About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Sunday, December 30, 2007

Stock Market -- Fundamental

As 2007 closes out, my SP500 Market Tracker has continued
to weaken, putting current fair value around 1400. That
reading is down from the all-time high of around 1600 set
in July, 2007, with the decline reflecting a 7% cut to
the consensus 2007 earnings estimate, and a sharp contraction
of the multiple to adjust for a ramp up of inflation
pressure. My profits indicators outside of the financial
sector actually strengthened a bit in Q4 '07, but financial
sector earnings have been slashed for CDO related loan losses.
Moreover, banks may warn of more losses for late 2007 after
the books have been closed and the auditors speak up.

The weekly leading economic indicators continue to decline and
are warning of a possible downturn. I am looking forward to
the ISM data on new orders for both manufacturing and services
due out next week to see how the monthly leading numbers shape
up. December may have been quieter for inflation, but the
inflation thrust gauge remains in a strong uptrend as we pass
into 2008.

The SP500 is trading at 1478, or a 5.6% premium to fair value.
A stronger liquidity injection by the Fed and declining short
rates have a number of investors and traders trying to discount
an eventual improvement in the fundamentals later in the year
just ahead, but the choppy price action off the 11/26/07 low
makes clear that there are plenty of players not yet on board.

The SP500 carries an earnings yield of roughly 6% presently.
That translates to a nice premium over the 91-day T-bill yield,
but there is still decent quality 5% short money out there, so
the market's e/p yield, although positive, is still modest.

Dividend growth continues strong -- up 10.9% yr/yr -- and the
dividend discount model I use has the SP500 fairly valued for
the long term at 1405.

There is no excess liquidity in the US financial system above
the needs of the real economy, so the stock market will remain
heavily dependent on managers' portfolio cash for support.

The continuing economic uncertainty surrounding near term
output growth and inflation potentials could well extend through
the first quarter of 2008, and it would not be a surprise
for the stock market to remain on edge and listless as a result.
I am not uncomfortable thinking in a range of 1400 - 1550 for
the SP500, nor am I uncomfortable with the idea of elevated

I do think that springtime 2008 will bring an improvement in
confidence, a topic I'll discuss soon.

Wednesday, December 26, 2007

Liquidity Factors

Finance sector commercial paper issuance in the US has
fallen from a historic peak of $2.2 tril. set in early Aug.
2007 to about $1.6 tril. currently, primarily reflecting the
collapse in the asset backed segment of the market. This
has shut off the yield spread funding of longer dated CDO
and other types of high risk long paper. For the past
six months, the broad measure of credit driven funding or
liquidity has grown at a 2.0% annual rate, compared to an
8.6% AR over Half 1'07. Since the commercial paper market has not
bottomed yet, we can look forward a little and say that the broad
measure of liquidity ($11 tril.+) is not growing fast enough to
sustain economic expansion and heavier trouble will result if
liquidity growth does not improve. the matter has been made more
pernicious by the fact that accelerated inflation has been
gobbling up what liquidity has appeared.

Viewed yr/yr, the matter is less dire, as liquidity has risen
about 6.5%. So there has been enough of a longer term tailwind
to sustain the economy, but that will run down with time.

With the new TAFs added in, Fed Bank lending to the banking
system is around $900 bil., up roughly 6.0% yr/yr, with the vast
bulk of this increase coming in recent weeks. This high powered
monetary liquidity plus the cuts to the FFR% form the base of the
Fed's plan to keep the economy growing and to encourage a step-up
in funding and lending by the banks. Under the best of cirumstances,
this will not work overnight and it's no small wonder the Fed has
pushed the prospect of faster economic growth out until the second
half of 2008.

Dry, arcane stuff you say? A clear 3-6 month window of uncertainty
you say? Right on both counts. Will the Fed have to do more?
Could well be they will. Were They too slow to act? Probably. Was
Their concern about inflation misplaced? Doesn't look so yet.

Measured yr/yr, the $ cost of production is up just about as much
as the broad measure of liquidity. This means no liquidity
tailwind for the capital markets and increased reliance on portfolio
cash and perhaps a new source -- the sovereign wealth fund.

On an annual basis, the US is now exporting about $120 bil. less in
$ through the trade window. This means you have to keep an extra
careful watch on the smaller less well developed countries that
have increased reliance on exporting to the US. Eastern Europe
comes to mind.

Monday, December 24, 2007

Economic Indicators

The weekly leading economic indicators have been trending
down since July, and have fallen enough below those peaks
to move the economic expansion light from green to amber.
This is a tricky situation, since we had similar moves in
1987 and 1998 without a resulting downturn. Those two periods
were ones of financial crisis, but matters did settle out
favorably for the US economy. Such could well happen this time
too, but there has been enough damage to the readings to
warrant more concern.

The inflation thrust indicator has been flat over the past
month, but it remains in a strong uptrend, paced by oil and
basic agriculturals. The CPI inflation of 4.3% yr/yr through
November wiped out the growth in the average wage, and
the increase of inflation pressure has damaged the economy
as a result. Rising deliquencies on consumer credit cards is
likely also a result of faster inflation. Consumers have
probably been a little slow to re-work budget priorities with
the rises in energy and grocery bills.

The longer term economic indicators have turned from negative
to mixed. Real M-1 growth is still negative, the real wage is
under pressure and the real price of oil remains in an uptrend.
Positively, the Fed is stepping up liquidity infusion, at least
for the short run, and short rates are trending down. I might
add that despite the bevy of negative headlines, the banking
system is functioning and growing.

Since I am a growth freak, I have my fingers crossed.

Friday, December 21, 2007

Stock Market -- Technical

As was indicated in the 12/17 post on the market, it needed
to catch bids this week to put it on a recovery trajectory
that was sensible. The initial responses were very tentative
earlier in the week, but today's action was more robust and
broad. From a short run perspective, there's nothing to do
but let it go through the holidays and see if it can muster
further upside consistency. That first run up from the 11/26
low was a joke, being nearly vertical (See prior recent comments).

I plan to put some posts together in the days ahead regarding
2008, toward which we are slouching along.

Monday, December 17, 2007

Stock Market -- Technical

In the 12/6 post on the stock market, it was mentioned that
the anticipated rally had materialized, but that the rocket
like trajectory was simply too strong. It was mentioned that
a sharp sell off was in the offing, as seasoned traders were
not likely to ride the rocket much longer. And so, the
market behaved and delivered a heavy sell off. The market is
mildly oversold in the very short run, and I am intrigued that
my six week selling pressure gauge is once again in significant
oversold territory. That suggests to me that there will be
another try at a rally before the year is out.

At 1445, the SP500 needs to hold around this level in the days
right ahead to put it on a suitable trajectory up from the
Nov. 26 low. Further sharp weakness from here would suggest
another retest of lows down around 1400 -1410. That's the easy
call, but we've had enough of a sell off already to bring in
some buying interest now. So, I'd watch the action carefully
over the next day or two to see whether the bulls are ready or

Wednesday, December 12, 2007

Monetary Policy -- Plan B (Bailout)

Today the Fed and a quartet of other central banks announced
a coordinated effort to accelerate the process of rebuilding
credit driven liquidity. The details have been widely reported,
so no need to repeat them here. But, observations are in

The $40 billion term auction facility plus the $24 billion
currency swap arrangements adds substantially to monetary
liquidity. This is a plus for the economy down the road. It is
also mildly inflationary and brings the Fed to the brink of
abandoning a policy of bringing down the long term growth of
monetary liquidity from the high levels of the bubble years
(1992 - 2003). It is a setback for the Fed.

Creation of this facility partially separates the liqudity
aspect of monetary policy from the rate setting aspect. This
will complicate the process of analyzing policy.

The TAF gives the Fed substantial flexibility to manage liquidity
in the system independent of month to month FOMC activity geared
to managing the FFR%.

Because the Fed can increase the $ amount of these facilities if
needed, it is a strong prompt to the banks to resume a more
normal level of lending and to service qualified credits. The
Fed is obviously unhappy with the slow pace of private sector
credit / funding growth and wants to protect against defaltion
of asset values secured by credit. Time will tell how well it

A strong positive response from the banking system would allow
the Fed to roll up these faciliities easily and return to normal
operations. But, why jump ahead of the story?

The de-linking of this announcement today from the FOMC meeting
relects longstanding protocol, creates a new protocol and was
also an expression of Fed disdain for The Street and the banks
who abandoned any semblance of credit underwriting integrity
in the the CDO market. I would have enjoyed "perp walks" for
banks to the discount window instead of this more anonymous

Tuesday, December 11, 2007

Monetary Policy

The FOMC moved to cut the FFR% and DR% by 25 bp each today.
The FFR% now stands at 4.25%. That was the consensus view
among pundits going into the meeting. The stock market threw
a tantrum. Players were expecting 50 bp cuts. They had noticed
the large 150 bp spread between the 91 day Bill rate and were
encouraged by "dovish" Fedspeak from Board members in recent

I am not much of a psychoanalyzer of the Fed, so I will not try
to divine why They did exactly what They did. But, I do think it
is fair to say that it is understandable that a number of players
felt snookered.

The longstanding policy variables did suggest a cut, especially
the weakening of the ISM manufacturing survey and a modest downturn
in the capacity utilization rate. The situation was not without
some ambiguity, as short term business credit demand remains
robust. Here though, the recent surge in C&I loans is likely more
a reflection of interim financing for deals still stuck in the

Besides a strong C&I book, home equity and mortgage loans are ticking
up at banks, although both are well off the trends seen in recent
years. The decline in the commercial paper market has slowed sharply
as well. So the system is functioning. Higher risk credits are priced
at much larger spreads over solid, investment grade credits -- as they
should be in a sluggish economy.

The Fed has been adding monetary liquidity more generously to the
system in recent weeks, but this may be only a seasonal development
which could continue into early January, 2008.

Friday, December 07, 2007

Economic Indicators & S&P 500 Market Tracker

My leading economic indicator composite continues in a
downtrend. It has not fallen far enough to signal the
advent of an economic downturn, but unless the composite
stabilizes soon, we'll have to entertain that idea in Q1
'08. Significant declines in this indicator gave false
downturn signals twice over the past 50 years -- 1987 and
1998 -- which, interestingly, were both periods of turmoil
in the financial and capital markets. So, one can still
get a recession signal and have it backfire if unsettled
financial conditions return to stability in a timely
enough fashion. Frustrating? Well, remember Aristotle's
reminder not to demand more perfection from a subject than
it admits of.

Yr/Yr employment growth continues at a paltry 0.5% and the
real wage continues to grow below 1.0%. These conditions
reinforce a very sluggish economy.

My long lead economic indicators do not present a pretty
picture either. Continued low real growth of Federal Reserve
Bank Credit and weak real M-1 have implied economic
vulnerability the moment credit driven liquidity slackened,
which it has in dramatic fashion since July. The real oil
price continues to rise, punishing broader consumption, and
capacity utilization has lost its uptrend. The bright spot
is that short rates are trending lower. Moreover, the Fed
has stepped up the buying of securities, but we'll have to
wait a month or two to see if this is other than a temporary
seasonal push.

The SP500 market Tracker continues to slip, and is now assigning
fair value for the "500" in a range of 1460 - 1500. Analysts
continue to chip away at earnings estimates, and the pace of
inflation measured yr/yr has accelerated. Thus, both earnings
and the p/e are under pressure.

Thursday, December 06, 2007

Stock Market

The oncoming rally discussed in recent Stock market posts
has turned into a rocket off the deep oversold mentioned in
the 11/18 post. At 1507, the SP500 faces trend resistance up
around 1520. The market is mildly overbought, but the
trajectory is too strong, indicating a chase to get in.
Players are betting heavily on a minimum 25 bp cut to the FFR%
at the 12/11 FOMC meeting and like the "freeze" on many sub-
prime ARMs announced by GWB / Paulson, because it will likely
stretch out the drain on lender capital over several years.

Some time over the next week or two there should be a sharp
downdraft as short term players take some chips off the table
and leave investor resolve to be tested.

Tuesday, December 04, 2007

Braille Economics

Braille economic analysis is what I resort to when the crystal
ball gets too murky. It consists of moving your way into the
future by grappling with the economic data and inching your
way along. Besides, no one is paying me to make forecasts now.
Forty plus years of investing and trading has taught me that
you do not have to be the first kid on the block to know what's
going to happen to make good money and / or dodge bullets. (One
important key to success in the businesses of investing and
trading is to learn how to dodge bullets.)

I have not bought into the recession camp. It is slow out there
now in the US and maybe getting slower. But I have yet to see the
sort of broad imbalances between production and consumption that
signal an involuntary build of inventories that leads to plant
down time and furloughs. Customarily, excess inventory is a
linchpin for a down cycle. The bad news here is that inventory
data on the broad economy comes late in the reporting of
monthly data. Two further points: Many businesses have the
supply chain management capability to control inventories rather
well. But, employment gains and real earnings progress has been
scant this year, so it may not take gaudy inventory excess to
usher in a downturn. So I inch along....

Unlike many economists, I remain concerned about inflation. As
I discussed a short time back, we did have a blowoff in the oil
price. The recent $10 bl. correction is a help, but oil remains
in an ominous uptrend that will sap most households of
purchasing power if it persists.

THE ODD ITEM: The new US NIE asserts that Iran is aggressively
developing fissionables but does not appear to have an active nuclear
weapons development program underway. WHATEVER, this document does
undercut the ability of GWB and the Shooter to kite the oil price
for the boyz in the great Southwest. Maybe less swagger from these
two will help settle down the oil market.

Wednesday, November 28, 2007

Stock Market

Back on 11/18, I posted that the stock market was deeply
oversold and that a rally might not be far off in time. Well,
in the interim, the market got even more oversold, and with
better news over the past 2 days, it rallied powerfully, to
the point of leaving only a slight short term oversold in its
wake. Hard to say how it will do in the days straight ahead
after a 4% 2 day pop, but there has been a positive break in
my shorter term momentum trend, and that's an attention getter.
So is the prospect for a positive turn in MACD (12/26/9 day).

At this point, I continue to see enough economic uncertainty
out there to feel a degree of comfort in plunking the SP500 into
a rough 1400 - 1550 trading range until matters sort out

For the daily SP500, click.

Monday, November 26, 2007

Bond Markets

The long Treasury closed under 4.3% today. This market is
now getting seriously overbought. The Marketvane index of
bullish advisories on Treasuries has reached 77% and is
trending up. As a contrarian reading, 77% bulls is signaling
an eventual rebound in yields (and lower prices).

The strong rally in Treasuries since this summer reflects
prospects for a slowing economy and a strong flight to quality
from riskier assets, especially CDOs of varied stripes. But
yield spreads between top quality and medium quality corporates
are widening, and the high yield market is now once again the
junk market, with yields here jumping from under 8.0% a few
months back to 10.8% presently.

One indicator I watch closely is the industrial commodities price
composite. Broad measures of industrial commodities prices have
leveled off in recent months, a normally bullish development for
bond prices.

I had a nice trade earlier in the year when long Treasuries were
oversold, and now I am looking carefully at a short on the Treasury
price. I am also getting intrigued by the junk universe, which
is deeply oversold. Yields above 10% are attractive for risk capital
since you have a shot at a 10%+ annual return for the risk taken.
So maybe there is nice long / short trade coming up. (I rarely hold
positions in bond trades past 2-3 months.)

I regard Treasuries as fundamentally unattractive for investment.
Investors are not being adequately compensated for inflation and
interest rate risk, nor are they being compensated for the vagaries
of the offering calendar in the years ahead. Flip the coin and you
could make a good argument for offering long Treasuries to the
market to lock in these yields.

For the long Treasury price ($USB), click.

Friday, November 23, 2007

Holiday Season Sales

As all know, sales for the holiday season are avidly watched
by many. Business and investment people enjoy debating the
prospects for the season when it comes to hand, and this time
will be no different, especially since the Fed's FOMC is to
meet on monetary policy on 12/11.

The fundamentals are far more somber this year than last.
Yr/yr, employment is up only 0.5% and the real wage is up by
only 0.5% as well. That yields a base case for a 1.0% gain
in sales before inflation and maybe 4.0% in current $ terms.
But beyond that, it is hard to say how consumers will do at
the register. From my perspective, much depends upon whether
there's an interesting cross-section of newer stuff to buy and
also the weather will play an important role. A good cold snap
with some snow around the US can do wonders at the malls as
folks stock up on easy stuff -- hats, gloves, boots, coats etc.
Another interesting issue is how tough it is to stick to
a modest budget. That requires shoppers have a plan and that
they carry it through with ruthless precision. If you head out
to shop with a vague idea of cutting back, you may find yourself
in trouble when Christmas Eve comes, and the same old large
pile of goodies is under the tree. Debate the outlook if you
wish, but do not fail to miss the magic of the season, for
magic it is.

Tuesday, November 20, 2007

Short Term Rates & US Dollar

Short Rates

My 3 mo. T-bill yield indicator spans more than 90 years
of data. It is a diagnostic tool and not a forecasting
model. Based on recent inflation readings, the T-bill
should be trading in a range of 5.10 - 5.50%. The bill
is now around 3.50%. Part of the discount to the model's
value reflects the recent 75 bp. of cuts to the FFR%, but
most of it reflects investor flight to quality. Some
players are anticipating further FFR% rate cuts as the
economy slows, and some have moved into bills and notes
hurriedly as they dump or reduce positions in higher
risk assets.

A 3.50% T-bill yield is not attractive at all to the
average investor and saver. With inflation at 3.5% on a
yr/yr basis, the after tax return is negative and savings
are being confiscated. For higher net worth savers, 6
month CDs at 5.10% are even a bit below breakeven.

Holding taxes aside, the real or inflation adjusted rate
on the bill has fallen from a cyclical high of 3.8% down
to zero since late 2005. Retirement funds have been put
under increasing pressure to increase risk levels to
maintain beneficiary purchasing power.

My longer run measure of inflation has been running about
3.1% this year. On this measure, short rates and shorter
duration T-notes are just too low and unless inflation
pressures ease, savers are going to continue to take it
on the chin. With the economy slowing, consumers may
be pushed to increase savings anyway, especially with a
soft housing market.

US Dollar

The rapid decline in the real rate of interest since late
2005 has greatly reduced the appeal of holding dollars for
US householders and businesses. That alone is a good
reason for foreigners to avoid dollars in preference for
stronger currencies. The cost of doing business in and
with the US for Asian mercantilists like China is rising
sharply as US rates and the dollar decline. The weak dollar
is sharply increasing US competitiveness abroad and is
producing large currency translation gains for US multi-
nationals. Even smaller US companies are getting into the

I genuinely like the fact that US exporters are doing very
well, and if it takes a low dollar for a goodly time to
put our exports out there successfully, fine. However,
The Fed owes savers as well and must move as quickly as is
prudent to restore short rate equilibrium for savers.

Sunday, November 18, 2007

Stock Market

The market oversold has deepened. The SP500 remains at a
nice discount to its 25 day m/a, and my six week selling
pressure and buying pressure gauges are in deep oversold
territory. So, a tradable rally may not be far off. I would
also note that there are two distinct 20 week cycles and
one nine monther that point to lows within the next 30 days.

That's the good news. The bad news is that the SP500 Market
Tracker is coming down fast reflecting both earnings estimate
cuts and pressure on the p/e multiple from accelerating
inflation. The Tracker is undergoing its sharpest decline
since early 2001, falling from a July 'fair value" estimate
high of 1610 to just slightly below 1500. Analysts are cutting
Q4 '07 estimates and are just starting to trim Q1 '08 numbers
as well. The weekly leading economic indicators have stopped
falling however, but are flattish and suggest slow or "drag
ass" growth. The inflation thrust indicator remains in a
substantial uptrend, pushed hard by the oil price and, more
lately, a recovery in the retail gasoline price. The momentum
of inflation thrust has slowed a little bit over the past ten
days. You have to respect all of this, but not get carried
away with it as there are at least short term indications the
economy is stabilizing. There is no end of print about the
problems of the financials, but the banking sector is
functioning -- loans are ticking up and funding is not unduly
constrained. Loan losses are rising, but cash flow for this
sector has mushroomed to $150 billion annually in recent years.

Visibility to sustain the cyclical bull market is low now, but
my indicators do not yet suggest throwing in the towel.

I plan to give discussion of the stock market a rest for a couple
of weeks and look at some other topics. I include a link to the
weekly SP500 chart.

Wednesday, November 14, 2007

Quick Note On The Short, Short Term

As discussed on Sunday, we entered the week with a deep
short term oversold. As expected, traders jumped on it and
rallied the market strongly yesterday, right up to short
term downtrend lines. The market failed to break through
today and ended on a weak note. There is still a moderate
oversold in place, and players may have to watch the oil
price carefully because the strong bounce in oil today
following a steep, fast sell off, did not sit well with
the stock market in my view.

Sunday, November 11, 2007

Stock Market Comments

The recent weakness in the market has brought it into a
deep short term oversold condition at about 4.5% below
the 25 day m/a. Oversolds at this level have proven very
attractive to aggressive traders in recent years. In turn,
my six week selling pressure gauge is heading into oversold
territory which is another positive.

Intermediate and longer run measures have turned negative.
Breaks of trend on market and breadth measures, weakening
momentum against the 40 wk m/a and a downturn in the 14 wk.
stochastic all signal caution. There have been no breaks
in any of these measures so decisive that a whipsaw move
in the market to the upside can be readily precluded.

Speaking more broadly, the volatility in the market since
mid-July suggests that players are re-appraising fundamentals
that guided the market sharply higher from mid-2006. Signs
of a slower economy, earnings estimate cuts and re-ignition
of inflation pressure have forced the re-appraisal.

The suggestion to me is that any forthcoming rally may be
more subdued and of shorter duration than we have seen in
recent months.

Wednesday, November 07, 2007

Stock Market Comments

My SP500 Market Tracker is weakening. It is now signaling
fair value at 1570, down from a range of 1600 - 1625 several
weeks back. Analysts are cutting earnings through 2008, and
with a fast rising retail gasoline price, headline inflation
is likely accelerating. The result is a lower market P/E on
lower earnings.

The subprime mortgage reset volume is peaking now, and that
assures more defaults and foreclosures going forward. One
difficulty here in trying to restructure these loans is that
law rquires you deal directly with the lender -- tough to do
with sliced and diced collateralized obligations. the larger
problem is that most of the delinquencies involve inadequate
collateral and fraud as to opposed macro-conditions. Not much to
work with even for sympathetic lenders. Net of foreclosure $
and tax writeoffs, I am thinking the total tab will be $145
billion. That figure could equal 10% of total underwriter
capital. The regulators will need to allow recognition of
these losses to be gradual or even amortizable so as not to
impair primary capital. A tough but not unmanagable situation.
The banking industry throws off about $150 billion a year in
gross cash flow.

So, there are more financial sector losses to come. On top,
leading economic indicators do not yet signal a recession but
are in a downtrend. Global indicators are still solid, but are
trending down as well. My inflation thrust indicator is moving
up sharply from a steep low set early in the year and is being
paced by the oil price, up 92% from the Jan. '07 low.

The Fed has so far taken 75 bps off the FFR%, and there are clear
signs that system liquidity is repairing. I'd advise the Fed to
maintain a stable policy course for the next few months to better
sort out economic and inflation potential and to glean how the
financial sector is coping with the mess it created.

The financial system is repairing and the problems, although
very large, are managable with deft regulatory handling. Also,
a little time is needed to take the measure of the oil price.
Yep, supplies are tight, but the action suggests a full scale
blow-off may be well underway.

Bottom line? Patience is needed here. I am not uncomfortable
with the idea that fundamental direction may remain elusive for
another four weeks or even longer.

Monday, November 05, 2007

Treasury Bonds -- Heads Up

I am strictly a contrarian when it comes to trading bonds.
I get very interested in bonds when the long Treasury yield
has drifted far from its 40 wk M/A and / or when trader
advisory sentiment moves to extremes. The Long T is a little
overbought relative to its M/A, but advisory sentiment,
specifically Marketvane, is moving into territory that is
starting to signal excess bullishness. In recent weeks, the
Marketvane compilation of sentiment has kissed 70% bullish
once or twice and most recently stood at 69%. These are the
highest bull readings since mid-2005. Bullish sentiment is
not yet flat out extreme, but the 70% area signals to me
I should starting to think about shorting the bond.

Friday, November 02, 2007

Quick Notes

1. Leading economic indicator set weakened slightly more
in Oct., but growth indication still posiitive, albeit

2. Yr/yr growth of employment through Oct. was a slim 0.5%.
Wage growth was 3.8%. Underlying consumer purchasing power
continues to erode.

3. Heating oil has broken out to the upside and on deck is the
wholesale price of gasoline, set to break out
above the 2.35 - 2.40 per gal. area. Retail gasoline price
continues to inch up, but now has potential to run up to the
$3.25 area again.

4. Support for SP500 has firmed at 1500. Let's see how they take it
out today.

Thursday, November 01, 2007

The Fed "Zinger"

This past Monday, I opined that should the Fed choose to
blow off the speculators in the markets by standing pat
on Halloween, it would cause a ruckus. Well, the Fed did
cut the FFR and discount rates by 25 bp, but in its
statement it cited economic growth and inflation risk as
of equal concern, hoping folks would infer that it was
going to stand pat on rates going forward.

The message did not sink in right away, but today it did,
and with news of economic slowing and concerns about
Citibank's dividend in hand, market players took stocks
to the woodshed.

Since mid-August when the Fed addressed the fallout from the
subprime debacle more earnestly, oil prices have rocketed as
all know, and industrial commodity prices have surged at a
25% annualized rate. Inflation potential has been growing
quickly. The Fed's gambit here is to posture tough enough to
crack oil and materials prices in hopes of taking steam out
of the inflation thrust underway. The Fed knows that an
inflation surge domestically will punish consumer real incomes
and confidence down the road and damage the economy. So, they
hope to scare the commodities markets and the US dollar shorts
in the interim. The Fed knows only too well that capacity is
constrained in oil and industrials, but they also know there
is plenty of speculative interest as well.

Many market players appear to have all but dismissed inflation
in favor of tracking economic potential. Let's give it a week
or two to see if they can connect the dots, and whether an
apparently firmer stance by the Fed will shake out some of
the commodities speculators.

Monday, October 29, 2007

Federal Reserve -- Trick & Treat

I would not pretend to know what the Fed will choose to do
with the Fed Funds Rate come Halloween Wednesday. The heavy
betting is on a 25 bp cut then followed by another 25 at the
upcoming 12/11 meeting to stoke holiday shopping. The markets
have all but stampeded the Fed into a cut on Halloween. At
some point, the Fed is going to need to reclaim authority at
the short end of the yield spectrum. Blowing off the speculators
on Halloween would be terrific fun, but it could create a ruckus
not soon forgotten.

So, the bettors are counting on a FFR% cut treat this week. The
"trick" is that the Fed is continuing to run a very tight ship
in terms of monetary liquidity. Federal Reserve Bank Credit and
the adjusted monetary base, cornerstones of policy, are up a
pittance this year, despite the July crisis. However, the Fed
also sees that a third of the funding lost in the lock up of
the commercial paper market has shown up in the banking system's
jumbo deposit category (over $ 200 billion just since July). So,
credit driven liquidity, although barely growing short term, is
repairing nicely.

Things may change, but so far the Fed is holding off on the kind
of fast liqudity infusions we saw in Uncle Al's heyday. We'll see,
but right now, a modest US liquidity situation does not of itself
support all the excitement in the various markets we have seen
since last August.

Friday, October 26, 2007

Gold Price -- A Less Glib And Flippant View

Yesterday, I had some fun with the wilder side of the stories
surrounding the recent price action of oil and gold. Today,
I look at the more normal measures for gold.

The weekly macroeconomic price directional for gold continues
to track the ups and downs of the gold market rather well. The
macro indicator hit a new all-time high this week reflecting
the powerful surge underway in the oil price. For 2007 to date,
better than 90% of the move up in the macro indicator reflects
the combine of oil and industrial commodities prices -- elementary
building blocks of inflation.

Over the long term, a one point move in the indicator has translated
into a $7.50 oz move in the price of gold. However, since the end of
2005, a point move in the macro indicator has translated into roughly a
$25. oz move for gold. That's a dramatic increase in gold's volatility
relative to the indicator and it reflects a greater speculative
interest in the metal coupled with the deployment of more borrowed
or leveraged money moving into the market. Much the same can be said
for the oil price.

Prior to the speculative jump in the gold price in early 2006, it was
tracking a 13.6% annual return trend. That's very good relative to the
inflation that developed over the period. With the price channel
established over 2000 - 2005, gold would close out the year at around
$625. But gold at the current $788 is well above that level and is
rapidly getting extended relative to the speculative leg in place since
early 2006.

I'll keep reporting on gold, but the action is too zippy for me.

Thursday, October 25, 2007

The Artist Zu Sheng Yu

I promised some links to interesting artists whose work
deserves a look. Below is a link to the work of Zu Sheng
Yu, whose stuff I first saw only two years ago. China's
loss is our gain. Lovely work.

Note: I have a long position here. A few years back, some
canvases could be had for $800 - 1k. We are talking $26K

If the link does not pick up, go to www.zsyu.com. There
are 20 pages of work to view.

Oil & Gold -- Wild & Wooly

Oil and Gold prices took off in the immediate wake of the
subprime financial crisis circa mid-August. Speculators have
bought the whole nine yards of the "Helicopter Ben" pastiche.
The Fed's decision to cut the FFR% in mid-September only added
fuel to the story. Ben has not complied, except seasonally.
Then there's GWB / Cheney and Iran's Ahmgonnabebad kiting the
oil price with an ongoing pissing match regarding Iran's
nuclear ambitions.

Now, we have both oil and gold in speculative blow-off mode,
with prices for each now in danger zones viewed long term.
Both markets are getting extended and vulnerable. So, I
would say that whatever your upside targets for these entities
may be, recognize that prices are in zones when even slight
dents to the mantras can lead to unsportsmanlike tumbles.

The Fed normally adds to liquidity as the holiday season
approaches, and the FOMC is moving at a remarkably leisurely
pace. GWB and The Shooter want to sound tough vis a vis Iran
and help out their oil buddies as well. Their macho routine
has been ineffective geopolitically and has been a disservice
to the US from an economic perspective. With the troop "surge"
of this year and the large naval build up in the Gulf, I would
have thought that US aircraft would have lit up the border with
Iran already to disrupt supply pipelines to Iran's Iraqi
clientele. And, I doubt we can count on the Turks to hit oil
production in northern Iraq.

So, lots of talk all round, but not any action. Oil and gold
might need some of that wilder action to keep the runs going.

Monday, October 22, 2007

Stock Market Comments

As discussed in several recent posts, the stock market
experienced a strong bullish impulse off its mid- August
low that went too far, too fast. I had a nice run off those
lows, but exited in early October as the action was too zippy
for my taste. The crunch came last week as earnings
disappointed, oil surged and G-7 came out grumpy. My plan is
be thankful for the recent surge and bide my time, allowing
the market to sort itself out short term. These are uncertain
times and the Sep. / Oct. high flyer discounted a rapid return
to sunny prosperity.

The SP500 bounced off classic pivotal support today at 1500.
That may bring in some fast super short term money, but I have
to confess that textbook bounces like today leave me a bit
leery because the action seems facile. More as the week
wears on.

I owe some links to some interesting art I have seen recently
and I am readying that.

Wednesday, October 17, 2007

Stocks, Inflation & Liquidity

With the latest inflation readings, the fair value estimate
for the SP500 Market Tracker has been reduced from a range
of 1600 - 1625 to 1575 - 1600 to reflect downward pressure
on the p/e multiple from an acceleration of inflation.
Looking forward, the p/e may be downshifted further, as this
year's surge in the oil price works its way through to the
retail level. The oil price has moved well above parameters
long seasoned traders would be comfortable with, but
speculative interest has been bubbly in recent weeks.

The broad measure of liquidity I favor has been flat since
May, '07, due entirely to the sizable contraction of the
market for financial org. commercial paper. Measured yr/yr,
broad liquidity has dropped from the 9+% level to just 6.3%
through Sep. In turn, the yr/yr % change in the $ cost of US
production has inched up to 4.8%(also through Sep.) Thus,
excess liquidity in the system has dropped from over 5% earlier
in the year to just 1.5%. Much of the rally in stocks since
mid-August then likely reflects the put back of cash raised
during the immediately preceding sell-off. The liquidity
tailwind for the capital markets has thus moderated in
dramatic fashion.

My longer term inflation indicator has turned sharply upward.
Sustainability of trend remains a question as the indicator
is being powered by the oil price which is heavily overbought
and which could turn volatile at any time.

Monday, October 15, 2007

Stock Market -- Short Term Technical

As posted on 10/2, I opted to close out my longs at 1547 on
the SP500. These were good trades, but as usual, I left some
money on the table. The market was overbought and on too fast
an upward trajectory. That frenetic run was broken late last
week and we've dipped to 1549. As the chart below shows, the
10 day m/a has been violated. The market is still well over
the 25 day. As well, the MACD looks set to roll over.

The dip buyers have been frozen out of the market since 9/10
and going long since then has basically involved chasing them
up. Whether today's sell-off was strong enough to pull in
sideline money I do not know. Equally, I do not know if we
will see a test of the 25 day m/a soon, either, although I
sure would like to see it to get a handle on follow through
potential in the wake of the spike following the Fed's 9/18

Look across for the link to the SP500 chart.

Thursday, October 11, 2007

Corporate Profits...

Earnings season has kicked off. Expectations for total
yr/yr profits performance for the Sep. Q are the most
subdued for a good several years, with analysts having
circled this Q up as the worst momentum-wise months ago.

For earnings expectations, Q3 results are normally quite
important. It is now October, and analysts have to get more
serious about company earnings potential for the new year
ahead. That's an annual rite. And this year, there is more
on the line since the Sep. Q is widely seen as the bottom
in yr/yr earnings momentum with acceleration in profits
growth foreseen from now clear through 2008.

My top line overview for US only sales is about 4% yr/yr
for Q 3. This suggests some margin pressure and the likelihood
that a number of companies will report mildly down earnings
prior to share buybacks and gimmicks. The smaller cap. companies
with only US operations would be the most vulnerable. Companies
with a hefty export book of products or services will do much
better, as will the larger firms with substantial foreign
operations. About 30% of total US profits is now earned abroad,
and there are a number of SP500 companies with better than 50%
exposure. There will be additional positive leverage to foreign
operations in the quarter as the USD averaged about 80 compared
to 85 last year. Basic industry scored moderate sales growth,
but has nice leverage from continuing pricing power, and has
also exhibited more stability in performance than in many years.
Tech and capital goods are expected to have improved. Oil lifting
profits continue to accelerate, but integrated producers are
experiencing poor refining margins. Financial service revenue
growth for the quarter will surprise to the upside, but as has
been well documented, many providers will show large loan losses
and writeoffs related to subprime.

As discussed last week, the indicators suggest slower global
growth ahead, and it may be difficult for the broad market
to benefit from rising oil and materials prices as well as a
falling USD, as these variables, though positive for sector
earnings and relative performance, are inflationary and are
negatives for earnings capitalization overall.

A positive stock market environment for 2008 may well require
stronger and more balanced US economic growth along with
expanding foreign operations. Such is not in view yet, and
is a critical reason for keeping a strong short term focus.

Wednesday, October 10, 2007

Stock Market Fundamentals

When I look at consensus earnings estimates for 2007 and
2008, it is easy to build a case for a 1625 - 1650 close
for the SP500 for this year, and 1825 - 1850 for next year.
As a group, analysts expect earnings growth to accelerate
significantly from a very tepid 3rd Q '07, and many
economists are looking for inflation to stay under reasonable
control. The 50 bp. cut to the FFR%, stabilization of key
weekly economic indicators and stabilization of financial
system liquidity have reduced risk and form a decent down
payment on a positive market turn.

We have the down payment, but a fair measure of uncertainty
remains. The global economy is more likely to slow down
before it would regain sufficient positive momentum to support
the presumed earnings outlook. We still have to see whether
US liquidity will turn sufficiently positive to support faster
growth, and just as important, we have to see whether faster
liquidity growth will drive commodity prices sufficiently to
produce an acceleration of inflation pressure and a consequent
reduction of the market's p/e ratio.

It is reasonable to assume that managers of large pools of
equities are thinking that the Fed will attempt to do what's
needed to keep the economy growing. After all, 2008 is a wide
open national election year, and the Fed would not like its
failings to be a major campaign issue. I agree with this view,
but like many other greybeards, know the Fed does not always
succeed at what it intends in a timely fashion. However, recent
Fed action has likely earned a measure of investor and politician

So, it is easy to lean positive. Yet, I think it could take
five or six months before the uncertainties inherent in the
economic environment are resolved. This translates to thinking
about return potential in the context of elevated uncertainty.

My SP500 Market Tracker currently has the "500" fairly priced at
1600 - 1625. The market closed at 1562 today, suggesting some
continuing investor wariness despite the recent strong advance.

I am anticipating elevated volatility through Q1 '08, and am more
interested in trading than taking investment positions.

Friday, October 05, 2007

Economic Indicators

My leading economic indicator composite declined again
in September, and is now sharply below the interim
cycle high seen in June. The data do imply that the
economy should expand slowly. The major reason for the
drop off in the composite since June reflects sharp
declines in the breadth of new orders for both the
manufacturing and services sectors. The same pattern
is repeated for the global indicators, signaling that
worldwide economic growth should slow further as the year
winds down. The trends are not healthy, but there are no
tangible signs of recession yet, either.

With the magic of data revision, the decline in US payroll
jobs originally reported for August has been replaced by
a reasonable net gain to compliment the 110K jobs allegedly
added in September. Wouldn't you know that the error for
August made it easier for the Fed to cut the FFR% on 9/18.
It is OK to cook the books once in awhile, but the employment
data is getting sloppier than normal. The more positive
jobs data for recent months will ease talk of recession and
may prevent the Fed from being pushed into another rate cut.

The short and longer term inflation indicators are rising,
signaling increased inflation pressure ahead. Main culprits are
oil and agriculturals.

Tuesday, October 02, 2007

Stock Market -- Short Term

In the 9/24 post on short term prospects for the market,
I suggested the shorter run trend was clearly up and that
the huge jump in the indices in the immediate wake of the
Fed's announcement that It was shaving 50 bp off of the FFR%
produced a likely bullish or healthy heavy overbought. Last
week saw more of a consolidation than clear profit taking,
and yesterday's spike brought the market into strong over-
bought territory once again. The last strong entry point was
Mon. 9/10, with the SP 500 at 1452, and frankly, the trajectory
up from that date seems awfully fast. So, I have moved to the
sidelines as I am trading and not investing at present. From
my perspective, technical conditions do not warrant a short or
put position at this time.

On a lighter note, the 50th high school class reunion was a
terrific experience. As I look back, I was fortunate to have
attended high school with such an exceptional group of boys
and girls and to have gone to a school that emphasized
personal achievement as firmly but quietly as it did. I missed
the ones we lost and the ones who did not attend, but the
turnout was still large and it was great to see old friends
again. If you are in pre-geezer mode like me, I strongly
recommend you attend your 50th whence it comes.

The beautiful wife and I also hit the Big Armonk, NY art show.
It is just mind boggling to see all of the fine arts media
and the very high quality throughout. I'll put some of the
artists' websites up as links in coming days.

Thursday, September 27, 2007

Be Back Next Week...

Heading out for a long weekend lark. I'll be attending
my 50th high school anniversary reunion for our class of
'57. Then on to the galleries and the big Armonk Art Show
(IBM). Then come Sunday, I take the younger set out for a
bite and a screening of "Resident Evil". No blog entries
until early next week.

Monday, September 24, 2007

Stock Market -- Short Term

Following the larger than expected cut in the Fed Funds
rate, the market quickly surged to its heaviest short term
overbought in a good several years, as the SP 500 rose to
about 4.5% above its 25 day m/a. That kind of early overbought
is normally a bullish development. Yet, the market has been
exhibiting a deep staccato uptrend since the mid - August
low, and it could be that such a pattern may continue for
a while. From a strictly technical point of view, the short term
trend is up, and a few of the intermediate trend indicators
have turned positive as well. A round of profit taking in the
wake of last week's big overbought would hardly be an unnatural
development. I would happily concede we could see some more
jittery selling pressure, but the market favors the long side
of the trade until we see some technical damage.

Wednesday, September 19, 2007

Resolution Could Take Time...

My approach to understanding the US economy and the capital
markets has left me in an uncomfortable position at this
point. I do key heavily off the liquidity cycle on a
fundamental basis, and as of today's available data, liquidity
is flat or down some in the short run. I think it can take a
good six months to determine how positively the economy will
respond to changes in the liquidity picture going forward.
With the 50 bp cut in the FFR% to 4.75%, the Fed is signaling
that it is prepared to provide faster growth of monetary
liquidity via open market purchases of Treasuries and other
securities. It is far less clear when and how rapidly credit
driven liquidity will resume its growth.

The broad economy has yet to show the sort of imbalances that
assure a recessionary period, while on the negative side, the
level of residential construction is still running well
above levels seen in prior downturns, and could fall considerably
further before settling out. I also remain concerned that
system capacity growth continues well below underlying demand
growth potential. In this latter regard, should the economy
respond positively and quickly to an easing of monetary policy,
more sustainable inflation pressure could appear.

I have maintained since late 2006 that I would let the other guys
do the forecasting. I had hoped that by autumn of this year, the
horizon would be easier to discern, but, regrettably for me, the
economic horizon has a heavier layer of fog on it than it did
going into the year. For now then, I'll maintain a shorter term
perspective, since I cannot say with conviction that this stretch
of bumps to confidence and higher volatility has ended.

Tuesday, September 18, 2007

Benny B Jumps Through "The Window"

Yesterday, I suggested that if the Fed deemed it warranted to
cut the FFR%, They should give it a good go. So, we got 50 bp
on both the FFR% and the DR%. 'Twas the uncertainty of it all
that got them. "The Window" of course was the moderation of
short term inflation stemming heavily from a weaker gasoline
price. Bernanke and the Gang also departed again from the
formulaic approach that had governed policy for many years.

The problem as set out yesterday, was that there may be
inadequate liquidity in the system to fuel economic expansion.
Federal Reserve Bank Credit -- the raw material of the basic
money supply -- has grown a paltry 0.8% this year as the Fed
"leaned against the wind" to counter rapid credit growth.
Credit driven liquidity came to a screeching halt in August,
and since the Fed cannot be sure when the system will fully
unlock, It cut rates and may add monetary liquidity more
rapidly to shore up the reserve base of the banking system.
As I pointed out at the end of 2006, the Fed would wait as
long as it could before refueling, and the rate cuts say the
time is nigh.

The process of liquidity restoration sufficient to restore
stronger positive momentum to the real economy may happen
quickly, but could easily take up to six months. More on
all of this in the days ahead.

Monday, September 17, 2007

Monetary Policy

As most know, the Federal Open Market Comm. meets
tomorrow to decide on interest rate policy. Most Fed
watchers are looking for the FOMC to cut the FFR%,
although there is less of a consensus of by how much.

The time honored indicators that have made it relatively
easy to surmise the direction of policy over the years
may count for less with the Bernanke Fed. Those indicators
described a weakening of manufacturing and capacity
utilization in late 2006, and signaled a FFR% cut for
Jan., 2007. The Fed passed over that signal and kept the
rate at 5.25%. As you will recall, Mr. Greenspan quickly
followed with mention that the odds of recession for the
US in 2007 had risen to one in three. The economy did
rebound over Q 2 of this year, and now the same indicators
imply it is too soon to cut the FFR%.

The Street and many name economists are putting substantial
pressure on the Fed to follow up on the recent cut to the
discount rate with a cut to the FFR% in the hope that it will
further ease credit crunch conditions for weaker credits and
preserve the economic expansion. Within the technical domain
of money and credit, there is an issue of whether there is
sufficient liquidity in the short run to fund a growing economy
properly. This may be only a transitory matter, but it goes to
the heart of the uncertainty Bernanke says the FOMC faces.
Moreover, the speculative run ups in gold and oil along with a
weakening dollar in the forex arena are all signaling a
deterioration in the inflation environment should the Fed follow
through with rate cuts.

We'll see soon enough what the Fed intends. For the short run,
my suggestions for the Fed would be to cut the FFR% by well more
than a slim 25 basis points if They deem a cut is needed, and to
not fear reversing course within a few months if inflation
pressures materialize. Trying too hard to mimimize volatility
in short rates and in the economy creates unnecessary volatility
in the liquidity data and may be inappropriate for an economy
that is bound to be more volatile anyway now that inflation
pressures are showing up more often.

Friday, September 14, 2007

Stock Market -- Technical

One check I like to make on markets involves comparison
against the simple 10 and 25 day moving averages. the $SPX
is trending up as is the 10 M/A. Moreover, both have come
up through the 25 M/A. Interestingly, the 25 M/A has just
perked up a touch after a basing period. Check the chart.
The 25 M/A is likely to show some additional improvement next
week as well. It is a development that commands my attention,
as it is an additional sign that the market is turning positive
in the short run. There is much to cavil, of course. The volume
has been on the light side for several weeks, and the $SPX has
had trouble staying over the 1480 level. As well, it has yet
to take a good run at shorter term resistance at 1500. Note also
that there may be sharply increased volatility next week as the
FOMC announces on the Fed Funds target rate. Finally, recall
that many savvy technicians are looking for a retest of the
August low around 1371.

Did I damn the $SPX with faint praise? Maybe. But there is a
noteworthy positive development to be observed nonetheless.

Wednesday, September 12, 2007

Oil Price Tizzy

Crude futures tapped a record $80 a bl. today. Traders
blew off reports that OPEC intended to boost production
by 500K bd., preferring to focus on reports of tighter
crude inventories in the US and the rapid development of
a tropical storm just south of Galveston, TX and west of
major offshore producing fields. Storm warnings went up
from Houston east to Lake Charles, LA.

This is a strong contra-seasonal move for the oil price.
It also brings oil into clear overbought territory, as
it has a high weekly RSI and is now trading well above
its 40 wk. moving average.

Interesting moment. Traders are pushing oil higher as we
near the eve of the FOMC's forthcoming meeting on interest
rate policy set for the 18th. The Street and many leading
economists are busy steamrolling the Fed into cutting rates,
and now the price of crude remains on a role and hits new

Let's see how the traders handle a strongly gathering
overbought on crude with this interesting mix of variables.

Friday, September 07, 2007

Economy & Stock Market

My leading economic indicator composite fell sharply in
August after rising significantly over the first seven
months of the year. It signals possibly sharp moderation
of growth in the months ahead. There are no recession
warnings yet.

The BLS household survey of civilian employment, the
broadest and most current measure of jobs, shows no growth
of employment in the US for the year to date. Measured
yr/yr, civilian employment growth has decelerated from 2.0%
early in 2007 to 0.8% through August. Real wages are up
about 1.5% yr/yr through August. The combination of real
wage and jobs growth is 2.3%. This is a modest but not yet
perilous level. It does contrast sharply with the comparable
3.9% level seen early in the year, and is moving in the wrong
direction from a growth perspective. The subdued jobs data
seems out of synch with a rising level of corporate profits,
and I am not confident I fully understand it.

Headlines notwithstanding, the US banking system seems to be
functioning normally. C&I loans continue to trend up and
the real estate book has even inched up a little recently.
Part of the rise in C&I loans is however likely attributable
to deals stuck in the pipeline.

The change in inventory levels, which was strongly positive over
the second half of 2006, has been quite trim over the first half
of this year, a favorable development.

The economy is not on thin ice yet. The problem of course is that
thin ice comes along quickly, especially when liquidity flattens
out the way it did in August. As Mr. Bernanke recently said,
uncertainty is deeper in the short run.

The stock market seems almost haplessly unstable as investors and
traders try to handicap the economic outlook. The US economy is
the largest, and it is deeply diversified and stable. It is now
under stress from sizable pockets of disorder in the financial
markets. It would be nice to say something more positive than
"keep an eagle eye on it", but sometimes you have to suck it up
and go along until matters clear a little.

Tuesday, September 04, 2007

Inflation Issues

Inflation indicators have been volatile this year, reflecting
wide swings in the price of crude oil and gasoline. Both oil
and gasoline have been ticking up recently, partly for
seasonal reasons and partly in view of speculation concerning
hurricane activity.

Strong upswings in both gasoline and oil from 01/07 well into
the spring pushed up the inflation rate sharply. Real wages
declined over the first half of the year as a result, and this
development has undercut the near term economic outlook. That
fast surge of inflation no doubt influenced the Federal Reserve
to maintain inflation pressure as its primary target
through July. The Fed is concerned not only that inflation
will raise the cost of capital, but that real household income
can be threatened as well, since wage rates change far more
slowly than does inflation that is heavily influenced by
volatile commodities prices.

Now as autumn approaches, oil and petrol prices are expected to
ease as driving conditions fall off the seasonal peaks in the
northern hemisphere. Shorter term inflation pressures may subside.
On balance, the longer term inflation indicator, although rising,
is still in benign territory.

Traditional bedrock indicators of monetary policy certainly do
not yet support a cut in the Fed Funds Rate, but if the Fed
remains concerned about financial market liquidity and its effect
on the economy, there is a "window" of seasonal weakness ahead
in key petroleum price composites that might offer "cover", as
headline inflation could remain modest. Naturally, the Fed also
knows that strong upward pressures on the petroleum complex
can develope over the first half of the new year reflecting
continuing demand for heating oil and the start of accelerated
gasoline production. the Fed must also contend with commodities
speculation, should the FOMC vote for rate cuts. The pit bulls
could well reason that monetary stimulus would eventually lead
to a stronger economy and higher demand for a variety of crude

There are a couple of other points worth remembering. Modest
inflation through year's end will lead to faster real household
income growth, providing the economy remains stable. Also, note
that the Fed has a little "breathing room" on the FFR at 5.25%.
With inflation running at 2.5% measured yr/yr, the Fed could
take the FFR% down to 4.75% and still leave savers with some

Saturday, September 01, 2007

Don't Be No Hero

New Yorkers of a certain age will recognize the expression
above. Translated into ordinary English it means "Do not
take unnecessary chances".

The stock market has turned up for the short run, but there
is precious little to confirm the upturn. Moreover, although
Friday was a strong up day, the market failed to take out
short term resistance set the prior Friday, after having
it clearly in its grasp. For some traders, the weakness
before the close was a sell signal.

The ambivalence seen in the market reflects a wider sense of
uncertainty. Investors do not know whether they have seen all
of the fallout from the subprime mortgage fiasco, nor are
they so confident that the economy and corporate profits will
escape this financial debacle relatively unscathed. In his
speech yesterday to economist conferees in Jackson Hole, WY
Fed Chair Bernanke cautioned that only the "timeliest"
incoming economic data warrants strong attention and further
stated "the uncertainty surrounding the outlook will be
greater than normal, presenting a challenge to policymakers
to manage the risks to their growth and price stability
objectives." That statement made clear that the Fed would
take steps to ease policy quickly if the economy seems to be
faltering or on the verge of doing so.

So, let's see what the freshest data tells us over the next
week or two...

Thursday, August 30, 2007

The Jackson Hole Gig

Tomorrow, Ben Bernanke is to keynote an economic conference
focusing on housing, housing finance and the economy. For BB
to talk about moving the FFR% would be a profound breach of
professional ettiquette as that is the role of the Federal
Open Market Comm. as a whole. He might reiterate that the Fed
stands ready to protect the economic expansion, but that has
already been factored in.

I am hoping BB opens an eventual wide ranging discussion on
the future for housing and how best to finance it. The
demographics are changing rapidly, with boomers looking to
downsize or find housing with more senior amenities, and the
prime buyers, aged 25 - 44, will gradually but persistently
fill with younger folks as well as immigrants. The market will
over time need to find ways to accomodate younger buyers yet
not destroy the savings of seniors wishing to simplify their
lives. I would doubt BB would carry it all that far, but this
will continue on as an important economic and social issue for
years to come, and he would do all a favor by starting to
address it.

Wednesday, August 29, 2007

Gold Price ($666. oz.)

On a seasonal basis, gold tends to do a fair bit better over
the second half of the year reflecting stronger commercial

In the interim, gold has lapsed into a $640 - 695 trading
range, and has fallen out of the very sharp uptrend seen
since mid - 2005. The break of trend has been mild, as most
players are attuned to the seasonal pattern. Moreover, there
has to be a contingent of bugs out there who are counting on
the Federal Reserve to cut its Fed Funds target rate and
re-inflate the economy in the hope of calming unsettled
markets and concerns about a loss of economic growth

My macroeconomic gold price directional indicator remains
in an uptrend, but is only modestly higher than it was in
mid - 2006, when gold traded around $650 oz. The indicator has
grown more volatile, reflecting a wide ranging oil price over
the same period.

I still have the gold price as overextended on the upside. The
long term price trend going back to 2001 suggests gold should
now trade in a range of $550 - 630 oz., and the macro model
suggests gold belongs in a range of $530 - 540. The macro model
trails the chart range because it has trended up far more
slowly since the end of 2005, as both US monetary liquidity
and the oil price have progressed more modestly since then. In
short, long range inflation stimulus in the US has moderated
substantially in recent years.

Wednesday, August 22, 2007

Stock Market -- Short Term

Yes, the rally off last week's sharp lows has proven
irresistable. However, "spike" lows / no look back
rallies are inherently dubious. In bull markets,
straight climbs in the indices off spike lows work out
only about 40% of the time. In bear markets, the odds
are lower. Many seasoned traders will be looking
for a retest, and if they are long now, are working with
tight stops and hard sell points in mind.

I have included a link to the SP500 below. A couple of

-- It is disappointing the "500" could not take out the
downtrend line from the July highs, but closed at the
line instead.

-- The index also did not challenge the 25 day m/a today.
It would not be healthy if it rolls over under the
"25" as it did a few weeks back.

-- There was a positive turn in MACD. Let's see if the slower
red line follows black up.

Stay cool, stay disciplined. CLICK.

Monday, August 20, 2007

Stock Market -- Fundamentals

My SP500 Market Tracker has now moved up from the 1550
area on the "500" to the 1575-1590 area reflecting
stronger than expected earnings through July and mild
moderation of inflation pressure. At 1445, the SP500 is
trading 8.7% below the midpoint of the Tracker estimate
of fair value. Investors are far more concerned about
earnings potential than earnings capitalization at this
point. The S&P at 1445 implies the economy and profits
are going to turn down in the months ahead.

I am stuck with the idea that the US economy in concert
with the global economy at large will continue growing
and that profits will remain in an uptrend. The leading
indicator sets I follow have lifted strongly since the end
of 2006. They have moderated recently, and have done so
even before the financial crisis struck. Even so, the
evidence I work with does not yet signal either a precipitous
slowdown or a downturn.

It is a risky period now. Finacial liquidity, broadly defined,
has started to contract in the US primarily reflecting a
sudden run-off in commercial paper outstandings. Moreover, the
Fed has just begun to add some monetary liquidity to the system
and this will not stimulate the economy overnight. It is cold
comfort that the Fed is prepared to do more to maintain economic
growth as one cannot be sure the tumblers are not already starting
to slip in place for a downturn.

Economies normally blow out into recession when they overheat
and policy actions taken to suppress demand lead to large
inventory excesses and the need for business to cut jobs to
maintain cash and profitability. The US economy has a tight labor
market, but is nowhere near overheating. So, I think the proper
framework for now is to see the banks providing needed trade
credit for worthy borrowers and to resume mortgage lending at
a far more restrained rate than in days of yore. The hedgies
and private equity dudes will have to work out their own fates.

Leading economic indicators tend to pitch downward ahead of a
recession or downturn, so I'll continue to monitor the weekly
and monthly data. Capacity growth is a lame 2%, so we need to
monitor the inflation indicators if production growth exceeds
capacity growth by a significant margin.

My "500" Tracker will top 1600 by the end of 2007 so long as
earnings progress as expected and inflation stays modest. There
is no saying how soon investors will regain confidence to push
stocks higher again, and there is no saying for sure that my
vision of a positive and rational resolution of the current
liquidity squeeze will prove right.

At this point, the fundamentals still seem ok although only a fool
would refuse to see the short term risks. But, I'm willing
to give the lenders a chance to fire the dummies and rework credit
policy sensibly. I hope that the Fed's limited kind words and
actions to date will enforce confidence.

Wednesday, August 15, 2007

Stock Market -- Time To Get Back To Work

I have been cautious on the stock market all this year
and have stayed away fully. As such, I have missed the
good, the bad and the ugly. But, with a full cash position
plus a good T-bond trade, I am decently ahead on the year.

the market is down very close to 10% from the recent all time
high. By my analysis, that more than discounts the direct
fall out from the subprime business. The decline has proceeded
to the point where one must ask whether the economy is headed
for broader fundamental trouble. The leading indicators I
track do not point that way yet, and my longer term indicators
are starting to tick up ( A weighted combo of the Fed Funds rate
Fed credit, real M-1, the real oil price, real wages + job growth
and capacity utilization%). I have some concerns about whether
inflation will re-accelerate as the economy expands, but the
sizable price correction in stocks to date provides some cover.

I now think we are much closer to a price level zone in the
stock market where we could have a decent tradable rally. I
am no timer, so I will be looking for signs of a positive trend
reversal before jumping in. It does not matter much that the
market is oversold, because a market in a downtrend can get
even more oversold. Nope, now we look for strong suggestions
of a reversal.

Could it go lower? Sure it can. Folks are now running scared
after we broke support this week. It is getting emotional out
there again, and not everyone so inclined may have thrown in
the towel. But it is getting interesting, too.

Will the Fed be stampeded into cutting rates? I hope not as a
rate cut and an uptick in the economy could send commodities
prices higher and the dollar lower and push down market p/e.

If there is a good rally in the next week or two, I am back
to work. I am also thinking that if I get lucky on the long
side, I'll sequester some dough to buy puts, something I do
rarely. However, we are in a global economic expansion that
is now more mature and which will sprout more excesses and
deficiencies as we go along.

I have included a link to the weekly SP500. Note the very low
14 week stochastic (usually suggests a rally at these low
levels) and also that the MACD has finally come down from
the moon to more respectable levels. Click.

Monday, August 13, 2007

More On Liquidity, Credit & Monetary Policy

As discussed in the 8/08 post below, financial liquidity
is plentiful when viewed yr/yr, with the M-3 proxy ahead
by 9.2%. However, over the past three months broad
liquidity increased at only a 4.4% annual rate, as banks
capped off real estate exposure. Since a faster growing
real economy claimed the past three months' modest liquidity
increase, the financial markets have been squeezed. As
suggested last week, the Fed would have to be alert to the
squeeze. They were not alert enough and had to inject over
$60 billion in reserves in short order.

There are credit issues out there beyond the crummy real
estate loans. Spikes in overnight lending rates as occured
last week spell mismatches in deposit and payment flows
within the banking system and daylight overdraft problems.
That says late arriving money and stepped up redemption
requests from risky portfolios that cannot produce firm
NAV and are drawing on credit lines. Today we learn that
Coventree, a junior sized Canadian finance house could not
roll over its asset backed commercial paper and was forced
to extend. So, beside a liquidity squeeze, we have some
crunch in the credit sector.

As a former chief investment officer at a major money center
bank, it has been my distinct pleasure to sit through
bankerly meetings when the spit has hit the fan o'er lending.
The dumb guys who made the bad loans now do not want to
make good loans. The CEO sics the chief credit officer on
loan officers who have earned special contempt. The economist
is brought in to do his routine. Folks are marked for termination.
There is near endless paper shuffling and procrastination.
Finally, someone will inquire whether the lights should be
turned off and all go home for good. After a bit, people get
working to adopt policies sensible to the times. The bank
moves forward, no longer seized up and ready to implement the
new marching orders. Bad credits get dumped and the good
credits get taken out to lunch. We're not there yet in the

The Fed has belatedly added a large measure of liquidity. It
remains to be seen how much they take back and how much they
leave on the table. The Fed has leeway to leave plenty on the
table without creating an inflationary surge as it has been
tightfisted with reserves for three years running.

Difficult moments in the credit markets take time to work out.
Smarter more decisive guys do not get the upper hand on the
dunderheads overnight. But progress will come.

Wednesday, August 08, 2007

Liquidity, Credit & Monetary Policy

The broad measure of monetary plus credit driven
liquidity increased at a still high 9.2% yr/yr
through July. However, for the April - July period,
this measure rose at only a 4.4% annual rate. After
factoring out an acceleration of economic growth
over this interval, it turns out the financial and
capital markets faced a liquidity deficit or squeeze.

The slowing of liquidity growth follows directly in the
footsteps of the emergence of default problems with
subprime mortgage loans in the late winter. Since April,
banks have effectively capped off real estate exposure.
The banks did increase business loan exposure, but the
leveling off of the much larger real estate book
resulted in reduced funding needs and hence, slower
growth of financial liquidity to the economy. Real
estate lending is now as slow as it has been since the
wake of the international financial crisis of 1998-99.

To maintain net interest margin, banks jumped even more
aggressively into the deal and share buy-back games over
the April - July period, with business loans increasing at
a powerful 20% annual rate. Come July, as other speculative
lenders such as hedge funds grew chary, the banks were
loaded up with deal flow participations, some intended as
short term, but quite risky. As the banks stepped back,
Fred Molinaro, the CFO of Bear Stearns, complained bitterly
about the stalled pipeline.

Over the long pull, commercial banks like to maintain a
balance between business loans and their Treasury investment
holdings. One can use this measure as a quick check on
balance sheet liquidity within the banking system. Despite
the recent bulge in C&I loans, banking liquidity is still
adequate with a C&I to Treasury ratio of 1.075 to 1. In
fact, liquidity may be a little understated as banks have also
been buying munis for investments as well. On a long term
basis, banks are hardly loaned up or loaned out, and can
re-claim some liquidity as the deal pipeline restarts, if even
hesitatingly. What the banks cannot do for long, is generate
business loans at a 20% rate. Continued rapid growth of C&I
loans from here would sharply reduce liquidity, force the Fed
to raise short rates and lead ultimately to crunch time.

Above all, the Fed is interested in the stability of the
banking system. Its decision to maintain the FFR% at 5.25%
is an expression of willingess to allow the banks to regain
manegerial control over their exposures. Key economic data
that have been bedrock in setting monetary policy are far
stronger than in late 2006 - early 2007, and the Fed could have
raised the FFR% yesterday based on that data. My guess is that
They doubt the strong readings will hold. Realistically, since
inflation of 5% (annualized) wiped out all but 0.1% of the
increase in real household wages over the first half of the
year, the Fed does not see growth running away to the upside,
and sees no compelling reason to aggravate the credit picture.

Fed policy is in a higher risk zone now. Monetary liquidity has
grown rather sparingly since 2004, and the larger component of
credit driven liquidity has financed the expansion and the asset
inflation. But with credit driven liquidity growth now also low
in the short run, the Fed must be on its toes.

Sunday, August 05, 2007

Stock Market -- Technical Observations

Short term, the market is in steep descent. Reminds one of
the adage: "Don't try to catch a falling knife".

If you are charting the downtrend, the DJIA seems easiest to work

The "average stock" is down 9.8% from its July peak, in line with
an ordinary, mundane 10% correction.

The market is getting strongly oversold on a short term basis, both
on price momentum and on breadth. The 21-day TRIN is also showing a
moderate oversold.

The market is just slightly oversold on an intermediate term basis.
Even mild price weakness, net / net, over the next week or two would
create the technical underpinnings for a rally.

My selling pressure gauge has been on the rise since early in the second
quarter, reflecting deteriorating market breadth. The uptrend in selling
pressure is intact, but is now signaling the market is getting oversold.

The major price indices have broken trend based on the 6/06 interim low.
My Basic Trend Index (NYSE A/D line adjusted by daily TRIN) is on the
verge of a breakdown but has not given up the ghost quite yet.

The SP500 closed Fri. 08/07 at 1433. A further decline to 1395 would
amount to a 10% correction. A decline below that 1395 level would create
concerns as it would trigger a break in trend from the 2002 - 2003 lows.

Link to the SP500 weekly chart.

Emotion is running very high with plenty of chatter about a credit
crunch or enough weakness from a weak housing sector to create a
recession. I'll pick this up later in the week. Note though, that
the FOMC is meeting this week. No doubt there are folks of influence
out there trying to push FOMC to ease up, either via a cut in the
FFR% or more benign language in the statement that attends the

Friday, August 03, 2007

Stock Market -- Cliffhanger Resolved

This week the bulls had a three day window to reverse the
slide and could not pull it off. Bear Stearns, apparently up
to its ass in alligators, got its ratings cut, and the bears
took over. The selling today was more emotional and
indiscriminate. So we have have another "feel bad Friday" when
folks head home to ponder their losses.

I have been cautious on the market this year and have stayed
away. As I pointed out back last December, the global economic
expansion has been strong enough and gone on long enough that it
was only logical to expect that some of its excesses and
deficiencies might start to haunt us and create more volatility.
So, I blew off the idea of a forecast of the market, with the
idea I would take a back seat and see how the year went.

I mentioned on this past Tuesday that a 10% price correction in
the SP500 down to 1395 might better wash out lurking fears, but
also pointed out that I did not have a good clue whether such
would happen. With the "500" closing today at 1433, we are within
hailing distance.

Growth potential for the US economy stands only at 2.8% in my book.
The economy picked up its pace this spring, but has not been strong
enough to present a case which would dominate the junk credit woes
that beset housing and the world of deals. So, legitimate uncertainty
has crept in, but so has emotional selling.

I am staying out of the forecast business for now, but I would note
that the uncertainty is being well handicapped as we go and that I
am getting my first inklings emotions are starting to get a little
bit raw.

Tuesday, July 31, 2007

Stock Market -- Cliffhanger

Well, today it was American Home Mortgage (AHM), writer of
Alt - A loans (scant credit underwriting required). Going,
going, gone. Now I guess the market could really have blown
out on this, but instead it fell to a rough short term
support area (low test zone), with key composites just near
the Friday, 7/27 close.

So, the boyz left it until tomorrow to decide whether we go
lower or whether enough is enough. More bad news of the sort
we had today should have led to a clean break to a lower level.
I call it a cliffhanger because the market held so near the
7/27 low, and like an adventure serial, we have to tune in
tomorrow to see whether the market holds.

1450 - 1460 for the SP500 is an interesting support area for
several chart reading reasons. My preference would be for a
healthy 10% shakeout from the highs seen earlier in the
month. But, I have seen enough technical surprises over the
past four months not to bank on anything.

Thursday, July 26, 2007

Stock Market -- Fundamental & Technical


The SP500 Market Tracker remains fairly valued at 1550 - 1560.
I doubt I'll review the Tracker again until Q2 '07 eps reports
are more nearly complete. With the SP500 closing today around
1483, the market is getting cheaper, with concerns about
decelerating liquidity growth a main concern. Data through
mid-July shows that my broad M-3 proxy has been flat for the
past six weeks. This kind of shortfall does not always bother
the market, but it appears to be a source of concern now.

I note as well that the Fed drained liquidity over the past
week, so sell offs in certain markets are not scaring Them, yet.

Remember, the bigger earnings estimates for 2007 are back loaded,
with a sizable step-up in earnings power envisaged for Q4 '07
and running into 2008. The economy needs faster growth and a
stable inflation environment to provide a big long side trade in
the months ahead. So far, capacity growth may be too small to
support faster growth without more inflation pressure.


The market did respond to the improvement in fundamentals from
06/06 through 06/07, but it strained technical measures and
rules of thumb in doing so.

Short term, the market is unstable and further weakness cannot
be ruled out. I think it would be dumb to think the SP500 just
could not sink 10% off its high down to the 1395 level with players
worried about liquidity and how to "properly" re-price assets for
more risk.

For now, the market is moderately oversold. A more interesting
oversold for the SP500 would be around 1460-65, where it briefly
touched today. A successful retest of that low would clarify the

Since I have but a very few "turn on a dime" technical indicators,
I am willing to give the market a week or two to sort itself out
before considering positioning.

I have been cautious on the market this year, concerned that a pick
up in the economy might bring some re-acceleration of inflation that
would dampen the p/e multiple. That test is still ahead, and I have
passed up some good trades in the interim. But, I like to be on
familiar, comfortable ground when trading and so far this has not
been my year.

Wednesday, July 25, 2007

Long Treasury

I did close out a long position with an ok profit. Cannot
tell whether I am leaving money on the table or not. The
big oversold of a few weeks back that caught my eye is nearly
worked off. The economic fundamentals behind the Treasury are
deteriorating, with industrial commodities and now capacity
utilization both on the rise. I suspect a number of hedge funds
have unwound a major trade: long junk and short the Treasury.
Junk has moved up 100 basis points in yield since late May,
and Treasuries have likely benefited from short covering. The
renewed upward move in the 91 day T-Bill yield to close to 5.0%
suggests the panic in the junk sectors has eased some.

One factor worth noting is that bullish sentiment on the outlook
for the long Treasury price is rather subdued, as measured by
MarketVane. At 45% advisory sentiment bullish, this measure is
in the lower register and suggests keeping track of the bond from
a contrarian perspective.

Thursday, July 19, 2007

Stock Market -- Fundamentals

The SP500 Market Tracker has the SP500 fairly valued in
the 1550 - 1560 range (now 1552). The upward thrust of
the Tracker has lost considerable momentum in recent months
reflecting a leveling off of yr /yr inflation readings (thus
leading to a flattening of the p/e ratio) and a projected
modest rising earnings trend. A look at the risk factors:

My forward inflation gauge is continuing to rise but has been
blunted over the past two months by a downdraft in gasoline
prices. Not enough of a break yet to signal relaxing one's
guard. Capacity expansion in the US continues too low relative
production growth potential. This remains a concern.

The leading economic indicators I track most closely have firmed
up substantially in recent months, suggesting a re-acceleration
of growth. My long term indicators -- real average earnings and
the monetary base, are still subdued.

On the monetary side, credit driven liquidity remains the primary
driver of stock prices. Viewed yr /yr, this indicator remains
strong, but growth is moderating.

Credit driven liquidity growth exceeds that of the real economy,
so for now, there is a good tailwind for stocks.

My top down earnings indicators are not impressive for the economy
as a whole. In Q 2 '07. The dollar value of all production was up
only about 4.5%. This suggests that many companies are struggling to
maintain profit margins. But there are important offsets: a weak
dollar, growing offshore operating earnings for US based companies,
strong pricing power in basic and heavy industry and better than
anticipated lifting results for the oils. Tech and export driven
companies are also showing decent comparisons. However, unless we
start to see the dollar value of production growth accelerate,
stock market breadth could prove quite vulnerable.

Widening credit spreads have occured in the junk markets, but spreads
have been maintained elsewhere. So far, crunch conditions have
been narrowly focused.

The SP500 has an earnings / price yield of 5.8%. With high quality
short term paper available at 5.25 - 5.50%, the e/p yield is nothing
to wtite home about.

The monetary policy indicators I watch most closely have turned up,
signaling that odds of an increase in short rates are rising.
Since the Bernanke Fed is less formulaic and more discretion prone
than the Greenspan Fed, take it as an advisory and not a prediction.

Feeling funny about this market? This is not an elegant mosaic of a
bull market. It is butt ugly instead, mostly because as a credit
driven market, it lacks the balances it needs to allow even bulls
to sleep that well at night.

Monday, July 16, 2007

Stock Market -- Technical

Last week the market broke out of a month long period of price
compression to minor new highs. On a twenty plus year long term
chart, the SP500 remains in an uptrend. Ditto for the periods
measured from the cyclical 2002 and mid-2006 interim lows.
At around 1550, the SP is trading slightly above mid-range in a
1700-1300 long term range.

Some of my key intermediate term indicators have failed this time
out, signaling tops that turned out to be but very temporary
respites. Even my momentum oscillator, which keys off the 40 week
m/a and is very reliable, whipsawed once. This all tells me to be
careful what I say about the future. The rally has been a real ass
kicker for those interested in the significant squiggles.

At this point, I do think it is fair to say that although we are
tracking an up market on most all counts, it is a very elevated
market and one that could experience a rapid and substantial
price correction without breaking major uptrend lines. All the
guyz know this. If you're long trades now, you have to be not just
smart but quite diligent as a decline, should one come, could
easily be fast enough to shoot or blow up many of the trailing
stops in place. Armed with cell phones and laptops, the big hitters
are in the action even if at the beach (as many are).

I have linked to the weekly SP500 below. Note the elevation of the
MACD and the fact that the market is dancing near the top of a
20 week price channel. Chart.

Wednesday, July 11, 2007

Liquidity Update

Not surprisingly, the banking industry's real estate loan
book -- to include home equity loans -- has flattened out
since February, 2007. In typical lagged fashion, bank
funding growth has also slowed, with this huge measure of
liquidity actually declining slightly in the month of
June. Data on hedge fund lending capability is much harder
to come by, but the CMO sub prime and CDO junk markets have
been roiled enough to figure there is more caution. The
banking industry's C&I loan book is hopping. It is a safe
estimate that half of the volume gain here over the past twelve
months is deal related. On balance, credit driven liquidity,
which has supported all markets, is just starting to show some
growth momentum loss, with the riskiest markets paying the
heaviest price to date.

Keep in mind also that monthly data are showing a pick up in
industrial and commercial output and order flows for the US.
Since real economic activity lays first claim on available
liquidity, there could be some more pinching of flows available
for markets investment and speculation in the months ahead. It
is early in the game, but stay focused and do not automatically
dismiss the idea that your favorites will be exempt. Remember
the old Wall Street adage : "When they raid the whorehouse, they
arrest the piano player, too."

Tuesday, July 10, 2007

Stock Market -- Technical

The price compression period underway for the past several
weeks has eliminated the shorter term overbought and
extended conditions for the market. Despite flashing caution
lights, the market has been bending, but has not broken.

So we find we have a US market that is still trending higher
from its mid-2006 interim low, but one which is still elevated
enough to suffer a sharp correction without losing the trend.

To make matters more interesting, periods of price compression
in the market can last for a good several months and need not
be wound up quickly with a break out or a break down in price.

Thursday, July 05, 2007

Stealing Time

The wife and I are on a working vacation. The wind-up comes
this weekend when we finish helping our youngest set up shop.
My daughter is just zipping along, but I must confess that
wife and I are pooped by about 7pm each evening.

The stock market has entered a period of price compression
so I doubt I am missing anything too much. Most of the
overbought that accumulated in late spring has been worked

I expect to be back on line this Monday, July 9, if not a
day or so sooner.

Wednesday, June 27, 2007

Bond Market At Mid-year

As I have previously discussed, the US bond market is very
sensitive to the momentum of production plus sensitive materials
prices. The latest upturn in bond yields started around the
end of November, 2006 and it remains intact. Over this same
period, the six month annualized rate of change in cyclically
sensitive industry has risen from 3.0% to 10.2%. Since US
production has been sluggish, the damage to yields has come
largely from strong industrial commodities prices, reflecting
high capacity utilization rates and strong international

Although I was surprised by how weak May durables orders were
(as reported today), the lead indicators I follow closely are
still signaling a stronger second half for the economy. So I am
stuck with the view that bond yields may well trend irregularly
higher as the year progresses. Interestingly, there is usually
at least one period each year when industrial commodities prices
turn weak. That tends to occur around mid-year, perhaps because
smelters, mills and other smokestack production may elect to take
a little downtime in the warmer weather. At any rate, normal
seasonal weakness in sensitive prices could bring some improvement
in the bond market near term.

My super long term model, which regresses the Treasury bond yield
with inflation, suggests the bond should now be yielding between
5.75% and 6.25%. Trading around 5.20%, the long guy is well below
the indicated range. So, the premium for interest rate and inflation
risk has trended down in the new century. I attribute it to the
combination of strong financial liquidity coupled with moderate
inflation levels as well as the role of Treasuries in a variety of
swaps and other derivatives programs. I am not happy with this
explanation because Treasury yields do not correlate that well
with liquidity trends. I am also figuring that a combination of
eventual faster US production and ultimately higher sensitive
materials prices might bring the long bond yield closer to the
indicated 5.75 - 6.25% range.

The long Treasury yield is however high enough to trade now, which
I did recently. The investment case remains unappealing, especially
since there is decent grade short paper out there at 5.25 - 5.50%.

I note that the spread between high yield or junk bonds and Treasuries
is an exceptionally narrow 300 basis points. Since junk trades like
junk in more stressful economic times, no one is being adequately
compensated to own the stuff now. As the economic expansion
matures, the eventual migration to quality will begin....