ColinTwiggs, Author at the patient investor

August 22, 2014

Bank Watch: US Tsy’s OFR Finds Risk Weighting Has No Clothes | MNI

Denny Gulino writes on recent research commissioned by Treasury Department’s Office of Financial Research (“OFR”) to investigate the validity of using risk-weightings to determine bank capital requirements:

On risk weighting, OFR commissioned researchers Paul Glasserman at Columbia University and Wanmo Kang of the Korea Advanced Institute of Science and Technology to examine the subject from the ground up. As much as the practice has been incorporated in regulatory parlance, they were able to find very little other research on the validity of the weighting methodology.

“Risk weights implicitly assign prices in terms of additional capital to asset categories and thus inevitably create incentives for banks to choose some assets over others,” they wrote.

“Surprisingly,” they went on, “the ideal risk weights turn out to have little to do with risk and are instead proportional to the profitability on each asset.”

August 22, 2014

Paul Krugman: Hawks Crying Wolf | NYTimes.com

According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation…

…The Times article singles out for special mention Charles Plosser of the Philadelphia Fed, who is, indeed, warning about inflation risks. But you should know that he warned about the danger of rising inflation in 2008. He warned about it in 2009. He did the same in 2010, 2011, 2012 and 2013. He was wrong each time, but, undaunted, he’s now doing it again…

August 21, 2014

Barack Obama: Foreign policy realist?

Harvard professor, Stephen M Walt says Barack Obama isn’t weak and waffling — he’s calculating, coldhearted, and decisive when it counts:

….One can even see elements of this approach in Obama’s handling of China. He has repeatedly emphasized Asia’s importance to the United States, and the much-publicized “rebalancing” was obviously intended to signal to America’s Asian partners that it wasn’t abandoning the region. Obama reinforced these themes during his visit to Asia in April, but the administration has implemented this policy at a measured pace, content to let China’s growing assertiveness do the work for us. Overreacting would alarm the local powers and let them continue to free-ride, while speaking softly makes present and future allies more eager for help and more willing to do what America wants to get it.

The common thread to these various responses is an appreciation not just of the limits of U.S. power, but also of the limited need to exercise it. “Limited” does not mean zero, which is why sensible people oppose a return to 19th-century-style isolationism. But this approach recognizes that the overwhelming majority of problems in the world do not threaten the United States directly and therefore do not require an immediate, forceful, and potentially costly U.S. response.

As Andrew Sullivan likes to say, Obama’s greatest political genius has been his Road Runner-like ability to let enemies beat themselves.

August 21, 2014

Rare mid-sized black hole

From NASA:

M82 X-1 is the brightest X-ray source in Messier 82, a galaxy located about 12 million light-years away in the constellation Ursa Major. While astronomers have suspected the object of being a midsize, or intermediate-mass, black hole for at least a decade, estimates have varied from 20 to 1,000 solar masses, preventing a definitive classification.

Working with Mushotzky and Strohmayer, UMCP graduate student Dheeraj Pasham sifted through about 800 RXTE observations of M82 in a search for specific types of brightness changes that would help pin down the mass of the X-ray source.

As gas streams toward the black hole it piles up into a disk around it. Friction within the disk heats the gas to millions of degrees, which is hot enough to emit X-rays. Cyclical intensity variations in these X-rays reflect processes occurring within the disk.

Scientists think the most rapid changes occur near the inner edge of the disk on the brink of the black hole’s event horizon, the point beyond which nothing, not even light, can escape. With such close proximity to the black hole, the effects of Einstein’s general relativity come into play, resulting in X-ray variations that repeat at nearly regular intervals…..

So that’s what happened to that stock I once bought on a hot tip 🙂

August 21, 2014

The Stock Market’s Missing Ingredient | Bloomberg View

Barry Ritholz discusses why military conflicts around the globe and civil strife in Ferguson, Missouri have little impact on market performance:

….None of this seems to matter to Mr. Market. He continues to power on, oblivious to issues that don’t affect corporate earnings. They have, by the way, been stellar, growing at a 9 percent annual rate. Meanwhile, interest rates are still low and inflation is subdued.

Rarely have conditions for market gains been so promising at a time when investor psychology has been so negative. Gallup reports that only 7 percent of those surveyed were aware of last year’s scorching [29.7%] gains in the Standard & Poor’s 500 Index.

via The Stock Market's Missing Ingredient – Bloomberg View.

August 21, 2014

Paul Krugman: Why We Fight Wars | NYTimes.com

…Once upon a time wars were fought for fun and profit; when Rome overran Asia Minor or Spain conquered Peru, it was all about the gold and silver. And that kind of thing still happens. In influential research sponsored by the World Bank, the Oxford economist Paul Collier has shown that the best predictor of civil war, which is all too common in poor countries, is the availability of lootable resources like diamonds. Whatever other reasons rebels cite for their actions seem to be mainly after-the-fact rationalizations. War in the preindustrial world was and still is more like a contest among crime families over who gets to control the rackets than a fight over principles.

If you’re a modern, wealthy nation, however, war — even easy, victorious war — doesn’t pay….We might add that modern war is very, very expensive….So the thesis of “The Great Illusion” was right: Modern nations can’t enrich themselves by waging war. Yet wars keep happening. Why?

One answer is that leaders may not understand the arithmetic…..The larger problem, however, is that governments all too often gain politically from war, even if the war in question makes no sense in terms of national interests.

August 21, 2014

Dollar surges as crude falls

Dollar surges
Treasury yields rally, but the trend is down
Crude oil prices fall
Gold uncertainty continues

Interest Rates and the Dollar

The Dollar Index followed through above resistance at 81.50, signaling a long-term advance to test the 2013 highs at 84.50. Recovery of 13-week Twiggs Momentum above zero strengthens the signal. Reversal below 81.50 is most unlikely, but would warn of another test of support at 80.00.

Dollar Index

* Target calculation: 81.50 – ( 81.50 – 79.00 ) = 84.00

The yield on ten-year Treasury Notes recovered above support at 2.40 percent, but the primary trend is downward. Respect of the descending trendline is likely and reversal below 2.40 would confirm a decline to 2.00 percent*. 13-Week Twiggs Momentum holding below zero strengthens the bear signal. Recovery above the descending trendline is unlikely, but would suggest a rally to 2.65/2.70 percent.

10-Year Treasury Yields

* Target calculation: 2.50 – ( 3.00 – 2.50 ) = 2.00

There are two factors driving the fall in long-term interest rates. The first is aggressive purchases of US treasuries by China in order to maintain a weak yuan. The second is the abysmal state of the employment market when we look past the official unemployment figures. Employment levels for males in the 25 to 54 age group remain roughly 6% — and females 5% — below their previous high.

Employment levels

Gold

Gold is consolidating in a triangle pattern, between $1200 and $1400/ounce. Price action is now too close to the apex (“>”) of the triangle for breakouts to be reliable, but breach of support at $1280 would test $1240, while breakout above $1320 would test $1350. Oscillation of 13-week Twiggs Momentum close to zero continues to signal hesitancy. In the longer term, recovery above $1350 would indicate a primary up-trend, while breach of support at $1240/$1250 would signal a down-trend.

Spot Gold

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

Declining crude prices may be contributing to lower inflation expectations and weaker gold demand (as an inflation hedge). Brent Crude breach of $99/barrel would confirm a primary down-trend as would Nymex WTI crude below $92/barrel.

Gold and Crude

August 19, 2014

The Battle for Donetsk Reveals a Resigned Populace | SPIEGEL ONLINE

From Christian Neef in Donetsk:

Could it be that the much discussed conflict between the Russians, the West and the eastern Ukrainians doesn’t really exist? The longer I am in this city, the more I believe that much of what is said about the war in eastern Ukraine isn’t true. Others have imported the conflict…..

August 19, 2014

ASX 200 strong rally

The ASX 200 is rallying strongly, led by US and Chinese markets. Breakout above 5650 would indicate an advance to 5750. Completion of another 13-week Twiggs Money Flow trough above zero would strengthen the signal. Reversal below the rising trendline is unlikely, but would warn of a test of primary support at 5050.

ASX 200

* Target calculation: 5550 + ( 5550 – 5350 ) = 5750

Retreat of the ASX 200 VIX below 12 indicates low risk typical of a bull market.

ASX 200

August 19, 2014

China leads Asian recovery

Hong Kong’s Hang Seng Index is testing its 2010 high at 25000. Breakout would confirm a primary advance, with a target of 27000*. A 13-week Twiggs Money Flow trough at zero indicates long-term buying pressure. Reversal below 24000 is unlikely, but would warn of a correction to the rising trendline.

Hang Seng Index

* Long-term target calculation: 24000 + ( 24000 – 21000 ) = 27000

China’s Shanghai Composite Index is testing resistance at 2250. Breakout would confirm a primary up-trend. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Reversal below 2150 is unlikely, but would warn of another test of primary support at 1990/2000.

Shanghai Composite Index

* Target calculation: 2250 + ( 2250 – 2000 ) = 2500

India’s Sensex recovered above 26000, offering a target of 27000*. Declining 13-week Twiggs Money Flow continues to warn of selling pressure, but respect of the zero line and recovery above 10% would indicate that buyers have taken control. Reversal below the secondary trendline is unlikely, but would indicate a correction to the primary trendline.

Sensex

* Target calculation: 21000 + ( 21000 – 15000 ) = 27000

Dow Jones Japan Index is testing resistance at 86/87 on the weekly chart. Breakout would suggest a primary advance. Reversal below 82 is unlikely, but would warn of a test of primary support at 74.

Dow Jones Japan Index