The Next 10 Days

…I will be in a motorhome, touring NZ North Island, so internet access is going to be occasional and fleeting. So an update and roundup on the markets below, and I will post in the comments beneath it anything important in that period. After New Zealand it’s Abu Dhabi for a week, the last stop on the trip, before returning to Europe.

Let’s start with gold. Major extreme readings were reached last week in oversold and overbearish measures, in both gold and gold miners, many more extreme than in the 2008 sharp falls. I won’t reproduce them here, as many blogs and sites have shown them, but it was sufficiently extreme for me to add to both gold and miners last week as declared. Gold has since rallied away from those extremes and therefore in price, and whilst I don’t know how it will shape technically from here, the key question is whether its secular bull is over and ended in 2011 with silver’s parabolic rise and fall. So here is gold since the start of its secular bull in 2000, measured in all the major currencies. It should be clear that gold has tracked sideways since 2011 and has consolidated up high, whichever currency it is measured in.

260220139

Source: Gold.org

As a parabolic excessive-greed finale is the norm as a conclusion to an asset secular bull, and as gold is the leading asset in a Kondratieff winter (which we are concluding), I would give good odds to gold finishing with a blow-off parabolic. A comparison with gold’s last secular bull, below, shows that blow-off parabolic clearly and how gold’s secular bull this time has been fairly measured to date.

2602201310

Source: Nowandfutures

I am not suggesting that gold has to shoot as high as the comparison suggests – only rather that some kind of excessive exuberance would be a normal end. So, the lack of parabolic ending move in gold yet, together with the high sideways consolidation when the whole secular bull from 2000 is viewed, give me a couple of reasons why I believe we have been seeing a final washout of weak hands before gold breaks higher. However, I await supporting evidence such as from sunspots breaking higher (to confirm the solar peak is ahead), commodities starting to outperform equities, and inflation picking up. This is how sunspots look:

2602201313

There is a mess, rather than a trend. If the solar peak is ahead this year, which remains the most common forecast, then we need to see daily sunspots register over 200 to make the uptrend clearer. So I am looking out for that.

Since my last post on the markets it has become clearer that pro-risk did begin a correction at the turn of January into February. The chart below combines proxies for stocks, commodities, risk-safehaven FX and treasury bond yields.
260220134

I suggest there are two paths forward, both of which eventually will see equities return to their highs, in order to deliver a negative divergence top (price advances but internals weaken). The first is the five-models-in-alignment path, which suggests pro-risk may pull back into March before advancing again. The second is that pro-risk is only making a normal lunar pullback, into yesterday’s full moon, and will continue upwards over the next few weeks, for a Spring swing top. This option is supported by cyclicals as a leading indicator, and my geomagnetism model shown:

2602201312

The tail on the model stretches out into the end of March and remains in an uptrend due to unseasonally tame geomagnetism (actual and forecast). The oscillations within that are the lunar phase pressures.

There also remains a fairly benign macro-economic environment, which should support pro-risk, although we should always be alert for early warning signs of a change, and we could potentially have this in the latest PMIs.

China PMI, US PMI and Europe PMI in order below:

260220131

260220132

260220133Source: Markit

A droop in the latest data, but still positive in China and the US.

Meanwhile, economic surprises show unclear developments in both Europe and the US, but using oil prices as a leading indicator for the latter, a topping out in this measure may occur in Spring.

260220135

260220136Source: BrokenMarkets / Citigroup

US earnings season is pretty much over, and the final results in both earnings and revenues were good, and supportive for equities.

260220137

260220138Source: Bespoke

The latest Conference Board leading indicator data table looks like this:

2602201311

Source: Conference Board

Since my last market post, readings for China, Germany, US and Mexico all came in positive. The table is healthy, for now.

In summary, the picture between leading indicators and economic/earnings data is fairly supportive for pro-risk for now, unless that droop in PMI readings becomes wider weakness ahead.

There is bearish sentiment towards sugar, coffee, wheat, corn and cattle currently, as well as the precious metals, and I would add to commodity positions if we saw improved evidence of a secular commodities peak ahead, namely those developments listed above. Until that becomes clearer however, I am playing it safe and sticking largely with what I have, as both the primary (secular commodities and solar peak ahead) and alternative (secular and solar peak passed) scenarios remain in play.

Australia

OK, I am a little jealous. This is a country rich in natural resources and the size of Europe but owned by just 25 million people. It has great climate and biodiversity and the vast majority of people live right on the coast, enjoying outdoor living. It is an old land mass and indigenous people have been here for 50,000 years, but as ‘Australia’ since mass European immigration, it is a young nation and economy, unimpeded by history and tradition (as an example. in terms of protecting and sustaining its nature it is trying to get things right from the start, compared to older countries with vastly depleted natural stock). The indigenous Aboriginals represent just 2.5% of the population now, and what is of particular interest to a Brit like me, is that around 80% of Australians can trace their descent back to the UK and Ireland, a migration that continues. More so than USA, which is more multicultural, that makes Australia ‘New England’, and visiting the country has left me with a respect for those who have had the bravery to migrate to the other side of the world for a country that not only offers good living, but excellent future potential. This is currently the 13th largest economy in the world but I believe this century it can become one of the leaders. For the UK, I don’t predict anything too terrible, but a continued gradual relative decline in wealth compared to other countries with greater natural resources and less debt, such as Australia.

It is not without problems of course. Like the USA,  nature challenges the country. A decade of drought and bush fires, followed by a couple of years of floods, make up recent history. The  interior of the country is very dry and tough, which is a reason why most live on the more fertile coasts. Many of the world’s most dangerous animals live here, from tiny killer spiders to saltwater crocodiles. But such natural threats did not stop the USA from becoming the world’s leading economy, and I suspect it won’t impede Australia too much either, because the two countries have something else in common: almost everyone is an immigrant (or descendant of an immigrant) who came in search of a better life. In other words, they are both nations of ambitious, adventurous people. But Australia, as an economy, is younger than the US. It was only when the USA successfully fought for independence that the Brits turned to colonising Australia, 200 years ago, and it is only in the last half century that Australia really began to find its feet. It was the only major nation to avoid a recession around 2008 and is enjoying a particularly golden decade on the back of the secular commodities bull. The result is an expensive Aussie dollar and a cost of living which to me, as a British traveller, was higher than in London. It was impossible to avoid paying what felt like significant overpricing for food, accommodation and transport. However, if a new secular commodities bear erupts for the next 10 years, I suspect the Aussie dollar will give back some of its strength, and the economy may slow too. Nonetheless, Australia is still just scratching the surface of its potential, and the population is expected to grow to over 40 million by 2050, with continued migration from other high density countries into Australia’s wide open spaces.

My Australia visit comprised a road trip from Sydney to Melbourne including the Great Ocean Road to the west of Melbourne. Sydney is supposed to be one of the most beautiful cities in the world, and having now seen it, I concur. It is glamourous and pristine and the waterside setting is optimised. Melbourne has a more relaxed, student feel to it, but also has its treasures in its ‘lanes’. The scenery between the two cities and beyond was beautiful all the way, and the wildlife interactions with kangaroos, wallabies, seals, penguins and more a real pleasure. One negative was dated motel-style accommodation (often this was the only option), and one positive was never paying for parking anywhere. If I was to repeat the journey, a motorhome might therefore be a better option. The empty roads made for great driving, and it is easy to find your own deserted bit of coast. I found the Australians themselves polite and friendly and whilst clearly showing some shared characteristics with the Brits, also their own laidback approach, not taking life too seriously. Very clear information was a theme: wherever you walk, drive or stay, you won’t ever be short of signs and instructions, and everyone seems to conform rather than abusing the rules.

The Aboriginal population lives largely together in certain designated parts of the country, but this group is troubled, with unemployment, drugs and suicide problems. For a long time they were treated badly by the European settlers, and whilst that has now been officially rectified, it is only very recent, in the last 20 years. It is they who have paid the price for this new flourishing nation. For 50,000 years they owned this country and in just 200 years they lost their nomadic lifestyle, became second class citizens, and now under official equality they are still struggling to adjust.

This sadness aside, I found Australia a very tempting prospect. I would very much like to be a part of this lovely country and its bright future. But the bravery of those who made the migration here from Europe, is that they left behind friends and family – it really is the other side of the world. So, instead I intend to come back and travel the rest of the country and I will look for investment opportunities in Australia from my armchair. I don’t see those investment opportunities right now – I believe a secular bear in commodities is ahead and that will pull back the Aussie dollar and economy to some degree, but once at a more reasonable level I will be looking. I end with some pics:

Sydney:

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A wallaby:

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Harbour-side entertainment from a wild seal, some cormorants and a large ray under the water with his tail out:

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Koalas spend most of the day asleep in the eucalyptus trees:

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Hanging out with the kangaroos:

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As Things Stand

Gold, silver and gold miners are at extremes of oversold and overbearish readings, with possible high volume capitulation candles on the last day of last week. Mean reversion should now follow in the form or either a relief rally to work off these conditions or the start of a new upleg, but first we need to see a turnaround and some buying interest.

The majority of other stock sectors, aside gold miners, are overly bullish, and warning flags persist in equities, but without any technical break yet. Is the narrowing number of global stock indices making new highs a sign of a gradual top taking place since the end of January, or was that meagre correction only a blip in a continued advance into March? It’s not clear at this point, but here are two reasons why equities could potentially advance into March: cyclicals as a leading indicator and actual/forecast geomagnetism. So far this year actual geomagnetism has been tame and it is forecast to remain so into early March at this point – here is the latest model with the tail three weeks into the future:

20feb20131

Only in June-September last year did US stocks diverge particularly from the cumulative geomagnetism model and whilst that divergence gap has not been repaired, the market direction has since been following the model direction again.

If equities are instead in a correction that began in late January, with a couple of laggards about to turn and join (e.g. US indices), then I can refer you back to five models in alignment, and would also point to the current narrowing wedge in treasury yields which could suggest a switch to safety and away from pro-risk is coming, if yields break down:

20feb20132Source: Stockcharts

The latest leading indicator releases from CB came in flat for Korea, +1.0 for Spain (improvement on last month) and -0.1 for Australia (also). Commercial loan data for China showed quite a jump in January. US earnings beat rate for this quarter came in at an impressive 64% beat rate both in earnings and revenues. Citigroup economic surprises have turned up again in the US:

20feb20133

All in all, a continued positive environment persists for pro-risk assets and any pullback at this point should be as a result of excessive bullishness rather than a deterioration in the macro picture – at least until that changes.

I have no further evidence at this point to validate or invalidate the primary scenario (secular commodities peak and solar peak ahead) or the alternative scenario (secular commodities peak and solar peak in the past), but I expect we will see decisive evidence one way or the other within the next couple of months.

I am leaving Australia on Saturday and coming to Auckland NZ for 3 nights, before motorhoming around the rest of the North Island for 10 days.

Brief Weekend Update

Please excuse the brevity and standard of this post. Internet provision in Australia is behind the times (payable, slow, restricted or unavailable), and it appears this will continue for the remainder of my time in Australia and again in New Zealand. I am currently approaching the region around Melbourne.

We’ve reached extreme bearishness levels in coffee, sugar, gold, silver and wheat, as well as oversold readings and what looks like a capitulation in both gold and miners. These are normally the circumstances in which I would buy, but I am happy with my exposure in commodities and as the alternative scenario remains in play (secular commodities peak passed) I do not wish to twist here. I am awaiting more evidence in support of the primary scenario (secular commodities peak ahead within the next 12 months), which would include evidence of another extreme hot year developing globally (January data not in yet), evidence of sunspots still climbing towards their peak (currently a quiet sun), and technical breakouts with momentum in the laggard commodities. Oil and copper have been involved in the pro-risk rally, which I believe is a good sign, particularly as oil correlates normally well with both agri (key input in production) and gold (inflation hedge).

US equities remain resilient but I maintain the overall picture for equities, as represented by the MSCI World Index, is that a consolidation began at the turn of February. My short treasuries position made some progress in line with the pro-risk rally but also looks to be digesting a little.

The latest leading indicators from the Conference Board showed a move into the positive for Japan, another +0.1 reading for the UK and flat for Korea. The latest ECRI leading indicators reading for the US showed a small pullback but still strong positive. The OECD leading indicators for all the OECD countries showed the healthiest picture for some time. The overall picture remains supportive for pro-risk.

We are in a down pressure period until the full moon around the 25th February. On the flip side, geomagnetism remains tame.

So I watch and wait. Equities have stretched to the upside, agri and precious metal commodities have stretched to the downside. A switch in performance ought now to follow, with bearishness extremes in the latter providing the fuel. Gold is certainly testing patience, but there is a historical pattern of assets pre-secular parabolic finale doing their best to shake out weak hands before the final upleg, plus on a secular view (since 2000) it can be seen that gold has been consolidating near its highs over the last 18 months, which is not a typical secular bull ending pattern. Nonetheless, the case I made for the ‘alternative scenario’ (secular commodities peak passed) remains potentially valid for now (though I rate it lower probability), so I await developments to shore up the one or the other scenario.

Sri Lanka

We started off in Colombo, which is a noisy, busy, messy sprawl, with the 24/7 sound of peeping horns. Every journey on the roads was fairly hair-raising. It was interesting to soak up the chaotic atmosphere, but there is little in the way of attractions or sights in the city. It is not yet at the development or wealth level whereby it can be more than a functional city – maybe in the future. Despite the rawness, the people generally seemed friendly and there felt little threat, and that proved to be so throughout our Sri Lanka stay. In that I am mainly referring to men, because most of the service jobs are taken by men, with the women home. It was not uncommon for the complete range of hotel staff to be male, from cleaner to manager. Tuk-tuks are truly everywhere, used by locals and tourists alike, but every driver was a male. So here goes one person’s experience of the Sri Lankans (largely males) – backed up by a little research:

The Sri Lankans are often keen to sell you something, and if you stick only to the main tourist circular route (Galle – Nuwara Eliya – Kandy etc) then that it likely to be at the most intense. But they are generally friendly and keen to say hello, and it felt very safe. Personally, I would rather people came up to me wanting to make a living (as in Sri Lanka), rather than coming up to me trying to con a living (countries where it doesn’t feel safe), and like in Bali, if you step off the main tourist circular then you’ll experience less opportunists. I didn’t find the Sri Lankans as charming as the Balinese or Malaysians, as there appeared to be some pettiness, impatience and competition amongst the Sri Lankan men – not so much with the  tourists but with each other. There was also a little incompetence and lack of confidence, particularly evident at the higher-end accommodation, whereby the general standards didn’t measure up to other countries on the trip. Nonetheless, these were niggles in an otherwise positive experience, with these highlights:

The beaches of the south-west (down from Colombo and across to Yala) are excellent: palm trees, soft sand and dramatic waves. The staple ‘rice and curry’ dish on offer everywhere is in fact a great banquet-for-one at a very cheap price: you get a fish or meat curry, 3 vegetable curries, rice and poppadoms. We experienced great wildlife on the doorstep of a lot of our accommodation choices: chipmunks, bats, monkeys, fireflies, mongooses, and more. Plus on sea safari blue whales, dolphins and manta rays, and on safari in Yala elephants, eagles, crocodiles, water buffalo, and others. You can’t stay in Yala National Park, but the closest hotel is Chaaya Wild, which is completely open to the wilderness, and the wilderness comes in. In and around the hotel complex we saw iguanas, langurs, crocodiles, snakes, leopards and more. So as well as a safari in the national park, just being at that hotel was a real wildlife treat (rooms, beds and food all excellent too).

The Sri Lankans are mainly Buddhists, but various religions are practiced and there are statues of different gods in large roadside glass display cabinets, including Jesus and Hindu gods. One principle of Buddhism is anti-alcohol, and whilst booze is legal in Sri Lanka, it is therefore not moral for many of them. Instead, betel leaf chewing (stimulant with euphoria) is common, with red spit marks all over the streets as a result. English is widely spoken but not everywhere. There are 3 different main languages, with 3 different scripts. The far north, home of the Tamils (which is one language and script), is still considered unsafe for tourists, and it was only 5 years ago that the Sri Lankan army defeated the Tamil separatist movement, ending a 25 year civil war in that region. There are still many soldiers around guarding the streets throughout Sri Lanka, a reminder that those troubles are still fresh.

For some of the reasons outlined in this brief summary, I did not come away wanting to invest in Sri Lanka (shares/funds). But understand this is based on 3 weeks, in 6 different areas, in particular circumstances, and is only based on a shallow understanding. If a Sri Lankan reader wishes to pull me up on any inaccuracies or generalisations I shall humbly defer. But this was my experience, and I would return as a traveller for the beaches and the wildlife. Let me end with some pics.

P1050367 P1050486

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Weekend Roundup

Mixed fortunes within asset classes heading into the weekend, but a summary chart below showing MSCI world equities and the CCI equally weighted commodities index reveals a general pullback began at the turn of February, which could mean the January swing top predicted by the 5 models in alignment could still be validated.

9feb20134Source: Bloomberg

Treasury yields also peaked at the same time, the turn of February, adding to the case.

If we look solely at US stock indices, however, it would appear that they just broke upwards out of a range on Friday, which is normally technically bullish. However, the Dax made a similar range breakout in late January only to then reversed it, and there are some clues that the same could occur here, such as the Vix divergence below:

9feb20135Source: Cobra / Stockcharts

US earnings, so far coming in at a 64% beat rate coupled with a 63% revenue beat rate, have been providing a tailwind. However, economic surprises have been weakening, and also suggest a pullback should occur:

9feb20136Note how surprises have turned negative, and that the last two times that occurred, equities made a swing top.

We also see some frothiness extremes in certain sentiment readings for US equities and also in equity fund flows. In short, I see more reasons for US equities to turn down here and pullback, rather than fulfill their breakout, and so join other pro-risk in consolidation or correction. I maintain that any pullback will be followed by a return to the highs and likely a higher high, which will mark a cyclical top if accompanied by negative divergences in breadth, leading indicators and so on, likely by mid-year 2013.

In terms of leading indicators, the global picture is still fairly healthy. Here is the latest combined global PMI (manufacturing and services) reading:

9feb20137Source: Markit / JP Morgan

To add to that, ECRI’s leading indicators for the US also show strength:

9feb20138Source: Dshort / ECRI

Copper, which is generally a bellweather for the global economy, may have broken out:

9feb20131Source: Kitco

Which brings me to a chart provided by Rob Bowden showing many commodities may be poised for such upward thrust out of large triangles, with equities largely having broken out.

9feb20133

Source: Rob Bowden

There are no guarantees commodities can break out here but the scenarios shown would largely reflect my own views – equities pull back to the nose in a final shallow cyclical bear, and commodities make a secular finale acceleration up and out.

The caveat would be if my primary scenario is incorrect (secular commodities peak and solar peak ahead), and the alternative scenario is correct (secular commodities peak and solar peak passed). NASA’s updated forecast this month continues to point to a solar peak circa September 2013, and I maintain that the probability lies with the primary scenario for now. One or the other is likely to be validated soon by action in gold, which remains tantalisingly undecided, shown here:

9feb20132

Into the nose of the triangle, it remains above the 200MA, which has largely supported the secular bull, but it remains perilously close to dropping out of the triangle and beneath that key MA. Sentiment is fairly depressed for both gold and gold miners which should be fuel for an up-move. But I do wonder whether we might see a lunge to the downside to flush out weak hands before an upwards break. We’ll see.

Lastly, here is a summary of global house prices. It’s a busy graphic but the overall theme is that in late 2011 and early 2012 we saw what appears to be a turning point for global real estate, with a pick up since then in markets such as Hong Kong, US, Switzerland, South Africa, New Zealand and Canada. Various European countries remain in downtrends but may turn out to be the laggards in a change in trend.

9feb20139This would fit with an overall transition from K-winter to K-spring. A bottoming out in real estate and a new secular equities bull emerging in due course. One last push in commodities, before money begins a secular move out of treasury bonds and commodities and into equities and real estate.

Borneo

Borneo is a lush green island with a rich variety of flora and fauna. With geological interest too, the main tourist draw is trekking. Borneo also has an interesting tribal history and although the tribes still exist, they now largely live in modern housing in towns. The modern world’s pressures apply here just as anywhere, and cutting down the jungle for timber or to make way for more profitable palm plantations has meant there now has to be a focus on ensuring migration corridors are kept in tact so that animal populations don’t become ‘stuck’ and their survival threatened. Nonetheless, around 50% of the island remains rain forest, and it is the oldest rain forest in the world.

The island is split between three countries: Indonesia, Malaysia and Brunei, and we spent our time solely in Malaysian Borneo (as the Indonesian part is malarial). I wrote about the country of Malaysia here, so just a little addition about Borneo today. I was interested to see whether we’d experience a rather different Malaysia to Pensinsular Malaysia, and the Borneo locals answered that their part of Malaysia is more relaxed and inclusive. From my traveller perspective, Pensinsular Malaysia was already very relaxed and inclusive, and it was a real pleasure to enjoy their warm, friendly, gracious hospitality again in Borneo. To try to quantify they way the people are, imagine no road rage, no wariness of strangers, and service industry people proud and happy. The quality Malaysian infrastructure and rich variety in food again mirrored peninsular Malaysia. Suffice it to say I am a big fan of this country.

Kuching is an attractive riverside town/city. From there Bako National Park is a bus and boat ride away, where we were treated to animal encounters galore as we trekked around the jungle and the mangrove. Up near Kota Kinabalu, we stayed at the Shangri-La Rasa Ria, with its own white sand bay and nature reserve. The whole experience at that resort was one of the best I’ve encountered, with the attention to detail. Time for some pics.

The wild beauty:

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Silver leaf monkey:

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A flying lemur:

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The curious-looking proboscis monkey:

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A highly venomous viper:

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The iconic Borneo orangutang:

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