ColinTwiggs, Author at the patient investor

March 10, 2017

ASX 200: Resources or Banks?

The ASX 200 reflects a tussle between the resources and banking sectors which are pulling in opposite directions. The ASX 300 Metals & Mining Index is falling, with declining Twiggs Money Flow warning of long-term selling pressure.

ASX 300 Metals & Mining

The banking sector, however, is rallying. The ASX 300 Banks index recovered above 9000, signaling another advance, while rising Twiggs Money Flow indicates long-term buying pressure.

ASX 300 Banks

The banking sector is larger, but more vulnerable to shocks from other parts of the economy, so this is an even match.

The ASX 200 is again testing resistance at 5800. The ascending triangle (5600 to 5800) and rising Twiggs Money Flow are both bullish signs. Breakout above 5800 would signal a test of 6000*.

ASX 200

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

Banking performance tends to lag other sectors, however. It takes time for consequences of a slow-down in other parts of the economy to impact on banks, through slower growth and higher bad debt provisions. I expect stubborn (ASX 200) resistance at 6000.

March 10, 2017

Australia’s economic growth is slowing.

Employment and Participation rates are falling.

Australia Employment & Participation Rates

Wage rate growth is slowing.

Australia Wage Rates

Slowing wage rate growth and inflation confirm that the economy is faltering.

Australia Underlying Inflation

The RBA, with one eye on the housing bubble, has indicated its reluctance to cut rates further. Increased infrastructure spending by Federal and State governments seems the only viable alternative.

With the motor industry winding down and apartment construction headed for a cliff, this is becoming increasingly urgent.

March 10, 2017

US Job Growth, Wage Rates & Inflation

Payrolls jumped by a seasonally adjusted 235,000 jobs in February, setting the Fed on track for another rate rise next week.

US Job Growth

GDP growth is projected to lift in line with employment, wage rates and hours worked. At this stage, the Fed is still attempting to normalize interest rates rather than slow the economy to cool inflationary pressures.

Projected GDP

Wage rate growth remains muted, at close to 2.5 percent, so rate hikes are likely to proceed at a gradual pace.

Hourly Wage Rates and Money Supply

The need to tighten monetary policy is only likely to be seriously considered when wage rate growth [light green] exceeds 3.0 percent [dark green line]. Then you are likely to witness a dip in money supply growth [blue], as in 2000 and 2006, with bearish consequences for stocks.

*The dip in 2010 was a mistake by the Fed, taking its foot off the gas pedal too soon after the 2008 crash.

March 10, 2017

Dow: How long will stage III last?

Dow Jones Industrial Average is testing resistance at 21000. Another narrow consolidation, as in December-January, would confirm strong buying pressure already signaled by rising Twiggs Money Flow troughs above zero.

Dow Jones Industrial Average

We are witnessing stage III of a bull market. While this is the final leg, it could last several weeks or several years. My guess is that it will last until the Fed is forced to hike interest rates in 2018, to cool inflation.

March 10, 2017

Robust Job Growth, Solid Labor Market | WSJ

From WSJ:

The pace of job creation remained robust in February, with payrolls rising by a seasonally adjusted 235,000 new jobs, the Labor Department said.

Evidence of continued health in the U.S. labor market likely cleared the way for the Federal Reserve to raise short-term interest rates next week. The unemployment rate ticked down to 4.7%, as both workforce participation and employment rose….

Source: Robust Job Growth, Higher Wages Show Solid Labor Market – WSJ

March 6, 2017

Can Australia dodge the great deleveraging? | MacroBusiness

Interesting chart from UBS (via Macrobusiness). Movement between 2002 and 2016 for a number of Developed and Emerging Market (DM and EM) countries in the ratio of bank credit to GDP and bank debt to credit.

The good guys are in the top left corner and the bad guys bottom right.

Australia and China are testing record levels of bank credit to GDP, tracing a similar path to Spain. We all know how that ended.

Source: Can Australia dodge the great deleveraging? – MacroBusiness

March 6, 2017

CEO pay is rigged | Barry Ritholz

From Barry Ritholz:

CEO pay is rigged.

If that sounds more like a late-night presidential tweet than a fact, let’s consider the evidence.

The compensation packages of the chief executive officers of America have been rising faster than just about any rational metric upon which they are supposedly based. “CEO pay grew an astounding 943% over the past 37 years,” according to a recent Economic Policy Institute analysis. EPI further observes this was a far faster growth rate than “the cost of living, the productivity of the economy, and the stock market.”

CEO compensation isn’t the pay for performance its advocates claim. Instead, it is unmoored from any rational basis.

We may blame corporate boards for allowing this abuse to happen, a breach of their duty of stewardship, but why isn’t more being done about it?

Those in the best position to press for changes in executive pay are the giant fund companies like BlackRock Inc. and Vanguard Group Inc….. Vanguard Chairman and CEO Bill McNabb said in an interview last fall that rather than only rely on proxy votes, the firm has been pressuring companies behind the scenes to pare back outrageous packages. That approach makes sense, given that the indexing giant, for the most part, can’t simply sell the stock of uncooperative companies without uncoupling their funds from the indexes they are trying to track.

It looks like passive investing is part of the problem. Membership of an index ensures that a stock will be supported by passive, index investors. Plus boards can use stock buy-backs to support their own stock price, giving them partial control over the major performance metric on which they are rewarded.

Only active fund managers will dig deeper and rate management on their ability to create long-term value. Unfortunately their influence over stock prices is shrinking.

Source: Excessive CEO Pay for Dumb Luck – Bloomberg View

March 3, 2017

ASX 200 slows as resources fall

The Australian Resources sector has been on a tear over the last 12 months, something I was slow to pick up on. China’s PBOC stepped in to boost a slowing economy, sending property prices surging. But now the central bank is tightening monetary policy and housing price growth is slowing.

China House Prices

The ASX 300 Metals & Mining Index is losing momentum, falling below its long-term trendline. Declining Twiggs Money Flow, with peaks near zero, warns of selling pressure.

ASX 300 Metals & Mining

The fall has slowed advance of the ASX 200. Resistance at 5800 is proving stubborn. Breach of support at 5600 would complete a double top reversal, warning of a primary down-trend. But declining Twiggs Money Flow indicates no more than medium-term selling pressure at present, recovery above 5800 is more likely and would signal a test of 6000*.

ASX 200

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

March 3, 2017

Gold hesitates as Fed hints at rate hike

From WSJ:

Federal Reserve Chairwoman Janet Yellen signaled the central bank is likely to raise short-term interest rates at its March meeting and suggested more increases are likely this year if the economy performs as expected.

“At our meeting later this month, the [Federal Open Market] Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Ms. Yellen said in remarks prepared for delivery at the Executives’ Club of Chicago.

The Dollar Index rally continues to meet resistance, with tall shadows on the last three weekly candles signaling selling pressure. Rising interest rates would strengthen the advance, with bearish consequences for gold.

Dollar Index

Spot Gold hesitated at $1250/ounce. Rising interest rates also increase the opportunity cost of holding precious metals. Reversal below $1200 would warn of another decline but recovery above $1250 remains more likely and would signal an advance to $1300.

Spot Gold

March 3, 2017

Australia is on a different path

Motor vehicle sales are strong, according to the Federal Chamber of Automotive Industries:

Motor vehicle sales across Australia got off to a solid start in January, with the month’s sales nudging ahead of the same period last year and showing a rise in activity among private purchasers.

Total sales for January, including passenger cars, SUVs, light and heavy commercial vehicles totalled 84,910 for the month, 0.6 percent up on the same month in 2016.

Within the segments, light commercials fell 3.9 per cent, passenger car sales declined slightly (down 0.8 per cent), while SUVs continued their consistent growth pattern with a gain of 3.2 per cent….

But retail sales growth is slowing.

Australia Retail

While housing is slowing after a surge in high-density units over the last five years.

Australia Housing

Resources exports have been performing well but a slow-down in Chinese housing sales could act as a hand-brake on future growth.