On the weekly chart below it's not looking as bullish for a reversal just yet, as there are few things still required to confirm a reversal.

The positives:

*The current price on the weekly chart of $5.03 is above the 10 week moving average of $5.00.
*In addition the previous week strong up week was on above average volume which is a bullish signal.

The Negatives:

*The price action on the weekly chart is currently below the resistance level of $5.10. (See chart)
*On a weekly basis the chart is still within a down trend, with a close above $ 5.60 - $5.70 required for confirmation.
*The 10 week moving average is below the 50 week average showing bearish cross.
*Volume on the week just completed was below the average showing that there was a lack of conviction with the move higher.

Overall we would need to see on the weekly chart the price move above $5.70 level with above average volume to confirm that the current reversal taking place is valid.

Reversal Of Downtrend - Daily Chart

The daily chart is showing good signs of a reversal in trend.

The first important thing to note is that the downtrend that started back in July this year has ended, as the current price is clearly above the downtrend line. (See circle in chart below)

The closing price on Friday of $5.03 is now above the previous resistance level, which is now the new support of $4.94. Its important to stay above this level to confirm the reversal.

Lastly the price is above the 10 and the 50 day moving average which is also a bullish sign.

Caution Ahead - Where Is The Volume?

One of the most important things in trading after the price action is volume. Whenever you are trading and you are looking to go long (price to go higher) its essential that you have above average volume for confirmation to ensure the market is behind you with your trade. You want to be with the herd to catch the biggest moves not against it.

If you take a look at the chart, I have circled the volume below. With the last 5 days trading volume all below the daily average volume. This is a bearish signal.

Because there is a lack of conviction with buyers on the daily chart, I would wait for the chart to move above the next level of resistance at $5.22 - 25 with an accompanying above average volume to confirm the reversal has taken place.

There is a high possibility that Telstra could fall back within the down trend and close below support of $4.94 in the short term due to a lack of volume with the current price action.

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The Perfect Storm Set To Pop Aussie Apartment Bubble Bringing Down The Economy With It

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The Aussie apartment boom that has turned into an epic bubble with record sky high prices, is showing all the signs for the perfect storm which will ultimately pop the apartment boom bubble. With the popping of the apartment boom, it will simultaneously bring down the Australian economy, as the apartment market is set to have a sizeable correction in 2017 and 2018.

A short Look At Australia's Real Estate Market.

Australian real estate prices have been going up for over 25 years with hardly a pause in between since the late 80's. The last time real estate prices fell considerably was when Australia last had an official economic recession back in 1987, when interest rates skyrocketed to around 17-18%.

The chart below show the price growth of real estate, rents and CPI since mid 1987. Initially the price growth of Australia's real estate market climbed steadily taking 11 years to double in 1988. From there the price growth continued to accelerate with the next 100% increase in price taking 4.5 years to reach.

An interesting observation on the chart below is that real estate prices have risen by over 700% since 1987, yet rents have risen  just under 300% over the same period. This chart clearly shows that the majority of the price growth was not supported by a fundamental increase in rents to support the higher prices, but rather an massive surge in mortgage debt over the same period drove prices higher.

Rising Credit Leads To Booms & Contractions In Credit Lead to Busts

Professor Steve Keen in the interview shown below highlights his own reasons why he see's a recession coming in 2017 for Australia.

Steve highlights a number of reasons for his prediction, including a deteriorating terms of trade, the ending of the mining investment boom, the Government's pursuit to cut spending and a reduction in foreign buyers for real estate among others. However, the most important reason is a deceleration of credit / mortgage debt. Based on Steve's research and economic models the deceleration of mortgage debt growth is the leading cause for all economic downturns globally including the US, Japan and Europe economic recessions, with a correlation close to -1. What all his research showed is with the deceleration of mortgage debt growth, lead to a collapse in real estate prices which then lead to an economic recession in those countries.

Due to this research, Steve believes Australia will react the same way as other countries based on slowing growth in mortgage debt. Especially, as the conditions have already begun to slow based on the bank's tightening their standards overall. However, most of the lending restrictions imposed from the banks are for off the plan apartments and existing apartments within most major cities around Australia.

Given Australia was recently ranked number 4 in the world in the UBS global real estate bubble index, see: Australia's debt addiction fuels record real estate bubble, its easy to see that prices could fall over 20% as lending conditions continue to tighten and their effects take hold.

Why Are Banks Tightening Lending Conditions With Record Real Estate Prices?

The simple reason is that the banks do not want to be caught in a credit crunch like they faced back in 2008 and 2009 where they had to have the RBA and the US FED provide considerable financial assistance to keep them afloat.

Right now the banks can see what everyone else can see if you look at all the data publicly available. Australia will face a major oversupply of apartment dwellings over the next 1 - 3 years from a major ramp up of approvals of apartments. The growth of approvals over the last 7 years which you can see in the chart below, is leading to a big jump in the construction of apartments with a number of them being competed in the next 18 months.

Due to the rapid increase in approvals there has been a massive spike of cranes currently being deployed in Australia, to handle the apartment boom that is currently taking place. As you can see below in the chart Sydney and Melbourne are leading the way in Australia, dwarfing most major cities in the US including New York and LA.

With all the current construction for apartments taking place from the buildup of approvals, especially in the last 3 years, Australia is facing a glut of new apartments that are about to be completed in 2017 and 2018.

Knowing the upcoming glut of apartment completions is about to come available on the market soon, the banks have taken action to protect their capital by providing most of their tightening around new and existing apartments within the CBD's of Sydney, Melbourne and Brisbane where most of the construction has taken place.

Highest Housing Completions = Biggest Housing Price Fall

The chart below shows a comparison of house prices in Australia, UK, Spain, US and Ireland with an accompanying housing completions chart.

The most obvious data from the chart is both Ireland and Spain had the biggest fall in prices during the GFC in 2008 relative to the other countries shown. Those 2 countries also had the largest ramp up of new housing completed from 2000 - 2007.

Surging Bond Yields Leads To Higher Mortgage Rates In Australia.

Back in October US Government 10 yr bond yields were sitting at around 1.55%. Fast forward one month and rates are now sitting at around 2.3%.  A 0.8% increase from the October levels (see chart below). The reason why this is a big deal, is that the US Government bond yields are what are utilized to benchmark most of the different types of retail and commercial loans.

In Australia the banks also rely heavily on overseas markets and especially the US markets to provide the necessary funding to support their loan book. So as bond yields have skyrocketed in such a short period in the US, it has already led to the banks in Australia lifting rates by between 0.20% - 0.60% on their fixed loans as their funding costs have jumped dramatically.

With mortgage rates rising and lending conditions being tightened its becoming more difficult for developers to sell their off the plan apartments as investors find it more difficult to access bank lending to finance their purchases, resulting in a slump in demand for off the plan apartments.

Melbourne Developer Offers $21,000 To Encourage Buyers

In an attempt to lure buyers to a new off the plan development in Melbourne, a large well known developer is now offering $21,000 to investors in an attempt to sell their $420,000 1 br apartments in Southbank Melbourne. The idea is to match the investor or first time buyer's 5% deposit of $21,000 to  least assist them in meeting a 10% deposit.

The problem that this Melbourne developer and other developers will find, is even with this huge financial incentive, many of the banks in Australia have lifted their minimum deposit requirements for off the plan apartments in major cities to between 15% - 25% deposit.

Apartment Bubble Bursting Leading To Australian Recession

Similar to Professor Steve Keen's prediction that a recession is coming to Australia in 2017 or early 2018, I also believe that the perfect storm of conditions are developing that will soon pop the apartment bubble that has been taking place in Australia.

When the correction in apartment prices takes hold, it will have a domino effect on the Australian economy, leading to a contraction in economic activity in Australia. The reason for this is because the real estate industry and related industries now has the largest contribution to GDP at around 28%. (See chart below)

With record amount of apartment construction taking place over the last few years, fueling a considerable amount of GDP growth, I believe the slowing of the construction industry will start to subtract heavily on GDP growth in 2017 and 2018 leading to Australia's first recession in over 25 years.

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On Friday the Australian big banks which make up the majority of the Financials Sector finally were about to break out of its year long resistance, as it finished just above its 6,820 resistance at 6,823. The strong performance from the banks on Friday also lifted the Aussie XJO 200 index higher to 5,359.

Since the US election results were released some 2 weeks, the US markets have been on a strong V like sharp recovery which had lifted most world markets with it. This included the Australian stock index XJO 200 which up till recently had been struggling. The bullish performance of the US markets had also been the catalyst for the  reversal in banking stocks higher in Australia. Which in turn significantly helped the XJO index with its recovery.

The Key Questions To Answer Going Forward

Is the Financial sector breakout a false breakout, or will the financials sector hold its bullish momentum going forward?

Can the financials continue to lift the XJO 200 higher out of its downtrend and back into an uptrend?

Lastly will the strong run from the US markets continue and support the XJO 200 index higher?

Can The Financial Breakout Be Trusted?

Since the breakout on Friday for the Financials sector excl A- REIt's was not exactly an overwhelming strong breakout, as it closed 3 points above its year long resistance. The most sensible idea would be to wait for more information from the market.

Overall the technical's looks good for the sector, however it's usually best to wait to see if the sector moves higher and can be supported by the strong momentum. If the sector can than retrace and rests on its old resistance level of 6,820 to form a new support level this would confirm the breakout.

If the sector moves higher from here this week and later reverses to close considerably below the 6,820 level, to say the current 6,580 support level this would confirm it was a false breakout. Considering this is the seventh attempt this year to break out higher there is a higher probability that it will not be able to maintain the breakout.

Note: Why The Financials?

For investors and or traders who are not aware of the significance of the financials sector in driving the overall performance of the XJO 200, I wanted to quickly highlight that financials excl A REIT's sector has the largest weighting on the XJO 200 index. With 4 out the top 5 largest market cap stocks within the XJO 200 belonging to this sector.

Big Picture Review - XJO 200

The XJO index has had a mediocre calendar year so far, however before having a closer look at what's been happening I wanted to quickly review the long term chart for perspective.

The first thing to note is that even though the index is currently been trending lower, the index has been able to hold its 5 year long term uptrend. This is despite being within a mini downtrend inside its longer setup uptrend.

You can see on the chart below that on a monthly basis it touched its trend line 4 times over the last 5 years and respected the trend before heading higher each time.

Currently in the month of November you can see that the index had fallen considerably touching a low of 5,052 which was the day of the US election results. However just like the US markets the XJO was able to rally stronger to close on Friday at 5,359 and is currently up for the month.

Since it respected its uptrend and has completed recovered from its earlier monthly losses it's behaving very bullish on a monthly chart and based on previous history since 2011 it would indicate that the index will be heading higher over the coming months.

To confirm the bullish action and a continuation of its uptrend  on a monthly chart, we would need to see a monthly close above its down trend as indicated in the chart below with the rectangle box area. Otherwise its possible we could see a reversal of its uptrend if it its unable to close above the down trend and it respects the downtrend line.

Within a weekly chart (See chart below) the index does not look strong when compared to the strong uptrend performance over the last 5 years.

After reaching multi year highs in March 2015 the index has been steadily heading lower and has now formed a down trend that it has failed to close above on a weekly chart.

I have circled on the chart action the 2 times in the last 18 months where it has failed its uptrend. Once in August last year and again this year in late October. The first time it happened in August you can see the index fell sharply for several months.

Since the momentum on a weekly chart is negative at -156 and the index is still within its downtrend, it's likely we could see the index move higher in the very short term to the downtrend line (shown on the chart) before pulling back.

On the chart I drawn the 2 possible scenarios I see that could happen over the coming weeks.

1. We see the index move higher, than have a slight pullback before continuing higher and closing above its downtrend. (The Financials sector would have to hold its breakout to support the XJO 200)

2. The index moves higher, touches the downtrend line and reverses back down to 5,030 support level.

Daily Chart - Downtrend With Bullish Indicators

Whilst the daily chart is currently in a downtrend and has broken its long term uptrend, the chart has a number of bullish indicators present that could see the index reverse its downtrend.

* The momentum indicator has recently turned positive and is now at 130 after its strong rally from the lows reached on Election day.

* The current price of 5,359 reached on Friday is above the 10, 50 & 200 day moving average.

* After breaking support of 5,195 on the 9th of November the XJO 200 index quickly reversed back above its previous support level the next day, indicating a false breakout of support.

The Key Levels To Watch

For the daily chart of the XJO 200 to continues its strong move higher and reverse its current downtrend, we would need to see a confirmed close above its 5,390 resistance level. If it can close above that level and its downtrend line marked on the chart, we could see the index continue back on its previous long term uptrend.

Failure to close above 5,390 resistance and its downtrend line would result in the index most likely falling back to the 5,195 support level.

To finish the review of XJO 200, I wanted to take a look at the price action of the US S&P 500 index since the US markets usually moves the Australian index with it.

S&P 500 Stuck At Resistance

On Friday the S&P 500 index briefly touched a daily high of 2,189.89 which was just slightly below its current resistance level of 2,190.

You can see on the chart below that the index had reached the resistance 2 prior times already back in August this year before fading lower.

Considering the US index has had a strong rally higher since the Election results came out 2 weeks ago, the likely outcome in the short term is that the US index will pull back briefly over the coming days. Its even possible that after such a string of higher days over such a short period that the index could fall back to the 2,155 support level, before considering another attempt to close at an all time high.

If the S&P 500 index is unable to climb higher in the very short term, it would have a negative impact on the Australian XJO 200 index in its attempt to continue higher. 

So to sum up the review there are another factors in play that could effect the XJO 200 direction. The biggest factor in the short term being the strength of the US markets, which directly impact the direction of the Australian financials sector which considerably impacts the bigger XJO 200 index overall.

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The US election results overnight stunned the mainstream media, wall street, world markets and millions of people around the globe. After initially falling sharply on the news, the markets eventually recovered and moved to finish higher as the mood turned from fear to bullishness.

Once the markets saw that Donald Trump moved to the lead early in the election results, the markets around the globe began to panic as the DOW futures was down over 800 points, the S&P 500 futures was down 5%, Gold jumped up over $50 and currencies moved violently as the odds turned to Trump becoming the new President.

Markets 180 Degree Reversal.

Once the S&P 500 futures fell by 5% the index automatically went to limit down, and temporarily stopped trading. Once trading resumed the S&P 500 futures began to slowly climb as the limit down measures meant the index could no longer fall more than the 5% level for the trading day.

Once the S&P 500 began to climb with the DOW, the massive fear that was gripping the markets slowly moved to cautioned optimism as the markets slowly crawled back the losses. By the time Trump was giving his President elect speech early in the morning US time, the DOW had recovered to be down 300 points. By the end of the trading day in the US with the results in for the new President the equity markets swung to a strong gain for the day.

S&P 500

The chart below shows that initially when the markets opened that the S&P 500 fell to the support level of 2125 before slowly climbing during the day for a big swing towards an up day closing at 2163.

Since momentum is now back into the positive and the S&P 500 closed above the 2157 resistance level the next target is 2190 which is back to it's all time highs for the broad US equity index.

US 10 Yr Govt Bond

One of the interesting swings in the markets overnight was in the bond markets. During the initial fear stages of the market the US 10 yr Govt bond yields fell all the way down to 1.70 level as investors moved into bonds bidding up bonds as the selling accelerated out of stock futures.

Like the equities market the bond market began to turn around and swing from a 1.70% yield on the 10 year to as high as 2.09% jumping by 20 basis points by the end of trade. Currently the 10 yr is sitting at 2.005 level.

The previous resistance level which is now support is around the 1.97/98 level, with the next resistance level for the US 10 yr Govt bond at 2.13%.

Lastly you can see that since June of this year that bond yields have been climbing since reaching the low 1.30's level and have broken its downtrend on a daily chart.

Crude Oil

Crude oil had a crazy day after having been down considerably to as low as $43 and change which was also a key support level, to a swing to the green rising to 45.25. Currently in the next day of trading crude is sitting at just over $45.

Crude is currently in a middle ground with no clear direction at the moment. Having said that crude recently broke its long term uptrend which is displayed on the chart by the blue line which is a bearish signal for crude moving forward.

The key areas to look out for in the medium term are $46.25 to the high side and $43.05 on the low side. We would need to see a break out in either direction to determine its next move.

USD/JPY

Currencies around the globe experienced violent moves overnight as the market tried to digest the news that many did not expect to occur within the US election.

The USD/JPY pair fell sharply initially to a low of 101.18, before climbing sharply during yesterday's trade to also climb into the green reaching a high 105.88.

The technical's for this pair has recently turned bullish, after reversing it's long term down trend and clearing the previous resistance level now turned support of 103.88.

Momentum has now moved positive and with the strong reversal intra day the next resistance level for the pair is 106.83. Currently it's sitting at 105.57 at the time of writing this.

EUR/USD

The EUR/USD pair had a similar outcome to the USD/JPY but in the opposite direction. After climbing strongly when news first came out that Trump was in the lead and looking likely to win the election. The EUR/USD pair jumped as high as the 1.13 level which also market the high end of the down trend level for this pair (see chart for trend line).

The currency also reversed course during the day and swung from a strong gain for the day giving up all the gains and falling for the day to reach a low of 1.090 level.

Momentum is only just positive and looks likely to swing back to the negative. The likely next stop for the EUR/USD is down to the next support level of 1.088 as shown in the chart below.

Gold

One thing that the gold bugs had expected was that if Trump would win that Gold would jumped sharply higher.

Unfortunately for Gold investors their prediction did not remain true as the trading day continued. Gold initially jumped spectacularly higher to a high of $1,336 for the day, before giving up practically all the gains to finish around $1,277 level.

Currently in the next day of trading Gold is slightly higher sitting at $1,286 at the time of writing.

Looking ahead for Gold it has 2 key levels to clear before it could regain it's uptrend. Its first resistance level is around the $1,305 - 08 level which it breached intra day but could not close above that level. If it clears this level the next level to close above is its downtrend line shown in the chart. During the highs reached Gold hit its downtrend at around $1,336.

XJO - Aussie Stock Market

Australia was one of the stock markets that was trading as the results were unfolding for the election yesterday. The Aussie market index the XJO was initially up in the morning when the market believed Clinton was winning. It quickly swung to the downside sharply following the US futures market, hitting a low of 5,052 which was around it's strong support level reached back in late June, before recovering considerably by the end of trade yesterday.

Today the XJO has risen sharply on the back of the swing in the US markets to around 5,300 level at the time of writing.

Since the XJO is currently sitting comfortably above its previous support level of 5,190, its next target is around 5,390 - 5395.

Keep in mind though that Momentum is still well in the negative at -142 as well as the current price is sitting below its 50 day moving average. The XJO would need to see buying to continue in the US markets to help lift the XJO out of its current slump.

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The Australian Banking sector is approaching a key resistance level for the 5th time and a break out above this congested area of resistance is key for the sector. We take a closer look at the sector and the key levels to watch out for confirmation of a breakout to higher levels.

The actual name of the stocks that make up the banking sector is called the ASX 200 Financial index excluding REIT's, which means the sector is predominately made up of the large and small banks and other financial intermediaries. If you would like to have a look at my review of the REIT sector last month you can by clicking REIT sector review. I excluded the REIT sector as the REIT sector continues to struggle from rising bond yields in October and the poor performance would skew the actual performance of the banks within the financials sector.

The Financial sector has been riding on a very long term uptrend that began after the considerable fall in 2008. Since making those lows the financials have been steadily climbing higher, on the back of rising profits from Australia's insatiable appetite for Real Estate. Thankfully for the bank's Australian's continue to increase their debt levels by taking out larger mortgages to participate in the Australian market that has been recently been described a bubble market. For more information on the Australian real estate bubble you can take a look by clicking: Debt Fueled Real Estate Bubble

ASX 200 Financials Ex REIT's Sector Review

After making all time record highs in March 2015 of 8419, the sector retreated back to the long term uptrend level over the next 18 months to around the 6060 level as it formed a down trend within its longer term uptrend. (See chart below)

Since bouncing off its uptrend line in February and March this year, the sector has been moving sideways in a tight range. However with only 5 trading days left in the month of October, the Financials index looks to have broken its downtrend pattern and has continued on its longer term trend (Labelled on the chart). In addition on a monthly basis the sector looks set to break out of its 6760 resistance level as it closed on Monday 24th October at 6750 only 10 points away from resistance.

On the weekly chart below the Financials ex REIT sector is slightly different. From the chart below you can see the resistance level is a little higher than the monthly chart at 6785. You can see that several times this year the sector attempted to close above the 6785 level and failed. However you will also notice that each time it failed to close higher, the retreat lower was shallower as it formed higher lows (shown with the blue up trending line), which is a bullish signal.

I have also circled the area on a weekly chart where it broke its downtrend pattern in July and August this year, which confirmed the end of the 18 month down trend within its large uptrend cycle.

If the sector can close above its 6785 level the next level of resistance is 7070, as shown in the chart. You will also notice for the sector to reach the previous record highs set in 2015, the sector has a number of resistance levels to clear along the way.

On a daily chart taking a much closer look at the sector, you will notice the resistance level is set a little higher again at 6815 compared to the monthly and weekly charts. I have marked with circle each attempt the sector made to close above this key area of 6815.

Considering the financials ex REIT sector has failed the close higher above 6815 level on 4 attempts, this resistance level is a very critical area for the sector to break in order to move to higher levels.

On a daily chart there are a number of technical indicators that provide a bullish case for breaking its resistance level of 6815 including but not limited to:

1. The chart has been forming higher lows indicated by the blue rising sloping line.
2. The closing price on the 24th October is above the 10 and 50 day moving average.
3. The sector has broken out of its down trend on a weekly and monthly basis.
4. The closing prices in 2016 has respected the longer term uptrend line.

The Market To Confirm If The Real Estate Bubble Will Continue

Since the Financials sector comprising mostly of the banks, if the market confirms a close above the key resistance levels mentioned above, this would indicate that the market believes the Australian Real Estate Bubble will continue in the medium term.

Alternatively failure to close above resistance, and break below its long term uptrend would indicate that the market believe both the bubble is coming to an end and that real estate prices are set to fall in Australia.

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Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

The world has changed a great deal in the last 85 years in terms of how the markets and the economy functions as well as how we see them operating. Slowly over time we have added and implemented more and more policies, regulations, controls, mechanisms and various forms of stimulus in an attempt to smooth out business cycles booms and busts. Central Banks (CB's) and Governments have tried very hard to shorten the busts / recession cycle by lowering interest rates and extend the boom cycles in each and every business cycle over the last 85 years.

Now we fast forward to 2016 and the chief aim is to never experience a bust / recession / depression or deflation ever again. Central Banks (CB's) have taught us that they are all bad things and that we must avoid them at all costs.

These CB's have tried multiple policies and even some new experiments like negative interest rates in attempt to keep the global economy from experiencing a slow down or any amount of deflation. How bad is it really if the price of everyday items like food, rent and fuel becomes 1 or 2% cheaper each year. For the average income earner around the world their money will be allowed to go further if prices fall.

The more we have tried to control every aspect of the market, capitalism and the economy, the harder its becoming to not lose total control of these very things. However I believe we are already in the process of losing control of one of the most important things, the real economy. Presently all the Central Banks have done an excellent job at keeping the Financial assets Ie Stocks and Bonds markets up at or near record highs , while the actual economy has been unable to improve in real inflation adjusted terms over the last 10 years.

Real Assets At All Time Lows

If we take a look at the chart below, it illustrates perfectly the complete distortion of over 85+ years of controlling mechanisms, policies and Central Bank experiments have done to the relative value of real assets compared to financial assets.

This chart goes all the way back to 1925 and currently we are at an all time low, for real assets (Houses, commodities, fine art, jewellery etc) relative to financial assets of stocks and bonds. All the stimulus and attempts at controlling the markets and economy have only influenced the price of financial assets. Financial assets are more easily influenced and controlled through electronic exchanges, rather than real tangible assets which are much harder to manipulate on a global scale.

In the video below, Ray Dalio and company deliver a frank assessment on how we have reached the physically limits of the system. As we have artificially pushed markets and demand higher through debt accumulation, lowering interest rates to zero and by ballooning the derivatives market.

Increasing Volatility And Valuation Divergence

The chart below provides a good understanding on the ever increasing huge swings in volatility the financial markets have experienced. Central Banks began to introduce and try new stimulus and policy ideas in the early 2000's to reduce the busts / recessionary periods, causing large swings in the prices of the financial market as well as the valuations.

The most recent round of stimulus that began in 2009 with Zero Interest Rate Policy (ZIRP), followed by QE 1, 2, 3 and negative interest rates have stretched out the valuation of the S&P 500 relative to US productivity. Up to 1995 / 96 US productivity moved in sync with the S&P 500 stock market. This is clearly no longer the case as the chart indicates a strong divergence in valuation.

This week we received the latest monthly industrial production number in the US and showed that the year on year figure remains negative.

Since mid 2014 you will notice that industrial production data used to coincide with the value of the S&P 500 index very well. Now industrial production has been falling for 2 years and the stock market is near nominal all time record highs.

One of the policies that the Central Banks have utilized to try and control the economy, markets and financial assets values is to physically adjust interest rates up and down. Since the 1980's when Paul Volcker raised interest rate to around 18% to combat high inflation, we have been steadily lowering them all the way to zero.

Why Lower Interest Rates No Longer Work?

Presently the federal funds rate is at 0.25% as you can see from the chart, however lower interest rates are no longer having the desired effects to stimulate the real economy anymore. One of the reasons for this is the fact we have reached the limits of our debt bubble cycle. We can no longer leverage ourselves any higher despite having interest rates at close to zero .

Leveraging Corporate America

One of the many side effects of lowering the federal funds rate to close to zero, has been the leveraging of US companies to levels higher than the 2007 and 2008 peak before the GFC crisis. Debt to equity is approaching 60% for non-financial companies, as the incentive to load up on debt has never been so high. But is it really helping corporate America?

What Is The Debt Being Utilized For?

The accumulation of more debt relative to assets would be ideal in the short term if companies were utilizing the debt to fund new innovation, capital expenditure and additional capacity for future growth.

The reality is that a large majority of the debt accumulation has been utilized to fund buybacks of company stocks to artificially boost earnings per share (EPS) which in turn helps stock prices rise despite the company profit not actually growing from this strategy.

The chart below shows that share buybacks have more than doubled since 2012 to $161 Billion in the 1st quarter of 2016, as more companies engaged in artificial growth strategies rather than invest in their own business models.

IBM a large technology company that has been an consistent innovator issuing several thousand new patents each year. However even though IBM still continues to issue several thousand patents, the company has been steadily increasing its debt levels (See chart below) to allow it to participate in stock buybacks.

IBM Increasing Debt & No Growth

These higher debt levels has allowed IBM to engaged in stock buybacks with the additional funds at their disposal. Unfortunately for IBM the stock buybacks have not helped the actual company as  it has struggled to grow over the last few years.

The chart below is a perfect example how a large company has tried to control its EPS through artificial boosting its profits with stock purchases funded through debt. However the actual result is that IBM's revenue (which can't be artificially adjusted through stock buybacks) has been falling since 2012 as the company continues to struggle to grow its top line and bottom line numbers.

Netflix, which is relatively young technology company that provide online streaming of TV content, is a company that has been investing large amounts of money into the companyto deliver new and original TV content, as it differentiates itself and reduces its reliance on licensing content from other media companies.

On the 18th October Netflix announced its latest quarterly result, which was above estimates for EPS and subscriber growth. However the interesting thing that investors didn't seem care about is that Netflix free cash flow is going the wrong way and accelerating. It burned through $506 million in a single quarter and just over $1 billion over 3 quarters. (See chart below) The stock ended up jumping around 19% after reporting its results.

Because of the huge drain of cash despite reporting a profit, Netflix did mention it will be tapping the markets for an increase in debt soon. Because interest rates are so low the market does not care that Netflix is essentially, borrowing more money to make new TV shows to attract more members. The current business model is simply not sustainable, especially when the company spends $142 to add one new subscriber.

If Interest rates were set by the market and were not manipulated by Central Banks the actual interest rate would be significantly higher to encourage savers to part with the capital. In this scenario Netflix business model would not survive in its current form.

The last chart summaries very simply, how "we have lost control of the real economy by trying to control everything". Global GDP estimates continues to decline as global stocks continue to increase, as Central Bank balance sheets fund global stocks higher.

Lastly this MUST WATCH video Rick Santelli makes a simple request to Central Banks.

Sources:

Forbes.com
Fred.stlouisfed.org
Zerohedge.com
Wsj.com

Last week I wrote about the huge trend that has been developing over the last 5 years, with investors leaving active funds and moving their money to passive funds in search for lower fees and better returns.

If you missed that article and wanted to see if the active funds industry has a future, you can view it by clicking on: Is the active money management business becoming extinct?

Today we take look at two of the larger listed active money management companies in Australia to see how they are trending against the growing competition of passive funds.

Stocks in Review

Perpetual Limited (PPT) VS Platinum Asset Management (PTM)

The first stock we will be looking at is Perpetual (PPT) which is valued around AUD $2.19 Billion. The chart below is a monthly chart, and you can quickly see that PPT has had a great run and is in a strong uptrend.

From the lows of around $19.00 a share set in late November 2011, to the highs of $58.48 set in mid April 2015, the shareholder of PPT have experienced superior returns over the last 5 years.

After reaching the highs in April last year, PPT experienced a pullback  in price falling back to just under $40.00 a share, where it touched that level a number of times. (Shown below as support level $39.75). Even though it experienced a pullback in price it was able to stay within its uptrend on a monthly basis.

In July this year PPT broke out (shown by the black circle below) and recently hit its resistance level of $49.50 and leveled off to close the month of September at $46.70.

Provided PPT can close above the $49.50 level on a monthly basis the next level of resistance is around $66.00 a share or $16.50 a share higher than its next resistance level.

Zooming in on a daily chart of PPT you can see below, that the stock is set to break out of the consolidation pattern that has emerged over the last few weeks. I have placed two rectangle boxes to highlight the possible outcomes PPT could go over the next few trading days.

Since PPT is in an uptrend on a monthly chart and daily chart, the likely outcome is that PPT will move to the upside in the near term, where the resistance level is also $49.50 a share. The same resistance level as the monthly chart. The likely of PPT heading for support level of $44.50 shown below is quite low.

Moving to the other stock in review, Platinum Asset Management (PTM) which is currently valued around AUD $2.95 Billion. This stocks fortune has not been as good compared to PPT with its recent price action.

Taking a look at PTM's monthly chart below, you can that the stock also enjoyed a strong run up in price from around $3.30 back in August 2012, to a high price of $9.50 a share in February last year. Since the incredible run up from last year highs, it has been a rocky road for PTM and its shareholders.

After reaching the highs of $9.50 a share PTM began to fall back to its monthly uptrend around the $6.50 level in September 2015, before reversing and rising again to just over $8.00 a share.

However PTM failed to continue higher along its uptrend, breaking its uptrend (shown below with a black circle) back in January this year closing around the $6.50 level. Things went from bad to worse after it reversed and closed below its uptrend on a monthly basis.

The stock continued to fall and closed at the end of the month of September at $5.04 a share, just below its support level which is a bearish signal.

If PTM is to confirm and close next month below the $5.04/5 level, its next level of support is at $4.40 a share or 64c a share away from the closing price of $5.04 a share reached on the 30th September.

In the unlikely event that it is able to reverse its downtrend on a monthly basis, the first level of resistance is around $5.75 level marked on the chart.

Looking at the daily chart of PTM below, you can see that the price action was not pretty for shareholders. Apart from the false breakout of the downtrend back in mid August this year when it reached a high of $6.19, the price of PTM has stayed within its downtrend.

Moving forward the two options for PTM are illustrated with the black rectangle boxes in the chart.
They are:

1. PTM breaks out of its downtrend and heads to its first resistance level of around $6.00 a share.
OR
2. The support level of $4.90 a share is crossed, and the next support level is $4.40 a share.

Given all the bearish signals of PTM and its downtrend chart pattern, the most likely option is for option 2 to occur.

Even though both stocks are in the exact same industry, they are trending in opposite directions. This is why its important to view both the long and short term trends of a stock, as well as continuing to monitor the current price action to see if the trend has actually reversed.

Attention Aspiring and Experienced Traders:

For all traders viewing this post I have put together a collection of trading books, that I believe must form part of every traders collection.

Each book chosen I have personally read and all are highly rated based on Amazon reviews.
To see the trading books click on the link to the : Trading Books Collection

Note:
The charts shown in this post were taken on the 30th September 2016, and the analysis was conducted based on the price action up to the 30th September.

Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

Australia's obsession with real estate over the last 50 years, has created a generational debt addiction and record levels of private debt to GDP of over 200% (see chart below).  Because of the record debt levels Australia now has a real estate bubble and just received confirmation with the title of coming 4th, behind Vancouver, London and Stockholm in the UBS Global real estate bubble index.

See link for full story on UBS Global Bubble index - www.zerohedge.com/news/2016-09-27/global-housing-bubble-biggest-these-six-cities

Our private debt levels relative to GDP has been steadily rising since the 70's (see chart below), surpassing the USA and most advanced economies. Besides pulling back so slightly in 2009 and 2010 due to the GFC, we have not looked back. Since Australia's debt levels have kept rising, real estate prices have followed suit, as people outbid each other to drive prices higher. This in turn has further fueled more speculation into real estate as asset prices rise year after year without hesitation.

In contrast to the USA and advanced economies, Australia's private debt to GDP levels are at record highs, where as the USA private debt tapered off from 2009 - 2012 as the consumer deleveraged, after millions lost their homes. Since then the private debt has been going sideways relative to GDP, which explains one of the reasons why growth in the US in the last few years, has been so sluggish compared to previous recoveries from a recession.

Income Vs Real Estate Prices

A key ingredient to determining whether an asset is in a bubble is  to compare the current value of an asset compared to income / rent levels.

The chart below shows since 1986 rents and construction prices have risen 25% -30% adjusted for inflation, compared to housing prices which have risen by 270+% adjusted for inflation over the same period.

If you take a look at household income it has risen by approximately 50% adjusted for inflation since 1986, which explains why its has become increasing difficult for first time buyers to get into market.

The exponential rise in real estate prices from the mid 80's has been clearly supported predominately by an equally significant rise in the level of private debt, rather than being supported by increases in household incomes or rent prices.

Australian Real Estate Bubble Parody Video

Below is a short real estate parody video that shows the crazy lengths Australians go to so they can participate in the real estate bubble as the fear of missing out drives their decision making.

Even though this is a parody the reality is, the themes shown here resemble behaviours similar to the current state of the Australian real estate market.

Real Estate Now The Biggest Contributor To GDP

Australia has experienced a record breaking 25 years of GDP growth without experiencing a recession, which is defined as 2 quarters of consecutive GDP declines.

Since the mining boom has slowed the last few years, the real estate and related industries have become more important within the economy, as it has been a big contributor to Australia's GDP growth.

Looking at the chart below of Australia's Industry share of GDP, I have outlined in black - Ownership Dwellings, Rental, Hiring and Real Estate, as well as Finance and Insurance. These 3 real estate industries account for a combined 20.3% of Australia's GDP.

When you combine the construction industry 7.7% contribution to GDP, of which real estate construction would be a considerable component of the construction industry. You realize that real estate industry is the single biggest industry by GDP in Australia, and any downturn in real estate prices and or construction activity would impact on Australia's GDP considerably in the future.

Lastly  I wanted to show a real life of example of a house that was sold this week to illustrate how much real estate prices have risen. The picture of the house below is a 2 bedroom house located in Greenarce, a suburb that is 17km away from Sydney. It sold for AUD $926,000 and features 545 sqm of land and is un-renovated.

If you want to take a look at Australia's REIT's sector review and how it is holding up, despite record levels of debt and low interest rates you can click on the link at: Aussie REIT Sector Review

Sources:

Debtdeflation.com
Zerohedge.com
Smh.com.au
Afr.com
Mortgagee Property Youtube Channel
News.com.au
Ibisworld.com.au

Australian REIT Sector In Review

The Australian real estate investment trust (REIT) sector has experienced a strong selloff in price in the last 6 -7 weeks. After reaching a 52 week closing high of 1,557.86 on the 1st August, the sector began to experience weakness around the same time as global bond yields started to rise sharply from record lows. Click my previous post: Is the bull market in stocks ending? where I cover the rise in Government bond yields and its potential impact on global stock markets.

Because REIT's typically use short term (3-6 year) lending facilities to gear their real estate portfolios. The fall or rise in Government bond yields over time, directly impacts the interest rates banks charge when the REIT's refinance their lending facilities. Hence the net income levels are directly impacted from changes in Government bond yields over time.

The REIT sector is usually a relatively stable sector, with lower volatility normally compared to other stock sectors. This is due to the long term rent contracts that are typically in place with commercial real estate portfolios. This makes them quite secure and stable as these rental contracts make up the bulk of the annual revenues for the majority of stocks within the REIT sector.

A Downtrend Has Started

Taking a look at the sector on a daily chart, you can that after reaching its high for the year on the 1st August, the sector began to show weakness and started to fall. The selling continued and its uptrend ended around the end of August which I have marked with the black circle below.

Once the uptrend was broken and reversed trend, the selling accelerated with sharp falls occurring over a 2 week period. This was coupled with an increase in volume (see chart) in the last 2 weeks which is a bearish sign.

However on a positive note for the sector, after touching the support level of 1,360 it was able to rally higher and finish off the lows reached mid week.

Looking ahead the sector needs to stay above the 1,360 support level over the next few weeks, in order to consolidate before looking to close above its new downtrend (see chart), to consider resuming its previous bull uptrend again.

Viewing the REIT sector on a longer term horizon with the weekly chart, the overall picture is actually quite positive compared to the daily chart. You can see within the chart that the sector is still with in its long term uptrend that began in August 2011.

Last week the sector reached the support level of 1,355/60 and also touched its uptrend before bouncing off the lows during mid week and finished slightly higher at 1,387.66. This is a positive sign that it was able to respect the long term uptrend and bounce of support.

The Key Issues For The REIT Sector

While the sector still remains in in uptrend for now, its important that it remain within its uptrend and not close below its trend to form a reversal and new long term downtrend.

The other key consideration or clue for the long term direction of the REIT sector, and whether the long term uptrend remains in tact, is the direction of Government bond yields. If the uptrend that has recently started for Government bond yields continues and keeps rising, then its most likely that the sector will end its 5 year bull run.

Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

With all the recent volatility in global stock markets, commodities and currencies due to fears of interest rates rising in the US soon. I take a look at the bull market in global stock markets to see if its coming to an end.

After falling around 55% in value during the GFC back in 2008 and 2009, the MSCI world index has been in a stellar 7 year bull market rally. The MSCI World Equity Index is a global stock market index that represents the majority of major stock indices.

The MSCI index has risen back to the 2007 pre GFC levels, as Central Banks around the world have conducted unprecedented stimulus actions by lowering interest rates and initiating Quantitative Easing or QE (printing money) to purchase Government bonds and lowering  the cost of borrowing money.

The Bull Market In Stocks Is Stalling

Since the MSCI index reached the previous peak of 2007 forming a double top early last year, it has struggled to make new highs and has been heading lower.

Currently the MSCI world index is still within its 7 year bull market uptrend, however the index will find it difficult to stay at these elevated levels, as Government Bond interest rates have started to rise again despite massive amounts of QE being conducted globally by the Central Banks.

Looking at the US 10 Year Government Bond Yield chart below, you can see the downtrend for interest rates has been in place since the start of the year and has recently completed a reversal of its downtrend. If the US 10 year Government bond is to climb above the current 1.705% level the next level of resistance is around 1.98% or 0.275% high from current levels.

A similar situation is evident with the German 10 Year Government Bond yield chart below, as the downtrend has ended with a reversal that occurred in the last few weeks.

The 10 year German Government bond is sitting today at merely 0.05% interest rate, with the levels of resistance at 0.125% and 0.28% that it would need to cross before heading higher.

Will The Global Stock Market Bull Market Continue?

So while the MSCI World Equity Index is safe for now and is still within a bull market, the current reversal of trend for Government bond interest rates going higher is a big problem for global stock markets to handle right now. If the trend continues for interest rates heading higher, the 7 year bull market uptrend will most likely reverse and begin to fall.

Source:
au.investing.com

Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.