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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

The Australian Economy Is On Shaky Ground But You Wouldn't Know Looking At Domestic Stocks
Posted by admin | Uncategorized | 0
  • Recently released Australian statistics paint a gloomy picture of the economy.

  • There are several very real threats facing the Australian economy.

  • Do Australian equities trade at a level that takes into account these threats.



The latest statistics illustrating the state of the Australian economy are not pretty. The most recent indication that the Australian market is on shaky ground is derived from the New Motor Vehicle Sales data (m/m) that came out today. It showed that the sale of new cars and trucks declined by 1.6%, the third decline in four months. This in itself would be nothing to worry about, but it is considered a leading indication of consumer confidence - consumers are most likely to purchase expensive items if they feel safe in their financial position or if they are confident they will be able to pay off the loan in the coming years. Cars and trucks are an oft-traded expensive goods that can be relied upon for information about where Australians are in the economic cycle. The property market would also give us a good idea of the economic situation, but the Australian property boom that has been fuelled by foreign investment for years has so warped housing prices, that it's a valid argument to state that it trades in a bubble that will shortly burst. The Reserve Bank of Australia has stated on numerous occasions that the property market is a cause for concern and this is the primary reason why they have not lowered the interest rate order to boost an economy tormented by plummeting commodity prices. Remember it was the resources boom that most likely saved Australia from the GFC that afflicted all major economies in 2008/09. With this boom over and Chinese growth and global economic activity slowing, what will save Australia now from any external risk? Could it be hit twice as hard seeing as the country is way past due for a true recession, not experienced since 1990/01 and are the RBA's hands tied in softening the blow due to a potential property bubble, the bursting of which could be far more catastrophic?

Screenshot_34

The ASX200 is currently trading at levels that were considered fair to overly priced in April this year. It extended those gains 4% to 5680 but has since retreated. At that time the Australian bureau of statistics was publishing healthy economic data, but here is a sample of the most important recent results:

11/11/14 - NAB business confidence. Previous 5. Actual 4
10/11/14 - Home Loans. Previous -0.9%. Forecast -0.3%. Actual -0.7%
10/11/14 - Employment Change. Previous -23.7k. Forecast 20.3k. Actual 24.1k
04/11/14 - Trade Balance. Previous -1.01B. Forecast -1.78B. Actual -2.2%
04/11/1 - Retail Sales m/m. Previous 0.1%. Forecast 0.3%. Actual 1.2%
03/11/14 - Building Approvals m/m. Previous 3.4%. Forecast -0.9%. Actual -11.0%
30/10/14 - Import prices q/q. Previous -3%. Forecast 0.3%. Actual -0.8%

These figures have come out in the backdrop of rising unemployment to 6.2% (this rate was last published in Jan 2002), declining immigration and plummeting Iron Ore price, Australia's main export. Equity market investors must be asking themselves if we have recently hit the top and if it is possible to add more value to stocks with these negative statistics in mind. Perhaps a good reason for the propped up index price is due to America's economic recovery. US stocks have surged ahead following years of QE and Australia has no doubt piggy-backed (to some degree) upon the stimulus wave as well. Historically, Australian stocks looked to US equity markets for guidance but we are witnessing a clear divergence in the direction of the two economies and the fair value of Australian market prices do not equal those of its American counterparts. Yet despite its poorer fundamentals, as American stock prices continue to rise with conviction, they continue to pull Australian stocks up along with them. It's only a matter of time before that bond breaks, and once it does, it may stay broken for years to come as is the case with the Nikkei.

It should be stated that even though the US economy's recovery is moving along satisfactorily, a stock market correction is predicted as a real possibility within the next six months as stimulus comes to a close, and an increase in interest rates is factored into the market which is necessary to take some steam out of the hot and overly-valued financial system. Many argue that after years of America's corporate addiction to cheap money (the benefit of which has not filtered down to households) an asset bubble has developed which itself poses a new catastrophic danger. In other words, there are large problems facing the US economy as well. Owing to the high US/Australian equity market correlation, it may be that the upcoming correction will hit Australian equities far harder than those on US exchanges.

One of Australia's largest sources of income is derived from the mining and energy sectors. Coal and particularly crude oil have fallen heavily and although Australia's not a huge producer of oil, its lack of demand driving down the price is indicative of the state of China's manufacturing machine which is starting to decelerate. The construction sector in China is also in trouble with the housing bubble considered a risk to the Australian economy. Glen Stevens of the RBA stated recently in a policy report that "concerns about asset quality in China have been heightened by softening conditions in the residential property market. While China has been able to manage a small number of defaults in trust funds and corporate bonds, a more widespread series of private-sector defaults - potentially associated with a sharp correction in property prices - could be more damaging."

To a large degree, Australia depends on a strong building industry in China for advantageous prices of construction materials (NYSEARCA:TAO). As the amount construction drops off, the prices of the materials that the mining industry in Australia produces falls as well. Lower mining prices and activity means increased unemployment and less taxable income. Additionally, as defaults increase in China, Chinese property investors are forced to sell up foreign asset investments such as those in Australia to pay off debts incurred by rapidly falling Chinese property prices. As thousands of cashed up Chinese property investors have had almost unfettered access to the Australian market for years, their sell-up brings us to the risk of an Australian property bubble popping in the near future.

Australia has the third largest housing price to income ratio in the world. Australian properties have never been so out of reach to households looking to own a home, particularly those looking to buy their first. If they take the plunge, Australians are forced to take out loans that are ever increasingly harder to pay off, they become more sensitive to interest rate rises, but more importantly, due to cashed up foreign investors who are willing to pay the higher prices to diversify and hedge their wealth, the domestic mortgages acquired do not accurately reflect the true price of the property bought. For a home owner, this is not too much of a cause for concern as a 30 year mortgage will paid off at any time during the economic cycle, but for those who purchase an investment property, they will get far less than what they paid should the foreign investors flee the market to pay off their own local debts. Property funds in particular will be in all sorts of trouble, some of which are listed on the ASX 200. Adding to this problem, with domestic interest rates rising following an historically long run of very low rates, as Australians become increasingly unable to make their repayments, they will be forced to sell at huge losses potentially leading to bank repossessions which may in turn lead to large bank losses if it is widespread. This is a gloomy but real scenario that will most certainly lead to a protracted recession.

The ASX200 (BEAR, EWA) is currently only 5% from the last high, but does that truly reflect the true state of the economy and do the fundamentals support the current price level? For the last six years, the Australian economy has been firing all cylinders, but the current data tells us that this is currently not the case. To compound concerns, there are clear and present dangers facing the Australian economy that have clearly not been factored into prices. The Australian equity market may dodge one bullet, but it can't dodge all of them.

Three charts that might convince you to sell indices, specifically those related to the ASX200
Posted by admin | Uncategorized | 0
AXJO I do see in this chart a strong possibility of the price returning to its long term trending support line. The price has bounced off this line several times when causes for a pullback come into play. Market Breadth is extraordinarily large and geo-political worries should be soon taking its toll on global markets. Th stock market may be at the top but $74 per barrel of oil tells me that the fundamentals don’t support the price. At the very least, I’m looking for  a small correction to its long running support line. AXJO This chart is a little confusing but I’m attempting to show two sets of evidence that build the case for a drop in the ASX200 of 160 points to the support of ~5368 as a minimum move down. The first set of information includes the blue arrows and the black resistance line at 58 points above the zero line on the MACD signal chart and the green text boxes. We can see that each time the blue MACD MA hits the resistance line, reaches a peak and starts to drop, it was followed by a 160 point drop  as a minimum. You can’t see it correctly, and in this chart, the price feed is a little delayed, but just in the last few days, the blue MACD line has indeed peaked and has just started to roll over. The second set of signals is represents my natural human instinct to determine patterns. This short signal is represented by the yellow ellipses and the blue A letters. What I’m seeing is a repetition of the price movement that occurred this time last year. Both yellow ellipses demonstrate similar price and MACD movements. Following the price movement in the yellow ellipse in Oct 2013, the price dropped by almost 300 points to the previous low (after immediately and quickly rising), destroying all the short position taken up by speculators . The question begs, will the same type of movement happen again and will the price drop to the previous low after a rapid price increase? The MA movement in the MACD chart is repeating itself as evidenced by the letter A. The Australian economy is not firing all cylinders and there is a lot of talk about an Australian recession in 2015. There are a number of reasons for this which I won’t go into now including Australia’s main export Iron ore selling very cheaply as China’s property market faces serious challenges. However, as we can see, the ASX is very close to record highs. This does not make any sense. The ASX200 highs are probably following the lead of the US markets, however it does not represent the the fundamentals of the Australian market. With the Australian dollar at historically high levels, I predict a correction in the ASX. NAS100 1811 As the Nasdaq repeatedly hits the upper resistance line, it seems to be squeezed between that resistance and the upward trending support. This support line is critical to US stocks because I believe it is preventing the other indices from falling much further. The price action of other indices looks ripe for a drop of about 4% but this support line seems to be restraining it. One the Nasdaq price break downs from this support, I believe we could see a much lower drop either today or tomorrow. I do think though that the NASDAQ can go higher before the introduction of higher rates.
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.

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