ColinTwiggs, Author at the patient investor

November 4, 2014

S&P 500 and Nasdaq retracement

The S&P 500 is likely to retrace to test the new support level at 2000. Respect would confirm a fresh advance with a target of 2150*. Rising 13-week Twiggs Money Flow indicates buying pressure. Reversal below 2000 is unlikely, but would warn of a bull trap (correction).

S&P 500

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 14 continues to indicate low risk typical of a bull market.

VIX Index

The Nasdaq 100 is in a similar situation, having broken resistance at 4100. Retracement that respects support at 4000 would confirm a fresh advance, offering a target of 4500*. Recovery of 13-week Twiggs Money Flow above 35% would flag buying pressure.

Nasdaq 100

* Target calculation: 4100 + ( 4100 – 3700 ) = 4500

November 3, 2014

US Freight Transport Index

Looks like a robust recovery to me.

US Freight Transport Services Index

November 3, 2014

Is Mathias Cormann acting in investors’ best interest — or the banks?

Chris Joye from the AFR comments on Finance Minister Mathias Cormann’s final Future of Financial Advice (FoFA) bill:

Cormann seeks to assure consumers that a commission “is banned if it is made solely because a product . . . has been sold”.

This is part of his new definition of a commission, which lawyers say bears no resemblance to the real legal meaning of commissions under precedent laws.

The word “solely” makes the definition a farce. Cormann’s explanatory statement says: “If an employee [had] to meet a reasonable target – [like] selling 1000 products – as well as a compliance target . . . the payment would not be made solely because of general advice [and] . . . would be permitted.” In every other universe, these payments are a “commission” and/or “conflicted remuneration”.

I do not have a problem with the Coalition’s changes to the laws on “general advice”. Companies should be free to motivate sales staff, as is the case across the rest of the economy.

My main concern is with Cormann’s modifications to the “personal advice” laws, which allow planners to earn up to 10 per cent of their total remuneration in sales bonuses partly determined by how many products they sell to customers relying on personal advice.

Cormann’s logic is because he has exempted these “performance bonuses” – which planners do not support – from the ban on conflicted remuneration, they are not conflicted remuneration: “With personal advice the requirements are very stringent, so all remuneration that would conflict the advice given is banned, and the overarching requirement for the adviser to act in the best interests of the client remains in place.”

Conflicts of interest are rife in the provision of financial advice. Removal of the overriding requirement that an adviser act ‘in the best interest’ of their client leaves the door open to an array of abuses. The argument that advisers are already obliged to act in the client’s best interest is not an argument against removal of the provision. If the obligation is already implied, making it an express obligation would simply reinforce this by removing any doubt.

In my view, advisers offering personal advice should not receive any (material) incentive for recommending specific products. That would limit the potential for any conflict of interest and improve public perception of adviser integrity. And where general advice is offered, the adviser should be required to (prominently) notify readers or listeners that they (the adviser) receive incentive payments based on the products they recommend. After all, the primary concern of the industry should be to protect the consumer. In doing so, advisers will benefit from an enhanced reputation and trust from the community.

November 3, 2014

Increasing bank capital is in the interest of shareholders

Westpac CEO Gail Kelly warns that all Australians will have to carry the cost of making the financial system safer:

“Of course you can ever increase capital and become ever more safe, but that does come at a cost. The increasing of capital ends up having ultimately having a diminishing return in terms of safety, but the costs are real, capital is not free. Those costs will flow through to impact the economy more broadly, noticing and noting that banks are strong intermediaries within the Australian economy.”

What Gail fails to consider is that Australians already carry the cost of an unsafe banking system, with the broad economy contracting when banks suffer solvency or liquidity problems. And the taxpayer effectively stands as guarantor in the event of a failure.

I agree that capital comes at a cost — higher than the direct cost of deposit funding which capital would partially replace. But when one factors in the cost of the vast infrastructure required to attract and service those deposits, the margin narrows. Increasing the level of capital will also make banks safer and reduce the risk premium, further lowering the average cost of capital. And not only for equity: improved risk ratings will lower the cost of deposit-funding as well.

Banks with higher capital ratios also benefit from higher asset and loan growth according to studies conducted by the Bank for International Settlements.

Making the banking system safer is not only in the interests of the taxpayer, but also bank shareholders.

November 3, 2014

Europe’s Energy Essentials by Ana Palacio | Project Syndicate

Ana Palacio on Europe’s energy challenge:

Energy’s emergence as a focal point for European leaders makes sense, given that it lies at the confluence of the three existential threats facing the European Union: a revisionist Russia, the declining competitiveness of European businesses, and climate change.

….The most tangible element of the EU’s emerging energy-policy framework is the internal energy market, which, once completed, will allow for the unimpeded flow of energy and related investments throughout the EU. Such an integrated energy market would lead to significant savings – estimates go as high as €40 billion ($51 billion) annually by 2030 – thereby providing a much-needed competitiveness boost.

The internal energy market would enhance Europe’s energy security as well…. individual countries are often excessively dependent on a single source and, more dangerously, a single supplier: Russia. Unrestricted energy flows within the EU would mitigate the risks of supply disruptions or shocks.

November 2, 2014

S&P 500 Prime Momentum 12 month performance

S&P 500 Prime Momentum

The S&P 500 Prime Momentum strategy has now been running for twelve months, since November 2013, and returned 17.46%* for the period compared to 17.27% for the S&P 500 Total Return Index. This is below the average return for the 1996 to 2013 research period and is attributable to the sell-off of momentum stocks in recent months. Macroeconomic and volatility filters continue to indicate low to moderate risk typical of a bull market and we expect stocks to recover in the months ahead.

* Results are unaudited and subject to revision.

November 2, 2014

The western model is broken | Pankaj Mishra | The Guardian

Pankaj Mishra opines:

….economic power had begun to shift from the west. The Chinese, who had “got capitalism”, were, after all, now “downloading western apps”, according to Niall Ferguson. As late as 2008, Fareed Zakaria declared in his much-cited book, The Post-American World, that “the rise of the rest is a consequence of American ideas and actions” and that “the world is going America’s way”, with countries “becoming more open, market-friendly and democratic”.

One event after another in recent months has cruelly exposed such facile narratives. China, though market-friendly, looks further from democracy than before. The experiment with free-market capitalism in Russia has entrenched a kleptocratic regime with a messianic belief in Russian supremacism. Authoritarian leaders, anti-democratic backlashes and rightwing extremism define the politics of even such ostensibly democratic countries as India, Israel, Sri Lanka, Thailand and Turkey….

I don’t agree. This is not a conflict between East and West or between capitalism and communism/socialism, but between totalitarianism and liberal democracy — a people’s right to govern themselves. Western forms of liberal democracy are mostly flawed, with many governments effectively hijacked by special interest groups whose needs determine government priorities. Russia is just a more extreme example of the situation in Washington DC.

Only by evolving new forms of liberal democracy, with more direct representation, are we likely to ensure its survival. We presently see many attempts at establishing new democracies fail because too much power is concentrated in the hands of a single individual or group. Only when power is shared between all major parties/interest groups, as in the Swiss system, are we likely to improve the success rate. It will take time to learn these lessons, but history is patient. The timescale is measured not in years but in decades, if not centuries.

November 1, 2014

The Global Drop in Oil Prices | Stratfor

Stratfor Vice President of Global Analysis Reva Bhalla and Global Energy Analyst Matt Bey discuss highlights of an upcoming series on the geopolitical impact of oil below $90 a barrel.

November 1, 2014

Gold breaks support

Gold broke support at $1200/$1180 per ounce, signaling another (primary) decline. 13-Week Twiggs Momentum peaks below zero strengthens the signal. The long-term target is $1000*. Recovery above 1200 is unlikely, but would warn of a bear trap.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

November 1, 2014

Dow and S&P 500 make new highs

US stocks have reaffirmed their bull market
European stocks are recovering
China and Japan signal up-trends
ASX is rising
Gold is falling

The new reporting season is under way and fund managers are now looking for opportunities rather than selling off under-performers.

Dow Jones Industrial Average made a new high, above 17300, signaling a primary advance. Reversal below 17000 and the rising trendline is most unlikely, but would warn of another correction. Target for the advance is 18000*.

Dow Jones Industrial Average

* Target calculation: 17000 + ( 17000 – 16000 ) = 18000

The S&P 500 similarly made a new high, signaling a fresh advance. Rising 13-week Twiggs Money Flow (above zero) indicates medium-term buying pressure. Target for the advance is 2150*. Reversal below 2000 and the rising trendline is unlikely, but would signal another correction.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1850 ) = 2150

CBOE Volatility Index (VIX) at 14 indicates low risk typical of a bull market.

S&P 500 VIX

Dow Jones Euro Stoxx 50 continues to advance above its former primary support level at 3000. Long tails on the weekly candlesticks and recovery of 13-week Twiggs Money Flow above zero indicate buying pressure. Expect another test of 3300. Reversal below 3000 is less likely, but would signal a primary down-trend.

Dow Jones Euro Stoxx 50

* Target calculation: 3000 – ( 3300 – 3000 ) = 2700

China’s Shanghai Composite Index rallied above its recent high at 2400, confirming a primary up-trend. Target for the new advance is 2500*. and the rising trendline, warning of a correction. Rising 13-week Twiggs Money Flow trough (above zero) indicates medium-term buying pressure; completion of a trough high above zero would signal trend strength.

Shanghai Composite Index

* Target calculation: 2400 + ( 2400 – 2300 ) = 2500

Japan’s Nikkei 225 Index broke resistance at 16300, signaling an advance with a long-term target of 18000*. Reversal below 16000 is unlikely, but would warn of another correction.

Nikkei 225 Index

* Target calculation: 16000 + ( 16000 – 14000 ) = 18000

The ASX 200 is headed for a test of resistance at 5660. Brief retracement at 5440 and rising 21-day Twiggs Money Flow (above zero) both indicate medium-term buying pressure. Reversal below 5440 is unlikely, but would indicate a test of 5250. I have lowered the target to 6000* because of constant back-filling in recent months.

ASX 200

* Target calculation: 5650 + ( 5650 – 5300 ) = 6000