Thursday, July 18, 2013

SP 500 and NDX Futures Daily Charts - Marked Divergence

by Jesse

Even Ben's second day of testimony could not shake the equity markets out of their dog days lull.
Philly Fed came in better than expected as did unemployment claims.
There was a marked divergence as the SP 500 finished higher while the tech heavy NDX dropped almost 30 points.
Things are looking so good that Jack Lew, the new US Treasury Secretary, during an interview on his way to the G20 finance ministers meeting in Moscow, shared his plans to tell the Europeans and Asians how to fix their economic problems by following the US example. China must reform, and Europe must stimulate growth.
I don't have the words.

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Now Time to Buy Gold Mining Stocks?

By: P_Radomski_CFA

The most important Wednesday’s event was Ben Bernanke‘s testimony. The Fed Chairman said the U.S. central bank still expects to start scaling back bond purchases later in the year, but left open the option of changing that plan if needed.

We all know that every action has a reaction. Yesterday gold rallied and climbed to a three-week high at $1,300 per ounce after Bernanke's remarks. This optimism didn’t last long. The yellow metal gave up the gains as the dollar remained strong and dropped slightly above $1,270 later in the day.

"Yesterday, gold was unable to convincingly break above $1,300 and some took this as a sign of weakness," Commerzbank analyst Eugen Weinberg said. "We don't expect any strong increase in the short time," he added.

Does it mean that we see may further declines in the yellow metal? If gold moves lower, it may trigger a move down in mining stocks. How low can they go? Let’s examine the situation in the charts (charts courtesy by http://stockcharts.com.)

At the beginning let’s take a look at the gold stocks index – the HUI.

In this week’s very long-term HUI index chart (a proxy for the gold stocks) we see that miners finally moved close to the upper border of the declining trend channel. Soon after that, they declined once again (it happened yesterday) and could be that the correction to the upside is already behind us.

The trend remains down, and another decline is likely before the final bottom is formed.

Where will it form? In our opinion, close to or slightly above the 2008 low as indicated in the above chart by the red ellipse (which also includes the 61.8% Fibonacci retracement level).

Once we know the current situation in the HUI index let’s take a look at the GDX ETF chart. Does it confirm the bearish outlook?

In this medium-term GDX ETF chart, we continue to see an analogy to the previous price patterns. The corrective ABC or zig-zag price pattern was previously followed by a period of declines. On each occasion, the GDX ETF did not move to the 50% Fibonacci retracement level. It declined after getting to or slightly above the 38.2% level. This same type of move was seen on Wednesday, and prices then declined. They seem ready to decline once again.

Furthermore, the volume levels on Wednesday being significant on a move to the downside suggest that it may be the start of bigger declines. The RSI level is close to 50, a level previously seen when the miners formed a local top.

In the past, sharp declines were not seen immediately after local tops. Moderate moves to the downside were seen initially and then – after a few days of moderate declines – we saw a period of accelerated declines.

Before we summarize, we would like to present you two interesting ratios: the gold-stocks-to-gold ratio and the ratio of the HUI Gold Bugs Index to the S&P 500.

Let’s start with the HUI-to-gold ratio. After all, gold stocks used to lead gold both higher and lower for years.

In the gold-stocks-to-gold ratio chart, we didn’t see a real improvement in the situation this week. Although the HUI-to-gold ratio moved higher on Tuesday, this move was barely visible from the long-term perspective. That was just a blip on the radar screen, just like when miners rallied relative to gold in the previous months.

Besides, when we look at the above chart, we clearly see that the HUI:gold ratio remains below the 50-day moving average,  a level which has served as approximate resistance for the past month.

Therefore, in our view the downtrend is still valid and the implications remain bearish.

Now, let’s find out how the HUI is doing compared to the stock markets.

In this very long-term gold-stocks-to-other-stocks ratio we have seen a breakdown below the important support level created by the bottoms of 2005 and 2008. The ratio has been clearly below this level for several weeks now so the breakdown is confirmed.

The next support line is all the way down at the 0.1 level so it seems that further significant declines are likely before the final bottom is reached here. This target level is created by (applying Fibonacci techniques) extrapolating previous declines by the Fibonacci transformation of the Phi number (1.618) . It coincides with the local bottom seen in the middle of 2002.

This chart confirms what we’ve seen in other charts: the bottom is not in yet, another big drop is likely ahead, but the majority of the declines are probably behind us.

Summing up, the outlook for mining stocks remains bearish. Miners are still in a downtrend and it seems that the next move lower will probably be the one to take miners to their final bottom.

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The triumph of low expectations

by Economist

“IT COULD have been worse” was the common refrain as American banks began reporting their second-quarter earnings. Indeed, the striking characteristic of the returns was their consistency. Big and small, local and national, lenders across the country have been benefiting from some common tailwinds. Legal settlements are becoming sparser; the economy is expanding, albeit feebly, and the housing market is recovering; auditors are pushing banks to keep releasing loan-loss reserves; and actual losses are trivial.

But avoiding disaster is not really cause for celebration. Consumers continue to shed debt; companies carry ever more cash. Banks’ pre-provision revenue growth is muted (see chart 1), and there has been no recovery in loan growth of the sort seen after previous recessions (see chart 2). This is so unusual that it may be unprecedented, says Michael Mayo, an analyst at CSLA, a securities firm, and it hardly suggests a good prognosis for the banking system. He predicts that the current decade will show the worst revenue growth for banks since the 1930s. Pricing and margins will inevitably tighten as a result.

 

In as much as borrowing activity has shifted from banks’ balance-sheets to the capital markets, some have benefited. The investment-banking arm of perpetually troubled Citigroup did well in the second quarter, as did the investment-banking arm of infrequently troubled Goldman Sachs. Underwriting and advisory revenues rose at both firms. Goldman reaped large gains from its own investments.

But Goldman’s return on equity was still barely in double digits. Its headcount is shrinking, not expanding. That is typically the single best indicator of an investment firm’s perspective on its prospects. Citi’s return on equity was well below Goldman’s, at 6.5%. Investors will not tolerate that sort of performance for ever. A major source of Citi’s revenue is in emerging markets, where conditions are deteriorating.

The likelihood that the overall banking environment will improve in the near future is low. Recent rises in interest rates, prompted by expectations that the Federal Reserve will start slowing the pace of asset purchases, will take a toll on mortgage refinancing, a source of revenue that has produced great gobs of money for banks in recent years. It is probably no coincidence that share prices for most financial institutions have flattened in recent weeks.

Regulators and politicians are still trying to suppress banks’ risk appetite, not whet it. American financial institutions are already expecting to hold more risk-weighted capital in order to conform with the international Basel 3 standards. Worried by the potential for banks to game the calculations that underpin these same risk weightings, regulators this month proposed a higher “leverage ratio”, a blunter measure of capital that reflects the overall size of a bank’s balance-sheet as well as its riskiness. The proposal calls for a 5% leverage ratio at the holding-company level, and 6% at the level of the bank, for the eight largest banks: Bank of America, BNY Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.

The new numbers will require institutions to fund themselves with more equity, further diluting returns (at least in the short term). Although the notion of a strict capital ratio has its detractors, it has a good chance of being instituted, says Michael Poulos of Oliver Wyman, a consultancy, if only because it is simple. But by increasing the cost of funding for the big institutions, he warns, the rule may push them away from safer, low-priced products and towards riskier, higher-margin ones.

Bankers have not reacted vocally to the leverage-ratio proposal. That may be because they feared even harsher limits, or because they are keeping their powder dry for other fights. Lawmakers continue to circle the industry. In April two senators, Sherrod Brown and David Vitter, introduced a bill that would require the largest banks to increase their equity capital to 15% of assets. It was loudly applauded, and subsequently quietly ignored. On July 11th four senators proposed bringing back a version of the Glass-Steagall Banking Act of 1933 that separated commercial banking from investment banking. This idea has also garnered lots of praise and is also likely to be ignored, if only because of the practical difficulties involved.

Even if these legislative proposals go nowhere, the regulatory environment is poised to become tougher with the Senate’s approval on July 16th of Tom Perez as secretary of labour and Richard Cordray as head of the Consumer Financial Protection Bureau (CFPB). In his prior position at the Department of Justice Mr Perez was an influential advocate of the principle of “disparate impact”—the idea that lending policies can be discriminatory because of their outcomes, even if there is no intent to discriminate. His approval is a congressional endorsement of uneconomic lending.

Mr Cordray’s appointment unlocks broad powers for the newly established CFPB, including the ability to investigate and regulate the price and scope of financial products under a new and undefined “abusive” standard. Senate Republicans had vowed to refrain from approving Mr Cordray until changes were made to the CFPB’s underlying structure, so that less power was concentrated in a single director and its budget was made subject to congressional approval. Whatever concerns they had were abruptly waived. Perhaps, like many of America’s banks, they concluded that however bad things are, they could always be worse.

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Stock Prices Are Outrunning Corporate Profits: When Has This Happened Before?

by F.F. Wiley

In a recent article titled “Step Right Up and Test Your Central Banking Skills against the Scariest Economy of All,” I encouraged readers to:

[Apply] your economic and policy beliefs to early 1928 conditions, and then [ask] how your decisions might have played out. Imagine you’re [New York Federal Reserve Bank chief] Benjamin Strong, puzzling over a strange brew of rising stock prices, uneven economic recovery, suspect banking practices and unusual strains in Europe’s monetary system.

I argued that global conditions in early 1928 were oddly similar to today, but skewed in a direction that would cause our current policymakers to apply even stronger stimulus than we’ve seen in 2013.

Consider these observations about early 1928:

  • Consumer prices were deflating about 1-2% per year.
  • House prices were stagnating.
  • The unemployment rate was significantly above its low in the previous business cycle.
  • The European monetary system was at risk of coming apart at the seams, due to England’s struggle to maintain its link to gold at an overvalued exchange rate (replace “gold” with “Euro” and “England” with “periphery” and you have today’s conditions in Europe).
  • Germany was near the end of an unsustainable borrowing binge that fueled extravagant local government spending (like China today) and facing near-certain sovereign default (like Japan today).

The analogy suggests to me that today’s Fed is threatening mistakes that aren’t unlike those of the 1920s Fed. But what about the stock market, you ask?

Unfortunately, a few market characteristics fit the late 1920s timeline pretty well. First, P/E multiples, which I touched on in the first article, place today’s stock valuation at levels similar to the latter part of 1928.

july fed article 5

Second, stock prices separated from corporate profits in the first half of 2013 in a way that’s comparable to market performance in late 1927 and early 1928.

Here’s the 1920s picture:

july fed article 6

And here’s the current expansion:

july fed article 7

Once again, the message is that the very conditions the Fed strives to create – buoyant asset prices and super low interest rates – have a history of ending badly.

As I wrote in the earlier article, the Fed cut rates only slightly in July 1927 (from 4% to 3.5%), and the stock market promptly went vertical. In the following year, policymakers acknowledged the easing was a mistake, but their attempts to discourage speculators (which included reversing course and lifting rates to 5% by July 1928) weren’t strong enough to stop the bull market.

With few limits on margin debt and the U.S. stock market just about the only game in town for speculators, the manic rally built on itself until the October 1929 crash.

Today’s policymakers would have presumably cheered the 1920s speculation, which now goes by the name wealth effect.

How do we reconcile a 1920s Fed that feared speculation, and yet was still badly burned by it, with a 2010s Fed that encourages speculation?

One way to look at it is that 1920s policymakers emphasized the long-term hangover that eventually occurs after asset prices are pushed above fundamentals, whereas current policymakers prefer to celebrate short-term benefits.

Economists or Trekonomists?

More fundamentally (and here’s my usual digression into basic causes of our boom-bust economy), today’s policymaking is dominated by academic economists relying on a tangle of abstract models that are full of holes and contradictions. These economists are the ivory tower equivalent of trekkies, unable to suppress their obsession with an alternative world that bears little resemblance to the real world. And their self-preservationary groupthink has spawned ever more dangerous bubbles.  (End of digression – look for past and future posts about specific fallacies in macroeconomics, such as this one and this one.)

Getting back to the 2013 vs. 1928 stock markets, the Fed’s current overreach doesn’t present the exact same risks that built up in the late 1920s.  But similarities between the two periods are strong, and especially when you account for the global backdrop as I did in the earlier post.  Moreover, these similarities are just as relevant as the comparisons to the 1930s that we hear constantly from economists defending current policies.

Finally, there can be little doubt that today’s Fed-fueled asset price rallies merely bring future price appreciation forward to the present. Asset prices eventually return to fundamental values, and as they do the Fed’s cherished wealth effects work in reverse. This is another risk that should be considered when you decide whether to take Bernanke’s bait and “reach for yield” in stocks and other risky assets.

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In Case You Don't Appreciate How Fast The 'Windows Monopoly' Is Getting Destroyed...

by Henry Blodget

Bill Gates testifies

Bill Gates' infamous video-taped testimony in the Microsoft anti-trust trial.

In the late 1990s, a single technology company became so unfathomably rich and powerful — and so hellbent on dominating not just its own industry but a massive and rapidly growing new one — that the U.S. government dragged the company into court and threatened to break it up over anti-trust violations.

The case was settled, and the company, Microsoft, agreed to play nicer.

But it turned out that the world had nothing to worry about. As often happens in the technology industry, what has really destroyed Microsoft's choke hold on the global personal computing market over the past 15 years hasn't been a legal threat but a market shift.

Just when it looked like Microsoft's vision of the PC as the center of the tech world would lead to the creation of the world's first trillion-dollar company, the Internet came along.

And it washed over the PC industry like a tidal wave swallowing a pond.

In terms of market value, Microsoft's loss of power has long been visible: The stock is still trading at about half the level it hit at the peak of the tech boom 13 years ago. The effects on the actual PC industry fundamentals have taken longer to develop, but they are also now crystal clear.

Microsoft's "Windows monopoly" hasn't been so much destroyed as rendered irrelevant. Thanks to the explosion of Internet-based cloud computing and smartphones, tablets, and other mobile gadgets, the once all-powerful platform of the desktop operating system has now been reduced to little more than a device driver. As long as your gadget can connect to the Internet and run some apps, it doesn't matter what operating system you use.

Three charts really bring home the challenges that Microsoft and other PC-powered giants like Intel, Dell, and Hewlett-Packard face in adapting to this new Internet-driven world.

First, look at global device shipments. For the two decades through 2005, the personal computer was the only game in town, selling about 200 million units a year. But then smartphones and tablets came along. And now they dwarf the PC market.

internet connected devices

BII

This shift in personal computing device adoption, meanwhile, has radically diminished the power of the Windows operating system platform. As recently as three years ago, Microsoft's Windows was still totally dominant — the platform ran 70% of personal computing devices.

Now, thanks to the rise of Google's Android and Apple's iOS, Windows' global share has been cut in half, to about 30%. More remarkably, Android is now a bigger platform than Windows.

bii global computer market share

BII

Lastly, and most recently, this chart from analyst Horace Dediu of Asymco illustrates that the PC business is no longer just getting dwarfed by the explosion of smartphone and tablet sales ... it has now actually begun to shrink.

Now that people have a choice of devices, it turns out that a full-blown personal computer is often not the most cost-effective, convenient, or simplest way to do what a user wants to do. Instead of being the center of the personal computing world, in other words, the PC is becoming a specialized office-productivity device.

Windows shipments

Horace Dediu, Asymco

The news for Microsoft is not all bad. The company has been quite successful at moving from a "unit-driven" sales model to a licensing model, in which companies pay a fee per user per year rather than buying a perpetual license with each new computer. And Microsoft's Office franchise is still extraordinarily profitable and dominant, in part because Google, Apple, and other more Internet-centric companies have made so little investment in their competitive products.

But only 15 years after the government went after Microsoft for anti-trust violations, the idea that the company ever had a "monopoly" on anything is hard to even understand. And the outlook for Windows, and the traditional PC business in general, seems sure to get even worse going forward.

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US Prepares For "Kinetic Strikes" Against Syria

by Tyler Durden

The chart below will likely come as a surprise to most. It shows total nominal US defense spending, more importantly it shows that such spending has been rapidly declining since 2010. And while on the surface it is great news the US is becoming more "pacifist" (apparently mass killings using drones are relatively cost-effective) and the result for the US is even better as it means lower deficits, there is one person who is very unhappy with this outcome - Ben Bernanke.

Why is Ben unhappy? Simple - as a reminder, the only reason Ben is even contemplating tapering has nothing to do with the economy. After all the Fed chairman (and/or his successor) is willing to send the stock market into stratospheric overdrive and would be very happy to add not subtract from the monthly QE $85 billion notional since it means more "wealth effect" and thus brings the US closer to the "Keynesian successful endgame" (that the logic here is completely inverted is well known to all but the most die-hard Keynesian fanboys and is not in the scope of this article).

However, the fact that the gross US debt issuance is declining (if only until the demographic and healthcare crunch hits in 2015 and deficits explode once more) means Bernanke has less primary issuance to monetize. Were Bernanke to maintain his monetization run rate into a lower deficit regime, the Chairman would destabilize the liquidity in the already increasingly illiquid Treasury market in which the Fed now holds over 30% of all 10 Year equivalents and its holdings increase by 0.3% every week. This illiquidity is manifesting itself most directly in the "special" repo rates that have become a norm in the past few months especially in the 10 Year, and which indicate an ongoing shortage of TSY collateral.

Of course, there is a very simple and elegant solution to declining defense spending, one which has been used time and again in US history when the US government needed to provide the Fed with more securities (i.e. deficit) to monetize: war.

According to RT that, or rather its more politically correct equivalent "kinetic strikes", is what may be just over the horizon. RT reports that President Barack Obama is considering using military force in Syria, and the Pentagon has prepared various scenarios for possible United States intervention. Army Gen. Martin Dempsey, chairman of the Joint Chiefs of Staff, said the Obama administration is deliberating whether or not it should use the brute of the US military in Syria during a Thursday morning Senate hearing. Gen. Dempsey said the administration was considering using “kinetic strikes” in Syria and said "issue is under deliberation inside of our agencies of government,” the Associated Press reported from Washington.

Dempsey, 61, is the highest ranking officer in the US military and has been nominated by Pres. Obama to serve a second term in that role. The Senate Armed Services Committee questioned him Thursday morning as part of the nominating process when Dempsey briefly discussed the situation in Syria.

The pre-story here is well-known to most: in a repeat fabulation of the Iraq "WMD" lie, the US and the entire developed world "found" Syria to have crossed a red-line when it used chemical weapons, despite subsequent reports that it was the Syrian rebels, aka Qatari mercenaries, who were the party responsible for chemical weapon use. No matter though: the public media campaign was hatched, and merely waited for the catalyst.

That catalyst may be imminent, although there is a substantial dose of skepticism this time around:

Pres. Obama said previously that the use of chemical weapons would cross a “red line” and likely trigger American intervention. When the White House concluded Assad had relied on chemical warfare, Rhodes said, “both the political and the military opposition . . . is and will be receiving US assistance."

That claim was met with skepticism, though. The Syrian Foreign Ministry called Obama’s claims a “caravan of lies.” Vitaly Churkin, Russia’s ambassador to the United Nations, later presented to the UN evidence supplied to his government that suggested the Syrian opposition fighters used chemical weapons.

With regards to foreign intervention, UN Secretary General Ban Ki Moon said, “Providing arms to either side would not address this current situation.” Sen. Rand Paul (R-Kentucky) and his father, former congressman Ron Paul (R-Texas) have also cautioned the White House against aiding Syrian rebels.

“You will be funding today the allies of al Qaeda” by aiding Syrian rebels, Sen. Paul said in May.

On his part, the retired lawmaker from Texas insisted that the administration’s lead up to possible intervention is “identical to the massive deception campaign that led us into the Iraq War.”

That isn’t to say the GOP is entirely opposed to taking any action. Although directly using the American military — either through boots-on-the-ground or unmanned aircraft — has been rarely discussed in public, Sens. John McCain (R-Arizona) and Lindsey Graham (R-SC), two long-time leaders within the Republican party, have been relentless with efforts to equip opposition fighters.

"I don't care what it takes," Graham told Foreign Policy’s The Cable earlier this year. "If the choice is to send in troops to secure the weapons sites versus allowing chemical weapons to get in the hands of some of the most violent people in the world, I vote to cut this off before it becomes a problem."

Other US officials have previously said Washington is considering implementing a no-fly zone above Syria, and last month the Pentagon left a fleet of F-16 fighter planes and its Patriot anti-missile system on the border of neighboring Jordan following a routine military drill.

And from the AP:

Amid an increasing clamor among President Bashir Assad's opposition for active U.S. involvement, Army Gen. Martin Dempsey said during congressional testimony that he has provided President Barack Obama with options for the use of force. But he declined to detail those choices, saying "it would be inappropriate for me to try to influence the decision with me rendering an opinion in public about what kind of force we should use."

The remarks by the Joint Chiefs of Staff chairman came after Sen. John McCain, R-Ariz., asked him which approach in Syria would carry a greater risk: continued limited action on the part of Washington or more significant actions such as the establishment of a no-fly zone and arming the rebel forces with the weapons they need to stem the advance Assad's forces.

"Senator, I am in favor of building a moderate opposition and supporting it," Dempsey said. "The question whether to support it with direct kinetic strikes ... is a decision for our elected officials, not for the senior military leader of the nation."

The use of kinetic strikes, a military term that typically refers to missiles and bombs, "is under deliberation inside of our agencies of government," Dempsey said.

"There are a whole range of options that are out there," Navy Adm. James Winnefeld, vice chairman of the Joint Chiefs, said of the planning for military action in Syria. "We are ready to act if we're called on to act."

All of the above, of course, is smoke and mirrors. The ultimate decision will come not from Congress but from the Fed.

So what may have spooked Bernanke and the sudden reappearance of the Syrian war as a real and credible possibility?

Why, the economy of course. Only not its "improvement" but its recent (and ongoing) deterioration.

And since the taper is largely priced in, Bernanke is already contemplating how to reengage in the subsequent untapering should all hell break loose following a September tapering announcement prompting the Fed to reengage once more. However, for that to happen, US deficits would need to flow once more, as only then will there be the much needed copious primary issuance of debt that the Fed will need in order to resume monetizing at a fervent pace without impairing the liquidity characteristics of the bond market.

As for the downside? What are some irrelevant Syrian lives in the grand scheme of things, when the status quo's wealth must be preserved at all costs. Costs including the death of thousands of innocent civilian Syrians and/or other nationalities should the conflict just happen to spill outside the Syrian borders.

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National Pyrotechnic Festival in Tultepec

‘Europe has no divine right to prosperity’ – Interview with Nick Malkoutzis

by Vassilis Paipais

Euro Crisis in the Press has asked the views of influential analysts and commentators throughout Europe on the multifaceted crisis facing the European Union. In today’s interview, deputy editor of the English language edition of mainstream Greek daily ‘Kathimerini’, Nick Malkoutzis, talks to our Managing Editors, Vassilis Paipais and Roberto Orsi. Mr. Malkoutzis argues that the idea of convergence of the Eurozone economies did not work nor does strict austerity now and that, in the long run, fiscal transfers will be inevitable. He notes that journalists were forced to do a crash course in economics to keep up with the intricacies of the crisis and that despite some patchy reporting and use of populist stereotypes across national and international media, poor coverage was mixed with some excellent analysis. Finally, he admonishes about the dangers of growing Euroscepticism should the alienating tendencies of the crisis are not addressed.

***

Mr. Malkoutzis, there is little doubt that Europe is undergoing an unprecedented crisis. The crisis itself can be seen as having multiple dimensions: a financial crisis of the Eurozone and the Euro as a common currency, an institutional EU-wide crisis, a crisis of the European post-war social and economic model or even a European identity crisis. From your point of view, what is the most important aspect of the crisis?

To a great extent, this crisis is about hubris. It seems to me that Europe thought it had made it when the euro was launched, that the European project had entered its final phase or had even been completed. We perhaps felt that economically, politically, socially and even culturally we had reached a higher plane than the rest of the world. While there is much to admire about the European project, this feeling of accomplishment simply covered up the cracks in the architecture of the EU and euro as well as the chasms between its member states. The idea that we had attained convergence was wrong as was the idea that Europe had a divine right to prosperity.

This is why addressing the current crisis is about more than just rectifying economic weaknesses. Yes, a banking union, for instance, would help but there is much more to it than that. Unless we develop a much clearer and more coherent picture of what we are trying to achieve, apart from making the EU more competitive in the global economy, then we are certain to fail. Our differences need to complement each other, our cultural diversity should be a cause for celebration rather than division, our long and sometimes bloody history must serve as a guarantee for cooperation and understanding, while our respect for human rights and the social model born in Europe have to be held up as a beacon in these challenging times. Ultimately, we need to discover who we are and where we want to go and the answers don’t lie just in our economies.

Is the Eurozone architecture the sole cause of the crisis? What are the potential policy responses that you think would be most effective?

In terms of the euro, the idea of convergence was a sham. Rather than economies coming together to form a powerful, competitive block, they became unequal pieces against each other. To some extent this was caused by the lack of fiscal, economic and political union to back up a single currency.

But there were also serious failings on a national level.  The Germans understood what lay ahead much better than others and Gerhard Schroeder’s Agenda 2010 put the country’s economy on a favourable footing. Unfortunately, other Eurozone members, particularly in southern Europe, closed their eyes, hoped for the best and were left foundering in Germany’s wake. Too many Eurozone economies became unproductive, uncompetitive and unresponsive to the needs of the global market. The euro, meanwhile, lacked the tools to address these weaknesses.  Some of these deficiencies are being addressed.

As painful as the process is, public finances need to come under control. The role and effectiveness of our public sectors also need to be scrutinised. Furthermore, structural reforms to allow our economies to be nimbler and responsive cannot be avoided. The key element to all this, though, is balance. I fear that in the Eurozone, we have got the balance totally wrong. Destroying economies, and with that people’s trust and hope, through excessive levels of austerity is no way of rebuilding. Austerity needs to be balanced with reform and then both have to be weighed up against investment and growth strategies. The Eurozone has to rediscover production and must innovate more. One element to this is creating a vision for the future; the other is finding the capital to support it. The former requires a serious upgrade in the quality of our decision makers at a national and European level and I don’t see how the latter can happen without greater economic union in the Eurozone, the introduction of Eurobonds and, ultimately, fiscal transfers.

The crisis has dominated the press across Europe, what did you think about the coverage? Was it credible and informed, did it help people understand the crisis, or do you think press coverage succumbed to populism and simplistic analysis?

There has been some very poor coverage but there has also been some truly excellent reporting and analysis. The crisis has thrown up a wide range of stories, from the high-level economic and political decision making process to the human impact of the savage cuts implemented in Greece, Portugal and elsewhere. Some of the coverage has been populist and failed to dig beneath the surface of what sometimes are complex problems. There has also been a tendency for national stereotypes to be used by the media in a number of countries, which has been really disappointing.

However, the crisis has also produced some outstanding writing and analysis. Examples in the English-language media include the work done by Marcus Walker, Charles Forelle and Matina Stevis at the Wall Street Journal, Peter Spiegel and Joseph Cotterill at the Financial Times, Luke Baker at Reuters, Landon Thomas Jr. at the New York Times and Nikos Chrysoloras, my colleague, at Kathimerini.

The crisis has been an incredible challenge for journalists because of the technical and intricate nature of the subject matter. Many of us have had to do a crash course in economics in order to keep up, and sometimes the gaps in our knowledge are evident. So, it has been inspiring and educational to follow the excellent analysis provided by some of our colleagues. The crisis has also fuelled the development of Twitter as a platform for journalists to disseminate information and exchange views. This has also been a real bonus of the past few years.

Europe shares a currency but is socially, culturally and politically heterogeneous. Do you think national media have been too ethnocentric in their approach to the crisis? How would you assess the coverage of the crisis in Greece?

In terms of how the Greek media has covered the crisis, I would say it has been patchy at best. There has been too much misinformation and misunderstanding of the situation to say the media has played a constructive role in people’s appreciation of what is going on. Too often the coverage has passed through the prism of petty politics and backstage gossip that has been such a mainstay of journalism in Greece, rather than giving a more comprehensive and balanced view of the situation. Even worse has been the stereotyping of certain nationalities, particularly the Germans, by some section of the media.

As for how the international media has covered events in Greece, I would also say that its reporting has been mixed. Too often, foreign reporters have bought into the prevailing narrative of the time: At the start of the crisis, the story was very much about the lazy, cheating Greeks, then it focussed on the human angle of the suffering caused by the collapsing economy and intense austerity before moving on to the oligarchs accused of having a vice-like grip on the country. There is something in all of these angles but none gives anywhere near the whole picture and some foreign journalists have not done themselves any favours by chasing these stories simply because someone else reported on them a few days earlier. The recent example of a string of stories on the Greek “success story,” which within a month were replaced by reporting on political turmoil and missed targets, was a particular eye opener. That said, there has been some admirable reporting from Greece by journalists based here or those who have taken the time to understand the country and its people, sometimes with the help of excellent fixers.

Are there any further important dimensions of the crisis which you think have been missed or under-analysed?

I think one of the developments dawning on all of us is that Europe could be sowing the seeds of its self-destruction during this crisis. Euroscepticism and nationalism is growing, the far-right is emerging and differences between member states and their peoples are becoming more pronounced. After the events of the last few years, I have the impression that the man on the Helsinki or Hamburg omnibus, so to speak, has a completely different interpretation of what the EU and the euro means to him than his counterpart in Athens or Lisbon. Equally, we find ourselves in a situation, largely due to the way national politicians and media have framed the debate, where many citizens in the north and south have different but equally warped impressions of what has caused this crisis. As a result, there is a big disconnect between the citizens in the north and south – the difficulties we face, our hopes and fears. If we do not address this quickly and decisively then the whole edifice will fall apart and the debate about austerity, reforms, banking union and Eurobonds will become academic.

Thank you very much for your answers.

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The Next Social Contract

by Kemal Derviş

PARIS – Around the world nowadays, persistent unemployment, skill mismatches, and retirement frameworks have become central to fiscal policy – and to the often-fierce political debates that surround it. The advanced countries are facing an immediate “aging” problem, but most of the emerging economies are also in the midst of a demographic transition that will result in an age structure similar to that of the advanced economies – that is, an inverted pyramid – in just two or three decades. Indeed, China will get there much sooner.

This illustration is by Paul Lachine and comes from <a href="http://www.newsart.com">NewsArt.com</a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

Illustration by Paul Lachine

Multiple problems affect employment. Weak demand in the aftermath of the global financial crisis that began in 2008 remains a key factor in Europe, the United States, and Japan. But longer-term structural issues are weighing down labor markets as well.

Most important, globalization results in a continuous shift of comparative advantage, creating serious adjustment problems as employment created in new activities does not necessarily compensate for the loss of jobs in old ones. In any case, most new jobs require different skills, implying that workers losing their jobs in dying industries have little hope of finding another one.

Moreover, technological progress is becoming ever more “labor-saving,” with computers and robots replacing human workers in settings ranging from supermarkets to automobile assembly lines. Given the volatile macroeconomic outlook, many firms are reluctant to hire new workers, leading to high youth unemployment throughout the world.

At the same time, aging – and the associated cost of health care for the elderly – constitutes the main fiscal challenge in maturing societies. By the middle of this century, life expectancy at age 60 will have risen by about ten years relative to the post-World War II period, when current retirement ages were fixed.

Marginal changes to existing arrangements are unlikely to be sufficient to respond to technological forces, reduce social tensions and young people’s fears, or address growing fiscal burdens. A radical reassessment of work, skill formation, retirement, and leisure is needed, with several principles forming the core of any comprehensive reform.

For starters, skill formation and development must become a life-long process, starting with formal schooling, but continuing through on-the-job training and intervals of full-time education at different points in life. Special youth insertion programs should become a normal part of public support for employment and career formation, with exemption from social-security contributions for the first one or two years of employment.

A second principle is that retirement should be a gradual process. People could work an average of 1,800-2,000 hours per year until they reach their 50’s, taper off to 1,300-1,500 hours in their early 60’s, and move toward the 500-1,000 range as they approach 70. A hospital nurse, an airplane crew member, or a secondary-school teacher, for example, could work five days a week until her late fifties, four days a week until age 62, three days until age 65, and perhaps two days until age 70.

Employers and workers should negotiate such flexibility, but they should do so with incentives and financial support from government – for example, variable social-security and income taxes. Paid holidays can be 3-4 weeks until age 45, gradually increasing to 7-8 weeks in one’s late 60’s. Maternity and paternity leave should be increased where it is low, such as in the United States.

Public policies should also encourage greater scope for individual choice. For example, every ten years, a worker should be able to engage in a year of formal learning, with one-third of the cost paid by the employer, one-third by public funds, and one-third by personal savings (these proportions could vary by income bracket).

The overall objective should be a society in which, health permitting, citizens work and pay taxes until close to the age of 70, but less intensively with advancing age and in a flexible manner that reflects individual circumstances. In fact, gradual and flexible retirement would in many cases benefit not only employers and governments, but also workers themselves, because continued occupational engagement is often a source of personal satisfaction and emotionally enriching social interaction.

Using the Gallup World Poll, my colleagues at the Brookings Institution in Washington, DC, Carol Graham and Milena Nikolova, have found that the happiest cohorts are those who work part-time voluntarily. In exchange for longer work lives, citizens would have more time for both leisure and skill formation throughout their lives, with positive effects on productivity and life satisfaction.

The new social contract for the first half of the twenty-first century must be one that combines fiscal realism, significant room for individual preferences, and strong social solidarity and protection against shocks stemming from personal circumstances or a volatile economy. Many countries are taking steps in this direction. They are too timid. We need a comprehensive and revolutionary reframing of education, work, retirement, and leisure time.

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German Banks on Top

by Luigi Zingales

CHICAGO – Overcoming the European Union’s current economic malaise, as almost everyone acknowledges, requires deeper integration, with the first step taking the form of a banking union supervised by the European Central Bank. But Europe’s banking union also requires uniform rules for winding up insolvent financial institutions – and this has become a sticking point.

This illustration is by Barrie Maguire and comes from <a href="http://www.newsart.com">NewsArt.com</a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

Illustration by Barrie Maguire

Germany opposes the new bank-resolution mechanism proposed by the European Commission, generating moral and political support at home by portraying its stance as an effort to protect German taxpayers: Why should the German ants pay for the southern European grasshoppers? In fact, Germany’s position is a ploy to hide its anticompetitive behavior, whereby the government subsidizes German banks and industry at the expense of everyone else – including German taxpayers.

Europe’s common market has been the single greatest success of post-World War II European policy, boosting economic growth and fostering cultural interchange. But a common market requires a level playing field, and the European Commission has worked hard to achieve this in many sectors over the years.

Until now, the main exception was banking. The emerging banking union is not only the first step toward a European fiscal union; it is also the final step toward completing the European common market. Without a common resolution mechanism that levels the playing field, the common market will remain unfinished.

In principle, the EU’s banking rules are common to all member states. In practice, their implementation was, until recently, left to national regulators, who applied very different standards. Most important, while state subsidies in all other sectors are forbidden, they are commonly accepted in banking – not only explicit subsidies, such as Germany’s bailout of several Landesbanks after the American subprime-mortgage crisis, but implicit subsidies as well. Some French banks’ traders openly boast of backing by the French government, which will never let its banks fail.

Unfortunately, this is not just a French or a German problem. All market players know that EU governments will not let big banks fail. This implicit subsidy not only costs each country’s taxpayers billions of euros; it also distorts competition, because not all implicit subsidies are created equal. Regardless of its fundamentals, a German bank would be considered safer than an Italian one, because the German government’s implicit guarantee is much more valuable than the Italian government’s.

As a result, German banks have a lower cost of funding and – all else being equal – higher profitability. To the extent that some of the lower cost is rebated to their clients, even industrial firms in Germany enjoy a lower cost of capital, giving them an unfair advantage vis-à-vis their European competitors.

One way to prevent this distortion would be to create a mechanism to bail out all banks with European money. But this approach would not only leave German taxpayers on the hook; it would also create perverse incentives in the entire European banking system, maximizing instability.

The preferred alternative is to create a common resolution mechanism, which would apply throughout Europe, regardless of a bank’s country of origin. Such a mechanism would prevent the need for government intervention.

The recent proposal by Michel Barnier, the European Commissioner for the Internal Market and Services, is an effort to implement this solution. It provides a common resolution mechanism for all banks in Europe, which forces losses to be absorbed by shareholders, bondholders, and large depositors before any government money is committed. To provide short-term financing to a bank during any restructuring, the Commission’s plan would create a European Fund, putting all banks on an equal footing.

The Commission’s proposal is far from perfect. After a bank’s shareholders are wiped out and its creditors take an 8% “haircut,” the European Fund transforms itself into a bailout fund, justifying some of Germany’s fears. And there is no explicit prohibition of some form of national government bailout.

Even so, the proposal is a step in the right direction. German criticism should be directed at improving it, not at sandbagging it.

German taxpayers have paid dearly for German banks’ mistakes. In 2008, when the Landesbanks were found to be full of American subprime mortgages, the German government bailed them out with a €500 billion ($650 billion) rescue package at its taxpayers’ expense. In 2010, when German banks were badly over-exposed – to the tune of $704 billion – to Greece, Ireland, Italy, Portugal, and Spain, European taxpayers and the ECB helped them to bring most of that money home. The biggest threat to German taxpayers is not southern European profligacy, but their own country’s banks.

In this sense, the banking union is not a scheme to burden German taxpayers with the losses of failed southern European banks; rather, it is a mechanism to render all banks (including German ones) accountable for their own mistakes, thereby reducing the burden that they impose on domestic taxpayers. It is about time that German voters understood that the largest grasshoppers are in the center of their own towns.

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Bull Falling Wedge

By Tothetick Education

The Falling Wedge as a price pattern is fairly common and presents in all markets, time frames, & price ranges. Typically a Falling Wedge is presented as either a bullish trend continuation pattern or a reversal pattern depending on the trading environment in the background. Regardless of environment the contracting, narrowing price range outlined by the Falling Wedge is an indication that the immediate downtrend outlined by the wedge is losing strength and considered to have a definite bullish bias.

Visually Falling Wedges are characterized by a contracting range in prices with ‘converging’ or inclining toward each other trendlines that create lower lows & lower highs. By definition this means the Falling Wedge pattern outlines an immediate downtrend pattern in prices with both the immediate support & resistance trendlines slanted in the opposite direction of the larger bullish trend. The shape of the Falling Wedge is altered by the slope or angle of the descending resistance line which should be steeper than the tighter angle slope of the lower descending support line.

Falling Wedges vary in their duration, but will have at least two swing highs and two swing lows in price. Traders should be prepared to adjust the trendlines as needed with additional swings. Volume usually diminishes as the pattern develops & this becomes one of the best keys to determine when the pattern may break & it represents the bullishness of the formation. If volume remains the same or increases during the wedge formation then the signal will be less reliable. Buyers & sellers create this narrowing range-bound price action and eventually prices squeeze to an Apex. The closer to the apex price gets the odds for a breakout of the immediate price range becomes more likely.

Falling Wedges can be a little tricky to trade but traders can ‘stack the deck’ increasing the risk-to-reward ratio for profits when this pattern presents as one of the best performers statistically - the bullish continuation seen in an uptrend.

The bullish continuation pattern has 3 phases:

1) Background: A Strong impulsive, thrusting action with a surge in volume & price establishes a clear picture of the controlling bullish trend direction. In our falling wedge price pattern it is represented visually by a Pole. Higher and more drama the better as the Pole is the Key to recognizing the potential for the continuation of the bullish pattern. The Pole represents trend direction as well as its strength & often this pattern is initiated as a new breakout in price from an established area & buyers are in control.

2) The second phase is a pause for consolidation of the action both in volume & price and is represented by the falling wedge. As traders we like to see this phase short in duration with only 2 or 3 swings while our price action is range bound maintaining the lower lows & lower highs shape and the volume is ‘resting’. Again, pay close attention to the volume action with each push into the tightening slope of the support line which is an indication of weakening supply & offers clues to the bullishness of the pattern.

3) The pattern confirms as a bullish continuation pattern if the action creates a new bullish breakout with a surge again from the bulls in both volume & price. The immediate upper resistance outlined by the falling wedge is the area traders look to see confirm the breakout. Typically the action will mimic the volatility & energy experienced with the Pole creation & volume considerations aid in recognizing further potential for the pattern. Often with a bullish breakout pattern the reaction in volume is ‘delayed’ & price pullbacks to ‘re-test’ are common.

Options for Trading the Falling Wedge as a bullish continuation pattern:

There are two methods of trading this pattern & it depends on your trading style.

Aggressive traders will find the falling wedge to be a little tricky to trade before a breakout actually occurs. However, as a bullish continuation trade the background support seen in the larger uptrend offers clues when combined with the tightening slope of the immediate lower support trendline created by the wedge. As the price action tightens in this area it is an indication of the lack of any real conviction from sellers. Aggressive entries long in this zone are available with the concept being the trend is on your side & the bulls are maintaining a ‘wall of support’ & again, closely monitor the reactive volume with each push into this support zone for clues.

This can be an accurate trade that usually has a great risk:reward ratio. Stop placement can be fairly tight right below support & can be adjusted upward accordingly. When price approaches the upper descending resistance line you should gauge the momentum: if you see that the momentum is strong stick to the position. However, if you see that resistance prevails, close the trade & take your profits to maximize the reward.

The aggressive trading method can highly increase the profit potential of any falling wedge. However, the trader needs to assess whether the ‘extra’ profits choosing the earlier entry offers a decent risk:reward over waiting for the breakout of the falling resistance line. Remember that as a trend continuation pattern traders want this consolidation falling wedge formation to be relatively brief. Two or 3 swings may turn into more and the ‘spread’ or range in prices offered to the Apex should aid trade consideration. Traders want to see momentum weakening as prices squeeze to the Apex.

Conservative traders will use the more traditional method & will enter a long trade once the upper falling resistance line has been broken &/or the new breakout has confirmed.

All traders should be prepared for re-trace activity or a reaction rally to test the newly created support level. An expansion of bullish volume can aid confirmation. False breakouts do happen & confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakout above resistance price, retrace holds new support line, price clears breakout swing high price, price clears next swing high of wedge pattern, larger chart combination.

Stop placement considerations can be aggressively raised after the breakout of the price.

Measured Move Targets based on structure of Pole & the Bull Falling Wedge

Aggressive with Momentum & Volume: duplication of the original move or trader choice measurement of the Pole:

  • Pole measure (added to) Apex or BreakOut price = target
  • Pole measure = (Pole Tip price (minus) Pole Base price)

Conservative:

  • Falling Wedge measure (added to) Apex or BreakOut price = target
  • Falling Wedge measure = (swing high price of wedge (minus) swing low price of wedge)

Additional target considerations based on the Falling Wedge pattern itself are each swing high that created the pattern up to & including the re-test of the swing high of the pattern or Pole Tip price.

Examples: Falling Wedge as a bullish continuation pattern:

Bull Falling wedgeBull Falling Wedge

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Bernanke’s Hidden Hint of the Coming Economic Collapse

by Graham Summers

Today marks the final day of Bernanke’s testimony to Congress.

Highlights from the first day of testimony and Q&A include:

    Q: Are You Printing Money?

    Bernanke: Not Literally

Amazingly, no one said anything after this comment. But far more importantly was the last statement made by the Fed Chairman,

“If we were to tighten (monetary) policy, the economy would tank.”

Tightening monetary policy means if interest rates rise. Interest rates are currently being held at ZERO and have been there four nearly five years. And Bernanke has just announced that if interest rates rise, at all, then the economy would tank.

Unfortunately for Ben, rates are already rising around the world. Rates on Portugal’s ten-year are over 7%. Rates on Greece’s ten-year are back over 10%. Japan, the country of zero interest rates has seen a spike in its rates since April. Even Treasuries are surging higher, despite the Fed buying $45 billion worth of them every month.

Bernanke has told us point blank what will happen if rates rise (economic collapse). But he’s not telling us the whole truth. The fact of the matter is that if rates rise now while the Fed is running QE 3 and QE 4 then it’s game over. The Fed will have officially lost control of the system and a wave of defaults will implode the markets.

This process has already begun. As I noted before we’re seeing rates spiking around the world.

Stocks may hit new highs, but this rally has all the hallmarks of a blow off top, coming at the final stage of a bubble. Indeed, stocks have not been this overextended in over 20 years… that includes the 2007 peak. Soon after we reached that point… we then plunged into one of the worst market Crashes of all time.

By today’s metrics, this would mean the S&P 500 falling to 1,300 then eventually plummeting to new lows.

This is not doom and gloom. This is a fact. The Fed has created an even bigger bubble than the 2007 one.

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Are we there yet? Is Dow 16,000 an 800 pound resistance point?

by Chris Kimble

CLICK ON CHART TO ENLARGE

What do you get if connect these key "Emotipoints" (Emotional highs and lows)... The 1982 low, 1987 High, 2000 high, 2002 low, 2003 low and 2007 high together? 

You get a rare combo of resistance coming into play at Dow 16,000. As of this morning the Dow is now less than 500 points (less than 3%) from this potential key technical price point.

From a trend/momentum perspective the Dow is above key moving average and the advance decline line is healthy at this time.  Will this rare cross roads of "Emotipoints" dating back to President Reagan some how impact the markets?  I don't know at this time.

From a technical perspective, if the Dow does break above all this resistance, it has to be viewed as a big positive!

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Chinese growth set for lower lows

By Mark A. DeWeaver

China is slowing fast.  Since hitting a post-financial crisis high of 11.9% in the first quarter of 2010, Chinese quarterly GDP growth has risen in just two of the subsequent 13 quarters.  The latest figure of 7.5%, for the second quarter of this year, is down from 7.7% in the first quarter and 7.9% in the last quarter of 2012.

This downtrend is set to continue into the second-half.  Beijing has just launched a new campaign to rid the Party of “formalism, bureaucratism, hedonism and extravagance.”  This will stifle both consumption and investment for at least the next two quarters.

Beijing’s economic planners are in a bind.  High levels of excess capacity have reduced the return on investment to the point where China’s traditional investment-led growth model is no longer viable.  Yet this is the only model that the country’s economic institutions can support.

The obvious way forward would be to dismantle these institutions by privatizing state-owned assets and radically reducing the role of the state in the economy.  But this is a solution that Secretary General Xi Jinping has explicitly ruled out.  He is instead relying on stricter discipline of Party members to make the existing system more efficient.  Genuine reform is not really on the table.

This approach will do little to incentivize better economic decision making.  In the short term, officials will take cover as they wait for the storm to blow over.  Few will dare to promote obvious “white elephants” or to indulge in public displays of conspicuous consumption.  Sales of cement, steel, Rolex watches, and shark’s-fin soup will be poor.

But there will be no long-term gain for this short-term pain.  China’s economic problems are not primarily the result of immorality on the part of individual Party members or an imperfect understanding of national priorities at the local level.  They are an unavoidable consequence of state ownership and bureaucratic management.  The current “rectification” drive, with its focus on prosecuting corrupt officials and studying Marxist classics, might temporarily treat some of the symptoms but will not cure the disease.

The campaign will certainly do nothing to weaken the state’s economic power.  This means that competition among government officials will continue to be more important than market forces.  Even if new performance evaluation criteria are introduced—as Secretary General Xi has recently suggested—hitting targets will still take precedence over economic rationality.  Transitioning to productivity-led growth will be impossible under these circumstances.

Continued state sector dominance also will stifle consumer demand.  The low share of consumption in Chinese GDP is not primarily the result of household “over-saving.”  It is due instead to the fact that ordinary citizens have no real claim to the income of state-owned entities.  In fact, state-sector profits derive largely from subsidies, the burden of which ultimately falls on households.  As long as this is the case, the consumer can hardly be expected to “step up to the plate.”

China’s economic system, like the Soviet system on which it is based, is designed to channel national income into state-promoted investment.  In the initial phases of economic development, this strategy can work because it is relatively easy for planning authorities to identify investment projects that make sense on a cost-benefit basis.  Productivity growth is relatively unimportant and a case can be made for postponing consumption for the sake of rapid industrialization.

In China, this “big push” phase could be said to have ended in the late 1990s, when excess-capacity problems emerged in many sectors that had previously experienced excess demand.  The country had reached a point at which, as then-premier Zhu Rongji told the National People’s Congress in 2001, “further development would be impossible without structural adjustment.”

Yet structural adjustment has proved elusive.  As the Soviets discovered in the 1980s, a productivity renaissance cannot be brought about by fiat.  Nor are government and state enterprise elites going to allow a significant reduction in the state’s share of the national income pie.  As long as the economy is dominated by the state, switching to a new “mode of growth” is not a real possibility.

China is now facing a sustained deceleration.  In the absence of any other driver, GDP growth is not going to pick up until investment recovers.  But with the return on investment continuing to decline, such a recovery will prove to be short-lived.  Before long, Beijing will once again have to take up the battle against corruption and inefficiency, pushing growth rates even lower in the process.

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Capitalize On Crude Oil's Breakout

by Tom Aspray

Stocks managed solid gains again on Wednesday as the much better than expected earnings from Bank of America BAC +2.73% (BAC) increased the enthusiasm for stocks. Testimony by Fed Chairman Ben Bernanke was also reassuring as he repeated that there was no firm timeline for stopping the stimulus. Yields declined further in reaction to his comments which was inline with the technical outlook.

The market internals were solidly positive with advances leading declines by a 2-1 margin. This has stalled the slight deterioration noted after Tuesday’s close. Housing starts dropped 9.9% and hit the lowest level since last August. Economists were way off the mark as they were looking for some slight improvement.

One of the more interesting developments this month was the breakout in crude oil from a several-month trading range as the $100 level was overcome. Despite much lower than expected inventories in Wednesday’s EIA report, crude oil was just slightly higher Wednesday but is up in early trading Thursday.

Though the weekly relative performance for the energy sector has not yet completed its bottom formation, several oil stocks are now back to support where it appears they are being accumulated. This should be a good opportunity to add some energy exposure to your portfolio as crude oil should be even higher by year end.

chart
Click to Enlarge

Chart Analysis: The daily chart of crude oil futures shows the July 3 completion of a four-month trading range, lines a and b.

  • Crude testing its daily starc+ band last week so the recent sideways action was not surprising.
  • The formation has an upside target and the next weekly resistance at the March 2012 high of $110.55.
  • Of course in May 2011, crude oil hit a high of $114.83 based on the continuous crude oil contract.
  • The daily OBV had held above support during April’s sharp drop.
  • The OBV confirmed the price action by moving through its corresponding resistance at line c.
  • The weekly OBV (not shown) is also positive.
  • There is initial support in the $104.20 area with the rising 20-day EMA now at $102.24.

Valero Energy VLO -0.51% Corp. (VLO) is a $19.1 billion independent oil and gas refiner that has been correcting since its March highs of $48.93.

  • At the early July low of $33.00, it was down 32% from its high.
  • The daily chart shows a potential short-term bottom formation, line e, that should be completed with a move above $36.18.
  • The daily downtrend, line d, and the 38.2% Fibonacci resistance is at $39.13.
  • The 50% retracement resistance is at $41.03.
  • The relative performance moved above its WMA last week and looks ready to break its downtrend, line f.
  • The daily OBV has pulled back to test its flattening WMA and appears to have bottomed, line g.
  • Minor support is now at $34.50 with further at $33.40.

chart
Click to Enlarge

EPL Oil & Gas EPL +0.1% Inc. (EPL) is a $1.18 billion independent oil and gas company that reports earnings on July 29.

  • EPL rallied sharply from the June lows on June 21 as an HCD was triggered.
  • The rally stalled at the resistance in the $31.80-$32.10 area, line a.
  • There is stronger resistance in the $34.44 to $35.14 area.
  • The relative performance held above the long-term support at line d, on the recent correction.
  • The RS line needs to move above the resistance at line c, to confirm that it has bottomed.
  • The volume was very strong on the rally from the June lows as the OBV moved above its WMA ands then broke its downtrend, line e.
  • There is initial support at $28.75 with more important at $27, line b.

Phillips 66 (PSX) is a $35.94 billion oil and gas marketing and refining company, which reports earnings on July 31.

  • PSX peaked at $70.52 in April and hit a low on July 3 at $54.80.
  • This was a correction of 22% from the highs as the major 38.2% Fibonacci retracement support was tested (line g).
  • The relative performance did confirm the April highs before dropping below its WMA.
  • There is longer-term resistance for the relative performance at line h.
  • The on-balance volume (OBV) shows a positive zig-zag formation but need a good volume up day to bottom out.
  • The OBV has major resistance at the downtrend, line i.
  • The recent bounce failed at $59.85 with further resistance at $61.74, which was the quarterly pivot.
  • There is stronger resistance now in the $65 area.

What It Means: The sharply higher crude oil prices suggest an increased demand, which is consistent with the growing global demand.

The volume pattern is the strongest for EPL Oil & Gas Inc. (EPL) but a stop needs to be under Tuesday’s low.

Having taken some very nice profits in Valero Energy Corp. (VLO) earlier in the year, I would look to buy near current levels, but I would wait for a deeper pullback or confirmation of a bottom in Phillips 66 (PSX).

I do not see any good-entry strategies right now for either the SPDR S&P Oil and Gas Exploration ETF (XOP) or the Select Sector SPDR Energy (XLE).

How to Profit: For EPL Oil & Gas Inc. (EPL), go 50% long at $29.86 and 50% at $29.34, with a stop at $28.13 (risk of approx. 5%).

For Valero Energy Corp. (VLO), go 50% long at $34.90 and 50% at $34.11, with a stop at $32.84 (risk of approx. 4.7%).

For Phillips 66 (PSX), go 50% long at $56.64 and 50% at $55.44, with a stop at $54.19.
(risk of approx. 3.3%).

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Cotton falls as rain reported in key producing areas

By Jack Scoville

COTTON (NYBOT:CTV13)

General Comments: Futures moved lower on reports of rain in Texas. Temperatures are much cooler in Texas and rain was reported in central and western parts of the state, including key cotton producing areas. The rains there are called very beneficial. Some showers are possible in the next couple of days. Conditions in Alabama, Mississippi, and Missouri are below average now, but will see warm temperatures and some showers this week, with most of the precipitation in eastern and southern areas. Some rain and cooler temperatures are possible this weekend. It is possible that futures can continue to work lower as demand has turned soft and as the weather is getting better in almost all US production areas. Weather for Cotton appears good in India, Pakistan, and China.

Overnight News: The Delta and Southeast will see showers and storms develop this weekend. Temperatures will average near to above normal. Texas will see drier weather this week and this weekend. Temperatures will average near to above normal. The USDA spot price is now 79.80 ct/lb. ICE said that certified Cotton stocks are now 0.518 million bales, from 0.540 million yesterday. USDA said that net Upland Cotton export sales were 50,400 bales this year and 40,100 bales next year. Net Pima sales were 4,800 bales this year and 5,300 bales next year.

Chart Trends: Trends in Cotton are down with objectives of 83.00 October. Support is at 84.00, 83.10, and 82.80 October, with resistance of 85.50, 86.00, and 86.50 October.

FCOJ (NYBOT:OJU13)

General Comments: Futures closed higher and made new highs for the move. Some more buying is possible this week. There is not much new surrounding the FCOJ market these days, and the tropics remain quiet for now. Growing conditions in the state of Florida remain mostly good. Showers and storms are reported and conditions are said to have improved in almost the entire state. Ideas are that the better precipitation will help trees fight the greening disease. Temperatures are warm in the state, but the precipitation is the key right now. The tropics appear quiet and there are no storms in view. Brazil is seeing near to above normal temperatures and mostly dry weather, and there are reports of stress to trees and the potential for lower production. It could turn cold in some production areas early next week.

Overnight News: Florida weather forecasts call for showers. Temperatures will average near normal.

Chart Trends: Trends in FCOJ are up with objectives of 145.00 and 155.00 September. Support is at 140.00, 136.50, and 134.00 September, with resistance at 145.00, 147.00, and 149.00 September.

COFFEE (NYBOT:KCU13)

General Comments: Futures were higher in New York on speculative buying tied to some forecasts for colder and wetter conditions for Brazil Coffee areas starting this weekend. No forecast is calling for damaging temperatures, but the market is short. In addition, the rain could disturb the last of the harvest and it could get cold enough to freeze in Parana, which is nota ll that far away from Coffee producing areas. Chart trends are up in all three markets. London moved higher on some buying tied to fewer offers from Vietnam on ideas that producers there are about sold out. Exports in June as reported by the customs bureau there were less than expectations. Offers of Arabica from origin are still hard to find and feature strong differentials. Demand is improving as roasters sense the change in market direction. Brazil weather is forecast to show dry conditions, but no cold weather for the rest of the week. It could turn wetter and colder this weekend. Current crop development is still good this year. Central America crops are seeing moderate to light rains. Colombia is still reported to have good conditions.

Overnight News: Certified stocks are marginally lower today and are about 2.748 million bags. The ICO composite price is now 123.00 ct/lb. Brazil should get dry weather except for some showers in the south. Temperatures will average near to above normal, but below normal next week with frosts and perhaps a freeze possible in southern areas. Colombia should get scattered showers, and Central America and Mexico should get showers, and rains. Temperatures should average near to above normal.

Chart Trends: Trends in New York are up with objectives of 132.00 and 140.00 September. Support is at 125.00, 124.00, and 120.00 September, and resistance is at 129.00, 132.00, and 135.00 September. Trends in London are up with objectives of 1980 September. Support is at 1900, 1850, and 1820 September, and resistance is at 1980, 1995, and 2010 September. Trends in Sao Paulo are up with objectives of 156.00 and 164.00 September. Support is at 146.00, 143.00, and 140.00 September, and resistance is at 151.00, 155.00, and 159.00 September.

SUGAR (NYBOT:SBV13)

General Comments: Futures closed mixed in consolidation trading. There is not much new to talk about here so far this week. Futures trends remain down overall and price action has been weak as most expect a big production surplus for the year. Many expect production to be higher overall in Brazil due to a record Sugarcane production, and countries like Thailand and India also expect more production this year. The Indian monsoon is good so far this season and this should help with Sugarcane production in the country. Northern areas are in good shape, but southern areas might be too hot and dry and some stress to the Sugarcane is likely. Less production of Sugar beets is reported from Russia and Ukraine as farmers there elected to plant more grains.

Overnight News: Brazil should be mostly dry and warm this week, but could see colder and wetter weather this weekend.

Chart Trends: Trends in New York are mixed to down with objectives of 1580 October. Support is at 1570, 1540, and 1510 October, and resistance is at 1620, 1630, and 1650 October. Trends in London are down with objectives of 448.00 October. Support is at 457.00, 454.00, and 451.00 October, and resistance is at 465.00, 466.00, and 470.00 October.

COCOA  (NYBOT:CCU13)

General Comments: Futures closed higher on speculative buying tied to ideas that the North American grind data could be very strong. The US data should be out today. Ghana and Nigeria would appear to have the most problems with the rains, and it remains a little too dry in many parts of Ivory Coast. The weather is better in West Africa, with more moderate temperatures and some rains. A few showers are appearing again in Ivory Coast this week, but Ivory Coast will still need more rain. Other West African countries are reported to have good conditions. Malaysia and Indonesia crops appear to be in good condition and weather is called favorable.

Overnight News: Scattered showers are expected in West Africa. Temperatures will average near to above normal. Malaysia and Indonesia should see episodes of isolated showers. Temperatures should average near normal. Brazil will get mostly dry conditions and warm temperatures. ICE certified stocks are slightly lower today at 4.803 million bags.

Chart Trends: Trends in New York are up with no objectives. Support is at 2250, 2240, and 2210 September, with resistance at 2330, 2350, and 2380 September. Trends in London are up with objectives of 1640 September. Support is at 1560, 1550, and 1530 September, with resistance at 1610, 1640, and 1660 September.

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Options Trading - Using a Risk Reversal on Apple

by Reggie Middleton

This is a guest post from Marcus Holland. I don't endorse nor necessarily agree with the opinion and research expressed herein, and it is supplied as an OpEd piece only.

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Apple Stock (NYSE:AAPL) is trading slightly lower despite news that the company colluded with five major U.S. publishers to drive up the prices of e-books in the months ahead of the technology company entering the market in 2010.  Option volatility in the wake of this news, has declined slightly and sentiment surrounding the company has remained strong.

In a civil antitrust lawsuit, the Department of Justice claimed that Apple agreed with the 5 publishers in January 2010 to allow them to increase prices for best sellers and new releases in response to publisher Amazon.com $9.99 price point for those books on Amazon.com Inc.

The judge will likely schedule a hearing on a request by the Justice Department for injunctive relief, which could include requirements that Apple not enter into another agency agreement to sell e-books for a two-year period.

aapl stock rangeaapl stock range

Despite the blow to Apple the stock technically remains sound after recently testing support near 390 per share.  Resistance on the stock is seen near the 50-day moving average near 433.  Momentum on the stock is gaining traction as the MACD has recently generated a buy signal.  This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread.  The RSI (relative strength index) is printing in the middle of the neutral range near 50, well below the overbought levels of 70 and and above the oversold levels of 30.

aapl stock volatilityaapl stock volatility

Implied volatility on AAPL edged higher, prior to the release of the decision and ahead of earnings in the coming weeks.  The recent lows near 25% represent an excellent opportunity to purchase volatility, while levels near 45% reflect a robust place to sell volatility.  At the current levels near 30%, options traders who are bullish on the stock could use a risk reversal and use the skew on the puts to benefit from the structure.  The structure mitigates the effect of implied volatility on a directional play.

In a risk reversal the investor will purchase a call and use the proceeds of a sold put to finance the trade.  A trade that would allow an investor to earn theta is an August 450-390 risk reversal in which the investor collect 10s cents by purchasing the 450 call for $5.20 and selling the 390 put for $5.30.  By using recent support at $390, and investor has a good spot to purchase the stock if Apple’s stock turns lower.

Comments from Reggie on the fundamental side...

The Apple Profit Engine Has Stalled & Is Rolling Downhill

Apple is facing a shart decline in the margins of its top two value drivers. May I also add that these two value drivers are 83% of Apple's revenues and an even greater portion of its profits. Such a drastic concentration in only two products who have reached their zenith is not a good thing!

Click the graphic once to view, twice to enlarge to printer quality...

Reggie Middletonss Ultimate Apple Value InfographicReggie Middletonss Ultimate Apple Value Infographic

Apple's Competition Is The Greatest It Has EVER Been!

Apple's competition is the greatest it has ever been, and features companies who are literally at the top of their game. We are talking a lot of companies, and at the top of a very difficiult game as well. Reference What Sell Side Wall Street Doesn't Understand About Apple - It's Not The Leader Of The Post PC World!!!

Apple is Materially & Quickly Losing Global Market Share! Clear Indicators Of Permanent Downward Moves In Its Peer Group

Apple is rapidly losing global market share over and the trend is worsening. This has ALWAYS signaled the beginning of the end for its peers. Reference Is Tim Cook Cooked? Market Share vs Profit Margin, part 2 - Follow What I Do, Not What I Say!

For those who don't subscribe and/or haven't already seen it, here is the video that tells (nearly) all about Apple, from beginning (Q3 2010) to end.

Of course, there is a point at which Apple is a good buy. After all, they have a lot going for them. The question du jour is, exactly what is that point? I refer my subscribers to the research documents below for the answers...

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