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MOOSPEAK-- thru 10.11.2015 Welcome to Moospeak, the weekly commentary. Club members who, despite a secret interest in growing their own investments, are annoyed by the actual economic, political, and financial realities implicit in that endeavor may choose to avoid the pro-investor opinions expressed on this page. God-Like?... or Google-Like? Google's director of engineering, Ray Kurzweil, predicts that brain implants among Ivy League wannabes will one day be as popular as breast implants are among Hollywood wannabes today. And that day isn’t far off. He's predicted that humans will be hybrid robots by 2030, once nanobots, connecting us to the internet, are implanted in our brains. Kurzweil believes we'll be a far better species when we're part robot. He insists that this is the next natural phase of our existence, the next stage of human evolution. "Evolution creates structures and patterns that over time are more complicated, more knowledgeable, more intelligent, more creative, more capable of expressing higher sentiments like being loving," he said. "So it's moving in the direction that God has been described as having -- these qualities without limit." In short, according to Kurzweil, we are about to become God-like… in a robotic sort of way. I’ll admit: being God-like sounds kind of cool… from a purely existential point of view, of course. Practically speaking, however, I’ll be over 80 in 2030. Who am I going to impress with my god-like implants? Chicks? Don’t bet on it. And brain implants, no less! A brilliant octogenarian. Ever noticed how nobody listens to smart 80-year olds, unless they’re a Pope, a Fed Chairman, or your mother-in-law? (Let me confess on the record right now that I have a far better chance of becoming your mother-in-law than Pope or Fed chairman… and that’s without any plans whatsoever for a sex change.) Kurzweil says, "We're going to add additional levels of abstraction, and create more-profound means of expression. We're going to be more musical. We're going to be funnier. We're going to be better at expressing loving sentiment." He assures me that my brain will develop in the same way that my smartphone has. That all sounds very promising. I do love my smartphone after all, but… god-like? Not to slow down the entirety of human evolution with a few personal concerns, but I do worry about people looking at me at 80 and wondering, “Do you think those are real?” Referring to my ideas, my funniness, my musicality, my expressions of love. Fair or not, many people ask that of folks who have implants. They may enjoy and even lust after such implants themselves, but they denigrate them all the same as “falsies”. I don’t want to be known as the geezer with the falsies. Then there’s always the possibility that the implants improve me so much that family and life-long friends don’t even recognize the new me. Once I let on, they suddenly realize what a dull, dour, insensitive, lout the old me was by comparison; feel bad about all the time they wasted on me; and want nothing more to do with either of me. As a personal lifestyle choice, then, there are the two things about implants. First, you have to realize and accept that there is room for improvement. Second, you have to believe that the improvement will have a meaningful impact on your life going forward. I figure that by the time I’m 80, I’ll be so stuck in my ways that I’ll be convinced that there is absolutely, positively no room for personal improvement. I know this because I am almost there already. Apart from the purely personal, I have serious socio-political concerns as well. What if nanobots create millions of brilliant baby-boomer 80-year-olds, who, despite the best efforts of the Obamacare Death Panel, figure out a way to live joyfully past a hundred. That, of course, bankrupts the United States, destroys the global economy and causes bread riots among the impoverished, radical, ignorant who have been unable to afford nanobot-enhanced intellect. While I am merrily celebrating my new musicality, funniness and sensitivity, the rioting masses hold the “implant aristocracy” accountable for their condition, and roll out Madam Guillotine to lop off my nanobots. In short, it’s no mortal lock that implants will make mankind more god-like. In fact, I’d even take issue with Kurzweil's basic premise that "Evolution is a spiritual process and makes us more godlike." Technically, evolution is a biological process that improves our chances of survival as a species. Survival is about maintaining a physical and intellectual presence in a material world. Survival is never an issue on the spiritual plane, as gods are, generally speaking, always immortal. I do think we can evolve spiritually, just as we can evolve intellectually and physically. It doesn’t necessarily follow, however, that evolving in one area means we evolve in another. Being linked to the internet may help our intellectual evolution by providing us with access to more information than we could ever hope to remember. It doesn’t necessarily mean we’ll evolve spiritually, however, especially to god-like status. It is not the quantity or quality of intellect, but how we use that intellect, which defines how spiritually evolved we are. Fascinating that nanobots should harken me back to my first day of second-grade. That’s when Sister Teresa told us the story of Adam and Eve and how they got tossed out of the Garden of Eden. Eve gets drawn into a conversation with a snake (always a mistake) over God's prohibition against eating fruit from the Tree of Knowledge. The serpent assures Eve that God will not let her die if she eats the fruit, and, furthermore, that if she eats it, her "eyes would be opened" and she would "be like God…" This eventually led to the phrase “That lying snake.” And the rest is history. The Author's Take on the Latest Signal "This thing, what is it in itself, in its own constitution? What is its substance and material? And what its causal nature (or form)? And what is it doing in the world? And how long does it subsist?" --Marcus Aurelius, 167 AD Weekly Close 10/02/2015 Latest Signal HOLD CASH End Date 10/11/2015 (In this section of the Moose Calls newsletter, the author discusses his thinking on the validity and duration of the current signal. This may be a good thing or a bad thing, as the signal is more aggressive and has often proven itself a better predictor of the future than its somewhat skittish author with his more moderate risk profile.) Weekly market review— close 10.02.2015 Monday, Stocks Slump. US equities finished the session with solid losses. China growth concerns sapped sentiment and thrashed commodity prices, including gold and crude oil. A potential government shutdown next week and nagging uncertainty over the next Fed rate hike did not help. Treasuries finished higher, while the US dollar was lower. The S&P 500 Index lost 50 points (-2.6%) to 1,882. Tuesday, Stocks Mixed. After an upbeat start, US equities closed mixed in choppy action, stabilizing after yesterday's steep declines. Global growth concerns, Fed uncertainty, and a potential government shutdown continued to dampen sentiment. Europe and Asia finished lower. Treasuries were higher, despite an unexpected improvement in domestic Consumer Confidence. Gold and the US dollar were lower and crude oil prices were higher. The S&P 500 Index added 2 points (+0.1%) to 1,884. Wednesday, Stocks Rebound. US equities closed the final session of 3Q with solid gains, part of a broadbased global advance. Soft data out of Japan and the Eurozone boosted the chances of additional stimulus in those regions, leaving Europe and Asia broadly higher. Treasuries were mixed as an upbeat ADP employment report was met with an unexpected decline in Midwest manufacturing activity. Gold was lower, crude oil prices were mixed, and the US dollar was higher. The S&P 500 Index increased 36 points (+1.9%) to 1,920. Thursday, Volatility Carries Into Q4. US equities pared steep early losses and closed mixed as crude oil prices reversed from early gains and as global and domestic economic data did little to allay growth concerns and Fed uncertainty ahead of Friday's September jobs report. Europe was mixed, while Asia rose on the strong US lead. Treasuries were mostly flat following an increase in construction spending and jobless claims and tepid domestic manufacturing activity. Gold and the US dollar were lower. The S&P 500 Index increased 4 points (+0.2%) to 1,924. Friday, Lousy Jobs Report Sparks Equities. A way-softer-than-expected September US labor report initially caused heavy equity losses, but the eventual realization that a Fed tightening was less imminent as a result, boosted stocks well into the black by day’s end. Meanwhile, Europe pared its advance on the US jobs data, while Asia had finished mixed before the release. Treasury yields plunged, the US dollar continued to see pressure, while gold rallied, and crude oil prices were mixed. The S&P 500 Index gained 28 points (+1.4%) to 1,951. Summary: US long T-bonds (+3.7%) outperformed US equities, thanks to a very weak jobs report. US large caps were down all week until noon Friday, when they rallied from down 2% on the week to up 1.1%. Small caps (-0.7%) did not fare as well. Mid-caps were flat. Offshore equities fared considerably better overall, led by battered Latin America (+4.3%). Europe (+2.3%) and Asia Pacific ex-Japan (+1.7%) also posted nice gains. Only Japan (+0.3%) lagged. Commodities were mixed. The CRB (-0.8%) was down, along with gold (-0.7%), while oil (+0.3%) worked higher. The dollar (-0.2%) was slightly weaker. Weekly Market Table-- thru 10.11.2015 RANK 1 2 3 4 5 6 7 8 9 CI --88 75 60 52 35 27 13 0 ASSET Cash-- MMF or three-month T-bills Gold Bullion (GLD) Long Zero-Coupon Treasury Bonds (EDV) US Large-cap Equity Index (SPY) US Small-cap Equity Index (IWM) Japan Equity Index (EWJ) European Equity Index (IEV) Asia-Pacific ex-Japan Equity Index (AXJL) Latin American stocks (ILF) Other Considerations Fed Check (what the Fed ought to do) Impact of interest rates on US Equities Impact of Volatility on US Equities Impact of the US $ on Foreign Equities and Gold Commodity Inflation Trend Crude Oil Price Trend Technical Trend --bearish neutral very bearish very bearish very bearish very bearish very bearish very bearish ease policy slightly bearish bearish slightly bearish very bearish very bearish TS ---65 -2 -89 -86 -86 -90 -87 -92 1.16 -32 +57 -30 -91 -82 *CI is the "confidence index" measuring the model's overall confidence in the asset. It combines the relative strength (rank), the technical strength (TS), and the Fed Check. For more information, see the FAQs. Bad Economy + Good Stocks = Cash The model remains in cash. Volatility rules. This week saw one of the biggest intraday Dow swings in four and a half years. And in the end, the Fed is still yanking the market’s chain, as bad economic news turned out to be good market news. A truly lousy September employment report on Friday initially sent stocks plunging, but then it gradually dawned on folks that weak job growth equates to no immediate Fed rate hike, and stocks did a 180. Friday morning the S&P was down 2% on the week, and a few hours later it finished the week up 1%. Suddenly financial engineering was back in play for a little longer. Thing is US long bonds (+3.7%) were up even more than stocks. Normally, a surge in bond prices is a bet that the economy is in trouble. Higher stock prices are the opposite-- a bet that the economy is improving. When stock and bond prices don’t head in opposite directions, like they’re supposed to, the rule of thumb is that somebody is wrong. So who’s wrong this week? Stock investors or bond investors? At the moment, everything in the model is at some stage of bearishness, with the exception of long bonds. The entire equity complex is very bearish. So are commodities, including gold and oil. Long bonds meanwhile, bulled their way up into neutral this week, but not by much. Once again, nothing clearly beats cash, though bonds look like they may want to at some point. The ten-year Treasury yield dropped from 2.17% to 1.99% this week. That’s a big move for one week. Big moves usually lead to big opposite reactions after, so it’s hard to get comfortable jumping into bonds this week. As for the model, EDV popped above its 200-day @ $120 on Friday. That’s a positive development, but the next resistance point is the August high @ 125-- only 4% away. So there isn’t a great deal of upside right now. We’re in technical Never-Never Land. Point and figure analysis puts the next breakout at $128. Part of the recent uncertainty with Treasuries is that China has been selling them in order to weaken its Yuan, which is tied to the Dollar. (Less demand for US Treasuries equates to less demand for Dollars to buy them, lowering the Dollar’s price. A cheaper Dollar means currencies tied to it become cheaper too.) This week, the US jobs numbers called US economic health into question and that weighed on the Dollar (-0.2%) without the Chinese necessarily having to sell bonds. Gold (-0.7%) is still #2 in the model, but Fed zero interest rate policy (ZIRP) probably isn’t enough to propel gold to #1 anytime soon or to push oil to new highs. The technicals just aren’t there for either of them yet. True, the traditional Indian wedding season is beginning, but that annual spike in gold demand has become unreliable. Taxes and regulations intended to curb gold hording in India have had an impact. China is now the largest buyer, and it has just devalued, making gold more expensive and reducing demand in China. If ZIRP works and revives the US economy, it should be good for gold and bad for bonds. Problem is, ZIRP doesn’t seem to work that well. (This week’s jobs report was a case in point.) ZIRP hasn’t failed miserably. It just seems to sit there, not doing much of anything noteworthy, one way or another. It contributes to the sense that monetary policy won’t get the job done alone. We need a government that not only provides progrowth fiscal policies, but one that reverses the severely anti-growth agenda of the last six years. Unfortunately, that is at least eighteen months away. Until then, central bank financial engineering will continue to drive the markets. There is no momentum either way in any of the model’s asset classes. There is little global growth, but little likelihood of a US recession as well-- and no indication whatsoever that today’s politicians have a clue of where to go from here. Cash may provide a net negative real after tax return, but at the moment, that’s less risky than riding out the volatility in the global marketplace. Weekly Perception— thru 10.11.2015 Global Economy, Current Perceptions-- Recently, the World Bank forecasted world economic growth of 3.0% this year and 3.3% in 2016, down from its earlier forecast of 3.4% and 3.5%, respectively. Emerging economies should still lead the way, but are becoming more sluggish. The Baltic Dry Index (889), an international shipping measure and proxy for current global growth, fell this week-- it was down in 2014, and just managed to turn positive for 2015 in July. It is still well below its 2010 peak (4640). WTI oil price ($45.54)-- another proxy for world activity— fell this week, rallying off a 6 1/2 year low below $40 in August. Oil is well off its 2011 peak ($113), and close to 2008 crisis lows ($37). Copper ($2.32) rose, recovering 2 cents after dropping 7 cents a week ago. Meanwhile, US bond prices also rose, assisted by a very weak US jobs report US Economy, Current Perceptions— Overall: Data mixed to poor. The good: Weekly continuing jobless claims (2191K) lower than anticipated. September consumer confidence (103.0) stronger than anticipated. September ADP employment change (200 K) better than expected. September unemployment rate (5.1%) unchanged. August construction spending (+0.7%) beat forecasts. August personal spending (+0.4%) slightly better than expected. August core PCE prices (+0.1%) in line. July Case Schiller 20 city index (+5.0%) up in line. The bad: Weekly initial jobless claims (277K) up more than expected. September nonfarm payrolls (142K) below expectations. September hourly earnings (0.0%) unexpectedly flat. September average workweek (34.5 hours) unexpectedly lower. September Chicago PMI (48.7) below forecast. September ISM manufacturing index (50.2) below forecast. September Challenger job cuts (+93.2%) up considerably. August factory orders (-1.7%) much weaker than anticipated. August personal income (+0.3%) weaker than expected. August pending home sales (-1.4%) unexpectedly down. The ugly: September labor participation rate (62.4) declined approaching all time low. Jobs-population ratio (59.2) also down and near record low (58.5). The Fed, Current Perceptions: The Fed stopped buying bonds in October 2014. ZIRP remains in effect, however, as the Fed again stood pat at September’s FOMC meeting. Various Fed governors have been giving mixed signals on the timing of the first Fed rate hike in a decade, and the Fed meeting and press conference did little to allay the confusion. September was declared too early for a hike due to global weakness, but October remained a possibility. Meanwhile, the IMF’s recommendation is that it be delayed until 2016. This week, an ugly US September jobs report made delay more likely, as did tame core PCE (+1.3%), which held well below the 2% inflation target. The Fed Check (1.16) still suggests deflation. The yield curve has begun flattening. 3-month LIBOR (0.33%) was flat, while the 3-month T-Bill yield (0.01%) fell, putting the 3-month LIBOR/T-Bill spread at 32 basis points, up 1 tick, still closer to the bottom of its longterm, post-2008 15-57 basis point range. (A lower spread suggests easier bank-to-bank credit, and a more confident banking system.) Inflation, Current Perceptions-- Consumer inflation cooled down in August, as did producer prices. Import and export prices are cool. The Fed's favorite inflation gauge (core PCE) is still within the 1-2% target range (August all). Commodity prices, meanwhile, have turned very bearish, implying waning global inflation pressures– especially from oil. August CPI (-0.1%) very cool. August Core CPI (+0.1%) cool. August export prices (-1.3%) very cool. August import prices (-0.4%) very cool. August 12-month PCE (+0.3%) cool. July 12-month core PCE (+1.3%) ok. Q2 employment cost index (+0.2%) cool. Q2 GDP chain deflator (+2.1%) hotter than expected, but within range. Q2 unit labor costs (-1.4%) revised lower. Q2 productivity (+3.3%) revised upward, cutting inflation threat. The U.S. Dollar Index, Current Perceptions: Technically: slightly bullish. Latest Year (52 weeks): +11%. Latest Quarter (13 weeks): 0%. This week: The dollar index (-0.2%) was relatively flat despite an ugly September jobs report at the end of the week. The buck rallied strong from August 2014 to March 2015 on rate hike expectations. After that, it began making a classically indecisive pennant formation. The indecision has been due to uneven US economic data, uncertainty over a 2015 Fed rate hike, and volatile currency markets. At 96, however, the greenback is now testing both its 50-day (96), and its 200-day (96), and only about 4% off its mid-March high (100). 14-day RSI (50) has it is neither oversold (30) nor overbought (70). This week, the major currencies were almost will are all up vs. the Dollar. The Canadian dollar (+1.2%), the Swiss Franc (+0.8%), the Yen (+0.4%), the Aussie Dollar (+0.2%), and the British Pound (+0.1%) gained. Only the euro (0.0%) remained flat. Commodities, Current Perceptions-- Technically: very bearish. Latest Year (52 weeks): -30%. Latest Quarter (13 weeks): -14%. This week: The commodity index (-0.8%) continues to fade, giving back all of last week's gain. Oil prices (+0.3%) continued to move off a six-and-a half-year low below $40 in late August. Monetary easing over the past month in China has helped stem the collapse in commodities, but has driven the dollar (-0.2%) higher as well. That is rare. The CRB index peaked @313 in June 2014, before plunging to 209 in March. It bounced to 233 by mid-May, but plunged to a new year-to-date low at 185 in August before recovering to 194 this week. It is below its 50-day (197), and well below its 200-day (216). Oil prices initially led the CRB lower, plunging from $95 in October to $43 in mid-March. After rebounding to $60 to start the summer driving season, WTI oil was back below $40 to end it, rebounding to $46 this week. That is still well off its 2014 high ($107), and bearish— having dropped below its 200-day ($51). It is, however, testing its 50-day ($45). Per 14-day RSI (52), oil is neither oversold (30) nor overbought (70). Oil prices are down over the last 13 weeks (-22%), and over 52 weeks (-56%). Gold Bullion, Current Perceptions-- Technically: bearish. Model Rank: #2. Latest Year (52 weeks): 5%. Latest Quarter (13 weeks): -2%. This week: Gold (-0.7%) faded along with a weaker, but still slightly bullish US dollar (-0.2%). Fed zero interest policy (ZIRP) remains intact, propelling gold ($1138), through its short-term moving average ($1119), but leaving it well below its 200-day ($1178). It is also well below its 2015 high around $1300. Spring and summer are traditionally the seasonal low point in gold, while the fall usually brings improvement with September through January the strongest. We're starting to see that now. The dollar has been range-bound (93-100) in 2015. At the moment, it is near the bottom of that range (96), which theoretically, is good for gold. The recent Chinese devaluation, however, lowers demand for gold by making it more expensive for the world’s number one buyer, though it also set off a wave of safe-haven buying elsewhere. Global inflation pressures meanwhile, remain muted. 14-day RSI (55) has gold neither oversold (30) nor overbought (70). US Long Treasury Bonds, Current Perceptions-- Technically: neutral. Model Rank: #3. Latest Year (52 weeks): +11%. Latest Quarter (13 weeks): +8%. This week: US long T-bond prices (+3.7%) had blown past their 50-day ($117) and 200-day ($120) averages by Friday, in a knee-jerk reaction to a lousy US jobs report. The 10-year yield dropped from 2.17% to 1.99%. From March through June, EDV made a series of lower highs and lower lows, plunging from $132 down to $107. It turned up in late June, retook it’s 200-day ($120) in August before peaking ($128). It dropped back to $112, but at $120 is now making a new run at its August high. The idea of a premature Fed rate hike appears to have helped EDV solidify that bottom near 107 in June, and begin a new bull run. September’s Fed meeting saw no change in ZIRP, but kept speculation of a 2015 Fed rate hike in play. When the chances of a premature rate hike lessen— as they did this week, when the jobs report slapped the Fed upside the head with a shovel-- we have to re-evaluate bonds’ prospects. Another round of QE won’t work for bonds. Bonds want premature Fed tightening. For now, 14-day RSI (60) makes EDV neither oversold (30) nor overbought (70). US Large Cap Stocks, Current Perceptions-- Technically: very bearish. Model Rank: #4. Latest Year (52 weeks): -1%. Latest Quarter (13 weeks): -6%. This week: US large cap stocks (+1.1%) continued to dance on the edge of correction territory, about 9% off their highs. The Fed is in charge of stocks’ destinies, and Friday’s seriously weak employment report was a double-edged sword. Recession fears initially tanked US equities, until the expectation of more financial engineering asserted its pre-eminence. These days, a weak US economy is good for stocks if it postpones a rate hike-- the Chinese market collapse blamed for the plunge in Asia, Europe, and the United States in late August only add to the pain. Equities have bounced since, but weak global growth, and previous uncertainty over a Fed rate hike in 2015, has been pressuring risk assets. This week, large-cap US investors bought big into the notion that the Fed will keep the FFR at zero. SPY’s 14-day RSI (50) is neither oversold (30) nor overbought (70). The S&P500 index @1951 is below both its 200-day average (2063), and its 50-day (2002) this week. US Small Cap Stocks, Current Perceptions-- Technically: very bearish. Model Rank: #5. Latest Year (52 weeks): +1%. Latest Quarter (13 weeks): -11%. This week: US small cap stocks (-0.7%) continued to erode, keeping the Russell 2000 in correction territory, down about 14% from its highs. The Chinese market collapse has been blamed for the plunge in Asia, Europe, and the United States in late August. Equities have bounced since, but weak global growth, and continuing uncertainty over a Fed rate hike in 2015, is still pressuring risk assets. Small-caps lagged large-caps this week, fading to #5 in the model. IWM has a 14day RSI of 42, neither oversold (30) nor overbought (70). It worked higher until June 2015, posting a new high at $129, but then bottomed near $108 in August. Working back up to its 50-day ($116) this month, it failed, and at $111 remains well below its 200-day ($120) as well. European Large Cap Stocks, Current Perceptions-- Technically: very bearish. Model Rank: #7. Latest Year (52 weeks): -7%. Latest Quarter (13 weeks): -8%. This week: IEV (+2.3%) held its double bottom low and rallied. The China worries, disappointing US and German data, and local refugee crisis that have dampened Europe’s sentiment faded a bit, as stocks neared oversold territory. Moreover, the threat of a Fed rate hike by year-end lessened with this week’s poor US jobs report. Meanwhile, the third Greek bailout is still up in the air until several European parliaments approve the $95B package previously approved by both Greece and Eurozone officials. After forming a double bottom at $40 in early January, IEV rallied to $47 in May, but last week, was back at $40, where it held and rallied. At $41 now, it is about 10% off its May high, and below both its 200-day ($44) and 50-day ($42). IEV is showing a 14-day RSI of 48, neither oversold (30) nor overbought (70). Japanese Stocks, Current Perceptions-- Technically: very bearish. Model Rank: #6. Latest Year (52 weeks): +1%. Latest Quarter (13 weeks): -6%. This week: Japan per EWJ (+0.3%) crept higher again, but not before testing and bouncing off its August low for a second straight week. (The Chinese market collapse has been blamed for the plunge in Japan and elsewhere in late August. Most equities had bounced since, but Japan had not.) China worries and the currency wars that have resulted from them had boosted the Yen by over 8% since August, threatening the export economy underlying Japan’s equities. This week, the Yen (+0.4%) rose some more, adding to Japanese stock investors’ pessimism. So far, China’s devaluation and equity collapse has sent EWJ ($11.65) plunging below both its 50-day ($12.15) and its 200-day ($12.34). It tested the 200-day a few weeks back and failed. EWJ has a 14-day RSI of 48, and is neither oversold (30) nor overbought (70). Latin American Stocks, Current Perceptions-- Technically: very bearish. Model Rank: #9. Latest Year (52 weeks): -36%. Latest Quarter (13 weeks): -22%. This week: ILF (+4.3%) bounced off a seven-year low at $21.50 last week, before recovering nicely this week. Latin stocks appear ready to test their financial crisis low ($19.64). A collapse in the Chinese market has impacted the world, but especially Latin America. Weak global growth, depressed commodity prices, and the possibility of a Fed rate hike later this year are also pressuring the region. Bearish commodity (-0.8%) and oil prices (+0.3%) have kept ILF’s 10-month bear trend intact. At $23, it well below both its 50-day ($25) and its 200-day ($29). The Leftist governments have the economies of Brazil, Uruguay, Venezuela and Argentina on the brink of collapse. Weak copper prices have killed Chile. It was thought China might ride to the rescue, but recent events have proven that not to be the case. ILF has a 14-day RSI of 49, and is neither oversold (30) nor overbought (70). Asia Pacific ex-Japan Stocks, Current Perceptions-- Technically: very bearish. Model Rank: #8. Latest Year (52 weeks): -17%. Latest Quarter (13 weeks): -17%. This week: Asia Pacific ex-Japan (+1.7%) got a bounce. After setting a new high in late April ($73), AXJL has dropped like a stone. Bottoming in late August ($51) after China impacted the entire Asian region, AXJL @ $55 remains below both its 50-day ($57) and its 200-day ($64) and only about 8% off its multi-year lows set in August. Bearish commodity (-0.8%) and oil prices (+0.3%), recession in Japan, and an ongoing currency war continue to pressure AJXL. This week, the Dollar (-0.2%) faded, helping returns for dollar investors. Meanwhile, a stronger Japanese Yen (+0.4%) also helped the export outlook for Asia ex-Japan. AXJL currently has a 14-day RSI of 48, not quite oversold (30) nor overbought (70). Assumptions -- Q3 2015 Global Economy, Assumptions: JUL 1-- The IMF expects global GDP to improve, driven by recovery in the United States. Global growth improved to 3.4% in 2014, and in 2015–16 is projected at 3.5% and 3.8%. Recent reassessments of prospects in China, Russia, the euro area, and Japan as well as weaker activity in some major oil exporters because of the sharp drop in oil prices have led to a reduction in growth estimates. Stagnation and low inflation are still concerns in the euro area and in Japan. The United States is the only major economy for which growth projections have been raised. Accommodative monetary policy and lower oil prices will boost advanced economies, but this boost is projected to be offset by negative factors, including investment weakness. Emerging market and developing economies, meanwhile, depend on stronger external demand from advanced economies and from China to lift growth. China began to ease monetary policy this spring, and higher commodity prices in Q2 may induce the IMF to raise its growth forecasts for emerging markets and developing economies from 4.3% in 2015 and 4.7% in 2016. US Economy, Assumptions: JUL 1— The IMF estimates that the United States grew 2.4% in 2014 and will expand 3.1% in both 2015 and 2016. (That’s compared to 2.2% in 2013 and 2.8% in 2012.) Two unseasonably cold winters in a row sent first quarter GDP in 2014 (-2.1%) and 2015 (-0.2%) into negative territory. Once adverse conditions ended in spring 2014, second and third quarter 2014 GDP bounced back +4.6% and +5.0% respectively before the Q4 disappointed at 2.2%. A similar mid-year bounce is expected in 2015, and according to the Fed, a moderate US economic expansion is underway. The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat. Growth in household spending has been moderate and the housing sector has shown some improvement; however, business fixed investment and net exports stayed soft. The Fed, Assumptions: JUL 1— Federal Reserve policy remains accommodative. The target range for the federal funds rate (known as “zero-interest-rate policy” or ZIRP) is steady at 0 to 1/4 percent, and expected to remain there into the second half of 2015. The Fed began tapering new monthly Quantitative Easing purchases from $85B per month in December 2013, taking them to zero in October 2014. They continue to roll-over existing securities on the balance sheet as they mature, however. Inflation, Assumptions: JUL 1— Global inflation is generally projected to remain subdued (2-4%) in 2015 with continued sizable negative output gaps in advanced economies, weaker domestic demand in several emerging market economies, and falling commodity prices. In some advanced economies, including the euro area and Japan, headline inflation (1-2%) is low and deflation is becoming a worry. The developing economies expect 4-6% inflation in 2014-15. US inflation has been running below the Fed’s longer-run objective (2%-2.5%), partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Moreover, energy prices appear to have stabilized. Market-based measures of inflation compensation remain low; and survey-based measures of longer-term inflation expectations have remained stable. The latest 12-month price index change for all urban consumers (CPI) is -0.3% (May). The U.S. Dollar, Assumptions: JUL 1-- The Dollar index was narrowly range-bound (79-81) for almost a year, and then went parabolic in July 2014, as the end of QE drew near. Most of the Dollar gains were at the expense of the euro and the Swiss franc, after the ECB began its own QE program. After making an 8-year high in early 2015, the Dollar peaked in March, and has faded about 5% since. Most major currencies, however, are still either neutral or bearish vs. the Dollar. Current outlook: Neutral. The bullish case for the Dollar primarily rests on five assumptions: (1) that QE Infinity has restored the US economy (2) that Europe’s sovereign debt problems, slow economy, and QE program will continue to pressure the Euro (3) that easier Japanese monetary and fiscal policies will continue to weaken the Yen; (4) that slow Chinese growth will continue to dampen commodity prices, and (5) that possible geopolitical strife (Ukraine, Sea of Japan, Middle East) could promote a flight to quality, strengthening the greenback. The bearish case for the Dollar is (1) rising longer term interest rates in the second quarter in anticipation of a Fed rate hike later in 2015 will weigh on the economy going forward, depressing the Dollar. (2) Energy expansion was responsible for most US growth in 2014. Oil prices collapsed, contracting energy sector growth, and weakening the Dollar. Oil came back halfway and stalled, limiting growth and Dollar upside. (3) A $4.0 Fed balance sheet, and trillion-dollar-plus Federal deficits for another decade reflect US politicians’ decision to monetize US debt and inflate their way past fiscal problems. US government policies over the last five years–from the stimulus that wasn’t, to unaffordable healthcare, to financial regulation, to blocking domestic energy production – are all expected to raise the cost of US labor and capital, making US investment less attractive and job creation and growth less likely-- inducing less and less faith in the Dollar. Commodities, Assumptions: JUL 1— Commodities bottomed, down 30% in Q1 2015, but have bounced in Q2. The 2014-15 swoon in commodities was led by the collapse in oil prices, which have since recovered from WTI $38 to $60, still well below their previous high ($113). Falling global demand and a spike in US energy supply from fracking are generally credited with the move in oil. Current outlook: bearish. The bearish case: Slow growth and financial concerns in China, a stagnant Europe distracted by Greek insolvency, and an only recently improving US has curbed demand for commodities. In addition, the US has eliminated quantitative easing and is discussing higher interest rates later this year. All of that removes the easy Dollar floor under risk assets, reducing global liquidity, and demand for commodities. It also strengthens the Dollar, which cheapens commodities. The bullish case: With most of the developed world now engaged in quantitative easing, a weakening global economy is only transitory. Emerging markets are still growing at 5-7%. The Fed continues to see an improving US economy and greater demand for commodities. Greek debt concerns are being managed, as the ECB will do anything and everything to avoid sovereign default. Gold Bullion, Assumptions: JUL 1— Gold is down 12% in the past twelve months, but only down 2% year-to-date in 2015. It has been making lower lows and lower highs since it peaked above $1900 an ounce in August 23011. It eventually collapsed below $1200 in the summer of 2013 as the Fed announced tapering. It hit a recent low in late March 2015, as the Fed began discussing hiking interest rates later this year. That and the absence of anything resembling global inflation has left gold drifting in 2015. Current outlook: bearish The bearish case: Fed quantitative easing is over and rate hikes are on the way, removing the easy money floor under all risk assets. The US economy is still the best of a sickly lot and the Dollar can be expected to continue strengthening, even as global deflation fears pick up. Any debt or financial crisis could strengthen the Dollar and US bonds and weaken the demand for gold. India-- once the world’s largest gold consumer-has placed an import tax on the metal curbing demand. Meanwhile, China, now the largest buyer, has cut inflation and slowed economically. The bullish case: Massive monetary stimulus and deficit spending in the US, Europe, and Japan over the past five years have cheapened fiat currencies, increasing global inflation pressures. As the world economy begins to improve inflation will finally kick in. Easy money will not only stoke monetary-demand for gold but induce central banks to diversify their reserves with gold as well. US Long Treasury Bonds, Assumptions: JUL 1-- Long Treasury bonds fell 20% in 2013 after Congress made most of the Bush tax cuts permanent, and delayed sequester, rejecting austerity to open 2013. In addition, the Fed expanded quantitative easing in 2013, upping its monthly purchases to $85B, and the European debt crisis receded, limiting the flight to quality in US bonds. Bonds then rallied 42% in 2014, thanks initially to drastic winter weather that slowed the US economy in early 2014. Various political crises (in Ukraine, Syria, Iraq, Gaza) and financial worries in China and Greece induced a flight to quality in US bonds. All that helped keep bond prices bullish in 2014. As the Fed ended QE3 in October 2014, however, investors began discussing rate hikes in 2015. Q1 (+7%) was better for bonds than equities (+1%), as the 10-year yield fell below 2%, but Q2 was wicked, leaving bonds down 20% in the first half of 2015. Current outlook: Bearish. The bearish case: rests on three assumptions. (1) The Fed underestimates the inflation danger of an improving global economy created by its quantitative easing (2) Massive U.S. government expenditure in Obama's first five years-- most of it financed by new debt-- has increased the supply of Treasury paper going to market. The Fed had been purchasing up to 90% of that paper. Now that Fed demand is gone, yields will shoot higher, and prices will plunge. (3) The European Union’s debt situation has stabilized, and the ECB’s easy money policies will restore growth, lessening demand for US bonds. The bullish case for long Treasury bonds primarily rests on four assumptions: (1) US and global growth are anemic and inflation is not a problem. (2) Europe’s sovereign debt crisis and weak economy have led to easier money out of the ECB and lower European bond yields. That and geopolitical flare-ups, have led to a flight to quality in US Treasuries. (3) Japan’s effort to weaken the Yen also causes a flight into Dollars and US bonds. (4) So far, even an extremely accommodative Fed monetary policy has not overcome the fiscal and regulatory drag created by the administration, and may not until 2016. US Large Cap Stocks, Assumptions: JUL 1— US stocks finished 2014 in the black after a strong fourthquarter. Large caps (+12%) led both mid-cap stocks (+9%) and small-cap stocks (+4%) higher during the calendar year. The rally has stalled in the first half of 2015 (+1%), however, as the Fed has begun hinting at higher interest rates amid a spate of weak to mixed economic data. Fears that investors might “walk away in May” ahead of a 2015 rate hike may have begun to be realized. Current Outlook: bullish. The bullish case: US quantitative easing has ended and ZIRP still puts a floor under risk. Japan’s massive monetary expansion isn’t over, and much of that capital is still flowing into the US. Europe has also begun easing its monetary policy in the face of a weak economy and deflation fears. That too is redirecting investment capital out of the euro and into the US Dollar. With cash and bonds still yielding a negative real return, large or dividend paying stocks are filling investors’ income needs. The bearish case: The US economy is limping along below trend, corporate profits are expected to be weak, and valuations are pricey. We are overdue for a correction. The Fed intends to raise interest rates in 2015. European sovereign debt problems still remain, particularly in Greece. Lastly, mismanaged US fiscal and regulatory policies have failed to provide economic stimulus. “Affordable” healthcare became the biggest tax in US history in 2014 and has expanded in 2015. US Small Cap Stocks, Assumptions: JUL 1— US stocks finished 2014 in the black after a strong fourthquarter. Large caps (+12%) led both mid-cap stocks (+9%) and small-cap stocks (+4%) higher during the calendar year. The rally has stalled in the first half of 2015 (+1%), however, as the Fed has begun hinting at higher interest rates amid a spate of weak to mixed economic data. Fears that investors might “walk away in May” ahead of a 2015 rate hike may have begun to be realized. Current Outlook: bullish. The bullish case: US quantitative easing has ended and ZIRP still puts a floor under risk. Japan’s massive monetary expansion isn’t over, and much of that capital is still flowing into the US. Europe has also begun easing its monetary policy in the face of a weak economy and deflation fears. That too is redirecting investment capital out of the euro and into the US Dollar. With cash and bonds still yielding a negative real return, large or dividend paying stocks are filling investors’ income needs. The bearish case: The US economy is limping along below trend, corporate profits are expected to be weak, and valuations are pricey. We are overdue for a correction. The Fed intends to raise interest rates in 2015. European sovereign debt problems still remain, particularly in Greece. Lastly, mismanaged US fiscal and regulatory policies have failed to provide economic stimulus. “Affordable” healthcare became the biggest tax in US history in 2014 and has expanded in 2015. European Large Cap Stocks, Assumptions: JUL 1— According to the IMF’s most recent world economic outlook, European Union GDP is expected to add a lethargic 1.5% in 2015, and rise to 1.6% in 2016, hindered largely by weak investment. Lower oil prices; quantitative; a more neutral fiscal policy stance; and the recent euro depreciation have helped Europe. Inflation and inflation expectations continue to decline. These positives will be offset by weaker investment prospects, however, partly reflecting the impact of weaker growth in emerging market economies on the export sector. European stocks are down 11% over the last 12 months, having fallen 3% in the second quarter of 2015. Though the ECB has begun quantitative easing, Greece is a major cloud on Europe’s horizon, a situation that will probably not be resolved until later this summer. If Greece and the EU can agree to a reform program that addresses Greek debt, the EU will extend further credit, allowing Greece to remain in the euro zone. If no agreement is reached, Greece will be forced into bankruptcy and out of the euro zone. That could have broader implications for the entire community. Current outlook: Neutral The bullish case: European politicians have gotten their act together, and the ECB, the IMF, the Fed, and the EU will flood Europe with more liquidity as necessary. Lower oil prices will help the continent’s consumers this summer and fall. A weaker euro will help European exporters. The bearish case: Quantitative easing in Japan and the US quieted sovereign debt fears in Spain, Portugal, and Italy through the carry trade. US QE is over, however, removing the easy money floor under risk assets, reducing global liquidity, and weakening banks and financials-- the predominant equity sector in Europe. Europe’s financial crisis is not over, then, just on sabbatical. Greece may exit the euro zone this year, prompting future leftists in Spain to follow, threatening the continent’s financial system. Meanwhile, EU economic growth is anemic. Flagging household and business confidence, deflation worries, and conflict between Russia and Ukraine comprise Europe’s wall-of-worry. Japanese Stocks, Assumptions: JUL 1— Japan’s economy fell into technical recession in Q3 2014. Private domestic demand did not accelerate as expected after a sales tax increase, despite increased infrastructure spending. Additional quantitative and qualitative monetary easing, and a delay in the second consumption tax rate increase should support a gradual rebound in activity. Along with cheaper oil and yen depreciation, growth should modestly strengthen in 2015–16, to 0.6% and 0.8% respectively. Japanese equities, meanwhile, broke out of a long-term downtrend in late 2012 with the advent of “Abenomics”-- a three-part program of (1) regulatory reform, (2) fiscal stimulus, and (3) massive BoJ quantitative easing. The goal was to reach a 2% inflation target and to weaken the Yen, thereby improving Japan's trade competitiveness. As a result, the Nikkei posted a 26% gain in 2013. It followed with a choppy performance in 2014 (+2%), but has surged in the first quarter of 2015 (+16%), as the BoJ announced Japan's publicly held pension funds would double their equity holdings. Note: due to the weak yen policy, dollar investors have only matched the gains posted by the Nikkei in hedged ETFs. Current outlook: Bullish The bullish case: The BoJ’s massive quantitative easing program-- about 60-70 trillion yen per year in asset purchases-- will double the monetary base and begin to work in time. In addition, the Japanese government has spent $200B in new stimulus spending to get the country going again. Lately, they are doubling the equity holdings in their pension funds. Elsewhere, the Europeans are now easing along with the Chinese, Australians, and Koreans. Falling oil prices help the energy importer, and once global growth returns, the weaker Yen will spur Japanese exports and revive its economy. The bearish case: The domestic Japanese economy is moribund due to an aging population, and a weak global economy. Since the Fukishima nuclear crisis, nuclear power generation has been shut down, forcing Japan to import fossil fuels to make electricity. The nation’s already high debt-to-GDP ratio required a 10% consumption tax to go into effect in April 2014. Conceptually, easy money and a weakening Yen is like pushing on a string— more likely to result in a carry trade than investment in Japan. Meanwhile, the possibility of Fed rate hikes also reduces global liquidity and weakens the floor under risk assets. Latin American Stocks, Assumptions: JUL 1-- According to the IMF’s most recent world economic outlook, Latin American GDP is projected to be +0.9% in 2015 and +2.0% in 2016. Latin American equities fell 23% in the last 12 months, including a 3% loss in the second quarter of 2015. Entering Q3, then, Latin American equities are weak. A slowing recovery in the advanced economies and in China, has kept the Latin 40 mired in a highly volatile downtrend since March 2011, and it still hasn’t broken out. It touched mid2009 financial crisis lows in early 2014, and has gone even lower since. Current outlook: Bearish The bearish case: The region is currently mired in one of its “inept government” phases. That tends to increase both domestic and foreign capital outflows. Capitalism has been on the fade since 2011 in Latin America, and the equity markets have reflected that. Below trend growth in China, Europe, and the US adds to the problem by curbing demand for Latin exports. In addition, the end of US quantitative easing last fall removes the easy money floor under risk assets, reduces global liquidity, and weakens Latin financials. It has also strengthened the Dollar. A stronger Dollar cheapens commodities, including oil, among Latin America’s primary exports. While that should increase commodity exports in the long term, short-run, it not only cuts Latin revenues, but erodes Dollar investors’ returns in Latin equities. The bullish case: Latin American countries are generally rich in natural resources. They also have positive demographics with a younger population and a rising middle class. That tends to attract foreign capital inflows. Ongoing central bank easing in the US and Japan and looser policies in Europe and China increase those inflows, promote growth, and lift commodity prices, improving profitability for Latin exporters. Meanwhile, slower global growth in 2013 reduced Latin inflation pressures and allowed interest rates to recede. Asia Pacific ex-Japan Stocks, Assumptions: JUL 1-- According to the IMF’s most recent world economic outlook, growth in Emerging and Developing Asia is only projected to reach +4.3% in 2015 and +4.7% in 2016. China and India are expected to lead the Asian Tigers (ASEAN) higher. Asia Pacific ex-Japan equities, meanwhile are down about 5% in the last 12 months. Most of that decline occurred in the past two months. The region’s equities are heavily weighted in financials and materials, and its fortunes are closely tied to those of China, directly, and Japan, indirectly. Current Outlook: Bearish. The bearish case: Asia Pacific is an export region and the global economy is still slow, including China, Europe, and Japan. China’s stock market, in particular, is at a crisis point. After a sharp run-up, prices have dropped 30% in Q2. In addition, Japan’s beggar-thy-neighbor policies soak up what trade demand remains at the expense of its Asian neighbors. In addition, the US elimination of quantitative easing and possible removal of ZIRP, removes the easy money floor under risk assets, reduces global liquidity, and weakens Asian financials. That also strengthens the Dollar, which is already bullish versus the Yen. A strong Dollar increases Asian exports to the US in the longer term, but short-run, a rising Dollar erodes Dollar investors’ returns in Asia. The bullish case: the Fed is talking rate hikes, but US monetary policy remains very easy along with Japan’s and Europe’s. The Fed has ended QE, but ZIRP remains into 2015. Looser policies in Europe and China should also improve global growth prospects. Europe has gotten the institutions in place to deal with its debt crisis. Asian inflation pressures are under control allowing interest rates to recede in the region—further stimulating growth in 2015. Moosextras— Outside the Box: —Top Bullish Sectors thru 10.11.2015 Bonds (9), Currencies (3), Equity Shorts (3), Industrial Metals (1) TICK NAME RWM Short US Small-caps MYY Short US Mid-cap 400 SH Short US S&P 500 TLH 10-20 Y Treasuries IEF 7-10 Y Treasuries FXY Japanese Yen IEI 3-7 Y Treasuries TLT 20+ Y Treasuries EDV 25+ Y Long Zero T’s PALL Palladium FXS Swedish Krona MUB Munibonds MBB Mortgage-backed bonds FXE Euro SHY 1-3 Y Treasuries AGG Aggregate Bond Index * overbought, **oversold RSI 61 56 49 65 65 50 66 60 57 82* 14** 69 60 42 66 61 COMMENTS Sudden equity collapse boosts shorts Sudden equity collapse boosts shorts Sudden equity collapse boosts shorts Flight to quality, global growth worries help bonds Flight to quality, global growth worries help bonds Asian currency war boosts Yen Flight to quality, global growth worries help bonds Flight to quality, global growth worries help bonds Flight to quality, global growth worries help bonds Bet against diesel (platinum) catalytic converters Currency wars weaken Dollar Flight to quality, global growth worries help bonds Flight to quality, global growth worries help bonds Currency wars weaken Dollar Flight to quality, global growth worries help bonds Flight to quality, global growth worries help bonds Outside the Box: —Thrift Savings Plan thru 10.11.2015 The Thrift Savings Plan, or TSP, is the government’s 401K style retirement plan. Millions of federal employees are invested in it, including several life-long friends here in the capital region. The TSP does not provide all of the choices that the Moose does. Gold is notably absent, and foreign equities are all lumped into one choice, not broken out by region. As a result, TSP investors often have questions at switch time— especially when the Moose switches to a choice that TSP doesn’t offer. To clarify that situation, the following ranking table applying a Moose-like momentum model to the TSP has been added to the site. This week the 100% model switches to F (Fixed Income) Fund (1st September switch). Note: TSP choices can be highly correlated. That means the model can jump around a lot, giving false signals. Since TSP limits account holders to two switches per calendar month, diversifying the portfolio to give it more stability is an option. This week the diversified model holds at 75% cash, and a 25% position, in bonds. RANK 1 2 3 4 5 FUND G Fund F Fund C Fund I Fund S Fund ASSET TYPE Short-term income Fixed Income Large-cap US Equities International Equities Small-cap US Equities COMMENTS Safe, but negative real return Bonds improvng Stocks fading Only Japan positive US Small-caps bearish DIV% 75 25 0 0 0 Outside the Box: — Carry-trade thru 10.11.2015 Currency vs. Dollar Euro (FXE) Yen (FXY) Australian $ (FXA GB Pound (FXB) Canadian $ (FXC) Trend neutral neutral very bearish slightly bearish very bearish TS +1 +1 -84 -49 -88 Medium Term Implications for non-Dollar investors Euro investors match the $ Moose Yen investors match the $ Moose Aussie $ investors outperform the $ Moose Sterling investors outperform the $ Moose Canadian $ investors outperform the $ Moose Non-Dollar investors who want to maximize their profits using the Moose should incorporate a "carry-trade" currency strategy into the decision, making it a two-step process. First, decide whether it's a good time to switch to US Dollars, and then use the Moose to identify the best place to put those Dollars. (Generally, if one's currency is weakening (Bearish) against the Dollar, non-Dollar investors in the Moose will outperform.) This table is intended to give non-Dollar investors an additional clue as to whether following the Moose might work for them. It may not be right every time-- as the currency markets can be volatile, and government intervention can make them even more so-- but more information is probably better than less. Copyright, QuantStreet Corporation, 2003-2015, all rights reserved