There are 2 main reasons for this - firstly the recent Breakout to New All Time Highs on the US Major Indexes (and also on the FTSE100) is Technically a very Bullish event. In the early part of the Week just gone we had a bit of a Pullback but this already seems to have sucked in a new load of Bulls and it looks to me like Markets are turning up again - Friday was especially strong after a big Jobs Number in the US (I will move on to some Charts later where I will show these moves). Secondly, despite the confusion this Price Bullishness has caused among Investors, the Fundamentals look highly supportive of this move - and a Programme I heard on BBC Radio 4 on Thursday demonstrates this very well.
The blurb for the Programme is as follows:
“President Trump says he'll make America richer. He's promised a raft of radical economic reforms including a huge cut in tax on businesses, an income tax cut, a massive reduction in regulation, and investment in America's infrastructure.
His goal is to get America's economy growing at roughly double its current rate. He also wants to create 25 million new jobs, and put 'America first' in every policy decision.
But are these goals achievable and are the measures he's proposing likely to work?
David Aaronovitch explores what 'Trumponomics' might mean in practice and asks a range of experts whether his plans for the economy will lead to boom or bust.
Guests include Arthur Laffer, Professor John Kay, Diana Furchtgott-Roth and Jim Tankersley.”
The Key Points I took from the discussion are as follows:
- The first part of Trump’s growth boosting Policies is around Tax Cuts. He wants to lower Personal Tax for pretty much everyone but the big gains for the Economy will come from cutting Corporate Tax Rates. At the moment they seem to be about 39.6% (when you combine State and Federal Taxes) and Trump aims to chop them to 19.6%. Globally in the OECD the average is 25% so this will give US a big advantage compared to the current situation where Companies have an incentive to Invest Overseas not in America.
- The issue of US Corporations with Cash Overseas has been a big issue for a long time but for some weird unfathomable reason the Obama Administration did nothing about this (probably on the Golf Course). Trump is proposing to change the Tax Rules so that Companies can bring their Dosh home to the US without being penalised with 35% Tax on it (I think that is the figure they mentioned). John Kay in the discussion claims this will have little effect but I am not convinced - I would expect this to encourage a lot of Money to flow back to the US and that can only help the US Economy grow - even if in just a small way.
- I have said for a long time that part of the problems The West has with regard to moribund GDP Growth has arisen from Over-Regulation - we seem to have Parliamentary systems across most countries that just add new Laws but never take away existing Laws - with the result that over many decades the Regulatory burden has just grown and grown with horrible stifling effects. This is particularly a problem of Europe and was one of the major reasons I voted to escape the tyranny - the worst effect it has is that it entrenches and supports Big Businesses by creating false ‘Economic Moats’ and prevents new Businesses from being formed and in this way extracts dynamism from an Economy. You can forget all about ‘Creative Disruption’. Trump’s aims in this area are astonishing - he is talking about chopping out 75% of Regulation on Firms - I suspect that is a hugely inflated figure but at least it shows an intent to take America in the right direction (in a Political sense as well !!). He is talking about a Freeze on existing Regulations and for any New Regs that are brought in, 2 Old Regs will have to go (this is music to my ears !!).
- The last booster is around Infrastructure Spending. This is also a difficult bit to achieve and I suspect Trump will face many battles around his plans in this area. He is intending to use Tax Credits to encourage Private Business to invest in Infrastructure Projects and to fund partly by borrowing. This would probably work fine for things like Toll Roads and Toll Bridges but it would have limitations for necessary Infrastructure that does not easily lend itself to a Revenue Stream - it will be interesting to see what his full plans are around this. It is mentioned in the Radio Programme that there should be a Budget produced at the end of February or Early March - that should tell us a lot. To get an idea of the scale of what Trump is talking about, under Reagan and George W. Bush Government Spending rocketed but this was mainly on the Military - Trump intends a far bigger boost than either of these and it will not just be limited to the Armed Forces.
- Perhaps the most interesting bit of the Programme is near the start when David Aaronovitch talks to Arthur Laffer (of the ‘Laffer Curve’ fame - the idea that lowering Tax Rates actually increases the Total Tax Take for a Government) who was an advisor to Ronnie Reagan back in the 1980s. He makes the point that under Reagan they achieved Annualised Growth Rates of as much as 8% for a period of 18 months starting from January 1983 - bearing in mind that current US GDP Growth is about 2% this is an astonishing number (China is not even managing 8% at the moment although of course no one really knows what China’s Growth Rate really is). It doesn’t take a genius to figure out that if Growth accelerates to these kind of numbers it will have a huge boost to Profitability of US Companies - and hence the rise in US Stocks makes a lot of sense. In addition, if the US (remember, this is the most important and largest Economy in the World) achieves such rapid Growth then the knock on to all other Countries will be considerable - as the saying goes, “If America sneezes, the Rest of the World catches a cold”. For this reason, a boom in the US will not only drive US Stocks up but it will also boost UK Stocks and Europe etc. Of course such Growth Rates cannot be sustained for long, but Laffer reckons GDP Growth of about 5% to 7% is possible and another speaker on the Programme reckons 3% longer term is very possible - compared to the current 2% that is break-neck speed and it must be appreciated that this is after the Short Term Boosts when Growth Rates could be much higher. Laffer makes the point that it is easier to get very high Growth Rates when you are coming from a low base, as we are at the moment.
- In terms of Capacity, the current Labour Force Participation Rate is said to be 62.7% and this is low as it is back at 1978 levels and has declined since 2008 - this implies there is a lot of spare Capacity and rapid Growth may not immediately result in higher Inflation. There are clearly a huge number of ‘Economically Inactive’ potential workers that are not counted in the Official Unemployment numbers - this is the same in the UK and all over Europe.
- Laffer makes the point that the Republicans are in a very unusual situation in that they hold all 7 Major Branches of the State - he lists these as: The White House, State Legislatures, Governorships, US Supreme Court, The Senate, The Congress, The Federal Reserve (I am not convinced by the latter as Janet Yellen was an Obama appointment - perhaps the theory is that she is supposed to be neutral - hmmm.) The relevance of this is that the Democrats are extremely weak for the duration and despite various skirmishes along the way, the Republicans should be able to get their way and drive the Growth Agenda through.
Anyway, that’s the gist of it and much of what was said makes a lot of sense to me and I expect to see a big change in how Economies are managed as a result of this. If Europeans see the US booming they will soon realise that the crop of Politicians that have been ruling the roost for recent decades has let them down badly and we will see a clamour for more Free Market thinking and some proper Growth Policies. It is certainly shaping up to be a very interesting period for both Economics and Politics around the World after much tedium. Of course, a really scary idea is that if Trump is successful in boosting US growth, then he will most definitely be President for 8 years - remember, “it’s the economy, stupid”……….
When looking at this sort of stuff we must throw away our Political Biases and try to think rationally and objectively about what Trump’s Policies are most likely to bring in terms of the effect on Stocks. It is pretty basic Economics that lowering Taxes and cutting Regulations will boost Economic Growth and if Trump’s Infrastructure Plans are anything like what he suggests, then this will give a huge Keynesian type Boost. In such an environment I think Stocks can go massively higher and we could be on the verge of a big Stockmarket Boom - as ever, we will face countless problems along the way, particularly stemming from Europe over 2017 but overall I am going to be positioned very much on the Long tack and I will just use bits of Hedging to tactically ride out any Pullbacks along the way.
Something else to consider is that many Stocks (and Stockmarket Indexes) appear to be very fully Valued if not Over-Valued. However, if Growth is set to take off like I think it might, then these apparent Over Valuations might actually not be anything like as bad as they appear as Upgrades by Brokers to Earnings Forecasts could make those P/E Valuations a lot lower.
FREE Share-Talk Investor Evening in Cardiff
My mate @conkers3 on Twitter is arranging an Investor Evening which takes place in Cardiff on Saturday 18th February and has Fund Manager Gervais Williams doing a talk and Chris Bailey of Financial Orbit who is worth listening to. I quite like listening to Fund Managers because they often mention particular Companies they like and why they are attractive and this is often a good route to new Ideas. Anyway, the Event is FREE to attend and if you live in that vicinity it might be worth the trip. You can register here:
Rosland Capital created the picture below which Readers might find interesting. It is originally based on the part of their US site that includes Gold IRAs and a Gold-US dollar chart which you can view here (be warned it‘s got a rather scary ‘US National Debt‘ counter at the top of the page !!):
You can see more stuff like this on their UK website too, although I have had no dealings with Rosland themselves so I make no recommendations or anything:
First off I will repeat yet again the Long Term FTSE100 Chart going back to the 2009 Lows - as ever the Charts are all Screen Grabs from the Top Quality ShareScope Software that I use. I know Regular Readers like to flagellate themselves and do penury to the Market Gods by reading this stuff over and over again so your masochism is duly fulfilled by this Chart.
The reason I make you all suffer is because this Chart is just so important and so relevant to what is happening on the FTSE100 and what is likely to occur going forwards. The Red Lines (I have marked the bottom one with the big Red Arrow) mark the Long Term Uptrend Channel and my small Yellow Circle highlights where the Price got back into the Uptrend Channel in mid January but early last week it fell back outside the Channel but only marginally and it looks like it is pretty much back inside now.
My Black Arrow is pointing to a Black Horizontal Line at about 7130 which was a Previous All Time High from October 2016 and which was Broken Over back in the dying days of 2016. Such Breakouts are extremely Bullish and note that in the recent Pullback earlier this Week we got back to about 7100 and then turned up again - so there was a slight over-shoot but the 7130 Level is clearly important Support.
The New All Time High is 7354 and we need to see the FTSE100 breakout over that level.
7206 is immediate Resistance now and we need to see the FTSE100 get over this early next week. 7260 is then the next level to take out. Clearly there is good Support just below at 7130, 7100.
The Chart below is a zoomed in view on the Daily Candles for the DOW. The Key thing here is the Sideways Range between 19678 and 20000 and my Green Arrow shows where the DOW Broke-out over 20000 in late January but then it fell back inside the Range as per my Yellow Circle. We then had some sogginess but still within the Range and then my Blue Arrow points to where we have popped out of the Top again and we are back over 20000. 20126 is the next All Time High Resistance that needs to be taken out - it looks pretty likely.
This is interesting so I will bung it in. The Chart below has the Daily Candles for the FTSE250 with the Long Term View going back to the 2009 Lows. As you should be able to see, there is a clear Uptrend Channel here - don’t dwell on this Chart, this is just to set the context. Having said that, note we are up at All Time Highs as I will show closer in a mo.
At the very last minute I noticed what might be a Cup & Handle Pattern - my Huge Yellow Circle points out the Cup bit and my Smaller Pinky Circle shows the delicate Handle bit (clearly a proper China Tea Cup like you see on Antiques Roadshow) - the implication of this is that this Cup & Handle Pattern should be bullish if it can breakout over the top of the Handle and it looks like it will do that.
I don’t usually show this but I know many Readers (and myself) have exposure to this lower size part of the Market - the Chart below goes back to the 2009 Lows and clearly the Price has stayed within an Uptrend Channel with pretty good discipline since that time. Looks a powerful trend to me.
I knew that would make you smile !!
As is Charting Best Practice, I want to show a Longer Term view first off and the Chart below shows the Daily Candles for the £/$ going back about 8 Months. OK, this is not what some people would call ‘Long Term’ but what I mean is that it is longer than the Chart I will show you next !!
The key point here is that there seems to be 2 Sideways Ranges as marked by the Green Horizontal Lines. The Higher one is from about 1.28 to 1.35 and the Lower one is from about 1.1947 to 1.28. I am showing these because I think it is highly relevant - if the £ is going to recover then it needs to escape the Lower Range and get back into the Higher Range - at the moment it is struggling to do this although I suspect it is far more likely to breakout Upwards rather than Downwards - despite what all the Media Scare Stories will tell you.
Remember, the FTSE100 has been reacting very closely to how the £ moves since the Brexit Vote and a Stronger Pound might drag on the FTSE100 whereas a Weaker Pound is generally good for the FTSE100.
However, I have drawn in a Top Line of a possible Uptrend Channel and done this in sort of Mauve or Purple maybe - this is the Line that has the large Arrow pointing at it in a similar horrible colour. I am quite happy with the placement of this Top Line but my Lower Parallel Line only has a couple of weak touch points so it might not be particularly valid - however, if it is correct, then perhaps the £ will turn up earlier than we expect. Something to watch in coming Days. Support is clearly very strong at 1.2418.
Overall it is a mixed picture. I am not going to show them here but other Indicators such as the RSI, MACD, Bollinger Bands, Heiken Ashi Candles all look Bearish in the short term so we might see more of a downwards move - the key is for that 1.24 ish level to hold as Support.
I am particularly keen on this one as I have a Long Spreadbet Position which I will talk about next. The Chart has the Daily Candles going back about 3 Months and as you can see we are butting up against the New All Time High (ATH) at 2301 - a Breakout above this would be another Bullish Sign and I am tempted to put another Long Spreadbet on here if it happens.
My Black Line marked with the Black Arrow marks a cap on a tight Range that was running for about 7 Months before we got a Breakout to the Upside back on Wednesday 25th January before we had a small Pullback. After this Breakout I took this as a Technically Bullish Signal and I went Long on the S&P500 at 2299. I thought it very possible that it would build on the Breakout straightaway but in practice it fell back but after just 6 soggy Days it looks like the S&P500 is challenging the Highs again as per the Candle from Friday in my Green Circle. It looks to me like the Pullback was a very healthy and normal occurrence within a Bull Move and it merely created an opportunity to take some ‘Heat’ out and calm all the excitement down a little.
My Yellow Circle highlights a Hammer Candle that was formed back on Thursday 12th January 2017 where we had a big Reversal during the Day putting in a Low at 2254. I took this as a good level to put my Stoploss under and I have done a Stoploss at 2250 - if it falls through this level I will close the Long Spreadbet.
Let me clarify something here. I have mentioned on the Chart that the Stoploss is on an “EOD Close basis” - what I mean by this is that I do not have a ‘programmed in’ Stoploss Order with igIndex but that I will initiate the Stoploss Manually if the Price falls below my Stoploss level. The reason for this is because if you have a firm Stoploss Order with the Broker then it is extremely likely that a Spike Down will close the Stoploss just before the Price reverses and starts to move up and go your way - I try to avoid this particularly because the Markets have a nasty habit of ‘hunting your Stops’. The EOD bit means End of Day Close - so I am not interested in the wobbles during the Day, I will only Trigger the Stoploss if it Closes below my Level at the End of the Day.
The obvious risk with this type of ‘manual’ Stoploss is that you must have iron discipline to make sure you execute them. However, it is easy for me because if I do not trigger it then somebody reading the Website will soon let me know !!!
The Chart below has the Daily Candles for Brent Oil (Spot) going back around 6 Months. The Key thing now is that we seem to be in a bit of a Range as marked by my Green Arrows - between about $54 and $57.535 and perhaps as high as $58.375 (note this last number looks like very Strong Resistance and I think this will be difficult to get over - however, if the Oil Price does get over this, then that would be a Very Bullish sign and we might push up to the mid $60s. Support is clearly very Strong at $54 and just below at $53 - if these levels fail, then expect more falls. I doubt this will happen and I think the Oil Price looks pretty happy up around here.
My Yellow Circle is highlighting an Inverted Hammer which was bashed out on Thursday and a Narrow Body Doji (Spinning Top) from Friday - both of these suggest the Price will drop in the very short term (which of course would be very consistent with the Range idea I talked about).
The Chart below has the Daily Candles for Gold (Spot) going back about 4 Months. It is great that we are back over $1200 and I take this as a positive for a while, although Longer Term this could be just a bit of a Recovery before more drops - the recent Low at $1122 is critical here and it must hold.
We now seem to be battling with Resistance around $1220 and the Price managed to get up to $1225 Intraday on Thursday 2nd February but it then fell back below $1220. I would like to see a convincing break upwards over $1225 to really feel that things are Bullish again with a fairly short term horizon - as I mentioned earlier the Bigger Picture still looks a bit weak (particularly with the Moving Averages looking a bit ropey).
Right, that’s it for this week - what an epic !!!
I better proof read it now or it will be nowt but Spelinhglmistakes and grammatical errors.
Laters Peeps, WD.