Negative divergences


Author Cam Hui

Posted: 06 May 2013

Further to my last post (see Sell in May?) I am seeing more negative divergences that create more concerns for the bull case. The recent rally, which has been led by the golds and deep cyclicals, have all the appearances of a dead cat bounce rather than the start of a sustainable advance.

Last week, I suggested that traders should watch the silver/gold ratio for signs of a sustainable rally (see Watch silver for the bottom in gold). The idea was that silver, being the more volatile poor man’s gold, should display positive relative strength against gold and lead a precious metal rally if these metals are in the process of making a sustainable bottom. Look at what’s happened to the silver/gold ratio since then:

We can see how the oversold rally developed by analyzing the price charts of the gold and silver ETFs. GLD has certainly staged a classic capitulation and rally pattern to fill in the gap left by its recent freefall:

But what about silver? Sure, this poor man’s gold rallied, but the rebound has been weak and the gap was not filled, which suggests to me that this advance is an oversold rally and the next major move in precious metals is likely to be down.

As confirmation of the bearish commodity trend, the entire industrial metals complex remains weak despite the rebound in gold and oil:

In my previous post, I also wrote about watching the AUDCAD currency cross rate, with the premise that the Australian Dollar is more sensitive to growth in China and the Canadian Dollar is more sensitive to growth in the American economy. A breach of the uptrend in this cross rate would would be a signal that the market’s belief that Chinese growth is slowing, which would be negative for the global growth outlook. The breakdown in this currency pair cannot be regarded as good news for the prospects of Chinese growth.

Another concern is the disappointing South Korean April exports, which were just released and missed expectations at 0.4% compared to estimates of 2.0%. The South Korean economy is regarded as cyclically sensitive as the country is highly exposed to trade with China and Japan.

In addition, Cullen Roche at Pragmatic Capitalism recently pointed out that the Citigroup Economic Surprise Index is turning down in every major region in the world. As a reminder, a economic surprise index reading below zero is indicative of more misses than beats on economic data. Falling surprise indices around the world suggests, therefore, that global economic growth is starting to stall.

As we wait for the decisions of the Federal Reserve and ECB this week, it will be a test of market psychology of whether bad news is good news, i.e. economic slowdown will lead to central bank stimulus, which is bullish, or bad news is bad news.

Non-confirmation of SPX new highs
Moreover, with the SPX making new marginal highs, I am not seeing the breadth confirmations from the 52-week highs and lows. While these kinds of breadth divergences can last for months, it nevertheless raises a red flag about the sustainability of this stock market rally.

Here’s another puzzle. If the stock market is making new highs, why is the VIX/VXV ratio (which I described in a previous post here and first pioneered by Bill Luby, see his original post) sitting at only 0.91, which is barely below my “sell signal” mark of 0.92? What is the term structure of the option market telling us?

This is not investment advice
One final point. I have outlined a number of negative divergences that suggest a bearish tone for stocks, but I have not outlined the timing of any trades. In my last post entitled Sell in May? I sketched out a number of likely triggers for to get more defensive. Since then, I have had a number of emails and other responses asking if and when I would write about when those events are triggered and, by extension, when it’s time to sell or short the market.

Let me make this very, very clear: Those triggers are just a set of suggested triggers. It will be up to each individual reader to make up his or her own mind as to what to do if and when each event is triggered. Don’t expect me to hold your hand and shout “sell” for you. You are responsible for your own portfolio and your own profit and loss statement.

For the readers who are waiting for me to tell when to buy or sell, I strongly suggest that you re-read my previous post about why the contents of this blog does not represent investment advice. This blog is a forum for discourse, not pre-digested investment or trading advice.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest. 

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

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Is the secular bull market in Vancouver RE over?


Author Cam Hui

Posted: 17 Mar 2012

I don’t generally comment on the local residential real estate scene, largely because the topic isn’t within the scope of this blog and I don’t have much in the way of unique insights. However, I have a personal interest since I live here. In addition, several items came across my desk that piqued my interest.

First, the Conference Board of Canada recently unveiled some research indicating a statistical link between Chinese GDP growth and Vancouver property prices:

Statistical analysis confirms the importance of China’s economic health to Vancouver’s housing markets. Standard tests find significant correlations between the country’s real GDP growth and three important market yardsticks: existing home sales, existing home price growth and total housing starts. By contrast, local employment growth is significantly correlated to none of these and the five-year rate related to only the resale variables. This could mean that a substantial proportion of Vancouver real estate purchasers do not need local jobs to buy any home (new or existing) and that many do not need a mortgage to buy a new home. On the other hand, better economic health in China gives its residents wealth to spend on Vancouver housing.

While statistical relationships do not indicate causality, anecdotal evidence suggests that Vancouver property prices have been buoyed over the last couple of decades by several waves overseas buyers. The first was from Hong Kong, followed by the Taiwanese and now the Mainland Chinese.

The future of foreign demand
I came across an item Friday in the WSJ indicating that the older generation of Mainlanders looked to North America if they intend to emigrate (or at least to get a foreign passport), but the new generation is considering other alternatives such as Singapore, Hong Kong and Cyprus (see video and article). In particular, this wave of “economic refugees” seeking foreign passports as a safety valve should things turn south at home are looking to troubled eurozone jurisdictions such as Cyprus, where you can get a residency permit if you buy property there (and apply for Cypriot, and therefore EU, citizenship after five years). Other eurozone countries like Spain, which saw the collapse of a property bubble, also has a residency for house purchase program.

Yes, I have heard the local real estate boosters. Vancouver is a “world class” city (yes, as “world class” as other Winter Olympics sites like Salt Lake City, Lillehammer, Turin and Sarajevo – can you find them all on a map?). It has a mild climate (as mild as Cyprus or southern Spain?)

So what happens if Mainland Chinese demand starts to decline?

What’s the downside risk?
The Conference Board study indicated that the health of the local economy had little or no effect on local property prices. In other words, the locals have been priced out of the market. At what price does local demand start to put a floor on the market?

Here are some back of the envelope numbers. A typical single-detached house on upscale neighborhoods on Vancouver’s westside goes for about $2 million, give or take. If you were to open up the career section of the local paper, a good paying job is roughly 50-80K a year. Let’s assume that you have a couple with a combined household income of 200K a year – which would roughly puts them in the top 2% in Canada. Assume that they have no other equity from an existing home but have the 20% down payment, they can afford a house of $1.0-1.2 million range based on current interest rates.

That’s where local demand starts to kick in.

With the news that Vancouver real estate market slump is continuing:

Sales recorded through the Multiple Listing Service dropped 24 per cent in February to 4,501 transactions compared with 5,895 a year ago, the report said. The provincial average price was $529,922 in February, down 8.1 per cent from February 2012.

…the concern is that the overseas buyer is looking elsewhere is a threat to the secular bull market in Vancouver residential property prices. Should that happen, market price trends will transform itself from a series of higher lows and higher highs to a more cyclically driven market where prices move up and down with the economic cycle.
Right now, I am watching China (for cyclical effects on Vancouver RE prices, as per the Conference Board study) and emigration preferences (for the secular effects).
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

A Canadian’s roadmap for Greek struggles


Author Cam Hui

Posted: 22 May 2012

A small state within a federation of states believe it’s getting a raw deal. A charismatic leader emerges who tells the population of the small state that he has a solution that relieves them of the burden, but get the benefits of the federation at the same time.

Greece? Well, sort of. In Canada, we went through a similar experience with the Quebec sovereigntist movements, culminating in the referendum of 1980 and a second one in 1995. If that is a road map for the political struggles that we see in Greece today, then consider what happened in the Canadian experience.

In the Quebec case, the sovereigntist message was, “We can have our own country, our own culture and at the same time have the economic benefits of Canada as well.” The reasoning went something like this. If Quebec were to separate, Canada would have no choice but to enter into some sort of economic association with Quebec, as the economies are so intricately connected with each other. Quebec would even use the Canadian Dollar as its currency (a bad idea given the eurozone experience of not having control of your own monetary policy, but they didn’t know that then). Canada has always allowed dual citizenship, so Quebec citizens could retain their Canadian citizenship, so what’s the big deal?

It was a seductive message, just as Syriza’s message is today to Greeks. Default, but stay within the euro. What can they do to us?

Expect a carrot and stick
Here’s what to expect. From the Canadian federalist (anti-separation) side, there were two messages, one offering a carrot and the other a stick. There was the tough talk about the dire consequences of what happens if Quebec were to leave. You’re either in or out. Don’t expect a sweet deal, or any deal on economic association if you were to leave. For example, there was some dispute of how much of Canada’s national debt Quebec were to assume if it were to become a separate country. I can recall that Diane Francis of the conservative National Post suggesting that Canada should unilaterally separate Government of Canada bonds and notes by a set amount and declare a portion to be Quebec’s obligation.

Already, we are seeing signs of this tough talk of a stark choice as Angela Merkel appears to be suggesting that Greece hold a referendum on euro membership, which most Greeks are in favor. Johann Rupert, the head of the Swiss-based luxury goods maker Richemont, chimed in on how Greeks should adjust their expectations:

You cannot work 35 hours a week, want to retire by 50 with full pension, have eight weeks of holiday and expect to be bailed out by people who work their butts off either in northern Europe or in China. Life does not work like that.

Michalis Chrysohoidis, the minister of Citizen Proection in the former Greek government, warned of civil war should Greece exit the euro:

An outgoing Greek minister warned that the country could descend into “civil war” amid the chaos of a euro exit. “If Greece cannot meet its obligations and serve its debt the pain will be great,” Michalis Chrysohoidis was quoted as telling a local radio station. “What will prevail are armed gangs with Kalashnikovs and which one has the greatest number of Kalashnikovs will count … we will end up in civil war.”

On the other hand, you will have a group with a soothing message of what you would get if you were to remain with the federation. You have Merkel-Hollande sounding conciliatory to Greece in their first meeting [emphasis added]:

German Chancellor Angela Merkel and French President Francois Hollande said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro.

Requests for measures to bolster growth will be “considered” and the European Union may also “approach Greece with proposals,” Merkel said late yesterday at a joint press conference with Hollande during his first official visit to Berlin. “Greece can stay in the euro area,” and “Greek citizens will be voting on exactly that.”

Notice the carrot and stick in their statements.

Even the hardline Germans appear to be bending a bit, both on inflation, which indicate easier monetary policy, and higher wages in Germany, which boost German demand and lessens the burden to take all of the the adjustments through austerity programs:

The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the region’s debt crisis.

A future German inflation rate above the eurozone average could be part of a natural adjustment process as crisis-hit countries pulled themselves out of recession, the Bundesbank argued in evidence to German parliamentarians submitted on Wednesday.

It followed comments at the weekend by Wolfgang Schäuble, German finance minister, backing stronger wage increases, which would boost domestic demand – benefiting other European countries exporting goods and services to Germany – but could drive German inflation rates higher.

Despite the Bundesbank’s conciliatory stance on inflation, German policy makers have been among the toughest in insisting that Greece sticks to its agreed reform programme underpinning its bailout in the aftermath of Sunday’s Greek election in which most voters rejected the plan. Speaking in Brussels, Mr Schäuble said that changing the bailout terms would unleash ‘’catastrophic uncertainty’’ in financial markets.

How will all this play out?
In Canada, both Quebec referendums on sovereignty were defeated. The first by a fairly wide margin and the second narrowly by less than 1%. Guessing the likely outcome of the Greek elections is trickier.

Bruce Krasting wrote that he has a source in Athens and recounted their recent conversation:

Athens – The results of the May election are in conflict with the people’s desire to stay with the Euro.

The people voted in anger. They voted against those they had voted for in the past. Now they see whom they have elected.

Every day on TV the extreme right is interviewed. They are Nazi’s. People are frightened by this.

On the left you have Alexis Tsipras (Syriza). This man is an uneducated thug. The people understand that. They don’t want this man to be their leader.

When the next election comes, Greeks will not vote in anger and they will not vote for the idiots on the fringes. The centrist parties will rebound. A National Salvation Government will be formed.

BK – There are polls in the US press that say that Syriza will win a majority. (link)

Athens – I don’t think those polls are accurate. To me, things look much brighter today than a few weeks ago.

BK – But does it matter who wins? Can Greece be saved?

Athens – This up to Germany. Most of the debt is now with Germany and France. France’s Hollande would agree in one minute to reset the interest on the debt to zero for the next five years. If Germany agrees to do the same, there is a chance. The IMF would support Greece under these conditions. The restructured bank debt would get paid interest.

BK – Do you really believe that Greece can achieve a long-term recovery with this?

Athens – Not a chance. Everything will blow up again in less than one year.

Already, the latest polls show that New Democracy regaining the lead against Syriza:

After recent polls put Syriza in the lead, a survey Friday showed the race narrowing, giving New Democracy 23.1 percent of the vote, up from the 18.85 percent it won on May 6, with Syriza on 21 percent, up from 16.8 percent.

The Germans are becoming more conciliatory. The pro-European Greek parties are starting to gain ground. Going forward, events will be fluid and volatile, but don’t get short and bet on the catastrophic scenario of a Greek exit or even default. Chances are, Europe kicks the can down the road one more time.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

Canadian Banks and Stress of the Housing Sector


Author Larry Berman

Posted: 28 Feb 2012 reposted from etfcm

Bank earnings start off with a slightly better than expected result, but there does seem to be at least some concern about the forward outlook. There appear to be notable stresses developing in Canada’s housing sector that are bound to have an impact on the banks in the coming years. The CMHC is about full on their loan books, and housing is simply becoming unaffordable for a conventional type mortgage. How many young couples have $100K or more needed for a down payment?

More important today and tomorrow is what the S&P 500 does at its 2011 high of 1371. There is obviously some hope that the ECB delivers another monster tranche of LTRO (QE), so there is room for some disappointing ‘sell the news’ type event as well.

Gold and silver look poised for a breakout type trade and all will know how badly gold and silver stocks have lagged their bullions. There are lots of potentially offsetting factors for the TSX, which should limit the upside in the coming weeks and months. We still see 13,000 as a reasonable target to take money off the table.

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