Iron ore price crashes through $50 |

From Frik Els at

“It’s going down significantly,” Katie Hudson, managing director and senior investment manager at Goldman Sachs Asset Management Australia told the Financial Review on Wednesday: “The major producers are adding incremental volume at around $US20 a ton, that gives you a sense of where the vulnerability is.”

Iron ore miners invested north of $100 billion in new projects and expansions since the start of the decade and most of those projects are now delivering or will do so soon. The big three producers are following a scorched earth policy of raising output and slashing costs to weather low prices and push out competitors.

This week top producer Vale announced record third quarter shipments of 88 million tonnes despite idling 13 million tonnes worth of high cost operations. More astonishing is the fact that the Rio de Janeiro-based company was able to reduce cash costs to just $12.70 per tonne (it’s in the high teens at Rio Tinto and BHP).

Read more at Iron ore price crashes through $50 |

Iron ore headed for the smelter

Bloomberg News quotes Zhu Jimin, deputy head of the China Iron & Steel Association, representing major steel producers, at their quarterly briefing on Wednesday:

“Production cuts are slower than the contraction in demand, therefore oversupply is worsening.”

“China’s steel demand evaporated at unprecedented speed as the nation’s economic growth slowed,” Zhu said. “As demand quickly contracted, steel mills are lowering prices in competition to get contracts.”

Little wonder that bulk commodity prices are falling sharply.

RBA: Bulk Commodity Prices

Australian producers have been ramping up production to compensate for lower prices.

RBA: Bulk Commodity Exports

But with further production due to come on line, the market looks ready for a meltdown. This from David Llewellyn-Smith at Macrobusiness:

Yes, China is still shutting in supply and is on track for 270 million tonnes this year but it’s not going to drop enough in the future (at the very best down to 200mt) as Roy Hill, Sino, Anglo, Vale and India (and possibly Tonkolili as well) continue the great ramp up, adding another 200mt plus in the next two years even as Chinese steel production keeps falling at 2-3% per year, taking 40mt per annum out of demand….. the total seaborne iron ore market is about to peak and then shrink….

The ASX 300 Metals & Mining Index is testing its 2008 low. Breach appears likely and would offer a target of 1700*.

ASX 300 Metals & Mining Index

* Target calculation: 2200 – ( 2700 – 2200 ) = 1700

North America

The S&P 500 respected support at 2050 and is headed for a test of the previous high at 2130 on the back of strong earnings performance. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure but expect strong resistance at 2130. Reversal below 2050 is unlikely, but would warn of another test of primary support at 1870.

S&P 500 Index

* Target calculation: 2000 + ( 2000 – 1870 ) = 2130

A declining CBOE Volatility Index (VIX) indicates market risk is easing.

S&P 500 VIX

NYSE short sales remain subdued.

NYSE Short Sales

Dow Jones Industrial Average is similarly headed for a test of 18300, with 13-week Twiggs Money Flow rising steeply.

Dow Jones Industrial Average

Canada’s TSX 60 continues to test stubborn resistance at 825. Weak 13-week Twiggs Momentum, below zero, indicates the market remains bearish. Breakout would signal an advance to 900, but reversal below the former primary support level at 800 is as likely and would warn of another decline.

TSX 60 Index

* Target calculation: 775 – ( 825 – 775 ) = 725


Germany’s DAX is testing resistance at 11000. Recovery of 13-week Twiggs Money Flow above zero indicates medium-term buying pressure. Breakout above the descending trendline would suggest another test of the previous high at 12400. Expect stubborn resistance, however, and reversal below 10000 would warn of another decline.


The Footsie is similarly testing resistance at 6500. Breakout above the descending trendline would suggest another test of the previous high at 7100. 13-Week Twiggs Money Flow troughs above zero indicate long-term buying pressure. Reversal below 6250 is unlikely, but would warn of another test of primary support at 6000.

FTSE 100


The Shanghai Composite Index continues to test resistance at 3500. Respect is likely and would indicate a re-test of government-backed support at 3000.

Dow Jones Shanghai Index

Hong Kong’s Hang Seng Index is retracing to test support at 22500. Respect would indicate a rally to 24000, but failure remains as likely and would test primary support at 21000. A 13-week Twiggs Money Flow trough above zero would indicate (long-term) buying pressure.

Hang Seng Index

Japan’s Nikkei 225 is testing resistance at 19000. Breakout would signal another test of 21000. Respect is less likely, but would warn of another test of primary support at 17000.

Nikkei 225 Index

* Target calculation: 19000 + ( 19000 – 17000 ) = 21000

India’s Sensex encountered resistance at 27500. Rising 13-week Twiggs Money Flow troughs above zero indicate long-term buyiong pressure. Expect another test of 26500 but respect is likely and would indicate continuation of the rally. Reversal below 26500 would warn of another (primary) decline.


* Target calculation: 25000 – ( 27500 – 25000 ) = 22500


The ASX 200 is retracing to test medium-term support between 5200 and 5300. Reversal of 21-day Twiggs Money Flow below its rising trendline indicates (medium-term) selling pressure; decline below zero would strengthen the signal. Breach of 5200 would warn of another test of primary support at 5000. Recovery above the descending trendline is unlikely at this stage, but would suggest another test of 6000.

ASX 200

* Target calculation: 5000 – ( 5400 – 5000 ) = 4600

Zero deposit loans for Chinese investors in Australian property market |

From Angus Grigg:

One of China’s biggest financial institutions is offering zero-deposit home loans for off-the-plan apartments in Melbourne and the Gold Coast, a practice at odds with efforts by Australian regulators to tighten lending standards and cool the property market….

The RBA must be viewing this with alarm. The property bubble is one Chinese export Australia does not want to reach these shores.

Read more at Zero deposit loans for Chinese investors to spur Australian property market |

S&P 500 reporting in full swing

Of the 172 S&P 500 stocks that have reported for Q3 2015: 120 beat, 37 missed, and 15 met their estimates.

S&P 500 Q3 2015 operating reports

Sectors with the highest percentage of misses so far are: Materials, Energy and Financials. Lowest are: Information Technology, Health Care, Telecom and Utilities.

Aussie big four banks overpriced

Australia’s big four banks have raised significant amounts of new capital as the realization finally dawned on regulators that they were highly leveraged and likely to act as “an accelerant rather than a shock-absorber” in the next downturn.

Chris Joye writes in the AFR that the big four have raised $36 billion of new capital in the 2015 financial year:

Before Westpac’s $3.5 billion equity issue this week, the big banks had, through gritted teeth, accumulated $27 billion of extra equity over the 2015 financial year through “surprise” ASX issues, underwritten dividend reinvestment plans, asset sales and organic capital generation via retained earnings. If you add in “additional tier one” (AT1) capital issues (think CBA’s $3 billion “Perls VII”), total equity capital originated rises to about $32 billion, or almost $36 billion after Westpac’s effort this week.

The effect of deleveraging is clearly visible on the ASX 300 Banks Index [XBAK].

ASX 300 Banks Index

Having broken primary support, the index is retracing to test resistance at 84. Bearish divergence on 13-week Twiggs Money Flow, followed by reversal below zero, both warn of a primary down-trend. Respect of resistance at 84 would strengthen the signal, offering a (medium-term) target of 68* for the next decline.

* Target calculation: 76 – ( 84 – 76 ) = 68

Matt Wilson, head of financial research at the $10 billion Australian equities shop JCP Investment Partners, says the bad news for those “long” the oligarchs is that “we are still only halfway through the majors’ capital raising process at best”.

Chris calculates the remaining shortfall to be at least $35 billion:

Accounting for future asset growth, I calculated the big banks will need another $35 billion of tier one capital if the regulator pushes them towards a leverage ratio of, say, 5.5 per cent by 2019, which is still well below the 75th percentile peer.

One of the big four’s most attractive features is their high dividend-yield and attached franking credits, but Chris compares this to the far lower dividend payout ratios of international competitors and quotes several sources who believe the present ratios are unsustainable.

JCP’s Wilson does not think payout ratios are sustainable and accuses the big banks of “over-earning”. “Bad debts of 0.15 per cent are running at a 63 per cent discount to the through-the-cycle trend of 0.40 per cent,” he says. “Should we see a normal credit cycle unfold, then payouts will be cut significantly due to the pro-cyclicality of risk-weighted assets calculations and bad debts jumping above trend.”

He concludes:

Aboud [Stephen Aboud, head of LHC Capital Fund] reckons artificially high yields also explain why the big banks’ “2.5 times price-to-book valuations are miles above the 1-1.5 times benchmark of global peers”, which he describes as “a joke”.

Plenty of food for thought.

Read more from Chris Joye at Hedge funds that shorted the big banks | AFR

Niall Ferguson: The Real Obama Doctrine – Real Daily Buzz

Niall Ferguson on US strategy in the Middle East:

Henry Kissinger long ago recognized the problem: a talented vote-getter, surrounded by lawyers, who is overly risk-averse. Even before becoming Richard Nixon’s national security adviser, Henry Kissinger understood how hard it was to make foreign policy in Washington. There “is no such thing as an American foreign policy,” Mr. Kissinger wrote in 1968. There is only “a series of moves that have produced a certain result” that they “may not have been planned to produce.” It is “research and intelligence organizations,” he added, that “attempt to give a rationality and consistency” which “it simply does not have.”

Two distinctively American pathologies explained the fundamental absence of coherent strategic thinking. First, the person at the top was selected for other skills. “The typical political leader of the contemporary managerial society,” noted Mr. Kissinger, “is a man with a strong will, a high capacity to get himself elected, but no very great conception of what he is going to do when he gets into office.”

Second, the government was full of people trained as lawyers. In making foreign policy, Mr. Kissinger once remarked, “you have to know what history is relevant.” But lawyers were “the single most important group in Government,” he said, and their principal drawback was “a deficiency in history.” ……..

It is clear that [Barack Obama’s] strategy is failing disastrously. Since 2010, total fatalities from armed conflict in the world have increased by a factor of close to four, according to data from the International Institute of Strategic Studies. Total fatalities due to terrorism have risen nearly sixfold, based on the University of Maryland’s Study of Terrorism and Responses to Terrorism database. Nearly all this violence is concentrated in a swath of territory stretching from North Africa through the Middle East to Afghanistan and Pakistan. And there is every reason to expect the violence to escalate as the Sunni powers of the region seek to prevent Iran from establishing itself as the post-American hegemon.

Today the U.S. faces three strategic challenges: the maelstrom in the Muslim world, the machinations of a weak but ruthless Russia, and the ambition of a still-growing China. The president’s responses to all three look woefully inadequate……

Some things you can learn on the job, like tending bar or being a community organizer. National-security strategy is different. “High office teaches decision making, not substance,” Mr. Kissinger once wrote. “It consumes intellectual capital; it does not create it.” The next president may have cause to regret that Barack Obama didn’t heed those words. In making up his strategy as he has gone along, this president has sown the wind. His successor will reap the whirlwind. He or she had better bring some serious intellectual capital to the White House.

Source: Niall Ferguson: The Real Obama Doctrine – Real Daily Buzz

Effect of long-term unemployment on the labor participation rate

Alan B. Krueger is Bendheim Professor of Economics and Public Affairs at Princeton University and an NBER research associate. Here he discusses the effect of long-term unemployment on the declining labor participation rate:

….The SIPP [Survey of Income and Program Participation] data indicate that, irrespective of the business cycle, the probability that an unemployed worker will be “steadily” employed in a full-time job for at least four consecutive months a year later is strikingly low and declines further as the duration of joblessness rises. Even in the strong job market of the late 1990s, the chance of a long-term unemployed worker finding steady, full-time employment after a year was only around 20 percent. This likelihood did not change very much during the 2001 recession, and it didn’t change substantially during the Great Recession. Conversely, the likelihood that an unemployed worker will leave the labor force a year later increases substantially as the duration of joblessness rises. According to the SIPP, 35 percent of workers who became long-term unemployed during the Great Recession were out of the labor force by 2013.

Why does long-term unemployment have such an adverse effect on workers? There has been a long, unresolved debate in the economics profession about whether the job finding rate is lower for the long-term unemployed because of either unobserved heterogeneity in the characteristics of such workers or something about the nature of unemployment that adversely changes people. Although this is an inherently difficult question to answer, the literature suggests that duration dependence plays a larger role than unobserved heterogeneity in explaining this phenomenon….. Much research suggests that long-term unemployment has a negative impact on both the supply side and the demand side.

On the supply side, an individual’s mental health and self-esteem can be affected by the experience of long-term unemployment. Till von Wachter has done good work showing that one’s physical health and mortality are adversely impacted by joblessness. Andy Mueller and I did a longitudinal study where we asked workers who were receiving unemployment insurance about the intensity of their job searches. We found that job search activity tends to decline the longer people are unemployed. We also found that the long-term unemployed tend to be socially isolated…… Furthermore, long-term unemployment tends to be associated with repeated job loss and lower re-employment earnings. All of these findings point to a decline in human capital and disengagement from the labor market as a result of long-term unemployment.

On the demand side, studies have shown that employers discriminate – at least statistically – against the long-term unemployed. Kory Kroft, Fabian Lange, and Matt Notowidigdo conducted a study in which they sent out resumes with varying gaps of joblessness, and they found that the likelihood of receiving an interview depended upon the duration of unemployment. Rand Ghayad also found similar results.

My take on the evidence is that the experience of being unemployed makes it harder for people to get back on their feet, and that even a strong economy doesn’t solve this problem. In addition, once a person leaves the labor force, he or she is extremely unlikely to return. The labor force flows data from the CPS bear this out (Figure 6). According to CPS data, the monthly rate for transitioning from out of the labor force to back in the labor force is unrelated to the business cycle. We didn’t see a wave of people returning to the labor force either in the late 1990s or earlier in the 2000s, and we’re not seeing one now……

To conclude, I will briefly comment on policies to address the problem of long-term unemployment. One of the overriding lessons that I take away from this body of research is that, if left untreated, long-term unemployment can have hysteresis-type effects on the labor market. A cyclical recovery does not cure the problems created by long-term unemployment. Going forward, I think one of the lasting legacies of the Great Recession is that the labor force participation rate will be about one percentage point lower than it otherwise would have been. This analysis argues in favor of using “overwhelming force” in a deep recession to prevent those who lose their jobs from becoming long-term unemployed in the first place.

Since long-term unemployment has been so widespread throughout sectors of the economy, “industry-specific” policies are insufficient to solve the problem. In 2012, for example, only 10 percent of long-term unemployed workers were from the construction sector, and only 11 percent were from manufacturing, despite the fact that these industries were hit particularly hard by the Great Recession.

Instead, I would prefer more targeted measures geared specifically toward helping the long-term unemployed stay in the labor force and find employment, such as a tax credit for employers who hire the long-term unemployed or direct employment. There also has been some research to support the notion that volunteering can help jobless workers make new connections, learn new skills, and stay engaged in the labor force. In the United States, job search assistance has typically been found to be effective in helping workers regain employment. I also think wage loss insurance might be worth considering, especially for older long-term unemployed workers.

Lastly, given that many of the long-term unemployed have already left the labor force, we should consider policies that address the structural decline in labor force participation. For example, more family-friendly policies might help greater numbers of women either enter or remain in the labor force. Likewise, reforms to the disability insurance system could possibly prevent some workers from permanently exiting the labor force.

Source: NBER Reporter Online

Japan abandons Fed-style inflation targeting and targets GDP growth instead

Scott Sumner quotes Marcus Nunes:

Japanese Prime Minister Shinzo Abe vowed on Thursday to raise gross domestic product by nearly a quarter to 600 trillion Japanese yen ($5 trillion), pledging to refocus on the economy after the passage of controversial security bills that eroded his popularity. Abe unveiled the plan at a news conference marking his election to a second three-year term as ruling Liberal Democratic Party leader and hence, premier. Abe stopped short, however, of setting a timeframe for the new GDP target, which could raise doubts about the goal.

System-based rules targeting (nominal) GDP growth are likely to deliver more stable and consistent economic performance than the discretionary monetary policy followed by the Fed. No matter how smart the people on the FOMC, they are reacting to imperfect data in a complex world. Many decisions, in hindsight, prove to be late. Sometimes with disastrous consequences.

For a detailed discussion, see Marcus Nunes: The “Rules debate” once again.

Read more at Japan adopts an NGDP target, Scott Sumner | EconLog | Library of Economics and Liberty

Deflation supercycle is over as world runs out of workers | Telegraph

….The world fertility rate has steadily declined to 2.43 births per woman from 4.85 in 1970 , with a precipitous collapse over the past 20 years in east Asia.

The latest estimates are: India (2.5), France (2.1), US (2.0), UK (1.9), Brazil (1.8), Russia and Canada (1.6), China (1.55), Spain (1.5) Germany, Italy, and Japan (1.4), Poland (1.3) Korea (1.25), and Singapore (0.8). As a rule of thumb, it takes 2.1 to keep the population on an even keel.

Read more at Deflation supercycle is over as world runs out of workers – Telegraph

Australia: Latest SMSF statistics | FINSIA

Key statistics to have come from the ATO’s latest quarterly SMSF report include:

  • The total number of SMSFs increased by 30,723 from 526,275 to 556,998.
  • The total number of SMSF members increased by 58,219 from 991,621 to breach the one million mark at 1,049,840.
  • The total value of SMSF assets decreased from $600,276 million to $589,911 million.
  • Total borrowings increased from $13,328 million to $13,496 million.
  • Total other liabilities increased from $4,556 million to $4,613 million.
  • Total net assets decreased from $582,392 million to $571,802 million.

Source: SMSFs prefer cash despite falling rates

NYSE short sales easing

NYSE short sales and daily volume are trending lower, suggesting that selling pressure is fading.

NYSE Daily Volume & Short Sales

S&P 500: Market risk remains elevated

NYSE daily volume and short sales declined Thursday & Friday, indicating selling pressure is easing.

NYSE Daily Volume & Short Sales

There is no sign yet on the daily chart, however, with 21-day Twiggs Money Flow respecting the zero line from below. Breach of support at 1900 would warn of another decline. Follow-through below 1870 would confirm. Recovery above 2000 is unlikely at present, but would suggest that the correction is over.

S&P 500

Daily VIX indicates market risk remains elevated.


The market is closed Monday 7th for Labor Day.

NYSE short selling rises

NYSE short sales and daily volume dipped slightly on Wednesday but remain elevated, warning of selling pressure.

NYSE Daily Volume & Short Sales

NYSE Short Sales

NYSE short sales and daily volume are only published 24 hours after the close of trade, but are still a useful indication of where the market is headed. Short sales over 500 million on Monday, remain elevated. Keep an eye out for any increase above 600 million this week — which would warn of rising selling pressure and a likely breach of support.

NYSE Daily Volume & Short Sales

China: It just got worse

S&P 500: Dead cat bounce?

After Friday’s narrow consolidation between 1970 and 1990, S&P 500 September 2015 E-mini futures broke support at 1970, indicating moderate selling pressure.

S&P 500 September 2015 E-mini

Sound domestic economic performance is likely to ensure that the S&P 500 returns to its primary up-trend in the medium- to long-term, but upheaval in international financial markets may have sapped investor confidence in the short- to medium-term. The doji star on the daily chart reflects indecision. A close below 1970 would suggest another test of support at 1870, with respect of resistance at 2000 a bearish sign. A 21-day Twiggs Money Flow peak below zero would also warn of selling pressure. Follow-through above 2000 is less likely, but would indicate light selling and a snappy recovery.

S&P 500

NYSE volumes reflect the increase in activity, starting Friday August 21st, with daily volumes over 2 billion and short sales jumping to 800 million. It will be worth keeping an eye on short sales this week. Recovery above 600 million would warn of rising selling pressure.

NYSE Daily Volume & Short Sales

ASX during the 1997 Asian financial crisis

Performance of the All Ordinaries during the 1997 Asian financial crisis and ensuing Russian financial crisis in 1998.

All Ordinaries 1996-1998

The index gained 7.9% in 1997 and 7.5% in 1998 despite the upheaval in Asian markets. Australia is now a lot more reliant on exports to Asia, however, than in 1997/98.

All Ordinaries

Reversal of 13-week Twiggs Money Flow below zero warns of long-term selling pressure. Follow-through of the All Ords below 5000 would confirm a primary down-trend.

S&P 500 during the 1997 Asian financial crisis

Here is the performance of the S&P 500 during the 1997 Asian financial crisis and the ensuing Russian financial crisis in 1998.

S&P 500 1996-1998

The index gained 31% in 1997, and 26.7% in 1998, despite the upheaval in Asian markets. Global markets are nowadays a lot more interconnected, however, than in 1997/98.

S&P 500

All the same, gradual decline on 13-week Twiggs Money Flow suggests medium-term selling pressure — a secondary rather than a primary movement.