US & Canada Archives - Page 86 of 172

January 27, 2014

ROSENBERG: More Signs Of Wage Inflation

Gluskin Sheff’s David Rosenberg:

The Fed’s Beige Book contained no fewer than two dozen references to wage pressures and skilled job shortages and in sectors that cover around 40 million workers. I realise the average hourly and weekly earnings data from the non farm payroll survey are tepid but a big disconnect seems to have emerged between those measures and the broad wage/salary growth numbers out of the National Accounts data……

January 26, 2014

Beware of the CAPE

I have just read John Mauldin’s warning that the market is overvalued:

Not only does today’s CAPE of 25.4x suggest a seriously overvalued market, but the rapid multiple expansion of the last few years coupled with sluggish earnings growth suggests that this market is also seriously overbought, as I pointed out last week and as we are seeing play out this week.

CAPE

Robert Shiller’s CAPE ratio compares the current index price to a 10-year simple moving average of inflation-adjusted earnings in order to smooth out earnings and provide a long-term indication as to whether the market is under- or over-valued. But ratios are far from infallible. One of the first things fundamental investors/traders learn is: do not buy a stock simply because the Price-to-Earnings (PE) ratio is low, and never short a stock simply because the PE ratio is high. The reason is fairly obvious. In the first case, current earnings may be expected to fall and, with high PE ratios, earnings are likely to grow.

Let’s examine CAPE more closely. First, we have experienced the worst recession in almost a century; so does a moving average of the last 10 years adequately reflect sustainable long-term earnings? In the chart below I removed the highest and lowest quarter’s earnings in the last 10 years [dark green]. Note the visible difference losses reported in Q/E December 2008 make to the long-term average.

Price Earnings Ratio

The chart also highlights the fact that Shiller’s CAPE is relatively low compared to the last 15 years, where the average is close to 30. The normal PE of 18.4, calculated on the last 12-month’s earnings*, is also low compared to an average of 28 for the last 15 years.

*Reporting for the December quarter is not yet completed and unreported earnings are based on S&P estimates.

As novice investors learn, it is dangerous to base buy or sell signals on a PE ratio, whether it is CAPE or regular PE based on 12-months earnings. Using CAPE, we would have sold stocks in 1996 and again in 2003, missing two of the biggest bull markets in history. And we would have most likely bought in 2008, when CAPE made a new 10-year low, right before the collapse of Lehmann Brothers.

I submit that CAPE or PE ratios are not an end in themselves, but merely a useful tool for highlighting expectations of future earnings. At present both ratios are rising, suggesting that earnings prospects are improving.

January 24, 2014

The correction we had to have

US markets were overdue for a correction and continuation of the advance for much longer would have resulted in instability, from an imbalance between buyers and sellers.

At Research & Investment we do not attempt to time entries and exits on secondary corrections. Our research shows that this is expensive and erodes performance. What we do pay a lot of attention to, on the other hand, are macro-economic and volatility indicators of market risk, exiting to cash when risks become elevated.

With a long-term view of the market, secondary fluctuations are relatively insignificant, but they do present opportunities to increase investment in the market.

The S&P 500 broke support at 1810, signaling a correction. Bearish divergence on 21-day Twiggs Money Flow strengthens the signal. Expect support at the Setember 2013 high of 1730.

S&P 500

A monthly chart places the latest breakdown in perspective. Respect of support at 1700 — and the secondary trendline — would confirm a healthy primary up-trend. A 13-week Twiggs Money Flow trough above zero would again strengthen the signal.

S&P 500

* Target calculation: 1800 + ( 1800 – 1700 ) = 1900

The VIX is rising steeply, but continues to indicate low risk and a bull market.

S&P 500 VIX

January 23, 2014

China: Roiling the Waters

Roiling the Waters: Why the United States needs to stop playing peacemaker and start making China feel uncomfortable.

BY Elbridge Colby, Ely Ratner

History has demonstrated the perils of focusing too much on stability at the expense of deterrence. The Cuban missile crisis, the modern world’s closest brush with the apocalypse, was precipitated by Soviet Premier Nikita Khrushchev’s perception that the United States, especially President John F. Kennedy, was overly concerned about stability and cooling tensions between the superpowers. Khrushchev’s sense that America could be pushed was formed by Kennedy’s cautious reactions to assertive Soviet moves toward Berlin, as well as Khrushchev’s measure of Kennedy at the 1961 Vienna superpower summit as “weak” and accommodating……..

OF COURSE, CHINA IS NOT THE SOVIET UNION. And 2014 is not 1962. The point is simply that a country with the power of the USSR or China, unsatisfied with features of the existing order, motivated to do something to change it, and skeptical of the resolve of the United States, could well pursue a policy of coercion and brinkmanship, even under the shadow of nuclear weapons. As historian Francis Gavin has argued, the whole history of the Cold War shows that countries like China — and, at times, the United States — can bluff, coerce, and threaten their way to geopolitical gain.

The worst way to deal with such a power is to leave it with the impression that these approaches work. Just as the United States would have been far better off if Kennedy, at the Vienna summit, had squelched Khrushchev’s doubts about his resolve to defend Berlin, it will be far better if the leadership in Beijing has the clear sense that the United States will meet each challenge to its and its allies’ interests resolutely.

Canada: Bull market

Canada’s TSX 60 is heading for a test of resistance at the 2011 high of 820* after successfully testing its new support level at 780. Rising 13-week Twiggs Money Flow suggests strong buying pressure. Breach of the rising trendline is unlikely, but would warn of a correction.

TSX 60

* Target calculation: 780 + ( 780 – 740 ) = 820

Declining TSX 60 VIX, below 20, flags a bull market.

TSX 60 VIX

January 19, 2014

Bull market but correction overdue

Both the S&P 500 and Nasdaq 100 have exceeded their targets. Absence of a significant correction for several months indicates extreme bullishness, but makes the advance more precarious as buyer/seller imbalances grow.

The S&P 500 is testing medium-term resistance at 1850. Breakout would confirm a target of 1900*. Respect is less likely, but would warn of a correction if followed by reversal below 1810. Rising 21-day Twiggs Money Flow suggests (short-term) buying pressure, but reversal below the rising trendline would warn of medium-term bearishness.

S&P 500

* Target calculation: 1850 + ( 1850 – 1800 ) = 1900

Declining CBOE Volatility Index (VIX) readings for the S&P 500 continue to indicate a bull market.

VIX Index

The Nasdaq 100 is similarly testing resistance at 3600. Twiggs Money Flow troughs high above the zero line indicate strong buying pressure. Absence of a significant correction makes the advance more precarious, but the imbalance can endure for several months.

Nasdaq 100

* Target calculation: 3600 + ( 3600 – 3500 ) = 3700

January 16, 2014

Desperately Seeking Demand | Patrick Chovanec

I have followed Patrick Chovanec on Twitter for several years and really enjoy his insights. His latest Quarterly Report for Silvercrest Asset Management is no exception.

For the past several decades, the U.S. has served as the world’s consumer of last resort. That allowed developing countries – namely Japan, and later China – to turbo-charge growth by producing more than they consumed, confident in the knowledge that Americans would provide the demand by consuming more than they produced. (A parallel pattern emerged within the EU, with Germany playing net producer and the rest of Europe net consumer). The surplus countries kept the game going by taking their export proceeds and lending them back to their customers so the deficit countries could keep buying. This is the global growth model we all became comfortable with……

Listen to most market commentators: while they may say that the financial crisis showed us the error of our ways, their every word belies a tacit wish to return to the world we knew before 2008. “When,” they ask, “will the U.S. consumer start spending again? When will Chinese output get back on track?” Europe, they dare to hope, will turn out okay as long as more countries learn to imitate Germany. Maybe a cheaper Yen will give a renewed boost to Japan’s exports.

These hopes are misplaced. We’re not going back to the past. The old growth model is broken. Here’s what will replace it…..

Read Patrick’s outlook at SILVERCREST ASSET MANAGEMENT GROUP LLC 1Q 2014: Desperately Seeking Demand

Hat tip to Leith van Onselen at Macrobusiness.com.au

January 15, 2014

Canada: TSX 60

Canada’s TSX 60 is retracing to test its new support level at 780. Respect would confirm an advance to 820*. Bearish divergence on 13-week Twiggs Money Flow suggests nothing more than secondary (medium-term) weakness unless there is a crossover below zero. Breach of the rising trendline is unlikely, but would test primary support at 750.

TSX 60

* Target calculation: 780 + ( 780 – 740 ) = 820

TSX 60 VIX is rising but remains bullish.

TSX 60 VIX

January 14, 2014

Bullish VIX readings for the S&P 500

Declining CBOE Volatility Index (VIX) readings for the S&P 500 continue to indicate a bull market.

VIX Index

The S&P 500 itself is headed for another test of short-term resistance at 1850. Breakout would confirm the target of 1910*, while respect would warn of a correction, especially if followed by reversal below 1800. The recent decline in 13-week Twiggs Money Flow was secondary in nature and less severe than the corrections in June and August 2013; troughs high above the zero line are a long-term bull signal.

S&P 500

* Target calculation: 1810 + ( 1810 – 1710 ) = 1910

The Nasdaq 100 continues its accelerating up-trend, with Twiggs Money Flow troughs above the zero line indicating long-term buying pressure. The last decent correction was in June 2013 and continuation of the advance much further without a correction would suggest the market is becoming over-extended.

Nasdaq 100

January 9, 2014

TSX 60 in healthy shape

Canada’s TSX 60 is in healthy shape, with 13-week Twiggs Money Flow troughs above zero indicating strong buying pressure. Breakout above 780 would confirm an advance to 820*. Reversal below 740 is most unlikely, but would warn of a test of primary support at 675/680.

TSX 60

* Target calculation: 780 + ( 780 – 740 ) = 820