Commentary by Eoin Treacy

Email of the day (1) – on rotation:

“ If my memory is right, you have been discussing potential rotation away from recently popular consumer stocks into beaten down mining and industrial stocks. I thought the graph below would be of interest. ”

My comment – Thank you for this long-term ratio which is sure to be of interest to subscribers and yes I have been discussing the potential for rotation in the Subscriber's Audio for the last couple of weeks.

Fullermoney has favoured the consumer sector for a number years because so many of these companies fit the requirements we look for in an Autonomy. They are truly global with household name brands that instil consumer loyalty. They have strong records of building businesses overseas and many are no longer dependent on their domestic markets to revenue growth. They tend to have strong balance sheets and a significant number have impressive records of dividend growth. The global population went from being mostly rural to mostly urban in the last few years. As cities grow, productivity tends to improves. The associated growth of the consumer sector represents a powerful investment proposition for the long-term.

However, despite the allure of the fundamental story, which an increasing number of people find inspiring, we can only deal with the reality provided by the market. The simple fact is that when prices become wildly divergent from a trend mean such as the 200-day MA, the temptation is to become more bullish because we want the good news to keep coming. However the risk of a reversion back towards that mean increases even as sentiment becomes progressively more complacent.

This section continues in the Subscriber's Area.

Soybean Futures Cap Longest Rally in 14 Months on China Imports – This article by Jeff Wilson for Bloomberg may be of interest to subscribers. Here is a section:

China's soybean imports will start surging from this month and jump 17 percent in the season beginning Aug. 1 to 68 million tons, Hamburg-based researcher Oil World said May 21. U.S. reserves on Aug. 31 will shrink to 125 million bushels, the lowest since 2004, the USDA predicted on May 10. As a percentage of consumption, inventories will be the smallest since at least 1961.

Prices also rose on speculation that new rules from China to control capital inflows may end commodity-financing deals, forcing the country's importers to buy futures to lock in purchases, Gerlach said. The National Business Daily reported yesterday some banks have stopped issuing letters of credit for copper importers after a government crackdown on hot-money flows.

“Talk that Chinese crushers are buying futures to lock in shipments because of the crackdown on financing is adding to the surge in prices today,” Gerlach said. “The only way to ration supply is to make it uneconomical to use the commodity.”

My view – Soybeans has been notable for its relative strength in the grain and bear complex but encountered resistance today in the region of the psychological 1500¢. A sustained move above that level will be required to indicate a return to demand dominance beyond the short-term.

Email of the day (2) – on the effect of low natural gas prices and state-sponsored wind (no pun intended) on nuclear:

http://csis.org/publication/wisconsin-nuclear-plant-retires-early-because-market-forces-and-federal-and-state-govern

“The bottom line - a significant portion of US nuclear power plants may be at risk of becoming uneconomical to operate - details in the article. I had not considered this aspect of the ongoing switch to gas fired generation for new power plants, coupled with the ongoing governmental subsidization of the mostly uneconomic alternative energy projects.”

My comment – Thank you for this educative article contributed in the spirit of Empowerment Through Knowledge. Here is a section:

Q3: Will the economic outlook for merchant nuclear plants improve in the long run?

A3: By the end of this decade, market analysts predict that about 50 GW of coal-fired capacity will retire from the grid because of EPA regulations and low efficiency. Further, if the EPA is successful in regulating greenhouse gas emissions from new and existing power plants, more coal plants will be driven from the market in increasing numbers.

We expect natural gas to benefit the most from the departure of coal from the grid, but fuel switching from coal to natural gas will increase prices for that feedstock, which will improve the outlook for nuclear in some merchant markets. Civil nuclear power will still face significant obstacles from government renewable mandates in all competitive markets, but particularly in states that are pushing for higher and higher levels of subsidized renewable penetration, as well as in states that are establishing challenging efficiency targets.

The advent of unconventional natural gas remains a game changer for the energy sector and represents a disruptive influence on more established electricity production. While we tend to focus most acutely on the relative performance of natural gas prices compared to coal and oil, the political and regulatory environment are also powerful factors in this sector. Natural gas does not pollute to the same extent as coal. It does not have the waste issues of nuclear but it does provide base load which is a major challenge for wind.

This section continues in the Subscriber's Area.

Email of the day (3) – on an addition to the Chart Library:

“May I request you to kindly add the chart for INXG.L - I SHARES II PLC I SHARES BARC GBP, which is an ETF for inflation linked gilts, to our chart library? Thanks and regards”

My comment - Thank you for this suggestion which has been added to the Chart Library.


Please note - David is on holiday and will return to the office on June 4th.

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