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):

"With 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?

"I trust that you are well."

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.

Email of the day (2) - More on how American investors can buy overseas shares:

"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.

My personal portfolio: Gold future long trade increased - I bought back the portion of my gold (weekly & daily) holding which had been stopped out at a slightly higher level a short while ago. I paid $1732.6 for another December position, including spread-bet dealing costs. I will have to roll this forward late next week as the next contract is not yet available on my spread-bet platform. (See also yesterday's comment on gold.)


Clive Hale's View from the Bridge: Christmas is coming! - My thanks to the author for his wry observations on the global economic and political scene. Here are the opening paragraphs, posted without further comment:

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...

Peak [Fresh] Water? - My thanks to a subscriber for this futuristic report which is posted without further comment.

Quote of the week - On problems:

"A problem well stated is a problem half solved."
Charles F Kettering, inventor and engineer (1876-1958) (courtesy of Grayson)



Additional commentary by Eoin Treacy

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.

Shell Is 'Welcome Barbarian' in China's Shale-Gas Development - This is an interesting article by Stanley Reed and Dexter Roberts for Bloomberg. Here is a section:

PetroChina 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 energy-hungry consumers.

The U.S. Energy Information Administration said in April that Chinese shale may hold 1,275 trillion cubic feet of gas, 12 times the country's conventional natural gas resource. The "technically recoverable" reserves are almost 50 percent greater than the 862 trillion cubic feet estimated for the U.S., the agency said.

Last year, China became the largest energy consumer in the world, surpassing the U.S., according to BP Plc's Statistical Review of World Energy. China is expected to account for almost half the world's growth in oil consumption in the next two decades, becoming the largest market for oil, and it's trying to more than double the use of gas in its economy, to 8 percent of the energy mix, by 2015.

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.

The 'antelope' gets to its feet - This article from Gas Matters, republished by Bloomberg may be of interest to subscribers. Here is a section:

"As 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."

Welgemoed insisted that Oryx would be profitable even at oil prices below $40/barrel, a claim that is credible because the project was unusually cheap. Because the EPC contract was awarded on a lump-sum turnkey (LSTK) basis to Technip before the construction cost overheating that began in 2004, overall investment has been a little over $1 billion, giving a specific capital cost of around $30,000 for barrel per day of capacity - a figure unlikely to be matched any time soon.

The deal was not such a good one for Technip, conceded chief technology officer Sanjiv Ratan, because procurement and construction did extend into the cost-inflationary period. He added that in the current era of high cost volatility, future projects were more likely to be undertaken on a reimbursable contract basis than the LSTK model.

My view - Every innovation in generating, transforming or saving energy creates efficiencies. These are rapidly reinvested in labour saving devices which in turn lead to increased consumption. This "rebound effect" is more commonly referred to as the Jevons Paradox. The result is that even though we might be concerned about the effects our actions are having on the planet the hard fact is that our way of life depends not only on maintaining our energy consumption but increasing it if we are serious about improving the standards of living for everyone on the planet.

This table from the World Resources Institute courtesy of Wikipedia, although dated 2003 is a useful indicator of energy consumption. China in particular is moving up this table in a secular trend. Much of that demand growth will be met by unconventional oil as well as natural gas.

Qatar's future is intertwined with the outlook for natural gas which remains extremely positive. The Qatar Investment Trust, listed in the UK, trades at a 18.8% discount to NAV. It broke out of an 18-month range in June and continues to consolidate above 80p. A sustained move below that level would be required to begin to question medium-term scope for continued higher to lateral ranging.

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.

Email of the day (1) - on an addition to the Chart Library:

"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."

And

"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.

Weekend Reading - Thanks to a subscriber for this list of academic reports contributed in the spirit of Empowerment Through Knowledge.

"Has the Fed Reacted Asymmetrically to Stock Prices?"

Fed: "The International Role of the Dollar: Does It Matter if This Changes?"

Fed: "Future Recession Risks: An Update"

Fed: "Housing Busts and Household Mobility: An Update"

Fed: "What Moves the Interest Rate Term Structure?"

Fed: "Did Speculation Drive Oil Prices? Market Fundamentals Suggest Otherwise"

Banca de Italia: "THE SOVEREIGN CREDIT DEFAULT SWAP MARKET: PRICE DISCOVERY, VOLUMES AND LINKS WITH BANKS' RISK PREMIA"

BIS: "China's evolving reserve requirements"

SnB: "On the Predictability of Stock Prices"

IMF: "Bank of Japan's Monetary Easing Measures: Are They Powerful and Comprehensive?"

Fed: "How Do Joint Supervisors Examine Financial Institutions? The Case of State Banks"

IMF: "Rapid Credit Growth: Boon or Boom-Bust?"

IMF: "Can Emerging Market Central Banks Bail Out Banks? A Cautionary Tale from Latin America"

Central Bank of Ireland: "Credit Access for Small and Medium Firms. Survey Evidence for Ireland"

USA Today: "Foreclosure backlogs could take decades to clear out"

RealtyTrac: U.S. Foreclosure Activity Hits 7-Month High in October

Zillow on % underwater and foreclosure re-sales

The Chart Seminar 2012 - 2011 has been a very successful year for The Chart Seminar with a sell-out tour to Singapore and Australia, as well as our ever popular London events. I am greatly looking forward to a number of venues in 2012.

We are currently taking bookings for our San Francisco and New York dates in April as well as London seminars in May and November. Anyone interested in securing a place at any of our events should contact Sarah Barnes at sbarnes@fullermoney.com.

The date and venues for my seminars so far in 2012 are:

San Francisco - April 16th &17th 2012 Nikko Hotel

New York - April 23rd & 24th 2012 at The Manhattan Club at 800 7th Avenue

London - May 25th & 25th 2012 at the Radisson Edwardian Hampshire

The full rate is £950 + VAT. The early booking rate of £875 for non-subscribers expires on September 30th for the London seminar and January 30th 2012 for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.

Next Item  Print this Item  Email this Item   Archive May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 November 2009 October 2009 September 2009 August 2009 July 2009 June 2009 May 2009 April 2009 March 2009 February 2009 January 2009 December 2008 November 2008 October 2008 September 2008 August 2008 July 2008 June 2008 May 2008 April 2008 March 2008 February 2008 January 2008 December 2007 November 2007 October 2007 September 2007 August 2007 July 2007 June 2007 May 2007 April 2007 March 2007 February 2007 January 2007 December 2006 November 2006 October 2006 September 2006 August 2006 July 2006 June 2006 May 2006 April 2006 March 2006 February 2006 January 2006 December 2005 November 2005 October 2005 September 2005 August 2005 July 2005 June 2005 May 2005 April 2005 March 2005 February 2005 January 2005 December 2004 November 2004 October 2004 September 2004 August 2004 July 2004 June 2004 May 2004 April 2004 March 2004 February 2004 January 2004 December 2003 November 2003 October 2003 September 2003 August 2003 July 2003 June 2003 May 2003 April 2003 March 2003 February 2003 January 2003 December 2002 November 2002 October 2002 September 2002 August 2002 July 2002 June 2002 May 2002