S&P 500: Expect strong resistance

The S&P 500 is testing resistance at 2100, while declining 13-week Twiggs Money Flow warns of medium-term selling pressure. Expect strong resistance between 2100 and 2130 but reversal below 2000 is now unlikely.

S&P 500 Index

CBOE Volatility Index (VIX) at 15 indicates calm is restored after the last two turbulent weeks.

S&P 500 VIX

More capital ‘likely’ for banks: APRA

From Clancy Yeates:

APRA on Monday updated a study that showed the common equity tier 1 (CET1) capital ratio of Australia’s major banks were now in the top quartile of banks internationally – a key target set by the 2014 financial system inquiry……APRA said the banks’ average CET1 ratios were 13.5 per cent of assets at December 2015, up from 11.7 per cent in June 2014.

The comparisons are significant because the 2014 financial system inquiry (FSI), chaired by former Commonwealth Bank chief executive David Murray, said that in order to be “unquestionably strong”, the banks’ capital position should be among the top quartile globally.”

….Echoing previous comments from APRA chairman Wayne Byres that capital requirements would rise “somewhat higher”, APRA said global banking regulators were likely to settle on rules later this year that would ratchet up how much capital banks must set aside. This will probably affect Australian lenders, too.

….It said the final shape of these rules would not be known until late this year, and it would be “prudent” for banks to plan for “the likelihood of strengthened capital requirements in some areas”.

While increased capital requirements may reduce bank profitability and slow lending growth in the medium-term, an increased capital buffer is critical for long-term sustainability of the industry and the broader economy. The pay-off banks should see is lower risk premiums for both deposit and liability funding, more stable growth and higher equity valuations.

Source: More capital ‘likely’ for banks: APRA

Why Brexit Is Good For Iron Ore, China | Hellenic Shipping News

Brexit gives a further reason to buy Asian and emerging markets stocks, according to CLSA‘s chief equity strategist Christopher Wood. Wood raised emerging markets to Overweight this morning.

First, Brexit is good for commodities such as iron ore and steel, thereby boosting Asia’s material stocks. This is because a …..cheaper pound and euro that resulted from Britain leaving the European Union, provides an excuse for more monetary and fiscal easing. “Infrastructure stimulus in the G7 world should give some sort of bid to the commodity complex on a global basis,” wrote Wood.

Indeed, commodity traders in China agree. Iron ore futures jumped 5.2% this morning, hard-rolled coil (steel) soared 4.5%…..

Second, Brexit relieves pressure on the People’s Bank of China, which is trying to liberalize its exchange rate while keeping capital outflow under control. The deep slump in the British pound gives the PBoC another excuse to guide its yuan fix lower.

Indeed, the PBoC’s yuan-dollar fix is at a 6-year low this morning, even though the pound still tumbled 8.7% against the yuan in onshore trading.

Third, Wood raised emerging markets to Overweight “given the increased negative outlook on European equities, given the political uncertainties raised by Brexit and given the negative consequences of even more negative interest rates and more negative bond yields for European banks.”

Wood continues to see gold price soaring …..G7 central bankers are crazy, in Wood’s view.

Source: Barron’s

Source: Why Brexit Is Good For Iron Ore, China, Emerging Markets | Hellenic Shipping News Worldwide

IEX Group Gains Approval for Stock Exchange | The New York Times

By NATHANIEL POPPER:

America is getting a new stock exchange from the most prominent critics of high-frequency trading.

After months of delays and a brutal lobbying battle that divided Wall Street, the IEX Group won approval on Friday from the Securities and Exchange Commission to become the nation’s 13th official stock exchange.IEX is run by the people at the center of the Michael Lewis book, “Flash Boys: A Wall Street Revolt,” which profiles the early efforts of the IEX team to create a trading exchange that would be somewhat shielded from high-frequency traders.

Other exchanges and trading firms had urged the S.E.C. to reject the IEX application to become an exchange.

Opponents of IEX, including the other stock exchanges, have argued that the structure of the new exchange will add unnecessary new complexities into an already complex stock market, and potentially end up hurting small investors.

…..The most novel and controversial feature of the IEX exchange is a so-called speed bump that would slow down trading slightly to throw off traders that rely only on speed.

The speed bump slows trades down by only 350 microseconds — or millionths of a second — but that is an eternity in a stock exchange universe in which computers can buy and sell stocks in nanoseconds — or billionths of a second.

The Nasdaq, and other existing exchanges, have said that the IEX’s speed bump will violate rules mandating that exchanges make their prices available to all parties at the same time.

Judging from the barrage of objections from other exchanges, they see IEX as a threat. Not as a threat to small investors as they so eloquently argued in their submissions — and whose interests they have ignored for years — but a threat to the billions of dollars in fees they receive from high-frequency traders for privileged co-location and access to stock exchange data feeds. Why would any investor want to trade on an exchange that encourages HFT when there is another exchange that offers a level playing field?

Source: IEX Group Gains Approval for Stock Exchange – The New York Times

Who is/isn’t buying Australian stocks?

Two interesting charts from Tim Baker at Deutsche Bank. Foreign investment in ASX equities, avoiding banks and resources, has slowed to a 5-year low.

Foreign Investors in ASX

Super fund investors have lost their enthusiasm for bank deposits, as interest rates tumble, and are allocating more to equities.

Super Fund Investors

Hope isn’t a strategy

Cautious optimism has evaporated after poor recent polls favoring a BREXIT. I hope that sanity prevails but, as the saying goes: “Hope isn’t a strategy”.

Better to have a Plan A and a Plan B to cope with the two alternatives. But if enough investors decide their money is safer in the bank, then expectations of a fall are likely to become a self-fulfilling prophecy.

The S&P 500 does not appear unduly alarmed but a sharp fall on 13-week Money Flow warns of selling pressure. Reversal below 2000 would warn of another test of primary support (1820 to 1870).

S&P 500 Index

Dow Jones Industrial Average shows a similar picture. Breach of medium-term support at 17400 to 17500 would warn of another test of primary support at 15500 to 16000.

Dow Jones Industrial Average

A CBOE Volatility Index (VIX) spiked to 20, indicating increased market risk. Long-term measures remain unaffected.

S&P 500 VIX

Europe

Germany’s DAX retreated below medium-term support, warning of another test of primary support. 13-Week Money Flow below zero suggests a primary down-trend.

DAX

The Footsie broke support at 6000 warning of a test of 5500. Reversal of Money Flow below zero would suggest a primary down-trend.

FTSE 100

* Target calculation: 6400 + ( 6400 – 6000 ) = 6800

Asia

The Shanghai Composite Index continues to range between 2700 and 3100.

Shanghai Composite Index

Japan’s Nikkei 225 Index broke support at 16000 and its lower trend channel, warning of another decline.

Nikkei 225 Index

* Target calculation: 15000 – ( 18000 – 15000 ) = 12000

India’s Sensex remains bullish, with a short retracement below 27000. Bearish divergence on 13-week Money Flow would end if the descending trendline is penetrated.

SENSEX

Australia

The ASX 200 broke medium-term support at 5200, warning of another test of primary support at 4750. Expect support at the former level of 4900 to 5000 but it is questionable whether this will hold. Combination of a seasonal sell-off and BREXIT fears are going to test buyers’ commitment.

ASX 200

The Banks Index fell sharply and breach of support at 7200 would offer a target of 6400*.

ASX 300 Banks

* Target calculation: 7200 – ( 8000 – 7200 ) = 6400

Health Care is experiencing a strong sell-off, led by CSL. This is a good long-term stock but exposure to the UK/Europe has spooked the market.

ASX 200 Health Care

Why BREXIT matters

From The Guardian, June 14th:

Support for leaving the EU is strengthening, with phone and online surveys reporting a six-point lead, according to a pair of Guardian/ICM polls.

Leave now enjoys a 53%-47% advantage once “don’t knows” are excluded, according to research conducted over the weekend, compared with a 52%-48% split reported by ICM a fortnight ago.

….Prof John Curtice of Strathclyde University, who analyses available referendum polling data on his website whatukthinks.org, noted that after the ICM data, the running average “poll of polls” would stand at 52% for leave and 48% for remain, the first time leave has been in such a strong position.

If the UK votes to LEAVE, we can expect:

  • A sell-off of UK equities. GDP is expected to contract between 1% and 2%. A Footsie breach of support at 6000 would signal a test of 5500, while breach of 5500 would offer a target of 5000 (5500 – [ 6000 – 5500 ]).

FTSE 100

  • UK housing prices fall.
  • A sharp sell-off in UK banks in response to falling GDP, equities and housing — threatening contagion in financial markets.
  • BOE rate cuts to support the UK economy.
  • A sharp fall in the Pound due to uncertainty, lower interest rates and lower capital inflows.

GBPUSD

  • The Euro falls in sympathy, as confidence in the EU dwindles.
  • The US Dollar strengthens, causing the Fed to back off on further interest rate rises.
  • Volatility surges across all markets.
  • Gold spikes upward.

Hat tip to The Coppo Report

BREXIT: Stocks to watch

From Bell Potter:
Australian stocks with more than 80% of revenue derived from UK/Europe:

  • Macquarie Atlas Roads
  • Hendersons

HGG

  • Ansell
  • Amcor

AMC

Stocks with 40% to 50% of revenue derived from UK/Europe:

  • Cochlear
  • CSL

Stocks with 30% to 40% of revenue derived from UK/Europe:

  • Resmed
  • Brambles

Australian media a China stooge | MacroBusiness

By Houses and Holes:

From FT: When Liu Qibao, China’s propaganda minister, visited Sydney last month and signed a raft of deals with Australia’s top media companies, few paid much attention. But the fruits of that trip — a supplement produced by China Daily, the Communist party’s English-language mouthpiece, appearing in such bastions of free speech as the Sydney Morning Herald — lay bare the growing reach of China’s multibillion-dollar propaganda machine as it seeks to win hearts and minds across the globe. ….China Watch, the new monthly pullout in Fairfax Media newspapers, marked its inaugural issue with favourable coverage of China, including an article backing Beijing in its stand-off over contested waters in the South China Sea.
…..Controversy stoked in Australia by Beijing’s deals with Fairfax, Sky News Australia and several other local companies proves the point. Critics point to the harder edge of Beijing’s propaganda machine, with journalists imprisoned and many foreign media websites blocked at home. Some warn that publishing Chinese propaganda alongside other news could undermine their newspapers and hand Beijing commercial influence over the way Australian journalists report on China. ….Fairfax dismisses these concerns, saying China Watch is clearly labelled and no different to other advertising content. “Our commitment to providing independent, quality journalism — including on matters relating to China — remains absolute and unchanged,” it said.

Welcome to the whorehouse Downunder.

Media independence is subject to one overriding and unspoken rule: DON’T BITE THE HAND THAT FEEDS YOU. Advertisers with multi-million dollar budgets are not criticised. And journalists who ignore that rule will find themselves looking for a job. The silence of the media on health issues related to cigarette smoking, when tobacco giants were spending billions of $ on advertising, is the most obvious example but food giants like Monsanto still hold considerable sway over mainstream media. Would China be treated any differently?

Source: Australian media a China stooge | MacroBusiness

How the RBA killed Australian wages | MacroBusiness

Good summary of Australia’s predicament from David Llewellyn-Smith:

…..A lot of this is to be expected in a post-mining boom environment. I mean, we seriously overdid it:

This is why I obsess over lowering the dollar. It absorbs an huge amount of the deflationary pain in repairing one’s competitiveness rather than doing it internally vis-a-vis Europe’s PIIGS.

That is also why authorities have made such a hash of the adjustment by at first denying the mining bust was happening and then inflating debt and asset prices to offset it when they found themselves behind the curve.

They thus levitated the dollar throughout, hammering tradable wages harder than otherwise and spilling it out more widely now. Worse, we now have the debt overhang to deal with and another adjustment to face in non-tradable sectors related to households once the post-mining boom adjustment abates.

Pity we didn’t listen to Prof. Warwick McKibbin in 2012 when he warned: “…the central bank should ‘lean against the wind’, that is intervene to slow down the extent of appreciation of the exchange rate.”

Source: How the RBA killed Australian wages – MacroBusiness

Gold strengthens as Dollar weakens

Long-term interest rates continue their decline, with 10-year Treasury yields testing support at 1.65 to 1.70 percent. Breach would signal a test of the all-time (July 2012) low of 1.40 percent.

10-year Treasury yields

Gold rallied in response, breaking initial resistance at $1250/ounce to signal a test of $1300.

Gold

The Chinese appear to have resumed selling foreign reserves to support the Yuan, with USDCNY running into resistance at 6.60. PBOC sale of reserves would weaken the Dollar, boosting demand for Gold. Failure to support the Yuan is unlikely, but would increase safe haven demand for Gold from Chinese investors.

USDCNY

The Dollar Index, representing predominantly the Euro and Yen crosses, fell sharply. Breach of support at 93 would confirm the primary down-trend earlier signaled by 13-week Momentum below zero.

Dollar Index

The Australian All Ordinaries Gold Index broke through 4500 to signal another advance, with the weakening Australian Dollar adding further impetus. Gaps between trough lows (orange line) and preceding highs (brown line) indicate strong buying pressure.

All Ordinaries Gold Index

Disclosure: Our Australian managed portfolios are invested in gold stocks.

A tale of two gluts: oil and iron ore cross $US50 on opposite paths

From Eddie van der Walt:

Crude oil and iron ore are two of the world’s most important industrial commodities, where supply and demand are tied to the fate of the global economy. Yet, they’re doing very different things right now.

Oil traded above $US50 a barrel for the first time this year while iron, moving in the opposite direction, fell below $US50 a ton on Thursday. It’s a slightly artificial comparison — there’s little physical equivalence between a barrel of oil and a ton of ore — but their differing paths tell us something about how the aftermath of the global commodities crash is playing out in different industries.

…Iron ore has been on a wild ride in 2016 following three years of losses spurred by rising low-cost production. A speculative trading frenzy in China helped to lift prices above $US70 last month from below $US40 in December, but they’ve fallen back on signs that global stockpiles are still building.

Port inventories in China increased 1.6 per cent to 100.45 million tons last week, the highest level since March 2015, according to data from Shanghai Steelhome Information Technology Co. They’re up 7.9 per cent this year.

Citigroup Inc. said in a report on Tuesday it remained bearish on iron ore, forecasting persistent oversupply on rising output from the top miners like Brazil’s Vale SA and BHP Billiton Ltd. as well as Gina Rinehart’s Roy Hill project in Australia.

“It takes a long time to turn output in mining on and off; the oil tap is arguably easier to open and close,” Robin Bhar, an analyst at Societe Generale SA in London, said by phone. “There was also a lot more to be done in metals, where demand collapsed. Oil hadn’t experienced a similar collapse.”

Source: A tale of two gluts: oil and iron ore cross $US50 on opposite paths

Donald Trump and Hillary Clinton agree on one thing…. | Business Insider

Hillary Clinton and Donald Trump disagree on a lot, if not most things. There is, however, one issue in which they seem in agreement….. both candidates have expressed support for increased infrastructure spending. This is good news for manufacturing and heavy industries.

…..Trump has supported rebuilding infrastructure from the beginning of his campaign.

“Rebuild the country’s infrastructure; nobody can do that like me, believe me,” he said in the speech announcing his candidacy.

“It will be done on time, on budget, way below costs, way below what anyone ever thought. I look at these roads being built all over the country and I say, ‘I could build these things for one third.’ We have to rebuild our infrastructure: our bridges, our roadways, our airports.”

…..Clinton, for her part, has said she would increase federal spending on infrastructure projects by $275 billion in the five years following her possible inauguration.

Monetary policy has been over-used and is not having the desired effect. Instead of new capital investment, low interest rates have encouraged speculative investment in stocks and real estate, driving up prices to unsustainable levels, and stock buybacks with similar results.

Infrastructure spending is absolutely essential to get the global economy back on track. It boosts employment and national income, saves government spending on welfare (unemployment) programs, and encourages new capital spending. Voters are rightly afraid of rising public debt but investment in productive infrastructure is a no-brainer.

Source: Donald Trump and Hillary Clinton agree on one huge thing — and Wall Street knows it | Business Insider

Hat tip to Steve L.

Why Aussies sell in May

We all know “sell in May and go away” but why do Australian investors mimic their Northern counterparts when they are headed into Winter, not Summer holidays?

Apart from the influence of large Northern hemisphere indexes on smaller Southern hemisphere markets, we should also consider that the financial year for Australians ends on 30 June. Institutions tend to window-dress their balance sheets before the year-end by selling off non-performers and building a strong cash holding for new acquisitions. Private investors are also motivated to realize tax losses before the year-end.

Bell Potter’s Coppo Report observes:

“I have looked at tax loss selling over the years & it actually begins earlier than most realise – around now. It usually goes for 4 weeks until the 3 week of June & then some stocks start to recover.”

Only 35% of ASX 200 stocks are lower but these tend to be the heavyweights, with Coppo pointing out they represent 56% of market capitalization. At an average annual loss of -15%, they offer plenty of motivation for tax loss selling.

Stock buybacks: Short-term gain, long-term pain

Companies are maintaining stock buybacks and dividends payouts despite falling earnings. Combined buybacks and dividend payouts for S&P 500 corporations exceeded earnings by an estimated $572 billion for 2015.

The chart below illustrates how stock buybacks, for S&P 500 stocks, have grown to exceed dividend payouts. The combined figure now exceeds earnings, leaving nothing for investment. The only way to make up the shortfall is to raise debt.

S&P 500 Stock Buybacks and Dividends compared to Earnings

Private nonresidential fixed investment (which excludes inventory increases) is declining as a percentage of GDP.

Fixed Investment

And corporate debt is rising relative to profits.

Nonfinancial Corporate Debt v Profits

But rising debt is not a recent development. Corporate debt has been growing since interest rates started to decline in the 1980s, doubling the corporate debt level as a percentage of GDP.

Nonfinancial Corporate Debt v 10-year Treasury Yields

Corporate profits have also grown dramatically, even when adjusted for inflation. But some of this increase is attributable to unsustainable low interest rates.

Corporate Profits in 2009 Dollars

And the more debt grows, the more unsustainable corporate profits become.

Corporate Profits / Debt

The graph above shows corporate profits as a percentage of corporate debt (excluding banks and other financial corporations). The lower the level, the greater the risk.

University of Massachusetts economics professor William Lazonick warned in 2014 that companies were forsaking new investment in favor of stock buybacks. His conclusion was that corporate executives are lining their own pockets:

“Corporate executives give several reasons …..But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices.”

Gold: Is it flagging?

Gold is now in the fourth week of a flag formation and is testing support at $1250/ounce. The best flag signals are in weeks 3 or 4. With no immediate prospect of a breakout, this raises the question: is gold losing momentum?

Gold

Increased likelihood of a Fed interest rate hike has certainly taken some wind from the sails …..as has recent Chinese stimulus which at least postponed (but not averted) Yuan devaluation against the Dollar. While this affected short to medium-term prospects, factors driving long-term demand for gold are unaltered. From a technical view, narrow candle ranges over the last 4 days suggest increased buying at the $1250 support level. And breakout above the flag remains a buy signal ……at least into the fifth week.

Silver experienced a much sharper sell-off, but on the weekly chart still looks likely to respect support at $16.00/ounce. Respect would suggest another test of resistance at $18.00 to $18.50.

Silver

On the weekly chart gold remains on track for a test of $1300/ounce. For as long as support at $1200 holds, we retain our bullish view on gold.

Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

With the added incentive of a weakening Aussie Dollar, Australian gold stocks, represented here by the All Ords Gold Index (XGD), remain in a strong primary up-trend. A 13-week Twiggs Money Flow trough above zero and breakout above the recent trend channel are both bullish signs.

All Ords Gold Index (XGD)

Disclosure: Our Australian managed portfolios are invested in gold stocks.

Iran Hits Saudis Where It Hurts…. | OilPrice.com

From Irina Slav:

Iran has introduced a discount on the June contract for its heavy crude going to Asia, just a few days after Saudi Arabia announced a price increase for its own June contract for the continent. With the discount, Iranian oil will be noticeably cheaper for Asian clients than both Saudi and Iraqi crude.

The motivation behind Iran’s move is easy to see. The country is starving for oil revenues. It has a lot of work to do on its oil production and transport infrastructure to boost production, and it has just begun to recover from years of harsh sanctions.

Asia is a priority destination for its crude, so Iran has been lowering prices in parallel with pumping more oil. In March, for example, its exports to Asia marked a 50 percent increase on the year. Even factoring in the sanctions that were in effect last March, a 50 percent increase is a substantial achievement.

Competition between Iran and the Saudis for Asian orders is likely to increase downward pressure on crude prices.

Light crude shows no signs of easing, with June futures at $47/barrel. Expect resistance between $48 and $52/barrel. Penetration of the rising trendline would warn of a correction to test primary support at $32 but earlier penetration of the long-term descending trendline suggests that a bottom is forming and primary support is likely to hold.

June Light Crude

Source: Iran Hits Saudis Where It Hurts, Offers Discounts On Asian Crude | OilPrice.com

Old-school American retail is getting crushed by capitalism | Yahoo

From Seana Smith:

Earnings season is sending a massive warning for the retail sector: Big players are getting crushed, and if companies fail to change their strategies, things may go from bad to worse. A slew of weak results sent traditional retailers into a tailspin this week. Gap (GPS) and Ralph Lauren (RL), along with department stores Macy’s (M), Kohl’s (KSS), Nordstrom (JWN) and J.C. Penney (JCP), all disappointed Wall Street with their latest numbers.

Gap and Ralph Lauren both reported a drop in comparable sales, falling 7% and 5% respectively. And the results weren’t any better for department stores. Macy’s recorded its worst quarterly results since the recession, Kohl’s posted an 87% decline in its profit, Nordstrom slashed its guidance and J.C. Penney reversed five straight quarters of sales growth.

But there’s one massive retailer that’s bucking the trend — Amazon.

The e-commerce giant is gaining market share while wreaking havoc on its brick-and-mortar competitors.“Amazon is already the second largest U.S. apparel retailer (trailing only WMT), as the company has grown to ~7% of the overall U.S. apparel market. We estimate Amazon will reach 19% share of the U.S. apparel market by 2020,” Morgan Stanley wrote in a note to clients on Thursday.

AMZN

Amazon (AMZN) broke through resistance at 700, offering a target of 900. Rising troughs on long-term (12-month) Money Flow reflect strong buying pressure. Retracement that respects the band of support at 680 to 700 would confirm the breakout.

Source: Old-school American retail is getting crushed by capitalism – Yahoo Finance