Crude headed for $30 if OPEC fails to deepen cuts

Crude could fall to $30/barrel next year — and stay there for two years — according to Fereidun Fesharaki, chairman of consultants FGE.

Nymex Light Crude breached support at $45/barrel, signaling a primary decline. Expect further support at $40 but penetration of this would target the 2008 low at $30 and the 2016 low at $25 a barrel.

Nymex Light Crude

Debbie Flintoff-King – 1988 Olympic 400m Hurdles Final

A mate I swim with mentioned that his sister was Debbie Flintoff. I didn’t recognize the name. Obviously missed this memorable performance:

 

Westpac Leading Index counters jobs surge

In stark contrast to the buoyant recent ABS jobs numbers, the Westpac Leading Index slowed:

From Matthew Hassan at Westpac:

The six month annualised growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, eased from 1.01% in April to 0.62% in May.

…..The index is pointing to a clear slowing in momentum. While the growth rate remains comfortably above trend, the pace has eased markedly since the start of the year….

Read more at Westpac.

Moody’s downgrades Australian bank credit ratings

From Mathew Dunckley and Clancy Yeates at SMH:

Credit rating agency Moody’s has downgraded a dozen Australian banks, including the big four, citing increased risks in the nation’s increasingly indebted households.

Moody’s stripped the big four banks – the Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), and Westpac Banking Corporation (Westpac) – of their Aa2 long-term rating and placed them on the next level down at Aa3….

“In Moody’s assessment, risks associated with the housing market have risen sharply in recent years. Latent risks in the housing market have been rising in recent years, because significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness,” the statement said.

Source: Moody’s downgrades Australian bank credit ratings

Gold and the Dollar test support

The Dollar Index is finding support at 96.50/97; the latest long tail on the weekly chart signaling buying pressure. But the primary trend is down and breach of support would signal a decline to test the 2016 low at 92/93.

Dollar Index

Spot Gold is testing support at $1250. Fundamentals, like a weaker Dollar and rising political uncertainty, still favor an up-trend. Respect of support at $1250 would confirm. Breach of $1200 is unlikely but would warn of another decline.

Spot Gold

S&P 500 stays on course

The S&P 500 continues to advance, with a short-term target of 2500*. Bearish divergence on Twiggs Money Flow warns of rising selling pressure. While secondary (medium-term) in nature we should expect stronger resistance at 2500.

S&P 500

Bellwether transport stock Fedex is advancing strongly after breaking out above $200, signaling rising economic activity in the economy.

Fedex

Stage III of a bull market can last for several years.

Strange week on the ASX

Strange week on the ASX, with strong jobs numbers from the ABS causing a surge in the Aussie Dollar and a more optimistic outlook on the ASX.

But Iron ore continues to fall, headed for a test of 50.

Iron Ore

The ASX 300 Metals & Mining index respected resistance at 3000 and is headed for a test of primary support at 2750. Breach would confirm the primary down-trend.

ASX 300 Metals & Mining

The ASX 300 Banks index respected resistance at 8500 and is likely to test primary support at 8000. Again, breach would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 has formed a broadening wedge consolidation, in a down-trend. Declining Twiggs Money Flow indicates some selling pressure. Expect a test of primary support at 5600. Again, breach would warn of a primary down-trend. But a failed swing (that respects 5700) would warn that all bets are off and the index may be preparing for a rally.

ASX 200

Australia: Jobs surge

The May 2017 ABS Labour Force Survey surprised to the upside, with employment increasing by 42,000 over the previous month (full-time jobs even better at +52,100). These are seasonally adjusted figures and the trend estimates are more modest at 25200 jobs.

Australia Jobs and Unemployment

Seasonally adjusted hours worked also jumped, reflecting an annual increase of 2.3%.

Australia Hours Worked and Real GDP

The Australian Dollar surged as a result of the impressive numbers but Credit Suisse warns that there may be some issues with the latest strong NSW estimates:

By state, the gains in full-time employment were particularly strong in NSW…..

But beware the sample rotation bias ….the ABS has confessed that for the sixth time in seven months, it has rotated the sample in favour of higher employment-to-population cohorts. Officials report that this has had a material impact on the NSW employment outcomes.

If the numbers are correct, there are only two areas that could account for the job growth: apartment construction and infrastructure. The former is unlikely to last and the latter, while an important part of the recovery process, are also not a permanent increase.

I would prefer to wait for confirmation before adjusting my position based on a single set of numbers.

One swallow does not make a spring, nor does one day.

~ Aristotle

The Myth Of The “Passive Indexing” Revolution | RIA

From Lance Roberts at RIA:

While the idea of passive indexing works while all prices are rising, the reverse is also true. The problem is that once prices begin to fall the previously “passive indexer” becomes an “active panic seller.” With the flood of money into “passive index” and “yield funds,” the tables are once again set for a dramatic and damaging ending.

Source: The Myth Of The “Passive Indexing” Revolution | RIA

The dangers of passive investing

There is a lot to be said for passive investing.

Key Takeaways from Morningstar’s Active/Passive Barometer Report:

  • Actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons.
  • Failure tended to be positively correlated with fees.
  • Fees matter. They are one of the only reliable predictors of success.

Prof. Burton Malkiel, author of A Random Walk Dow Wall Street, writes in the WSJ:

During 2016, two-thirds of active managers of large-capitalization U.S. stocks underperformed the S&P 500 large-capital index. When S&P measured performance over a longer period, the results got worse. More than 90% of active manager underperformed their benchmark indexes of a 15-year period.

…..In 2016 investors pulled $340 billion out of actively managed funds and invested more than $500 billion in index funds. The same trends continued in 2017, and index funds now account for about 35% of total equity fund investments.

Volatility is also near record lows as the market grows less reactive to short-term events.

CBOE Volatility Index (VIX)

Lower fees and lower volatility should both improve investment performance, so what could possibly go wrong?

Investors could stop thinking.

If passive funds are the investment of choice, then new money will unquestioningly flow to these funds. In turn the funds will purchase more of the stocks that make up the index.

Prices of investment-grade stocks that make up the major indices are being driven higher, without consideration as to whether earnings are growing apace.

And the higher index values climb, the more investment flows they will attract. Driving prices even higher in relation to earnings.

More adventurous (some would say foolhardy) investors may even start using leverage to enhance their returns, reasoning that low volatility reduces their risk.

The danger is that this becomes a self-reinforcing cycle, with higher prices attracting more investment. When that happens the market is in trouble. Headed for a blow-off.

Investing in passive funds doesn’t mean you can stop thinking.

Don’t lose sight of earnings.

When prices run ahead of earnings, don’t let your profits blind you to the risks.

And start thinking more about protecting your capital.

Draining the swamp?

WASHINGTON—The Trump administration proposed a wide-ranging rethink of the rules governing the U.S. financial sector in a report that makes scores of recommendations that have been on the banking industry’s wish list for years.

….If Mr. Trump’s regulatory appointees eventually implement them, the recommendations would neuter or pare back restrictions from the Obama administration, which argued the rules were necessary to guard against excessive risk taking and a repeat of the 2008 financial crisis.

Seems to me like the exact opposite of ‘draining the swamp’. The new administration proposes removing or limiting the rules intended to reduce risk-taking in the financial sector.

This could end badly.

Especially with bank capital at current low levels.

Source: Trump Team Proposes Broad Rethink of Financial Rulebook – WSJ

Crude tests support at $45/barrel

Nymex Light Crude is testing support at $45/barrel. Breach would offer an immediate target of $40. Follow-through below $40 would signal another test of the 2008/2016 lows at $30.

Nymex Light Crude

The chart below plots long-term crude prices adjusted for inflation. Recent falls show real crude prices returning to their previous trading range (0.1 to 0.2) before the 2004 to 2015 “China boom”.

Nymex Light Crude/CPI

The 2004 to 2015 surge in crude prices is very likely a major cause of low global growth over the last decade. Return to the previous trading range would be a bullish sign for the global economy.

Steady growth in US hours worked

Growth of total hours worked, calculated as Total Nonfarm Payroll multiplied by Average Hours worked, improved to 1.575% for the 12 months to May 2017.

Total Hours Worked

And the April 2017 Leading Index, produced the Philadelphia Fed, is tracking at a healthy 1.64%. Decline below 1.0% is often an early warning of a slow-down; below 0.5% is more urgent.

Hourly Wage Rate Growth and Core CPI

Dow Jones Industrial Average continues to advance. Rising troughs on Twiggs Money Flow signal long-term buying pressure.

Dow Jones Industrial Average

Dow Jones Transportation Average is slower, headed for a test of resistance at 9500. But recent breakout of Fedex above $200 is an encouraging sign and the index is likely to follow.

Dow Jones Transportation Average

We are in stage III of a bull market, but this can last for several years.

Australia: RBA hands tied

Falling wage rate growth suggests that we are headed for a period of low growth in employment and personal consumption.

Australia Wage Index

The impact is already evident in the Retail sector.

ASX 300 Retail

The RBA would normally intervene to stimulate investment and employment but its hands are tied. Lowering interest rates would aggravate the housing bubble. Household debt is already precariously high in relation to disposable income.

Australia: Household Debt to Disposable Income

Like Mister Micawber in David Copperfield, we are waiting in the hope that something turns up to rescue us from our predicament. It’s not a good situation to be in. If something bad turns up and the RBA is low on ammunition.

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and — and in short you are for ever floored….

~ Mr. Micawber in Charles Dickens’ David Copperfield

ASX banks and iron ore drag the index lower

Last week I wrote: “I believe that the latest rally is a secondary reaction and that the ASX is headed for a down-turn, with miners and banks leading the way. But it’s no use arguing with the (ticker) tape.” This week the ticker tape backs up my bearish sentiment, so I am a lot more comfortable.

Iron ore continues to fall, headed for a test of 50.

Iron Ore

Banks’ bear market rally also petered out, with the ASX 300 Banks index headed for a test of support at 8000. Breach would confirm the primary down-trend.

ASX 300 Banks

The ASX 200 broke support at 5700. Declining Twiggs Money Flow signals selling pressure. Breach of primary support at 5600 would warn of a primary down-trend.

ASX 200

China: Stay clear

“Never trade against the central bank” is a golden rule of trading. Rule #2 should be: “When the central bank behaves erratically, stay clear.” The PBOC announced a crackdown on wealth management products in May but alarm at the rapid contraction elicited a quick retraction.

The Shanghai Composite Index broke support at 3050/3100 signaling a primary decline. But the PBOCs sudden reversal spurred a recovery, with the index now likely to test resistance at 3300. Rising Twiggs Money Flow indicates buying pressure. Reversal below 3050 is unlikely but would confirm a primary down-trend.

Shanghai Composite Index

India’s Sensex consolidates

India’s Sensex is consolidating above its new (medium-term) support level at 31000. Bearish divergence on Twiggs Money Flow indicates medium-term selling pressure. Target for the advance is 32000* but further testing of the new support level is likely.

BSE Sensex

* Target: 29000 + ( 29000 – 26000 ) = 32000

Footsie stalls, Sterling weakens

Political uncertainty, with a hung parliament, increased downward pressure on Sterling which is testing primary support at 1.13/1.14 against the Euro. Breach would signal a test of the 2016 low at 1.10.

GBPEUR

The FTSE 100 stalled at 7600, with bearish divergence on Twiggs Money Flow indicating medium-term selling pressure. Retracement that respects support at 7400 would re-affirm the target of 7700*. But breach of the rising trendline is as likely, which would warn of a test of primary support at 7100.

FTSE 100

* Target: 7400 + ( 7400 – 7100 ) = 7700