ColinTwiggs, Author at the patient investor

July 16, 2015

Greece and Iran party but China lurks in the shadows

From the Wall Street Journal:

Greece’s Parliament passed early Thursday a crucial set of austerity measures required for a eurozone bailout package….The measures were supported by 229 lawmakers in the nation’s 300-seat Parliament.

A Grexit has been avoided for the present, but unless the Greeks are successful in implementing structural reform, reversing many years of cronyism and corruption, we are likely to witness further re-runs in the future.

The nuclear deal with Iran has outraged the Right in Israel and the US. There are many pitfalls along the way but I believe this is a bold step forward. The outcome will be uncertain for many years but presents both sides with a chance to build a new relationship where they can peacefully co-exist. The alternative is another war in the Middle East — with no winners.

Photos: exuberant Iranians celebrate the nuclear deal http://t.co/RBqvCR6Vm0 pic.twitter.com/fUfvelIeP5

— Quartz (@qz) July 16, 2015

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I was surprised to see the Russians playing a constructive role in the dialogue. I am sure that Vladimir Putin would take personal delight in poking a stick through Obama’s bicycle spokes, but the interests of the state come first. “Follow the green” as one US diplomat described it. The New York Times offers a clue:

Sergey V. Lavrov, the Russian foreign minister, lost no time in talking about the accord on Iran’s nuclear program. He was on television minutes after the deal was clinched, and even before the formal news conference had begun, announcing the landmark agreement to the audience back home and emphasizing the many potential benefits, strategic and economic, that it holds for Russia…..Russia possesses some of the world’s foremost expertise in atomic energy, and has helped build and operate atomic reactors in Iran for many years. Rosatom, the Russian state nuclear energy company, helped build and expand the Bushehr nuclear plant and already has contracts to build two more reactors there.

China, on the other hand still lurks in the background. The state managed to stem the flood, suspending trading on more than 50% of stocks and forbidding large stockholders from selling. This is a public acknowledgment that Chinese stock prices are artificial and in no way to be trusted (“What’s new” some cynics would ask). They have destroyed any credibility that their stock markets had. Japan had zombie banks after their 1990 stock market crash, solvent in name only. China seems to be following a similar path with zombie stocks. Banks who have lent money against those stocks are likely to follow.

For a deeper understanding of the situation, read China’s stock market falling off a cliff: Why, and why care? by Alicia Garcia-Herrero at Bruegel.org

Europe

Germany’s DAX recovered above its descending trendline, indicating the end of the correction. Follow-through above 11600 would strengthen the signal, suggesting a fresh advance. Breakout above 12400 would confirm. Recovery of 13-week Twiggs Money Flow above its descending trendline shows that selling pressure has eased.

DAX

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

The Footsie also recovered above its descending trendline. Follow-through above 6750 would indicate another attempt at 7100. A 13-week Twiggs Money Flow trough at zero flags buying pressure.

FTSE 100

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

Asia

The Shanghai Composite is testing resistance at 4000. Government efforts to stem the crash are unlikely to restore credibility to stock prices. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.

Shanghai Composite Index

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

Japan’s Nikkei 225 recovered above 20000, suggesting a fresh advance. Breakout above 21000 would confirm. Recovery of 13-week Twiggs Money Flow above its descending trendline suggests the correction is over.

Nikkei 225 Index

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

India’s Sensex recovered above 28000, suggesting a fresh advance. A 13-week Twiggs Money Flow recovery above zero indicates medium-term buying pressure. Breach of primary support at 26500 is now unlikely.

SENSEX

* Target calculation: 30000 + ( 30000 – 27000 ) = 33000

North America

The S&P 500 respected medium-term support at 2040. Another 13-week Twiggs Money Flow trough above zero would confirm long-term buying pressure. Breakout above 2120 would offer a target of 2200*.

S&P 500 Index

* Target calculation: 2100 + ( 2100 – 2000 ) = 2200

The CBOE Volatility Index (VIX) retreated to low levels typical of a bull market.

S&P 500 VIX

The Nasdaq 100 is approaching its Dotcom-era high of 4800. Breakout above 4550 would signal a test of long-term resistance. 6-Month Twiggs Momentum oscillating above zero reflects a healthy long-term up-trend.

Nasdaq 100

Canada’s TSX 60 recovered above support at 850/855. Breakout above the upper trend channel would indicate the correction is over, suggesting another test of 900. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal. Respect of the upper trend channel is unlikely, but would warn of continuation of the down-trend.

TSX 60 Index

* Target calculation: 900 + ( 900 – 850 ) = 950

Australia

The ASX 200 broke out above its descending trend channel, flagging end of the correction. A 21-day Twiggs Money Flow trough above zero indicates medium-term buying pressure. Follow through above 5700 would signal another test of 6000.

ASX 200

More….

Could a new property tax save the Australian economy?

Will Iran deal nuke crude?

Hint of Greek bailout revives rates (and the Dollar)

Bank share prices tipped to decline

Gold: Is Barrick next?

APRA considers two per cent capital adequacy increase

Greece: the musical (with thanks to Grease)

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.

~ George Soros

July 15, 2015

China’s stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at Bruegel.org

Great insight from Alicia García-Herrero:

….The need for Chinese corporations and banks to avail themselves of fresh equity cannot be underestimated. On the one hand, corporate debt has grown sixfold from 2005 levels. On the other hand, Chinese banks are not only heavily exposed to these corporates, being still their main source of financing, but also to local governments whose huge borrowing from banks is starting to be restructured. To make a long story short, China’s governments needed a bull stock market to transfer part of the cost of cleaning up its corporates’ and banks’ balance sheets from the state to private investors, including foreigners. The PBoC danced to the Government’s tune, easing monetary policy since November last year. This was done through several interest rate cuts and by lowering the liquidity ratio requirements. The problem with all of this liquidity is that it only fueled additional leveraging, including for gambling on the stock market…..

The sudden collapse of the Chinese stock market had two triggers. First, the was a wave of profit taking after the Shanghai benchmark index broke through 5 000 in early June and doubts emerged about further easing from the PBoC. At that very same moment, China’s securities regulator announced measures to cool down the market, which amounted to banning brokerage firms from providing unregulated margin funding to investors. This was more of a shock to the system than one might imagine, as margin financing in China is much larger than in other stock markets.

Japan had zombie banks, looks like China could end up with a zombie stock market.

July 15, 2015

Could a new property tax save the economy?

Interesting article by Robin Christie | 16 Jul 2015

Property levies could be the key to fixing state and territory budgets, and could raise as much as $7 billion a year, the Grattan Institute has claimed.

Grattan’s ‘Property Taxes’ report…..explores how imposing a broad-based property levy could help Australia’s state and territory governments to boost their deteriorating budgets.

According to the report, a levy of just two dollars for every $1,000 of unimproved land value would raise $7 billion a year.

…….While it accepts that property taxes can be unpopular because they are highly visible and hard to avoid, it states that they are also both efficient and fair. In addition, it argues that property taxes don’t change incentives to work, save and invest.

“Our proposal is manageable for property landowners, and protects low-income people,” said Daley. “Low-income retirees with high-value houses could defer paying the levy until their house is sold.”

Key points

According to the paper, other key arguments in favour of property taxes include:

Unlike capital, property is immobile – it cannot shift offshore to avoid taxes.

Over the last 25 years, taxes on property and property transactions have been the only significant growth taxes for states, with revenues keeping pace with the economy.

Shifting from stamp duty to a property levy would provide more stable revenues for states, and add up to $9 billion in annual GDP.

“Concerns about the risks of multinational tax avoidance, the increasing mobility of capital around the world, and the increasing value of residential property relative to incomes, should make property taxes a priority in any tax reform,” states the paper.

“Higher property taxes could also be used to fund the reduction and eventual abolition of state stamp duties on property. Stamp duties are among the most inefficient and inequitable taxes available to states, and their revenues are inherently volatile.”

Abolition of stamp duties would remove the temptation for State governments to restrict land release, driving up prices in order to increase stamp duty revenue. But high prices act as a deterrent for young families to purchase their own homes. Land taxes instead would create an incentive for states to release new land for development, widening property ownership and their tax base.

July 15, 2015

Will Iran deal nuke crude?

The nuclear deal with Iran is likely to increase supply of crude oil, especially in European markets, driving down prices.

Brent Crude August 2015 Futures

Brent crude August 2015 contract (CBQ15 above) is testing support at $56 per barrel. Narrow consolidation suggests continuation of the down-trend. Breach of $56 would signal a test of primary support at $53.

Nymex WTI Light Crude August 2015 Futures

Nymex (WTI) Light Crude August 2015 contract (CLQ15) is in a similar pattern, with medium-term support at $51 and primary support at $49 per barrel.

July 14, 2015

Hint of Greek bailout revives rates (and the Dollar)

10-Year Treasury yields rallied on hint of a Greek bailout, although Tsipras still has to obtain approval from the Greek parliament. Breakout above 2.50% would offer an immediate target of 2.75% but the advance is likely to test major resistance at 3.00% in the longer term. Reversal below 2.25% is unlikely (unless there is a breakdown Greek/EZ negotiations) but would re-test the rising trendline at 2.10%.

10-Year Treasury Yields

The Dollar Index also rallied. Breakout above 97.5 would suggest another advance; confirmed if resistance at 100 is broken. Reversal below 93 is most unlikely but would warn of a primary down-trend.

Dollar Index

* Target calculation: 100 + ( 100 – 93 ) = 107

July 14, 2015

Bank share prices tipped to decline

Chris Joye at the AFR warns that increased capital requirements could cause an 18.5 percent fall in bank stocks:

….APRA warns that because the report makes several assumptions that are unrealistically favourable to the majors, and the majors’ CET1 ratios have fallen behind global peers since June 2014, it believes they “are likely to need to increase their capital ratios by at least 200 basis points … to be comfortably positioned in the fourth quartile”.

In dollar terms, UBS’ No. 1 ranked analyst Jonathon Mott estimates that this represents a CET1 shortfall of about $24 billion today, accounting for the extra equity the majors have started sourcing since June 2014 (the short-fall would otherwise have been $30 billion). That’s consistent with the lower bound of estimates I previously canvassed here.

Yet this number may be a low-ball for two reasons. First, APRA has yet to respond to the FSI’s recommendation of introducing a minimum average residential mortgage “risk-weighting” of between 25 per cent and 30 per cent. Second, the majors are likely to be slugged with higher risk-weights on their non-residential assets as a consequence of the new Basel 4 rules.

UBS’ research implies that the combined impact of this will be another $16 billion in CET1 on top of the $24 billion shortfall, which gives a total CET1 capital deficiency of $40 billion.

The Australian Financial Review’s Chanticleer column says the majors will only be given 12 months to boost CET1 in response to APRA’s looming decision on residential mortgage risk-weights, which the regulator says it will make “shortly”.

Bank share prices tipped to decline

From a shareholders’ perspective, higher equity means lower leverage and associated returns. Whether that translates into a fall in the majors’ valuations is an open question and depends on whether reduced returns on equity are offset by repricing of deposits and loans and cheaper overall funding costs. As I have explained before, there are arguments for and against. My base-case is that we see a 200 basis point dilution in returns on equity from current world-beating marks that results in a circa 18.5 per cent reduction in major bank valuations.

I would expect APRA to soften the blow by phasing in increased capital ratios and risk-weighting of residential mortgages over time. The impact this will have on valuations depends on several factors. Lower perceived risk could lead to lower cost of funding as well as higher earnings multiples. Also, a BIS study has shown that banks with stronger balance sheets are likely to experience stronger growth — which would again raise the earnings multiple. But I agree with Joye that we are likely to witness some softening of major bank stocks.

July 13, 2015

Gold: Is Barrick next?

The Gold Bugs Index — representing un-hedged gold stocks — broke primary support at 150, warning of a bear market for gold.

Gold Bugs Index

Major producer Barrick Gold is testing primary support at $10. Peaks below zero on 13-week Twiggs Momentum already indicate a primary down-trend. Breach of support would confirm, offering a target of $6.50*. More importantly, it would strengthen the bear signal for gold.

Barrick Gold

* Target calculation: 10 – ( 13.50 – 10.00 ) = 6.50

Gold is headed for another test of primary support at $1140/ounce, while 13-week Twiggs Momentum peaks below zero suggest continuation of the down-trend. Breach of primary support would offer a target of $1000*.

Spot Gold

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

July 13, 2015

APRA considers two per cent capital adequacy increase

by Robin Christie | 14 Jul 2015

The Australian Prudential Regulation Authority (APRA) has stated that the major banks would need to increase their capital adequacy ratios by at least two per cent to meet Financial System Inquiry (FSI) recommendations.

APRA has been comparing the capital position of the Australian major banks against a group of international counterparts, and the results of this study, released today, have led to the two per cent figure being mooted.

The study was implemented as a direct response to the FSI final report’s first recommendation, that APRA should “set capital standards such that Australian authorised deposit-taking institution [ADI] capital ratios are unquestionably strong”. This would mean making sure that Australian ADIs sit in the top quartile of internationally-active banks in capital adequacy terms.

….the statement adds that APRA is committed to ensuring that any capital adequacy requirement improvements occur “in an orderly manner”. This process would take into account Australian ADIs’ ability to manage the impact of any changes “without undue disruption to their business plans”.

While APRA hasn’t made a decision on whether it will go as far as mandating a two per cent increase in capital adequacy ratios…. it has stated that Australian ADIs should be well placed to accommodate its directives over the next few years – “provided they take sensible opportunities to accumulate capital”.

Bear in mind that capital adequacy ratios are measured against risk-weighted assets, where asset values are adjusted for the perceived risk of default. Australian banks have historically used risk weightings as low as 15% for residential mortgages compared to 50% in the US. That means that a bank with a capital ratio of 10% would only hold 1.5% capital against residential mortgages. And a 2% increase, to a capital ratio of 12%, would only increase capital cover to 1.8%. Revision of risk weightings is more important than an increase in the capital ratio, especially given Australia’s precarious property market.

July 9, 2015

Another week another crisis

The crisis in Greece continues, dragging down stocks across Europe.

Germany’s DAX broke support at 11000, warning of a decline to 10000. Reversal of 13-week Twiggs Money Flow below zero would warn of a primary down-trend. Recovery above 11500 is unlikely, but would signal a fresh advance.

DAX

The Footsie found short-term support at 6500. Decline of 13-week Twiggs Money Flow below zero warns of a primary down-trend. A peak below zero or breach of support at 6100 would confirm.

FTSE 100

* Target calculation: 6700 – ( 7100 – 6700 ) = 6300

Asia

Events have been overtaken by collapse of Chinese stocks. The Shanghai Composite found support at 3500, but government efforts are unlikely to stem the rout. Reversal of 13-week Twiggs Money Flow below zero would warn of further selling pressure. Expect support at the primary trendline, around the 3000 level.

Shanghai Composite Index

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

Japan’s Nikkei 225 was unsettled by events in Shanghai, breaking support at 20000 to warn of a correction. The decline on 13-week Twiggs Money Flow is gradual, suggesting a secondary correction.

Nikkei 225 Index

* Target calculation: 20000 + ( 20000 – 18000 ) = 22000

India’s Sensex retreated below 28000 warning of another test of primary support at 26500. A 13-week Twiggs Money Flow trough above zero, however, would indicate medium-term buying pressure. Breach of support at 26500 is also unlikely, but would signal a primary down-trend with support at 23000*.

SENSEX

* Target calculation: 26500 – ( 30000 – 26500 ) = 23000

North America

The S&P 500 is testing medium-term support at 2040. Declining 13-week Twiggs Money Flow suggests a test of primary support (1980/2000) but today’s rally in China may alleviate this. The index is likely to range below 2120 until the situations in both China and Greece reach a conclusion.

S&P 500 Index

* Target calculation: 2120 + ( 2120 – 2040 ) = 2200

The CBOE Volatility Index (VIX) is fairly subdued but likely to break 20, indicating moderate risk.

S&P 500 VIX

Dow Jones Industrial Average broke support at 17600. Follow-through below 17500 would warn of a test of primary support at 17000. Decline of 13-week Twiggs Money Flow below zero indicates strong selling pressure but this was aggravated by yesterday’s technical trading halt on the NYSE and recovery above zero is likely.

Dow Jones Industrial Average

Canada’s TSX 60 broke support at 850, warning of a test of primary support at 800. Decline of 13-week Twiggs Momentum below zero suggests a primary down-trend. Recovery above the descending trendline is unlikely, but would indicate the correction is over.

TSX 60 Index

* Target calculation: 850 – ( 900 – 850 ) = 800

Australia

The ASX 200 found support at 5400, highlighted by the long tail on today’s candle. Breakout above the trend channel is still unlikely, but would indicate the correction is over. It would be prudent, in the current climate, to wait for a higher trough or some other confirmation. Rising 21-day Twiggs Money Flow indicates moderate buying pressure.

ASX 200

More….

Gold Bugs warn of a bear market

Dollar calm while prospect of rate rises fades

Silver tests primary support at $15

Australia: Rising foreign debt

RBA strategy: Fight fire with gasoline

Crude breaks $54

Australian stocks: Buy in July?

Never let a serious crisis go to waste.

~ Rahm Emanuel

July 9, 2015October 5, 2017

Dollar calm while prospect of rate rise fades

The Dollar Index penetrated its descending trendline, indicating the recent correction is over, but the latest red candle warns of uncertainty. Reversal below 95 would warn of another test of primary support at 93. A weaker Dollar would boost demand for gold and lift the US economy, enhancing the competitiveness of exporters and local manufacturers facing competition in domestic markets.

Dollar Index

10-Year Treasury yields retreated below support at 2.25% as turmoil in Europe (Greece) and China reduce the prospect of rate rises. Expect support at 2.10% and the rising trendline. Breach of support is unlikely, but a Fed retreat on rate hikes would warn of serious upheaval in financial markets.

10-Year Treasury Yields