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Joshua Brown earned degrees in Economics, Finance, and Business Management from RMIT University in Melbourne, Australia before entering the financial industry in 2001. He has since worked for prestigious companies such as Goldman Sachs JBWere and the Commonwealth Bank of Australia. In his last position he was employed as a senior analyst, senior account manager and department manager at AvaTrade. His experience ranges from forex trading and commodity derivatives, all the way to portfolio management, investor relations and education, financial planning, and even penny stocks. He also currently writes for several financial websites such as DailyFX and Seeking Alpha.

The Trade Marked Blog

A market correction is right around the corner. Yes, Really!
Posted by admin | Uncategorized | 0

Summary:

• The US economy will pay for years of cheap money and a low exchange rate. This has created an unsustainable asset bubble.
• Economic activity will drop as European and Chinese economies stumble.
• Low volatility and technical indicators point to a market nearing the top.

There is no shortage of articles predicting a correction or even a crash in the near future. The author usually highlights a couple of persuasive arguments or specific signals that proves their case such as the threatening "death-cross" of the Russell 2000 showing the 50 day moving average falling below the 200 day MA as noted in Marketwatch.com today . Individually, I believe that the points forecasting a correction are worthy of note but they are not necessarily convincing. If we bring them all together, the argument is quite compelling. As a hedge fund manager, I usually focus on analysing forex and commodities however after a period of market analysis, I have become convinced that a correction is not more than 3 months away. I'm going to step outside my noted area of expertise and explain why traders should prepare for a correction that is more than 10% and at the very least a near-future pullback of 5%.

The Asset Bubble


The most obvious cause for a correction is that we are witnessing the end an era of access to very cheap money. It is widely believed that asset prices are elevated due to ultra loose monetary policy implemented by almost all the main global reserve banks, specifically the US Federal Reserve. The Fed is on course to bring its bond buying program to a close in October and is expected to begin raising rates next year with many analysts predicting that it will occur sooner rather than later if Yellen's employment dashboard gives her the green light. However it would seem the market is giving us indications that while employment is a serious factor in the Yellen's decision making process, pressure coming from other members of the fed might cause Yellen to view her dashboard with less immediate importance as the US economy fires all pistons and almost all other economic indicators are overwhelmingly positive. It is possible that cooling the US economy may be of higher priority than waiting for US unemployment to fall further (which is certainly improving anyway).

It's irrefutable that company valuations have soared and some of the largest corporate acquisitions ever have been made over the last few years; a financial period that is and will be characterised by cheap money producing inflated asset prices or an asset bubble (in my opinion the acquisitions of Whatsapp (NASDAQ:FB) and Minecraft (NASDAQ:MSFT) and the IPO of Alibaba (NYSE:BABA) are evidence of irrational exuberance). Since the dissipation of the credit freeze that characterized the GFC, companies have been allowed to borrow at a very low rate and have been exporting products at an historically favourable exchange rate since 2004. Risk-off precious metals and bond prices have plunged as risk-on equities increased in demand, supported by value seeking investors who have disregarded the natural economic cycle but have sought a place to park their funds in well-oiled market; stock price indices are at record high and have risen continuously without a serious pause since 2011.

Following the GFC, corporations have been the main beneficiary of QE while the private sector has yet to really feel the benefit of the Fed's moves and perhaps this is the reason why Yellen is so cautious to see employment rise before lifting rates. It is the private sector that is really the driver of demand in the economy and as it stands, there is noted slack and unused capacity. Current company valuations seem to be based on profit potential and low borrowing expenses rather than current income and this will surely translate to a massive problem when the age of low interest rates come to an end and all of a sudden acquisitions have become far more expensive. As a young stock analyst I was always taught to evaluate a company based on its fundamentals but it almost seems as if nobody really pays attention to that anymore. Ultimately, as Sam Zell says the stock market is at an all time high, but economic activity is not and noted that ""every company that's missed has missed on the revenue side, which is a reflection that there's a demand issue; and when you got a demand issue it's hard to imagine the stock market at an all-time high." It is understood that before 2008, the private sector was addicted to credit, it may be that in 2014 it becomes apparent that it was the corporate world that bit off more than it could chew.

I think it is quite telling that voting Fed member Stanley Fisher has been tasked with leading a committee to assess whether or not an asset bubble exist and yet he is considered a hawk. If there is an asset bubble you can be sure he would be making convincing arguments for raising interest rates following his successful leadership of the Israeli Reserve bank during a period of a good economic growth and relatively low employment participation rates. It' a different ballgame sure, but the similarities are there.

Exports

The US Dollar has been trading at historical lows for much of the last decade helping to keep the economy afloat during the tough times earlier this decade. China grew steadily during the worst of the GFC with annualised growth hitting double digits year on year but now we can be assured that those days are well over, and it has been predicted for years as such a rate of growth was not sustainable. There are serious concerns for the Chinese economy with its balance of trade rising to record levels and it's rising debt. Any stimulus the Chinese government injects into the economy is not guaranteed to perk up the economy. China is the US's four largest importer and any reduction in demand is a big deal.

It is worth noting that crude oil has fallen recently to its lowest level since April 2013, despite the well-known geopolitical risk. The market is flooded with oil and this is this a terrible indication of the global economic activity. The increase in US crude oil supply could not have come at a more inopportune time and supply far outweighs demand.

Imports to Europe are falling as the region's fortunes become apparent that is tied to the crises in Ukraine and its ability to fight deflation. The possibility that it might fall back into recession is real and that the Ukrainian crises will exacerbate - a likely scenario considering Putin's unpredictable and obdurate attitude. The Euro will likely fall to its lowest point since 2012 and that will make US exports expensive.


Low Volatility

When market volatility is low this is often a sign of complacency but it is also a warning light that perhaps the market nearing the top and that it's hard to see how much more value can be added to stock prices (on the other hand it may also be a sign of overconfidence where downside risk is overlooked). Market consolidation usually follows with a sudden and rapid movements in either direction. With the stock market already considered expensive, it's hard to see how that rapid movement will be upward. BIS says it best "Financial markets have been exuberant over the past year, [...] dancing mainly to the tune of central bank decisions. Volatility in equity, fixed income and foreign exchange markets has sagged to historical lows. Obviously, market participants are pricing in hardly any risks."

Technical Indicators show overbought prices

Looking at the Nasdaq 100 chart (NASDAQ:QQQ), we come to the conclusion that certainly stocks rose quickly over the past 6 years and that we may be overdue for a correction. September is historically the worst month for stocks and the biggest market crashes occurred in October and therefore I would consider going short over the coming months to offer a good risk/return ratio. Certain technical indicators show that the market is overbought for an overbought market and that even a small correction is probable. It might be that the first drop will be to the middle of the linear regression. The next target would be the bottom of the linear regression channel. The final target (but not guaranteed) would be the upward trending long -term support line.

nasdaq100
There are many big names traders including Soros are preparing for a market correction. The retail market on the other hand seems oblivious to what the experts are doing by jumping on hyped up IPOs and that's a mistake. Winter is coming and investors should take notice and be looking at the warning signs. Even if you're a doubter of the pending market correction, consider the fact that in the last 52 weeks alone, eight of the ten major S&P sectors have retreated more than four percent at least three times each. Nine sectors - all except technology - have had at least a 6.9% drop. Consequently it might therefore be a prudent decision to short indices highly consisting of technology stocks such as the Nasdaq 100.
AUD/USD set to fall by all metrics
Posted by admin | Uncategorized | 0
By every metric that I use, AUD will fall, fundamental, technical and sentimental.

Sentimental:
Retail clients with FXCM are net long but reversal looming:
http://www.dailyfx.com/technical_analysis/sentiment?technicalSentiment=AUD/USD
Orders are very strong supporting Selling strength above current price:
http://fxtrade.oanda.com/analysis/forex-order-book#AUD/USD
Expert analysis:
http://www.fxstreet.com/analysis/forecast-currencies-poll/?pair=audusd
Net retail clients are mostly bearish:
http://www.investing.com/currencies/aud-usd
Technical:
Although the technical indicators showing immediate downwards momentum are lacking, we have several long-term moving averages showing falling price and overbought signals. This is one of the reasons why we are holding this for a while...it's not going to fall overnight.

audusd
​ This is the 1 day chart. The case is even stronger with the 4 hour where you have MACD starting to show falling momentum plus it it the top of the linear regression and the reversed (a signal that shows the maximum and min (channel) of a trading range.


Fundamental:
Well the strongest reason for my decision to go short is that the Australian dollar was lifted because of the resources boom. As this is coming to an end, you could ask why the Aussie is still elevated. With chinese manufacturing falling greatly and europe falling back into recession, demand for the Aussie as far as commodities is concerned is dropping. Another reason why the aussie is strong is because of the relatively high interest rates Australia offers, however once the USA and the UK lifts rates, the rate differential will start to drop and the market will factor this in soon. Ultimately the Australian economy is not so strong as it once was and despite Capex data showing a small tick upwards, the overriding trend of economic health is down. A high Australian dollar, which it is historically, is certainly weighing down on other Australian exports and unless it falls, it will be disastrous for the economy as it tries to move away from mining income, already unemployment in Australia is higher than the USA. The reserve bank of Australia has made it clear that the Aussie should come down "eventually" and that the fundamentals don't support its strength. The governor, Glenn Stevens has made this clear by consistently talking it down. If this fails to work, which it is has so far, we might consider RBA efforts to push the price down manually. Even if the RBA decides not to to cut rates, as USA lifts rates, we should see a massive switch of funds across the pacific.

Quotes and forecasts:

Societe Generale
"The euro's fall may be a bit at odds with other asset market moves in the last couple of days, but the bounce in NZD and especially in AUD, is an opportunity. The longer-term outlook remains for monetary policy divergence to give the RBA the currency weakness it craves, and so we repeat our view that shorts near AUD/USD 0.94 represent very attractive trades from a medium-term point of view."

National Australia Bank
The dollar's rise following the data release is likely to be a short spike rather than a trigger for any sustainable change to the Australian currency, National Australia Bank senior foreign exchange strategist Emma Lawson said. "The headline number was good so the currency reacted accordingly. But it's not enough to cause (a sustained) upside or downside movement, it's not that influential," she said.NAB's forecast remained at US85¢ by the end of 2014, despite the capital expenditure data beating market expectations.

HSBC
HSBC Bank Australia chief economist Paul Bloxham said it was "somewhat surprising" the Australian dollar strengthened given the falling commodity prices, narrowing interest differentials and data indicating below-trend economic growth. "The currency clearly bounced on the capex data because headline showed a rise in investment," Mr Bloxham said. "But you dig a little deeper and the capex survey's not all that positive." He said the survey indicated investment was likely to continue to fall.HSBC forecast the Australian dollar to plummet to US86¢ by the end of the year.
LTG Goldrock
Director Andrew Barnett said while the US dollar continues to gain traction on the back of positive economic data, the local currency has been stuck in a three cent range for five months. "The one currency we are continuing to see appreciate is the US dollar, we saw some more positive economic data out of the US overnight with a strong GDP number," Mr Barnett said.

Glenn Stevens “It would remain my view that the risk that it [AUD] goes down materially at some point is being under appreciated.” “I cannot see the logic for it not being a bit lower at some point than it is today.” http://www.bloomberg.com/news/2014-08-27/aussie-defiance-of-iron-ore-erodes-on-fed-bets-chart-of-the-day.html

So all in all, selling upwards seems like a prudent thing to do when all the signals point that it should go down, if not by the end of September, then a good chance by December.
A quick analysis of Crude Oil
Posted by admin | Uncategorized | 0
crudeoil

By looking at the CCI and Stochastic RSI and combining them with cyclical up and down movements of the price, we might start to imagine the price falling back to about $100 a barrel. In order for this to happen, we would need to see a slight improvement in the geopolitical arena of Libya and Ukraine. Perhaps the market is building this oil tension into the price, and it could get a lot worse, but we saw a severe decline in oil stocks which really lifted the price. This decline may be due to seasonal higher demand and global economies generally recovering. In any case a sell stop at 103.80 might be an idea.

More on top of this, as the EUR falls, we should see the price of commodities which are priced in USD to fall along with it. Ie as Oil becomes more expensive, less is bought. There is a well established correlation coefficient of about 0.50 - 0.80 so if the euro continues to fall as Draghi introduces QE, we may see further downward pressure on crude oil.

According to the US Energy Information Agency, it estimates U.S. total crude oil production averaged 8.3 million barrels/day (bbl/d) in April 2014, which would be the highest monthly average production since March 1988. U.S. total crude oil production, which averaged 7.4 million bbl/d in 2013, is expected to increase to 8.5 million bbl/d in 2014 and 9.2 million bbl/d in 2015. The 2015 forecast represents the highest annual average level of production since 1972.

A Flightless Bird Took Off This Year But Will It Stay Airborne?
Posted by admin | Uncategorized | 0
Summary

  • Why all the interest in the kiwi?

  • The current drivers and downside risks of the NZD.

  • The historically overvalued kiwi sets the stage for a fall below the support of NZDUSD 0.85.


  The "kiwi."

The New Zealand dollar is often ranked as being one of the most traded currencies which is somewhat counterintuitive as it represents the 53rd largest economy. The national currency was de-pegged from the US dollar in 1985 and since then it has fluctuated greatly though often trading in a manner highly correlated to the Australian dollar. The government of New Zealand and the Reserve Bank has historically been hesitant to manipulate the price with the last major action taking place in 2007 with the reserve bank selling NZD in order to drive down its value.

The kiwi has seen lows of less than 0.40 USDNZD in 2001 and 0.50 in 2009 and seen highs of 0.88 in 2011 and in recent months we are witnessing a renewed climb to parity with the price reaching 0.87 this month. Analysts often explain the current strength of the kiwi is being derived the growth of the Chinese economy and strong demand for dairy products. New Zealand is also the first economy to raise interest after the GFC, with the last raise in April to 3%; one of the highest in the western world and acts as a magnet for carry trade funds. There has been recent calls by certain sectors and political parties to intervene in the high value of the kiwi, but as of yet no action has been taken and exporting industries have sustained the rise in their stride. A move to parity or perhaps over 90c would certainly, nonetheless be highly worrisome for the RBNZ and put a brake on monetary contraction.

The idea of a merger or union of the Australian dollar with the kiwi dollar, both highly correlated currencies with shared drivers has long been discussed in order to remove conversion costs, build economic strength and financial power. It would seem New Zealanders are most in favour of this union (as Australia is its main trading partner) and as the currencies move towards parity, this option may garner further consideration. A common currency would also create a trading bloc that would increase the wealth of small pacific Island states that would most likely also adopt the new dollar. At the moment, this idea may not be so palatable after the euro experience, however US economics professor Barry Eichgreen of the University of California says it is worth examining and so it should be more seriously debated in the coming years.

Another reason why the New Zealand dollar is one of the most highly traded currencies is because it represents an economy that is the first to trade after the close of the US markets. Due to its geographical timezone, New Zealand markets are the first to digest and react to American events and released data and often global markets will follow its lead. While other markets are closed, the New Zealand dollar will be the only currency trading with any volatility.

Drivers of the kiwi

The New Zealand economy was forecast to outperform its developed market peers at the beginning of the year and indeed it has met that expectation. Strong demand of its exports, such as dairy and wool, rose in China and Australia - its largest trading partners. This lifted the economy despite interest rate hikes reducing investment spending.

Other factors bringing value the kiwi comes from large wave of immigration that has led to a housing and construction boom. This includes the residential investment in re-building Christchurch following the earthquakes of 2010 and 2011 that devastated the region. Tourism is also up with annual growth of 5% and tourism expenditure rising to 9%. Small businesses are considered to be a large driver of economic growth with New Zealand rated as being one of the best places in the world to do business.

Along with the Australian dollar, New Zealand is also an attractive destination for the investment funds of a newly cashed up Chinese middle and upper class who are now able to invest their funds abroad. The relatively high NZ and Aussie interest rates plus the depreciating yuan have caused the Chinese to park their funds in this stable pacific region.

Potential downside forces of the kiwi

    The New Zealand dollar is considered to be overvalued by many analysts. Here are some of the reasons why:
  • The Kiwi is exposed the economic uncertainty of China. A drop in exports will lead to a drop in kiwi demand.

  • High interest rates will reduce investment which in turn offsets the growth of the economy and private consumption.

  • reduction in the prices of dairy and cattle products such as wool and meat.

  • New Zealand sits upon an unstable geological fault line. This fault line is a potential hazard for some of the largest New Zealand residential areas such as Christchurch and its capital Wellington. The country is also vulnerable to droughts and naturally occurring phenomena.

  • The demand for exports might be hampered by the strong New Zealand currency and would in turn widen the current account deficit, despite the best efforts of the Government to reduce it (by reigning in spending).

  • The rise of foreign interest rates may pull funds away however this risk seems to be some time off.

  • A reduction in Asian investment as the Chinese economy slows. We might even see a reversal as Chinese debt rises or growth drops to a point where investors becomes risk averse and want their funds situated closer to home.


A New Zealand dollar outlook

It would appear that the kiwi is trading at historical highs and technical indicators say the currency is overbought over NZDUSD 0.85. Strong resistance lies at 0.87, 0.88 and good support lies at 0.85, 0.80 and 0.77. The moving average is still rising but it's hard to see how there is enough upwards pressure to see the currency reach parity with either the AUD or the USD considering the NZD has probably priced in all favourable conditions. We should enter a period of price stability with movement between 0.87 and 0.80 and this opens up the currency to profitable range trading opportunities. In the near future we should see a retracement to ~0.81 should the currency drop below 0.85. After the recent increases of the interest rate, the reserve bank will probably wait to see its effect on the economy before taking action again. On the other hand, the US continues to contemplate how and when it will raise rates and therefore at the current rate of 0.856, the downside risks are stronger than upwards momentum. We at the Alpha Generator make this New Zealand dollar prediction with a downside bias but a drop below the support of 0.85, would crystallize this opinion.

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