Last Australian car-maker exits

An emotive moment for many Australians:

On Friday morning, a unique group of workers will slip into their uniforms: denim jeans, dark boots and black collared jumpers. Some will make coffee, or have a bite to eat, before arriving at their factory, a bit later than usual…..

Production has been winding down. By the time they arrive today, the machines will have already stopped for good.

And just before noon, the workers inside – all 1000 of them – will gather around to mark a very special moment: when the last-ever car was built in this country….

The climb in the Australian Dollar from 50 cents in 2001 to $1.10 in 2011 was more than local motor manufacturers could handle. The last straw.

AUDUSD

Could this have been avoided?

“Dutch Disease” is a term coined by The Economist to describe the experience of the Netherlands in the 1960s. Discovery of extensive gas reserves caused an influx of investment to establish new gas fields. Large capital inflows drove up the exchange rate, blighting the local manufacturing sector.

Australia experienced a similar influx of investment in response to the commodities boom of the early 2000s. The Australian Dollar more than doubled in value against the greenback in the 10 years to 2011, while manufacturing employment in Australia headed in the opposite direction.

Decline of Australian Manufacturing

Norway faced a similar problem with the discovery of large oil reserves in the 1980s. To cushion local industry from a steep rise in the Norwegian krone, the government channeled a percentage of oil revenues, roughly equal to the trade surplus, into a sovereign wealth fund. The fund invests mainly in stocks and bonds on major global markets. With assets now exceeding $1 trillion the investment outflow has helped to soften the impact on the currency from rising oil revenues.

Chile followed Norway’s example, investing its trade surplus from copper exports in a sovereign wealth fund.

The Australian government, on the other hand, distributed its trade surplus, hoping to win votes at the next election. Resulting in a housing bubble and a decimated manufacturing sector.

Source: Holden assembly workers despair as last Australian car-maker exits manufacturing

Bank rally boosts the ASX

Banks rallied, with the ASX 300 Banks index breaking 8500 to signal another test of resistance at 8800. Breakout above 8800 would signal resumption of the primary up-trend but expect retracement to first test the new support level. I will remain wary of banks until the support level is respected.

ASX 300 Banks

The bank rally helped to lift the ASX 200 above resistance at 5800 — from the narrow ‘line’ formed over the last four months. Breakout signals another primary advance but again wait for retracement to respect the new support level. Respect would confirm a test of the 2015 high at 6000. Twiggs Money Flow peaks below zero still warn of long-term selling pressure. Reversal below 5800 would mean all bets are off.

ASX 200

On a more bearish note, iron ore is heading for a test of primary support at $53. Declining Twiggs Trend Index signals selling pressure. Breach of primary support would spell trouble for the miners.

Iron ore

The ASX 300 Metals & Mining index rally continues but another test of 3100 is likely. Breach of 3100 would most likely drag the ASX 200 (and banks) lower.

ASX 300 Metals and Mining

Beijing Pushes for a Direct Hand in China’s Big Tech Firms – WSJ

By Li Yuan, Updated Oct. 11, 2017 7:27 p.m. ET:

The Chinese government is pushing some of its biggest tech companies–including Tencent, Weibo and a unit of Alibaba–to give the state a stake in them and a direct role in corporate decisions, according to people close to the companies.

While the authoritarian government already exerts heavy sway over businesses through regulation, a management role would give Beijing a direct hand in innovative companies that service hundreds of millions of Chinese. The biggest of these companies have expanded beyond their original niches into finance, health care and transportation, collecting data that give them unparalleled insights into people’s lives. Some companies privately say they are wary of the move, because of the power balance….

A major concern as China moves away from free market reforms and towards more autocratic control. See China’s push for hegemony.

Source: Beijing Pushes for a Direct Hand in China’s Big Tech Firms – WSJ

East to West: Seoul and Footsie find support

A Twiggs Money Flow trough high above zero reflects strong buying support on the Seoul Composite Index. Breach of support at 2300 is unlikely but would signal a primary down-trend.

Seoul Composite Index

Japan’s Nikkei 225 Index broke resistance at 20200, signaling another advance.

Nikkei 225 Index

Hong Kong’s Hang Seng Index has been in a strong bull market since breaking resistance at 24000 early this year.

Hang Seng Index

India’s NSE Nifty Index displays strong buying pressure, with Twiggs Money Flow oscillating above the zero line. Breakout above resistance at 10000/10100 is likely and would signal another advance.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Dow Jones Euro Stoxx 50 is headed for a test of resistance at 3650. A big Twiggs Money Flow trough above zero signals buying pressure. Breakout is likely and would offer a target of 3900*.

DJ Euro Stoxx 50

* Target calculation: 3650 + ( 3650 – 3400 ) = 3900

The UK’s Footsie is rallying strongly after a bear trap at 7300. Often the strongest bull signals start with a bear trap or false break through support. breakout above 7550 would offer a target of 7900*.

FTSE 100

* Target calculation: 7550 + ( 7550 – 7200 ) = 7900

Canada’s TSX 60 continues to consolidate below its former primary support level at 900. Beset by a massive property bubble, with soaring household debt, and weak crude oil prices the index displays a similar pattern to the ASX 200. Declining Twiggs Money Flow warns of selling pressure. Breach of support at 880 would confirm the primary down-trend.

TSX 60

ASX 200 finds support

The ASX 200 found support on Friday after threatening to break support at 5650 earlier in the week. The narrow ‘line’ formed over the last four months continues. Twiggs Money Flow peaks below zero still warn of long-term selling pressure. Breach of support at 5650 remains likely and would signal a primary decline. Breach of support at 5650 would confirm.

ASX 200

Iron ore broke short-term support at $62, signaling a test of primary support at $53. Declining Twiggs Trend Index signals selling pressure.

Iron ore

Strangely, the ASX 300 Metals & Mining index rallied. Breakout above 3300 would confirm a primary up-trend.

ASX 300 Metals and Mining

The ASX 300 Banks index are a major drag on the ASX 200 broad market index. See Australian Banks Under Selling Pressure.

The economic consequences of Jeremy Corbyn socialism

Martin Wolf on socialism:

Socialism is not a new idea, but one that has been tried and tried again. It has come in three main varieties: autocratic, populist and social democratic. Autocratic socialism was that of the Soviet Union and Mao Zedong. It was a catastrophe. The social democracy of the Nordics or the Netherlands has, in contrast, been a triumph. These are among the most successful societies on the planet: wealthy, dynamic and stable.

Finally, the populist socialism so characteristic of Latin America has never worked economically. But it has at least not had the cataclysmic human results of Soviet or Maoist communism (though the outcome of Hugo Chávez’s Venezuelan experiment, much lauded by Mr Corbyn, is clearly ghastly).

Why has European social democracy been such a success? The answer is that it understands the fundamental constraints that have to shape any successful programme, particularly for a party that believes in active government. First, it must avoid the lure of magical thinking on budget constraints, at all levels of government. Resources are always limited. Second, it must recognise the crucial role of incentives in shaping human behaviour. Third, it must fully internalise the importance of a stable institutional framework in guiding these incentives. Last, it must understand that the private sector, foreign as well as domestic, must play a leading role in the economy.

The economy can function with very high levels of tax: ratios of close to, or over, 50 per cent of gross domestic product are common in the advanced social democracies. Governments can also play a big role in supporting the economy. But private initiative is essential. And that does not come because the government commands it. It comes because the government motivates it.

Why, then, has populist socialism failed? It is because it does not respect these constraints. It is undisciplined on public finances, unconcerned about incentives, contemptuous of property rights, hostile to the private sector and antagonistic to the constraining institutions. The last point is crucial. As Princeton’s Jan-Werner Müller has written, the one thing leftwing and rightwing populists share is the belief they alone represent the people against the elites. Anything that limits their ability to act as they see fit is seen as illegitimate….

Sweden’s experiment with socialism is often lauded as an outstanding success but numbers from the Institute of Economic Affairs suggest otherwise:

Between 1950 and 2005, the Swedish population grew from seven to nine million, but net job creation in the private sector was zero. Jobs in the public sector expanded rapidly until the end of the 1970s. As it became difficult to further expand the already large public sector, job creation simply stopped (Bjuggren and Johansson, 2009)….

Will Tanner at the London School of Economics highlights more recent reforms:

In the last two decades, Sweden has reformed its welfare state to deliver efficiency as well as equity. Policymakers have opened up services to competition, using new, for-profit providers to drive down costs and improve quality within Sweden’s universal health and education systems. Around 27 per cent of healthcare is now delivered by profit-making firms, including nine major hospitals and 10 per cent of ambulance services, compared to just 3 per cent in the UK. Hospital waiting times have fallen by nearly a quarter….

Alongside market-orientated reforms, citizens have been given greater power and responsibility over the public services they use…. In the decade to 2010, Swedish hospital admissions grew just 1.6 per cent compared to the UK’s 38 per cent.

Sweden’s reforms have brought the country’s finances under control. Between 2003 and 2009, healthcare spending rose by just 0.6 per cent of GDP, compared to 2 per cent of GDP in the UK, while pension spending is actually expected to fall by 1 per cent of GDP by 2030. In contrast to the UK, meaningful reform has also allowed Sweden to meet its own fiscal targets: in the last 20 years, Sweden has consistently run a budget surplus of 1 to 3 per cent of GDP.

Source: The economic consequences of Jeremy Corbyn

Facebook and Google are struggling to put the fake news genie back in the bottle

From John McDuling:

As news of the horrific gun attack in Las Vegas unfolded earlier this week, millions of internet users flocked to Google and Facebook to find out what happened. But in the immediate aftermath of the event – the worst mass shooting in modern United States history – widespread confusion was apparent online.

Phony reports from a message board wrongly identifying the gunman were prominent on Google’s ‘Top News’ page in US, and also made their way into Facebook’s algorithms, The Washington Post reported.

….Facebook earlier this year outlined a series of steps designed to curtail fake news, including pledges to employ more human fact checkers.

….Yet Nick Enfield, a professor of linguistics at the University of Sydney, who has studied fake news as part of the university’s Post Truth Initiative, doesn’t think fact checking is going to cut it.

The volume of information is just too big to deal with, he reckons. It is “just too weak a solution, because the internet is an open resource,” he says.

Proliferation of fake news is a serious threat to social media. Fact checking appears unlikely to succeed. The alternative may be some form of moderated content, with users given more freedom to post when they have proven their credibility. And better classification of posters, with satire sites like @DarthPutinKGB clearly labeled as such, while news site classification should require an established track record and regular review by an external editorial panel.

Source: Facebook and Google are struggling to put the fake news genie back in the bottle

How to survive in the fake-information age | Computerworld

By Mike Elgan:

“Information wants to be free.”That was the motto of truth-seeking digital activists in the ’80s and ’90s.The motto today is: “Information wants to be fake.”

….Senator James Lankford (R-Okla.) pointed out this week that Russian troll farms are stoking both sides of the debate over NFL players protesting during games, urging Americans to join kneeling players in protest, and also to boycott the NFL over kneeling players.

One recent tweet on a Twitter account called “Boston Antifa” came from a poster who apparently forgot to remove the location stamp. The location wasn’t Boston, but Vladivostok, Russia.

Such is the nature of our age that some said even the time stamp may have been faked to smear Russia.

Nobody knows what’s true.

Buzzfeed reported this week on the rising readership of content farms based overseas in places such as the Philippines, Pakistan and Macedonia. Such “publications” exist solely for profit. They don’t care what’s true. They just care what goes viral…..

The rise of false information online is caused by five factors:

1. The Internet allows anyone anywhere to publish anything everywhere.

2. Digital content is easy to counterfeit or modify.

3. Many people have powerful incentives to spread false information.

4. It’s easier for social network algorithms to favor emotionally reactive content than true content.

5. The public increasingly relies upon digital internet content for “knowledge.”

Facebook, Twitter and Google claim that they’re taking active measures against the rise of fake information. But previous efforts have failed.

The reality is that fake information will continue to be spread online. And that could be a problem for you and your company.

A possible solution lies in applying existing law and extending it to the Internet. If a newspaper publishes information they are required to take reasonable steps to ensure the information is correct, else the publisher may face criminal prosecution, liability for civil damages, and/or censure by media/advertising standards bodies. The same should apply to online media.

Source: How to survive in the fake-information age | Computerworld

ASX 200 selling pressure continues

Iron ore found short-term support at $62 after a sharp fall. Declining Twiggs Trend Index signals selling pressure. Breach of $62 is likely and would warn of a test of the June 2017 low at $53.

Iron ore

Decline of ASX 300 Metals & Mining index similarly halted at 3100. Respect of 3000 would confirm the long-term up-trend.

ASX 300 Metals and Mining

The ASX 300 Banks index is consolidating below resistance at 8500. Respect of resistance would be a bearish sign, as would another Trend Index peak below zero. Breach of 8000 would signal a primary down-trend.

ASX 300 Banks

The ASX 200 continues to test support at 5650, in the narrow ‘line’ formed over the last four months. Trend Index peaks below zero warn of selling pressure. Breach of support at 5650 is likely and would signal a primary decline. But wait for breakout to confirm.

ASX 200

S&P 500 makes new high

The S&P 500 made a new high on Friday, while Twiggs Money Flow rose above its descending trendline, signaling that selling pressure has eased. Expect retracement to test the new support level but respect is likely and would confirm a target of 2600* for the advance.

S&P 500

* Target calculation: 2500 + ( 2500 – 2400 ) = 2600

The Nasdaq 100 has been dragging its feet a bit, still testing resistance at 6000. But Technology stocks are likely to follow the main index, with breakout above 6000 signaling a fresh advance.

Nasdaq 100

Tech giants Amazon and Apple are partly responsible for Nasdaq tardiness, with Amazon retreating from its watershed breakout above $1000. Further decline would be cause for concern — when leading stocks no longer lead — but recovery above $1000 is more likely and would be a bullish sign for the broader market.

Amazon

The big shrink commences

“The Federal Reserve left its benchmark interest rate unchanged and said Wednesday that it would begin to withdraw some of the trillions of dollars that it invested in the US economy after the 2008 financial crisis.” ~ Binyamin Applebaum

The Federal Reserve balance sheet ballooned in the last decade to current holdings of $2.5 trillion of US Treasury securities and $1.8 trillion of mortgage-backed securities.

Hourly Wage Growth

Fed total assets of $4.5 trillion (the red line on the above chart) does not give the full picture. Of the cash injected into the economy, $2.2 trillion found its way back to the Fed by way of excess reserves deposited by banks (the blue line). These deposits earn interest at the rate of 1.25% p.a., providing a secure return on surplus funds. What this means is that the net effect of the balance sheet expansion is the difference between the two lines, or $2.3 trillion.

Even $2.3 trillion is a big number and any meaningful sale of securities by the Fed would contract the supply of money, tipping the economy into recession. So how does the Fed propose to manage “normalization of its balance sheet” without disrupting the economy?

Firstly, the Fed does not intend to sell securities. It will simply decrease the “reinvestment of principal repayments it receives from securities held” according to its June 2017 Normalization Plan.

The amount withheld from reinvestment will commence at $10 billion per month ($6bn US Treasuries and $4bn MBS) and step up by $10 billion each quarter until it reaches a total of $50 billion per quarter.

That means that $100 billion will be withheld in the first year and $200 billion in each year thereafter….”so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.”

Second, the Fed will reduce the level of excess reserves by an appreciable amount in order to soften the impact of the first step. So a $100 billion reduction in investments may only result in a net reduction of say half that figure, after taking into account the decline in reserves.

Third, the federal funds rate will remain the primary tool of monetary policy and will be used to fine tune monetary policy to fit economic conditions.

It appears that the Fed will start quite tentatively, withholding only $30 billion in the first quarter, but the longer term targets seem ambitious.

With currency in circulation now growing at an annual rate of $100 billion, even a $50 billion reduction in the first year (net of excess reserves) could leave a big hole.

Currency in Circulation

This is bound to take some of the heat out of the stock market. The plus side is it may restore some sanity to market valuations, but any sudden moves could cause an overreaction.

Added later:

Even if we compare the reduction to the annual change in M1 money supply, it takes a big bite.

M1 money supply

M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.

East to West: Seoul selling pressure

Declining peaks on Twiggs Trend Index and a tall shadow on this week’s candle warn of selling pressure on the Seoul Composite Index. Breach of support at 2300 would signal a primary down-trend.

Seoul Composite Index

Most other exchanges remain bullish, with Japan’s Nikkei 225 Index breaking resistance at 20200. Expect retracement to test the new support level. Respect would signal a fresh advance.

Nikkei 225 Index

China’s Shanghai Composite Index is retracing to test its new support level at 3300. Declining peaks on the Trend Index warn of medium-term selling pressure. Respect of support would confirm a primary advance.

Shanghai Composite Index

India’s NSE Nifty Index respected resistance at 10000/10100 and declining peaks on Twiggs Trend Index warn of medium-term selling pressure. Follow-through below the rising trendline would warn of a correction.

Nifty Index

Target 10000 + ( 10000 – 9000 ) = 11000

Moving to Europe, Germany’s DAX consolidated ahead of the elections. The Trend Index trough at zero indicates buying pressure and a test of 13000 is likely.

DJ Euro Stoxx 600

The UK’s Footsie retraced to test its new resistance level at 7300. Respect would confirm a primary down-trend. Declining Twiggs Trend Index peaks, especially below zero, signal selling pressure. Follow-through below 7100 would strengthen the bear signal.

FTSE 100

Canada’s TSX 60 continues to consolidate below its former primary support level at 900. Declining Trend Index warns of selling pressure. Breach of medium-term support at 880 would confirm the primary down-trend.

TSX 60

Fedex bullish but Nasdaq displays selling pressure

Bellwether transport stock Fedex is testing resistance at 220. A higher trough on Twiggs Money Flow indicates buying pressure. Breakout above 220 is likely and would signal a primary advance. This is a bullish sign for broad economic activity.

Nasdaq 100

The S&P 500 is retracing to test its new support level at 2480/2500. Declining Twiggs Money Flow warns of medium-term selling pressure. Respect of support would confirm a fresh advance, offering an immediate target of 2600. But breach of support is as likely and would warn of a correction to test the rising trendline around 2420.

S&P 500

The Nasdaq 100 also displays medium-term selling pressure, but with a steeper fall on Twiggs Money Flow. Having failed to break resistance at 6000, a correction is likely, with a target of 5750.

Nasdaq 100

Bob Doll: Bull market continues

From Bob Doll’s weekly commentary:

…Despite its longevity and strength, we don’t believe the current bull market is approaching an end. The U.S. remains in an environment of solid growth and easy monetary policy. We think we would need to see some combination of economically damaging political turmoil, decisively higher bond yields and/or a material drop in the value of the dollar to cause an end to this bull market. None of those events appear particularly likely.

Source: Weekly Investment Commentary from Bob Doll | Nuveen

S&P 500 and Nasdaq test resistance

The bull market continues, with the S&P 500 testing resistance at 2500. Twiggs Trend Index troughs above zero signal buying pressure. Breakout would signal a fresh advance, offering an immediate target of 2600.

S&P 500

The Nasdaq 100 is similarly testing resistance at 6000. Immediate target for a breakout would be 6200.

Nasdaq 100

ASX 200 selling pressure as iron ore corrects

Iron ore penetrated its rising trendline, signaling a correction. A trough that forms above the June 2017 low would be bullish for miners.

Iron ore

That seems likely given rising crude steel output in China.

China Output

The ASX 300 Metals & Mining index is testing support at 3200. Breach is likely and would signal a test of 3000. But respect of 3000 would confirm the long-term up-trend.

ASX 300 Metals and Mining

The ASX 300 Banks index rallied off support at 8000. Respect of resistance at 8500 would be a bearish sign and breach of 8000 would signal a primary down-trend. Recovery above 8800 is unlikely at present but would complete a double-bottom reversal.

ASX 300 Banks

The ASX 200 continues to consolidate in a narrow line between 5650 and 5800 but the tall shadow on this week’s candle and Twiggs Trend Index troughs below zero both warn of selling pressure. Breach of support would signal a primary decline, but direction remains uncertain until there is a clear breakout.

ASX 200

Banks drag ASX lower

The ASX 300 Banks index is headed for a test of support at 8000. Declining Twiggs Money Flow warns of selling pressure. Breach of 8000 would signal a primary down-trend.

ASX 300 Banks

The ASX 200 continues to consolidate in a narrow line between 5650 and 5800. The index is testing support at 5650 while Twiggs Money Flow warns of selling pressure. Breach of support would signal a primary decline, but direction remains uncertain until there is a clear breakout.

ASX 200

Hardly an over-heated market

Discussions as to whether the stock market is over-priced normally imply that stocks are about to fall if valuations are too high. But history shows that this isn’t true. The euphoria of bull markets often outruns earnings multiples and only reverses when there is an unexpected fall in earnings.

Earnings multiples (the price-earnings ratio) may rise for two reasons:

  1. Stock prices are rising faster than earnings; or
  2. Earnings are falling and stock prices are declining at a slower rate.

S&P 500 Historic PE

The S&P 500 historic price-earnings ratio (based on the last 4 quarters earnings) spiked above 20 several times in the last three decades:

  • 1991 was caused by falling earnings;
  • 1997 by rising stock prices;
  • sharp falls in earnings were responsible for 2001 and 2008; and
  • declining earnings, particularly in the Energy sector, explain the bump in 2015.

The problem with historic PE is that it looks backward, at the last 4 quarters, rather than forward. If we take the Forward PE, based on the next 4 quarters earnings estimates, we can see that earnings are recovering.

S&P 500 Forward PE

Forward PE dipped below 20 in 2016, indicating that expected earnings are advancing faster than prices.

This does not signal a buy opportunity, which normally presents when Forward PE is close to 15:

  • 1988-1989
  • 1993-1994
  • 2002-2005
  • 2009-2012

S&P 500 and Forward PE

Nor does it represent a sell signal.

Most corporations (98.5%) have reported earnings for June 2017. Estimates are included for the remainder, giving total earnings of $27.00 per share.

S&P project that earnings will grow a further 20% over the next four quarters (Jun-18: $32.40). This may be optimistic but provided earnings grow faster than the index we will see earnings multiples decline.

S&P 500 Forward Earnings Estimates

Hardly an over-heated market.