Today’s consumer round up from WF. Steady as she goes really.
Trends_in_Consumer_Spending_2013_09032013
CREDIT SUISSE – JAPAN – 28-08-13
Japan is increasingly important as a potentially interesting nominal growth asset market..
Here a CS report on japan just in.
Weekly FX Technical Analysis, Macro Comments & Bullion Technicals
There is one story dominating everything at present namely: To taper or not to taper?
I’m very tempted to think this is a premature question as the FED is currently monetizing 85bn of securities a month and simply a taper of 25bn or less aimed at the short end of the yield curve could be a great short term strategy of effectively doing nothing. This would ensure rates stay lower for longer across the important 10yr treasury and therefore mortgage rate market and high yield paper markets.
But lets be clear rates for the US$ are all important and global capital is waking up to the potential ending of the zero interest rate world, soon. No where will this be felt more acutely than the fixed income markets. So here off a CS report on their recommendations on FI strategy. In my view, whether or not you hold fixed income assets doesn’t matter as what occurs in fixed income markets will drive all asset markets (as it did if you recall in 2008!).
Relative yields will be a key driver for fx markets going forward. In a world of world wide zero interest rates there has been little rate divergence in recent years to differentiate between the major currency pairs. As we progress this differential may widen with considerable fx pair implications. The weakest economies or rather those with the highest debt to gdp ratios will sustain lower rates for longer. This is a hugely important macro strategy issue that must be remembered, in my view.
Alongside the FED decision on the taper we have the announcement of the next Fed president with Yellen and Summers the two candidates. Which one is more dovish and hawkish remains an open question. Both are negative long term for the US$ as both are on record as desiring a lower US$ international exchange rate to rebalance the US economy. We also have the German elections and important German high court decision on the legality of the ECB’s debt monetizations.
To a few reports:
First, a few macro economic reports:
Here CS from 01 Aug13 with a visual chart pack summary on global pmis.
Here the latest LEI reading care of WF’s LEI index:
Here comment and details on the latest disappointing US housing data point today
(I’ll update here to include the weekly WF report here tomorrow as soon as i get copy).
Here a new regular report here the weekly macro chart pack from CS which sits neatly between the macro big picture presenting key technical chart levels for us.
I’ve been following this report for the last few months and I have found very useful as a reminder and walk through of the major global asset market technical levels. I can’t argue with many of their levels and calls. Although occasionally they under play the cross asset implications of resistances and supports breaking etc. A good example at present is the DX break or not of her support here and the all important eurusd breakout or not of her cyclical bear vs the usd.
And here continuing the themes above another new weekly, the CS FX weekly technical report. (Last week’s can be found on this Tuesday’s technical post).
The euro has already broken a key level vs the sgd here:
The Singapore economy is stalling here though her pockets remain very deep if the stall develops into something more pronounced. In essence, we have growth, albeit very weak growth, in the DM nations vs EM nations so capital flow is back towards DMs for now. Part of this is a partial reversal of prior capital flows as the trade had become crowded into the EMs and growth has stalled on a relative basis. The structural issue remain totally unchanged for the DM countries so a trading/investment opportunity may be on the horizon if this trend continues and the DM positive capital flows become over crowded. India is a good example of huge negative capital flows at present which is leading to a double whammy of the Rupee collapsing as asset prices fall, even in Rupee terms now. Should this continue we must vigilant for an entry into distressed rupee priced assets. But only on extremes as there are clearly structural issues India needs to address in the coming years.
The US$ has broken out vs the JPY of the bull flag and 3 month bear market vs the Jpy.
Bullion wise here the German team’s weekly tech view and comments.
BullionWeeklyTechnicals20082013
Every one is suddenly calling out the 1400 to 1425 level area as marking the top for this recent rally. A corrective bounce within a continuation of her bear market or something more?
And so we come around full circle to my opening para. The question for participants here remains, will the Fed taper meaningfully or not? Its so vital as the cost of US$ credit affects all asset prices worldwide. If the Fed backs away from the taper, or waters it down, the resurgent move in recent years of the US$ will be over as will the commodity bear market and the bond secular bull market may get a little more time therefore a corrective bounce.
Time will tell but certainly this September is likely to see increased volatility as these key secular and cyclical trends are tested in the coming months. We are approaching a test in so many instruments and asset classes. Is the bullion secular bull market over or about to resume? Is the commodity super cycle secular bull market over or merely resting? Is the bond secular bull market over or not? Will the secular equity (real terms) bear market resume or are we about to embark on a (real terms) new secular equity bull market?
On a cyclical basis there are even numerous instrument charts coming to some key levels as a continuation or breakout of their cyclical trends. In short a market defining moment approaches. We need to be at our best this alert Q4 2013 I suggest.
All the best
Rich
p.s. As some further food for thought a one off for you from the hugely respected “Mr Grant” here: GIRO-AUG23-13
Finally please don’t forget, we are still in August here. Its a holiday time and levels are less respected at this time. Have a great weekend all I’m off to the mountains to do some reading and homework. Enjoy whatever you are up to.
Weekly Technical Analysis – “S&P500 Top in Place, Over sold on the Near Term”
Its that time of week again for a barrage of technical market reports and comments.
First up here the weekly market comments from SC:
SC-WklyMkt-View-16-August-2013
Over weight US equities and European equities and US$ high yield.They repeat their rational which is leaves the door open for a continuation of near term technical weakness.
“Recent earnings season supports our preference for US market. 72% of companies reported earnings above analyst expectations at the time of writing. We recognise short-term technicals appear a little stretched (see p6), suggesting the possibility of a temporary period of consolidation or a pullback, but this does not alter our positive fundamental view. We continue to believe investors who are not already Overweight DM equities should use any pullback to accelerate purchases”.
They stay under weight gold, ems. Note their comment on euro high yield credit which plays perfectly into comments and trade planning in the forum pages.
“Maintain preference for US HY over European HY. European high yield (HY) has historically offered a premium of approximately 1.5-2.0% over
US HY, but currently this premium is close to zero.”
They make this point but fail to mention what affect these higher rates may have on euro (& US) equities given the historic inverse correlation between equities (and all asset prices) and rising rates. A possible 3.2% rate on the 10 yr treasury by end Q4 2013 would mark rates at the level Goldman Sachs forecast, in their H2 report, for Q2 2015! That’s a meaningful (and bearish asset price) shift it occurs.
Next up the Swiss team’s award winning weekly comments.
They correctly recap that as soon as the S&P500 broke the 1685 level the 1652 level was quickly reached. Short term they sight the SP500 is oversold and due a bounce though as long as sentiment remains away from extremely negative readings any bounces now should be corrective only and therefore the guys recommend that participants :
“Remain short-biased into minimum later September/first half October. A break of 1654 would call for 1635 and a break of 1617 would imply that a re-test of the late June low is underway.”
The only proviso they make here is if the sp500 broke the 1709 level which they say would represent a new bullish wave into December 2013. Thought they give a low probability of occurring. Their momentum work indicates 1570 will be tested later in 2013.
Inter-market wise the semiconductor index trend break is meaningful and especially so for the cyclical implications. But so to they sight the continued weakness in Utilities and Consumer staples that is indicating more weakness to come in these sectors and so withdrawing their out performance call of the last few weeks on these two.
I want to interject here, on this inter market issue that i am witnessing this same phenomena that is very concerning for long asset market holders. Weakness is flowing from both cyclical as well as defensive sectors here. Diversification is no hiding place as it has been before on market weakness. Price is indicating, albeit an early indication, of a potentially perfect storm here driven by the secular ending of the bond bull market. In a world awash with debt and facing higher interest rates as well as a slowing economy a 1987 style panic is a possible, though currently ‘off field’ outcome.
European equities remain “toppish and vulnerable”.
Credit markets remain critically correlated to all markets and particularly so US$ markets. The secular top in bond markets was reached in May according to the guys which, if correct, has meaningful implications across all asset classes, as above.
“Sooner than anticipated, the T-Bond broke its July low last week, which is bearish bonds, and although we can see a bounce short-term this suggests higher yields into later this year. We continue to think that on the macro side we are trading in a very classic inter-market cycle, where rising interest rates are a threat for equities and in particularly interest rate sensitive sectors”!
And later this:
“We do not only see rising yields in government and EM bonds. With municipals and corporate bonds under pressure we currently see rising
interest rates across the board”.
I would add that rates cut the core of the entire market as debt levels are so high across the world. And be aware that US$ rates defines rates for the entire world.
On this basis, a tactical market opportunity currently shows on European high yield credit. Rates show a great divergence now to US$ high yield rates. European high yield’s rate spread to Bunds has also compressed. Unless the ECB is will to see the euro debase a long way the divergence to the $ high yield should narrow considerably in the coming weeks and the spread to bund rates should decompress again.
Bunds wise a break of 140 would be extremely meaningful, according to the team, and imply significantly high rates for Spain and Italy, especially given their current chart formations.
I include here the CS Fixed Income Team’s tech analysis, trades and comments. Note they have revised up their forecasts and provide a possible Q4 rate on the US 10yr up to 3.22%.
European market specifics inc levels I leave to the team to comment on and have little to add aside from the euro credit issues, as above.
Here the Swiss Team’s latest report:
I want to pick up the FX side of things here below.
As a new weekly regular i’ll be putting up CS’s FX weekly report. Ill do this as a part of issuing some macro reports, probably every Thursday or Friday, weekly.
And here SC on FX with their weekly tech report issued yesterday.
The FX markets have reached a very interesting point where secular trends are starting to intersect cyclical trends. The Eurusd is at a key resistance which is challenging a multi year cyclical bear market vs the USD. The GBP cyclical bear vs the USD is also on the verge of breaching a key level. The EURGBP also challenged the multi year cyclical bear last week and has key resistances close to the current price. The dollar basket is at a key support. What occurs here and now is likely to be meaningful for commodities, bullion as well as non US$ credit markets.
Here a couple of charts illustrating the EURGBP from a few days ago. None of the trend lines are new as they have been running for some time. The medium term chart to the left is an old chart with the trend line drawn several years ago. I don’t believe the cyclical downtrend vs the gbp is over for the euro in spite of the widely reported “return to growth” for the eurozone. For now this trend has another leg down. Whether we get a lower low i doubt but stick with medium term trend, for now. When the latest UK housing and debt ends then will be the time for the euro’s long secular bull trend to reassert and the pain will really start up in the UK as real incomes collapse and the nominal game is exposed but that’s later for now ride the bubble and lets enjoy.
As I’m running low on time here I’ll leave the detail to the two reports though i would add that i’m bullish US$ here today. We have the Fed minutes tomorrow and then the Jackson Hole meeting Thursday and Friday so volatility aside and some off field aside capital should flow back to the US$ especially as monetary policy looks to be relatively tighter than Europe and the UK and JPY.
As usual lets discuss the points on the forum pages.
All the best
Rich
Weekly Technical Analysis – “S&P500 Still Holding 1685”
The swiss team’s latest report is below.
There is some caution in their latest report. They have opened the door to adjusting their model dependent on potentially “game changing moves” in the metals to Europe.
To my mind this is all part of the summer heat. Summer trading days are there to confuse the unlucky few that have to trade through these days. I believe the best clarity will emerge later in the month or early Sept. Volumes are very low at present and price is at its best as an indicator when participation rates are high.
This said, the key pivot level on the S&P at 1685 has been repeatedly hit and remains in play as a market defining price area. For as long as it holds a price extension to 1720 is very possible here, which i believe is spot on and indeed a likely event i believe. Sector wise i’ll leave the detail to the guys but i must confess to picking up sectors like the SOX as a trading entry to rejoin trend. It would be almost impossible to see a cyclical continuation here without the SOX leading. Apple has surged. If the SOX breaks her bull trend its a very important, informative event in my view so, trading, with trend, entries aside i would continue to monitor/chart the sox. Oil cyclicals also very interesting and also note that the divergence between the euro oil sector and US oil sector has narrowed considerably and whereas the US oil sector is on the verge of breakdown of her bull trend the euro oil sector is on the verge of a breakout of her bear trend. Historically the US index should be the lead as where the US goes the rest of the world generally follows so we watch that one with great interest as well.
Copper and Shanghai. I like the issue immensely as an indicator. Its early days on the copper breakout and she is very extended. The Shanghai remains a key cyclical driver and got a confirmed buy signal technically 2 sessions ago! http://www.stocktiming.com/Shanghai_Daily_Stock_Market_Updates/shanghai-index-update-tuesday.htm
I have taken that entry myself. I’ve chosen to take that medium term trade via the Chinese banks listed on the HSE (HK) (also as ADRs in the NYSE). China’s largest banks have collapsed in capital value terms. They are uniformly trading on forward pes of around 5 to 6. They pay good dividends and are significantly undervalued if the expected avalanche of Chinese bad loans don’t occur. Or, in my view, the day of reckoning is pushed back by policy makers in China. The shadow banking squeeze has been halted for now and inter bank liquidity improved. If China is to get a bounce the banks will bounce the most and possibly therefore provide the alpha play. At the very least a cyclical bounce will support the banks and they should provide a beta on the index. If the move reverses they may well also provide a beta to the downside of course though suspect not the alpha as participants have really beaten up these issues greatly.For info the issues i have entered are: China Construction Bank, Bank of China and Industrial and Commercial Bank of China. I also picked up exposure to Vietnam via the VNM etf listed on the NYSE, again, as a trading entry. The technical chart shows a base and the correction with cyclical China positive. I already Hang Seng Bank and picked up Standard Chartered on its weakness a few weeks ago in the HK markets. If the cyclical bounce call is correct Conooc and PBT and Sinopec etc should get a continued bid. The Ftse listed miners like ANTO, amongst others are strongly over bought albeit for very low levels. The commodity sector has got a bounce recently whether its a dead cat or something more remains to be seen.
The bullion asset class has been producing some very curious moves and particularly the thin silver markets whose volatility has spiked up and price rises have shown a strong bid returning to the metal. Price technically its a counter trend rally still well within a cyclical bear within the bullion’s long term secular bull market. But there are non price technical indicators that point to some dramatic events that might occur in the not too distant future. Both the comex and LBMA physical stores of gold are at very low levels and the LBMA is specifically in danger of being unable to meet gold redemption requests according to reports. The BOE also recently confirmed a significant collapse in its own stores of gold indicating lending rates have surged. There is immense backwardation in the gold futures markets indicating there is an immediate shortage of the metal in the markets at present. Premiums in Asia have risen strongly recently and a few days ago India again increases taxes for the third time on the metal due to surging imports of the physical. There is a huge divergence once again between the physical markets and the paper markets. At some point soon the two markets will need to converge and it could occur, given the news flow, at much higher nominal price level. As volatility is high the asymmetric trade entry on this phenomena remains expensive, for the moment.
I have multiple similar reports to post up from other sources and much more to say on the credit markets and divergence between US and Europe, etc etc. As well as FX where we see some key secular and cyclical levels in play. But I’m going to have to come back and update this as I realize many are waiting for the Swiss team’s latest report.
Without delay I attach the Swiss team’s report here:
And below a few slides etc that are noteworthy. I will update this report later today!
I recently commented on the short Aud trade and interest in the Australian economy. Someone has kindly forwarded to me the latest August RBA report on Asia and the Australian economy. Its a very useful and up to date chart pack. The short Aud trade is in full motion here and we are starting to see some yield de-compression for Aud reits etc. If the trend continues a macro medium to long term trade will develop which will be long defensive, strong balance sheet, yielding commercial Aud property assets. Its on the radar as a potential macro trade for q4 2013. Thanks again to the reader for mailing me this report.
And here the rising 30 year mortgage rates in the US today reaching 4.73%. This chart below shows the 30 yr rates together with the US mortgage re-finance numbers illustrating the collapse in the consumption enabling re-finance ongoing. Consumers re-finance when rates are lower than their current mortgage rates. As rates fell to May greater numbers have re-financed to take advantage of the lower rates. Since May the ‘refi’ numbers have collapsed. The consumption tail wind appears to be ending and could therefore become a significant headwind moving forward.
UK savings rates..
\UK consumer lending.. It never really falls it only increases but the issue is whether the increase is ahead of inflation or below it.
And post this slide we know that in q1 2013 consumer debt ticked up again in a dramatic way.
How can it be that the uk consumer has repaired his balance sheet by deleveraging even as his real disposable income falls to levels a decade ago. Savings rates are also back down to multi decade low levels. Sure zero interest rates and free deposit schemes can raise house prices in the short term but whether this strategy will be a long term wealth creator remains to be proved. The 2003 to 2008 attempt failed dramatically. Perhaps this time will be different. I think not.
Here yet another problem. The concentration of risk in the allocation of uk consumer debt.
http://calumjc.blogspot.com.es/2013/07/does-uk-have-household-debt-problem.html
In Focus: The UK
Headlines wise its been a strong quarter for the UK and an out performance in terms of economic surprises. The UK is suddenly leading the pack with a rapid expansion in domestic growth. The latest data releases last week inc services growth which expanded at the fastest pace in over 6 years.Manufacturing growth last week confirmed the fastest growth seen in the last 2 years and the trade balance was the best in 12 months reflecting the increase in domestic demand was partially being met by domestic producers stepping up.
Here Reuters reporting on the data, some of which is the most positive for 15 years:
http://uk.reuters.com/article/2013/08/05/uk-britain-economy-idUKBRE9740P720130805
House prices rose at the fastest pace since 2010 and auto demand is surging with Aug data showing sales for the year to date total 1.325 million, 10.3 percent more than at the same point in 2012 paradoxically this occurred as European car sales slumped to a 20 year low in May 2013. Latest data (9 Aug) from the Finance & Leasing Association (FLA) show a 6% increase in new business consumer finance compared with June 2012. Areas of notable growth include second charge mortgages, up 52% during the same period, and point-of-sale car finance up 29%. Store installment credit also increased by 12%. Consumer credit is certainly taking off again as the UK savings rate has halved in the last year. (The correlation between rates and savings ratios once again asserting itself).
In spite of market bearishness towards the UK and a large short sterling position from q2 2012 to end q1 2013 the UK data has been consistently improving and surprising market participants to the upside. The ftse250 has surged by +45% in from high to low in the less than 12 months out performing the more internationally exposed ftse100 as a strong domestic growth cyclical story develops. From the 2009 lows she has surged +300%.
And for those interested this 2013 high was a clear +45% higher than the prior 2007 boom year bull market high. Even inflation adjusted the domestic UK economy appears to be at all time record highs as domestic corporate profits are booming well beyond the prior boom of 2007 and the number of UK bankruptcies has fallen to its lowest level in more than ten years. On the face value the UK economic data suggests the UK is in the middle of giant boom which is setting new record highs across many metrics.
This undeniably positive data stands very much at odds against a whole series of other data and reflects a very uneven boom that appears to be ‘touching’ an ever smaller group of asset holders. Whether this boom widens in the coming year will be one of the key measures to test whether this is a secular move or purely a monetary induced nominal mirage based on balance sheet wealth creation via a domestically exploding money supply at an, eye watering, annualized rate of +10% m3, +20% M1, the 2013 calendar year thus far.
The ‘transmission’ process, broken for so long, now appears to be in mean reversion and therefore playing catchup as banks seek to gain return from their excess capital reserves created from the BOE’s large QE programs. According to the FLS lending to small and medium-sized British firms grew at its fastest pace since record began for June 2013. And here below a few of the numerous announcements by lenders to reduce rates even as 10 year gilts as well as corporate high yield rates rise. Ie the spreads to 10 year public and corporate rates are seeing significant compression with the banks reducing margins to the consumer sectors to increasing lending levels.
http://www.introducertoday.co.uk/news_features/lenders-launch-more-market-leading-deals
http://www.newsroom.hsbc.co.uk/press/release/hsbc_lowers_mortgage_rates_eve
Buy to Let is enjoying another leg upwards within a massive secular boom in this sector. The latest august data point shows year-on-year, buy-to-let lending was 19% higher by volume and 31% higher by value taking it to record 2008 levels and by value new record highs. Spreads are also compressing downwards in the “btl’ sector as lending appetite increases and the cyclical and secular expansion gathers momentum. According to Rightmove the average UK buy to let gross yield is now fallen to than 5%. Given capital replacement, management accounting fees, registration, agent and finance fees the, non capital appreciation yield must now be negative for most UK “buy to let” properties.
On a micro level there are a continuous stream of new financial lenders to the rapidly expanding BTL sector with new announces every few days as LTV rates increase and margins reduce.
http://www.introducertoday.co.uk/news_features/huge-rise-in-buy-to-let-lending-by-paragon
The HSBC’s recent survey of yields across the UK buy to let market did find pockets of yields up to 7.8% in depressed illiquid property areas eg Blackpool. Yields in many zone 2 areas of London are around 3% and in Belgravia yields of 1% to 2% are not uncommon. Continual capital appreciation maintains the capital inflows to these ultra yield compressed residential property areas.
http://www.newsroom.hsbc.co.uk/press/release/hsbc_identifies_the_uks_buy_to
To most independent observers some sort of a ‘feeding’ frenzy appears to setting up and partially already underway in the UK mortgage markets.
The new BOE’s governor, Carney, last week, has further stoked the fire providing begin forward guidance and promising to increase QE if the economy shows any signs of weakening. Further measures from the UK government to encourage a cyclical and secular boom in house prices seems likely to expand the domestically lead expansion.
Clearly such an expansion of money supply via QE and credit always ends badly but the uptick in domestic nominal prices created by such policies is undeniable and powerful. If the trend sustains for long enough, which looks likely, leveraged up asset “flippers” will gain significant returns. The money supply expansion will benefit this group in particular being on the positive side of this great wealth transference from the dilution of cash savings.
The obvious questions are how far can this trend extend and how does this affect long term asset values? The only way of getting an insight to these sorts of questions other than hyperbole is to look around the world at other developed economies which have also followed such policies for an indication. The Scandinavian region is an obvious candidate for precedents as they lead the world in terms of consumer debt to income levels, GDP, LTV etc.
Here a report from Norges Bank looking at the region’s consumer credit history and long term asset prices. Its a fascinating report in terms of its implications for the UK and other “DM” economies keen to follow these policies.
In summary what their findings show is that extremely highs levels of consumer debt are possible in states where the public provision of current and future welfare is at a high level and belief in the sustainability of this provision amongst the population is also high. So it is that savings rates in Southern European nations dwarf the savings rates in Northern European nations as both belief and provision in these states is much lower than exists in their northern neighbor’s. Another interesting data point from this study is the relative house price levels that exist across the relative states with very differing consumer debt profiles. Their findings suggest a long term correlation to income levels rather than debt levels. (Emphasis added as its something i long argued). Their findings suggest price volatility rather than long term prices is what is greatly increased by government fiscally subsidies and consumer debt encouragement. In summary that governments that adopt high consumer housing debt policies will experience massive swings in house prices both to the upside and downside. (This fits perfectly with classical and contemporary Austrian credit cycle theories of course. Link for those interested here – http://mises.org/freemarket_detail.aspx?control=46 You will notice this link is from 1999 when yet another credit fueled government sponsored asset bubble was coming to its end. In economic terms, policy makers seem incapable or simply don’t want to hear the lesson provided by recent history).
Those of here at capitalsynthesis.com are not academic economists. We are speculators and investors. And as Soros famously remarked. “When i see a bubble forming I buy”. The medium and longer term issues of sustainability and long term asset prices should not blind us to the short term up side leveraged gains here. Instrument selection is key however in my mind. Its true the largest gains will be seen in domestic UK leveraged illiquid asset markets but these also the most dangerous. Housing hits all the criteria of such a market. High leverage, illiquid, limited new supply and government subsidized. Clearly price gains could on the short run be significant. The gains could be largest in specific pockets of the UK ie luxury marina fronted property in Bristol or Pool perhaps. But for those that gain entry into these markets international empirical evidence suggests you want to be a ‘flipper’ rather than a developer as getting stuck with an asset when the cyclical trend changes would be painful in the extreme.
Liquid listed assets markets in the Uk are deep and leverage plentiful. They are a more efficient forward discounting mechanism so I’m buying pull backs as sentiment is extremely bullish at present given the strong news flow we have seen in recent weeks.
This sentiment can be seen here in the following CS reports on the UK. This cyclical bull appears in her early days so I am a holder and buyer on a pull back in the shorter term. Funding wise, leverage and the equity funded as a sterling carry trade as clearly such monetary expansionary policies will have an effect on trade weighted Sterling values in the medium and long term.
Here the latest CS reports on the UK
A great thanks to the various banking teams for the reports and data. Lets, as usual, pick up the discussion on the forum pages here:
http://www.capitalsynthesis.tech/forum/topic/uk-economy-1
All the best
Rich
Weekly Technical Comments – “S&P Toppish”
The latest Swiss team’s report is attached below.
Low volume continuation moves are always possible in the thin August months. Be very selective on targets until technical confirmation of the bear move is printed. She isn’t there quite yet from a US index perspective but we are getting closer.
A mix of holidays and personal events meaning unscheduled travel and poor internet connection means i cant report more meaningfully for now. I leave it to the guys.
Here the report:
All the best
Rich
Weekly Technical Comments – “S&P500 Moving to an Important Medium-Term Top, Cycles Imply a Top This Week”
The Swiss team’s latest report below.
They retain their bearish call on equities and significantly call for a top in cyclical stocks and a re-rotation back into the defensive issues.
Their words, also mine on the forum pages:
“Make or Break Setup in US Cyclical Performance”
This issue cuts to the core of the sustainability of higher rates, quantitative easing , consumption, credit cycles, etc etc. Its the elephant in the room as regards to whether we have a real recovery or merely a hunt for yield driven by deficits, super easy money and central bank money creation. In short the market technicals are hitting some key macro headwind issues here. When the two collide usually it produces a market defining moment. New cyclical trends are normally defined by such moments. Ie we are getting to an important market moment here summer or not.
Levels wise S&P500:
“A close below 1687 would be initially negative and a close below 1671 would imply that a more important trading top is in
place”.
I’ll leave all the detail to the guys inside their report. Lets pick up on the individual points and cross examine them on the forum pages.
Timing is everything. We have a very powerful bull run here sponsored by governments and central bankers alike. Lets not be too fast to pull any hedging or out right short triggers here. Detail detail and careful consideration is all important in these matters.
Here the Swiss team’s weekly report:
And at this critical moment in technical and macro issues here some of the world’s most respected third party reports.
Here the SC, H2 outlook. Not in the last four years has an H2 been more controversial.
Global-Market-Outlook-July-2013
Here Citi’s H2 calls. Some brave and interesting calls here inc dow 10,000.
Here below, piecing it all together on the Fx side of things SC again.
FX-Strategy-Support-for-the-Third-Arrow-22-July-2013-PvB
I like the NOK on cyclical continuation. SGD in most market situations aside from a china hard landing scenario.
Here last week’s WF macro round up.
wf-WeeklyEconomicFinancialCommentary_07192013
WF – LEI outlook.
Watch risk at this moment and lets discuss the detail on the forum pages as usual.
Cheers Rich
Weekly Technical Comments
I am travelling at present. I’ll update this page with some personal comments Thursday evening.
http://www.capitalsynthesis.tech/wp-content/uploads/2013/07/UBSTAWeekly16-07.pdf
Proprietary Sector Tech Comments – Dow30 & Euro Cyclicals
I would encourage all readers of the “latest news” pages on Capitalsynthesis.com (around 500 unique visitors daily) to regularly check and preferably contribute to the forum pages. The content on the forum pages is far greater and the analysis deeper.
Here below I re-post a couple of the recent forum comments.
From Saturday 13th July:
We have weak sp500 internals and weak structure on price but within a huge cyclical bull.
The difference this time is that rates are rising and have not retraced. Its certainly the weakest internal and price structure wave yet of this bull run. Its also extremely stretched in terms of over bought. But do you step in front the train here? Thats not something im ever very keen to do having been burnt so often by this approach.
What we can say is that more sectors need to join this move urgently if this is to have a chance of sustaining. In terms of which the cyclicals need to lead unless rates come back down. We should therefore be watching rates, the us$ and the cyclicals.
As an exercise just trawl through the dow30 components. Its an interesting thing to do to look inside this giant bull run from 2009.
Go to yahoo and track through the components.
http://uk.finance.yahoo.com/q/cp?s=%5EDJI
There are many cyclical stocks in the dow.. 23 of the 30 are cyclical which implies, if we are starting a new cyclical bull wave up then we are only just getting started here in terms of values for the dow.
Obviously finance is booming and tech isnt far behind. For the bulls issues like ciscos and MS performance is telling. Cisco and MS are indicative of global tech infrastructure investments but so is IBM’s & Intel which is far less tech promising and a short target as is CAT.. (indeed cat looks promising at the 90 level for a short. Ie can she get above her may lower high??!
I watch the tech earnings reports and I’m still in touch with some tech colleagues & friends. There is a boom at present in terms of tech infrastructure H/W and S/W investment.. Why? Simply put cost of finance is super cheap. This feeds into the 5 or 7 yr P&L of any deal. All big tech deals are dependent on taking to the boards of large cos 5 or 7 yr P&L deals. Usually these deals are on cost savings based on biz process re-engineering simplifying speeding efficiency and cutting man power over heat as well as energy over heads maintenance and s/w. If the cost of finance is close to zero on these deals then the whole p&l shifts downwards in terms of be point. For corporates this encourages tech investment. This passes on as low prices to consumers and industry and higher margins for corporates and shareholders.
In the short term it creates positive tail winds to the economy as creates high paid tech and professional services jobs, bonuses and margins for the tech cos. It also makes a lot of people redundant ie new money into the economy as redundancy payments. Its all positive stuff really but note. None of this is really expansionary. Its tech progress, short term plus but its not about expansion of products and services its more around margin improvements cost cutting driven by low rates and falling demand.
So the cyclical story is more complex than meets the eye.
Issues like CAT are indeed very cyclical and there in lies the weakness or potential weakness in my mind.
Housing – hgx had a bounce on thurs friday and did achieve the may high so its all ok so far. Issues like HOME DEPOT look ok here. HD is as much linked to the consumer balancesheet story as any co. So for as long as she is ok the consumer is alive and kicking. HD is not a target for now. No way. We cant ever sell this sort of tech strength. You will 9 times out of 10 get burnt!
And having seen the strength here in some cyclicals (but a mixed pic) what about the defensives? Is MS right that higher rates is going to squeeze the defensives?
JNJ – doesnt show this.. New breakout and she is powering on. Defensives leading again even as higher rates??????? mrk also strong.. PFE is weak technically. She is interesting as a bet against the defensives on this basis. She topped out early in april and has been tech weak ever since. Beautiful level on the 29.5 usds to play off.
UNH – United health care.. health care, according to MS should be weak. It isnt. Tech very strong here with new highs.
Another defensive that should be problems is PG. What do we see.. No problem. Very close
to breaking out, again.
Volumes are weak and especially weak given the gaps and high momentum price move we have seen. This hasn’t be the usual drift upwards. This is a surge, a powerful momentum rally upward. For this to occur on low volumes, and falling volumes as the move has progressed isnt bullish but price and tech remains bullish here.
My own book is long but i do hold a few underwater hedges. Looking at the tech i may have thrown a some margin away here as i dont see the weakness to support short here other than the volume issues, weak internals, rates and us$ issue. There are reasons for shorters to be optimistic but its not really translating yet into price.
Its not the high prob move to short this. What of my hedges, cover or ride? Really i should cover but we are so close now to the prior high and so over bought im holding for now but really starting to look for an exist rather than adding, expect for a tactical trade off the level short. A false break to rejoin the distribution is a reasonable prob trade given how fast and on low vol we have come.
In summary, the dow30 looks good. And this is surprising as the dow30 represents the world view more so than the purely US view. You would expect, if there is real weakness, to see the US centric cos start to out perform the dow30 cos given the em problems and continued euro weakness. And yet its the reverse? Another paradox i guess. But also possibly a sign that the world view is not as weak as we hear?
We have tech strength on cyclicals and defensives here, combined. We still have a low rate environment. Rates have now become positive and the usd is strong. The combination of events is usually bearish for equities. We also have huge weakness in world indexes also a usually bearish event. Im on the perpetual look out for weakness in internals but i cant find the evidence myself yet that i would like to (in terms of being able to add to hedges) see.
This is where i am. This is a crazy crazy cyclical bull driven by central banksters. Where she ends i have no idea. No model i have ever read forecasted this sort of strength from the 2009 lows. Just throw away these predictive long range models. Or better yet use them as toilet paper for that is their best use.
Big picture wise the euro cyclical indexes look ok. Less convincing than their US cousins but they are intact technically. 5 of the 6 charts here are cyclicals. Euro tech and autos are leading this in Europe. The Euro Finance sector the obvious laggard and significant laggard to their US finance cousin. If MS etc are correct re the cyclical defensive rotation the euro finance sector has a lot of catch up to do and that remains an interesting trade therefore. Though with stops as if they are wrong, from “failed moves come fast moves”.
In spite of the Italian and Spanish contraction in lending to the consumer, paradoxically, the Euro Travel and Leisure sector also leading this off the back of the German consumer, in the main. Defying all reports, It appears, from the index, there is a European discretionary spending boom underway?
From Europe the list of german cyclical stocks is telling and remains very weak technically with lots of may non confirmations in tact:
http://www.bloomberg.com/quote/BMW:GR
http://www.bloomberg.com/quote/VOW:GR
http://www.bloomberg.com/quote/BAS:GR
http://www.bloomberg.com/quote/SAP:GR
http://www.bloomberg.com/quote/IFX:GR
http://www.bloomberg.com/quote/TKA:GR
Patience for clarity will come here. Run the longs, the high yielding defensive stocks and look for some clarity on the cyclicals before taking any action. Will the great rotation occur here or has jumped the gun on the taper talk? The trade should be clear when she comes.
Its also worth noting that Issues like AMB2, the domestic German insurance co, hitting extreme highs yesterday at 115 euros. I bought in the 60s and still hold 2/3rds. The german cos domestic earnings are booming and no wonder. But there may be problems ahead looking at the large cap german cyclicals which would eventually feed into consumer confidence but in a lagging way. Like the US a domestic German housing boom could continue to lead consumer expansion but with rates creeping up there are obvious threats to this if the cyclical story cannot join.
From Alan on the forum pages a nice quarterly review of his own allocations and nos. I draw out a few paras here:
“I elected to sell a large part of my equity holdings midway through Q2 as I was convinced that an equity correction was due, in addition to the “sell in May” trend. It turned out I was right about the correction, although it turned out to be fairly short lived – but unfortunately I held onto my paper PMs and PM miners and suffered the consequences.
So my asset allocation now looks like this:
UK Equities 20.3%
North American Equities 5.1%
European Equities 1.5%
Japanese Equities 0.2%
SE Asia Equities 1.8%
Emerging Markets Equities 0.8%
Bonds & Gilts 17.1%
Commodities 9.6%
Property 7.3%
Cash 36.3%
So… the questions for Q3 are, can the PMs and their miners recover, and have the prices of physical PMs permanently decoupled from their paper instruments ?
And, for me personally, is there any point in continuing to hold paper PMs in a SIPP when suspicions of price manipulation are all around ?
I really don’t know. I guess it comes down to whether the deflationists or the inflationists are correct… and whether those who allegedly manipulate the paper markets have achieved whatever it is they want for the moment.
While I’m not comfortable about holding such a large proportion of cash and gilts at this time, I’m equally not too happy about reinvesting in equities right at the moment, so I’ll probably sit out the next couple of months and look again at the markets in September.
I suppose the one consolation is that a lot of pro investors were on the wrong side of the PM and PM miner movement in Q2, so I am probably not the only one licking my wounds.
My ISA portfolio also suffered in Q2, but not to the same extent, since I have very little exposure to PMs there, and because I invest monthly I benefit from pound-cost averaging and I’m not tempted to short-term trade on that account. Shame I didn’t adopt the same approach on my SIPP.”
The content of this site is mainly found in the forum pages not in the “latest news”
Contact me at info@capitalsynthesis.com if you would like a user name to contribute to the discussion.
Thanks Rich
Week Ahead Tech Comments – “Bullish Bullion, Bearish GBP”
A new trading week awaits us with some key equity index levels as well as fx levels fast approaching.
First up a very useful report from citi.
They are bullish for this week on the bullion, WTI, and bearish the GBP. On WTI if price breaks the 110 level 145 will come into play. This is all bullish commodities in general should oil breakout like this. And in turn this would feed into the cyclical themes out performing the defensives. As the cyclicals are a larger portion of the market’s capitalization, if they are correct, this would be bullish for the equity indexes initially. Obviously much higher commodity prices would eventually squeeze equities negatively. The correlation between equities & interest rates and commodities is eventually negative not positive though in the early stages the relationship can be positive.
The report is here and its not that dissimilar to the recent MS view re oil breakout and bullion strength near term.
And picking up on similar themes of US$ strength, GBP weakness GS here:
Market participants like to herd. They concentrate their fire power to roll over corporates and investors forcing them to cover or hedge positions. This is how a margin is made and it works when participants group together. On the forum pages we often call this the ‘circus’ coming to the instrument. The GBP is truly in their sites on the fx side of things. The data has been better but there are few buyers for the pound even on good news. On any bad news the gbp will fall and fall far. Oil is becoming an interesting instrument again as momentum is increasing and when oil gains momentum she can really start to move quickly. Note when the circus is unable to roll the instrument over into they are forced to cover their positions and hence you see “fast moves from failed moves”. There is a bear attack move underway on the gbp at present it seems. Whether the moves works we cannot predict but she has some momentum and more are joining the attack it seems.
Here some macro comments from WF.
Weekly here:
WFWeeklyEconomicFinancialCommentary_07122013
Monthly here:
WFMonthly Economic Outlook_07102013
One of the great market issues here, at present, is whether the cyclical story can gain weight to allow equity indexes to move higher. QE continues as does the MBS purchases and ultra low rates. Japan continues on her own stimulus program but rates have risen in the last 6 weeks or so globally and as Citi point out US consumer confidence surveys couldd be a good clue as to whether this cyclical story will gain weight or if the tappering talk and higher rates have already done their damage on the great US consumer’s appetite to add more credit and consume.
Here’s hoping for a profitable week.
All the best
Rich
Weekly Technical Comments – “Short Term, Sell into Strength, Medium Term, Weekly S&P Sell Signal Triggered”.
As expected, we have seen a decent bounce from the report two weeks ago but no key levels have been broken here.
The bounce has been swift but narrow with a new higher high in very few sectors though inc US finance, ( US Oil & Gas is very close) and in Europe only travel and leisure has broken out with finance lagging badly. US housing related stocks have barely bounce at all from their deep sell off and neither have the prior defensive leaders like health care, food and beverage and retail related stocks. (All the sectors inc utilities and telecos that generally have a negative correlation to rising interest rates note!)
Summary, the technical damage done in the June sell off sustains with nothing signalling a change of stance re the ongoing distribution and correction calls. On this basis we have bounced back into sell zones for US indexes.
“Our early October target for the SP500 is at 1450 and a break of this level would call for 1380/1350 as a worst case scenario”.
But the issue, as always, is short what? Its been a theme in the forum pages of what the best hedging vehicles will be for this coming index weakness. Whether to use the technical weakness in the – beta European indexes and or the Emerging market indexes as the basis for short positions or conversely whether the + alpha ie the US indexes as a short target. Probability wise, the + alpha indexes are not usually the indexes to attack though the Swiss team argue here that given the US dollar strength issues and extreme AAII investor positive sentiment toward the US (and negative sentiment on the Ems and Euro area) the alpha should on this occasion be the target.
A key plank of the Swiss team’s report again seems to be rates and currency. Rates have risen considerably in recent weeks across the yield curve and across all credit based instruments from corporate to junk to mortgage rate to treasuries. What’s worse rates have sustained even as equity indexes have bounced. Higher interest rates normally squeezes domestic demand (especially in high debt ratio environments) at a time when world demand is already weak and greatly driven by consumer demand. A stronger US$ is also usually a drain on world liquidity as the dollar is internationally a funding currency. The combination of higher rates and stronger dollar basket is key bearish signal though not a timing signal in itself, of course.
For my own comment here, in terms of targets. I’d say the team will be correct that the US indexes are the correct target if this coming weakness is purely a correction rather than a market crash. As we saw in the 2009 crash liquidity becomes a key driver in a crash driven event. The US markets always normally sustain liquidity as their capital markets are so deep and their central bank always ensures liquidity. In a panic environment, for purely liquidity reasons, the US indexes should sustain their relative positive out performance. We cannot determine here how much strength this technical weakness will gain to the downside as she reveals herself. This we will have to play according to what technically occurs as the move gathers momentum.
Inter market wise
“financials are a key driver of the current bounce are getting increasingly overbought and they are forming a big non confirmation on the indicator side, which means the rally in financials will be increasingly limited and this also means that the SPX will sooner or later lose its biggest asset versus the world. If we do not see a rotation back into defensives/value it will be difficult for the SPX top to hold the current high price levels”.
Issues such as these in the US are earnings impairing for Financial services, if they pass into law.
So the logic runs that technically finance has been leading this charge and unless the old leaders ie the defensives rejoin the attack then the indexes will at the least see a distribution and most likely a correction.
If we put this report together with the recent MS report detailing the sector action correlated to higher rates we start to see the wood for the trees here. Defensives do badly in rising interest rate environments. They often have large balance sheets with large long term funding needs and operate in highly regulated environments where they cannot easily and quickly pass on a steeping yield curve.
It therefore follows that the defensives are unlikely to join, unless rates fall considerably again. And this is not what the market is reading into the FED’s tapering comments at present as can be seen in credit market prices.
In this high ratio debt environment credit market rates are all important in determining asset markets direction.
If this rally is to continue, as rates rise, it would need the positively correlated sectors to higher rates to start to significantly out perform. These include construction, autos, chemicals, resources etc. Opposite to what we would expect to see at the start of a rate rising environment (which usually signifies the economy is starting to over heat) these sectors are already struggling which is generally not a good starting point for a sustainable rally.
US sector targets for the Swiss team remain the HGX and the Dow Transports.
Timing wise near term the 10 yr treasury remains a key indictor. The higher the rate the more pressure on equities given the structural weakness above re cylicals vs defensives. The second key indicator is the US$. The $ is at key levels vs several pairs inc the euro. The euro today fell again to 1.277 which is key area. A fall through the historic support, rise in the us$ in tandem with the t-bond 10yr rising to the resistance at 2.8% or so would badly squeeze equities and likely trigger another correction wave as the over bought financials fade and the defensives struggle due to the higher rates. Trading wise monitoring these correlations and inverse correlations on one screen is not a bad strategy at this point in the market over the next few days and weeks, in my view.
Without delay here the report:
And I also highlight this useful GS report which nicely reminds us of the coming week’s important tech charts. A very useful doc to reference which ill aim to publish every Friday alongside the WF macro reports.
As a general comment we have seen asset markets rise considerably across the world since the 2008 boom and subsequent bust in 2009, inc the implosion in the financial system and credit market collapse. The rally has been driven greatly by the hunt for yield thus far in this negative interest rate environment. In the last few months credit conditions have started to tighten once again and this has lead to the defensive high yield equities to sell off in a dramatic fashion. The cyclical stocks continue to be weak as world pmis and consumer demand struggles. Structurally this makes for an interesting H2 here with weakening equity market internals, tightening credit conditions and strengthening US$ which further tightens credit conditions. The May highs were confirmed in several key sectors in the US, if less so in Europe and not at all in Asia and EM markets. As we have said before there remains some technical strength in key sectors but its weakening here. Credit rates and US$ are key to keeping this cyclical asset market bull alive. Any significant divergence between rates the US$ and equity markets are an opportunity on both sides of the market here. Without either much more liquidity and or significant market turbulence gold remains likely to be unloved though a near term bounce is to be expected given the sell off she has seen in recent months.
All the best
Rich