The Australian All Ords is likely at bottom

The Australian market is looking like pretty good buying at this point, though I don't see any need to rush in. I would suspect some more weakness in commodity based stocks, but I think we will see a flow of money back into banking, insurance and retail stocks. Sure commodity prices are looking a little weaker, but as far as the economy is concerned the economy is still generating large amounts of cash, and the contribution of the farm sector will kick in. I would suggest one of the biggest factors helping to hold up the market will be the huge amounts of investment in gas, iron ore, coal, coal seam methane projects in WA, NT, NSW and Qld. All this new capacity means Australia will be well positioned for the next decade, and the investment will help lift demand in the short term. The market will likely consolidate around this level for some time.
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Andrew Sheldon www.sheldonthinks.com

Weaker Dow for the present time

The Dow Jones is going back down to 11,000 pts.


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Andrew Sheldon www.sheldonthinks.com

The global economic super cycle

These are interesting times. We are told that this is an inflationary cycle. True enough. But its not exactly clear just how significant this credit squeeze is. My personal opinion is that this is just a medium term correction, that within 18 months we are going to see a new period of credit growth. My reasons for believing this are that this 23-years growth period (1984-2007) has been too limited or regional. It was in Asia ('the tiger economies'), then it was the West, then the commodity countries. I am looking for a period when it is everywhere, when all markets are booming. I know that we will be at the top of the economic cycle when the developing countries are having property booms, when there is an excess of industrial capacity rather than a shortage. You might say that over-supplies start with shortages since they are what ignite all the new capacities. But this is what differs. This is a super-cycle where the bottlenecks run so deep that there is no chance for sufficient supply to meet demand. For this reason, I think the current credit squeeze is a period of debottlenecking. That the relaxed demand will see softer prices, particularly in assets, but it will be a period of rebalancing. Everyone is going to be relatively rich because of the huge productivity gains that are going to come from technological change.

My understanding is that this is one of those economic cycles that come around every century or so, the last being the 1880s through to the 1920s, when the world goes through a economic revolution of soughts. The Modern Era started in the Rennnaissance in the 1570s, with Leonardo Da Vinci and others. Invention of the printing press and global exploration driven by news ideas and technology. This is such a period with global inter-connectedness which will do the following:
1. Allow people in third world countries to catch up on technical skills faster than at any time in the past. Every day more & more of the information we need is on the internet and its going to grow. So how does one differentiate oneself? By having better, more useful, more insightful information.
2. The culmination of that trend is going to be global outsourcing of services. It will start with basic things like accounting, bookkeeping, technical support for call centres, but eventually it will include sales roles and project management.
3. This of course has to push a lot of productivity incentive upon the Western countries who need to stay relevant. The key is for the West to appreciate their strengths.
4. The globalisation of markets will change the way we relate. The distinctiveness between cultures will die. The market will become global. already markets are aligning. Sadly there is no competition between governments so it looks like they will align themselves in their common goal of screwing taxpayers.

The big feature of this credit expansion is that its going to move to Asia. The ASEAN region is currently creating a framework for economic integration which I believe is going to make this a region not just of savings to finance the West, but a region of conspicuous consumption. We are going to see more Indians and Chinese holidaying in the Philippines, Indonesia, whilst these countries reform to embrace the benefits of capital inflows. China and India will continue to rapidly urbanise their populations, with those new pools of labour providing part of the productivity gains, the rest coming from better organisation and technology. Organisation will mostly mean more outsourcing and specialisation.

So what are the implications for markets and commodities?

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Andrew Sheldon www.sheldonthinks.com

Iran threat an evolving issue

About a year ago gold prices rose as a result of escalating fears that Iran was developing nuclear weapons, though the threat seemed some time off. The latest news is that Iran has developed and successfully tested a long range missile capable of reaching Israel. the implication is that unless their nuclear program is terminated, they will have the capability of delivering a nuclear weapon. Clearly we are going to see an escalation in tensions between the USA and Iran, and we cannot dismiss the possibility that Israel will not take unilateral action.
The implication for the markets are:
1. Possibility of the USA scaling up its war machine - thats bad for the USD and the US deficit
2. More USD floating around the world means more inflation
3. Stronger gold (precious metal) prices are inevitable

4. A fall in market confidence can also be expected, particularly since the oil price will take off, and that will quash retail sales around the world.

On the strategy side, the US might take heart from the fact that they have a missile defence system. Will they rely on that? The other problem is the threat that Iran can terrorise the world by threatening to cut oil supplies. Iran is a significant exporter of oil, and with tight supplies, there is no question that threats by Iran will push oil prices higher. Of course it would only hurt non-Western countries since no supporter of the USA would buy from them. Given the sanctions against Iran, the country would benefit from higher oil prices (15% of its GDP) since its economy cannot benefit from any other exports. So intimidation works for it. The President of Iran is universally disliked in his country, mostly because of his poor efforts to improve the economy. Sanctions must carry a lot of the blame.


Clearly the oil and precious metal stocks are the best to consider.

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Andrew Sheldon www.sheldonthinks.com

Dow Jones at support

There is good reason to think that the Dow Jones and equities are about to rally. I think it will be a short term phenomena, but consider these facts:

1. Oil prices are down to $136/bbl - thats some relief - sorry excuse

2. The Dow is at a support level

3. The Dow in short term trading has been well supported

This is a strong support, given it has many points of support. My view has long been that the Dow will go sideways for the next 3 years, with successive rally & retracement. Well this marks a likely entry point.

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Andrew Sheldon www.sheldonthinks.com

Another big bank failure

For the last few weeks I have been debating with a guy that I think the USD is going down, gold was going up. I saw it returning to the Y85 support. He was saying I was wrong, and maybe so. The reason for my trepidation was the believe the market would get worse, that a Goldman Sachs size financial institution would fail. I specifically mentioned Goldman Sachs and J.P. Morgan because years ago they had the biggest exposure to derivatives. With this (until recently unregulated) market having contracts 3x larger than the physical market, and higher for some commodities, and with there being a risk on counter-party exposure, it would seem natural to expect folly. Well, if this news is correct - Fortis Bank (former ABN Bank) - and its all over the internet, then the Dow is going to break 11, 400 pts support when the market opens this week.

The flipside is that the USD is likely to be a safe haven, but I would suggest not as safe as the Japanese Yen. Last time I looked it was Y107 to the USD. I'm a long way off target though. This will be big news. You would expect a significant rate cut in the wake of it. We might just get to my 1% Fed rate soon.

PS: I though it was convention to change the name of a bank after it restructures, not before.

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Andrew Sheldon www.sheldonthinks.com

The Dow Jones at a critical point

The Dow Jones Industrial Average fell 358.41 points overnight, that's more than 3%, closing at 11,453 pts. I had previously said support was around 11,680 pts, however these things are not cut and dry. Support can come at the tip of candle wicks, or at the candle bars themselves. The market is in an interesting position because:

1. The Dow fell a great deal, and it closed at a support level
2. The Dow closed at its low for the day
I consider this information as inconclusive, so I will be looking for a strong OR weak day from the Dow overnight. The Asian market can only take its money off the table, or try to anticipate what will happen based on the trading action in today's trading action. Might Fed chairman Ben Bernacke try to comfort the market with talk of a rate cut, or oil prices might rally further. Actually in trading oil prices have fallen back to $138/barrel. The USD is mixed in cross trading. The gold price is looking good. Might have to wait for the US market to open. I expect it to hold, but if its breaks the next support is 11,000 pts.
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Andrew Sheldon www.sheldonthinks.com

The US market took a big tumble overnight as the oil price raced over $140/barrel. There seems no reason it won't go higher unless there is a severe squeeze on the global economy, or if India and China don't curtail demand with the removal of subsidies. The reality however is that the oil price is being pushed to speculative highs by the Fed policy on interest rates. It makes you ask whether Bush has a deal with his oil buddies to push oil to $200/barrel. Why? Well if oil went to $200/barrel, the oil executives would do very well, the US government might be forgiven for a market-sponsored slowdown, and he might be able to secure a lot more funding from oil companies for his presidential campaign. Well, its just a conspiracy theory. But its not like he needs to identify the implicaitions as such. He need only convey to Bernacke that lower interest rates are required to hold up the economy.
Higher interest rates are the surest way to reduce demand for oil. Not just physical demand but speculative demand. As soon as the Fed starts raising rates we will see a fall in oil prices because the speculators will see a downward path for oil. No doubt that would be another basis for a Dow Jones rally, though not likely to be sustained. The Fed is waiting for bad news to take the Fed rate down to 1%, then I think it will be looking for bad inflation to raise it. The USD strength is surprising me.
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Andrew Sheldon www.sheldonthinks.com

Dow Jones close to support

If you like equities, you might want to take a look at the Dow Jones and various indices that correlate with it. The Dow Jones is hanging just above 12,000 pts. This is a support level, though it might be broken, so its worth waiting for news that would sustain a rally. The market might yet fall to 11,680 pts, its previous support. I am not all to gether negative on equities. There are several reasons for this:

1. Some markets like Australia, Canada, South Africa have a considerable exposure to commodities, so it goes without saying that those markets will be positively impacted by the bouyancy of commodity prices.
2. Broader equities will be hurt by higher interest rates, but they will be bouyed by inflation and industry consolidation, ie. takeovers & mergers.

For this reason I see equities going sideways. Might the Dow and other indices slip to a lower rung of 'hell'? Possibly, but I dont see that happening without higher interest rates or the failure of a large financial institution. So at this point its worth looking for evidence of a turn around. A rally to 12,400 pts would be pretty convincing evidence at this point.

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Andrew Sheldon www.sheldonthinks.com

Market outlook

[Gaijin 06] Gold is still under the $930 levels you were tipping it at earlier in this thread.. and not all equity markets are down that much - Topix is down just 5 or 6% this year. Pretty similar performance to gold.... with a lot more upside risk in the long term.

Here is my response to some negative sentiment towards gold...

Firstly I am tipping $2400/oz gold price, but that is subject to 'some' revising as events unfold, so I think this Japan Forum writer is responding to someone else. Most things dont happen overnight. Equities are holding because companies are actually making money from inflation, ie. inventories & plant are revalued up by inflation, and because of all the money floating around, consumer sentiment is actually holding up quiet well. It is not until you see sustained strong inflation that will demand higher interest rates that you will see stronger gold prices. At the moment the Fed is giving priority to holding asset prices rather than reining in inflation. It is of course silly to hold asset prices because that actually would result in less inflation later, but governments like stealthy destruction of purchasing power (by inflation) rather than debt liquidations, foreclosures, etc. The reality is - the result is the same, just the timing is different.
Job levels are still high, and interest rates are still low, so that is helping to hold equity markets. Over the long term equities will go sideways, but you can trade the rallies. Just dont buy & hold.

Gold will do very well yet.
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Andrew Sheldon www.sheldonthinks.com