ColinTwiggs, Author at the patient investor

March 25, 2017

More evidence of a bull market, except in Australia

One of my favorite indicators of financial market stress is Corporate bond spreads. The premium charged on the lowest level of investment-grade corporate bonds, over the equivalent 10-year Treasury yield, is a great measure of the level of financial market stress.

Moodys 10-year BAA minus Treasury yields

Levels below 2 percent — not seen since 2004 – 2007 and 1994 – 1998 before that — are indicative of a raging bull market. The current level of 2.24 percent is slightly higher, reflecting some caution, but way below elevated levels around 3 percent.

The Financial Stress Index from St Louis Fed measures the degree of stress in financial markets. Constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. The average value of the index is designed to be zero (representing normal market conditions); values below zero suggest low financial stress, while values above zero suggest high market stress.

St Louis Financial Stress Index

Current levels, below -1, also indicate unusually low levels of financial market stress.

Leading Index

The Leading Index from the Philadelphia Fed has declined slightly in recent years but remains healthy, at above 1 percent.

Philadelphia Fed Leading Index

Currency in Circulation

Most recessions are preceded by growth in currency in circulation falling below 5 percent, warning that the economy is contracting.

Currency in Circulation

Current levels, above 5 percent, reflect healthy financial markets.

Australia

On the other side of the Pacific, currency growth is shrinking, below 5 percent for the first time in 7 years. A sustained fall would warn that the economy is contracting.

Australia: Money Supply

Further rate cuts, to stimulate the economy, are unlikely. The ratio of Household Debt to Disposable Income is climbing and the RBA would be reluctant to add more fuel to the bonfire.

Australia: Household Debt

There is no immediate pressure on the RBA to raise interest rates, but when the time comes the impact on the housing market could be devastating.

March 24, 2017

Dow warns of a correction

The commentator’s curse. Three days after I posted that Dow Jones Industrial Average was consolidating in a bullish narrow band below resistance at 21000, the Dow breached support at 20800. Downward breakout warns of a correction with support at 20000. Declining 21-day Twiggs Money Flow indicates medium-term selling pressure. Follow-through below 20600 would strengthen the (medium-term) bear signal but the primary trend remains up.

Dow Jones Industrial Average

The false break above 21000 was a hint that all was not well with the trend. Unfortunately we often only see what we expect and miss the subtle clues.

The Dow is in Stage III of a bull market. This is confirmed by a primary up-trend on the Transportation Average, although the current month shows a correction.

Dow Jones Transportation Average

Small Caps indexes like the Russell 2000 also display a strong up-trend, reinforcing the Stage III conclusion.

Russell 2000 Small Caps

Likewise, the Nasdaq 100.

Nasdaq 100

I have not drawn conventional trendlines, on the above charts, through the lowest points in the up-trend. Instead I have dragged a linear regression line down to “touch” the mid-point lows. I find this offers a better fit in many cases where there is an initial (bounce) spurt at the start of the trend.

March 24, 2017

Gold benefits from Dollar fall

The Dollar Index continues its downward path, having breached support at 100. Follow-through below the rising trendline at 99 would warn of a test of primary support at 93.

Dollar Index

Spot Gold has benefited. Currently testing resistance at $1250/ounce, narrow consolidation is a bullish sign. Follow-through above $1260 would confirm a target of $1300. Crossover of 13-week Momentum to above zero is also bullish, suggesting a primary up-trend.

Spot Gold

March 24, 2017

ASX stalls at 5800

Banks have run into resistance, with the ASX 300 Banks Index retreating below 9000. The recent false break (above 9000) is a mildly bearish sign but the long-tail on this week’s candle is mildly bullish. Follow-through above 9100 remains more likely and would signal an advance to 9500*.

ASX 300 Banks

* Target medium-term: 9000 + ( 9000 – 8500 ) = 9500

This is not a criticism of the policy, but recent rate hikes on investor mortgages become a self-fulfilling prophecy. Concerns about the housing market lead banks to hike rates. Higher rates discourage new borrowing, leading to a contraction in demand. Which in turn leads to lower house prices.

Miners continue their downward path. The ASX 300 Metals & Mining Index has broken its long-term rising trendline, while Declining Twiggs Money Flow peaks below zero warn of strong selling pressure.

ASX 200

With its two biggest sectors meeting resistance, the ASX 200 is stuck at 5800. But rising troughs on Twiggs Money Flow (above zero) signal buying pressure. Breakout above 5800 is likely and would signal a test of 6000*. Reversal below 5600 is unlikely but would warn of a correction.

ASX 200

* Target medium-term: 5800 + ( 5800 – 5600 ) = 6000

March 23, 2017

Who controls the media? Google is about to find out

From The Age:

Google’s advertising crisis went global after some of the biggest marketers including AT&T and Johnson & Johnson halted spending on YouTube and the internet company’s display network, citing concern their ads would run alongside offensive videos.

The controversy erupted last week after the London-based Times newspaper reported that some ads were running with YouTube videos that promoted terrorism or anti-Semitism.

….Search represents the lion’s share of Google’s advertising revenue, which totalled $US79.4 billion ($104 billion) last year.

Google is about to discover who controls media. Noam Chomsky was right all along. The media is not controlled by shareholders — nor the Illuminati as conspiracy theorists would have us believe — but by advertisers.

No private media outlet is going to bite the hand that feeds and run material that offends its biggest advertisers. That explains why mainstream media, instead of being at the forefront, were the last to discover that tobacco smoking is harmful to your health. And still haven’t awoken to the enormous social damage caused by alcohol. Because Tobacco and Alcohol were (and in the latter case still is) some of the biggest advertisers in mainstream media.

Watch how quickly Google responds to the current furore by changing its censorship of offensive content.

March 21, 2017

S&P 500 Bollinger Band Squeeze

John Bollinger says that a Band Width squeeze has preceded many spectacular moves on the S&P 500. A Bollinger Band squeeze highlights when the bands contract into a narrow “neck” indicating low volatility. The squeeze is normally signaled by a fall in the Band Width indicator to below 2.0%.

S&P 500

Upward breakout from a narrow “squeeze” in late January flagged a strong advance, from 2280 to 2400.

Now we have the opposite, with breakout below 2360 warning of a correction. But Bollinger warns that the market often starts with a fake move, in the wrong direction, before the real move commences. So we need to be cautious.

March 21, 2017

Dow breaches support

The commentator’s curse. Three days after I posted that Dow Jones Industrial Average was consolidating in a bullish narrow band below resistance at 21000, the Dow breached support at 20800. Downward breakout warns of a correction. Expect support at 20000. The false break above 21000 was a hint that all was not well with the trend. Unfortunately we often only see what we expect to see and miss the subtle clues.

Dow Jones Industrial Average

The Dow is in Stage III of a bull market, with long-term Twiggs Money Flow signaling strong buying pressure. Chances of a (primary trend) reversal seem low.

[Correction: Breach of support was at 20800, not 21800.]

March 20, 2017

Value capture: a good idea to fund infrastructure but not easy in practice

Marion Terrill and Owain Emslie are the authors of the new Grattan Institute report, What price value capture?

….Federal ministers from the prime minister down are enthusiastic about value capture and are pushing the states to embrace it. Only last week, Urban Infrastructure Minister Paul Fletcher reiterated that the Commonwealth does not want to be “just an ATM” for the states. But if the federal ministers face up to some home truths, they may find value capture less to their liking.

Value capture is a tax

Home Truth No. 1 is that a value-capture scheme is a tax. That’s how it raises revenue…..

Which brings us to Home Truth No. 2: to raise a reasonable amount, a value-capture tax would need to include the family home….. A tricky question of who’s in and who’s out.

Home Truth No. 3 is that many taxpayers are likely to feel aggrieved…..Drawing a boundary around a new piece of infrastructure to distinguish between those who must pay the new tax and those too far away to benefit is bound to involve rough justice.

Broad-based land tax is better still

A better answer still could be a broad-based land tax. Such a tax is highly efficient, because land is an immobile tax base (see the chart below).

While it would not zero in on the beneficiaries of new infrastructure, a land tax would capture the effects of all infrastructure, old and new, as these translated into land values, making it scrupulously fair. A broad-based land tax would also be simpler to administer than a value-capture tax. That’s because there would be no requirement to police the geographic boundary of the catchment area.

So a broad-based land tax has some distinct advantages over a value-capture tax…..

One of the biggest dangers with any tax is complexity. It promotes the perception of unfairness and makes collection difficult.

Funding infrastructure is a headache for government. Benefits from increased indirect taxes like personal and company taxes may prove elusive. “User pays” taxes, like road tolls, tax direct users but assume that every user benefits by the same amount. And they have no way of taxing others who indirectly benefit — landowners who build a new shopping centre for example.

A broad-based land tax is far more efficient than indirect taxes and fairer than narrowly-focused direct taxes, while encouraging broader use of new infrastructure assets.

An example of the pitfalls surrounding infrastructure funding is the Skye Bridge in Scotland, a road bridge which connects the Isle of Skye via the A87 to the mainland. The bridge was built by a private consortium and opened in 1995.

Skye Bridge

Locals objected to the tolls charged (a round trip cost £11.40). Mass protests followed and a prolonged non-payment campaign. Despite numerous prosecutions, by 2004 the issue had become such a political hot potato that the Scottish government purchased the bridge for £27m and abolished the tolls.

Land taxes would have stood a better chance of success, especially if weighted towards land and businesses that would receive the greatest benefit. They also ensure public ownership of monopoly assets that may be exploited by private operators.

Source: Value capture: a good idea to fund infrastructure but not easy in practice

Skye Bridge: Wikipedia

March 19, 2017

Sensex breakout

India’s Sensex broke through resistance at 29000, signaling another advance. Twiggs Money Flow swung upward, the trough above zero indicating strong buying pressure. Resistance at the 2015 high of 30000 may yet prove stubborn, but the target for the advance is 32000*.

Sensex Index

* Target: 29000 + ( 29000 – 26000 ) = 32000

March 19, 2017

Europe advances

Germany’s DAX is testing the band of resistance between 12000 and its April 2015 high of 12400. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Breakout is expected but we are likely to experience consolidation below 12400, or a moderate correction, ahead of this.

DAX

The FTSE 100 followed through above resistance at 7350, signaling another advance. Rising troughs on Twiggs Money Flow indicate strong buying pressure. Target for the advance is 7600*.

FTSE 100

* Target: 7350 + ( 7350 – 7100 ) = 7600