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China, Evergrande and The Boom & Bust Cycles of Capitalism

The recent headlines in the markets are all about China's "Evergrande" which may require a name change before the dust finally settles. China's quasi capitalist front - the business class - which is under the umbrella of Communism is under fire on many fronts. Let's discuss the economic front first. Evergrande - you may not have heard of the company until now - is China's largest property developer and has been a company at the forefront of China's economic boom and phenomenal new city development and expansion. As can be the case in an economy that has been booming and expanding for decades, it is easy for companies to lose sight that "booms" always come to an end. The economic cycles in Capitalist societies are inevitable, in spite of trillions in government "funding" intervention in the last decade. China is not a capitalist society - at least not culturally - and the interesting juxta-positon between capitalism and communism under one roof is playing itself out now with "Communism" asserting itself in ways that those who have heavily invested in china are now discovering to their detriment.

Evergande's booming business was fuelled by increasing debt and leverage. As can happen, that debt to debt servicing ratio was not properly managed and the banks - yet again - failed in their fiscal due dilligence and evaluation of the company. The US equivalent often cited in the media is "Lehman Borthers". The bottom line is that "Evergrande" is teetering and on the cusp of failure, unable to service its debt with no immediate convincing plan to lower its $300 billion debt mountain. It missed it's interest payment to bond holders yesterday - thursday September 23rd - and now has a 30 day grace period to make good on this or officially be in default. The writing is on the wall. It has effectively lost the little negotiation power it may have had. It's unlikely - not impossible - that the company will survive in its current "Evergrande" form. Will the chinese state intervene? Given the millions of livelihoods at stake and economic repercussions for the region, there is a high likelihood the government will intervene in some way. In wake of China's clamping down on "businesses" that have grown too big and too powerful for the State's liking and its emphasis on the welfare of the people, we see a strong possibility that state financial aid will come, but with caveats or demands that the company be broken into several companies and assets sold off to pay down bondholder and retail buyer debt.

As we have already mentioned, we believe it is unlikely that "Evergrande" will survive in its current form.

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What is a Head & Shoulders Pattern?

In this installment of our technical patterns education series, we will explore what is known as a "Head and Shoulders" pattern. This pattern can signal a shift in trend whether at the top of a price discovery trend or at the bottom (when it is referred to as an "inverse head and shoulders bottom" pattern).

As the name suggests, a head and shoulder pattern comprises of left shoulder that corrects only to move higher to form the "head" typically the highest price point in the prevailing price trend (or the lowest price point in the case of an "inverted head and shoulder bottom pattern" after which it will correct while only to rally again but not as high as the previous "head". This point marks a trend reversal, down in the case of a traditional head and shoulder pattern and up in the case of an inverted head and shoulders bottom pattern.

The chart to the left provides a classic example of a head and shoulders pattern whereas the chart below of Cisco in 2000-2001 shows how these can play out in real markets.

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A Window into Institutional Adoption of Digital Currencies

Institutional adoption of digital currencies and payment methods is on the rise. We are seeing a tectonic shift in the payments landscape along with the rise of Bitcoin. However, behind Bitcoin, blockchain companies and projects are looking to reinvent the way individuals and entire industries transact across the entire global industrial landscape.

One of the the core concepts behind blockchain is "trustless" transactions which essentially means transactions between two parties that are controlled by a piece of computer code "A smart contract" that is programmed to embody the transactional details and execute automatically. Essentially any "exchange" of property or digital property can be programmed accordingly removing the need or reliance on centralized parties or intermediaries to broker an exchange for fees. The movement to decentralised finance for example aims to remove "banks" and "brokers" as intermediaries allowing what is known as "peer" to "peer" transactions. Individual A can buy a stock or any asset directly from Individual B in a secure and trustless manner or Individuals can send monies "peer to peer" directly to one another without a bank as an intermediary.

Every transaction on the blockchain is recorded in a tamper proof ledger. No one can go back in time and modify the ledger which makes blockchain one of the most secure and transparent technologies in history to date.

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The Import of Volume - Technical Indicator Series

Volume is a measure of how much stock or how many contracts (if options) or barrels (if oil) are traded in a given day, week, month or quarter. Changes in volume traded can signal a change in price trend and relative strength either up or down. A marked shift in average daily volume alongside an increasing or decreasing price trend is a signal that should be carefully assessed as part of any trading strategy whether short, mid or long term.

Some volume trends worth noting include:-

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RSI Technical Indicator

RSI otherwise known as the Relative Strength Index is a measure of strength or momentum in the price action of a stock, commodity, ETF or other tradeable instrument. It measures the magnitude of price action strength on a relative scale and is displayed as an oscillator with a measurement parameter between 0 and 100. The top range e.g. 70-100 typically indicates relatively overbought conditions whereas the bottom range 0-30 can indicate oversold conditions within a given or chosen timeframe. The longer the timeframe over which this is measured the stronger the signal as a function of trend.

Investors and traders will use this signal to gauge - over different timeframes - from days to years, potential buy and sell decisions or portfolio rebalancing decisions. As with all technical signals they should be used in concert with other technical signals to confirm the probability or weighting of that signal's validity. Technical analysis can provide probability weightings for buy sell decisions providing a statistical bell curve that will indicate how often a signal or combination of signals in a given market, under various economic conditions and different timeframes is accurate with respect to signalling a change in trend.

As you can see on the diagram in the left, the yellow circles show corresponding lows and highs in the weekly stock price of SESN as well as a corresponding RSI indicator below 30 and above 70. RSI indicators can show multiple signals above 70 or below 30 so the first time the line crosses over these values does not necessarily mean a low or high has been reached which is why it is best to use technical analysis in combination with a range of different signals to get a higher probability signal or confirmation of whether a shift in price trend - up or down - is pending.

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1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
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Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

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