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Victor Adair: When Quality Means More Than Lower Yields PDF Print E-mail
Written by Victor Adair via Drew Zimmeran @ PI Financial   
Tuesday, 22 July 2014 10:28

We see markets “priced for perfection”…vulnerable to a correction…from a geopolitical shock or from a growing perception that the Fed will raise interest rates more and faster than people think. We think it’s time for investors to get defensive…we see signs that the smart money is already taking money off the table.

We see markets “priced for perfection” as yield-hungry investors pour billions of dollars into the sovereign bonds of obscure countries at tiny premiums over US Treasuries…as option volatility falls to all-time lows…as leverage ramps up to all-time highs. Our good friend BOB HOYE describes the recent market condition as, “Euphoria in the credit markets!”

David Rosenberg reminds us that it’s been 8 years since the Fed raised rates…that we’ve gone 33 months (double the norm) without so much as a 10% correction in the stock market…but last week the DJIA registered a new All Time High Weekly Close…despite geo-political shocks in the Ukraine and Gaza.

BUT…we see signs that the smart money may be quietly slipping out the back door…or at least getting much more defensive. We think capital is moving from the periphery to the center.

For instance, so far in July:

1) Treasury bonds have rallied while “weaker credits” have fallen…credit spreads are widening.


2) The DJIA has made new highs but the broader S+P 500 has gone sideways…while the much broader Russell 2000 is down…the major European stocks markets are down...(L to R: DJI,S&P,Russell)


3)The US Dollar has been rising against most currencies and if it rises another 1.5 to 2% (trading above 8100/8150 ) it will register a significant breakout.


We’ve been anticipating a reversal in bullish Market Psychology to cause:

     A sharp widening in credit spreads
     A break in the stock market
     A higher USD

We think the reversal in Market Psychology has begun…that the key market to watch is the US Dollar…because if the US Dollar starts to rally then EVERYTHING changes. (See: Ambrose Evans-Prichard’s prediction of a  “BLISTERING US DOLLAR RALLY” on

We think that over the next few years the US Dollar could rally like in did during President Reagan’s first term (it DOUBLED in just over 4 years) or during President Clinton’s 2nd term ( it rose more than 50% in 6 years) as global capital flows to the relative safety of the USA…to the much freer and more innovative American markets…here’s a quote from our July 2nd blog:

     “Longer term we expect inflation to erode the purchasing power of the dollar….but capital flowing from the rest of the world to the relative safety of America would see the dollar rise against most currencies. We can imagine a rising USD, rising interest rates and rising stock markets all happening at the same time…a “virtuous circle” based on a relatively stronger and safer America drawing capital from the rest of the world…with that capital flow pushing stocks higher and those gains drawing more capital to America…thus continuing to boost the USD Vs. other currencies. Something similar happened during the 1995 to 2001 period (Clinton’s 2nd term) when capital flows created a virtuous circle of rising interest rates/rising USD/rising stocks which caused the US Dollar Index to rally ~50% and the S+P 500 to gain more than 200% (while the US$ price of gold fell from around $400 to less than $300.)”

A US Dollar Bull Market is not typically good for gold, commodities or commodity currencies.

Short term trading:

We remain long the US Dollar Index…and short CAD. We’re looking for other opportunities to make “USD bullish” trades…waiting for markets to “set up” for short positions…possibly in NZD, GBP and EUR. We may buy the Yen Vs. USD and/or EUR.  We have taken very short term short positions in the S+P…waiting for “set ups” (for instance, a break of 1940) to confirm that it’s time to take longer term positions.   


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Market Buzz - Poloz Continues to Talk Loonie Lower PDF Print E-mail
Written by Ryan Irvine: Keystone Financial   
Tuesday, 22 July 2014 10:23

This week, Bank of Canada Governor Stephen Poloz took the opportunity once again to talk down the Canadian dollar, as he has at almost every opportunity since he took the helm of the central bank.

His plan has been working for the most part as the Canadian dollar has been on a downward trajectory since Mr. Poloz took over. It eroded in the first quarter of the year, and rebounded in the second, most recently trading in a range of about US$0.93 to US$0.94.

The central bank has for some time now held what is known as a neutral bias, which means it’s sending no signal to the markets of whether the next move in its benchmark rate could be up or down. Governor Poloz, however, has left the door open to a rate cut, which has had helped hold the currency down. And the weak jobs report from Statistics Canada last week helped feed into that.

“While there’s no disputing the Canadian manufacturing sector has been in secular decline for more than 30 years, the Loonie has been a pivotal factor in driving activity,” senior economist Benjamin Reitzes of BMO Nesbitt Burns said in a research note this week.

“Clearly the run to parity had a devastating impact on the sector,” he added, referring to his research - posted in chart from below - that shows how the movement in the currency has affected factory jobs, with a lagging impact.


“The only good news here is that the chart suggests we may be nearing a bottom on manufacturing employment. Indeed, if the Loonie weakens as we expect, that could mean some improvement in a year or two.”

This past Wednesday, shrugging off a recent surge in inflation as temporary, the Bank of Canada warned the country's economy does not yet have enough steam to grow without the bank's help and said it could just as easily cut interest rates as raise them.

The central bank, as expected, kept its key overnight rate at a low 1%, the stimulative level at which it has been for 46 months. But Governor Stephen Poloz made clear he is worried about downside risks to the economy after "serial disappointment" with global growth in recent years.

“Monetary conditions today are highly stimulative and it's evident that we don't have a process of natural growth in the economy yet,” he told a news conference.

The central bank said it would keep its policy stance “neutral,” meaning its next move could be either a tightening or easing.

Small-Cap Opportunities in Exports?

While we see the potential for opportunities to present themselves in the Canadian export sector in a lower dollar environment, we are careful not to base our analysis strictly on this one factor. While the current bias appears to be for a lower Loonie, this is far from a fait accompli.

At this stage, we prefer to invest in quality companies, be they Canadian exporters or Canadian energy producers for example that are already profitable and well run and would benefit further from a lower Loonie, but do not require that type of environment to be profitable and ultimately successful.

KeyStone’s Latest Reports Section






Chinese Debt Matters PDF Print E-mail
Written by Jack Crooks - Currency Currents   
Tuesday, 22 July 2014 06:59


“You are a slow learner, Winston."
"How can I help it? How can I help but see what is in front of my eyes? Two and two are four."
"Sometimes, Winston. Sometimes they are five. Sometimes they are three. Sometimes they are all of them at once. You must try harder. It is not easy to become sane.” 

George Orwell, 1984

 [I think of the US Federal Reserve Bank when I read Orwell’s quote.]

Commentary & Analysis

Aussie could suffer a lot more if Chinese debt matters

“Overall credit growth continues to outstrip growth in value added, which is not sustainable,” said Stephen Green, chief China economist at Standard Chartered.

 Financial Times


The Financial Times reported yesterday Chinese debt/gdp is now at a whopping 250%.  I thought it was only the slovenly West that doled out debt in such large quantities in order to save its respective economies?  Nothing like Westernizing is there…

The total debt-to-gross domestic product ratio in the world’s second-largest economy reached 251 per cent at the end of June, up from just 147 per cent at the end of 2008, according to a new estimate from Standard Chartered bank.

Even GaveKal, who seem to be quite smitten by China, sound concerned: “China’s current level of debt is already very high by emerging markets standards and the few economies with higher debt ratios are all high-income ones,” said Chen Long, China economist at Gavekal Dragonomics, a research advisory. “In other wordsChina has become indebted before it has become rich.”

And from Reuters today, trouble in the Chinese construction industry indicating the real estate market is losing momentum at the least:

SHANGHAI, July 22 (Reuters) - Yields on a short-term bond issued by atroubled Chinese construction company have more than doubled in recent days as hope fades that the firm can avoid defaulting on Wednesday.  On July 16, unlisted Huatong Road & Bridge Group Co Ltd announced that it was uncertain about its ability to make payment on a 400 million yuan ($64.4 million) one-year bond issue that matures July 23, after its chief executive was placed under investigation for illegal behaviour.

“The real estate sector in China accounts for 15 percent of China’s economy and impacts 40 other business sectors,” says Reuters.

So how is this debt problem and real estate linked?  A great chart of this dynamic comes from the FT


But many analysts imply rising debt in China doesn’t really matter much because China will keep rolling over bad debt problems into the balance sheets of Chinese banks.  But Prof. Michael Pettis thinks it does matter; here is why…

At any rate for several years I have been arguing that the main reason analysts have managed to get China so wrong is because of their failure to understand the basic distortions driving the economy and one of the major consequences of these distortions is the creation of debt, which itself further impacts the evolution of these distortions. All rapid growth, Albert Hirshman argued in the 1960s and 1970s, is unbalanced growth, and in many if not most cases the kinds of imbalances that result from rapid growth may be acceptable and even necessary in a growing economy.

But as the economy changes, the nature and extent of the imbalances change too, and it is inevitable that eventually the system forces a reversal of the imbalances. This is especially true in countries, like China, with highly centralized decision-making. In these countries the imbalances can be taken to extremes impossible in other countries, thus creating all the more pressure for a reversal of the imbalances.

This means that in China, if you can figure out how the growth model works and how the model generates imbalances and debt, you can pretty much figure out logically, albeit fairly broadly, the various paths that the country must follow in order the reverse the imbalances.

Pettis, I believe correctly, argues China at this stage of development (and given the global backdrop) has two options: 1) sharp slowdown in GDP growth, or 2) continued unsustainable increase in debt.

Some implications of hiding the bad debt in China, according to Prof. Pettis:

  1. China’s GDP may be overstated by as much as 20-30%.
  2. Productivity numbers are biased upwards.
  3. Losses rolled over do not just disappear [there are real implications even in a command-control economy.]
  4. Effective transfer of this bad debt has fallen on the household sector; it reduces their consumption [which is the sector vital in making the transition to a more balanced economy.]
  5. Bad debt must be assigned somewhere; socializing debt does not change this.
  6. When debt stops being hidden, which seems part and parcel to real financial reform in China, GDP growth will become biased downward.
  7. Three places China can assign the bad debt: households, business, or government.
  8. Assigning debt and slowing GDP does not necessarily lead to crisis.  If the household sector is not assigned, income will grow despite a lower GDP.  Rising household income equals a stable social environment and aids the transition to more healthy domestic demand.

Thus, it seems likely sooner rather than later China’s GDP growth will decelerate faster than is now expected.  And though this may be a healthy change for China as malinvestment is reduced, it will likely not be a healthy change for its raw-material satellite country, aka Australia. 

This resource demand aspect of the China story triggered by rising debt and overinvestment, which to reiterate doesn’t necessarily lead to crisis for China, is the a big part of why I expect the Aussie to grind lower in the months ahead (which would be quite welcomed by the Australian central bank by the way).  Here is our weekly chart view for the Aussie possibly heading to the low 80’s:


If you would like to sample our forex service, I will set you up for a two week trial and you can see more of what we do and determine if Black Swan Forex could be a resource to help you make real money in the currency market.

Please click here to request a free trial.  We simply need your name and email address.

Here are the last 10 closed trades we recommended in Black Swan Forex; it produced 215 total pips and $2,173 in total profit, assuming you traded just one-lot or regular-sized contract per recommendation:


Jack Crooks

President, Black Swan Capital

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Twitter: @bswancap


July Market Breadth PDF Print E-mail
Written by   
Tuesday, 22 July 2014 06:46

The last market breadth update was written in June, with a theme of main internal indicators pushing towards overbought levels. The report showed how NYSE High Low Ratio, Advance Decline Line and Percentage of Stocks Above 50 & 200 MAs were all signalling that the rally was overextended.

Click image for larger view



Source: Short Side of Long

After the report was published, majority of the main US indices paused, as the price action has been consolidating in a sideways manner throughout majority of July. During the consolation, we have seen a slight pullback in indicators that were overbought the month before (as seen in Chart 1), but not enough change to write an in-depth summary. At the time of writing, HL Ratio and Stocks Above 200 MA both remain around 90% readings, which is considered overbought. This is still not a time to be making long term investments.

Click image for larger view


Source: Short Side of Long

One interesting condition that does stand out as a cautionary signal is seen within the Nasdaq Composite internals. While the overall index remains in a bull market and continues to higher highs, one should be able to observe that since the beginning of the year internals measured by New Highs vs New Lows have been showing signs of deterioration. We have seen a similar condition during peaks in both 2007 and 2011.

I will definitely be keeping a close eye on the conditions of Nasdaq’s internals in the future newsletter posts focusing on market breadth. As the volatility picks up, I am sure market internal picture will get more interesting and posts more in-depth.


What’s Driving The Market PDF Print E-mail
Written by Lance Roberts - The X-Factor Report   
Monday, 21 July 2014 11:03

“Last week the market finished up 0.54% marking the 15th week of gains which has pushed the year-to-date return of the S&P 500 to 7%.”

If I worked in the media, this would be how I spun the market action last week. However, such bullish spin would miss some important facts such as:

  1. On Thursday, there was a 1% plunge in the index as geopolitical tensions spiked with the downing of a Malaysian Airlines passenger jet and an invasion of the Gaza Strip by Israel. (Note to self: Do not travel on Malaysian Airlines. Two entire planeloads of passengers lost since the beginning of the year is more than just coincidence.)
  2. The other 14 weeks of the year have been negative, and;
  3. All of the gains for the year have occurred since April 1st.

The third point is most important. All of the gains have occurred during a period that has historically been some of the weakest return months of the year.


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Mark Leibovit
23 July 2014 ~ Michael Campbell's Commentary Service

We intruded on Mark Leibovit's summer break and asked him for...   Read more...