Banks & Interest Rates Archives - Page 47 of 62

March 4, 2013

Rate cuts: Short-term benefit, long-term pain

Shane Oliver at AMP recently tweeted:

Why rate cuts help household spending: 1/ Aust hholds have approx $750bn in deposits but $1700bn in debt….

…so a 1% rate cuts makes depositors $7.5bn worse off, but borrowers $17bn better off. The net gain for households is $9.5b !

Reason #2 as to why rate cuts help. Depositors r less likely to change spending on rate changes than borrowers (families with mortgage)

He is right that rate cuts stimulate household spending, but that is not the only consideration. Rate cuts also stimulate borrowing and expansion of the money supply — leading to asset bubbles and inflation. They further force savers/investors to take greater risks in the scramble for yield, leaving them exposed if the bubble collapses. If only we could let market forces of credit supply and demand determine the rate — and resist the urge to tinker.

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

March 4, 2013

S&P 500 and Nasdaq selling pressure

The S&P 500 is oscillating between 1485 and 1530. I avoided using the word “consolidating” because that implies a degree of calm. Far from it. Bearish divergence on 21-day Twiggs Money Flow continues to warn of medium-term selling pressure. Reversal below 1485 and the rising trendline would indicate a correction. Breakout above 1530 is less likely but would offer a target of 1575*.

S&P 500 Index

* Target calculation: 1530 + ( 1530 – 1485 ) = 1575

On the monthly chart we can see that a correction below the secondary trendline would target primary support and the primary trendline between 1350 and 1400. A 63-day Twiggs Momentum trough above zero would indicate continuation of the up-trend, while retreat below zero would suggest a primary reversal.
S&P 500 Index
The VIX Volatility Index remains close to recent lows at 0.15. This does not provide much long-term reassurance: the VIX was at similar levels in May 2008. Breakout above the recent high at 0.20 would be a warning sign.
VIX Index
The Nasdaq 100 displays a bearish divergence on both 63-day Twiggs Momentum and long-term (13-week) Twiggs Money Flow. Reversal below the rising trendline would strengthen the signal. While breach of primary support at 2500 would signal a reversal.
Nasdaq 100 Index

* Target calculation: 2500 – ( 2900 – 2500 ) = 2100

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

February 25, 2013

S&P 500 breaks support at 1500

The S&P 500 broke support at 1500 and is headed for support at 1475.

S&P 500 Index

On the weekly chart we can see that a correction below 1475 would target support at 1425 (the secondary trendline). Only primary support at 1350, however, would signal a reversal. A 63-day Twiggs Momentum trough above zero would indicate continuation of the up-trend, while retreat below zero would suggest a primary reversal.

S&P 500 Index

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

February 24, 2013

S&P 500 finds support but Nasdaq warns caution

The S&P 500 found support at 1500 and is headed for a re-test of resistance at 1525/1530. Bearish divergence on 21-day Twiggs Money Flow warns of mild selling pressure. Breakout above resistance would negate this, while reversal below 1500 and the rising trendline would warn of a correction.

S&P 500 Index

Breach of the secondary trendline (above) would indicate a correction to test primary support at 1350. Recovery of 63-day Twiggs Momentum above 10% would increase likelihood of an upward breakout — with a target of 1750* — while retreat below zero would suggest a primary reversal.
S&P 500 Index

* Target calculation: 1550 + ( 1550 – 1350 ) = 1750

The Nasdaq 100 is weaker, with bearish divergence on 13-week Twiggs Money Flow warning of a primary trend reversal. Breakout below primary support at 2500 would confirm, offering a target of 2100*.
Nasdaq 100 Index

* Target calculation: 2500 + ( 2900 – 2500 ) = 2100

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

February 20, 2013

S&P 500 caution

The S&P 500 retreated below 1525, heading for support at 1500. Failure of support would test the secondary trendline at 1475. Bearish divergence on 21-day Twiggs Money Flow warns of selling pressure, but may not be sufficient to start a full-blown correction.

S&P 500 Index

Breach of the secondary trendline at 1475 would indicate a test of primary support at 1350. Recovery of 63-day Twiggs Momentum above 10% would increase likelihood of an upward breakout — with a target of 1750* — while retreat below zero would suggest a primary reversal.
S&P 500 Index

* Target calculation: 1550 + ( 1550 – 1350 ) = 1750

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

February 17, 2013

S&P 500 still cautious

The S&P 500 is testing short-term resistance at 1525 on the daily chart. Breakout would signal an advance to 1550. Bearish divergence on 21-day Twiggs Money Flow, however, warns of retracement to the rising trendline.

S&P 500 Index

The quarterly chart warns us to expect strong resistance at the 2000/2007 highs of 1550/1575. Recovery of 63-day Twiggs Momentum above 10% would increase likelihood of an upward breakout — with a target of 1750* — while retreat below zero would suggest a primary reversal.
S&P 500 Index

* Target calculation: 1550 + ( 1550 – 1350 ) = 1750

The Nasdaq 100 is testing resistance at 2800 on the monthly chart. Breakout would suggest a primary advance to 3200* but bearish divergence on 13-week Twiggs Money Flow warns of a reversal. Breach of the rising trendline would strengthen the signal.
S&P 500 Index

* Target calculation: 2800 + ( 2800 – 2400 ) = 3200

I repeat my warning of the last few weeks:

These are times for cautious optimism. Central banks are flooding markets with freshly printed money, driving up stock prices, but this could create a bull trap if capital investment, employment and corporate earnings fail to respond.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

February 14, 2013

Cause of the 2007/8 crash and threatened double-dip in 2010

Here is the smoking gun. Note the sharp contraction in the US monetary base before the last two recessions and again in 2010. Monetary base (M0) is plotted net of excess bank reserves on deposit with the Fed, which are not in circulation. The Fed responded after the contraction had taken place, instead of anticipating it.

Monetary Base minus Excess Reserves

The long-term problem is that the monetary base should not be expanding at 10 percent a year. More like 3% to 5% — in line with real GDP growth.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

February 12, 2013

Fed's 2007 Transcripts Show Shift to Alarm | WSJ.com

2007 Fed transcripts show that tremors in the US financial system were initially treated with complacency before shifting to alarm. Janet Yellen, then president of the Federal Reserve Bank of San Francisco, was one of the few who showed an understanding of the magnitude of the growing crisis. JON HILSENRATH and KRISTINA PETERSON at WSJ report:

“I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector,” [Ms. Yellen] said in June 2007. “The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst.”

By December, she was pushing the Fed to respond aggressively. She noted that the financial system’s problems were happening in the “shadow banking system”—that is, not in traditional banks but rather in bond markets and derivatives markets where hedge funds, investment banks and others traded mortgages and other financial instruments. “This sector is all but shut for new business,” she warned.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

February 12, 2013

A credit vigilante arrives at the Fed | Gavyn Davies

Gavyn Davies at FT writes:

[Fed Governor, Professor Jeremy Stein] argues that the credit markets have recently been “reaching for yield”, much as they did prior to the financial crash. Although not yet as dangerous as in the period from 2004-2007, this behaviour is shown by the rapid expansion of the junk bond market, flows into high-yield mutual funds and real estate investment trusts and the duration of bond portfolios held by banks……. he indicates that the right weapon to deal with this might well be to raise interest rates, rather than relying solely on regulatory and other prudential policy to control the process. This would obviously come as a big surprise to the markets, which have tended to view the Fed’s stated concerns about the “costs of QE” as so much hot air……

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

February 11, 2013

S&P 500 reverse pennant

The S&P 500 displays a small broadening wedge (reverse pennant) on the daily chart. Respect of support at 1500 on the last down-swing (within the wedge) suggests an upward breakout. Watch for bearish divergence on 21-day Twiggs Money Flow — which would warn of retracement to the rising trendline.

S&P 500 Index

* Target calculation: 1550 + ( 1550 – 1350 ) = 1750

The Dow is similarly testing long-term resistance, at 14000. Breakout is likely, with 13-week Twiggs Money Flow troughs at zero indicating long-term buying pressure.
S&P 500 Index

I repeat my warning from last week:

These are times for cautious optimism. Central banks are flooding markets with freshly printed money, driving up stock prices, but this could create a bull trap if capital investment, employment and corporate earnings fail to respond.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.