The US & Chinese equity market outlook for late 2015 into 2016

In my last post on 18th August 2015 I forecast that the US and China were destined to enter recession. The reason for saying so is the subject of this article, however it needs to be acknowledged that the recession is destined to be 'short-lived', or simply a 'crisis of confidence'. There is no reason to expect mass employment, or foreclosures. The problem will simply be an absence of spending and falling asset prices. The reason for the falling prices will simply be:

1. The inability of the Fed to convince the investing public that there is destined to be a recovery soon
2. The fact that the market thinks asset prices are over-priced
3. The difficulty of resorting to more stimulus at this time - again - given that the first stimulus didn't fix what ails the economy
4. The fact the equity/property boom have been long-winded - worthy of a break

Having wrote that article, the US and Chinese markets collapsed. Now we are at a point where the Chinese and US markets are about to turn - the question is - which way? The fact is that there is hardly any recognition that the US is at a weak point. US business inventories are weak, confidence is poor. No one is spending money, and Obama wants to look good. Are we going to see any big spending initiatives at this point? I don't think so. He cannot serve another term, so we can expect that it could only be a new president who would do that. We can therefore expect confidence to be poor until the middle of next year. That's effectively at least a short 9-month recession. Mind you, given the US people appear set to elect a maverick, then you might conclude that is reason for more investor 'unease'. It is nevertheless good to see. It is however destabilising. 

Look at this chart - this is what the Chinese market is about to do - fall to 2500 points. I show in the first chart that 2500pts is support. This is not a crisis market, so its not going to 2000pts in my opinion. You can see the flag structure in the 2nd chart below. 

The US market however is the more important market. It is overpriced because of the very low prevailing interest rates. Interest rates are not going to rise; asset prices are going to fall, and that will scare some people, having fallen already. The US Dow Jones is going to 14,000 pts, as you can see in the following graphic.

As you can see the market is already half way to its support level of 14,000pts. In fact, I think it will find more support at 15,000pts, and finally at 14,000pts. We can probably count on a Xmas rally, and then a March-May 2016 sell-off as the election looms in November 2016. The implication is that after the recovery off the 14,000pt support, 2016 is going to be a very flat year for equities. Its hard to say with 2017 given that it will depend on the capacity of the leader to build a consensus.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Outlook for China's equity markets

The Shanghai Composite index appears to be in a free-fall. I have just signed off on an article on our sister website 'Critical Media Group', where I describe the outlook for Chinese equity markets.

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The prospects of global recession heightened in the Dec-2015 quarter

The Dow Jones is coming under pressure at a time when market pundits are being told to expect a market recovery. What's new? There have been numerous opportunities for equity markets to go into a tailspin, but on each occasion asset prices (equities, property and bonds) have tended to rise. The elusive recovery to date could be attributed to:

• The strong equity markets
• The housing market recovery
• Low unemployment
• Low interest rates

The problem of course is that these indicators are not convincing for the following reasons. Basically there is little economic activity going on in Western economics, and that is even undermining growth in the emerging markets that rely on their exports to the West. 

Equity markets

The following chart shows that the Dow Jones is close to challenging its support levels. It has of course been sold off before, only to recover...So we might ask what is different this time?

Source: 4-Traders.com

The problem is apparent in the following chart. The market has had a huge 'unprecedented' rally in terms of its longevity. Even if you were positive about the outlook, you might question the sustainability of this rally, given the expectation of rising rates. Looking at the following chart it seems reasonable to expect a 'good retracement' to at least the 14,000pts level. The reason why we might not expect more than that is simply that, there is every reason to expect a recovery in the real economy because:

1. Interest rates remain very low - so there is scope for the market to accept some increase in rates
2. Higher rates would actually encourage more spending because the incentive to pay off one's liabilities will be lower. The problem is that the Fed would not raise rates if there was any prospect of sinking equity & property markets. 
3. There are no signs of inflation

Source: Google Finance

Based on the chart above, there is good reason to expect a 'sell-off' in Sept-2015 on the prospect of rising rates, but also for other reasons:

1. The 'dead-cat' bounce in China's equity markets, suggests a lack of confidence there
2. Ominous signs of political instability in the USA, with elections looming in 2016
3. The prospects of a currency war, that can only undermine confidence in political leaders. This is the surest sign of no demand. 

Housing market recovery

Judging by the following chart of new housing starts in the US, you could be forgiven for thinking the strong growth in construction is a 'good sign'. The reality is however is that:

• Current levels of housing construction only offset the 'pent-up demand' for new housing that arose after the global financial crisis. 
• There is no 'fundamentals' which would support the persistence of this trend, as I will show next.

Source: Federal Reserve

Looking at this chart and the absence of fundamentals to support it, it is easy to conclude that the USA is about to enter another recession, and that housing starts are destined to dip down soon. Might the Fed arrest this prospect with another QE program. The problem is the lack of jobs to justify it. You can put credit into the banking sector, but in the absence of 'real spending', it will just end up in already over-priced asset markets. If the Fed resorts to QE, it would probably also raise rates, and prompt more liquidity to enter the derivatives market 'short'. That would not help confidence in the real economy.

Low unemployment myth

The myth is being perpetuated that the unemployment rate is low, and that it has fallen over the last 7 years since the global financial crisis. In fact, we have simply seen a lot of Americans, as in other countries, live off their equity, and simply stop looking for work. I'm way ahead of these people because I left the workforce 15 years ago to simply live off investments. I was motivated by the decline in Western values; but others were mostly motivated by the decline in opportunities, i.e. retrenchments. The problem of course is that we have four types of people in the market place:

1. Families spending like there is no tomorrow because they have kids and little savings
2. Subsistence lifestylers living frugally - mostly these are skilled people leaving themselves flexible
3. Subsistence welfare recipients - mostly these are 'estranged' unskilled people, or skilled people in vocations that society does not value. Sometimes they are just people who don't readily integrate into society, i.e. libertarians, white supremacists, atheists, disabled or convicted felons for drug use. 
4. Skilled people who have seen a rapid rise in incomes - Even these people are not spending because they are rapidly paying off their homes

You can see from this 'anecdotal survey' of Americans that the only people spending are working families; whilst everyone else in 'economizing', whether because they are struggling, cautious or opportunistically paying down debt on their significant liabilities. This explains why spending is subdued, and why it will not increase until:

• There is a recovery in the 'real economy to justify a rise in interest rates by over 100bp beyond Sept-2015
• Quantitative easing in order to stimulate the US market

I am actually expecting the Fed to pursue both of these courses of action. So-called reference to a 'liquidity crunch' is nonsense. The reality is that there is a 'wage gap' between Western society and Emerging Markets. This will take time to resolve, however Western governments have done the exact opposite of what they need to have done in order to solve the problem. Far from increasing productivity, they have reduced it. Far from reducing waste; they have taken it to new levels with more intrusive 'distortionary' laws. This is why I support Donald Trump. He's not a political hack, he talks about reducing waste, and unlike Rand Paul, he resonates like a conservative, so he is plausibly electable.

It is therefore important to appreciate that 'low unemployment' is a 'dirty white lie' that is in fact a long term decline in the US workforce participation. You could argue that too many people have simply left the workforce, or 2-income families have become one, or full-time workers have become part-time, that more children are staying at home until their 50s, or more people are packing into ever-smaller apartments. Of course there are more Americans on welfare programs. But the greater reality is that they are simply living minimalist lives. This is actually one of the reasons why governments have shifted to taxing consumption, as well as expanding their powers to intrude into foreign bank accounts, as more people 'live abroad'.

Source: US Bureau of Labor Statistics

Why would this rate be falling if unemployment is falling. People have simply stopped looking for work. Not everyone of course. It is also fair to say that a lot of people are 'under-employed'.

Excess business inventories

There are however also other 'demand indicators' that are used to justify the premise that the US economy is recovering, such as new vehicle sales, which are at "record levels". There is other evidence however to suggest that not all is well in the US economy, namely:

• US inventory levels - see the ominous signs of recession below
• Vehicles in the US are a 'necessity' unlike Japan. The issue is not 'car ownership' but car cost. Moreover the credit terms for new cars have never been easier, and anyway delaying the purchase has a reason to jump into the market....they have been saving for 7 years.
• Judging by the statistics belong, vehicle sales are at 'break-neck' rates, so I'd expect a fall in coming months.

Source: Trading View & Federal Reserve; trend analysis by Andrew Sheldon

Source: US Bureau of Economic Analysis & Federal Reserve of St Louis

In conclusion, there are strong reasons to be cautious about the outlook for the next few years. There are also compelling reasons to appreciate that the current crop of conservative and democratic politicians have no intent to reform goverrnment. Only politicians like Rand Paul and Donald Trump are likely to make those tough decisions to cut costs, that will restore the US economy to health. Note the following:

• Stock and bond prices - the tendency for stock indices to fall every 7 years (2001, 2008 and now 2015??)
• Excess inventory levels - a precursor to recession
• Prospect of a modest interest rate increase - not so significant as only 25bp probable
• Election concerns diminishing confidence in the next year

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

The Dow Jones has confirmed a short term correction - looking for more

On the 10th Sept 2014 I warned of a sell-off in stocks, only to withdraw that warning on the 18th Sept 2014, when the market went to new highs. As it turns out, it was a false signal, insofar as the market went back into reversal, and we now have a solid short-term downtrend, that seems likely to take us far lower. Markets down always have a 'pretty pattern' as we see in the first chart below. They under and over-shoot on occasion.
The reason for this market correction is simply the high level of asset prices. Asset prices are simply too high because rents are taking too much of people's incomes, or interest payments too much of their incomes, and that is despite record low interest rates. People are forced to live 'expensive lives' in the city in order to 'have a job in the city'. The problem is most wealth is created and vested in the cities. The problem is that these centres of growth become over-capitalised when governments are able to restrict land development. They do this in order to keep local taxes high, and because landlords like the 'wealth effect' of rising property prices.

In this first chart we can see the solid downtrend that has emerged in the last two weeks. We can see that the Dow, which closed at 16,660 overnight, closed off its low for the day. I actually think its going to break that in a big way....perhaps overnight, but it might really. But when it does break 16,660pts in the next day or two, it will be convincingly.
We can see that a short-term support is 16,500pts, however looking at the lowest chart, its possible we will be looking in a fall in the market to 14,000pts. That is a correction of 19%, or 13.67% from the start of 2014 (at 16220pts).

There is no compelling reason why the market should fall that much; not because the market is overpriced, but simply because there is nothing pulling it down. Interest rates are not rising. That augers well for the present. So I don't necessarily see this downside reaching 14,000pts because I'm going to wait for the market to tell me. The trick is to wait for the market's lack of confidence to be shaken out. It is fair to say that the central banks will look favorably upon a fall in asset prices - not just equities, but also housing. Housing markets are also softer in recent times. So let's see how much confidence is undermined. I frankly think these are good times. The problem is people are incredibly myopic. They tend to think markets evolve around their 'Western experience' and fail to see how Western market weakness (i.e. unemployment) is a boon to markets elsewhere. The money is flowing to the farthest corners of the world. It will collapse eventually, but we are a long way off that yet. The question is - how much of a fall is necessary to restore confidence in the short term. Rest assured that this fall is not going to spook consumers in emerging markets who don't own stocks, and who don't have so much wealth invested in their houses. They aren't going to be concerned because you might not be buying a new car, but you still need the underwear you make, and the people in their country are increasingly buying new 'branded' underwear, motor scooters and I-phones to impress their girl friends. Some of them are better off still doing your computer programming.

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The prospects for a short term sell off in place - but how severe?

On the 27th August 2014 (2 weeks ago) I gave a warning of a possible correction in equity markets, based on the leading S&P500 Index. The prospect of a correction remains in play. Today, I'm outlining the technical drivers for a correction based on the Dow Jones Industrial Average - which is based on 28 of the leading stocks in the United States. This index is actually a better guide to the international market given the focus on the larger 'multinational' corporations.

Starting at the shortest-term chart, we can see that the index price action is trending down, and making successively low-lows, where previous support on the downside becomes resistance on the upside, conveying a downward market.
In the 2nd chart, the longer 2 month chart shows that we remain in a broader 'channel trend', so the market is ambivalent about direction, or otherwise stated, the market is an ongoing fight between buyers and sellers. You might also argue that large investors are buying or selling in this range, where buyers are actually placing large sell orders on to create resistance levels, so they can accumulate stock slowly below those resistance levels. Likewise, those companies with an adverse outlook, are placing large orders at support levels, and selling in anticipation of the channel structure breaking on the downside. The implication is that when the market finally 'breaks' it will either be a big move on the upside or downside.

The third chart is interesting because it conveys that the market is challenging previous resistance, and that its at previous highs. You might have heard as much in the last few weeks, and yet it remains at those 'highs', but sparingly so. The market has not marched on, but rather languished around those highs. In fact, it was sold off significantly to 16,500 points in late July. The index however preserves its uptrend. The question is whether it is going to break the long term trend. This is arguably just the same type of consolidation as occurred in Jan 2014, before the market marched on further.

Looking at the last chart, we can see that we are in the 5th year of this 'long market rally. Most market cycles are 7-8 years long, so it might be argued that this one has a little time to run. If this is your logic, than you might still want to exit the market because the market is still way off its long term support. It has the capacity to fall from the current 17,040 level to 16,500 points. There are a number of issues to precipitate that:
1. The poor job growth in the USA - real jobs I mean - not govt revision of methods that see 'self-starters' living on benefits classified as 'nascent entrepreneurs'. That's not to say that a "Bill Gates love child" is not among them, but rather that, you probably have not met the children of Bill Gates. But who you have undoubtedly encountered is the children of your typical conservative family, whether they are libertarians, anarcho-capitalists or liberals. They are less interested in making money until they desperately need a benefit.
2. The prospects of sustained war with Russia in the Ukraine - There is some apprehension about a protracted war. I personally don't see how such a war is likely given the capacity of Western nations to undermine the logistical support lives of counterparts. There will not be a war, but there will be a lot of bluffing. In the interim, you have a lot of apprehension, and war only undermines confidence.
3. The prospects of a terrorist threat. Today is Sept 11th. Are we going to expect a re-occurrence of terror? Its a symbolic gesture that undermines market confidence, however this time round the 'potential' is worse than the reality because it immediately becomes apparent that life goes on, and there are just too many targets. Whose going to miss a flight? The 300 passengers on board a plan and 15,000 relatives and 30,000 friends. Its very sad, but the world will go on. Even if you had 10 such events a year, it would be traumatic, but we would endure it. The odds of it happening to people in 'most parts of the world' are low. Most events would be in certain parts of Asia, EU, Africa and the Middle East. i.e. In places where markets are small or already depressed.

We are looking for a retracement to 16,500 points, and thereafter a possible fall to 14,000 points. The foundamentals for the global economy are actually very good. The problem I would argue is not the 'fundamentals' of excess debt, but really the travesty of too high property prices. The reason is that, when property prices get to a point where they are so high, two things happen:
1. Existing property investors see no further opportunity for gains, so they are not financing their activities with more passive property income
2. Aspiring property buyers are deferring their property purchases, which means they are not buying all the accessories that go with property acquisition.
3. Revision of market values are occurring as well. Many youths are responding to the 'new market reality' with more modest consumptive patterns of behaviour. This is great for the environment, for their long term 'savings sustainability', but it hits the current 'consumption driven' paradigm for this economy.

The implication is that once the stimulus from the central banks is seen for what it is, this market is going back down, and it will hurt the speculators and savings of people. This is part of the appeal for the government. Its your savings, so the impact is on your balance sheet, not the 'public budget'. The fact that you don't need to worry because your super will not be claimed for years, is part of the reason why, as investors, you will tolerate their bad custodianship, and not question the legitimacy of their form of governance. So we can expect government to continue going about their dirty business for at least the first start of this cycle, but in the long term there is solid prospects for political reform and fundamentally a very strong economy.

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An imminent correction in global equity markets is coming

In previous blogs I have alluded to the fact that the next 10-15 years will be punctuated by a succession of boom-bust events. The reason is that the fundamentals for the global economy are very good. The problem is that there is a process of adjustment under-way, and the Fed and other central banks are making sure that it comes sooner rather than later. They are doing so because, having caused an economic crisis by attempting to sustain the unsustainable boom, they are now attempting to sustain the 'normalcy' of the current 'persistent recession'. Well, recession if you are unskilled labour in the West. If you are skilled, or living in emerging markets, you're probably not going to feel what is about to happen.
I'm expecting in the next week, maybe even overnight, a correction to start in the S&P500. I expect the S&P500 to start falling from around 2000 at present to a support level of 1600pts. That's a 20% fall. I'm actually expecting the ASX-200 (Australian) market to fall back from 5624 to around 4950-5000 point mark. The reason is that resources are priced low, so the Australian market is relatively subdued anyway.
In either case, after these 'asset price' corrections, these markets will recover quickly, and I fully expect that by the end of 2015, they would have reclaimed those losses. The reason is because the current rally was too strong, too fast, and the evidence or justification for it will probably not emerge to later in the year.

I reiterate the global market outlook is fundamentally good. Its just in the short term assets are overpriced, and there is a need for a correction to allow reasonable value to be sustained. The reason I've expecting a correction is because:

1. Asset prices are very high - the best evidence is probably this Forbes media article, which was published back in July 2014. Since then, the S&P500 has climbed even further to 2000pts. They didn't pick a 'level'. They were purely going off fundamentals. Well, now you have a technical 'indicator'.

2. The uptrend has been broken - see the chart above - care of Google Finance

3. The S&P500 is at an important psychological level - its not breaking the 2000 point level convincingly, but rather wallowing around it. I would argue that it is being sold into. Even in the resources market, for the last 2 weeks, I have sensed that the market was being 'sold into'. People were unloading, expecting a correction.

4. You don't get a rally after a persistent rally like the one we've just had. The market needs a correction. It has been 7 years since the last correction - so we are due for another. Now, also note that this 'bubble' is bigger than the last 'bubble'.

Now, there are people arguing that this will be the end of the world...swarms of locusts will inherit the Earth. I'm not in that crowd. I'm arguing that this is simply an opportunity cost that you can avoid. It would be sad if you retained your shares now, because you can buy them back cheaper soon. But if you don't, do it at a reasonable price, just hold them because you'll probably get a bad re-entry price anyway. In any case, you probably have cash to buy more later - and you should do that. Don't sell during the collapse because you might get really bad prices. Maybe you want to hedge your bets if you are uncertain...if stocks are akin to gambling to you. I suspect however there will be some logic in what I say. I'm not even arguing that there is some imminent rise in interest rates. I think interest rates are staying low. There might be a modest increase in some countries worried about 'bubbly asset prices', but it will be intended to discourage you buying property rather than to 'tighten lending' to slow the economy'...in which no one is spending except on investment property. 

Whilst you are waiting for this correction, which is not long off, I hope you will take the opportunity to acquaint yourself with my latest publication 'Global Mining Investing'. These will be great stocks to own, whether to invest or trade moving forward. We actually want to teach you how to invest; but moreover we want to use investing to teach people how to think analytically. It will have applications in other areas of your life. Critical thinking is an undervalued tool, and we will be exploring stocks using your mind and our experience. We are discovering you from outsourcing responsibility for your money. We want to empower you, so you develop a sense of efficacy in investing. Of course we want you to profit as well - financially as well as intellectually. But we think it will mean more to you if you made the money yourself. Some of you will not have as much time. You'd be surprised how much time you do have when you are supported by other investors, potentially your partner and kids, as well as your passion for learning and profiting from your learning.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

The market upside is looking a little 'tentative' in the short run

Asset prices are relatively high. In such times, you have to question when or what can undermine them, and what will not. The reality is that the stimulus of the previous few years has meant that conditions are rip for economic growth. There is however considerable concern about the sustainability of that growth given that a lot of the past growth was fuelled by debt finance in the West. You might wonder however why we cannot expect more of the same. The reason is that there is considerable concern about the prospects of higher interest rates. The reality is that there is no reason for central banks to raise interest rates more than modestly to end the 'ultra-easy' monetary policy. The reason not to do that is simply that the economy is not strong enough. Those fears are however positive in some respects because 'fearful' mortgagees are rapidly paying off their debts, and that is of course preparing the way for another cycle of spending moving forward

For these reasons, you can expect a sustained growth in the global economy, on the basis that:
1. The fundamentals are good, i.e. Asia and other emerging markets keep getting richer, with strong rates of economic growth, income growth, high rates of urbanisation, strong population growth. Its all good.
2. Interest rates are ultra-low, so moving back to neutral policy will not greatly affect spending since that nominal rise in interest rates will only be taken when it won't hurt spending. i.e. The Fed will wait for signs of an overheated market before it raises raises, to establish a sustainable growth outlook
3. There is no sign of inflation simply because there is no wages pressure. Moreover there will not be wages inflation for another 15 years or more, i.e. There will be no wages spiral for over a decade. So we don't need to worry about 'cost-of-living' inflation.
4. There is every reason to expect asset inflation. This process has been well-entrained since 2000. Ultra-easy interest rates have been around for a long time. The Fed and the Western governments were not interested in sustainable economic policy, they were interested in running the economy as 'fast or as hard as they could get away with', without paying the consequences. This might strike people as sensible. i.e. Its actually the same policy as applied on the Titanic. Now, do they understand the global economy so well? Well, you'd have to wonder. They simply can't know what can thwart it. The greatest threat would have been SARS. But they might well get away with it. In any respect, the fundamentals are good. So whilst you can expect bursting equity and property markets, you can expect them to rebuild or recover in the current market. You should however look to trade these positions however to maximise wealth. This means using 6mth or shorter charts to pick entries and exit points.

On that note, looking at the following charts for the Dow Jones, we can see that:
1. The long term trend for the market is at its highs, and that it has downside to 15,000 points. I'd even expect it to go to support at 14,810 points.
2. The short term 6 month trend has seen the market rise back above the Moving Average. We will be interested to see evidence that this trend continues. Certainly the 176 point rise today is a positive lead.
We should not however overlook the fact that the market is getting peakish, and there is a need for a little short term scepticism if we are going to trade this market efficiently.

I'm looking for a market peak around 17,100-17,300 points; from which I think you can expect a substantial correction .The most logical correction would see a fall back to the 14810-15,000 point level. One already gets some sense that one's buying is getting 'sold into'. i.e. One gets the sense that for every order one places, there is a 'bigger player' getting out. This is most apparent in the less liquid stocks. Looking ahead, I'm expecting a very lucrative recovery from any sell-off. I'm expecting the next rally will offer a lot of profits based around a lot of Mergers & Acquisition (M&A) activity. This next rally I think will get consumer spending momentum going again.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Outlook for US & emerging equity markets - the next 6 months and beyond

There is some ominous news around of ebola virus spreading fears. It is improbable that such fears will manifest as any sustainable problem, however there is good reason for people to monitor the issue. There is some good news from China with growth in manufacturing. The job growth in the US was not as positive as expected, however we remain in a low interest rate environment, and the global context is largely stimulatory, even if economic activity is largely flat. The lack of spending is really just a concern that needs to feed its way through the economy. People are not going to start spending until skilled labour see wage gains, and then this will give unskilled wage earners more confidence despite 'wage restraint' at their end.
At the same time, strong employment and wage growth in the emerging markets mean these economies are going gang-busters. Its really just a patience game waiting for the economy to recover. The question is what will equities do in the meantime. I'm inclined to see the current sell-off as just a temporary correction. Using charts, I'm expecting a fall in the US S&P500 back to 1880 points, and a restoration of the rally. I'd not expect to see a collapse in earnings, and since yields are not overly high, then I'd expect more upside. You can however expect a bursting of high asset prices (including equities) at some point. In fact, I'm expecting a succession of 'small bursting bubbles' before a final 'serious burst' when we see higher interest rates.

                                Source: Google Finance

There is another reason to expect higher equities. There is a great deal of Chinese and Japanese money that it destined to pursue foreign markets. i.e. Japan bonds will experience a sell-off in favour of higher-yielding growth assets. The same for China. This will raise interest rates somewhat, but there will be a corresponding rise in economic growth. 

In the chart above, I'm expecting a large drop in equities to 1880 points on the S&P500, however I'd expect it to recover strongly in intra-day trading. 

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Market poised for a correction - Dow Jones and ASX equities

The Australian, US and other global equities have enjoyed a very positive and persistent rally over the last few years. The US Dow Jones reached a new high of 18,865 points, and its otherwise been a monumental rally from 6,626 points set in the first quarter of 2009. The market was of course buoyed by stimulus, but in actual fact there are some underlying positive fundamentals which apply to the global market.

Judging from the following indices, we can expect the US Dow index to fall back to a support level of 13,610 points, and possibly even 13,228 points, however I suspect that would only be a short term intra-day phenomenon. It can also be expected that the 14,000 psychological level will also be important, as it was a difficult level to exceed.

Do I expect this uptrend to break? This is an interesting issue given that the market until now has been held using stimulus. Do I think the US will continue with the stimulus? Undoubtedly the answer is - if necessary. I would however expect the US to be aided by a recovery in property markets, as new home buyers enter the market. There has been some level of job creation in the US, and its probable that this will continue as property prices are actually not so high in 'unemployment' zones. So this is a favourable basis for growth in US jobs and economic activity. For this reason, I would fully expect a recovery from the US market, but its probably doubtful that it would exceed 14,865 points. I would be looking for a double-top, and a lot of short term rallies for the next few years before we see the development of a new trend, or the next phase of the cycle.


You might wonder if matters are any better for the Australian market. Australia is of course strongly tied to Asian markets. The Asian markets have strongly relied on strong US consumption in recent years, and given that these economies remain strongly export-orientated, you can expect that to continue, though to a declining degree. It will take time for Asia to purge its 'US-centric' reliance, even though intra-regional trade is being encouraged. They remain competitors more than compatible exporters.
Australia is of course a major exporter of minerals, energy and food. You might expect strong volumes growth to offset weaker prices in coming years. This will mean a relatively strong Australian economy, and thus one can expect a resilient AUD currency, as well as only subtle weakness in the ASX-200.
It seems unlikely that the ASX-200 will collapse as low as 4,000 points. I would expect a fall back to 4,400 points, with some resilience at 4,600 points.

 Two serious threats posed to markets could be a game-changers in terms of their effects:
1. The prospect of a military intervention in the Middle East (Iran) or North Korea.
2. The prospect of bird flu in China spreading to other countries. Those "preppers" might just be on to something. Expect there to be a huge crisis if consumers stop going out because they are concerned about contracting bird flu.

Clearly the bird flu event is the more serious 'vulnerability'; as war is stimulus because its more spending and because its contained in parts of the world which will not impact industrial output. North Korea and Iran have no industrial activity, and there is every reason to think these countries can be contained without serious threat to other countries in their regions, or to freight movements.
The bird flu crisis threat will ultimately depend on the extent of its virility (i.e. how deadly), its communicability (i.e. how easily it spreads), and how well the threat is managed. There is every reason to think that it will be able to spread internationally. If that is the case, then that means people staying home and not spending money. That has to hurt confidence. It takes 6 months to develop an anti-viral and another 6 months to produce sufficient quantities to contain the threat. The implication is that its a year of 'vulnerability' allowing for:
1. The worst market conditions you have seen for a long time - given the high levels of indebtedness
2. The best rally you will ever see after the virus is contained

If there is a serious viral threat, you might expect the ASX to collapse to its historic low of 3,145 points (set on March 2009, and perhaps 10,000 points for the Dow Jones. There is a lot of 'economic grey' in between, but consider that it might be difficult for the market to anticipate the extent of the threat. That means that the carnage to unfold would be self-fulfilling, and there is no prospect of government stimulus working. i.e. You can't force people to go out for a 'killer latte' - at least not when they think it will kill them within the week. Otherwise 'radium lattes' would be all the rage.

I am a trader in the 'spec mining' end of the market, so given the spectre of 'upside' in the mineral explorers and emerging miners that I follow, you might at least expect 'company-specific' news. This is sadly little protection for two reasons:
1. Emerging miners carry some forward-looking value that is not going to be realised in terms of earnings in the short term, i.e. They are not going to be paying dividends, but repaying debt, or exploring to prove up more resources. This is reason to sell until there is light at the end of the tunnel.
2. Developers will be adding value to resources, and whilst that is 'tangible' in the sense that it exists as 'bankable resources', its not 'realised' in the sense of generating cashflow, with the double-edged problem of 'costing' you in terms of dilution to fund exploration. In these conditions, you are inclined to be conservative. Under these conditions, even positive exploration results get forgotten. Tangibility of say a JV partner committing money to project spending bodes well, but its still a bad market outlook, so that's a mixed signal, but still negative.

Appreciate that the market has not yet priced in war or bird flu. These are still peripheral issues at the moment. It is therefore critical that people follow North Korea, Iran and China (bird flu) for news, whether they are looking for an exit or entry point. Want to learn more about mining investment - read our book. There is no better time to learn that in these types of market conditions. You can trade in these types of markets as well, but that requires more skill; particularly if you are trading against the trend.

Happy trading!

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
    Profit from mining with Global Mining Investing eBook

    Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Dow Jones - a great performer?

Reading the NZ Herald, you could be forgiven for thinking that the US economy has re-emerged 'transformed' from the global financial crisis. In the last few weeks, we heard that in the month of January, that the US deficit was positive for the first time in years. A seasonal aberration  however it did denote a positive trend. The problem with such news is that:
1. Asia is still growing and spending
2. Unites States is still saving, not spending, by paying down mortgages

The problem is two-fold:
1. Corporations are still strongly incentivised to take jobs offshore because emerging market wages are still very competitive
2. Once confidence returns, Americans will resume spending. This will create some 'domestic service' jobs, but it will also restore to some degree the spending which caused the problem in the first place.

The focus of this NZ Herald article however was the strength of the Dow Jones. The problem with the Dow Jones as a measure of financial well-being is:
1. The US has greatly depreciated in the time since it bottomed; and some of those economies to which it trades, have therefore been impacted. The USD has likely bottomed I would suggest to you. Its at an all-time low against the Philippine Peso.
2. The Dow has benefited from a significant amount of monetary stimulus by the Federal Reserve
3. Interest rates are very low - so of course equities will out-perform the bond market.

The issue is whether yields are attractive; whether the stimulus will be sustained. Investors apparently think it will be; or are they going to capitulate in coming days, and send the Dow crashing back down? Time will tell. There is no reason to say that Americans will not resume spending at some time. There is every reason to think that the softer currency and immigration will not effectively recapitalise the nation, that higher taxes a nd restored activity will result in a budget surplus as well as more jobs. The question is whether confidence has returned. We'll see.

Is the time to 'invest in stocks' destined to come after a doubling in the market? Apparently Robert Pavlik, chief market strategist at Banyan Partners, thinks so. We are told that these equity price gains can be sustained because earnings have risen drastically. Well, we need to factor in whether:
1. Those earnings came from consolidation gains - taking over the competition - remembering that corporations entered the recession cashed up
2. Higher prices due to weaker US
3. These earnings can be sustained if there is an increase in taxes

The implication is that now is a great time for American Filipinos to move their savings to the Philippines if they are looking to retiring there, or simply to paid off any investments in property there. The USD is I suggest going to be stronger from herein, or at least after that support is reached.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Significance of Dow Jones record high

Overnight the Dow Jones broke the previous 2008 high of 14,140 points (end of day data), rising to a new intra-day record of 14,278.87 points. This is positive news for long investors, however it is not yet a convincing break, so I'd not be surprised to see the index collapse back under 14,000 points. It is noteworthy that the S&P 500 index is still 2.2% below its all-time high. The important distinction is that the Dow Jones Industrial Average is constituted by just 28 stocks, so its hardly a representative sample of the US equity market. These 28 stocks are 'huge' enterprises to be sure, like GE, but it tends to ignore stocks like Facebook, which pertains is a representative for the 'new economy'. The other aspect is that the Dow Jones Industrial Average gives greater consideration to offshore activity. GE for instance is a global enterprise with greater exposure to Asian economic activity. This is 'exposure' which would be less pronounced in the S&P-500 Index. So, if we are looking for a proxy for global economic activity, then the S&P is a better measure.
For this reason, whilst I was confident of a 14,000 point break, after a discussion with a colleague, I am inclined to wonder how sustainable this 'bull' is. I am instead inclined to wait for a more compelling trend indicator, whether short term price action. The reason for the concern is:
1. The chart below
2. The promise of stimulus
3. The relatively small size of the emerging markets in terms of their contribution to economic activity.

Having said that, this could change with:
1. A preparedness by Westerners to resume spending. At the moment they are paying off debts or under-utilised on welfare. Stronger property prices, low interest rates can change that, but it needs spending to build confidence. This is the role of stimulus and low interest rates; but are people so confident? At the first hint of confidence, are Western governments going to be forced to raise interest rates. There is no risk of wage demands. Asian offshoring has scared unionism out of existence (for the next 2 decades).
2. Further stimulus.

The market is making tentative steps at this point...I think so should you.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Market outlook - Dow not going to break

I've been doing some reflection over the last few days. I had previously thought the Dow Jones was tentatively going to break 14,000 points, and that it would be a precursor to a rally. This view was underpin by some positive fundamentals inherent in the market. The problem is the negatives, which I see as these:
1. Market support - The Fed Reserve has been pumping a lot of liquidity into the market in the last few years to sustain the market - the market is fully valued, and I expect the Fed to ease that support, in an attempt to draw the market into more sideways movement.
2. Emerging markets - The strength in Asian markets rests upon expatriated earnings, passive foreigner investment funds, stronger construction and rapidly growing emerging service economies in their own right, but they are still dominated by 'food'. The Asian economies have their Gucci stores, but most still cannot afford these items. When they go shopping, its mostly to look, and mostly to eat, because that is all they can afford at this time. It will be different in a few years.
3. Dow Jones trend - The Dow Jones has historically been a trending market - see the log-linear chart below. This chart offers 115 years of history. So what can we garner from the current trend. There appears to be further evidence for consolidation for a number of years in the Dow before it is able to grow again. The question is why? Property markets in the US are already starting to recover, but everyone is still highly indebted, they are focused on rebuilding savings, and without really a substantive basis for upside, and perhaps some apprehensions about higher taxes, we are not going to see a rapid return of 'big spend' USA. So what if the US government increases taxes and gave the poor tax relief. The problem with that is that it would result in the sucking in of imports. The moral of this story is that this would be great 'stimulus' when the world is really to sustain it, because they are growing as well. Japan is talking stimulus, but perhaps they might wait before they do so. Perhaps its not going to be a sudden injection, but spread over a number of years. I don't expect Japanese stimulus however to result in a substantive rise in imports, and anyway, it would be offset by a competitive yen, so the net effect would be positive. Japan does not have a high reliance on imports because Japanese people consume products 'particularised' for Japan, i.e. Cute TVs and refrigerators.

4. Techically, the market action is telling me the Dow Jones is going to fall. See how the Dow has encountered strong resistance at 14,050 points. That was to be expected; its a major psychological hurdle to break 14,050 and previous 2007 high of 14,140 points as well. The issue for me was the break of the low of 15th Feb, followed by its failure last night to recover sufficiently to break above that low. It remains on a downtrend, and I am expecting a very convincing break of the 13,850 point level will occur tonight. In fact, I'm expecting a fall back to 13,650 points, with a nominal recovery. That will be a 230 point correction; before stabilisation. 

Source: Google Finance.

Lastly, I am not going to be a hero, so I was inclined to take golden profits - sold Gippsland for 1.4-1.5c, having bought for $0.08c. I believe this company is positioning for a capital raising around 1-1.2c. Its not the best climate to do this. The rest of my stocks are longer term - UCL and GBE. I also have a number of other stocks, and the rest is cash to buy on weakness. GBE has a buy-back provision in place, and has a lot of cash. UCL is just great exposure to great (2) projects.

Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

The US market potentially set for recovery

I've been taking time off to focus on writing books lately, and develop new websites, mostly of a political nature. Seeing that the US has managed to create 230,000 jobs in the last money, and get its unemployment rate down to 8.3%, I am wondering if this is pre-election stimulus, or real jobs. Perhaps someone could look at the job numbers and tell me whether these jobs are bureaucrats or factory workers. If indeed these are factory workers, then we are likely to be seeing a global recovery. Back in 2008, I fully expected this recession to last 4-5 years. So we are in the 4th year, and the market tends to look 12-18 months ahead, so we might thus expect this market to bubble ahead; at least for another 15 years until India and China have fully absorbed their labour surpluses. This is of course the reason why inflation is under control.

I based my 4-5year recession outlook on the basis of a log-linear curve of the Dow Jones. I should reproduce it, so we can see where we sit. Really, its an arbitrary measure because there is no reason why governments cannot pre-empt such trends with stimulus...if only temporary.

So recognising this outlook, we are inclined at this point to get excited. Well, this is why I ask if these are real jobs. Please tell me, as I'm too business etching out a philosophical treatise for the time when society wants to discard representative democracy. I want to avoid some cheap form of populism. You will undoubtedly be rich, and you will be looking around for concrete measures to protect your assets, and you will undoubtedly be snubbing intellectuals like me; retorting "What good are ideas in a crisis!". I will of course respond "A great deal of good if you listen a decade earlier".

So back to the 'boom'. Is it real or not? Maybe I should just look to my trusty log-linear chart. I might have to make it a priority. I used to be so much more focused on such data.

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Andrew Sheldon www.sheldonthinks.com

Dow Jones equities heading down

The S&P500 has broken support in the last 2 days....sadly I was not watching the market. Irrespective, I was well cashed up, since a number of stocks I like had announced issues, so it was of no consequence. Remaining in my holdings are some gold stocks. Rest assured however there will be some good trading rallies on the way down. Gold explorers, which I very much like, will come under threat because they are intangible, even at a time of high gold prices.

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Andrew Sheldon www.sheldonthinks.com

The Fed to engage in monetary easying

Markets are expecting a correction. There is every reason to expect a correction, but by no means is the US, UK, EU or Japanese governments going to allow equity markets to collapse in any dire way. Of course we have come to expect monetary debasement....its what unaccountable governments do rather than increase tax. Why? Inflation is a far more cowardly tax, and politicians are cowards; well-matched with a psychologically repressed constituency which allows them to engage in all manner of 'economic persecution'.

Here is a good article on the problems confronting the USA. I will only add that I expect Japan and the EU to debase their currencies more. It will be a pooled effort by these governments, the USA and the UK. Because I think these other governments are going to do more debasing than the US, we can expect a 'relatively' strong USD, but of course it will be the commodity countries and emerging markets which will perform best. We might also expect the property markets in emerging Asian countries to do rather well. i.e. Thailand and the Philippines. The Philippines has the most liberal laws for foreign investment as well as most relaxed visa laws. You can stay 18 months without leaving the country on a tourist visa.

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Andrew Sheldon www.sheldonthinks.com

Nonsense about a currency war

In the media we are being told that a currency war is brewing in international markets because China is supporting its currency. We might ask - what are the ramifications of this?

In this blog however I want to focus on what is not said.

The yen is too high because over the last decade it has not engaged in the currency debasement that the USA and EU have...this has meant its currency has been resilient despite its weak local economy. It has also been supported by a current account surplus, however that benefit has declined in recent years, so that the surplus is all but gone. I would argue that this posturing against China's strong yuan is nothing more than a justification for the 'quantitative easing' which is about to follow. That has nothing to do with China, but everything to do with the poor economic management of Japan.

You might wonder why these countries keep blaming each other. The intent is to give the appearance that they are out there acting in your interests. They are not. Its all a 'serve-serving' show to make the international political debate look like a battlefield. These countries have never been more alligned in their desire to expropriate more wealth from you. Did the Chinese government object when the Australian government placed a resource rent tax on miners...no...it had done the same to its miners in the year previously.

You are not going to see the debasement of the USD for the most part because Europe and Japan will be debasing their currencies at the same time. The only strong currencies will be the commodity currencies. So expect an economic miracle in these countries. The reality however is that whilst people will look at commodity prices and say these countries are benefiting from high commodity prices. The reality is that commodity prices have not risen in real terms, so much as the USD in which they are denominated in as collapsed in value. We can show this by looking at the impact of commodity prices in Australian dollars - a hard currency. Hard by virtue of its monetary discipline. No one can match the capacity of the USA to debase its currency...since its debt is denominated in USDs. Of course the US will have to change its posture if debtor nations like China and the Middle East give pause to buying US bonds. It will be forced to raise rates, taxes. There is in fact no need for a new currency....just a rationalisation.

This is the era of moral relativism. A consequence of that value system is economic relativism, and that means in this context, currency relativism. i.e. If you don't see it, it does not exist. So its ok to have a debasing currency, as long as no one sees the problems associated with it. What will happen? Countries like Australia which have a hard currency will be forced to debase by either:

1. Engaging in quantitative easing

2. Increasing debt spending, i.e. Long term infrastructure projects which will make no returns in the short term.

See how it is. It is about sabotaging your economy, as by inefficiently making your economy as inefficient as possible, you can keep your currency competitive and your people happy. The reality is that only countries like China, which imports, processes and exports is immune from the effects of this economic relativism....and that will remain true as long as the country has a surplus of labour. Give it about 15-20 years before it is forced to adjust. In the meantime, Australia will be forced to debase its economy. We will have a welfare state as big as European stages in future. Don't say you were not warned. It will all be done in the name of the 'common good', so you won't see it coming. Of course they use different words these days. Even since '1984' was published the words have changes in each decade. Today its 'global competitiveness' and 'quantitative easing'....tomorrow it will be 'lifestyle preservation' and 'harmonic adjustments'. Well they are my suggestions.

So back to Japan. Does it have any alternative but to engage in 'quantitative easing'? Not unless it is prepared to raise its taxes, raise interest rates or reform the economy, or cut spending. But the government is not prepared to significantly do any of that because that would cause 'disharmony'. So its national delusion and currency debasement....which places it in tune with the global imperative. The excuse is that Japan's currency is too strong. The reality is that Japan needs to fund its debt by debasing its currency. By printing money to repay debts.

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Andrew Sheldon www.sheldonthinks.com

Does Ben Bernacke give stock tips?

Want to know when to buy & sell stocks? Maybe you should ask the Fed, as their arbitrary injections of stimulus are pretty well what drives stock prices. We have managed exchange rates, now its managed stock prices....so much for free markets. I used to be a mining analyst, but now I have to read Ben Bernacke's mind to pick stocks. Adds new meaning to trading psychology.

I guess if Ben Bernacke is making stock tips, I guess he is recommending banks. If he gets his ideas from Obama, maybe he also likes hospitals and toll roads.

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Andrew Sheldon www.sheldonthinks.com

Watch the S&P - it might impact gold trend

The S&P is at a fairly critical point at this time. We can see that the market can either fall back to its previous lows, or it can resist such moves and fight another today. The question is - to what extent is the Fed and other central banks going to support this market.

This market has ceased to be a product of supply and demand. Its all about Fed decisions. You can't be a good market analyst in this market; you would need to be Ben Bernacke's psychotherapist.

I suspect it is ultimately the break of that long term downtrend, i.e. a break in the S&P above 1178points, which is ultimately going to stimulate the market, or see the market fall back to its lows. Bernacke has stated that they will support the market. Just how much he does though is up to his arbitrary whim. That is what happens with highly interventionist (statist) market regimes. The idea that you can know the market, and respond to price signals is the rhetoric, but the reality is that, like the stock market, pricing is being determined by some guy with a lever somewhere. General prices that is. You would think the Australian market is strong at the moment. There is a shortage of housing stock...and yet no one is building. Its all a facade. But that is one facade which will not be allowed to collapse because too many of you believe and depend on it. Just as a lot of junkies depend on their daily heroin dosages. Is now the time to question your principles? Probably, as we role through another election of conspicuous stagnation, but at the very least the time to think was in your school years when you debated public policy and economics, and alienated the libertarians among you.

At this point gold is at a support level. There might be some consolidation at this point.

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Andrew Sheldon www.sheldonthinks.com

Market correction underway - DJIA leads

Based on the following chart, it is evident that the Dow Jones Industrial Average is undergoing a sell-off. There has for a long time been talk of a 'double-dip' recession. This has always been our expectation, and I would suggest we are seeing evidence of it now. If you look back to our early 2009 forecasts, we actually anticipated that the market would rally to its current level, and that it would be sold off. I would suggest that the Dow Jones is going to fall back to the 8800 level. I don't think it will fall below that because ultimately it will be supported by the Fed. Basically this '5 year' period was always going to be about consolidation.

Bear in mind that the Dow is not convincingly in downtrend yet. It silly is hanging on the 11000 level. It closed the day at 10,991 points, which is only slightly below the support. The trend will be set by tonights trading.

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Andrew Sheldon www.sheldonthinks.com

Dire warnings about a US debt default

There are some pretty dire predictions about the global economy out there. There is talk of debt default by the US. There are two reasons why this is not going to happen:
1. The US will likely get the support of foreign nations. Why should they continue financing the US given the collapse of the USD and the pitifully low interest rate? They can't even look to their external trade surplus and say Americans are buying far more of their products. Americans are all spent up. The implication is that the US would have to accept higher interest rates. Governments don't just like to raise rates. They need very good reasons to do so. The only good reason is inflation. Given the level of indebtedness around the world, no one is going to aggressively raise interest rates. We can therefore expect the next scenario to avail.
2. The US will print money: The USD is the monetary base for global finance. Most global debt is denominated in USD, and all US debt is in USD. The implication is that a weaker USD is not inherently bad for the US. The US can simply print money to make payments. The problem of course is that this is inflationary. The problem is that this option will lead to high interest rates as well, just inflation will be leading rather than rising rates.

Add the fact that Iran is being an annoyance, and you have a huge justification for holding gold or other precious metals.
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Andrew Sheldon www.sheldonthinks.com