ColinTwiggs, Author at the patient investor

February 3, 2015

ASX breakout on RBA rate cut

Australia’s ASX 200 broke through resistance at 5660, signaling a fresh primary advance after several months in the doldrums. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Retracement to test new support at 5550/5650 is likely, but the target for the advance is 6150*.

ASX 200

* Target calculation: 5650 + ( 5650 – 5150 ) = 6150

The surge was driven by an RBA rate cut to a new low of 2.25%.

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Chart: The RBA takes Australia's benchmark rate to new historical low – pic.twitter.com/qnCELNK2be

— (((The Daily Shot))) (@SoberLook) February 3, 2015

The cut was largely unexpected. My view was (and is) that a cut is unnecessary, given that falling commodity prices (especially crude oil and LNG) are weakening the Aussie Dollar. Now that we have one, further cuts are likely.

Rate moves are like cockroaches – there's usually more than one. So expect another #RBA 0.25% rate cut to 2% around April

— Shane Oliver (@ShaneOliverAMP) February 3, 2015

US Markets

The S&P 500 continues to test support at 2000, but rising 13-week Twiggs Money Flow indicates long-term buying pressure. Breach of 1980/2000 is unlikely, but would warn of another correction. Recovery above the descending trendline would suggest the start of a fresh advance.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1800 ) = 2200

CBOE Volatility Index retreated below 20%, but only breakout below the triangle would reassure that the recent up-surge has passed — and risk has reverted to ‘low’ from ‘moderate’.

S&P 500 VIX

Europe

Germany’s DAX is heading for 11000* after breaking resistance at 10000. A 13-week Twiggs Momentum trough above zero confirms the primary up-trend.

DAX

* Target calculation: 10000 + ( 10000 – 9000 ) = 11000

The Footsie continues to test long-term resistance at 6900/7000. Breakout would signal a fresh primary advance, with a long-term target of 8000*. 13-Week Twiggs Money Flow is rising, but it will take considerable buying pressure to break through the 1999/2000 high.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6000 ) = 8000

China’s Shanghai Composite Index is retreating from resistance at its 2009 high of 3400. A small decline in 13-week Twiggs Money Flow indicates medium-term buying pressure is weakening. Reversal below 3100 would warn of a correction. Breakout above 3400 remains as likely, however, and would signal a fresh primary advance. The stimulus effect of lower energy prices may allow the PBOC scope to rein in monetary expansion, which would have a dampening effect on the current stock boom.

Shanghai Composite Index

Chart: China's short-term rates are on the rise again. Why would the PBoC allow monetary conditions to tighten? pic.twitter.com/6JgDQBMGAS

— (((The Daily Shot))) (@SoberLook) February 3, 2015

The whole art of government consists in the art of being honest.

~ Thomas Jefferson

February 1, 2015

An Unconventional Truth by Nouriel Roubini – Project Syndicate

Nouriel Roubini argues for increased infrastructure investment to accompany monetary easing, else the benefits of the latter will not last:

Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero-sum game that merely exports deflation and recession to other economies.

Perhaps more important has been a profound mismatch with fiscal policy. To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. Indeed, the eurozone, the UK, the US, and Japan are all pursuing varying degrees of fiscal austerity and consolidation.

Even the International Monetary Fund has correctly pointed out that part of the solution for a world with too much supply and too little demand needs to be public investment in infrastructure, which is lacking – or crumbling – in most advanced economies and emerging markets (with the exception of China). With long-term interest rates close to zero in most advanced economies (and in some cases even negative), the case for infrastructure spending is indeed compelling. But a variety of political constraints – particularly the fact that fiscally strapped economies slash capital spending before cutting public-sector wages, subsidies, and other current spending – are holding back the needed infrastructure boom.

All of this adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation. That is why, in the absence of appropriate fiscal policies to address insufficient aggregate demand, unconventional monetary policies will remain a central feature of the macroeconomic landscape.

Again, I add the warning that infrastructure investment must be in productive assets, that generate market related returns. Otherwise we are merely swapping one set of problems (a shortfall in aggregate demand) for another: high public debt without the revenue to service or repay it.

February 1, 2015

Will the global economy follow Japan?| Michael Pettis’ CHINA FINANCIAL MARKETS

More from Michael Pettis on “Japanification” of the global economy. How abundant capital and investment in unproductive works may lead to long-term stagnation:

“Panics do not destroy capital,” John Mill proposed in his 1868 paper to the Manchester Statistical Society. “They merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.” Our ability to postpone the recognition of the full extent of these unproductive works depends in part on our ability to expand the supply of credible money. If we are constrained in our ability to expand the money supply, one impact of the crisis is a contraction in money (velocity collapses) that forces lenders to write down debt. If money can expand without constraints, however, debt does not have to be written down nearly as quickly.

With the main central banks of the world having banded together to issue unprecedented amounts of credible currency, in other words, we may have changed the dynamics of great global rebalancing crises. We may no longer have to forcibly write down “hopelessly unproductive works”, during which process the seemingly endless capital of the globalization phase is wiped out, and we enter into a phase in which capital is scarcer and must be allocated much more carefully and productively.

Instead, the historically unprecedented fact of our unlimited ability to issue a credible fiat currency allows us to postpone a quick and painful resolution of the debt burdens we have built up. It is too early to say whether this is a good thing or a bad thing. On the one hand, it may be that postponing a rapid resolution protects us from the most damaging consequences of a crisis, when slower growth and a rising debt burden reinforce each other, while giving us time to rebalance less painfully — the Great depression in the US showed us how damaging the process can be. On the other hand the failure to write down the debt quickly and forcefully may lock the world into decades of excess debt and “Japanification”. We may have traded, in other words, short, brutal adjustments for long periods of economic stagnation.

Investment in infrastructure is essential to rescue an economy from a contraction of aggregate demand following a financial crisis. The unpalatable alternative is a deflationary spiral and significant contraction in GDP. But we need to ensure that investment is made in productive assets — that generate market-related returns — rather than investments in social infrastructure that cannot generate sufficient revenue to service, nor be be sold to repay, debt funding.

February 1, 2015

Infrastructure opportunity | Michael Pettis’ CHINA FINANCIAL MARKETS

Interesting view from Michael Pettis:

Excess liquidity and risk appetite makes it easy to lock in cheap, long-term funding for investment projects. Countries that have weak infrastructure, or whose infrastructure is in serious need of improvement, have today an historical opportunity to build or replenish the value of their infrastructure with very cheap capital. This is truly the time for governments to identify their optimal infrastructure needs and to lock in the financing.

January 29, 2015

India: Sensex advance

India will also benefit from lower oil prices. The BSE Sensex broke resistance at 29000, signaling a primary advance to 31000*. Rising 13-week Twiggs Money Flow troughs above zero signal strong, long-term buying pressure. Retracement to test the new support level at 29000 is a possibility, but breach of support is unlikely.

Sensex

* Target calculation: 29000 + ( 29000 – 27000 ) = 31000

January 29, 2015

ASX rebounds

A low inflation outlook is likely to ease pressure on the Fed to raise interest rates. The S&P 500 is testing support at 2000. Breach would warn of another correction, but the primary trend is intact. Respect of the secondary trendline would suggest this is likely to continue. Rising 13-week Twiggs Money Flow indicates long-term buying pressure; decline below the rising trendline would again warn of a secondary correction.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1800 ) = 2200

CBOE Volatility Index is making more frequent penetrations of 20%, suggesting moderate risk. VIX ranging between 20% and 30% would warn of increased market stress.

S&P 500 VIX

The Nasdaq 100 is also testing support, at 4100, and breach of this level would warn of a correction. But the primary trend is strong and further 13-week Twiggs Money Flow troughs above zero would reinforce this.

Nasdaq 100 Index

* Target calculation: 4100 + ( 4100 – 3700 ) = 4500

Europe is buoyant after the ECB signaled further monetary easing (QE). Germany’s DAX is heading for 11000* after breaking resistance at 10000. Recovery of 13-week Twiggs Momentum indicates continuation of the up-trend.

DAX

* Target calculation: 10000 + ( 10000 – 9000 ) = 11000

The Footsie has also recovered, testing long-term resistance at 6900/7000. Expect strong resistance at this level. Breakout would signal a fresh primary advance, with a long-term target of 8000*.

FTSE 100

* Target calculation: 7000 + ( 7000 – 6000 ) = 8000

China is benefiting from falling oil prices, with the Shanghai Composite Index again testing resistance at 3400. Breakout would signal a fresh primary advance. Rising 13-week Twiggs Money Flow indicates strong (medium-term) buying pressure. The stimulus effect of lower energy prices may allow the PBOC scope to rein in monetary expansion, which would have a dampening effect on the current stock boom.

Shanghai Composite Index

Discussion of monetary expansion would not be complete without mention of Japan where the BOJ has gone “all in” to curb long-term deflationary pressures. The Nikkei 225 Index is testing resistance at its 2007 high of 18000. Rising 13-week Twiggs Money Flow respecting the zero line suggests long-term buying pressure. Breakout above 18000 would signal another primary advance, with a target of 20000*.

Nikkei 225 Index

* Target calculation: 18000 + ( 18000 – 16000 ) = 20000

Australia’s ASX 200 has suffered from falling commodity prices over the past 12 months, with falling crude adding to the energy sector’s woes in the last quarter. But an up-tick of 13-week Twiggs Money Flow hints at brighter days ahead. Breakout above 5650 would offer a target of 6000*.

ASX 200

* Target calculation: 5600 + ( 5600 – 5200 ) = 6000

The Daily chart shows the index completed a double bottom, breaking resistance at 5550, after twice testing primary support at 5120/5150. A 21-day Twiggs Money Flow trough above zero signals medium-term buying pressure. Follow-through above 5660 would confirm a fresh primary advance.

ASX 200

January 28, 2015

Gold resurgent despite stronger Dollar

The Fed has signaled a “patient approach” to raising interest rates, causing long-term yields to fall. Ten-year Treasury Note yields broke primary support at 2.00%, signaling another test of the 2012 low at 1.40%. Declining 13-week Twiggs Momentum below zero confirms continuation of the down-trend. Recovery above 2.00% is unlikely, but would warn that the down-trend of the last 12 months is ending.

10-Year Treasury Yields

The Dollar Index is headed for a test of long-term resistance at 100. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Retracement to test support at 90 remains a possibility, but the likelihood of reversal below this level is remote.

Dollar Index

* Target calculation: 90 + ( 90 – 80 ) = 100

Gold

Despite the rising Dollar, Gold continues to test resistance at $1300/ounce. Breakout would signal a rally to $1400/ounce, but trend reversal is unlikely. Retreat below $1200 would confirm a long-term target of $1000*.

Spot Gold

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

The Gold Bugs Index, representing un-hedged gold stocks, displays a similar picture. Breakout above 200 would signal a rally to test the declining trendline around 250, but reversal of the primary down-trend is unlikely.

Gold Bugs Index

January 28, 2015

Crude still has further to fall

West Texas Crude has been falling since breaking support at $75/barrel, following through below $50/barrel. A test of 2009 lows at $30/barrel is likely unless there is major disruption to supply.

WTI Crude Monthly

When we adjust crude prices for inflation, they remain high by historical standards. Prior to the China boom of the early 2000s, the ratio of WTI Crude to CPI had seldom ventured above $20/barrel when measured in 1982-1984 dollars (shown as 0.2 on the chart below). After the dramatic fall of the last 3 months, the adjusted price at the end of December 2014 (in 1982-1984 dollars) is still $25.20/barrel (0.252 on the chart) — well above the former high.

WTI Crude adjusted for inflation

January 22, 2015

Russia terror alert | Kyiv Post

Kyiv Post quotes Markian Lubkivskyi, an adviser to SBU head Valentyn Nailyvaichenko on the rise of terrorism outside of Eastern Ukraine:

“(Terrorists) are aiming to undermine Ukraine from within,” Lubkivskyi told the Kyiv Post, adding that terrorism is one of Russia’s tools in the war against Ukraine. “This is definitely a planned set of linked actions carried out to demoralize people, scare them, spread chaos and create protest moods.”

One of the latest incidents occurred on Jan. 20, when a bridge near the village of Kuznetsivka in Zaporizhzhia Oblast collapsed under a cargo train that was carrying iron ore to Volnovakha in Donetsk Oblast. As a result, 10 cars derailed.

This was the fourth railway explosion over the last two months.

In January, three fuel tanks on a freight train were set on fire at the Shebelynka station in Kharkiv Oblast, and a bomb blew up a freight tank with petrochemicals at the Odesa-Peresyp railway station. On Dec. 24, explosives hidden under the railways hit a train at the Zastava 1 railway station, also based in Odesa.

Odesa has become the main target of attacks in the last two months.

The word terrorism is widely misused. What we are dealing with is state-sponsored terrorism or war by proxy. Without state sponsorship — in the form of training, weapons, logistics and financial support — most terrorist organizations would shrivel up and die. The level of proxy warfare increased hugely since World War II, when direct confrontation between major powers became dangerous because of the advent of nuclear weapons. Instead of direct confrontation these powers resorted to deniable aggression, by proxy, in order to weaken their enemies. The former Soviet Union was a major sponsor of proxy wars, from Korea and Vietnam to support for guerrilla wars elsewhere in Asia, Africa and South America. It appears that Vladimir Putin has adopted a similar strategy and is expanding its use into Eastern Europe.

It is difficult to win a guerrilla war where there are few conventional battles. The lesson from Vietnam is that you can win every battle, but still lose the war. Far better to identify and attack the sponsor through unconventional (asymmetric) means such as sanctions. Make sure that the cost outweighs the benefits of proxy warfare.

When we read the word “terrorism” in popular media, our first question should be: who is the sponsor and how can we make them desist?

S&P 500 up-trend continues

The S&P 500 encountered solid support at 2000. Rising 13-week Twiggs Money Flow indicates buying pressure. Recovery above the descending trendline is likely and would indicate the end of the correction. Breakout above 2080 would confirm another advance with a target of 2200*. Failure of support is unlikely, but would test the primary trendline at 1900.

S&P 500

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

CBOE Volatility Index (VIX) retreated below 20, reassuring that risk remains low to moderate.

VIX Index

Bellwether transport stock Fedex continues in a primary up-trend, signaling that economic activity levels are improving.

Fedex

Small caps also remain in an up-trend, with the Russell 2000 consolidating between 10.50 and 12.0. Retreat of 13-week Twiggs Momentum close to the zero line is typical of a ranging market. Breakout above 12.00 would signal a primary advance with a target of 13.0*; follow-through above 12.10 would confirm. Reversal below 10.50 is unlikely, but would warn of a bear market.

Russell 2000

* Target calculation: 12 + ( 12 – 11 ) = 13

Victory attained by violence is tantamount to a defeat, for it is momentary.
~ Mahatma Gandhi