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Planned Obsolescence: The case for designing services with limited shelf life

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06 November 2018

 

 

Video commentary for November 5th 2018

 

 

Eoin Treacy's view

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics covered include: rotation underway in the major indices, they need to push back above their MAs but that might take a while, China eases, India firms, Australia somewhat oversold, Europe needs to hold its lows, Dollar eases, gold and oil quiet. 

 

 

Martin Spring's On Target

Thanks to the author for this edition of his wide-ranging report which may be of interest to subscribers. Here is a section on the outlook for stock markets.

There are no signs yet of imminent recession. Morgan Stanley says: “Consumer
confidence remains high and spending on services remains healthy.” There’s no significant weakness yet in “early-cycle” industries such as advertising or casinos.

We can expect the Fed to err on the side of caution in raising interest rates. Future earnings growth of around 10 per cent sounds fine to me. And nearly all commentaries about Trumpian policies are infested with emotion and ignore positive outcomes.

The fundamentals of the world economy remain sound. The US remains the world leader in the new technologies that drive much of the growth. China, we’re told, is “slowing down”… but to an incredible 6.2 per cent a year. India is doing even better. Europe, despite its crazy politics, doesn’t seem to face any credible major threats to its prosperity and abundant welfare systems.

All of which suggests that what the markets have been experiencing is nothing more than a major correction. Sentiment has been shocked by the speed and dimensions of the trend reversal. Those with lots of cash will hold back and not recommit till they see positive news. This suggests the probability that markets will soon stop falling, but they’re not likely to bounce back strongly for a while, and to trade in a range for some months to come.

But what if I’m wrong with my relative optimism? What if the current stock-market weakness is not merely a correction, a pause for consolidation after years of excitement, but an ominous signal of something much worse to come?

The Economist recently ran a speculative report on the subject of The Next Recession. Its big fear is that governments won’t be up to the job of taking swift action to deploy the many policy tools available to underpin economic growth and to drive recovery.

The traditional stimulus policy of easing credit won’t be available because interest rates are already too low, while going to the extreme of negative ones – charging interest on bank deposits or bonds -- is (probably correctly) viewed as too dangerous.

 

Eoin Treacy's view

Personally, I’m not convinced by the argument that central banks will not be able to ride to the rescue the next time we have a recession because interest rates are already too low. The simple fact is that when you control the money supply, and hold vast swathes of the bond market there is no limit to the number of extraordinary monetary and fiscal levers that can be deployed if the need arises. As we have learned over the last decade, just because it has never been done before does not mean it can’t be.

 

 

Hedge Fund Three Bays to Close After Poor Performance

This article from Yahoo may be of interest to subscribers. Here is a section:

Value investing, which was pioneered by Benjamin Graham and Warren Buffett, has struggled since 2015 as so-called growth stocks beat out their inexpensive brethren. Sidman joins a growing list of managers that have given up on the strategy. In the last week alone, Bloomberg has reported plans by both Chieftain Capital Management and SPO Partners & Co. to return client money. John Griffin closed Blue Ridge Capital last year. Another long-time value investor, Eddie Lampert, has been flailing after his bet on Sears Holdings Corp. went awry.

 

Eoin Treacy's view

Value strategies work best after a really big decline because they are oriented towards identifying the mispricing of individual stocks relative to their intrinsic value. However, they are prone to selling too early as prices advance for exactly the same reason.

 

 

Which individuals may be impacted by the ALP franking credit proposal?

This article by Dr.Don Hamson for Livewire may be of interest to subscribers. Here is a section:

Mrs H was a fully self-funded retiree, owning a modest home in the outer northern suburbs of a capital city, living off the income from a portfolio of direct shares and some bank deposits. Her assets, other than the home, totalled $650,000, with $50,000 in non-income bearing assets. Of her investments, $500,000 are invested in fully franked dividend paying Australian companies and $100,000 invested in term deposits and cash. Mrs H is ineligible for a part aged pension, since her assets exceed the maximum assets test level (currently $564,000 for a single homeowner).

Mrs H currently has a taxable income of $30,571. The $100,000 in deposits only earns $2,000 in interest, while the share portfolio yielded an average 4% cash dividend providing $20,000. Importantly the dividends were all fully franked, receiving $8,571 in franking credits (these are included in taxable income). With no tax payable due to the Seniors tax offset, Mrs H received a full refund of her franking credits, considerably boosting her cash income from $22,000 to $30,571.

Since Mrs H is not eligible for any pension entitlements, she would no longer receive those franking credits under the ALP proposal. The loss of $8,751 would reduce Mrs H’s income by 28%, reducing her weekly income by $165, from $588 per week to just $423 per week.

This means her income would actually fall below the full aged pension for a single homeowner ($23,889 p.a. or $916.30 per fortnight /$458.15 per week).

 

Eoin Treacy's view

Full franking on dividends is the number one topic of conversation that comes up when I have conducted The Chart Seminar in London. It has been one of the primary factors in Australian investors tending to favour their domestic market’s dividend paying stocks. Significant changes to the tax structure for dividends and pension could have a significant knock-on effect for the banks in particular because so many investors own them for income.

 

 

Planned Obsolescence: The case for designing services with limited shelf life

This article by Paul Taylor included this interesting graphic which I thought may be of interest to subscribers.

 

Eoin Treacy's view

Obsolescence by design is a major component of the business plans for just about all manufacturing companies. A friend of ours is the world’s largest manufacturer of the sensors in elevator doors. He has stated on more than one occasion that the business would not exist if the sensors did not fail after approximately 15 months, so that is how they design their products. It’s what keeps cashflow moving.

 

 

Long-term themes review October 29th 2018

 

 

Eoin Treacy's view

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities.

2018 has represented a loss of uptrend consistency for the S&P500 following a particularly impressive and persistent advance in 2016 and 2017. Many people are therefore asking whether this is a medium-term correction or a top. There is perhaps no more important question so let’s just focus on that for the moment.

 

 

The 49th year of The Chart Seminar

 

 

Eoin Treacy's view

The next Chart Seminar will be held on 12 and 13 November 2018 at The Army and Navy Club in London.

If you have an interest in attending an online Chart Seminar please contact Sarah and we will arrange times based on the time zones of those who wish to attend.

I am also in initial discussions with a potential partner about organising a New York Seminar.

If you would like to attend or have a suggestion for another venue please feel to reach out to Sarah at [email protected].  

The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non EU residents are not liable for VAT). 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.

 

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