Paul Hanly's  Instablog

Australia has stalled, at least in the non-resource sector.

Building approvals have a falling 12 month SMA and there is virtually no growth in employment. The only saving grace is that most of the excess building approved after the GFC was not housing, but school buildings.

Banks and some retail are expected to reduce staffing now that Christmas is out of the way and the store sales are almost.

The question is whether cuts in interest rates and a higher earnings yield for stocks compared to bonds will hold the stock market steady.

And of course for investors in EWA a judgement must be made about the currency impacts of the AUD/USD exchange rate.

Given Australia has a 1 in 100 year terms of trade at present there are clear downside risks, even assuming the residential property bears are wrong. The World Bank forecast for abnormally low global growth and European recession could impact commodity prices, stock markets and the AUD, but then again they may be so far behind markets in publicly recognising these issues that they are effectively marking the bottom.

Building Approvals
(As goes building, so goes much of the non-resource economy)

The fall in building approvals is only seen during periods of significant reduction in economic activity, many if not most of which periods are recessions.



Full Time Employment
(Falling building approvals flows to commencements and employment).

Given the falling building approvals I expect growth in employment to decline further.







Conclusion

Australia is highly dependent on foreign funds as debt and equity (direct and indirect). While the Reserve Bank may continue to cut interest rates, Australian private sector dependence on international funding at a time of European austerity and need for recapitalisation of banks means that retail interest rates for bank customers may not fall anywhere near as fast as the official cash rate. Australia is highly dependent on foreign funds as debt and equity (direct and indirect).

Australia also faces continuing fiscal austerity as the Federal government strives to return to surplus.

In the face of these headwinds Australian households, which are in aggregate very highly geared on a household debt to GDP ratio may well continue to save at currently high rates of disposable income against the uncertainty of reduced household income through lost employment.

The Coppock Indicator was specifically designed as a signal to indicate a very likely safe and profitable buy after a significant downturn in markets. The signal occurs when the month end indicator turns up from below zero. See http://en.wikipedia.org/wiki/Coppock_curve

As at 13 or 14 January as well as at 31 December the Coppock is still trending down in S&P 500, Nasdaq 100, UK FTSE 100, Japan Nikkei 225, Chinese Shanghai Composite and Australian All Ordinaries, however it is not below zero for S&P 500, Nasdaq or UK FTSE, although close to negative for UK FTSE and falling very fast for NASDAQ.

I have also looked at a modified (170,150,20) MACD (Moving Average Convergence and Divergence) more suitable for divining long term trends using Incredible Charts free version. See http://en.wikipedia.org/wiki/MACD

My MACD indicates that there are clear BUYS for S&P 500 and UK FTSE (in local currencies).

Using my MACD for USD denominated similar instruments it indicates a clear BUY for the FXI, the US listed MSCI ETF for China and hints at probable emerging buy signals for EWA (Australia), EWU (UK) and (EWJ) Japan.



Coppock is always late but for the Australian All Ordinaries it has been a good signal 13 of the last 15 times with an average 24 monthly return of over 20% so it is useful for market timing BUYs. See http://thortsoninvesting.blogspot.com/2011/12/coppock-bottom-picking-performance.html

For those who trust Coppock start looking to BUY stocks which have given a favourable Coppock signal, particularly in markets as they also generate a Coppock BUY signal as a whole.

While the fundamentals for Europe look appalling on current German and ECB policy settings, that could change very quickly.

For the Australian All Ords, a fall of over 6% in the first month after a buy has reliably indicated a False Coppock signal.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The Reserve Bank of Australia publishes charts and statistical tables for Australia.

These would be of interest to investors in EWA and KROO and companies like BHP.

To me the most interesting thigs are:
1. Commodity Prices for coal and iron ore (still very high)
2. Trade weighted index (still very high)
3. Housing Prices (very high but declining, generally slowly)
4. Household debt (high but some delveraging)
5. Household saving ratio (high, over 10% and stabilising at that level)
6. FX rates (generally near highs although not so much now against USD and JPY)
7. Export destinations (China is now quite important)
8. Unemployment (may have bottomed)
9. Retail sales (very low growth, reflecting household savings)
10. Interest rates (cash rate has had 2 cuts in consecutive months)
11. Stock market (volatile and way below the 2007 highs but better on USD basis because of AUD/USD rate changes, YTD is better than most developed countries in USD but US has been best of developed markets on MSCI indices.)
12. Federal government debt (very low on a net basis)
13. Bank dependency on foreign source wholesale funds (very high)

Chart pack is at:
www.rba.gov.au/chart-pack/index.html

Statistical material is at:
www.rba.gov.au/statistics/tables/index.html


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.