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 !!!

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.