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Guest Article Written By  - Trader, Pete Armstrong - Twitter: @PeteArmstrong

2018 is drawing to a close although the markets show no sign of going into holiday mode until the
machines are switched off and forced to take a break for a few days.

As a trader in the southern hemisphere it’s our annual summer holiday period for at least 2 weeks.
I always use this time to reflect back on the last 12months, draw a line in the sand and consider
the new game starting in January……It can be a satisfying time or very depressing period.

A traders life is not anything close to what society deems as “normal”, and as such no one but us
traders can really relate to what we actually go through.
This isn’t a story about how lonely trading is because I’m one of the weird ones who trades best
in total isolation. It’s just a fact we can go through things that no other career can throw at you
and a lot of the time we bring it upon ourselves due to the nature of this business and how us
humans are wired……I brought it all upon myself this year. Here is a story of a period I went
through.

It is amazing how easily you can lead yourself off course, down a path you know isn’t going to
end well, but at the time, in the moment, you honestly think you are making intelligent decisions.

The last few years have been hard in this game.
• Volatility contraction but now expanding dramatically forced me to alter my approach and
mindset towards the market (I struggled with the mindset aspect),
• Algo’s exacerbating “chop” in price action due to a number of factors made tight entries harder
than previous years,
• Politicians ramping up their desire to have public feuds,
• Geopolitical issues seem to be piling up, adding another risk to manage daily,
• Fake headlines from “Sources” that Algos react to with sudden bursts of price action that will
fade sometimes and not other times.

The list could go on, but markets are always evolving and we have to evolve with them, however I
found myself fighting these factors when in-fact I thought I was just working hard to adjust and
get on top of them.

This year I found myself so determined and focused on getting on top of this market that I worked
around the clock; sleep was optional and only when the body forced me or on weekends.

Down the Rabbit Hole I Go.

In my mind it was a case of; “Yes I know this isn’t sustainable or smart but if I can push through
this period, get on top of it, then I can rest, do all the right things and get back to a sustainable
balanced approach/lifestyle of making returns”

I would tell myself daily - “It’s just a phase the market is going through, this isn’t your first rodeo
you have been here before, you just need to grit your teeth and work through it.”

Telling myself to back off a little, ride it out with lower performance expectations whilst working
through fine tuning my approach would have been the intelligent thing, but with pressures of
performance and life etc, I was always feeling like my back was against the wall and I needed to
go harder at it not back off. Cue the Anxiety.
That last paragraph I think was the root cause of this stupid behaviour

Obviously my day to day trading thought process are extremely clouded in this exhausted state,
more errors were being made than normal, frustration builds and everything is second guessed.
Confidence evaporates.

The harder I tried the worse it become!

[ Side Story - I used to be a golf pro, and pros will play their best when they let themselves be free
of pressure and they believe in their ability to execute. The harder a golfer tries to “ steer” a shot
under pressure down the fairway the more they spray the ball all over the course. I was trying to
steer every trade instead of letting it just happen]

All this leads to crippling depression periods and constant anxiety.
The dark times are dark. Very Dark!

It takes rock bottom to snap me out of it.

Tired, exhausted, mentally drained, angry at myself, constantly sick, no confidence and for the
first time I truly can’t wait to step away from the markets.

I knew better, I made it all harder than it needed to be and I’m feeling to consequences of it.

I think I got stuck down the rabbit hole due to the pressures that I have on me. Some your typical
life pressure we all have, and likely some others all manifested in my head. Thats something to
explore during the time off.

When I return it will be fresh, back to basics, structure and discipline. Focus hard on not losing my
way again.

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Disclaimer: This post is 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.

Stellar Run

Netflix has been on a tear over the last 12 months as investors continue to focus on the rampant rise of subscriber growth especially in the international market. From the image below you can see that domestic growth has been steadily rising in the US, however the real star has been international growth as Netflix has been introducing its content into several new countries.

Even more surprising has been the record surge in the stock from the start of this year now having risen 30% year to date.

Netflix stock jumped higher today in the futures market after the stock closed for trading as the market digested the earnings report. I have added the latest jump taken from CNBC.com where the stock has moved a further 8% after a strong day leading up to the earnings release. It seems the company cant do no wrong.

What Investors Are Ignoring

One of the key reasons why Netflix subscriber growth has been so spectacular has been due to the fact that Netflix pricing for its streaming services is extremely low. This is even more evident when you compare it to traditional cable / pay TV companies.

By keeping the pricing low its placed a huge strain on its cash flows, as the company has been spending record amounts of its cash as its business model clearly inst sustainable even though company is growing so quickly. With the chart below you can see its latest cash burn was staggering at $523 million for the most recent quarter.

Whats even more worrying is the company is forecasting to burn through a total of $4 Billion in 2018.

Original Content Is Its Achilles Heel

The other key reason for the massive cash burn for Netflix is its huge budgets spent on generating its own original content. Not only has it been rising every year for the last five years, but its expected to hit $7.5 + Billion based on forecasts. (See Below)

The company's historical content spending is as follows:

2018: $7.5-$8 billion (forecast)
2017: $6 billion
2016: $5 billion
2015: $4 billion
2014: $3 billion
2013: $2 billion

Netflix content also outpaces its competitors own content budgets by a significant amount with a spend of approximately double its closest competitors content budget.

The end result of Netflix business model is the company is knowingly placing huge strains on its balance sheet with the loss of billions in cash each year and rising debt which is sitting around $20 Billion to fund its yearly cash burn.

For the moment none of this matters as stock investors cheer the company on by bidding it higher and higher rewarding the company for such reckless spending that it clearly cannot sustain.

Why Low Rates Are Important?

Netflix like many companies listed in the US are more reliant than ever on low interest rates to fund their business model. If US Government 10 year bond yields continue to move higher it will spell disaster for Netflix and other companies who continue to accelerate their debt levels to fund their losses.

If yields move beyond 3% it will mean significantly higher interest payments and accelerate already high cash burn levels which could ultimately lead to bankruptcy under their large debt levels. However until that day its celebrations all round for investors as the fundamentals don't matter at all.

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US Interest rates have been steadily rising since the lows in July last year, as the market reacts to both inflation pressures, FED commentary and 2 rate rises in 15 months. As a consequence interest rates have risen around 1.2% for US 10 year Government bonds since July 2016. Rising rates has created a major headwind for the US economy, as the weight of the massive debt levels for consumers and companies are starting to have a weakening effect on demand dragging the US economy towards slower growth. In spite of slowing growth economy the US stock markets are or near all time record highs as bullishness over the Trump presidency have overridden a weakening macro environment as stock investors look to the future with optimism.

Market Pricing 100% For FED Rate Rise For March

Over the last few weeks the probability of FED rate rise in March has been climbing, as a series of press releases and comments from various FED officials, including FED chairperson Janet Yellen have shown their eagerness to raise rates this month. Due to FED officials comments the market has priced in a 100% probability of rate rise when the FED holds their Federal Open Market Committee (FOMC) meeting and release their statement on the 15th March US time. 

US  Government 10 year Bond Yields Set To Break Out Towards 3.00%

With the recent talk regarding interest rate rises by the FED this week and the market now pricing a 100% certainty of FED funds rate rising by 0.25%, Government bond yields have once again started to climb higher for two straight weeks reaching previous resistance of 2.62% last Friday. (See chart below)

The important factor to note for the 10 year bond yields is if the 2.62% level is broken and closes above the resistance level indicated for the week, we will see interest rates move progressively higher towards 3.00% which is the next level of resistance.

Higher Rates To Hit Corporate & Consumer Credit Debt At Record Highs

If US Government bond yields move towards 3.00% over the coming months, a situation which is likely if the FED raises rates this week. This is going to have a major effect on slowing the US economy even further. The extremely high debt levels in the US, that were built up during a low interest rate environment created by the FED is now beginning to cause some serious problems for the economy and eventually stocks as well with small increases in rates having a larger impact on considerably higher debt levels.

The reason rising US Government 10 year bond yields is such an important factor in determining the health of the US economy, is because the majority of debt products for consumers and companies are priced from Government 10 year bond yields. In other words everyone will experience a rate rise and be negatively effected because the US is drowning in debt, with consumer credit and companies debt levels excluding financials are at record highs. (See charts below)

Crush The Market addressed the negative effects that a significant rise in rates would do towards the US economy back in November as rates began to spike higher in November with the election of Donald Trump. To view this article click the link below:

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

Since November's article the rise in yields has played out as predicted with a slowing in a number of key macro economic data announcements, as the economy continues to slow in a rising interest rate environment causing pain for consumers, companies and the economy overall.

Consumer Credit  Debt Led By Student & Auto Loans

The picture is no different for the average consumer who is struggling under record levels of debt, with debt levels rising by approximately 1 trillion since the previous peak reached before the global financial crisis in 2008 & 2009.

The majority of the gains in debt levels have come across from an exponential increase in student debt as tuition fees for college are far outpacing CPI increases. The other main contributor for such a significant rise in consumer credit has been the boom in auto loans to the average consumer. Auto sales had previously been booming from increasing in credit for a number of years. Now as consumers are tapped out with much more debt since 2009, delinquencies are rising in the auto loans market as higher interest rates are biting hard on consumers disposable income.

The rapid increase in debt since 2009 together with increasing rates since July last year, has already been felt within the economy as various parts of the economy are now showing further continued weakness.

Higher Rates Slowing Lending Growth For Consumers

The rise of around 1.2% in US Government 10 year bond yields since July has already started to impact demand for more debt by consumers over the last year. Since the start of 2016 loan creation growth has slowed dramatically from between 9 - 10% per year to a current growth level of between 4% - 4.6% pa. Although the growth rate are in the positive the accelerating of debt growth levels is impacting retail sales within the economy. For example auto sales from the Big 4 auto manufactures have fallen by up to 11% in January 2017 from a year ago. To view auto sales data shown in my recent US economy article Click here.

Atlanta FED Slashes Q1 GDP Forecast to 1.2%

In the beginning of February this year the Atlanta FED forecasting team had set Q1 GDP as high 3.4%. Since February economic data has been released showing further deterioration and slowing in the economy with economic data missing expectations. As a result of this the Atlanta FED has had to  continually reduce their forecasts all the way to 1.2% as of March 8th. Depending on pending new economic data releases in the coming weeks we could see Q1 forecast fall below 1%.

US Gasoline Sales Begin To Fall Again

US Gasoline sales have been in structural decline for several years now, as the chart has shown below falling by over 50% since 2005.  After reaching the lows in 2014 gasoline sales began to start rising again as the economy began to gather pace as jobs and debt accumulation began to accelerate. However recent data has shown Gasoline retail sales have once again resumed their downward trend and starting falling as weakness in the economy  from higher rates is started to effect consumer demand.

Federal Government Receipts Now Negative Y/Y - First Time Since Last Recession

Similar to Gasoline sales US Federal Government receipts were growing strongly up to 2014 reaching a growth rate close to 14% y/y. Since 2014 recent high Federal Government receipts have been falling dramatically over the last 2 years, having just recently turned negative falling -1.1% Y/Y for the first time since the last recession in 2008 /9. (See chart below)

Having a closer look at the chart on the right hand side, you will notice that the majority of the decline in growth rates occurred over a relatively short time frame in 2016. This coincides with the similar time frames when interest rates stopped falling and began to rise rapidly in the second half of 2016.

US Restaurant Operators Same Store Sales Falling

The most recent data available for restaurant same store sales has been released, showing that December 2016 same store restaurant sales are the weakest they have been for in 3 years. In addition Q4 comparable sales and traffic is also down from a year ago, indicating that the restaurant industry is reeling as consumers cut back spending out for food.

 Does A Rising Interest Rate Environment Matter To Stocks?

According to history a rising rate environment has serious implications to the future performance of the market. Since the 1970's 7 out of 8 occurrences where interest rates cycles began to tighten resulted in some large corrections in the stock market. With the last tightening cycle resulting in a 56% fall in the markets in 2009.

The tightening cycle has been running for close to 9 months now as has already had a major impact to the grow rates of the economy slowing dramatically over the same period. With the potential for another rate rise occurring this week, its quite possible we could see 3% US 10 year Government bond yields in the coming months playing further havoc on the economy. Based on the last 45 years of data a tightening cycle in the US has not be very kind to stocks either as the economy reacts to higher rates.

Warning! - The Insiders Are Rushing For The Exits

Company executives are selling around 10 to 1 relative to buying trades of company stocks despite record prices for stocks. The buyer / seller ratio is also on a downtrend since peaking in late 2015  and the beginning of 2016 (See chart below)

When executives are selling in such large amounts it usually means they are seeing the writing on the wall for future earnings and prospects for the companies they run. Perhaps since interest rates are rising and the economy is slowing its starting to place pressure on future earnings targets. The next quarter earnings may provide further insights, especially since companies are conducting record amounts of buybacks that are financed from previously low rates of  debt.

The recent strong performance of stocks in late 2016 and early 2017 has masked a serious deterioration in the US economy that started as early as 2014 - 2015. With interest rates about to break out higher on the way towards 3% we could see the last legs of the economy knocked out bringing stocks down with them as earnings will start to fall again with weaker consumer demand filtering through to lower sales results.

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If you would like to view my most recent macro article on the US economy click the link below:

Stocks Bullishness At Record Highs While The US Economy Is Approaching Recession

To view my most recent Stock/s review click the link below:

Russell 2000 Bullish Run Looks Tired As Momentum Falls

Disclaimer: This post is 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.

US stocks are at or near all time record highs across all major indices, with the markets bursting out after the election win of Donald Trump back in November 2016. Since then investor bullishness has also spiked to 10 year high levels. While this bullish euphoria is occurring something else is taking place far more important. The US economy has been trending down for some time now and the slowdown momentum is gathering pace as it moves closer to a recession possibly as soon as this year.

Market Euphoria Clouds Judgement

The markets have a history of becoming totally blind to whats actually occurring in the real economy, instead focusing on the direction of the market to give them an indication of whats taking place. In the chart below you can also see that the composite bullish index (red line) back in mid 2007 was very high around 130 just before the markets began their 50% decline.

Currently the market greed / fear index (see chart below) is close to at the maximum level of extreme greed side, while the actual economy is rapidly declining with a similar dynamic playing out presently with a potential twist to the market outcome.

How Can The Market Be At Record Highs While The Economy Is Heading Towards Recession?

In a nutshell the answer is Central Banks, if you take a look at the chart below you can see how the Central Banks have massively increased their balance sheet since 2008 / 2009. This has been achieved by printing money and buying up assets to provide additional liquidity into the system. This extra liquidity has flowed its way into stocks all over the world, regardless of which Central Bank has been been providing the additional liquidity.

Recently though most Central Banks have once again picked up the pace in growing their balance sheet . So even though the US has effectively kept their balance sheet flat to slightly down over the last 2 years, the other Central Banks have effectively been adding to the pool of global liquidity pushing up prices of stocks, real estate and other assets. Clearly this practice is totally artificial and is giving false bullish signals to investors as the markets are not functioning on their own.

The S&P 500 Index No Longer Tracks Earnings

Further evidence that the Central Banks actions are providing false signals to the markets is shown in the chart below. S&P 500 earnings per share (EPS) are totally out of sync with the rise of the market and now represent a large divergence in their trends.


Earnings are now slowly tracking higher after falling for several years, however this is more a case of financial engineering of companies artificially raising their EPS by buying back their stock usually with debt. Since 2012 corporate profits are down so even companies themselves are misleading investors to the true financial health of their investments.

How Lower Corporate Profits Tie In With The Economy - Jobs, Jobs, Jobs

Since 2016 global employment in S&P 500 companies has been slowing down (see chart below) and late 2016 turned negative as the slowdown accelerated with employment growth. The last time this occurred the US economy went into a recession shortly after.

If you look at US non-farm payrolls you will notice that its also trending down but a slower pace.

The interesting point about the non-farm payrolls data is that the data each month is provided based on the combination of a Government surveys (small sample) as well Government generated predictions of jobs, Ie Birth death model of estimated new businesses commenced to produce the monthly result. Several months later up to a 1 year later the actual data collected from companies are imputed and adjustments are made on prior months. Usually the number of jobs actually created is readjusted lower. So the true effect of a slowdown with companies in the S&P 500 will not show in the non-farm payroll data for several months.

Every Time The FED's Own Signal Falls Below Zero Y/Y A Recession Occurs

Scroll video to 12min 52sec.

This video indicates that an indicator that the FED actually monitors has fallen -0.3 in December and has fallen 5.8% y/y, which is the largest since 2010. Each of the last 8 occurrences of this indicator falling below zero y/y has resulted in a recession in the US.

Consumer Credit Grow Demand Drops 43% Month on Month

In December consumer credit grew by $14.2 billion  a 43% drop compared to November's $25.2 billion. Since consumer spending makes up over 70% of the GDP data and the savings rates is falling in the US, a large drop in the amount of new credit card debt also points to a slowdown in retail sales.

The credit data below is actual data collected from the banks rather than from surveys, so it shows a very accurate picture of demand for credit card debt. Given the big collapse in S&P500 employments levels the trend in credit demand will likely continue to move lower and lower the GDP result.

FED Senior Loan Officer Survey Demand Falls Over

The overall trend for credit demand going forward is not looking good with the latest results from the FED senior loan officer survey. Indications for demand for debt for Construction, credit cards and auto loans are all down at multi year lows.

This is important as credit demand overall has been tied to overall demand within the economy and especially with consumers. If the intentions from the survey follow through, the slowdown in the economy will begin to gather pace with the higher probability of the US starting a recession in 2017.

Auto sales have performed very strongly since hitting the lows in 2009, with demand for auto loans driving a large proportion of retail sales demand. Auto sales have recovered strongly also because interest rates for auto loans have fallen substantially over the last 7 years from the FED dropping interest rates and pushing down bond yields via QE purchases. This has allowed buying a new car more accessible for consumers and allowed consumers to own more expensive models that previously they have not been able to afford on higher interest rates.

Auto sales Decline Y/Y First Time Since 2009

The strong performance of auto sales bubble appears to be over as December and January figures have been very weak. Making things worse y/y auto sales have recorded its first decline since 2009 the same year the US experienced a recession.

The data below shows the big 4 car companies in terms of autos units sold all experienced declines in y/y figures. Since the FED senior officer survey results for demand for auto credit is also falling, US car sales declines will  most likely continue in 2017.

With Record Amounts Of Stimulus Why Is The US Economy Weak?

Each month the Government releases the wages growth figures and overall they are usually positive rising slowly over time. The data that the financial media show is the data in the chart below (red line) which is nominal growth in wages. Since 2000 nominal growth has risen 40.2%, however when you take into account inflation real wages have declined 1.1% over the same period.

When the Government calculates inflation, the data they release is usually under reporting the true state of inflation due to various statistical measures like hedonics applied to the data to bring the level of actual inflation down. Therefore the average workers real wages have probably fallen by more than 1.1% since 2000.

Since the average worker has to spend more of their wages to buy the same amount of goods and services, this impacts on their spending power and ability to borrow. Lower spending and borrowing capability translates to weaker GDP growth since consumer spending makes such a large proportion of the calculation.

Weaker Economy = Higher Bankruptcies

The 2009 US recession caused bankruptcies to rise for several years and after peaking in 2011 the overall trend in bankruptcies continued to decline for the next 5 years as the economy recovered from record stimulus implemented by the FED and the Federal Government.

The declining trend has shifted when bankruptcies began to surge in November 2015 and continued to move higher in 2016. This has resulted in bankruptcies recording their first y/y rise since 2010 after rising 26% from the prior year.

Given bankruptcies is a lagging indicator due to the time required to process and complete bankruptcies, the deterioration of the economy has been occurring for an extended period of time now. Since other economic data  is showing further weakness, bankruptcies will continue to rise further in 2017 and into 2018.

Stimulus High No Longer Effective

Despite continuous stimulus of some form or another from Central banks and the US Federal Government growing their debt levels at record pace, the 2016 GDP growth came in at only 1.6% matching the 2011 low read after hitting 2.6% growth in 2015.

Based on the actual data from the US Government, the economy is slowing and no longer receiving a boost from the various stimulus options in place currently to support the economy, consumers and businesses.

Whilst the economy was slowing in 2016 another setback for the economy occurred in November last year, when the US 10 year Government bond yields soared over 0.60% within short period after the US election results.

Given the majority of consumer and business debt products interest rates in the US are priced from the 10 year Government bond yield rate, consumers and businesses effectively experienced two 0.30 rate rises over a 2 month period in late 2016. To view the article written back in November outlining the impact of higher Government bond yields on the US economy click the link below:

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

A Rising Stock Market During A Recession Is A Possibility

After viewing this article you might come to the conclusion that despite the stock market sitting at record highs in the US, stocks are set to fall if an imminent recession is arriving in 2017. Well not exactly, since we are not in normal times and the actions of Central banks and the US Government are unprecedented.

When you take into consideration several of the previous FED QE programs occurred after US stocks began to correct by around 10%. In addition the odd market behavior in stocks over the last 6 - 12 months where we have not experienced a fall of greater than 5%. Its a reasonable possibility that stocks may stay elevated or even rise higher even if the US has an official recession. If this occurs this will be another new record in US history.

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Whos Winning In The Aus Large Cap Healthcare Sector CSL vs Ramsay

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China Braces For More Pain Ahead As Economy Slowdown Accelerates

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 Election Honeymoon Is Over

It appears the honeymoon has ended for Trump and the markets after sparking a major rally in both the US dollar and the stock market since the election result.

The US dollar after topping at the end of 2016 has now started in a new down trend after falling steadily in January. It's now at the same level reached just after the election results in Mid November. (See chart above)

Over the last 2 trading days the US stock market has fallen the most in 4 months, as a series of actions taken by president Trump over its immigration policy in the last few days has shocked the market and brought about uncertainty and fear. Ironically the actions taken by Trump was already raised in his election campaign promises.

Adding to further uncertainty and fear in the market Trump decided to fire the acting attorney general for not following on his executive order over his immigration ban on seven countries. (For further information you can click the headline below)

DOW Reverses Breakout Trade

The Dow Jones Industrial index made a breakout out of its tight trading channel last week after moving sideways for nearly a month. However the last 2 trading days losses has seen the index fall back within the channel as the 20,000 level support failed to hold.

For traders and investors interested in the Dow index, watch the index to see if the previous support line shown in the chart will hold. A close below support could easily see the Dow fall back to pre-election results levels around 18,600.

Nasdaq Still Bullish Despite Uncertainty

The Nasdaq composite has been on a steady uptrend with little hesitation / pullback in price since the election rally begun. As a consequence of the strong uptrend rally late in the year the Nasdaq has made multiple record highs in January 2017.

Even though the index has fallen the last 2 days the index continues to remain well within the uptrend as well its current support. Compared to the Dow index the Nasdaq is showing strong bullish technicals despite the minor pullback in price from Trump's recent actions.

Note:

Despite the relative strong performance of the Nasdaq Composite, a potential close below its current uptrend line could see the Nasdaq fall back to the 5,500 level in price. With the current uncertainty and fear that is currently gripping the markets its quite possible for a reversal to occur.

S&P 500 - Hanging On To Breakout

The S&P 500 has experienced a minor pullback so far this week and depending on how you look at it, is just above or just below its breakout level that it crossed over in last week's breakout trade.

With the last 2 trading days showing some buying support despite falling both trading days, indicates the S&P 500 is likely to respect new support level around 2,275 - 2,278 in the short term. On the flip side with recent above average volume on both down days for the index does not bode well for market sentiment as fear remains within the market.

Weak Economic Data Adding To Market Weakness

Last Friday the US released its first look at last quarter's GDP as well durable goods orders for last month. Both pieces of key economic data missed market expectations, with GDP coming in at 1.9% versus 2.1% expectation. Durable goods missed heavily coming in at -0.4% vs 2.7% expected. 

Interestingly after the release of the key data the market barely responded initially. However after the unexpected immigration ban placed over the weekend by Trump's executive order and the firing of the acting Attorney General yesterday the market decided to react the recent deluge of negative news and shocks with the 2 day declines.

Market Bullish Exuberance Not Broadly Supported

Another key risk for the markets on top of the recent market uncertainties from Trump's actions, is the lack of bullishness among the majority of the stocks within the S&P 500. If you look at the chart below, the percentage of stocks above their 200 day moving average has diverged from the index back in September last year.  This indicates the larger stocks within the S&P 500 are driving the recent strong performance as the remaining stocks under perform. A divergence this large will most likely result in a reversal in trend to coincide with the overall strength of the index.

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If you would like to view my last macro article on China's click the link below:

China Braces For More Pain Ahead As Economy Slowdown Accelerates

To view my latest chart review on Gold click the link below:

Gold begins the year strong will the bullish run continue for 2017?

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.

China's amazing GDP growth and recovery experienced since the 2008 - 2009 crisis is slowing down. The rate of growth continues on a downward trajectory, as more economic problems begins to emerge that are accelerating its slowdown for the economy and global growth. These problems have been building for some time now and many of the problems now faced by China have stemmed from the economic policy decisions that the Government implemented to fight off the last crisis.

How Did China's Economic Problems Start?

China's economic recovery from the 2008 crisis has been remarkable as the country was able to quickly adapt to the global challenges that swept through and effected its own economy. China was able to shift the focus temporarily away from exports, to their own domestic economy as they began to accelerate spending on fixed asset expenditure on various large infrastructure projects around the country.  This was funded by lowering interest rates and accelerating the use of debt to spur their own economic recovery. By implementing this strategy it also spurred demand for overall consumer spending as more credit began to flow through their economy. 

This strategy worked very well and within a short period of time the flow of credit and spending began to shift the growth of China's economy higher once again. As a result, it lifted the global economy higher as China grew imports to fuel its large fixed investment expenditure projects and increased consumer spending. This allowed many commodity based countries like Canada, Brazil, US and Australia among others to bounce back quickly from the 2008 economic crisis. The increase growth in consumer spending in China also facilitated countries with a large manufacturing base like the EU region to also return to growth.

As a direct result of China's return to strong GDP growth, global foreign capital investment in China  soared, as investors were attracted by the growth rates.

So why does China have some many problems effecting its economy in 2017?

One of the main causes is because China's economic recovery was predominately achieved by utilizing record amounts of debt to stimulate demand and now the debt load is becoming an anchor to their economy. (See chart below)

Before the 2008 / 2009 crisis, debt to GDP in China was moving sideways at around 130%, as new debt growth offset new growth in GDP.  After the crisis hit the debt to GDP skyrocketed, meaning the new debt was no longer having the same effect on demand and GDP growth like it did prior to 2008 -  2009 crisis. The probably cause for the shift in effectiveness on GDP growth after the crisis, was due to increased debt towards inefficient projects designed only to spur immediate demand regardless if the projects were financially viable.

Since demand  now has been effected by the debt levels of mostly inefficient debt accumulation, it began to hamper growth and the economy began to slow after a few short years.

Now that the economy slow down is accelerating, the capital that came from abroad during the China growth recovery, together with domestic savings of China's citizens is fleeing China, in search of new growth opportunities in other countries.

The capital flight of over $1.2 trillion since 2015, is impacting on China's financial system and its currency the Yuan as financial conditions have tightened. This has impacted demand in China as access to credit becomes more difficult. This in turn spurs more demand for capital to find a new home globally as the currency becomes weaker as well as growth.
 

How  Are The Economic Problems Impacting China's Growth?

Real Household Disposable Income Growth Falling

Prior to 2008 - 2009 crisis, China's real household disposable income was growing above 10% (See chart below). It reached a temporary high of 14% y/y on growth just after the crisis took hold as the stimulus spurred growth and incomes for a short period. After the crisis was in full swing the real household disposable income slowed to 6-7 % growth.

After peaking in 2012 income continued to decrease, as it made its way to just above 4% growth in real household disposable income in 2015. A level of growth that was considerable lower than the trough reached in 2009.

Since the new debt that flowed into the economy during the recovery was not introduced in an efficient way, the increased debt provided only a short term spike in growth rates. This most likely caused the slow down in real household disposable income growth as the debt began to wane on overall demand rather than expanding it.

China's Capital Flight Explained

The flow of capital leaving the country has been accelerating in late 2016 and 2017. This short video below explains why the rush of capital out of China is occurring.

China Tries To Stem The Capital Flight Problem

Since record amounts of capital is continuing to leave China each month it has placed an enormous amount of pressure on the financial system, as the outflow pressure is tightening financial conditions and liquidity within China. To tackle the tightening conditions, the Chinese Government has been adding massive amounts of liquidity that spiked in 2016 to attempt to stem the pressure. While they continue to add billions in liquidity the People's Bank Of China (PBOC) have had to sell their foreign reserves assets to fund their liquidity injections and support the currency.

The Outflow Pressure Continues In 2017

The chart below highlights the fact that China continues to struggle with managing their financial conditions as their financial system has once again required a surge of liquidity injections to ease the tightening conditions. Over the 5 day period from the 16th to the 20th January 2017, the PBOC had pumped in $1,130 billion Yuan into the system.

Without these injections the banks would face a cash crunch and the whole system would seize up and their economy would go from slowing growth to a crash in GDP.

Defending The Yuan To Slow  Capital Flight

The existing policy of China is to have an orderly and planned depreciation of the Yuan currency relative to the US dollar, in order to keep their export driven economy competitive internationally.

However, as the capital flight began to increase in reaction to the Government decision to devalue the Yuan by larger amounts in August 2015, the currency has become more volatile on the market as the Yuan began to depreciate at a faster rate to what the Government had planned. To reduce the pace of devaluation, the PBOC has been actively supporting the Yuan by selling their foreign US dollar reserves to allow the Yuan to appreciate and offset the selling demand from capital leaving the country. By engaging in continuous support of Yuan they have depleted their reserves of US dollars by over $800 billion to support the Yuan.

Depleting Foreign Exchange Reserves

Since the Yuan is pegged to the US dollar, with a small allowance for market swings from the set daily spot rate, the Chinese Government has created another problem as it tries to control their currency devaluation to spur exports. The PBOC is rapidly depleting its reserves to control Yuan currency market. With the current pace of depletion of reserves the PBOC will run out of foreign reserves in only a few years time. So their current strategy to control the exodus of capital leaving their country by actively intervening in their currency is running out of money and time.

This is why the calls from economists around the globe to allow their currency to be fully floated rather than be pegged is growing. This will allow the PBOC to retain their reserves as they no longer need to intervene. The downside is that the reaction from the market from a free floating dollar is that the currency will most likely experience a sharp fall once floated, compounding the problems for China.

Chinese Citizens Buy Bitcoin To Protect From Devaluation Of The Yuan

The Chinese people are fully aware of the Governments plans for a continued devaluation of the Yuan as one of the economic policies to spur GDP growth for China. This has led to Chinese citizens sending large amounts of their capital in 2014 & 2015 overseas to purchase foreign assets like real estate in Vancouver, Sydney and New York to protect themselves from devaluation. To combat this the Government has implemented stricter capital controls to slow the capital flight by limiting the annual limit of capital leaving China to $USD 50,000 which is one of the many recent capital controls put in place by the Government.

To get around the capital controls the Chinese citizens have had to become creative and finds new ways around the capital controls. One of the big trend in 2016 to get around the capital controls, was to buy Bitcoin in China.  When they want to sell their Bitcoin investment, they sell on a foreign Bitcoin exchange rather than the Chinese exchange meaning their capital is now outside of China.

This strategy became very popular last year and was one of the main reasons why Bitcoin was the best performing currency in 2016 with an approximate 100% return priced in Yuan / Rmb currency. (See chart below)

If the Government decided to also crack down on the use of Bitcoin as part of their capital controls, we could see a sizeable correction in the price of Bitcoin in 2017.

Global Economy Slowing As Trade Volumes Show Anemic Growth

Global trade volumes are barely growing and have been experiencing anemic growth since 2012. (See chart below). Like many of the charts shown in this article, there was a spike in volumes in 2010 as stimulus measures impacted on trade volumes as they spiked to just under 20% growth. After the stimulus waned the growth rates collapsed as well and now are barely growing.

Since China is a major trading partner with most countries the trade volumes growth doesn't bode well for its exports. Together with China's other economic problems, China will struggle with its GDP targets for 2017 due to its export weakness. This is especially true as it appears that the low growth in volumes is slowly heading towards 0% growth.

Global Export Values Slowing

The global trade values show a similar picture to the trends experienced with trade volumes globally. After experiencing a sizeable correction in trade values in 2009, global trade was able to rebound and make new highs. However since 2010 - 2011 the global trade values have been trending sideways, with the last 2 years showing that global trade values have been steadily falling.

China's Growth Engine - Exports Records Worse Slump Since 2009

Recent data released last week showed that China's exports recorded its biggest fall in exports since the 2009 slump. Exports actually declined by 7.7% in 2016, while China's imports also slowed by 5.5% as their economy internal demand for goods continued to decline.

Now President Trump is officially in office, the Chinese Government are worried about the implications of an impending trade war that could begin under his Presidency, as he tries to restore jobs and begin to increase manufacturing of goods in the US. If tariffs are implemented in the US on foreign goods as previously suggested by Trump, China's exports would fall even further in 2017 and beyond which would encourage more capital to flee China.

China's Key Economic Data - All Trending Down

The four key areas the world monitors to gauge the health and prosperity of China's economy are GDP, Industrial production, retail sales and fixed asset investment. From the most recent data available provided by the Chinese Government (see chart below), you can see the long term charts of all 4 data areas, are trending down from 2010. The official economic data even though may be overstated by the Government on the true state of the economy, reflect the consensus that China is slowing by its own metrics.

The Market Reacts To A Slowing China

The market has taken notice on the shift of China's economy and the problems its currently faces, as traders have been steadily increasing the bets on the Chinese stock market that it will fall. The percentage of shorts over shares on the China A shares ETF has jumped from 1% in September 2016 to 13% in January 2017 as traders prepare for a correction in the stock market based on a deteriorating economic outlook for China.

China's Economic Challenges Face No Easy Solutions.

This article highlights the many issues at play contributing to China's slowdown of the economy for 2017. There are however several more issues currently at play that are not covered in this article.  See below a short video to highlight some of the problems discuss in this article, as well as others  not addressed that China need to solve for the long term viability of the economy and its people.

China & Global Economy Fortunes Tied Together

The implications of China's problems on the global economy are real and significant as the world relies on China's annual GDP growth to fuel global GDP growth. China also relies on the global economy for its export growth. This means that if China's growth slowdown is gathering pace in conjunction with global trade stagnating, it would appear the global economy is heading for another slowdown. If the slowdown persists this could easily turn into a recession. The only difference this time compared to  the 2008 - 2009 crisis, is that the stimulus plan that will be implemented by Central Banks and Governments might not work as effectively. This is because the global economy has already been subjected to at least one or more forms of stimulus continuously for the last 8 years to support global growth.

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China's debt bubble threatens global growth as debt to GDP nears 300%

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Gold begins the year strong will the bullish run continue for 2017?

Additional Sources:

Ft.com - Subscription required
Afr.com
The-japan-news.com
Chinatopix.com
Theguardian.com 

New Gold Bull Market Rally Or A Bull Trap


Gold has started 2017 similar to 2016 with a strong performance, as well as outperforming most asset classes year to date. (See chart below). This out performance so far has shocked the market as Gold had been under performing the market since Trump won the election in November.

Now that Gold has rallied strongly in the first 2 weeks many investors and traders are now wondering if Gold will continue its out performance and generate another positive year for Gold.

Gold Monthly Chart Review

The monthly trend of Gold since 2011 does not bode well for the shiny metal over the long term. Since reaching the highs of just over $1,900 some 6 years ago, Gold has been on steady decline and still well within its long term downtrend. This is despite recording a positive gain for 2016.

The recent strength of Gold in January has pushed the price above resistance of $1,205, which is its first level it needs to close above by the end of the month. With approximately 2 weeks to go before the month is over its early to confirm the break of resistance.

Provided it can sustain the rally in price this month Gold will find its next level of resistance along its blue down trend line, which is currently around $1,310 - $1,315.

If Gold were to continue its strong performance over the next few months closing above its downtrend and $1,350 resistance level on a monthly basis. This would result in Gold making a reversal of its 6 year downtrend and starting a new bullish uptrend.  This scenario I believe is unlikely based on the current trend as well as the technicals.

Monthly Momentum Suggests Rally Is Temporary

Within the monthly chart I have added a Stochastic indicator that measures momentum. I utilize this indicator to assist in determining the overall strength of the trend and for trend reversals.

In 2016 the stochastic momentum was bullish as the Gold price for the first 7 months was rising. Once Gold stalled and began to fall as it reversed its trend, the Stochastic indicator had crossed over to the downside and began to fall, confirming the uptrend was over. (See circled area within Stochastic indicator)

Observing the stochastic indicator on the monthly chart you can see that momentum continues to head lower suggesting the reversal that started in August last year will continue over the longer term, despite the strong rise of Gold this month.

Note: 1. Stochastic Indicator is a lagging indicator. 2. The Stochastic indicator should not be utilized in isolation but rather in conjunction with other indicators to determine direction.

Weekly Gold Chart Review

The weekly chart of Gold suggests there is potentially more upside coming in the medium term as the price heads towards its weekly alternate downtrends. (See chart below)

Gold comfortably surpassed its prior $1,176 resistance level and now forms as new support level. This new support level is an area to watch out for when Gold retraces.

Key Levels To Watch As Gold Rally's

For investors and traders looking for higher prices for Gold, the key areas to watch as it moves higher is the $1,250 resistance level.

In addition its important to note the 2 alternate downtrend lines that have developed to watch out for as overhead resistance. These downtrend levels are $1,240- 45 & $1,285 -90.

Weekly Stochastic Turns Bullish

One of the reasons I believe at least within the medium term that Gold will make higher prices is the fact that Stochastic has crossed to the upside and confirms the change of trend within the weekly chart. (See circled areas on chart) This also suggests that momentum is on the bulls side for now.

Most likely target over the coming weeks is for Gold to hit resistance level of $1,250 before consolidating, as this target area has previously struggled to initially close above in 2016.

Lastly for the weekly chart review, if Gold fails to hold above the $1,176 support level in the coming weeks. Look for Gold to retrace all the way back to $1,132 support level.

Gold Daily Chart Review

The price action of Gold on the daily chart has been very strong over the last 2 weeks, with the vast majority of trading days Gold has closed higher as shown by the consecutive blue candles. This sudden burst has created a very sharp uptrend line for Gold as shown by the blue trend line at the bottom right of the chart. This is important to note because usually the steeper the trend line in either direction the harder it is to maintain the trend.

Overnight the price closed above $1,207 resistance level and now forms support on a daily basis. The next major level for Gold to reach is the $1,250 level of resistance.

However based on the current downtrend that Gold is still trading within, I believe Gold will also find it difficult to close above the resistance of the first downtrend line of $1,242 -44.

Gold's Momentum Approaching Peak Level

The stochastic indicator shows that momentum is still in support of the current rally on the daily chart with blue line above the red line. However the Stochastic indicator in most instances peaks out above the 90 level and eventually begins to fall. I have circled the prior 2 instances this has happened on the daily chart to illustrate what to look out for.

Note: The price action can continue to move higher in the short term if the Stochastic is above 90. It's more ideal to wait for stochastic to cross over and move lower for confirmation of potential reversal of trend.

Summary

From the review of all 3 time frames for Gold I believe we will be seeing a consolidation / pullback in the price of Gold soon. After a brief consolidation Gold will make another attempt to head higher over the medium term.

However the longer term prospects for Gold are not as favorable as Gold will run into strong resistance around $1,310 - $1,315 level based on the 6 year long downtrend line on the monthly chart.

Therefore the recent strong rally of Gold is most likely going to be a bull trap for investors who are holding it for the long term. However if your time horizon is shorter there will be opportunities in 2017.

Thanks for checking out my latest chart review on Gold.

For Crush The Market's  most recent chart review article click:
Suncorp Group Set To Break 2 Year Slump

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Holiday Macro Reading

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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.

Thank You For Your Support

I would like to personally thank all the viewers of Crush The Market.

Crush The Market has been running for only a couple of months now and already I have received so much support, with followers sharing/liking posts.

Without you the viewers, there would be no Crush The Market, so thanks for providing the opportunity to share my thoughts and ideas to you in 2016.

I would like to also wish everyone Happy Holidays and a safe and relaxing time off over this period.

Holiday Reading / Entertainment

For any one who may of missed a previous macro article or wants to refresh on some of Crush The Market 2016 macro posts you can view them below:

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

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

US Economy Continues To Weaken As Warning Signs Flash Recession Ahead

How We Lost Control Of The Real Economy By Trying To Control Everything

Global Real Estate Bubble Begins To Pop Like Dominoes

Macro Views On the US and Global Economy - Peter Schiff

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Suncorp Group (SUN) Chart Review - Monthly Chart
NB: Charts prepared before the close of 19/12/16.

Suncorp Group shareholders have something to cheer about this Christmas in 2016, after several years of slow declining prices Suncorp Group looks set to finally close above its 2year downtrend.

For this chart review I have pulled the data over a much longer period than usual (Hence chart appearing condensed) to give you a good overview of the performance of this stock since 2007, together with some longer term resistance levels.

The first initial thoughts are that you will notice that the stock has still not recovered from its 2007 highs around the $19 a share range. On the positive side after collapsing in 2008 and 2009 to a low of around $4 a share, the stock like the overall Australian stock market has made a strong recovery albeit not at new all-time highs at $13.47.

Supporting Long Term Trend

Suncorp is showing a strong and healthy uptrend since making the lows in 2009. You can see there were a few unsuccessful attempts to close below the uptrend only to recover during the month.

After a few years of a consolidation within the bigger 9 year uptrend, Suncorp appears to be making a breakout higher with its first close above its 2 year downtrend. (See circled area on chart)

The first level of resistance for Suncorp now after breaking past $13 level this month is $14.60 resistance. With the strong momentum this month and usual bullish tendency of December trading month there is a good chance Suncorp may reach the $14.60 area with only a few weeks left in the month.

Since its the 19th of December with a little under 2 weeks to go, there is a potential possibility that Suncorp retreats and falls back within the downtrend line. Given the bullishness of both the US and Australian markets this month this scenario is only a remote possibility.

Lastly having shown a longer period for this monthly chart you can see that there are still several levels of resistance for Suncorp to clear before reaching its previous all time highs. After the near term resistance of $14.60 there is $16.00 a share as well $19 a share to reach before it can begin to attempt new all-time highs. 

Weekly Chart

The Drought Has Ended

Three weeks ago Suncorp was able to finally break its long term down trend on the weekly chart with a confirmed close above its downtrend. (See circled area below)

Prior to the break out Suncorp had been experiencing a long term downtrend since late 2014, as the stock failed to make higher highs. After reaching the lows of the year at $10.11 in February the stock has been able to make a staged recovery.

With momentum rising for several weeks, the move higher over the last 6 or so weeks has been well supported by strong momentum indicating strength behind the rally higher.

Suncorp is now fast approaching its next level of resistance at $13.70 with around 20c to go before reaching the level. The stock make initially struggle at this level as the previous two attempts failing to move higher. Therefore the $13.70 level is a critical price point for Suncorp over the last few weeks of the year. A failure to close above the next resistance level could see the stock fall back to $12.85 level of support.

Daily Chart

Trump Effect

Since the day of the US election when the news of Trump winning shocked the markets into freefall temporarily, Suncorp has been able to enjoy a spectacular move higher for a alrge cap stock. After closing at $11.47 on the 9th of November the stock has rallied $2 a share or over 17% in a 6 week period.

Due to the fact that the rally has been so strong the daily chart uptrend is quite steep. (See chart below) The reason why I'm mentioning the steepness of the trend is because the steeper the move of a trend the shorter the trend normally lasts. This is because buyers quickly disappear with such a large move forcing the price to fall violently on most occasions.

Warning:

I suggest to wait for a retracement / pullback in price before considering this stock due to the very strong run up over a short period. I have drawn in the uptrend line to carefully watch for a reversal to occur.

Given that volume has also been above average which is a very bullish sign, Suncorp most likely will reach the $13.80 resistance level first before experiencing a pullback in price.

Overall Suncorp looks very bullish on all 3 time horizon charts following the big banks higher in the month of December. I have indicated the resistance and support levels to watch out for over the next couple of weeks.

Lastly be mindful of any sharp increases in volatility over the holiday period we are entering into now with low volume over the holidays the markets can move erratically.

Back in the last week of December last year and the first week of January 2016 the markets had the worse start of the year, after the FED raised interest rates in December 2015, just like they have in 2016.

Thanks for checking out my latest chart review on Suncorp Group.

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Ford Outperforms Tesla

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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.