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, 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.