US & Canada Archives - Page 78 of 179

August 22, 2014

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:

European unemployment is nearly twice the rate in the U.S.: http://t.co/ELXH1YcCcw pic.twitter.com/i5FQ1YvXBk

— Bloomberg News (@BloombergNews) August 22, 2014

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

August 22, 2014

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.”

August 22, 2014

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…

August 21, 2014

Barack Obama: Foreign policy realist?

Harvard professor, Stephen M Walt says Barack Obama isn’t weak and waffling — he’s calculating, coldhearted, and decisive when it counts:

….One can even see elements of this approach in Obama’s handling of China. He has repeatedly emphasized Asia’s importance to the United States, and the much-publicized “rebalancing” was obviously intended to signal to America’s Asian partners that it wasn’t abandoning the region. Obama reinforced these themes during his visit to Asia in April, but the administration has implemented this policy at a measured pace, content to let China’s growing assertiveness do the work for us. Overreacting would alarm the local powers and let them continue to free-ride, while speaking softly makes present and future allies more eager for help and more willing to do what America wants to get it.

The common thread to these various responses is an appreciation not just of the limits of U.S. power, but also of the limited need to exercise it. “Limited” does not mean zero, which is why sensible people oppose a return to 19th-century-style isolationism. But this approach recognizes that the overwhelming majority of problems in the world do not threaten the United States directly and therefore do not require an immediate, forceful, and potentially costly U.S. response.

As Andrew Sullivan likes to say, Obama’s greatest political genius has been his Road Runner-like ability to let enemies beat themselves.

August 21, 2014

The Stock Market’s Missing Ingredient | Bloomberg View

Barry Ritholz discusses why military conflicts around the globe and civil strife in Ferguson, Missouri have little impact on market performance:

….None of this seems to matter to Mr. Market. He continues to power on, oblivious to issues that don’t affect corporate earnings. They have, by the way, been stellar, growing at a 9 percent annual rate. Meanwhile, interest rates are still low and inflation is subdued.

Rarely have conditions for market gains been so promising at a time when investor psychology has been so negative. Gallup reports that only 7 percent of those surveyed were aware of last year’s scorching [29.7%] gains in the Standard & Poor’s 500 Index.

via The Stock Market's Missing Ingredient – Bloomberg View.

August 19, 2014

Dow heading for 17000

Dow Jones Industrial Average is headed for another test of 17000/17100 after finding support at 16400/16500. Recovery of 13-week Twiggs Money Flow above its July high would indicate that buyers are back in control. Breakout above 17100 would offer a target of 17500*. Reversal below 16400 is unlikely, but would warn of a test of the primary trendline at 16000.

Dow Jones Industrial Average

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

The S&P 500 followed through above Friday’s high of 1965, suggesting another attempt at 2000. Completion of a trough above zero on 21-day Twiggs Money Flow would confirm buying pressure. Breakout above 2000 would offer a target of 2250*, but expect markets to remain cautious because of current geopolitical tensions. Reversal below 1950 is unlikely, but would warn of another test of support at 1900.

S&P 500

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

Low CBOE Volatility Index (VIX) readings are typical of a bull market.

VIX Index

August 18, 2014

Under What Circumstances Should You Worry That the Stock Market Is “too High”? | Brad DeLong

Brad DeLong discusses Robert Shiller’s CAPE ratio, a stock-price measure he helped develop:

….on average, at a ten-year horizon, for any CAPE ratio below 35 the S&P has delivered average real asset returns pretty much outclassing all other major asset classes…..

Thus you can see why I am relatively unsatisfied with Shiller’s writing:

“In the last century, the CAPE has fluctuated greatly, yet it has consistently reverted to its historical mean–sometimes taking a while to do so….”

Shiller’s rhetoric leads us to focus on graphs like this one of the Campbell-Shiller CAPE, and to think that what goes up must–someday–come down:

But is there any reason to think that the central tendency of the CAPE today is the same as what it was in the 1880s or the 1950s? There is no unchanging machine buried in the earth for the past 120 years throwing dice to determine the CAPE. It would be much better to say that extreme values of the CAPE are followed by reversion not to but toward the previous historical mean. And dividends and earnings shift too. A much better graph than the CAPE graph is the cumulative reinvested return graph [on a log scale]:

It goes way up, and way down, but the dominant feature is not mean reversion but rather exponential growth…..

August 17, 2014

The Joseph Cycle: 7 Fat years and 7 lean years

George Dorgan writes:

Since both the positive and the negative phases of a financial cycles take around seven years, financial cycles are sometimes called “Joseph cycle“, from the biblical prophet Joseph that speaks of seven good and seven bad years. The financial cycle connected to expectations about real estate prices, is also called credit cycle…..After the bust of dot com bubble in 2001, the Fed lowered interest rates. Credit was easily available and private debt strongly increased. Government debt remained relatively stable.

Only in few countries like Germany, Japan or Switzerland people were far more cautious, because they had seen a real estate bubble bust in the 1990s. The leveraging phase finally ended in 2011, in China and in some other emerging markets…..

We think that the reduction of debt will continue to be the main driver of global economies during the next Joseph cycle, in the next seven years. After the US lowered debt levels until 2011/2012 it is now time for Europe except Germany and Switzerland and Emerging Markets….

August 17, 2014

GOLDMAN: Here’s The Simple Reason We’re Probably Not About To Have Another Huge Crash | Business Insider

From Joe Weisenthal:

Historical analysis of past big busts done by top economist Jan Hatzius and Sven Jari Stehn shows that while there is growing risk of a stock market drop because of the big rally we’re missing one of the key preconditions needed for a true bust: high credit growth.

They write: “[C]redit growth is the most important predictor of house price busts, especially when we focus on busts that involve a recession. House price busts have also tended to follow periods of high inflation, high equity volatility and large current account deficits, although all of these effects become less pronounced when we focus on recessionary busts….”

via GOLDMAN: Here's The Simple Reason We're Probably Not About To Have Another Huge Crash | Business Insider.

August 17, 2014

SHILLER: The Market Is At One Of Its Most Expensive Levels Of All Time…| Business Insider

Joe Weisenthal on Yale Professor Robert Shiller’s CAPE pricing model:

So while it’s true that the market is very expensive right now, based on his measure, [Shiller] notes that it’s difficult to use this information to actually time the market. Just because it’s expensive, doesn’t mean it will go down. Furthermore, the market has been expensive based on his measure for the past 20 years excluding the period of the recent crash, which raises the question of whether there’s been some fundamental change to the economy or markets that would warrant higher valuations.