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 !!!

Tuesday, January 29, 2008

Stock Market -- Fundamental Landscape Part 2

As outlined in Part One of this thread (see below 1/25), the
fundamental environment for stocks remains markedly risky
reflecting the Fed's reluctance to liquify the economy as It
cuts rates. Rate cuts may eventually coax broader credit and
liquidity growth, but liquidity is now not sufficient to
support meaningful economic expansion. This does not mean that
the stock market must decline. It is a discounting mechanism,
and if enough players see growth not too far down the road,
stocks can advance even if the current environment carries
significant risk. I am not just curious about this current
unusual environment, but cautious as well.

After topping out a touch over 1600 in July, 2007, my SP500
Tracker has declined to the 1360 - 1380 area. Higher inflation
has suppressed the multiple, and the consensus earnings estimate
for the "500" for the twelve months ended 3/31/08 has dropped
nearly 14% to about 84.80. As it turns out, speculation the Fed
will again cut the FFR% and DR% at tomorrow's FOMC meeting has
brought the "500" composite back up to levels near the Tracker.

I have to confess I have some longer term concerns about the
stock market as well. These concerns have to do with the longer
run growth potential of profits and dividends. With the low
dividend payout of the "500", profits need to grow at 8-9% per
annum to hold the current p/e range. Since the US demograhics
no longer support robust consumer spending and housing investment,
earnings sources will have to be continually diversified both
to other sectors within our economy as well as abroad. So far,
corporate US has done admirably well moving earning capital
abroad, and US managers will need to remain strategically alert.
One key to US success here will be if countries with rising
wealth and high savings rates program acceleration of domestic
spending and rely less on export growth. Such is no wise assured.
In addition, if a falling US dollar remains a wellspring of
offshore growth for US companies, the US equities market may not
be much of a beneficiary as lower levels on the dollar will
prompt higher inflation and could lead eventually to overwhelming
demand for currency realignment.

Returning to the present, I am likely to be stuck in caution mode
for a while longer. I think my views on liquidity are idiosyncratic
enough that the market could well ignore them. I do not mind being
wrong as long as I catch on before it's too late.

Sunday, January 27, 2008

Quick Stock Market Comment

As mentioned on the 24th (see below), the rally in the
market would need to see the SP500 take out 1360 trend
resistance on Fri. the 25th. The "500" moved up from
the previous 1352 close to 1360 - 62, but lost momentum
then. This triggered a sell signal for a number of chart
watchers. The market sold off sharply over the day
following the failed test. As I have discussed, there
might be no shortage of sell-the-rally players despite
the recent sharp oversold.

Friday's action suggests further weakness at the outset
of the coming week, but you have to be careful not to make
too much of a one day retreat from resistance. Just keep
Friday's action in mind if you are trading.

Friday, January 25, 2008

Stock Market -- Fundamental Landscape Part 1

Let me start with the liquidity cycle. I can tell you
straight off that there is no prior period in the modern
era that comes very close to matching this one. We are
thus in an environment with unusual elements. Short term
interest rates are falling and broad, credit driven
liquidity is barely growing (1.0% over the past six months).
This is unusual, but not unprecedented. What is new, is that
even with a weakening economy, the Fed is maintaining a very
tight rein on the growth of monetary liquidity. So, although
the price of credit is falling, liquidity remains scarce.
Through its TAF, the Fed has bought $50 billion of crummy
quality bank paper, but it has had the FOMC drain the
markets of a nearly comparable amount of Treasuries and repos.
It is trying through the TAF and lower rates to coax the
credit markets back to life. There has been some success, but
progress remains slow and the process is fragile.

By holding back on infusions of liquidity into the banking
system, the Fed is still seeking to contain commodities driven
inflation pressures, but in doing so, it is keeping the economy
at considerable risk. The message to me is that further
economic weakness short term is tolerable to the Fed if it
results in breaking the uptrend in commodities prices where there
is strong speculative interest. Some Wall St. guys like Jim Cramer
may well see the Fed as composed of loosely hinged academics who
are testing academic suppositions at the expense of the real

The risk here is that if economic weakness intensifies short term,
lenders will grow even more risk averse, and there will be an
acceleration of "downcycling" to the detriment of the economy. This
would, in turn, force the Fed to slash rates further and pour
liquidity into the system. But, if the lower rates work now to coax
borrowers in, and the banks use their new flexibility to fund more
and provide more credit, well then, the plan might work. It is all
in the timing, as they say.

The lead economic indicators are still trending down and are consistent
with the development of an economic downturn. A downturn may not yet
be "a lock" but the indicators are moving that way. There is some
evidence that inflation pressures may be easing, and such easing could
become more pronounced if the economy develops more slack.

There is substantial economic uncertainty here and a fair measure of
downside risk. Bernanke is running a significant gamble,and if
commodities prices do not crack over the next month or two, he may
be forced to re-think it.

The stock market has started to price in a recession and not just a
sharp slowdown, preferring to think the Fed's gamble may well fail.

More on this landscape issue in the days ahead.

Thursday, January 24, 2008

Stock Market -- Short Term

New e-mails are rolling in. Last week they told me the US
market was seriously oversold. This week, they are telling
me we put in a solid bottom and because the oversold was so
deep, the market is poised to run on the upside for months. I
agree with the deep oversold condition. Coming into this week,
my six week selling pressure gauge was about as oversold as it
gets. Readings at this level are consistent with strong rallies
even in bear markets. The SP500 is still nearly 5% below the 25
day M/A, so it is still oversold.

The SP500 closed today around 1353, and must take out 1360 in the
next day or two to signal a short run reversal to the upside.
It may be a nice test, as we have witnessed a super quick run-up
from the 1260 - 1270 area, which is, by the way, the new low test
zone. There is also chart resistance around 1375.

From my perspective, it is now timely to take a longer view of the
market, which is what I'll do in the next post or two.

Tuesday, January 22, 2008

Some Quick Thoughts

The Fed's action today to cut the FFR% by 75 bp to 3.50%
was intended to curtail a global meltdown in stocks and
lower quality bonds.

The Fed has remained stingy on the liquidity front. Fed
bank credit is up only 3.2% yr/yr through last week even
with its TAF. It is hard to stimulate an economy with
Fed credit actually down in real terms. Let's see the
liquidity situation this Thurs. in the wake of the cuts.

The cut in the FFR% cements the screwing of the saver and
is a negative for US dollar holders.

The stock market did bounce on the news, but so did the oil
price. Overnight, oil traded at $86.11 a bl. There were prints
above $90 in late day trading. A stock rally that brings
stronger oil and commodities prices will simply punish
consumers further.

I am taking tomorrow off. Be back Thursday.

Monday, January 21, 2008

The 1/21/08 Global Sellathon

The SP500 closed at 1325 on Friday, the 18th, and in keeping
with today's sellathon, the SP500 E mini was printing down
between 1260 - 1270. A little touch of panic. The foreign
markets get a crack at it again overnight.

The US stock market has stopped its pussyfooting around. The
drop in the E mini says traders are pricing in an economic
downturn of consequence, with profits to fall sharply as
2008 unfolds. As I have pointed out, the leading economic
indicators have fallen far enough from peak levels to signal
a recession, but further downside thrust in the indicators
may be required to seal the deal.

At this point, we need to track the more or less coincident
indicators to see if the economy is about to "cycle down." By
that I mean weakening employment and incomes which beget lower
sales and production, which in turn foster another round of
job losses, and so on. I watch real retail sales, real spendable
earnings, production and household employment. On balance here,
the economy is stagnating, with employment growth and real
spendable earnings up about 0.2% yr/yr.

The "average" stock is down a little over 20% since the 2007
highs. So it is a bear market as far as I am concerned. The
market was in panic mode today but is also very deeply oversold.
The bet is being made that recession and likely resultant
additional credit losses are coming. My SP500 Market Tracker
sits at around 1375 and does not immediately envision the leaner
times the market now expects. When the market starts to trade
well away from the Tracker, I focus most heavily on near term
fundamentals to see if the market's view is being confirmed or
if It is overshooting (to the downside in this case).

Feeling a bit queasy? Stay well puckered and try some Prilosec...
Good stuff for acid reflux.

Thursday, January 17, 2008

Stock Market -- Good Luck!

The e-mails are rolling in. The message is that we have a
deeply oversold market on any number of counts. Agreed.
We are also in a bear market with a breakaway downleg that
just started this week when the SP500 took out important
support at 1375. Had we held support and not gone bear, I
would be as happy as the next guy to play this deep oversold
on the long side. But, in bear formations, oversolds are
inherently dangerous. The simple reason is that with bear
prints on the chart, oversolds can get even more oversold.

So I plan to leave the buy side to the young and the restless
and those older dudes who believe they have a nose for these
things. Rest assured, that whence comes the bounce, there
will be a fair number of folks who will sell into the rally.

My plan will be to look to short overboughts in the interim.
I will not be on the long side until my momentum oscillators
have turned positive. I wouldn't dream of arguing with the
timers who want in on the long side now, but I do not like
the breakaway action.

I have linked to a weekly chart. It will show a deep oversold
on MACD and RSI. It also shows a "death cross" with the 13
wk M/A having turned below the 40 and with the 40 wk M/A also
having turned down. The market has also blown through the 69
wk M/A containment or "safety valve" line. Chart.

I intend to watch the oil price closely relative to both stocks
and gold. A sharp break in the oil price would work to alleviate
the pressures on incomes and inflation.

Tuesday, January 15, 2008

Gold Price

The weekly gold price macroeconomic indicator reached new
peaks in late 2007, although it has settled down recently.
The microeconmic indicator has also reached record levels
reflecting higher extraction costs.

The gold price has become more volatile relative to both
indicators since 2005, as speculative interest has intensified
greatly. At $902. oz, gold is in a mania staging area after
a sharp run up over half 2 '07. It is reminiscent of the
period running from latter 2004 through mid-May 2005, when gold
ran up from $460 to an interim peak of $735. The top in May
completed a parabolic up move. Gold went into a mania staging
area then when the price topped $600, but quickly fizzled. At
present, gold must top $930 soon to move into a more robust
mania. Many gold prognosticators see gold at $1000. oz in 2008.
Should gold move quickly up to $1000 in the next few months, it
would move into full bubble mode, with large upside and massive
downside when the bubble pops.

My macro indicator has started to diverge negatively from the
gold price trend, so it will be interesting to see whether gold
can stay strong or whether a correction might be in store. Gold
is on another parabolic up move dating from early 2007, and the
curve is set to bend back in Feb. 2008, suggesting that a top of
consequence could be coming soon.

The monetary component of the macro indicator was signaling
inflation of 5-6% for a good decade, but with high US and
Asian productivity growth, it never happened. Since 2004, that
indicator has turned far more somber, and is now pointing to
a deceleration of US inflation several years out, down to
1-2%. The shorter term inflation thrust indicator is still
pointing up, but has lost a little momentum.

Given that gold is in a mania staging area, it carries both high
upside and downside risk, depending on the degree of speculative

I include a link to a weekly gold chart. Note when you look how
extended the MACD formation is to the upside. Chart.

Friday, January 11, 2008

Stock Market

Today's tumble left the SP500 down at 1400. As I have discussed,
the auditors have arrived at the banks and internal audits are
in full swing at the investment banks. The pressure will be on
to make a clean breast of the CDO mess, including reserving for
likely future losses. The trick here is to recognize the heavy
losses, but not be stupid about it. That is, as the soon to be
arriving regulators and examiners will point out, spread some of
the pain out over time to soften the blow to capital adequacy.
Consumers are also reading over their home heating bills for a
chilly December and are paying more at the pump. Folks will need
a month or two to sort out priorities and look for ways to
conserve and save. The economists are throwing stimulus plans out
there and the economy will likely take center stage in the
presidential races as the pretenders pander away with growth
programs. Bernanke will face sharp questioning at the upcoming
Humphrey-Hawkins testimony as a Democrat Congress berates a Bush
appointee. And, Sweet Jesus, the media, they'll play it all up
to a fare thee well.

The market is rounding into a tradable oversold, but the emotion
level is cranking up not just on the Street, but across the land
as the media happily scares the crap out of people with a drumbeat
of negativity.

My guess is that the swirl of negative emotion about the economy
may not exhaust itself for another two months or so. This means
continued volatility for a spell and the pressures on trader and
investor discipline could be intense. The folks who succeed in this
pressure cooker are the ones who keep their cool and force those
wily and powerful emotions fear and greed into the background. Gird
up, as the legion of thumbsuckers and pantspoopers may still be

Thursday, January 10, 2008

The $100 Kiss

Last week oil kissed the $100 bbl. mark. It was an expensive
kiss, since oil has trended lower since. The weakness in the
market reflects the dawning of the realization that oil demand
could trend below expectations over Half 1 '08 on a rapidly
slowing US economy and the prospect that big stakeholders in
US growth such as Japan, China and Canada may face slower growth.

The rapid rise in the oil price over the course of 2007 undermined
the US economy and the Fed's efforts to provide stimulative support
as higher fuel prices were a major factor in depressing spendable
earnings in real terms.

Continue to keep a close eye on fuels prices over the first half
of the year.

Wednesday, January 09, 2008

Stock Market


Yesterday's closing low of 1390 on the SP500 confirmed that
we are in a down market off the summer and autumn 2007 highs.
A close below spring '07 support around 1375 would open the
issue of a breakaway down and bear market.

The 1390 close yesterday took the market more than 5% below
the 25 day m/a. As discussed often, that kind of deep oversold
has been a clarion call to rally in recent years. The bulls were
in today, but it was likely the Street and major institutions
buying baskets of stock to move others in off the sidelines. I
say that from long experience and after having noted the weak
positive breadth.

Barring a major immediate advance, my buying and selling pressure
gauges are likely to show a sizable and tradable oversold at some
point over the next two weeks.

I have also pointed out that rallies we would see over the second
half of 2007 would grow weaker as we went along. The last one in
the latter part of December was particularly wicked, because it
established a sensible trajectory only to roll over last week.

For the moment, I am going to shelve my expectation of a range
bound market (SP500 1400 - 1500) to reflect yesterday's fresh
closing low.

To recap, the US market is in a down phase that came very close to
a major break. Today's rally is from a deep oversold which could
turn into a nice tradable move if the market stays lame and builds
a base for a week or two. A sharp break in the "500" below 1375
would suggest more trouble is in store for River City.


The analysts remain busy cutting estimates for both 2007 and 2008.
With inflation pressure also still evident, my SP500 Tracker has
dropped to, gulp, 1375. That's a steep move down from the 1600 level
seen back in July.

For a daily SP500 chart, go here.

Friday, January 04, 2008

Economic Indicator Update

The weekly leading indicators have stabilized but remain
in firm downtrends. The monthly leading indicator through
12/07 dropped sharply again. The monthly re-caps the weeklies
but also includes a large downward hit for the breadth of
new orders in the manufacturing sector.

The monthly jobs report was plug ugly. The broad household
survey showed a sizable decline in jobs and a sharp uptick in
the unemployment rate to 5.0%. Measured yr/yr, jobs growth was
a scant 0.2%. This coupled with a 4.1% yr/yr gain in the average
wage gives underlying support for current dollar growth of
4.3% for the economy. Adjusted for inflation, it zeros out.
Inflation is canceling out the very modest growth potential.

Talk of a 50 bp cut in Fed Funds and a possible stimulus
package from GWB and his group will do little to help the
economy if inflation pressure continues to intensify.
Unfortunately, my inflation thrust indicator remains in a
sharp uptrend.

Wednesday, January 02, 2008

Manufacturing Dip

The ISM released its purchasing managers' report for the US
manufacturing sector for 12/07 today. The full index declined
well more than was generally expected, and the index for new
orders fell sharply. The export order component was not
spared, either. The data is consistent with a contraction of
manufacturing activity, and the sharply weaker new orders
index bodes ill for the near term future.

The ISM index fell to 47.7. Contraction in manufacturing can
start when the index falls below 50.0, and profit margins do
not hold up below the 50.0 level, either. A decline in this
index to the 43 - 44 area is thought consistent with development
of a recession. The one positive sign was that inventories
do not yet appear to be bloating up.

The drop in this monthly index is consistent with the weekly
leading indicators which have been trending significantly lower
since July, 2007.

Traditionally, the Fed has responded to weakness of this
magnitude in the manufacturing sector with cuts to the FFR%.

The sell off in the stock market reflects investor realization
that deterioration of profit margins is widening.

Tuesday, January 01, 2008

Oil Price -- Major 2008 Issue

The global oil industry is lacking in data transparency
and timeliness, and, with the re-emergence of the issue of
"peak" oil production, has become highly politicized among
geologists, petroleum economists and consultants. So, with
oil, I spend more time on the price charts over shorter periods
of time than I do chasing down oil supply / demand stories.

As we head into the new year, I am struck by how overbought
this market is. I'll provide a link in a moment, but suffice it
to say, the oil price is moving toward a moment when a price
correction would be overdue. Consider the weekly chart with
some six month measures.

If the price does correct in the next month or two, it will
reflect not only a global economic slowdown, but prospects for
substantial new production from a variety of fields to come this
year and next and to total 3-4 mill. b/d net of declines from
existing producing fields (You might want to check in at www.
econbrowser.com for an attempt to look at the industry objectively.)

When the price of oil is rising sharply in real terms, it is
difficult for large net consuming economies to adjust readily to
the price trend, even when supply is adequate. So, a break in the
oil price and a down period would help consumers and businesses
greatly in efforts to adjust to the preceding price shock.

For 2008, I think it will be important to catch a break in the
oil price for the global ecoonomy and the capital markets. The
trend of oil over the past 12 months would be increasingly ominous
if it were to continue.