Category: US & Canada

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Dow selling pressure

The S&P 500 is retracing for a test of short-term support at 2150. Respect of the rising trendline would signal a test of 2200. Breakout above 2200 would complete an inverted scallop (or fish hook) with a target of 2400*. Declining Twiggs Money Flow, however, warns of selling pressure. Breach of 2050 would test medium-term support at 2100.

S&P 500 Index

* Target calculation: 2100 + ( 2100 – 1800 ) = 2400

The Dow Jones Industrial Average also displays a potential inverted scallop on the weekly chart. Follow-through above 18600 would confirm but bearish divergence on Twiggs Money Flow again warns of selling pressure. Tall shadows on the last two candles also suggest short-term selling pressure. Breach of support at 18000 would warn of a test of primary support at 17000.

Dow Jones Industrial Average

* Target medium-term: 18500 + ( 18500 – 18000 ) = 19000

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Gold respects support

10-Year Treasury yields are retracing to test the recent support level at 1.60 percent but the trend remains upward.

10-Year Treasury Yields

The Chinese Yuan is easing against the US Dollar, with USDCNY in a gradual up-trend as the PBOC manages the decline in order to conserve foreign reserves. This is likely to alleviate immediate selling pressure on the Yuan, both from capital flight and borrowers covering on Dollar-denominated loans.

USDCNY

Spot gold respected support at $1300/ounce. Breakout above the falling wedge (and resistance at $1350) would signal another advance.

Spot Gold

* Target calculation: 1375 + ( 1375 – 1300 ) = 1450

Rising interest rates and low inflation are bearish for gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to bullish sentiment.

Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, growth stocks will do well and gold is likely to underperform. If there is instability and growth stocks do poorly, gold stocks are likely to outperform.

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Bob Doll: Equities Appear More Attractive than Other Asset Classes | Nuveen

From Bob Doll’s weekly newsletter:

The strong patch of summer U.S. economic data may have ended. Following weak Institute for Supply Management readings in previous weeks, August retail sales declined 0.3%. This marks the first pullback since March, and bears watching for a broader downtrend into September…..

Corporate earnings expectations are climbing slowly. Following a modest second quarter improvement, analyst expectations for future quarters have climbed in recent weeks…..

Equities may continue to climb in 2016, based on historical trends. Strategy group Fundstrat shows that since 1940, when stock prices increased more than 5% by mid-September, 87% of the time they rallied further in the last three-and-a-half months of the year. As of Friday’s close on September 16, the S&P 500 Index is up 6.3%….

As you can see from Bob’s commentary, there seems to be a divergence between economic data (retail sales in this case) and technicals which tend to be more focused on the earnings expectations. I have seen something similar.

Retail sales have fallen in July/August but of greater concern is the longer-term down-trend. Continued growth below core CPI would warn of a contraction in real terms.

Retail Sales ex Motor Vehicles & Parts

Light Vehicle Sales are also below trend, reinforcing the down-turn in consumer outlook.

Light Vehicle Sales

The decline in sales is reinforced by the decline in growth of average weekly earnings (all employees).

Weekly Earnings - All Employees

Technicals, on the other hand, remain reasonably strong for the present. Until declining sales impact on corporate earnings.

Source: Weekly Investment Commentary from Bob Doll | Nuveen

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S&P500 consolidation suggests another downward leg

The S&P 500 is consolidating between 2120 and 2150 after a rounding top. Short-term consolidation (I would hesitate to call this a pennant) suggests another downward leg is likely, with a target of 2080. Respect of primary support at 2000 remains likely. Recovery above 2200 would complete a bullish rounded top (an inverted “U”) or a stronger inverted scallop pattern (resembling an inverted fishing hook) depending on the length of the right-hand leg. Twiggs Money Flow high above zero continues to indicate long-term buying pressure. Breach of primary support at 2000 is unlikely but would warn of another test of 1800.

S&P 500 Index

* Target calculation: 2200 + ( 2200 – 2000 ) = 2400

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Niall Ferguson: The West and the Rest – The Changing Global Balance of Power

Niall Ferguson is the Laurence A. Tisch Professor of History at Harvard University.

I would love to see Ferguson re-visit this 2011 talk every five years. One certainty about the future: it isn’t what we think it’s going to be. China’s economic rise seems to be slowing far more rapidly than was expected. Foreign reserves have declined by $800 billion in the last two years (from a peak of $4 trillion) through PBOC efforts to prevent the collapse of the Yuan in the face of rising interest rates from the Fed. China’s growth-through-infrastructure-investment model seems to have run its course and is now facing diminishing returns. Transition to a consumer society is not going to be easy. And China’s property bubble has created an extremely fragile banking system with massive bad debts.

On the plus side, Ferguson seems to have been right about rising Chinese nationalism — to deflect the population’s attention from enormous inequality in the distribution of wealth — and the CCP’s ability to maintain tight political control. Let’s hope that he is also right about China’s inability to suppress personal and political freedom in the long-term if it wants to maintain stable growth.

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Bayer, Monsanto in $88b deal that could reshape the world’s food supply

From Drew Harwell:

The German chemical company Bayer said it will take over US seed giant Monsanto to become one of the world’s biggest agriculture conglomerates.

The $US66 billion ($88 billion) deal – the largest corporate mega-merger in a year full of them – could reshape the development of seeds and pesticides necessary to fuelling the planet’s food supply…..

Bayer in the US is known largely for its pharmaceuticals, with scientists who developed modern Aspirin and Alka-Seltzer. But the deal would pivot the 117,000-employee company more towards its farm-targeting business in agriculture chemicals, crop supplies and compounds that kill bugs and weeds.

Monsanto is the world’s largest supplier of genetically modified seeds, which now dominate American farming but are still a major source of environmental protests in Europe and abroad. The 20,000-employee company also develops Roundup, the weed-killing herbicide.

This is a merger of two giants in the agricultural and chemicals sectors and could lead to some interesting new developments in the future.

Source: Bayer, Monsanto in $88b deal that could reshape the world’s food supply

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Rising debt—not a crisis, but a serious problem | Brookings

Testimony by Alice M. Rivlin, Senior Fellow – Economic Studies, Center for Health Policy, before the Joint Economic Committee of the United States Congress on September 8, 2016:

…..our national debt is high in relation to the size of our economy and will likely rise faster than the economy can grow over the next several decades if budget policies are not changed. Debt held by public is about 74 percent of GDP and likely to rise to about 87 percent in ten years and to keep rising after that.

This rising debt burden is a particularly hard problem for our political system to handle because it is not a crisis. Nothing terrible will happen if we take no action this year or next. Investors here and around the world will continue to lend us all the money we need at low interest rates with touching confidence that they are buying the safest securities money can buy. Rather, the prospect of a rising debt burden is a serious problem that demands sensible management beginning now and continuing for the foreseeable future.

What makes reducing the debt burden so challenging is that we need to tackle two aspects of the debt burden at the same time. We need policies that help grow the GDP faster and slow the growth of debt simultaneously. To grow faster we need a substantial sustained increase in public and private investment aimed at accelerating the growth of productivity and incomes in ways that benefit average workers and provide opportunities for those stuck in low wage jobs. At the same time we need to adjust our tax and entitlement programs to reverse the growth in the ratio of debt to GDP. Winning broad public understanding and support of basic elements of this agenda will require the leadership of the both parties to work together, which would be difficult even in a less polarized atmosphere. The big uncertainty is whether our deeply broken political system is still up to the challenge.

…..There are three necessary elements of a long-run debt reduction plan:

  • Putting the Social Security program on sustainable track for the long run with some combination higher revenues and reductions in benefits for higher earners.
  • Gradually adjusting Medicare and Medicaid so that federal health spending is not rising faster than the economy is growing….
  • Adjusting our complex, inefficient tax system so that we raise more revenue in a more progressive and growth-friendly way and encourage the shift from fossil fuels to sustainable energy sources…..

Source: Rising debt—not a crisis, but a serious problem to be managed | Brookings Institution

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