Adam Scott, 2007. 3-Wood off the tee at St Jude.
Note how Adam anchors the left side of his body. I don’t agree that his down-swing starts with his hips. Watch his right shoulder.
Gold and Inflation
The Dollar Index is testing long-term highs at 90. Breakout is likely and would suggest a strong bull trend.
One reason is falling inflation expectations, with the Breakeven Rate (5-year Treasury yield minus equivalent TIPS yield) testing its 5-year low. Further falls would increase pressure on the Fed to raise interest rates.
A strong Dollar and low inflation both weaken gold prices. Declining 13-week Twiggs Momentum, below zero, suggests a strong down-trend. Follow-through below $1180/ounce would confirm this.
Markets back on track
Threat of a Russian collapse roiled markets in early December, but the immediate crisis now seems to have passed.
Recovery of the S&P 500 above resistance at 2080 would indicate another advance , with a target of 2150*. Rising 13-week Twiggs Money Flow troughs indicate long-term buying pressure. Reversal below 2000 is most unlikely.
* Target calculation: 2000 + ( 2000 – 1850 ) = 2150
A 10-year view of CBOE Volatility Index (VIX) suggests low to moderate risk typical of a bull market.
My favorite bellwether, transport stock Fedex, also underwent a correction. The long tail suggests buying pressure and breakout above the recent high would confirm a strong bull trend, indicating rising economic activity.
Dow Jones Euro Stoxx 50 found support at 3000 and is likely to test 3300. Rising 13-week Twiggs Money Flow indicates buying pressure, but the index is likely to continue ranging between these two levels until tensions between Russia and Eastern Europe are resolved.
China’s Shanghai Composite Index is in a strong bull trend, having broken resistance at 2500, and is likely to test the 2009 high at 3500. Rising 13-week Twiggs Money Flow indicates strong (medium-term) buying pressure.
I continue to question China’s ability to sustain this performance, given their poor economic foundation.
RT @TomOrlik Puns are now banned in China so I'll just say that November electricity, cement, & steel output was weak pic.twitter.com/4FY3Uc6s1R
— Patrick Chovanec (@prchovanec) December 12, 2014
Japan’s Nikkei 225 Index breakout above its 2007 high of 18000 would signal an advance to 19000*. Rising 13-Week Twiggs Money Flow indicates strong buying pressure. Index gains are largely attributable to rising inflation and a weaker yen.
* Target calculation: 18000 + ( 18000 – 17000 ) = 19000
India’s Sensex found support at 27000. Recovery above 28000 would suggest another advance. Breakout above 29000 would confirm a target of 31000*.
* Target calculation: 29000 + ( 29000 – 27000 ) = 31000
ASX 200 performance remains weak. Breach of the recent descending trendline suggests that the correction is over, but only breakout above 5550 would complete a double-bottom formation, suggesting a fresh advance. Rising troughs on 13-week Twiggs Money Flow indicate medium-term buying pressure. Reversal of TMF below zero, or breach of support at 5000/5150, is now less likely, but would warn of a down-trend.
* Target calculation: 5500 + ( 5500 – 5000 ) = 6000
Stille Nacht / Silent Night
Tomorrow is the 100th anniversary of a momentous day during the First World War. By December of 1914 the war had already drawn to a stalemate with huge loss of life on both sides and appalling conditions in the trenches. Many of the dead could not be retrieved and were abandoned in No-Man’s land. The war that was supposed to be over by Christmas stretched interminably ahead.
Temperatures fell below freezing and snow began to fall on some parts of the line. German troops decorated the parapets of their trenches with small conifers, resembling Christmas trees. On Christmas Eve they lit candles and sang carols.
The Germans lit candles and in beautiful harmony sang “Silent night…Holy night.” So moved by their cheer, the British soldiers responded with carols of their own. This goodwill inspired many soldiers on both sides to toss gifts of food over into their enemy trenches. The German side applauded the British singing then the Brits cheered and applauded the Germans. One miracle act of goodness led to another, then another….. [1]
Informal truces were negotiated by officers despite warnings from British High Command that the enemy may be planning an attack.
Some of the more adventurous on both sides left their trenches and exchanged small gifts, swapping chocolate for sauerkraut and sausages.
“What a sight; little groups of Germans and British extending along the length of our front. Out of the darkness we could hear the laughter and see lighted matches. Where they couldn’t talk the language, they made themselves understood by signs, and everyone seemed to be getting on nicely. Here we were laughing and chatting to men whom only a few hours before we were trying to kill ”
~ Corporal John Ferguson of the Seaforth Highlanders.[2]
Christmas Day started with unarmed German and British soldiers collecting their dead from No-Man’s Land.
Fraternization continued throughout Christmas Day and the informal truce extended in some parts of the line until after New Year’s day. Regimental records of the 133rd Saxon Regiment report a football match against the British which the Saxons won 3-2.
Roughly 100,000 British and German troops were involved in the unofficial cessation of hostilities. Similar exchanges were reported between German and French troops. On the Eastern front, an unofficial ceasefire was recorded between Austrian and Russian troops the following Easter.
Overtures in later years were less successful after Allied Command ordered artillery barrages to discourage communication. Attempts at fraternisation with the enemy and negotiation of local truces to collect the dead between the lines faced severe punishment.
Company commander, Sir Iain Colquhoun of the Scots Guards, was court-martialled for defying standing orders to the contrary. While found guilty and reprimanded, the punishment was later annulled by General Haig and Colquhoun remained in his position.[3]
The Christmas truce of 1914 was a triumph of the human spirit over adversity and is a symbol of man’s humanity towards his fellow man. When we recognize that the enemy is not some faceless devil, as some leaders would have us believe, but much like us — with mothers, fathers, brothers, sisters, husbands, wives, sons and daughters — we will find it easier to resolve our differences without waging war.
Scène du film “Joyeux Noël” (Version Française)
Wishing you peace and goodwill over the Christmas season and prosperity in the year ahead.
Thanks to:
[1] http://professortaboo.wordpress.com/tag/1914-christmas-truce/
[2] http://www.historylearningsite.co.uk/christmas_1914_and_world_wa.htm
[3] http://en.wikipedia.org/wiki/Christmas_truce
Apologies for my absence
Apologies for my absence over the last week. My computer was damaged during a thunderstorm. Even though I unplugged and powered off, it was dead as a dodo when I tried to turn it back on. Backups are only as good as the recovery software unfortunately (in future I will take mirror images of my hard disk), so I am going through the tiresome process of setting everything up manually.
Regards, Colin
Murray has endorsed macroprudential | Macrobusiness.com.au
Posted by Houses and Holes
At 12:52pm on December 8, 2014
Published with permission from Macrobusiness.com.au.
From Callam Pickering:
The one glaring problem with the Financial System Inquiry is that it didn’t push hard for the introduction of macroprudential policies. That takes the heat off both the RBA and APRA.
The truth is that higher capital requirements — combined with higher risk weighting on mortgages and tax reform — would have a similar (potentially larger) effect as macroprudential policies. In the long term financial system and tax reform is clearly the better approach to creating an efficient and sustainable housing and financial sector, but these reforms will take longer to implement.
That’s right. Murray’s principle recommendations are macroprudential. APRA is now free (and is being urged) to implement higher capital requirements. They do not require anything from government to go ahead. This is basically the model of MP envisaged by Prof Ross Garnaut.
A more interesting question is whether or not APRA will still act on specific areas of risk such as interest-only loans. These are a menace, as the US bust showed, and are surging. Murray did not mention them, being too granular, but said the following on MP more particularly:
The global financial crisis (GFC) prompted policy makers and regulators around the world to reconsider their approach to maintaining financial stability. Some countries at the epicentre of the crisis have since expanded their prudential perimeters and adopted more formal and centralised institutional arrangements. This includes establishing single entities with responsibility for macro-prudential regulation. Australia has long adopted what could be called a ‘macro-prudential’ approach to supervision under the rubric of financial stability. Yet, Australia’s institutional structure is relatively informal and decentralised. The Reserve Bank of Australia (RBA) and APRA each have responsibility for financial stability. However, most macro-prudential tools can only be deployed by APRA. This places a strong premium on cooperation between the two agencies.
Against the background of developments overseas, the Inquiry has considered whether Australia should change its institutional arrangements for making and implementing financial stability policy.
However, the Inquiry does not see a strong case for change in this area. Although approach has advantages and disadvantages, alternative institutional approaches are yet to be tested — as indeed is the effectiveness of many macro-prudential tools. For this reason, the Inquiry recommends no fundamental change to the current institutional arrangements for financial stability policy and no change to the prudential perimeter at this time.
That is neither here nor there and APRA will still be free to raise capital requirements for specific loans if it sees fit.
Economics is just politics masquerading as science | Pragmatic Capitalism
From Cullen Roche:
….much of economics is just politics masquerading as science
In an earlier blog, Roche discusses the reasons for this (emphasis added):
- Most of economics involves conforming a political bias with a world view. For instance, most Keynesians start with government spending and taxing, how those government policies can influence the economy and then interpret a “model” in such a way that confirms their political bias. Monetarists start with the central bank and interpret a more laissez-faire view of a “model” to interpret how policy can impact the economy. Austrians start with the private sector and build a “model” that seeks to eliminate government. So on and so forth. Every “school” of economics has a very specific ideology and the political lines are very clearly drawn. This doesn’t even approach “science”. It’s more like religion.
- If economics were more of a science it would start with stylized fact. It would start purely with how the system works and how it functions at the operational level instead of looking at how a certain political entity can use certain policies to conform to a particular world view.
- Why did most economists fail to predict the crisis or prescribe the right cures? Because they’re not working from the foundation of stylized fact. They’re working from a policy bias position that renders their world view inapplicable much of the time.
- So, what is economics good for? Unfortunately, not very much given that so much of it is really just a policy debate masquerading as a scientific debate. And until we start getting more scientific, like say, trying to figure out how key institutions (like banks) in our monetary system operate, then we’re just chasing our own tails thinking that economics is useful.
Read more at Economists are Politically Biased and That’s a Good Thing | Pragmatic Capitalism.
Australian banks rally on Murray Report
The ASX 200 Financial sector (ex-REITs) responded well to release of David Murray’s report into the financial services industry. As the largest constituent of the ASX 200 index, comprising more than one-third of market capitalization, sector performance is critical in determining future direction of the broader index. Breach of resistance at 7220 suggests that the correction is over. Follow-through above 7400 would confirm a fresh primary advance.
David Murray’s Financial System Inquiry
The Final Report of the Financial System Inquiry, led by ex-Commonwealth Bank CEO David Murray, calls on Australian banks to become “unquestionably strong” to prevent another financial crisis. The FSI calls for increased bank capital in the form of common equity, with capital ratios increasing from an average of 9.1% to the 12.2% threshold for the top quartile of international banks. The FSI also proposes that banks increase their average risk-weighting for home mortgages to 25-30% compared to current weightings as low as 15%.
Chris Joye from the AFR estimates that the first proposal would require about $21 billion in new capital, while increased risk-weighting would require an additional $15 billion. There may be some overlap between the two, but the combined requirement is likely to be more that $30 billion.
Impact on consumers is likely to be negligible. The FSI projects that a 1% increase in bank capital ratios would increase the weighted cost of capital by 6 basis points (0.06%) because of the higher cost of equity capital.
But this does not take account of lower risk premiums required, for debt and equity, when capital is increased. A reduction of debt funding costs to 3.65% and equity to 14.75% would offset the increase in equity capital; so the actual cost increase may be considerably smaller.
A resilient banking system would not only avoid significant losses of GDP (as high as 158 percent) in the event of a financial crisis, but would save up to 900,000 jobs according to the FSI. In addition, reduced risk of a government bailout would minimize the threat to government debt levels and Australia’s AAA credit rating. Banks would also benefit through improved profitability and stronger growth prospects.
My concerns with FSI are mainly long-term. Raising capital ratios to the top quartile of international banks would certainly improve the resilience of Australian banks, but this is a moving target. We can expect average capital held by international banks to increase as other countries conduct their own reviews into the adequacy of bank funding. Also, leverage ratios (ignoring risk-weighting) remain low and should be progressively lifted towards a long-term goal of 6 to 8 percent. Reliance solely on risk-weighted capital ratios can encourage industry-wide concentration in low-risk-weighted assets which in turn will elevate risk. Lastly, bail-in bonds are dangerous — any attempt at conversion would destroy creditor confidence in the banking system with far-reaching repercussions — and should be discouraged.
I believe that stronger capital ratios are a win for both Australian taxpayers and bank shareholders. Implementation of the FSI recommendations would be a major advance towards building a resilient and sustainable banking sector.
A long-term view
Better than expected US jobs data and strong German factory orders helped to rally markets Friday. Also, ECB chief Mario Draghi’s Thursday announcement is seen as supporting broad-based asset purchases (QE) early in 2015. A long-term view of major markets may help to place current activity in perspective.
The S&P 500 continues a strong advance, with rising 13-week Twiggs Money Flow indicating medium-term buying pressure. Long-term and medium targets coincide at 2250* and we should expect further resistance at this level.
* Target calculation: 1500 + ( 1500 – 750 ) = 2250; 2050 + ( 2050 – 1850 ) = 2250
CBOE Volatility Index (VIX) continues to indicate low risk typical of a bull market.
Germany’s DAX broke resistance at its earlier high of 10000, suggesting a further advance. Recovery of 13-week Twiggs Momentum above zero indicates continuation of the up-trend. The long-term target is 12500*, though I cannot see this being reached until tensions in Eastern Europe are resolved.
* Target calculation: 7500 + ( 7500 – 2500 ) = 12500
The Footsie is testing long-term resistance at 6900/7000. Respect of the zero line by 13-Week Twiggs Money Flow indicates long-term buying pressure. Breakout above 7000 would signal a fresh primary advance, with a long-term target of 10500*.
* Target calculation: 7000 + ( 7000 – 3500 ) = 10500
China’s Shanghai Composite Index broke resistance at 2500 and is likely to test the 2009 high at 3500. Rising 13-week Twiggs Money Flow indicates strong (medium-term) buying pressure.
Japan’s Nikkei 225 Index is testing resistance at its 2007 high of 18000. 13-Week Twiggs Money Flow respecting the zero line indicates long-term buying pressure. Breakout would signal another primary advance. A long-term target of 28000* seems unachievable unless one factors in rising inflation and continued devaluation of the yen.
* Target calculation: 18000 + ( 18000 – 8000 ) = 28000
Weak ASX 200 performance is highlighted by the distance below its 2007 high of 6850. Falling commodity prices have retarded the recovery and are likely to continue for some time ahead.
The 2005-2008 Australian commodities boom was squandered, damaging local industry and hampering the current recovery. Norway successfully weathered a similar commodities boom in the 1990s, protecting local industry while establishing a sovereign wealth fund that is the envy of its peers. Their fiscal discipline set a precedent which should be followed by any resource-rich country looking to navigate a sustainable path through a commodities boom and avoid the dreaded “Dutch Disease”.
Respect of support at 5000 would indicate the primary up-trend is intact — but declining 13-week Twiggs Money Flow indicates selling pressure. Reversal of TMF below zero or breach of support at 5000/5150 would warn of a down-trend.
* Target calculation: 5000 + ( 5000 – 4000 ) = 6000
The daily chart shows a slightly improved perspective. 21-Day Twiggs Money Flow oscillating around zero signals indecision. Recovery above 5400 would suggest the correction is over. But reversal below 5200 is as likely and would warn of a test of primary support at 5120/5150.
A 3-Sentence Explanation Of What Crashing Oil Prices Mean For America | Business Insider
Charles Schwab’s Liz Ann Sonders offers some simple maths that puts it all into perspective. In three sentences:
Consumer spending represents 68% of the US economy. Oil and gas capex represents about 1% of US GDP and less than 9% of US total capex (which in turn represents about 12% of US GDP). Therefore, the benefit of lower energy prices to the consumer and many businesses greatly outweighs the significant hit to energy companies and/or energy-oriented capex, especially in energy-oriented states.
Read more at A 3-Sentence Explanation Of What Crashing Oil Prices Mean For America | Business Insider.