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 !!!

Wednesday, July 29, 2009

Long Treasury Bond

With the 5/29 and 6/9 posts on the bond, I indicated there could be
a good short term long side countertrend tade in the offing reflecting
a steep yield premium to the 200 day moving average and "too many
bears" among trading advisors. Well, there was a good 6 point (in
price) leveraged trade there, but it turned out to come in well below
expectations. With the recent weakness in the price of the bond, the
yield is again at a substantial premium to the 200 m/a, with this
implying a sharply oversold market. Bearish sentiment has abated,
and this weakens the logic for a long side trade. Even so, there has
just this week been a small shift in trader psychology away from being
long industrial commodities. So, this keeps the bond interesting and
in play as a candidate for re-placing the trade. Since traders are
now a little concerned about whether cyclical risk exposure is ahead
of the fundamentals, the bond could get another play. However, this
would be a trend / momentum call with odds of getting the best
price low.

30 year Treasury yield.

Tuesday, July 28, 2009

US Economy -- Baseline

As a retired guy who no longer gets paid to do economic forecasting,
I do not do it. As readers know, I rely heavily on time tested
indicators to look ahead. But I do develop a baseline outlook on
an occasional basis, particularly after economic / markets watershed
events. No time like the present, then.

Basically, I think the US economy can experience an economic
recovery / expansion which can run 8 - 10 years from Q3 ' 09. This
expansion should averge 4% growth in the early part followed by a
multi-year run averaging 2.75% annually. I look for growth to be
well balanced between consumption and investment, and for a
solid base of export sales to be a key driver. So, I do look for an
eventual substantial recovery of employment and profits. I expect
the dramatic increase of entrepreneurship we have seen over the
past 15 years to continue and for the economy to grow ever more
diverse. I expect inflation pressure to return and to average
about 3.5% over this lengthy period. I see short term interest
rates recovering to a range of 3.o - 6.0% and anticipate that
bond yields will rise significantly. Following a strong 2 year
recovery period, I have corporate profits growth settling in at a
6.5% growth rate. Investor pressure to increase dividend
payout will eventually grow as retirement funds look for more
stable income.

The expected long duration of the expansion reflects the very large
build up of capital slack in capacity, employment and financial
resources and the length of time it will take to redeploy these
resources profitably.

There should be exceptional political battles to come as the Feds
face more market pressures to regain budget discipline and
re-prioritize spending against a revenue stream which cannot be
easily augmented by tax increases. The country is greying and
through increased geographic dispersion has grown more conserva-
tive politically (This is so even though the GOP has turned truly
and well stupid and is in need of broad new leadership).

I also suspect the Fed finally realizes that asset bubbles can be
every bit as damaging as high inflation and that monetary policy
will turn more balanced in the years ahead.

Finally, I would say that the 2007 - 2009 economic debacle will
serve as a reminder to all to pursue more balance in economic,
business and investment affairs. This fresh probity will of course
wear off with time, but not, I think, for a good while.

Friday, July 24, 2009

Stock Market ALERT & A Note

Market Alert
The market advanced nicely for the week. It will no doubt be seen as
a Godsend for many suffering with depressed 401Ks. The trend is
positive. However, we have a fairly strong overbought condition on
both my 25 day oscillator (SP 500 is a hefty 6.6% above the 25 m/a)
and on RSI (See chart link). Shorter term players should take note.

SP 500 chart.

Earnings Note
Some of the boyz along The Street are starting to play fast and loose
with interpretations of earnings. they want that red ink Q 4 '08
number to go away. So, some have pulled out AIG, GM and other sick
pups that collapsed in value. Others are working to "normalize" the
earnings data so that the 12 month net per share reading will not look
so awfully low against the current level of the market. Now, S&P
observed that companies rushed to write off everthing their auditors
would let them get away with in last year's final quarter. They may
have written off up to $ 10 a share, thus "borrowing" losses from
2009.

SP 500 eps for the 12 months through 7/09 is most probably around
$40. That gives a whopping 24.5 p/e ratio -- a tough sale, no? To make
matters worse, that nettlesome Q 4 will not drop off the 12 month
running total until Oct. '09. In my view, investors have simply put the
12 month number aside and are looking at earning power going forward
in a recovery. I think they are now pricing in $15 quarterly earning
power for the SP 500 and $60 annual. That is not a "stretch" number
at this point. If you are looking at material wherein the analyst is
putting forth a $60 number as the current 12 month number, you are
reading the work of a charlatan.

Now a final point here. Since companies in toto may have shifted $10 a
share in losses from 2009 to late 2008, then it follows that current
comparisons yr/yr are are overstated. It also follows that the $60 in
estimated earning power is also a bit overstated, say by $5. I would
conclude the market is fairly valued for the next several months, but
is far from undervalued.

US Economy Through Year's End 2009

My view for months has been that the economy will be in recovery
mode over most of Half 2 ' 09, with July either the transition or
turnaround month. The leading indicator sets I follow suggest a
strong initial bounce for the economy, with industrial output up by
as much 6.5% from mid -year levels through early 2010. I would
also expect to see profits recover sharply from depressed levels.

Ironically enough, my longer range economic leading indicators rose
to the strongest level in many years last autumn, just as the economy
fell off the cliff. The longer term indicators -- liquidity and interest
rate measures plus the real wage and the oil price -- remain positive,
although the unusually strong rebound of the oil price has brought
the composite below truly exceptional levels. For now, 2010 looks
like a solid recvovery year, although a continued strong uptrend in
oil and other commodities composites would prove problematic.

The main issue of concern near term is liquidity preference and debt
minimization evidenced in reaction to the deep economic decline. We
will indeed need to see consumers loosen up and spend more freely
to regain solid footing and to start refilling depleted inventory
pipelines.

The US economy is in a deep hole presently when measured by such
key cyclical indicators as residential construction, real retail sales,
industrial production and unemployment. Business investment has
tailed off to the point where production capacity is now down 0.5%
yr / yr. On balance, the cyclical side of the US economy is right at
a depression level, and it will take several years of solid growth to
bring it back to prior peaks. In a volatile and uncertain global
climate, such a straight forward run back up and through the old
peaks is far from assured.

Tuesday, July 21, 2009

Stock Market -- Technical

Back on 7/08, I posted that the market correction had brought
stocks to a significant short term oversold. The action on that
day was suspect enough that I let a few days go by to see if some
sort of rally could develop. Well, contrary to my initial suspicion,
investors and traders did turn the market around off key support
and in the intervening days have brought the rally up to new highs
following the deep early Mar. low.

Now of course, we have a confirmed short turn uptrend which is
getting overbought in the short run. My 6 week buying and selling
pressure gauges do not indicate an overbought yet at all, so from a
technical perspective, I could not argue with the idea that the
market, although subject to short term pullback, could advance for
another several weeks, before a much more substantial overbought
condition could develop.

This recent advance has brought the major composites plus the NYSE
adv/dec line up through major downtrend lines with origins well back
in 2008. From a simple chart perspective, this is very good news.

The up action of the market since the early part of July will embolden
some technicians to argue that we have started a second leg up in the
early phase of a cyclical bull market. Could be, but too early to tell
with any assurance.

SP 500 daily chart.

Thursday, July 16, 2009

Shanghai Express -- 2009 Version

Back in early 2007, I highlighted the Shanghai Stock Index because a
mania had formed that could induce a bubble. The index was trading
around 3500, and I argued that to form a true, spectacular bubble,
the index would have to rise to 6700, perhaps in 2008. Well, it
continued on its parabolic way and did top 6000 by 10/07, before
rolling over into a deep bear. That run was bubble enough for most
people.

The Shanghai entered a new cyclical bull market in 10/08 as players
responded to a massive $580 billion stimulus package, and so it
qualifies as a cycle leader presently. Using a long term 10% real
economic growth rate, I value the Shanghai at 3200 - 3500 presently.
The index is now trading a little below the 3200 mark . Two big
caveats are in order on fundamental value. First, this is a volatile
index. Second, it can trade away from fundamental value for
extended periods of time. It was, as examples, deeply undervalued
over the 2001 - 2005 period and seriously overvalued for much of
2007 and a good slug of 2008.

I have included a price chart for the index and it shows that the
market is getting overbought short term. You will note that for
most markets, an RSI of 70 is a good warning of an overbought, but
for the Shanghai, make that a 90 RSI as this baby likes to blow off.

There are some good objective sources on China. One is economist
Mike Pettis, a Beijing based finance prof. (http://mpettis.com) and
the other is Caijing (http://english.caijing.com.cn). Check both as
counterweights to the China mavens.

Shanghai chart.

Wednesday, July 15, 2009

Liquidity Factors

Federal Reserve Bank Credit
The Fed is keeping its balance sheet greatly enlarged to support the
financial markets and the economy, with credit out more than double
a year ago. The Fed has allowed a couple of the TALF facilities to
lapse, so that credit offered is about $200 bil. below the peak level
seen in 12/08. To return to more normal pre-crisis levels, the Fed
will need to let about $1 tril. of swap facilities expire and will be
under close scrutiny when economic recovery is underway.

Monetary Liquidity
Thanks to massive liquidity infusions in Half 2 '08, the 5 year growth
rate for the basic money supply has risen to 6% and 3% inflation
adjusted. This is adequate for economic pump priming and is vital
now since consumers have been paying down installment debt and
have been purchasing on a cash and carry basis.

Credit Driven Liquidity
My broad measure of credit driven liquidity is down an astounding
0.7% yr/yr, with both commercial paper and jumbo bank deposits
lower. The market for financial service company commercial paper
is about $1.2 tril. or 53% below the 8/07 level, which was the high
water mark for the shadow banking system and the CMO market.

The banking system's loan book is contracting and is at levels last
seen in early 2008, at the outset of the recession. Even so, the loan
book is a full $1 tril. or 14% above a reasonable and conservative
longer term trend. The boyz went on quite a bender from 2003 -
2008. The loan book could remain flattish for another 12 months
even if the economy recovers.

Excess Liquidity Measure
The $ cost of US production is down nearly 15% yr/yr. Thus, even
though the broad measure of credit driven liquidity is down yr/yr,
large production losses and mild deflation have created substantial
excess liquidity in the system. Put another way, the velocity of
money has fallen very rapidly, as the economy has shrunk even
faster than the financial system.

Excess economic liquidity usually, but not always, forms a strong
tailwind for the stock market as investors have funds to anticipate
an economic recovery.

Trade Window Liquidity
A collapse in US trade saw imports fall far more rapidly than did
exports. The outflow of dollars from the US has declined deeply and
rapidly, forcing the major central banks to engage in a variety of
sizable currency swaps to keep the global system halfway liquid. Still,
the inability of smaller, less seasoned economies to earn reserves in
these treacherous times has worked hardships and leaves capital
flows restrained. There will be more financial fall out in the form of
failed loans abroad.
------------------------------------------------------------------------

As tattered as it is, the global liquidity framework should be sufficient
to edge economies forward into recovery if confidence returns as
expected.

Monday, July 13, 2009

Oil Price

The oil price started to anticipate economic recovery and improved
oil supply / demand fundamentals early this year. That in itself is
remarkable, given how oil tends to weaken and dawdle following one
of its periodic price busts. Then matters veered toward ridiculous
as oil surged to over $70 bl., near the top of a longer term range,
bubble price moves excluded. In fact, oil above $55. is trading as if
there are already pressures developing on excess production capacity.
Nothing could be further from the truth. There is significant excess
capacity at the well head, and there is a huge amount of oil in
storage as carry stock. Moreover, demand remains subdued.

Last week the Commodity Futures Trading Commission announced
it would hold hearings this summer on the advisability of limiting
position size in the futures market. It realized that hedgies and long
only oil index funds were holding huge long positions. These are funds
with no intention of ever taking delivery, and guided by computer
models, are essentially momentum followers who have again driven
the price to levels out of line with fundamentals.

With the pro big oil Bush / Cheney team out of the picture, the CFTC
and other power centers in DC have a freer hand to stop or at
least retard this foolishness before it again does substantial damage
to the economy.

Oil at $60. ought to be trading no higher than $55. and, probably even
less on supply / demand fundamentals. If oil, which has corrected
sharply in recent weeks, is set to progress more sensibly, a range of
$48 - 61 bl. would make sense from a purely technical perspective.

It will be interesting to see if the newer big players in this market
are ready to challenge the CFTC with some "in your face" fresh
buying or whether they will be smart enough to lay lower at least
for the summer.

The oil price is getting modestly oversold short term.

Friday, July 10, 2009

Corporate Profits

Earnings performance from mid-2007 through the end of 2008
represented one of the worst in US history, including a never
before seen loss of $.09 per share for the SP 500 in the final
quarter. The dramatic bear market was fully sensible given the
profound collapse of profitability.

Top down earnings indicators have bottomed over the past 6
months and almost all are on the rise. SP net per share was about
$10.00 in Q 1 ' 09 and the indicators presently suggest it will rise
sequentially through Q 4 '09. Viewed sequentially, sales have yet
to rise, but profitability has improved reflecting lower cost structures
for many companies. Some of this improvement has been
"manufactured" via the taking of massive inventory, termination
and closing losses in Q 4 '08. In my book, the market is now pricing
in 12 month earning power of $50 - 55 a share. This a humble
number when you consider that earning power based on the
past 23 years' range is a midpoint of $92 per share. Also of note is
that in the spring of 2008, the consensus for SP 500 eps in 2009
was $112. The recent pause in the stock market's progress is a
direct reflection of caution concerning earnings recovery prospects.

The strength of the leading economic indicator sets I follow suggests
that at some point over the second half of the year, investors may
raise the consensus for 12 month earning power from the current
$50 - 55 to $60 - 65.

Viewed on a yr/yr basis, earnings are not now expected to top the
prior year until late in 2009.

Wednesday, July 08, 2009

Stock Market -- Technical

As expected based on my 6/2 post, the market has entered a
corrective phase, with the SP 500 down about 7% from the 6/2
close. The down trend was confirmed by rollovers in the 10 and
25 day m/a 's and a break by the market below both. We have
reached a short term oversold level, and it is the steepest since
just after the market's positive turn in Mar.

The SP500 is at an interesting spot now. It is at the bottom of
my short term oscillator channel and smack on support around
880 based on the close. Since today's late rally up to support may
be but a "head fake", I would not get too excited about jumping
right back in. This cute action was too neat by half. A oversold can
be a bad thing to waste, but I plan to sit back for a few days on this
one.

A rally off 880 would suggest to many the development of a range
bound market. We'll see. After such a powerful bull run from
Mar. through early Jun., it is not unreasonable to suggest that a
10% correction off the 6/2 close of 945 down to 850 could well be
in order. If such were to occur, I would have to say that I would
have mixed feelings from a technical perspective about the
future course of the market. But, I plan to worry more about that if
and when we get there.

SP 500 daily chart is HERE.

Monday, July 06, 2009

Long Treasury Bond

Back in late May and again on 6/9, I posted that the long Treasury
was deeply oversold and that advisory sentiment was approaching
being overly bearish. I suggested I would be looking for a counter-
trend long side trade. Well, a rally of sorts has developed, although
it has been a slow one. Sentiment is less bearish now, but the bond
remains substantially oversold against its 200 day m/a. The ongoing
uptrend in the industrial commodities price composite is acting as a
strong headwind as Treasury traders like to stock up on the long side
when industrials weaken. I was hoping for some seasonal slack in
this sector of the commodities market from late June into July,
but that has yet to materialize, either. So, although the price trend
for Treasury is ok, the trade is on shakier ground, pending some
help from the industrials commodites sector. Monitoring very
closely.

Treasury price chart : $USB.

Thursday, July 02, 2009

Economic Indicators

The weekly and monthly leading indicators continue to progress,
and signal the US is coming ever closer to closing out this very
deep recession. My business strength index, which made an
astounding cyclical low of just 101.9 for 12/08, has risen to
113.4 through June, with a reading of around 120.0 tantamount
to recovery. So, recession pressure has receded substantially,
and the pieces are all in place for a positive turnaround, including
an exceptionally strong reading for real disposable income of
the consumer sector to reflect a battery of fiscal counter -
recession programs. What's needed now is more confidence to
spend at retail and invest in housing and less emphasis on
building liquidity and savings. The window is there now,
especially after a large round of inventory liquidation, which
has taken production well below consumption.

There is not a ready formula to determine when consumers will
decide to reduce the flow of money into savings and to increase
their spending. At this point, it is much more a matter of psychology
than a macro econonomic fine point. For more on spending vs
savings, go here.