InvestMacro Forex News

By Terry Coxon, Senior Economist, Casey Research

During World War II, the British Royal Air Force (RAF) undertook a plan of misdirection to allow a squadron of bombers to approach an exceptionally valuable target in Europe undetected. The target was so heavily guarded that destroying it would require more than the usual degree of surprise.

Although the RAF was equipped to jam the electronic detection of aircraft along the route to the target (a primitive forebear of radar was then in use), they feared that the jamming itself would alert the defending forces. Their solution was to “train” the defending German personnel to believe something that wasn’t true. The RAF had a great advantage in undertaking the training: The intended trainees were operating equipment that was novel and far from reliable; and those operators were trying to interpret signals without the help of direct observation, such as actually seeing what they were charged with detecting.

At sunrise on the first day, the RAF broadcast a jamming signal for just a fraction of minute. On the second day, it broadcast a jamming signal for a bit longer than a minute, also around sunrise. On each successive day, it sent the signal for a somewhat longer and longer time, but always starting just before sunrise.

The training continued for nearly three months, and the German radar personnel interpreted the signals their equipment gave them in just the way the British intended. They concluded that their equipment operates poorly in the atmospheric conditions present at sunrise and that the problem grows as the season progresses. That mistaken inference allowed an RAF squadron to fly unnoticed far enough into Europe to destroy the target.

People will get used to almost anything if it goes on for long enough. And the getting-used-to-it process doesn’t take long at all if it’s something that people don’t understand well and that they can’t experience directly. They hear about Quantitative Easing and money printing and government deficits, but they never see those things happening in plain view, unlike a car wreck or burnt toast, and they never feel it happening to themselves.

QE has become just a story, and it’s been going on for so long that it has no scare value left. That’s why so few investors notice that the present situation of the US economy and world investment markets is beyond unusual. The situation is weird, and dangerously so. But we’ve all gotten used to it.

Here are the four main points of weirdness:

1. The Federal Reserve is still fleeing the ghost of the dot-com bubble. It was so worried that the collapse of the dot-com bubble (beginning in March 2000) would damage the economy that it stepped hard on the monetary accelerator. The growth rate of the M1 money supply jumped from near 0% to near 10%. This had the hoped-for result of making the recession that began the following year brief and mild.

2. A nice result, if that had been all. But there was more. Injecting a big dose of money to inoculate the economy against recession set off a bubble in the housing market. Starting in 2003, the Fed began gradually lowering the growth rate of the money supply to cool the rise in housing prices. That, too, produced the intended result; in 2006, housing prices began drifting lower.But again, there was a further consequence—the financial collapse that began in 2008. This time, the Federal Reserve stomped on the monetary accelerator with both feet, and the growth of the money supply hit a year-over-year rate of 21%. It’s still growing rapidly, at an annual rate of 9%.

3. The nonstop expansion of the money supply since 2008 has kept money market interest close to zero. Rates on longer-term debt aren’t zero but are extraordinarily low. The ten-year Treasury bond currently yields just 2.7%; that’s up from a low of 1.7%.The flow of new money has been irrigating all financial markets. In the US, stocks and bonds tremble at each hint the Fed is going to turn the faucet down just a little. And it’s not just US markets that are affected. When credit in the US is ultra-cheap, billions are borrowed here and invested elsewhere, all around the world, which pushes up investment prices almost everywhere.

4. US federal debt management is living on borrowed time. The deficit for 2013 was only $600 billion, down from trillion-dollar-plus levels of recent years. But this less-terrible-than-before figure was achieved only by the grace of extraordinarily low interest rates, which limit the cost of servicing existing government debt. Should interest rates rise, less-than-terrible will seem like happy times.

Almost no one imagines that the current situation can continue indefinitely. But is there a way for it to end nicely? For most investors, the expectation (or perhaps just the hope) that things can gracefully return to normal rests on confidence that the people in charge, especially the Federal Reserve governors, are really, really smart and know what they’re doing. The best minds are on the job.

If the best minds were in charge of designing a bridge, I would expect the bridge to hold up well even in a storm. If the best minds were in charge of designing an airplane, I would expect it to fly reliably. But if the best minds were in charge of something no one really knows how to do, I would be ready for a failure, albeit a failure with superb academic credentials.

Despite all the mathematics that has been spray-painted on it, economics isn’t a modern science. It’s a primitive science still weighted with cherished beliefs and unproven dogma. It’s in about the same stage of development today that medicine was in the 17th century, when the best minds of science were arguing whether the blood circulates through the body or just sits in the veins. Today economists argue whether newly created cash will circulate through the economy or just sit in the hands of the recipients.

Let’s look at the puzzle the best minds now face.

If the Federal Reserve were simply to continue on with the money printing that began in 2008, the economy would continue its slow recovery, with unemployment drifting lower and lower. Then the accumulated increase in the money supply would start pushing up the rate of price inflation, and it would push hard. Only a sharp and prolonged slowdown in monetary growth would rein in price inflation. But that would be reflected in much higher interest rates, which would push the federal deficit back above the trillion-dollar mark and also push the economy back into recession.

So the Fed is trying something else. They’ve begun the so-called taper, which is a slowing of the growth of the money supply. Their hope is that if they go about it with sufficient precision and delicacy, they can head off catastrophic price inflation without undoing the recovery. What is their chance of success?

My unhappy answer is “very low.” The reason is that they aren’t dealing with a linear system. It’s not like trying to squeeze just the right amount of lemon juice into your iced tea. With that task, even if you don’t get a perfect result, being a drop or two off the ideal won’t produce a bad result. Tinkering with the money supply, on the other hand, is more like disarming a bomb—and going about it according to the current theory as to whether it’s the blue wire or the red wire that needs to be cut means a small failure isn’t possible.

Adjusting the growth of the money supply sets off multiple reactions, some of which can come back to bite. Suppose, for example, that the taper proceeds with such a light touch that the US economy doesn’t tank. But that won’t be the end of the story. Stock and bond markets in most countries have been living on the Fed’s money printing. The touch that’s light enough for the US markets might pull the props out from under foreign markets—which would have consequences for foreign economies that would feed back into the US through investment losses by US investors, loan defaults against US lenders, and damage to US export markets. With that feedback, even the light touch could turn out not to have been light enough.

To see what the consequences of economic mismanagement can be, and how stealthily disaster can creep up on you, watch the 30-minute documentary, Meltdown America. Witness the harrowing tales of three ordinary people who lived through a crisis, and how their experiences warn of the turmoil that could soon reach the US. Click here to watch it now.

USDCHF: With USDCHF declining strongly to take back almost all of its three weeks gains the past week, the risk is for more weakness to occur. However, watch out for any correction following the mentioned decline. Immediate support lies at the 0.8700 level where a break will turn focus to the 0.8650 level. A cut through here will set the stage for a run at the 0.8600 level and subsequently the 0.8550 level. Its weekly RSI is bearish and pointing lower supporting this view. On the other hand, the pair will have to return above the 0.8952 level to annul its entire last week losses. Further out, resistance resides at the 0.9050 level. This if broken will aim at the 0.9100 level with a close above here if seen will aiming at the 0.9150 level and next the 0.9200 level. All in all, the pair remains biased to the downside in the medium term.

Article by www.fxtechstrategy.com

Weekend Update | www.thepracticalinvestor.com

April 11, 2014

— VIX ramped above weekly mid-Cycle resistance and challenged its February high before closing beneath it.  This is the start of the run to the top of the chart that may occur over the next 3-4 weeks.  The press continues to “whistle past the graveyard,”  (here, here, here and  here).

SPX breaks supports and Bearish Wedge trendline.

SPX made a clean break of weekly Intermediate-term support and the upper trendline of its Bearish Wedge.  There is a good probability that SPX may make a 150-200 point drop beneath 1700 next week.  There may also be a probable bounce due in the latter half of the week, followed by a continuation of the decline through the remainder of April.

(CNNMoney)  Markets are finally closed for the week after a truly bumpy ride that ended with investors running for the exits Thursday and Friday.

The weakness in the technology sector appears to be spreading to the broader stock market.  The S&P 500 was down nearly 1% today with selling in all sectors. Information technology was the hardest hit, but more defensive sectors such as utilities and telecoms were also under pressure. For the week, the S&P 500 fell 2.6%.

NDX falls dramatically beneath the Ending Diagonal.

NDX declined dramatically beneath its Ending Diagonal trendline.  The next level of support is at 3360.37.  NDX is leading the other indexes in a decline as it has now given a seasonal sell signal.

(ZeroHedge)  On Tuesday of this past week I posted an article entitled “No One Rings A Bell At The Top” wherein I stated: “The current levels of investor complacency are more usually associated with late stage bull markets rather than the beginning of new ones. Of course, if you think about it, this only makes sense if you refer back to the investor psychology chart above. The point here is simple. The combined levels of bullish optimism, lack of concern about a possible market correction (don’t worry the Fed has the markets back), and rising levels of leverage in markets provide the “ingredients” for a more severe market correction. However, it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that ‘this time is different.’ Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion and unable to extract themselves in time.”

The Euro bounces back to its upper trendline.

The Euro made a final bounce from the lower trendline to the upper trendline of its Ending Diagonal.  The lower trendline of the Ending Diagonal is important, since a decline beneath it may imply a further decline to the July 2012 low.  A break of the trendline signals that the decline back to the Lip of its Cup with Handle formation at 121.00 has begun.

(Bloomberg)  European government bonds advanced after Federal Reserve minutes damped speculation U.S. policy makers are moving toward raising interest rates, and as Greece returned to debt markets for the first time since 2010.

Italian bonds gained for a second day and Belgian, French and German securities also rallied. Greek bonds fell, pushing 10-year yields up from near the lowest level since February 2010, as the nation agreed to sell 3 billion euros ($4.17 billion) of five-year notes via banks. Greece received about 600 orders for a total of around 20 billion euros, a person familiar with the sale said. Ireland auctioned 1 billion euros of 10-year debt at a record-low yield.

EuroStoxx reverses hard from the Cycle Top.

The EuroStoxx 50 index reversed down hard from its Cycle Top, challenging but not breaking Intermediate-term support at3099.40.  Even though the rally from the March 14 low broke out to a new high, the top was made in 21 days, making it left-translated and bearish..

(ZeroHedge)  Another day ending in “y” means another day in which Putin plays the G(roup of most insolvent countries)-7 like a fiddle.

The latest: Europe should provide aid to Ukraine to ensure uninterrupted natural-gas deliveries to the region, President Vladimir Putin’s spokesman said as reported by Bloomberg.

“Russia is the only country helping Ukraine’s economy with energy supplies that are not paid for,”  Dmitry Peskov told reporters today in Moscow,  commenting on President Vladimir Putin’s letter yesterday to 18 European heads of state. “The letter is a call to immediately review this situation, which is absurd on the one hand and critical on the other.

Said otherwise: PUTIN SAYS EUROPE GAS TRANSIT DEPENDS ON UKRAINE: IFX

The Yen also rises.

The Yen launched higher this week and appears ready to challenge weekly Long-term resistance at 99.24.  Since the dollar/yen carry trade is dependent upon a declining Yen, it makes sense that equities markets declined as their source of funding was removed.  This may affect the liquidity from the world equity markets for the next month as a large retracement rally unfolds.

(ZeroHedge)  It took Virtu’s idiot algos some time to process that the lack of BOJ stimulus is not bullish for more BOJ stimulus – something that has been priced in since October and which sent the USDJPY up from 97.000 to 105.000 in a few months, but it finally sank in when BOJ head Kuroda explicitly stated overnight that there is “no need to add stimulus now.” That, and the disappointing news from China that the middle kingdom too has no plans for a major stimulus, as we reported last night, were the final straws that forced the USDJPY to lose the tractor-beamed 103.000 “fundamental level”, tripping the countless sell stops just below it,  and slid 50 pips lower as of this moment to overnight lows at the 102.500 level, in turn dragging US but mostly European equity futures with it, and the Dax was last seen tripping stops below 9400.

The Nikkei sits on the Head & Shoulders neckline.

The Nikkei declined a whopping 1100 points to the neckline of its Head & Shoulders formation on Friday.  Last week I suggested, “The Cycles Model calls for a probable 4-week decline that may break the Head & Shoulders neckline and meet its target.”  This is an auspicious start to a monster decline.

(MarketWatch)  Japanese stocks tumbled to their lowest level this year in early Friday trading, hit by Wall Street’s overnight fall, a stronger yen, and selling by foreign investors.

The Nikkei Stock Average opened sharply lower, falling quickly to its lowest level since late October. As of 0020 GMT, or 20 minutes after the Tokyo Stock Exchange opened, the index was down 2.8% at 13904.75.

The Nikkei has not closed under 14,000 since late October, leading many investors and analysts to believe that level represented a so-called “hard floor” of support.

U.S. Dollar loses most of its prior gains.

The Dollar lost most of its hard-earned gains made since March 13, but did not make a new low.    It appears that the decline may have ended on Thursday, which allows for the Cycle to go higher.  A challenge of, or a breakout above, mid-Cycle resistance at 81.05 will confirm a probable new uptrend.

(Reuters) – The safe-haven U.S. dollar edged higher on Friday, garnering support from a selloff in equities around the world, as investors fretted about overstretched valuations.

Global equities fell to two-week lows, triggered by selling on Wall Street on Thursday. Wall Street stocks continued their decline on Friday, spurring a broad risk-averse environment that led to selloffs in higher-yielding and emerging market currencies.

“Bad news for the world is good news for the dollar,” said Steven Englander, managing director and global head of G10 FX strategy at CitiFX in New York. “Once fears about the equity market intensified, they picked up a more conventional type of mode to buy the dollar.”\

Treasuries spike higher.

Treasuries spiked out of its Triangle formation to rise above its two-month sideways consolidation.  But it may not last, since there is daily resistance near 135.00 (not shown).  In addition, USB has a date with a major Cycle bottom near the end of May.

(WSJ)  Treasury bonds strengthened Friday and logged the biggest weekly price gain in a month as investors sought safety in bonds.

Demand for ultra-safe U.S. government debt rose over concerns about the U.S. stock market. Shares of high-flying biotechnology and Internet firms led the selloff as concerns grew that they are overpriced.

Reassurances from the Federal Reserve’s minutes from its March policy meeting earlier this week that it will be in no rush to raise interest rates has added to the bond market’s strength.

The Gold bounce meets resistance.

Gold gained additional traction off its Long-term support at 12982.04 and managed to close just beneath Short-term resistance at 1321.30.  Not overcoming its final resistance makes it susceptible to a reversal.  It appears that the decline may impose itself again soon.

(CNBC)  This week last year, the price of gold suffered a 15 percent drop inside two trading days. It was a volatile year for the precious metal — 2013 finally put an end to a 12-year bull run. And that is unlikely to be reversed no matter how volatile the markets get, analysts have told CNBC.

Gold has been trading near two-and-half-week highs and is on track for its best week in a month as equity markets have been hit hard and tensions continue to mount in Ukraine.

Will it be déjà vu all over again???

Crude falls short of a breakout.

Crude has been edging higher, attempting to make new highs.  However, this may not happen, since Friday was the last day in an inverted Trading Cycle.  A reversal next week would leave this Cycle left-translated and bearish.  A subsequent decline may lead to the Head & Shoulders formation at the base of this rally, which may be overshadowed by the Cup with Handle formation with an even deeper target.

 (MarketWatch) — Oil futures finished higher on Friday as a rise in U.S. consumer sentiment to a nine-month high buoyed the outlook for energy demand, and after the International Energy Agency reported much lower OPEC production in March and warned of the prospects for further output declines.

Crude oil for May delivery CLK4 -0.03% tacked on 34 cents, or 0.3%, to settle at $103.74 a barrel on the New York Mercantile Exchange after tapping a high at $104.44. For the week, prices scored a 2.6% gain, based on the most-active contracts.

China spikes, but doesn’t achieve lift-off.

The Shanghai Index spiked above its Model resistance levels to its weekly high on Thursday, day 29 in the new Cycle.  Should the index fail next week, the Cycle may be left-translated and bearish.  The ensuing decline may be swift and deep.  There is no support beneath its Cycle Bottom at 1934.61.

(ZeroHedge)  Last night’s devastating trade data from China had the bad-news-is-good-news crowd chomping at the bit over the next massive stimulus that ‘surely China will unleash…because they’ve got so much in reserves’. However, as we have explained previously, Chinese premier Li Keqiang destroyed those expectations last night when he ruled out major stimulus to fight short-term dips in growth. Unlike his ‘desperate for a short-term fix’ colleagues in the west, Li stated more thoughtfully (and perhaps more knowingly given his country’s pending credit bubble crash), “we will instead focus more on medium- to long-term healthy development.”

The Banking Index falls out of bed.

BKX dropped below its trading channel trendline and violated all but Long-term support at 66.61.  The next target is below its Orthodox Broadening formation.  A bounce from beneath the Broadening Top may heighten the probability of a flash crash soon after.

(ZeroHedge)  Yet again, it seems, once senior political or economic figures leave their ‘public service’ the story changes from one of “you have to lie, when it’s serious” to a more truthful reflection on reality. As Finanz und Wirtschaft reports in this great interview, Bill White – former chief economist of the Bank for International Settlements (who admittedly has been quite vocal in the past) – warns of grave adverse effects of the ultra loose monetary policy everywhere in the world… “It all feels like 2007, with equity markets overvalued and spreads in the bond markets extremely thin… central banks are making it up as they go along.” Some very uncomfortable truths (are) in this crucial fact-based interview.

(ZeroHedge)  Overnight, Bloomberg released its analysis of a Basel derivatives rule proposed last year according to which banks would be required to set aside more money in the event swaps making up the $693 trillion swaps market go bad. “And not just a little bit more — as much as 92 times, or 9,100 percent, more, according to calculations by three banks shared with Bloomberg News. The higher costs in turn may cause market participants to flee rather than take advantage of the clearinghouses, making it more difficult for those third-party guarantors.”

(ZeroHedge)  It was about 5 years ago, roughly the same time we launched our crusade against HFT, that we also first made the accusation that as a result of QE and the Fed’s central planning, the forward-looking, discounting mechanism formerly known as the “market” no longer exists, and instead has been replaced with a policy vehicle designed to create a “wealth effect” if only for those already wealthy. In other words, while HFT may have rigged the market, it was the Fed that has openly broken it.

Today, none other than the WSJ is the latest to confirm this.

(Forbes)  JPMorgan Chase JPM -3.66% & Co., the nation’s biggest bank, kicked off big bank earnings season in a bad way on Friday, reporting net income of $5.27 billion, or $1.28 per share, missing analyst expectations of $1.40 per share. The bank’s first quarter profits in 2014 dropped sharply from the previous year, when JPMorgan Chase reported $6.53 billion in earnings, or $1.59 per share.

The news was bad for big banks, suggesting that the weakness that had hit the shares of some big financial firms in recent weeks like Goldman Sachs, Morgan Stanley MS -2.67%, and Citigroup C -1.19%, would move to other large banks that are either more diversified or have not been hit by recent scandal like Citigroup’s Mexico unit. Shares of JPMorgan fell by 3% in pre-market trading.

Have a great weekend!

Anthony M. Cherniawski

The Practical Investor, LLC

P.O. Box 129, Holt, MI 48842

www.thepracticalinvestor.com

Office: (517) 699.1554

Fax: (517) 699.1558

Disclaimer: Nothing in this email should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of certain indexes or their proxies using a proprietary model.  At no time shall a reader be justified in inferring that personal investment advice is intended.  Investing carries certain risks of losses and leveraged products and futures may be especially volatile.  Information provided by TPI is expressed in good faith, but is not guaranteed.  A perfect market service does not exist.  Long-term success in the market demands recognition that error and uncertainty are a part of any effort to assess the probable outcome of any given investment.  Please consult your financial advisor to explain all risks before making any investment decision.  It is not possible to invest in any index.

The use of web-linked articles is meant to be informational in nature.  It is not intended as an endorsement of their content and does not necessarily reflect the opinion of Anthony M. Cherniawski or The Practical Investor, LLC.

By MoneyMorning.com.au

I normally don’t agree with much of the information that comes from the mainstream. But this week, the Age took the words right out of my mouth.

`‘You’ve been told it was the internet, that it was the economy, it was the high wages, the government, the customer, that is was the strong Australian dollar or maybe the weak Australian dollar.

‘It was anything but second-rate management and dull boards that were responsible for Australian retail’s poor performance – yet it turns out it was poor management all along.’

This came about after the South African company Woolworths Holdings [JSE: WHL] proposed a $4 per share premium to buy David Jones [ASX:DJS]. This is equal to 20 times next year’s earnings. This is very high for company with limited growth prospects.

Don’t be fooled, this international buyer is good news for the Australian retail sector.

Because Aussies are about to see how it’s done.

The whispers of a Myer [ASX:MYR] takeover of David Jones sent shivers down my spine. It was one ordinary business making a play for another ordinary business. Myer’s main goals were to save a few bucks in back end operations from a merger, and capitalise on David Jones’ property portfolio. Not transform department store retailing.

Cost-cutting is hardly inspirational management. 

However, the vote from DJs shareholders won’t happen until June this year. But in the two days since the announcement, Woolworths have already laid out their vision for the grand dame of Aussie retailing.

First up, they’re going to train and put on more floor staff. Next, management are going to target the David Jones credit card holders and members of the loyalty programs. And finally, they’ll increase the private label offering from 3% to 20%.

In retailing, private labels are a higher margin product which offer more control over costs and say in how the final merchandise is sold.

All this is only what Woolworths plans to do immediately. I’m sure there are a couple more tricks up Woolworths Holdings’ sleeve, because they reckon they’ll increase the bottom line at DJs $130 million per annum by 2019.

That’s not too shabby at all.

Just when others were telling us department store retailing was dead in Australia, the chief executive officer of Woolworths Holdings, Ian Moir, said this:

‘The department store isn’t dead, mediocrity is dead, poor retail is dead, but what is alive is a great department store that can give a great product range, great service, product that is on trend fashionable, great value and experience in stores that you love and that engages you online as well.’

Simply put, bad retailers in Australia have had their day.

Hear me now conservative and short term thinking retail corporate board members. You are about to be shown how it’s done. If online shopping and the recent international brand invasion in Australia didn’t force you to lift your game and stay relevant in the marketplace, then this takeover better.

A fresh set of money hungry eyes from a country that’s managed to capture a large market share of its rising middle class is a threat to any stagnant retail business.

Never owned DJs — never will

In spite of my keen interest in retail stocks in Australia, I’ve never, ever wanted to own David Jones.

I didn’t want to own them when they were paying a 4% yield in 2007. I still didn’t want them when the company hit $2 billion in turnover in 2008. And I certainly didn’t want them when the company hit 7.7% net profit margin in 2009 (the average for international department stores is 4%).

In between then and now, the share price fell from $5.80 and scraped along at $2.50 for some months. Still, DJs never looked like a tempting investment option to me.

Why? Because all this time, David Jones was a retail dinosaur.

At no point was the company doing anything revolutionary. Never during this time was the company stimulating or changing the market. And as fashion shows became glitzier each season, I saw that as a business trying to hide something.

And that was that they had nothing progressive or exciting to offer an investor.

All DJs could muster was the fact that they ‘did good’ at what they did. In the past decade, most of that ‘good’ was knowing consumers had money to spend, and weren’t particularly picky where it was spent. 

I say ‘good’, because David Jones was never great, at least not in a time I remember. It was just a large-scale retailer. With diverse bulk goods to sell you, and seasonal sales that made you feel like you scored a bargain.

As an investor, this translated into lower share prices, dwindling dividends and lip service about how times were tough.

Once the dust settles on the proposed transaction from Woolworths Holdings, I could be very interested in becoming a DJs investor. Simply because I think good management could turn the company around.

The thing is, they now have a management team that wants DJs to be successful. Let’s be honest, you don’t spend $2.15 billion on 50-odd department stores for short term profits.

However, investing in DJs once the takeover goes through might not be an option. First, it opens me up to currency risk. The South African Rand has been steadily rising against the Australian dollar for the past five years. But this is a moot point as my international stock broking account doesn’t offer shares on the Johannesburg Stock Exchange anyway.

This means the only retail stock I finally might have an interest in owning isn’t an option.

However, Australian Small-Cap Investigator analyst, Tim Dohrmann says I need not fear. There are a couple of Aussie retailers worth investing in.

In fact, he’s recommended two retail stocks to Australian Small-Cap Investigator subscribers. One that could achieve triple digit gains in the next two years…

Shae Smith+
Editor, Money Weekend

Two Stories from Money Morning This Week

While I’m on the subject of department store retailing, Kris Sayce looks at three big retailing stocks versus one tech stock while he’s in San Diego. The results will surprise you.

Many Australian’s don’t like banks. In fact bank bashing in Oz is a sport. This week Sam Volkering took a look the new technologies coming up that are going to compete with traditional banking. And the big loser will be the banking sector.

And you might like this

ASX: 15,000 within four years…bullish or bull dust?

Join Money Morning on Google+

By MoneyMorning.com.au

Source: Editors, The Gold Report (4/9/14)

https://www.theaureport.com/pub/na/puerto-ricos-tax-benefits-more-than-the-better-florida

Puerto Rico promises to now do for Americans what Singapore and Hong Kong have done for bankers and businessmen from London. In this interview with The Gold Report, three experts with in-depth knowledge of the pros and cons of living and investing in Puerto Rico share what it is like on the ground for investors.InternationalMan.com Senior Editor Nick Giambruno and Casey Research Chief Technology Investor and Puerto Rico resident Alex Daley join Sterne Agee’s Managing Director of Equity Research Todd Hagerman in clearing up some of the confusion about this “misunderstood” island and why the tax benefits for Americans make it “The Better Florida.”

The Gold Report: Alex and Nick, you just co-authored a report on Puerto Rico titled “Pocket Enormous Tax Savings in Puerto Rico.” Can you give us a rundown on the tax incentives in Puerto Rico?

Alex Daley: Sure. The first thing your readers should understand is that for Americans, this is truly a unique option and a tremendous opportunity for the right people.

Puerto Rico recently passed what are known as Act 22 and Act 20, or the Individual Investors Act and Export Services Act. They allow new residents of Puerto Rico to be completely exempted from Puerto Rican taxation on their capital gain, dividend and interest income. And the Export Services Act levies a top 4% tax rate on earnings from businesses that perform services, like professional consulting, asset management, research and development, computer programming, and so forth, in Puerto Rico for clients outside of Puerto Rico.

Before Puerto Rico’s new laws, it was immensely difficult for Americans to take advantage of incentives like these. For decades, programs in countries like Panama and Singapore sought to attract investors with tax breaks—but Americans couldn’t take advantage of them. Unlike countries in Europe, Asia and Canada, American nonresident citizens are taxed on their worldwide income. The only exceptions have been in far smaller jurisdictions—never before in a country with the modern infrastructure and a deep labor pool that Puerto Rico offers.

Todd Hagerman: In addition to Acts 20 and 22, the International Financial Center Regulatory Act, referred to as Act 273, is specifically designed to attract foreign investment outside the U.S.

Nick Giambruno: When I first heard about these tax incentives, I thought for sure it had to be something that was too good to be true. This motivated me to dig deeper. After extensive research, it became clear that the benefits were not an illusion and were 100% legitimate. For many Americans, including individuals operating on a modest scale, they are a huge opportunity that could really be game-changing. They’ve already helped a couple of my colleagues at Casey Research, like Alex.

TGR: Alex, tell us your rationale for moving to Puerto Rico. How is life there working out for you?

AD: I was no stranger to Puerto Rico and had been to the island a number of times previously. I had long been considering relocating to the Caribbean. Of course, Act 20 and Act 22 were a huge draw, but so is the tropical weather, beautiful white sand beaches, lower cost of living and the adventure of all of it. Just like everywhere else, of course, Puerto Rico has its negatives. Make a decision like mine and inevitably you will hear something about the crime. But to extrapolate these statistics to the entire area is a mistake. It would be similar to not moving to Michigan because there is crime in Detroit. Like any state with a dense metropolitan area, there’s crime in some areas. If you steer clear of those areas or take the same precautions you would in any big city around the world, you’ll be fine. In fact, one of my colleagues lives right on the beach in the touristy Condado neighborhood and just loves walking to the nice restaurants. For me, the more far-flung areas of the large island were more of a draw.

TGR: What makes these incentives in Puerto Rico different from, say, the Cayman Islands or other low-tax jurisdictions?

AD: It has better infrastructure, more familiar goods from home and because the U.S. is the only country that taxes its nonresident citizens on their income no matter where they live and no matter where they earn their money, it has huge tax benefits. This means that while a Canadian could relocate to a place like the Cayman Islands and pay zero tax, an American could not. The American would still have to pay taxes anywhere in the world by virtue of his citizenship; for Americans there really was no escape. . .until now.

NG: Yes, that’s exactly right. Because Puerto Rico is an unincorporated territory of the U.S., it’s not quite a state and not quite a foreign country; it’s a commonwealth. This arrangement allows it to have a unique tax situation. Namely, Puerto Rican residents who derive their income from Puerto Rican sources do not pay taxes to the U.S. government—they pay them to the Puerto Rican government. The same is true of the U.S. Virgin Islands, for instance, in a state of affairs that has been all but unchanged since the 1950s. Combine this commonwealth status with the new tax incentives, and mainland American citizens have a window to legally lower some of the burdens of U.S. taxation. There isn’t another jurisdiction in the world that offers such an opportunity for Americans. You can obtain most of the tax benefits of renunciation without giving up your U.S. passport.

TGR: Why would Puerto Rico want to make such an attractive offer to new residents?

NG: Quite simply, the Puerto Rican economy needs it. The island needs to boost its economy to reduce its debt burden, and that’s what gave impetus to Act 20 and Act 22. So in that sense, Puerto Rico’s economic troubles are a blessing in disguise. Puerto Rico is no novice at sculpting tax rules to attract foreign investors and expatriates. For decades, the country has offered tax incentives to many types of businesses, especially manufacturers, which is why today you’ll find plants belonging to Praxair (PX:NYSE), Merck (MRK:NYSE), Pfizer (PFE:NYSE) and other big names dotting the island’s interior. However, after watching India attract knowledge workers and Singapore attract asset managers, it was glaringly obvious that it could up its game and bring in less environmentally impactful businesses. After all, the populace is better educated, speaks English more fluently as a whole and doesn’t have to man the graveyard shift to work with American customers due to time-zone differences. So, the government set out to attract service businesses.

TGR: Is it working? Are people taking advantage of the benefits, moving to Puerto Rico and opening businesses?

TH: The intended outcome hasn’t been realized to this point. I think that part of the challenge is that Puerto Rico has been having a difficult time publicizing and promoting the various tax incentives, and, at this stage of the game, while the incentives were clearly designed to attract foreign investment largely in the manufacturing sector and facilitate job creation, they really haven’t lived up to expectations. Those who have participated have been largely professional investors who put money into properties, assets and other types of alternative investments to take advantage of the act. Unfortunately, those investments, while they create tremendous tax incentives for the investors, don’t create the jobs.

TGR: So will the government keep the incentives in place?

TH: It will. The legislation has been extended several times, and I believe it will continue to be extended until the government feels it is on more solid ground from both an economic standpoint, as well as an employment standpoint.

TGR: Couldn’t the U.S. government force Puerto Rico to change its tax incentives?

AD: Of course the U.S. government could pressure the government here, but it likely wouldn’t affect those who have already obtained the benefits. Such an action would just close it off to new participants. But we believe that is unlikely. The U.S. government understands that Puerto Rico needs to boost its economy to help it address its debt problem. Act 20 and Act 22 help the island do just that. The last thing that the U.S. government wants is a disorderly default or to have come to the rescue in the form of an unpopular bailout. As of right now, it looks like Act 20 and Act 22 are here to stay.

NG: There’s also the issue of Puerto Rico becoming the 51st state or its legal status otherwise changing. That would also be something that would end the tax incentives. However, this issue has languished for decades; the Puerto Ricans themselves are divided—some want statehood, some want the status quo, and others want complete independence. I think it is very unlikely that Puerto Rico’s current commonwealth status will change any time soon.

TGR: Todd, you said in a recent industry report that Puerto Rico’s economic activity is stabilizing. What specific steps have had the most success in slowing the year-over-year decline in Puerto Rico?

TH: There are a couple of different things. Puerto Rico typically changes administration every four years and there is a strong correlation with declining economic activity post the election year. That is often the result of the incumbent increasing spending to improve chances of getting elected. As usual, after the last change in administration a couple years ago, we immediately saw a drop off in economic activity compared to the election year.

TGR: Are some of the reform measures, like pension reform and passing a neutral budget, working to improve the economy?

TH: It remains to be seen. Clearly, part of the stabilization in the economy right now reflects the fact that the employment participation rate continues to tick higher. Revenues are exceeding government expectations, largely through the immediate implementation of the corporate tax hike in July. But we probably won’t see the full impact of austerity measures on consumers and small businesses until the latter part of 2014, after we’ve had a full year of the budget.

TGR: Are there any publicly listed stocks with exposure to Puerto Rico worth discussing?

NG: If you want to get exposure to Puerto Rican stocks through your brokerage account you don’t have many options. You are basically limited to investing in Puerto Rican retail banks listed in New York. There are four such banks that most investors look to for exposure to Puerto Rico: Popular Inc. (Banco Popular) (BPOP:NASDAQ), First Bancorp (FBP:NYSE), Doral Financial Corp. (DRL:NYSE) and OFG Bancorp (Oriental Bank) (OFG:NYSE).

If you wanted to make a bullish bet on Puerto Rico, Banco Popular is your safest choice. It’s by far the largest retail bank on the island. It will likely be a primary beneficiary from any economic activity spurred by Act 20 and Act 22. Banco Popular has a market cap of around $3 billion, ample liquidity, a healthy Tier 1 capital ratio of 19.2%, a relatively low nonperforming loan ratio of 2.5% and is trading at 68% of its book value.

If you are more of an extreme contrarian or crisis investor, you may want to check out Doral Bank. It is one of the island’s primary mortgage providers and took a huge beating last quarter as its loan book deteriorated in tandem with the general economy.

Doral’s stock is down around 45% year-to-date—near 10-year lows—and is only trading at a mere 15% of its book value. Its nonperforming loan ratio is 11.3% and its Tier 1 capital ratio is 9.7%. It’s definitely a very risky proposition, but it could be an interesting play for speculators looking to profit from a potential economic upturn in Puerto Rico.

TGR: Todd, you have three of Puerto Rico’s banks as Buys. What are the individual catalysts for each company?

TH: The banks on the island were some of the most troubled institutions as we went through the financial downturn a few years ago. The banks in Puerto Rico were treated differently during the bailout than their U.S. counterparts. After a six-year recession, we are finally starting to see an inflection point where the credit quality at these institutions is becoming more manageable, bank capital levels have reached all-time highs and liquidity levels have improved. The underlying financial footing of each of the banks in Puerto Rico is significantly stronger than where it was only a couple years ago.

That said, these banks continue to operate under pretty close supervisory scrutiny from the various banking regulators. But we’re at a point where, with credit quality becoming more manageable, companies such as Banco Popular and First Bank are in a position to exit their various regulatory agreements. Banco Popular also has Troubled Asset Relief Program (TARP) debt that was provided from the Department of the Treasury during the downtown, and it is now in a position to repay that debt. All of these issues would be positive not only for the individual banks but also collectively. It’s signaling to investors that the banking authorities are now more comfortable with the financial condition of these companies and Puerto Rico’s economy.

TGR: For Banco Popular, is the improvement in the credit quality the most important factor?

TH: It is. The biggest problem asset class that each of the banks has in Puerto Rico is residential mortgage assets. Similar to the U.S., Puerto Rico has been experiencing a modest rebound in housing, particularly at the lower end of the market. Puerto Rico lagged the U.S. both in the recovery, as well as the downturn. This is certainly not a surprise, but we are seeing ongoing housing improvement. Thus, the banks are becoming that much healthier as we go forward.

TGR: Oriental Financial Group is also processing a merger. How is that going?

TH: Oriental was able to do what we consider to be a transformational merger with Banco Bilbao Vizcaya Argentaria S.A. (BBVA:NYSE). That purchase from the Spanish parent company effectively doubled the size of Oriental, giving it a meaningful delivery channel in the form of branches that it didn’t have before. It also provided much-needed diversification to its loan portfolio and its balance sheet so it looks more like a commercial bank than what we’ve seen in Puerto Rico in the past.

TGR: Do you have a favorite of the three?

TH: I think each one has a fair amount of upside from current levels, but Banco Popular is the one name that stands out. It is now in a great position to move forward by exiting the regulatory orders and repaying the TARP funds. That could have a meaningful impact on the stock price to the positive in the very near term. Once that happens, it’s going to send a very positive message to investors as a whole and have a residual benefit to the other banks on the island.

TGR: Do you have any final advice for investors who are either thinking of moving to the island to take advantage of some of the tax benefits or investing in Puerto Rico?

TH: Puerto Rico has long been a very interesting market, but it is also a very misunderstood market because of its commonwealth status. Many U.S. investors are unfamiliar with the laws and how that may impact them as an individual or as a company. But it has a lot of potential, particularly from a manufacturing standpoint. It has a tremendous education system, infrastructure to support a fair amount of growth and programs that have been put in place to stimulate investment and the economy, and underlying job growth. So I think we’re in the early innings, but the base has been set for growth going forward. It’s just going to take some time.

TGR: Thank you all for your insights.

Learn more at the Puerto Rico Investment Summit April 24–25 or access The Casey Research Guidebook to the tax advantages of residing in Puerto Rico. To contact some of the investors who have made the move and ask questions, simply email [email protected].

Nick Giambruno is senior editor at InternationalMan.com. He has lived in Europe and worked in the Middle East. Most recently in Beirut and Dubai, where he worked as a research analyst covering Middle East and North Africa equities for an investment bank. Giambruno is a CFA charterholder and holds a bachelor’s degree in finance, summa cum laude.

Alex Daley is the senior editor of Casey’s Extraordinary Technology. In his varied career, he’s worked as a senior research executive, a software developer, project manager, senior IT executive and technology marketer. He’s an industry insider of the highest order, having been involved in numerous startups as an adviser to venture capital companies. He’s a trusted adviser to the CEOs and strategic planners of some of the world’s largest tech companies. And he’s a successful angel investor in his own right, with a long history of spectacular investment successes.

Todd Hagerman joined Sterne Agee in March 2011 to lead the firm’s research coverage of the commercial banking sector, primarily focused on U.S. multinational and regional banks. Prior to joining Sterne Agee, Hagerman was head of regional bank equity research at Credit Suisse Securities (USA), where he focused on the regional banking sector. Prior to joining Credit Suisse in 2007, Hagerman spent eight years as a senior banking analyst at Fox-Pitt, Kelton in New York and well more than a decade at the Federal Reserve Bank, which encompassed various roles in bank supervision and regulation at both the Federal Reserve Bank of New York and Federal Reserve Bank of San Francisco. His work at the Fed included various management positions in bank surveillance and review, bank examinations, and policy and special studies. Hagerman holds a Bachelor of Science in finance and economics from the University of Arizona and received his Master of Business Administration from the Marshall School of Business at the University of Southern California.

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S&P500 has turned nicely to the downside in the last 24 hours from 1865/1870 resistance area where wave 2/B completed a corrective rally. Market already reached a new swing low but based on downside fib. projections we see room for a decline to 1800/10 level as minimum target on the bearish side.

S&P500 4h Elliott Wave Analysis

Crude oil exceeded 102.20 swing high which makes rally from 97.00 more complex but still corrective. We are looking at a three wave move with a triangle placed in wave b), so current leg from 99.87 can be wave c), final leg within a corrective advance, so traders should be aware of a bearish reversal. An impulsive sell-off back to 101.50 will be an important sing for a completed recovery. In that case we would be looking for short opportunities again.

Crude OIL 4h Elliott Wave Analysis

Gold is recovering from 1277 low but still showing a corrective personality because of an overlapping price action. Therefore we think that rally from the low is temporary; ideally it’s wave (b) that is part of a larger downtrend. We see price now moving into 1320-1342 reversal zone from where a new sell-off may occur. A decline in impulsive fashion will confirm a downtrend continuation for this market.

GOLD 4h Elliott Wave Analysis

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So what is a Japanese candlestick?

In order to understand the term “Japanese candlestick”, we need to go back to the 17th century when the Japanese were using technical analysis to trade rice. Yes, technical analysis is that old! The history of the Japanese candlestick is a bit of a mystery and is mostly left to stories, but we do know that much of the credit belongs to a legendary rice trader by the name of Homma from the town of Sakata. His original ideas and concepts have no doubt been modified since then, but his early development of the candlestick pattern laid the path for further refinement.

The Japanese candlestick techniques made popular by Homma later made their way to the US around 1850, where technical analysis and price action were further developed by Charles Dow. You may recognize the name. Charles Henry Dow founded the Wall Street Journal and later invented the Dow Jones Industrial Average as part of his ongoing market research as it relates to price action. You read that correctly, the founder of both the Wall Street Journal and the Dow Jones Industrial Average was adamant about Japanese candlesticks and price action. So much for price action being some form of “hocus pocus” as some fundamental traders have claimed.

The Anatomy of a Japanese Candlestick

Now that we have a better understanding of how  the Japanese candlestick was developed and where it came from, let’s discuss what it is and how we can use it to trade price action. However, before we can use the pattern to trade price action, we need to understand the anatomy of the Japanese candlestick…what makes it “tick”. Pun intended 😉

More: Japanese Candlestick

Justin Bennett is a full-time Forex trader and Owner of Daily Price Action. His Forex trading career began 6 years ago and has followed a path similar to many traders. For the first 3 years he tried nearly every indicator and strategy known to man, but each time the journey ended where it began, frustrated and in search of the next “holy grail” that would bring consistent profits. It wasn’t until he cleared every indicator from his chart that he had his “ah ha” moment. For the past 3 years, Justin has worked to perfect that moment into something that can be easily duplicated by other traders in search of consistent profits.

By HY Markets Forex Blog

Crude prices were seen trading lower on Friday, but holding on to its highest in a month amid the ongoing crises in Ukraine as talks over the tension between the country and Russia and gas supplies are expected to be held. Crude exports from Libya are expected to resume within the next five days.

The North American West Texas Intermediate (WTI) crude for May delivery edged 0.33% lower to $103.07 a barrel on the New York Mercantile Exchange at the time of writing, while Brent crude for May settlement dropped 0.24% to $107.21 a barrel on the ICE Futures Europe exchange at the same time. The European benchmark Brent crude was at a premium of $4.13 to WTI.

Crude – Ukraine Crises

As the ongoing talks between Russia and the Ukrainian central government continues, investors worry over Russia’s gas disruption threat.

In a letter sent to the European leaders, the Russian President Vladimir Putin warned that the increasing debt of Ukraine’s gas threatened supplies to Europe. Gazprom considered forcing Ukraine to pay for gas supplies in advance, however Ukraine refused to pay nearly double the price for the commodity, according to reports.

Libya

In Libya, oil exports from one of the eastern ports are expected to begin within the next five days, Ibrahim Al Awami, the oil ministry measurement director said on Thursday. Approximately 1 million barrels is expected to be loaded by next week, the terminal can handle approximately 8.5% of the country’s export capacity of 1.3 million.

On Thursday, the Organization of the Petroleum Exporting Countries (OPEC) said its production fell by more than half a million barrels a day in March to 29.6 million barrels a day.

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The post Crude Prices Drops, Trimming Previous Gains appeared first on | HY Markets Official blog.

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By HY Markets Forex Blog

Stocks in Europe were seen falling on the last day of the trading week, following a heavy decline in the US and Asia.

The pan-European Euro Stoxx 50 declined 1.11% to 3,116.50 at the time of writing, while the French CAC 40 edged 1.16% lower to 4,362.30. At the same time the German DAX declined 1.49%, trading at 9,312.80, while the UK’s benchmark FTSE 100 lost 1.21% to 6,561.30.

The global outlook was affected by the steep declines in the US overnight, where the Nasdaq Composite index ended the session dropping to 2.3%, the most since 2011. While Standard Poor’s 500 Index closed the session with a fall of 1.8%.

Germany CPI 

In Germany, the country’s consumer price index climbed 0.3% higher in March on a monthly basis, compared to the previous reading of 0.5% seen in February, reports from the Federal Statistical Office showed. The reading came in line with analysts’ forecasts.

Stocks – Session Losses

The British broker Hargreaves Lansdown dropped 4.83% to 1,260 pence per share, while the chip designer ARM Holdings edged 3.5% lower.

German Steel producer, Salzgitter AG climbed 2.4% higher after Citigroup Inc suggested that investors should sell-off the company.

Russia Tensions

The President of the World Bank, Jim Yong Kim said on Thursday that the ongoing crises between Russia and Ukraine could cause the Russian economy to shrink by approximately 1.8% this year.

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By HY Markets Forex Blog

After increasing to a five-week high, oil prices slipped following a report that showed weak trade data from China. The relationship between the Chinese economy and oil prices is one investors who participate in crude oil trade should pay close attention to, as the Asian nation surpassed the U.S. as the world’s biggest energy consumer in 2013, according to The Wall Street Journal.

This relationship can help oil traders predict market volatility, as a poor economy could reduce Chinese demand for oil. As a result, the price of oil may fall, as demand is down from the world’s largest energy consumer.

The fear is that these latest trade numbers from China signal a gradual slowdown in the country’s economy. According to ABC News, Chinese imports of crude oil were at the lowest in five months at 5.54 million barrels in March. This is related to the struggle that leaders have had reaching the target of 7.5 percent economic growth this year.

However, oil prices aren’t falling too much on the new Chinese data, as concerns over tension in Russia and Libya has created uncertainty for some of the world’s supply, according to Reuters.

“The market was knocked last night by the Chinese import export data – it was a bearish double whammy,” Matt Smith, analyst at Schneider Electric in Louisville, Kentucky, told Reuters. “But we’re loath to move lower given the dual concern of Moscow and Libya, where there is uncertainty as to when control of those ports will transfer power.”

Moving forward, oil traders should keep an eye on the Chinese economy as any further slowdown could have a much bigger impact on the crude market.

The post Oil Prices Decline on Weak Chinese Trade Data appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog