David Fuller and Eoin Treacy's Free (Abbreviated) Comment of the Day.
Friday 18th November 2011
Browning Newsletter: It's Official - A Cold La Niña Winter! - My thanks to Alex Seagle of Fraser Management Associates, publishers of this fascinating letter written by Evelyn Browning-Garriss. Here is the opening:
You've seen the headlines. The Northeast was hit by a Nor'easter snowstorm that affected 60 million people. Over three million were left without power and the outages may last for days. New York City received its earliest inch of snow since the Civil War. Pennsylvania, Washington DC and the entire Northeast were buried in as much as two feet of snow and then hit by freezing weather.
The Northeast is not the only cold area. Even Texas, drought-stricken Texas, had snow this month in Amarillo. The Rocky Mountains, including my home 300 miles from the Mexican border, has been buried in white stuff two times in October. Sunny California started the month with heavy rain in the Fresno valley (hammering the drying raisin crop) and snow for the ski resorts in the Sierra Nevadas. And it is all due to hot water and cold, cold air.
We are being hit by a La Niña and a "wild card". Welcome to the early beginning of the winter of 2011/2012.
My comment - This beautifully illustrated publication discusses the global weather outlook and implications for some important crops. I commend it to you.
Email of the day (1) - On the euro region (from me, a first for Fullermoney):
so many momentous decisions to be taken within the EU, I wondered how you and
your fellow citizens view the situation as it is unfolding. Do you see the end
game, in terms of how all of this will play out?
My comment - I sent the email above to a Bavarian friend, Erwin Grandinger, yesterday evening. I did so because I do not always trust American or British views on the eurozone, including my own. Brits in particular have issues with the euro, which I understand and often share, but they can impede our objectivity in the current crisis. Also, one cannot know or intuit everything, which is why I always like hearing from knowledgeable people within the Collective of subscribers on subjects where they have considerable knowledge, insights and firsthand experience.
Veteran subscribers will know of Erwin Grandinger as his views have appeared in Fullermoney over the years and can be found in the Archive by using the 'Search' facility (shown upper-left, fourth item down). For the record, he is an independent political economist and consultant at EPM Group Berlin. He has also been a guest columnist with the German daily DIE WELT for over 12 years. Dr Grandinger's acclaimed book: "Beyond Repair: Germany in the Midst of Systemic Change", published in March 2010, discusses problems in the welfare state. An English translation of the introduction is also in the Archive and hopefully the entire book will be published in English at some point.
Here is the opening from Erwin Grandinger's detailed and illuminating reply to my email above:
"There is a clear disconnect between what fund managers think / believe, and what is happening on German streets.
"The virtual world (financial markets) believe they experience a crisis and are partially in panic (how do you explain the German-Austrian 10 yr. yield spread explosion?). The real world (German voters) has, in general, not the slightest concern when it comes down to the "Euro". Nice theme on TV, but does not existent in your daily life.
"Take the city state of Berlin. The city has more debt than Argentina (over EUR 60bn). But the new SPD-CDU Berlin coalition government has just agreed to employ another 11.000 civil servants, and has come up with all sorts of welfare state goodies for voters... No sign of "austerity"... There are only 12 companies in Berlin that employ more than 500 employees... Unlike Argentina, Berlin has no underlying business model, except tourism (exactly like Greece)...
"A tiny portion of Germans try to copycat the "occupy"-movement, but these guys are organized by the usual left-wing suspects (Greenpeace, Green Party, attack movement, etc.) which do know how to exploit anti-market, anti-capitalistic sentiment in Germany (certainly prevailing for a long period of time). "Lehman" 2008 simply re-confirmed their views.
"However, one aspect of the drama has become very apparent: the politicians have successfully managed to blame the "banks" in total for all the ongoing trouble. "Bad governance" by German / European governments regarding fiscal policies is not discussed. The "banks" have caused all of these problems... No one discusses the excessive, debt-driven welfare states (organized by generations of politicians) in Europe that have reached the limits of refinancing while their respective demographics are deteriorating.
"So, while a huge part of the Germans may not like the "Euro" (see many polls), the same huge part is not at all concerned about the stability of the currency and/or places like Italy. As you David have mentioned before, debt de-leveraging can take many years. Therefore the name of the game in Europe / the Eurozone is and can only be "muddling through", given the number of countries and political decision-makers involved. There is no quick fix and everybody understands this.
"Also, all lip-service apart, when push comes to shove German politicians expect the ECB to jump in and buy sovereign bonds directly. That is what I hear all the time here in Berlin. The "options" are: temporarily higher inflation (good to reduce government debt and to expropriate savers) or a defunct financial system. Politicians, Bundesbank and the ECB will of course go for the former. Buying sovereign bonds directly, truly, will only happen in the very last "second", i.e. when the "virtual" crisis has become a "real" crisis (from a German perspective, since the country is booming economically & mentally). The ECB and the Bundesbank (playing good guy, bad guy) need to keep the pressure up (Italy, Spain, etc.) as long as possible to enforce domestic political reforms (Italy, Greece)... When all options are exhausted, and only when, then the ECB will act more forcefully in my view.
"As an independent advisor and analyst here in Berlin I have also experienced a gradual, but very slow learning curve by Berlin politicians when we talk about the "Euro" crisis. In May 2010 (first Greek bailout package) politicians claimed that "we" can pay Greece out of our (German) pocket money. They had never heard before about CDSs, CDOs, yield-spreads, etc... They fully and comprehensively underestimated the problem. Now, 24 months later (after in Oct 2009 the Giorgos Papandreou government revealed that the Greek budget deficit figures are in fact much higher), they are still behind the curve to some extent, but they no longer underestimate the importance of the subject. In fact, they spent 90 percent of their professional time to deal with the issue.
"Italy (definitely unlike Greece) has an array of options: support from the ECB, IMF, EFSF (once it works properly), China/Asia, bilateral agreements (when experiencing repayment troubles in the 1970s Italy did borrow a few billion DM from Chancellor Helmut Schmidt and repaid everything including interest subsequently). Italy has a high savings rate, primary surplus and a huge and effective energy sector (ENA, business interests in Northern Africa). And a new (Mario Monti) government. Italy's Debt Office works highly professionally. The next major bond repayment is not before Feb12. With the new government in place Italy has gained some time. BTPs have printed an ending signal, as you also pointed out, last week. The pressure is off for the time being. So, we (the bond market vigilantes) have gone all the way from Greece, over Ireland to Italy. What's next? France? Germany? US? All of this is too predictable.
"The Germans will never let the Euro go. Market participants think along the lines of MBA school P&L. Politicians don't think so. For them the "Euro" was born out of the Holocaust. It is not negotiable. Simple as that. German politicians feel that we are in a transition period: from nation states to a more unified Europe. Time will tell whether we will end up with real EU Finance Ministry and German-inspired fiscal discipline rules... We may get there in the next 10-20 years. Not now. Now we are in muddling through territory. It is too early for all participants. That also means Germany will never leave the Eurozone on its own (as Anatole Kaletsky suspected a while ago). That is pure nonsense. Germany may accept that the Eurozone may have to shrink, before it can expand again.
"German Chancellor Angela Merkel has pointed out a number of times: the "Euro" is Europe. Many people disagree with that concept, but for the overwhelming number of politicians and for the most part of the German intellectual elite this is exactly the point. In less than 12 years the Euro has become the raison d'être for Europe in their view. In that respect, financial markets are behind the curve. They have failed to understand that philosophical concept in the context of what has happened in Europe since 1933."
My comment continued - If Erwin Grandinger is correct, and I think he is, then the next significant move for stock markets should be to the upside. This is also the Fullermoney view when we consider monetary policy (mostly accommodative), valuations (mostly reasonable and often quite attractive) and sentiment (still quite pessimistic and therefore a contrary indicator).
However, price chart action is the final arbiter. We saw a terrific stock market rally in October. Most share indices have given up some of those gains this month. The October lows need to hold if we are to see further gains anytime soon.
"US brokerage Charles Schwab, mostly a discounter and mostly on the Internet is beefing up its ability to trade directly on about 40 foreign markets. They will charge $50 over their regular commission which in my case will be zero for a while (luring them in)."
My comment - I have always been under the impression that US brokerage facilities with offices overseas would handle overseas buy and sell orders for American citizens based in the USA. However, they may be selective in accepting accounts, not wanting a one-off or occasional transaction. And they certainly will not charge discount commission rates for business that will be more expensive to execute.
It would make a change to write about something other than Europe, but with the world looking on at this dysfunctional continent, epitomised by having a German Pope and an Italian central banker, that is much easier said than done. America and China have been consistent in their message that the eurozone needs to sort itself out, and soon, but don't expect any handouts as they have enough problems of their own.
America is in election mode and with Republican candidates like Rick Perry and "Bunga Bunga" Cain you almost have to feel sorry for them. The only one of a sorry bunch with any understanding of the economic realities is Ron Paul yet the pro-establishment press have already written him off. The "free" press is becoming a bit of a joke; try watching the "Faux" News channel and you will see what I mean...
problem well stated is a problem half solved."
Growth and Representation - Yesterday, I posted a number of charts describing the process of valuation contraction that has been evident on Wall Street over the last decade. I also posted a long-term chart of the spread between the S&P 500's dividend yield and the yield on US Treasuries which has returned to almost zero. Following an overnight rumination and taking into account some of the equities that yesterday's click through of the S&P 500 focused on, I began to think about the old Nifty 50.
The Nifty 50 was a term used to describe high-performing US growth stocks in the 1960s and 1970s. These were primarily focused on the growth of the US consumer and some were among the first to establish a presence in global markets. Some of the relevant shares have since been taken over, demerged, gone bankrupt or changed names. However, a large number still exist. I created a section in my Favourites for these companies and where one company has bought the original, I inserted that share instead. Here is a link to a PDF of the list.
Technology shares were perhaps the greatest domestic US growth shares over the last few decades. Emerging markets, particularly in Asia have become dominant drivers of growth and consumer demand over the last decade. Some of the original Nifty 50 companies such as McDonalds, Coca Cola, Unilever, Diageo, Johnson & Johnson, Yum Brands, IBM etc. have transitioned effectively from being dependent on their respective economies to representing the global consumer. Therefore rather than focusing on the Nifty 50 I thought it would be instructive to find companies with a reasonable presence in Asia and Latin America.
To do this I used Bloomberg to identify companies that derive at least 20% of their income from Asia and Latin America. A number of original Nifty 50 companies as well as a number of dividend aristocrats are present on this list of 108 shares which I suspect will be of interest to subscribers. I will perform a more detailed examination of these shares next week.
wants Shell's expertise to unlock the unconventional gas and oil resources,
such as shale gas, that require new techniques to extract. Shell wants PetroChina's
help in gaining access to the mainland, China's newly hot gas fields, and its
My view - One of the main challenges for major energy companies is gaining access to promising new discoveries because they are so often in foreign jurisdictions where national governments want to hold onto the lion's share of potential profits. Resource nationalisation is a persistent theme. One of the reasons companies such as Exxon Mobil and Shell now produce more gas than oil is because they have been shut out of major new oil discoveries in many parts of Africa and particularly Brazil. If they wish to participate in countries with large national interests, they have little choice but to team up.
Many companies seeking to do business in China have had to weigh the consequences of technology sharing with local partners. Energy is unlikely to be any different. The Chinese are well aware of their unconventional resource base and have been buying into unconventional oil and gas operations in North America in an effort to gain access to the technology required to exploit them. Therefore, it is not a question of if but when China's energy companies become more proficient in developing their own fields. For a company such as Shell, the argument for becoming an enabler is compelling. Their conclusion is likely to have been that in the long run, it is probably better to have China's national oil and gas company as a partner than an adversary.
Technological innovation has been the edge major energy companies have used to promote themselves for decades. They may have to share their know how to gain access to fields in China, the Middle East or Brazil but that should not impinge their ability to continue to represent the forefront of technological innovation.
Royal Dutch Shell's (4.68%) share price has been largely rangebound for the last decade but hit a new high in March and continues to consolidate in the region of the upper side of the long-term congestion area. The share has held a progression of higher major reaction lows since late 2008 and a sustained move below 1900p would be required to question medium-term scope for additional upside.
PetroChina (4.2%) also found support in late 2008 but has been largely rangebound since early 2009. The share is currently mid range and a sustained move above HK$12 will be required to suggestion a return to medium-term demand dominance.
a pioneer Oryx takes its role in the development of GTL very seriously,"
said Welgemoed. "We are eagerly awaiting the start-up of the Pearl GTL
plant. I can say that the two companies are working together to incorporate
lessons learned from Oryx GTL within the start-up and commissioning planning
of the Pearl project. We believe that we have to work together in the industry
to make GTL grow."
Sasol, which has a number of projects in Qatar, retested the upper side of its base in August and has rebounded powerfully to test the April peak near ZAR40,000. It is overbought in the short term, but a sustained move below ZAR35,000 would be required to check medium-term scope for additional upside.
"I hope you are well. Could you please add a recently listed tech company to the chart library? The company is Fusion IO (FIO on NYSE). The chief scientist is the guy who co-founded Apple with Steve Jobs so it has been getting a bit of a lift recently. Many thanks."
"Interesting times! Would you mind adding Expansys plc, code XPS to the chart library - best wishes,"
My comment - Thank you for this suggestion which has been added to the Chart Library.
Emerging Market Central Banks Bail Out Banks? A Cautionary Tale from Latin America"