US & Canada Archives - Page 87 of 185

July 31, 2014

Treasury market volatility climbs

From Susanne Walker and Lucy Meakin, Bloomberg:

Treasuries dropped, with 10-year note yields reaching the highest level in three weeks, as monthly jobless claims at the lowest level in eight years added to evidence the employment market is strengthening.

U.S. government debt was poised for the biggest monthly drop since March on bets the Federal Reserve will raise interest rates after second quarter economic growth surged past analysts’ forecasts.

The stock market frets that interest rates may rise ….because the economy is recovering and unemployment is falling. And this is bad news?

July 30, 2014

Shilling: Big Banks Shift to Lower Gear | The Big Picture

Gary Shilling describes how US regulators are getting tough with big banks:

Break-Up

Like unscrambling an egg, it’s hard to envision how big banks with many, many activities could be split up. But, of course, one of the arguments for doing so is they’re too big and too complicated for one CEO to manage. Still, there is the example of the U.K., which plans to separate deposit-taking business from riskier investment banking activities – in effect, recreating Glass-Steagall.

In any event, among others, Phil Purcell believes that “from a shareholder point of view, it’s crystal clear these enterprises are worth more broken up than they are together.” This argument is supported by the reality that Citigroup, Bank of America and Morgan Stanley stocks are all selling below their book value Chart 5. In contrast, most regional banks sell well above book value.

Push Back
Not surprising, current leaders of major banks have pushed back against proposals to break them up. They maintain that at smaller sizes, they would not be able to provide needed financial services. Also, they state, that would put them at a competitive disadvantage to foreign banks that would move onto their turf.

The basic reality, however, is that the CEOs of big banks don’t want to manage commercial spread lenders that take deposits and make loans and also engage in other traditional banking activities like asset management. They want to run growth companies that use leverage as their route to success. Hence, their zeal for off-balance sheet vehicles, proprietary trading, derivative origination and trading, etc. That’s where the big 20% to 30% returns lie – compared to 10% to 15% for spread lending – but so too do the big risks.

Capital Restoration
….the vast majority of banks, big and small, have restored their capital….Nevertheless, the FDIC and Federal Reserve are planning a new “leverage ratio” schedule that would require the eight largest “Systemically Important Banks” to maintain loss-absorbing capital equal to at least 5% of their assets and their FDIC-insured bank subdivisions would have to keep a minimum leverage ratio of 6%. This compares with 3% under the international Basel III schedule. Six of these eight largest banks would need to tie up more capital. Also, regulators may impose additional capital requirements for these “Systemically Important Banks” and more for banks involved in volatile markets for short-term borrowing and lending. The Fed also wants the stricter capital requirements to be met by 2017, two years earlier than the international agreement deadline….

CEO remuneration is largely driven by bank size rather than profitability, so you can expect strong resistance to any move to break up too-big-to-fail banks. Restricting bank involvement in riskier enterprises — as with UK plans to separate deposit-taking business from riskier investment banking activities — may be an easier path to protect taxpayers. Especially when coupled with increased capital requirements to reduce leverage.

July 29, 2014

Canada: TSX 60 at 2008 high

Canada’s TSX 60 is testing its 2008 high at 900. Rising 13-week Twiggs Money Flow troughs above zero indicate strong buying pressure. Expect resistance at 900, but this is unlikely to hold. Reversal below the rising (secondary) trendline is not expected, but would warn of a correction to 800/820.

TSX 60

July 29, 2014

Dow and S&P 500 remain bullish

Dow Jones Industrial Average found support at 16950, with long tails indicating short-term buying pressure. Recovery above 17075 would indicate a fresh advance; above 17150 would confirm. A close below 16950 is less likely, but would warn of a correction to 16500. The decline of 21-day Twiggs Money Flow indicates mild selling pressure typical of a consolidation.

Dow Jones Industrial Average

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

The S&P 500 also displays a long tail indicative of buying pressure. Recovery above 1985 would indicate another attempt at 2000. Further consolidation below the 2000 resistance level is likely. Reversal below 1950, however, would warn of a correction to 1900.

S&P 500

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

The CBOE Volatility Index (VIX), trading at low levels last seen in 2005/2006, is typical of a bull market.

VIX Index

July 28, 2014

Is unemployment really falling?

US unemployment has fallen close to the Fed’s “natural unemployment rate” of close to 5.5%. Does that mean that all is well?

Chart: The unemployment rate vs. Fed's measure of "natural" unemployment rate (NAIRU) over the past 20 years – pic.twitter.com/zq2fxtcHLt

— SoberLook.com (@SoberLook) July 28, 2014

Not if we consider the participation rate, plotted below as the ratio of non-farm employment to total population.

Employment Participation Rate

Participation peaked in 2000 at close to 0.47 (or 47%) after climbing for several decades with increased involvement of women in the workforce. But the ratio fell to 0.42 post-GFC and has only recovered to 0.435. We are still 3.5% below the high from 14 years ago.

When we focus on male employment, ages 25 to 54, we exclude several obscuring factors:

the rising participation rate of women;
an increasing baby-boomer retiree population; and
changes in the student population under 25.

Employment Rate Men 25 to 54

The chart still displays a dramatic long-term fall.

July 28, 2014

A compassionate conservative: Arthur C. Brooks

Bill Moyers interviews the American Enterprise Institute’s president Arthur C. Brooks on how to fight America’s widening inequality.

“The problem is we have a bit of a conspiracy between the right and left to have people now who are tending to be more part of the machine…We need a new kind of moral climate for our future leaders.”

Bill Moyers seems a bit light on the economics of the Walmart situation. Raising the minimum wage would reduce welfare payments to Walmart employees, but WMT is a rational entity with the primary goal of maximizing profits and shareholder value. An increase in the minimum wage would increase the appeal of automation and result in a reduction in staff numbers, causing an increase in unemployment, or alternatively WMT will pass on the additional cost in the form of increased prices to consumers, causing a rise in inflation. The only sustainable long-term solution is not an easy one: to increase economic growth and employment so that market-driven wage rates rise. Interference with the pricing mechanism in a market — whether through legislated minimum wages, price controls or Fed interest rates — is misguided and unsustainable. It may defer but also amplifies the original problem.

July 25, 2014

Consolidation expected

S&P 500 retreats below 1985.
VIX continues to indicate a bull market.
ASX 200 breaks resistance.

The S&P 500 retreated below its new support level at 1985, indicating a false break. Consolidation between 1950 and 1985 is likely — below the psychological barrier at 2000. Respect of support at 1950 would confirm. Declining 21-Day Twiggs Money Flow continues to signal mild, medium-term selling pressure. Further resistance is likely at the 2000 level — and at 4000 on the Nasdaq 100. Breakout would offer a long-term target of 2250*.

S&P 500

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

CBOE Volatility Index (VIX) recovered to above 12. Low levels continue to indicate a bull market.

S&P 500 VIX

Dow Jones Euro Stoxx 50 is consolidating above medium-term support at 3150. Breach would signal a test of the primary level at 3000. Descent of 13-week Twiggs Money Flow warns of modest long-term selling pressure. Recovery above 3250 is less likely at present, but would suggest a target of 3450*.

Dow Jones Euro Stoxx 50

* Target calculation: 3300 + ( 3300 – 3150 ) = 3450

China’s Shanghai Composite Index broke resistance at 2100 and is headed for a test of 2150. Breakout would suggest a primary up-trend, but I would wait for confirmation at 2250. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Reversal below 2050 is unlikely at present but would warn of another test of primary support at 1990/2000.

Shanghai Composite

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

The ASX 200 broke clear of resistance at 5540/5560 on strong results from BHP. Expect retracement to test the new support level, but Friday’s long tail and rising 21-day Twiggs Money Flow indicate short-term buying pressure. Respect of support would indicate a long-term advance to 5800*. Reversal below 5540 is unlikely, but would warn of a correction.

ASX 200

* Target calculation: 5400 + ( 5400 – 5000 ) = 5800

July 18, 2014April 18, 2024

S&P 500 pregnant pause

S&P 500 advance to 2000 likely.
VIX continues to indicate a bull market.
ASX 200 finds support.

A Harami candlestick formation on the S&P 500 suggests continuation of the up-trend. Harami means ‘pregnant’ in Japanese. Expect a test of the psychological barrier at 2000. 21-Day Twiggs Money Flow recovery above the descending trendline would confirm that short-term selling pressure has ended. Further resistance is likely at the 2000 level — and at 4000 on the Nasdaq 100. Short retracement or narrow consolidation would suggest another advance. Reversal below 1950 is unlikely, but would warn of a correction to 1900 and the rising trendline.

S&P 500

* Target calculation: 1900 + ( 1900 – 1800 ) = 2000

CBOE Volatility Index (VIX) spiked to 15 on news of the Israeli incursion into Gaza and the downing of Malaysian airlines flight MH17 over Eastern Ukraine, but soon retreated to 12 and remains indicative of a bull market.

S&P 500 VIX

The ASX 200 retreated below support at 5525/5530 on the hourly chart, but long tails at 5500 indicate buying pressure and another attempt at 5550 is likely. An open above 5530 would confirm. Breakout above 5550 would suggest a long-term advance to 5800*. Reversal below 5450 is unlikely, but would signal another test of 5350.

ASX 200

* Target calculation: 5400 + ( 5400 – 5000 ) = 5800

July 15, 2014March 22, 2021

Ray Dalio: The Economic Machine and Beautiful Deleveraging

Ray Dalio, founder of Bridgewater Associates, released a 30 minute video in 2013, explaining his template of the economy and how central banks and government should manage a deleveraging like the Great Recession and its after-effects.

Ray proposes three simple rules to avoid future crises:

Don’t let debt grow faster than income (GDP) otherwise it will eventually crush you;
Don’t let income grow faster than productivity otherwise you will become uncompetitive in international markets; and
Do all that you can to raise productivity because in the long run that’s what matters most.

What is productivity and how do we measure it?

Productivity is the result of hard work and innovation, both of these factors will increase the level of output (GDP) per unit of input.

We measure productivity by comparing GDP to units of input, either:

the population of a country;
the number of hours worked; or
the number of people employed.

Index

Each will give a different perspective, but there are a few general rules:

countries with high technology and innovation (e.g. Germany or USA) show high productivity;
as do resource-rich countries with big extraction industries (like Norway and Australia); and
countries with low tax regimes (Singapore and Ireland) which attract transient income.

July 15, 2014

TSX 60 heading for 2008 high

Canada’s TSX 60 continues to perform strongly, with rising 13-week Twiggs Money Flow troughs above zero indicating strong buying pressure. Expect a test of the 2008 high at 900. Reversal below the rising (secondary) trendline is unlikely, but would warn of a correction.

TSX 60