David Fuller and Eoin Treacy’s
Comment of the Day
November – 152021
Eoin Treacy’s view
Some of the topics discussed include: private equity exits and interest rate sensitivity, bitcoin rally fading, gold steady, nasdaq easing back, value indices like Europe, UK, Japan and emerging markets doing better.
4 Million Tons a Day Show Why China and India Won’t Quit Coal
This article from Bloomberg may be of interest to subscribers. Here is a section:
Meanwhile, mines across China and India have been ramping up production in recent weeks to ease a supply crunch that’s caused widespread power shortages and curbs on industrial activity. China’s miners have beaten a government target to raise output to 12 million tons a day, while India’s daily production is close to 2 million tons.
“The power cuts since mid-to-late September show that we are still not prepared enough,” Yang Weimin, a member of the economic committee of the Chinese People’s Political Consultative Conference and a government advisor, told a conference in Beijing on Saturday. Additional funding is needed to ensure coal plants can be used to complement a rising share of renewables, he said.
Coal’s share in global electricity generation fell in 2020 to 34%, the smallest in more than two decades, though it remains the single largest power source, according to BloombergNEF.
In China, it accounted for about 62% of electricity generation last year. President Xi Jinping has set a target for the nation to peak its consumption of the fuel in 2025, and aims to have non-fossil fuel energy sources exceed 80% of its total mix by 2060.
For India, coal is even more important, representing 72% of electricity generation. The fuel will still make up 21% of India’s electricity mix by 2050, BNEF analysts including Atin Jain said in a note last month.
Eoin Treacy’s view
The focus on attention right now is on the willingness and potential of both India and China to eventually limit their use of coal. Much less attention is focused on Africa where the bulk of population growth is occurring. The next couple of billion people will mostly be born in Africa. That means increasing demand for power and higher standards of living as the continent urbanises.
Predictably the bare minimum was agreed at the COP26 negotiations in Glasgow. Both India and China only agreed to achieve decarbonization within 50 years without stating how they will achieve it. China in particular did not go much further than the measures announced ahead of the conference. For example, they will no longer build coal fired power stations overseas.
That begs the question where the electricity to support African growth is going to come from? It seems inevitable many high population emerging countries will continue to burn coal, regardless of whatever was agreed this weekend.
Meanwhile, the political will to support less energy intense solutions remains strong. That suggests continued investment in wind, solar and batteries and higher prices for competing sources.
It also suggests there will need to be a new mining investment cycle to support demand growth for copper, nickel etc.
The creation of a global carbon market is perhaps the most significant result of the COP26 talks. The EU’s carbon emissions price hit a new all-time high today.
Despite the fact people remain worried about the potential for accidents at nuclear power plants, they remain the most compelling zero carbon base load providers of electricity.
Rolls Royce is now getting into building small modular reactors with each expected to be built in a factory, occupy the size of two football fields (90% less than conventional plants) and provide power for 1 million home each. The share continues to exhibit first step above the base characteristics.
Commentary by Eoin Treacy
Fed’s Kashkari Says Policy Shouldn’t Overreact to Inflation
This article from Bloomberg may be of interest to subscribers. Here is a section:
Kashkari said the move was “appropriate” and stressed that moving too quickly to remove the Fed’s support could end up hurting the economy more than it helps on the inflation front.
“When we adjust monetary policy it acts with a lag,” he said. “So if we overreact to a short-term price increase, that can set the economy back over the long term.”
Kashkari, who doesn’t vote this year on the policy making Federal Open Market Committee, said he expects heightened demand connected to previous fiscal stimulus and supply constraints caused by the pandemic to slowly ease.
Asked about President Joe Biden’s pending decision whether to reappoint Fed Chair Jerome Powell to another four-year term, or perhaps choose Fed Governor Lael Brainard to succeed him, Kashkari said both are capable and would be likely to pursue similar monetary policies.
“Both of them have been instrumental in the new framework that we’ve adopted in terms of not shortcutting the recovery, and I’m confident that either of them as chair would continue to see that through,” he said.
Eoin Treacy’s view
Kashkari is one of the biggest doves at the Fed but he is not short of company considering the trajectory of policy. Regardless of who is in charge, the set of challenges that need to be addressed will not change. The economic recovery is uneven with labour force participation declining while the number of job opens is climbing. That’s not going to be fixed by monetary policy.
Instead, a medium-term combination of higher wages, more flexible working conditions and adoption of technology will be required to address the challenge. That process is unlikely to be smooth and there remains considerable potential for volatility in the statistics economists monitor.
The 5-year yield continues to trend higher. It is now looking increasingly like a failed downside break which holds out the prospect of a return to test at least the 2% level. That entails a significant increase in the cost of servicing the debt mountain.
As I have mentioned in the subscriber’s video over the last couple of months, I find myself in the company of a lot more private equity investors. At a parents’ function for our daughters’ school over the weekend I was talking to another. His firm invests in companies with strong growth and turnover in the region of $200-$500 million.
We were chatting about the outlook for rates and he had two memorable things to say. The first was to repeat Chuck Prince’s quip “as long as the music keeps playing, we’ll keep dancing”. The second was that most of the companies he deals with have ongoing funding requirements and could not survive an interest rate hike of 100 basis points.
That reality is why bond yields are not keeping pace with inflation. On the one hand investors are willing to give the benefit of the doubt to the transitory argument. On the other they are aware of how interest rate sensitive many portions of the economy are. There is no way rates can normalise with this kind of interest rate pressure.
Even a modest move higher in rates is weighing on the best performers in the Nasdaq.
The volume of venture exits over the last year suggest some awareness among investors of the risk from higher rates.
Commentary by Eoin Treacy
Why AT&T Stock May Be Near a Bottom With Its Proposed Dividend Cut
This article from investorplace.com may be of interest to subscribers. Here is a section:
The question remains then whether $20.23 is still too high. For example, with a 6% dividend yield, the stock has to trade at $19.17 per share. If we add $4.76 to that price, this implies that T stock should be at $23.93 per share.
That implies that T stock could fall another $1.12 or 4.5% to $23.87 if the post-split dividend yield will be at 6%.
But don’t forget this is just an estimate. We don’t know exactly what the new dividend payment will be. For example, if the dividend is reset at $1.18, then today’s price implies a new post-split yield of 5.62% (i.e., $1.18 / $20.99). That is fairly close to 6% and may imply that T stock is actually near a trough.
Until the company begins to clarify some of these issues, the market will not know exactly where to price T stock. However, all indications are that it is getting close to a trough, assuming that the new yield will be close to 6%.
Eoin Treacy’s view
An 8.38% yield is conspicuously large even for the high yielding global telecommunications sector. With a lengthy history of both paying and increasing the pay out, it is reasonable to assume a good many investors are in the share for the income and are selling because they fear their income will be reduced.
With the impending demerger of Warner Media scheduled for the 2nd quarter the market has been busy attempting to figure out what the pay-out is going to look like. That helps to explain the sharp decline post the demerger announcement. The price is now back testing the 2010 lows but it is going to need an upward dynamic to check the downtrend and pressure shorts.
Meanwhile commonality in the wider sector supports the argument the stock is in the region of a low.
Commentary by Eoin Treacy
Eoin’s personal portfolio: leveraged profits taken September 7th
Eoin Treacy’s view
One of the most commonly asked questions by subscribers is how to find details of my open traders. To make it easier I will simply repost the latest summary daily until there is a change.
I bought back into both bitcoin and ethereum last on August 6th. I took the profit in both positions today at $47,935 and $3,477 against my purchases at $42,427 and $2,866 respectively. I’ve been happy to buy back on weakness but remain of the view that the risk in the sector is substantially higher since the peak in March. Therefore, my policy was to sell on the first sign of trouble. That was delivered today with large downward dynamics.
I increased my platinum long on August 27th paying $1002 for another position. My existing platinum longs were purchased at $1072 and $885. I remain of the view that precious metals are still cheap and are to be bought on significant dips.
I also continue to hold my silver trading position, initiated at $23.7. I will buy more if the current reaction deepens.
I have been saying for months that I have purchase orders below the market in gold and silver. The first of these was triggered on August 9th. I was filled at $1702.3 including spread-bet dealing costs. My original positions were opened in Q4 2020 at $1879.2 and $1818.6. That reduces by average purchase price to $1800.
I still have additional bids in the market below prevailing prices in gold and silver and will leave them in place to take advantage of any possible additional volatility. These are leveraged trading positions rather than medium to long-term investments.
With baby steps trading one has to have high conviction prices will recover and the patience to buy on weakness before eventually being proved right; hopefully.
Among my investments, my original position in the VanEck Vectors Gold Miners ETF was purchased on March 25th at $20.12. I bought another unit at $35.79 on December 1st. I continue to shop for opportunities in the gold sector.
My two investment positions in Rolls Royce were purchased at 154.75 and 105p respectively. I also took up the rights issue which has resulted in an average purchase price of 54.63p. Rolls Royce has not participated in the stock market rebound of late and continues to form a first step above the Type-2 base formation.
Commentary by Eoin Treacy
The Chart Seminar 2022
Eoin Treacy’s view
With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022. Please drop [email protected] a line if you would be interested in attending an event next year, as well as your preferred location. At present the two locations with greatest demand are London and Dubai.
