ColinTwiggs, Author at the patient investor

November 11, 2013

NAB Convertible Pref issue | FIIG

From FIIG Newswire:

National Australia Bank Limited (ASX:NAB) has announced to the ASX the issue of a listed, floating rate convertible preference share (\”CPS II\”) with an indicative dividend of 325 to 340 bps over the bank bill swap rate. NAB is seeking to raise $750,000,000 for general corporate purposes. APRA has confirmed that the CPS II will count as additional Tier 1 Capital, supporting the NAB\’s regulatory capital requirements.

A welcome move to see the big four banks raising more Tier 1 capital. My view is that TBTF banks should have a minimum leverage ratio of 10 percent — more than double the current 4 to 5 percent.

Ending Too Big to Fail | The Big Picture

From an address by William C. Dudley, President of the NY Fed, to the Global Economic Policy Forum, November 8, 2013:

There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed. Tough enforcement and high penalties will certainly help focus management’s attention on this issue. But I am also hopeful that ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.

Dudley calls for increased capital requirements to reduce the risk of failure as well as more robust procedures to reduce the impact of a single large failure:

The major initiative here is the single point of entry framework for resolution proposed by the Federal Deposit Insurance Corporation. Under this framework, if a financial firm is to be resolved under Title II of the Dodd-Frank Act, the FDIC will place the top tier bank holding company into receivership and its assets will be transferred to a bridge holding company. The equity holders will be wiped out and sufficient long-term unsecured debt will be converted into equity in the new bridge company to cover any remaining losses and to ensure that the new entity is well capitalized and deemed creditworthy. Subsidiaries would continue to operate, which should limit the incentives for customers to run. By assigning losses to shareholders and unsecured creditors of the holding company and transferring sound operating subsidiaries to a new solvent entity, such a “top-down” resolution strategy should ensure continuity with respect to any critical services performed by the firm’s subsidiaries and this should help limit the magnitude of any negative externalities.

November 6, 2013

Is the market in a bubble?

As global growth recovers we expect equity markets to be buoyed by improvements in both earnings and dividends, with strong momentum over the quarter. There is much discussion in the media as to whether various markets are in a “bubble”. Little attention is devoted to the fact that bubbles can last for several years, and sometimes even decades. The main driver of both stock market bubbles and real estate bubbles is debt. Anna Schwartz, co-author with Milton Friedman of A Monetary History of the United States (1963) described the relationship to the Wall Street Journal:

If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates …..

Currently, there is evidence of expansive monetary policy from the Fed, but the overall impact on the financial markets is muted. Most of the QE bond purchases are being parked by banks in interest-bearing, excess reserve deposits at the Fed. The chart below compares Fed balance sheet expansion (QE) to the increase in excess reserve deposits at the Fed.

US Household Debt

A classic placebo effect, the Fed is well aware that the major benefit of their quantitative easing program is psychological: there is little monetary impact on the markets.

Corporate debt (green line below) is expanding rapidly as corporations take advantage of the opportunity to issue new debt at low interest rates, but household debt (red) is still shrinking.

US Household Debt

There are pockets of concern, like the rapid recovery in NYSE margin debt, but risk of a Dotcom-style stock market bubble or a 2002/2007 housing bubble is low while household debt contracts.

Australia

Australian personal debt (included with household debt in the US chart) and corporate debt growth are both close to zero. Household debt, while also low, appears to have bottomed. Resurgence above 10% would be cause for concern.

RBA Household Debt

November 5, 2013

Asia: India breaks out, ASX near target

India’s Sensex broke out above its 2007 and 2010 highs at 21000. Expect retracement to test the new support level. Respect would signal a primary advance with a target of 24000*. Rising 13-week Twiggs Money Flow suggests medium-term buying pressure. Reversal below 20500 is unlikely, but would warn of a correction to primary support at 18000.

Sensex

* Target calculation: 21000 + ( 21000 – 18000 ) = 24000

Japan’s Nikkei 225 again respected resistance at 15000. Declining 13-week Twiggs Money Flow suggests medium-term selling pressure. Breakout above 15000 would signal an advance to 17500*, but reversal below the October low is more likely and would test primary support at 13200, penetration of the rising trendline warning of trend weakness.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 12500 ) = 17500

Singapore’s Straits Times Index is heading for another test of long-term resistance at 3300. Breakout would signal a primary advance to 3600*. But 13-week Twiggs Momentum below zero warns of a primary down-trend and reversal below the rising trendline would strengthen the signal. Breach of support at 3000 would confirm a primary down-trend.

Straits Times Index

* Target calculation: 3300 + ( 3300 – 3000 ) = 3600

China’s Shanghai Composite is consolidating below resistance at 2150/2160. Breakout below 2100 would signal a correction to primary support at 1950, while recovery above the upper trend channel at 2200 would suggest another advance; follow-through above 2250 confirming a primary up-trend. Declining 21-day Twiggs Money Flow indicates medium-term selling pressure, but respect of the zero line would suggest long-term support.

Shanghai Composite Index

Hong Kong’s Hang Seng is again testing resistance at 23500 on the weekly chart. Breakout would signal a primary advance, with a medium-term target of 24500 and a long-term target of 28000*. Follow-through above 24000 would confirm. Rising 13-week Twiggs Money Flow suggests medium-term buying pressure; a trough above zero would strengthen the signal. Reversal below 22500 is unlikely, but would warn of a correction to 21500 or the primary trendline.

Hang Seng Index

* Target calculation: 24000 + ( 24000 – 20000 ) = 28000

The ASX 200 found short-term support at 5390, short retracement suggesting buying pressure. Penetration of the descending trendline on 21-day Twiggs Money Flow, after a mild bearish divergence, would confirm this. Breakout above 5450 would test 5500, exceeding the target for the current advance. Respect of resistance remains as likely, however, and would warn of a correction to 5250/5300; confirmed if support at 5390 is broken. In the longer term, another Twiggs Money Flow trough above zero would suggest a healthy primary up-trend.

ASX 200

* Target calculation: 5300 + ( 5300 – 5150 ) = 5450

November 4, 2013

Europe tests key resistance levels

The monthly chart of the FTSE 100 is testing resistance at the 2007 high of 6750. Rising 13-week Twiggs Money Flow signals buying pressure. Breakout above 6750 would test the 1999/2000 high at 7000*. Respect of resistance (reversal below 6650) is unlikely, but would warn of a correction to primary support.

FTSE 100

* Target calculation: 6700 + ( 6700 – 6400 ) = 7000

Germany’s DAX found short-term resistance at 9000, but rising 13-week Twiggs Money Flow again signals buying pressure. Target for the current advance is 9300*. Reversal below 8500 is most unlikely, but would warn of a correction to the primary trendline around 8000.

DAX

* Target calculation: 8500 + ( 8500 – 7700 ) = 9300

Dax Volatility remains low, indicating bullish sentiment.

DAX

Dow Jones Euro Stoxx 50 is retracing to test support at its 2009/2011 high of 3050. Rising 13-week Twiggs Momentum continues to suggest a healthy up-trend. Respect of support at 3000 would signal another advance — a bullish sign for the European economy.

Euro Stoxx 50

* Target calculation: 2850 + ( 2850 – 2500 ) = 3200

November 4, 2013

Transport: Fedex improving outlook

Bellwether transport stock Fedex has risen dramatically in recent weeks, reflecting the improving outlook for economic activity.
Fedex

UPS has enjoyed a similar surge, as has Deutsche Post AG (which owns DHL).

Deutsche Post AG

November 3, 2013

Nasdaq accelerates while Dow and S&P500 hesitate

The Nasdaq 100 continues its accelerating up-trend — as indicated by successively steeper trendlines and a rising trendline on 13-week Twiggs Momentum. Accelerating trends, or blow-offs, are well-known for rapid gains but inevitably end with a sharp fall.

Nasdaq 100

* Target calculation: 2900 + ( 2900 – 2500 ) = 3400

The CBOE Volatility Index (VIX) remains below 15, indicating low market risk.

VIX Index

The S&P 500 is edging higher on the weekly chart, but bearish divergence on 13-week Twiggs Money Flow warns of rising selling pressure. Reversal below the secondary trendline at 1700 would indicate a correction to the primary trendline and primary support at 1630.

S&P 500

* Target calculation: 1730 + ( 1730 – 1650 ) = 1810

Dow Jones Industrial Average is testing resistance at 15700. Breakout would offer a target of 16600*. Respect of the descending trendline on 13-week Twiggs Money Flow, however, would confirm the earlier bearish divergence and warn of a correction to primary support at 14800. Breach of 14800 remains unlikely, but would signal a reversal.

Dow Jones Industrial Average

* Target calculation: 15700 + ( 15700 – 14800 ) = 16600

Canada’s TSX 60 is retracing after a strong spurt. Duration of retracements reflect trend strength. Another trough above zero on 13-week Twiggs Money Flow would suggest strong buying pressure. Reversal below 740 is most unlikely, but would warn of trend weakness.

TSX 60

* Target calculation: 740 + ( 740 – 680 ) = 800

TSX 60 VIX below 15 also reflects low market risk.

TSX 60 VIX

October 31, 2013

Forex: Euro & Aussie test support

The Euro is retracing to test the new support level at its February high of $1.37. Respect of the rising trendline would confirm a long-term advance to $1.46*. Troughs above zero on 13-week Twiggs Momentum indicate a healthy up-trend. Reversal below the trendline is unlikely, but would warn of a correction to the primary trendline and support at $1.31.

Euro/USD

* Target calculation: 1.37 + ( 1.37 – 1.28 ) = 1.46

Sterling broke medium-term support at €1.175, signaling a correction to test primary support at €1.14. Reversal of 13-week Twiggs Momentum below zero strengthens the warning. Recovery above resistance at €1.19 is unlikely, but would suggest an advance to €1.24*.

Sterling/Euro

* Target calculation: 1.19 + ( 1.19 – 1.14 ) = 1.24

A higher trough on the Greenback against the Yen suggests buying pressure. Breakout above ¥99 would strengthen the signal, offering a target of ¥101. 21-Day Twiggs Momentum appears to have leveled out and a trough above zero would indicate a primary up-trend. Reversal below support at ¥97 is unlikely, but would test primary support at ¥96.

USD/JPY

Canada’s Loonie retreated below support at $0.96 against its US neighbor. Breach of primary support at $0.9450 would signal continuation of the primary down-trend, as would another 13-week Twiggs Momentum peak below zero. Recovery above $0.96 is unlikely, but would warn of a trend reversal.

Canadian Loonie

The Aussie Dollar retraced to test medium-term support at $0.95* against the Greenback. Recovery above $0.9550 is likely and would indicate a test of parity*. Two doji candles suggest support and follow-through below $0.9450 is unlikely, indicating a fall to $0.93.

Aussie Dollar

* Target calculation: 0.975 + ( 0.975 – 0.95 ) = 1.00

The Aussie encountered resistance at $1.16 against its Kiwi neighbour, suggesting a test of medium-term support at $1.14. Respect of $1.14 would be bullish and breakout above $1.16 would complete a double-bottom reversal with a target of $1.20*. Failure of $1.14 is now unlikely, but would threaten primary support at $1.12.

Kiwi Dollar

* Target calculations: 1.16 + ( 1.16 – 1.12 ) = 1.20

October 30, 2013

Will dollar support stem gold & silver rise?

The Dollar Index found support at the 2012 low of 79 and is likely to test resistance at 80.50. Respect would confirm the primary down-trend, with a medium-term target of 77.50*. Breakout above 80.50 is unlikely, but would indicate strong support. The falling dollar is expected to boost gold and commodity prices.

Dollar Index

* Target calculation: 79 – ( 80.5 – 79 ) = 77.5

The yield on ten-year Treasury Notes found support at 2.50 percent and is expected to rally to test the descending trendline at 2.60 percent. Respect would signal a decline to 2.40 percent. Falling yields depress the dollar while lowering the opportunity cost of holding precious metals; both increasing upward pressure on gold. Respect of primary support at 2.40, however, would warn of an advance to 3.60 percent.

10-Year Treasury Yields

* Target calculation: 3.00 + ( 3.00 – 2.40 ) = 3.60

Gold

Spot gold is testing resistance at $1350/ounce. Breakout would indicate a primary advance to $1600*, while follow-through above $1425 would confirm. Respect of resistance is less likely, but would warn of another test of primary support at $1250.

Spot Gold

* Target calculation: 1425 + ( 1425 – 1250 ) = 1600

Silver is similarly testing resistance at $22.50/ounce. Follow-through above $23 would indicate a primary advance — confirmed if resistance at $25 is broken — while a fall below $22 would re-test primary support.

Spot Silver

Crude Oil

Nymex crude below medium-term support at $98/barrel and 13-week Twiggs Momentum crossing to below zero both warn of reversal to a primary down-trend. But recovery above resistance at $103 would negate this. Divergence of Brent crude reflects both a strengthening European recovery and continued supply threats in the Middle East.

Brent Crude and Nymex Crude

Commodity Prices

China, a primary driver of commodity prices, continues to offer mixed signals. The Shanghai Composite Index recovered above medium-term support at 2150, suggesting another test of the upper trend channel. A failed swing, or downward breakout from the trend channel, would warn of correction to test primary support at $1950; a bearish sign for commodity prices.

Shanghai Composite Index

Dow Jones-UBS Commodity Index continues to test medium-term support at 126. Breach would indicate a test of the primary level at 124. Recovery above 130 still seems more likely — and would signal a primary up-trend. A 13-week Twiggs Momentum peak below zero, however, would warn of a continuing down-trend.

Dow Jones UBS Commodities Index

* Target calculation: 130 + ( 130 – 125 ) = 135

Copper prices, bellwether for the global economy, tested 2011 lows at $6800/tonne over the last few months. Prices are now rallying to test resistance — and the descending trendline — at $7500/tonne. Breakout would signal a primary up-trend, as would recovery of 13-week Twiggs Momentum above zero; a bullish sign for the global economy.

Copper

October 28, 2013

Shanghai weakens, ASX unaffected

China’s Shanghai Composite index broke support at 2150, signaling a correction to test primary support at 1950. Declining 13-week Twiggs Money Flow indicates selling pressure. Follow-through below 2100 would confirm. Recovery above 2150 is less likely, but would suggest a bear trap.

Shanghai Composite Index

Japan’s Nikkei 225 respected resistance at 15000. Declining 13-week Twiggs Money Flow suggests medium-term selling pressure. Monday has so far posted gains and breakout above 15000 would signal an advance to 17500*, but reversal below the October low is as likely and would test primary support at 13200. Penetration of the rising trendline would warn of trend weakness.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 12500 ) = 17500

India’s Sensex respected its 2007 and 2010 highs at 21000, retracing to test support at 20500. Rising 13-week Twiggs Money Flow indicates buying pressure and breakout above 21000 would offer a long-term target of 24000*. Reversal below 20500 is unlikely, but would warn of another test of primary support at 18000.

Sensex

* Target calculation: 21000 + ( 21000 – 18000 ) = 24000

The ASX 200 posted a strong blue candle on Monday, but mild bearish divergence on 21-day Twiggs Money Flow warns the index is nearing its target and is due for retracement to test support at 5250/5300. In the longer term, however, troughs above zero reflect a healthy primary up-trend.

ASX 200

* Target calculation: 5300 + ( 5300 – 5150 ) = 5450