Dow signals fresh advance

Dow Jones Industrial Average recovered above 17000, signaling a fresh advance. Follow-through above 17150 would confirm a target of 17500*. Leveling off of 21-day Twiggs Money Flow in recent days, however, indicates (short-term) resistance. Reversal below 16950 is unlikely, but would warn of a test of 16750.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

The S&P 500 is again testing resistance at 2000. Breakout would offer a target of 2250*. Recovery of 13-week Twiggs Money Flow above its recent (July 2014) high would confirm buying pressure. Reversal below 1950 is unlikely, but would warn of another test of (primary) support at 1900.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

Declining CBOE Volatility Index (VIX) readings suggest continuation of the bull market.

VIX Index

The Nasdaq 100 broke through the psychological level of 4000. Expect retracement to test the new support level. Respect is likely and would confirm another advance. Recovery of 13-week Twiggs Money Flow above its recent (July 2014) high would confirm buying pressure. Reversal below 4000 is unlikely but would warn of a test of support and the rising trendline at 3750.

NASDAQ 100

* Target calculation: 4000 + ( 4000 – 3750 ) = 4250

Scottish Independence | Cato @ Liberty

From David Boaz:

Some scholars argue that the Act of Union in 1707 made the Scots part of a larger and more advanced nation and opened the way to the Scottish Enlightenment of David Hume, Adam Smith, and other scholars. And perhaps those modern ideas and the connection with England made possible the achievements of the inventor James Watt, the architect Robert Adam, the road builder John MacAdam, the bridge builder Thomas Telford and later Scots such as Alexander Graham Bell and Andrew Carnegie.

But whatever the benefits of union might have been in 1707, surely they have been realized by now. And alas, the land of Adam Smith has become one of the poorest and most socialist parts of Great Britain…

Read more at Scottish Independence | Cato @ Liberty.

Euro, Yen plunge against Dollar

The Euro broke support at $1.33, signaling a further decline against the Dollar with a target of $1.30*. Falling 13-week Twiggs Momentum, below zero, warns of a strong down-trend. Recovery above $1.35 is most unlikely, but would suggest that the down-trend is slowing.

Euro/USD

* Target calculation: 1.35 – ( 1.40 – 1.35 ) = 1.30

The recent rally of the Euro against the Russian ruble has faltered. An economic contraction and rising tensions over Eastern Ukraine both contributed. The Euro remains in an up-trend and recovery above RUB 49 would suggest another attempt at the previous high of RUB 51. But failure of support at RUB 46 would signal a primary down-trend. 13-Week Twiggs Momentum oscillating close to zero reflects current uncertainty.

Euro/Rouble

Vladimir Putin is attempting to exploit fault lines in the US/European alliance, targeting the powerful European farming and motor industry lobbies. Unauthorized incursions into Ukrainian territory by his white-painted “aid convoy” are another example, where the infringement is so apparently inoffensive that Angela Merkel will find it difficult to convince her European allies to escalate sanctions further. Failure to react will merely embolden Putin to conduct further minor infringements in defiance of the EU, confident in their response, until the Ukraine suffers “death by a thousand cuts”.

Putin

Only if the US/EU adopt an aggressive escalation, as suggested here on Defence & Freedom, are they likely to contain Russian aggression.

“…a defensive and reactionary game plan makes one predictable. The very existence of a crisis should be understood as a hint that someone used this predictability to predict the outcome of a produced crisis — and arrived at the conclusion that it’s a good idea. Aka failure of deterrence.”

Japan

As with the Euro, the Japanese Yen is also weakening against the Dollar. The Greenback broke resistance at ¥103.50, signaling a rally to test the 2013 high. Follow-through above ¥104 would confirm. Rising 13-week Twiggs Momentum above zero strengthens the signal. Reversal below ¥103 is unlikely, but would warn of another test of primary support at ¥101.

USD/JPY

Australia

The Aussie Dollar, however, is holding its own — ranging between $0.92 and $0.95 against the US Dollar. The narrow band and 13-week Twiggs Momentum holding above zero both suggest continuation of the up-trend. Breakout above $0.95 would suggest a target of $0.97. Reversal below $0.92 is unlikely at present, but would warn of a decline to the band of support between $0.87 and $0.89.

Aussie Dollar

The ASX 200, retracing slightly from resistance at 5650, is also influenced by strong foreign investment flows. Indications are predominantly bullish, including 21-day Twiggs Money Flow forming troughs above zero. Follow-through above 5660 would signal another advance, with a medium-term target of 5850. Reversal above 5550 is unlikely, but would warn of another test of primary support.

ASX 200

* Target calculation: 5650 + ( 5650 – 5450 ) = 5850

Aggressive defence | Defence and Freedom

From defence_and_freedom@gmx.de:

Imagine an unfolding crisis, and your government has confidence in its expectations for what’s going to happen next. Couldn’t a couple aggressive*, unexpected actions ruin the opposing sides’ plans, crush their timetable, make their political calculations obsolete, destroy their confidence in their ability to predict your government’s reactions and to predict the costs of the crisis?

Couldn’t such a disruption make a quite acceptable diplomatic settlement more likely? — I’m all for peace and free love and stuff**, but I distrust the notion that escalation is always a bad thing. An escalation to ruin some aggressor’s day may be the right thing to do. To have and obey a defensive and reactionary game plan makes one predictable. The very existence of a crisis should be understood as a hint that someone used this predictability to predict the outcome of a produced crisis – and arrived at the conclusion that it’s a good idea.
A.k.a. failure of deterrence.

* “aggressive”, NOT “aggression against a peaceful country
** Similarly, I don’t think “war as last resort” makes much sense.

Read more at Defence and Freedom: Aggressive defence.

Houses overvalued by up to 30 per cent, says ex-RBA official

From Christopher Joye:

One of Australia’s top economic experts, Jeremy Lawson, says the ­housing market is 20 per cent to 30 per cent overvalued and has left Australia vulnerable to a big international ­economic shock.

Mr Lawson is the global chief ­economist of Standard Life, a massive British fund manager with $460 billion in assets under management. He was previously a senior economist at the Reserve Bank of Australia and the OECD, and in 2007 advised then ­opposition leader Kevin Rudd…

Read more at Houses overvalued by up to 30 per cent, says ex-RBA official.

Tom Devine: Why I now say yes to independence for Scotland

Tom Devine, Scotland’s most celebrated historian of recent years, reveals why he now intends to vote in favor of independence on September 18:

I come from a Labour background that includes my grandfather, mother and father and I was very much anti-independence at the start of the campaign. For me, the catalyst for change has been how threadbare the union has become since the early 1980s and linked to that is the transformation of Scotland. I wouldn’t have voted for this in the Scotland of the 1970s or 80s. It’s the Scotland that has evolved since the late 80s and 90s that is fuelling my yes vote. It now seems to me to be in a fit condition to run a successful economy. There is a list of reasons for this.

There has been a Scottish parliament which has demonstrated competent government and that parliament has also indicated, by the electoral response to it, that the Scottish people seem to be wedded to a social democratic agenda and the kind of political values which sustained and were embedded in the welfare state of the 1950s. In fact, you could argue that it is the Scots who have tried to preserve the idea of Britishness in terms of state support and intervention, and that it is England that has chosen to go on a separate journey since the 1980s.

There has been an enormous increase in a sense of Scottishness and pride in Scottish identity which has itself been sustained by an explosion in Scottish writing and creative arts since the 1980s, especially in relation to my own subject. We now have a proper modern history of Scotland which we didn’t have until as late as the 1970s and 1980s. We now have a clear national narrative sustained by objective and rigorous academic research. In 1964, one of my great predecessors Professor Hargreaves said that the history of modern Scotland is less studied than the history of Yorkshire.

There has also been a silent transformation of the Scottish economy. As late as early 1980s it was not sustainable owing to the continuing domination of the dinosaur heavy industries. The problem there was simply that labour costs not be sustained in an emerging global economy where goods and machines could be made cheaper elsewhere. Of course the process could have been managed much more sensitively and more thoughtfully by a Labour government, instead it was the radical surgery of Thatcherism and Toryism that had its way. What we have now – and this has been the case since the mid-1990s and de-industrialisation – is a diversified economy in which heavy industry, light manufacturing, the electronics sector, tourism, financial services have come together. And the vibrant public sector is important in terms of employment. We now have a resilient economic system.

We also have considerable reserves of one of the most important things for an independent state and that is power; power through the assets of oil and also through the potential of wind energy. Scotland is disproportionately endowed with these, compared to almost all other European countries. So, in other words, because of this economic transformation, which has undoubtedly led to social dislocation for many communities – and let’s not forget that – we now have an economy that can sustain itself in a resilient way in world markets.

I support his decision, but am concerned that Devine doesn’t seem to realize that Scotland has a thriving and vibrant economy precisely because it has moved away from the welfare state policies of the 1950s and 60s. Oil will obviously play a part, but Scotland has no future as an independent nation unless it follows the Irish model of an open economy, encouraging global industries to locate there. Nothing would discourage global industry faster than a glimpse of 1960s-style British Labour policies.

Read more at Tom Devine: why I now say yes to independence for Scotland.

Putin antics fail to impress markets

For all his macho posturing, Vladimir Putin has demonstrated an inability to move financial markets with his antics in Eastern Ukraine. His latest incursion towards Luhansk, with white-painted military trucks bearing aid to the rebel-held city, unchecked by the Red Cross, passed barely noticed. Instead markets are intently focused on nuances from a 68-year old Jewish mum at Jackson Hole, who also happens to chair the Federal Reserve.

I would have loved to call Janet Yellen a “grandmother”, but son Robert Akerlof — himself a PhD in Economics — does not claim any offspring on his CV. The apple doesn’t fall far from the tree. Husband, George Akerlof, is a Nobel prize-winning economist and professor emeritus at University of California, Berkeley.

The image below highlights the differences between the Fed and the ECB:

The Fed’s more stimulatory approach has paid dividends in terms of economic growth and employment while inflation expectations remain muted. The inflation breakeven rate — 10-year Treasury yield minus the yield on equivalent inflation-indexed securities — continues to range between 2.0% and 2.50%.

Inflation breakeven rate

The ECB’s more austere approach, on the other hand, has caused a world of pain.

Market update

  • S&P 500 tests 2000.
  • VIX continues to indicate a bull market.
  • DAX hesitant rally.
  • China bullish.
  • ASX 200 faces strong resistance.

The S&P 500 hesitated after making a new high on Thursday, but there was no dramatic fall in response to news from Eastern Ukraine. Expect retracement towards 1950, followed by another test of 2000. 21-Day Twiggs Money Flow is likely to re-test the zero line, but respect would indicate strong buying pressure. Breach of support at 1900, warning of a reversal, remains unlikely.

S&P 500

* Target calculation: 1500 + ( 1500 – 750 ) = 2250

Declining CBOE Volatility Index (VIX) indicates low risk, typical of a bull market.

S&P 500 VIX

Germany’s DAX rallied above 9300 on the weekly chart, but 13-week Twiggs Money Flow warns of continued selling pressure. Reversal below support at 8900/9000 would warn of a primary down-trend.

DAX

* Target calculation: 9000 – ( 10000 – 9000 ) = 8000

Shanghai Composite Index is testing resistance at 2250. Breakout would confirm a primary up-trend, signaling an advance to 2500*. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Respect of resistance, however, would suggest further consolidation.

Shanghai Composite Index

* Target calculation: 2250 + ( 2250 – 2000 ) = 2500

Tall wicks on ASX 200 daily candles indicate strong resistance at 5650. Respect would suggest retracement to 5550, while follow-through would be a strong bull signal, suggesting an advance to 5850*. Another 21-day Twiggs Money Flow trough above zero would indicate long-term buying pressure. Reversal below 5450 is unlikely, but would warn of a test of primary support.

ASX 200

* Target calculation: 5650 + ( 5650 – 5450 ) = 5850

Bank chiefs in last-ditch plea to David Murray on tougher rules | The Australian

From Richard Gluyas at The Australian:

THE four major-bank chief executives have each made an eleventh-hour appeal to members of the Murray financial system inquiry ahead of Tuesday’s closing date for final submissions, as concerns mount that the sector could be forced to hold even higher ­levels of bank capital due to the ­inquiry’s emphasis on resilience. The closed-door meetings with the inquiry panel members come as Steven Munchenberg, chief executive of peak lobby group the Australian Bankers’ Association, said the industry was “jittery” about the inquiry’s focus on ­balance-sheet resilience because more onerous capital requirements would affect the banks’ ability to lend and serve the ­economy.

I disagree. Banks with strong balance sheets are better able to serve the needs of the economy. Highly leveraged banks leave the economy vulnerable to a financial crisis and are more likely to contract lending during periods of economic stress.

The shrill outcry may have something to do with the impact on bankers bonuses. Incentives based on capital employed would shrink if shareholder’s capital is increased.

Bank shareholders on the other hand are likely to benefit from stronger balance sheets. Reduced default risk is likely to enhance market valuation metrics like price-earnings multiples. Reduced risk premiums will also lower cost of funding and enhance lending margins. And shareholders are also likely to benefit from enhanced growth prospects. Analysis by the Bank for International Settlements in the post crisis period shows banks with higher capital ratios experience higher asset and loan growth.

Bank Watch: US Tsy’s OFR Finds Risk Weighting Has No Clothes | MNI

Denny Gulino writes on recent research commissioned by Treasury Department’s Office of Financial Research (“OFR”) to investigate the validity of using risk-weightings to determine bank capital requirements:

On risk weighting, OFR commissioned researchers Paul Glasserman at Columbia University and Wanmo Kang of the Korea Advanced Institute of Science and Technology to examine the subject from the ground up. As much as the practice has been incorporated in regulatory parlance, they were able to find very little other research on the validity of the weighting methodology.

“Risk weights implicitly assign prices in terms of additional capital to asset categories and thus inevitably create incentives for banks to choose some assets over others,” they wrote.

“Surprisingly,” they went on, “the ideal risk weights turn out to have little to do with risk and are instead proportional to the profitability on each asset.”

Read more at Bank Watch: US Tsy's OFR Finds Risk Weighting Has No Clothes | MNI.

Paul Krugman: Hawks Crying Wolf | NYTimes.com

According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation…

…The Times article singles out for special mention Charles Plosser of the Philadelphia Fed, who is, indeed, warning about inflation risks. But you should know that he warned about the danger of rising inflation in 2008. He warned about it in 2009. He did the same in 2010, 2011, 2012 and 2013. He was wrong each time, but, undaunted, he’s now doing it again…

Read more at Hawks Crying Wolf – NYTimes.com.