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, December 29, 2009

Stock Market Fundamentals -- Indicators

Looking at 2010, most projections I have seen fall in a range of 1150
to 1350 for year's end. My SP 500 Market Tracker has the "500"
winding up next year somewhere between 1235 - 1300, depending
upon how strong recovering earnings may be. I do not a have major
issue with the Tracker projection as of now.

Core indicators -- monetary liquidity measures, market short rates,
confidence measures and the trend of lower quality investment
bond yields remain positive. So, I am still on a fundamental buy
signal. As the economy recovers, I doubt all the measures will
remain positive over the course of the year, so I look for a time
when the market will transition from an "easy money" buy signal
to a market more suitable for traders with time horizons that may
run out to a year.

My earnings indicators remain strongly positive as we move into
2010. The market tends to do well when earnings are accelerating
on a 12 month basis relative to the long run trend. Companies have
taken out enormous sums of cost, so earnings operating leverage
should remain strong, even if top line growth is moderate.

I am less confident about two key secondary indicators. One is
the oil price. The real oil price rose sharply over 2009, and petrol
prices rose accordingly. The impact of such on inflation was clearly
muted by a large decline in natural gas cost for heating, processing
and cooking. Pricing in the energy complex represents a key area
of uncertainty for the stock market in 2010. The other measure is
the degree of excess liquidity in the system. The economy is
expanding now and the broad measure of credit driven liquidity is
still in decline. Excess liquidity is winding down and could disappear
by spring 2010 unless private sector credit begins growing again.
The stock market rarely progresses strongly for long without a
liquidity tailwind, as the real economy normally outbids the market
for liquidity. We saw a situation like this in 2004 when real growth
outpaced liquidity in the early phase of expansion. Situations of this
sort are far more common in the latter stages of economic expansion
when inflation pressures arise and the Fed starts trimming credit.

Saturday, December 26, 2009

Stock Market Fundamentals -- Valuation

S&P 500 Market Tracker
This method of valuing the market rests on very long term ties
between earnings, inflation and the market's p/e ratio. The Tracker
has the SP 500 valued at 950 - 960 to wind up 2009 and at 1235 -
1300 to wind up 2010. With the SP at 1126, it is clear the market
is looking well into 2010 and is discounting continuing sharp eps
recovery. As I will discuss in the next post, the earnings indicators
do support handsome recovery next year. Readers should know that
the market will often trade at a premium to the Tracker in the
early stages of earnings recovery / expansion and that intervals of
this sort with the market at a premium can last two or so years.
The current premium over the Tracker value is nearly 18%. That
represents a sizable spread and points to significant price risk if
there is a conservative turn in investor psychology. For the record,
the Tracker did hit a cycle low of 655 for the "500" last spring
as earnings were bottoming. It matched the lows.

Valuation -- Digging Deeper
The market is discounting a return of earnings back from extremely
low levels to the very long term trend.

Investors are pricing in a sharp improvement in $ dividend payout
and expect solid earnings and dividend growth over the next 5 - 7

Investors are aware that the SP 500 has been moving over the
years to a much higher earnings plowback rate as corporate
managers have acted agrressively to accelerate profit growth. But
the p/e ratio implied by a high 65% earnings plowback rate is well
above what investors are willing to pay. Earnings growth has
accelerated since the latter 1980s, but earnings have become far
more volatile. Moreover, CEO interest in maximizing short term
earnings results has greatly fattened executive pay, but has
penalized the incomes of the rank and file and has done nothing
to add to shareholder value for over ten years. Sloppy returns on
assets deployed has led to heavy intermittent cuts in headcount
and wages to boost productivity and profit margins. True, the
development and growth of low wage emerging economies has
hurt US corporate pricing power and return on assets. Even so,
concentration on cost cutting in preference to wiser asset
management has left too many companies writing off too much
asset value and disgourging too much headcount when business
turns down. Finances within the market tell me that wiser business
asset management and higher and more stable dividend payout
would provide a less volatile and more satisfactory earnings and
market performance.

Cost cutting in the area of 25% plus moderate growth next year
could lead to a 15% return on equity for The Sp 500. A high
earnings plowback rate of 65% would imply sustainable growth of
nearly 10% in earnings over the long term. The global economy
will not support such ambition and continued CEO focus on labor
productivity to the exclusion of wise asset management will lead
to further squandering of resources that would best be dividended
out to shareholders.

In summary, investors are pricing in a standard economic recovery,
but are not now willing to pay a premium for aggressive asset
and resource management going forward and for good reason.

Wednesday, December 23, 2009

Stock Market Quickie

Volume has been light for a good several weeks now, and with the
year end holidays upon us, has dropped off about 50% save for
the recent options expiration. The light move up reflects year's
end window dressing by institutional and funds managers, with the
full panopoly of tricks on display (you own 100k shares of smaller
cap XYZ corp and you play in another 1k shares bid higher so you
get an extra 1/8 on your full position etc.).

I plan to do full profile fundamental and technicals on the market to
benchmark us before year's end and will post shortly.

Friday, December 18, 2009

US Dollar ($USD) -- Technical Note

The recent rally in the dollar continues on. The buck has come
up through its 10 and 25 day m/a's and both averages have turned
up to confirm the trend. MACD is positive and I like the ADX
reading which shows a positive turn and rising momentum. Chart.

However, do note that the dollar is now approaching overbought
levels on the RSI measure. I think that soon we'll see how sincere
this contra-seasonal move up in $USD is.

Financial System Liquidity

The Fed continues to make sure that narrow measures of monetary
liquidity grow. This remains essential to underwrite the early phase
of economic recovery. Since I think the Fed ought to maintain higher
levels of monetary liquidity in the system through time, I remain a
cheerleader here. The broader measure of credit-driven liquidity
(about $13.8 tril.) has yet to sustain growth from month-to-month
and is about 0.7% above year ago levels. This performance reflects
the continued roll-off of private sector credit demand and the
spectacular collapse of the shadow banking system and hence the
commercial paper market.

Flat funding for credit is not a major issue in the early stage of an
economic recovery, because businesses can fund operations via
internal cash flow. Moreover, in the current situation, mortgage
demand in the residential market is only beginning to show a little
improvement. However, as 2010 progresses, it will become
more important for the credit markets to loosen up to provide
more funding of a rising level of economic activity. This will not
be as easy a process as in most past cycles, since there are a
number of banks still posting higher loss reserves from loans
made over 2005 - 08, and this constrains both capital and

When bank credit is damaged as badly as it has been, the chief
credit officer at banks has the CEO's ear and can hold the
loan officers at bay and under control. He rules the roost. But,
as an economy expands and inquiries rise from decent credits, the
commercial side of the bank gradually regains power and $ finally
flow. Smart CEOs keep the chief credit person in play as a
consigliere once the commercial guys swing into action.

There has been a sizable amount of excess liquidity in the system
relative to the needs of the real economy. With recovery and
with no discernible growth trend in system liquidity, excess
liquidity is receding and could disappear for a spell by late
winter, 2010. That would remove a substantial support factor
for the stock market and could leave it vulnerable to a price
correction, especially if investment portfolio cash levels are low
(they are). So this is something for stock investors to watch
for early next year.

Wednesday, December 16, 2009

Monetary Policy & Short Term Rates

It was steady as she goes today from FOMC. No surprise. The
economy is recovering and the deterioration of the job market is
ebbing, but my key benchmark policy indicators do not suggest it
is time to raise rates. In fact, two of the indicators -- capacity use
rate and my short term business credit supply / demand gauge
remain well in the red. The latter, the pressure gauge, can turn on a
dime, but for now it is still showing weakening demand.

My cyclical model for where the 91-day T-bill should be, based
on super long term historical data, puts the rate in a range of 1.0 -
1.5%. As we move into 2010, the model will lift the value to 1.5%.
So, The Fed's ZIRP is behind the curve and points to the Fed's
conviction that inflation poses no problem in the early stage of the
recovery. Just so you know how accomodative the Fed is being,
consider that the long term model for the bill rate with capacity use
"neutral" at 80% is 4.5% (US operating rate now just 71.3%).

You should remember that even though the CPI is 1.7% below its
mid-2008 historic peak (still deflation), we now have the CPI up
1.8% yr/yr, and the inflation thrust indicators remain in a positive

Monday, December 14, 2009

The Banks & Their Fat Cats

System capital has improved over the past year, although most
of the increase reflects the net addition of TARP funds to the
system. On a "quick" basis, banking system liquidity is also
improving, as commercial loans roll-off rapidly against Treasury
holdings. This is a normal development after a deep recession
and primarily reflects weaker business loan demand. It is no
exaggeration to say that US based businesses have lost up to
$2 trillion in gross sales globally during the recession, and that
means a large reduction in working capital financing needs.

The banks' loan / lease book expanded in November after months
of decline. There was an uptick in the residential mortgage
portfolio to reflect higher home sales in the US. Still, loan / lease
footings are down 6.5% yr/yr, as C&I loans to business have
dropped by nearly 17.5% yr/yr. Bank loan loss reserving is still
growing, albeit at a more modest pace. The system loss reserve
account has topped $200 bil., or 16.5% of gross capital.

The system is repairing slowly. Bankers are no longer friendly
and it is understandable that credit standards have tightened
further when you consider that loan losses are still rising. With
business sales only beginning to recover, and with excess housing
inventories still being worked off, the economy does not yet
need robust development lending by the banks.

Relative to a sensible long term trend to include 3% inflation,
the loan / lease book of the banks was $1.5 tril. on the high
side in 2008. It is now half that amount.

The Fat Cats
Attacking commercial and investment bank compensation
programs has been a fine, populist sport for nearly two years
now. The programs that were volume or production based were
exquisitely dumb as they gave bankers the green light to put
their firms capital at risk in pursuit of higher comp. Plans will be
subject to regulatory review going forward.

Their are a lot fewer bankers around these days upon which to
lavish bonus money. If you are into attack mode on the comp.
issues, you might keep that in mind.

Even so, when one gazes at the shrinkage of the asset base of the
system, the still rising loan and securities losses books, and the
fact that TARP money has underwritten cash flows for many
banks and IBs, you have to admire the insouciance of a number
of the guys who are still standing. This issue is not going away
soon, and it will be interesting to see just how the Fed and other
regulators will treat bonus plans going forward.

Friday, December 11, 2009

Stock Market -- Be Careful With The Ho-hum

The market has been in a period of substantial price compression
for a month now. It has grown so tight that bull vs bear efforts are
perfectly balanced. Easy to go to sleep on the job. What's worse,
price compression can easily last another month or so, although the
bull vs bear balance may grow more imperfect. But, price com-
pression periods usually lead to major price action when they
break. I think it is very difficult to call the direction of these breaks,
and I know from experience that you can get head faked when the
break comes, because there can be occasions when the first few
days belie the eventual direction. In short, if you are trading, it
can be a frustrating period. But, know that there is action ahead.
SP 500 chart shows the compression.

Thursday, December 10, 2009

Inflation Potential

The broad CPI made an historic peak of 220.0 in 7/08. Then,
deflation set in and the CPI made an interim cyclical low of 210.2
in 12/08. Since then, prices have risen. The CPI hit 216.2 in 10/09.
Still, this latest reading is below the all - time high by 1.7%. So,
even though the economy is inflating here in 2009, we are still
in a deflationary period, and will not be out of it until the CPI takes
out the 220.0 all-time high.

Now, the markets closely observe inflation momentum on a trend
basis. Inflation often restarts even after a severe recession period,
and for now, the shorter term trend is for more inflation when
measured yr/yr. My inflation thrust indicator, which fell the
most steeply in many years from mid- 2008 through mid- 2009,
is now rising quickly and suggests the inflation rate is going positive
yr/yr now and that it will reach around 3.0% on a 12-month basis
through 1/10. A broader cyclical measure I follow from the
Economic Cycle Research Institute turned up early in 2009 on the
first signs an economic recovery may develop. It has moved up
rapidly and is also signalling a crossover in the CPI% yr/yr from
0.0% to a plus reading.

Looked at month to month, my pressure gauge is losing positive
momentum, reflecting a slowing in the progress of recovery in
commodities prices (chart). In fact, the CRB composite shown in
the chart is now "stuck" in long term resistance zones of 265 - 280.
Now without a fresh surge in commodities, any advance in the CPI
through mid - 2010 is likely to be tepid, and the old 220 high would
stay safe for a good several months. There is too much slack in
the US economy to expect a more rapid rise of inflation pressure
without another strong surge in fuels and other major commodities
sub-groups. It would be easy to question whether inflation would
be more than very mild except that there are two newer forces
to contend with: The growing importance of China and its satellites
as an industrial power, and the much heavier influence of pure
financial speculation in the commodities markets (viz. the oil price
bubble of 2007 - 08).

So, commodities will remain the key variable in the inflation
outlook. For now, it looks like expectations in these market sectors
have grown more subdued. But, let's not kid ourselves. Speculative
interest in fuels and other commodities loops back into the
economy just as readings of the economic indicators can feed into
speculative interest in commodities. So, you have to watch both
processes carefully in assessing the inflation outlook.

Tuesday, December 08, 2009

Oil Price

A bump up in the weighted exchange value of the US$ has helped
nudge the oil price into a more normal seasonally weak interval.
AT $80 bl., the price was fabulously overbought. Then it was
trading at a 33% premium to its 40 wk. m/a, when a good rule of
thumb for traders is to be wary of any commodity that trades at
a 20% or more premium.

My view has been that autumn seasonal weakness could take oil
down to $65. Its decline so far has been so tortuously mild that
one is hard pressed to say with confidence that it could slide
another $8-10, especially since the bulk of the big overbought
has been relieved. But I would also note that the 12-26 wk MACD,
which does not whipsaw often, has turned down. Chart.

In my view, it is difficult for the US economy to expand at its
potential when the real price of oil is rising rapidly. Advances in
oil of this sort are short-term inflationary, push the Fed to tighten
credit and punish the real wage, as wages are far less elastic than
the price of oil currently. Unstable oil and petrol prices also
create uncertainty for businesses and households facing capital
investment decisions. Now, it is true that the oil demand to GDP
ratio has come down over the years, but that salient factor can
be outweighed over the shorter run by booms in the oil price.

Interestingly, my longer term log scale chart (weekly) has oil on
a fast track to $150 bl. by the end of 2010. That, or anything
within hailing distance of it, would be disastrous for the broader
economy. At present, basic supply / demand for oil hardly
warrants a $75. price. So I am expecting oil to break down from
the current upsweep and settle into a far more modest path, lest
chances for a continued path of economic recovery are imperiled.

Friday, December 04, 2009

Economic Indicators

Weekly Leading
Both sets of weeklies resumed advancing in Nov. following brief
respites. They remain strong, continue to signal a "V" recovery
and point to growth out through Q1 2010.

Monthly Leading
the momentum of the breadth of new orders for businesses has
leveled off. The indicator did make a slight cyclical high for Nov.
It is solidly positive but is well below boom levels. "V" pattern
is still indicated.

Business Strength Index
This indicator is well off its lows. Now in the 123 - 125 area, it is
still below the 130 - 140 threshold that normally marks a turn
toward tightening by the Fed. The weakness here is in capacity
utilization %.

Economic Power Index
This index declined sharply in Nov. as the yr / yr rate of inflation
cut into a declining rate of salary growth. Real wage growth could
flatten or turn slightly negative through early 2010. The
employment momentum part of the index improved markedly
last month as there was a mild gain in total civilian employment
after months of deep decline. The bottom line here is that basic
consumer purchasing power remains increasingly dependent on
automatic fiscal stabilizers and fiscal policy initiatives. The
favorable change in employment momentum is a good sign that
needs to carry through further in the months ahead. The rise in
oil and petrol prices through 2009 has undercut the recovery.

Economic Slack / Pent-up Demand both remain sizable
and form the base for a lengthy period of recovery.

Other Current
The depth and persistence of inventory liquidation did catch me by
surprise. A normal cyclical swing off current levels could alone add
1.5% to GDP over the next year.

The home purchase tax credit is helping to clear excess inventory
in the housing market. Mortgage purchase applications dropped
recently, so the inventory clearing process could slow in early 2010.

Long lead Indicator --US
This composite hit historically high levels in late 2008. It remains
strongly positive, although there has been some slippage in the
wage vs. inflation component recently.

The global indicators are consistent with modest economic
expansion. The readings are far above the low levels seen back in
the depths of the recession, but are not especially strong. The flow
of new orders in foreign economies has lagged the US and I
would rate it as a little disappointing to date.

For a look at a real-time measure of economic activity by the
Phila. Fed, (ADS / BCI) go here. Open the PDFs. The index
does not include the positive employment data for early Dec.
We need to see a reading above 1.0 soon here to confirm that
a decent recovery is underway.

Thursday, December 03, 2009

Economy -- I'm Out On The End Of The Positive Limb

The US has experienced near depression conditions and severe
demand privation over the past two years. There is more economic
or capital slack in the system than at any time since the 1930's.

My reading of US economic history suggests to me that with
powerful monetary and fiscal tailwinds, the US should experience
a strong and sustained economic recovery that can run out at
least 5 - 6 years. Now, naturally it is not like days of yore when
US growth potential was quite a bit higher. I peg that potential at
2.8% growth per annum, but I do expect at least a couple of years
ahead where production grows at 5 - 6% and where employment
gains are strong. I also expect to see the US move from modest
deflation to inflation that could approach 5% on the CPI. Further,
I expect an eventual sharp climb in short term interest rates, with
the 91 day T-bill yield eventually returning toward 5%, and with
that could come a rise in longer dated Treasury bond yields back
toward 6%. That kind of inflation / interest rate framework will
crimp the stock market p/e ratio, but the offset there will be
likely substantially higher earnings.

I expect a return to more stable monetary policy, and I expect a
combination of higher tax revenues and a more aggressive trade-off
posture toward spending priorities will lead to substantial
improvement in fiscal budget balance. If anything, the risk now
is toward premature tightening and creation of fiscal drag. The
struggle in the years ahead to regain better fiscal and monetary
policy balance will increase economic volatility for short intervals.

I think we will remain in an elevated financial risk mode through
mid - 2011, as not even a stronger than expected US and global
economic recovery may be good enough to save any number of
marginal household, business and sovereign credits. For some,
the negative hit to cash inflows relative to debt service already
sustained may be too much to overcome (like Dubai).

I did not expect I would be doing a longer term overview again.
After all, I am no spring chicken. But, we are looking at extreme
low levels of economic activity, and history says that when such
is addressed, the economy eventually regains substantial verve.

The web is overloaded with points of view that would challenge
my simplistic outlook and I have to say part of the reason I
wanted to establish a stronger position was that it would better
enable me to grasp and profit from deviations to plan as I go along.

There, I said it and I am glad.

Monday, November 30, 2009

Stock Market -- Technical

I turned more cautious on the outlook for the market back on 9/20.
Since that time, my internal supply / demand model has run on
the flat side. The model includes a broad unweighted price index
plus the cumulative NYSE adv. / dec. line. Note that with over
3,500 issues now traded on the NYSE, it is basically a small / mid
cap measure.

The SP 500 has done better. It is up about 2.1 % over the same
time frame, and this better performance reflects rotation into
more of the blue chips that may have lagged in the early phase of
the bull run from 3/09. there is also a modest sense of caution as
well since more issues with relatively stable earnings and / or
well protected above average yields have found favor.

Now I have to say that large blue chip indices can easily outrun
my internal supply / demand measure for up to a year or so. Yet,
I do not think it is a favorable long term omen when this happens.
It is also fair to say that a short term disconfirmation of this sort
is not necessarily deadly.

On its own, the SP 500 is in a mild short term uptrend and is
only overbought on measures running out from 14 - 40 weeks.
These are the more important measures, but the situation does
allow positive play in the short run.

NYSE a /d chart.

Tuesday, November 24, 2009

Stock Market -- Niggly Stuff

1. The Value Line Arithmetic Index -- 1700+ stocks, not cap.
weighted ($VLE) -- has been a stock market leader for a decade
now. So, it is with concern that the weekly chart has turned down
and is even sporting a short term head / shoulders pattern no
less. Chart. It may just reflect rather short duration rotation into
large cap. stocks, but it is not confirming the recent SP 500 rally

2. I am also a little disappointed that the NYSE advance / decline
line rallied so close to the prior 2007 all - time high before falling
back. Taking out the old high would have been quite something,
and it still will be if it occurs over the next six months or so.

3. I use a short term price oscillator that I compute daily off the 25
day m/a. Since the upswing started in 3/09, the oscillator has
narrowed, with both overboughts and oversolds getting more
shallow each time out. Within the next week or two, this ongoing
compression is due to zero out. I do not know whether this is
bullish or bearish, but it clearly suggests a fresh trading pattern
is in the offing and that upside and downside momentum may be
less balanced as we go forward. Something to keep in mind.

Friday, November 20, 2009

Stock Market -- Fundamentals

Core fundamentals -- monetary liquidity, short term rates, medium
quality bond yields, market confidence measures -- remain
positive. Earnings indicators are positive, although the weekly lead
measures have started to flatten out. Secondarily, there remains
substantial excess liquidity in the system (a positve), but two other
measures are less promising. Investor expectations regarding the
momentum of economic recovery have flattened out, and the real,
or inflation adjusted, oil price is up very substantially this year, a
development which is an emerging positive for oil production
earnings, but which could prove a negative factor for economic

Y/End '09 net per share currently looks to come in around $56.50
for the SP 500. My Market Tracker gives those earnings a value of
about 940 for the index. With the SP 500 now around 1090, the
premium in the market is 16%. This is a substantial premium, but
is not an unusual one for the early stage of economic recovery, when
the market does tend to run ahead of the fundamentals. However,
the premium does imply smooth delivery of higher earnings as the
economy progresses, and is vulnerable to widely perceived
perception that the recovery in profits could lose momentum.

So, despite strong core fundamentals, there is risk in the market
since the leading weekly indicators are taking a breather and since
the recent flagging of interest in cyclical stocks reflects flickers of
recognition that the forward view suggests some moderation in
growth momentum.

The SP 500 Market Tracker based on long term trend earnings of
$75. per share for 2009, stands around 1240. Because costs have
been slashed strongly, index earnings for 2010 could approach this
level on a moderate gain in sales. But keep in mind that SP 500
book value fell more than 15% peak to trough through the
recession, so that $75. in earning power would represent a strong
return on book equity of 15.6%. In short, if earnings could reach
$75. next year, that would represent a formidable development.

Wednesday, November 18, 2009

Gold -- Good Luck With It

Gold entered a price mania in early 2006. There have been frothy
price moves up in 2006, 2008, and again this year, when gold
closed above the $1100 oz. mark. By my analysis, we have not yet
seen a classic bubble in the price. Gold is now strongly overbought
and we have witnessed a parabolic price move up over this decade,
but a classic bubble would suggest that gold close out 2009 at
precisely $1500.

There are plenty of players in the gold market who see a bubble as
a classic and fitting climax to a lengthy period of strong global
liquidity growth and profligacy in the management of monetary and
fiscal policies. And they are playing the market on the long side for
a bubble that would take gold to $1500 oz. or higher on signs that
excessive monetary and fiscal policy point to a greater debacle. The
clincher for the bubble bulls is their belief that even though the
globe's central bankers and budget managers see the risks of
perceived continued profligacy, they will ultimately ignore them or
act only in the eleventh hour under duress.

I have to confess I no longer possess the interest or talent for such
grand thinking. I follow a more humble / bumbly road that usually
brings me out close to the truth, but hardly in leaps and bounds.

For now, suffice it to say gold is strongly overbought, but should this
current frothy period continue into 2010, gold could be pushed to
$1265 oz. before a correction of up to 25% could take the metal
back down to the $950 oz. area by spring. How's that for winging

I do not play in markets I consider overvalued, with the exception
of the Treasury market where price behavoir is more predictable.
Going forward, I am going to pay less attention to the gold market
until its vulnerability become far more apparent. Frothy markets
are dangerous to short because they can get more frothy and
bubbly. For a long in gold, I would be looking for $600 oz. At this
point, I suspect at least a few readers would say: "Yeah, good luck
with that."

Long term gold chart.

Friday, November 13, 2009

Stock Market Comment

The market has done a bit better than I expected over the past
couple of weeks, and it is tougher to make the case that a classic
price consolidation is underway. The major concerns I have had
since mid - Sept. have been the 60% + move and whether there
could be a shakeout when the momentum of the leading economic
indicators begins to slow, as has happened over the past month.
Evidence of the latter concern does not yet appear to have
shaken the market as it has pushed irregularly higher recently.

I am still a watcher from the sidelines from a trading perspective.
The market is about 17% over its 40 wk. m/a, and the MACD
intermediate term reading -- 12 weeks plus -- is nearly as high
as it was during the major topping process of 2007. As well, the
SP 500 has priced in solid earnings (and sales) recovery through
mid - 2010. No outrage here, but we all need to recognize that
the early phase of profits recovery is "in the price".

I plan a detailed market fundamental update for next week.

Thursday, November 12, 2009

Gold -- Overbought Developing

Gold has been on a tear since taking out the $1000 oz. resistance
level. Given the much increased volatility of the gold price since
2005, you have to be ready to encounter the occasional dramatic
overbought / oversold condition in the market, and you need to
allow some broad parameters to be breached before the odds favor
a trade in or out.

At present, gold could probably move to $1140 - 1150 oz. before it
becomes extremely overbought in the shorter run. But, the recent
spike up in price has moved the metal into overbought territory
nonetheless, so if you play this market extra attention may be
required over the next week or two.

Chart for Gold Trust shares.

Tuesday, November 10, 2009

Financial System Liquidity & Policy Risk

System liquidity improved in October on both fronts -- money
& credit. The narrow base of money liquidity (cash & checking)
has been growing strongly since mid-2008 and no doubt helped
to arrest the economic free fall. But, by my analysis, the US
economy is still running a cash shortage of nearly $100 bil. This
is a big improvement over the nearly catastrophic $300 bil.
shortfall that was evident in mid-2008, but I think the Fed
would be wise to allow significantly more cash to flow into the
system through 2010.

The much broader measure of credit-driven liquidity did show
some improvement over the past 2 months, as financial firms
now seem to have better access to the commercial paper mkt.

Banking system liquidity has improved from negative to
adequate, as Treasury holdings have increased and commercial
loans have run-off. The boost to balance sheet liquidity is a
necessary building block to sustain economic recovery down the

Banking system capital remains constrained, but it is starting to
look like the worst of the loan loss reserving is past (Reserves
now total about 16% of capital).

Policy Risk
When the Fed loosened reserve requirements in 1992 to make
it easier for commercial banks to absorb a bevy of troubled
S&Ls, Greenspan failed to re-impose the standards after the
transition was completed. This left the banks with an array of
no and low reserve requirement deposits to fund operations and
reduced Fed control over the banking system. Bernanke also
passed on taking up this challenge.

Monetary policy has thus become grotesque -- drain cash in
a voluminous manner when credit surges, and then belatedly
rush to add cash to the system when credit stalls and falls. The
policy of raising or lowering rates in small increments has only
made the process worse. What the Fed must do going forward
is maintain a much better balance between cash and credit in
the system. The obvious choices are to broaden reserve
requirements and to move more dramatically in changing the
Fed Funds rate.

I have discussed this issue in detail several times since I began
this blog in 2005. Now, the Fed faces one of its largest
challenges ever -- managing a bloated balance sheet down as
the economy recovers. There is a large non-borrowed reserve
position in the system, so maybe the Fed can use deposit rates
to manage this position down in lieu of new, tighter reserve
system rules. We'll see.

The challenge has not been tried before, so elevated risk is
involved. The best outcome for the Fed would be to be more
decisive in raising rates and to maintain a better balance
between cash and credit in the system as the economy
recovers. Given the 2 credit tightening debacles we have
seen over the past 10 years, I would strongly favor tougher
reserve mangement and an end to "baby step" rate changes.
These two steps might ameliorate the need to boom and bust
the cash mangement in the system and provide for more
stability in the execution of policy.

Friday, November 06, 2009

Economic Indicators

Leading Indicators
Both weekly and monthly indicators remain positive, although
there has been modest loss of momentum in both categories. The
leading indicators are still signaling a "V" economic recovery.

Business Strength Index
This index has rallied strongly since early 2009 and indicates
economic output has turned positive. The Fed prefers to tighten
credit when this index rises up into a range of 130 - 140. Current
reading is 126.7.

Economic Power Index (EPI)
The index is built off wage and employment trends. The news is
not good here. After historically strong performance over Half 2
' 08, the real wage is now running a more subdued 2.4% yr / yr.
The job market is weak, health care insurance premiums have been
strongly boosted and deflation has subsided yr / yr.

Much worse, total civilian employment continues southward, and is
now down a hefty 4.4% yr / yr. From the late 2007 peak, 5.7% or
8.4 million people have lost their jobs. This puts the EPI at a weak
-2.2% through 10/09. The low yr/yr EPI reading contrasts with
the broader real disposable income measure of +0.5% for the
comparable period and shows you the importance of tax cuts,
higher gov. spending and the automatic stabilizers in supporting
recovery from the income side.

From a micro perspective, the stock market has rewarded earnings
rebounds from harsh cost cutting by pushing up company share
prices. From a macro perspective, this policy is proving injurious
for economic recovery potential as incomes and purchasing power
are being eroded at home. Moreover, without a turnaround in
hiring, there will be pressure for another sizable gov. stimulus
program to counter the growing weakness of employment.
In the short run, companies are pleased with an abnormal surge in
productivity growth, but in the long run, the economy and the stock
market will suffer without stronger employment. Smart micro,
dumb macro. Employment link.*

Capital Slack Measure
This is a measure of the degree of idle resources in the economy.
It incorporates plant utilization, idle worker levels and interest
rates. This measure is at its lowest since prior to WW 2, and
reflects the depth of the recession experienced.

The global activity and leading indicator measures are up sharply
in 2009, and very much mirror the US experience. The indicators
suggest the global economy bounced from deep recession mode over
Half 1 '09 and moved into recovery mode in Aug. Progress on
employment abroad has been much slower than the recovery of
* If link does not hold up, go to bls.gov employment series for
total civilian employment.

Thursday, November 05, 2009

Monetary Policy

As was widely expected, the Fed has left policy unchanged. ZIRP
stays. The economy has turned up, and the breadth of businesses
reporting higher activity levels has risen sharply, especially in
manufacturing. The monthly data is volatile, but the economy has
cleared the first hurdle toward a decision to boost rates. However,
plant utilization is a full 10 percentage points below levels where
the Fed generally raises rates. The Fed is thus holding to the
historic view that much higher levels of resource utilization are
required to warrant a firming of monetary policy. As well, my
short term business credit supply / demand balance is very soft
as loans continue to roll off the books in reponse to much lower
working capital needs. This can continue, as businesses often
generate sufficient internal cash flow to handle early stage
recovery needs. My yr / yr measure of broad credit driven
liquidity is still down in % terms. Thus the Fed and the Treasury
remain the primary providers of increments to liquidity in the
financial system.

With the CPI at a + 2.6% annual rate through Sept., real short
rates are negative and continue to be hosed. Thus the US dollar
is losing purchasing power at home. For now, the Fed, in moving
to liquify the system and keep interest rates low, is running well
behind the inflation curve.

Pundits have made much of the postive slope of the yield curve
and how it, through a positive cost of carry, as well as the ZIRP
policy, are funding a recovery of asset values. This is a normal
cyclical development, and the liquidity available for asset
speculation will dry up as the real economy recovers and claims
additional liquidity. In fact, you have to be careful with this since
financial liquidity, when measured broadly, has been contracting.
This means that as the economy improves, the velocity of money
is rising from low levels and that excess liquidity is contracting from
high levels. Talk of "asset bubble" conditions is decidedly early,
to say the least.

Tuesday, November 03, 2009

Stock Market -- Technical

The market has entered a short term correction, but it has not
weakened enough to change it from a consolidation phase into a
more vulnerable one. The correction is indicated by breaks of
the market and its 10 day m/a below the 25 day m/a and the fact
that the 25 day m/a is starting to roll over (See chart link below).
The SP 500, now 1045, would fall out of consolidation below short
term support of 1025.

The market, on my measures, is only modestly oversold at current
levels, and would need to fall to the 1010 - 1020 range to give a
stronger, more respectable oversold reading. That range would
also be equal to a 7 - 8% correction off the 10 /15 rally high of
1097 (closing). An 8% pullback represents a goodly shorter term
correction in a cyclical advance.

Since the market has broken its uptrend line from 3/09 and since it
failed to take out trend resistance dating back to the '2007 highs,
we have a situation that commands attention.

I would also note that I have a sell signal from my smoothed 40
wk. oscillator, which went definitively positive in mid - March ' 09
and stayed that way until this past Fri. This indicator can whipsaw
like any other, but long experience says a change in direction is
well worth attention. This is a momentum oscillator which puts
weekly closes against the 40 wk m/a and which is smoothed out to
13 weeks.

I will happily concede that the market can confound the short term
situation by swinging back into rally mode, but my work is now
flashing amber or caution.

Looking long term, this upleg since 3/09 represents one of the
more powerful 6 - 7 month advances in history and the market
today is trading well above levels indicated by a more typical
cyclical advance. From a historical perspective, it is wise to
figure that this powerful upleg will transform into a more normal
one at least for a while, but just how that situation may eventuate is
something that one can probably only guess at. I have been thinking
that there could be another leg up to the current advance before a
more rugged correction takes hold, but that awaits resolution of
this current cautionary period which I have been looking for since
mid - Sept. '09 (See 9/20 post).

Sp 500 chart.

Saturday, October 31, 2009

Economic Momentum Expectation Measure

The relative strength of the MSCI Cyclicals index vs. the broader
SP 500 gives a good insight into investor expectations for the pace
of economic growth ahead. Chart.

$CYC relative strength turned up with the market last spring and
has vaulted back up to the historic long term high range. So, we
are seeing technical resistance and the possible beginning of a
cooling in growth expectations. The $CYC RS line does fit well
with the weekly leading economic indicator sets in that they are
flatlining in the short run as well.

The chart shows a slight break of short term support for $CYC RS
and it thus raises the question of whether portfolio managers are
at the early stage of thinking through whether rotation into more
stable earnings prospects companies might be appropriate. Keep
this yellow flag in mind re: cyclicals.

Back on 9/20, I turned cautious on the shorter term outlook for
the stock market and decided to take a trading holiday for 6 weeks
or so. I mentioned then that positve earnings surprise for Q3 ' 09
might lift stocks higher in the interim but that a period of either
consolidation or correction probably lay ahead. We got the bounce
from earnings as expected and we are now seeing some weakness.
I'll pick up more intensive coverage of the broad market again next

Tuesday, October 27, 2009

Gold Price

As discussed in the last gold post on 9/10, I pointed out that the
gold price needed to take out key resistance at $1000 oz. to hold
the uptrend in place since 10/08. This it has done.

The gold price was rambunctiously up over Q1 '09, but it could not
hold that action and has since settled into a more stable uptrend.
The negative price action of the past few days has taken some of the
froth off the market, but gold has not been dizzyingly overbought
now since a brief stretch in 3/09. I would rate it mildly overbought
at this time.

My gold price macroeconomic directional indicator entered a new
uptrend starting last December. It has been rising with relative
consistency and reached a new all-time high on 10/23, slightly
exceeding the previous high set in 8/08. The primary factor
behind the setting of a new high has been the strong growth of
monetary liquidity via the Fed's easing actions, but oil and industrial
commodities prices have also contributed significantly since the
early part of this year.

It is encouraging that gold and the indicator made new highs close
in time to one another, but I continue to see gold as carrying a large
price premium that I cannot account for through various techniques
of economic analysis. That premium is now close to $350 an oz.
It is clear that there is no shortage of folks who worry about the
stability of the financial system. But, I would also point out that
2009 has seen sharp advances for the other precious metals, so
there could be as much a cyclical element in gold's recent trend as
anything else.

At any rate, gold remains too rich for my blood, and I have been
happy to trade away from this market and will continue to do so
until gold finds a range closer to my idea of its economic value (now
a paltry $500 -550 oz.). Gold chart is here.

Friday, October 23, 2009

More On SP 500 Profits

This entry builds from the 10/21 post on earnings. With
earnings in recovery mode, analysts now see quarterly
operating net improving serially straight through the
final quarter of 2010, and they expect full year SP 500
eps for 2010 to be up by 31% to about $73.50. Now, this
represents a fairly strong takeoff, and as discussed in the
10/21 post, suggests that profit margins will benefit from
a positive turn in top - line or sales growth. Looking out
to Q 4 ' 10, the consensus is for quarterly net of about
$20.20. This is hardly a stretch with modest real growth
in sales of 3% and a pricing gain of 2%. So, I do not think
the numbers needed to produce much stronger earnings
in 2010 are heroic by any stretch.

For perspective, should Q 4 ' 10 eps come in at $20.20, we
can compare that number to a mid - range $25. based on
the SP 500 earnings channel for the past 20 years. The
projection represents good recovery from severely
depressed levels, but would fall far short of the indicated
norm of the past 20 years.

You should know that earnings projections through 2010
are somewhat backloaded in that no big lift is expected
until mid - 2010. So, as analysts now see it, the big test
of their projections is still 9 months out.

I think the above fairly presents the earnings
fundamentals game plan out through 2010. It looks
daunting, but really represents a "lay up" with a modest
modicum of economic recovery.

I think investors are clearly looking well into 2010 with
the SP 500 at current levels. And that is an important
takeaway for you as you assess the economic outlook for
yourself from week to week and month to month.

Wednesday, October 21, 2009

Corporate Profits

Reality Check: Yes profits are coming in better than expected and
that is a good thing. But the companies that have crashed and
burned or are doing so now, get deleted from earnings when their
market capitalizations shrink enough to be supplanted by stronger
companies. So, earnings are better than they would be if the SP 500
were static. Over time this imparts an upward bias to index eps
and its price value.

That caveat aside, corporate profits are coming in better than
expected and estimates are being raised for Q 4 ' 09 and for 2010.
Q4 '08 eps were so awful that comparisons will be easy. Ditto for a
match with Q1 '09. So the game now is to watch earnings progress
Q to Q through time. S&P estimates that yr / yr sales through Q3
' 09 were down by an astounding $1.52 tril. or more than 15%. Since
companies cannot cost cut their way to prosperity, analysts are
going to focus heavily on a prospective recovery in sales. The profit
margin on extant 500 company operating eps is way off the high
levels of 2007, but is higher than most imagined it would be
nonetheless. The positive leverage to earnings from a recovery of
sales looks awfully good now.

My earnings indicators save for the finance services sector have
been in sharp uptrends since the spring of ' 09. They have been so
strong, some degree of moderation would be normal in the months
ahead. Financial service company net revenues before fees and
trading profits are down reflecting lower private sector credit
demand and low returns on liquid holdings. On the plus side, the
pace of loan and securities loss reserving has moderated. Now,
oil and gas producers face tough comparisons for Q 4 ' 09, but
rising product price realizations suggest some recovery in 2010.

My SP 500 Market Tracker has net per share for 2009 of around
$56. By my calculations, the market is currently pricing in earning
power of $66. per share. So, investors are looking positively well
into 2010 -- a reminder of why a positive turn in sales is going to
be so critical.

Monday, October 19, 2009

Stock Market -- Some Thoughts

Back on 9/20, in an identically titled post, I decided to take a
more cautious view of the stock market. I thought the 60%
run - up off the 3/09 low represented a tidy downpayment on
economic recovery. I pointed out that forthcoming Q 3 '09 earns.
reports would come in better than expected and that a decision
not to play in the market could prove early. Right about that.

My core fundamentals remain ok. The market is in a firm uptrend.
Looking out past the short run, the market is strongly overbought,
but, that is a hallmark of a powerful market. Even so, there are a
couple of issues that bother me, issues that might even be
antithetical in the short run. First, I believe the market has derived
much of its power from one of the strongest surges ever in the leading
economic indicators. Since the redundancy here is so mild, I think it
is fair to wonder how stocks hold up once the leading indicator spurt
moderates and flattens out for a spell as it inevitably will. So, I am
calling into question the staying power of market psychology.
Secondly, my inflation thrust indicator, which quieted some over the
summer, has started to surge again, with even natural gas joining the
petrol complex to lead the way. Oil, which is now closing in on $80 bl.,
is now high relative to what most consumers can afford without
looking again at their budgets. In short, a fast rising oil price dims
the longer term economic outlook.

Now, it may well turn out that if the leading economic indicators
moderate over the next several months, the stock market will correct
and the oil price -- nearly 32% above its 40 wk. m/a and wildly
overbought -- will drop down sharply in price. I'll happily sign up
for another long side tour in stocks if that all happens and the core
fundamentals hold up.

I am all in cash now and will likely just monitor the economic indicators
and the markets for another 3 weeks or so. But, I'll be posting even so.

Thursday, October 15, 2009

Financial System Liquidity

My broad measure of credit driven liquidity is down 1.5% yr / yr,
and has decreased at a 4.0% annual rate over the past 6 mos. With
deep recession and its immediate aftermath, private sector credit
demand has been declining. The weakness shows not just with
shadow banking, which has collapsed, but with the banking system's
loan book as well. The big roll-off on the banks' book is business or
C&I loans. Readers will recall I have discussed this probability for
months, and also that the C&I loan book could decline significantly
for another year or so. The banks are charging off the loans that
some businesses cannot service, and viable companies are
reducing exposure because with business depressed, working capital
needs have shrunk. Moreover, as the economy recovers, many
companies will generate cash flow well above spending needs, at
least in the early stages.

Monetary liquidity -- the narrow money supply -- is up about 15%
yr / yr, and this has been, as always, the platform to turn the
economy positive. Monetary liquidity represents only 10 -15% of
the broader measures of financial liquidity and cannot sustain an
economic expansion for very long without a positive turn in private
sector borrowing, but it is the kick starter. The Fed, for seasonal
reasons, is presently allowing monetary liquidity growth to
accelerate via its open market activities.

Despite a reduction in the broader credit driven composite, the
velocity of money has declined sharply, as the cyclical economy is
down much more yr / yr. The excess liquidity thus created has
supported the cyclical recovery in stocks, although it should be noted
that velocity has started to recover and that excess liquidity is
easing. A "V" shaped recovery, suggested by the leading indicators,
would likely bring down excess liquidity rather rapidly and give stocks
much less of a tailwind.

The world's major central banks are keeping large currency swap lines
to cushion the decline in global capital flows fostered by the 2007-08
credit crunch and a collapse in global trade. The outflow of US dollars
through the trade window is down 50% over the past 2 years.

Banking system loan loss reserves have increased only modestly in
recent months following a large leap from late 2007. Even so, bank
capital remains flat as cash flow is moderating on a declining loan
book. Thus, as the economy recovers, and with it private sector loan
demand, more than a few banks will need to raise additional primary
equity capital.

Tuesday, October 13, 2009

Oil Price

Oil has been playing peek a boo in the $70 -75bl. range for several
months now. We are into a period of serious seasonal weakness for
oil, so it is noteworthy the price is holding up. The strength in the
price in recent days has boosted the relative stock price performance
for the producer group.

One concern I have here, which is not tangential to the interests of
oil price players is that if oil does break above $75 a bl., it will have
the effect of reducing the longer term performance potential for
the economy. A rising fuels bill could well put some pressure on the
real wage, and it would force consumers to borrow more to maintain
discretionary spending. Down the road this little series of
connected dots could work not only to moderate economic demand,
but demand for petrol as well. Suggest you keep this in mind.

Oil chart.

Thursday, October 08, 2009

Stock Market Quickie

The rally off of the mildest of short term oversolds plus the failure
today of the SP 500 to take out resistance at the 1072 level will
not go unnoticed by a good sized group of traders. Some of the
boyz may see this little failure as a mechanical sell signal. Well, it
sets up a couple of interesting days...CHART.

Tuesday, October 06, 2009

Economic Indicators

Weekly & Monthly Leading
Both weekly and monthly lead indicators continued to improve in
9/09, and both continue to point to a "V" shaped economic recovery.
The weeklies did lose some momentum over the month, so we will
have to keep an eye on that.

Coincident Indicators
Data is available through August. With real retail sales and industrial
production rising over the first 2 months of the quarter, it is likely
the coincident sets have stabilized. Measured yr / yr, momentum
has improved from -6% readings to -3%.

Corporate Profits indicators
My profits indicators have improved dramatically since early ' 09.
The number of companies reporting rising output has risen sharply
over Q 3 ' 08, but actual output levels, although rising in recent
months still trail prior year levels. Pricing power has remained
weak, but operating costs have been slashed. Viewed sequentially,
quarterly profits are rising from low levels as earnings power
recovers, and this positive trend is the more critical factor. The
"buzz" on The Street has it that Q 3 profits will top estimates.
Right now, annualized SP 500 net per share is probably running $60.

Economic Power Index
This simple index has turned negative. Yr / yr real individual wage
growth has decelerated, but remains historically strong. But,
this crucial positive has now been eclipsed by the deterioration of
total civilian employment when measured yr/ yr. Thus for now,
tax cuts, automatic policy stabilizers and a growing flow of fiscal
spending $ have to carry the day. The key here will be how quickly
negative job loss momentum reverses in the wake of improved
spending and production. This transition period is anxiety provoking
not only because of the weak job market, but also because the
consumer has been adding to liquidity by boosting savings and
paying down revolving credit. The plus side here is that the
underlying demand for consumers is strong following nearly 2
years of marked retrenchment.

Most economists are not sanguine on the employment outlook. And
it is tempting to just go along with this view. But, since business
slashed costs so sharply as the recession took hold, I think it only
prudent to see if higher demand might bring people back on to
payrolls at a faster clip than expected. Companies do not like to
blow orders because they are short handed. Good way to lose
market share, that.

Global Indicators
Output on a global basis appears to have turned positive over the
summer and might be slighly ahead of the US, except for new
orders where the breadth of companies with a rising book has been
quite strong. Employment and pricing power remain subdued on a
global basis, in tandem with the US.

Saturday, October 03, 2009

Long Treasury Bond

As readers will recall, I have thought the long Treasury was a
decent countertrend trade on the long side over the past 3-4
months. This was not easy work, but it was an ok call. Now the
bond is trading around the 40 week m/a after posting up 10 points
in recent months. So, it is no longer an oversold entity, and, given
my admittedly indiosyncratic way of trading the bond, is now less
interesting as a trade, even though it is trending positively and has
decent fundamental support, now that industrial commodities
prices have been softening.

I have no quarrel with the bond bulls in the very short run. Trading
on the long side may still be ok, but I am less sure footed now in my
method, so I plan to sideline it for a while. Treasury price chart.

Thursday, October 01, 2009

Stock Market -- Technical

As discussed back on 9/20, this large advance was in need of a
vacation or correction after such a powerful run. Today's sharp
decline fractured the uptrend leg running from early July.
Moreover, further weakness would fracture the uptrend line
running from early Mar. At today's close of 1030, the SP500 is but
10 points above the longer running trend line and a break there
would be a bit more serious. the market is slightly oversold now
and is not yet in a confirmed shorter term downtrend. Now since
July, the boyz have been quick to go long on the little dips, so the
next trading day or so will be interesting. A more respectable
oversold would come at around SP 500 990.

A look at the chart linked in below shows that SP 500 is in a
pivotal area. Chart.

Tuesday, September 29, 2009

Inflation Potential

My inflation pressure gauge rose at a good clip over the first half
of this year on the strength of a rally in the commodities market.
In tune, the CPI, not seasonally adjusted, increased by 2.7% for the
year through Aug. However, the pressure gauge has flattened out
in recent months as the rally in commodities has stalled. In fact,
the uptrend in the commodities market for ' 09 is being tested
presently (chart).

There could well be several reasons for the stall out in the upturn
in commodities. The obvious one is that with a global economic
recovery just starting from low levels, supplies are ample. But I
suspect players are also being influenced by the CFTC inquiry into
the trading structure of these markets as well as the recent weak-
ness of China's stock market and concerns about how strongly its
credit driven business recovery may proceed.

The quick moderation of inflation thrust has helped the bond
market in recent months, and it may also account for the more
stable US dollar seen in the last couple of weeks. Normally, the
prospect of a moderation of inflation pressure as economic
recovery commences would be cheered by stock players, and
we have seen that, although there could be some backlash
potential if players begin to worry again about deflation. that is
why some traders are concerned that a rising dollar would be
bad for stocks in that it would signify a flight to quality in
anticipation of a failed economic recovery. Fancy stuff, but
interesting nonetheless.

When inflation is commodities - driven as it has been so far in
this decade, you have to be prepared for volatility, and this
means keeping a careful eye on the the commodities composites.

Friday, September 25, 2009

Oil Price

Viewed historically, the oil price is about to enter a period of seasonal
weakness that can last well into Dec. The sharp 8.8% decline in the
crude price this past week is not without seasonal precedent. The
decline did fracture a sharp uptrend that began in Feb. '09 off a
another seasonal low point, a trend that essentially belied the broad
supply / demand fundamentals, and one which was fuelled by
speculation on eventual economic and oil demand recovery. I think
the run - up came early, but I guess one has to recognize that newer
long only and price - mimic ETF funds have brought more purely
financial players into the game. Some of these guys do take actual
bunker crude, but most have no intention of riding at home at night
on the train seated next to a barrel of oil.

As mentioned, there has been a break in trend line, and a break in
shorter term trend relative to the 10 and 25 day m/a 's. (Chart
below). The market is also approaching a mild oversold situation,
and there is more downside possible.

In days well gone by, one might have plausibly assumed that the
downward seasonal adjustment in the oil price into Dec. could be in
a range of $15 - 25. a bl., which could take crude as low as $50. But
with more financial players on board, that easy assumption is no
longer assured.

If, indeed, there is a period of seasonal weakness, then we might look
to a test of support at $60 as the first line of defense. A break below
this area might well signal that a more traditional seasonal swoon is
at hand. Chart is here.

Wednesday, September 23, 2009

A Twofer

Monetary Policy
FOMC left matters largely unchanged today. They acknowledged
an improving economic outlook, and expressed considerable
confidence inflation would remain very well contained. FOMC
normally raises rates on rising business strength, and does so
when my Business Strength Indicator (BSI) rises into the 130 - 140
range. This indicator -- capacity utilization % + ISM mfg. output --
now stands around 121.5. That is way up from the late '08 low
but remains under the monetary tightening threshold because of
a sharply depressed CU%. So, the Fed is continuing to count on
the large gap between capacity and production to anchor its view of
any inflation threat. Short term, they are counting on the CPI,
not seasonally adjusted, to flatten out or recede over the final 3
months of this year. This also implies the Fed thinks that oil and
gasoline prices are also set to flatten or drop on seasonal grounds.
The US has had inflation this year through Aug. ' 09, and this has
undermined the USD.

Cyclical Stocks -- Relative Strength
The relative strength of cyclical stocks is a good measure of economic
growth momentum potential. The MSCI index of cyclicals, $CYC,
divided by the SP 500, has historically peaked in a range of .65 - .75.
The cyclicals relative strength index is up in this historically high
ground now and shows some flattening after a very strong run-up.
Good time to monitor it closely. Chart here.

Tuesday, September 22, 2009

Stocks -- Tech Sector Leadership

The broad info. technology sector has exhibited relative strength
vs. the market (SP500) since the late spring of 2008. The
relationship has been a volatile one for sure, but the leadership
tech has shown makes it worth watching not only as a sector to
search out for candidates, but one which, because of its economic
sensitivity and substantial p/e ratios, could cave in early in a market
correction. You have to keep in mind that a loss in relative strength
by a particular sector may simply spell normal rotation in a
cyclical market and not be a precursor of a correction. But I say
attend to the tech sector vs. broad market closely for now for
the former has the bigger trading profits to be protected, and,
because individual sector rotation which comes after a lengthy
period ofrelative strength frequently indicates increased investor
concern about "the story" behind the market advance.

Tech sector relative strength chart is here.

Sunday, September 20, 2009

Stock Market -- Some Thoughts

This cyclical bull market, unfolding since 3/09, has been one of the
most powerful seen over the past 100 years. The leading indicators
for the economy and for earnings recovery have surged, and
suggest that the early phase of an economic turnaround will be far
stronger than most folks expect. It may be the case that the
recovery is due entirely to massive easing of monetary policy and
a large fiscal stimulus, but that would be to deny that the economy
has self-recuperative powers inherent in deep pent up demand
and empty product pipelines. Not a wise denial.

A century of market history involving bona fide cyclical advances in
the wake of deep financial and / or economic crisis suggests cyclical
recovery averages nearly 50% over the first 12 months from market
trough and can hit nearly 120% as occured over 1932 - 33 in the
wake of the Great Depression. Since Mar. '09, the SP 500 has
advanced by roughly 60%, and so it stands only behind 1932 - 33
in a 12 months out context. Moreover, the big advance over the
1932 - 33 surge was interrupted by a deep and scary correction. So,
there is risk, especially when you consider that the p/e multiple is
now not at all low on early recovery stage earnings potential.

In my view, a 60% shot up over 6 months time has earned the
market a vacation if not a correction of consequence. As readers
know, I turned bullish on the market's potential in Dec. '08, did not
give up on it over Jan. / Feb. and wound up seeing the bottom as
coming over Mar. / May ' 09, which I judged to be about 6 months
ahead of the decisive positive turn of earnings. So, I have done ok
with this market. I also understand that there could be plenty of
positive earnings surprises ahead when Q3 reports come out in
October, and at least some players no doubt have this very idea in
mind as the market is pushed higher. But, being a conservative
fellow, I think a 60% move is a very healthy down payment on
recovery. Acknowledging that I could be early with a cautionary
approach, I leave the field to the bulls for the next 6 weeks. In the
meantime, I have continued to trade long Treasuries with leverage
in the interim and am not hurting for profits.

I plan to relax and enjoy the autumn weather.

Wednesday, September 16, 2009

Stock Market -- Short Term Technical

My 25 day oscillator broke a downtrend on 9/8, signaling another
run-up was in prospect. This oscillator now has the market at a
moderate overbought level at 1068 on the SP 500. To be precise,
the market stands 4.7% above the 25 day m/a. Over the course of
the advance since 3/09, heavier overboughts have been recorded
at 7 - 10% above the 25 m/a. Historically, however, a reading of
near 5% above the 25 day m/a has often been strong enough to
attract profit takers, so if you're a short term player, you need to
pay attention.

I have linked to the SP 500 chart below. Note that momentum is
overbought and that the 40 day RSI is near 63%. That is a high
reading for this measure.

SP 500 chart is here.

Friday, September 11, 2009

US Dollar -- $USD

I did make a good call on the dollar in early 2008 (saw it higher), but
Forex is not a game of interest to me. So currency posts are very few
and far between.

The dollar has lost ground since early in the year. The Fed has
provided strong money liquidity growth and is running an effective
ZIRP with Fed Funds %. Meanwhile, my inflation pressure gauges,
after bottoming early in the year, are moving up and the CPI without
seasonal adjustment is higher than at y/e 2008 on a lift in petrol
prices. So, the dollar supply has been increasing and money left on
deposit is earning a negative rate of return. The purchasing power of
the dollar is declining in the US, and with global economic recovery in
prospect, no need to blame traders for exiting the dollar, even though
the supply of dollars moving offshore has declined dramatically.

Internal or domestic fundamentals for the dollar will not improve
until basic money growth moderates and short term interest rates
turn positive in real terms. Economic recovery here will bring that
moment closer, but it is a ways off for now.

The $USD is moving toward an oversold position in the forex
market for the first time since early 2008, so a rebound in the next
several weeks cannot be ruled out despite the internal fundamentals.

Here is a link to the weekly $USD.

Thursday, September 10, 2009

Gold -- Around $1,000oz.

Well, here we are at $1,000 again. And, here we are at resistance
again, as well. It is fair to say though that the market is not heftily
overbought as it was on its two prior trips to this historic level.

Gold is in an uptrend off 10/08 low, but to confirm from here, the
price needs to take out $1,000 oz. with some authority over the next
five odd weeks.

Gold remains in a mania price zone, and to get into full bubble
territory, we would need to see a sharp break above $1,100 in the
weeks ahead. The market is now mildly overbought.

My gold macroeconomic directional indicator made a low in 12/08
and has been in a relatively strong uptrend since. The fit of the
price of gold to the indicator is somewhat off over the past three
years reflecting price surges in gold within the first five months of
each year that were well out of proportion to the rising indicator
values. The "fit" over the longer run is much closer.

My work shows a basic economic value for gold in a range of $500 -
550 oz. If I push the data using the macro indicator or gold's
relationship to the dollar, I can wring out $700. So, I am unable to
account for about $300 oz. or 30% of the gold price. The "premium"
in the price may have something to do with fears of both inflation
and financial instability, but this concern is not felt with consistency.
I would also note that gold players have followed China's economy
and stock market with very focused interest since last autumn.

At any rate, I would have to say that unless gold can blow well
through the $1000 level before year's end 2009, it is going to look
vulnerable on the long term chart.

Wednesday, September 09, 2009

Stock Market -- Technical Observations

The stock market remains in a powerful cyclical uptrend in effect
since 3/09. Price momentum has eased measurably as the market
has advanced, but this is a normal dvelopment. My internal market
measure -- cumulative advance / decline plus unweighted prices
has run far stronger than the SP 500, a good sign.

The market exhibits a modest overbought short term and a stronger
one based on 6-13 week reads. An early bull market hallmark does
involve an extended price advance coupled with a substantial and
continuing intermediate term overbought. In a period such as this,
I find it difficult to pick interim tops and corrections when the short
term momentum of the market does not behave audaciously.

25-40 day measures of RSI are around 60% and do suggest the
recent loss of positive momentum may extend ahead. There are not
sufficient disconfirmations from other favored measures to signal
that a significant price correction may lay right ahead.

Because the SP 500 has lagged the broader, unweighted price
measures of the market, it could take another month or two
before the "500" confirms a major positive cyclical reversal.

My reading of the charts suggests that even if a 5-7% price pullback
does lie ahead in upcoming days and weeks, there could well be
another extended but more moderate upleg in price to follow. To
continue this conjecture, I would have to say I am more confident
another upleg lurks out there than I am that we would escape with
a mere 5-7% correction.

The two sentiment measures I follow most closely, the trader
advisories of Market Vane and Consensus Inc., are both a country
mile below levels that would signify "too many bulls".

SP 500 chart is here.

Friday, September 04, 2009

Economic Indicators

Leading Indicators
The two sets of weekly indicators remain in strong uptrends and are
close to turning up when measured yr/yr. They have lost some
momentum over the past 2 weeks as sensitive materials prices have
leveled off. The action of the indicators point to a "V" shaped bounce
for the economy in the early stages. The monthly indicators are
also strongly up, paced by a rapid surge in the index of new orders
for manufacturing. With 100 = to expansion, the combined index for
commercial / mfg. has moved up from a 12/08 low of 62.6 to 114.8
for August. This represents a substantial positive reversal of trend
from a downmove in order momentum that ran from early 2004
through mid-2008. Again, the pattern for now is a "V".

Also of note here is that the index of mortgage purchases has been
basing after a severe 3 year downtrend. This suggests a lift to
housing sales (already recently seen). The Monster Inc. index of web
job listings peaked over 2007 and heralded the end of expansion. It
is now in basing mode and jumped up sharply in August (Monster).

Economic Power Index
The swift positive turnaround in this index over Half 2 '08 helped
significantly to stabilize consumer spending and the economy. The
turn was fuelled by a fast rise in the real wage as inflation fell away.
The index is now only slightly positive. Measured yr /yr, the real
wage remains a strong 4.2%, but this is nearly offset by a 3.9%
decline of civilian employment. There will be a dicey interval ahead.
Job losses are moderating, but so is the real wage.

Capital Slack Measure
This measure continues to show deeply ample slack: Short rates are
near zero, unemployment is at 9.7% and capacity utilization is very
low. The extent of the slack is sufficient to underwite a prolonged
period of expansion if the recovery takes hold.

Worldwide indicators replicate the recent US performance. With 50
= to expansion, the global output measure has moved up sharply
from a 11/08 low 0f 35.5 to 52.1 through 8/09, and the new
orders component has jumped from a 11/08 low of just 35.2 to 51.1
through 8/09. Both series are giving the "V" sign for now.

Thursday, September 03, 2009

Natural Gas -- Time For Me To Study Up

As all seasoned traders know, few commodities can break your
spirit and your pocketbook faster than playing natural gas. Well,
it has been crashing on oversupply concerns, and as anyone who
cares to look can see, the vast bulk of downside price risk in
absolute $ terms is now behind it.

So, I am going to dust off the NG file and have a look see at what
might be done about this free falling substance. I plan to look at
the trade and investment possibilities and come back soon on it.

Weekly NG chart is here.

Wednesday, September 02, 2009

Long Treasury Bond

Short Term Situation
Back on May 29, I opined that a deeply oversold long bond was
setting up for a countertrend long side trade as rapidly falling
bullish advisory sentiment was nearing an attractive contrarian
signal. Well, the market has been choppy since then, but did
afford two nice long side trades. Now, with advisory sentiment
neutral and with the oversold condition greatly reduced, I have
closed out to the sideline.

My 52 wk. rate of change in yield indicator turned negative at
year's end 2008, and did signal a rising yield straight through the
end of 6/09. It has since turned neutral and may even be set to
signal a lower yield straight ahead, as the weakness of the stock
market, coming off a large overbought condition, may aid the T
bond.(Scroll down at link below for the 52 ROC).

On the fundamental side, my indicator of industrial commodites
prices plus production has steadfastly signaled a rising Treasury
yield since early 2009. However, this indicator has leveled off in
recent weeks as sensitive materials prices have eased off a bit
following a strong run. The run up in the long Treasury yield
this year has far outpaced my very broad measures of the
economy / inflation, so that the run in sensitive materials prices
has been the dominant driver this year. Normal mid -year seasonal
weakness in the industrial commodities market did not occur in
2009, but the recent easing up may be a delayed reaction.

In sum, the Treasury bond market is developing a modest positive
bias on price short term, and still remains interesting, although my
original reasons for buying the bond have been satisfied.

Long Term
I have linked to a long term chart of the 30 yr. T bond. The bull
market remains intact and clearly implies that investors are not
yet ready to give up on a low inflation environment. Should
economic recovery proceed and inflation intensify on a cyclical basis,
folks may change their minds and reverse the downtrend in yield.
The bulls remain in charge for now. Treasury yield chart.

Monday, August 31, 2009

Financial System Liquidity

Basic monetary liquidity, the most critical element to starting an
economic recovery, remains in growth mode. The large increase in
this composite over the past year brings the 5 year growth up to a
level sufficient to give the economy a fighting chance at expansion.
It also serves as a major positive fundamental for stocks, as rising
real M-1 lets you know you are betting with the Fed.

The broader measure of credit driven liquidity has continued to
decline and is now down about 1.6% yr/yr. The market for financial
company commercial paper outstanding has sunk another 38%
yr/yr or nearly $600 bil. as the shadow banking system continues to
be unwound. Large time deposits at banks have fallen nearly $200
bil. as banks let C&I loans run off and remain with a flat real estate
book. Even the massive M-2 money measure would be down were it
for the large growth of M-1 primary liquidity.

Both retail and institutional money market funds have declined in
2009. Some of this decline is attributable to the purchase of goods
and services by individuals and businesses, but with market short
rates near zero, investors have extended maturities to capture more
yield and have no doubt used funds to fuel the rally in stocks on
expectations of economic recovery.

Individuals have increased savings by over $500 bil. and companies
have added to their liquidity by slashing inventories, capital expend.
and payrolls. So, the economy does not need an ample supply of
private credit to fund economic expansion in the early stages.

Monetary velocity, measured in terms of the cyclical side of the
economy has plunged despite a 1.6% decline in the broad, credit
driven measure of financial liquidity. This has created a large pool
of liquidity that runs over and above the needs of the real economy,
and, as mentioned above, has fuelled the stock and corporate bond

The Fed and other central banks continue to maintain a network of
large currency swaps to provide liquidity to serve those trapped by
the major decline of global trade. Peak -to-trough, US dollar outflows
have fallen nearly 75% on a monthly basis as the trade deficit has
contracted substantially.

Credit quality spreads have narroweded globally and liquidity appears
sufficient to underwite the initial phase of global economic recovery.
Banking system liquidity is improving as loans run off, but capital is
still not adequate to fund an extended economic expansion.
However, in the US, rising business cash flow and the appearance
of stabilization in home prices will serve to ease the way for banks
to access the capital markets going forward.

Tuesday, August 25, 2009

Beach Days

The weather is simply too nice. As a retired gentleman of leisure,
I am taking full advantage this week and will not be posting on
the usual subjects.

Thursday, August 20, 2009

Stock Market -- Quick Note

The steep sell down on Mon. of this week did wipe out the hefty
short term overbought. It is interesting that we have had "dip"
buyers in the aftermath, as there is rarely a shortage of guys who
say they will buy a dip, but do not. Volume has been light. The beach
days have arrived.

The market remains overbought looking out 30 days and longer, so
it is unclear whether the recent dip marked but a way station on the
way higher. Traders will be watching to see whether the current
bounce off the Mon. low carries to a new rally high and beyond with
any conviction.

Tuesday, August 18, 2009

Stock Market -- Fundamentals Profile


1. The market remains in earnings recovery anticipation mode. SP
500 eps for the past 12 months (7/31/09) stand at $39.70. Investors
are presently pricing in a return to $60. earning power, which
primarily reflects heavy cost cutting and slight growth just ahead.
(Q 2 '09 eps should come in around $14.)

2. On a very long term trend basis, SP 500 net per share for 2009
works out to $75. Using the same model, top-of-the-channel eps
would equal about $85. With 12 month earns running about 47%
below the "normal" $75., you get a good sense of how deep the
recession has been.

3. Investors have not changed the broader valuation framework for
the market during this steep downturn. Specifically, players are
pricing in a return to moderate inflation of 3.0 - 3.5% with economic
recovery and have ignored the mild 12 month deflation readings
witnessed recently. This is important. Should economic recovery not
occur and should deflation pressures continue, the market would be
vulnerable to a downward adjustment of earnings and fears that a
period of more prolonged deflation could signal a lengthy period of
sub-par economic performance. This kind of serious further downside
would not be a foregone conclusion, but it would be a reasonable one.

4. Looking out over the next year, the speed of global economic
recovery should be the dominant feature for the stock market. With
a lower cost structure evident, and with the SP 500 companies now
holding prodigious cash, there exists sizable positive earnings leverage
from economic recovery, even if it is mild in scope. With recovery,
profit margins will expand and earnings will benefit from cash mergers
and acquisitions.

5. Despite the rapid run-up in stocks since 3/09, the SP 500 price level
does not include a presumption of a sizable positive take-off in earns.
In my framework, players are looking at $60 earning power now, with
the potential to scale that number up if recovery does indeed take hold.
My thinking is that in a moderate economic recovery, expectations
for SP 500 earning power of $75. - 80. will take hold sooner rather
than later, and that the market would chart a course for 1250 - 1325.

6. The problems the banks and investment banks have experienced
coupled with exceptional weakness in sales over the past year or so
have left a residue of investor fear and no willingness yet to take the
concept of a decent global economic recovery for granted. We have
now entered a period where there is substantial downside price
risk to a failed recovery as well as continuing large upside price
potential should recovery proceed smoothly. This means that eyes
will be fixed on progress, and not just benefits from cost cutting, but
from a resumption of top line growth as well. Given this risk / reward
profile, there is good potential for elevated volatility over the next 6
odd months as investors monitor news carefully for indications of

7. The SP 500 dividend stands at $21.50. With recovery, the dividend
will likely increase to about $30. by Half '1 2011.

For more detail on SP 500 earnings, go here.

Friday, August 14, 2009

Coincident Economic Indicators

The CEI data sets I follow posted a small increase form the preceding
month in July, for the first month on month increase in the past 14.
So, the US economy appears to have expanded modestly in July.
On my indicators, the growth reflects a 0.1% increase in real retail
sales plus a 0.5% positive in industrial production.

This increase in activity came right on time relative to the turn in the
leading indicators. However, I would have to say that the gain in
inflation adjusted retail sales was quite low, and we are going to have
to see the pace of recovery in sales pick up markedly in the months
ahead if the US economy is to have anywhere near a normal first year
of recovery.

In passing, I would note that both US exports and imports did gain
in June (latest month available).

Measured yr/yr, the coincident indicators declined by more than
6%, reflecting deep declines in real retail sales and production. The
one bright spot remains the change in the real wage, which reached a
record high 4.6% for the 12 months through July. In past recoveries
a large positive change in the real wage of this magnitude would likely
have triggered much stronger consumer spending. But with the
depth of the recession coupled with large losses in home values and
equities portfolios, folks have skewed activity toward building savings
and paying down all manner of revolving credit. The balance needs
to tilt away from emphasis on liquidity and more toward spending
if there is to be a recovery worthy of the name.

I would note that the momentum of job losses is declining rapidly,
and more level sales and production could continue this sharp reversal
in job losses, as companies did make dramatic cuts to employment
and will not want to blow orders because they are short on people.

But, bottom line, I would chalk up July as a month favoring those
who are the more conservative regarding the economy, and this on
the basis of scant progress in real retail sales.

Thursday, August 13, 2009

Stock Market -- Technical & A Note

The short and intermediate uptrends remain intact, although the
new intermediate uptrend line has not been tested since the SP 500
touched the 879 level on 7/10. (I link to the "500" chart below and
it features an extended MACD you might find interesting.)

The current shorter term upleg started on 7/13. Since then, the
SP 500 has shown hefty price momentum overboughts daily and
is now materially overbought on RSI (% of "up" days) as well. This
kind of strong positive action has trashed the shorts and has forced
many long side traders to chase stocks.

The market is also registering significant overboughts on breadth and
on positive spread over the 13 and 40 wk. moving averages. You have
to go back to the 1995 - 2000 period to recapture the upward drive
we have seen recently.

the SP 500 chart is here.

Note: On the fundamental side, the market has fully discounted the
positive bounce to earnings from sheer cost cutting alone. Extended
strength from here would imply players are moving on to the
assumption of the commencement of rising sales for businesses and
the prospect of improving profit margins.

Tuesday, August 11, 2009

Monetary Policy & The Banking System

The Fed has convened its normal 2 day FOMC meeting. The basics
for rate setting that I follow continue to point to maintenance of a
low short rate. Business activity in the US has moved sharply from
deep recession to sufficient breadth to be just below the expansion
threshold. Change has been very rapid so far in 2009. However,
expansion must proceed apace for at least several months before it
would signal it was time to raise rates. As well, capacity utilization
remains depressed and would normally be expected to improve
substantially before the Fed reversed course. Finally, the short term
credit demand / supply pressure gauge continues to move in favor
of slack, as C&I loans run-off as expected. So, a change in FOMC
rate posture would be quite a surprise.

Now, since there has been some inflation pressure from the petrol
sector, and, since economic recovery is now expected to begin sooner
rather than later, the markets and the many observers of the Fed are
likely to begin questioning how long the Fed may maintain its several
large liquidity injection programs. This latter issue is distinct from the
rate setting function, and at some point soon, the Fed may well have
to provide more specifics about keys to closing out these programs.

There is a potential kicker here for the markets. Fed diligence in
framing out how it will move to restore long term integrity to its
balance sheet could have significant consequences for the US dollar,
Treasury securities and precious metals and commodities prices.
The impact of Fed commentary on this issue for equities is less
clear, but could be important nonetheless. Bottom line: the Fed
will want to show it is supportive of recovery but is also increasingly
sensitive to restoring monetary integrity. The sooner it does this,
the faster worries of substantial eventual inflation should dissipate.

Banking system lending has been flat now since mid-2008. No
surprise here at all. A deep recession brings lower private sector
credit demand which can persist for a while even as recovery begins.
C&I loans are running off, the real estate book is very sluggish, and
home equity loans, which did spike up over Half 2 '08, have begun
to level off as borrowers grow more confident about the security of
those lines. The real estate book for the industry is now running
about $800 billion below the longer term trend.

Even with the loss of momentum to real estate lending, total bank
lending is running about $1 tril. or 17% above its 10 year trend. This
suggests continued vulnerability of the banks to further significant
loan losses ahead. Bank net interest cash flow has flattened out, but
bank profitability can still improve markedly if loan losses come in
below recent horrific levels. Capital remains level and system
liquidity is improving as borrowers rely more on their internal
cash flows.

Friday, August 07, 2009

Economic Indicators

Leading Indicators
The data, both weekly and monthly, continue to trend strongly
upward from the deeply depressed levels of late 2008 - early
2009. The data suggest the US economy is closing in fast on
expansion, with the global economy moving in a likewise fashion.
The same may be said for profits recovery. The volatility of the
indicators remains remarkable. My new orders diffusion index
suggests an expanding book of mfg / commercial business at 100.
It fell from 103.3 in 5/08 to a startingly low 73.8 in 2/09, but has
since bounced back up to 103.4 for July. The weekly and monthly
leading indicators are just now starting to show positive trend

Economic Power Index
This somewhat longer term index foreshadowed significant
recession by falling from 4.0% (yr/yr) to -2.5% by 8/08. The
index then rallied sharply through year end on a powerful rise of
the real wage as hourly rates kept rising while inflation fell quickly
away. This exceptionally positive development did portend
eventual economic recovery in the US, which I hope is at hand.
However, as I have warned, the growth of wages in current $ is
slowing with growing slack in employment, and the power
index will falter more later in this year if the real wage erodes as
expected and if the drag effect of job loss momentum does not
abate. As of now, job loss momentum, measured month-to-month,
is quickly easing so that the yr/yr measure may soon show some
improvement from the current sharply negative -3.8%.

There are current offsets -- higher social security payout, tax cuts,
unemployment insurance and the ramp up of federal spending for
projects. Consumers also have the option to finance more of their
spending. However, over time, low or no real wage growth coupled
with a weak job market will not sustain economic expansion.

Inflation Indicators
The inflation pressure gauges I use have stopped signaling deflation.
These measures have turned up, and now suggest a return to mild
inflation (measured yr/yr) by late 2009. This development
underscores the need to see the monthly rate of job losses continue
to be cut very quickly as the year progresses.