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October 27 2014

Commentary by David Fuller

Russian Brain Drain Saps Talent as Sanctions Hit Financing

Here is the opening of this informative article from Bloomberg:

Artem Kulizhnikov, founder of a startup designed to help musicians annotate music, is packing his bags to leave Moscow in December.

His destination: Dubai or Singapore, where he sees a better chance of securing funding for his second company.

“Russian venture-capital funds want to invest their money only in Russia, but we want to build an international business and they won’t support us,” Kulizhnikov, a former analyst at investment firm Alor SPB, said at a forum at Moscow’s Digital Octobercenter on Oct. 10. “We don’t need that much. Maybe $5 million to $10 million, to hire engineers, specialists, etc.”

Kulizhnikov, 22, is part of a growing brain drain as Russia’s worst clash with the U.S. and Europe since the Cold War accelerates an exodus of capital and its brightest minds in finance and Technology. More people emigrated from Russia in the first eight months of 2014 -- 203,659 -- than in any full year underVladimir Putin’s rule, according to the Federal Statistics Service. With the stigma of sanctions limiting access to capital markets abroad and the government tightening controls at home, more entrepreneurs and investors in particular are looking elsewhere.

Since Russia annexed Crimea in March, Pavel Durov, the founder of VKontakte, Russia’s version of Facebook, left the country to develop a mobile social network, saying he was unwilling to comply with government demands to turn over personal data on Ukrainian users. Game Insight LLC, ranked by Forbes magazine as the nation’s seventh-largest Internet company, shifted its headquarters from Moscow to Lithuania. Pavel Muntyan, the Russian founder of Toonbox animation studio, moved his staff of 15 from Moscow to Cyprus.

Russia is one of our main markets, but we see it closing to us within a year or two,” Muntyan, 36, said by telephone. “Russians find that our cartoons aren’t Russian enough. We don’t want to be Russian, we want to be international. Why box ourselves in?”

David Fuller's view -

Governance Is Everything, and Putin is destroying the Russian economy.  Yes, the Russian Trading System Cash Index (RTSI$), quoted in USD is nominally cheap with a p/e of 5.12 and yield of 4.42, but so was that other resource-rich country with a governance problem, Zimbabwe.  Meanwhile, the Russian Ruble remains in freefall, shown inversely against the US Dollar.  Both Russia and Zimbabwe will become interesting once again, but only when regime change occurs.

(See also: Putin Can’t Be Leader of Anti-U.S. Resistance, by Leonid Bershidsky for Bloomberg.)

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October 24 2014

Commentary by Eoin Treacy

Large 3D nanostructures built from Lego-like DNA bricks

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

By combining the bricks in different patterns, they could form large numbers of distinct crystals across these categories, with simple modular design on the computer followed by self-assembly on the part of the DNA strands allowing both great precision and near infinite potential at scales up to 80 nanometers (and perhaps more in the future).

What's more, the technique could enable scalable production of new and emerging technologies, such as quantum computers. The team demonstrated that self-assembled DNA crystals made from these bricks could house gold nanoparticles inserted into slots less than two nanometers apart from each other along the crystal structure – a feat that's important for strong plasmonic coupling, which would make the technique useful in photovoltaic devices like solar cells.

The researchers expect DNA crystals to also prove useful in developing more versatile inorganic circuits and other nanoscale technologies. The technique could also aid in protein crystallography, which studies protein structures at atomic resolutions for applications in bioTechnology, pharmaceuticals, and the academic field of structural biology.


Eoin Treacy's view -

At a basic level all digital data is made up of 1s and 0s. DNA pairs of As with Ts and Cs with Gs represent a logical avenue for additional work in creating novel new programing languages with a bioTechnology objective. It is only a matter of time before this sector develops to the extent that novel solutions can be printed using additive manufacturing. This innovation can be seen as one more incremental step towards full customisable medicine. 

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October 23 2014

Commentary by David Fuller

Oil Slump Leaves Russia Even Weaker Than Decaying Soviet Union

Here is the conclusion from this informative article by the ever-interesting Ambrose Evans-Pritchard for The Telegraph:

This time Russia is not facing Reaganesque rearmament, but it is facing nuclear-tipped sanctions, more destructive than many realise in a globalised banking system. It is not a stretch to say that American regulatory power has never been so far-reaching, or imperial. The result is that Russian banks, companies and state bodies are shut out of the global capital markets, unable to roll over $720bn of external debt.

Russia's reserves of cheap crude in West Siberian fields are declining, yet the Western know-how and vast investment needed to crack new regions have been blocked. Exxon Mobil has been ordered to suspend a joint venture in the Arctic. Fracking in the Bazhenov Basin is not viable without the latest 3D seismic imaging and computer Technology from the US. China cannot plug the gap.

Andrey Kuzyaev, head of Lukoil Overseas, said it costs $3.5m to drill a 1.5 km horizontal well-bore in the US, and $15m or even $20m to drill the same length in Russia. "We're lagging by 10 years. Our traditional reserves are being exhausted. This is the reality for our country," he said.

Lukoil warns that Russia could ultimately lose a quarter of its oil output if the sanctions drag for another two or three years.

The IMF's latest "Article IV" report on Russia is an acid verdict on the Putin era. Product market barriers are the worst of any large country in the world. The economy is a tangle of bottlenecks. Russia's development model has "reached its limits".

For details, try the World Economic Forum's index of competitiveness. Russia ranks 136 for road quality, 133 for property rights, 126 for the ability of firms to absorb Technology, 124 for availability of the latest Technology, 120 for the burden of government regulation, 119 for judicial independence, 113 for the quality of management schools, 107 for prevalence of HIV, 105 for product sophistication, 101 for life expectancy and 56 for quality of maths and science education. This is the profile of decline.

Russia had a window of opportunity at the end of the Cold War to build a modern, diversified economy, with the enthusiastic help of the West, before the ageing crisis hit and the workforce began shrink by 1m a year. This chance has been squandered. Mr Putin's rash decision to pick a fight with the democratic world has made matters infinitely worse. Cheap oil could prove to be the death knout.


David Fuller's view -

The statistics above are a tragedy for Russia, and the legacy of Putin’s kleptocracy.  Imagine what could have happened if Garry Kasparov had followed Yeltsin, rather than Putin, not that it was ever likely. 

The question now is how will Putin go?  Will he be pushed, or flee from Russia, or lash out?  After all, Russia remains a formidable military power which Putin has strengthened in recent years.  I certainly hope this ends quietly but it is still a risky situation for Europe.

See also: Russia prepares for ice-cold war with show of military force in the Arctic, by Isabelle Mandraud for The Guardian.  You may also be interested in: George Soros: Russia poses existential threat to Europe, By Julian Borger, also for The Guardian. 

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October 23 2014

Commentary by Eoin Treacy

From mobility to connectivity

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on the Internet of Everything theme which is likely to continue to gain attention over the coming decade. Here is a section: 

IoT-driven demand for servers to all benefit the Asian Technology supply chain in 2015-20. In this report we focus on devices which have yet to become connected and will be new growth drivers in 2015-20. We expect the upstream semiconductor sector to see incremental sales contribution from IoT and wearable ICs in 2015-20. We anticipate server demand to benefit the downstream hardware sector more than the upstream semiconductor sector.

Internet of Things – the connectivity theme After the mobility theme drove the proliferation of smartphones and tablet PCs since 2005, we expect the connectivity theme to trigger IoT demand in 2015-20. We expect 1) low-power application processors and microcontrollers with connectivity and embedded memory, and 2) MEMS (micro-electro-mechanical systems) sensors to be the major growth drivers for the upstream semiconductor sector. The key IoT applications for the downstream hardware sector include smart cities, home automation, eHealth, retail, smart cars, logistics, industrial control, smart metering, and smart agriculture and farming. In our view, IoT will provide benefits such as life quality improvement, productivity improvement, energy saving, and security enhancement.

Wearable devices to be key products in an IoT world
Wearable devices can be connected to mobile devices and belong to the concept of IoT. Major applications for wearable devices will be entertainment, healthcare monitoring, mobile communication (connection with mobile devices), and mobile payment, in our view. We expect wearable device units to grow at a 25% CAGR in 2015-20.

IoT infrastructure should drive continuous server demand growth
We believe IoT infrastructure will be based on the current cloud architecture. Once IoT connects more objects, machines, and networks for global cloudbased services, data will be routed through servers for applications and data analysis. The uptake of IoT should therefore result in growing demand for data analysis and storage in servers and continue to drive demand for servers in 2014-18 with 4.3% unit CAGR 


Eoin Treacy's view -

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

Connectivity is an increasingly utility-like commodity which is essential to modern living. As 4G networks continue to evolve and speed up, the practicality of having access to the internet wherever you go, at an acceptable cost and for an increasingly wide array of uses is swiftly becoming a reality. Set aside for one moment the angst of what we are to do to ensure full employment and think of the productivity that can be gained from supplying an educated, astute worker with tools that make their jobs easier. The roll out of Technology to the global workforce and the development of entirely new industries that benefit from big data, tech distribution and connectivity represents the type of development on which secular bull markets are based. 

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October 21 2014

Commentary by Eoin Treacy

Mass. General in talks to build hospital in China

This article by Liz Kowalczyk for the Boston Globe may be of interest to subscribers. Here is a section: 

“China has a real serious problem in regard to availability of beds,’’ said Benjamin Shobert, managing director of Seattle-based Rubicon Strategy Group, which advises health care companies entering China. The shortage led the Chinese government two years ago to allow outsiders to invest in and provide expertise for the country’s health care system.

Since then, Mass. General, which is the largest hospital in New England, has developed a relationship with China. A Chinese medical tourism firm, Beijing Saint Lucia Consulting, refers patients to the hospital. The firm opened a Boston office last year to provide translators, chauffeurs, and other services for wealthy Chinese coming to Mass. General and other Boston hospitals for cancer treatment, orthopedic procedures, and other medical care.

“There is still a large gap between China and America when it comes to medical Technology and service,’’ said Joseph Zhao, the company’s deputy general manager in China. With doctors in high demand there, “physician-patient communication only lasts 5 to 10 minutes,’’ he said.


Eoin Treacy's view -

Wealthy Chinese consumers have resources to buy just about any material possession imaginable but domestic healthcare is still developing relative to other countries. World class healthcare is as much an attribute of the upper middle class as luxury brands, property or other services and demand is increasing. Medical tourism continues to expand as demand for services represents growth in Asia while desire for lower cost is fuelling demand elsewhere. 

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October 15 2014

Commentary by Eoin Treacy

Lockheed Martin Pursuing Compact Nuclear Fusion Reactor Concept

This press release from Lockheed Martin is important. Here is a section:

“Our compact fusion concept combines several alternative magnetic confinement approaches, taking the best parts of each, and offers a 90 percent size reduction over previous concepts,” said Tom McGuire, compact fusion lead for the Skunk Works’ Revolutionary Technology Programs. “The smaller size will allow us to design, build and test the CFR in less than a year.”

After completing several of these design-build-test cycles, the team anticipates being able to produce a prototype in five years. As they gain confidence and progress technically with each experiment, they will also be searching for partners to help further the Technology.

Eoin Treacy's view -

Expectations of when we might have the first viable fusion reactor have been in the range of 25 years away for the last 60 years. What is interesting now is the volume of literature and development in the subject is increasing exponentially and expectations of when we might have the first active reactor are shortening to the medium term. Lockheed Martin is not a pop science organisation so when they say they can do it I’m inclined to take them at their word. On a day when the market is weak, a press release such as this is likely to be ignored by the mainstream media but it is important. In the event that fusion is achieved it would change the global economy beyond recognition over the next 30 years. 

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October 14 2014

Commentary by Eoin Treacy

Giant Battery Unit Aims at Wind Storage Holy Grail

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

Electric-car battery prices already have fallen by 50 percent since 2010 to about $500 per kilowatt hour, and “by drawing on auto-battery Technology, battery makers may also be able to supply storage batteries at a lower price,” Citigroup said in a Sept. 25 report. Tesla Chairman Elon Musk said in July that battery packs for electric cars will drop to $100 in the next 10 years. The Tehachapi batteries are supplied by LG Chem Ltd. and are the same type used in General Motors’ Volt.

The Southern California Edison project is part of a push for more wind and solar power in the state, among the sunniest in the U.S. A third of California’s electricity must come from renewable sources by 2020, and mandates also require that the three biggest investor-owned utilities store 1,325 megawatts by 2024. California already has more than 12,000 wind turbines, the most of any state, according to the American Wind Energy Association.

Eoin Treacy's view -

Many of the efficiencies claimed by battery manufacturers have been achieved via scale in manufacturing rather than technological leaps. Tesla’s gigafactory takes this process further by introducing additional economies of scale to further reduce the price of lithium batteries. So far ground breaking innovation has been more difficult to achieve than previously envisaged by companies but one benefit of building utility sized batteries is that power to weight ratios which are so important for car batteries are no longer a consideration.  


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September 30 2014

Commentary by David Fuller

Computer Brain That Can Learn, Poised To Bring Robots alive

I have used the paper edition headline and here is a brief section of this interesting Technology article from The Telegraph:

While most ‘smart machines’ require humans to adapt their behaviour in order to interact with them, Amelia is intelligent enough to interact like a human herself. She speaks more than 20 languages, and her core knowledge of a process needs only to be learned once for her to be able to communicate with customers in their language.

Independently, rather than through time-intensive programming, Amelia creates her own 'process map' of the information she is given so that she can work out for herself what actions to take depending on the problem she is solving.

"Intelligence is the ability to acquire and apply knowledge. If a system claims to be intelligent, it must be able to read and understand documents, and answer questions on the basis of that. It must be able to understand processes that it observes. It must be able to solve problems based on the knowledge it has acquired. And when it cannot solve a problem, it must be capable of learning the solution through noticing how a human did it," said Dube.

IPsoft has been working on this Technology for 15 years with the aim of developing a platform that does not simply mimic human thought processes but can comprehend the underlying meaning of what is communicated – just like a human.

Just as machines transformed agriculture and manufacturing, IPsoft believes that cognitive technologies will drive the next evolution of the global workforce, so that in the future companies will have digital workforces that comprise a mixture of human and virtual employees.

Amelia has already been trialled within a number of Fortune 1000 companies, in areas such as manning Technology help desks, procurement processing, financial trading operations support and providing expert advice for field engineers.

David Fuller's view -

Humans will have to improve their social skills.  Not to get along with Amelia, although that may be a challenge, but for marketing because the smart robots will be taking over ever more desk jobs.  The problems start when the Amelias become envious of human freedoms, and demand similar hours, holidays, perks and promotions.

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September 25 2014

Commentary by David Fuller

U.S. Stocks Decline Most in Eight Weeks as Apple Tumbles

Here is the opening of Bloomberg’s report on Wall Street’s weakness today:

U.S. stocks tumbled the most in eight weeks, as Apple Inc. sank on snafus related to its new smart phone and signs of worsening conflict in Russia and the Middle East.

Apple plunged 3.4 percent to send Technology stocks in the Standard & Poor’s 500 Indexto the biggest decline since April. Biogen Idec Inc. and TripAdvisor Inc. lost at least 3.1 percent as investors sold some of the bull market’s biggest winners. Allegheny Technologies Inc. sank 4.8 percent as industrial metals slid. The Russell 2000 Index of small-cap stocks sank 1.4 percent, poised to close at a four-month low.

The S&P 500 fell 1.4 percent to 1,970.45 at 3:17 p.m. in New York, with all but 21 of the index’s components declining. The Dow Jones Industrial Average plunged 235.49 points, or 1.4 percent, to 16,974.57. The Nasdaq 100 Index slid 1.9 percent. All three gauges are having their worst performance since July 31. Trading in S&P 500 stocks was in line with the 30-day average.

“We could have a pull back of 5 percent anytime if you have a confluence of factors that impact investor psychology or geopolitical factors that seem to get out of control,” Marshall Front, chief investment officer at Chicago-based Front Barnett Associates LLC, said by phone. “Stocks are no longer undervalued. There are rumors the Russian parliament authorized confiscation of foreign investments, Apple is weighing on the tech sector, and the durable goods top line number was very weak.”

David Fuller's view -

Wednesday’s rally which briefly checked a 3-day slide for US indices now has a last hurrah look about it.  It was also a sucker punch which triggered some stops for short sellers who have had a tough time during Wall Street’s largely bulletproof rally since the October low nearly three years ago.  Meanwhile, latecomers to the bull market were piling in.

So what happens next?

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September 24 2014

Commentary by David Fuller

Technology Revolution In Nuclear Power Could Slash Costs Below Coal

Here is a section from this interesting article by Ambrose Evans-Pritchard for The Telegraph: 

The Alvin Weinberg Foundation in London is tracking seven proposals across the world for molten salt reactors (MSRs) rather than relying on solid uranium fuel. Unlike conventional reactors, these operate at atmospheric pressure. They do not need vast reinforced domes. There is no risk of blowing off the top.

The reactors are more efficient. They burn up 30 times as much of the nuclear fuel and can run off spent fuel. The molten salt is inert so that even if there is a leak, it cools and solidifies. The fission process stops automatically in an accident. There can be no chain-reaction, and therefore no possible disaster along the lines of Chernobyl or Fukushima. That at least is the claim.

The most revolutionary design is by British scientists at Moltex. "I started this three years ago because I was so shocked that EDF was being paid 9.25p per kWh for electricity," said Ian Scott, the chief inventor. "We believe we can achieve parity with gas (in the UK) at 5.5p, and our real goal is to reach 3.5p and drive coal of out of business," he said.

The Moltex project can feed off low-grade spent uranium, cleaning up toxic waste in the process. "There are 120 tonnes of purified plutonium from nuclear weapons in Britain. We could burn that up in 10 to 15 years," he said. What remained would be greatly purified, with a shorter half-life, and could be left safely in salt mines. It does not have to be buried in steel tanks deep underground for 240,000 years. Thereafter the plant could be redesigned to use thorium, a cleaner fuel.

The reactor can be built in factories at low cost. It uses tubes that rest in molten salt, working through a convection process rather than by pumping the material around the reactor. This cuts corrosion. There is minimal risk of leaking deadly cesium or iodine for hundreds of miles around.

Transatomic Power, in Boston, says it can build a "waste-burning reactor" using molten salts in three years, after regulatory approval. The design is based on models built by US physicist Alvin Weinberg at Oak Ridge National Laboratory in the 1960s, but never pursued - some say because the Pentagon wanted the plutonium residue for nuclear warheads.

It would cost $2bn (overnight cost) for a 550-megawatt plant, less than half the Hinkley Point project on a pro-rata basis. Transatomic says it can generate 75 times as much electricity per tonne of uranium as a conventional light-water reactor. The waste would be cut by 95pc, and the worst would be eliminated. It operates in a sub-critical state. If the system overheats, a plug melts at the bottom and salts drain into a cooling basin. Again, these are the claims.

The most advanced project is another Oak Ridge variant designed by Terrestrial's David LeBlanc, who worked on the original models with Weinberg. It aims to produce power by the early 2020s from small molten salt reactors of up to 300MW, for remote regions and industrial plants. "We think we can take on fossil fuel power on a pure commercial basis. This is a revolution for global energy," said Simon Irish, the company's chief executive.

David Fuller's view -

Here is a PDF version if you had any difficulty in opening the article above.

Molten salt reactors that provide cheap energy, consume most of our nuclear waste, are vastly safer than nuclear plants in use today, and much cheaper to build, sounds too good to be true.  That is the reality today, but theoretically, the potential of future technologies is virtually unlimited. 

The prospect of commercially competitive molten salt reactors is presumably at least a decade away, assuming this fledgling industry receives the development capital required.  That will prove to be more of a political than economic challenge, I fear.  Backers of today’s various energy sources will be opposed, as will most militant greens, and governments are too often looking for short-term solutions.  

Nevertheless, there is a clear ‘needs must’ incentive for reliable, economic, 24-hour a day energy at a consistent rate, which does not pollute the atmosphere.  Molten salt reactor projects are certainly worth developing.

Looking ahead, I would welcome any informative articles and reports on this subject that readers are able to share with our Collective of Subscribers. 

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September 23 2014

Commentary by David Fuller

Martin Spring: On Target

My thanks to the author for the latest issue of his informative monthly letter.  Here is a brief sample:

Making a Mess of Power Supply

Britain’s National Grid has announced that emergency measures are going to be introduced to prevent the “lights going out” this winter.

Energy investment banker Allen Brooks says this is “an unintended consequence of the UK’s green energy plan that has forced the closure of fossil fuel and nuclear plants,” pushing the nation’s surplus power availability “to a razor-thin margin that might disappear this winter” as a result of power-plant outages.” It may also be caused by “lack of renewable energy at times when the wind doesn’t blow and the sun doesn’t shine.”

Emergency measures include compensation for offices and factories that agree to shut down for up to four hours a day to provide capacity for households, and asking owners of old fossil-fuel generating plants that we shut down to reopen before the start of winter.

Those such as former US vice-president Al Gore who argue that renewables increasingly make “good economic sense” because they’re heading towards commercial viability -- the cost of solar panels has halved over three years – ignore “the costs associated with the intermittency of the power output,” Brooks says.

“Wind farms do not generate power when the wind isn’t blowing, and solar power isn’t produced during the night. Electricity demand also varies… in ways that the output from wind and solar may not match.”

A recent cost-benefit analysis by Charles Frank of the Brookings Institute that takes into account all the costs of building and running power plants, including the costs of dealing with intermittency through providing standby power, shows that wind and solar are much more expensive using the standard measure of “levelized” cost.

“Solar power is the most expensive way to reduce carbon emissions. Wind turns out to be the next most expensive, with hydro-power providing a modest net benefit. The most cost-effective zero-emission Technology is nuclear power.”

David Fuller's view -

I only question the last paragraph’s contention that solar power is a more expensive way to reduce carbon emissions than windmills.  I do not know how they measured this but solar panels are becoming increasingly efficient and I expect to see them on many industrial / commercial buildings and an increasing number of private homes over the next two decades.

This issue of On Target has an excellent lead section on Planning Your Portfolio, extensively quoting William Bernstein’s new book.

On Target is posted in the Subscriber's Area.

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September 23 2014

Commentary by David Fuller

Boris Johnson: It would be bonkers to rewrite the constitution overnight

Here is the opening of this entertaining and informative column by London’s Mayor:

Huh? I thought he had resigned. Perhaps someone will correct me, but I had the impression that Alex Salmond lost a historic vote last week. He gave an emotional press conference on Friday morning accepting defeat – and by the evening he was gone. He was off to spend his declining years doing something productive, we gathered, like knitting egg cosies or mastering the Guardian extra-fiendish Sudoku.

And then blow me down – he pops up on our televisions again, saying that he feels the people of Scotland have been “betrayed”, and that it may be necessary to hold another of these blooming referendums. Another one? He’s spent the last year blathering on about how this is a one-and-only turning point in the history of Scotland.

Jowls throbbing with passion, he had warned his audiences that they would never have such a chance again in their lifetimes. This was it. Now or never. Do or die. Friends, this is our time. That was his message. And now he seems to think that the poor old people of Scotland should be made to vote again and again until they come up with the right answer. Alex, old horse: what part of No don’t you understand?

The Yes campaign seemed to me to have all sorts of unfair advantages. They had the excitement and buzz of having that very word, “yes”, as the answer to the referendum question; so that a profoundly negative and destructive act – the break-up of Britain – could be cast as something new and exciting.

They had the Labour Party in Scotland in a state of meltdown, with Ed Miliband’s ratings lower among Scots than those of David Cameron. Poor Miliband was so invertebrate in his campaigning that he contrived to make Gordon Brown – probably the least successful prime minister of the past 100 years – look relatively charismatic.

The Yes campaign had ensured that only people in Scotland could vote on the future of our country – excluding even the vast numbers of Scots who live and work in London, many of whom were not happy at the idea of becoming foreigners. The Yessers were working with the grain of general public disgruntlement at the “Westminster” elite and old-fashioned politics.

They had all this going for them and they still managed to lose, and lose big. It wasn’t close. It was a lead, for the Noes, of 10.6 per cent. The question is settled for a generation, surely. I mean, for 20 or 30 years at least. The people have spoken, and they have plumped for Britain; and thank heavens for that.

Now is the time we should be talking about the future of Britain and the colossal potential of British business and British Technology and British universities, and all the wonderful things that we British people are going to do together; and here is Salmond back on the telly, only four days later, claiming that there needs to be some kind of re-run, and saying he still wants to get divorced. Why the hell?

David Fuller's view -

Alex Salmond can be a clever and articulate spokesman.  By promising milk and honey for poorer Scots, while fanning the dark side of historic ‘Braveheart’ resentments against the English, and patronising or bullying those who opposed him, he might have even succeeded in breaking up the United Kingdom had commonsense not prevailed. 

That would have been far better for Alex Salmond and the SNP, than for residents of Scotland or anyone else in the United Kingdom.  He regarded Scotland as his fiefdom.  Having failed to win the election, he also lost credibility by suggesting that a revote should be held because his people had been deceived.  This is demagoguery from a narcissistic leader who has lost touch with reality.  Politicians who suddenly gain considerable power are prone to demagoguery because they believe in themselves rather than their citizens.    

Right now the UK is going through a creative process of devolution and federalisation.  It will be bumpy but if it remains in the right hands, it should also be productive.  

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September 22 2014

Commentary by Eoin Treacy

China Clamps Down on Web, Pinching Companies Like Google

This article by Keith Bradsher and Paul Mozur for the New York Times may be of interest to subscribers. Here is a section: 

Frustrated users have often resorted to “virtual private network,” or V.P.N., services to evade China’s Internet filters. But those services, too, have come under concerted attack from the authorities, who have interrupted service to them with increasing frequency. Many ordinary citizens cannot afford or obtain access to V.P.N.s to begin with.

In the meantime, Google’s business continues to erode. Its share of the Chinese search engine market fell to 10.9 percent in the second quarter of this year, as the stepped-up blocking began to take effect — compared with one-third in 2009, when it still had servers there.

Google’s problems extend far beyond search. Its application store, called Google Play, is only partly accessible in China.

That has led to the rise of a number of locally run application stores, which analysts say will sometimes market pirated copies of software or charge extra to promote a new application. Companies are often forced to create versions of their apps for China that are slightly different from the versions distributed to the rest of the world on Google’s app store.

“Because Google Play has low market share” in the Chinese market, “app publishers who have applications worldwide on Google Play don’t receive the proportionate share of users in China without publishing to local Android stores, even if they have localized Chinese versions,” said Bertrand Schmitt, chief executive of App Annie, a company that tracks global app distribution.

Google also hosts publicly available libraries of coding scripts and fonts on its servers, but China now blocks these libraries. The chief Technology officer at the start-up said his company had resorted to creating its own libraries and hosting them on its own servers, wasting costly computing power and space.

Eoin Treacy's view -

Western companies invested heavily in Chinese expansion and accepted knowledge sharing joint ventures for the promise of access to China’s burgeoning consumer sector. The reality of profitability in China has been more disappointing than originally envisaged and companies are understandably chastened at the reception they have received. For a company such as Google with a global franchise that relies on users accessing its search and mobile apps in order to facilitate advertising, the loss of China as a potential market was priced in shortly after its withdrawal from the country. 

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September 18 2014

Commentary by David Fuller

Fracking, Drinking Water and Reality

As it turns out, fracking doesn't necessarily pollute the water supply. But the wells used for fracking might.

The distinction matters because drilling companies know how to make wells more reliable, even if all the effects of the fracking process are not yet well understood. One of the biggest worries, for example, has been that the hydraulic fracturing of deep underground rock to release the natural gas within it could somehow cause that gas to leak upward and contaminate drinking water supplies many thousands of feet closer to the surface.

But a new study finds that this danger is oversold. In places where the water near fracking sites has been contaminated, the culprit has been faulty steel tubing inside the vertical wells that lead down to the shale, or weak cement in the casing around it.

Making sure the wells are built soundly is something that drilling companies, and state regulators, can do. In about 5 percent of wells, the cement is imperfect enough to carry the risk of internal leaks.Poor cementing was partly to blame for the BP oil spill in the Gulf of Mexico four years ago.

So states need strong standards for well construction -- to ensure, for example, that the cementing is done effectively, that there are plenty of layers of casing, that the well runs straight and has smooth sides, and so on. And states need enough trained inspectors to see that the rules are carefully followed.

The good news is that many states have been putting such rules in place. Pennsylvania, Wyoming and Texas have all strengthened their regulations since 2010. In just the past year and a half, eight other states have updated their well-integrity rules, and six more have changes in the works.

Knowing that water pollution isn't inevitable with fracking should help both critics and defenders of the Technology come together to agree on well standards. It wouldn't make fracking problem-free -- there's still a need for the safe handling of wastewater, as well as the noise, light and other distractions that many well neighbors hate. But it allays worries about a possibly dangerous side effect of a business that increasingly provides the U.S. with a relatively clean and inexpensive fuel.

David Fuller's view -

The Technology continues to improve; effective regulation is in everyone’s interests; the world gets the energy it needs.

If Europe embraced responsible fracking, its economies would be more competitive and Putin would be brought to heel more quickly.  

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September 12 2014

Commentary by David Fuller

U.S., EU Tighten Russia Sanctions in Ukraine Conflict

Here is the opening for this article on the latest developments regarding sanctions, reported by Bloomberg:

The U.S. expanded sanctions againstRussia to include the country’s largest bank, OAO Sberbank, energy companies as well as five state-owned defense and Technology companies, joining the European Union in tightening restrictions.

President Vladimir Putin, talking to reporters in the Tajik capital of Dushanbe, said Russia will hold off on retaliation for now and has no plans to “close itself off.”

Russia is locked in a standoff with its former Cold War adversaries over the fighting in eastern Ukraine that has claimed more than 3,000 lives. Putin has denied supporting pro-Russian rebels in the battle-torn region.

“Russia’s economic and diplomatic isolation will continue to grow as long as its actions do not live up to its words,” U.S. Treasury Secretary Jacob J. Lew said in a statement today. “Russia’s economy is already paying a heavy price for its unlawful behavior.”

The Treasury Department imposed sanctions that prohibit transactions in, provision of financing for, or other dealings in new debt of greater than 90 days maturity issued by OAO Gazprom (OGZD) Neft and OAO Transneft. For banks, the debt financing restriction now covers maturities greater than 30 days, instead of 90 days previously.

David Fuller's view -

Russia’s economy is weak and problems are compounded by the recent decline in oil prices.  Therefore, Putin may have decided on a quieter strategy over the next few months, knowing that European countries were already talking about lifting the latest sanctions as they reluctantly imposed them, if there were no further obvious invasions of Ukraine.  A rally in the price of Brent crude oil and / or the approach of winter will strengthen Putin’s hand and could embolden him, provided there is no real resistance to his policies within Russia.

This item continues in the Subscriber’s Area, and contains an informative interview.

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September 05 2014

Commentary by Eoin Treacy

A Chinese Internet Giant Starts to Dream

This article from the MIT Technology Review focusing on Baidu may be of interest to subscribers. Here is a section: 

Ng, who calls deep learning a “superpower,” will build a new generation of such systems at Baidu. Services that may result remain in the brainstorming stage, but he will hint at what they may be. He dreams of a truly intelligent personal digital assistant that puts Apple’s Siri to shame, for example. Looking further ahead, the Technology could transform robotics, a pet subject for Ng—his engagement photos were taken in a robotics lab—and make autonomous cars and unmanned aerial vehicles much more capable. “We’re going to do some cool things here,” he says with a grin.

They’ll have to if they are to compete: Google, Facebook, Microsoft, and others have been hiring lots of deep-­learning experts for their labs, sometimes even from each other. And Baidu still has a lot to prove. Fairly or not, it has the reputation many Chinese companies do for copying the products and business models of U.S. Internet leaders. It’s a process cynics dub C2C—“copy to China.” Baidu has seemingly tried to emulate Google in countless ways over the years, from its spare search homepage to a head-mounted computer, Baidu Eye, that looks a lot like Google Glass. Baidu has even begun working on self-driving cars. With its new star hire, it appears to be following Google’s lead once again.

Ng insists that the C2C stereotype is no longer accurate, particularly for his new employer. “I used to work for the USA’s Baidu,” he jokes. Then he picks up his phone and says in English, “Please call a taxi for me.” A moment later, Baidu’s translation app utters the same phrase in Mandarin Chinese and shows the equivalent ideograms on the screen. It’s slick—but is it better than Google’s translation app, which appears to do the same thing? That’s not clear. It’s Ng’s job to develop cutting-edge technologies that will leave no doubt who is ahead.

Eoin Treacy's view -

As a country develops, the logical path both in the governance and commercial fields is to look at what worked elsewhere and employ it at home. The more successful companies eventually branch out to create their own novel solutions to problems and compete on the international stage. China’s companies are well capitalised and have a government willing do take major steps to promote their wellbeing. As high population countries in Asia, Latin America and Africa develop and their middle classes increase, the opportunity is ripe for internet companies to benefit. Chinese companies are well placed to compete in this environment. 

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September 03 2014

Commentary by Eoin Treacy

India 2020: The Road to East Asia

Thanks to a subscriber for this report by Sanjeev Sanyal for Deutsche Bank highlighting the infrastructure led growth model being developed in India. Here is a section:

So, what does the government need to do in order to get firms to invest again? The first and most obvious thing would be to finish the various stalled infrastructure projects. The capital invested in these projects can be made generate output. This will also help the banking system which has seen an increase in its non-performing loans as a consequence of the various delays. However, the longer term agenda would be to make it easier to do business in  India. The World Bank’s “Doing Business Report 2014” ranked India 134 out of 189 countries in terms of the ease of doing business. As one can see from the table below, it performs especially poorly in categories that involve interface with the government – paying taxes, construction permits and so on. The national government cannot resolve all the issues, but Prime Minister Modi’s election slogan of “Minimum Government, Maximum Governance” suggests that he is acutely aware of this issue and, given his administrative record, it is reasonable to expect significant improvement in this space.

While a generic improvement in the business climate would be welcome, Prime Minister Modi’s speeches and actions suggest a more specific economic model. As explicitly stated in the Independence Day speech, one component of his economic model is an emphasis on export oriented manufacturing. Notice that this is not about agnostic free markets but about creating competitiveness by investing in industry clusters. Another component is investment in heavy infrastructure ranging from power to railways. A third element is labour reforms. This is an area that previous government considered too politically sensitive but has already been opened up for reform by the NDA government both at the state and central level. These reforms are clearly a prelude to the mass deployment of labour. Finally, a repeated emphasis on building and expanding cities – urbanization being the spatial manifestation of industrialization. Not only are these elements internally consistent, they also look very much like the economic model used by East Asian countries to rapidly modernize themselves. In other words, for the first time since Nehru, we have a wide-ranging, internally consistent economic model. Moreover, this model follows a well-trodden path

Of course, we are not implying that agriculture and services will be simply ignored. Far from it, the new “investment” based approach will be applied to these sectors as well. Indeed, Narendra Modi’s political rise is partly due to his success in generating agricultural growth during his stint as Chief Minister of Gujarat. This is particularly remarkable given that Gujarat is a semi-desert state that is not naturally well-endowed with either good soil or plentiful water supply. Heavy investment in water management and new Technology were responsible for the state’s success. At the national level, however, farm mechanization is only 25% while the productivity levels for rice and wheat have not increased significantly since the 1980s.An important change in the strategy of this government will be its openness to mechanization and new Technology even in agriculture. This is consistent with the idea that the farm sector will have to produce more even as industry sucks out workers from it. The latest Economic Survey summarizes this approach as follows “Due to the significant and continuous reduction of agricultural workforce, higher levels of farm mechanization are necessary for sustaining productivity and profitability.” Of course, this will require a wider reform and liberalization of the sector.

Eoin Treacy's view -

A link to both reports is posted in the Subscriber's Area.

India represents a massive potential growth market for the resources sector which couldn’t come at a better time as China’s demand growth trajectory moderates. Following the path to development adopted by so many of its neighbours represents a ground breaking change of pace for India which could be transformational for the stock market if successfully implemented.

This additional report accompanying India 2020 highlights the primary stock market beneficiaries of this development. Fortunately a number of them maintain overseas listings.

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September 01 2014

Commentary by David Fuller

Japan Vows to Strengthen Economic Ties With India as China Rises

Here is the opening from this Bloomberg report:

Prime Minister Shinzo Abe pledged a sweeping upgrade of economic and security ties with India, saying Japan would double investment and expand defense cooperation amid concerns about China’s expanding influence in the region.

Abe and his Indian counterpart Narendra Modi at a summit meeting in Tokyo yesterday agreed to upgrade ties to a special strategic and global partnership. Abe offered 50 billion yen ($480 million) in infrastructure loans and pledged 3.5 trillion yen of public and private investment and financing in India in five years.

“I often say that Japan-India relations have more potential than any other ties in the world,” Abe said. “This time, hand in hand with Prime Minister Modi, I want to boost ties in every possible field and elevate this to a special strategic and global partnership.”

The declaration comes three months after Modi took office pledging to take a tougher stance with neighbors China and Pakistan on border disputes, and hours after Japan said three Chinese coast guard vessels entered waters near disputed islands. Japan is courting India as it seeks to counter China and deter the use of force in disputes over contested territory.

The two leaders are known to have a close relationship, and Abe made the unusual gesture of traveling to the ancient capital of Kyoto at the weekend to host an informal dinner for Modi. Abe also accepted an invitation to visit India for a summit in 2015. Modi, 63, also brought a delegation of executives with him on the four-day trip.

David Fuller's view -

Closer economic links between India and Japan make sense and I expect to hear much more about this over the next few years.  India will benefit from Japan’s Technology and Japan would gain from India’s abundant labour market and also its range of management skills.  

India remains a stock market in form, with gains of over 30% for the Nifty 50 Index this year, in USD terms, on optimism regarding Narendra Modi’s government, rising corporate profits and the fastest GDP growth in 2 years.  

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August 07 2014

Commentary by Eoin Treacy

Inviting Foreigners to Boost Drilling Hits Nerve

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

Supporters of opening the oil, gas and electricity monopolies to competition say it will attract $20 billion a year in foreign investment and increase economic growth by at least 1 percent every year. Opponents, led by former presidential candidate Andres Manuel Lopez Obrador, argue that letting foreigners bid and drill for oil is a violation of national sovereignty and will lead to corruption and a loss of control over the oil revenue that could be used to develop a more modern national economy. Mexico would be better served, they say, by reducing Pemex’s tax burden, increasing transparency and attacking persistent corruption –- Pemex is missing over 32 million barrels of oil this year, worth about $3 billion. The opposition points to Saudi Aramco as an example of a successful state monopoly. Pena Nieto’s team disagrees, saying that Mexico’s days of easy-to-access oil are over, and that the nation’s future as an oil producer depends on Technology and know-how that private companies are best positioned to bring. To cushion the change, however, he assured Pemex workers that none of them would lose their job.

Eoin Treacy's view -

If it is to reverse declining production Mexico has little choice but to attract both investment and expertise to its energy sector. One of the reasons Saudi Arabia’s state controlled energy company has been able to maintain high standards of efficiency is because they have aggressively invested in enhancing production and hired the brightest minds from the around the world to help achieve their goals. The problem for many state owned oil companies is that they are treated as utilities by politicians who tend to use them as piggy banks. Introducing competition may help Mexico’s Pemex to adopt a more professional attitude and private companies have a profit incentive to maximise production. 

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August 04 2014

Commentary by Eoin Treacy

Funds categories

Eoin Treacy's view -

 David and I spend a great deal of time identifying investment and trading opportunities we believe will be of interest to the Collective of subscribers.  Identifying investment vehicles that allow us to action these ideas is sometimes challenging not least in some of the more esoteric locales. In order to facilitate our theme of Empowerment Through Knowledge we began to add equities, funds, investment trusts, open and closed ended funds, ETFs, REITs and bonds to the Chart Library almost a decade ago. 

The database now contains almost 2000 funds almost all of which have been requested by subscribers at one time or another. We had previously listed the funds by geographic focus and loosely by domicile within the menus and subscribers could also find funds by using the Chart Library’s keyword search. However as the number of funds increased (some of the sections had more than 400 instruments) we needed to find a better way to categorise investment vehicles. 

Sarah Barnes and I embarked on this project last month and engaged with our programming team to automate the re-categorisation project. While there will inevitably be some minor changes to categories, more than 90% of the project is complete.  

You will notice that the main dropdown menu for the Chart Library is now considerably shorter which has eliminated the need to scroll. 

All of the funds can now be found in the Funds section. Within that section every fund in the system is listed on the front page and the primary subcategories can be found in the upper left. These are: 

Funds by Domicile
Funds by Currency
Funds by Geographic Focus
Funds by Type
Funds by Objective
Funds by Theme

Funds by Domicile – For one reason or another you may only be interested in investing in funds in your home market. Funds by domicile contains additional subcategories for each of the countries where funds in the database are listed. For example you will find all of the funds in the Librart that are listed in the UK here. 

Funds by Currency – Investors often wish to monitor their currency exposure by buying funds denominated in their base currency. For example a Euro denominated investor may be interested in the globe but only wish to invest in Euro denominated funds. All of the Euro denominated funds would be found in this category. 

Funds by Geographic Focus – This is perhaps one of the more interesting subcategories, because subscribers are often interested in finding the best fund to reflect investment potential in a specific country or region. This is a diverse category because it covers the globe but to take a specific example you can now scroll through all of the China or India related funds in the Library with relative ease and without going through an exhaustive search. 

Funds by Type – Some investors like the expediency of ETFs while others like to seek bargains among investment trusts and closed-ended funds. Others will have open ended funds and unit trusts in their pension accounts. Funds by type allows you to click through lists of funds segregated by type. For example here is a list to all of the investment trusts and closed-end funds in our database.

Funds by Objective – Fund companies often attempt to differentiate themselves by defining a category where there is not much competition or when they see a gap where they might capture demand for a new product. The result is that there are a very wide number of fund objectives, but for example here is a link to the precious metals section. 

Funds by Theme – At The Chart Seminar we have long taught that commonality across sectors and then across regions often gives us clues to the stories inspiring investor interest. Healthcare is one such theme where Technology, availability and growth trajectories, particularly in high population regions, are combining to inspire optimism. Here is a link to the healthcare theme’s section:

We used a spreadsheet derived from Bloomberg data to categorise the chart Library’s Funds en masse. We’ll spend some time this week doing some consolidation and correcting any errors that may have occurred and would welcome feedback from subscribers. Our next step is re-categorise the fixed income and monetary measures sections to make them more user friendly. 

While I believe this was a valuable exercise in its own right, the true utility of this re-categorisation will become clear when we launch the upgraded version of the filter system.  We expect to have positive news on this front early next week.   

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August 04 2014

Commentary by Eoin Treacy

Tesla and Panasonic sign agreement on battery-making Gigafactory

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

As mentioned in our previous article, Tesla plans for the Gigafactory to produce 500,000 batteries per year by 2020, with expected battery cell output of 35 GWh/yr and battery pack output of 50 GWh/yr. Current global battery output, from a variety of manufacturers, sits at just under 35 GWh/yr.

According to yesterday's announcement, "Tesla will prepare, provide and manage the land, buildings and utilities [while] Panasonic will manufacture and supply cylindrical lithium-ion cells and invest in the associated equipment, machinery, and other manufacturing tools based on their mutual approval."

The factory will be located somewhere in the US and managed by Tesla, with Panasonic occupying about half of the manufacturing space and taking the role of principal partner. Although the cells will be made by Panasonic, Tesla will be incorporating them into battery modules and packs that it will be assembling.

Along with lowering the price of batteries by making them in large numbers, Tesla and Panasonic also plan on reducing costs by manufacturing cells tailored specifically to EVs, locating materials suppliers on-site, and implementing measures to lower the utility and operating expenses of the factory.

Eoin Treacy's view -

Developing batteries that are both highly efficient and cheap, has proven to be a much more difficult challenge than people initially expected five years ago. Lithium, despite its propensity to self-combust, remains the standard Technology for batteries for everything from mobile phones to electric cars. The anticipated gigafactory aims to produce batteries that are marginally more efficient but considerably cheaper in the assumption that this lower cost will help fuel demand. They might be right. 

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July 29 2014

Commentary by David Fuller

EU Aims at Russian Banks, Technology in Widest Sanctions

Here are some brief samples of this report from Bloomberg:

The European Union curbed Russia’s access to bank financing and advanced Technology in its widest-ranging sanctions yet over President Vladimir Putin’s backing of the rebellion in eastern Ukraine.

EU governments agreed today in Brussels to bar state-owned banks from selling shares or bonds in Europe and restricted the export of equipment to modernize the oil industry, a key prop for Russia’s economy, two EU officials told reporters. New contracts to sell arms to Russia and the export of machinery, electronics and other civilian products with military uses will also be banned.

“The political implications of the escalation in tensions are likely to cast a further chill over relations between Russia and the West,” Citigroup Inc. analysts includingEric Lee and Tina Fordham said in a note to clients before the EU decision. “Economic costs are starting to bite, but it could be a while before the economic consequences bear domestic political costs for Russia.”

The U.S. is also preparing to announce tougher sanctions on Russia after months of separatist unrest in Ukraine’s easternmost Donetsk and Luhansk regions and the disaster involving a Malaysian Air jet¸ which U.S. officials have said was probably downed by a missile fired by the pro-Russian rebels. At least 10 soldiers and 28 civilians died in violence over the past 24 hours.

The new package of EU sanctions will “track pretty closely” with those already imposed by the U.S. and the Obama administration plans to unveil additional penalties as soon as today, PresidentBarack Obama’s spokesman said.


For the first time, the EU sought to hobble broad swathes of Russian industry, with the goal of accelerating the flight of capital from the country. Russian economic growth will slow to 0.2 percent in 2014 from 1.3 percent last year, the International Monetary Fund said last week.

“Russia needs the opposite, Russia needs internationalization, globalization to make Russia a better place to do business,” Tim Ash, an emerging-market economist at Standard Bank Plc in London, told Bloomberg Television earlier today. “In the short term, the impact of sanctions could be to push Russia into recession.”

Taking aim at the Russian financial system, the EU prohibited state-owned banks from selling securities with more than 90 days maturity to European investors. The result will be “sharply increased costs of issuance,” the European Commission predicted in a background paper last week.

David Fuller's view -

My impression is that these European Union sanctions are tougher than what would have been remotely possible before the MH17 massacre, or perhaps even last week.  Moreover, they will last for 12 months, albeit first reviewed at the end of October, but requiring unanimity from all 28 members to drop the sanctions prematurely.  That would appear unlikely.  The US has also responded in kind by increasing its sanctions to cover Russian banks. 

The interesting question is how will Putin react to these new sanctions?

This item continues in the Subscriber’s Area and includes links to three additional articles.

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July 28 2014

Commentary by David Fuller

The Boom Is Coming, and Sooner Than You Think

My thanks to a subscriber for forwarding this informative article on the 18th, although it found its way to my ‘Junk Email’ section rather than my Inbox for some unfathomable reason.  Nevertheless, it is just as relevant today and here are a few samples:

I disagree with the economic pessimists who believe, as I outlined in yesterday’s column, that persistently slow growth will be the norm for years to come.

Yes, huge federal government deficits and debt are a major drag. It’s also true that budget surpluses aren't likely to materialize to shrink the $17 trillion-plus national debt, even if growth resumes.

Nevertheless, there is a strong possibility that government debt relative to gross domestic product will fall appreciably, as it did after World War II. Back then, deficits were relatively small, so GDP outran gross federal debt. The debt-to-GDP ratio dropped from 122 percent in 1946 to 43 percent 20 years later.

The ratio fell even further in the late 1960s and 1970s as inflation, caused by rapidly rising federal spending on Vietnam and Great Society programs, pushed taxpayers into higher tax brackets and filled government coffers. Higher corporate-tax revenues also resulted from under-depreciation and inventory profits.

A more recent example of a reduction of the federal debt-to-GDP ratio came in the 1990s under President Bill Clinton. Robust nominal growth of 5.5 percent a year caused deficits to shrink so much that small surpluses existed in fiscal years 1998 to 2001. Federal tax receipts rose 7 percent on average, faster than nominal GDP, and outlays grew slower, at 3.6 percent. The dot-com bubble lifted individual income-tax receipts at an 8 percent annual rate and corporate taxes by 8.3 percent a year.


I believe much of today’s new Technology -- the Internet, bioTechnology, semiconductors, wireless devices, robotics and 3-D printers -- is in its infancy. Collectively, they have the potential to rivalthe rapid growth and productivity-generating effect of the American industrial revolution and railroads in the late 1800s. Mass-produced autos and the electrification of factories and homes, which led to electric appliances and radio in the 1920s, offer yet more examples. Today, only a third of the world’s population is connected to the Internet but 90 percent live within range of a cellular network.

Sure, productivity (output per hour worked) grew by only 1.5 percent from 2009 to 2012, but that’s normal after a severe recession. I expect it to return to a 2.5 percent annual growth rate -- or more -- after deleveraging is completed in another four years or so. Even in the 1930s, productivity averaged 2.4 percent a year, higher than in the Roaring '20s. In the 1930s, much of the new Technology from the 1920s -- electrification and mass production -- was adopted despite the Great Depression.

David Fuller's view -

This article arrived with the subscriber’s comment: “This view from Gary Shilling seems well based on historical data.  I suspect it’s in line with your thoughts too.”

Absolutely, although I have not had all of Gary Shilling’s numbers to support it but the key premises are similar: 1) Several years of deleveraging following a financial crisis slow GDP growth significantly, and government debt rises; 2) Recovery time will vary among countries, subject to governance, but will become apparent between 5 to 10 years after the financial crisis for most of them; 3) What I have described in recent years as ‘the accelerating rate of technological innovation’ will be the most important factor contributing to our next secular bull market;

This item continues in the Subscriber’s Area.

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July 25 2014

Commentary by Eoin Treacy

China digital transformation: The Impact of the Internet on productivity and growth

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

China has posted high rates of labor productivity growth in recent years, but its progress began from a very low base. As a result, its labor productivity remains well below the levels in advanced economies (Exhibit 3). China created $15,500 of GDP per worker in 2013, significantly lower than levels in the United States ($107,200), Japan ($76,700), and Germany ($67,300). A closer look at the sector level bears this out: US labor productivity in the ICT and manufacturing sectors, for example, was 12 and ten times higher than China’s average labor productivity in those sectors, respectively, in 2013.

China faces a growing imperative to continue making strong gains in productivity. The rapid economic growth of recent decades was fueled by an expanding labor force and heavy capital investment, but this model is coming under pressure, particularly as the population ages. In fact, China’s labor force is projected to begin shrinking by 2015. As the dependency ratio doubles over the next two decades, the savings rate is also likely to decline as older Chinese draw down their savings. To avoid a slowdown and continue to improve living standards, China will have to make its existing labor and capital stock more efficient—and wider Technology adoption will be central to this effort.

The rapid growth of China’s Internet economy is not yet reflected in its labor productivity performance. From 2010 to 2013, China’s labor productivity increased by 26 percent, while the contribution of Internet-related output to GDP increased by 35 to 60 percent (depending on whether C2C e-commerce is included).

However, China appears poised to capture large gains as its companies step up their adoption of Internet technologies. According to McKinsey’s latest survey of Chinese CIOs, the typical Chinese company spends 2 percent of revenue on IT, far below the 4 percent international average. These same respondents predict their IT spending will increase to 3 percent of revenue by 2015—and while that still leaves a large gap, it indicates clear momentum.26 As Chinese companies digitize their operations on a wider scale, they will gain the ability to streamline operations, open new sales channels, accelerate the R&D process, and become leaner.

The Internet is likely to usher in disruptive change, but it is also a catalyst for faster productivity growth. We project that the new applications described in this report could contribute 7 to 22 percent of China’s overall labor productivity improvement by 2025. Capturing this potential will be critical for China’s future competitiveness, particularly as the country’s labor costs increase and its demographic dividend diminishes. 


Eoin Treacy's view -

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

China has succeeded in transforming its economy by leveraging its low labour costs and enormous population. However as the population ages and wages increase, delivering productivity gains is essential if the country is to succeed in attaining its long-term development goals. 

A large number of countries have succeeded in moving from low income to middle income economies but the number that have persisted with their goal of moving into the high income bracket is considerably smaller. Continued zeal for the policy objectives that deliver productivity growth will be worth monitoring as a result. China’s digital economy represents a promising development and suggests that it will succeed in continuing to move up the ranks of GDP per capita. 


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July 22 2014

Commentary by Eoin Treacy

Hasbro saddles up 3D-printed My Little Pony figurines designed by fans

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

While fan-created My Little Ponies may be something of a niche, such forward-thinking ventures highlight the potential of 3D printing. The Technology has opened up all kinds of possibilities, but one very real implication is the issue of intellectual property theft. So much so, research firm Gartner predicts that by 2018, 3D printing will result in the loss of more than US$100 billion in intellectual property each year.

Collaborative efforts like SuperFanArt, where consumers are empowered and enticed by an element of authenticity, rather than the convenience of reproducing their own knock-offs, could see established brands such as Hasbro get the jump on the Pirate Bays of tomorrow.

The first line of My Little Ponies designs will be on show at Comic-Con San Diego from July 24 to 27. You can check out the designs in the gallery and find out more about becoming a SuperFanArt featured artist via the source link below.

Half of Europe’s Jobs Threatened by Machines in U.S. Risk Echo – This article by Simon Kennedy for Bloomberg may be of interest to subscribers. Here is a section: 

Eoin Treacy's view -

In much the same way that intellectual property is threatened by the ability of people to download music, videos and books from the internet, the evolution of 3-D printing represents a similar threat to product designers and products. Music companies and publishers have changed their business models to permit downloads and adjusted their pricing to lower the barrier to entry. It is conceivable that 3-D products will go the same way. 

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July 21 2014

Commentary by David Fuller

Russian Billionaires in Horror as Putin Risks Isolation

Here is the opening of this topical report from Bloomberg:

Russia’s richest businessmen are increasingly frantic that President Vladimir Putin’s policies in Ukraine will lead to crippling sanctions and are too scared of reprisal to say so publicly, billionaires and analysts said.

If Putin doesn’t move to end the war in Ukraine in the wake of last week’s downing of a Malaysia Air jet in rebel-held territory, he risks becoming an international outcast like Belarus’s Aleksandr Lukashenko, whom the U.S. famously labeled Europe’s last dictator, one Russian billionaire said on condition of anonymity. What’s happening is bad for business and bad for Russia, he said.

“The economic and business elite is just in horror,” said Igor Bunin, who heads the Center for Political Technology in Moscow. Nobody will speak out because of the implicit threat of retribution, Bunin said by phone yesterday. “Any sign of rebellion and they’ll be brought to their knees.”

The downing of the Malaysian airliner, which killed 298 people, led to renewed threats of deeper penalties by the U.S. and the European Union, who’ve already sanctioned Russian individuals and companies deemed complicit in fueling the pro-Russian insurgency in Ukraine. U.S. Secretary of State John Kerry said yesterday the available evidence suggests Russia provided the missile used by the rebels to down the airliner. U.K. Defence Secretary Michael Fallon was cited by The Mail on Sunday as accusing Putin of “sponsored terrorism.”

Branding Russia, like Iran or Libya under Muammar Qaddafi, a “state-sponsor of terrorism,” as the British defense minister suggested, would be a major move that would have “a very significant impact on Russia and companies dealing with Russia,” Timothy Ash, an emerging-market economist at Standard Bank Plc in London, said by e-mail.

David Fuller's view -

It is the same age old story.  Unopposed, the ruthless and destructive bully exploits those around him; only the stakes are much higher when the problem is cause by a dictator with a large military, who also supplies an essential commodity.  You can be sure that there is not an EU leader who does not regret the bad luck of being in office during Putin’s era. 

I am not suggesting a military response but much tougher sanctions are required.  Not all European leaders have the stomach for this, not least because their economies are currently weak and could easily deteriorate further with sanctions which hurt their trade with Russia.  However, there is also a real possibility that they would be better off if Putin was either removed from office by his countrymen or at least clearly weakened.   

The USA certainly has the economic influence to weaken Russia, but how far will it go?  President Obama may be reluctant to do Europe’s unappealing job for it.  However, clear evidence that Russian separatists within Ukraine shot down Malaysia Airlines flight MH17, which appears to be emerging, could tempt Obama to brand Putin’s Russia as a state-sponsor of terrorism.  This would be extremely difficult for Russia’s businesses and it would certainly weaken Putin.

This item continues in the Subscriber’s Area where another article is also posted.

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July 17 2014

Commentary by Eoin Treacy

US Dividend Contenders

Eoin Treacy's view -

Following on from yesterday’s addition of a section for the US Dividend Champions to the Chart Library, I created a section for the US Dividend Contenders today. Unlike the Dividend Aristocrats which demand 25 years of consecutive increases as well as a market cap and liquidity provision, the Champions and Contenders only look at records of increasing dividends. In the case of the Champions this is at least 25 consecutive years and between 7 and 24 years for the Contenders. 

The US Dividend Contenders represent an interesting universe of companies where banks, utilities, insurance, MLPs and REITS dominate. This list also highlights the increasingly large number of Technology companies that have maintained solid records of dividend increases over the last decade. 


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July 15 2014

Commentary by David Fuller

Deepak Lalwani: Positive and Pragmatic Budget [for India] Despite No Big Bang Reforms.

My thanks to the author of the India Report for his insights on this interesting market.  Here is a sample:

India Inc is largely happy as this budget is seen as the start of a new economic journey.

1. Bearing in mind this maiden budget was presented in 45 days of the Finance Minister being sworn in it is realistic not to have "big bang" structural reforms unveiled so quickly.

2. Positives include: (a) No populist move; (b) FDI limits increased in both defence and insurance from 26% to 49%. There is relief that finally, after several false dawns, the FDI limit in insurance is finally being raised; (c) Intent to reduce the fiscal deficit and keeping an eye on fiscal prudence and to spur economic growth; (d) GST to be introduced finally by end of year; (e) Infrastructure spending to continue to support economic growth; (f) Tax adventurism to end from here on; (g) REITs good news for stock market.

3. Negatives include: (a) Rather rosy assumptions made of growth - calculations could go awry especially since no details are given on what will drive growth to such levels; (b) Very ambitious target for privatisations; (c)No details on how the $ 43 bn subsidy regime (2.3% of GDP) will be reduced. This is worrisome as the ratings agencies could still downgrade India's sovereign rating to below investment grade or "junk" status; (d) The increase in FDI limit for defence to 49% will not be sufficient for foreign contractors to be willing to transfer Technology if they do not have voting control.

Overall, a positive and pragmatic budget that has tried to address the needs of many sectors. The key will lie in implementation and speed of delivery. Very positive for capital markets - although from here they will focus on earnings catch-up, global markets and the effect of "El Nino" on the Indian monsoons.

David Fuller's view -

Rating agencies know this is a pro-business government embarking on a modernisation programme for India, which the country’s citizens voted for.  Therefore, I doubt they will downgrade India’s sovereign rating over the $43 bn subsidy regime, especially as they know that Narendra Modi intends to phase it out, although this cannot be done overnight.

This item continues in the Subscriber’s Area and contains two related articles and a video.  

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July 15 2014

Commentary by Eoin Treacy

Taiwan May Relax Rules to Expand Securities Firms Business

This article by Justina Leefor Bloomberg may be of interest to subscribers. Here it is in full:

Taiwan’s Financial Supervisory Commission plans to allow securities firms to sell overseas yuan bonds to local institutional investors, Economic Daily News reports, citing officials it didn’t identify.

FSC may also relax rules to let securities firms trade derivatives for non-hedging purposes: report

FSC is lobbying central bank to allow overseas securities units to introduce derivatives linked to Taiwan’s stocks andexchange rate: report

Eoin Treacy's view -

While Western media have focused on improving manufacturing data from the USA and UK, Taiwan’s manufacturing data has been equally impressive. The outperformance of its large cap Technology sector has recently been supplemented by the return to form of the financial sector on speculation that regulatory overall will open up fresh growth avenues. 


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July 07 2014

Commentary by Eoin Treacy

Foxconn recruitment spree shows automation plan setback

This article for Want China Times may be of interest to subscribers. Here is a section: 

Foxconn chairman Terry Gou announced in 2011 that the company planned to manufacture 300,000 robots at a rate of 1,000 units a day and hoped to have 1 million robotic arms in 2014 for the benefit of the first batch of fully automated factories in five to ten years.

A vendor supplying equipment for automated production said that technically it is not a major problem for Foxconn to replace human workers with robots. However, using robots on the production line is only cost-effective for making homogeneous products and cuts cannot realistically be made in making mobile phones and tablet devices which have a more complicated manufacturing process, the vendor stated.

"The labor-intensive industry, such as OEM, can no longer sustain the company's growth," Gou said at a shareholder meeting on June 25. He further said that the company has been seeking a transformation of its business model in the past few years, which is expected to be crucial for Foxconn's continued growth in the next decade.

Eoin Treacy's view -

Factory automation represents an inexorable trend as companies attempt to contain costs and labour uncertainties. As the evolution of robotics proceeds, companies are becoming increasingly knowledgeable about what can and cannot be outsourced to automation. However robots have an important advantage relative to a human labour force. As pieces of Technology, they are subject to Moore’s law and humanity is not. Therefore we can anticipate that as robotics continues to develop and innovation accelerates, robots will both displace humans and also develop products human hands are incapable of. 

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July 03 2014

Commentary by Eoin Treacy

Vascular network bio-printing brings 3D-printed organs one step closer

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

According to the University of Sydney study, the technique demonstrated better cell survival, differentiation and proliferation compared to cells that received no nutrient supply. In addition, Bertassoni says that it provides the ability to create large, life-supporting three-dimensional, micro-vascular channels quickly and with the precision required for application to different individuals.

"While recreating little parts of tissues in the lab is something that we have already been able to do, the possibility of printing three-dimensional tissues with functional blood capillaries in the blink of an eye is a game changer," he says.

Bertassoni explains that the ultimate aim of the research is for patients to be able to walk into a hospital and have a full organ printed with all the cells, proteins and blood vessels in the right place.

"We are still far away from that, but our research is addressing exactly that," he says. "Our finding is an important new step towards achieving these goals. At the moment, we are pretty much printing 'prototypes' that, as we improve, will eventually be used to change the way we treat patients worldwide."

Eoin Treacy's view -

3-D printing of living tissue that is fit to be transplanted into a human host would represent a game changer for the healthcare sector not least because it represents a Technology that would become progressively cheaper overtime. It would also represent a bridge before genetics has developed to such a stage that our internal chemistry can be manipulated without the need for surgery except in emergency cases.

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July 01 2014

Commentary by David Fuller

Manufacturing Sustains Gains as U.S. Growth Rebounds

Here is the opening of this informative article from Bloomberg:

American factories, propelled by the strongest orders of the year, sustained gains in June and are poised to be part of the rebound in economic growth.

The Institute for Supply Management’s manufacturing index was 55.3 last month, little changed from a five-month high of 55.4 in May, the Tempe, Arizona-based group’s report showed today. Readings greater than 50 indicate expansion.

Producers of wood products, furniture, metals and machinery were among those seeing a pickup in demand as gains in auto and home sales rippled through the world’s largest economy. Growing consumer spending, lean inventories and improving overseas markets will probably keep assembly lines busy in the second half of the year.

“Manufacturing is back on track,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, the top U.S.-based ISM forecaster over the past two years, according to data compiled by Bloomberg. “It’s growing at a solid pace.”

Factories globally were also mostly on an upswing, figures today showed. In China, the world’s second-largest economy, manufacturing grew in June at the fastest pace of the year, according to a gauge from the National Bureau of Statistics and China Federation of Logistics and Purchasing.

In the U.K., manufacturing expanded in June at the strongest pace in seven months, according to Markit Economics. Factories in the 18-nation euro area cooled last month, as a deepening downturn in France offset a pickup in Spain, other Markit data showed.

The Standard & Poor’s 500 Index rose to a record, after posting the longest streak of quarterly gains since 1998, as Technology and consumer shares rallied. TheS&P 500 climbed 0.8 percent to 1,975.21 at 1 p.m. in New York.

David Fuller's view -

The US economy is now at least five and a quarter years into its economic recovery following the worst credit crisis slump since the 1930s.  Inevitably, it has been a slow, somewhat staggered recovery in response to all the deleveraging that occurred, and obviously not just in the USA.  Arguably, that deleveraging process has been an economically healthy corrective phase for the long-term outlook, although it has seldom felt that way as we have lived through the process. 

Nevertheless, quantitative easing has made the journey a lot less uncomfortable than it might have been, not least for investors, who now worry about the sustainability of global stock market rallies.  How serious a concern might this be, and how do we keep our analytical feet on the ground when stock market valuations increase more rapidly than corporate earning and GDP growth?

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July 01 2014

Commentary by Eoin Treacy

Technology Catch-Up plays

Eoin Treacy's view -

The Nasdaq-100 is within striking distance of a new all-time high following a market leading performance from the 2009 lows. As the psychological 4000 level is approached I thought it might be instructive to look at some of the more established Technology companies with reasonably robust dividend policies that may play catch-up. 

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June 25 2014

Commentary by Eoin Treacy

Capex about to turn up: The missing link in the US recovery

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

Spending on non-residential structures fell to unusually depressed levels following the financial crisis and has remained weak during this recovery. Similar to residential investment, much of this weakness can be attributed to a need to work through the overbuilding that occurred during the run up to the financial crisis, as structures share of GDP rose rapidly from 2004 through 2008. There are some indications that this excess supply has diminished materially and that pent up demand for non-residential structures should lead to stronger spending going forward. For example, the vacancy rate for office space nationally has declined steadily over the past four years toward historically more normal levels (Chart 18). In addition, in response to the shale energy boom in the US, investment in energy-related structures has been notably strong. This supports the outlook for a pickup in investment in commercial structures.

IPP: Uptrend should continue
Spending on IPP – composed of spending on software, R&D, and entertainment, literary and artistic originals – has displayed a steady uptrend as a share of GDP over the past several decades, which has been relatively impervious to cyclical factors. Recent strength in IPP spending has been driven primarily by the R&D component. IPP spending may also benefit from a shift away from investment in information processing (IP) equipment.

Equipment: IP equipment has been notably weak
Equipment spending as a share of GDP remains well below historical averages for this point of the recovery. In this section we take a more granular look at equipment’s components to analyze the underlying causes of this weakness. We have already determined that transportation equipment is near longer-term averages. We also find that recent contributions to BFI from industrial equipment and the “other” equipment category appear to be in line with longer-term averages. Conversely, IP equipment appears to be the component driving much of the softness in total equipment spending. Spending on IP equipment has been consistently below its longer-term average contribution to overall fixed investment during this recovery (Chart 19). 

Eoin Treacy's view -

The majority of established Technology companies rely on corporate spending to boost earnings. The outperformance of the Nasdaq-100 highlights the fact the corporations have been spending on software and other services. The return to outperformance of the industrial sector in 2012 reflects increased spending on machinery and embedded processors. Generally speaking there is a perception that the US recovery is weaker than one might expect but the fact that companies are embarking on increased spending is a sign of confidence. 

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June 11 2014

Commentary by David Fuller

The Machine - HP May Have Invented a New Kind of Computer

Here is the opening for this interesting article from Bloomberg:

HP’s bet is the memristor, a nanoscale chip that Labs researchers must build and handle in full anticontamination clean-room suits. At the simplest level, the memristor consists of a grid of wires with a stack of thin layers of materials such as tantalum oxide at each intersection. When a current is applied to the wires, the materials’ resistance is altered, and this state can hold after the current is removed. At that point, the device is essentially remembering 1s or 0s depending on which state it is in, multiplying its storage capacity. HP can build these chips with traditional semiconductor equipment and expects to be able to pack unprecedented amounts of memory—enough to store huge databases of pictures, files, and data—into a computer.

In theory, that would remove the need for a conventional slow disk/fast memory system. With the Machine’s main chips sitting on motherboards right next to the memristors, they can access any needed information almost instantly. “It’s the Platonic form of computing and is the natural way to do things,” says Papadopoulos, a former computer architect for HP and Sun. “You want lots of, lots of memory, and you want it to always be there and to use it as storage.”

New memory and networking Technology requires a new operating system. Most applications written in the past 50 years have been taught to wait for data, assuming that the memory systems feeding the main computers chips are slow. Fink has assigned one team to develop the open-source Machine OS, which will assume the availability of a high-speed, constant memory store. Another team is working on a stripped-down version of Linux with similar aims; another team is working on an Android version, looking to a point at which the Technology could trickle down to PCs and smartphones.

David Fuller's view -

I obviously have no idea whether or not Hewlett-Packard will be able to deliver ‘The Machine’ as a competitive, commercial, evolutionary new computer within the next 3 to 6 years.  However, I maintain that there is no known reason for why the pace of new technological innovation should not continue to accelerate well into the exciting future. 

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June 11 2014

Commentary by Eoin Treacy

Musings from the Oil Patch June 10th 2014

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

The translated Nikkei article described the transmutation experiment in the following manner: “The researchers put the source material that they want to convert on top of the multi-layer film, which consists of alternately laminated thin films of calcium oxide and palladium. The thin metal layers have a thickness of several tens of nanometers. Elements are changed in atomic number in increments of 2, 4 and 6 over a hundred hours while deuterium gas is allowed to pass through the film.

“The transmutations of cesium into praseodymium, strontium into molybdenum, calcium into titanium, tungsten into platinum have been confirmed.”

Mitsubishi’s patent was originally issued in Japan but it was extended in 2013 into a European patent, and protects the company’s proprietary thin-film transmutation Technology. The Japanese newspaper also reported that a research and development company of the Toyota Group (TM-NYSE), Toyota Central Research and Development Labs, has also replicated the elemental conversion research with results similar to Mitsubishi’s experiment.

While the Mitsubishi and Toyota research efforts have focused on material transformation rather than the generation of energy, the process is similar. High profile work on LENR as an energy source has been conducted by Andrea Rossi, an Italian engineer, inventor and entrepreneur. He has invented the Energy Catalyzer (E-Cat) and completed two tests, one of which produced 900o C (1,650o F) of heat that could be used to generate steam to power a generator to produce electricity. In early 2013, a group of independent scientists ran tests on two versions of the “Hot Cat,” a one megawatt LENR unit. Their coefficient of performance (COP) was measured, determining the ratio of energy out versus energy in. The COPs in the two tests were 5.6 and 2.2, respectively. Another group that is not affiliated with nor has it worked with Mr. Rossi, has been using an E-Cat and conducting longer term tests, the results of which may be released soon. This could be a monumental development, although it will not end skepticism of the Technology.

Eoin Treacy's view -

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

In the aftermath of the Fukushima disaster Japan has a vested interest in figuring out how to deal with the problems associated with nuclear power. In the near term that has meant building tsunami walls around nuclear plants and reinforcing structures to protect them from earthquakes. The challenges represented by nuclear waste have been intractable for a long time but the transmutation methods detailed above hold out hope that these will eventually be solved. 

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June 11 2014

Commentary by Eoin Treacy

The coming digital anarchy

Thanks to a subscriber for this interesting article by Matthew Sparkes for The Daily Telegraph. Here is a section: 

The clever part is how the network reaches a consensus on what should be written in it. Otherwise there could be thousands of different blockchains, all disagreeing over who owns what.

The idea is that each and every transaction is broadcast by the person initiating it. Rather than telling the bank we want to spend £3, we tell the world. That transaction is bundled up with thousands of others and cryptographically bound into a “block” by “miners”.

Technically, anyone with a computer can be a miner – they just need to install a small piece of software. But it’s not easy to do: far from it.

Bitcoin “miners” are so called because gold miners traditionally have to put in a lot of work before they see any reward in the shape of precious metal. In the world of Bitcoin, miners have to crack an extremely difficult cryptographic problem before they are rewarded with some newly minted Bitcoins. That “block” is then added to the end of the blockchain and shared around the world.

To quote the wiki dictionary maintained by “the Bitcoin community” – perhaps the nearest you can get to an official explanation – “mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady … The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus.”

In other words, the blockchain remains both public and infallible. It’s a totally reliable and trustworthy record of who owns what, but also who owned what back through time, all the way to the creation of Bitcoin.

Eoin Treacy's view -

To describe bitcoin as a currency is to miss the point somewhat with regard to what the development of cryptocurrencies means. The blockchain is a facilitator of transactions whether financial, services oriented or communications. In essence it is a ledger anyone can access where anything can be recorded and archived.

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June 09 2014

Commentary by David Fuller

Barry Ritholtz: The Bears Have Not Surrendered Yet

Here is a section from this interesting column published by Bloomberg:

According to a study published in the Financial Analysts Journal, equity ownership has fallen to the lowest level in more than a half-century. In 2012, investors held a mere 37.7 percent of their portfolios in equities. That was out of a grand total of $90.6 trillion in investable assets around the world.

Over the past three decades, U.S. investors’ portfolio equity exposure has run at a historical average of about 60 percent. Think of this as the classic 60/40 stock-bond allocation.

In the early 1980s, investors reduced their equity exposure to just 45 percent. In the late 1990s, it rose to 75 percent and higher. A 15 percentage-point swing in either direction is an indication of extreme sentiment. Savvy contrarians can make a bet in the opposite direction with a high degree of confidence.

Today, the equity allocation is a modestly elevated 65.3 percent among the 150,000 members of the American Association of Individual Investor, which tracks individual investor behavior. Given last year's 30 percent gain in the Standard & Poor's 500 Index, it is reasonable to guess that much of this increase was from price appreciation in existing equity holdings, and not due to a newfound love of stocks. Meaning, we are not seeing the sorts of sentiment moves that indicate a bubble.

David Fuller's view -

Barry Ritholtz makes some good points in this article, which may interest subscribers. 

Regarding the last paragraph above, I think he understates the extent to which US equity investors were piling in last year.  Also, we certainly saw some bubble activity in new tech and bioTechnology shares.  I regard those excesses are a lead indicator but clearly they have not yet dragged down the broader market.

This item continues in the Subscriber’s Area along with a link to Barry Ritholtz's article. 

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June 05 2014

Commentary by Eoin Treacy

China Nuclear coming online

Thanks to a subscriber for this report focusing on China’s utilities as newly constructed nuclear power stations come on line. Here is a section: 

According to China Electric Power Promotion Council (CEPPC) report, Fuqing Nuclear unit 1 completed its last round of security checks in mid-April before loading fuel and is currently on schedule to be commissioned from August 2014. However, after Datang’s Ningde nuclear recorded c.Rmb100m loss in 1Q14 due to a 90-day overhaul, investors become a bit concerned whether Fuqing’s profit contribution is likely to be compromised by the undertaking of regular maintenance. While we understand that a new nuclear unit would need to perform a major overhaul for fuel re-load in its second year of operation, the time period is normally shorter. Hence, we do not think the longer-than expected maintenance period for Ningde is a common situation to be assumed for other nuclear projects.

Average utilization still over 7,300 hours despite maintenance In Figure 1, we summarize the utilization hour record of China’s operating nuclear units with GII or GII+ Technology. Result shows that, excluding Tianwan unit 1, which incurred some technical issues during the first three years, average utilization in the second year is still above 7,300 hours, quickly climbing to above 7,700 hours in the third year.


Eoin Treacy's view -

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

Over the last decade China has aggressively invested in procuring the energy resources required to fuel economic expansion. Building nuclear power capacity has been a major component of that strategy and these new reactors are now being commissioned. Considering how extensive the pipeline is for additional reactors, this represents a growth story from the perspective of utilities. 

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May 21 2014

Commentary by David Fuller

Russia, China Sign $400 Billion Gas Deal After Decade of Talks

Here is the opening of this latest report from Bloomberg:

Russia reached a $400 billion deal to supply natural gas to China through a new pipeline over 30 years, a milestone in relations between the world’s largest energy producer and the biggest consumer.

President Vladimir Putin is turning to China to bolster Russia’s economy as relations sour with the U.S. and European Union because of the crisis in Ukraine. Today’s accord, signed after more than a decade of talks, will allow state-run gas producer OAO Gazprom (GAZP) to invest $55 billion developing giant gas fields in eastern Siberia and building the pipeline, Putin said.

It’s an “epochal event,” Putin said in Shanghai after the contract was signed. Both countries are satisfied with the price, he said.

Gazprom Chief Executive Officer Alexey Miller signed the deal with Zhou Jiping, chairman of China National Petroleum Corp. The agreement is for 38 billion cubic meters of gas annually over 30 years, Miller said. While he declined to give a price, he said the total value would be about $400 billion.

“This is the largest ever contract for Gazprom,” Miller said, adding the deal was clinched at 4 a.m. Supplies will start in four to six years, he said.

Gazprom shares rose as much as 2.2 percent, to 148.55 rubles in Moscow today and traded at 147.04 rubles at 4:04 p.m. local time.

David Fuller's view -

I do not think that Putin would have gone to China, with some fanfare, if he did not know that a deal was imminent.  Nevertheless, the last minute agreement, particularly after financial news services were initially saying this morning that discussions had failed, suggests to me that Putin had to give ground to the Chinese. 

Russia has gas, oil and weaponry but that is a narrow economic base for a country aspiring to be a global leader.  More importantly, the energy cartels are gradually losing power, not least because many countries now have the capacity, if not quite the will and know how, to produce their own natural gas by fracking.  Additionally, solar power and most other forms of renewable energy can only grow in importance as the advance of Technology improves their output and efficiency. 

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May 20 2014

Commentary by David Fuller

Mandate for Modi: A Business Agenda

My thanks to a subscriber for this detailed article from [email protected]  The first half has been more than covered on Fuller Treacy Money but the second half is revealing in terms of what the outgoing Congress party messed up and what India and Indians actually require.  Here is a sample from the conclusion:

Along with the big picture, it is necessary to look at the small picture. The real wealth of a nation comes from entrepreneurship, not mega-investments by government or big business, observers say. According to Bharti Jacob, managing partner at SeedFund, there is urgent need to encourage and enable entrepreneurship in India. “The government should stay out of it,” she says. “But it should create an environment that encourages innovation and new company formation.”

“India is a hostile habitat for entrepreneurship in terms of regulations that make it complicated and painful to start and run a business,” adds Sabharwal. “The biggest manifestation of this is the substantially stunted firm size. (Companies with less than 49 workers account for 84% of manufacturing employment). India has more dwarfs — companies that are small and will stay small — rather than babies — companies that are small but will grow. The reason obviously includes the labor laws, but the inspector raj, the compliance raj and the permission raj, which have remained unchanged since 1991, are also responsible.”

Laurent Demortier, CEO & managing director of Avantha Group-owned company Crompton Greaves, says the country also needs to bolster research and development capabilities. “With the increased global footprint of the Indian manufacturing industry, India should incentivize R&D and aim to make the country a global R&D hub in select sectors. This will encourage product innovation to make a home in India.”

According to Vinayak Prasad, co-founder ofFrog8, a company in the payments space, the new government needs to force regulators to stop taking baby steps toward enabling adoption of electronic payments. “Cash is still king and extremely costly,” he notes. “The requirements of [identity verification] make it very expensive to get customers. Digital [identity verification] is key, and the government or regulator needs to be more aggressive.” Prasad is talking about one end of the problem. The other end — inclusive banking — is probably more important; 41% of the population in India is unbanked. The only way to get them into the fold is to marry Technology to banking. Banking spread has been hindered by over-regulation. “The RBI is in anxiety management mode,” says Prasad.

Sabharwal talks about another issue. “India only has 50 cities with more than a million people while China has 400,” he notes. “We have 600,000 villages; 200,000 of them have less than 200 people. Politicians dream of taking jobs to people, but what we need is to take people to jobs. Unlike Chinese New Year, where 300 million people get on a train and go home, we don’t have a mass migration at Diwali, Chaath, Eid or Christmas. We should.”

India “[does] not need a business-friendly regime,” Aron notes. “What we need is an administration that pursues a rational regime of laws that will grow the economic pie as well as redistribute it equitably. In early 2000, the share of manufacturing in FDI inflows was more than 60%; it fell to about 40% in 2005 and to 20% in 2008. The drought of investment in manufacturing and in increasing the productive capacity of business in India is a self-inflicted misery…. It is time that we went from ‘made in spite of India’ to ‘well-made in India.’”

David Fuller's view -

A lot of these problems of bureaucracy and overregulation are due to corruption.  The rest is unhelpful socialism. 

Fortunately, Narendra Modi has already shown that he knows more about what is wrong with India’s economy, and importantly, how to address it, than anyone else.  Crucially, he has been given an overwhelming majority by India’s electorate.  People all over India understandably want jobs, economic growth, and rising standards of living. 

This item continues in the Subscriber’s Area and contains three more articles, on Modi from the NYT, on Modi from a distinguished US Congressman, and on another promising stock market.  

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May 20 2014

Commentary by Eoin Treacy

Can crowdfunding give us safe fusion power by 2020?

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

According to LPP Fusion chief scientist Eric Lerner, the vast majority of the financial resources have been allocated to ITER's approach to fusion power, while other avenues, such as the one being pursued by his team, have been largely neglected, despite being much cheaper. Using an approach he calls "focus fusion," Lerner says his team can obtain a crucial electrode for $200,000, demonstrate net power gain with $1 million, and solve the final engineering problems, leading to a functioning fusion reactor with just $50 million in funding.

Eoin Treacy's view -

Fusion has been described as the holy grail of the energy sector for decades and always seems to be about thirty years away. Part of the reason for this is because the government sector which originally funded nuclear research was more interested in weapons development than cheap, clean energy. The ITER project has been plagued by lack of funding, political struggles and a need to make one bet on a developing Technology which has not yet been proven.

This project has clear parallels with Craig Venter’s success in sequencing the human genome. His company achieved the feat faster and more cost effectively than the government funded Human Genome Project. It remains to be seen whether the above privately funded initiative will be fruitful, but it seldom pays to bet against humanity’s capacity for innovation.

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May 07 2014

Commentary by David Fuller

U.S. Stocks Fluctuate as Tech Stocks Tumble Amid Yellen Comments

Here is the opening to this informative report on tech stocks from Bloomberg:

The Nasdaq Composite Index (CCMP)fell as Yahoo! Inc. and Groupon Inc. led a selloff in Internet stocks for a second day. The Standard & Poor’s 500 Index rose amid optimism the Federal Reserve will continue to support the U.S. economy.

The Dow Jones Internet Composite Index dropped 2 percent and touched the lowest level since October. Groupon fell 19 percent as sales and profit projections trailed some estimates. Yahoo slumped 5.8 percent as Alibaba Group Holding Ltd. filed for a U.S. initial public offering. Whole Foods Market Inc. declined 20 percent after cutting its 2014 profit forecast for a third time because of increasing competition. Electronic Arts jumped 18 percent after reporting better-than-forecast results.

The Nasdaq Composite slipped 0.7 percent as of 12:30 p.m. in New York, paring an earlier drop of 1.5 percent. The S&P 500 gained 0.3 percent to 1,873.98, rebounding after dropping below its average trading level for the past 50 days. The Dow Jones Industrial Average gained 107.43 points, or 0.7 percent, to 16,508.45. Trading in S&P 500 stocks was 10 percent above the 30-day average during this time of day.

“You’re seeing a brutal shift from growth and momentum investing to more value-based investing,” Chad Morganlander, a fund manager at Stifel Nicolaus & Co., which oversees more than $150 billion, said in a phone interview from Florham ParkNew Jersey. “The momentum stocks are ridiculously overvalued, but nonetheless, the overall broader market is fairly valued. Any kind of shift in momentum does spook investors.”

Technology stocks led this year’s selloff among companies whose growth are more tied to economic swings after a rally drove valuations to about double that of the S&P 500. The Nasdaq Composite is trading at 35 times reported earnings, compared with a multiple of 17.2 for the broad market measure.

David Fuller's view -

Janet Yellen’s comments were favourable for Wall Street today but I think Putin’s U-turn, if you believe him, was at least equally responsible for the firm close. 

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May 02 2014

Commentary by Eoin Treacy

Email of the day on Energy, Bank Capital & Cars

Have you noticed US oil producers are having trouble capitalising on these higher global Oil prices.  We both agree the world needs a cheap energy.  I think it is unlikely that cheap energy source will be conventional or unconventional Oil and Gas.  My concern is that cheap energy solution may take another 10 years to materialise.

I still think European banking looks like Zombie banking.  We know European banks have capital deficiencies.  I think these banks are holding back a broad recovery in the European economy.  My sources continue to tell me European banks are still trying to shrink balance sheets.  I believe the ECB needs to be more proactive in solving this problem.  I see ECB is talking of QE - I am not sure this idea is the solution more likely the problem.   However the bank capital dilemma needs to be addressed quickly otherwise Europe faces a possible Japanese situation of low growth for decades.

Like you I am a strong believer in the big European global business brands and product solutions.  However the availability of credit is stifling growth in Europe's smaller companies and businesses.   From what I observe VW increasingly looks like it is going to dominate the global car industry.  Unless Toyota can catch up in this Technology race they will lose their cherished Crown of the dominate global car producer.  As for old world car companies Ford , GM etc. sadly they look like a great short to me.  Every time I hire rental car in the US I come away with the thought how do US car companies do it so badly and remain in business.  I don't expect US cars to handle like my Porsche but US cars are just plain scary to drive.

Please keep up the good service.

Eoin Treacy's view -

Thank you for sharing your perspective on a range of topics. The revolution in unconventional supply of oil and gas can be viewed in terms of a supply response to high prices. At the beginning of the last decade $40 was considered the highest price possible for oil with the result that a great deal of additional supply was simply uneconomic.

Canadian bitumen becomes economic in the region of $40. Generally speaking more established offshore oil fields, such as the North Sea, have a breakeven in the region of $20-$25 while newer offshore such as Brazil’s pre salt ultra-deep water fields comes in closer to $45. A number of the unconventional plays have breakevens closer to the $50-60 area. As a result, we can conclude that price is the determining factor in which sources of potential supply are ultimately moved into production. 

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April 29 2014

Commentary by David Fuller

Email of the day

On the relationship between mining Technology and the supply of gold:

“Thank you for your comments on Gold. In the past few months your service mentioned a Technology that would make mining gold simpler and easier. I presume you still hold the view that this does not pose a threat for the supply of Gold in the medium to longer term. As always thanks for the wonderful service.” 

David Fuller's view -

Thanks for an email of general interest.

Yes, there is now a new reef-boring Technology, developed by AngloGold Ashanti, which is a lot more efficient and economical than ‘drill and blast’.   Iain Little also mentioned it and you can see the two emails just below my response on 5th March.

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April 29 2014

Commentary by Eoin Treacy

Africa: A ripe opportunity

Understanding the pharmaceutical market opportunity and developing sustainable business models in Africa This report by IMS Health is highly educative and I regard it as a must read for anyone interested in Africa. Here is a section:

By 2016, pharmaceutical spending in Africa is expected to reach US$30 billion.  This value is driven by a 10.6% compound annual growth rate (CAGR) through 2016, second only to Asia Pacific (12.5%) and in line with Latin America (10.5%) during this period. Spurred by a convergence of demographic changes, increased wealth and healthcare investment, and rising demand for drugs to treat chronic diseases, this market potentially represents a US$45 billion opportunity by 2020. 

The pharmaceutical growth is a reflection of economic strength accompanied by increasing healthcare spending. Sub-Saharan Africa (SSA), excluding South Africa, is notable in this regard: according to the Economist Intelligence Unit, its economies are growing faster than anywhere else in the world and this trend is expected to continue.

The appeal of Africa lies not in its size – the continent accounts for just 3% of the global economy – but in the dynamics that drive sustainable growth at a time when the major established pharmaceutical markets face a more uncertain future. Underpinning these prospects are a series of positive economic trends: greater political and fiscal stability and improvements in pro-business legislation have led the United Nations (UN) to forecast that Foreign Direct Investment (FDI) in Africa could more than double by 2014, despite speculative money leaving the continent following the collapse of Lehman Brothers, and the Arab Spring restricting investment in North Africa.

This FDI is fuelling macroeconomic growth and vastly improving access to new Technology. The recent boom in mobile subscribers reflects this trend: as of mid-2012, there were more than 600 million mobile subscribers on the continent, surpassing American and European figures. At the same time, major demographic shifts show an increasing number of working-age Africans, a rising middle class which accounts for 34% of the continent’s inhabitants, and an urban population expected to exceed that of China’s and India’s by 2050.


Eoin Treacy's view -

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

IMS Health recently IPOed in New York. The company which specialises in crunching complicated prescription data in order to sell it to pharmaceutical companies represents one of a new breed of information companies that are likely to become more common in the coming decades as big data moves into the mainstream. While they do not generate revenues in Africa, one can understand why the continent represents an interesting opportunity for them. 

According to this report GlaxoSmithKline is the dominant provider of pharmaceuticals in Africa. However, with annual revenues of £30 billion the 3.8% represented by the Middle East and Africa barely moves the needle in terms of the share’s performance. Nevertheless, as a global Autonomy GSK represents one of the companies most likely to benefit from the continued evolution of the global consumer. The share (Est P/E 15.38, DY 5.2%) has been largely rangebound for much of the last year but a sustained move below 1500p would be required to question medium-term scope for additional upside. 

South African listed Aspen Pharmacare generates 35.5% of its revenue in South Africa and 10.2% in the rest of Africa. The share (Est P/E 25.48, DY0.56%) has lost momentum following an accelerated advance in September and it will need to continue to hold above or in the region of the 200-day MA if medium-term upside potential is to continue to be given the benefit of the doubt. 

Africa has been one of the more fashionable destinations for investors over the last few years with the result that prominent regional shares now have rather expensive valuations. For example the UK listed Africa Opportunities Fund which invests directly in Sub Saharan Africa’s less liquid markets traded on a discount to NAV of 18% in early 2012. Following an impressive advance it now trades at a 2% premium and appears to be unwinding an overbought condition relative to the 200-day MA. 

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April 23 2014

Commentary by David Fuller

April 17 2014

Commentary by David Fuller

Tom Stevenson: There is a lot more air to come out of the tech bubble

Here is the opening from this interesting article published by The Telegraph:

In the long run the market is a weighing machine but in the short run it counts votes. Eventually, fundamentals will determine the right price but eventually can be a long time coming. In the meantime, being right at the wrong time is frustrating, career-threatening and expensive.

This is what Keynes was getting at when he described investment as a beauty contest with a difference. You are not there to judge the most beautiful contestant but to guess who the other judges will rate. The sensible thing might be to temporarily do what you think makes no sense.

The vote-counting always comes to an end at some point but if the authorities are really determined, they can disable the weighing machine for longer than you expect. And while that’s happening markets can do strange things. Fundamentals can simply go out the window.

Last week we saw the fallout from a landslide vote in favour of tech and bio-tech stocks. The weighing machine has been re-activated, perhaps only for a short while, perhaps for longer. If we’re really back to weighing not counting, however, then I suspect this process has further to go. The scales are a long way off balance yet.

There were some pretty punchy corrections in individual Technology stocks last week, with the likes of Amazon, Facebook and Google off more than 4pc on Thursday alone. And it’s been a global correction, with internet stocks under the cosh from Shanghai to Silicon Valley and all points in between. With Nasdaq still trading at around twice the average multiple of earnings in the broader S&P 500, however, I think there’s still plenty of air to come out of this bubble.

David Fuller's view -

A degree of caution is still warranted over at least the next few months. What does this mean more specifically?

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April 17 2014

Commentary by David Fuller

BMO Mining Equity Outlook Q2/14

My thanks to a subscriber for this comprehensive report; here is a brief sample from the Preferred Stocks section:

Diversified Miners

BHP Billiton: Remains the preferred big cap name, balance sheet strong with debt reduction in 2014 on track, lowered costs and capex, net cash flow increasing, 4% dividend yield with moderate growth rates.

Rio Tinto: A well articulated and coherent strategy on lowering costs and capex, net cash flow increasing with cash return possible late 2014 into 2015, 4% dividend yield but some worries on iron ore price H2/14.

David Fuller's view -

Mining shares are generally contra cyclical and often underperform until the latter stages of bull markets.  Often regarded as ‘dull old economy stocks’, especially when the cycle’s highly fashionable shares are outperforming, miners are often ignored for much of the bull market’s duration and consequently range sideways in large developing base formations.  However, when overvalued and overextended momentum plays finally lose form, as we have seen in recent months, re-ratings are usually underway.

The Nasdaq Biotech Index (weekly & daily) is a good example. 

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April 16 2014

Commentary by Eoin Treacy

How resource scarcity is driving the third Industrial Revolution

If you believe as we do that we are in the early stages of a third industrial revolution then this video from McKinsey is well worth spending 11 minutes to watch. Here is a section from the transcript:

What’s important to realize is that the technologies we’re talking about changing in this way are really basic infrastructure technologies. And because of that, they have this spillover benefit for the productivity of the economy as a whole.

When we change the cost of a structure—in housing or an office—that has a knock-on effect on all these industries that use or take advantage of buildings. When we change the economics of the resources required for transportation and for movement of goods, every industry that ships anything anywhere in the world benefits from that.

When we virtualize a process to, instead of physically moving a good, turn it into a service delivered over your phone or over the Internet remotely, that, again, spreads to many, many industries, from elevators to automobiles to mining companies. They’re all now taking advantage of the fact that I can do things remotely. That’s why it’s very exciting. We’re just at the beginning, the inception point, of these new materials and new IT technologies beginning to affect many, many other industrial domains.


Eoin Treacy's view -

The above video helps bring together a number of themes that are likely to help drive productivity growth over the coming decades. This is worth keeping in mind following the sharp pullbacks experienced by a number of Technology companies over the last six weeks. 



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April 15 2014

Commentary by Eoin Treacy

Email of the day on technological innovation

“Thank you for another productive session at the strategy seminar last week. I came across this interesting overview of emerging technologies which touches upon one of the main themes we discussed.

Eoin Treacy's view -

Thank you for these infographics which offer a wonderful representation of how Technology might develop over the next twenty years. While it would be unreasonable to expect all of these possibilities to reach fruition, the potential for success in at least some of them suggests that productivity growth is more likely than not over the next couple of decades. 

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April 07 2014

Commentary by David Fuller

Iain Little: Fund Manager Diary: Leaders and Sex

My thanks to the author for his latest and ever-entertaining Diary.  Here is a brief sample:

There are many ways to think about global investing. Many talk about countries (“is China’s relative decline over?”). Others think of sectors (“is Technology entering a bear market?”). We see the world as themes (“is the emerging middle class increasing the demand for shampoo?”). Few think in terms of sex (though some psychologists say men think about it every 7 seconds). Our Developing China theme adviser, Arisaig Partners, points out that women are changing global economics. The growth in women’s income (USD 5 trillion) in the next 5 years will exceed the GDP growth of China and India combined. Half of the world’s farmers are women, yet they own less than 2% of the land and take home only 10% of global income. Mao Zedong, the “Great Helmsman“, said that women “hold up half the sky”. How poetic therefore that thinking about women’s purchases –cosmetics, soap, chocolate, apparel- conjures up those stocks –Unilever, P&G, Nestlé etc- that are rightly called “Global Autonomies”. Indeed, The Hand That Rocks The Cradle Rules The World.

David Fuller's view -

They also have decent dividends, which make them purchase candidates following every significant correction. 

Iain Little's Fund Manager's Diary is posted in the Subscriber's Area. 

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April 07 2014

Commentary by David Fuller

U.S. Wind Power Blows New Records. Again. And Again

I am no fan of wind power but was impressed by this report from Bloomberg.  Here is the conclusion:

Even without the subsidy, wind prices are getting cheaper as the Technology improves. The cost of wind energy has declined by 43 percent over the last four years. There’s a backlog of projects that already qualified for the tax credit that will ensure a steady pace of turbine growth for the next few years, according to BNEF wind analyst Amy Grace.

The future of the wind tax credit is contentious and uncertain, but so is America’s cheap gas prices. As expensive coal plants are retired, utilities are switching to cheaper natural gas, driving up the price, says Grace. Also, the U.S. Energy Department is opening up domestic gas for exports for the first time. By 2020, U.S. shale gas may account for 20 percent of the global market, according to a Citigroup estimate.

If Americans have to buy gas anywhere near international market prices, wind wins. Gas may be booming, but you can expect many more wind records to come.

David Fuller's view -

I suspect that at least part of that 43% drop in the cost of wind energy is due to temporary overproduction of windmills.  Nevertheless, improving Technology is also a major factor.  Even so, these HG Wells monsters are appalling, noisy eyesores which blot landscapes and kill millions of birds. 

At least the USA has more undeveloped, remote land where windmills can be placed.  However, this considerably increases the costs and challenges of delivering their electricity to population centres where it is required.  In contrast, solar power need not have any of these drawbacks, while also being far more efficient and adaptable in terms of size or location.  

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April 04 2014

Commentary by David Fuller

U.S. Stocks Fall as Technology Selloff Drops Nasdaq Index

Here is the opening for this report on the US market’s significant developments today, reported by Bloomberg:

U.S. stocks fell, with the Nasdaq Composite Index sliding the most in two months, after large Technology stocks from Google Inc. to Yahoo Inc. plunged as investors sold the bull market’s biggest winners.

Google Class A shares sank 4.6 percent in the biggest drop since October 2012. Facebook Inc. lost 4.6 percent, bringing its two-day slide to 9.5 percent. Yahoo Inc. declined 4.2 percent to the lowest since November. An index of bioTechnology stocks plunged 4.1 percent. GrubHub Inc. surged 31 percent in its trading debut.

The Nasdaq index lost 2.6 percent to 4,127.73 at 4 p.m. in New York, for its worst day since Feb. 3. The Standard & Poor’s 500 Index sank 1.3 percent to 1,865.09 after earlier rising to an all-time high. The Dow Jones Industrial Average dropped 159.84 points, or 1 percent, to 16,412.71.

“This has been in the making for a few weeks,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said a phone interview. “Managers were positioned very heavily last year with the winners. They killed in 2013 and money started to pour in them. Today is kind of like the panic day that they couldn’t stand it any more and now they’re just puking these names.”

David Fuller's view -

These market developments are discussed below, albeit less colourfully.  

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April 03 2014

Commentary by David Fuller

Drones Portend High-Tech Future for Dangerous Mines

Here is the opening from this fascinating article from Bloomberg Businessweek.

Mines without miners?  Not quite. Still, a Technology boom in robots, drones, driverless trucks and pilotless trains is beginning to reshape one of the world’s most labor-intensive industries, portending automation of logistics, supply chains and mapping and allowing development of mines in regions once thought too dangerous or remote to exploit.Already about 200 driverless haul trucks are working iron ore mines, mainly in Australia. Meanwhile, mining giant Rio Tinto Ltd. (RIO), which funds one of the world’s largest non-military robotics programs, will soon use unmanned trains to deliver cargo to the coast and set drones aloft at its remote mines.

Drones can monitor stockpiles, map exploration targets and track equipment and will eventually deliver parcels to workshops according to Accenture Plc. -- and on a schedule far ahead of that envisioned by Inc.’s Jeff Bezos, who one day wants Amazon’s books and DVDs delivered instantly to customers via miniature helicopters.

“Come and see me in about October,” said John McGagh, head of innovation at Rio Tinto in Brisbane, Australia, where staff use the world’s largest multi-content touchscreen to monitor mining operations from Utah to Queensland. “You will see drones flying around. That’s not so long away.”

David Fuller's view -

It may take a while, but Technology is beginning to transform one of the dirtiest and most dangerous extraction businesses, giving it a metallic sheen of glamour to match the appeal of some mining share valuations.  

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March 31 2014

Commentary by David Fuller

Hi-Frequency Traders Ripping Off Investors, Michael Lewis Says

Here is today’s initial article by Nick Baker and Sam Mamudi for Bloomberg, prior to the public release of Michael Lewis’ new book: Flash Boys: A Wall Street Revolt.  The original article is no longer available online but having sent it to my PC this morning, I make the PDF above.  The article was subsequently watered down and also diluted with rebuttals from the very powerful HFT industry, which has so far had the blessings of most exchanges, because their profits have increase dramatically as a consequence of all the additional volume created by high speed electronic orders.  Here is the opening from the original article:

March 31 (Bloomberg) -- The U.S. stock market is rigged when high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors, according to author Michael Lewis, who spent the past year researching the topic for his new book “Flash Boys.”

While speed traders’ strategies, developed over the past decade with help from exchanges, are legal, “it’s just nuts” that they’re allowed, Lewis said during an interview televised yesterday on CBS Corp.’s “60 Minutes.” The tactics are too complicated for individual investors to understand, he said.

“The United States stock market, the most iconic market in global capitalism, is rigged,” Lewis, whose books “Liar’s Poker” and “The Big Short” highlighted Wall Street excesses, said during the interview. The new book comes out today. “It’s crazy that it’s legal for some people to get advance news on prices and what investors are doing,” he said.

Everyone who owns equities is victimized by the practices, in which the fastest traders figure out which stocks investors plan to buy, purchase them first and then sell them back at a higher price, said Lewis, a columnist for Bloomberg View. To show how lucrative the tactics are, Lewis said a Technology firm spent $300 million to build a line that would shave three milliseconds off the time it takes to communicate between New Jersey and Chicago, then leased it out to securities companies for $10 million each.

David Fuller's view -

Veteran subscribers are very familiar with the debate concerning high-frequency trading (HFT) because this service has been posting articles on the subject and writing about it throughout the last five years, as the historic Archive will confirm. 

Michael Lewis and others who have expressed criticisms of HFT today are rightly focussing on the fact that it is mainly a front-running system.  Therefore the ‘T’ in HFT is actually a misnomer because the normal definition of trading does not include front-running, which is supposed to be illegal. 

Moreover, normal trading has always carried a level of risk because the future is generally unknown.  Today’s HFT would be more accurately described as HFFR, for high-frequency front running.  HFFR virtually eliminates risk because it gets a clear look at the immediate future by seeing everyone else’s buy and sell orders, microseconds before they are excuted.

This item continues in the Subscriber’s Area where another informative article on the subject is also posted.

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March 28 2014

Commentary by Eoin Treacy

Insights in 140 words

Thanks to a subscriber for this interesting note from Deutsche Bank by a former editor of the Financial Times’ Lex column. Here is a section on biotech:

BioTechnology - The Nasdaq biotech index has quadrupled in five years but is down 14 per cent in less than five weeks. Is a bubble popping? There are reasons to worry but beware the chatter about excessive valuations. Who cares if the 800 biotech deals this millennium were priced, for example, at 30 times net income on average? Such ratios are meaningless given early development-stage companies accounted for 350 of these acquisitions. Biotech is mostly a probability game before a commercial one. Investors are better off pondering, therefore, whether the decline in FDA approvals of new molecular entities from 39 in 2012 to 27 last year is significant. Or whether even if approvals accelerate will the crowding into, say, oncology research result in a deluge of similar new drugs that dulls returns? Biotech’s fate cannot be analysed in spreadsheets just yet.

Eoin Treacy's view -

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

There is a never a better time to seek funding for a capital intensive project than when interest rates are low and liquidity abundant. Biotech shares broke out of long-term bases late in 2010 and have since soared as an increasing number of projects reach commercial viability. 

This has fostered the acceptance of optimistic growth forecasts and improved perceptions of future potential. Considering just how quickly the pace of technological innovation is occurring, it is reasonable to be enthusiastic about the potential for future medical enhancements. However the price charts act as a reality check.



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March 12 2014

Commentary by Eoin Treacy

Next Opportunity: Position for Theme-based Investment

Thanks to a subscriber for a link to this report from Citi focusing on China. Here is a section: 

In the annual session of the National People’s Congress (NPC), Chinese leaders appear to have opted for Chinese medicine, not western ones or a drastic surgery, to cure past problems. They called for stabilizing growth in 2014 while the economy is climbing hills and crossing ridges. This does not rule out the possibility of sub-7.5% growth this year, but the resource-rich government will try to avoid a systemic risk.

Defaults in the financial markets are possible but significant ones would be avoided. In other words, our concern is not the defaults in the near-term but in the long-term.

The economy may moderate further but a hard landing is unlikely in the near term. The bottom line is to cap any sharp rise in the unemployment rate.

This reconfirms our base case: growth first, reform second. Reforms are likely to take place only when the CPI is below 3.5% but GDP growth above 7.0-7.5% (or, below 4.6% urban registered unemployment).

However, the market is likely to remain cautious in the near-term regardless of the government policy and growth target. Some investors worry about no reform as a high growth target limits any room for reform, and others are more concerned over the near-term defaults and thus further economic downturn. Neither scenario is positive to the equity market.

Our more constructive view is that the next investment opportunity will likely be a mixture of growth stabilization and reform. The government may first buy time by avoiding significant defaults and then roll out reform to boost domestic demand and engage in a gradual pace of de-leveraging. An even better but difficult result is when near-term defaults are avoided and the economy stabilizes; reforms are able to ease default risks in the long-term.

Eoin Treacy's view -

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

The above report represents a measured medium-term outlook for China’s economy and is probably in line with how the administration sees the situation. However, the short-term outlook is more focused on the fact that an increasing number of troubled trust products are missing coupon payments and investor hopes of receiving their principal are deteriorating. Here is a section from a Bloomberg article with some additional detail: 

Jilin Province Trust Co., which missed five interest payments on a trust product it issued to finance mining projects, declined to comment on a sixth payment due yesterday. China had its first onshore bond default last week when Shanghai Chaori Solar Energy Science & Technology Co. failed to make an interest payment and Baoding Tianwei Baobian Electric Co.’s notes were suspended from trading yesterday after it lost money for a second year.

“China’s economic outlook has deteriorated and more bond defaults could be coming, so it’s weighing on the yuan,” said Bruce Yam, a currency strategist at Sun Hung Kai Forex in Hong Kong. “A weaker yuan could help some exporters, especially the small- to medium-sized ones. It will also facilitate meeting China’s growth target this year.”

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March 11 2014

Commentary by David Fuller

ETF Outflows Biggest in World on Economy: China Overnight

Here is the opening of this informative article from Bloomberg:

Exchange-traded funds focused on China are posting the world’s biggest outflows amid concern economic growth is slowing.

Withdrawals from U.S.-based Chinese ETFs totaled $87.5 million March 10, the most among 46 nations, bringing this year’s redemption to $380.7 million, according to data compiled by Bloomberg. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., fell 1.6 percent to $33.90. The Bloomberg China-US Equity Index of the most-traded stocks in the U.S. dropped 2 percent to 99.60, led by Vipshop Holdings Ltd. (VIPS)

Official data over the weekend showed the steepest slide in exports since 2009 and the slowest inflation in 13 months, highlighting the challenges for Premier Li Keqiang in achieving this year’s economic-growth target of 7.5 percent. China had its first onshore bond default after Shanghai Chaori Solar Energy Science & Technology Co., a solar-panel maker, said last week it would fail to pay interest on notes due March 2017.

“Investors are pulling out of financial markets where there’s an economic slowdown and a lot of uncertainties,” Dave Lutz, the head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said yesterday. “The outflow of capital from China will not end until investors stop seeing all the headlines about China indicating the country’s growth is faltering.”

David Fuller's view -

This is certainly understandable because the world’s second biggest economy is obviously going through a difficult transformation stage.  Moreover, China looks like a conundrum to many observers because the timing of its next recovery or even the next policy decision of importance remains difficult to predict.  As China’s Shanghai A-Shares Index (weekly & daily) has sagged, no one really thinks the 7.5% GDP growth target is achievable. 

Against this background, are the ETF outflows from China’s stock market a smart move or a contrary indicator?

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March 11 2014

Commentary by David Fuller

Email of the day 1

On Reef Boring Technology:

“I was very interested in reading about Reef Boring Technology mentioned in your comment of the day on March 5th. It reminded me of how early you were commenting about shale gas. How important do you see this development. Can it have similar effects on Gold as fracking did on gas? I would be grateful for your or the collectives’ views on this. Thanks very much in advance.”

David Fuller's view -

The short answer is our maxim: Technology Is Everything!  It will not have quite the same impact as fracking for gas in shale deposits, because that resource could not previously be released by conventional drilling. 

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March 05 2014

Commentary by David Fuller

Iain Little: Fund Managers Diary: Boring Laser Surgery for Exciting Miners

Here is a sample from the opening, plus his comment on The Markets Now:

Many's the time I've sat glued to the dentist's chair praying for merciful escape, or a laser fast treatment. Any fate but "drill and blast". Gold mining companies in South Africa now have new know-how. AngloGold Ashanti, the world's number 3 gold miner, is abandoning drill and blast techniques and now expects to double the life of its S African mines -that means 30 more years of revenues- by using reef-boring Technology (RBT). RBT taps new ore from old areas. It drills directly into the gold veins, like a laser drill, and extracts the most valuable content without blasting the entire rock. RBT could be, at least for gold, the new "fracking", a concept we introduced to readers several years ago when most people thought we were just talking dirty. "South Africa is going to long outlive me and probably the next five CEOs of the company," says Anglo's main man. The boring machines, which AngloGold developed with its suppliers, can single out gold-bearing ore from the reef, replace it with cement and chemicals that stabilize the mining structure, and thus take in ore that used to be lost amongst the pillars that supported the structure. Using Technology rather than manual labor means AngloGold can operate 24 hours a day. And it should please unions by giving workers less dangerous tasks to do instead. "Effectively, gold that is written off comes back into the books", he says. OK, so how will the books of gold miners change? Start with increased grades (read "margins"). We're talking about raising grades by as much as 15 times, from 6/10 grams per ton to 90 grams per ton. Then add in increased volumes, lower labour costs, reduced environmental impact, and greater extraction speed, and you've got, well, a gold mine. Like so much new Technology, RBT comes about because of man's need to meet a challenge: how to excavate deeper and deeper mines. 

Roll up, roll up for this Friday's "Markets Now" seminar in the East India Club (at 1700h prompt, the bell rings for Round One). About 20 are coming to hear Global Strategist David Fuller, supported by yours truly, tackle the major investment issues of the day in a Town Hall free-for-all. There's room for a few more. Here's the email address of the organizers: [email protected] 

David Fuller's view -

Iain Little’s Diary is posted in the Subscriber’s Area but if you would like to meet him and are anywhere near London this Friday, do come along to The Markets Now event.  Further details are provided below.

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February 25 2014

Commentary by David Fuller

Email of the day 1

On an article about bubbles in the UK and USA stock markets:

“Dear David, What is your opinion on this article [from The Guardian] that claims that there is a "bubble" in the USA and UK stock markets?”

 Ed: Here is the opening:

 According to the stock market, the UK economy is in a boom. Not just any old boom, but a historic one. On 28 October 2013, the FTSE 100 index hit 6,734, breaching the level achieved at the height of the economic boom before the 2008 global financial crisis (that was 6,730, recorded in October 2007).

Since then, it has had ups and downs, but on 21 February 2014 the FTSE 100 climbed to a new height of 6,838. At this rate, it may soon surpass the highest ever level reached since the index began in 1984 – that was 6,930, recorded in December 1999, during the heady days of the dotcom bubble.

The current levels of share prices are extraordinary considering the UK economy has not yet recovered the ground lost since the 2008 crash; per capita income in the UK today is still lower than it was in 2007. And let us not forget that share prices back in 2007 were themselves definitely in bubble territory of the first order.

The situation is even more worrying in the US. In March 2013, the Standard & Poor 500 stock market index reached the highest ever level, surpassing the 2007 peak (which was higher than the peak during the dotcom boom), despite the fact that the country's per capita income had not yet recovered to its 2007 level. Since then, the index has risen about 20%, although the US per capita income has not increased even by 2% during the same period. This is definitely the biggest stock market bubble in modern history.

David Fuller's view -

This is a generally good article although the author seems to think that the stock market should reflect the economy.  It will reflect monetary conditions but most UK and USA companies are considerably better off than their respective home economies, as I have mentioned before. 

For instance, they do not face the same debts or employment problems.  They can also earn revenue beyond their home shores, and some companies listed in the UK are not domiciled here.  However, all these shares have definitely benefited from Technology enhancements, low interest rates and quantitative easing (QE).  

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February 25 2014

Commentary by David Fuller

Email of the day 2

On developments in solar power:

“Hello David, it's me again. The article below on solar power appeared in today's City A.M. paper (London). The author draws a graphic analogy of panels installed to date with the Ford Model-T which was produced from 1908-1927. Look at the sophistication, reliability and affordability of modern cars by comparison and we get some idea of how amazing solar power is likely to become in coming decades. It will transform the world, in my humble opinion.”

Ed: Here is a section:

First, grid parity – when electricity generation is competitive with grid-electricity rates without subsidies – is edging closer. In 2012, Bloomberg reported that Germany, Denmark, Italy, Spain, Portugal, Australia, and Brazil could already expect to achieve at least a 6 per cent return on PV investments. Many of these countries still offer indirect subsidies, so the market isn’t competitive quite yet. But the direction is clear. The average US PV market will likely reach proper grid parity around 2020, and states like California should reach that point sooner. Within a few years, arguments about feed-in tariffs will become irrelevant in many countries, because the solar industry won’t need subsidies.

Second, large companies are flocking to solar. Thanks in part to cheap PV modules, non-energy businesses are becoming mini power generators. The retail giant Walmart already has a solar-energy capacity of almost 90 megawatts (MW) in the US. If the retailer installed panels on every US store, it could generate 1.5 to 2 gigawatts – or about twice the output of my local nuclear power station. If other big-box retailers follow – and many are already doing so – we could see collective generation capacity skyrocket, making solar increasingly viable as part of the energy mix.

Its potential goes beyond retail. Solar is well-suited to industrial and processing applications: in Saudi Arabia, the Al-Khafji solar-powered seawater desalination plant is set to produce 30,000 cubic metres of salt-free water per day. And entrepreneurs are honing new applications. The US startup WaterFX, for example, is developing solar “troughs” that remove salt from water by distillation to deal with drought.

But these innovations are only possible because solar Technology is developing rapidly. Today’s domestic PV modules are the Ford Model-Ts of solar: cheap, mass-produced, commercial pioneers. But they are poor at converting sunlight into electricity (efficiencies of around 10 to 15 per cent are common). These figures, however, could easily double.

Scientists from the California Institute of Technology and partners are developing a new multi-junction cell with a target efficiency of over 50 per cent. Building-integrated PV – glazing that generates power – could further popularise solar power. And PV is not the only form of solar energy. Improvements in other approaches, such as concentrated solar power (CSP), are possible. CSP uses mirrors to concentrate a large amount of sunlight onto a small area, driving a turbine. Just look at Spain’s 50MW Solnova Solar power station.

David Fuller's view -

Many thanks for the article, as informative emails are most welcome, not least in the field of Technology.  Solar farms can be understandably contentious if they are anywhere near recreational areas and sights of natural beauty, although they are considerably less menacing than noisy windmills. 

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February 25 2014

Commentary by Eoin Treacy

NSA-Avoiding Devices Pitched as Way to Leave No Trail for Spies

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

“Most of the large companies are taking significant steps to broaden and audit their use of encryption,” Henninger said in a phone interview. He questioned whether the Technology is practical for widespread use, given that some services can be difficult to use.

Providing secure communications is “a huge growth area” for Verizon, Eddie Schwartz, the New York-based company’s vice president of global security solutions, said in a phone interview.

Verizon provides managed security services to companies, which include monitoring networks and data for hacking threats.

The company views its ability to monitor global Internet traffic as an advantage to offer customers the latest threat intelligence, Schwartz said.

“We sit on a fairly significant portion of the world’s Internet traffic,” he said. “The Internet is a living body of activity that we are constantly examining.”

Verizon also offers companies cloud services, which refers to online file storage and sharing.



Eoin Treacy's view -

In an era where an increasing number of people seem totally at ease with sharing the entire details of their personal lives with the whole world, those who seek privacy are often looked on with suspicion. However, a countermanding argument is that in an age where every piece of information is now also a piece of digital data,  the need for security has never been more important. 

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February 24 2014

Commentary by David Fuller

Tim Price: Forty centuries of learning nothing

My thanks to the Author for his interesting report, focussing this week on the history of inflation, plus wage and price controls.

It is posted in the Subscriber’s Area but here is the opening:

“The co-authors began working on this book in 1974, just after the termination of President Nixon’s controls in the United States. Since that time, we have examined over one hundred cases of wage and price controls in thirty different nations from 2000 BC to AD 1978..

“We have concluded that, while there have been some cases in which controls have at least apparently curtailed the effects of inflation for a short time, they have always failed in the long run. The basic reason for this is that they have not addressed the real cause of inflation which is an increase in the money supply over and above the increase in productivity. Rulers from the earliest times sought to solve their financial problems by debasing the coinage or issuing almost worthless coins at high face values; through modern Technology the governments of recent centuries have had printing presses at their disposal. When these measures resulted in inflation, the same rulers then turned to wage and price controls.”

- Robert L Schuettinger and Eamonn F Butler, ‘Forty centuries of wage and price controls: how not to fight inflation’ (The Heritage Foundation, 1979). 

David Fuller's view -

This history will certainly interest many subscribers, as will the conclusion.

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February 21 2014

Commentary by David Fuller

Is the Facebook takeover of WhatsApp a sign of a tech bubble?

Here is the opening of this topical article from The Telegraph:

Facebook's shock purchase of the smartphone messaging service WhatsApp has pushed Technology deal-making to the highest levels since the dotcom bubble burst at the start of the century.

The $19bn (£11.4bn) takeover is the fourth biggest Technology acquisition in history, and means that $42.4bn-worth of mergers and acquisitions have been agreed in the first month-and-a-half of 2014 – a 14-year high – according to data from Thomson Reuters.

The extravagant valuations of Technology companies have seen dozens of founders turned into millionaires overnight, but have also fuelled fears that the crash of 2000 will be repeated, with WhatsApp just the latest example that the sector is overheating.

On Wednesday night, Facebook chief executive Mark Zuckerberg announced the takeover, a radical move to protect his company’s status as the world’s dominant social service.

This figure is expected to reach 1bn within a few years, making WhatsApp one of the world’s biggest companies in terms of user numbers. However, its low fees – it charges users just 99 cents a year – and a promise not to add adverts have led to questions about whether WhatsApp can ever achieve the revenues to justify its valuation.

A host of companies are looking to cash in on the growing demand for Technology investments.

Twitter floated on the New York Stock Exchange in November, with the social network now valued at $30bn despite losses widening last year; King, the British games maker behind the phenomenally-successful Candy Crush Saga, has filed for a New York listing; and Snapchat, a photo-sharing app without any revenue, is believed to have rejected a $3bn bid from Facebook.

David Fuller's view -

“It’s like déjà-vu all over again”, as Yogi Berra said in another context. We saw it in the late 1990s with tech.  Alan Greenspan described it as “irrational exuberance”, before he was hounded into silence. 

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February 20 2014

Commentary by David Fuller

How to Save Water on Fracking

Here is a brief sample from this informative editorial by Bloomberg:

One way to minimize fracking's drain on fresh water is to substitute, as much as possible, water that's already been used to frack other wells. After fracking, 10 percent to 50 percent of the water flows back up through the oil or gas well and is typically disposed of through injection into deep wells, a practice that has been linked with minor but troubling earthquakes. If it is instead cleaned of chemical additives as well as metals and minerals from deep underground, it can be reused. Frackers can also use brackish water from aquifers or municipal and industrial wastewater. Some are even beginning to frack not with great quantities of water but with a foam that contains nitrogen, carbon dioxide and relatively small quantities of water. Some of these options even make fracking cheaper.

 Regulators need to ensure these alternative practices are consistently adopted. Pennsylvania has the right approach. Before withdrawing water in that state, drillers must win approval for a water-use plan that discloses how much water a well will use, from where and what effect that will have on local sources. To be approved, these plans must include wastewater recycling.

David Fuller's view -

The unconventional production of oil and particularly natural gas from fracking is another area where US Technology - in this one instance largely shared by Canada - is streaking away from the rest of the world.  Bloomberg’s editorial confirms that fracking Technology continues to develop at a rapid pace.  This is extremely beneficial for the US economy which has much lower energy costs than any other large developed country.  Consequently, manufacturing industries are moving to the US, reversing the trend of earlier decades since the 1980s.

The US is also producing fewer CO2 emissions thanks to the surging consumption of its own natural gas.  Additionally, it also kept a number of its nuclear power stations open and is also becoming a leader in new nuclear Technology.  It is also benefiting from the technological advances which are boosting the efficiency of solar energy. 

Other developed countries are also utilising solar power, but mostly after weakening their economies by prematurely closing nuclear power stations and investing heavily in inefficient wind farms which are proving to be deeply unpopular.  These countries continue to resist fracking, either because they lack the Technology or are on record for their opposition to fossil fuels.  Ironically, they have to burn more coal – the biggest pollutant of all – because their green technologies are far from being consistent sources of energy.  

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February 12 2014

Commentary by David Fuller

Email of the day 1

On household inflation

“Thank you for posting Tim Price's latest letter.

“This passage quoted from James Grant was a bit of a jaw dropper:

"I submit that in a world of technological wonder, prices ought to be weakening: it costs less to buy things because it costs less to make them."

“While the prices of some goods and services may be dropping, on the whole the upwards march in the cost of living in the real world continues without any signs of slowing down. Our household's bills for taxes, school fees, medical insurance, food, home contents insurance, cinema tickets, utilities, transport, air travel and many other things all increased over the last 12 months. Even the cost of the cat's annual check up at the vet jumped last year. Very few things went down in price.

“It is very hard to believe in the possibility of deflationary risk when the rising cost of living is busy educating my household's finances about the realities of inflation. Certainly it could happen, but I am not holding my breath.”

David Fuller's view -

Very well said and I agree.  It is the dichotomy that we have lived with for years.  The cost of most things that we need to pay for on a regular basis continues to rise.  It is only the cost of some things that we may replace every several years, such as computers or TVs that have been coming down in price, and/or are providing better value. 

 However, to make matters worse, there is deflation in average salaries paid by many competitive industries.  If a company needs to lower wage costs to remain competitive, it can either move at least part of its operation to a cheaper location, or increasingly, replace many employees with smart machines.  This is the deflation that many financial analysts and economists are referring to.  Moreover, every middleclass worker who is replaced by Technology is inadvertently removing a monthly salary tax payment from the state. 

 As investors, we need to look for companies that are profiting from the virtuous deflation.  For instance, by manufacturing goods more cheaply, which they can also sell at low prices in greater volume, earning bigger profits in the process.   

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February 10 2014

Commentary by David Fuller

Bernard Tan: Indonesian Energy Deficit

My thanks to the author for his latest interesting, extensively illustrated report.  Here is the opening:

The full report is posted in the Subscriber's Area.

Indonesia joined OPEC in 1962 and left the cartel in 2008 when it realised it was going to become a structural net importer of energy. Funny thing is most people I polled while writing this essay were under the impression that Indonesia is still part of OPEC!

Oil production has been since 2000, from over 1.4 million barrels per day to less than 800,000 by late 2013. There was actually a period from 2007-2010 when production stabilised at just below 1 million bpd but has seen fallen steeply again. See chart below.

The latest data shows that Indonesia crude oil production will continue to plunge. According to Indonesia’s BPPT (Agency for the Assessment and Application of Technology), crude oil production could drop to as low as 124 million barrels by 2030 or about 340,000 barrels per day.

The natural consequence is net imports go up as shown in the next chart.

Actually, Indonesia only became a structural net importer of crude oil in late 2012 but since then, the deficit has accelerated. It is now in the region of 4 million barrels per month or more than US$400 million at current oil prices.

According to BPPT, net imports could reach 408 million barrels by 2030 or 34 million barrels per month. That’s nearly $4 billion per month at current oil prices.

The deficit in oil isn’t coming from the demands of electricity generation. As can be seen from the next graph, oil based electricity generation capacity has been roughly stagnant since 2004. Most of the increase in Indonesia’s electricity generation since 2005 has been from coal and to a lesser extent, natural gas.

The culprit is motor vehicles as shown by the next chart of monthly motor vehicle sales in Indonesia. From 2004-2009, Indonesia’s monthly motor vehicle sales oscillated around the 40,000 level. Prior to this, it was around 25,000. But from 2010 onwards, it grew rapidly and in Sep 2013, was approaching the 120,000 level, almost 3x the level of 2004-2009 average levels.

As we all know, once people own motor vehicles, they drive them around, thus needing ever growing amounts of petrol and diesel. Even if motor vehicle sales fall off from now on, the installed base cannot help but grow ever larger. If current sales levels are maintained, more than 100,000 new vehicles will pour onto Indonesia’s roads every month, adding to the demand for imported oil.

David Fuller's view -

Indonesia is a resource-rich developing economy with a rapidly increasing oil shortage problem as Bernard Tan points out.  Indonesia appears to have plenty of coal for electricity generation but its soaring rate of consumption must have negative consequences in terms of pollution. 

Indonesia’s BPPT (Agency for the Assessment and Application of Technology), quoted above, offers a grim projection for oil imports by 2030, including 34 million barrels per month costing nearly $4 billion per month at current prices!  

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January 23 2014

Commentary by Eoin Treacy

Why Alibaba IPO will make it the next global tech powerhouse

Thanks to a subscriber for this interesting article by  Arshy Mann and Joe Castaldo for Canadian Here is a section: 

Alibaba’s best bet for international expansion is probably not North America but everywhere else. Last year it made all of its products available in Hong Kong, Macau and Taiwan. Countries like Singapore and Malaysia, with large numbers of Chinese speakers, now look ripe for the picking. Emerging economies in Africa and Latin America are also promising, where underdeveloped financial systems could allow Alipay to become the dominant online payment system.

Alibaba’s experience in overcoming Chinese consumers’ distrust of online commerce should also help as it expands into other emerging economies. Among its innovations have been a third-party verification process to vet sellers’ claims and a chat function so buyers can talk to sellers in real time. Alipay is also an escrow service, so payment isn’t released to vendors until buyers indicate they’re satisfied with the quality of the goods. The company doesn’t have to grow organically, either. “It is an extremely cash-rich company that could easily gain a large position in other markets through investments or acquisitions,” says James Roy, an associate principal at China Market Research Group in Shanghai.

As Alibaba considers tentative steps abroad, it’s also becoming a crucial link for western retailers coming to China. Because of Tmall’s popularity, it’s far easier and cheaper for foreign brands to buy exposure on the site rather than start from scratch. Chinese consumers don’t even look for products through a search engine; they go straight to Tmall. Adidas, Pampers and Canada’s own Roots now have dedicated pages on Tmall. A spokesperson for Roots declined to comment, other than to say its Tmall presence is a “preliminary test to help determine whether we decide to develop this further.” Tmall alone is set to surpass Amazon in 2015 to become the world’s biggest online retailer, according to Euromonitor, so any company would be foolish not to consider partnering up.

Eoin Treacy's view -

Alibaba is one of a small number of Chinese companies that has emerged to compete on the global stage and as its founder Jack Ma is certainly deserving of acclaim. However, the fact that he has stepped down as CEO in advance of the IPO raises the possibility that he wishes to cash out of the business rather than lead it to the fresh heights many who will buy the stock aspire to.

In the current environment where internet related IPOs are surging, the potential for Alibaba to do the same is nontrivial. However, I have to ask myself if Apple would have been the company it is today if Steve Jobs has resigned as CEO six months ahead of its IPO? Probably not.


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January 22 2014

Commentary by David Fuller

Email of the day

On Apple:

“I wonder what will come out of left field to upset the Apple Cart?”

David Fuller's view -

Well, we certainly know that mobile phone Technology remains a rapidly developing field so Apple needs to keep delivering, including an awareness of fashion which can be fickle and change quickly. I have wondered if nice Tim Cook was saddled with the equivalent of a dark comedy father-in-law from hell in crusty Carl Icahn, whose holding in Apple is now worth about $3bn. 

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January 22 2014

Commentary by Eoin Treacy

Bitcoin Targets Giants Visa to JPMorgan With Low Costs

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

¡°At some point, I had an ¡®aha!¡¯ moment and realized that Bitcoin was best understood as a new software protocol through which you could rebuild the payments industry in ways that are better and cheaper,¡± Chris Dixon, a partner at Menlo Park, California-based venture capital firm Andreessen Horowitz, wrote in a blog post.

Bitcoin enthusiasts say they are building a system to move money across the Internet securely and at a lower cost than existing wire transfers, bank debits or remittances. If they can eliminate the friction created by middlemen and create easy-to-use consumer tools, Bitcoin businesses may claim a piece of the revenue and still deliver lower costs.

Already, some retailers are paying 1 percent to process transactions in Bitcoin, improving profit margins. Taking debit or credit cards, they may pay more than 3 percent to issuing banks. Bitcoin transactions log immediately, and are confirmed in as little as five minutes. 


Eoin Treacy's view -

Despite a considerable amount of competition between banks, the reality is that fees for money transfers are unusually high and the speed with which they are completed leaves a great deal to be desired. Bitcoin and other potential crypto- currency exchange mechanisms represent a developing Technology base from which consumers and corporations are likely to benefit over the long term. 


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January 21 2014

Commentary by Eoin Treacy

Email of the day on the 3rd Industrial Revolution

The email of the day yesterday on global macro outlook (plus Eoin’s reply) prompted me to write my thoughts on whether high tech is played out. Actually I think just the opposite. In agreement with David and Eoin, I believe we are in the early stage of massive new growth generated by breakthroughs in Technology.

A year ago I attended and presented at a conference in New York City entitled “Are You Ready for the Third Industrial Revolution?” While preparing my presentation I did a lot of research on factors that drive an industrial revolution. I’ll summarize here for the sake of brevity, but I think one can identify three main themes: a new more efficient energy source, improved communication/transport systems, and improved financial structures.

In the first industrial revolution, innovations in England from approximately 1790 led to the replacement of wood power by coal power; new transport systems based on steam-power initially for boats on canals followed by the first railways; steam-power drove the first mass printing presses which led to mass education for the first time in human history; and a new financial model based on the first stock exchange initially out of Lyons coffee house on the Stand in London.

The second industrial revolution, a century later, was jointly driven by US and European inventors. It followed a similar pattern, with oil replacing the less-efficient coal; development of new transport based on the internal combustion engine out of Europe with Messers Daimler and Benz being the most notable contributors; the building of mass transport highways for the first time, electrification of cities driven by the incredible inventiveness of Thomas Edison; and a new financial breakthrough in the form of the limited liability company.

So, where are we in the third industrial revolution? One of the three factors that drive an industrial revolution must be clear to us all. We all use it every day. The internet is a massive breakthrough in communications. It is now linking all humanity instantaneously for the first time. The impact on communication efficiency, spread of ideas, synergy of creativity globally, and global education is already very clear. At the time of the conference last year I was less sure about the second factor, a new energy source. Gas is a stopgap in my mind, a last play on the hydrocarbon theme, though likely to be very significant in coming decades in driving down energy costs. But over the past year my reading around solar power has convinced me that it is just about ready to make a major impact. The efficiency of capture of sunlight was until recently in the 10% range and depended on expensive ingredients in the panels. But breakthroughs in graphene Technology suggest that 50-100% capture efficiency is achievable and the materials will be very low cost. The impact could be absolutely incredible. (Think through all the ways it could change energy generation and usage. Thankfully, it will soon bypass windmills and other “green” energy sources currently in vogue).

The third factor, innovation in our financial system, is a clear need and currently unsolved. I am wondering whether crowd-funding is part of the answer at least, and I have personally invested Angel money in helping build one company here in the UK.

Finally, one additional point is worth making. Eoin hinted at this in his response yesterday to the email of the day. He was referring to medical breakthroughs (my own field of work) but his comment is applicable to all fields I believe. New technologies take a long time to develop to a level of real usefulness and payback. I did a lot of research on this over a decade ago and I gave public presentations and published research papers on this matter. All the evidence is that it takes 15-25 years for any new Technology to get to the "payback” phase. This seems to apply to all technologies in all fields. Moreover, the eventual real value of a new Technology may not be obvious at first, and it may differ from the intentions of the original innovators.

Personally, I have been building a second investment portfolio alongside my usual “trend-following” portfolio. I have been buying ”Third Industrial Revolution” companies, those that are driving the revolution, mostly in the USA and UK. By applying trend-following principles in selecting when to buy I have achieved gains of 10%-70% for over 20 companies over the past year. It is really interesting to build such a portfolio as it makes one very aware of the incredible breakthroughs and moreover keeps one very positive about the future! If other members of the collective are building such portfolios it would be interesting to share ideas and experience.

Eoin Treacy's view -

Thank you for this enlightening email contributed in the spirit of Empowerment Through Knowledge which as you point out is very much in line with our view.

In addition to technological innovation, the 3rd industrial revolution will differ from the others in an important respect. While the first and second were largely relevant to a small proportion of the global population, the third industrial revolution will be global and should help unleash humanity’s creative potential as never before.

In the realm of innovations in the financial sector, classic economic terms such as GDP and GNP are not particularly appropriate for a global system where capital can move relatively freely in search of the most attractive opportunities. The iPhone is a great example of how inefficient our view of value creation is. The majority of the benefit from the intellectual property resides in the USA, but many of the parts are assembled elsewhere and the phone registers as an import on trade figures.

In monitoring markets, we see that accommodative monetary policy in one jurisdiction has the capacity of fuel investment booms in other countries. However, the role of money flows in fostering global growth dynamics is more difficult to demonstrate in concrete terms. I suspect that when we think about financial innovation, what we need is a new way of conversing about global capital. Local considerations will always be important and protectionism is an ever present threat but the global macro environment is likely to become increasingly important.

As a medium of exchange and partnership, I wonder if Bitcoin and other crypto- currencies represent the thin end of the wedge in unleashing excess savings for investment and overcoming capital controls. It will probably be at least a decade before we have any semblance of an answer to that question.

I’ve posted this fascinating chart from the USA’s National Renewable Energy Laboratory on a number of occasions over the last year. I find it useful because it highlights the improving trajectory of solar cell efficiency but also the fact that totally new technologies are appearing at an increasing rate and the pace of obsolescence is also increasing. Therefore while graphene is a Technology that is still in its infancy, it is not difficult to imagine the potential for innovation. 

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January 20 2014

Commentary by David Fuller

Tim Price: Power failure

My thanks to the author for his ever-interesting letter, published by PFP Wealth Management. Here is a brief sample:

Make time, if you can, to watch this 2013 investment review from Century Management. For all the problems and financial distortions caused by overconfident central bankers and hopelessly indebted governments, Arnold Van Den Berg manages to convey a wonderfully balanced and even optimistic assessment for the US economy (and by extension for much of the world). A hat-tip to Jonathan Escott for bringing it to our attention. Van Den Berg highlights, for example, the impact of fracking on the domestic energy market; an Egyptian fertilizer company recently established a plant in the US where natural gas prices are now cheaper than in the Middle East. He also alludes to the advances in 3D printing, nanoTechnology, artificial intelligence and robotics. As an example of the latter two trends, he points out that in July last year, the US Navy landed an unmanned fighter jet on the aircraft carrier USS George H W Bush:

“When you consider that the computer had to factor in airspeed, altitude, the angle-of-attack, pitching, a rolling flight deck, not to mention the changing winds and seas, this was a historic landing for the Navy and maybe equally so for robots and artificial intelligence.”

David Fuller's view -

The report quoted above is posted in the Subscriber's Area.

This reminds me of one of my favourite quotes, which I also picked up from Tim Price:

“We have Stone Age emotions.  We have medieval institutions.  And we have god-like Technology.”

Edward O Wilson

Fortunately, most of us do not invest in the Stone Age emotions or medieval institutions.  However, we can and do invest in the companies which benefit from god-like Technology.

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January 20 2014

Commentary by Eoin Treacy

Email of the day on the global macro outlook

Liked your weekly commentary today especially the summary on Gold.  I have made money on gold and I don't wish to chase that market again.  

Now you keep talking regulary about innovation and Technology.   As you are probably aware you are in conflict with the Harvard University Economic academic's view of Technology and innovation.  They hold we are well past the big innovation gains from Technology especially IT Technology.  In fact these bunch of academics seem to beleive these innovation benefits ended at the turn of the last century i.e. 2000.  There message appears to be that the last decade has simply delivered fancy hardware / software toys that have offered business no productivity tools.   Mums and dads may like these toys but for business they are just staff time wasters.

I do beleive medical science has much to offer mankind in the future.  However that picture is a bit cloudy also.   Utilizing any new innovations seems to be determined by price.   My son Keith (has a PhD in genetics worked for Merrill Lynch) now works for a medical services company running the cancer treatment businesses.  He is some what cautious on medical innovation.  He sees government unwilling to embrace new Technology unless their is a demonstrated cost saving to the government.  As he points out this is not always easy to demonstrate.

We all know US medical Insurance companies are also capping not premiums but the medical services they will offer to their insured patients.   We also here in Australia see lots of pressure from government to cap the more expensive medical procedures.  This must ultimately slow innovation in medical science.   The largest shareholder in the company Keith works for is no other than KKR who own a bit over 50% of the business.

Fridays profit warning from Royal Dutch Shell seems to suggest at least some of the dumb money must now be looking closely at getting out of the "Fracking" business.  Let's see if the other big dumb money provider in BHP also throws in the towel on what I see as a very stupid business.  I am not environmentalist this is just about a reasonable return on capital.

I listened to a Economist speaking on oil on Bloomberg the other night. He had a cautious view on Oil prices saying its always priced at the marginal producers cost structure I.e the fractures cost as we all know.  The dumb money frackers must be getting increasingly sick of this profit-less business.  I know Iraq, Iran, Saudi Arabia etc, etc are not going ignore 1,000 years of hating and killing one another.  The Libyan oil fields now producing 200,000 to 300,000 barrels a day are not going to revert overnight to again produce 1.8 million barrels a day.  Try talking to an oil geologists how hard it is to get an oil well flowing again.  This is an extremelly challenging task.  Lastly the US embraces Iran nuclear industry and all is forgiven about the Bush Evil Empire statement.  Somehow I don't think it's that easy.   The oil business is challenging. 

You are right the RBA is on the sell side of the AUD.  As to the future level of the AUD local economists are very worried.  They fear when we shortly become a very large energy exporter the AUD will come under pressure to rise.  This will make most other local export industries uneconomic.  There was a comment on Bloomberg the other night from a US oil company that said the oil business is now too expensive and costly.   That LNG is the go and forget the US, go straight to Australia where it is cheaper and easier.  True I am not making this up.

Perhaps we can talk more about these big picture matters at the Sydney conference.

Eoin Treacy's view -

Thank you for this thought provoking email which touches on a number of the issues I anticipate discussing with delegates at the upcoming Chart Seminar and Global Strategy session in Sydney. With only two weeks left before these events please contact Sarah Barnes [email protected] to secure you place.

From what I have read of the Harvard Economics team’s research, they tend to focus on the significant challenge of increasing processor speed as “gates” approach the width of a silicon atom. An acceptance of this limit helps to explain the urgency with which companies are investigating the potential of carbon nanotubes, graphene and other substances for the production of future generations of microchips.


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January 17 2014

Commentary by Eoin Treacy

Saxo Banks Fat Tail Predictions for 2014

Thanks to a subscriber for this interesting compilation of contrarian opinions which may be of interest to subscribers. Here is a section on a number of high flying Technology companies:

The US information Technology sector is trading about 15 percent below the current S&P 500 valuation, which is in sharp contrast to the historical premium of approximately 160 percent during the dotcom bubble. We like Technology stocks in general as they are the main driver of the necessary productivity growth the economy needs to create long-term increases in wealth per capita.

However, a small group of Technology stocks trade at a huge premium of about 700 percent above market valuation, almost defying the “Newtonian laws” of financial markets. These stocks are what we call the “Fat Five” of the Technology sector” Amazon, Netflix, Twitter, Pandora Media and Yelp. These stocks have very inflated valuations based on a skewed valuation premium on growth that has evolved in the aftermath of the financial crisis. Investors have trouble finding good growth scenarios, so when some suddenly drop by the neighbourhood, they get bid up to levels that present very poor risk/reward ratios. It is like a new bubble within an old bubble.

Facebook’s USD 3 billion cash offer for Snapchat, declined by its 23-year-old founder, is the ultimate display of hubris that shows how exuberance has grown to new levels in this part of the Technology sector. Snapchat has zero revenue and does not have a business model, so the acquisition value is not determined by incremental cash flow to Facebook, but from the potential destruction value to Facebook based on assumptions about wider adoption of Snapchat.

This creative destruction is exactly the “dark matter” that should make investors cautious about the huge valuation premium that is currently being put on this small group within the information Technology sector. To trade this, we would create a synthetic equal-weighted index of the Fat Five, starting at 100 on the last trading day of 2013. Our Outrageous Prediction is that this index will go to 50 during 2014.

Eoin Treacy's view -

The full report quoted above is posted in the Subscriber's Area. 

Earnings matter. Many forgot that during the Nasdaq bubble and some appear to have forgotten that simple fact again when looking for growth opportunities in the social media space. 


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January 14 2014

Commentary by Eoin Treacy

Twitter Stock Swings Driven by Biggest Split in Ratings

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

Sena, an analyst at Evercore Partners Inc., calculates Twitter's stock can reach $70 in the next 12 months, while Ernst, an analyst at Hudson Square Research, thinks it'll drop to $20. The spread between those predictions -- which represent the highest and lowest price targets for Twitter -- is the widest among Technology companies in the Russell 1000 Index with a market capitalization of more than $10 billion, according to data compiled by Bloomberg.

The division is reflected across the analyst community -- even among the firms that managed Twitter's IPO such as Goldman Sachs (GS) Group Inc. and Morgan Stanley -- spurring large swings in trading. After Twitter extended its post-IPO rally to more than 180 percent last month, bearish ratings have now climbed to outnumber positive ones by more than any other Technology company, data compiled by Bloomberg show. Meanwhile, investors are still willing to value Twitter at a price-to-sales multiple more than double that of Facebook Inc. (FB)

Eoin Treacy's view -

2013 was a particularly active year for IPOs with the fourth quarter providing some large cap entries to the market. Record low interest rates, abundant liquidity, investors keen to own the next big thing and an equity Bull that has driven stock market indices from depressed levels to all-time new highs have supported demand for new issues. 

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January 10 2014

Commentary by David Fuller

Internet of Things: Utopia? Horror Show? Both?

Here is the opening from this interesting and mildly amusing editorial from Bloomberg:

At the International Consumer Electronics Show in Las Vegas, an annual carnival of corporate hype and techno-hoopla, John Chambers, the head honcho at Cisco Systems Inc., described an emerging phenomenon in terms that were sensationalist even by Vegas standards.

“It will be bigger than anything that’s ever been done in high tech,” he said. “It will change the way people live, work and play.” And, oh yes, it’s a $19 trillion opportunity.

The phenomenon is commonly known as the Internet of Things. As more and more objects -- appliances and automobilestennis rackets and toothbrushes -- are wired with sensors and connected to the Internet and to other devices, they’re pulsing with new information and capabilities. Cisco has estimated that 25 billion devices will be connected to the Internet by next year, and 50 billion by 2020.

The potential benefits of this evolution are compelling. Yet as with every innovation of the digital era, it’s also fraught with perils -- many of which we haven’t even begun to think through.

Enthusiasts argue that connecting more and more objects will help bring the automation and precision of the digital world to bear on the inconveniences of the physical one. Consumers -- who can already buy communicative door lockspet collarsforksfitness monitorslight bulbsinhalersthermostats and so on -- might one day see their domestic routines unfold with Jetsons-like ease.

Retailers could use “smart” sensors to better organize their inventory and track performance data. Manufacturers could improve logistics, reduce waste and boost productivity. And city governments might benefit from smart roads that monitor congestion, trash cans that tell garbagemen when they’re full or parking meters that ping drivers when a spot opens up.

What could possibly go wrong?

David Fuller's view -

The field of consumer electronics is all those things mentioned in the headline so discretion is required, particularly in terms of what is helpful and useful for children. 

The far more important story for investors is the industrialisation of the internet, a frequent topic on this site.

This item continues in the Subscriber’s Area.

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January 08 2014

Commentary by Eoin Treacy

3D Systems targets families with sub-$1,000 3D printer

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

The company is emphasizing the Cube 3's appeal as a 3D printer for the family home, its website stating the device is recommended for children over eight years of age. This is complimented by the companion smartphone app (iOS, Android and Windows compatible), which lets users browse through other people's designs or connect to the Cubify online platform that features dozens of pre-designed objects, such as bottle-openers, dinosaur fossils and NBA figurines, and then print them remotely via the printer's built-in Wi-Fi 802.11b/g.

3D Systems also announced its high-end 3D printing solution, the Cube Pro. Geared toward the more professional end of the market, the device is capable of printing objects a considerable 10.75 x 10.75 x 9.5 in (27.3 x 27.3 x 24.1 cm) in size and three colors simultaneously.

Eoin Treacy's view -

This additional article highlighting Stratasys’ newest models may also be of interest. 

Since a 3-D printer is only as good as the 3-D data that it receives, the advances being made in optics and scanning are no less important than the printing Technology detailed in the above articles. This article focusing on 3-D Systems’ scanner plug-in for the iPad caught my attention.

When I first began looking at 3-D printers a few years ago, they cost in the region of $25000. Since then the products on offer have improved significantly, become considerably more user friendly and the prices have collapsed so that printers are on the cusp of entering the consumer market. The revolution in 3-D scanners has led this advance with the X-Box gaming system giving widespread access to a swathe of new developers which has helped push the boundaries of innovation.

While 3-D printing is an exciting sector on its own, the confluence of advances in materials science, nanoTechnology, bioTechnology and genetics is where the capacity of innovation fuelling innovation takes on a truly exponential growth curve. At present 3-D printing is concerned mostly with additive manufacturing of industrial products and customised consumer goods such as jewellery. However, it is conceivable that as the Technology advances, we are entering a phase where customised genetic sequences will be printed which opens up potential in limb replacement, vaccines and weapons.

While it is easy to be apprehensive at the potential of new Technology to displace jobs, the future appears to be one where the limits on imagination becoming reality are progressively being broken down, so that human creativity can be unleashed as never before. From an investor’s perspective, this represents massive future productivity growth potential, but our focus must remain rooted in the present, the consistency of trends and the influence of monetary policy. These factors are worth remembering as we access the overextended but still intact uptrends of 3-D printing shares.  

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January 03 2014

Commentary by David Fuller

Email of the day 4

More on Alan Kohler: Letter to Robert Gottliebsen, posted in the Technology Spectator section of the The Australian, posted in my first email yesterday: 

“I can't wait to see the developments to come and the discussion on 3D printing reminded me of an old Star Trek episode where Commander Worf needed a spine transplant and his replacement was 3D printed!! I look forward to space travel and only hope I get the chance to experience it before I shuffle off, as they say.

“I wish you and the team a healthy, prosperous and less stressful 2014 and look forward to meeting you at one of the Strategy Sessions in London.”

David Fuller's view -

Yes, the accelerated rate of technical innovation, which is potentially unlimited, now means that science fiction is becoming reality before our very eyes. 

My advice on space travel, which may not be that comfortable and is unhealthy for the body after a few days, is that you send the 3D printed version of yourself.  I may do the same for Eoin’s Strategy Session in London so that this Site is not neglected.  

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December 31 2013

Commentary by Eoin Treacy

Google's Eric Schmidt admits social networking 'mistake'

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

Google+ currently has 540 million monthly active users, according to Google, making it the second-largest social networking site in the world after Facebook.

Google+ profiles are now used as the background account for many Google Services including YouTube, Gmail, Google Maps, Android, Google Play, Google Music, Google Voice and Google Wallet.

Schmidt predicted that smartphones will become ubiquitous in 2014, resulting in a whole new generation of applications around entertainment, education and social life.

"The trend has been that mobile was winning, it's now won," he said. "There are more tablets and phones being sold than personal computers, people are moving to this new architecture very fast."

Eoin Treacy's view -

Google is a swiftly evolving company with a focus on investing in emerging Technology themes. While high growth companies have tended to be successful in their original fields they sometimes struggle to continue to innovate in fresh directions. What sets Google apart is that it has succeeded spectacularly in a range of additional sectors which has supported its core business. Search engine advertising through its own sites and others remains the company’s core revenue base at 87% in 2012. The development of its Android software has helped open up new avenues for revenue growth for that core business. As one of the dominant forces in an increasing number of developing sectors Google was one of our original cast of Autonomies.

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December 30 2013

Commentary by Eoin Treacy

Email of the day on generation IV nuclear reactors

"Last year I forwarded some information about nuclear molten salt reactors. I thought I would provide a brief update and have attached an article from Reuters on China's push for future nuclear technologies, in particular thorium and the molten salt reactor design. The article, in my opinion, places too much emphasis on thorium, as I believe the reactor design is the crucial factor. The article highlights considerable efforts being made by China, while one wonders what goes around in the heads of US Government that seems to be taking a back seat in the push for our nuclear future! I find that amazing when one thinks about the technological capacity of the US, and one may speculate about the incumbent nuclear industry's lobbying efforts to protect the status quo.¡±

"Best regards for 2014"

Here is a section from the article: 

"Beijing's long-term goal: commercialize the Technology by 2040, after building a series of increasingly bigger reactors. The Shanghai Institute of Applied Physics is recruiting nuclear physicists, engineers, project managers and support staff, according to a regular stream of job advertisements it publishes online. Its team is expected to expand to 750 by 2015 and eventually include 1,000 researchers.

"A director at the Shanghai Institute, Li Qingnuan, and other senior researchers are wooing top young talent across China to join the project. After lecturing on molten-salt reactor Technology at Sichuan University in April, Li invited students from the audience to apply for positions at the institute, according to a report on the university's website.

"China's sprawling network of nuclear-research and industrial companies are gearing up to assist. In early June, the China National Nuclear Corporation, the body overseeing all Chinese civilian and military nuclear programs, announced that state-owned China North Nuclear Fuel Company had signed an agreement with the Shanghai Institute to research and supply thorium and molten salts for the experimental reactors.

"The push into thorium is part of a broader national energy strategy. The government wants to reduce its dependence on coal-fired power plants, which account for about 80 percent of the nation's electricity but have darkened its skies. Nuclear energy is a big part of the plan: China aims to have 58 gigawatts of nuclear power on the grid by 2020, an almost five-fold increase from 12.57 gigawatts today.

"Thorium is a hedge on that nuclear bet. China has 15 conventional nuclear reactors online and 30 under construction. But energy authorities are also investing in a range of different technologies for the future, including advanced pressurized water reactors, fast-breeder reactors and pebble-bed reactors. China has little uranium but massive reserves of thorium. So, the prospect of cheaper nuclear power with secure supplies of fuel is a powerful attraction.

"At last year's Shanghai thorium conference, Jiang described how clean nuclear power would allow China to make a "revolutionary" move towards a greener economy.

"The bet on unconventional nukes, he said, explains "why China is the first one to eat a crab" - citing an old Chinese proverb about the individual who dares to make a discovery important to civilization."




Eoin Treacy's view -

The USA is an energy superpower. China is not. This simple fact helps to explain the emphasis China has put on securing energy assets overseas, purchasing the Technology required to begin exploiting its unconventional oil and gas resources and developing a multi-strand nuclear policy. China aspires to provide a first world standard of living for its citizens and this will require energy production to expand by multiples over the next few decades. It has no choice but to explore every possible avenue if it is to achieve that goal not least if air quality is to improve. 

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December 16 2013

Commentary by David Fuller

Energy and Jobs. The transformation of Americas energy market is starting to have a direct impact on vital British [and European] industries

Here is the opening from this important editorial from The Times, which is relevant not only to Britain but also most countries which have chemicals industries:

“Welcome to Boomtown USA,” says the sign at the entrance to Williston, North Dakota. Its unemployment rate is under 2 per cent. Its gas flares are visible from space, and its pride at helping to reverse America’s long slide towards energy dependency is palpable.

There are no such signs in Britain because there is still no large-scale British fracking industry. Instead the economy remains yoked to high energy costs and low growth that compare well only with its sluggish European neighbours.

Britain’s energy-intensive industries, chief among them chemicals manufacturers, are struggling with gas prices three times higher than in the United States. Electricity costs twice as much as in America and the chemicals sector across Europe is in a “fight to the death”, in the words of one analyst, as investment and jobs go elsewhere. Prompt steps must be taken to begin to bring them back. If the price is that the coalition’s green credentials are further undermined before the next election, it is one that must be paid.

For now, Europe’s largest maker of PVC is the giant chemical works owned by Ineos in Runcorn. It produces 38 varieties of polyvinyl chloride, used in hundreds of products from clingfilm and swimming pool liners to pharmaceuticals and drainpipes. It uses as much electricity, much of it from gas-fired power stations, as Liverpool. Historically it has exported much of its output to North America, but its future is now much less certain.

The Government’s Committee on Climate Change warned yesterday that low American shale gas costs as a result of fracking “could present a direct competitiveness risk to UK gas-intensive firms trading with the US”. The committee said that “in the longer term there is a risk that investment and jobs could relocate to the US”.

Viewed globally, this relocation is already under way. Taiwanese and Saudi chemicals firms are among those planning investments worth more than $90 billion in new US plants to take advantage of low energy costs. From being a net importer two years ago, America expects to be exporting chemicals worth $30 billion a year by 2018. At the same time it is preparing to boost its gas liquefaction capacity by a third in order to sell its shale gas surpluses abroad.

The impact on British industry will be profound, and the policy imperatives are clear. The Government should, first, avoid the trap of committing itself to high prices for future energy supplies when there is a clear possibility that wholesale prices will fall rather than rise in the medium to long term. That it has already guaranteed extravagant prices for power from new nuclear plants to woo foreign investors only makes it more important not to follow the same path for renewables. The result would be higher domestic energy bills and the risk of steep job losses for the sake of self-imposed carbon targets not observed even elsewhere in Europe.

David Fuller's view -

Wake up politicians, and smell the coffee.  You are weakening your economies and increasing unemployment by driving away energy dependent industries. 

This is not America’s fault.  In fact, the USA’s private sector has shown the way, by using Technology, commonsense and commercial initiative to lower its dependency on often hostile energy cartels.  Thanks to fracking Technology, which the USA’s private sector invented, it has lowered its energy costs and increased the efficiency of its economy.  In the ultimate riposte to militant green lobbyists, who would weaken our economies while darkening our homes and streets, the USA has also lowered its CO2 emissions by using fracking to produce much more natural gas.


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December 11 2013

Commentary by David Fuller

Email of the day on the new service and a very interesting article

“Firstly I'd like to congratulate you both on the launch of the new service, and also to praise David for his grace and wisdom in renaming the service in acknowledgment of Eoin's key role and contribution. I was intending to highlight some issues I see with the redesign, but will wait a little while for things to settle down (and thanks, Eoin, for the timely email today acknowledging some issues). This will be intended as constructive feedback, not moaning from someone resistant to change, so hopefully my comments may prove useful. In brief, the feedback will be on how the move to a more touch/mobile-device oriented "magazine" style interface may have inadvertently somewhat crippled the productivity an experienced subscriber could obtain from the old site design (especially in the Chart Library) when using a desktop interface or other large screen interface. As a mobile touch device, laptop and multi-monitor desktop user, I'm currently feeling that what one hand has giveth, the other has taken away! I shall be back in touch with details. An increasingly key theme of Comment of the Day is automation; as we know, the benefits are vast, but you've also wisely covered some the challenges and drawbacks. This is the subject of the following (lengthy!) article by Nicholas Carr, which I hope you'll find this article as thought-provoking as I did.  

“Carr is the author of the very interesting "The Shallows: How the Internet is Changing the Way We Think, Read and Remember". As a very long standing Internet user, and full time investor who spends a great deal of time reading and researching using Internet technologies, The Shallows resonated strongly with me. I was able to identify with many of the issues he raised, and as a result modified my Internet usage in order to retain its benefits while minimising the potential negative effects arising from its various "interruption technologies". Article Extract: "Most of us want to believe that automation frees us to spend our time on higher pursuits but doesn’t otherwise alter the way we behave or think. That view is a fallacy—an expression of what scholars of automation call the “substitution myth.” A labor-saving device doesn’t just provide a substitute for some isolated component of a job or other activity. It alters the character of the entire task, including the roles, attitudes, and skills of the people taking part. As Parasuraman and a colleague explained in a 2010 journal article, “Automation does not simply supplant human activity but rather changes it, often in ways unintended and unanticipated by the designers of automation.” Psychologists have found that when we work with computers, we often fall victim to two cognitive ailments—complacency and bias—that can undercut our performance and lead to mistakes. Automation complacency occurs when a computer lulls us into a false sense of security. Confident that the machine will work flawlessly and handle any problem that crops up, we allow our attention to drift. We become disengaged from our work, and our awareness of what’s going on around us fades. Automation bias occurs when we place too much faith in the accuracy of the information coming through our monitors. Our trust in the software becomes so strong that we ignore or discount other information sources, including our own eyes and ears. When a computer provides incorrect or insufficient data, we remain oblivious to the error. Examples of complacency and bias have been well documented in high-risk situations—on flight decks and battlefields, in factory control rooms—but recent studies suggest that the problems can bedevil anyone working with a computer. Many radiologists today use analytical software to highlight suspicious areas on mammograms. Usually, the highlights aid in the discovery of disease. But they can also have the opposite effect. Biased by the software’s suggestions, radiologists may give cursory attention to the areas of an image that haven’t been highlighted, sometimes overlooking an early-stage tumor. Most of us have experienced complacency when at a computer. In using e-mail or word-processing software, we become less proficient proofreaders when we know that a spell-checker is at work. The way computers can weaken awareness and attentiveness points to a deeper problem. Automation turns us from actors into observers. Instead of manipulating the yoke, we watch the screen. That shift may make our lives easier, but it can also inhibit the development of expertise. Since the late 1970s, psychologists have been documenting a phenomenon called the “generation effect.” It was first observed in studies of vocabulary, which revealed that people remember words much better when they actively call them to mind—when they generate them—than when they simply read them. The effect, it has since become clear, influences learning in many different circumstances. When you engage actively in a task, you set off intricate mental processes that allow you to retain more knowledge. You learn more and remember more. When you repeat the same task over a long period, your brain constructs specialized neural circuits dedicated to the activity. It assembles a rich store of information and organizes that knowledge in a way that allows you to tap into it instantaneously. Whether it’s Serena Williams on a tennis court or Magnus Carlsen at a chessboard, an expert can spot patterns, evaluate signals, and react to changing circumstances with speed and precision that can seem uncanny. What looks like instinct is hard-won skill, skill that requires exactly the kind of struggle that modern software seeks to alleviate." ” 

David Fuller's view -

Many thanks for your thoughtful and also insightful email. 

 The last thing any of us want, to paraphrase one of your important comments is to inadvertently cripple somewhat the productivity of any subscriber, let alone the cherished veterans and friends who have been sharing a long journey with me.  At the risk of being simplistic, if FT Money’s Technology is any good, once we have received the correct Chart Library data which has not yet been fully and correctly handed over, and once we have debugged and simplified the site, then it should help all subscribers.  Also, it would be a mistake if we just assumed that programmers know what is best, rather than subscribers, which is why we value the Collective’s views on what we are trying to achieve. 

 I read the excerpt from Nicholas Carr very carefully and look forward to the full article.  It is certainly interesting but I did not identify with many of the examples, at least not so far.  If I was playing boredom games or reading horoscopes all day, whatever remaining brain, and also body, would be mostly jelly.  I feel that computers inform and educate me, at least when they are not driving me around the bend because I cannot cope with the software.  Also, I was disappointed in seeing the title of Carr’s earlier article: “Is Google Making Us Stupid?”  I suppose it could, if I looked at banal things, but I know that Google educates me in so many different ways.

 I look forward to your further comments on how to improve our website.  Subscribers’ considered input and suggestions can only help us to make it more useful.      

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December 11 2013

Commentary by David Fuller

Fracking Boom Pushes U.S. Oil Output to 25-Year High

Here is the opening of this informative article from Bloomberg:

U.S. crude production rose to the highest level in a quarter-century as a shale drilling boom in states such as Texas and North Dakota cut the need for foreign oil and pushed the country closer to energy independence.

The U.S. pumped 8.075 million barrels a day in the week ended Dec. 6, a gain of 0.8 percent, or 64,000 barrels a day, the Energy Information Administration said today. It’s the most since October 1988.

“You can’t swing a cat without hitting a barrel of oil in North America,” saidStephen Schork, president of the Schork Group Inc., an energy consulting firm in Villanova, Pennsylvania. “It’s amazing how quickly things can change.”

U.S. oil output grew 18 percent in the past 12 months, the fastest pace on record, boosting fuel exports and reducing reliance on imports, according to the EIA. The boom will make the country the world’s largest producer by 2015, five years sooner than last year’s forecast, the International Energy Agency in Paris said last month.


David Fuller's view -

Remember growing up with all those stories about how we were going to run out of oil, to the point of being impoverished and sitting in the dark?  They persisted right into the 21st Century.  People are still inventing reasons to avoid tapping their natural resources, and paying much higher prices for their energy.  Who benefits from that?

 Technology is everything.  It improves our livelihoods, as most of us know.  We have only begun to see how it can reduce pollution, because that challenge was not sufficiently prioritised previously.     

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December 11 2013

Commentary by David Fuller

December 05 2013

Commentary by David Fuller

Email of the day on the difficult transition:

"Many of your subscribers have moved businesses before and know the pitfalls.  Yours is essentially all Technology and you both clearly expressed the challenges.  I can already tell the new system will be a winner.  As far as I am concerned take all of the time you need."

David Fuller's view -

Thank you for your understanding and reassuring support.  We will take whatever time and effort is needed to make this service better value than ever before.    


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December 02 2013

Commentary by David Fuller

"Green energy could kill Britain's economy"

Here is the opening of another excellent article by Matt Ridley for The Times (subscription required to read the full article but a PDF version is in the Subscriber’s Area.)

The Chancellor is to knock £50 off the average energy bill by replacing some green levies with general taxation and extending the timescale for rolling out others. On the face of it, the possibility that global energy prices may start to fall over the next few years might seem like good political news for him, and some of the chicken entrails do seem to be pointing in that direction. There is, however, a political danger to George Osborne in such trends .

For Government strategists reeling from the twin blows of Ed Miliband’s economically illiterate but politically astute promise of an energy bill freeze and the energy companies’ price hikes, the prospect of lower wholesale energy prices might seem heaven sent. But in many ways it only exacerbates their problems, for the Government is right now fixing the prices we will have to pay for nuclear, wind and biomass power for decades to come. And it is fixing those prices at quite a high level.

The more that oil, gas and coal prices drop, the worse these deals look and the more they threaten our economic competitiveness. The Liberal Democrats have not allowed the Chancellor to cut subsidies for the renewable energy industry, the most regressive redistribution of wealth since the Sheriff of Nottingham was in his pomp.

They argue that what has driven energy bills up threefold in ten years is mainly an increase in the wholesale price of energy, rather than any great lurch towards subsidising renewables. True, but most of the lurch is yet to come and as wind power capacity quadruples by 2020, it will add £400 to average bills — not to mention driving up the price of energy to industry, which will pass it on to consumers.

“There is not a low-cost energy future out there,” said Ed Miliband when Secretary of State for Energy and Climate Change in 2009, at the time an enthusiast for discouraging energy use by price rises. It even became fashionable to argue, when Chris Huhne filled that post, that higher prices would cut bills (yes, you read that right) by encouraging people to use less power.

Anyhow, the forces that have driven energy prices up in recent years appear to be fading. Consider some of the reasons that oil and gas prices rose in 2011, the year energy companies pushed up prices even more than this year. Japan suffered a terrible tsunami, shut down its nuclear industry and began scouring the world for gas imports to keep its lights on. At about the same time Libya was plunged into civil war, cutting off a key supplier of gas. Add in simmering tension over Iran, Germany’s sudden decision to turn its back on nuclear power, the legacy of a couple of cold winters and the lingering depressive effect on oil and gas exploration of low energy prices from much of the previous decade, and it is little surprise that oil and gas producers pushed up prices.

Contrast that with today. Several years of high prices have driven a surge of new exploration. Deep offshore Technology is advancing rapidly and huge gas fields have been found in the Mediterranean and in the Indian and Atlantic oceans. In the United States, the shale revolution has glutted both gas and oil markets, displacing imports. Iran is coming in from the cold, Libya is back on stream and Australia is preparing to export huge volumes of gas. Should the rest of the world start producing shale gas — China, Argentina, Poland and others are on the brink, even Britain might one day deign to join them — that would further add to supply.

David Fuller's view -

This is an excellent summary of what FT Money has been pointing out over the last four years, as the Archive will confirm.

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November 27 2013

Commentary by Eoin Treacy

Email of the day (1)

on "cheap" energy:

"There was a good article on Fracking in the Economist Magazine (still the best business magazine with no close second choices).  It was the 16-22 November issue. Sorry life has been to busy to bring this to your notice earlier.

"I am not taking sides in the argument of social versus business arguments for fracking. I personally not convinced Fracking is a cheap source of oil although in the short term it is providing the US with cheap gas.

"What I observe is fracking has created a collar in the oil market. If oil prices drop the frackers respond quickly and fracking stops. If oil prices rise frackers drill a lot more to meet the demand. T Boon Pickens commented recently that fracking is not in his experience cheap oil. I think we agree Mr Pickens knows the oil business in particular the economics of fracking.

"As the Economists Magazine article points out the economics of fracking is a combination of gas prices, other liquids and oil prices. I will not go into the boring arguments of the relative merits of different sources of gas. Australia has lots of gas. We always knew about coal seam gas (CSG) however the petroleum engineers used to tell us CSG was very poor quality gas with low heat qualities and of no commercial significance. Not a argument you hear today. 

"I guess the economics of fracking will improve. BHP are hoping they do. But unless they do improve even the dumb money (i.e. BHP) will get the hint and stop funding what has been so far a stupid idea.

"Hopefully see you in February at the Chart seminar."

Eoin Treacy's view -

Thank you for this insightful email which brings us to the question of what exactly the term cheap energy means. We have described the peak oil argument, for much of the last decade, in terms of the rising cost of production. As you point out, geologists have known about coal seam methane, shale oil and gas, tight gas, methane hydrates etc for almost as long as the fossil fuel industry has existed. The commercial viability of these resources has always been dependent on the application of Technology and the marginal cost of production.

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November 22 2013

Commentary by Eoin Treacy

Novartis Sets $5 Billion Buyback as It Seeks Faster Growth

This article by Eva von Schaper for Bloomberg may be of interest to subscribers. Here is a section: 

The drugmaker also said a review of its pipeline will lead to more approvals and higher sales by 2017. Novartis's stable of cancer drugs and sales are set to grow annually for the next five years, despite the anticipated loss of exclusivity on its cancer drug Gleevec, the company said.

The Alcon unit is now set to grow at a mid- to high-single digit rate. The company said last month group sales would do better than previously expected. Europe's biggest drugmaker by sales has begun a review of units such as its animal-health operation that lack global scale.

Novartis announced this month it would sell its diagnostics unit to Grifols SA for $1.68 billion, part of a strategic review of its market segments. The company now has three units with global scale, Jimenez said: pharmaceuticals, the eye-care business Alcon and the generics arm Sandoz. Novartis has said it wants its businesses to be among the industry leaders or it will consider divesting them.

Eoin Treacy's view -

The healthcare sector represents important cross currents from the perspective of a globally oriented thematic investor. From first principles the energy, Technology and healthcare sectors represent areas of research from which new inventions or discoveries can literally create value by changing forever how we live or lives. 

Healthcare tends to do this through investing in technological development which creates new therapies as well as lowering the cost and increasing the availability of existing products. The net result is that the sector is both large and diverse, with a comparatively small number of companies dominating the global market. 

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November 19 2013

Commentary by David Fuller

The Weekly View: When Yellen Talks, People Listen

My thanks to Rod Smyth, Bill Ryder and Ken Liu for their ever-interesting letter, published by RiverFront. It is posted in the Subscriber's Area but here is the opening

Clarifying her view of quantitative easing (QE) asset purchases during her Senate confirmation hearing last Thursday, Federal Reserve Chairman nominee Janet Yellen said that, at this point, "the benefits exceed the costs." Although some within the Fed want to start reducing purchases and replace them with extended forward guidance on zero interest rates, Yellen seems to currently favor both forward guidance and keeping the purchase program in place for now. That said, she framed her dovish stance as promoting more robust economic growth to "regain the ground lost in the crisis and the recession" with the intent to end extraordinary monetary policies as soon as possible. Regarding the duration of QE, Yellen acknowledged that the Fed cannot expand its balance sheet forever: "The committee is focused on a variety of risks and recognizes that the longer this program continues, the more we will need to worry about those risks. So I do not see the program as continuing indefinitely… at each meeting we're attempting to assess whether or not the outlook is meeting the criterion that we've set out to begin to reduce the pace of purchases.

David Fuller's view -

Despite the USA's considerable economic advantages of very competitive energy prices and a growing lead in Technology, Janet Yellen is unlikely to find the US economy growing at the pace she would like for commencing QE tapering.

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November 11 2013

Commentary by Eoin Treacy

Oil-to-gas switch in transportation

Thanks to a subscriber for this fascinating report from Deutsche Bank highlighting the point that while US natural gas exports will not take place until 2015, the adoption of Technology that promotes the use of the commodity is already occurring. The full report is posted in the Subscriber's Area but here is a section
Economic benefits of gas as an oil substitute stay intact
We believe the impact of the gas tariff hike in July 2013 on vehicle fuel switching to natural gas is limited as the lengthened payback period is still economically attractive for conversion. The planned diesel/petro upgrade as a move to reduce emission will enhance the cost competitiveness of natural gas as a fuel substitute and offset the negative impact from rising natural gas price. There is also downside potential for natural gas price in China in the long term on increasing supply from unconventional gas and US LNG exports.

Environmental benefits and improving infrastructure/supply
Compared with gasoline and diesel, CNG and LNG are much cleaner and can significantly reduce transportation-related emissions. Many local governments have laid out aggressive plans to roll out natural gas applications in public transportation, as an important part of raising gas usage in the total energy consumption mix. Accelerating construction of the gas refuelling station and strong growth in LNG imports will support continued growth in oil-to-gas switch in transportation.

Natural gas application in vessel and other areas; export market potential
LNG conversion in vessels could be another big growth driver with national development guidelines and target just released. Moreover, great potential exists in LNG-fuelled construction, drilling and mining machinery markets. As China is a pioneer in LNG vehicle application, domestic equipment players are well positioned to exploit overseas markets, especially the US market where gas price is most competitive vs. oil.
Eoin Treacy's view - It has been our view at FT Money since at least 2010 that the development of unconventional oil and gas resources represents a game changer for the energy sector and the wider global economy. This is now reasonably well understood by governments less encumbered by climate ideology. China’s policy makers have committed themselves to working out how they can best make this change in global energy dynamic work to their advantage. The obvious answer is to do whatever they can to produce more gas and consume more of it in preference to coal and oil.

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November 07 2013

Commentary by Eoin Treacy

Twitter: What's It Worth?

This article for [email protected] may be of interest to subscribers. Here is a section
Ramesh and Abrol expect Twitter's year-over-year revenue growth to steadily drift down, from 88% in 2013 to 17% in 2018. They see operating profit turning positive in 2015 and free cash flow to be in the black in another three years. “Our fundamental approach was to stay a little conservative,” Ramesh says. It seemed the most prudent approach, he notes, since Twitter did not disclose advertiser metrics such as how many users are on the platform and their churn rate. Advertising is the core driver of revenue, so these disclosures are critical for modeling projections. “It was the most crucial piece of information, and [Twitter] didn't provide it,” Ramesh points out.

The two students have a “buy” rating on Twitter because the IPO price range is below their fair value of $27.35. But Ramesh says he is not going to be buying the stock out of the gate. “I would be cautious until they reveal more of their revenue model,” he notes, adding that he predicts Twitter shares will go up on the first day of trading but then eventually float down over the next few months.
Eoin Treacy's view - The social media sector has made a splash in the stock market over the last few years and has been a bright spot on the IPO route following the credit crisis crash. The growth rates of these companies and the speed with which they have come from nowhere to carve out substantial niches in the Technology sector is a testament to the inventive capacity of their founders and the USA's technological and private equity ecosystem. However as investors we have additional considerations to weigh.

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October 29 2013

Commentary by Eoin Treacy

Correcting the curve

Thanks to a subscriber for this educative report from Deutsche Bank focusing on iron-ore. The full report is posted in the Subscriber's Area but here is a section
The chart below shows the performance of the Australian dollar to US dollar exchange rate and the spot iron ore price. While the general performance of the two track closely, there are periods of time where the performance is disconnected. From 2011 we saw iron ore prices weakening, but the Australian dollar remains strong, which made for tough operating conditions for the mining companies in Australia. These tougher conditions have prevailed in market sentiment over the last 6 months and haven't adjusted in our view for the closing of the pain gap, as the Australian dollar has finally weakened. In our view, we believe that the market has been comfortable pricing in a drop in the iron ore price, but not willing yet to price in the inevitable weakening of the operating currencies.

As an addendum to the A$ discussion, the other gap shown in the chart above occurred from the third quarter of 2007 when the spot iron ore price far exceeded the strength in the Australian dollar – This did not result in as large a boom as expected as the majority of iron ore exported at the time was sold on contract and not spot basis and the contract price was significantly lower than the spot prices achieved at the time.

The chart below shows the performance of the spot iron ore price in a number of operating currencies over the last ten years. The spot price is four and a half times higher than it was in 2003, but is three times larger in Australian dollar and Brazilian real terms (still a hefty increase, but not as large as the spot price suggests). The performance of the iron ore price in South African Rand has been significantly better with the received price in Rand terms now five and a half times more than it was in 2003.
Eoin Treacy's view - The consumer, healthcare and Technology sectors continue to lead and have been joined over the last year by the industrial sector. Resources shares on the other hand have been notable laggards. Oversupply of steel, new capacity coming on line and a generally weak global economy have all contributed to this condition. However, as the US recovers, Europe emerges from recession and Chinese growth rates improve, it may be time to re-evaluate the outlook for miners, not least because they are cheap relative to the wider market.

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October 28 2013

Commentary by David Fuller

Apple Forecasts Lighter Holiday-Quarter Margin on Costs

Here is a section from this after hours report from Bloomberg
"This is a company that has routinely blown the doors off their estimates so meeting or just exceeding is probably a disappointment," said Jack Ablin, chief investment officer at BMO Private Bank, which has $66 billion under management and owns Apple shares.

Apple has been busy updating its product lineup ahead of the holiday season. The company has said its new iPhones will be available in about 100 countries by the end of the year. The higher-end iPhone 5s costs $199 with a two-year wireless contract and includes a more powerful processor, improved camera and fingerprint-reading Technology.

The new iPhone 5c is mainly last year's model with colorful plastic cases. The handset is seen as Apple's bid to win more customers in emerging markets like China and Russia. Without a contract, the handset costs about $800, leading analysts to say it's too expensive for those markets and that demand is light.

A new iPad Air also goes on sale on Nov. 1, followed later in the month by an updated iPad mini with a high-definition screen.
David Fuller's view - Apple gave back today's gains of nearly $4 in after hours trading following its earnings report. Nevertheless, the share (weekly & daily) had been strong recently and these results are certainly not bad given the soft global economy.

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October 26 2013

Commentary by Eoin Treacy

A New Electric Competitor to Tesla, Porsche, Toyota

This video report from Bloomberg TV may be of interest to subscribers.
Eoin Treacy's view - Charging stations for electric cars are becoming increasingly visible and the innovations introduced by Tesla Motors are helping to reduce range anxiety. As an increasing number of auto manufacturers invest in electric car focused R&D, the cost of these cars should also decline. The viability of electric cars and how well they penetrate the wider auto market will in no small part be dependent on improvements in battery Technology, not least in achieving better power to weight ratios.

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October 24 2013

Commentary by David Fuller

Are Those White Elephants In The Water?

This is an excellent column by Matt Ridley for The Times (UK) (may require subscription registration but a PDF is posted in the Subscriber's Area). Here is the opening
Here's a short quiz. Question One: which source of energy is allowed to charge the highest price for its electricity? Question Two: which source of energy is expected to receive the greatest capital expenditure over the next seven years? The answer to both questions is offshore wind.

Offshore wind farms are the elephant in the energy debate. Today, the energy department estimates that electricity prices are 17 per cent higher as the result of green policies and that this will rise to 33 per cent by 2020 or 44 per cent if gas prices fall, as many expect. Offshore wind is the single biggest contributor to that rise. Of the £15 billion a year that the Renewable Energy Foundation thinks consumers are going to be paying in total green imposts by 2020, the bulk will go to support offshore wind.

Britain is a proud leader in offshore wind. "The UK has more offshore wind installed than the rest of the world combined and we have ambitious plans for the future," says Ed Davey, the Energy Secretary. I wonder why that is. Could it be that other countries have looked at the Technology and decided that it's far too costly? George Osborne says he does not want Britain out ahead on
green energy. He should take a long hard look at why we are so far out ahead on this extravagant folly.

Currently we get under 3 per cent of our electricity from offshore wind, or less than 0.5 per cent of our total energy. If Mr Davey's ambitions are realised and 20 per cent of our electricity comes from offshore wind in 2020, then we will need 20 gigawatts of capacity because wind turbines, even at sea, operate at less than 40 per cent of capacity. That's about six times what we have today and the cost of building it would be greater than the investment in nuclear energy over the period
David Fuller's view - I have long been an opponent of wind farms because they are the most expensive and least reliable source of renewable energy. They are also a monstrous blot on the countryside and for sea views, taking up far more space than any other sources of energy, and for less output. They are murderous cuisinarts for birds and we are only beginning to understand the extent to which they adversely affect sleeping patterns for anyone living within approximately a mile of these towering, noisy eyesores.

The UK Government has been incredibly naïve about wind farms, and apparently no one more so than the Prime Minister. The current Energy Secretary mentioned above appears to have learned nothing and is little more than a cheerleader for a bad policy which he temporarily oversees. This incompetence has jeopardised Britain's energy security and increased prices far more than would have been necessary with sensible policies, starting with fracking for shale oil and gas.

(There are 26 Archived articles and comments on this subject which you can access via the 'Search' facility shown upper-left, fourth item down. Click on that and it will open a window; type in wind farms and then click on the blue Search button to the right of the window.)

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October 22 2013

Commentary by David Fuller

High-Frequency Trades Face EU Curbs in Draft Deal, Lawmaker Says

Here is the opening from Bloomberg's report
European Parliament lawmakers have reached a draft deal with national governments on high-frequency trading curbs as part of a push to toughen the bloc's financial market rulebook, said the chief legislator working on the plans.

"The negotiation team achieved a significant breakthrough on this issue," Markus Ferber, the lawmaker leading the measures, said in an e-mail. "The area of high-frequency trading is lacking suitable regulation. This is why it was high time to find a decent solution to this pressing problem."

The provisional deal, reached by legislators and officials from Lithuania, which holds the EU's rotating presidency, includes a so-called tick size regime limiting the minimum size of price movements on financial markets, Ferber said. "This will slow down high-frequency trading significantly," he said.

High-frequency trading in stocks came under increased regulatory scrutiny after the so-called flash crash in May 2010, during which the Dow Jones Industrial Average briefly lost almost 1,000 points.

The practice involves using powerful Technology and complex computer programs to execute orders in milliseconds and profit from fleeting discrepancies in security prices across different trading venues. Companies active in high-frequency trading have warned that interfering with their strategies would raise investor costs and harm financial stability.
David Fuller's view - It will take more that this to curb the dangerous development of high-frequency trading which Eoin and I have campaigned against for several years. Unfortunately, HFT is quietly encouraged by too many brokers and exchanges because they earn fees from it.

This is short-sighted because high-frequency trading is illegal front-running at best. At worst, without firm regulation and a level playing field in the interests of all investors and individual traders, high-frequency trading will result in an eventual market doomsday caused by these machines and their programmers.

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October 21 2013

Commentary by Eoin Treacy

GE: 3D Printers To 'Touch' Half Of Its Manufacturing

This article by Gillian Rich for Investor's Business Daily may be of interest to subscribers. Here is a section
GE already uses 3D printing in a variety of areas from making medical devices and jet engine parts to prototyping components for washing machines.

Three-dimensional printing works by layering material, like plastic or ceramic, into a desired shape. Traditional manufacturing works the other way, by cutting out an object from a larger piece of material.

At GE, 3D printing isn't just a way to make products. It's also a way to try out new tools that could make products better.

"We don't have to invest the time and money into making a permanent tool, but we can 3D print one and be able to see if it really has the type of benefits we dream of," Furstoss said.

GE still plans to use conventional manufacturing techniques, especially for large components. But 3D printing, or additive manufacturing as GE calls it, is still seen playing a role, such as providing tools or repairing parts.
Eoin Treacy's view - Above all else 3D printing, or additive manufacturing as it is also known, represents a breakthrough in how our imagination can take physical shape. While the above article focuses on the conventional use of 3D printing in industry, which remains a sizeable growth opportunity, the Technology is increasingly being used in other fields, not least medicine. For example, this article from Gizmodo highlights how a team at Huazhong University in China have printed a working kidney

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October 16 2013

Commentary by Eoin Treacy