Sixteen Tons [video]

Not many people know that Tom Jones (born Thomas John Woodward) started as a blues singer. Here he covers Sixteen Tons by Merle Travers.

Gold declines as interest rates rise

The Fed is expected to hike interest rates in December. Long-term interest rates are rising in anticipation of further rate hikes in 2017. 10-Year Treasury yields have penetrated their 10-year descending trendline, warning that the secular down-trend is ending. Breakout above 2.50 percent would strengthen the signal, while follow-through above the 2013/2014 high of 3.0 percent would confirm.

10-Year Treasury Yields

The Dollar Index successfully tested its new support level at 100. Target for the advance is 107*.

US Dollar Index

* Target medium-term: 100 + ( 100 – 93 ) = 107

With interest rates rising and the Dollar strengthening, demand for Gold is shrinking. Steps by the Chinese government to limit private gold purchases, part of their program to support the Yuan by slowing capital flight, will also impact on demand. Target for the decline is unchanged at the December 2015 low of $1050/ounce. Retracement that respects the resistance level at $1200 would strengthen the bear signal.

Spot Gold

Are stocks overpriced?

Some good discussion on our forum regarding current high stock valuations, based more on hopes than on earnings.

This chart of Price-Earnings ratios highlights the problem. PEs for both the MSCI World Index (ex-Australia) and the ASX 200 are close to historic highs (after the Dotcom bubble).

Price-Earnings

Strong earnings growth would soon fix this but there is little sign of that at present.

Jia Jiang: What I learned from 100 days of rejection

Lovely TED talk by Jia Jiang

Wider trade gap adds to economy’s worries

From Jens Meyer and Patrick Commins:

A surprise blow-out in the October trade deficit has raised questions about the predicted rebound in economic growth, following the first contraction in GDP in five years.

Instead of shrinking as predicted, Australia’s trade gap widened 20 per cent to $1.54 billion as growth in imports outpaced exports….

Paul Dales from Capital Economics said the October trade number was worrying as it implied net exports – a key GDP component – might be a big drag on economic growth in the fourth quarter, as volumes mattered for real GDP growth.

“This could all change when the November and December trade data are released. But at the moment, other parts of the economy will have to be much stronger to prevent another fall in GDP,” he said, adding that while that was probable, he was nonetheless now more worried about a possible recession.

On its own, the trade deficit is unlikely to tilt the economy into recession but there is a worrying contraction in business investment, outside of the expected mining slow-down, and in wages growth.

Source: Wider trade gap adds to economy’s worries

Australia: Say goodbye to growth

Business investment in Australia continues its sharp descent since the end of the mining boom, falling below 14% of GDP for the first time since the Dotcom crash.

Australia Business Investment
Source: RBA Chart Pack

Apart from the expected “cliff” in Engineering, investment in Machinery and Equipment has fallen to record lows.

Australia Business Investment - Components
Source: RBA Chart Pack

Without investment, growth is likely to contract. The impact on Australian wages is an ominous warning.

Australia Wage Growth
Source: RBA Chart Pack

Markus Fischer: A robot that flies like a bird

Plenty of robots can fly — but none can fly like a real bird. That is, until Markus Fischer and his team at Festo built SmartBird, a large, lightweight robot, modeled on a seagull, that flies by flapping its wings.

First Impressions: Australian Q3 GDP

Andrew Hanlan

From Andrew Hanlan at Westpac:

The Australian economy contracted in the September quarter, with a sharper fall than anticipated.Q3 GDP was -0.5%, after a +0.6%. Annual growth slowed to 1.8% from 3.1%….

Source: WIB IQ – world-class thinking in real time.

Trump the biggest positive and negative risk for growth, survey finds

From Zac Crellin:

The policies of a Trump administration are both the biggest downside and upside risks to the global economy, an international survey of companies by Oxford Economics has found.

While 38 per cent of respondent companies were hopeful for US growth to surge thanks to President-elect Donald Trump’s fiscal stimulus program, 27 per cent feared Mr Trump would instigate a trade war between the US and China….

Source: Trump the biggest positive and negative risk for growth, survey finds

Yuan Warning

Our forex data feed shows a current USDCNY exchange rate of 7.4775, which matches Barcharts.com and Google Finance, but Bloomberg and NetDania show a far lower rate of 6.8681. We have asked our data suppliers to investigate the disparity. Please do not act on the rates quoted without verifying with your bank/forex dealer.

ASX rally falters

The ASX 200 rally stalled at 5500. Declining 21-day Twiggs Money Flow indicates rising selling pressure. Breakout above 5500 would complete a bear trap, indicating a primary advance to 5800*. But reversal below 5400 would signal another test of primary support at 5150.

ASX 200

DAX retreats

Germany’s DAX is retracing to test support at 10200. The DAX has formed a narrow line (or consolidation) between 10200 and 10800 over the last quarter. Declining Twiggs Money Flow is typical during a consolidation and does not have much significance unless it crosses below zero. Breakout will signal future direction, either an advance to 11500* or a test of support at 9000.

DAX

* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

Footsie selling pressure

The Footsie (FTSE 100) is again testing support at 6700. Declining Twiggs Money Flow warns of selling pressure. Breach of 6700 is likely and would warn of a correction to 6500.

FTSE 100

Gold and Dollar pause

The Dollar Index paused in its advance and is likely to retrace to test the new support level at 100. Target for the advance is 107*.

US Dollar Index

* Target medium-term: 100 + ( 100 – 93 ) = 107

Gold paused in its primary decline, in response. The target is unchanged at the December 2015 low of $1050/ounce. Retracement that respects the resistance level at $1200 would strengthen the bear signal.

Spot Gold

Wisdom, in short, whose lessons have been represented as so hard to learn by those who were never at her school, teaches us only to extend a simple maxim universally known and followed even in the lowest life, a little farther than that life carries it. And this is not to buy at too dear a price.

Now, whoever takes this maxim abroad with him into the grand market of the world, and constantly applies it to honors, to riches, to pleasures, and to every other commodity which that market affords, is, I will venture to affirm, a wise man; and must be so acknowledged in the worldly sense of the word: for he makes the best of bargains, since in reality he purchases everything at the price of a little trouble, and carries home all the goods I have mentioned, while he keeps his health, his innocence and his reputation, the common prices which are paid for them by others, entire and to himself.

~ Henry Fielding: The History of Tom Jones, a Foundling (1749).

Probably the most important lesson one can ever learn: wealth and success are important, but not as important as your health, your family, your friends and your reputation.

True wisdom, Henry Fielding

China turns to ‘The Art of War’ as Donald Trump signals battle on trade

Having backed off some other campaign pledges, it’s unclear if Trump will end up slapping punitive tariffs on China – and Beijing has signalled some optimism he will be more pragmatic in office. Still, the message from China is that any move to tax Chinese imports would bring retaliation. The US economy would take a hit and America would damage its longstanding ties with Asia.

“China wouldn’t like to see that happen,” Fu Ying, who chairs the foreign affairs committee of the legislature and was a vice-foreign minister until 2013, said of the US imposing punitive tariffs. “But if so happens, it won’t be one-way traffic,” she said last week in Beijing.

That’s where I think the former vice-foreign minister is wrong. China has rigged the game so that trade with the US is largely one-way traffic.

Container imports and exports at the Port of Los Angeles (FY 2016) highlight the problem. More than 57% of outbound containers are empty. Container shipping represents mainly manufactured goods, rather than bulk imports or exports, and the dearth of manufactured exports reflects the trade imbalance with Asia. Even the container statistic understates the problem as many outbound containers contained scrap metal and paper for processing in Asia, rather than manufactured goods.

Port of Los Angeles (FY 2016) Container Traffic

Source: China turns to ‘The Art of War’ as Donald Trump signals battle on trade

Brexit negotiators identify UK’s trump cards

From Alex Barker:

Some British ministers reckon that Europe will eventually realise there are negative consequences for all sides from a hard, sharp Brexit. One is the competitive threat posed by a UK unbound. Dubbed the “Singapore model”, this is a scenario of British tax and regulatory “dumping” that European capitals fear. Britain is too big, too close and too similar an economy to not worry about being undercut…..

The second is the City of London. This remains Europe’s main financial hub and a hard exit could raise costs for corporate Europe and inflame weaknesses such as Italian banks.

David Davis, Brexit minister, has noted that more EU companies request a financial-services passport to operate in the UK than vice versa….

Source: Brexit negotiators identify UK’s trump cards

Priming the Pump

US stocks are buoyant on hopes that a Donald Trump presidency will benefit business, with major indexes flagging a bull market. But promises come first, the costs come later. While I support a broad infrastructure program and the creation of a level playing field in global markets, the actual execution of these ideas is critical and should not be allowed to be hijacked by the establishment for their own ends.

Erection of trade barriers is a useful negotiating position but is unlikely to be achieved without enormous damage to the global economy. As long as your trading partners think you are crazy enough to do it, they may be more amenable to establishing fair ground rules for international trade. If they don’t believe the threat, they will be happy to continue on their present path. So Trump walks a fine line between reassuring his allies and the domestic market, while keeping others guessing about his intentions.

Before we get carried away with hopes and expectations, however, we need to evaluate the current state of the economy in order to assess the current potential for growth.

The Cons

Let’s start with the negatives.

Construction spending is slow, at about three-quarters of pre-GFC (and sub-prime) levels. It will take more than an infrastructure program to restore this (though it is a step in the right direction). What is needed is higher growth expectations for the economy.

Construction Spending to GDP

Industrial production is close to its pre-GFC peak but has been declining since 2014.

Industrial Production Index

Job growth is slowing. Decline below 1.0 percent would be cause for concern.

Employment Growth

Rail and freight activity also reflects a slow-down since 2015.

Rail & Freight Index

The Philadelphia Fed’s broad-based Leading Index has also softened since 2014. Decline below 1.0 percent would be cause for concern.

Leading Index

One of my favorite indicators, this graph compares profit margins (per unit of gross value added) to employee costs. There is a clear cycle: employee costs (per unit) fall after a recession while profits rise. As the economy recovers and approaches full capacity, employee costs start to rise and profits fall — which leads to the next recession. At present we can clearly see employee costs are rising and profit margins are falling.

Profits and Employee Costs per unit of Value Added

It will be difficult for corporations to continue to grow earnings in this environment. Business investment is falling.

Gross Private Nonresidential Fixed Investment

Plowing money into stock buybacks rather than into new investment may shore up corporate performance for a while but hurts construction and industrial production. Turning this around is a major challenge facing the new administration.

The Pros

Retail sales are rising as increased employee compensation costs lift consumer confidence. Solid November sales with strong Black Friday numbers would help lift confidence even further.

Retail Sales

Light vehicle sales are also recovering, a key indicator of consumers’ long-term outlook.

Light Vehicle Sales

Rising sales and infrastructure investment are only part of the solution. What Donald Trump needs to do is prime the pump: introduce a fairer tax system, minimize red tape and reduce political interference in the economy, while enforcing strong regulation of the financial sector. Not an easy task, but achieving these goals would help restore business confidence, revive investment, and set the economy on a sound growth path.

In the short run, the market is a voting machine
but in the long run it is a weighing machine.

~ Benjamin Graham: Security Analysis (1934)