It appears that governments have grown increasingly confident about their capacity to finance the next wave of the economic cycle. They are throwing caution to the wind and are committing to debt-finance further stimulus. Clearly they are looking at the poor state of unemployment and are concluding that they cannot afford to end the stimulus. This can only increase the inflation rate, though it might just push equity markets higher. I would caution, its probably just likely to prevent a faster fall as the markets will struggle with two issues:
1. The rising unemployment rate
2. The prospects of falling equity markets
3. The prospects of rising inflation

The market in the interim will react positively to good stock news, but rest assured that markets will shake off this good news eventually. In any respect the metals markets are looking good, with gold and other precious metals particularly attractive. In the Asian region, we have seen Philex, one of our favourite stocks double in price to P18.
In Australia, we have seen gold stocks perform well despite the strength in the AUD which reduces the $A denominated receipts from gold sales. There is of course a limit to how high the AUD will rise because of the prospects for a weaker global economy. Meanwhile we are projecting gold to rise from the current $1104/oz to $2400/oz. I'd give the market a maximum of 3 years to reach that level. We first started investing in gold in 2000 when gold was around $280/oz. The stocks then differed from todays. More news at Blue Sky Mines.
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Andrew Sheldon www.sheldonthinks.com

S&P500 - set to challenge downtrend

The next few weeks will be critical to the US market. The S&P500 could go either way. We can see from the following chart that, despite the recent strong rally in the Dow to 10,000 and the S&P500 to 1100, the market is still in a downtrend. This condition will be challenged in coming weeks. The market has been celebrating the positive earnings recovery, though one has to acknowledge several things:
1. Tight credit conditions
2. Continued job losses
3. Prospect of inflation
4. The role of government stimulus in preserving economic activity

For this reason I am expecting US equities to fall in coming weeks. One might wonder however if this gloomy forecast is premature. Afterall the US can keep printing money, so until the day when inflation undermines the impact of further stimulus, the US Fed can support the equity market for a time yet. The market might however see it another way, so this is good reason for a pause. This also adds to the allure of gold.
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Andrew Sheldon www.sheldonthinks.com

S&P500 - still in a downtrend

Looking at the US market it is apparent that despite the recent rally in the S&P500 from 670 to 1078 between March and September 2009, the market is still in a downtrend. The implication is that the market tanked when its downtrend was being challenged. The question therefore becomes - how low will it fall? I am expecting a fall back to the 942 support level, then consolidation from that point.
I would not be surprised to see the S&P500 return to its lows of 670, however that will not occur for some time yet.. 12-18 months as I believe the motivation for that move will be the prospect of higher interest rates to fight inflation. This will all be conjecture to cynics who need to experience things first hand before they believe.

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Andrew Sheldon www.sheldonthinks.com

Nikkei-225 resistance proves too strong

The Nikkei-225 broke resistance on Monday and has continued to fall during the week. This is of course another downtrend in global equity markets. The question is how low will it fall? We see the most likely support levels as 9,065 (interim) and 6,850. The possibility of the market falling to 6,850 is pretty dire. But that is what happens when people are fearful of the future, and are unable to spend because they are concerned about losing their job or face ever-tightening rises in interest rates.

It will be hard for market pundits to appreciate but the worst has yet to come. The recovery in the stockmarket was of course the result of government stimulus. There is talk that the property market is about to recover as well. We do not believe that at all. We think there are safe places to buy, but cities and tourist meccas are not among them, and will not be for several years yet.
Much will depend on whether government continues spending. It seems impossible because of the damage they are doing to the underlying economy. Stimulus absorbs underlying lack in market capacity by stimulating demand, but in as much as governments don't constitute 'productive' capacity, the implication is that they do not create wealth. They simply redistriiute money, which means they are inflationary. Right now they are among the few spending money. The greater share of the economy they represent, the more protracted the slump. The implication is that we are either going to see failures or have a long drawn-out recession like Japan. I would suggest its going to be some compromise between collapses and protracted recession. i.e. We are looking at selective intervention.
For the reasons above I sold a position I had in KDDI last Friday before their was considerable carnage this week.

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Andrew Sheldon www.sheldonthinks.com

Nikkei-225 at resistance

The Nikkei-225 has reached an important resistance. It is my belief that the global central banks will continue to print money, so we can expect global equity markets to keep rising for the time being. For this reason I see the Nikkei probably rising to 12,500 resistance before being overwhelmed by inflation concerns. In the short run inflation tends to look good on balance sheets, however eventually it eats into consumer confidence and results in more job losses.
For the Japanese market it will be interesting what impact a change in leadership will have on the economy. This is a landmark development for Japan. Historically when Japan has had periods of reform, they have been earthquake-type shifts in policy, so with two senior business figures leading Japan's new party it will be interesting to see the impact of this new team. I watch with interest their forthcoming announcements.

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Andrew Sheldon www.sheldonthinks.com

The outlook for the Dow

There are a great many people predicting another slump in the Dow. Certainly that can be expected given the protracted rally we have just experienced. The rally was of course driven by the Fed and Bank of England 'recapitalising' the monetary system with government debt, as opposed to household debt, and also printing money. The implication is that there is no end to the largesse until it has no effect, and that 'crisis of confidence' typically comes in the form of inflation. For this reason I see no reason why the Dow can't keep going on its current track. A pull back is inevitable, and no doubt the continuation of the rally will not be justified, but neither is silly government monetary policy.

US unemployment continues to rise, sales continue to slump. A big factor in the Dow slump will be the sign that central banks around the world are starting to raise rates. But I do not predict this will be a significant obstacle until inflation gets up to around 5%. At that point, people will conclude that we are in for a serious slump. By that point gold will likely be over $1800/oz. My latest calculations suggest gold will rise to a minimum of $2200/oz. See my commodities post.
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Andrew Sheldon www.sheldonthinks.com

Investing in Taiwan

One of my readers suggested Taiwan makes sense as an investment destination, and I agree. He notes that Jim Rogers, the commodities trader who set up the Quantum Fund with George Soros was also investing in Taiwan. The positives for Taiwan are:
1. The ability of foreigners to invest in Taiwanese stocks - within limits that are unlikely to affect you, and there is the CFD opportunity as well.
2. The investment exposure to China
3. Tiger economy
4. The positive prospects of Taiwan and China cooperation

If you want to see there blogs, I refer you to Taiwan blog and Jim Roger's blog. I also like the Philippines northern coast, which has witnessed an increase in Chinese (HK, Taiwanese, Singapore, China) investment in property (resorts, hotels) in recent years. There is now an international airport at Laoag. Check out our property report or our property blog.
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Andrew Sheldon www.sheldonthinks.com

US Fed reaches deep for new levels of delusion

The latest headline “US Fed sees signs of economic upturn” by Rob Lever, SMH Online, 21st May 2009 has the US Fed recognising "tentative evidence" that the US economy is emerging from recession and could show modest growth in the second half of 2009. By way of our analysis, suggests a new low in US Fed delusion. How possibly could the US be looking at turning around when it’s just about to experience a re-setting of mortgage loans. Remember the sub-prime crisis. Well there is an equally large problem facing US mortgagees – the resetting of those ‘teaser’ interest rates to market rates. Now, I must concede that those interest rates are not going to reset at troublesome rates in the short turn, but with the Fed and central banks around the world pumping money into the banking system, the day is not too far away that we are going to experience some inflationary pressures. Just as governments have been stripping out costs to reduce taxation, now we are going to see consumers or households facing higher costs, higher inflation, partially for the sake of debt sustainability, and partly because there is so much paper money in the market which is not supported by current levels of economic activity.
The Fed revised its economic outlook to suggest US output would fall 1.3-2.0% over 2009, and that the worst declines may be over. Well that does not surprise me. If you are ‘high’ on economic stimulus there is no question people are going to feel good about a stabilisation of asset prices, but at some point inflation is going to take its toll on household’s purchasing power.
The notion that “there are improvements in financial and credit markets” only highlights the fact that the Fed and other central banks have been recapitalising the banks using taxpayer money, and rather then using the proceeds to lend to households, who are already indebted, the banks have been speculating in the securities markets, driving up security prices. This will come to an end at some point soon, and we will be looking at another volatile downtrend through 2009-2010 as interest rates move higher.
US economic output fell by 6.1% in the March quarter of 2009 after a 6.3% fall in Dec-08 quarter. They are serious hits to the market, but more will follow. There is at least some recognition that this is crisis is not over. The Fed projects unemployment to rise from 8.9% in 2008 (a 25-year high) to 9.2-9.6% in 2009.
The Fed expects inflation to hold at 0.6-0.9% in 2009. I have never believed in inflation numbers because you only have to look at how they define the concept. Any measure of inflation that does not consider all asset prices, excludes the most important components like securities, food and energy, is just trying to plan delusional games betting on Chinese deflationary impacts. A sudden loss of economic capacity is going to result in higher fixed costs to all production. There is no escaping that, though if you are selective in your inflationary analysis, you can of course opportunistically consider energy and asset prices, which have been falling...but not for much longer. The reality is – inflation as defined is manipulated, so give it no heart.
Now for those of your with a sense of humour. The Fed is forecasting “modest growth” of 2-3% in 2010. Wow, that is quite a turnaround. You might be inclined to believe that there is no reason why this market cannot just turnaround like it did in years past. Afterall as long as the Fed and other central banks shore up the banking system, what it to stop Western governments from sustaining this delusion for years to come. I think there are several issues which can stop them:
1. War
2. Pandemic
3. Debt levels
The international political environment is pretty tense, but there is probably little prospect of war or further substantial military action at this point since oil prices have fallen significantly. A pandemic is a threat to consumer spending, though I would suggest any threat is likely to be short lived. It might actually be expected to affect the financial system more than the real economy. My analysis is that it will cause short term financial volatility, which will probably knock a few more financial institutions out of the market, but that the market will recover from a bird/swine flu based pandemic. We will stock up on food, hide in our houses for a few weeks as it sweeps the world, and on that basis it will die out, and become a less virulent strain.
Debt levels remain the biggest obstacle to the sustainability of the current economy. Even if tax increases can be delayed a few years, it will only result in government debt being rising to the same levels of household debt. With many households already having lost a lot of equity in their homes in recent times, causing the biggest mass transfer of wealth (as a % of GDP) in history, who would expect a recovery? This at a time when governments are moving to consumption-based taxation. Who understands the logic of these people? Well of course its a desire for short term political power, and taking every expedient step to preserve it.
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Andrew Sheldon www.sheldonthinks.com

Nikkei-225 likely to top off

The Nikkei-225 is likely to come under selling pressure at these levels. The country is really faring poorly as a result of a slump in exports, and job cuts. Confidence is at a low level. The defiance comes only from the market, which of course is being fuelled by the cheap bank funding, as you can bet the funds going into the banking sector are not going into loans.
I don't see the Nikkei going above 9600 points unless the Japanese government decides to stimulate the economy with yet more money. Of course there is no limit to the upside in equities in the short term. It all comes down to how much you are prepared to debase your currency.
So I am negative on Japan, but let's wait and see for the market to set the direction. Stimulus will drive the market higher, property taxes will drive it lower.

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Andrew Sheldon www.sheldonthinks.com

ASX-200 set for a rally

I have indicated already that I see a hard time for the US economy. There is nevertheless the prospect of more stimulus in the US, and I would not be surprised to see a tax on energy. We have the prospect of carbon credits trading in the US, as in other countries. This issue awaits the Copenhagen Summit. I would not however be surprised to see these governments agree to just tax energy consumption since that will allow them to control the cash. Really it was all just a rationalisation to create another indirect tax.
The chart to the right suggests that the ASX stock index has broken through resistance at 3,845. Having convincingly done so, the market has once again pulled back to support at that level. I suggest this is an opportunity to buy.
The reason the ASX200 is looking so positive is because of the positive shape of the Australian economy. The positives are its agricultural and mineral export base. This is positive in several respects. China is talking about buying up commodities, which means commodity prices are going to stay relatively strong, or at least stronger than they otherwise would, so we can expect the ASX market to trade higher as well. This also helps support some of those projects which would otherwise be cancelled, as I am sure that a good deal of investment will be going into mining/mine equity as well as commodity inventories. So we can expect a lot of investment in Australian resources, and that's across the board - coal, iron ore, copper, gold, nickel and ENERGY. There are some large LNG projects on the table. Australian tourism is very weak despite the weak dollar, though that fabulous Qld govt campaign promotion for the 'Best Job in the World' will help.
So basically I am expecting the ASX-200 to climb to 4360 level in coming year, though I think that will be the top of the market. The China factor will stop Australia sinking back to lows, but it will mean the AUD and equities just trading in a higher channel band. The flipside is that the market might go sideways longer, but I don't think so, as I don't think China will be dumping commodities in a hurry.

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Andrew Sheldon www.sheldonthinks.com