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Comments of the Day
20 October 2020
Video commentary for October 19th 2020
Eoin Treacy’s view
A link to today’s video commentary is posted in the Subscriber’s Area.
Some of the topics discussed include: stimulus remains illusive in the short-term, stock markets ease, Renminbi at new highs, gold, oil steady, bitcoin rallies, retailers very exposed to a lack of stimulus.
Infinite QE Was Always Unsaid by Fed. Until Now
This article by Brian Chappatta for Bloomberg may be of interest to subscribers. Here is a section:
Quarles is clearly uncomfortable with that kind of framing, judging by his need to interject that the Fed’s bond buying should be seen “not as a way of supporting the issuance of Treasuries, but as a way of supporting a functioning market in Treasuries.” But as much as he tries to draw a distinction, those two things are effectively one and the same. As I wrote last week, Fed Chair Jerome Powell and his colleagues could be much more forceful on the need for more fiscal spending if they wanted. All they would have to do is pledge to increase their monthly purchases of Treasuries in line with certain policy initiatives, such as extra unemployment benefits or funding for state and local governments. But that would give away the game, which is why they consistently describe their bond buying in terms like “market functioning.”
Quarles also took the rare step of walking back his remarks, saying at an event less than 24 hours later that “I wouldn’t want the comments that I made today about thinking about Treasury market structure to suggest that I think that there’s some need for some permanent backstop of the Treasury market in normal times.”
It’s hard to not interpret them in that way, but leaving that aside, I’d be curious what “normal times” means to Quarles and other Fed officials. There’s little doubt that its Treasury purchases — or even just the threat of ramping them up — helps to keep benchmark yields right about where the central bank wants them. And the Fed considers rock-bottom long-term borrowing costs as a complement to keeping the fed funds rate near zero to boost the economy. So is normal when the central bank is raising interest rates again? That, in turn, would mean U.S. inflation “has risen to 2% and is on track to moderately exceed 2% for some time,” per its new framework. That could be quite a while, indeed.
Eoin Treacy’s view
Unprecedented has the been the most overused word in 2020. However, the sheer scale of the changes that have taken place makes the current set of monetary and fiscal conditions unsuitable for direct historical comparison. In order to truly comprehend the breadth of the challenge we need to have some very long-term historical perspective.
Conoco to Buy Concho for $9.7 Billion to Create Shale Giant
This article by Kevin Crowley and David Wethe for Bloomberg may be of interest to subscribers. Here is a section:
Houston-based Conoco emerged from the oil market slump in a relatively strong position with about US$7 billion of cash on hand. It recently resumed share buybacks. But its growth outlook is challenged: second-quarter production was down by almost 25 per cent from a year earlier after it joined many other US drillers in curbing output in response to lower prices.
Adding Concho will dramatically alter its production profile. The Midland, Texas-based shale company is entirely focused on the Permian and pumped 319,000 barrels in the second quarter, about six times what Conoco produced there.
The combination will save US$500 million a year by 2022, and hand shareholders more than 30 per cent of cash from operations through dividends and other distributions, the companies said.
The Conoco-Concho deal may also signal further mergers and acquisitions in the sector. Despite a compelling rationale for more consolidation in order to cut costs, a lack of cash and Wall Street’s antipathy toward the sector has made it hard to get deals across the line.
Eoin Treacy’s view
The USA is the global swing producer of crude oil. Not only does it have ample supply but the government is not reliant on revenues from oil to support its social programs. Together with the unique production profile of unconventional wells, supply can be tailored to the price environment. The one challenge that has impacted profitability has been the high cost of production. The large number of independent producers has been a factor in that condition.
Email of the day – on zombie explorers
On zombie companies. I was very interested to hear your comments on zombie companies at the start of this week’s video. It seems to me that many of the mining exploration companies would come under this umbrella.
Some weeks ago, I decided, having done some prior research, to make an investment in one of these companies. I have reached an age where I am quite willing to put a small amount of my cash resources at risk.
I was also somewhat amused by the name of the company and its ticker, Alien metals (UFO). It had had a chequered history having traded at GBP5 a share at one point in 2011 but over subsequent years investors deserted the company to value the assets at a fraction of a penny.
Although making no profits, it has assets in the ground in Mexico and Western Australia. I purchased early in August, one million shares at 0.22 pence per share. As the belief stage sets in on the developing bull market in metals, it seems logical that more of these companies are going to be noticed by investors in the near future.
Eoin Treacy’s view
Thank you for this email and congratulations on taking opportunities in the market. I agree there is likely to be more interest in explorers for the simple reason that there have been no big gold discoveries in the last few years. Mining is an extractive industry and miners have to expand their reserves through exploration or acquisitions.
Eoin’s personal portfolio: investment position increased October 2nd
Eoin Treacy’s view
One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.
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