data as a service and even intelligent prosthetics all depend heavily on broadband access. 



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December 14 2017

Commentary by Eoin Treacy

Electric Car Range May Soon Triple, Thanks to New Research

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

The paper, published in the journal Joule, details how scientists added a compound made up of phosphorus and sulfur elements to the electrolyte liquid, which carries charge within batteries. The team claims that this compound reacts with the lithium metal electrode in a battery to “spontaneously coat it with an extremely thin protective layer.” This protection, supposedly, allows for the use of lithium metal electrodes within batteries, which adds greater storage capacity, without risks or degradation. This improvement could triple the range of these nascent vehicles.

Eoin Treacy's view -

The prize of achieving greater efficiency for batteries can’t be overstated so there is a flood of capital pouring into R&D. At the same time, large factories are being built to achieve economies of scale with current Technology. This two-pronged approach is likely to deliver both quantity and quality to the electric car sector over the coming decade. The additional factor of more stringent environment standards for emissions is a third important consideration for major automotive companies. 



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December 13 2017

Commentary by Eoin Treacy

Mean Reversion and other Misconceptions about Profit Margins

Thanks to a subscriber for this interesting report from the The Jerome Levy Forecasting Center on the contributing factors behind the relationship between profits, margins and profit sources. Here is a section:

When it comes to conventional wisdom about macroeconomic profit margins, investors beware.

First of all, do not expect margins to “revert to the mean”. A profit margin is not a random variable. Its behavior is complex and sometimes hard to predict, but that does not make it random. Throughout history, when the aggregate profit margin has been unusually far from its historical mean, it would have been unwise to expect it to revert. One would often have ended up waiting for many years, and sometimes for decades.

Second, looking to the future, each step of the way profit margins will depend on profits, which will depend on the profit sources. Global structural financial issues, public policy, business trends, Technology, demographics, sociology, and other influences on the profit sources – and not a simple probability distribution – will determine what happens to profits and profit margins.

Third, interpreting profit margins depends a great deal on context. For example, recent years’ wide margins have accompanied by a low ratio of profits-to-equity, which is what ultimately matters to shareholders.

Fourth remember that the influences on aggregate profits margins are different from influences on the margins of individual firms. Competition can certainly compress margins within a firm or industry, but aggregate profit margins are not “competed away” in the business sector as a whole. Rather, changes in the profit sources are what increase or decrease aggregate profit margins. 

Eoin Treacy's view -

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

There has been considerable debate about the elevated level of US Corporate Profits over the last few years with some analysts predicting what would be a cataclysmic mean reversion while others have been more sanguine. This is the first report I’ve seen attempting to look through the figures to identify the factors behind corporate profits that are contributing to this condition and I commend it to subscribers. 



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December 11 2017

Commentary by Eoin Treacy

Nikkei Climbs to 26-Year High as Global Growth Optimism Returns

This article by Min Jeong Lee and Emi Urabe for Bloomberg may be of interest to subscribers. Here it is in full:

Japanese shares rose with the Nikkei 225 Stock Average advancing to its highest since 1992 on a weaker yen, as upbeat jobs data from world’s largest economy reignited optimism over global growth.

Japan’s currency slid to a one-month low against the dollar after Labor Department figures Friday showed the U.S. added more jobs than expected in November and the unemployment rate held at an almost 17-year low. Both the Nikkei 225 and the broader Topix index advanced for a third day, with banks and machinery makers providing the biggest boost. Local equities are bouncing back to their highest levels in a quarter century following a pullback in late November on profit-taking.

“The global economic expansion isn’t over yet,” said Tatsushi Maeno, a senior strategist with Okasan Asset Management in Tokyo . As the yen heads lower “investors will anticipate upward revisions to corporate profits ahead of the earnings season in March.”

Both main stock gauges retreated briefly on Monday as Technology companies slid in the wake of the sector’s recent global selloff. A measure of electronics makers finished 0.1 percent higher after slipping by as much as 0.6 percent.
“Performance for semiconductor stocks like Tokyo Electron is sluggish with investors torn over whether it’s alright to take an optimal view on the sector again,” said Hideyuki Suzuki, a general manager at SBI Securities Co.

 

Eoin Treacy's view -

The Nikkei-225 has been ranging above 22,000 since early November and closed at an incremental new high today. Upside follow through tomorrow and a sustained move above 23,000 would reassert medium-term demand dominance. The broad Topix Index has now also moved to a new 25-year closing high and importantly these indices are doing so on a much lower valuation than Wall Street. 



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December 08 2017

Commentary by Eoin Treacy

Musings From the Oil Patch December 5th 2017

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

A section from the report is posted in the Subscriber's Area.

Eoin Treacy's view -

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

Tesla’s high profile makes it a target for just about every other automotive company regardless of the fact it does not make a profit on its vehicles. The fact General Motors loses as much as $9000 per electric vehicle is also a testament to the fact that battery Technology and manufacturing capacity is still an evolving theme. 



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December 06 2017

Commentary by Eoin Treacy

Tencent Seen Doubling by Stock-Picker Already Up 6,000%

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

Fueled by fast-growing sales, Tencent and Alibaba have almost doubled in share price this year, and both have market caps above $400 billion even after slipping recently. Their parallel climb explains in part why Leverenz’s fund has returned 31 percent in 2017, on track for its best year since 2009.

The stocks come with political risks. The Chinese government in September made creators of online message groups responsible for managing information within their forums, a move that chilled users of WeChat, Tencent’s popular social network.

“If you are an investor in Tencent you are basically betting on management’s ability to adjust to policies,” Duncan Clark, chairman of Technology consulting firm BDA China Ltd., told Bloomberg News at the time.

 

Eoin Treacy's view -

Privately held companies will be tolerated and even prosper in China provided they accept the role of ensuring the permanence of Communist Party rule and toe the Party line. Jack Ma saying today that China benefits from the stability of a single party system can be viewed in that vein. “Private” companies are increasingly organs of central propaganda and are expected to assist both in monitoring and influencing the public. 



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December 04 2017

Commentary by Eoin Treacy

Video commentary for December 4th 2017

Eoin Treacy's view -

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

Some of the topics covered include: rotation underway in response to the passing of tax cuts in the USA. Technology overbought conditions being unwound, domestically oriented sectors breaking out, gold steady, Rupee firm, oil pulls back from $65, 5-year bond yield tests the upper side of its range. 



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December 04 2017

Commentary by Eoin Treacy

Mars and beyond: Modular nuclear reactors set to power next wave of deep space exploration

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

Rated at 10 kilowatts, the Kilopower reactor puts out enough power to support two average American homes and can run continuously for ten years without refueling. Instead of plutonium, it uses a solid, cast uranium 235 reactor core 6 inches (15 cm) in diameter. This is surrounded by a beryllium oxide reflector with a mechanism at one end for removing and inserting a single rod of boron carbide. This rod starts and stops the reactor while the reflector catches escaping neutrons and bounces them back into the core, improving the efficiency of the self-regulating fission reaction. Until activated, the core is only mildly radioactive.

And

The design is modular, so the self-contained reactor units can be hooked together to provide as much power as and where it's needed, whether it's a deep space probe or a Martian outpost. According to Lee Mason, STMD's principal technologist for Power and Energy Storage at NASA Headquarters, the Technology is "agnostic" to its environment, allowing it a wide range of applications.

 

Eoin Treacy's view -

Small, modular and safe reactors, that can be produced in factories and transported to their destination via regular roads represent perhaps the only feasible future for the nuclear industry. The fact NASA is moving ahead with such designs, for its own purposes, increases the potential similar programs will find utility in the wider economy. 



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November 29 2017

Commentary by Eoin Treacy

The Tax Bill Is Hurting Tech Stocks

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

“It’s the tax bill hurting tech,” said Frank Ingarra, head trader at Greenwich, Connecticut-based NorthCoast Asset Management LLC, which oversees $1.8 billion. “When you have something that’s got so extended and done so well, and people start thinking about these things, of course you’re going to have profit taking.”

Equities were caught in another violent rotation Wednesday, with financial stocks poised for the best two-day rally in more than a year and tech shares their worst rout since last August’s meltdown. Companies from Nvidia Corp. and Facebook Inc., up more than 50 percent in 2017, are nursing losses of 3 percent or more Wednesday. Their effective tax rates are 6.5 percent and 10.1 percent, respectively, data compiled by Bloomberg show.

Eoin Treacy's view -

The Technology sector has delivered some of the most impressive performance of any sector this year with the result that a considerable number of wide overextensions relative to the trend mean are now evident. Mean reversion is therefore an increasingly likely possibility. 



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November 27 2017

Commentary by Eoin Treacy

Email of the day on the digital economy:

Another dynamite audio last weekend - much appreciated, and thank you.

I came across this report from Huawei and Oxford Economics the other day. I'm still reading but it really ups the argument about the effect of digital Technology using what it calls the spill-over effect within and across industries.

Some of the report’s key findings are:

The true size of the 2016 digital economy is US $11.5 trillion globally, or 15.5% of global GDP. This is roughly 3 times larger than traditional measurements. The base digital assets comprise 1/3 or $3.8 trillion, while digital spillover effects account for the remaining 2/3 or $7.5 trillion

The digital economy is 18.4% of GDP in advanced economies, ranging in size from 35% to 10%. The US has the largest digital economy at 35% of GDP.

The global digital economy has almost doubled between 2000 and 2016, growing 2.5 times faster than global GDP over this period. China’s share has tripled from 4% of GDP in 2000 to 13% in 2016.

Over the past three decades, every dollar invested in digital technologies added $20 to GDP on average, 6.7 times higher than non-digital investments which added $3 for every dollar invested.

Assuming current growth rates of digital investments over the next 10 years, the report estimates that by 2025 the digital economy will be US $23 trillion globally, or 24.3% of global GDP, up from 15.5% in 2016.

 If you download, I found the graph on 9.17, Fig 3 particularly interesting and unexpected.

Eoin Treacy's view -

Thank you for your kind words and I’m delighted you are enjoying the big picture long-term videos. If the viewer numbers on Vimeo are anything to go by they are the most popular feature on the site apart from the Chart Library.

This is a very welcome contribution to the debate on how much the digital economy contributes to productivity growth. Some are still arguing that the productivity gains from the internet peaked more than a decade ago and use that to explain why growth has been less than impressive since. However, as the complementary evolution of artificial intelligence, automation, cloud computing, social media, 4G connectivity and Internet of Things advance they all contribute to productivity gains when viewed from a wider digitisation theme. 



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November 27 2017

Commentary by Eoin Treacy

China Shares Resume Decline as Year's Top Performers Take a Hit

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

The CSI 300 Index of large-cap stocks closed down 1.3 percent, with ZTE Corp. and BYD Co. both falling the 10 percent limit in Shenzhen, while BOE Technology Group Co. slid 9.7 percent. Shanghai-listed liquor giant Kweichow Moutai Co. couldn’t maintain its brief foray into positive territory and closed down 1.4 percent, its seventh straight loss since state media warned it was climbing too fast. The stock has slumped 14 percent since Nov. 16.

“Institutional investors are choosing to cash in toward year-end as valuations are near historic highs and market sentiment deteriorated after official media targeted Moutai,” said Shen Zhengyang, Shanghai-based analyst at Northeast Securities Co. He said the market “lacks steam” for further gains.

Eoin Treacy's view -

The pace of the CSI300’s advance has picked up over the last six months and has outperformed the bank-heavy Shanghai A-Share Index. The institutional memory of the bubbly activity which contributed to the surge and collapse of the market in 2015 is still relatively fresh and the government does not want to see a repeat. That suggests some pressure may be coming to bear on the highest-flying shares, to instil some discipline among investors. 



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November 09 2017

Commentary by Eoin Treacy

Britain risks a nuclear dead end by spurning global technology leap

Thanks to a David for this article from Ambrose Evans-Pritchard in the Telegraph. Here is a section: 

A few million will be put aside for ‘blue sky’ research but the real money will go to a consortium led by Rolls-Royce to develop a series of 440 megawatt SMRs for £2.5bn each, drawing on Rolls’ experience building PWR3 reactors for nuclear submarines. The company bills it as part of a “national endeavour’ that will create 40,000 skilled jobs. It requires matching start-up funds of £500m from the state. 

I find myself torn since these ambitions are commendable. They revive a homegrown British sector, akin to the success in aerospace. It is exactly what Theresa May’s industrial strategy should be. Rolls-Royce is a superb company with layers of depth and a global brand. It could genuinely hope to capture an export bonanza.  

Yet the venture looks all too like a scaled-down version of Sizewell, plagued by the same defects as the old reactors, less flexible than advertised, and likely to spew yet more plutonium waste.  

Rolls Royce insists that the design is novel and can slash costs by relying on components small enough to be manufactured in factories. “Everything can be cut down to size and put on a lorry,” said a spokesman.  

Rolls-Royce has said the design can slash costs by relying on components small enough to be manufactured in factories It aims for £65 MWh by the fifth plant, dropping to £60 once the scale is ramped up to seven gigawatts (GW), with exports targeting a putative £400bn global market.  

 

Eoin Treacy's view -

A decade ago the UK went from being an oil and gas exporter to an importer, as the North Sea oil fields hit peak production, and the cost of production began to rise. That represents a considerable headwind to growth from a sector which had been a tailwind for decades previously. When people bemoan declining living standards and the rising cost of living, one of the first places to look has to be the energy sector and absence of a clear strategy to promote energy independence. 



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October 26 2017

Commentary by Eoin Treacy

FAAMG: A Bubble In The Making?

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

FAAMG: The music continues to play We continue to be bullish on the global Information Technology (IT) sector, mainly due to our positive view on the semiconductor and software sub-segments. Global IT is benefiting from a macro environment, which is characterised by accelerating growth and rising rates that support IT companies due to their low financial leverage and high operating leverage. Global IT stocks are trading at a forward P/E of around 18x, broadly in line with the sector’s long-term historical valuation multiple average. As a result, we believe that the good growth perspectives of the sector are not yet fully reflected at current levels.

However, within the IT segment, we would like to take a closer look at the FAAMG group (Facebook, Amazon, Apple, Microsoft, Google). Those five stocks have been the main performance drivers of the underlying IT and consumer indices and now represent around 13% of the S&P 500, roughly the same weighting as the US energy sector.
 
A recession would be needed to trigger a bubble burst. 
While we agree that the share price performance of the FAAMG group may look like a bubble in the making, we would stress the fact that bubbles only tend to burst when the underlying market moves into a recession. According to our economists, global growth should accelerate towards the end of the year and stabilise at current levels in 2018. Leading indicators in all major regions around the globe support this forecast and thus a recession looks highly unlikely in the foreseeable future.

 

Eoin Treacy's view -

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

The US Technology sector continues to represent some of the clearest beneficiaries of the evolution of the digital economy where data is a valuable asset. While companies like Microsoft and Facebook look quite different on the surface they both see their growth deriving from gathering, parsing, interpreting and selling data. The evolution of the home speaker/digital assistant market being simultaneously pushed by Apple, Amazon and Google are all symptomatic of their desire to secure consumer cashflows by being the conduit for data. 



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October 26 2017

Commentary by Eoin Treacy

New CRISPR tools enable extraordinarily precise gene editing in human cells

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

In the team's early experiments with base editing a specific mutation associated with the disease hemochromatosis was successfully fixed. No unwanted off-target effects were identified and the base editor enzyme operated with greater than 50 percent efficiency.

"We are hard at work trying to translate base editing Technology into human therapeutics," Liu says.

The second new CRISPR innovation revealed recently comes from a collaborative team of Broad Institute and MIT scientists. For the first time the team discovered a way to accurately edit RNA base pairs in human cells.

Dubbed "REPAIR" this system also focuses on base editing but this time is targeted at RNA. Unlike permanent changes to DNA, RNA is much more ephemeral and even reversible. The ability to edit RNA in human cells opens up an entirely new world of disease treatments targeting conditions including diabetes and IBD.

"REPAIR can fix mutations without tampering with the genome, and because RNA naturally degrades, it's a potentially reversible fix," explains co-first author David Cox.

 

Eoin Treacy's view -

CRISPR represents a paradigm shift for the genetics industry because it reduces the cost and time required to experiment with how to edit DNA. When I visited the MIT genetics labs a year ago it was clear that what was next to near impossible five years ago is now something doctoral students can achieve with ease on a daily basis.  

 



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October 20 2017

Commentary by Eoin Treacy

Investment Implications of the Final Frontier

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

We estimate that the ~$350b Global Space Industry will grow into a $1.1+ Tr Global Space Economy by 2040. However, there is significant execution risk, and we, accordingly, estimate a wide range of potential outcomes, from ~$600 bn (-60 bps v. Global GDP) to ~$1.75 Tr (+400 bps v. Global GDP). Working with our aerospace & defense, internet, satellite, and telecom analysts, we estimate a $400 bn+ incremental revenue opportunity from providing internet access to under- or unserved parts of the world, and a ~$725 bn revenue opportunity for internet companies focused on social media, search/online advertising, and, in particular, e-commerce, if global internet penetration reaches 100%. Ultimately, this will depend on the success of the new low Earth orbit (LEO) satellites from players like OneWeb and SpaceX.

In the short to medium term, most of the value of the industry is linked to internet bandwidth. Satellite broadband is responsible for ~50% of the Global Space Economy, and ~70% of our Bull Case. The demand for data is growing at an exponential rate, while the cost of access to space (and, by extension, data) is falling by orders of magnitude. However, over the long term, the discussion expands to topics such as national security, research, deep space exploration, high speed travel, … even mining asteroids. In this report, we discuss the potential for the BFR from SpaceX to disrupt the freight transportation industry.

Space is the "ultimate high ground" for national security. With the United States military's expenditures exceeding $600 bn/ year, and global military expenditures ~$1.7 Tr, compared to NASA's budget of ~$20 bn, there appears to be substantial room to increase the investment in space. While we expect the topic of space to increase in importance, our view is balanced by a recognition of realworld budgetary constraints, and other priorities.

Eoin Treacy's view -

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

How do companies that depend on the number of internet users reach the 3 billion or so potential customers not already under their purview? For leading Technology/social media companies it’s a big question because it is what their continued organic growth depends on. That is why investment continues to pour into space related ventures. 



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October 16 2017

Commentary by Eoin Treacy

Ray Kurzweil's Most Exciting Predictions About the Future of Humanity

This article from Futurism.com contains of video of Kurzweil’s presentation at SXSW which may be of interest to subscribers. Here is a section: 

Kurzweil continues to share his visions for the future, and his latest prediction was made at the most recent SXSW Conference, where he claimed that the Singularity — the moment when Technology becomes smarter than humans — will happen by 2045. Sixteen years prior to that, it will be just as smart as us. As he told Futurism, “2029 is the consistent date I have predicted for when an AI will pass a valid Turing test and therefore achieve human levels of intelligence.”

Kurzweil’s vision of the future doesn’t stop at the Singularity. He has also predicted how technologies, such as nanobots and brain-to-computer interfaces like Elon Musk’s Neuralink or Bryan Johnson’s Kernel, will affect our bodies, leading to a possible future in which both our brains and our entire beings are mechanized.

This process could start with science fiction-level leaps in virtual reality (VR) Technology. He predicts VR will advance so much that physical workplaces will become a thing of the past. Within a few decades, our commutes could just become a matter of strapping on a headset.

 

Eoin Treacy's view -

Technological innovation is occurring not only at a rapid pace but is affecting many different areas at once. Nvidia’s CEO believes the CPU is going to be left in the dust by the GPU which is being used in everything from VR to Ethereum mining, artificial intelligence systems and self-driving cars. At the same time, the evolution of cloud computing and quantum computing means the market for computing as a service is on a growth trajectory. 



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October 11 2017

Commentary by Eoin Treacy

Email of the day on over representation of tech in emerging market indices

Think, this issue discussed in Reuters article may be of interest to you and subscribers. The boom in emerging market Technology stocks is becoming a problem for fund managers of all stripes. The soaring market capitalization of a handful of companies such as China’s Alibaba (BABA.N) and Tencent (0700.HK) is steadily lifting their weighting in the MSCI emerging equities index. This means investors in funds that track indexes (exchange traded funds or ETFs) - who want exposure to a range of companies for a lower fund management fee - are finding themselves increasingly exposed to a single sector. Meanwhile, active fund managers, who justify charging higher fees for their individual stock-picking expertise, are under pressure to buy those tech stocks to ensure their funds keep up with the index’s gains. And with both sets of investor chasing the same thing, the risk of dramatic outflows increases if the sector falters.

Eoin Treacy's view -

Capitalism trends towards concentration and the nature of bull markets is to increasingly favour winners as they mature. There is no doubt that the Technology sector has been the clear leader in this economic expansion so it is to be expected it occupy an increasingly large segment of major market indices in both developed and developing markets. As you point out that contributes to deteriorating diversification in portfolios. 



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October 10 2017

Commentary by Eoin Treacy

Not Business as Usual

Thanks to a subscriber for this heavyweight 329-page report from Deutsche Bank which may be of interest. Here is a section:

Not business as usual for the oilfield services industry 
This is an industry that is still in transition, and these are companies that still need to navigate this transition. The commercial development of tight oil reserves in the US was disruptive and it derailed the normalization of the cycle. The business models that worked last cycle will not necessarily work again this cycle. We believe in the long term, the oilfield service franchises that will be the winners will be those that evolve with innovative business models, and those that acquire or invest in niche Technology leaders. 

Pressure pumping demand poised to recover to 2014 highs 
The biggest common denominator among our top picks is exposure to pressure pumping. As US producers tailor their drilling programs to focus increasingly on their core acreage and best wells, there will be a disproportionate mix of leading edge, longer lateral wells with tighter stage spacing and higher sand loadings. This will drive the average completion intensity per well even higher, which should restore the demand for horsepower to the 2014 highs despite a lower rig count.

 

Eoin Treacy's view -

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

Oil service companies have been among the primary targets for cost cutting by major oil producers. As wave after of wave of rationalization gripped the sector during the oil price collapse the major oil producers cancelled green field sites, abandoned deep-water drilling and committed to a lower for longer price forecast which dramatically altered their spending plans. The result was that the oil service sector is now a fraction of the size it attained at the oil peaks in 2008. That is before one considers the current optimism for electric vehicles, renewable energy and domestic batteries. 



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October 05 2017

Commentary by Eoin Treacy

More Lean, More Green

Thanks to a subscriber for this report from Goldman Sachs dated June 5th which is no less relevant today and may be of interest to subscribers. Here is a section:

We expect the costs of wind and solar to fall below the level of European power prices in the early 2020s (Exhibit 4). As costs fall below the price of the marginal Technology, we expect utilities to ramp up their renewables installations, to keep/gain market share in the generation mix. We expect this to significantly change the generation mix in Europe, and would expect thermal technologies (mainly coal and gas) to be negatively impacted in terms of output. We would expect most governments (aside from those keen to protect a particular Technology, such as domestic coal) to support this, as it should help reduce carbon emissions and lower electricity tariffs.  

Profits for wind developers/manufacturers to accelerate We estimate that the reduction in costs for wind/solar that we forecast will trigger a 30% step-up in annual global renewables investment (MWs) globally, post 2020, for the main European developers (Exhibit 7). We expect this trend to accelerate net income growth to c.2.5% (2017-36E) from 1.5% currently (Exhibit 8). 

For the European wind turbine manufacturers, we expect an average step-up in annual revenues of c.17% globally over 2017-36E, vs. 2017E (9 pp higher than previously anticipated), boosting annual net income by 58%. We estimate that this will support an equity value c.15% higher than we previously anticipated for the manufacturers.  

Our forecasts assume a significant change in the generation mix only in Europe: therefore, we would see upside to our renewables estimates if we were to extrapolate this globally.

 

Eoin Treacy's view -

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

When thinking about the march of Technology we need to force ourselves to think about the consequences of something that is happening today on the future. The pace of innovation is accelerating; often in an exponential manner so the linear trajectory of our personal experience is often not the best way to think about the how markets will evolve. It would be easy to look at the wind or solar sector today and conclude it is not yet competitive but Technology is changing so quickly that it is almost inevitable it will be cost competitive in future. That is the whole point of the exponential way of thinking Ray Kurzweil pioneered. 



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October 04 2017

Commentary by Eoin Treacy

Shale Oil What the Thunder Said

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

After a year-long investigation, we challenge the orthodoxy on shale oil. Breakevens will deflate from $50/bbl to c$25-30/bbl. Ultimate production potential is 25-30Mbpd by 2025-30, overwhelming agency forecasts for 5-7Mbpd. The implications extend far beyond the oil industry.

What has changed is our perception of shale oil as a new Technology paradigm: a digital revolution, offering 50-70% further productivity gains. Unlocking the full potential requires $100bn pa of upstream investment to be attracted by improving economics. Requisite political support is also warranted by reshaping global geopolitics and manufacturing, in favour of the US.

But world-changing trends are rarely realised in smooth trajectories. The conventional oil industry will contest shale’s ascent. International costs will continue deflating. Tax regimes will be overhauled to reinvigorate investment. Incumbent producers must compete with shale. OPEC’s last resort may be to incite periodic oil price volatility, potentially as soon as 2018.

Investing in this era is challenging. Our models now assume sustained deflation, averaging $46/bbl oil to 2020. The forward curve is too optimistic. Complacent companies will disappoint shareholders. But the leading European Majors are becoming remarkably resilient and can at least preserve equity value.

The prize lies in shale, with 25% upside and lower risk than conventional oil, even amidst low, volatile oil prices. US Super-Majors will capture the opportunity, by pivoting to short-cycle investment. Chevron is preferred. Shorter term bottlenecks will also emerge, benefiting select Oil Services.

Eoin Treacy's view -

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

The energy sector is in a state of flux. That is the natural reaction to a prolonged period of high prices which encourage economisation, greater technological innovation and investment in more supply. We now see a broad spectrum of responses to high prices which have contributed to better efficiency and more potential options for both production of electricity and storage as well as uses for electricity. Meanwhile oil is likely to remain a vitally important commodity for the foreseeable future not least as the global economy continues to industrialise and the chemical industry innovates the cracking process to prioritise commodities as the market demands. 



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October 04 2017

Commentary by Eoin Treacy

Micro-grids at the threshold

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

Batteries allow micro-grids to tap multiple revenue streams: Storage is helping micro-grid to transition beyond suppliers of just back-up power. Aggregation of storage and generation assets within a micro-grid creates a VPP and is capable of providing much-needed resiliency services to the central grid. Demand for these services is more than doubling every five years due to rising renewables in the generation mix. In Europe, this trend will likely continue considering targets to increase renewables by 20% by 2020. 

Block-chain and batteries make electricity trading possible: Utilities in the US and Europe are trialling block-chain Technology, which, coupled with storage, can enable electricity trading within and also between micro-grids. Unhindered electricity trading is necessary if we are to overcome the intermittent, geographical and seasonal limitations of renewables. Batteries only offer a limited solution as overcoming these issues in the absence of fossil fuel generation would need uneconomic oversizing of storage capacity. 

Smart grid will be based on storage, micro-grids and electricity trading: We forecast the grid-connected micro-grid market globally to grow to $10bn by 2021 from under $0.5bn in 2016. Battery storage (residential and large) is estimated to play a major role and we expect 30GWh of micro-grid, which translates into a $5bn market opportunity by 2021. Fuel cells could be important for micro-grids as they are the most efficient generation Technology – 15% adoption of fuel cells in microgrids will translate into 7.5Gw of demand and a market worth more than $2bn.       

Eoin Treacy's view -

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

Electricity traders have represented one of the largest demographics at The Chart Seminar over the last few years. At least part of the reason for that interest in Behavioural Technical Analysis is because it is a market with a bewildering array of fundamental inputs; coming with a slew of local considerations which contribute to volatility. That is before one considers the innate volatility of the energy markets. Therefore, an understanding of crowd psychology, the rhythm of markets and how one market can affect another are valuable tools which are going to be all the more important as the energy markets fracture with the growth of microgrids. 



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October 04 2017

Commentary by Eoin Treacy

Space: The Next Investment Frontier

Thanks to a subscriber for this report from Goldman Sachs which is dated April 4th but is no less relevant today. Here is a section:

The commercial space economy has stood nearly still for decades. More satellites have gone up and growth has been solid, but the fundamental commercial landscape has remained relatively stagnant. We are witnessing an inflection point in the significance of the space economy, where it becomes central in providing Internet access and basic services to more than half the world’s population, compounding growth. The coming decade will be one of pruning, where only the strongest and most innovative survive the wave of new Technology and business models, but that is necessary to propel the mainstay manufacturing and services industries forward. 

The commercial satellite services industry is entering an arms race to acquire the most capacity as pricing collapses in end markets. A single satellite is now being built with more Internet bandwidth than everything launched into orbit, ever. A constellation of small satellites will likely grow the amount of bandwidth on orbit by a factor of at least 10X, at a rapidly falling cost. At the same time, pricing in the launch industry is plummeting. On a cost per kg to LEO basis, prices will soon have fallen by about 90% over the last decade. Decreased launch cost lowers the barrier to entry and helps incumbents that may take advantage of lower capex to flood the market with additional capacity. 

We do not expect all existing players to survive the turbulence that is unfolding, but we also expect new companies to rise to the challenge to take the place of those that fail. The near term will present challenges, but in the back half of the next decade we see supply and demand balancing once prices have fallen sufficiently to fit the budgets of the rural populations of developing countries. Given our view on elasticity in the space economy, though with some stickiness, we expect lower prices to spur demand for launch, spacecraft, and satellite services.

Eoin Treacy's view -

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

A few years ago the 21st century was heralded as China’s century but advances in technological innovation suggest that provided standards of governance continue to improve the region most likely to benefit will be Africa. The introduction of microgrids for power, satellites for internet connectivity and the potential elimination of malaria will allow the focus of infrastructure development to focus on roads, schools and healthcare which should contribute to continued urbanisation and improving crop yields. Since Africa will account for the bulk of global population growth in the first half of this century the stakes couldn’t be higher for achieving a better standard of living for literally billions of people. 



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October 03 2017

Commentary by Eoin Treacy

Email of the day on blockchain

Been following some of your spreadbets successfully and thought I'd repay the favour with an interesting video on blockchain. Some readers may want to skip to about half way through this 18 min video

Best regards

Eoin Treacy's view -

Thank you for this thought provoking video and congratulations on taking opportunities as they appear in the markets.

The idea he proposed that each person can take back their identity and only share what they choose is a powerful notion and could easily be a rallying call around which people coalesce to support the Technology. The continued rise of cyber criminality and the enormous profits of companies like Facebook and Alphabet could both become politicised topics which help to grow participation in blockchain applications. 



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October 02 2017

Commentary by Eoin Treacy

Missile Defense: Money Well Spent; Budgets Unlikely to Stay Flat

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

The threat from expanding missile Technology by potentially adversarial nations is on the rise and has been since the early 2000s (see Figure 3). The most visible signal of that being the acceleration in missile Technology breakthroughs and launches by North Korea. On the back of this accelerating tension is a rising tide of political support. A bipartisan call for higher missile defense spending seems to be gaining traction, with the "Advancing America's Missile Defense Act of 2017" gaining 27 cosponsors in the Senate (21 Republicans, 5 Democrats and 1 Independent) introduced in May 2017. The bill laid out a few points for its rallying cry, but in particular drove home that a 23% decline in Missile Defense Agency budget since 2006 (while Iran and North Korea activity was going in the opposite direction) needed to be corrected. In the Bill, there is explicit language to: 1) increase the number of ground-based interceptors (by 28 with expansion to 100 interceptors vs. the 44 scheduled to be in place at the end of 2017, 2) reintroduce the development and deployment of space-based missile defense sensors (e.g. Space Tracking and Surveillance System--STSS), and 3) evaluation and testing of radar and sensors for the ground-based midcourse systems (e.g. LRDR) as well as the system as a whole (for which testing funding has declined over 83% since 2006). More additions are possible following recommendations from the Department of Defense's upcoming Ballistic Missile Defense Review ("BMDR") and Missile Defeat Review ("MDR"). Even more near-term, the DoD this week released details of a budget reprogramming request for 2017 for over $400M ~5% of the Missile Defense budget) toward previously unfunded missile defense efforts consistent with the desires laid out in the "Advancing America's Missile Defense Act of 2017". 

Eoin Treacy's view -

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

Subscribers are probably aware that I was intrigued by the many topics covered in Elon Musk’s presentation to the 68th International Astronautical Congress. There were some big claims made which highlighted the rapid pace of innovation in the space sector, the introduction of private capital has achieved. However, there are some pressing geopolitical considerations that should also be considered from this evolution. 



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September 20 2017

Commentary by Eoin Treacy

Proterra Catalyst E2 MAX Sets World Record And Drives 1,101.2 Miles On A Single Charge

This press release contains some impressive statistics and may be of interest to subscribers. Here is a section: 

Today Proterra, the leading innovator in heavy-duty electric transportation, announced it has set a world record for driving the longest distance ever traveled by an electric vehicle on a single charge at the Navistar Proving Grounds in New Carlisle, Indiana. Proterra’s 40-foot Catalyst E2 max traveled 1,101.2 miles this month with 660 kWh of energy storage capacity. For the last three consecutive years, Proterra has demonstrated improved range and battery performance. Last September, Proterra drove 603 miles with 440kWh of energy storage, and in 2015, Proterra drove 258 miles with 257kWh of energy storage on a single charge. This year’s world record range marks exceptional performance improvements over prior years, and underscores Proterra’s commitment to innovation and accelerating the mass adoption of heavy-duty electric vehicles.

“For our heavy-duty electric bus to break the previous world record of 1,013.76 miles — which was set by a light-duty passenger EV 46 times lighter than the Catalyst E2 max — is a major feat,” said Matt Horton, Proterra’s chief commercial officer. “This record achievement is a testament to Proterra’s purpose-built electric bus design, energy-dense batteries and efficient drivetrain.”

Beyond meeting transit agencies’ range requirements, the Catalyst E2 max is poised to make a significant impact on the transit market because of its low operational cost per mile compared to conventional fossil fuel powered buses. According to Bloomberg New Energy Finance, lithium-ion battery prices have dropped by roughly 72 percent since 2010, and the economics for batteries continue to improve. Between li-ion battery cost savings and improving vehicle efficiency, electric vehicles represent the most disruptive mode of transport today.

“Driven by the best cost savings-per-mile, we believe the business case for heavy-duty electric buses is superior to all other applications, and that the transit market will be the first to transition completely to battery-electric powered vehicles,” said Ryan Popple, Proterra CEO. “Early electric bus adopters like our first customer, Foothill Transit, have paved the way for future heavy-duty applications, like motor coaches and commercial trucks. As we see incumbents and more companies enter the heavy-duty EV market, it has become very apparent that the future is all-electric, and the sun is setting on combustion engine Technology.”

 

Eoin Treacy's view -

One of the primary arguments often trotted out to combat ambitious forecasts about the future of long haul and large passenger vehicles is the battery would have to be so large and heavy as to make the endeavor untenable. 



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September 13 2017

Commentary by Eoin Treacy

After hurricanes, flood of storm-damaged cars heading for market

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

Scafidi expects the number of flood-damaged cars to be greater for Harvey than it was for Hurricane Katrina in 2005, both because of Harvey's bigger footprint and because in the last 12 years more vehicles rely on computer Technology and electronics.

"Beneath the surface, water can permanently damage computers that control everything from the gas pedal to steering," said Cliff Wood, chief operating officer at CarMax, a leading used car dealer.

Katrina damaged about 600,000 vehicles, Basso said. Carfax is still working on an estimate for Harvey.

 

Eoin Treacy's view -

It has been my experience that insurance companies are more than willing to write off cars even with little more than superficial damage, so they are likely to have little compunction in writing off flood damaged cars. Even if the estimates of upwards of half a million vehicles being written off are too high, there are still going to be a lot of new cars bought or leased in the next few months as people claim insurance. 



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September 12 2017

Commentary by Eoin Treacy

Email of the day on the ground experience from the Texas panhandle

I had the pleasure of spending several days with a friend who is an executive in a drilling company. He indicated that the recovery had brought a boom in drilling, but that customers were demanding the latest high-tech drilling rigs (faster, more efficient, much bigger pumps, able to drill longer laterals). This requires very large capital investments with uncertain payback times. Older, lower tech rigs are left unused, which creates dramatically lower rig utilization rates for drillers. Unfortunately, the past month has seen a bit of a slowdown, with some new tech rigs coming off of pads with no new contract (meaning the rig goes to the yard and sits, and the crew have no jobs). While this may be a short-term issue, it could alternatively be a sickly-looking canary.

Unlike last year, when vast numbers of pump jacks were idle (indicating the well is not producing at that moment), this year more than 75% of the pump jacks I saw were pumping, and most looked well-maintained. Pump jacks do not normally pump full-time, as they shut down for maintenance, and when their storage tanks are full, etc. A lot of the oil in the area is pumped into tanks and then picked up by trucks. 

The beef, pork, chicken, and nuclear weapon businesses all appeared to be thriving.

Probably needless to say, but the Texas Panhandle is about 700 miles from the flooding.

Eoin Treacy's view -

Thank you for this trip report which I’m sure will be appreciated by subscribers. Relatively low prices, at least compared to a few years ago, put pressure on services businesses to employ the most sophisticated Technology which requires fewer people and more capital. That benefits larger companies with the financial heft to prosper while it is likely to have a negative effect on smaller operations. 



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September 11 2017

Commentary by Eoin Treacy

Dollar Advances From 2015 Low Before UN Meeting on North Korea

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

“Markets seem to have headed into the weekend priced for the worst -- a North Korean missile test and maximum financial damage from Irma,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “The dollar seems overdue for a bounce. The dollar should return to 109 to 110 yen early in the week.”

The dollar is also supported by “decent” U.S. economic data momentum and a deal between President Donald Trump and the Democrats suspending the debt ceiling to December, Callow said.

Still, traders said some short-term accounts took long-yen positions after the state-run Korean Central News Agency said Monday morning that the U.S. will pay a "due price" if harsher sanctions were imposed on North Korea at an expected United Nations Security Council meeting.

 

Eoin Treacy's view -

The Dollar has a widening interest rate differential with its largest trading partners, an economy that is expanding, a hot Technology sector, full employment and the prospect of reduced supply as the Fed begins to tinker with the size of its balance sheet. 



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September 11 2017

Commentary by Eoin Treacy

Email of the day on the deflationary impact of technology

I have noticed from your recent postings that while you recognize all the great outcomes Technology will bring, you also recognize the downside consequences of all the displaced labor. Another effect on labor has been the financialization of our economy. Check out this article (open domain) Thank you for your continued great work!

Eoin Treacy's view -

Thanks for this link may also of interest to subscribers. I found the chart of wages and salaries as a percentage of GDP to be particularly interesting. 

Technology is inherently deflationary which means we can do more with less and each of us can easily come up with examples of how innovations have improved different aspects of our lives. However, the rapid pace of innovation in artificial intelligence, robotics and healthcare while representing truly exciting developments for corporations also mean that millions of jobs are going to be under pressure. 

 



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September 08 2017

Commentary by Eoin Treacy

3D Sensing

Thanks to a subscriber for this report from Deutsche Bank focusing on the evolution of augmented reality Technology in the upcoming suite of new mobile phones. Here is a section: 

It is a reflection of Apple’s influence on the smartphone market that Apple’s competitors are already lining up copycats to ship in 2018 even before the market reception to Apple’s iPhone 8 has actually been seen. By introducing facial recognition on the iPhone 8 leveraging 3D sensing, Apple is adding extra cost, but it is also enabling bezel minimisation and the fingerprint module to be removed. With the bezel removed, the real estate for adding 3D sensing is extremely small, but it looks like they have achieved an industry first – getting structured light to miniaturise on a smartphone. This is no mean feat and reflects considerable efforts since Apple acquired Primesense in 2013.

Eoin Treacy's view -

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

Virtual Reality relies on headsets and expensive pieces of hardware. Augmented reality works differently by overlaying graphics on the real world. That represents a cheaper solution though not quite as immersive. By being the first company to bring out an augmented reality-enabled phone Apple is breaking new ground which has historically not been its forte but does help to explain why the price of the share has been performing so admirably of late. 



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September 05 2017

Commentary by Eoin Treacy

The Times, They Are A-Charging

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

In the near-term, adoption is likely to be constrained by this slightly extended payback, concerns over driving range and thus, charging infrastructure. That said, investors may be surprised at the speed at which infrastructure can be built out (Tesla has constructed 830 SuperCharger locations in 31 countries to date, expected to double in 2017). However, the short driving range (~200 miles) is likely to constrain the market to specific use cases, until battery Technology improves/costs decline. We forecast 10% adoption by 2027 within the NAFTA Class 8 market.

The shorter, closed-loop nature of typical medium-duty truck routes should yield faster adoption of electric trucks vs. heavy-duty. Range is not a major concern for medium-duty trucks, given that they tend to drive much shorter routes (well below 200 miles/day), haul less tonnage, and often follow closed-loop networks, allowing for night-time charging. As such, we agree with consensus on this topic – medium-duty adoption of electric vehicles is likely to be much faster than with heavy-duty trucks. We project 15% adoption by 2027 within the NAFTA Class 5-7 market.

OEMs that offer the best payback period/total cost of ownership are likely to win share. Tesla will be a new entrant in the market, which presents risk to existing OEMs in itself (Daimler, Volvo, Navistar, PACCAR) – we believe the company that provides the best combination of average selling price with battery range/cost will win, and Tesla will have many advantages in this regard. Nonetheless, today it seems that all OEMs are developing electric trucks with range in the ~200-mile zone, which shifts the focus to the ASP. At this point, Daimler, MAN/Scania and Tesla appear to be preparing to launch electric truck offerings, so they could potentially have a head start vs. Navistar and PACCAR.

Legacy components suppliers could face significant headwinds. This centers around components that will be phased out in a fully electric world, such as the transmission (Allison Transmission) and engine (Cummins). Note that in conjunction with this report, we have downgraded Allison Transmission (covered by Nicole DeBlase) to Sell (price as of 8/31: $34.54), as we match longer-term electrification concerns with shorter-term earnings headwinds.

Eoin Treacy's view -

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

Intel acquired Mobileye earlier this year to gain access to the autonomous vehicle sector because cars and trucks are going to require a lot more computing power in future regardless of how quickly autonomous features develop. 



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September 04 2017

Commentary by Eoin Treacy

Comparing Risk and Opportunity

Thanks to a subscriber for this summary by Byron Wein for Blackstone, from his series of discussions with investors. Here is a section:

There was general agreement that both inflation and productivity were understated. Housing is a big part of the inflation calculation and, for most of the country, housing costs have been rising modestly. The prices of services like healthcare and lifestyle-supporting needs used by everyone, such as haircare and cleaning services, have risen sharply but don’t show up in the numbers. As for productivity, the measurement techniques were developed in the 1950s when the U.S. was more of a manufacturing economy. Now with services and knowledge-based industries so important, the historical measurement approaches, which underestimate the impact of computer software developments, understate productivity improvements. Time spent posting and reading posts on Facebook during working hours, however, detracts from productivity. One Technology person pointed out, though, that the video games of today are intensely interactive and represent a learning experience for the kids playing them. This is in sharp contrast to the passive watching of television by previous generations.

We talked a bit about inequality and agreed the problem was likely to become worse because of globalization and Technology. One investor was optimistic, however, because of the positive impact machine learning was making in improving the outlook of disadvantaged Americans and educational opportunities in the emerging markets. Another pointed out that 60% of the jobs held in 1980 don’t exist today and still unemployment is down to 4.3%. On-demand services, such as Uber, are creating jobs, but Technology displacing workers is a problem throughout the world.

Even though there was an apprehensive mood at the lunches few were buying gold as a safeguard. In spite of the strong performance of the Japanese economy this year and the rise in its stock market, the group remained wary of Japan. There was no clear consensus on why the dollar was weak, but a lack of confidence in the new administration in Washington was clearly a factor in spite of strong U.S. growth and a rising stock market. One of the lunches was decidedly bearish. Overall, a vote on market performance between now and year-end showed that 60% believed it would be higher in spite of the caution expressed in the discussion.

Eoin Treacy's view -

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

What I spend money on every month is going up in price yet official inflation measures tell me there is little inflation. I took a look at my family’s expenditures on a year over year basis at the weekend. My health insurance went up 30% last year, my children’s tuition increased 10%, my car insurance went up 8%, food was relatively unchanged and gasoline was volatile. Meanwhile my mobile phone service got cheaper.



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September 01 2017

Commentary by Eoin Treacy

Email of the day on cobalt

Nickel is an important metal in itself for battery Technology, but 2/3 of nickel goes into stainless steel, so from this perspective nickel isn't a very highly leveraged play on battery advances. Whilst Cobalt is a by-product of nickel mining, it is my understanding that this is mainly the case from lateritic nickel deposits, and there is a much lower % of cobalt by-product from deep mines. 

Eoin Treacy's view -

Thank you for this educative email, from a subscriber who literally wrote the book on mining economics. I agree that not every nickel company produces cobalt which is why the three large miners I mentioned all specifically state they do produce it. 



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August 31 2017

Commentary by Eoin Treacy

U.S. Jobs Engine Keeps Defying Forecasts for 2017 Slowdown

This article by Shobhana Chandra may be of interest to subscribers. Here is the relevant section:

 

A confluence of reasons helps explain the outperformance, including steady consumer spending; bullish business sentiment on hopes President Donald Trump will cut taxes and boost growth; stabilization in oil prices; and improving export markets. Moreover, weak wage gains suggest employers are adding workers instead of investing in Technology, something reflected in sluggish productivity. Recent hiring has been driven by typically low-paying industries such as restaurants, home health-care services and leisure.

“There is enough supply of labor to keep hiring growing at a fairly robust pace,” said Michael Gapen, Barclays Plc’s chief U.S. economist, who projects payrolls grew 200,000 in August. There’s also still plenty of demand for workers in this “slow but super-durable expansion,” he said.

Eoin Treacy's view -

Declining labor force participation has been a thorn in the side of policy makers for much of the recovery but that should begin to improve as the number of job openings increases and wages edge higher. The upgrading of GDP figures to 3% combined with surprisingly firm Chinese factory gauges point toward the continuation of this period of synchronized global economic expansion. 



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August 30 2017

Commentary by Eoin Treacy

Breakthrough Cancer Therapy for Dire Cases Gets FDA Approval

This article by Michelle Fay Cortez, Anna Edney and James Paton for Bloomberg may be of interest to subscribers. Here is a section: 

“We’ve never seen anything like this before,” said Stephan Grupp, director of the cancer immunotherapy frontier program at Children’s Hospital of Philadelphia, the first medical center to study Kymriah in children. “I believe this therapy may become the new standard of care for this patient population.”

Novartis said that it’s made an agreement with the U.S. government to pay for the drug only when paediatric or young adult patients with the cancer respond to treatment by the end of their first month. That agreement could have implications for other drugmakers developing expensive, specialized treatments, such as one-time therapies meant to cure rare genetic diseases. Novartis said its working on similar agreements with other payers.

Kymriah will carry a boxed warning because of the treatment’s potential to cause deadly side effects, including neurological complications and what’s known as cytokine release syndrome, a systemic reaction triggered by the destruction of the cancer cells. The FDA also approved Roche Holding AG’s Actemra to treat patients with cytokine release syndrome, pointing to research that shows 69 percent of patients suffering from it improved completely after one or two doses.

 

Eoin Treacy's view -

It’s been a busy week for the immuno-oncology sector with Gilead Sciences announcing a bid for Kite Pharmaceuticals over the weekend and Novartis getting the go ahead for its CAR T-cell treatment today. A point I have been making for more than a year is that the first place we are going to see personalised medicine evolve is in the oncology sector. Every cancer is genetically unique and the number of types they can be categorised into is mind boggling. Even with limited tools tailored treatment programs are already the norm so the evolution of better tools not least through re-educating the immune system is a logical progression. 



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August 30 2017

Commentary by Eoin Treacy

The Fat Tech Dragon

This report by Scott Kennedy for the Center for Strategic & International Studies may be of interest to subscribers. Here is a section:

China’s embrace of intellectual property (IP) is highly positive when contrasted with the country’s original disdain for property rights of any sort and widespread violation of IP rights. However, China’s efforts to develop and obtain more IP is driven heavily by bureaucratic imperatives as opposed to market incentives. Moreover, China may now be a “large” IP country, but it is still a “weak” one. Whether one is discussing licensing and royalties, mergers and acquisitions, or dispute settlement, Chinese patents still have little commercial value. 

China’s commercial success has outstripped its progress in Technology innovation. Chinese companies are acquiring greater market share in high tech, particularly in the most commodified segments of sectors. The value-added contribution to manufacturing is growing in absolute terms, and domestic companies are contributing a growing share to China’s high-tech exports. 

Overall, China’s high-tech drive may be characterized as “good-enough innovation.” From a negative perspective, China is investing—and may be wasting—a great deal of human capital and funding, but is still far from a leader in high tech. From a more positive perspective, China is achieving incremental progress by benefiting from its strong capacity in manufacturing, the accumulation and diffusion of tacit knowledge, and the opportunities provided by such a large market. 

Regardless of the level of support they receive from their government, Chinese companies will face growing challenges in their interactions with multinational businesses and in overseas markets. Foreign governments and multinational businesses likewise need to decide how to strategically respond to China’s approach. They could take a firm stand in opposition, try to influence China’s approach at the margins, or go along with the strategy as best they can. In any case, if they are not careful, they could end up under the heavy foot of a fat tech dragon.

 

Eoin Treacy's view -

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

In addition to its race to become a centre for high tech innovation China is also intent on a “China first” policy of making sure it is producing its own semiconductors without having to rely on US, Japanese, Taiwanese and South Korean manufacturers. That raises important questions about M&A activity since so much of it is state sponsored. The reality is that if China gains the Technology to produce its own semiconductors it will seek to flood the market with cheap products and that could represent a significant issue for the global tech ecosystem. 



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August 25 2017

Commentary by Eoin Treacy

Dear iPhone: Here's Why We're Still Together After 10 Years

This article by Brian X.Chen for the New York Times may be of interest to subscribers. Here is a section:

 

Many eyes are now on Apple’s 10th anniversary event for the iPhone, which is expected to be held next month. There, Apple is set to introduce major upgrades for the next iPhones, which could stoke our appetites again for the gadget. Or not.

Chief among the changes for the new iPhones: refreshed versions, including a premium model priced at around $999, according to people briefed on the product, who asked to remain anonymous because they were not authorized to speak publicly. Apple made room for a bigger screen on that model by reducing the size of the bezel — or the forehead and the chin — on the face of the device. Other new features include facial recognition for unlocking the device, along with the ability to charge it with magnetic induction, the people said.

Here’s a look back at the last 10 years of why the iPhone still has us in its grip — so much that people keep coming back for more.

Eoin Treacy's view -

Rather than think of the iPhone as a product iteration it is probably better to describe it as an ecosystem. The phone itself represents a hefty initial outlay but the AppStore, while generating considerably less revenue, acts as an anchor for the brand because apps are transferrable between phones of the same brand but push up the cost of switching. 



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August 22 2017

Commentary by Eoin Treacy

Sorry, Banning 'Killer Robots' Just Isn't Practical

This article by Igor Zarembow for Wired may be of interest to subscribers. Here is a section: 

 

Weapons systems that make their own decisions are a very different, and much broader, category. The line between weapons controlled by humans and those that fire autonomously is blurry, and many nations—including the US—have begun the process of crossing it. Moreover, technologies such as robotic aircraft and ground vehicles have proved so useful that armed forces may find giving them more independence—including to kill—irresistible.

A recent report on artificial intelligence and war commissioned by the Office of the Director of National Intelligence concluded that the Technology is set to massively magnify military power. Greg Allen, coauthor of the report and now an adjunct fellow at nonpartisan think tank the Center for New American Security, doesn’t expect the US and other countries to be able to stop themselves from building arsenals of weapons that can decide when to fire. “You are unlikely to achieve a full ban of autonomous weapons,” he says. “The temptation for using them is going to be very intense.”

Eoin Treacy's view -

Automation is being driven by technological innovation and, unlike chemical weapons, is applicable to just about every area of our lives. That’s an important differentiator and virtually ensures the trend will continue despite the real threats posed by the increasing autonomy of weapons of war. 



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August 17 2017

Commentary by Eoin Treacy

Why Cryptocurrencies Will Never Be Safe Havens

Thanks to a subscriber for this article by Mark Spitznagel for the Mises Institute. Here is a section:

Bitcoins should be regarded as assets, or really equities, not as currencies. They are each little business plans — each perceived to create future value. They are not stores-of-value, but rather volatile expectations on the future success of these business plans. But most ICOs probably don’t have viable business plans; they are truly castles in the sky, relying only on momentum effects among the growing herd of crypto-investors. (The Securities and Exchange Commission is correct in looking at them as equities.) Thus, we should expect their current value to be derived by the same razor-thin equity risk premiums and bubbly growth expectations that we see throughout markets today. And we should expect that value to suffer the same fate as occurs at the end of every speculative bubble. 

If you wanted to create your own private country with your own currency, no matter how safe you were from outside invaders, you’d be wise to start with some pre-existing store-of-value, such as a foreign currency, gold, or land. Otherwise, why would anyone trade for your new currency? Arbitrarily assigning a store-of-value component to a cryptocurrency, no matter how secure it, is trying to do the same thing (except much easier than starting a new country). And somehow it’s been working.

Moreover, as competing cryptocurrencies are created, whether for specific applications (such as automating contracts, for instance), these ICOs seem to have the effect of driving up all cryptocurrencies. Clearly, there is the potential for additional cryptocurrencies to bolster the transactional value of each other—perhaps even adding to the fungibility of all cryptocurrencies. But as various cryptocurrencies start competing with each other, they will not be additive in value. The Technology, like new innovations, can, in fact, create some value from thin air. But not so any underlying store-of-value component in the cryptocurrencies. As a new cryptocurrency is assigned units of a store-of-value, those units must, by necessity, leave other stores-of-value, whether gold or another cryptocurrency. New depositories of value must siphon off the existing depositories of value. On a global scale, it is very much a zero sum game.

 

Eoin Treacy's view -

I agree it is more appropriate to think of bitcoin and the other cryptocurrencies as assets rather than currencies which they are not. They are at best a reflection of the economic value of the network they represent. 



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August 16 2017

Commentary by Eoin Treacy

Email of the day on cyclicals

Thank you for another exceptionally interesting Long-Term Commentary. Once again, you have referred to "cyclicals" and given mining as an example. Which other sectors would you include in this category?

Eoin Treacy's view -

Thank you for your kinds words and this question which other subscribers may have an interest in. Generally speaking, miners, shipping, banking and Technology are considered cyclical sectors. 



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August 15 2017

Commentary by Eoin Treacy

Video commentary for August 15th 2017

August 14 2017

Commentary by Eoin Treacy

The Continuum of Disruption

Thanks to a subscriber for this report from the team at Raymond James focusing on the revolution in the retail sector. Here is a section:

Reflecting on the past and examining the continuum, it was and is totally logical that that Amazon first attacked “media” (books, etc.) as its entry into eCommerce. Books are typically small, easily shipped and not damaged in shipping, require little additional selling by the vendor (other than recommendations from friends, families, or acquaintances), require no imagination to understand the form, and have an indefinite shelf life.

Nearby, we then positioned electronics – particularly consumer electronics including televisions, computers, and other similar electronic accessories. While some of these items are outsized, the form factors for most of these have become smaller as Technology has advanced, thereby becoming easier to ship. Additionally, there is now so much online literature on the various alternatives available that make human selling interaction less necessary (or helpful or trusted). And finally, while the technological life of many of these products may be limited, the physical lives are longer, sometimes infinite.

At the other end of the continuum, we position heavy building materials such as gypsum, bags of cement, cinder blocks, and lumber. These items tend to be irregularly packaged and often not acceptable for shipment by UPS and/or Federal Express and subject to damage if shipped over-the-road by truck. Accordingly, Home Depot and Lowe’s, each of which has be developing their own eCommerce capabilities, have, to date, been less intermediated by the pure e-tailers than a host of other brick and mortar retailers. 

 

Eoin Treacy's view -

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

The big box departments stores have collapsed. The fact they had posted some of the most consistent uptrends from their respective 2008 lows; bouncing so early following the credit crisis is a testament to just how quickly the market is changing. 



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August 14 2017

Commentary by Eoin Treacy

Trump trade investigation will 'poison' relations with China, media warns

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

“Given Trump’s transactional approach to foreign affairs, it is impossible to look at the matter without taking into account his increasing disappointment at what he deems as China’s failure to bring into line [North] Korea,” the English-language paper said.

“But instead of advancing the United States’ interests, politicising trade will only exacerbate the country’s economic woes, and poison the overall China-US relationship.”

An administration official said diplomacy over North Korea and the potential trade probe were “totally unrelated”, saying the trade action was not a pressure tactic.

The China Daily said it was unfair for Trump to put the burden on China for dissuading Pyongyang from its actions.
“By trying to incriminate Beijing as an accomplice in [North Korea’s] nuclear adventure and blame it for a failure that is essentially a failure of all stakeholders, Trump risks making the serious mistake of splitting up the international coalition that is the means to resolve the issue peacefully,” it said.

 

Eoin Treacy's view -

The US Administration might be backing away from confrontational rhetoric regarding North Korea, but the question of China’s trade practices is now moving centre stage. China’s practice of insisting on Technology transfer, which is then used to promote domestic manufacturing in direct opposition to the original foreign firm’s interests is predatory. It’s hard to imagine that a government investigation won’t be able to find evidence of unfair trade practices if it wants to. 



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August 08 2017

Commentary by Eoin Treacy

Email of the day on batteries

Welcome back from China, I would also reciprocate the glowing comments
on Saturdays missive.

FYI attached please find some headlines from the Asian Nikkei, unfortunately I am not a subscriber, but for all the battery fanatics following you and I agree with the view that battery Technology is a game changer. I thought you would be interested in the following :

Eoin Treacy's view -

Battery Technology was a fringe industry for a long time because there was no compelling commercial reason to invest the money required to develop it. That changed when oil prices surged higher and consumers were forced to begin to think about economizing to reduce how much they were spending on energy. 

The dynamics that have unfolded in the energy sector are a perfect example of how high prices influence spending decisions by producers and economizing by consumers while low prices have the opposite effect. These long-term dynamics contribute to the long-term cyclical nature of markets. 



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August 07 2017

Commentary by Eoin Treacy

Bitcoin Soars to Record as Buyers Look Beyond Miners' Split

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

“The miner-orchestrated hard fork has had limited traction and will not impact the price or future development of bitcoin,” said Aurelien Menant, chief executive officer of Gatecoin Ltd., a cryptocurrency exchange in Hong Kong, referring to the split. “The activation of SegWit is a significant milestone in bitcoin’s technological evolution.”

At the heart of the dispute is an issue that has dogged bitcoin’s development: as its popularity grew, transactions slowed because of a cap on the amount of data processed by the blockchain. Under SegWit2x, some of that data will be moved off the main network while block sizes will be doubled to 2 megabytes in November -- a quarter of that for Bitcoin Cash. While the first step of SegWit2x has been locked in and the Technology will probably be adopted at some point in August, infighting could disrupt the transition.

The price of Bitcoin Cash has plummeted 62 percent from a record high reached last week to $274, CoinMarketCap data show, bolstering the appeal of its older cousin. For now, Bitcoin Cash still pales in comparison to the original asset: the former has a capitalization of $4 billion, compared with the latter’s $53 billion, according to CoinMarketCap.

“The scaling debate is not over yet,” Menant added. “The promised 2 MB block size increase due in November in accordance with the SegWit2x agreement may still be rejected by certain stakeholders.”

 

Eoin Treacy's view -

When Ethereum’s hard fork took place a year ago, it was the original version of the cryptocurrency that garnered the most adherents subsequently. That now also appears to be happening following the bitcoin hard fork. 



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August 04 2017

Commentary by Eoin Treacy

Germany Giving Gigafactory a Home in Latest Challenge to Tesla

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

German executives are preparing to announce a new home for a lithium-ion battery plant designed to rival the output at Tesla Inc.’s Gigafactory.

Terra E Holding GmbH will choose one of five candidate sites in Germany or a neighboring country next month to build its 34 gigawatt-hour battery factory, Frankfurt-based Chief Executive Officer Holger Gritzka said in an interview. The former ThyssenKrupp AG manager has helped to assemble a consortium of 17 German companies and won government support for the project, which will break ground in the fourth quarter of 2019 and reach full capacity in 2028, he said.

"The battery factory is the latest sign that German industry, the motor behind the world’s fourth-biggest economy, is gearing up for a new stage in the energy revolution. Lithium- ion batteries can help stabilize intermittent flows of wind and solar power on electricity networks. They’re also projected to power millions of plug-in cars expected to roll off German production lines beginning early next decade.

“We have to be better in process Technology than competitors, a constant step ahead,” said Gritzka, who emphasized that Terra E will be counting on Germany’s competitive edge in manufacturing robotics and automated production to make money.

Global battery-making capacity is set to more than double by 2021, reaching 278 gigawatt-hours, up from about 103 gigawatt-hours in the second quarter, according to Bloomberg New Energy Finance. Asia electronics makers including South Korea’s LG Ltd. and Samsung SDI Co. currently control the market. Tesla will become the world’s No. 2 battery maker once it finishes building its $5 billion, 35 gigawatt-hour Gigafactory in Nevada, according to the London-based researcher.

Merkel’s Endorsement

Some of Terra E’s consortium members also may become its clients, according to Gritzka, who declined to name companies participating. The project, which won 5.2 million euros ($6.2

million) in subsidies from Germany’s Ministry of Education and Research, expects to need upwards of a billion euros before completion, the CEO said.

Terra E will be seeking strategic investors that are attracted by the government-paid research embedded in Terra’s Technology and Chancellor Angela Merkel’s endorsement of the company, said Gritzka. In May, Merkel broke ground at another 500 million-euro plant to assemble lithium-ion energy-storage units for Daimler AG, which produces Mercedes-Benz and Maybach luxury cars.

Terra E will focus its batteries on stationary units, Gritzka said. The project aims to tap an emerging market for mobile and non-automotive power and storage, said Gritzka. The bet rests on projected faster demand for lithium storage in the next decade.

Eoin Treacy's view -

Germany’s dominant automotive sector is under pressure following the diesel cheating scandal which continues to remain an open sore, as various cases make their way through the US courts system. 



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August 03 2017

Commentary by Eoin Treacy

Textile companies go high tech in Arkansas

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

 

"From fabric cutting and sewing to finished product, it takes roughly four minutes," said Tang Xinhong, chairman of Tianyuan Garments. "We will install 21 production lines. When fully operational, the system will make one T-shirt every 22 seconds. We will produce 800,000 T-shirts a day for Adidas."

Tang said that with complete automation, the personnel cost for each T-shirt is roughly 33 cents. "Around the world, even the cheapest labor market can't compete with us. I am really excited about this," he said.

Tianyuan announced last October it would invest $20 million in the 100,000-square-foot defunct Little Rock plant it had acquired. In time, it will bring 400 new jobs to Arkansas.

The signing ceremony was witnessed by a Chinese textile delegation led by Xu Yingxin, vice-president of the China National Textile and Apparel Council.

Xu said that establishing a clothing factory in Arkansas enables Tianyuan to satisfy instant order demands from its clients. He praised Tianyuan's working with American partners in automation as a smart move at a crucial junction in the Technology revolution.

"The idea of Industry 4.0 and Intelligent Manufacturing is gradually becoming the reality," Xu said. "It is revolutionizing labor-intensive clothing manufacturing."

 

Eoin Treacy's view -

I first wrote about Softwear two years ago following a visit to a garment factory in Los Angeles. It was clear that the labour intensive nature of sewing garments was ripe for automation and Softwear was in the process of developing a robot to make people obsolete. 

 



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August 02 2017

Commentary by Eoin Treacy

Mobile money is only just starting to transform some of Africa's markets

This article by Moses Gahigi for Quartz may be of interest to subscribers. Here is a section:

The glossy numbers however only tell part of the story, the real equalizer effect of mobile money has been the impact of the innovation around financial services, where telecom players have churned out multiple use cases cutting across all economic divides in Africa, from simple ones like money transfer and air time top-up to more sophisticated ones like bill payments and bank-to mobile wallet transactions.

As more people overcome the digital cultural shock and become digitally literate they are shopping with tap & pay and other merchant payment solutions, while they also pay their utility bills, cable TV subscriptions and even taxes. Using mobile money significantly increases efficiencies, for instance Dar es Salaam water and sewerage cooperation registered a 38% increase in revenue collections when it started collecting it through mobile money.

Granryd also noted that telecoms have to develop more Non-communication services that ease life and solve problems, while consolidating the existing user-cases, that it is through these new revenue streams that the industry will stay afloat.

Mobile money has become a lifeline to unfortunate members of society, for instance up to 52% of refugees from Nyarugusu refugee camp in Tanzania use mobile money to receive humanitarian cash donations, remittances from home countries as well as wage payments.

Although the innovation was born in East Africa, West Africa has emerged as the new mobile money frontier, where adoption is currently almost 29% of active mobile money accounts in Sub-Saharan Africa are now based, compared to just 8% five years ago.

Markets such as Gabon, Ghana, Kenya, Namibia, Tanzania, Uganda and Zimbabwe have more than 40% of users as active mobile money users.

 

Eoin Treacy's view -

The transition of a mobile phone into a mobile wallet is global phenomenon but is moving particularly swiftly in markets with less robust networks of retail banks or where there is a problem with counterfeit currency. While online payments are progressing swiftly in Europe and North America but pace with which the Technology is being picked up in Africa, India and China is startling. 



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August 02 2017

Commentary by Eoin Treacy

Apple Signals Resilient IPhone Demand Helped by Supporting Cast

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

“There is some relief from the fear of a significant pause before the 10th anniversary iPhone refresh,” said Michael Obuchowski, chief investment officer at Merlin Capital LLC in Boston, which holds Apple stock. “I’m beginning to think it won’t matter if the new iPhones aren’t that exciting.”

Apple is likely to introduce three new handsets this year: a revamped top model, known for now as the iPhone 8, and upgrades to the existing iPhone 7 and iPhone 7 Plus, people familiar with the plans have told Bloomberg News. The high-end iPhone will include an organic light-emitting diode screen, and inadequate OLED supplies mean that it will not be as readily available as the cheaper handsets at launch, the people said.

Cook said reporting about the new versions of the iPhone “has created a pause” in consumer buying “that is likely larger than previously.” Apple’s stock has soared on expectations that the new high- end smartphone, which will also include a front-facing three- dimensional sensor to enable facial recognition, will spur a resurgence in demand that will carry into the holiday quarter and beyond. Sales growth of the company’s flagship product has slowed over the past two years as the market has become increasingly saturated and competitors have offered cheaper products with similar capabilities.

New Technologies
Slowing smartphone sales have prompted Apple to invest more heavily in developing new technologies. It’s working on smart glasses, an autonomous driving system, improved health and fitness offerings, and its own semiconductor Technology.

Research and development spending jumped 15 percent to $2.9 billion in the most recent quarter. Apple unveiled the early fruits of its spending on augmented reality Technology in June, releasing a set of tools which let developers build AR software for the iPhone and iPad when the next operating system for those devices is rolled out later this year. Cook has over the past 18 months repeatedly said how excited he is about the prospects for AR.

Cook is preparing to release Apple’s first new hardware category since 2015. The HomePod, the smart speaker that will go on sale in December, is the company’s response to Amazon.com Inc.’s Echo and Alphabet Inc.’s Google Home speakers. The company is hoping that advanced acoustic capabilities will encourage consumers to pay $349 for the device -- almost three times as much as the Google Home.

 

Eoin Treacy's view -

Apple faces stiff competition in the smartphone market but comes with two distinct advantages. The size and breadth of the app store is a considerable benefit for the company and acts as an anchor for customers. The second is Apple’s followers are among the most devoted fans of any brand and represent a latent source of demand for new products. 



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August 01 2017

Commentary by Eoin Treacy

Email of the day on genetic editing companies

I am referring to your email on genetic editing. What are the related companies that are worth looking into?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. The discovery of CRISPR-Caa9 genetic editing Technology has resulted in the both the pace of innovation accelerating and the cost declining meaningfully. Research into genetic engineering has been ongoing for decades but as understanding has improved and new tools have been invented the breadth of the sector has growth considerably. 



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July 28 2017

Commentary by Eoin Treacy

Scientists Just Successfully Edited the First Human Embryo Ever in The U.S.

This article by Jolene Creighton for Futurism may be of interest to subscribers. Here is a section:

According to MIT, the work was led by Shoukhrat Mitalipov, who comes from the Oregon Health and Science University. Although details are scarce at this point, sources familiar with the work assert that the research involved changing the DNA of one-cell embryos using CRISPR gene-editing. Further, Mitalipov is believed to have broken records in two notable ways:

He broke the record on the number of embryos experimented upon.

He is the first researcher to ever conclusively demonstrate that it is possible to safely and efficiently correct defective genes that cause inherited diseases.

It is important to note that none of the embryos were allowed to develop for more than a few days, and that the team never had any intention of implanting them into a womb. However, it seems that this is largely due to ongoing regulatory issues, as opposed to issues with the Technology itself.

In the United States, all efforts to turn edited embryos into a baby—to bring the embryo to full term—have been blocked by Congress, which added language to the Department of Health and Human Services funding bill that forbids it from approving any such clinical trials.

Yet, the potential of the CRISPR-Cas9 system as a gene editing Technology is undeniable. As previously mentioned, it has seen success in developing possible cancer treatments, in making animals disease-resistant, and it has even shown promise in replacing antibiotics altogether.

 

Eoin Treacy's view -

Removing genetic defects is going to be the first application of gene editing but the Technology will not stop there. Changing eye colour, hair colour, skin tone etc are all within the grasp of the Technology today. It will probably be another decade before intelligence, temperament or drive can be customised. There are clear ethical considerations for these sorts of enhancements but the discussion is taking place most vocally in North America and Europe. Asia does not have the same moral structure and will be the primary location for genetic experimentation as a result. 



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July 27 2017

Commentary by Eoin Treacy

There They Go Again...Again

Thanks to a subscriber for Howard Marks recent memo. Here is a section on Softbank;s Vision Fund: 

Fourth, and perhaps more importantly for my purposes here, I want to spend some time on the fund’s structure. For each 38 cents they put into the fund’s equity, outside investors are required to put 62 cents into preferred units of the fund. On the other hand, Softbank itself invested $28 billion in equity but nothing in preferred. 

That means when the fund reaches $100 billion, Softbank will have put up only 28% of the capital but will own 50% of the equity. Adding in management fees and carried interest, its 28% of the capital may give it 60-70% of the gains. 

Even the private equity industry – with its willingness to take risk – has traditionally shied awa from piling debt on Technology companies (although less so lately). Softbank doesn’t hesitate to lever its tech investments. 

The preferred units will pay a 7% annual coupon. Lending money to a tech fund at thata modest rate apparently is part of the price demanded of the LPs for an opportunity to invest in the fund’s equity. I can imagine the sales pitch about how lucky the LPs are to get a chance to provide leverage for this own investment, but doubt I’d be convinced. 

 

Eoin Treacy's view -

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

These look like very favourable terms for Softbank and based on its investments, so far, we can conclude it is not a value investor. If history is any guide the creation of such funds are often better for the manager than the investor. 



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July 24 2017

Commentary by Eoin Treacy

China's Got a Huge Artificial Intelligence Plan

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

"The positive economic ripples could be pretty substantial," said Kevin Lau, a senior economist at Standard Chartered Bank in Hong Kong. “The simple fact that China is embracing AI and having explicit targets for its development over the next decade is certainly positive for the continued upgrading of the manufacturing sector and overall economic transformation."

Chinese AI-related stocks advanced Friday. CSG Smart Science & Technology Co. climbed as much as 9.3 percent in Shenzhen before closing 3.1 percent higher, while intelligent management software developer Mesnac Co. surged 9.8 percent after hitting the 10 percent daily limit in earlier trading.

AI will have a significant influence on society and the international community, according to an opinion piece by East China University of Political Science and Law professor Gao Qiqi published Wednesday in the People’s Daily, the flagship newspaper of the Communist Party.

PwC found that the world’s second-biggest economy stands to gain more than any other from AI because of the high proportion of output derived from manufacturing.

Eoin Treacy's view -

China is in a race to automate before everyone else so that it can hold onto as much of the world’s manufacturing capacity as it can. That has meant it is the world’s largest market for industrial robots and virtually ensures it will have its own automation products in the market within the decade. 



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July 24 2017

Commentary by Eoin Treacy

Another Golden Age for Corporate Technology

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

Even consumer companies are trying to make businesses foot at least some of their bills. Instacart is figuring out ways to make money from large food brands such as Red Bull, and not only from consumers reluctant to pay delivery fees. Airbnb and Uber want more bookings from people traveling on the corporate dime.

Some of this strategy is about squeezing revenue from as many sources as possible. But it also highlights the limits of tech products and services just for individuals. We the people are penny-pinching jerks. Businesses watch their bottom lines, too, but they are often willing to pay for software and gadgets that give them an edge.

That's why Intel, Oracle, International Business Machines and the early internet were built on sales to governments, spies, big corporations and others that wanted cutting-edge stuff and had the budgets to support its development. It feels a little like that again now. I think I'll stream some Pink Floyd.

 

Eoin Treacy's view -

One area where there is an urgent need for additional corporate investment is in the delivery of 5G networks. That is if the full potential of the internet of things, connected devices, software as a service and especially autonomous vehicles are to be fulfilled. There is a great deal of media commentary about all of these sectors but the cold hard reality is that they cannot run on close to their potential on current networks. 



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July 19 2017

Commentary by Eoin Treacy

Musings from the Oil Patch July 19th 2017

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

The latest topic of interest in the oil and gas business is the lack of new discoveries given the cutback in capital investment in keeping with Mr. Dudley’s “capital diet.”  What does this mean for the industry’s future?  The International Energy Agency (IEA) has sounded the alarm over sharply higher oil prices in the 2020-2022 time frame due to a lack of industry capital spending.  With capital spending cut by 25% in 2015 and by another 26% in 2016, prospects are increasing for a growing gap in the future output trajectory for oil.  Current expectations call for a modest increase in capital spending during 2017, but that increase could prove overly optimistic should oil prices fail to recover in the second half.   

The IEA warned in its Oil 2017 report of a possible imbalance between demand and supply growth, leading to the smallest global spare production capacity surplus in 14 years by 2022.  That conclusion is based on demand growth for 2016-2022 of 7.3 million barrels per day (mmb/d), which exceeds the projected supply growth of under 6 mmb/d.  A possible relief valve might be the growth in U.S. shale output.  As Dr. Fatih Birol, the IEA’s executive director put it: “We are witnessing the start of a second wave of U.S. supply growth, and its size will depend on where prices go.”  He went on to say, “But this is no time for complacency.  We don’t see a peak in oil demand any time soon.  And unless investments globally rebound sharply, a new period of price volatility looms on the horizon.”

The supply shortage view seems to be gaining traction among oil and gas industry professionals.  Halliburton Company’s (HAL-NYSE) Mark Richard, senior vice president of global business development and marketing, told the World Petroleum Congress that “You’ll see some kind of spike in the price of oil, maybe somewhere around 2020, 2021."  This fits with Bernstein Research’s latest oil price downgrade.  The firm now sees oil prices exhibiting a U-shape cyclical pattern: after having declined from over $80 a barrel in 2014, they traded in the $40s for 2015-2016, and will now be flat at $50 for 2017-2018 before slowly climbing back to $70 by 2021.   

 

Eoin Treacy's view -

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

Synchronised global economic expansion is generally positive for energy consumption and most particularly in emerging markets where the bulk of energy demand growth is expected to originate. How quickly battery Technology advances to quell range and charging time questions is likely to represent a significant a key arbiter for whether bullish forecasts come to fruition over the next five years. 



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July 19 2017

Commentary by Eoin Treacy

Asia's Top-Performing Currency Is Missile-Proof

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

One major draw for the won is a strengthening in global trade that’s benefited South Korean exporters, along with regional neighbor Taiwan, which has also seen its currency appreciate this year. South Korea’s current-account surplus is projected by the International Monetary Fund to exceed 6 percent of its gross domestic product this year and the next two years.

“Ironically, the ones that are appreciating are the low yielders,” Soon said. South Korean 10-year government bonds yield 2.26 percent, a little less than that of U.S. Treasuries. By contrast, Malaysian debt yields 3.96 percent and India’s notes 6.45 percent.

Rapprochement Policy
President Moon Jae-in has spurred foreign investor interest after taking office in May on a platform of reducing the influence of the chaebol and seeking a diplomatic rapprochement with its belligerent, missile-firing neighbor to the north. South Korea’s stocks and bonds attracted a net $4.6 billion so far in July, reversing the outflows seen earlier this month.

The won hardly blinked after North Korea said on July 4 it fired an intercontinental ballistic missile for the first time. Moon is currently following on campaign pledges to pursue dialogue with Kim Jong Un by proposing some military and humanitarian exchanges.

Export-oriented economies like South Korea as well as Taiwan are benefiting from an upturn in the global Technology sector that’s still “has got some legs to it,” Jonathan Cavenagh, head of emerging Asia currency strategy at JPMorgan Chase & Co. in Singapore, said in a Bloomberg Television interview with Betty Liu and Yvonne Man, last week.

 

Eoin Treacy's view -

The original Asian Tigers, Taiwan, South Korea, Singapore and Hong Kong has been largely somnambulant for the last few years but have been exhibiting renewed signs of investor interest this year. From a chartist’s perspective, when indices complete lengthy ranges, not least when those ranges are decades long, it is time to pay closer attention. 



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July 14 2017

Commentary by Eoin Treacy

An email from David

Health: My thanks to subscribers for your thoughtful emails of support and best wishes for a speedy recovery.  I wish I had better news to share with you but here is a brief description of the reality.

My operation on 7th July was considerably more debilitating than I had expected.  Unfortunately my atrial fibrillation returned after a few days and I still have some fluid in my lungs. Consequently my mobility remains extremely limited. Therefore I do not have either the energy or concentration to resume my career at this time. I will focus on rest, recovery and a more holistic treatment of my condition, mainly from a healthier environment in North Devon.

Stock markets: In my opinion stock markets are even more fascinating than ever. A period of uncertainty and fear persists but that is far less dangerous than euphoria. As always there are many medium-term hurdles to be cleared, not least the eventual normalisation of interest rates. The longer-term outlook remains extremely promising, not least for successful Technology companies.

Your Fuller, Treacy Money Global Strategy Service: We are very fortunate to have Eoin Treacy with his calm, experienced and forensic study of global stock markets, best observed on price charts. These seldom move in isolation so Eoin also monitors global bonds, currencies and commodities on a similar basis, knowing that sharp moves in these instruments can affect sentiment. Consequently he can see potentially significant changes in relative strength or weakness more quickly than most other observers. This perspective is invaluable, ensuring that Eoin is less distracted by market noise.

Kind regards,

David

Eoin Treacy's view -

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July 12 2017

Commentary by Eoin Treacy

Email of the day on the future of electric vehicles

I thought you would be interested in this story from The Times. It’s a UK perspective but made a point about lithium battery Technology that hasn’t been much aired. Perhaps because I haven’t heard much about alternative battery Technology. I’d be interested in your take on it.

Eoin Treacy's view -

Thank you for this article which I would rate as an example of flawed conventional thinking that doesn’t take account of some pressing needs that are affecting the UK economy today. 



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July 07 2017

Commentary by Eoin Treacy

Musings from The Oil Patch July 6th 2017

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

While U.S. production grew slightly in 1978, and then remained stable until 1983 before once again growing. The emergence of the North Sea as a significant new oil supply basin (UK and Norway) as well as Mexico’s offshore oil success demonstrated the power the sustained higher oil prices had on creating new supplies. The impact of new supplies contributed to OPEC’s collapse.

At the same time oil supply outside of OPEC started growing, oil consumption in the developed world (OECD) fell, which is demonstrated by the United States and Europe consumption curves in Exhibit 13. Those two regions are the key part of the OECD. Non-OECD consumption continued growing. As the chart shows, the demand reduction was significant, and was key to crippling OPEC’s pricing power as was the growth in new oil supplies.

As we look at the factors helping to reshape today’s oil market, environmental pressures, especially the potential impact of electric vehicles, coupled with the impact on oil demand growth that will come in response to efforts by countries to decarbonize their economies, can be considered the equivalent of the 1970s oil price shock to global oil demand. Demand will continue to grow for the foreseeable future, but the annual rate of growth is likely to continue to slow until it eventually goes negative. Lower demand is coming at the same time oil companies are reducing well breakeven prices insuring more supplies in the future. These improved E&P economics is broadly similar in impact to the opening of new oil supply basins that occurred in the 1970s and 1980s. Just as the opening of new supply basins had a long-term impact, the reduced well breakeven prices will also have a long lasting impact. We can argue about how long the impact will last, but it is likely to last much longer than we expect.

History does not repeat, but it does rhyme, as suggested in the famous quote. In our view, the current oil industry downturn is rhyming more with the 1982-1986 cycle than with the 2008-2011 one. If that is true, then the industry may be looking at an extended period of low oil prices just as the industry experienced following the 1981 oil price peak. That span extended for 18 years as oil prices averaged below $45 a barrel, or the very long-term average of inflation adjusted oil prices, with the brief exceptions of the First Gulf War and 9/11. BP plc CEO (BP-NYSE) Robert Dudley’s comments in early 2015 that the industry needed to learn to live in a “lower for longer” environment seem to be proving accurate. That means the oil industry must continue adjusting its cost structure. The oil companies will need to keep their staffing lean, employ the best drilling and completion technologies available, and manage their balance sheets appropriately to succeed in the future. This environment doesn’t mean that there is no future for the oil industry. It means that corporate strategies must constantly be reassessed within a broader energy industry panorama subject to external pressures that will only grow in the future.

 

Eoin Treacy's view -

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

“The cure for high prices is high prices” has been an adage in the commodity prices for decades and is no less true of oil prices. After almost a decade of high prices a great deal of additional supply has been brought to market. However, the advent of new Technology which has allowed previously inaccessible reserves to be accessed, namely shale oil and gas, and the subsequent success in reducing the cost of extraction continue to represent gamechangers for the sector. That is before we begin to talk about the emerging trend of refracking; where wells that are past their peak output can be revitalized at a substantially lower cost.  



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July 06 2017

Commentary by Eoin Treacy

Emerging Markets Face SATT Problem to Rival Nasdaq's FAANG Woes

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

The Asian group is becoming more expensive, especially on a price-to-book-value basis, with a 77 percent premium to the wider index -- a 15-year high, Dennis said. That’s double the long-term average premium of 38 percent, he said.

Pictet Asset Management Ltd.’s Luca Paolini is also worried that a correction is coming after the MSCI Emerging Markets index’s surge. The gauge beat both the Nasdaq 100 and the MSCI All-World Index in the first half.

“If global equities do indeed witness a correction in the coming weeks, there are grounds to expect that emerging-market stocks’ outperformance will come to an end,” Paolini, London-based chief strategist with Pictet, wrote in a report.

Paolini downgraded Pictet’s view on Technology stocks to single positive from double, as earnings momentum appeared to peak in May. He also suggested reducing holdings of emerging-market equities given the outsize Technology exposure of the region relative to developed markets.

 

Eoin Treacy's view -

With some of the heat coming out of high momentum trades, that have driven performance this year, the potential for traders to look for additional sources of mean reversion trades has increased. There Is no denying that a number of Asian Technology shares have been more than keeping pace with their US counterparts so they are at equal risk of mean reversion. 



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June 29 2017

Commentary by Eoin Treacy

Nasdaq Unhinged From Everything as Volatility Fits Won't End

This article by Oliver Renick and Elena Popina for Bloomberg may be of interest to subscribers. Here is a section:

“Everyone talks about the VIX, but there are undercurrents of significant volatility in the market,” Joe Sowin, head of global equity trading at Highland Capital Management LP, said by phone. “There’s a lot more volatility in tech this month and that’s in part due to stretched P/Es, positioning and breadth that isn’t good.”

The VIX wasn’t its usual docile self, either, on Thursday. The measure jumped 3.5 points to 13.56, the highest since mid- May. Losses in consumer and health-care stocks sent the S&P 500 down 1.1 percent to 2,412.05.

Other measures of tech turbulence tell a similar story. The CBOE NDX Volatility Index has averaged 15.1 in June and has repeatedly touched levels this month that represent its biggest gap to S&P 500 implied volatility, or the VIX, since the financial crisis.

Excess volatility in Technology megacaps is partly a function of how fast they have run up. While the S&P 500 has tripled since markets bottomed in March 2009, gains in the Nasdaq 100 are approaching fivefold. After rising as much as 21 percent this year, valuations in the gauge sit 30 percent above their bull market average.

As was the case on June 9 when tech shares dropped 2.7 percent, the biggest laggards in the group Thursday were semiconductor stocks. KLA-Tencor Corp., Advanced Micro Devices, and Applied Materials Inc. weighed the most, with losses of more than 4 percent.

To Peter Cecchini, senior managing director at Cantor Fitzgerald in New York, that could mean that investors are second-guessing expectations for economic growth.

“A lot of these names are cyclical tech -- when you’re looking at economic slowdowns the semiconductors always get whacked first,” he said by phone. “Look at the durable goods data, it was a mess. Maybe these cyclical names are telling us something.”

 

Eoin Treacy's view -

There has been a major disconnect between volatility on the S&P 500 and the Nasdaq-100 over the last three months with the former holding at abnormally low levels while the latter has been trending higher. 



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June 27 2017

Commentary by Eoin Treacy

Fast, Precise, Cancer care is coming to a hospital near you

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

On Thursday, the Food and Drug Administration approved the first next-generation-sequencing-based test, from Thermo Fisher Scientific, that can tell you how different drugs will work for you, based on the genetic makeup of each tumour. And it only takes four days to get back results. In many ways, it represents the leading edge of precision medicine’s maturation from a buzzword in grant applications and investor pitch decks to a real, workable product that can actually improve patient outcomes.

Getting the FDA’s approval took nearly two years and 220,000 pages of data. (That’s like reading Karl Ove Knausgaard’s 6-book autobiographical memoir front to back 61 times in a row. Talk about My Struggle.) But the process has helped clarify the agency’s thinking about how to regulate personalized treatments going forward, opening up doors for tech that's still in the pipeline.

The panel, called Oncomine Dx Target Test, takes a tiny amount of tumor tissue and reports on alterations to 23 different genes. All that information is useful for physicians, but three in particular—ROS1, EGFR, and BRAF—are the most crucial. That’s because those mutations have drugs to match: Precision medicine chemotherapies from Pfizer, Novartis, and AstraZeneca. The test can be performed at any CLIA-certified lab, and it’s already being offered by two of the largest oncology-focused ones.

Getting the FDA to approve that amalgam of tests wasn’t easy. “Putting multiple genes and multiple drugs on the same test; all of these are firsts,” says Joydeep Goswami, Thermo Fisher’s president of clinical next generation sequencing. “That put the Technology under extraordinary scrutiny.” The FDA usually approves one diagnostic for one product or drug—that’s it. But the whole point of precision medicine is to tailor treatments for patients based on their genes, and a bunch of one-off genetic tests aren’t going to deliver on that promise. So a multi-gene, multi-drug panel is kind of a big deal.

 

Eoin Treacy's view -

I have written previously about the rotation into bioTechnology shares because of the overextensions present in other sectors and the potential for base formation completion in the healthcare sector. However the above story represents an additional bullish catalyst for the sector. 



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June 23 2017

Commentary by Eoin Treacy

Email of the day on feeling intimidated by the speed of a breakout

In today’s video you made two very valid points:

•    The five largest stocks account for 45% of the US Biotech Index.
Biotech stocks present a short to medium term investment opportunity.

The chart for a leading biotech ETF (see below).  This potential investor finds the chart more than a little frightening.

Eoin Treacy's view -

Thank you for this email and I agree explosive breakouts can be hard to deal with. At The Chart Seminar we define ranges as explosions waiting to happen. Ranges are boring relative to the trending phases so we tend to be surprised by the ferocity of breakouts when they occur even though when a range is completed we expect prices to rise quickly because the breakout punctures a vacuum of supply above the range. 



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June 22 2017

Commentary by Eoin Treacy

Foxconn Dangles $10 Billion Tech Investment to Create U.S. Jobs

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

The billionaire however focused primarily on Hon Hai’s plans for the longer term. Apple’s main manufacturing partner, which does most production in China, makes everything from smartphones to PCs with a growing clout that has seen it courted by governments around the world.

Gou promised to ramp up investment in the U.S., possibly helping with a rust-belt economic revival. Dubbed “Flying Eagle,” Foxconn’s plan to build a U.S. facility could create tens of thousands of American jobs during Trump’s first year in office. The company is considering a joint investment with Sharp, but details have yet to be hammered out.

In the nearer term, Hon Hai’s shares are riding high as Apple prepares to unveil its latest iPhone -- one of the most- anticipated devices of 2017. The shares closed little changed in Taipei after reaching a record earlier this week.

Hon Hai reported first-quarter earnings short of estimates after a stronger Taiwan dollar squeezed profit in the lull before the new iPhone. That came after a year in which smartphone shipments grew at their slowest pace on record and PC demand continued to flounder. In 2016, Hon Hai’s sales fell 2.8 percent while net income rose just 1.2 percent. Gou said Thursday that revenue and profit this year would be better.
Over the longer term, Gou is re-tooling Foxconn for the future, installing robots to offset rising labor costs in China.

It’s also investing in emergent fields from virtual reality to artificial intelligence.
Hon Hai makes a wide range of electronic devices from HP laptops and Xiaomi handsets to Sony PlayStation game consoles.

But Apple is by far its most important client, yielding roughly half the company’s revenues.

 

Eoin Treacy's view -

Foxconn employs 1 million people in China but is also one of the largest investors in robotic Technology to try and mitigate its reliance on human labour. Any factory built in the USA will likely employ a lot of people in the construction phase but will be highly automated to control headcount. 



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June 20 2017

Commentary by Eoin Treacy

Email of the day on companies benefitting from cryptocurrency mining:

Re. your companies associated with Crypto mining - would Softbank come into this after purchasing ARM last year - or were their chip designs of a different application?

Eoin Treacy's view -

Thank you for this question. I’ve done quite a bit of digging and I can’t find ARM listed as a manufacturer of chips that can be used to mine cryptocurrencies.  

While the number of cryptocurrencies is proliferating it is important to highlight that not all use the same kind of Technology. For example bitcoin mining is largely confined to ASIC machines manufactured in China and sold on Amazon for example. This article contains quite a bit of detail of which are the best machines. 

 



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June 19 2017

Commentary by Eoin Treacy

Clovis's ovarian cancer drug set for label expansion, shares soar

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

Clovis's late-stage trial was designed to move its drug, Rubraca, up to a second-line treatment and later, a maintenance treatment. Maintenance therapy immediately follows initial treatment to keep patients cancer-free if they go into remission.

Rubraca, like Tesaro Inc's Zejula and AstraZeneca Plc's Lynparza, belongs to a closely watched class of new medicines called PARP inhibitors, which blocks enzymes that repair damaged DNA, helping kill cancer cells in the process.

Rubraca was granted accelerated approval in December by the U.S. Food and Drug Administration (FDA) to treat patients whose cancer tested positive for defective BRCA genes, and whose disease had advanced despite two or more rounds of chemotherapy.

BRCA gene mutations are known to raise the risk of breast and ovarian cancers.

Clovis's latest study included 564 patients and tested Rubraca against a placebo in patients with various gene mutations who had undergone initial platinum-based chemotherapy.

When given Rubraca, women with recurrent ovarian cancer lived a median 10.8 months without their disease worsening, compared with 5.4 months for women on a placebo, Clovis said.

Eoin Treacy's view -

Immuno-oncology represents an exciting evolving subsector within the much broader bioTechnology theme. It represents the cutting edge of customised medicine where an increasing number of therapies are being developed for very specific attack vectors to target cancers even in late stage patients as detailed above. Considering the fact that tools to measure the immune system’s response to infections didn’t really exist until at least the 1950s, immunology and its many iterations from rheumatism to cancer represent significant growth themes. 



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June 16 2017

Commentary by David Fuller

Tim Cook on Donald Trump, the HomePod and the Legacy of Steve Jobs

MEGAN MURPHY: You’ve talked about Steve Jobs and how you revere him. How much time do you spend thinking about what people will say about your legacy at Apple?
 
TIM COOK: None. To be totally honest with you, I don’t think in those terms. I think more about doing stuff. I hope people remember me as a good and decent man. And if they do, then that’s success.

Steve’s DNA will always be the base for Apple. It’s the case now. I want it to be the case in 50 years, whoever’s the CEO. I want it to be the case in 100 years, whoever’s CEO. Because that is what this company is about. His ethos should drive that—the attention to detail, the care, the ­simplicity, the focus on the user and the user experience, the focus on building the best, the focus that good isn’t good enough, that it has to be great, or in his words, “insanely great,” that we should own the proprietary Technology that we work with because that’s the only way you can control your future and control your quality and user experience. And you should have the courage to walk away and be honest with yourself when you do something wrong, that you shouldn’t be so married to your position and your pride that you can’t say, “I’m changing directions.” These kind of things, these guardrails, should be the basis for Apple a century from now. It’s like the Constitution, which is the guide for the United States. It should not change. We should revere it.

In essence, these principles that Steve learned over many years are the basis for Apple. It doesn’t mean the company hasn’t changed. The company’s going to change. It’s going to go into different product areas. It’s going to learn and adjust. Many things have changed in the company, even in the last six to seven years. But our “Constitution” shouldn’t change. It should remain the same. I think of it as a North Star. It’s always important to have that in mind as you make decisions. It ­actually makes decision-making much simpler.

I was a little surprised the HomePod was pitched primarily as a music device when the competitive talk is of Amazon Echo’s Alexa and the immersive experience in the home. How will the HomePod better integrate Apple inside people’s lives?

We’re actually already in the home through the iPhone you take with you everywhere. It’s in your pocket or laying on a stand. Today, pre-HomePod, I can control my home using Siri through the iPhone. When I get up in the morning, my iPhone is my alarm clock. I say, “Good morning,” and all of a sudden my lights come on. The temperature adjusts and a series of things occur. We’re also in the home through Apple TV. Many people use iPad as their computing device. The desktop Mac enjoys a place in the home. The thing that has arguably not gotten a great level of focus is music in the home. So we decided we would combine great sound and an intelligent speaker.

So it’s going to be a holistic process joining up all those touch points so people can exercise control over their lives, whether through Siri or iPad?

To put it in perspective, Siri is getting requests from 375 million devices right now. My guess is it’s the largest by far of any kind of assistant. Some of those requests are done in the home. Some of those are done on the go. That’s the platform that we build off. It’s very different from our starting point. We’re also in so many languages around the world: Siri isn’t just in English. We’re well-positioned around the world. So, again, what is the thing that’s missing in this equation? The combination of quality audio and instinct.

David Fuller's view -

Apple is the market capitalisation leader of a dozen or so mega-tech shares which are almost independent of the pathetic political storms so often brewing in Washington D.C.  The main long-term challenge for these tech giants remains governance and competition. While obviously his own man, Tim Cook shares his mentor’s passion for excellence in this competitive field, including functionality, design and reliability.  Hopefully, Apple’s record cash balance will continue to be used wisely in terms of the share’s long-term development.

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June 16 2017

Commentary by Eoin Treacy

Many Rivers to Cross Decarbonization breakthroughs and challenges

Thanks to a subscriber for this report from J.P. Morgan Private Bank which may be or interest. Here is a section: 

New York. This is more of a theoretical exercise, since in NY, wind/solar comprise only 3% of electricity generation. But in principle, NY could also reduce CO2 emissions to 90 MT per GWh in exchange for a ~15% increase in system costs. One difference vs California is that NY’s build-out would start from a much lower base. The other difference is that storage is less optimal given lower NY solar capacity factors. Instead, a more cost-effective approach to reaching the deeper 60% emissions reduction target would be to build more wind/solar and discard (“curtail”) the unused amount, and not build any storage.

Conclusions. Scale and innovation are creating cost-benefit tradeoffs for decarbonizing the grid that are more favorable than they were just a few years ago, even when including backup thermal power costs. However, this is likely to be a gradual process rather than an immediate one. Bottlenecks of the past were primarily related to the high capital cost of wind, solar and storage equipment. The next phase of the renewable electricity journey involves bottlenecks of the future: public policy and the construction/cost of transmission are two of the larger ones7. As is usually the case with renewables, there’s a lot of hyperbole out there. The likely trajectory: renewables meet around one third of US electricity demand in 2040, with fossil fuels still providing almost twice that amount

Eoin Treacy's view -

Energy storage solutions have been evolving for a long time but the advances in battery Technology has potential to revolutionise the sector. However he cost of those batteries still needs to come down a lot for them to truly have a transformational impact on the cost of generating and storing energy. What is clear from the above report is that the continued build out of renewable energy solutions, with or without storage, represents an additional cost for consumers over the lengthy medium term without a major advancement in battery Technology.  



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June 15 2017

Commentary by Eoin Treacy

Goldman-backed startup Circle launches no-fee foreign payments service

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

Circle Internet's international money transfer service, built on a type of blockchain called Ethereum, will allow customers to send payments between U.S. dollars, British pound sterling or euros on their mobile phones. There are no fees or foreign exchange mark-ups.

International payments, according to Circle's chief executive officer and founder, Jeremy Allaire, should not take days to be processed and should be as easy and frictionless as sending an email.

"When's the last time you sent a 'cross-border email'?" Allaire said in an interview. "The idea of cross-border payments is going to completely go away. ... Our vision is for there to be no distinction between international and domestic payments."

Circle, which processed over $1 billion in transactions in 2016 and whose customer base increased more than 10-fold in the year up to last month, does not make money from its payments service, nor does it plan to, as it reckons consumers expect these services to be free.
"We don't think there is any money to be made in payments anymore," said Allaire. "The entire business model of extracting a toll or having time delays around the movement of value is going away completely."

Instead, the company makes money by trading bitcoin and other cryptocurrencies, both on digital currency exchanges and over the counter, at a time when the value of such web-based currencies has reached record highs. Last month alone, Circle traded over $800 million in digital assets, it said in a statement.

 

Eoin Treacy's view -

Blockchain Technology is increasingly being viewed as a way of transferring data from one location to another in a secure manner that is immune from the types of threats that have assailed the SWIFT network; most spectacularly with the Bangladesh heist. However, speculating on the value of crypto currencies as a business model would appear to be fraught with dangers. 



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June 14 2017

Commentary by Eoin Treacy

June 14 2017

Commentary by Eoin Treacy

ADAS - who has the credentials to succeed?

Thanks to a subscriber for this report from Deutsche Bank focusing on auto parts suppliers focusing on autonomous driving. Here is a section: 

Three key drivers of wider ADAS adoption in China
Although there are no regulatory requirements for ADAS adoption, the inclusion of ADAS features will boost scores in China’s official safety rating (C-NCAP) starting 2018. Moreover, we note that local brand OEMs have been adding ADAS features in their new models, probably as a means to compete with similarly priced JV products, which lack those features. Last but not least, in China’s “Made in 2025” master plan, the government highlights new auto technologies as a focus for the country’s Technology advancement, along with target ADAS penetration levels for local brands by 2020 and 2025. This gives China a more visible path for ADAS adoption growth than other countries.

We envision a long-term ADAS market of USD24bn
We have performed a proprietary ADAS market size analysis, mainly based on target ADAS levels and penetration across different timeframes. We use the sensor segment as an anchor to derive an overall ADAS demand forecast given the segment’s higher transparency vs. other fragmented ADAS component segments. In summary, we estimate that the Chinese sensor market could reach USD6bn in 2020 (2025E: USD12bn) and the total ADAS market could be worth up to USD12bn (2025E: USD24bn).

A few Chinese companies expected to outshine many others
Currently, major global part suppliers dominate the ADAS market. We can identify at least c.30 Chinese suppliers involved in the space. However, most of these local companies still have too limited an exposure for ADAS to make a difference to their profit and outlook. In this report, we identify six companies that we believe can become meaningful players in various ADAS markets. We value them using forward P/E vs. their growth prospects. Our top Buys are Nexteer and Joyson considering their advanced ADAS knowhow, which can rival global peers’. Sector upside risks include faster-than-expected ADAS adoption and positive scale effects. Downside risks include a slow pick-up in ADAS sales and local players’ inability to compete with foreign suppliers.

 

Eoin Treacy's view -

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

Traditional auto parts manufacturers are facing an existential challenge because the rise of electric vehicles means demand growth for their products is evaporating. That leaves open potential for wide disparities in performance between companies within the sector with the delineating factor being how well leveraged they are to supplying the kinds of sensors, cameras and motors new technologies require. 



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June 14 2017

Commentary by Eoin Treacy

Copper demand from electric vehicles to be nine times higher by 2027

This piece from the International Copper Association may be of interest to subscribers. Here is a section:

Electric vehicles use a substantial amount of copper in their batteries, and in the windings and copper rotors used in electric motors. A single car can have up to six kilometers of copper wiring. The metal is also required for busbars, used to connect modules and cells in battery packs, and in charging infrastructure.

Whilst most cars use internal combustion engines that require up to 23 kg of copper, the IDTechEX research found that a hybrid electric vehicle uses 40 kg of copper, a plug-in hybrid electric vehicle uses 60 kg, a battery electric vehicle 83 kg, and a hybrid electric bus 89 kg. A battery-powered electric bus can use 224–369 kg of copper, depending on the size of battery used.

“Copper has the highest conductivity of any non-precious metal, and plays an important role in all energy production, but it is particularly important for future sustainable Technology applications such as electric vehicles,” said Colin Bennett, Market Analysis and Outreach, ICA. “Copper increases the efficiency and reliability of these vehicles and is itself a sustainable material, as it is 100% recyclable without loss of properties.”

 

Eoin Treacy's view -

The automotive sector is betting big on electric vehicles while also attempting to figure out how autonomy will function and what that means for ownership and miles driven assumptions. With battery Technology improving all the time and with considerable investment flowing into the sector the potential for the electric vehicle market to grow from its current relatively modest footprint is considerable. 



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June 13 2017

Commentary by Eoin Treacy

Russian hackers breached voting systems in 39 US states

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

Russian tampering with US voting systems ahead of the presidential election last November was more widespread than initially thought with almost double the number of states affected investigators have revealed.

Investigators told Bloomberg that hackers linked to Russia breached the voting systems of as many as 39 states ahead of the election in which Donald Trump became president.

Cyber attackers accessed voter databases and software used by poll workers, according to Bloomberg. Campaign finance details were accessed in at least one state. And in Illinois the hackers attempted to edit or delete voter information, investigators found.  

The Obama administration complained to Russia about the intrusions in an unprecedented use of a modern-day "red phone", a secure messaging channel between the countries.  

The news follows the leak of classified National Security Agency documents to the Intercept, which showed Russia's military intelligence department conducted a cyber-attack against at least one major US voting supplier.

 

Eoin Treacy's view -

This article from Wired focusing on the use of a new program to target key pieces of utility infrastructure is an additional aspect to the evolving cybersecurity theme. 



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June 12 2017

Commentary by David Fuller

Rejection of Theresa May's Little Englander 'Brexit' is Splendid News

The EEA would in principle allow Britain to preserve open trade with the EU single market and retain passporting rights for the City of London, the goose that lays the golden egg for a very vulnerable British economy.

“We should use the EEA as a vehicle to lengthen the transition time,” said Lord (David) Owen, one-time Labour foreign secretary and doyen of the EEA camp.

“Theresa May’s massive mistake has been to allow talk of a hard Brexit to run and run, and to refuse to frame a deal in a way that makes sense for the Europeans. The logic of the EEA is irrefutable,” he said.

Lord Owen said the EU’s withdrawal clause, ‘Article 50’, is designed as a deterrent to stop any country leaving. It leads to a cliff-edge, facing Britain with a take-it or leave-it choice when the clock stops ticking. “This puts us in a dangerous position,” he said. The EEA is a way to overleap this Article 50 trap.

Meredith Crowley, a trade expert at Cambridge University, says the great worry is that tariff barriers into the EU will jump to 12pc or 15pc overnight on UK exports of cars, engines, auto parts, and a range of machinery, setting off an exodus of foreign investment. “Joining the EEA would shut that threat down,” she said.

Critics argue that the Norwegian route is tantamount to remaining in the EU, but on worse terms, with no vote over policy: “While they pay, they don’t have a say,” said David Cameron before the Referendum.

This is a canard. EEA states are exempt from the EU's farming and fisheries policies, as well as from foreign affairs, defence, and justice. They are free from great swathes of EU dominion established by the Amsterdam, Nice, and Lisbon Treaties.

Above all, EEA states are not subject to the European Court’s (ECJ) limitless writ over almost all areas of law through elastic invocation of the EU Charter of Fundamental Rights. The ECJ would no longer be able to exploit the Charter - in breach of Britain’s opt-out under Protocol 30 - whenever it feels like it. We would no longer be under an EU supreme court asserting effective sovereignty. These are not small matters. They are elemental.

Yes, the Norwegian option is a compromise. We would continue paying into the EU budget. This would do much to defuse the escalating showdown over the €100bn bill for EU reparations, poisonous because of the way it is presented. The transfers would become an access fee instead. Norway’s net payments in 2014 were £106 a head. Let us not die in a ditch over such trivia.

Britain would have to tolerate relatively open flows of migrant workers. But contrary to widespread belief, the EEA does not entail full acceptance of the EU’s “four freedoms” - movement of goods, services, capital, and people. Nor does it give the European Court full sway on these issues.

The arrangement allows “a lesser degree” of free movement than within the EU. The language covers the issue of residence, an entirely different matter from the rights of EU citizenship created by the Maastricht Treaty. The EEA permits the sort of emergency brake on migrant flows that was denied to Mr Cameron in his last-ditch talks with the EU before the Referendum.

The point in any case is that the EEA would be a temporary way-station for ten years or so, giving us time to negotiate 80 trade deals with the US, China, Japan, India, Mercorsur, and others without a gun held to our head.

David Fuller's view -

Events can turn quickly in our modern world and not only due to Technology. Theresa May’s sudden announcement of an election campaign, after she had repeatedly said there would be no new contest, was clearly an opportunistic gamble even if it appeared justified given the Tories lead in public opinion polls.

Unfortunately, her disastrous, control freakery, narcissistic campaign - including a silence order for other Tory MPs - resulted in what I had previously described as the worst Conservative Party campaign that I have ever seen. What possessed this otherwise nice and seemingly capable woman?

Everyone has a view but as we so often see in politics, Governance is everything. Having squandered the Tory majority Mrs May cannot survive as Prime Minister.  However, the UK and its Tory party need to avoid a lengthy, let alone contentious leadership contest at this vulnerable time.

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



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June 12 2017

Commentary by Eoin Treacy

Just Five Stocks Account for Nearly 75% of the Nasdaq's Plunge

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

When it comes to the ongoing Technology beat-down in the stock market, it appears not all shares are created equal.

Indeed, just five names account for nearly 75 percent of the drop in the Nasdaq Composite Index, which has fallen more than 2.1 percent since June 7. Meanwhile, the Dow Jones Industrial Average and S&P 500 Index are roughly unchanged over the same time frame.

Much of this dynamic is due to giants like Apple Inc., Microsoft Corp. and Goggle parent Alphabet Inc. falling as much as 6.5 percent. Those companies account for nearly 30 percent of the index’s weighting, and their outsize impact has driven the gauge lower even though the bulk of the stocks are doing fine.

This selloff was “way overdue given the extreme out- performance and positioning in Technology shares,” Morgan Stanley analyst Michael Wilson wrote in a note to clients Monday, Shares of Apple, for instance, are still up 25 percent this year, giving them room to fall.

But while Wilson expects the drubbing to continue in the short-term, he doesn’t think the market has seen a peak in tech shares.

“We would be surprised if this is the end for Technology stocks given the very strong earnings growth we are witnessing,” he wrote.

Analysts now believe performance in Technology will depend on the economic outlook. And if conditions change, finance will be the likely beneficiary.

“If the current economic ‘Goldilocks’ environment persists, Technology and other growth stocks should continue to outperform, despite today’s price declines,” Goldman Sachs Group Inc. analysts led by David Kostin wrote in a note to clients late Friday. “However, if investors recalibrate expectations for inflation and Fed policy to match the growth optimism suggested by the S&P 500 level, higher rates should lead to financial sector outperformance.”

Eoin Treacy's view -

Mega-cap Technology shares dominate the Nasdaq-100 and accounted for much of the Index’s outperformance over the last few months so it stands to reason they represent a headwind as a potential reversionary process unfolds.



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June 09 2017

Commentary by Eoin Treacy

Renault plans foray into energy market with mega battery

This article by Christoph Steitz and Edward Taylor for Reuters may be of interest to subscribers. Here is a section:

Large batteries can help stabilize the primary reserve electricity market, which is responsible for ensuring the grid has at least 50 Hertz. Carmakers can also earn money competing with conventional power stations to guarantee the provision of electricity during periods of high demand or volatility.

"We forecast the combined market for electric passenger vehicles, electric buses and battery storage to increase eight-fold to over $200 billion by 2020, a five-year compound annual growth rate of more than 50 percent," Berenberg analysts said.

With about 4 million electric cars expected to be on the roads by 2020, vehicle manufacturers looking at ways to recycle batteries, including Tesla, which already sells everything from solar panels to batteries and electric cars.

Daimler, BMW, Volkswagen and China's BYD Co Ltd are also exploring so-called second-life storage projects with batteries.

That includes partnerships such as the recent collaboration between BMW and Vattenfall, in which the luxury automaker will deliver up to 1,000 lithium-ion batteries to the Swedish utility for storage projects this year.

"What will end up happening is that BMW and Daimler will ... become utilities themselves," said Gerard Reid, founder of Alexa Capital LLP, a corporate advisor in the energy, power infrastructure and Technology sectors.

"They use Vattenfall now because they need to learn but I think the amount of batteries coming back will be so big that I think they'll end up engaging directly with the end customer themselves. And they've got the brand name to do that."  

 

Eoin Treacy's view -

The diesel scandal took a heavy toll on the growth ambitions of a number of auto manufacturers. There are now scrambling to come up with a way of ensuring their next clean energy gambit is successful. Since the batteries going into electric vehicles are a lot like bigger versions of those in phones we know that they lose capacity after a few hundred recharges. That means finding new uses for old batteries is a major field of endeavour if the price is to be kept under control. 



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June 08 2017

Commentary by Eoin Treacy

No One Has Ever Made a Corruption Machine Like This One

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

By Odebrecht’s admission in U.S. District Court in Brooklyn last December, Structured Operations doled out some $788 million in bribes in Brazil and 11 other countries, securing more than 100 contracts that generated $3.3 billion of profit for the company. Odebrecht and petrochemicals affiliate Braskem SA agreed to pay $3.5 billion in fines to Brazil, the U.S., and Switzerland tied to the activities of the division in Miami and beyond. It’s the biggest corruption-related fine ever levied on a company, eclipsing a $3.16 billion fine in Brazil tied to corruption allegations against another target of the Car Wash probe, Brazilian beef giant JBS SA.

For decades, Odebrecht has cultivated a certain corporate lore. It goes something like this: The company’s ascent to the upper ranks of the world’s engineering and construction companies came from an obsession with hard work, expertise, and customer service. Top executives imbibe the teachings of the company’s founder, the late Norberto Odebrecht, via his three-volume guide to best practices, the Odebrecht Business Technology system. But last Dec. 13, when Emílio Odebrecht, Norberto’s 72-year-old son, took a seat before a microphone in a 1970s-era attorney general’s building in Brasília, Brazil’s capital, he described a family empire built on graft.

 

Eoin Treacy's view -

The “Car Wash” scandal has enmeshed just about everyone in public office in Brazil including both sitting and past presidents as well as officials in a slew of neighbouring countries. Everyone has always known that corruption was part and parcel of doing business in the region but it has now been quantified and put on display for the world to see which has resulted in a blow to sentiment. 



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June 05 2017

Commentary by David Fuller

Tech That Takes the Controls from Terrorists

Governments ought to offer less generic reactions to the forms terror is taking. Of the three U.K. attacks this year, two started as attempts to mow people down with vehicles. This is an increasingly frequent terrorist practice, which has recently yielded gory results in Nice, Columbus and Berlin as well.

At least this part of the attacks (though not the subsequent knifings) could have been prevented or at least mitigated by modern Technology known as autonomous emergency braking. This is generally a life-saving Technology that has been shown to reduce rear-end collisions by 38 percent, and that, in its current forms, will stop a vehicle before it hits a pedestrian. In Berlin, the truck used by Anis Amri to plow into a Christmas market last December was equipped by an AEB system; it ultimately stopped the vehicle, preventing more deaths than the final casualty count of 12. The reason it didn't stop earlier is that the driver can ignore the system's initial warning, overriding it for a short while; in such a scenario, brakes are only applied after the collision.

The European regulation, adopted in 2012, required that all new vehicles come equipped with AEB starting in 2015. It decrees that the driver should be able to shut off the automatic braking function. The latter wasn't a problem in Amri's case -- he apparently didn't even consider whether the Polish-owned truck he had commandeered was equipped with the anti-collision system. But regulators would clearly make life much harder for terrorists planning to weaponize vehicles if they required that the systems couldn't be manually overridden when a collision with a human is imminent. That wouldn't make cars more dangerous: Current Technology allows the vehicle to "see" the full range of options in a dangerous situation more effectively than a human driver can.

The EU regulation was a major step forward (in the U.S., automakers have agreed with regulators they would equip every new car with AEB only by 2022). Before it entered into force, only some 32 percent of new cars sold in the Netherlands, 25 percent in Germany and 21 percent in the U.K. came with autonomous emergency braking. Banning manual overrides would be another useful step.

David Fuller's view -

With or without increased terrorist attacks Autonomous Emergency Braking (AEB) systems seem like an inexpensive partial solution to loss of life due to runaway vehicles.  



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June 01 2017

Commentary by Eoin Treacy

Japan Business Investment Rebounds as Corporate Profits Jump

This note by Connor Cislo and Maiko Takahashi for Bloomberg may be of interest to subscribers. Here it is in full:

Capital spending in Japan topped estimates during the first quarter of the year as the tightest job market in more than two decades drove investment in labor-saving technologies.

Highlights

Capital expenditure rose 4.5 percent in the first quarter of 2017 from a year earlier (estimate +4 percent).Corporate profits climbed 26.6 percent. Company sales rose 5.6 percent.

Key Takeaways

A moderate economic recovery and a labor shortage have created a favorable environment for business spending, prompting companies to invest in Technology. Today’s figures will be used to revise first-quarter growth, with the result due to be released next week. The preliminary reading showed an annualized expansion of 2.2 percent.

Economist Views

* “Non-manufacturers are taking the lead” as they try to save manpower to deal with the labor shortage, said Takeshi Minami, chief economist at Norinchukin Research Institute. “That’s a good trend. It’s long been said that old production systems are weighing on productivity.”

* “The business-spending figure in the GDP report may be revised up slightly” after the data, said Hiroaki Muto, chief economist at Tokai Tokyo Research Center in Tokyo. “With corporate profits rebounding a lot, companies are probably making investments to renew their old facilities and equipment or to boost productivity.”

Other Details

* Spending minus software rose 5.2 percent from a year earlier (estimate +4.1 percent).

Eoin Treacy's view -

Japan is growing at a G-7 beating 2.2%. That’s not something we hear very often for a country that has been mired in deflation for what feels like forever. The fact it is occurring against a background of full employment and an increasing labour shortage suggests companies will be investing more in Technology, automation and may as a last resort have to raise wages. 



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May 31 2017

Commentary by Eoin Treacy

Musings from the Oil Patch May 30th 2017

Thanks to a subscriber for this edition of Allen Brooks’ report which has a number of particularly interesting items this week. Here is a section on the pace of Technology adoption: 

When the pace of adoption of technologies is examined, there are a number of interesting questions that bear on the projections of how quickly EVs and AEVs, as well as on-demand ride services, will be accepted. Are they going to be adopted as consumer Technology items or truly revolutionary technologies and labor-saving devices? As shown in Exhibit 10, proponents of rapid Technology adoption point to the cellphone, which took about a decade to go from zero to 60% penetration. That was about the same time span as the internet, but maybe only slightly longer than the VCR. On the other hand, the telephone needed nearly 50 years, while electricity needed only about 25 years, to reach the 60% penetration level. However, maybe we should look at these vehicle technologies as akin to those that brought significant lifestyle changes such as the stove, the clothes washer and the dishwasher, which needed between 35 and 50 years to reach 60% of American homes.

Our best guess is that the adoption rate will be somewhere between the cellphone and electricity, 10 to 25 years, but with a bias toward the longer timeframe. Why do we say that? It is important to understand that vehicles play an important role in family evolutions, something that hasn’t changed over generations. The hyped concern about millennials not getting married, starting families and buying homes, which was very popular during the years immediately following the global financial crisis of 2008, is disappearing. We now see millennials coming out of their parents’ basements, getting married, starting families and buying homes – although maybe not of the same size or in the same locations as their parents. These millennials are, however, continuing the generational pattern of societal evolution, although they are taking longer than previous generations to take some of the steps down that road. Given the pace of this phenomenon’s development, it is important to remember that automobiles remain the second largest purchase after homes for families. These purchases are not made frequently, they usually require significant research and time to reach a decision, and the decisions are often based on economic considerations involving all aspects of families’ lives and not just social concerns, such as climate change.

Given the factors involved in new car purchases, those forecasting the demise of petroleum must explain how those with limited incomes and wealth will voluntarily give up their perfectly functioning fossil fuel vehicle for an expensive EV, which because of battery Technology may not get anywhere close to the advertised performance due to the climate where they reside. Their lives will become more complex until electric charging stations are as ubiquitous as gasoline stations, since they may not be able to afford the wait for battery recharges nor the cost of an installed charger in their home, if that option even exists for them.

There is also the question of what happens to the economics of EVs versus ICE cars when the values of used ICE cars go essentially to zero? In that case, unless gasoline and diesel fuels are banned, which may be the next target of environmental activists, it will be much cheaper to own and operate ICE cars than EVs.

There is also the question of how quickly the fleet of American vehicles can be converted to EVs or AEVs. For the past several years, Americans have purchased 17 million or slightly more new vehicles each year. At that pace, it will take 15 1/3 years to completely replace the approximately 260 million vehicles currently on America’s roads. To reach the magic 60% penetration rate, Americans must buy 17 million new EVs every year for more than nine years. Despite the high number of EVs in the fleet, it still leaves 104 million ICE vehicles on the roads burning fossil fuels.

Eoin Treacy's view -

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

Something that has always been at the back of my mind when reading comparisons about the pace of adoption of technologies is whether it is appropriate to compare adoption rates over more than a century. The pace of life has accelerated considerably in only the last decade so that we find it hard to imagine how anyone lived without the benefit of wifi or indeed indoor plumbing more than a century ago. My kids for example can’t imagine a world without iPhones, iPads and YouTube.



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May 31 2017

Commentary by Eoin Treacy

Trouble Brews for OPEC as Expensive Deep-Sea Oil Turns Cheap

This article by Serene Cheong, Sharon Cho and Dan Murtaugh for Bloomberg may be of interest to subscribers. Here is a section:

The falling costs make it more likely that investors will approve pumping crude from such large deep-water projects, the process for which is more complex and risky than drilling traditional fields on land. That may compete with OPEC’s oil to meet future supply gaps that the group sees forming as demand increases and output from existing wells naturally declines.

Saudi Arabia’s Al-Naimi left his post shortly after his speech targeting high-cost producers, and his successor Khalid Al-Falih organized production cuts by OPEC and some other nations that are set to run through March 2018. In a speech in Malaysia this month, Al-Falih bemoaned the lack of investment in higher-cost projects and said he fears the lack of them could cause demand to spike above supply in the future.

Warnings from OPEC of a looming shortage are “overstated and misleading,” Citigroup Inc. said in a report earlier this month. The revolution in unconventional supplies like shale is “unstoppable” unless prices fall below $40 a barrel, and deep- water output could grow by more than 1 million barrels a day by 2022, according to the bank.

Royal Dutch Shell Plc in February approved its Kaikias deep-water project in the U.S. Gulf of Mexico, saying it would break even with prices below $40 a barrel. That followed BP Plc’s decision in December to move forward with its Mad Dog Phase 2 project in the Gulf, with costs estimated at $9 billion compared to $20 billion as originally planned.

Over the next three years, eight offshore projects may be approved with break-even prices below $50, according to a Transocean Ltd. presentation at the Scotia Howard Weil Energy Conference in New Orleans in March. Eni SpA could reach a final investment decision on a $10 billion Nigeria deep-water project by October.

Eoin Treacy's view -

Oil producers spent a decade investing in additional supply and while they went right on investing until prices declined, the reality is that a lot of that investment was in new Technology which is now being used to drive prices down while exploration has been abandoned. 



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May 30 2017

Commentary by Eoin Treacy

The rise of the QR code and how it has forever changed China's social habits

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

Chen said what seems like disruptive Technology today eventually will be diffused into society and become an element of normal life tomorrow.

“The younger generation in China will grow up in a world full of two-dimensional barcodes,” he said. “They may develop a new understanding of money.”

“Maybe, in their eyes, money [will be seen as] not just a means to purchase commodities and services, but also socialise.”

Mobile payments began to grow in China as people increasingly used social media platforms such as WeChat to distribute the red money envelopes known as hongbao in Mandarin, or lai see in Cantonese, to friends and relatives in the traditional Spring Festival. Last year, the average WeChat user sent out 28 packets of hongbao every month, according to the platform. Much of the money was used to compliment a well-taken photo or well-written post.

Such behavioural changes are poised to profoundly affect the Chinese economy, according to Chen.

“When the credit card emerged, consumers were found to spend more than when they used cash. The QR code is even more convenient than the credit card, so we have good reason to expect it will increase consumption,” he said.

 

Eoin Treacy's view -

One of the reasons QR codes have not taken off in the West is because of the security concerns they represent. Any link can be embedded in a QR code so the potential for malicious codes to be used alongside commercial ones represents a significant security risk. Nevertheless the evolution of digital wallet solutions is undeniable and cash is increasingly looked on as an inconvenience. 



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May 24 2017

Commentary by Eoin Treacy

The Big Green Bang: how renewable energy became unstoppable

Thanks to a subscriber for this article by Pilita Clark for the FT which may be of interest. Here is a section: 

“I have been early twice in financing the low carbon energy transition,” says Bruce Huber, cofounder of the Alexa Capital advisory group. “But we feel it’s third time lucky.”

One reason for his optimism is what he calls the “tectonic plateshifting” in the car industry that is driving down the cost of energy storage. Storing clean power has long been a holy green grail but prohibitive costs have put it out of reach. This has begun to change as battery production has ramped up to meet an expected boom in electric cars.

Lithium ion battery prices have halved since 2014, and many analysts think prices will fall further as a slew of large battery factories are built.

The best known is Tesla and Panasonic’s huge Nevada “gigafactory”. Tesla claims that once it reaches full capacity next year, it will produce more lithium ion batteries annually than were made worldwide in 2013.

It is only one of at least 14 megafactories being built or planned, says Benchmark Minerals, a research group. Nine are in China, where the government is backing electric cars with the zeal it has directed at the solar industry.

Could this lead to a China-led glut like the one that helped drive solar industry writeoffs and crashing prices after the global financial crisis?

“It’s something to watch,” says Francesco Starace, chief executive of Italy’s Enel, Europe’s largest power company.

The thirst for electric cars, not least in China, means “the dynamics of demand are completely different” for batteries than for solar panels, he adds.

Still, Enel’s internal forecasts show battery costs falling by about 30 per cent between 2018 and 2021 and it is among the companies already pairing batteries with solar panels to produce electricity after dark in sunny places where power is expensive, such as the Chilean desert.

Eoin Treacy's view -

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

The main objections to renewable energy are focused on intermittency and their reliance on subsidies. However economies of scale and the application of Technology represent reasons for why we should be optimistic these can be overcome over the medium term. That represents a significant challenge for both the established energy and utility sectors. 

Right now we are talking about a time when solar and wind will be able to compete without subsidies on an increasing number of projects. However if we continue on that path there is potential for the sector to be a victim of its own success because the lower prices go and the more fixed prices are abandoned the greater the potential for volatility in energy pricing. 



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May 23 2017

Commentary by Eoin Treacy

Global cyberattack 'highly likely' linked to North Korea group

This article by Sherisse Pham for CNN may be of interest to subscribers. Here is a section:

But here's the puzzling thing -- Symantec says that despite the links to Lazarus, "the WannaCry attacks do not bear the hallmarks of a nation-state campaign."

Cyberattacks backed by governments "are usually impeccable, they don't make rookie mistakes," said Thakur. "In the case of WannaCry, we saw some of those mistakes."

For example, early versions of WannaCry had a bug in the code that prevented victims from paying the ransom.

While it's possible Lazarus thought they could make a lot of money with WannaCry, "they totally botched it up and got almost nothing," Thakur said.

The ransomware has so far collected about $108,000 in ransom. Security researchers and government agencies advised businesses not to pay the ransom.

 

Eoin Treacy's view -

The latest global ransomware attack might have been botched but that didn’t stop it from causing a great deal of inconvenience for consumers not least in the UK where trains didn’t run and hospital appointments were cancelled. The problem of course is that even if this attempt was not as successful as the originators hoped if will act as inspiration for ambitious criminal organisations to get it right next time. 



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May 22 2017

Commentary by Eoin Treacy

If you bought $100 of bitcoin 7 years ago, you'd be sitting on $75 million now

This article from CNBC highlights the current spate of excitement about bitcoin. Here is a section:

On May 22, 2010, Hanyecz asked a fellow enthusiast on a bitcoin forum to accept 10,000 bitcoin for two Papa John's Pizzas. At the time, Hanyecz believed that the coins he had "mined" on his computer were worth around 0.003 cents each.

Bitcoin mining involves solving a complex mathematical solution with the miner being rewarded in bitcoin. This is how Hanyecz got his initial coins.

The cryptocurrency has many doubters as it continues to be associated with criminal activity, but it has still seen a stunning rally. Here are two facts, on Bitcoin Pizza Day, however, that highlight this:

While being worth $30 at the time, Hanyecz pizzas would now cost $22.5 million at current bitcoin prices.

If you bought $100 of bitcoin at the 0.003 cent price on May 22, 2010, you'd now be sitting on around $75 million.

A number of factors have been driving the rally:

Recently passed legislation in Japan that allows retailers to start accepting bitcoin as a legal currency has boosted trading in yen, which now accounts for over 40 percent of all bitcoin trade

Political uncertainty globally has driven demand for bitcoin as a safe haven asset

A debate within the bitcoin community about the future of the underlying Technology behind bitcoin known as the blockchain has been taking place. There was fear at one point this could lead to the creation of two separate cryptocurrencies but those worries have largely subsided with an alternative, more palatable option now being put forward. 

Eoin Treacy's view -

At the Tech Symposium I spoke at in London last week Charlie Morris made a number of important points about bitcoin which I found very educative. The most important of these was his point relating to the fact that bitcoin is a digital asset rather than a currency so it is a misnomer to describe it as a cryptocurrency. The best way to value bitcoin is in the strength of the network supporting it and therefore it is a barometer for the prevalence and acceptance of blockchain. 



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May 19 2017

Commentary by Eoin Treacy

CAD Software Firm Autodesk Soars On Quarterly Earnings Beat

This article by Patrick Seitz for Investor’s Business Daily may be of interest to subscribers. Here is a section:

Analysts were modeling Autodesk to lose 15 cents a share on sales of $488 million.

Autodesk's annualized recurring revenue rose 18% year over year to $1.74 billion in the first quarter because of strong sales of subscription plans.

"Broad-based strength across all subscription types and geographies led to another record quarter for total subscription additions and a fantastic start of the new fiscal year," Amar Hanspal, Autodesk co-CEO and chief product officer, said in a statement. "Customers continue to embrace the subscription model, and we're expanding our market opportunity with continued momentum of our cloud-based offerings, such as BIM 360 and Fusion 360."

 

Eoin Treacy's view -

Subscription models have some pretty impressive advantages for companies not least because they get steady streams of income, do not have to worry about how well the next softward update is going to sell and have less pressure to discount. Consumers pay less upfront costs, have better ability to plan their expenditure and are always guaranteed to have the latest product so it is a win-win relationship.



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May 19 2017

Commentary by Eoin Treacy

China successfully mines flammable ice from the South Sea

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

During the mining trial done at a depth of 4,153 feet, engineers extracted each day around 16,000 cubic metres of gas, with methane content of up to 99.5%, Minister of Land and Resources Jiang Daming said.

The new energy source, while revolutionary, is not exempt of risks. The release of methane into the atmosphere as permafrost melts is regarded for those who believe in climate change as one of the worst potential accelerator mechanisms for it. Methane hydrate is also hard to extract, which makes the cost of producing it high.

Test drillings have also taken place in the US, Canada and Japan, with the latter announcing earlier this month that it was successful at producing the natural gas on the pacific coast and will continue mining it for around three to four weeks.

Sources of methane hydrate are so large that the US Department of Energy has estimated the world's total amount could exceed the combined energy content of all other fossil fuels.

 

Eoin Treacy's view -

Methane hydrate is uneconomical using today’s methods of extraction and current prices However, its existence highlights the important fact that any argument referring to peak oil must be prefaced with details of costs of production and timeframes. There is no shortage of natural gas or fossil fuels for that matter. Their supply is limited only by a combination of technological innovation and price. Technology is improving all the time so it is inevitable that major important countries like China and japan will continue to work on how to bring down the cost of methane hydrate.



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May 15 2017

Commentary by David Fuller

The End of Petrol and Diesel Cars? All Vehicles Will be Electric by 2025, Says Expert

No more petrol or diesel cars, buses, or trucks will be sold anywhere in the world within eight years. The entire market for land transport will switch to electrification, leading to a collapse of oil prices and the demise of the petroleum industry as we have known it for a century.

This is the futuristic forecast by Stanford University economist Tony Seba. His report, with the deceptively bland title Rethinking Transportation 2020-2030, has gone viral in green circles and is causing spasms of anxiety in the established industries.

Prof Seba’s premise is that people will stop driving altogether. They will switch en masse to self-drive electric vehicles (EVs) that are ten times cheaper to run than fossil-based cars, with a near-zero marginal cost of fuel and an expected lifespan of 1m miles.

Only nostalgics will cling to the old habit of car ownership. The rest will adapt to vehicles on demand. It will become harder to find a petrol station, spares, or anybody to fix the 2,000 moving parts that bedevil the internal combustion engine. Dealers will disappear by 2024.

Cities will ban human drivers once the data confirms how dangerous they can be behind a wheel. This will spread to suburbs, and then beyond. There will be a “mass stranding of existing vehicles”. The value of second-hard cars will plunge. You will have to pay to dispose of your old vehicle.

It is a twin “death spiral” for big oil and big autos, with ugly implications for some big companies on the London Stock Exchange unless they adapt in time.

The long-term price of crude will fall to $25 a barrel. Most forms of shale and deep-water drilling will no longer be viable. Assets will be stranded. Scotland will forfeit any North Sea bonanza. Russia, Saudi Arabia, Nigeria, and Venezuela will be in trouble.

It is an existential threat to Ford, General Motors, and the German car industry. They will face a choice between manufacturing EVs in a brutal low-profit market, or reinventing themselves a self-drive service companies, variants of Uber and Lyft.

They are in the wrong business. The next generation of cars will be “computers on wheels”. Google, Apple, and Foxconn have the disruptive edge, and are going in for the kill. Silicon Valley is where the auto action is, not Detroit, Wolfsburg, or Toyota City.

The shift, according to Prof Seba, is driven by Technology, not climate policies. Market forces are bringing it about with a speed and ferocity that governments could never hope to achieve.

David Fuller's view -

In the accelerating rate of technological innovation which this service has long forecast, many of the most important changes occur much more quickly than expected.  Nevertheless, I think Professor Seba is forecasting a rate of change which may be technologically feasible but impossible in terms of practicalities.  My guess is that it will take at least five to ten years longer before his views are confirmed. 

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



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May 12 2017

Commentary by Eoin Treacy

Stretching Thin

Thanks to a subscriber for this heavyweight 114-page emerging market fixed income focused for report from Deutsche Bank which may be of interest. Here is a section on Saudi Arabia: 

Large FX buffers buy time despite high fiscal breakeven KSA also has a high fiscal breakeven, expected to reach USD84 in 2017 according to the IMF and somewhat lower according to our estimates at USD72. As such fiscal reform is a priority, but over USD500 billion of SAMA reserves and the potential for part-sale of oil assets give flexibility of timing. However, arguably, the size and conservative nature of the Kingdom makes early reform a necessity.

Saudi Arabia’s approach to breaking its hydrocarbon habit has been to undertake something akin to a revolution in the country, as outlined in the Vision 2030 document and the shorter-term National Transformation Program 2020. The challenges are significant, given the elevated fiscal breakevens, delivering 11% budget deficit in 2017. Ambitions for achieving a balanced budget by 2020 (“Fiscal Balance Program 2020”), suggests the bulk of the social and economic overhaul should be front-loaded. 

The National Project Management Office (NPMO), announced in September 2015 and tasked with moving projects forward in a coordinated fashion, has stalled. Furthermore, headline projects such as the Makkah Metro or the North-South rail line have been pushed out. Of the USD1 trillion pipeline, the only actual new project awards have been limited to Aramco investments. Until the NPMO is fully in place, any major project awards will be exceptions.

By contrast the establishment of the Bureau of Capital and Operational Spending Rationalization – an entity aimed at reviewing the feasibility of projects less than 25 per cent complete has moved forward with a review of some of the SAR1.4 trillion of projects in development. On the first round, approximately SAR100 billion of costs have been cut. Some projects will be cancelled, others retendered or converted to self-financing PPP-style contracts, but the certainty is that these cannot continue to be financed substantially from the public purse. There has also been additional controls on current spending with cuts in civil service allowances. The switch from an Islamic contract year to a slightly longer Gregorian one amounts to a 3% pay cut.

 

Eoin Treacy's view -

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

With significant reserves Saudi Arabia has time to deal with a relatively low oil price environment and the effect that is having on its fiscal condition. Rolling back spending commitments would leave the country in a much healthier position to compete considering its abundant resources and low cost of production. The new administration has embraced the need for change both in terms of domestic reform and investing in sectors outside of energy. The soon to launch $100 billion Softbank Technology Fund is a case in point. 



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May 10 2017

Commentary by Eoin Treacy

Day One for President Moon Sees Korea Stocks in Retreat With Won

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

The Kospi index dropped the most since March as North Korea reiterating its pledge to push forward with another nuclear test showed Moon Jae-in, the victor in Tuesday’s presidential vote, is unlikely to get a honeymoon. While Citigroup Inc. to Morgan Stanley are betting on further upside for South Korea’s record- setting stocks, analysts and investors are seeking more from Moon, who ran on a platform of corporate reform and rapprochement with North Korea.

“Markets will take this on the chin,” said James Soutter, who helps manage the equivalent of about $500 million at K2 Asset Management in Melbourne, referring to the election.
“Rumblings out of North Korea on further nuclear tests should have a bigger influence on markets than the election.”

While Korean Technology shares rallied on bets Moon will bolster the sector as a way of delivering more jobs, the Kospi spiked lower, declining 1 percent Wednesday -- the most since March 3 -- as utilities and banks paced losses. Markets in Seoul were closed for the election Tuesday, so the drop came after a 2.3 percent surge in the Kospi on Monday, its best day since September 2015

Eoin Treacy's view -

The South Korean Kospi Index has been ranging for six years but broke out ahead of the election to new all-time highs. Increased tensions with North Korea coinciding with a short-term overbought condition suggest there is scope for some consolidation of the recent run-up. However a sustained move below the trend mean would be required to question medium-term scope for additional upside. 



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May 10 2017

Commentary by Eoin Treacy

Biotechnology Sector update

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

Industry’s sales/earnings growth and margin structure are enviable, M&A on-tap
1. With increases in sales and earnings power and improving product approval rates, large-cap biotech has stuck to its knitting, i.e., developing products for smaller, more focused disease areas with high unmet needs.
2. 2015 was a banner year for worldwide biopharma M&A. After downturns, such as seen in 2016, M&A typically picks up as valuations become realistic.
3. Drug pricing, recent slowdown in large-cap sales/earnings momentum, many companies between product cycles and some clinical disappointments, are all still overhangs.

And 

1. Sales/earnings growth deceleration following peak sales/earnings in 2014 for the large-cap companies.
2. Has led to generalist and momentum money reducing exposure/abandoning the sector.
3. This deceleration in sales/earnings growth to trough in 2017, then rapidly start accelerating again.
4. Currently GILD is the laggard in its peer group for expected sales/earnings growth over the next three years.

 

Eoin Treacy's view -

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

R&D is expensive, riddled with uncertainty and big bureaucracies tend to stifle the creativity necessary for the kind of out of the box thinking which leads to breakthroughs. The result is that large pharmaceuticals companies often buy promising bioTechnology companies, usually at a premium, rather than invest in the uncertainty of in-house development. 



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