ColinTwiggs, Author at the patient investor

August 16, 2015

CBA, ANZ, NAB and Westpac: The incredible shrinking big four banks | afr.com

Great article by Chris Joye:

Welcome to the world of that beautiful $140 billion behemoth, the Commonwealth Bank, which has inverted the axiom that there is a trade-off between risk and return. Years ago I highlighted a perversion embedded at the heart of our financial system: the supposedly lowest (highest) risk banks were producing the highest (lowest) returns. Normally it works the other way around.

…..contrary to some optimistic reports, the capital-raising game has only just begun.

The terrific news for shareholders is that this belated deleveraging will transform the majors into some of the safest banks in the world, which will be able to comfortably withstand a 1991-style recession, exacerbated by a 20 per cent decline in house prices.

In the past I have been critical of APRA’s failure to properly police Australia’s vastly-undercapitalized banking system but must now give them credit for their leadership towards creating a world-class system that will be able to withstand serious endogenous or exogenous economic shocks.

Shareholders face lower returns from reduced leverage but will benefit from improved valuations due to lower risk premiums and stronger, more stable, long-term growth.

August 13, 2015

A currency war has begun….

The Federal Reserve, Bank of England, European Central Bank and Bank of Japan all expanded their balance sheets (commonly referred to as quantitative easing or QE for short) post-2008 to counteract a contracting money supply and prevent a deflationary spiral. These actions also have the beneficial effect of weakening the currency and improving international competitiveness.

China was considered immune because of its persistent current account surplus and $4 Trillion in foreign reserves. But the recent sharp contraction in Chinese exports to the EU suggest otherwise.

The People’s Bank of China (PBOC) responded by effectively devaluing the Yuan. So far the “one-off adjustment” has been repeated on three consecutive days.

USDCNY

The Euro appreciated considerably against the US dollar as CNY carry trades are unwound.

EURUSD

Gold broke out of its narrow rectangle between $1080 and $1100 per ounce as investors scuttled to the safety of bullion.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

The Yen displays little net gain or loss.

USDJPY

The Dollar Index does not include China’s Yuan and is falling primarily because of the Euro. The Broad Trade-Weighted Index which includes the Yuan is calculated weekly; so it will take a few days before we can assess the impact.

Dollar Index

Competing devaluations are likely to continue as each state (or trading block) attempts to maintain an export surplus. This is a zero sum game, so each action will inevitably elicit an equivalent response from major trading partners. Currency markets are awash with vast sums of liquid capital and an estimated $9 Trillion in carry trades (where hedge funds borrow in a low-interest-rate currency and invest in another at higher rates). Any beggar-thy-neighbor escalation is likely to destabilize financial markets and the precarious balance may prove difficult to restore.

During the 1997 Asian Financial Crisis George Soros called for international regulation of financial markets to prevent a reoccurrence.

It is time to recognize that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take? …. To put it bluntly, the choice confronting us is whether we will regulate global financial markets internationally or leave it to each individual state to protect its interests as best it can. The latter course will surely lead to the breakdown of the gigantic circulatory system, which goes under the name of global capitalism.

~ George Soros: The Crisis of Global Capitalism (1998)

More….

IEA: At Least Another Year Before Oil Markets Rebalance | OilPrice.com

Desperate times, desperate acts

Crude fall continues

Let the Global Race to the Bottom Begin | Foreign Policy

Window on Eurasia: Kyiv Must Work to Isolate Moscow Rather than Negotiate with It

Goldman Sachs Doubles Down On Lower-For-Longer Scenario | OilPrice.com

Philip Glass: 100,000 People

August 12, 2015

IEA: At Least Another Year Before Oil Markets Rebalance | OilPrice.com

From Art Berman at Oilprice.com:

In its August Oil Market Report (OMR), the IEA revised 2nd quarter 2015 demand upward 370,000 bpd from its July estimate but also revised supply upward by 140,000 bpd. Total liquids supply is 96.53 million bpd and demand is 93.5 million bpd……

….The world continues to have an over-supply problem that is slowly improving but it will take another year before the market comes into balance.

August 12, 2015

Desperate times, desperate acts

A sharp fall in global trade is the most likely reason for China’s decision to devalue the Yuan — not aspirations for CNY to be considered a reserve currency.

There are clear signs that global trade is contracting. Shipbrokers Harper Petersen’s Harpex weekly index of charter rates for container vessels fell 9 percent in July and August is following a similar path. Reduced demand for container shipping reflects a sharp fall-off in international trade in manufactured goods.

Harpex Index

Tyler Durden from zerohedge.com highlighted China’s falling exports last week (August 8):

Goldman breaks down the geographic slowdown:

Exports to the US contracted 1.3% yoy, down from the +12.0% yoy in June.

Exports to Japan fell 13.0% yoy in July, vs -6.0%yoy in June

Exports to the Euro area went down 12.3% yoy, vs -3.4% yoy in June.

Exports to ASEAN grew 1.4% yoy, vs +8.4% yoy in June

Exports to Hong Kong declined 14.9% yoy, vs -0.5% yoy in June.

Slower sequential export growth likely contributed to the slowdown in industrial production growth in July. Weaker export growth is likely putting more downward pressure on the currency, though whether the government will allow some modest depreciation to happen remains to be seen.

Durden presciently concludes:

As global trade continues to disintegrate, and as a desperate China finally joins the global currency war, it will have no choice but to devalue next.

Michael Leibowitz at 720Global.com also warns of the destabilizing effect carry trades may have on any adjustment:

The “one-off” adjustment has now become two…. this devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the [estimated $2Tn to $3Tn] carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.

August 11, 2015

A currency war has begun….

A currency war has begun Get ready for central bank fun It starts kind of meek But then at its peak We start dropping bombs by the ton

— The Limerick King (@TheLimerickKing) August 12, 2015

August 11, 2015

Crude fall continues

Nymex Light Crude futures (September 2015 – CLU2015) are approaching their medium-term target of $40/barrel*. Expect support at this level.

Nymex WTI Light Crude September 2015 Futures

* Target calculation: 50 – ( 60 – 50 ) = 40

Long-term June 2017 Nymex Light Crude futures (CLM2017) are testing the medium-term target of $54/barrel* — a premium of about $11/barrel over current delivery. Expect support at this level but the long-term target could be as low as $36**.

Nymex WTI Light Crude June 2017 Futures

* Target calculation: 60 – ( 66 – 60 ) = 54; ** Target calculation: 66 – ( 90 – 60 ) = 36

August 11, 2015

Let the Global Race to the Bottom Begin | Foreign Policy

Patrick Chovanec writes:

On Aug. 11, the People’s Bank of China announced a decision to devalue China’s currency — the renminbi, or RMB — by 1.9 percent, by resetting the daily band within which it’s traded…..

The Chinese will try to argue they are just letting the market have its way. This is misleading: For years, the Chinese prevented the RMB from rising in value by buying nearly $4 trillion in foreign currency. The current market “equilibrium” is predicated on that massive distortion. The only way to get to a truly market-based RMB is to first unwind China’s past intervention by supporting the RMB and drawing down China’s foreign currency reserves. We shouldn’t want the RMB to float until that happens…..

August 11, 2015

Window on Eurasia: Kyiv Must Work to Isolate Moscow Rather than Negotiate with It

From Paul Goble:

Staunton, August 11 – Up to now, Ukraine has made “a serious error” by trying to negotiate with Russia about the Donbas, Bogdan Yeremenko [former Ukrainian diplomat] says. What it should be doing is devoting all its efforts to isolating Russia internationally. That will have far more impact on Moscow’s behavior than any talks Ukraine might have with it……

Up to now, Russia has acted more effectively than Ukraine by “imposing its will and taking the initiative both on the battlefield and at the negotiating table.” Ukraine in contrast “has held fast to a disastrous strategy responding with diplomacy to armed aggression and reducing the opportunities of its own Armed Forces.”

“…..Diplomatic efforts ought to be concentrated not on talks with Russia but on the creation for it of an uncomfortable foreign policy environment and the resolution of practical issues of securing the defense capacity of the country.”

August 6, 2015

Goldman Sachs Doubles Down On Lower-For-Longer Scenario | OilPrice.com

ZeroHedge quotes Goldman Sachs’ Jeffrey Currie:

….Not only will the macro forces keep prices under pressure, but historically markets trade near cash costs [near $50/bbl] until new incremental higher-cost capacity is needed (even the IEA has revised 2015 non-OPEC output growth from existing capacity up by 265 kb/d since March). In addition, low-cost OPEC producers are likely to expand capacity now that they have pushed output to near max utilization. At the same time Iran has the potential to add 200 to 400 kb/d of production in 2016 and with significant investment far greater low-cost volumes in 2017….

August 6, 2015

Signs of improvement

Earnings results for the second quarter of 2015 remain on track. Of the 354 stocks in the S&P 500 that have reported, 252 (71%) beat, 26 met and 76 (21%) missed their estimates.

The S&P 500 has lost momentum since March 2015, consolidating below resistance at 2130. Gradual decline of 13-week Twiggs Money Flow suggests buyers remain interested and this is a secondary formation. Breakout above 2130 would signal an advance to 2200*, but there is no indication that this is imminent. Reversal below support at 2040/2050 is unlikely, but penetration of the rising trendline would warn of a reversal — confirmed if support at 1980/2000 is breached.

S&P 500 Index

* Target calculation: 2130 + ( 2130 – 2050 ) = 2210

Dow Jones Industrial Average is weaker than the S&P 500. Breach of support at 17500 would test primary support at 17000. Reversal of 13-week Twiggs Money Flow below zero would warn of selling pressure.

Dow Jones Industrial Average

The CBOE Volatility Index (VIX) remains low — typical of a bull market.

S&P 500 VIX

Canada’s TSX 60 broke through the upper trend channel, suggesting the correction is over. Follow-through above 875 would indicate another test of 900. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal.

TSX 60 Index

Europe improving

Germany’s DAX respected support at 11000. Follow-through above 11800 would indicate another test of 12400. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure.

DAX

* Target calculation: 12500 + ( 12500 – 11000 ) = 14000

The Footsie similarly respected support at 6500. Follow-through above 6800 would complete a double bottom reversal, indicating a test of 7100. A 13-week Twiggs Money Flow trough above zero flags buying pressure.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6500 ) = 7500

Asia

The Shanghai Composite continues to reflect selling pressure with declining 13-week Twiggs Money Flow. Withdrawal of government support is unlikely, but would cause a breach of 3400/3500.

Shanghai Composite Index

* Target calculation: 4000 – ( 5000 – 4000 ) = 3000

Japan’s Nikkei 225 is respected support at 20000, indicating another test of 21000. Breakout above 21000 would offer a target of 23000*. Decline of 13-week Twiggs Money Flow has leveled off. Reversal below support at 20000 is unlikely but would warn of another test of 19000.

Nikkei 225 Index

* Target calculation: 21000 + ( 21000 – 19000 ) = 23000

A higher trough on India’s Sensex suggests buying pressure. Rising 13-week Twiggs Money Flow confirms. Breakout above 28500 would signal another test of 30000. Decline below 27000 is unlikely.

SENSEX

Australia

The ASX 200 encountered stubborn resistance at 5700. Rising troughs on 21-day Twiggs Money Flow continue to indicate buying pressure. Respect of support at 5550 would be bullish, while breakout above 5700 would indicate another test of 6000. Failure of 5550 is less likely, but would test medium-term support at 5400.

ASX 200

I find the idea that you can introduce democracy by military force a very quaint idea. Moreover, if I wanted to choose a testing ground for doing it, Iraq would be the last nation I would choose.

~ George Soros (2004)