Author: Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters. Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events. He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
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Why Our Elites Stink – NYTimes.com

David Brooks: Today’s elite is more talented and open but lacks a self-conscious leadership code. The language of meritocracy (how to succeed) has eclipsed the language of morality (how to be virtuous). Wall Street firms, for example, now hire on the basis of youth and brains, not experience and character. Most of their problems can be traced to this.

If you read the e-mails from the Libor scandal you get the same sensation you get from reading the e-mails in so many recent scandals: these people are brats; they have no sense that they are guardians for an institution the world depends on; they have no consciousness of their larger social role…..

via Why Our Elites Stink – NYTimes.com.

Comment:~ The first thing we need to teach college students is ethics.

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Forex: Euro, Pound Sterling, Canadian Loonie, Australian Dollar and Japanese Yen

The Euro broke medium-term support at $1.23, signaling a test of the 2010 low at $1.19/$1.20. Declining 63-day Twiggs Momentum warns of a strong down-trend. Breach of the 2010 low becomes likely if the ECB had to indicate an intention to directly or indirectly purchase government bonds — and would suggest a long-term decline.

Euro/USD

Pound Sterling broke through €1.26 against the Euro and is now retracing to test the new support level. Rising 63-day Twiggs Momentum indicates an accelerating up-trend. Respect of support is likely and would offer a target of €1.29.

Pound Sterling/Euro

* Target calculation: 1.26 + ( 1.26 – 1.23 ) = 1.29

Canada’s Loonie is weakening against the Aussie Dollar but long-term bullish divergence on 63-day Twiggs Momentum (and breach of the descending trendline) warns of reversal to an up-trend. Breakout above parity would confirm.

Canadian Loonie/Aussie Dollar

The Aussie Dollar broke support at $1.02 USD and its recent broadening wedge on the 2-hour chart. Expect a decline to $1.01; confirmed if short-term support at $1.015 is broken.

Aussie Dollar/USD

* Target calculation: 1.02 – ( 1.025 – 1.015 ) = 1.01

A long-term chart shows the US dollar forming a bottom against the Yen after long-term bullish divergence on 63-day Twiggs Momentum and breach of the descending trendline. Breakout above the current descending trendline and resistance at ¥80 would indicate another test of ¥84/¥85, while breach of that level would confirm a primary up-trend.

Aussie Dollar/Japanese Yen

* Target calculation: 84 + ( 84 – 78 ) = 90

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S&P 500: Weak rally suggests down-turn

The S&P 500 is advancing on the weekly chart toward another test of 1420, but falling momentum warns of a primary down-trend. Reversal of 63-day Twiggs Momentum below zero would indicate a primary decline. Failure of primary support at 1270 would confirm, offering a target of 1170*. In the shorter term, recovery above 1370 would indicate a test of 1420. Breakout above 1420 is unlikely at this stage — especially with money flowing into bonds.

S&P 500 Index Weekly Chart

* Target calculation: 1270 – ( 1370 – 1270 ) = 1170

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Dollar rises, gold and silver threaten support

The US Dollar Index rallied to test resistance at 83.50. Breakout would target the 2010 high of 88.00. 63-Day Twiggs Momentum oscillating above the zero line indicates a strong up-trend.

US Dollar Index

* Target calculation: 82 + ( 82 – 78 ) = 86

Spot Gold is consolidating above primary support at $1530 per ounce. 63-Day Twiggs Momentum below zero signals a primary down-trend. Downward breakout would offer a target of $1300*……. unless the Fed introduces QE3.

Spot Gold

* Target calculation: 1550 – ( 1800 – 1550 ) = 1300

Spot Silver is similarly testing primary support at $26 per ounce. Breakout would offer a target of $16*….. again with the QE3 caveat.

Spot Silver

* Target calculation: 26 – ( 36 – 26 ) = 16

Commodities continue in a primary down-trend, warning of a global economic down-turn. Respect of resistance at 295 by the CRB Commodities Index would warn of another primary decline, with a target of 235*. 63-Day Twiggs Momentum oscillating below zero indicates a strong down-trend. Penetration of the descending trendline is unlikely, but would suggest that a bottom is forming.

CRB Commodities Index

* Target calculation: 265 – ( 295 – 265 ) = 235

Brent Crude is also testing resistance — and the descending trendline — at $100 per barrel. Respect would indicate another decline, with a target of $75 per barrel*. There are two wild cards that could impact on price: tensions with Iran and QE3.

Brent Crude and Nymex WTI Light Crude

* Target calculation: 100 – ( 125 – 100 ) = 75

The gold-oil ratio (measured against Brent crude) is close to its mid-point of 15.0, offering little in the way of overbought/oversold readings for gold over the last  few years (after a false overbought reading — above 20 — in 2009).

Gold/Brent Crude Ratio

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Is America the greatest country in the world?

Beginning scene of the new HBO series The Newsroom answers the question: “Why is America the greatest country in the world?”

An honest three and a half minutes of television…. [strong language]

Hat tip Barry Ritholz/Doug Kass

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Laffer: Increasing taxes will cause a double-dip recession

Art Laffer of Laffer Associates warns that attempts to increase taxes on the top 2% of earners will drive the economy back into recession: “They employ everyone else, invest capital and provide the economic recovery” he said.

http://video.cnbc.com/gallery/?video=3000101378.

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Is China sliding towards deflation? | beyondbrics

Robert Cookson: Chinese policy makers spend a lot of their time worrying about inflation. But the growing risk now appears to be deflation….

The PPI index has already turned negative [and] year-on-year growth in money supply has plunged to a level that in the past been consistent with CPI of between zero and 1 per cent…..

via Is China sliding towards deflation? | beyondbrics.

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Basel takes aim at Mega Bank | | MacroBusiness

Deep T: As the research previously posted here on MB shows, Mega Bank [the big four Australian banks: NAB, CBA, WBC and ANZ] carries a level of capital against residential mortgages that is less than 2% even with mortgage insurance. Mega Bank uses internal risk based models to determine the amount of capital which are primarily based on the historical default rate of Australian mortgages relative to loan to value ratios. The period over which Mega Bank assesses the historical default rate is primarily over a period of rising house prices fueled by the expansion of mortgage credit by Mega Bank. Thereby masking probable default levels over a more benign period…..

via Basel takes aim at Mega Bank | | MacroBusiness.

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New Jolt Looms for Investors: Earnings – WSJ.com

Jonathan Cheng: Companies begin reporting second-quarter earnings this week, starting with Alcoa Inc. (AA -2.19%) on Monday. Already, 42 companies—including Ford Motor Co. (F -0.73%) and Texas Instruments Inc. (TXN -2.43%) —have warned investors that profits will be lower than initially expected…….

Companies now are being hit on several fronts. Economies in China, Europe and the U.S. are slowing. That is hurting companies dependent on demand from those countries. As well, the U.S. dollar has jumped against the euro and other currencies, reducing profits made from international sales for U.S. companies.

via New Jolt Looms for Investors: Earnings – WSJ.com.

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S&P 500 dividend yields signal oversold?

Historically the S&P 500 was considered overbought — and ripe for a bear market — when the dividend yield dropped below 3 percent. A surge in share buybacks in the past two decades, however, disrupted this relationship, with the dividend yield falling close to 1.0 percent in the Dotcom era.

S&P 500 Earnings and Dividend Yields

What happens when we adjust for share buybacks?

In 2011, S&P 500 share buybacks increased to $409.0 billion. With dividends of $298 billion*, that gives a total cash distribution (dividends and buybacks) of $707 billion for a yield of 5.44 percent. Right in the middle of the 5.0 to 6.0 percent range previously considered typical of an oversold market.

* S&P 500 market capitalization of $12,993 billion at June 29, 2012 multiplied by 2.29 percent

Unfortunately share buybacks fluctuate wildly with the state of the market:

S&P 500 Share Buybacks

If we omit the highest and lowest readings, and take the average share buyback over the remaining 3 years, it amounts to $349 billion. That would give adjusted total cash distributions of $614 billion and an adjusted yield of 4.98 percent — still close to the oversold range.

Compare to Earnings Yield

The current reported earnings yield of 6.8 percent, however, is way below the highs (10 to 14 percent) of the 1970s and 80s. Current distributions (dividends plus buybacks) amount to 80 percent of current earnings. Payout ratios above 60 percent are considered unsustainable.

My conclusion is that earnings yield offers a more accurate measure of value. And reflects a market that is fairly valued — rather than overbought or oversold — especially when we consider the likelihood of earnings disappointments.

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