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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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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Falling Treasury yields: Money is flowing out of stocks

10-Year Treasury yields broke medium-term support at 1.55 percent, indicating another decline. Breach of support at 1.45 percent would confirm, offering a target of 1.20 percent*. Latest stats from the Fed show holdings of Treasury notes and bonds fell over the last week, so the fall is not due to “Operation Twist”. Declining yields suggest that the current stock market rally is likely to fail: money is flowing out of stocks and into bonds. Recovery above 1.70 percent is unlikely but would suggest another stock market rally.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

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Roubini Says 2013 `Storm' May Surpass 2008 Crisis

Nouriel Robini on Bloomberg TV: The Euro summit was a failure… markets were expecting much more. Either you have debt neutralization [EFSF purchases of government bonds] or debt monetization by the ECB or EFSF/ESM be doubled or tripled using leverage ….or you will have a worse crisis in the next few weeks.

The ability of politicians to kick the can down the road will run out of steam in 2013…..next year could be a global perfect storm

Bloomberg TV: Roubini Says 2013 `Storm’ May Surpass 2008 Crisis

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The Threat From a Recession | ECRI

The Economic Cycle Research Institute, which claims a perfect recession-forecasting record, says an economic contraction is imminent. “We have not seen a slowdown where year-over-year payroll job growth has dropped this low without a recession,” ECRI states in a May report.

If, or when, the U.S. (and/or the global) economy does start to contract, commodity prices will tumble because of three factors…..

via The Threat From a Recession | News | News and Events | ECRI.

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