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 !!!

Thursday, October 30, 2008

Stock Market -- Technical

The SP 500 has come out from its crash trend line. The much
broader Value Line Arithmetic, a good 1700+ issue proxy for
"the average stock", exited its crash trend line today. However,
and based on closing prices, the SP 500 has yet to break out from
a far less dramatic downtrend line running from 10/13. So, trend
line-wise, the market is not out of the woods quite yet in the
short run.

The SP 500 has been showing basing at intraday 835-840 since
10/10, a good sign. The short term momentum oscillator is
improving, although still negative. The market is now moderately
oversold near term at -3.8% to the 25 day m/a. Note , however,
that rallies have only proceeded from deep oversolds of more than
-15% since the crash kicked off in Sept. Continuation of the latest
advance off the 10/27 closing low of 848 in the days ahead would
be another positive sign, indicating the market can move ahead
without having to first fall to agonizingly deep oversolds.

The 10 day m/a is starting to stabilize, while the 25 day m/a is
still in retreat. I like set ups when the market and the 10 day m/a
move up through the 25. You can be whipsawed here, but not
that often.

Intermediate and long term indicators remain negative and
deeply oversold. Since these are primarily early stage trend
following indicators, turns would not come quickly given the
depth of the oversold readings.

On balance, the market remains treacherous although there
has been some short term improvement.

SP 500 daily chart is here.

Wednesday, October 29, 2008

Monetary Policy

As was widely expected, the FOMC today cut the FFR% to 1.0%.
The longstanding cornerstone indicators suggested as much, and
the Fed indicated increased confidence that, with weakening
economic demand and falling operating rates, inflation would
subside to a low level over the next several quarters. They might
have spooked the markets had They not cut. Also, such forbearance
might have handed Sen. Obama another stick to use to whup
the GOP establishment.

The move will backfire if it is the proximate cause for a sell-off in
the US$ and sharp rally in the oil price. Should the latter occur,
it would ultimately put more cost pressure into a weakened system.

Thursday, October 23, 2008

Stock Market -- Brief Comment

The SP 500 closed today around 908 and based on closing prices
is putting in a short term base around the 900 level (Link to
chart below). That's the good news. The bad news is that the
market has yet to wiggle out from underneath the crash trend line
drawn from the 1213 level of 9/26 from whence the deepest part
of the recent decline commenced. In short, from a technical
perspective, the market is still in crash mode and needs to repair
further to exit it. So, for the moment the market situation remains
both fluid and unstable.

I still need fresher earnings data, but it looks like the Market
Tracker has the SP 500 fairly valued in a 1000 - 1025 range. This
represents the first time the market has fallen well inside the
Tracker since the crash of 1987. Then, however, earnings were
still trending nicely higher, whereas now, investors are trying to
gauge how weak earnings may be over the next 3 to 6 months based
on the quick acceleration in the business downturn in evidence

A daily chart of the SP 500 based on closing prices may be found
here. Note that the market is still deeply oversold relative to the
25 day m/a.

Tuesday, October 21, 2008

Oil Price

A weakening US economy is spearheading an expected sharp
contraction in global economic growth and consequent
substantial moderation of oil demand. With excess crude
capacity now rising markedly, the oil price is weakening. The
industry has yet to enter a typical bust following the boom
period. The dramatic 52% plunge in the oil price since the
summer high prints of $145 bl. reflects the popping of a
speculative frenzy in this market. Oil never reached the full
scale bubble price of $170 bl., but the market was bubbly and
destructive enough.

OPEC will meet later this week to look at cutting its output to
arrest the price plunge. Experienced hands know that it is
primarily the Saudis who can "afford" cuts, and that whatever
actual production curtailment may come will fall to them and
their accountants. In the meantime, oil demand is likely to
fall further.

There are now forecasts of $50 -60 a bl. for early 2009. These
projections merely extend the crash trendline in place since
July and recognize that oil price busts have toted 60% on
occasion in the past. These projections are a bit steep based
on the fundamentals, but are not so when you consider the
shakeout underway among the new generation of commodites
investors who got caught up in the champagne waltz up to $145.

Near $70 bl., oil is now as deeply oversold as it was ridiculously
overbought at this summer's high. No grey bearded trader would
be shocked at a $10 -20 bl. pop in price over the next couple of

For a weekly price chart, click here.

Friday, October 17, 2008

Corporate Profits

The indicators I track to gauge the outlook for non-financial profits
have nosedived over the past 6 weeks. Physical output has
deteriorated and pricing power has weakened substantially. Q 3
'08 will reflect just a minor portion of the weaker outlook. But
Q 4 '08 and next year's Q 1 will likely reflect more fully the
damage to profitability underway. There are still pockets of
strength offshore, and a weaker yr/yr comparison for the US $
will help, but broadscale earnings weakness is presently in the
cards. Financial sector profits remain dismally low as loan losses
and seccurities writeoffs remain large. Q 4 ' 07 was a disaster
for the financial sector and perhaps the current quarter will not
be as bad.

Corporate profitability has improved significantly since the late
1980's, and there is no evidence yet that profitability is set to
retreat to very long term norms. However, the next few quarters
could well test the longer term trend, especially since pricing
power has been such a strong feature of profits growth over the
past half dozen years ( oil & gas and basic materials especially).
To be more specific, SP 500 quarterly profits need to hold well
above the 15.0 level for the next several quarters, as that is the
low end of a broad range trend band in force for over 20 years.
I dwell on this because if it looks like yearly profit growth is set to
slow from 8.5% on average to a lower rate, then investors will
ultimately adjust the index price until the dividend yield is
high enough to offer an attractive rate of total return. I bring
this up now, because many corporations have already done so
many of the tasks that can reasonably be done to enhance

It has been my view that the recent sharp decline in stock
prices has not been irrational, but has been a reaction to a
fast turn for the worst in the outlook for profits in the months

Thursday, October 16, 2008

Stock Market -- Technical

High instability and volatility has made a mockery of my attempts
to analyze the technical standing of the market. A rally did start
right in the middle of the timeframe where I expected one to
start, but we got up 25.7% on the SP 500 trough to peak over
3 trading days -- Fri. through Tues. -- followed by a steep fall and
then another push up today. The 25.7% move was a good year's
work, never mind 3 days. The market remains deeply oversold,
but the lack of stability has so far made it worthwhile for only the
most astute day traders. The market may need up to a good 5-6
trading days to sort itself out as to short term direction.

Wednesday, October 15, 2008

US Banking System & Liquidity

The banks have expanded the book of interest earning assets by
10% over the past year. If a credit crunch has been on in this sector,
you could fool me. The crunch as it were has come in the primary
capital account, which, despite $ billions in new capital raised, has
grown by only 5%. Large increases in loan loss reserves have
greatly impeded capital growth as has a reduction of fees earned
because of sharply reduced deal flows. The suppression of growth
of capital has reduced bank liquidity sharply at the margin (the
ratio of Treasuries to C&I loans has increased substantially). With
the economic downturn deepening, loan losses will remain high,
and, since bank stocks are trading at very depressed prices, capital
was set to be starved further. Hence the gov.' s $250 billion "bail
in" via the acceptance of 5% preferred stock from the banks. This
development will increase system primary capital by more than
20% and will add immediately to bank liquidity. The feds have gone
for a large expansion in bank capital because they know there are
further loan losses ahead, and they want to keep the system
more liquid and able to grow.

Bank holding companies and their various up and down stream
conduits relied heavily on the commercial paper market to fund
mostly real estate, but, deal transactions as well. The paper market
in financials has declined by more than 35% or $800 billion over
the past 15 months. With this source of funding mainly closed off,
you can again see the gov. thinking on capital infusions and the
need for the Fed to make a market in commercial paper.

Banks have been tightening lending standards and with a weak
economy, private sector credit demand has fallen off. So, it will
be a while before we see how efficiently the system functions with
its new supports.

Over the past 6 months, my boad measure of credit driven
liquidity has increased at a paltry 0.8% annualized. To counteract
the freeze on liquidity, the Fed has moved to add well over $600
billion to its own balance sheet to liquify markets. As I warned in a
number of prior posts, the Fed took a huge gamble in withholding
net liquidity infusion for so long.

The Fed's action is a plus for the economy a bit down the road, but
viewed long term, this massive infusion of liquidity will be
extraordinarily destabilizing to the economy and the capital markets
if the Fed does not begin liquidating massive amounts of securities
as soon as it conveniently can. With the economic challenges the
US faces in the short run, the threats from a grossly expanded
Federal Reserve balance sheet should be viewed as a critical "memo
item" on your checklist.

Friday, October 10, 2008

Stock Market & Panic Of 2008

Stock Market
It was a mild down day in the end. But there was a trough to peak
swing of 1000 Dow points during the session. Thus it is that
traders have a strong interest in this deeply oversold market. I
try to observe the rules of the classic Sicilian trader: Never disclose
your positions or intent, and never offer advice. However, with
option premiums so high, some traders may well buy and write
against their positions. These fellows are acquiring downside
protection and income and if they go a little out of the money, they
may not care if positions are called away. A mere passing thought.

The crash in the market reflects the fact that investors have been
lowering expectations for profits and have been doing so in a rapid
manner. Not irrational action in my book since it could well be that
earnings may prove disappointing for this quarter and for Q1 '09.
However, further dramatic downside action in the days ahead
might be evidence that bearishness is getting ahead of itself.

The Panic Of 2008
There are new nostrums to end the panic in the air -- having
central banks guarantee international interbank lending and using
taxpayer money to buy equity positions in banks to bolster
primary capital directly. The first looks awfully unwieldy and I
regard the latter -- direct investment -- exceedingly dimly.
The ability of governments to manage properly a program such as
this over time seems heavily in question (Think post office and
FEMA). The Fed and the Treasury have so many $ irons in the
fire already, that it is reasonable to wonder how easily they can
unwind these programs in the future without causing further
dislocation. I also remain very wary of allowing lame ducks in the
US so much leeway in their closing days. But the tinkering will
go on.

Thursday, October 09, 2008

Economic Indicators

Long Term Indicators
This indicator set started turning negative over the course of 2004
and bottomed in terms of breadth in October, 2007. Since then, it
began to inch along positively, and turned robustly positive over the
summer of 2008. The timing of economic turns is hardly precise, but
the best guess now is that the domestic part of the US economy will
enter recovery mode in the spring of 2009. In turn, I would have to
rate the development of a cyclical bull market in stocks as still a
couple of months away based on long term considerations.

Looking at the key indicators -- short rates, trend of monetary
liquidity and inflation potential -- I have a number of questions about
the strength and durability of a US economic recovery, but I will
hold off on those until we are further on in time.

Shorter Term Lead Indicators
The weekly indicator sets peaked in mid-2007. They fell sharply
into the early spring of 2008, whereupon they bounced up in lieu
of the tax cut stimulus package. The economy held up far better
than the indicators suggested they would in view of strong and
rising export sales, superb inventory management by business and
the aforementioned stimulus package.

The indicators turned down again sharply in June. The stimulus
package proved only a temporary fix, and with real final demand
falling more broadly, supply managers could not keep up, and
wholesaler inventories bumped up. We are also now seeing a
weakening of orders of manufactured goods for export. These
developments plus the emotional shocks stemming from the
financial panic suggest further deepening of the downturn in
the US ahead.

Economic Power Index
This index is deceptively simple. I add the yr/yr % change of
real earnings to the yr/yr% in total employment. Declines of
2.0% or more are consistent with the development of severe
downturns. This index dropped down into the -2.0 to -2.5 %
range during the Sept. quarter, reflecting a negative real wage
and accelerating job loss (1 million jobs lost in 12 months). Now
with inflation receding, I expect some improvement in the real
wage in the months ahead, but the weakness in this index is
sobering. Moreover, with banks tight on lending across the board,
the power index assumes more importance as it cannot easily
be offset by heavier leveraging.

So, the indicators say it could be a hard go for a good several
months. Hence the bearish comments from Fed chair Bernanke
and the speedy 50bp cut in Fed Funds to 1.5%.

Tuesday, October 07, 2008

Stock Market

Well, the panic has extended to the stock market. Its recent
descent has turned closer to vertical, but the reaction has not
been irrational. As discussed in the last update on fundamentals
on 9/23, the SP 500 Market Tracker had fallen to a value of 1025.
At that time, the SP 500 was trading at a whopping 17% premium
to this measure of fair value. Then, investors were looking at
80.0 annual earning power for the index vs. roughly 68.0 for the
12 months through 9/08. With a suddenly deepening downturn,
investors have lost confidence in the 80.0 number and have pushed
its realization further out in time.

All of my earnings indicators have been weakening as US production
has been falling as well as have industrial price realizations. This
suggests more earnings disappointments across an array of sectors.
On the plus side, my inflation thrust indicators have sunk rapidly,
so the Tracker p/e multiple will start to be adjusted upward. The
Tracker needs fresh data, but for now, I am going with roughly
1000 for the SP 500. So, I have the market now trading at fair
value, with no premium for a quick return up in earnings.

As outlined in the 10/4 technical look post, I am on the hook as
calling for a substantial and tradable rally to start sometime over
the next five trading days. That would befit the market's very
oversold position. This "call" is based on six week breadth
indicators that have proven reliable over the years. So, I'll go
with that. It won't be nearly as helpful a call if the rally comes
within the next five trading day timeframe but from much lower
levels. But, I'll take it anyway.

Saturday, October 04, 2008

Stock Market -- Technical

As most technicians will tell you, the stock market is now
substantially oversold. As a guess, we are due for a rally of
several weeks duration to begin either this week or in the early
going next week. My selling pressure gauge -- a moving average
of NYSE decliners -- is near strong oversold levels. This one has
worked best in the decline since autumn '07.

It is still too early to tell whether this is a routine cyclical bear
market or whether something more serious is afoot. If one were
to allow for a rally over a few weeks in the short run, there
could well be another sell off that carries the SP 500 (1099 10/3
close) down to around the 1000 level by the latter part of
November. That would represent a nasty enough cyclical bear,
but if we put in a 1000 low seven weeks out, the chart would
give even odds it was a good bottom that would hold. For now,
I think it is reasonable to re-visit the issue then before delving
into darker scenarios.

Looking right ahead, the technicals suggest to me development
of a decent, tradable rally over the next 3 - 7 trading days. If a
rally does come along, I would note that traders have been
getting very edgy once the SP 500 gets about 2% above its
25 day m/a. That would put a provisional top in around the
1225 - 1250 level.