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March 20 2015

Commentary by Eoin Treacy

U.Ks FTSE 100 Rides Past Record, Reaching 7,000 for First Time

This article by Inyoung Hwang and Roxana Zega for Bloomberg may be of interest to subscribers. Here is a section: 

“U.K. stocks have had a strong rise given the headwinds,” Richard Hunter, head of equities at Hargreaves Lansdown Plc in London, said by phone. “Mining, oil and bank stocks make up a big part of the index, and we all know the difficult time these three sectors have had. Despite that, the FTSE 100 has managed to make progress.”

It’s been a good week for the benchmark: Chancellor of the Exchequer George Osborne on Wednesday unveiled higher economic growth and lower deficit and unemployment forecasts along with help for the North Sea oil industry. The latter has helped Energy stocks trim declines spurred by a rout in oil and metals prices. Banking shares have been hurt by a series of scandals ranging from manipulation of interest-rate benchmarks to tax- evasion schemes.

Even with the FTSE 100 at a record, the advance in British equities this year is about a third that of gains in European peers, which was boosted by additional stimulus from the region’s central bank.

Eoin Treacy's view -

Clicking through the constituents of the FTSE-350 sector Indices section of the Chart Library, we can see that the UK stock market’s rally is well supported, It is also worth noting that the banking, resources and oil & gas sectors are no longer acting as headwinds, have all found at least near-term support this week. 

We are in the final stages of testing for the new filter system and hope to re-launch it soon. Perusing the results of this high/low filter for the FTSE-350 we can see that the majority have been trending for some time which highlights just how much of a brake the above sectors have represented for the UK stock market. 

In the table, the columns represent performance over 1 month, 3 months, 6 months, 12 months, 3-years and 5-years. It will only show data for when the respective share has hit a new high. Therefore at the top of the table you will see all the columns are filled because prices have hit new five-year highs while further down the list a share may only have hit a new 3-month high. 

 



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March 19 2015

Commentary by Eoin Treacy

Yuan Surges Most in a Year as Fed Eases Capital Outflows Concern

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

China’s capital outflows concern may be tempered after the Fed’s comments, and the PBOC will likely become more flexible as worries about a weaker yuan ease, Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp., said in an interview.

China is in talks with the International Monetary Fund to include the yuan in the institution’s basket of reserve currencies, PBOC Deputy Governor Yi Gang said in Beijing on March 12. The currency will decline 0.22 percent the rest of this year to 6.21 a dollar at the end of 2015, according to the median estimate in a Bloomberg survey.

“The fundamentals are still bullish for the yuan with the government’s plan to make it a reserve currency,” said Scotiabank’s Tihanyi. The PBOC fixings also send a “strong signal” that the authorities favor a stable currency, he said.

 

Eoin Treacy's view -

The Renminbi can be viewed from a number of different perspectives. For some it represents how much of an advantage China has gained from devaluing its currency more than twenty years ago. For others it represents the challenges experienced by manufacturers as its value has increased over the last decade. For still others its stability is a totem for the increasingly vital role China plays in the global economy. 

The Chinese authorities have made clear they want to make the Renminbi as international as possible. Opening up the financial markets, encouraging competition, insisting on the currency being used as a medium of international trade and other measures are all designed to achieve this goal. As the largest Energy importer, the benefit of sourcing supply denominated in one’s domestic currency is obvious but for that goal to be reached the currency will have to be globally fungible which is not the case just yet. 

 



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March 18 2015

Commentary by David Fuller

The Weekly View: Submerging Markets

My thanks to Rod Smith, Bill Ryder and Ken Liu of RiverFront for their ever-interesting investment letter.  Here is a brief sample:

Asia (China, South Korea, Taiwan and India), in contrast, are net oil importers and benefit from falling Energy prices.  Furthermore, many of their largest companies export to the US and are thus helped by a strong dollar, which effectively makes their products cheaper for American buyers.  Thus, Asia ex-Japan is the only EM region with earnings and stocks near record highs, whereas Latin America and Eastern Europe remain well below peak levels.  Valuations in Asia ex-Japan remain near average levels, while we do not expect major currency depreciation among Asian nations, we think they are feeling pressure to weaken their exchange rates.  Therefore, while Asia ex-Japan is our favourite among EM, e prefer DM overall (especially on a currency-hedged basis).  

David Fuller's view -

Well, there is a lot of concern about currencies but is it justified?  People like the US market, backed by the strong USD, but the S&P 500 is only up +1.97% so far this year.  In contrast, the Euro has been the weakest currency but the Euro Stoxx 50 is up +4.55% in USD since QE was announced by the ECB.  It is by no means an exception because the French CAC is +5.64%, German DAX +9.03%, Italian MIB +6.43%, Holland’s AEX +4.92% and Sweden’s OMX +5.53%, all in USD terms so far this year.  In the Asia-Pacific region, Japan’s Nikkei 225 is +11.63%, Australia’s ASX 200 + 4.14%, China’s Shanghai Comp +10.16%, Taiwan’s TAIEX +4.83%, South Korea’s KOSPI +4.94% and India’s SENSEX +5.65%, again all in USD this year.

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March 17 2015

Commentary by David Fuller

Email of the day

On supply restrictions despite a superior product at a cheaper price:

“David, what if a country produces more of a high quality product as a result of their own technological innovations and they can hardly store it anymore and you are not allowed to sell it on the international markets and your product has a superior quality and is sold at a considerable lower price than the lower quality product produce abroad what would you do? What if companies like GE, Pentair, Caterpillar etc suffer due to decreasing sales because of this and if US banks are occurring losses due to this law; what would you do? What if a lot of jobs are at stake? Apparently there was a meeting last Friday with the White House. Isn't this a great opportunity for President Obama to lift the export ban on WTI?  These are as you said before very interesting times. Maybe BP an RD wouldn't like it but the European autonomies and consumers would like it for sure. Maybe a nice trade, going long WTI and short Brent.”

David Fuller's view -

Many thanks for a very interesting and topical email from The Netherlands, beautifully introduced to show the insanity of the policy to which you are referring.  My guess is that President Obama is not very interested in economic matters.  Moreover, he favours green Energy policies and mistrusts the oil industry, which is unlikely to have voted for him.  He certainly did not encourage fracking, which has been a godsend for the US economy.  More importantly, it is now the single most important factor in today’s much cheaper oil prices, which will help the global economy to recover over the next few years.

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March 17 2015

Commentary by David Fuller

Beyond China: The Future of the Global Natural Resources Economy

My thanks to a subscriber for this blockbuster report from Citi. Here is part of the introductory summary:

The structure of global economic growth is once again undergoing a fundamental transition, shifting away from the prevailing model of China as the world’s factory and advanced economies as the drivers of consumer demand. In its place, a more heterogeneous, multipolar framework is emerging with both manufacturing and final consumption more broadly spread across the globe.

Whereas the Commodities Supercycle was characterized by rapid, synchronized global demand growth centered on the rise of China, we expect the coming decade to feature slower, more geographically diverse, less synchronized demand growth. The drivers of natural resources demand are spreading across the globe in new ways. For oil, demand growth should increasingly come from the Middle East. For coal, the same is true of India. Only in base metals does China’s predominance look to remain unchallenged. As a result, the traditional practice of analyzing commodities demand based on the US, China and Europe will become less relevant as the drivers of incremental demand come increasingly from the “Emerging 5”: India, ASEAN, the Middle East, Latin America and Africa.

However, no large emerging market is likely to rise up to the point where China has now come to a landing. The most cited potential successors, India and Brazil, are based on democratic institutions unlikely to provide the consensus required to sustain high fixed asset investment levels. Japan and Europe could do this from the 1950s through the 1970s due to the imperative of post-WWII reconstruction. The “Asian tigers” also succeeded, but under what were initially authoritarian systems.

David Fuller's view -

I particularly agree with the first and last paragraph of this opening summary by Citi’s distinguished team of commodity analysts. 

I discussed part of this subject on 9th March, in response to my opening article by Andrew Critchlow of The Telegraph: Miners Pray the Commodities Collapse Has Hit Rock-Bottom.  

Taking a somewhat longer-term view than Citi above, here is my initial reply from the 9th:

Mining has always been the most cyclical of industries.  Nevertheless, this cycle has been longer for two main reasons: 1) The 2008 credit crisis has lengthened the global economic slowdown; 2) Accelerating technological innovation has made mining much more efficient. 

Consequently, the closest parallel for mining is with the oil and natural gas extraction industries.  However, they will learn more from mining because its bear market started earlier.  Fifteen to twenty years ago, and earlier still, the main fear was that the world was running out of these resources.  What we have learned is that technology can locate additional resources much more easily and enable us to extract them far more efficiently.  There is also a third factor in addition to the two mentioned in the paragraph above: 3) Technology has created new materials which will reduce demand for industrial resources.

Demand for crude oil and eventually natural gas will decline in decades ahead, as the efficiency with which solar Energy is produced continues to increase.  Similarly, demand for industrial metals will decline as they are replaced by graphene, ceramics and plastics. 

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March 13 2015

Commentary by Eoin Treacy

Material Question

This article by John Colapinto for the New Yorker offers an interesting history of the potential and challenges represented by graphene. Here is a section: 

Friedel offered a broad axiom: “The more innovative—the more breaking-the-mold—the innovation is, the less likely we are to figure out what it is really going to be used for.” Thus far, the only consumer products that incorporate graphene are tennis racquets and ink. But many scientists insist that its unusual properties will eventually lead to a breakthrough. According to Geim, the influx of money and researchers has speeded up the usual time line to practical usage. “We started with submicron flakes, barely seen even in an optical microscope,” he says. “I never imagined that by 2009, 2010, people would already be making square metres of this material. It’s extremely rapid progress.” He adds, “Once someone sees that there is a gold mine, then very heavy equipment starts to be applied from many different research areas. When people are thinking, we are quite inventive

Samsung, the Korea-based electronics giant, holds the greatest number of patents in graphene, but in recent years research institutions, not corporations, have been most active. A Korean university, which works with Samsung, is in first place among academic institutions. Two Chinese universities hold the second and third slots. In fourth place is Rice University, which has filed thirty-three patents in the past two years, almost all from a laboratory run by a professor named James Tour.

 

Eoin Treacy's view -

The intersection of graphene, solar innovation and concern for the environment suggest that the greatest application of the material will be in the Energy sector. The issue is that a number of issues with mass production and just getting graphene to perform as hoped remain to be solved. There is no reason to believe they will not be solved but the lead time to getting marketable products and earnings is an unknowable. 



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March 12 2015

Commentary by Eoin Treacy

Tesla Hackers Show an Energy Revolution Closer Than Once Thought

This article by Matthew Campbell, Tim Loh and Mark Chediak for Bloomberg may be of interest to subscribers. Here is a section:  

Consider the crash effort at the Joint Center for Energy Storage Research in suburban Chicago. Within five years, researchers want to create one or more battery types that can “store at least five times more Energy than today’s batteries at one-fifth the cost,” according to George Crabtree, an agreeable silver-haired scientist who runs the U.S. Energy Department-backed battery-research skunk works.

Harvard University, the Massachusetts Institute of Technology, leading-edge technology companies like Elon Musk’s Tesla Motors Inc. and scads of startups are getting into the act. Some are seeking to double the capacity and dramatically cut the costs of the lithium-ion battery, the standard in iPhones and electric vehicles. Others are working on mega-scale battery systems using novel chemistries that could cheaply store enough Energy to help power entire cities.

Battery entrepreneurs have begun to even talk like revolutionaries. “The ability for a battery company to change the dynamics of the world is what has got us excited,” says Bill Watkins, chief executive officer of Imergy Power Systems Inc., a Fremont, California, startup working on utility-scale batteries. “We can actually make a big difference here. I call it democratizing Energy.”

As the former CEO of Seagate Technology Plc, the Silicon Valley digital storage maker, Watkins can speak from experience about tectonic technology shifts. In 1980, a Seagate five- megabyte hard drive that rendered floppy disks obsolete was a $1,500 PC add on. These days, drives holding two terabytes of data -- equivalent to two million megabytes --  can be had for a retail price of under $200.

What’s primarily driving the battery revolution is the phenomenal growth of rooftop and other forms of solar Energy and an awakening by renewable Energy advocates that storage is the lagging piece of the transformative puzzle. Solar now powers the equivalent of 3.5 million American homes and accounted for 34 percent of all newly installed electricity capacity last year.

Wind supplies enough electricity for the equivalent of about 14.7 million U.S. homes, about the same as 52 coal-powered generating plants, according to the Wind Energy Foundation.
An exponential breakthrough in battery capacity and cost would bulldoze the limitations to adopting renewable Energy on a massive scale, be a potent weapon to fight climate change by lowering carbon emissions and potentially bring billions of dollars in profits, never mind fame, to the winners. The knock on renewables is that while fossil fuels keep the power on all the time, solar fades when the sun doesn’t shine and wind power fizzles when the wind doesn’t blow – unless you have a way to store the excess for when you need it.

“What’s holding back solar and wind isn’t their availability but the fact that the technology to generate renewable Energy has lept far ahead of the capacity to store and deploy it round the clock as needed,” says Crabtree of the Joint Center project, which is run out of the federal Argonne National Laboratory.

Prophesies of Energy revolutions always come with caveats, of course, and some researchers note that an exponential breakthrough in battery storage and cost has been forecast for more than a decade and still hasn’t arrived. “Of all these other battery technologies people promote, how many of them are real?” says Jeff Dahn, a professor at Dalhousie University in Nova Scotia who continues to plug away at making stronger and cheaper lithium-ion batteries. “All that remains to be seen.”

 

Eoin Treacy's view -

When we first started writing about the massive investments in battery technology as early as 2010 there was a great deal of enthusiasm about how batteries were going to make the case for renewable Energy more compelling than ever. However, the difficulty of innovating in the chemical sector and the lead time in bringing new methodologies to market was underestimated. 



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March 11 2015

Commentary by Eoin Treacy

Musings From the Oil Patch March 10th 2015

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

European natural gas prices have been falling during the past year, largely due to the drop in global oil prices. Most natural gas contracts in Europe have their delivered price tied to indices that reflect the level of and changes in crude oil prices. January’s delivered gas price has declined 5.9% from December’s $9.83 per million British thermal units (Btus). Versus a year ago, the delivered gas price has fallen by 20.2% to the January price of $9.25/mmBtus from $11.59/mmBtus. In response to the arrival of more LNG supplies into Europe, Gazprom has reduced its price demands slightly while also improving the financing and delivery terms.

The fact that Statoil and Lithuania have been negotiating the recently announced LNG contract for 4-6 months signifies that the huge competitive advantage U.S. LNG exporters anticipated when they started filing for permits to build the new export terminals has slowly dissipated. Lower crude oil prices have dragged down oil-linked LNG pricing terms in Asia and Europe, even as U.S. natural gas prices remain entrenched in a trading range below $3 per thousand cubic feet (Mcf). U.S. LNG exporters fully anticipate that domestic gas prices will remain below $4/Mcf giving them a significant cost advantage when delivering LNG into the Asian and European markets, but that was when Asian and European LNG prices were in the double digits, and in some cases the high double digits. Continued weak economic activity in these regions is further contributing to the narrowing of the gas price gap between delivered LNG prices in those markets and U.S. natural gas prices.

The arrival of additional supply, especially from the four new Australian export facilities just beginning to ship gas, is compounding the downward pressure on global LNG prices. As U.S. export terminals begin to near service, the pressure to secure markets for surplus U.S. natural gas will force shippers to seek the best deals available. As noted in the Statoil/Lithuania LNG deal, the contract terms are non-binding, suggesting that Lithuania will be looking for even better terms in future contracts. As reported, Lithuania has already signed an additional 16 non-binding agreements with companies that currently supply about half the world’s LNG. Does this suggest Europe will become a highly competitive LNG market with buyers playing one supplier against another? If so, it could mean the owners of the new North American LNG export terminals may regret their decisions to build them.

 

Eoin Treacy's view -

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

Europe has a laundry list of issues that have retarded growth not least public policy and labour inflexibility. The cost of Energy is another that has been a major headwind but the changing landscape of the market is removing that as an obstacle. Europe has a well- developed natural gas pipeline structure and has the capacity to receive shipments from just about anywhere. The changing Energy environment is not particularly good news for companies that have invested heavily in US export potential but the existence of this infrastructure represents a bonus for the global economy because supply will be plentiful. A great deal of LNG capacity will reach the global market in the next year or two. This couldn’t be better news for the global economy since it will reduce some of the demand for oil. 



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March 10 2015

Commentary by Eoin Treacy

Short Term Oil Market Outlook DNB March 9th

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

Since it seems the longer end of the 12-month forward Brent curve is anchoring up at around 66-68 $/b and we see limited upside for that part of the Brent price curve in the coming couple of months, we believe it will have to be mainly the spot Brent price that will have to do the job of creating the expanding contango required to incentivize the traders to continue to buy crude oil. Since global demand for crude oil will probably continue to drop seasonally until May, we believe the turning point for crude buying for crude processing (and not for storage) will be late April or early May. From then on and into late summer we should see more demand for crude oil as global refineries are ramping up their runs.
 
This will remove the worry of continuous crude stock builds as the market turns to build products instead (where stock levels are much lower). The acid test for the global oil market will then be what happens to global refinery margins when throughput is ramping up after May. Will oil consumption then be strong enough to withstand all the extra supply of products? That question can however be put aside for later reports closer to the summer. Before that, we believe in a bearish couple of months for the Brent price.

We do not subscribe to the view that Brent will fall into the 30’s, which we have seen advocated by several other analysts the past month or so. If the one-year ahead Brent price has an anchor in the 66-68 $/b range is should not be possible for the front of the market to drop much lower than the low 50’s because then it will pay of to store crude on ships and traders will be willing to buy the crude.

 

Eoin Treacy's view -

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

The collapse in oil prices over the last year helps to hammer home the conclusion that the bull market in oil prices is over. It is open to question whether we have already seen the peak in oil demand but if not we are a lot closer to that event that we were a decade ago. The evolution of competing sources of Energy is occurring so rapidly that the risk of oil shares disappointing over the medium to long-term has increased fairly substantially. 



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March 05 2015

Commentary by David Fuller

Email of the day

Dr David Brown interviewed by Forbes:

“Dear David, I was interviewed by Forbes Magazine following my presentation on the Third Industrial Revolution last week at the Markets Now evening. The interview was published yesterday and it is available at this link.

“It provides a summary of the main factors that drive industrial revolutions, which I covered in the first part of my talk. Subscribers who could not attend Markets Now last week may be interested in this summary - which is much shorter than my 2 hour presentation! However, the Forbes article does not cover the investment opportunities which were of course the most important part of the talk. Those are available to subscribers on the slides you posted.”

David Fuller's view -

Many thanks for this email and the link to your excellent interview with Forbes Magazine.  A small number of fortunate subscribers were mesmerised by your presentation and Q&A session at the last Markets Now, and many more saw your presentation, posted here last Wednesday.  The Forbes article, partially reproduced below, will generate considerable interest, as will your next presentation at Markets Now on an entirely different topic of considerable interest.  



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March 05 2015

Commentary by David Fuller

The Third Industrial Revolution: Internet, Energy and a New Financial System

Here is the conclusion of this fascinating interview with Dr David Brown by Goncalo de Vasconcelos for Forbes:

de Vasconcelos: So what will the Third Industrial Revolution impact the most?

Brown: Eventually everything, but the early movers have been USA-led computing, IT, internet companies and social media sites, which have grown to global behemoths faster than ever in history. These in turn have driven biotechnology as the genome at last begins to impact. Both went through a hype phase in the 1990s, then a bust, then the real winners emerged. That is a typical pattern over the initial 15-20 years of a breakthrough technology. Solar power has been driven mainly by Germany and more recently China, though the USA is catching up fast. Current solar systems have only 10-20% efficiency in sunlight capture but new materials will take this into the 50-100% range very soon now. And battery storage technology is advancing rapidly.  Additive manufacturing (aka 3D printing) will replace our old material and Energy-wasteful methods. Robotics is beginning to spread out of factories with Japan, Germany and China leading the charge, though expect the USA to catch up and contribute to innovation. Nanotechnology will mature in the 2020s. The Internet-of-Things is a few years away, and it will probably drive the next phase of healthcare advances, but needs more stable internet, better security and cheaper components before it can take off. And machine learning /AI will be a game-changer for humanity, beginning to impact within the next decade. The new finance is now appearing through Africa-led mPesa, followed by Google GOOGL +0.55%-wallet and Apple-pay etc. The US internet giants are registering as banks, they have very cheap infrastructure and billion-size customer bases and are likely to challenge patriarchs of the current financial system. There is much innovation in finance in the UK too. We see positive deflation all over the world as a result of these lower-cost and more-efficient solutions to human needs.

de Vasconcelos: So where are we in the Third Industrial Revolution?

Brown: Industrial revolutions take decades to play out. We have barely started in this one. Remember that the first and second Industrial Revolutions involved only Western Europe and its off-shoots, whereas this one is truly global. And online education is available to everyone for the first time ever. OECD projections indicate the world will become about 10 times wealthier during this century, and these advances certainly support their case. Exciting times!

David Fuller's view -

David Brown is assessing the current economic outlook in the context of two previous industrial revolutions.  Moreover, the panoply above is certainly no less exciting or revolutionary than anything else that has occurred throughout human history, and it is occurring at a much more rapid pace.  

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March 05 2015

Commentary by Eoin Treacy

Top 10 Emerging Technologies of 2015

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

Neuromorphic technology
Computer chips that mimic the human brain

Even today's best supercomputers cannot rival the sophistication of the human brain. Computers are linear, moving data back and forth between memory chips and a central processor over a high-speed backbone. The brain, on the other hand, is fully interconnected, with logic and memory intimately cross-linked at billions of times the density and diversity of that found in a modern computer. Neuromorphic chips aim to process information in a fundamentally different way from traditional hardware, mimicking the brain's architecture to deliver a huge increase in a computer's thinking and responding power.

Miniaturization has delivered massive increases in conventional computing power over the years, but the bottleneck of shifting data continuously between stored memory and central processors uses large amounts of Energy and creates unwanted heat, limiting further improvements. In contrast, neuromorphic chips can be more Energy efficient and powerful, combining data-storage and data-processing components into the same interconnected modules. In this sense, the system copies the networked neurons that, in their billions, make up the human brain.

Neuromorphic technology will be the next stage in powerful computing, enabling vastly more rapid processing of data and a better capacity for machine learning. IBM's million-neuron TrueNorth chip, revealed in prototype in August 2014, has a power efficiency for certain tasks that is hundreds of times superior to a conventional CPU (central processing unit), and more comparable for the first time to the human cortex. With vastly more computing power available for far less Energy and volume, neuromorphic chips should allow more intelligent small-scale machines to drive the next stage in miniaturization and artificial intelligence.

Potential applications include: drones better able to process and respond to visual cues, much more powerful and intelligent cameras and smartphones, and data-crunching on a scale that may help unlock the secrets of financial markets or climate forecasting. Computers will be able to anticipate and learn, rather than merely respond in preprogrammed ways.

Eoin Treacy's view -

IBM was a major contributor to the above article and as a result it mentions a number of areas where the company has a competitive advantage. We have all marvelled at the ability of its Watson program to compete against humans in real life tests of mental agility and at the company’s continued ability to develop cutting edge technology. However there has been a gap between development and delivery that has resulted in a lacklustre performance.



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March 04 2015

Commentary by Eoin Treacy

The Price of Oil Is About to Blow a Hole in Corporate Accounting

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

The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.

So Continental Resources Inc., led by billionaire Harold Hamm, reported last month that the present value of its oil and gas operations increased 13 percent last year to $22.8 billion. For Devon Energy Corp., a pioneer of hydraulic fracturing, it jumped 31 percent to $27.9 billion.

This year tells a different story. The average price on the first trading days of January, February and March was $51.28 a barrel. That means a lot of pain -- and writedowns -- are in store when drillers’ first-quarter numbers are announced in April and May.

“It has postponed the reckoning,” said Julie Hilt Hannink, head of Energy research at New York-based CFRA, an accounting adviser.

Eoin Treacy's view -

Oil prices have bounced from their January lows but nowhere near enough to alter the average pricing for the year to date.  In fact since the pace of the short-term advance has moderated there is an increasing possibility that the short covering rally is over. This opens up potential for a retest of the low. If oil follows anything like the path natural gas took following its 2008 crash, prices could range for a prolonged period. Such an environment would require some major adjustments by the drilling sector.
 



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February 26 2015

Commentary by Eoin Treacy

Tesla gearing up for release of batteries for the home

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

As the company’s first foray into selling directly to the home Energy storage market, the batteries are expected to get plenty of attention just by virtue of the attached Tesla label. And it should be an improvement from the home batteries Tesla has been quietly supplying to its sister company, the solar panel maker SolarCity, located up the road from Tesla in San Mateo, California. Those batteries are currently available in select markets within California, and only through SolarCity. The new batteries would be more widely available.

Tesla would face plenty of competition for their batteries, with names like Bosch, GE and Samsung involved. Honda has unveiled a demonstration smart home that features a rechargeable home battery, along with an electric vehicle, solar panels and geothermal heat pump, and is driven by an Energy management system.

Researchers from both Harvard and MIT have developed flow batteries for renewable Energy storage, while Bloom Energy’s fuel cell boxes act as a power source as well as an Energy storage device.

One area where Tesla might stand out is in cost. Tesla assembles its battery packs from battery cells provided by Panasonic, and is about to do it on a massive scale as soon as 2016 at its gigafactory currently under construction in Nevada. Such an economy of scale – producing 50 gigawatt-hours of battery capacity each year – is expected to push the company’s car battery costs down by 30 percent. Based on the same technology, Tesla's home battery costs should come down as well.

 

Eoin Treacy's view -

The same efficiency gains observed in how Moore’s Law is applied to semiconductors can also be seen in solar technology. This has changed how companies perceive the growth of the domestic Energy production sector. This requires a much more flexible electric grid and a utility sector that will have to evolve if it is to avoid obsolescence. As the potential to cut one’s personal expenses through the application of technology develop, homebuilders will be happy to see that the benefits of owning a new home equipped with the wide range of modern gadgetry is becoming increasingly convincing. 



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February 25 2015

Commentary by Eoin Treacy

Musings from the Oil Patch February 24th 2015

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

A contributing factor for the weak economic activity in recent years has been countries holding the line on their currencies. That attitude may be changing, which could be good news for Energy demand as currency devaluations are designed to pump up economies. According to a study written by economic historian Barry Eichengreen of the University of California, Berkeley, the countries that were the first to engage in monetary easing, in this case the break with the gold standard, recovered the fastest. In 1931, it was Britain that broke from the gold standard first and the first nation to recover. Today, we are relearning this history.

Since the U.S. was the first country to engage in massive monetary easing in 2008, our economy was the first to recover. As counted by investment bank Evercore ISI, there have been some 514 monetary easing moves by central banks over the past three years. According to Morgan Stanley’s (MS-NYSE) global strategists, there are now 12 central banks around the globe that have recently moved to ease their monetary policies. As this was happening, U.S. monetary authorities are discussing increasing interest rates and in effect becoming the recipient of deflationary pressures driven out by those countries easing their monetary policies. Because China has tied its currency to that of the United States, it will also receive deflation.

The prospect of raising interest rates in the U.S. has led to a strengthening of the dollar, which has been a contributing factor to the fall in oil prices and other commodity prices. As pointed out by the Morgan Stanley analysts, not everyone can be a winner in the currency wars. Therefore, there will be one or more losers, with the U.S. and China on the short end of the stick right now. Given the recent weakening statistics in retail sales, home building and now certain regional manufacturing data in the U.S., one wonders whether the Federal Reserve will not hike interest rates this year as broadly expected. We are also seeing moves by the Chinese government to ease its monetary policy to help bolster its local and regional governments and their banks to offset the flow of currency out of the country. Being tied to the U.S. dollar, the renmimbi has had an upward bias as the dollar has strengthened. That trend induced Chinese companies to borrow outside of the country expecting to be able to pay off the loans with cheaper local currency. Now, the renmimbi continues to weaken within a very tight band in response to the currency outflows. China monetary authorities struggle with whether to weaken its currency and stimulate economic growth, but that move runs the risk of leading to an increase in corporate bankruptcies. Is it possible that we could soon see every country engaged in monetary easing trying to promote its own economic self-interest? What would that mean for future Energy demand and oil prices?

 

Eoin Treacy's view -

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

Japan’s decision to embark on broad based monetary easing in order to kick start inflation in its economy was the catalyst for the competitive devaluation we now see just about everywhere. Various international currency agreements such as Bretton Woods I and II or the Plaza Accord eventually run their course and a rebalancing occurs as one country or another seeks an advantage. Eventually the process is taken to extremes, which creates the conditions necessary to encourage governments to agree to support multilateral intervention. We are still a long way from such a move. 



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February 19 2015

Commentary by Eoin Treacy

Leslie and Mark's Old/New Idea

This article by Josh Freed for the Brookings Institute is a balanced exposition of the state of the global nuclear sector and may be of interest to subscribers:

There are American political leaders in both parties who talk about having an “all of the above” Energy policy, implying that they want to build everything, all at once. But they don’t mean it, at least not really. In this country, we don’t need all of the above—virtually every American has access to electric power. We don’t want it—we have largely stopped building coal as well as nuclear plants, even though we could. And we don’t underwrite it—the public is generally opposed to the government being in the business of Energy research, development, and demonstration (aka, RD&D).

In China, when they talk of “all of the above,” they do mean it. With hundreds of millions of Chinese living without electricity and a billion more demanding ever-increasing amounts of power, China is funding, building, and running every power project that they possibly can. This includes the nuclear sector, where they have about 29 big new light water reactors under construction. China is particularly keen on finding non-emitting forms of electricity, both to address climate change and, more urgently for them, to help slow the emissions of the conventional pollutants that are choking their cities in smog and literally killing their citizens.

Since (for better or for worse) China isn’t hung up on safety regulation, and there is zero threat of legal challenge to nuclear projects, plans can be realized much more quickly than in the West. That means that there are not only dozens of light water reactor plants going up in China, but also a lot of work on experimental reactors with advanced nuclear designs—like those being developed by General Atomic and TerraPower.

Eoin Treacy's view -

There are exciting things happening in the nuclear sector at present as technology catches up with the early aspirations of the industry in the decade following World War II. However, while computer modelling and mathematical work is relatively cheap, building test reactors and overcoming the necessary regulatory hurdles is expensive and beyond the scope of the even the best funded start up. 

The reality is that with cheap oil and gas the USA just does not have the incentive to drive the next stage of nuclear research. China and India need the technology. The pace with which they are polluting their cities is unsustainable and represents a growing headwind to the development of the services and knowledge based economies that will further their development goals. As a result they have a great incentive to explore any technology that can deliver a semblance of Energy independence. 

 



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February 19 2015

Commentary by Eoin Treacy

Shale Giant Says U.S. Output Will Fall This Year on Big Cuts

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

U.S. oil production is set to fall this year as drastic drilling cutbacks take hold faster than world governments expected, according to the biggest, fastest-growing shale company.
EOG Resources Inc.’s forecast contradicts most estimates that see U.S. production rising, including those by the U.S. Energy Information Administration and the International Energy Agency. The company said the crude market would rebound quickly and labeled the current downturn a “short cycle.”

The Texas producer said its own production would bottom in the second and third quarter, resulting in output remaining unchanged for the year compared to last year’s breakneck pace of growth. The deciding factor in what has been viewed as a price war with Saudi Arabia and its OPEC allies is how many of the thousands of U.S. producers will follow suit.
“EOG is viewed as the premier company in shale development, and if they’re not going to grow, it is a very important signal to the market,” said Michael Scialla, a Denver-based analyst at Stifel Nicolaus & Co. “The argument that this slowdown is going to take a while to have an impact on supply is completely wrong.”

And 

Noble Energy Inc., Devon Energy Corp. and Marathon Oil Corp., three other companies with significant shale operations, said they will boost output this year. More than half of Devon’s 2015 oil production is hedged at a price of $90.75 a barrel. Apache Corp. plans to pump about the same volume of oil as last year.

 

Eoin Treacy's view -

The mechanics of unconventional oil and gas wells means that supply growth is not possible without constant drilling of new wells to make up for the early peak in production from older ones. It is for this reason that the Baker Hughes Rig Count has become such a focus of attention as prices fell. In a low oil price environment, at least relative to that seen early last year, unhedged producers have little choice but to cut back on expansion plans. Those that have hedged have secure cash flow, provided their counterparties are solvent, so they will be under less pressure to cut.



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February 18 2015

Commentary by David Fuller

Many fed Officials Were Inclined to Keep Zero Rates Longer

Here is the opening of this topical and important subject, reported by Bloomberg:

(Bloomberg) -- Federal Reserve policy makers judged that risks facing the U.S. economy argued for keeping interest rates near record lows for longer, minutes of their most recent policy meeting showed.

“Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time,” according to a record of the Jan. 27-28 Federal Open Market Committee meeting released on Wednesday in Washington.

The committee, while considering risks to be “nearly balanced,” pointed to a strengthening dollar, international flash points from Greece to Ukraine, and slow wage growth as weakening the case for the first rate rise since 2006.

The FOMC said after its last meeting it “can be patient” as it considers when to raise the benchmark interest rate, even as it described the labor market as “strong.” A report the following week showed payrolls rose more than forecast in January to cap the strongest three-month gain in 17 years.

Stocks pared losses and Treasuries rose after the report. The Standard & Poor’s 500 Index was down less than 0.1 percent to 2,098.96 at 2:03 p.m. in New York. The yield on the 10-year Treasury note fell five basis points, or 0.05 percentage point, to 2.09 percent.

Members of the committee discussed their communication strategy at length.

“Many participants regarded dropping the ‘patient’ language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates,” the minutes said. “Some expressed the concern that financial markets might overreact.”

David Fuller's view -

I think they are right to delay a rate hike.  The Dollar’s strong rise since last July is already a headwind for US exporters, at a time when the previously robust Energy sector is weakening due to the slump in oil prices.  Moreover, the global economy is still soft.  There will be plenty of time to lift rates closer to yearend or in 1Q 2016, assuming the economy remains steady, before the next US presidential election campaign is fully underway.  



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February 18 2015

Commentary by David Fuller

Disruptive Technologies: Advances That Will Transform Life, Business, and the Global Economy

My thanks to a subscriber for this terrific report from McKinsey Global Institute.  Here is a brief portion of the Executive summary:

Today, we see many rapidly evolving, potentially transformative technologies on the horizon—spanning information technologies, biological sciences, material science, Energy, and other fields. The McKinsey Global Institute set out to identify which of these technologies could have massive, economically disruptive impact between now and 2025. We also sought to understand how these technologies could change our world and how leaders of businesses and other institutions should respond. Our goal is not to predict the future, but rather to use a structured analysis to sort through the technologies with the potential to transform and disrupt in the next decade or two, and to assess potential impact based on what we can know today, and put these promising technologies in a useful perspective. We offer this work as a guide for leaders to anticipate the coming opportunities and changes.

IDENTIFYING THE TECHNOLOGIES THAT MATTER

The noise about the next big thing can make it difficult to identify which technologies truly matter. Here we attempt to sort through the many claims to identify the technologies that have the greatest potential to drive substantial economic impact and disruption by 2025 and to identify which potential impacts leaders should know about. Important technologies can come in any field or emerge from any scientific discipline, but they share four characteristics: high rate of technology change, broad potential scope of impact, large economic value that could be affected, and substantial potential for disruptive economic impact. Many technologies have the potential to meet these criteria eventually, but leaders need to focus on technologies with potential impact that is near enough at hand to be meaningfully anticipated and prepared for. Therefore, we focused on technologies that we believe have significant potential to drive economic impact and disruption by 2025.

David Fuller's view -

This report is posted in the Subscribers' Area.

McKinsey’s Report is an excellent primer for anyone interested in knowing more about technology. It is also a good introduction to David Brown’s presentation: The Third Industrial Revolution.  I have seen it and cannot wait to hear the discussion next Monday.   



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February 18 2015

Commentary by Eoin Treacy

Portland to generate electricity within its own water pipes

This article by Ben Coxworth for Gizmag may be of interest to subscribers. Here is a section: 

LucidPipe simply replaces a stretch of existing gravity-fed conventional pipeline, that's used for transporting potable water. As the water flows through, it spins four 42-inch (107-cm) turbines, each one of which is hooked up to a generator on the outside of the pipe. The presence of the turbines reportedly doesn't slow the water's flow rate significantly, so there's virtually no impact on pipeline efficiency.

The 200-kW Portland system was privately financed by Harbourton Alternative Energy, and its installation was completed late last December. It's now undergoing reliability and efficiency testing, which includes checking that its sensors and smart control system are working properly. It's scheduled to begin full capacity power generation by March.

Eoin Treacy's view -

This represents an innovative idea but is just one example of how technological innovation is enhancing productivity. LucidPipe is privately held but the video on their homepage is worth watching just for the sheer simplicity of the concept and the benefit that accretes to the user of the technology. 



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February 17 2015

Commentary by Eoin Treacy

Fiery Oil-Train Crash Probed by U.S. Rail, Pipeline Regulators

This article by Nancy Moran and Edward Dufner for Bloomberg may be of interest to subscribers. Here is a section: 

The draft rule also would require that new cars be built with steel shells that are 9/16th of an inch thick, people familiar with the plan said. The walls of the current cars, both DOT-111s and the newer CPC-1232 models, are 7/16th of an inch thick.

Monday’s derailment was the second in three days in North America. Canadian National Railway Co. shut its main line linking western and eastern Canada after an eastbound train carrying crude oil came off the tracks in Ontario.

The train of 100 cars, all carrying crude from Canada’s oil-producing region of Alberta to eastern Canada, derailed just before midnight Saturday in a remote and wooded area about 30 miles (48 kilometers) north of Gogama, Ontario, spokesman Patrick Waldron said in an e-mail.

 

Eoin Treacy's view -

There is still a great deal of opposition to building additional pipeline infrastructure in the USA, not least the Keystone project. However, considering the economic benefits of increasing domestic supply the product will find its way to market one way or another. The growth of shale-by-rail has been the primary response to the lack on Energy infrastructure serving North Dakota in particular.  This is regardless of the fact that trains carrying such large heavy cargoes run a higher risk of derailing. It is only a matter of time before the sector is more heavily regulated suggesting demand for new upgraded railcars is likely to increase. 



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February 16 2015

Commentary by Eoin Treacy

Is That All There Is? A Fresh Look At U.S. Gas/LNG Export Potential

Thanks to a subscriber for this article by Housley Carr for RBN Energy. Here is a section:  

Exports of U.S.-sourced natural gas as liquefied natural gas (LNG) will likely begin within a year’s time, and will ramp up through the 2016-19 period. That much seems certain. What’s less clear is whether the capacity of U.S. liquefaction/export projects will plateau at the roughly 6 Bcf/d in the “First Four” projects now under construction or continue rising higher. Yesterday’s decision by the BG Group to delay its commitment to the 2 Bcf/d capacity of the Lake Charles LNG terminal until 2016 certainly casts doubts on those further expansions. Prospects for additional export projects hinge on a few interrelated factors, including the higher capital costs associated with some next-round projects; the costs and challenges of shipping LNG through the expanded Panama Canal; and the possibility of competing LNG export projects being developed elsewhere, including western Canada. Today we consider these factors and handicap the handful of export projects on the cusp of advancing.

Making a final investment decision (FID) on multibillion-dollar liquefaction and export projects is not for the faint of heart. Once that FID trigger is pulled, there’s really no turning back. But the decision to build a project is in many ways easier than the decision by a Japanese utility or global LNG trader to commit to 15 or 20 years of LNG purchases. After all, if (as has been the case with all U.S. liquefaction/export projects so far) the project’s economics are based largely on long-term take-or-pay liquefaction commitments, the developer is basically assured of recovering the costs of its investment (and making at least some profit) once it has the necessary Sales and Purchase Agreements (SPAs), even if the LNG buyer elects not to use all the liquefaction capacity it has lined up.

An LNG buyer, on the other hand, is committing to pay up to $3.50/MMBTU for liquefaction capacity and—if, as is likely, it uses that capacity--115% of the Henry Hub price of natural gas for the gas that is liquefied. As a result, prospective LNG buyers need to be very sure that any SPA they enter into will work to their benefit over a wide range of possible scenarios, including the possibility (and current reality) of low oil prices that make once-onerous oil-indexed LNG contracts look not so bad anymore.  As we said in Episode 1, the first liquefaction “train” at Cheniere Energy’s Sabine Pass facility in southwestern Louisiana by early 2016 will be supercooling natural gas and loading LNG onto ships for export to Asia and other markets. Three more trains at Sabine Pass will start operating later in 2016 and in 2017, and soon thereafter the Cameron LNG, Freeport LNG and Cove Point LNG liquefaction/export facilities (a total of six more trains) will be up and running too. The LNG production capacity of what we call the First Four (four trains at Sabine Pass, three at Cameron, two at Freeport and one at Cove Point) totals 45 million tons per annum (MTPA)—enough to consume just over 6 Bcf/d of U.S.-sourced natural gas, or about one-twelfth of current U.S. gas production.

 

Eoin Treacy's view -

As a result of the fall in oil prices investment in Energy infrastructure is on hold at best. The decline has upended the growth assumptions of major oil and gas companies with the result they will likely need to see evidence of bottoming before they commit to major expenditure once more.  For Asia the fall in Energy prices is good news for some of the world’s largest importers i.e. China, Japan and India while it is a mixed blessing for countries such as Indonesia and Thailand. 
 

 



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February 13 2015

Commentary by Eoin Treacy

The Big Picture and the Autonomies

Eoin Treacy's view -

It was a great pleasure to meet so many subscribers in London earlier this week while speaking with potential investors in the FP WM Global Corporate Autonomies Fund. I thought subscribers might be interested in the presentation I prepared for the talk at the East India Club on Tuesday which includes some slides I had not used previously such as how population decreases as incomes increase. 

The base case for the Autonomies is that there are three main themes evolving that have exciting potential to drive a secular bull market in equities. These are the rise of the global middle class, where improving standards of governance is acting as an enabler. The exponential pace of technological development and the potential for collaboration to increase innovation is another. Meanwhile the revolution in Energy not least unconventional oil and gas as well as solar is the third. As truly global companies that dominate their respective niches, the Autonomies remain well placed to benefit from these themes.

If you have any questions please contact Chris Moore at [email protected]

Here also is a link to a post on the Autonomies and here is a link to the fund brochure

It was also a pleasure to meet with a number of journalists. I took the opportunity to ask the inestimable Merryn Somerset Web at Moneyweek, a Japan veteran, what her interpretation of its QE program is? 
 

 



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February 13 2015

Commentary by Eoin Treacy

Musings From the Oil Patch February 10th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. Here is a section on the Baker Hughes rig count:

Another week and another huge drop in the Baker Hughes oil-directed drilling rig count. The speed with which the rig count is dropping has encouraged forecasters to translate the decline into an immediate fall in oil output. The focus of analysts has been on the oil rig decline since the world is absorbed with determining when either Saudi Arabia cuts its production to boost global oil prices from current levels or the American shale industry cuts back drilling sufficiently that the natural decline rate of shale wells eliminates the existing oil surplus.

The chart of the count of active oil drilling rigs since the turn of the century shows an almost vertical decline in recent weeks. The angle of this oil rig decline is sharper than occurred in the 2008-2009. On the surface, this picture would support the view of a rapid decline in new oil production. Below the surface there may be some variances in the pace of decline of the various drilling rig types that could moderate the optimism of a quick production reaction.

In Exhibit 21 we plotted the change in the weekly rig count since Thanksgiving by whether the rigs were drilling directional, horizontal or vertical wells. In the first couple of weeks, there seemed to be little or no reaction to the start of the collapse of oil prices following the Thanksgiving Day meeting of the Organization of Petroleum Exporting Countries (OPEC) at which the members agreed to sustain the organization’s 30-million-barrel a day production level. The announcement of that decision caused one of the largest one-day drops in global oil prices and started the industry on the slide into its current recession.

 

Eoin Treacy's view -

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

The Energy sector has experienced a sharp decline as oil prices fell and as expansion plans were cancelled or at least re-evaluated. The Baker Hughes rig count offers a representation of just how quick the response to falling oil prices has been. Having cut back on expansion, drillers will now be watching for signs of oil prices stabilising before committing to additional expenditure. 



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February 12 2015

Commentary by David Fuller

Want Conservatives to Save Energy? Stop the Environmentalist Preaching

Indeed, one company in the behavioral space, Simple Energy in Boulder, Colo. – an Opower rival – is examining political beliefs as just one factor out of many that may shape how people perceive Energy messages. CEO and founder Yoav Lurie says his company has found, for instance, that terminology matters. “Liberal respondents tended to resonate well with the term ‘save Energy,’ where conservative households resonated better with the term ‘waste less Energy,’” he notes.

“It turns out that ‘waste less’ works in liberal households as well,” Lurie adds, “so you might just change that message to ‘waste less.’”

He emphasizes that his company is not selectively messaging to different consumers based on ideology, but it could be a potential way to reach people. When it comes to the message, Lurie says, “the thing we care about most is how it’s received.”

In the end, then, perhaps the best way to think about ideology and Energy use is this: Nobody is against efficiency or lower bills. Nobody is for waste. Nobody hates the environment.

But environmental and Energy issues are nevertheless wrapped up in politics, which makes conservation, overall, less of a “safe” space for conservatives, according to Renee Lertzman, who works with Brand Cool as Director of Insight and is a consultant on climate change communications. Conservatives often feel “ambivalent” about the topic, she says, pulled in different directions — and liberal assumptions don’t help.

“A lot of people I interviewed felt very offended that they were often assumed to be not caring, they felt very insulted and patronized, because of their choices, and I really felt for that,” Lertzman says. “I felt, it would be so important to convey to people, we know you really do care. And that itself, as a starting off point, would be very powerful.”

David Fuller's view -

For me, this is all about emotional intelligence, which is incredibly important in so many aspects of life, although it is too often misunderstood and therefore seldom taught.  



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February 11 2015

Commentary by David Fuller

What Apple Just Did in Solar Is a Really Big Deal

Here is the opening of this topical article from Bloomberg:

It was a year ago this week that Apple Chief Executive Officer Tim Cook responded to a climate-change heckler at the company's annual shareholder meeting with an impassioned rebuttal in which he famously told investors who care only about profits to "get out of the stock."

Now Cook is putting his prodigious sums of money where his mouth is, proclaiming the “biggest, boldest and most ambitious project ever,” an $850 million agreement to buy solar power from First Solar, the biggest U.S. developer of solar farms. The deal will supply enough electricity to power all of Apple’s California stores, offices, headquarters and a data center, Cook said Tuesday at the Goldman Sachs technology conference in San Francisco.

It’s the biggest-ever solar procurement deal for a company that isn't a utility, and it nearly triples Apple’s stake in solar, according to an analysis by Bloomberg New Energy Finance (BNEF). “The investment amount is enormous,” said Michel Di Capua, head of North American research at BNEF. “This is a really big deal.”

David Fuller's view -

Iconic Apple can only increase US and also global interest in solar power.  It remains far more flexible and adaptable in terms of instillations than any other source of electricity.  It also has more scope for lower costs because solar benefits more from technological progress than any other source of power.



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February 04 2015

Commentary by David Fuller

Iain Little: Oh Dear, An Odey Idea

My thanks to the author for his ever-interesting Fund Manager’s Diary.  Here is the opening:

I first met Crispin Odey in 1980. We were poorly paid, poorly fed company analysts in the City and in those floppy-haired, blue-sky days, Crispin and I followed the fortunes of the UK’s electronics companies, Crispin for Framlington, I for Kleinwort Benson. Crispin delivered questions to management with a courtly elegance that belied a passion for getting to the bottom of things, particularly if he suspected chicanery. I remember a precocious understanding of how companies really worked: top line, bottom line, margins, moats, management. Despite media puff, analysts who think with true originality about what makes companies tick are rare in the City (Terry Smith of Fundsmith is one).

The art of knowing a good fund is the art of knowing a good man.  So in the early ‘90s I backed Crispin with client money when he went independent with his European hedge fund.  My clients and I remember a volatile ride with some picturesque detours.  One year, Crispin assumed that knowledge of European equity markets perfectly equipped him to judge the West African cocoa market.  My clients were treated to a Six Flags roller-coaster, hefty drawdowns and the nearest thing to an apology I’ve read in 35 years in the industry.  Crispin began his client confessional with some TS Eliot poetry: “I should have been a pair of ragged claws / Scuttling across the floors of silent seas”.  It didn’t bring the money back, at least not that year, but it made Crispin a lot of friends.

In an industry filled with helmet-wearing piste-huggers, Crispin has skied off-piste like few others.  He has gone on to manage USD 12bn of other peoples’ money, and has made a considerable fortune.  I went on to graze in the quieter pastures of the private client world and immerse myself in the fascinating challenge of explaining a sometimes impenetrable and always mischievous world to families, clients and friends, a quest that continues to this day.

So when I read this week that Crispin has written that "Equities Will Be Devastated", I sat up.  It is so far from what we believe most likely (a humdrum and extended global recovery supported by technological breakthroughs, cheaper Energy and negligible interest rates).  Most chillingly, we are part of the very consensus that Crispin decries.  Crispin’s warnings could script a Hollywood disaster movie.  Here are clips.

David Fuller's view -

No forecast from a highly experienced fund manager should be dismissed lightly.  Nevertheless, when I read the clips from Crispin Odey’s Letter that Iain Little reproduced, I was far from convinced.  I also recalled remarks from other commentators who have said: “This is the most unloved bull market in history.” 

This item continues in the Subscribers’ Area, where Iain Little’s Letter is also posted.

 



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February 04 2015

Commentary by Eoin Treacy

Petrobras Top Management Resigns in Brazil Corruption Case

This article by Sabrina Valle, Denyse Godoy and Paula Sambo for Bloomberg may be of interest to subscribers. Here is a section: 

“With low oil prices and Petrobras’s financial difficulties, the incentives to lean more on international oil companies to help develop the pre-salt have grown substantially,” the Eurasia analysts wrote about the company’s offshore discoveries. “It is clear that any substitute to Graca is likely to be someone with industry credentials and capable of conducting a ‘house cleaning’ of the firm.”

The scandal has also engulfed Brazil’s largest construction companies, which may bring public works projects to a halt, and threatens the presidency of Dilma Rousseff, who served as Petrobras chairman during some of the time when the alleged graft was occurring.

Foster, a frequent guest at the presidential palace in Brasilia, had offered to resign “one, two, three times” after the company was forced to delay quarterly results because of the scandal, she told reporters on Dec. 17. Foster said then that she would stay in the job as long as the president trusted her.

Rousseff has been a personal friend since the two worked together at the Ministry of Mines and Energy in 2003.

Eoin Treacy's view -

An issue faced by many nationalised industries is that they become subject to the avarice of their politically appointed boards as well as rent seeking public officials. For Petrobras this was particularly poignant since the President of Brazil is a former executive. In the run up to the October election Petrobras rallied in anticipation of Dilma Rousseff losing. Unfortunately for shareholders she won and the additional decline in oil prices contributed to the share more than halving from what was already a depressed level. 



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February 03 2015

Commentary by David Fuller

U.S. Stocks Advance as Energy Rally Extends to Broader Market

Here is the opening of this report from Bloomberg:

(Bloomberg) -- U.S. stocks rallied for a second day, rebounding from the biggest monthly drop in a year for the Standard & Poor’s 500 Index, as a four-day rally in Energy stocks spread to the broader market.

Exxon Mobil Corp. and Chevron Corp. climbed more than 2.6 percent as Brent crude entered a bull market. Freeport-McMoRan Inc. rose 9.1 percent as commodities had the biggest three-day advance since 2012. Office Depot Inc. jumped 22 percent after the Wall Street Journal reported the company is in advanced merger talks with Staples Inc.

The S&P 500 added 1.2 percent to 2,045.13 at 3:23 p.m. in New York, climbing above its average level for the past 50 days. The Dow Jones Industrial Average rose 277.24 points, or 1.6 percent, to 17,638.28. That gauge is up 2.8 percent over two days. Trading in S&P 500 companies was 32 percent above the 30-day average.

“The fact that oil is stabilizing takes some edge off the argument that the global economy is really in trouble,” Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion, said in a phone interview. “The markets are a little oversold after being down in January, which is also part of the strength today.”

David Fuller's view -

Given the US stock market’s size it remains a big influence on equity trends in other parts of the world.  Consequently, few investors can afford to overlook market developments on Wall Street, where the technical action has been nervous since October 2014.  It has also been ranging in a volatile fashion so the next sustained breakout is likely to be important – up or down.   

This item continues in the Subscribers’ Area.



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February 02 2015

Commentary by Eoin Treacy

Oil Bears Miss Biggest Rally Since 2012 as Rigs Withdraw

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

The United Steelworkers union, which represents employees at more than 200 U.S. oil refineries, terminals, pipelines and chemical plants, began a strike at nine sites on Sunday, the biggest walkout called since 1980. A full walkout of USW workers would threaten to disrupt as much as 64 percent of U.S. fuel production.

The U.S. oil rig count dropped to a three-year low of 1,223, Baker Hughes said Jan. 30. Drillers idled 352 oil rigs in eight weeks.

Royal Dutch Shell Plc, Occidental Petroleum Corp. and ConocoPhillips alone said they would reduce spending by almost $10 billion this year.

Chevron Corp. cut its drilling budget by the most in 12 years and said it may delay some shale projects. The company is targeting $35 billion in capital projects this year, from $40.3 billion in 2014.

“Oil production growth should be flat or declining by May or June unless there’s some substantial recovery in oil prices,” James Williams, an economist at WTRG Economics, an Energy-research firm in London, Arkansas, said by phone Jan. 30.

 

Eoin Treacy's view -

Falling prices necessitate that those heavily impacted by the decline act. Oil companies cutting investment is an expected response and they will be slow to ramp back up now that they have relearned how swiftly prices can fall when supply exceeds demand. Striking union workers introduces a fresh dynamic and could act as a bullish catalyst if they succeed in withholding supply from the market. 

Brent Crude rallied by an additional $1.80 today to take the bounce to almost $10 from the mid- January low. This is the largest rally since the onset of the decline in June and suggests short covering is underway. Considering the speed and depth of the decline there is ample room for mean reversion and an unwind of the short-term oversold condition. However once this rally has run its course a potentially lengthy period of support building will probably be required before a return to medium-term demand dominance will be in evidence.  

 



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January 30 2015

Commentary by David Fuller

U.S. Economy Expanded Less Than Forecast in Fourth Quarter

(Bloomberg) -- The economy in the U.S. expanded at a slower pace than forecast in the fourth quarter as cooling business investment, a slump in government outlays and a widening trade gap took some of the luster off the biggest gain in consumer spending in almost nine years.

Gross domestic product grew at a 2.6 percent annualized rate after a 5 percent gain in the third quarter that was the fastest since 2003, Commerce Department figures showed Friday in Washington. The median forecast of 85 economists surveyed by Bloomberg called for a 3 percent advance. Consumer spending, which accounts for almost 70 percent of the economy, climbed 4.3 percent, more than projected.

Swept up by the cheapest gasoline in years and the biggest employment increase since 1999, households are gaining the confidence to spend more freely, which will bolster the odds the world’s biggest economy can escape a global slowdown unscathed. Engaged consumers will help ensure that most American employers will look to expand, even as the decline in oil hurts companies such as Caterpillar Inc.

The expansion last quarter was “all about a solid consumer performance,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who correctly forecast the fourth-quarter growth rate. “Overall, the number has returned to trend growth after a couple of really hot quarters.”

David Fuller's view -

The US consumer is in better shape with the help of higher employment, some wage increases and cheaper gasoline.  However, the US Dollar Index’s sharp rise remains a headwind for the profits of US multinational companies.  More seriously, a sharp slowdown in the domestic Energy sector, particularly regarding fracking, will weigh on 1Q GDP growth, and probably beyond. 

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January 30 2015

Commentary by David Fuller

Cheap Oil Burns $390 Billion Hole in Pockets of Investors

Here is the opening of this topical article from Bloomberg:

(Bloomberg) -- Investors have a message for suffering U.S. oil drillers: We feel your pain.

They’ve pumped more than $1.4 trillion into the oil and gas industry the past five years as oil prices averaged more than $91 a barrel. The cash infusion helped push U.S. crude production to the highest in more than 30 years, according to data compiled by Bloomberg.

Now that oil prices have fallen below $46, any euphoria over cheaper Energy will be tempered by losses that are starting to show up in investment funds, retirement accounts and bank balance sheets. The bear market has wiped out a total of $393 billion since June -- $353 billion from the shares of 76 companies in the Bloomberg Intelligence North America Exploration & Production index, and almost $40 billion from high-yield Energy bonds, issued by many shale drillers, according to a Bloomberg index.

“The only thing people are noticing now is that gas prices are dropping,” said Sean Wheeler, the Houston-based co-chairman of the oil and gas industry team for law firm Latham & Watkins LLP. “People haven’t noticed yet that it’s also hitting their portfolios.”

The money flowing into oil and gas companies around the world in the last five years came from a variety of sources. The industry completed $286 billion in joint ventures, investments and spinoffs, raised $353 billion in initial public offerings and follow-on share sales, and borrowed $786 billion in bonds and loans.

David Fuller's view -

This has been weighing on Wall Street’s performance recently.  However, a further technical rally in oil prices, of which we saw the first evidence today (see charts above) would reduce concerns.   



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January 30 2015

Commentary by David Fuller

Seven Reasons Cheap Oil Cannot Stop Renewables Now

Here is the opening of this interesting, somewhat controversial article from Bloomberg:

Oil prices have fallen by more than half since July. Just five years ago, such a plunge in fossil fuels would have put the renewable-Energy industry on bankruptcy watch. Today: Meh.

Here are seven reasons why humanity’s transition to cleaner Energy won’t be sidetracked by cheap oil.

1. The Sun Doesn't Compete With Oil

Oil is for cars; renewables are for electricity. The two don’t really compete. Oil is just too expensive to power the grid, even with prices well below $50 a barrel.

Instead, solar competes with coal, natural gas, hydro, and nuclear power. Solar, the newest to the mix, makes up less than 1 percent of the electricity market today but will be the world’s biggest single source by 2050, according to the International Energy Agency. Demand is so strong that the biggest limit to installations this year may be the availability of panels

“You couldn’t kill solar now if you wanted to,” says Jenny Chase, the lead solar analyst with Bloomberg New Energy Finance in London.

David Fuller's view -

This is a good article, even if it does lose its focus, in my opinion, in the last two paragraphs.  It also contains some helpful graphics.

In particular, look at the third point.  Here is a key sentence on solar: “It’s a technology, not a fuel.”  This is certainly true and solar is fast on its way to becoming the dominant technology in the Energy field.  



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January 30 2015

Commentary by Eoin Treacy

Musings From the Oil Patch January 30th 2015

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

What is most interesting is the consistency in long-term demand growth since 1989. As shown on the chart, for the decade 1989-1999, demand grew on average by 900,000 barrels a day. For the overlapping decade of 1994-2004, average demand grew 50% faster, or an average rate of increase of 1.45 million barrels a day. That period was marked by 2004’s dramatic increase along with healthy growth during the last half of the 1990’s. When we calculated the average demand growth for 2000-2014, it was at an annual average rate of 950,000 barrels a day. This means that last year’s demand grew by only two-thirds of the historical growth rate. This year’s growth will come close to matching the long-term average, however, that forecast was made before the International Monetary Fund (IMF) cut its global economic growth estimates for 2015 and 2016 by 0.3 percentage points, respectively. The problem is that if industry planners were anticipating growth more like that experienced over the 1994-2004 decade, then demand is falling well short of expectations. What we know about this year’s Energy demand forecast is that it will continue to be buffeted by the cross-currents from the demand stimulus as a result of lower oil prices and reduced economically-driven demand from around the world.

In our view, much of the world’s Energy business for the past decade has been driven by an extrapolation of the demand trends established in 1994-2004. The financial crisis and recessionary period presented a brief interruption in that healthy growth trend. Population growth, rising living standards and cheap capital, curtesy of easy monetary policies around the world, stimulated significant growth in oil drilling and production that contributed to the current supply growth. Lack of demand continues to play a greater role in the weak oil prices of today than many are willing to acknowledge. That imbalance between demand and supply is not particularly large – maybe 1.5 million barrels a day, although supply is growing while demand is lagging. Saudi Arabia knows it needs a healthy global economy to spur long-term oil demand growth and thus lift global oil prices. How long will it take to re-establish this growth? Saudi Arabia said it was prepared to live with low oil price for up to two years. Fundamentals, however, should shorten that time frame.

Eoin Treacy's view -

A link to the full report is posted in the subscriber's Area,

A 60% cut in the price of oil will reignite demand growth. However prices will not rebound in any meaningful way until demand has recovered sufficiently and supply has been pared back so that the market returns to relative equilibrium before reversing. The motives of the Saudi Arabians in holding production steady in a supply dominated environment will be cause of continued debate but until they decide to alter their strategy the market will be susceptible to weakness.  

As with any major decline analysts tend to extrapolate the trend and become progressively more bearish as prices fall.  However where oil finds support will be heavily influenced by the ability of shale oil producers to sustain production at lower prices.



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January 29 2015

Commentary by David Fuller

Five Hours and $20 Billion in Cuts: Big Oil Goes Long

The first major oil companies to report earnings amid the worst oil crash since 2009 all pledged to protect shareholder payouts even as they announced more than $20 billion in spending cuts in a span of five hours.

By preserving and even increasing dividends, Energy companies are attempting to keep investors on board while they wait for oil and natural gas prices to rebound to more profitable levels. Producers, meanwhile, are choosing to cut drilling programs and workforces to weather a downturn that could extend for years.

Royal Dutch Shell Plc, Occidental Petroleum Corp. and ConocoPhillips pledged to slash spending by almost $10 billion this year alone -- enough to drill more than 1,400 shale wells. The risk: cannibalizing budgets to feed cash to shareholders may leave companies with reserves too anemic to fuel future output, said Timothy Doubek, who helps manage $26 billion in corporate debt at Columbia Management Advisors.

“It’s a pretty impressive ax they’re taking to their drilling budgets, but when the stock is down 30 or 50 percent, what are they trying to protect by preserving dividends?” Doubek said in a telephone interview from Minneapolis. “You’re protecting a stock price that can’t be protected. Why don’t you keep as much cash as possible so you can be the first one to take advantage when assets go up for sale?”

Shell, Occidental and ConocoPhillips handed over more than $17 billion in dividends to shareholders last year, according to data compiled by Bloomberg. For the full year, Shell and ConocoPhillips paid out $11.8 billion and $3.5 billion, respectively. Occidental’s dividend bill for the first nine months of 2014 was $1.69 billion; the company hasn’t yet disclosed its fourth-quarter payout.

David Fuller's view -

The big international oil companies have long-term institutional investors who prize the shares mainly for their attractive dividends.  For that reason alone, the decision to hold payouts while slashing some now marginal projects makes sense to me.  It will be a different story if Brent crude oil is still trading below $50 a barrel a year from now.  Note: a slight loss of downside momentum is evident but there have been no upward dynamics to date.

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January 29 2015

Commentary by David Fuller

Deepak Lalwani: India Report

My thanks to the author for his informative letter, and here is a section:

What do India and the US bring to the table and why do they both wish to form a strategic partnership? For the US, India's size, location, fast growing economy and being the world's largest democracy offers much potential. Especially when Europe is facing economic, political and monetary problems, the Middle East faces continual challenges of embracing democracy and a rising China's military and territorial claims are causing concern. The US views India as a huge market and a potential counterweight in Asia to an increasingly more assertive China. But the US has been frustrated with the slow pace of New Delhi's economic reforms, inability to slash bureaucracy and make doing business in India much easier and a reluctance to support Washington in international affairs. The US is keen to expand ties in business, defence, civil nuclear contracts and counter-terrorism. For India, as it moves away from Soviet legacy institutions under Modi, the US represents a huge business market, a major source of badly needed investments into India to lift economic growth and a global superpower that could help with a permanent seat on the UN Security Council.

Obama's visit ended on a very upbeat note for both countries. The markets should view the trip as being very fruitful. The two leaders announced plans to unlock billions of dollars in nuclear trade and to deepen defence and counter-terrorism ties and knowledge. Of particular importance was an agreement on two issues that has stopped US companies from setting up nuclear reactors in India and had become a major irritant in bilateral relations. A 10-year framework for defence ties and deals on co-operation for the production of drone aircraft and equipment for C-130 transport planes was agreed. A $4bn US investment to expand trade and business with India was announced. Other deals ranged from financing initiatives to help India use renewable Energy to lower carbon intensity. An Obama-Modi hotline - India's first at leadership level- was agreed. Overall, a very positive path. The crucial part will be if the untapped potential of a US-India strategic partnership can be unlocked. If so, it will be a huge win-win for both countries.

David Fuller's view -

These are important points, with which I strongly agree.  No other country has the potential to contribute more to India’s future GDP growth than the USA.  America has a strong ally in Japan but another one would be very useful.  Technology projects between the US and India would be fruitful for both countries.  Additionally, if the US can hasten India’s economic development, it could be an increasingly powerful ally, with an unlimited and increasingly skilled labour force. 

Now if only the US played cricket…

The India Report is posted in the Subscribers' Area, with an additional comment.



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January 29 2015

Commentary by Eoin Treacy

RBA Rate-Cut Pressure Builds as Global Easing Wave Sweeps Closer

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

“The key driver for these central banks is increasing downside risks to global inflation and growth,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “Canada talked about an insurance cut and pointed at Energy, you substitute that in Australia for iron ore and dairy in New Zealand. It’s no coincidence that the commodity nations’ central banks are shifting rapidly in policy assessments.”

Traders are pricing in a 53 percent chance the RBA board will ease by a quarter percentage point at its first meeting of the year Feb. 3, according to swaps data compiled by Bloomberg.

The chance fell to 15 percent Jan. 28 after a report showed faster-than-forecast core inflation in the fourth quarter. The RBA has stood pat at a record-low 2.5 percent since August 2013.

A columnist in Australia’s biggest selling daily newspaper wrote overnight that the Reserve Bank of Australia will cut both its growth and inflation forecasts in its Statement on Monetary Policy to be released Feb. 6, without citing anyone. Terry McCrann predicted that Governor Glenn Stevens will lower rates by a percentage point this year to 1.5 percent.

Eoin Treacy's view -

When central banks worry about how to stock of outstanding debt in their respective countries, the last thing they want is for deflationary or disinflationary forces to take hold. They often view inflation as an aid in reducing the quantity of debt outstanding so we can anticipate that the RBA and RBNZ will cut Interest rates in the not too distant future not least because so many of their trading partners are doing so. The collapse of iron-ore prices and the fact that much of Australia’s natural gas exports are tied to oil represent additional reasons to weaken the currency in order to support prices in local currency terms.

The Australian Dollar completed a Type-3 top against the US Dollar in 2013, completed a first step below it in October and continues to extend its decline. While it is becoming increasingly oversold, a major change of trend would be required to question what could be a secular decline. 



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January 28 2015

Commentary by David Fuller

Three Charts Showing Why the Fed Shrugged at Low Inflation

Here is the opening of Bloomberg’s summary following the Wednesday’s Fed meeting, written by Craig Torres and Aki Ito:

Here's the biggest news out of the Federal Reserve today: Janet Yellen and her colleagues acknowledged some measures of slowing inflation but didn't panic. An epic collapse in oil prices has dragged down what were already too-low readings on consumer prices, relative to the Fed's target of 2 percent inflation. Those developments didn't convince the Fed to change its tune.

The Fed statement did have some notable additions on inflation. First, Fed officials told us that lower oil prices will support growth because they have "boosted household purchasing power." Second, they blamed the low readings on inflation "largely" on Energy prices, instead of "partly," the word they used in December.  The Fed policy committee nodded toward the bond market's perception that inflation risk is very low and said "market-based measures of inflation compensation have declined substantially in recent months." They also said they expect inflation to rise "gradually toward 2 percent over the medium term." The time horizon in that phrase is new, and underscores that officials still see low inflation as a temporary issue.

David Fuller's view -

This is a good article.  I think the Fed will also assume that low oil prices are good for the global economy, although they will surely be factoring in a sharp slowdown in the USA’s fracking sectors.

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January 28 2015

Commentary by Eoin Treacy

Sliding Oil Triggers LNG Drop as Indian Demand Seen Rising

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

LNG prices in Japan, the world’s biggest buyer of the fuel, will probably plunge 35 percent in 2015 and Indian costs will decline 33 percent, according to Energy Aspects Ltd., a London- based consultant. Costs in Asia will this year average below $10 per million British thermal units for the first time in four years as new projects in Australia and the U.S. boost supply through 2016, Bloomberg New Energy Finance said.

Most LNG in Asia is linked to crude costs with a time lag of several months, so Brent’s 49 percent drop in the second half of 2014 hasn’t fully filtered into prices. Global demand for the gas chilled to minus 170 degrees Celsius (minus 274 Fahrenheit) will rise 9.8 percent this year amid increased imports by India and southeast Asia, after climbing 0.5 percent in the first nine months of 2014, according to Sanford C. Bernstein.

“We are already seeing, at current prices, renewed interest from Indian buyers,” Laurent Vivier, vice president for strategy and market analysis at Total Gas & Power, said Monday by e-mail. “There is some flexibility in the demand as well. When prices fall to current levels, it creates additional demand.”

 

Eoin Treacy's view -

Consumers have bemoaned the link between natural gas pricing and crude oil over the last decade but the pendulum has swung back in their favour over the last six months. As major Energy importers without significant domestic supply Japan and India are major beneficiaries of the decline in oil prices. 

For Japan, the fall in oil prices gives the BoJ additional room to stimulate the economy while consumers will see they have additional cash. The Nikkei-225 continues to firm within its three-month range and a sustained move below 16,500 would be required to question medium-term potential for a successful reassertion of the medium-term uptrend. 

 



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January 28 2015

Commentary by Eoin Treacy

Email of the day on Caterpillar earnings

I've attached below the transcript of CAT's conference call following its latest earnings report-I believe the company is a good bellwether for the global economy. A bit depressing, but does give you a good picture of slow growth worldwide.  Note how Chairman expects stronger dollar & how that will hurt US manufacturing.  Also note how CAT expects that there might be a quarter or 2 delay in a slowdown of their sales (they'll work off their inventory first which will hit profits right away).  Company has cautious view on mining and expects flat oil & gas prices for 2015.

Eoin Treacy's view -

As a globally diversified company with operations in power systems, construction and resources Caterpillar is heavily influenced by both the extraction and construction sectors. The sharp declines in oil, iron-ore and copper represent significant headwinds for the company’s customers who have been cutting back on spending plans. Since investment in Energy projects in particular represents a significant source of income for the company the outlook is likely to remain uncertain for the foreseeable future as spending on new projects is cancelled. 



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January 28 2015

Commentary by Eoin Treacy

Pizza Boxes in Play as Rock-Tenn Heralds More Mergers

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

There are other forces driving consolidation. An improving job market and the drop in oil prices are helping to stoke demand for consumer-related packaged products, said Panjabi of Baird. International Paper Wednesday reported fourth quarter sales that beat analysts’ estimates.
At the same time, materials costs are coming down, Panjabi said.

“The idea of increasing your exposure to that paradigm makes more sense,” he said. Companies are going to want to “capitalize on that dynamic” and merging with a peer will help reduce costs even further.

Packaging Corp. could be a potential takeover target or a merger partner, Anthony Pettinari, a New York-based analyst at Citigroup, wrote in a report on Tuesday. The company could also be an acquirer, according to Mark Wilde, a New York-based analyst at BMO. After buying Boise Inc. in 2013, it has the balance sheet flexibility to start looking at deals, he said.

 

Eoin Treacy's view -

As Energy costs fall and consumers have more cash, the demand for and cost of manufacturing packaging should improve. The sector has been a solid outperformer over the last few years as consumer demand globally improved in line with the growth of the middle class but the fall in oil prices is an additional bullish catalyst. 



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January 23 2015

Commentary by David Fuller

Prince Alwaleed: We Will Never See Oil at $100-Plus Again

January 23 2015

Commentary by Eoin Treacy

New Saudi King to Keep Al-Naimi as Oil Policy Seen Unchanged

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

King Salman, Saudi Arabia’s new ruler, will keep Oil Minister Ali Al-Naimi in his post, bolstering expectations that he will continue the policy of maintaining crude output to preserve market share even as prices have plunged.

Salman, 79, issued a royal decree to retain current ministers, according to the official Saudi Press Agency. Al- Naimi led OPEC’s Nov. 27 decision to maintain its crude production even as shale supplies spurred U.S. output to the highest in three decades. Salman said on Saudi national television that he will maintain the policies of his predecessor.

With production of 9.5 million barrels a day and exports of 7 million, Saudi Arabia accounts for more than a 10th of global supply and a fifth of crude sold internationally. The country’s refusal to surrender market share to rising U.S. output has contributed to the worst slump in prices since the global credit crisis of 2008.

“The Saudi leadership has already taken the tough decision to live with lower oil prices,” Florence Eid-Oakden, chief economist at London-based consultants Arabia Monitor, said by phone. “Naimi is well established, he is respected and there shouldn’t be a change as long as the current cabinet is in place.”

 

Eoin Treacy's view -

I posted Allen Brooks’ prescient commentary on the likely path of accession to the Saudi throne on January 13th. I’ve reposted the report in the Subscriber’s Area which includes a particularly interesting family tree along with positions held. 

This additional article by Middle East veteran Robert Fisk for the Independent  highlights just how much of a challenge the Saudi administration faces with civil wars in a handful of neighbouring countries. The vast majority of people have difficulty with the Catholic/Protestant/Republican/Loyalist distinctions in Northern Ireland. The additional challenge of understanding the enmity between various Sunni and Shia sects, often but not exclusively influenced by historical rivalry and tribal priorities represents a daunting task. So far the Saudi administration has succeeded in ensuring fighting has occurred outside its borders. Viewed in this respect, the policy of maintaining crude oil output in order to maintain market share can also be seen as reducing a source of income for its enemies. 

 



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January 22 2015

Commentary by Eoin Treacy

UBA Plans Angola, South Africa Moves as Nigeria Hit by Oil Price

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

Nigerian companies and the Lagos-based bank are “adequately protected” against a drop in the value of the naira and the price of oil, Oduoza said. The currency of Africa’s largest economy and crude producer probably won’t be devalued further and loan defaults are unlikely to increase, he said. Angola is the continent’s second-biggest oil producer.

Nigeria is struggling to cope with crude prices that plunged by more than half in the past six months. Policy makers responded by devaluing the currency in November, increasing interest rates to a record 13 percent and proposing spending cuts.

“We have done quite a lot of hedging and we have applied various financial products to make sure that the bank is adequately protected,” Oduoza said. “The naira is finding its realistic value,” he said. “I do not think you are going to see any major devaluation, if at all it is going to happen.”

 

Eoin Treacy's view -

In the aftermath of the 2008 crash the Naira traded in a relatively tight range, albeit with a mild weakening bias, until November when it broke downwards. Considering the extent to which the Nigerian economy is reliant on Energy exports (95% of the total), it is too early to conclude the devaluation process has ended. 



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January 21 2015

Commentary by Eoin Treacy

2015 Asia Research Outlook Tread Carefully in the Year of the Ram

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

Cost savers: Mid-stream industrial sectors that could benefit from lower commodity prices and highly leveraged sectors that could benefit from lower financing costs.

Top-line growers: Increasing demand for better quality of life suggests a stronger appetite for healthcare, environmental protection, TMT, and child/senior-related consumption.

Reform beneficiaries: Look for potential beneficiaries from SOE reform, “Go Global”, financial reform and land/Hukou reform, but watch for potential losers from fiscal/tax reform.

MSCI inclusion: Select TMT and consumer discretionary names will benefit at the expense of the largest incumbents including financials, Energy and telecom.

 

Eoin Treacy's view -

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

In many respects the MSCI China Index is similar to the Hang Seng China Enterprises (H-Shares) Index. They certainly have a similar chart pattern and valuations. Mainland listed shares have so far been the primary beneficiaries of the opening up of the Hong Kong Shanghai Stock Connect with overseas investors dominating what has so far been one way traffic. 



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January 21 2015

Commentary by Eoin Treacy

Canada Cuts Key Rate as Oil Shock Clobbers Inflation Outlook

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

Canada, the largest exporter of oil to the U.S., is loosening monetary policy as a plunge in oil prices raises the risk of deflation globally. The European Central Bank is expected to announce tomorrow it will buy government bonds for the first time. The Bank of Japan has already boosted its asset purchases and the Bank of England said two policy makers had dropped their call for rate increases.

“It’s a shocker,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said in a telephone interview. “It is an aggressive move. It speaks volumes about where the Bank of Canada sees the economy and inflation going.”

The nation’s currency depreciated more than 2 cents against its U.S. counterpart on the rate decision and was quoted at 1.2368 per U.S. dollar at 11:33 a.m. in New York Wednesday. Two- year bond yields plunged 29 basis points to as low as 0.55 percent. Stocks surged 1.9 percent in Toronto.

The price of North American crude oil, Canada’s top export, has plunged 55 percent to $47.36 a barrel since June.

 

Eoin Treacy's view -

As a major commodity exporter the impact of falling commodity prices represents a headwind for a significant portion of the Canadian economy, not least Western provinces. On the other hand lower Energy prices and a falling Loonie will be welcomed by the manufacturing sector which has faced stiff headwinds over the last decade. 

The pace of the US Dollar’s advance versus the Loonie has picked up as the oil price fell and has been accelerating for the last week. The rate is closing in on the 2008/09 peak and a clear downward dynamic would be required to question potential for additional upside. 

 



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January 21 2015

Commentary by Eoin Treacy

BHP Billiton cuts US shale oil rigs by 40% amid sliding price

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

BHP said on Wednesday it would reduce the number of rigs from 26 to 16 by the end of the June in response to weaker oil prices. However, shale volumes were still forecast to grow by approximately 50 percent during the period.

“In petroleum, we have moved quickly in response to lower prices and will reduce the number of rigs we operate in our onshore US business by approximately 40% by the end of this financial year,” chief executive Andrew Mackenzie said.

“The revised drilling programme will benefit from significant improvements in drilling and completions efficiency.”

Mackenzie said while the firm’s drilling operations would focus on its Black Hawk field in Texas, “we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production”.

 

Eoin Treacy's view -

Energy companies are aggressively cutting back on investments in additional supply as prices fall but production from existing wells continues to flow. The constant need for new drilling, associated with the swift peaking of unconventional wells, means that the supply response of related drillers is likely to be swifter than might have otherwise been the case. This may bring forward the point at which the market returns to balance but some evidence of short covering will be required before we can conclude that demand is returning to dominance. 



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January 20 2015

Commentary by David Fuller

Tim Guinness: 2015 Outlook for Energy

My thanks to a subscriber for this comprehensive report, published by Guinness Asset Management Ltd.  Here are the first two bullet points for 2015:

We expect the oil price to remain volatile for a number of months, with a recovery to $75+/bbl likely over the next 12 months. A necessary part of this outcome is for US oil shale growth to fall back by the end of 2015. After 2015 the likelihood is that the price will fluctuate quite widely, but move on an upwards trajectory as accelerating emerging country demand growth and flattening US shale oil growth slowly tighten the global oil supply/demand balance.

The oil price at $50-60/bbl is not yet at an economic extreme, leaving a reasonable chance that it continues to decline while the market starts to rebalance. An oil price in the $50-60/bbl range is not high enough to justify new investment in higher cost and more marginal non-OPEC projects. However, it is not low enough to warrant existing high cost producers to shut in reasonable volumes of supply. We believe that oil prices would need to fall to around $35-40/bbl to warrant this.

Saudi and other OPEC members are acting rationally in their response to the falling oil price. OPEC’s decision not to cut production is borne out of a realisation that the falling price is principally a function of non-OPEC over-supply, making ‘emergency’ quota cuts a fools’ errand as they would simply encourage more non-OPEC growth. We sense that Saudi are eyeing US shale oil growth and would prefer a shallower oil price recovery for the time being (i.e. one that doesn’t allow US oil growth to accelerate unabated), rather than a ‘V’ shaped recovery that restores it to $100/bbl. If we are right, it is logical for Saudi & co to tolerate a lower oil price for as long as it takes to achieve this.

David Fuller's view -

I do not see this as an OPEC agreement.  It was a Saudi-led decision for the predominantly Sunni producers – Saudi Arabia, Qatar, Kuwait and the UAE - to keep pumping, weakening the growing and predominantly Shia Iran / Iraq alliance, while also curbing non-OPEC supplies from US shale oil to Russia’s production. 

This item continues in the Subscribers’ Area, where Tim Guinness’ Letter is also posted.   



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January 20 2015

Commentary by Eoin Treacy

The Global Corporate Autonomies Fund

Eoin Treacy's view -

Veteran subscribers will be familiar with the focus we have put on the types of companies David first referred to as Autonomies over four years ago. We came up with the designation in order to reflect the potential of truly global companies as some powerfully bullish factors converge.

Perhaps the most important of these is that governance is generally improving on a global basis. Some would argue the opposite with Russia deteriorating, ISIS running rampant in Iraq, Ebola posing a threat in West Africa and Europe still struggling with deflation. However that would be to miss the point that capitalism has gone global which is allowing more people than ever before to lift themselves out of poverty and into the middle classes. The major population centres of the world primarily in Asia and increasingly in Africa have abandoned the ideology of communism and billions of people are being provided with the tools, knowhow and infrastructure to multiply their productive capacity. This is a secular theme and the demand cycle this is unleashing represents a powerfully bullish force for equity markets over the long term.

The Technology, Healthcare and Energy sectors have the capacity to change how we live our lives. Innovation in any one of these has the potential to fuel a major bull market but right now we are presented with accelerating innovation in all three. This is important for two reasons. The first is that the world’s most advanced economies have potential to enhance their productive capacity. The second is that because capital is now global, these products, services, methods and skills can be disseminated rapidly so that more people than ever before can benefit. For emerging economies this represents a shortcut to development since they can sidestep a number of developmental stages as innovative solutions are embraced.

Energy deserves special mention because it touches each of our lives in a very real way every day. Unconventional oil and gas represent game changers for the Energy sector and are already delivering on lower Energy prices in real terms. One of the oldest adages from the commodity markets is that “the cure of high prices is high prices”. The high oil price environment ignited interest in developing new more efficient Energy sources. The entry of shale oil and gas is a partial solution. The application of Moore’s law to solar cell development has even more potential to displace fossil fuels and maintain a low Energy price structure. The evolution of nuclear technology shows similar promise.

These represent major themes and consumers are likely to be among the greatest beneficiaries. The companies providing new products and services will benefit but their customers will be benefit even more. This is one of the primary reasons we started looking at big multinational companies. What really sharpened our focus was the fact so many were breaking out to new all-time highs when the wider market was still getting off its knees. Truly global companies that dominate their respective niche have proven track records of generating brand loyalty, opening up new markets and they have the scale to achieve success whether others might flounder. Many of the Autonomies have strong balance sheets and have been around long enough to have lengthy records of dividend increases. However we did not make dividends a defining characteristic because that would exclude a significant number of the companies delivering the innovation upon which productivity growth potential relies.

I used the Autonomies in the latter half of Crowd Money to show base formation completion and as a template for how a number of themes can coalesce to drive a major bull market. A subscriber, Chris Moore at WM Capital Management in the UK, approached me last year at The Chart Seminar asking if there was a fund that he might invest in for his clients that represented these themes. There were some global funds and some dividend funds but none that we could describe as representing the Autonomies. He asked if I would like to start one and I concluded that it would be better to be part of the fund than have someone else do it so I agreed.

The fund will be equally weighted, rebalanced quarterly and will hold the 100 Autonomies with the most attractive chart patterns. Veteran subscribers will be familiar with our frequent commentary on the high costs of fund management so I made competitive fees a condition of my participation. The fund will have a management fee of 0.55%.

It will launch in March and I will be giving a talk at the East India Club on February 10th to talk about The Big Picture and the Autonomies from 6:30pm. If you would like to attend or would like some additional information relating to the Global Corporate Autonomy Fund please contact Chris Moore at [email protected]   

Here is a link to the fund brochure: http://www.wmcapitalmanagement.com/images/The%20Global%20Autonomy%20Fund.pdf



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January 20 2015

Commentary by Eoin Treacy

Email of the day on the impact of the Affordable Care Act on labour force participation:

I’ve been taking a tax class at UCLA Extension because I felt so at sea with how the system is structured since we moved to the USA and I wanted to get a better handle on what the best way to structure our finances is. I finished the open book exam over the weekend and commented to my instructor, in inestimable Linda Hewitt, that if I had ever wondered, now I know why I’m not an accountant. Here is her response: 

You have not lived here your entire life. But I can tell you, that our tax law continues to get crazier as we go along. 

We have regular income tax, AMT (Alternative Minimum Tax), FICA (Federal Insurance Contributions Act), and State Income Tax, & Medicare Surtax + all the other taxes (property, sales, etc.)

Then on the Wealth Transfer side of things you will learn in the Estate Class we have: Gift Tax, Generation Skipping Tax, Estate Tax, and IRD ('Income In Respect Of A Decedent)

OMG!

In CA. if you are in the Top Bracket between Fed./State/FICA/Medicare surtax you really are around 68% marginally. 

My husband and I used to be in AMT, until his company retired him out, with just my income we are no longer in AMT. 

I have clients where the wife has either quit work or reduced hours, and because of the tax savings are better off. 

You can get to the point where you punish a person for being productive!

Today with the medical subsidies many women work only part time or not at all to control their income to get the subsidy. These women were working full time prior. 

I go crazy. They advertise get a medical subsidy - 4 out of 5 people will get the subsidy in CA. under Cover CA. 

No one talks about the 5th person. Let's see that guy pay for his own health care + for 4 other people. 

I receive no help from anyone, I am almost 66 yr. old and work about 65 hours a week. What is fair about that? I work so someone else only has to work part time, and gets a big subsidy. My cost for Medical Premiums, out of pocket max and RX for my husband under Medicare runs me almost $20,000 a year for 2 people.  

If I had it to do over again, I would get a job in the public sector! 

Hope you don't mind me ranting away here! 

Eoin Treacy's view -

The USA has some of the most exciting advantages of any economy from the low cost of Energy, to its lead position in technological innovation, to the flexibility of its labor force and the proactivity of its central bank. However, the tax structure leaves a lot to be desired.

The breadth of the Affordable Care Act is incredible and perhaps more important, its full effects will not be in place for another year. The Fed has cited declining Labor Force Participation rates as a factor in why it has not raised interest rates so I thought it might instructive to view the chart. 



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January 16 2015

Commentary by Eoin Treacy

Global growth: Can productivity save the day in an aging world?

Thanks to a subscriber for this heavyweight 148-page report which I consider indispensable reading over the weekend. Here is a section: 

Extrapolating from these case studies, we find sufficient potential to accelerate productivity growth to about 4 percent a year in the G19 and Nigeria. That would be more than enough to compensate for the waning of demographic tailwinds. The persistence of large gaps in the productivity performance of developed economies compared with emerging economies underlines the potential to retool the world’s productivity-growth engine.

We estimate that roughly three-quarters of the total global potential for productivity growth would come from the broader adoption of existing best practices—which we can characterize as “catch-up” productivity improvements. The positive message here is that these types of opportunity are all known to us and exist somewhere in the world. Eighty percent of the overall scope to boost productivity in emerging economies comes from catching up. The remaining one-quarter, or about one percentage point a year, could come from technological, operational, or business innovations that go beyond today’s best practices and that “push the frontier” of the world’s GDP potential. In contrast to some observers, we do not find that a drying up of technological or business innovations will act as a constraint to growth. On the contrary, we see a strong innovation pipeline in both developed and developing economies in the sectors we studied. Our estimate of the potential here is based only on the innovations that we can foresee. It is quite possible that waves of innovation may, in reality, push the frontier far further than we can ascertain based on the current evidence.

 

Eoin Treacy's view -

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

Major secular bull markets don’t just appear out of thin air. In Crowd Money I wrote about the four pillars of an investment theme that need to be in place for it to be sustained beyond the short term. These are the fundamental story, monetary policy/liquidity, governance and price action/crowd psychology. Veteran subscribers will be familiar with our view the necessary elements to support a major bull market are falling into place. Let’s take them in succession: 

The investment theme is pretty clear. We are living in the greatest age of humanity ever. There are more people alive today than have lived at any one time in history. This is driving demand for just about everything. Concurrently one of the greatest periods of technological innovation is unfolding. This has contributed to the lower cost of Energy we are currently experiencing. If you combine more people with better tools and lower Energy costs the result is productivity growth. In order for valuations to justify progressively higher prices, productivity growth is essential. 
 



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January 15 2015

Commentary by David Fuller

Forget Emerging Markets. Hot Topic at Davos 2015 Is the U.S.

Here is the opening of this article from Bloomberg:

The World Economic Forum has long been something of a coming-out party for emerging economies, withdeveloping countries dispatching politicians and executives to the Swiss resort of Davos to drum up interest. This year, the big magnet for investment looks to be an older player on the global stage: the United States.

While Brazil stagnates, Russia enters a recession, and India struggles to implement economic reforms, the U.S. is booming as Energy prices plummet and Silicon Valley dominates global tech. Though yesterday’s retail sales report damped enthusiasm about the scale of the U.S. rebound, the American economy grew at its fastest pace in over a decade in the third quarter of 2014, reaching an annualized rate of 5 percent.

“The pendulum has shifted,” said Jacob Frenkel, chairman of JPMorgan Chase & Co. (JPM)’s international arm, who’s been attending Davos since the mid-1980s. “The U.S. is now regaining its position in the world economy. It is the place where the recovery took hold in the most robust way.”

David Fuller's view -

The US economy has done reasonably well on a relative basis and the US Dollar Index has staged a recovery after a lengthy period of underperformance, although this move has been flattered by the Euro’s weakness.

For investors, Wall Street’s performance has been OK, but the competition is picking up.  Last year, US stock market indices showed an average return of less than 10%.  In contrast, China’s Shanghai A-Share Index soared 40%, mostly in 4Q, India’s Sensex gained 25% and Indonesia was close behind.  These gains are quoted in US Dollar terms.  Less than two weeks into the New Year, the S&P 500 is down 3.2%, while the Hang Seng gained that amount, Shanghai A-Shares +3.4%, South Korea +1.7%, India +4.3%, Thailand +2.1% and New Zealand +1.5%, all in US Dollar terms as of today.  In Europe, following the uncoupling of the Swiss Franc from the Euro, Switzerland’s stock market fell sharply in CHF terms but is up +8.4% this year in US Dollars. 

This item continues in the Subscribers’ Area.



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January 15 2015

Commentary by David Fuller

Dubai Doubles Power-Plant Size to Make Cheapest Solar Energy

Here is the opening of this interesting report from Bloomberg:

Dubai’s government-owned utility plans to double the size of a solar power project that it expects will produce some of the world’s cheapest electricity.

Dubai Electricity & Water Authority awarded a contract to build the 200-megawatt plant to a group led by Saudi Arabia’s ACWA Power International. The 1.2 billion dirham ($330 million) generating station will be completed in April 2017, DEWA Chief Executive Officer Saeed Mohammed Al Tayer said yesterday at a news conference in the Persian Gulf emirate.

ACWA will sell electricity from the plant to DEWA at 5.85 cents per kilowatt-hour, a price that will be “the lowest by far” for solar power globally and among the cheapest from other sources, Paddy Padmanathan, the Riyadh-based company’s CEO, said in an interview.

Dubai plans to build 1,000 megawatts of solar capacity by 2030, enough to meet 5 percent of its forecast electricity needs that year, as it seeks to reduce reliance on natural gas as its main source of Energy for local use. Saudi Arabia and Abu Dhabi, the U.A.E.’s capital and largest emirate, are also developing renewable Energy as oil producers in the Gulf try to reduce the burning of costlier fossil fuels to produce power.

David Fuller's view -

There will be no stopping solar power, which is by far the most flexible Energy source, coming in units of variable sizes and shapes.  The efficiency of new solar panels improves every year, simultaneously lowering costs.



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January 14 2015

Commentary by Eoin Treacy

US Preeminence

Thanks to a subscriber for this detailed report laying out the case for remaining fully invested in US equities. Here is a section: 

Overweight the Dollar: The divergence in growth rates between the United States and the Eurozone and Japan, the resulting divergence in monetary policy and renewed recognition of US pre-eminence are likely to lead to an increase in the value of the dollar relative to the euro and the yen. We believe that this cycle of dollar appreciation is more akin to the 1978–85 and 1995–2002 periods of dollar strength. As shown in Exhibit 30, during these two periods, spanning 6.3 years and 6.8 years, the dollar appreciated 93% and 46% on a trade-weighted basis, respectively. In these periods, the primary driver of the dollar’s strength was the divergence of monetary policy. We expect the dollar to appreciate an incremental 10% or so relative to the euro and the yen over the course of 2015.

We are not projecting a higher level of dollar appreciation because we are not expecting large interest-rate differentials between Treasury securities and German bunds and Japanese government bonds. Furthermore, the US dollar has already risen 24% from its trough in We expect the dollar to appreciate further relative to the euro and the Japanese yen in 2015. April 2011. The most recent appreciation followed statements by ECB President Mario Draghi in November 2014 suggesting more significant measures to prevent the Eurozone from sliding into deflation and by BOJ Governor Haruhiko Kuroda in late October 2014 to increase Japan’s pace of quantitative easing to fight deflation. This divergence of monetary policy can also be seen in the projected balance sheets of the three central banks over the next two years, as shown in Exhibit 31. 

The corollary to our view on US pre-eminence and a strong dollar is a negative view on gold.  The correlation between gold and the dollar has been -0.36 since 1974. Even though gold has already declined almost 40% from peak levels in September 2011, we believe that gold prices have further downside given declining physical demand, a stronger dollar and rising US interest rates. We recommend a tactical allocation that is designed to benefit from declining gold prices with some downside protection. 

 

Eoin Treacy's view -

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

The reasons for the economic outperformance of the US economy are well understood and include important considerations such as a widening technological lead, lower Energy costs and a proactive central bank. While it is correct to state that the Euro has fallen following the announcement of the ECB’s intention to adopt quantitative easing, the end of the Fed’s QE program in October is equally important. 



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January 13 2015

Commentary by Eoin Treacy

Musings From the Oil Patch January 13th 2015

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report. It contains a number of titbits, not least on the outlook for the natural gas market and Energy stocks. Here is a section on the Saudi succession: 

Prince Muqrin is the third youngest son of King Abdulaziz. He is a pilot having been trained at a Royal Air Force college in Britain. He is a former chief of the General Intelligence Directorate and served as a governor of several provinces in the country including the one containing the holy city of Medina. While Prince Muqrin is thought to be a steady hand and close to the king, probably because he is strongly anti-Iranian, the fact that his mother was from Yemen and thought to have been a concubine, introduces a new dynamic into the succession thinking. At the current time, Islamist revolutionaries have seized control of Yemen and are actively fighting Saudi Arabia. We wrote about that development in the context of how Saudi Arabia is being surrounded by Islamist terrorists, which was manifest in the overthrow of the Kingdom’s political supporters in Yemen. The Saudi government admits it ignored Yemen in recent years, which contributed to the power shift and the loss of its allies there. 

At the time Prince Muqrin was elevated to his position as second in line to the throne in 2013, we and others commented that the choice indicated King Abdullah’s focus was on maintaining the historical consistency in the selection process rather than introducing politics into the selection. It also suggested that the King was entrusting Prince Muqrin with the future responsibility for selecting the first Saudi Arabian ruler from the family’s third generation, which will mark a significant event in the history of the country. 

The current fighting between Saudi Arabia and Yemen could present a succession issue within the Allegiance Council as family lines (loyalty) are considered very important in the Islamic world. Is it possible that Prince Mishal, as head of the Allegiance Council, might exercise power to alter the current royal succession line, and not just in dealing with the elevation of Prince Salman? Would he welcome his younger brother as King, or would he rather see the leader come from the next generation?

We have read that Prince Muqrin is not motivated by wealth and because of his strong anti-Iranian views may be more willing to use Saudi Arabia’s oil policy as a weapon against its neighbor. Does that mean he would be more willing to endure low oil prices for longer to ensure that the Kingdom’s Islamist enemies’ economies might be truly broken – possibly even leading to the overthrow of their governments? What about social unrest in Saudi in response to reduced government income? If low prices hurt Russia, would that be a problem? What would it mean for Saudi Arabia’s relations with the U.S.? We guess the Obama administration would be happy to have low oil prices for its remaining time in office as it should provide a powerful stimulus for economic growth. Low oil prices might also be welcomed by the presumed Democratic presidential nominee, Hillary Clinton. It would certainly set back the Energy self-sufficiency arguments made by the oil and gas industry and many Republican politicians, including some vying for their party’s presidential nomination, and it would hurt the economies of Texas, Oklahoma and North Dakota, among the handful of leading Energy state economies, all states dominated by Republican politicians. 

Eoin Treacy's view -

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

When the head of state is 90 one can’t but speculate about succession. When that state is Saudi Arabia, still the most influential oil producer, the stakes rise. As the custodians of Mecca and Medina, the Saudi royal family have a claim to leadership within the Muslin world that no other administration can touch. However it is worth considering that the deeply conservative elements of society that aided the creation of the state also represent a sympathetic ear for forces threatening the nation’s borders. Any new king will face a delicate task in managing the nation’s internal and external challenges. Oil will certainly continue to represent both a tool and weapon in achieving those goals. 



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January 13 2015

Commentary by Eoin Treacy

Copper Falls for Fifth Day, Extending Drop to Lowest Since 2009

This article by Joe Deaux and Agnieszka de Sousa for Bloomberg may be of interest to subscribers. Here is a section: 

Copper fell to the lowest in more than five years on speculation that cheaper Energy costs will encourage mining companies to increase production.

Crude oil in New York traded below $45 a barrel today and has plunged about 50 percent in the past year as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. The decline will help cut costs to produce and transport metals, according to Natixis SA.

“OPEC is sticking to the plan of continued production, which is driving oil lower,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “That’s seemingly driving the cost of production lower for copper, which was already seen as being in surplus.”

 

Eoin Treacy's view -

Energy represents a major factor in the cost of production for just about every commodity from grain to industrial metals. Falling oil and natural gas prices have contributed to lower costs for miners and allowed marginal production to survive at lower prices than many might once have expected. This reduced the price at which a tightening of supply due to lower prices might occur for at least some commodities. 



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January 09 2015

Commentary by David Fuller

How OPEC Weaponized the Price of Oil Against U.S. Drillers

Here are several paragraphs from Bloomberg’s report:

If there ever was doubt about the strategy of the Organization of Petroleum Exporting Countries, its wealthiest members are putting that issue to rest.

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want -- and are achieving -- further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.

U.S. crude production totaled 9.13 million barrels a day last week, up about 1 million barrels from a year ago and 49,000 from the OPEC meeting in November. Horizontal drilling and hydraulic fracturing in underground shale rock have boosted output by 66 percent over the past five years. Exports, still limited by law, reached a record 502,000 barrels a day in November, according to the Energy Information Administration.

The four Middle East OPEC members are counting on combined reserve assets estimated by the International Monetary Fund at $826.4 billion to withstand the plunge in prices. Petroleum represents 63 percent of their exports. At least 10 calls and several e-mails to the oil ministries of all four countries on Jan. 7 and yesterday weren’t answered.

OPEC won’t reverse course even if oil prices fall as low as $20 a barrel or non-OPEC countries offer to help with production cuts, Saudi Arabian Oil Minister Ali Al-Naimi said in an interview with the Middle East Economic Survey on Dec. 21. The kingdom may even bolster output if non-OPEC nations do so, he said. The global oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates.

It wouldn’t be the first time U.S. drillers are caught up in an OPEC battle for market share. In 1986, Saudi Arabia opened its taps and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

 

David Fuller's view -

OPEC’s four leading Sunni states of Saudi Arabia, the United Arab Emirates, Kuwait and Qatar are going for the jugular in this oil price war.  Their main target is the USA, not least as hydraulic fracturing (fracking) is one of the main factors undermining the Saudi-led OPEC control of oil prices, not least as many other countries could and probably will utilise fracking technology in future years.  Sunni countries are also hoping to weaken the growing potential alliance between Shia dominated Iran and Iraq.  Russia is another target, not least as it remains a very big oil producer and has previously used a navel base in Syria’s Mediterranean port of Tartus.  This has been significantly scaled back for security reasons during Syria’s bitter conflict but Putin is still a supporter of Bashar al-Assad.

This item continues in the Subscribers’ Area.

 



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January 09 2015

Commentary by Eoin Treacy

Oil Market Report

Thanks to a subscriber for this edition of DNB’s topical report. Here is a section: 

We are directionally bullish to prices, but are revising down our average price forecast for

2015 due to a lower starting point than anticipated in early December
2015 revised down from 70 $/b to 65 $/b - could see prices even well into the 40¡¦s in 1H-2015 (not our base case however), but we expect a sharp price recovery
2020 revised down from 95 $/b to 90 $/b as we expect deflationary pressure in the oil market as global E&P CAPEX is cut drastically and hence create slack in the service industry

The market changed after the OPEC meeting
After the OPEC meeting in November the market will be left to itself until the next OPEC meeting scheduled for June
Prices will have to be low enough to achieve a new equilibrium between supply and demand but the price effect on fundamentals will be somewhat lagged
How far down prices need to decrease is impossible to calculate as the market could easily overshoot to the downside during the adjustment process, but we believe that current low prices are not sustainable for the global oil industry

1H-2015 looks over supplied even with higher demand and lower supply
The market looks to be over supplied in 1H-2015 even after assuming that global non-OPEC production will decrease sequentially through the year and at the same time assuming much stronger demand growth in 2015 than what we have seen in 2014
We expect that by 2H-2015 US shale production will start falling
Our base case is that by the second half of 2015 the worst part of the adjustment process is over and prices will improve

 

Eoin Treacy's view -

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

In common with this service, the DNB team have been some the most sceptical of the widely held opinion that oil prices would stay perennially high. Veteran subscribers will be familiar with our refrain that unconventional oil and gas represent game changers for the Energy sector but a secular bear market does not happen all at once. It is therefore interesting that the DNB team are now beginning to call time on what has been a spectacular decline since June. 



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January 09 2015

Commentary by Eoin Treacy

China Nuclear

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

Compared with a 0-2GW p.a. capacity addition in 2007-13, we believe China’s nuclear installation is entering into a fast track. Based on the targeted 58GW of targeted nuclear installation set by the government for 2020E, China’s nuclear capacity will see a 20% capacity CAGR in 2014-20E, second only to the growth of solar (23%). While the 2019-20E actual capacity would be subject to the project approval in the next six to twelve months, the growth in 2015-17E is visible given the current construction schedule. We forecast a 9.5GW/10.9GW capacity addition in 2015/16, the highest in China’s history, and representing c.50% of the 2014E total capacity.  

Eoin Treacy's view -

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

The grey air that overhangs much of northern China in the winter months represents a drag for a country that has ambitions of creating a knowledge economy. If one is to depend on the productive capacity of an educated workforce then public health becomes an increasingly urgent priority. China’s nuclear capacity is growing impressively but from a low base. At only 2% of the Energy mix compared to somewhere in the teens for most developed economies, there is significant room for additional growth and it can’t come soon enough for those breathing the polluted air. 



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January 09 2015

Commentary by Eoin Treacy

Email of the day on generation IV nuclear reactors

Here are some exciting news on collaboration between a US nuclear lab and privately held Terrestrial Energy, which seems to have the most advanced molten salt nuclear reactor concept available. This is encouraging news for those of us eagerly awaiting commercialization of new nuclear!

Fyi and disclosure I am invested in Terrestrial Energy.

 

Eoin Treacy's view -

Following on from the above piece, there is no denying that the molten salt reactors currently considered generation IV technology hold a great deal of promise as does the fusion solution touted as possible by Lockheed Martin and others. However, considering the lead time to commercialisation it will be the decade beyond 2020 where some of these promises are fulfilled. 

These advances help to enhance further the future of abundant Energy we envisage as the most probably result of a decade of high pricing. 

 



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January 08 2015

Commentary by David Fuller

Market Tracing Familiar Pattern as S&P 500 Plunge Stops at 4%

Here is the opening, plus a concluding paragraph of this informative report from Bloomberg:

Traders whose bullishness on the Standard & Poor’s 500 Index (SPX) surged to the highest levels in 12 months last week finally got a break.

U.S. stocks rallied for the first time since the start of the year yesterday, rising 1.2 percent after suffering the fifth decline of 4 percent or more since last January. Relief that Federal Reserve minutes signaled no change in interest rate policy and optimism on employment growth helped break an 88-point slide in the benchmark gauge for American equity.

That was overdue news for speculators who had cut bearish bets on the SPDRS&P 500 exchange-traded fund to the lowest in a year and built long positions in futures to a 12-month high, data compiled by Bloomberg showed. The rebound came after trading in contracts tied to equity volatility flashed a signal on Jan. 6 that five days of selling had gone on too long.

“We’re trained like Pavlov’s dogs,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. “It’s been a little bit of a rubber-band phenomenon for the past six months or so. The market was thirsty for news, and we got some today.”

The S&P 500 rallied the most in three weeks yesterday. It rose at the market’s open as data on the labor market and the U.S. trade deficit bolstered confidence in the strength of the economy. Gains extended at midday as lawmakers in Chancellor Angela Merkel’s coalition said Germany is leaving the door open to debt-relief talks with Greece’s next government.

And:

The five-day, 4.2 percent slump in the S&P 500 came just 13 days after the index dropped 5 percent between Dec. 5 and Dec. 16. The span between the two dips was the shortest since two retreats of more than 4 percent in late 2011, data compiled by Bloomberg show. Since 2009, retreats of this magnitude have happened every 51 days, on average.

David Fuller's view -

That last sentence above provides more than enough evidence for a ‘buy the dips’ conditioning process.  Moreover, throughout most of this nearly six year bull market to date, plenty of investors have either lost money by shorting too aggressively or missed out on big gains by taking profits too early. 

The speed of the recent rebounds indicates that there is still significant buying power underneath the market although this will not always be the case.  Danger signs will be a particularly strong rally which thins out demand, followed by an even sharper retreat.  Additionally or alternatively, we will see rallies weaken, causing lower highs and lower lows to occur on indices.  Those, of course, would provide evidence of medium-term downtrends. 

Meanwhile, more investors appear to have realised that low Energy prices due to oversupply are considerably more bullish than bearish for the global economy.  However, while the benefits are spread widely over time, disasters for the most vulnerable oil producers will occur more quickly, making them newsworthy.  Some will default.  Also, there is a risk that Putin does something really dangerous, possibly in an attempt to lift the oil price. 

Nevertheless, the key point for investors to keep in mind is that there is no such thing as a risk free environment, in investments or life in general.  So maintain a healthy lifestyle, aided by an equally healthy portfolio, consisting of sensible, proven funds or investment trusts, and Autonomy-type shares with reasonably good dividends.  Try not to chase uptrends in a six-year old bull market.  Reasonably active investors will generally do better by lightening on persistent strength, rather than selling following a shakeout.

This extensive item continues in the Subscribers’ Area.



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January 08 2015

Commentary by Eoin Treacy

A year of public investment driven macro economic vigour

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on India. Here is a section: 

Improving economics and govt actions increase probability of ratings upgrade
We assign a high likelihood of a sovereign ratings upgrade for India as most macro indicators have exhibited improvements in past 2 years. A rating upgrade will likely entail multi-layered benefits for Indian economy and markets. Over the past decade we have witnessed 4 instances of rating upgrades by S&P and Moody’s and on an average Sensex has returned 9% in the following 6 months and 40% in the following 12 months of ratings upgrade. Boost to capital inflows and improved perception of India on the back of rating upgrade should help moderate volatility associated with US rate normalization and create some headroom for RBI to ease monetary stance.

India likely to remain one of the favored emerging markets
Expectations of normalization by the US Fed and a subdued commodity pricing environment will continue to drive multi-asset differentiation within Emerging markets. India's embrace of long pending, supply side reforms together with an investment driven macroeconomic stabilization will allow it to deepen its relative attractiveness in 2015. Among key EMs, India has demonstrated one of the best improvements on external front with CA deficit now in comfort zone at (2.1% in Sep’14 qtr. 4.7% in FY13), appreciable FX reserves accumulation and sharp uptick in capital inflows.

Government must ensure its economic agenda is not side tracked 
While the urgency in moving ahead on key ordinances is indicative of the commitment to reform, passing bills in parliament will be vital to ensure that reform is structural, enduring and getting institutionalized. Translation of many of the recent ordinances into law in the next session of parliament will be viewed as crucial determinants of the government’s execution prowess. Other risks: Faster- and steeper-than-anticipated Fed rate normalization and any systemic risk associated with steep decline in oil prices.

 

Eoin Treacy's view -

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

There are few countries that benefit more from weak oil prices than India so the recent Energy market moves represent something of a windfall for Narendra Modi’s government.  This might yet allow the RBI to cut interest rates but the broader question is over how bold the administration will be in its legislative agenda. A great deal of enthusiasm has already been priced into the market and it will be interesting to see how much is delivered upon this year. 

With a large young upwardly mobile population India represents a fertile market for global Autonomies, a number of which maintain listed subsidiaries on the Munbai exchange. Many of these trade on aggressive multiples not least because supply is reasonably thin. 

 



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January 08 2015

Commentary by Eoin Treacy

Toyota opens fuel cell patents to drive "hydrogen society"

This article by C.C. Weiss for GizMag may be of interest to subscribers. Here is a section: 

Toyota hopes to help jumpstart this future hydrogen society by sharing its intellectual property. This week's announcement represents the first time that it's sharing patents free of charge. The automaker helped to grow the gas-electric hybrid market in a similar manner, but those licensed technologies didn't come free.

"At Toyota, we believe that when good ideas are shared, great things can happen," said Bob Carter, senior VP of automotive operations at Toyota Motor Sales, USA Inc. "The first generation hydrogen fuel cell vehicles, launched between 2015 and 2020, will be critical, requiring a concerted effort and unconventional collaboration between automakers, government regulators, academia and Energy providers. By eliminating traditional corporate boundaries, we can speed the development of new technologies and move into the future of mobility more quickly, effectively and economically."

 

Eoin Treacy's view -

I wonder if falling oil prices had any impact on Toyota’s decision to open its patent portfolio for hydrogen-fuelled vehicles to the masses? After all one of the most compelling reasons for considering alternative fuel vehicles was the high cost of gasoline. The technology has come a long way in the last twenty years and governments are now more amenable to emission free technologies because of environmental concerns. However the total cost of ownership is likely to continue to be the primary arbiter for the majority of car buyers. 



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January 07 2015

Commentary by Eoin Treacy

US Equity Strategy The 2015 Playbook

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

Healthcare and Technology – Contrarian to be market-weight? While we are currently market-weight both, a lot of investors we spoke with recently are overweight at least one (or both of these groups). For healthcare, our assessment is that our call there was probably our best sector-level call in the last four years. We were overweight 2011-through December 1st of 2014, nearly four years, on a thesis that there would be a R&D pipeline re-rating in biotechnology and pharmaceuticals and that the medical distribution businesses would benefit from volumes and were growth at a reasonable price. Both played out, and our view is reducing the overweight in now prudent. We still hold a 4% position in MCK, and a 2% one in CAH, and select pharma and biotech, and we don’t view healthcare as a short, but valuations are now at ten-year highs on price-to-forward earnings in absolute terms, even if they remain compelling against other defensives like consumer staples.

For technology, we struggle to implement a discipline where we want to own stocks that are recommended by our fundamental analysts and screen well in our disciplined strategies. Today, there is one technology stock, HPQ, that screens in the top quintile in both our 24-month model, BEST, and our 3-month alpha model, MOST, that is recommended by a fundamental analyst at Morgan Stanley. Hard to get 20% weight in technology!

Utilities: While we appreciate that this sector is very idiosyncratic, and we wouldn’t be surprised if the 10-year yield went lower in the next few months (we have not studied this like the US equity market multiple but wouldn’t be at all surprised if this was also un-forecastable in short horizons), we just can’t recommend a sector that is the most expensive vs. its own history it has ever been and trades at a premium to the overall market. Given the S&P500 benchmark weight is only 3%, we don’t think the bet is that significant either way, but midcap value investors have to make up their minds to avoid valuation if they want to own even the benchweight in this group.

 

Eoin Treacy's view -

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

All 9 of the major SPDR S&P sector indices can be found in the USA indices section of the Chart Library (at the bottom of the third column). It’s worth clicking through them because what quickly becomes apparent is that while Energy and materials have lost consistency the rest are still trending reasonably consistently. 

Healthcare, technology and utilities have been among the best performing stock market sectors over the last 12 months. They share a common characteristic of generally strong balance sheets and improving consumer finances. 

 



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January 06 2015

Commentary by David Fuller

Cheap Oil Is Rich Opportunity for Asia

Across Asia, the lowest crude prices since 2009 are an almost unmitigated boon. Already, they've given Indonesia and Malaysia room to curb budget-busting fuel subsidies (although Malaysia, an Energy exporter, will suffer from a drop in oil revenues). In Japan, the Philippines, Singapore, South Korea, Taiwan and Thailand, sliding Energy costs stand to boost disposable incomes, household demand and corporate profits. Economist Glenn Maguire at Australia & New Zealand Banking Group thinks this "confidence multiplier" will lead to higher-than-expected growth. The drop in oil prices so far could add as much as 1 percentage point to global output. "We think this will be the defining, constructive dynamic that underpins Asian growth in 2015 and most probably 2016," Maguire says.

As India's Modi prepares to unveil his first full budget in February, he could hardly ask for a fairer tailwind. In the short run, says Peter Redward, principal at Redward Associates, oil trends will lead to a "massive improvement" in India's current account deficit, repair the government's balance sheet and restrain inflation, which should allow the central bank to cut rates.

Whether the pickup in growth can be sustained will depend on how bold Modi chooses to be next year. The Indian prime minister wisely slashed diesel subsidies when oil prices dropped, easing the hit consumers felt at the pump. But that was the easy part; it’ll be tougher to cut subsidies on liquefied petroleum gas and kerosene, which millions of Indians use for cooking. Together with diesel, subsidies for those two fuels cost the government $11 billion in the last fiscal year. Likewise, Modi will have to spend considerable political capital to abandon discounts on fertilizer. Without such cuts, it'll be difficult to free up space for more productive fiscal spending on infrastructure, education and health care. 

Nor can Modi afford to delay supply-side reforms. In addition to lower fuel bills, 2015 will feature a light election calendar: Only two of India’s 29 states will hold contests. This could well be the prime minister's best chance to push through politically difficult measures, such as allowing foreigners to hold majority stakes in key domestic sectors.

David Fuller's view -

Modi is ambitious, experienced and far more economically savvy than the head of government in most other countries, developed or undeveloped.  He also has an overall majority and a responsible central banker, so I do not think he needs our advice on how to run India’s economy. 

All politicians need an element of luck, and considerably lower oil prices are a huge benefit for all countries which import most of their Energy.  Luck has favoured them, although today’s prices for crude oil are in reality, a triumph for US technology.  Modi would also benefit considerably from a good monsoon, which he did not get in 2014.  However, this is in the hands of the weather gods.   

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January 06 2015

Commentary by David Fuller

Email of the day 1

On the third industrial revolution:

“I fully agree with your sense that the Third Industrial Revolution has a long way to run. I give presentations on this topic around the world. Analysis of the 1st and 2nd Industrial Revolutions shows they spanned 3-5 decades and involved not only a new communication system but new financial systems and new Energy sources too. The 1st Industrial Revolution from 1780-1830 involved synergy between the new Energy source (coal), the new communication system (coal-powered printing presses leading to mass newspapers and mass education for the first time ever, and the new financial system (the London stock market. The 2nd Industrial Revolution from 1880-1920 was driven by oil then electricity as the new power sources, the telegraph then telephone as the new communication system, and the Limited liability company as the financial breakthrough. Our present-day 3rd Industrial Revolution began with the Internet in the mid-1990s, and that part is progressing nicely. But the new Energy source (solar) is only just getting going, and we await a new financial system! When all three are in place and well-developed decades from now the world will be a very different place. Though I doubt the economics profession will have progressed quite so much!”

David Fuller's view -

Thanks for your informative email on a favourite subject, and your droll concluding sentence was also appreciated. 

Perhaps I lack imagination (or have too much of it) or hope to see too much more in my lifetime, but I think this ‘Industrial Revolution’, which I refer to as a visibly accelerating rate of technological innovation, has no natural end.  It includes the internet of everything, achieved with miniaturisation, plus new manmade resources such as graphene which will vastly improve the efficiency of many products, from solar Energy panels to infrastructure construction.  I believe that within the lifetime of middle-aged people we will also see new nuclear in various different forms and possibly also the holy grail of commercial nuclear fusion.  I also think we are only approaching the foothills of what will be an accelerating rate of development in artificial intelligence. Sentimentally, I hope that Stephen Hawking’s recent prediction on AI does not come true, although his conclusion was certainly logical. 

Lastly, I hope those of us in the London area and attending Markets Now on 12th January (see below) will question speakers’ views, not least Charles Elliott on his choices for performance among technology shares.      



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January 06 2015

Commentary by Eoin Treacy

Commodities Outlook 2015

Thanks to a subscriber for this report dated December 15th from Deutsche Bank which may be of interest. Here is a section: 

The fundamentals of copper do not mirror that of oil. In copper, there is no technological breakthrough which has opened up vast new resources, therefore copper should not suffer the same fall in pricing as that of oil. The fallout from oil has however impacted the overall sentiment towards commodities. However, copper remains a well-supplied market, and a lower oil price in combination with weaker producer currencies will lower the marginal cost support level, which we now estimate at USD5,800/t.

We continue to forecast a surplus market in copper for 2015E and 2016E, which in our view will see prices grind lower. However, we have cut the magnitude of the surpluses in both 2014 and 2015E by 200kt over the course of the year. The big increase in mined supply growth that we had previously forecast has been eroded by the latest round of downgrades to company guidance. Although we forecasts a more substantial surplus in 2016, we think risks are skewed to the downside, given the poor industry track record in delivering growth.

 

Eoin Treacy's view -

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

Energy represents a significant cost for mining companies and has been a major contributor to the commodity price inflation witnessed over the last decade. One might expect lower Energy prices to be a benefit for mining companies and they are. However the hard reality is this only helps marginal producers to survive longer and therefore prolong the supply surplus.

Oil prices are accelerating lower so Energy costs for mining operations have halved since the summer. This has contributed to the recent weakness in the industrial metal prices. The LME Metals Index broke downwards to new three-year lows this week and a clear upward dynamic would be required to check potential for additional weakness. 

 



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January 06 2015

Commentary by Eoin Treacy

Top Bond Managers Plan for 2015 Energy Rebound

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

Ken Leech, chief investment officer at Western Asset Management Co., has been adding Energy assets slowly, including debt from California Resources Corp., an exploration and production company. The Western Asset Core Plus Bond fund gained 3.02 percent after the risk adjustment.

Leech said he sees value in CMBS, residential-mortgage backed securities and U.S. investment-grade corporate bonds. The extra yield investors demand to hold company debt rather government notes rose last year for the first time since 2011 on slower global growth, which reduced returns. That trend probably will reverse this year as the economy accelerates.

 

Eoin Treacy's view -

I highlighted a number of high yield ETFs in a piece before Christmas when they were testing areas of previous resistance. I was led to this investigation by curiosity as to whether they had been affected by the fall in oil prices. What I discovered is that funds like HYG do not hold appreciable quantities of Energy sector debt and that the sell-off in high yield was more macro focused. 

In an effort to ascertain what effect the fall in oil prices has had on the debt markets I performed a search on Bloomberg for junk bonds, with ratings below BBB- and in the Energy sector. Coal companies, a number of which are at risk of bankruptcy, have the highest yields. 

 



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January 05 2015

Commentary by David Fuller

Email of the day 2

More on French nuclear power stations:

“The Government, which was in coalition with the Greens, decided to increase the % of "green" energies to reduce the French dependence (they should say independence) on nuclear electricity. To please the Greens, during the Presidential electoral campaign in 2012, Hollande promised to close Fessenheim (the oldest French nuclear plant). Since the departure of the remaining green ministers earlier this year, there are still talks of closing it down but other talks of lengthening its life (from what I read I doubt it since it would be very costly). In France, there is one nuclear plant under construction using a new technology  (EPR -Evolutionary Pressurized Reactors- a 3rd generation of PWR -Pressurized Water Reactor) in Flammanville; the second one has been suspended by EDF following Fukushima; in 2013 EDF announced that current demand did not warrant launching its construction. The first one under construction is in Finland and is a kind of financial disaster for Areva being 5 years behind schedule(!) so far and will probably increase to 9 years, due to design and construction problems (I understand the construction of this new generation is rather complex - I guess these are "normal" glitches for new babies).

“The French nuclear lobby is very powerful in France (even the communists are pro-nuclear) and I do not see how France could achieve 50% nuclear electricity by 2025 from 75% currently. The French nuclear plants are getting rather old and will need to be replaced: my guess is that most will be replaced but for any unforeseeable event.

“France badly needs nuclear electricity to balance (a bit) its Energy trade deficit. According to Areva, the nuclear industry represents EUR 6 billion of annual exports, employs 125,000 workers (410,000 in indirect and induced employment is added) plus several EUR billions of electricity exports. Finally, electricity is cheaper in France than Germany, one of the few competitive advantages of France.

“I have been very bearish on the French economy and I do not see any fundamental improvement. How long will the Germans tolerate France always signing agreements and never abiding by them? Time is running really short, and we are in an environment of artificially low interest rates which, when going up again, will really hurt the French budget (today, interest payments are higher than the income tax...). The mood in France is really bad (when talking to family and friends). I wrote an article a couple of years ago where I explained that it was France and not Italy that was the sick man of Europe, and I believe that the "chance" of an EU breakdown more possible than ever.”

David Fuller's view -

Thank you so much for this very detailed and informative summary.  The haunting question I ask myself: How much more prosperous might France and indeed most other European countries be today, without the Euro and the vast, often undemocratic and very expensive Brussels regime?  



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January 05 2015

Commentary by Eoin Treacy

Euro Slides to Weakest Since 2006 on ECB and Greece as Dollar Gains

This article by Lananh Nguyen and Lukanyo Mnyanda for Bloomberg may be of interest to subscribers. Here is a section: 

The euro slid against most of its major peers after President Mario Draghi said in an interview with German newspaper Handelsblatt published Jan. 2 that policy makers were ready to act if needed to counter deflation.

“The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago,” Draghi said.

“We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary.”

Greece began an election campaign that Prime Minister Antonis Samaras said may lead to an exit from the euro region should the Syriza party win. Der Spiegel magazine reported German Chancellor Angela Merkel considers a Greek exit from the euro to be manageable.

 

Eoin Treacy's view -

The Austrian School of Economics has a justifiable fear of the impact inflationary policies have on the assets of savers not least because of the region’s experience in the early part of the last century. Government bond yields below the expected rate of inflation represent a significant challenge for savers who have relied more on the momentum in prices to contribute to total return than yields over the last few years. 

There is little potential for the situation to change with deflation still a factor in the Eurozone’s deleveraging, disinflation in the Energy markets and the potential for Greece to vote in favour of an anti-establishment party in its upcoming election. The ECB will announce later this month just what it has planned in terms of additional extraordinary monetary policy but its balance sheet is already expanding. 

 



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January 05 2015

Commentary by Eoin Treacy

Kravis KKR Leads Record Sales by Private Equity Firms in 2014

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

“The exit activity is particularly significant, as many managers were still looking to exit deals done in the pre-crisis years and have been waiting for improved selling conditions,” said Christopher Elvin, Preqin’s head of private equity products.

Other big divestitures included Apollo’s $6.8 billion sale of oil and gas producer Athlon Energy Inc. to Encana Corp., which netted Apollo $2.2 billion in profit; Blackstone’s continued sale of shares in Hilton Worldwide Holdings Inc., the most profitable private equity deal ever; and Carlyle’s profit from Apple Inc.’s purchase of headphone maker Beats Electronics LLC, in which Washington-based Carlyle owned a minority stake.

Eoin Treacy's view -

A number of subscribers were wondering in the latter half of 2014 whether private equity firms would be capable of sustaining their outsized dividends. One way of looking at this question is as long as they are reaping the profits from earlier investments rather than raising debt to fund new purchases one might conclude they will continue with their partnership distributions. 



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December 31 2014

Commentary by David Fuller

U.S. Easing of Oil Exports May Foil OPEC Strategy

The Obama administration’s move to allow exports of ultralight crude without government approval may encourage shale drilling and thwart Saudi Arabia’s strategy to curb U.S. output, further weakening oil markets, according to Citigroup Inc.

A type of crude known as condensate can be exported if it is run through a distillation tower, which separates the hydrocarbons that make up the oil, according to U.S. government guidelines published yesterday. That may boost supplies ready to be sold overseas to as much as 1 million barrels a day by the end of 2015, Citigroup analysts led by Ed Morse in New York said in an e-mailed report.

Saudi Arabia led the Organization of Petroleum Exporting Countries to maintain its production quota at a meeting last month even as a shale boom boosted U.S. output to the highest in more than three decades. That prompted speculation OPEC was willing to let prices fall to force some companies with higher drilling costs to stop pumping.

“U.S. producers are under the gun to reduce capital expenditures given lower prices,” Citigroup said in the report. “Now an export route provides a new lease on life that can further weaken crude oil markets and throw a monkey wrench into recent Saudi plans to cripple U.S. production.”

Current U.S. export capacity is at about 200,000 barrels a day, which could be expanded to 500,000 a day by the middle of 2015, according to the bank.

David Fuller's view -

Commodity wars in the 21st century to date mostly involve knocking out export competition.  That is good for the global economy, corporations and consumers, provided countries are not overly dependent on exporting the commodities in question. 

President Obama has mostly opposed the US oil industry, despite benefitting from it.  However, led by the US Energy sector’s technological advances, he is now going for OPEC’s jugular.  That means weakening the Saudis who have been leading the cartel forcing oil prices higher since the 1970s.  Obama’s second target is the ruthless and irresponsible dictator Putin, who is still a major threat to Europe and possibly beyond. 

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December 30 2014

Commentary by Eoin Treacy

Musings From the Oil Patch December 30th 2014

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

The EIA later makes the following point about its scenario in which there is even greater closures of coal-fired power plants, which was authored prior to the EPA’s introduction of its new carbon emission restriction plans for existing power plants. “If additional existing coal-fired and nuclear generating capacity were retired, natural gas-fired generation could grow more quickly to fill the void. In recent years, the number of coal and nuclear plant retirements has increased, in part due to a decline in profitability as low natural gas prices have influenced the relative economics of those facilities. The Accelerated Coal Retirements case assumes that both coal prices and coal plant operating costs are higher than in the Reference case, leading to additional coal plant retirements. In this case, natural gas-fired generation overtakes coal-fired generation in 2019, and by 2040 the natural gas share of total generation reaches 43%. In the Accelerated Coal and Nuclear Retirements case, the natural gas share of total generation in 2040 grows to 47%.”

What if there isn’t sufficient natural gas available, at least at reasonable costs? That would create a serious economic hardship on Americans and the American economy. We suspect one immediate remedy would be to ban the export of all LNG from this country. If possible, there could also be some restrictions imposed on gas exports to Canada and Mexico. If the gas shortage proved even more severe, we would probably begin restarting coal-fired power plants, much like the UK is doing this winter at a significant cost merely to ensure that the UK has sufficient power generating capacity available. What would that cost our economy both financially and in greater carbon emissions? Maybe by the time the gas shortages become severe, we will have addressed the storage challenge for intermittent renewable power sources. Building new nuclear power plants might become an option, but we know that they take years to be constructed so they are not a short-term solution. In either case, the EPA is counting on the EIA’s abundant gas supply scenario as it moves forward with power plant shutdowns.

While this debate over gas production forecasts may seem like a tempest in a teapot, its significance should not be understated. The impact on the future economic strength of the United States if insufficient gas resources are available cannot be underestimated. Not only would we have misallocated Energy capital for decades, but we would have significantly altered the health of our public utility industry, possibly leaving it so weak it could not meet the needs of its customers, forcing the federal and state governments to have to bail out the industry. Maybe we need a “time out” before we rush to implement the EPA’s plan to restrict the carbon emissions for power plants to the degree that we force the retirement of much of our coal-fired generation capacity. Rest assured that the gas production forecast debate, while seemingly academic at the moment, will become a much more serious and a more mainstream issue in the coming years.

 

Eoin Treacy's view -

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

Shale gas has, as predicted, been a true game changer for the Energy sector. Let’s look at this question from both the supply and demand sides of the equation. 

On the demand side the EPA is wholeheartedly devoted to the climate change hypothesis. In order to deliver upon commitments to reduce carbon emissions, it is imposing progressively more stringent regulations on coal fired power stations. Since natural gas prices are competitive with coal at current levels this has had little effect on consumers. However it is worth considering that coal is the largest fuel for electricity generation at present and the USA is by far the world’s largest economy. Replacing even more coal with natural gas is going to require a great deal more natural gas than is currently used.

 



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December 29 2014

Commentary by David Fuller

Oil Falls to 5-Year Low as Supply Glut Seen Lingering

Here is the opening for this report from Bloomberg:

Oil tumbled to the lowest level in more than five years on speculation a global supply glut that’s driven crude into a bear market will continue through the first half of 2015. West Texas Intermediate fell 2.1 percent while Brent slipped 2.6 percent, reversing early gains spurred by an escalating conflict in Libya. Fires have been extinguished at three of six tanks at Es Sider, Libya’s largest oil port, which were set ablaze after an attack by militants, said National Oil Corp. spokesman Mohamed Elharari. Crude also fell as the dollar climbed to a two-year high against the euro, reducing the appeal of raw materials as a store of value.

Futures plunged 46 percent this year, set for the biggest annual drop since 2008, as the Organization of Petroleum Exporting Countries resisted supply cuts to defend market share in response to the highest U.S. output in three decades. Trading was below average amid Christmas and New Year holidays.

“We’re looking at a significant supply-demand surplus through the first half of 2015,” Tim Evans, an Energy analyst at Citi Futures Perspective in New York, said by phone. “The problems in Libya and any reduction in the growth of U.S. production will only help limit the surplus, but it’s not going away anytime soon.”

David Fuller's view -

The continued weakness of Brent and WTI crude oil is clearly positive for oil importing countries and their consumers.  However, it will also be disruptive for many oil producers in 2015, not least Russia and Venezuela, and there may be some debt defaults.   

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December 23 2014

Commentary by David Fuller

Roger Bootle: Can President Putin Explain How Osborne Conspired To Bring Down the Oil Price?

The headline is a tongue-in-cheek repetition of the last sentence of this upbeat article from The Telegraph.  Here is the opening: 

In my last column before Christmas, I traditionally have liked to bring some good cheer. As you may recall, there have been some years when this has been a herculean task.

But this is not one of them.

I will leave a review of the year just passed to next week’s column. Today, I want to write more about one of the year’s most important developments: low global oil prices. The tale I tell is about the overwhelming power of markets and prices over politics.

Some weeks ago, I stressed that I thought that oil prices would fall further but even I had not imagined that they would fall as far or as fast as they have. Of course, we still do not know whether this is a flash in the pan. It could be. But it doesn’t feel like it.

Three factors have come together to produce this big drop. The first is the slowdown in the world economy, led by China, but reinforced by the sluggishness of the eurozone. The second is increased supply, principally due to the shale fracking revolution in the US. And the third is the collapse of cohesion in Opec.

The third of these seems essentially political in origin and, I suppose, could go into reverse. The key player here is Saudi Arabia.

Supposedly, it wants low oil prices to hurt its traditional rival in the area, Iran, which is more vulnerable financially. Yet there are also sound economic reasons behind the apparent fracturing of Opec’s power.

For the oil-producing group to work, when there is downward pressure on prices Saudi Arabia, the so-called swing producer, has to cut output.

For it to agree to this, it has to be sure that other producers will not step into the breach and supply the oil that Saudi has cut back. It has always been a temptation for others to do this, and to some extent they always have.

This issue has taken a new twist with the resurgence of US production. Saudi wants to hammer US shale producers to deter long-term supply. This represents a return to traditional Saudi oil policy.

The late Saudi oil minister, Sheikh Yamani, was fond of telling audiences that when the Stone Age came to an end it was not through a shortage of stones. The danger was that the Oil Age would come to an end, not through a shortage of oil, but instead through the production of oil substitutes and increased efficiency.

David Fuller's view -

Subscribers are certainly familiar with the OPEC oil situation up to at least this point.  Yes, it is clearly a boost for the UK and every other oil importing country.  The anti-UK and particularly anti-English leaders of the Scottish Independence Party should be counting their blessings over losing their divisive referendum, although I do not expect to hear that from Alex Salmond or Nicola Sturgeon.   

This item continues in the Subscribers’ Area, where as PDF version of Roger Bootle's article is also posted.



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December 23 2014

Commentary by David Fuller

Gary Shilling: Who Gets Hurt When Oil Falls

Here is the opening of this second report on oil by the author, published by Bloomberg:

When the Organization of Petroleum Exporting Countries failed to cutproduction quotas last month, the initial investor reaction was: Hallelujah! Lots more savings for Energy buyers! Blowout Christmas spending by consumers!

The celebrations may have been premature.

True, the $1 decline in U.S. gasoline prices since April is the equivalent of a 1 percent rise in consumer spending power. Of course, some of that may be saved and not spent, at least initially. And in countries with fixed fuel taxes, including China, the economic effect will be greater. At the same time, U.S. auto makers may benefit from increased sales of low-mileage SUVs and light trucks, which are highly profitable. 

Net Energy importers, including Japan, South Korea and other East Asian countries, also benefit from lower Energy prices. China imports 60 percent of the 9.6 million barrels of oil it uses each day.  

Other Energy importers helped by lower prices include India, Turkey and Western Europe. Pakistan, Egypt, India and other countries that subsidize Energy costs will be able to reduce those expenses. Some of the benefit, though, is offset because the euro and other currencies are weak and oil is priced in more expensive U.S. dollars. 

But the list of oil losers may overpower the winners. Almost immediately, Energy companies started to cut capital spending, which equaled 0.9 percent of U.S. gross domestic product in 2013, the largest share since the early 1980s. An index of oil-field service companies is down about 40 percent from its peak. 

David Fuller's view -

There are some interesting and controversial points in this article but my view remains unchanged.  Prices near $60 a barrel are a major benefit for countries that import most of their crude oil.  Oil exporters are the big losers, especially high-cost producers.  There are more of the former countries, many of which also have large populations, so lower oil prices are a net gain for the global economy.



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December 23 2014

Commentary by Eoin Treacy

Tech hardware and supply chain, Ten themes to watch in 2015

Thanks to a subscriber for this detailed report from Deutsche Bank, dated December 8th, but no less relevant today. Here is a section:  

What is Big Data?
The terms Big Data and Big Data Analytics are often used interchangeably, but they differ in one fundamental way. Big Data describes the processes used to collect and store large amounts of data. A data set is generally considered big when traditional relational databases or statistical programs become difficult to work with on existing hardware platforms. When this happens, new techniques must be used which are based on distributing the processing of the data set across hundreds or thousands of servers. Examples of these data sets can include shopping patterns collected by customer loyalty cards or location information collected from iPhones. Big Data Analytics is the process of collecting value from that data.

Market size and growth expectations for the Big Data market
IDC estimates that the combined Big Data and Business Analytics market was a $115B market in 2013, with Big Data representing 11% of the total, while Business Analytics represented 89% of the total. As seen in Figure 10, the combined market is expected to grow at a CAGR of 13% over the next 5 years, reaching $214B by 2018. The Business Analytics market is expected to grow at a CAGR of 11% during this period to a $173B market by 2018, largely driven by growth in services and software to support Business Analytics, while the hardware to support that growth is only expected to see modest growth. 

The Big Data market is a smaller market than analytics and was a $13B market in 2013. As seen in Figure 11, the Big Data market is expected to grow at a CAGR of 26% over the next 5 years, driven largely by growth in hardware to support Big Data. Servers and storage to hold Big Data are expected to see growth of 28-29% during this period, with this growth significantly helped bycloud infrastructure which is expected to grow 41% over the next few years. Growth in Big Data is being driven by increased use of social media, the digital market place, the proliferation of mobile devices, and the growth in the Internet of Things (IoT).

 

Eoin Treacy's view -

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

The technology sector is in a constant state of flux, such is the rapid pace of innovation across its various subsectors. However some clear themes are evident such as mobility, connectivity, the accelerating output of data points from every part of our lives, increasingly intelligent machines capable of self diagnostics and rapid prototyping. All of these innovations are not occurring in isolation but are collaborative, so that developments in one area are quickly co-opted to accelerate growth elsewhere. While big data uses might be most apparent in social media and advertising, its application to the industrial, Energy and healthcare complexes is even more important. 

 



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December 23 2014

Commentary by Eoin Treacy

The Commodity Manual

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

Cattle on feed data partially vindicates last week’s stampede. Cattle markets locked limit-down early in the week as participants squared positions ahead of Friday’s Cattle on Feed report in the face of weakening slaughter data and concerns over potentially improving seasonal feeder cattle supply. The feeder cattle contract, which has outperformed live cattle by 1100 basis points YTD, lost 4% in the first three days of the week before recovering slightly on Friday. Live cattle faced a similar, though shallower decline, ending the week down less than 1% WoW. Friday’s data largely justified the bearish move, with Dec 1 feedlot inventories rising 1.4% YoY vs consensus expectations of a 1.2% increase. Some may read this report as more bearish for live cattle than for feeders, as an 11.1% decline in marketings YoY (vs consensus expectations of just a 9.8% decline) indicated continued weakness in slaughter demand. Meanwhile placements down 4% YoY (vs consensus predictions of a 3.4% decline) could be read as a sign that feeder supply remains challenged. However, we see the weakness in placements as signaling poor demand from feedlots rather than supply constraints. Average placement weights set a 5+ year high in Nov, signaling that ranchers are still holding back cattle to raise them to higher weights, artificially inflating prices. With high feeder cattle prices keeping feedlot margins under pressure and slaughter demand prospects weakening, feeder cattle prices may need to weaken further relative to live cattle to increase the flow of feeder cattle onto feed as winter reduces grazing options.

Eoin Treacy's view -

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

Cattle prices have been among the best performing commodity contracts this year. Part of the reason for this was that the 2013 surge in grain and feed prices advanced the slaughter schedule resulting in a smaller herd and an inability to increase supply in 2014. Against this background demand has been relatively stable. 

A look at a long-term chart of cattle pricing highlights its cyclical nature. What has been different about this move has been its size and longevity which can at least be partially explained by rising feed and Energy costs as well increasing demand from the global middle class. 

 



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December 19 2014

Commentary by David Fuller

Oil Production and Climate Change

My thanks to a relative for this interesting and detailed report by James W Murray, School of Oceanography, University of Washington.  Because it consists mostly of graphics, here is the briefest opening:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”

Mark Twain

There are many, many things that the public and policymakers know for sure about Energy that just ain't so.

"We like to think that the reason we enjoy our high standards of living is because we have been so clever at figuring out how to use the world's available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain."

- James D. Hamilton (Dept. of Economics, UCSD)

Oil Production has beenon a plateau since 2005

David Fuller's view -

Many thanks for this interesting and informative report.  I have been reading, trying to learn from, and commenting on Energy reports for over 45 years.  Most have proved to be quite inaccurate, in terms of long-term forecasts, largely because their authors did not fully appreciate the march of technology.  Many also had biases, across the widest range, from green alarmists to industrial deniers.  Moreover, if what we know about Energy production and technology had remained unchanged from the '60s or '70s, we would be living in a much more economically depressed and Energy challenged environment today.  I think you could say the same about what we know today, relative to what will happen during the rest of our lives and well beyond.

Of course Climate Change is extremely important and worrying, and we are but one of its major causes, if we consider the long-term history of our planet.  Coal is currently the cheapest Energy source, widely available and the biggest pollutant.  Fortunately, the use of coal is being phased out by many countries, not least in China, for health reasons. 

Greens and political alarmists such as Al Gore persuaded Germany to invest fortunes in inefficient wind mills and early solar projects.  As a consequence, in addition to some of the world's highest Energy costs, Germany is burning more coal today because the renewables need back-up coal-fired plants to offset frequent, sudden shortfalls when the wind is not blowing or the sun is not shining.   

France closed some of its older nuclear power stations following Japan's Fukushima nuclear disaster in March 2011, caused by a massive earthquake and tidal wave.  Today, France burns more coal for the same reasons as Germany, and both countries have considerably weaker economies.  These mistakes have been repeated across much of Europe and the UK.

The report above, interesting though it is, has biases and inaccuracies, such as the sweeping generalisations in points 3 & 4 below:

3. They are environmentally damaging because the fracking fluid is highly toxic and much of it escapes during the blowback process and sometimes water wells are contaminated.

4. Because each well has low flow and depletes quickly, massive numbers of wells must be drilled creating significant infrastructure damage to roads and bridges. Currently no state or municipal authorities are capturing anything close to the total cost of the infrastructure damage from the shale operators which means taxpayers are gong to be left paying those bills.

 This item continues in the Subscribers’ Area, where the report is also posted.



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December 19 2014

Commentary by David Fuller

Berkshire Energy Fined for Eagle Death at Wyoming Wind Farms

Here is the opening of this distressing report from Bloomberg:

PacifiCorp, one of the utilities owned by Berkshire Hathaway Inc. (BRK/A)’s Energy unit, agreed to pay $2.5 million to settle charges that its wind facilities in Wyoming killed eagles and other birds.

The deaths near the Seven Mile Hill and Glenrock/Rolling Hills wind farms violated the Migratory Bird Treaty Act, according to a statement today from the utility. PacifiCorp said it will pay $400,000 in fines, $200,000 in restitution to the Wyoming Game and Fish Department and $1.9 million to the National Fish and Wildlife Foundation to help protect golden eagles near the facilities.

David Fuller's view -

Good.  I hope they continue fining nice Warren Buffett and other owners of wind farms which remain cuisenaires for birds, and also drive people mad who have the misfortune to live nearby.   



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December 19 2014

Commentary by David Fuller

Iain Little: Global Thematic Investors

Here is a brief sample from Iain’s latest Fund Manager’s Diary:

The market has focused its laser gaze on negatives. Q: How much oil-related corporate debt is there? (A: about 15% of US recent issuance occasioned by the fracking capex boom,; a lot, but hardly a disaster) Q: How will Mr Putin react? (A: ask Mrs Putin; like Mr Putin, an unknowable unknown.) Q: Where are the bankruptcies? (A: it depends on how long resources languish at these levels, but there will be casualties; there always are) Q: Is oil's weakness a symptom of a wider economic malaise (A: maybe, but one detects the hand of swing-producer Saudi Arabia, rattled by US fracking, seeking to embarrass both the fracking and renewable Energy communities; it only adds to general merriment in Riyadh if political scores-Russia, Iran, Venezuela come to mind- can be settled at the same time)

David Fuller's view -

If you would like to meet Iain Little, a fellow subscriber to this service for decades, you can do so and hear his views, particularly on the important subject of Investment Trusts (closed-end funds) at the next Markets Now meeting in London on 12th January – see details below.  



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December 19 2014

Commentary by David Fuller

You Are Not Disabled. You Eat Junk

Here is the opening of this topical article from Bloomberg:

The decision by Europe's highest court that obesity can be a disability will only make a bad problem worse. Too many people in rich countries are already overweight. Giving them legal grounds to feel righteous about their condition, regardless of its causes, will almost certainly expand their ranks.

The case brought to the European Court of Justice involved Danish child-minder Karsten Kaltoft, fired by the municipality of Billund in 2010 after 15 years of service. The town attributed the firing to redundancy, but Kaltoft, who is 5'8'' tall and weighs 352 pounds, claimed his employer got rid of him because he was overweight: his weight was mentioned in the conversations that preceded his dismissal. The court was asked to decide whether that would have violated a 14-year-old European Union directive banning discrimination against people with disabilities. 

The matter turned on whether obesity qualifies as a disability. It's not expressly described as such in any Danish or European statutes. But the Court ultimately sided with an opinion filed by Advocate General Niilo Jaaskinen. He argued:

In cases where the condition of obesity has reached a degree that it, in interaction with attitudinal and environmental barriers, as mentioned in the UN Convention, plainly hinders full participation in professional life on an equal footing with other employees due to the physical and/or psychological limitations that it entails, then it can be considered to be a disability.

In other words, if one gets to be so overweight that it hampers one's work, the employer should find ways to accommodate the obese worker, rather than seek to replace him or her. That might mean buying her an extra large chair or even installing an elevator so she doesn't have to use the stairs to get to her workplace. It doesn't matter, Jaaskinen wrote, "whether the person concerned became obese due to simple excessive Energy intake, in relation to Energy expended, or whether it can be explained by reference to a psychological or metabolic problem, or as a side-effect of medication." Even if the disability is self-inflicted, Jaaskinen (and the Court) determined that discriminating on that basis shouldn't be permitted. 

David Fuller's view -

So people who eat too much junk food are not responsible for their own weight?

With rare exceptions in developed countries, of course they are.  You are what you eat.  We are responsible for our actions. 

Temptation is another matter and so is corporate responsibility.  I approve of the pressure governments, the medical profession, health industries and responsible individuals put on firms to provide healthier meals and accurately list all ingredients, not least including sugars, fats and preservatives.  This is sound commercial good sense, judging from the queues I encounter in Waitrose and Marks & Spencer food stores.     



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December 19 2014

Commentary by Eoin Treacy

Stress Testing EM FX

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

We expect this uphill battle to extend into 2015 as the main forces that drove EMFX in 2014 are still in place. However, we believe that these headwinds are poised to ease as the year unfolds, since we believe that: 1) the upside for the USD into 2015 is about one-third of what we saw in 4Q14 (and possibly concentrated in 1Q15); 2) oil prices have already approached the bottom of our expected range; 3) the political calendar will be considerably lighter; 4) policy uncertainty has reduced; and 5) EM growth will likely pick up some steam over the next year. On aggregate, we forecast EMFX spot slightly stronger in 2015. This, plus the usual contribution from carry, as the chart below shows, should eventually benefit portfolio flows.

Central banks: Not to the rescue. As one important byproduct of the recent fall in commodities, investors will still face mostly dovish central banks. In addition to reduced inflationary pressures (mostly outside LatAm), central banks see EM currencies as their main line of defense against external and domestic shocks. This – in addition to policy divergence and differences in exposure to oil – have underpinned our preference for INR, IDR, TRY vs. BRL, RUB – and to a lesser extent ZAR (where downgrade risks will linger) – among the high-yielders.

Although we believe that the dovishness of central banks is to a large extent priced among the lowyielders in EMEA, it will likely continue to weigh on Asia FX. With the JPY, food and Energy prices down, we expect the need to preserve value to drive policy in SGD, KRW, and THB. We also see BNM shifting its line of MYR defense to 3.50, while PHP remains vulnerable to perceptions that monetary policy is falling “behind the curve”. In LatAm, the room for easing monetary policy is a lot less given high inflation and the region’s FX exposure to commodities, but we believe that further easing will keep CLP undervalued in the first part of 2015, at least.

Eoin Treacy's view -

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

The Dollar’s rally this year not only against the Yen but a host of emerging and developed market currencies has been both outsized and counter to the trend that has prevailed for the better part of a decade. Commodity prices, electoral cycles and central bank actions have all been major factors but the relative strength of the US economy is perhaps the most notable factor of all. 



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December 19 2014

Commentary by Eoin Treacy

Year-Ahead Outlook 2015

Thanks to a subscriber for this report from Deutsche Bank focusing on the credit markets. Here is a section:

 

Historically, it has been the case that lower oil provided a net benefit to the US and EU economies, both of which were large net importers of Energy. This remains the case in EU today, however we wonder to what extent this relationship might have changed for the US in recent years. Just looking at Energy companies in our IG and HY indexes, we are seeing their cumulative capital expenditures since Jan 2010 at $4.7 trillion, with $1.15trln coming in the last four quarters alone. The latter figure translates into 6.5% of the total US GDP, not an immaterial figure. We realize that not all of this capex went into US shale plays, however it is just as important to acknowledge that not all US shale players are captured by our IG/HY index data. What part of this capex budget gets cut next year is subject to uncertainty, however even a relatively modest cut of 10% could translate into a noticeable 65bp impact on broader GDP figures.

What makes this issue even more consequential to the US economy, is that the negative impact of lower oil is unlikely to remain confined just to the Energy sector alone. Some of the more obvious casualties will include capital goods and materials sectors, where suppliers of drilling equipment, pipes, storage containers, machinery, cement, water, and chemicals used in shale production are all likely to experience a negative impact. Now, readers should be careful to avoid double-counting the same dollars here, as a dollar of capex by oil producer is 80 cents of inventory sold from its suppliers; only incremental value-added is captured by the GDP. Add to this list railroads, where volumes exploded in recent years as large quantities of oil were ferried by rail cars.

All these are relatively obvious casualties of a pullback in Energy producers’ budgets. Perhaps somewhat less straightforward would be utilities – we wonder how much electricity was used to power all this new shale-related manufacturing, production, transportation, and refining activity? Taking one more step towards less directly impacted sectors, we think about financials, and not even in a sense of direct loan exposures to cash-flow challenged producers. Energy producers have raised $550bn in new debt across USD IG, HY, and leveraged loan markets since early 2010 (Figure 3). Lower capex budgets would imply lower need (and ability!) to borrow, thus squeezing a revenue source for investment banks.

And now to the least obvious, or perhaps even counterintuitive, candidates: think about consumer discretionary sectors, such as retail, autos, real estate, and gaming. States with the strongest employment growth in the US in the last few years were all states heavily involved in shale development – average unemployment rate in Dakotas, Nebraska, Utah, Colorado, Iowa, Montana, Oklahoma, Wyoming, and Texas is 4.1%, compared to a national aggregate of 5.8%. Average unemployment rate in oil-producing states today is lower than the national aggregate was at any point in time in the last twelve years.

While we still believe that lower oil prices would provide a net benefit to consumer discretionary areas, we think that historical parallels between Energy prices and their positive net effects could be challenged in this episode given significant changes to structural characteristics of the US economy. Just as we believe consensus has consistently underestimated positive externalities of the US Energy revolution in the past few years, it is positioning itself to underestimate the other side of this development now. 

Eoin Treacy's view -

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

The stock market appears to be currently focused on the benign economic scenario that has allowed the Fed to signal short-term interest rates may increase in 2015. With unemployment back to trend and early signs of wage increases, along with recovering economic growth, the Fed has good reason to want to use this environment as an opportunity to replenish its arsenal of policy tools. Consumers will find that they have extra money in their pocket every time they fill up at the pump or pay of heating oil and these benefits will pass on to Energy consuming sectors as well. 



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December 18 2014

Commentary by David Fuller

S&P 500 Caps Best 2-Day Gain Since 2011 Amid Global Rally

The Dow Jones Industrial Average (INDU) surged the most since 2011 and the Standard & Poor’s 500 Index capped its best two-day gain in three years as global equities rallied on theFederal Reserve’s pledge to be patient on boosting rates.

The S&P 500 added 2.4 percent to 2,061.23 at 4 p.m. in New York. The index climbed 4.5 percent over two days, the most since November 2011. The Dow gained 421.28 points, or 2.4 percent, to 17,778.15, the biggest one-day jump since December 2011. Technology shares soared as Oracle Corp. increased the most in six years. About 8.7 billion shares changed hands on U.S. exchanges, 22 percent above the three-month average.

“Just as with other instances, a dovish Fed is making up for a lot of bad news, fromEurope and from other parts of the world,” Russ Koesterich, chief investment strategist at New York-based BlackRock Inc., said in an interview on Bloomberg Television. “This is why you have this rebound rally after a few days of very harsh losses.”

U.S. stocks are rebounding from a seven-day decline that erased $1 trillion from equity prices and coincided with a 15 percent drop in West Texas Intermediate crude between Dec. 5 and Dec. 16. S&P 500 (SPX) Energy producers tumbled 8 percent over the stretch while chemical and mining companies lost 7.4 percent. The S&P 500 is now 0.7 percent away from wiping out all its losses from the recent selloff.

A full recovery would be the fifth time this year the S&P 500 has come back after falling more than 4 percent from a high. In comparable drops beginning in January, April, July and September, the index needed about a month to erase losses, data compiled by Bloomberg show.

A full recovery would be the fifth time this year the S&P 500 has come back after falling more than 4 percent from a high. In comparable drops beginning in January, April, July and September, the index needed about a month to erase losses, data compiled by Bloomberg show.

David Fuller's view -

The greater two-way volatility confirms that buying and selling pressure are currently more evenly matched.  Nevertheless, there is still no evidence that the bull market has ended, judging from this weekly chart of the S&P 500 Index.

This item continues in the Subscribers’ Area.



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December 18 2014

Commentary by David Fuller

Vladimir Putin Looks Like a Man Trying to Hide His Own Incompetence

Russia has surged ahead since the end of the Cold War by accepting post-Soviet international borders, finally joining the modern world economy and joining in many European integration processes. But those gains require commitment to ever more sophisticated rules and transparency that set limits on policy options. Under Putin’s leadership Russia in 2014 has given the strong impression that it sees any such limits as weakness, and no longer wants that basic deal.

Unfortunately for the Kremlin, its assertive stance has collided this year with the fast-accumulating consequences of Russia’s own bad policies: systemic corruption, weak property rights and unwise over-reliance on high Energy prices. Prospects for medium-term growth were already uncertain before the oil price started to tumble, wrecking Russia’s state budget calculations.

Western leaders may shrink from confronting Vladimir Putin in person. But the Kremlin can’t intimidate the planet’s anonymous, restless international financial markets: they are voting down Russia’s credibility. Sharp-toothed Western financial sanctions prompted by the Kremlin’s illegal foreign territory-grabs earlier this year have reinforced a sense of crisis.

David Fuller's view -

People say the Russian stock market is cheap.  Yes it is, and it is also rallying from a short-term oversold condition.  However, dictators have never been reliable long-term assets for stock markets, for one very good reason; they only survive by managing kleptocracies.  Europe had hoped that Russia was turning into a democracy, but Putin shattered that illusion because he wanted to stay in power.  His dictatorial regime limited the considerable entrepreneurial skills of its population and Russia fell behind.  

This item continues in the Subscribers’ Area, where a PDF version of The Telegraph article is also posted.  



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December 18 2014

Commentary by Eoin Treacy

Falling oil prices and the implications for asset quality

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

Our country bank analysts have studied the financing of the local Energy production chain in 12 Asian markets and in this report evaluate the risks arising from sharply falling global oil prices. For the oil production countries, namely Australia, Malaysia and China, bank lending is primarily extended to the state-owned or globally established MNCs engaging in E&P (Exploration and Production), with some of them engaging in diversified Energy businesses; for example, gas, that can help offset part of the losses from falling oil prices. In Australia, banks have set aside economic overlays (3-6% of the exposure) to buffer against potential risks from the worsening asset quality of the mining and Energy sectors.

Impact for banks financing refinery businesses and overseas projects
While the refinery businesses of the major oil importing countries (India and Thailand) should benefit from falling global oil prices, the banks have less than 1% of loans pledged to the related industries, implying limited positive earnings impact. For Asian banks, such as Japanese banks, that have financed overseas projects, the borrowers are primarily strong companies with limited default risks.

Indian, Indonesian and Chinese banks historically the best performers
Since 2006, we identified four periods of global oil prices falling by an average of 46% within six months and we observed that global equity indices have been negatively affected, with MSCI Asia-ex JP financial index underperforming the S&P Index by 2%, but outperforming the global MSCI EM index by 4.7%. The best performers were India (+19%), Indonesia (+8%) and China (+4%), while HSBC (-14.5%), Standard Chartered (-21%) and Korean banks (-16%) were the worst. This order of performance is consistent with our preference among Asian financials based on our fundamental analysis.

Eoin Treacy's view -

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

A number of Asian markets have been subject to some quite extreme volatility over the last couple of weeks as the impact of meaningfully low oil prices have shaken the status quo. 



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December 17 2014

Commentary by David Fuller

Fed Vows Patience on Rates While Dropping Considerable Time

Here is the opining of this article on the Fed’s meeting, reported by Bloomberg:

The Federal Reserve said it will be patient on the timing of the first interest-rate rate increase since 2006, replacing a pledge to keep borrowing costs near zero for a “considerable time,” and raised its assessment of the labor market.

“The committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Federal Open Market Committee said today in a statement in Washington, removing a calendar-based phrase with language that gives it more flexibility to respond to economic data. “The committee sees this guidance as consistent with its previous statement that” rates are likely to stay near zero for a “considerable time.”

The labor market “improved further,” the Fed said. “Underutilization of labor resources continues to diminish,” it said, dropping the word “gradually” used in its previous statement.

The change in guidance is another step in the Fed’s plan to exit from the loosest monetary policy in its 100-year history. While a faster-than-expected drop in unemployment is pushing the central bank toward raising rates next year, plunging prices of oil and commodities are holding inflation below its target.

Today’s statement didn’t mention global market turmoil sparked by oil and the Russian currency crisis.

Restating language introduced in October, the FOMC said evidence of faster progress toward its goals of full employment and price stability could accelerate the timing of a rate increase, while disappointing figures could delay it.

The Fed repeated it will continue reinvesting proceeds from its bond portfolio until after interest rates start to rise. Three rounds of so-called quantitative easing have swollen the Fed’s balance sheet to a record $4.49 trillion. The central bank stopped purchases at the end of October.

Minneapolis Fed President Narayana Kocherlakota, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher all dissented. Kocherlakota said the decision “created undue downside risk to the credibility of the 2 percent inflation target.”

David Fuller's view -

Three Fed officials dissented but I think Janet Yellen’s decision was correct.  She knows the Dollar’s strength - reflected here by the Euro-dominated US Dollar Index (DXY) and the Asia Dollar Index (ADXY) - is now a headwind for US exporters.  Additionally, soft commodity prices should keep inflation in check for up to a year.  Most importantly, much of this year’s job creation and wage increases have come from the US’s booming Energy sector which is about to see a shakeout in fracking due to low prices for crude oil.  

This item continues in the Subscriber’s Area and includes a review of stock market indices.  



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December 16 2014

Commentary by Eoin Treacy

Global Metals Playbook: 2015 Outlook

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

Metal’s flagship has got upside: Copper’s price has come under pressure late in the year, reflecting the Energy sector sell-off and a perceived short-term metal surplus. Weaker, but the price remains well above its long-term average, and above the industry’s 90th percentile. Robust support of its value comes mainly from two drivers: China’s overwhelming dependence on imports (70% of supply); and the fickle nature of copper’s complex supply chain (mine supply; concentrates; scrap). Unlike other commodities, copper’s mine supply growth never quite matched demand growth during the Super Cycle, a condition that is unlikely to change over the medium term – underpinning our bullish price outlook.

Why so bearish? Consensus view: copper’s trade will now report persistent surpluses. Yes, current signals point to adequate supply: inventories are rising; key merchant premia are soft; backwardation may just reflect concentrated LME positions. Elsewhere, concentrate flows are adequate (TC/RCs are high); scrap flows are expanding. We acknowledge these bear signals. We’re just not convinced by the mine supply growth story. Low-risk re-rating of Escondida output over the past two years was actually unusual. To expect short-term green/brownfield deployments to proceed without disruptions at a lower price level (assuming unchanged demand growth) ignores the history of this industry.

Projects to watch: Key mine supply growth drivers to watch include Las Bambas, Toromocho, Sentinel, Cerro Verde; track Codelco’s ability to fund growth to >2Mtpa; Indonesia’s exports remain at risk, politically; in 2016, Escondida may de-rate again on lower grades; Rio Tinto has pared Kennecott’s supply outlook. We expect ongoing supply disappointments, simply because it is a feature of the industry.

 

Eoin Treacy's view -

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

There are a lot of moving parts to the commodity sector but the biggest change by far to the economics of production has been the falling oil price. We do not yet know at what level prices will eventually stabilise but the fact remains Energy costs have fallen almost 50% in six months. Considering how important Energy costs are for miners, this move will improve the average cost of production and prolong the ability of marginal producers to increase supply.



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December 16 2014

Commentary by Eoin Treacy

Norway Krone Drops to Parity With Sweden, First Time Since 2000

This bulletin by Paul Dobson for Bloomberg may be of interest to subscribers. Here is a section: 

NOK/SEK -2.2% to 0.9992, having fallen 5.8% so far this year.
* Norway’s krone is worst-performing major currency in 2014, having dropped more than 20% versus USD
* USD/NOK +1.5% today to 7.5989, reached 7.6091, strongest level since 2003
* NOTE: Sweden Readies Arsenal of Measures to End Deflation

 

Eoin Treacy's view -

As a major Energy exporter Norway has not been immune from the effects of the falling price of oil. However considering the fact that it has one of the world’s largest sovereign wealth funds and standards of governance on par with anywhere in the world, one might conclude that the indiscriminate selling of commodity currencies has fallen disproportionately on the Nordic nation. 



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December 15 2014

Commentary by David Fuller

A Second Chance for Abe

Tweaks -- taxing corporations that sit on their cash rather than investing it or raising wages, for instance -- might help around the margins. But the real problem is that for all his Energy and verve, Abe has not fundamentally altered the status quo in Tokyo.

Japan's entrenched bureaucracy waters down reforms almost instinctively. That means small changes are all but certain to be whittled to nothing. Abe’s first two arrows succeeded in part because of their size and shock value: They were designed to change expectations radically, and for a time they did. Abe needs another big bang -- something much more than a $25 billion stimulus package.

The most obvious place to start would be with the Trans-Pacific Partnership trade deal, which would crack open some of Japan’s most inefficient sectors. Abe barely mentioned the pact during the campaign, for fear of alienating the powerful farm lobby. Now he need not be so timid. While the U.S. Congress may still derail any deal, Abe could at least pressure Washington by making key concessions on agricultural and auto tariffs.

Abe has also walked too gingerly around the issue of immigration reform. The economy desperately needs new blood -- from nurses to care for the elderly, to construction workers, to high-skilled entrepreneurs who can teach Japan Inc. how to innovate again.

There is a chance that Abe could mistake his mandate as license to push ahead with more controversial elements of his agenda, including revising Japan’s postwar constitution. He would strengthen Japan far more if he instead worked toward his own Nixon-to-China rapprochement with Beijing next year, the 70th anniversary of the end of World War II. While tensions with the mainland are inevitable, the current chill in relations risks more harm to Japan than to China: By some estimates, China might need to import as much as $4 trillion to $6 trillion in services over the next decade -- a huge potential opportunity for Japanese businesses.

Some of the strongest resistance to all of these moves will continue to come from within Abe’s own party. But voters returned the Liberal Democratic Party to power because they saw little alternative and want to believe Abe can bring Japan's economy back. His party needs to let him try. 

David Fuller's view -

Neither Shinzo Abe nor anyone else can turn around an economy quickly that has been sliding for 25 years.  There are some interesting suggestions above, although I would not be increasing taxes on corporations, mentioned in the first sentence.  I would not raise the sales tax again either, at least not until the economy is clearly on a stronger footing.   

Japan is a high-tech entrepreneurial society, so it should be able to prosper once again in today’s environment of accelerating technological innovation.  Abe should promote this effort.  He could also champion Japan’s most underutilised asset - its educated women who deserve equal opportunity employment policies.  He could also show diplomatic initiative and attempt to break the 70 year old post WWII hostilities which make regional cooperation more difficult.  



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December 11 2014

Commentary by David Fuller

Mobius Says China Bull Market Is Just Getting Started

Here is the opening of this article from Bloomberg:

Mark Mobius says the bull market in Chinese stocks is just getting started and he’s using the biggest price swings in five years to boost holdings.

“We are buying more in China because we think this is the beginning of a longer-term bull run,” Mobius, who oversees about $40 billion as the executive chairman of Templeton Emerging Markets Group, said in a phone interview yesterday from Thailand.

The 78-year-old money manager, who’s been investing in emerging markets for more than four decades, is stepping up his wager on China after correctly predicting four months ago that the nation’s stock rally had further to run amid low valuations and government efforts to open-up state-dominated industries. The Shanghai Composite Index (SHCOMP)’s 51 percent jump from a four-year low in June 2013 is still less than half the average 122 percent gain during 26 bull markets since 1990.

China’s rally has accelerated during the past month as the central bank unexpectedly cut interest rates and mainland investors opened new stock accounts at the fastest pace in five years. While the Shanghai gauge posted its biggest one-day tumble since 2009 on Dec. 9, Mobius says increased volatility is creating opportunities to buy mispriced shares.

Mobius said he’s been buying Chinese stocks “across the board,” including oil-related companies, on expectations that crude prices will recover from five-year lows. Petro China Co., the nation’s biggest Energy company, has climbed 21 percent in Shanghai trading during the past month.

David Fuller's view -

One often sees a wide range of views in most markets, not least in today’s environment.  Nevertheless, Mark Mobius’ assessment of China makes sense to me.  

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December 11 2014

Commentary by David Fuller

Fed Bubble Bursts in $550 Billion of Energy Debt: Credit Markets

Here is the opening of this informative report from Bloomberg:

The danger of stimulus-induced bubbles is starting to play out in the market for Energy-company debt.

Since early 2010, Energy producers have raised $550 billion of new bonds and loans as the Federal Reserveheld borrowing costs near zero, according to Deutsche Bank AG. Withoil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for Energy junk bonds will double to eight percent next year.

“Anything that becomes a mania -- it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.

Borrowing costs for Energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44 percent to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

David Fuller's view -

What are the implications of this situation?

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December 10 2014

Commentary by David Fuller

Global Stocks Drop as Oil Renews Selloff; Yen Strengthens

Here is a section of this report from Bloomberg:

OPEC cut the forecast for how much crude it will need to provide in 2015 to the lowest level in 12 years amid surging U.S. shale supplies and lower demand estimates. U.S. crude inventories rose to the highest seasonal level in weekly data that started in 1982, the Energy Information Administration said. Energy shares in the S&P 500 tumbled 3.3 percent to the lowest since April 2013, while oil and gas producers led the slide in European equities and Canadian shares.

“Oil dropping is creating uncertainty,” Paul Zemsky, the New York-based head of multi-asset strategies at Voya Investment Management LLC, which oversees $213 billion, said by phone. “People are trying to figure out what it means for other markets. The indirect impact should be beneficial as gasoline prices drop but that happens later. There’s fear before benefits here.”

David Fuller's view -

A more nervous tone for global markets is very evident this week.  What might the contributing factors be?

I would start with vertigo, since Wall Street and many other markets had a good run following the mid-October lows, oil exporters excepted.  Primarily commodity producing countries have continued to underperform.  Celebrations of the oil price rout by industrialised economies have now given way to concern in economies that are also significant producers of Energy, including the USA.  

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December 10 2014

Commentary by David Fuller

Brent Crude Drops Below $65 as OPEC Sees Less Demand

Here is the opening of this report from Bloomberg:

Brent fell below $65 for the first time in more than five years as OPEC cut the demand forecast for its crude oil to a 12-year low. West Texas Intermediate dropped near $60 as U.S. inventories grew.

Both benchmarks are more than 40 percent below their 2014 peaks in June. OPEC reduced its projection for 2015 by about 300,000 barrels a day to 28.9 million in its monthly report today. U.S. crude inventories rose to the highest seasonal level in weekly data that started in 1982, the Energy Information Administration said.

Brent has collapsed 17 percent since Nov. 26, the day before OPEC agreed to leave its production limit unchanged at 30 million barrels a day, resisting calls from members including Venezuela to cut output to stabilize prices. The decision prompted the biggest one-day decline in more than three years.

“The sentiment is horrible right now,” said Paul Crovo, a Philadelphia-based oil analyst at PNC Capital Advisors. “People are just throwing in the towel. I don’t think anybody knows what OPEC wants to do.”

David Fuller's view -

Regarding the last sentence above, what we are really talking about is Saudi Arabia’s objective, as I have frequently been discussing in recent weeks.  Their gamble is that they can knock out high-cost producers. 

Can they?

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December 10 2014

Commentary by Eoin Treacy

Filling the tank before liftoff

Thanks to a subscriber for this report from Deutsche Bank. Here is a section on the USA:

The plunge in oil is concerning and is a net negative to S&P EPS, particularly for Energy, Industrials and Materials. We cut our 2014E EPS by $1 to $117.50 and our 2015E EPS by $5 to $121. We still expect 2015 EPS growth of ~3% as most macro data and company commentary do not suggest that global growth is careening. Europe is weak and hopes of improvement are policy dependent, but US growth remains healthy and consumption should stay strong on job gains and now cheaper oil. China and rest of EM is uncertain with what seems to be a controlled deceleration that isn't overly alarming, but is clearly weighing on commodities, materials and industrial goods' profits.

Our 2015E S&P EPS of $121 assumes 2015 avg. oil price of $65/$70 for WTI & Brent and euro doesn’t fall below $1.15. Every $5/bbl lower oil price lowers Energy earnings by 10% and S&P EPS by ~$1, net of benefits elsewhere. 

Since the S&P 500 is more of an oil producer than user, the ~30% decline in Energy sector profits that we expect next year, assuming oil at $65-$70/bbl, is too much of a hit for benefits at other sectors to fully offset. If oil price average ~$80/bbl next year then S&P EPS is likely $3 higher, all else the same.

The S&P is global: 40% of total profits from abroad, 25% in foreign currencies S&P 500 companies are among the largest and most successful multinationals in the world. We estimate that a third of S&P revenue and 40% of its net profits are earned abroad. This has been the case for at least 5 years and compares to 15-20% in the mid 1990s and likely 10-15% in the mid 1980s.

Excluding Financials, Utilities and Telecom, slightly more than half of S&P profits are from abroad. While some foreign profits are earned in dollars, we estimate that roughly 25% of total S&P profits are earned in foreign currencies. Thus, we estimate that every 10% gain in the dollar vs. a trade weighted basket of currencies reduces S&P EPS by ~$2 or ~2% from FX translation.

 

Eoin Treacy's view -

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

The above points relating to how the fall in oil prices and Dollar’s rally have the potential to impact the consolidated earnings of US companies are important. This is particularly true when the market has already been rallying for the last five years. When measured against the current short-term overbought condition on Wall Street potential for at least some consolidation and possibly mean reversion has increased. 



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December 09 2014

Commentary by David Fuller

Nuclear Poised to Be Winner as Abe Eyes Broader Japan Majority

Here is a brief section of this informative article from Bloomberg Businessweek:

As a result of the high cost of imported fuel, Japan’s current account registered a 367.9 billion yen monthly deficit in June, placing an extra burden on an economy that has contracted for two straight quarters after a sales tax increase in April.

In view of those numbers, some of Japan’s largest companies say nuclear Energy is critical to their operations.

“How much longer do we need to endure?” a group of Energy-intensive industries asked in a petition submitted to government ministers earlier this year. “We need to know the path for survival.”

Nippon Steel & Sumitomo Metal Corp. and Kobe Steel Ltd. are among the member companies belonging to the 11 industry groups that were signatories to the petition.

The absence of nuclear has also set back the nation’s climate goals. Japan’s greenhouse gas emissions have been on the rise since 2010 as thermal power generation increased to make up for lost nuclear capacity and the economy recovered after the 2008 financial crisis. Greenhouse gas emissions rose 1.6 percent in fiscal 2013 compared with the previous year and are 8.5 percent higher than the year before Fukushima, according to preliminary data by the Ministry of the Environment released on Dec. 4.

That’s bad news as climate envoys from more than 190 countries gather in Lima, Peru to debate a framework to keep the earth’s temperature from rising. Countries are to submit plans on their contributions to climate change in the first quarter of 2015, if possible, toward a universal agreement.

David Fuller's view -

Japan’s restart of approved nuclear power stations will be another important boost for its struggling economy, which has the potential to be one of Asia’s better performers in 2015.  



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December 09 2014

Commentary by David Fuller

Bank of America Sees $50 Oil as OPEC Dies

It will take six months or so to whittle away the 1m barrels a day of excess oil on the market – with US crude falling to $50 - given that supply and demand are both “inelastic” in the short-run. That will create the beginnings of the next shortage. “We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s Energy expert.

Mrs Schels said the global market for (LNG) will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.

If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.

Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, equal to a $730bn “tax cut” in 2015. Yet the effects are complex, with winners and losers. The benefits diminish the further it falls. Academic studies suggest that oil crashes can ultimately turn negative if they to trigger systemic financial crises in commodity states.

David Fuller's view -

These comments are interesting and add to my belief that Energy crises are largely over and even sooner than I have been predicting in recent years.  Oil crises have been a big concern since the 1970s, when OPEC could (and did) throw the global economy into recession by raising oil prices at will.  The last oil crisis was in 2008 and we are very unlikely to see another similar price spike in crude prices.

The comments on LNG from Australia being able undercut pipeline gas from Russia to Europe are certainly plausible.  However, I think Australia’ main target for these exports will always be Asia. 



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December 08 2014

Commentary by Eoin Treacy

Show me the money

Thanks to a subscriber for this report from Deutsche Bank focusing on Mexico. Here is a section: 

Mexico’s growth remains subdued despite 11 structural reforms passed months ago. Thus, baffled investors are now demanding prompt execution of projects to keep alive long-standing goodwill towards this administration.

Sentiment has been further hit by a pick-up in social unrest. We do foresee a marked turnaround in public and private spending in the short term, and prolonged dynamism in 2015-20. In turn, we highlight four themes investors should not miss and potential beneficiaries of these trends.

One developing superpower
Deutsche Bank anticipates approved reforms to support sustained GDP growth above 5% in the long term, practically double the average growth in the last three decades. The Energy Reform alone should contribute incremental GDP growth of 1.6% by 2025. Effective actions to control unrest are paramount to place Mexico in the selective group of developed economies, in our view.

Two signals of turnaround
Industrial production is likely to continue to accelerate supported by rising exports of automobiles (+10% YTD) and construction depicting faster growth (vs. contraction over the past three years). On this, housing starts are up 25% on a trailing 12-month basis and three months of supportive data hint that the downward trend of infrastructure activity has been broken. Three clear short-term catalysts

Round One of the Energy Reform should auction close to 170 exploration and extraction projects in 1H15. In addition, critical mid-term elections in June 2015 should unleash material public spending in the coming months. Finally, major projects under the National Infrastructure Program are starting to ramp up, and several more should be awarded next year. In sum, this means more than US$600bn of investments, equivalent to almost 50% of Mexico’s GDP.

 

Eoin Treacy's view -

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

The structural reforms introduced by the Mexican government over the last couple of years are encouraging from a governance standpoint. Those aimed at the Energy sector were particularly welcome since the sector was closed to outside investment for so long. As oil prices decline the question now being raised is whether these reforms were introduced too late to avail of the investment capital chasing shale development. 



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December 04 2014

Commentary by David Fuller

OPEC: Saudi Prince Says Riyadh Will Not Cut Oil Unless Others Follow

Saudi Arabia's influential royal Prince Turki al-Faisal al-Saud has said the kingdom would only consider cutting oil production if Iran, Russia and the US agreed to match those cuts because it wants to protect its market share.

Speaking in London, the Prince who is a senior Saudi royal and the former head of the country's spy agency, said that the kingdom would not repeat previous mistakes of surrendering its share of the global market for crude to its rivals. His remarks come just days after a controversial meeting of the Organisation of Petroleum Exporting Countries (Opec), when the group appeared split over a decision to keep producing at current levels.

"The kingdom is not going to give up market share at this time to anybody and allow - whether it is Russia, Nigeria, or Iran or other places - to sell oil to Saudi customer," said Prince Turki, who has also held Saudi Arabia top overseas diplomatic post as the kingdom's ambassador to the US.

Prince Turki added that Saudi Arabia and other producers would only consider adjusting production if other members of Opec adhered to the group's quotas and stopped making "under the table" deals to sell crude in barbed remarks apparently aimed at rivals Iran.

The remarks by the outspoken Saudi royal will add to the view that the kingdom - the world's largest oil exporter - is now locked in a bitter oil price war with the likes of Russia, Iran and shale oil drillers in North America. Oil has fallen by over 30pc since June to trade at around $70 per barrel with some analysts suggesting the level could fall further to as low as $40 per barrel.

David Fuller's view -

There you have it.  The Saudis obviously have no love for Russia, Iran or US shale oil producers.  They are not just commercial rivals but enemies in a costly war for oil producers.

What are the likely consequences?

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