Second of a three part post on market fundamentals.
Core market directional fundamentals have been positive since
late Dec. 2008. This group includes measures of monetary
liquidity, market short and long term interest rates and
confidence indicators. These are my "easy money" measures,
both in terms of betting with an accomodative Fed at your back
and the opportunity for a high return / low risk long side play.
Core indicators turn decisively negative when restrictive Fed
policy chases up short rates and corporate yields, curtails
basic monetary liquidity growth and starts to bite into my
favorite confidence measures. That process has yet to start.
When the "easy money" period ends and a more restrictive
policy is adopted by the Fed, the market may sell off some, but
can recover and go right on up. But this type of situation offers
moderate return for steadily increasing risk. It is a time to play
with a substantial and rising liquid reserve kept aside. I am
developing a couple of indicators for increasing business cycle
risk keyed on the 91 day T-bill and measures I use to determine
when corporate earnings are nearing a peak. More on this at
True to form, the 3/09 - 9/09 period was an "easy money" run.
I played it full out, but have been in on the long side more
sparingly since, simply because the advance was so strong and
I was concerned players would be far more nervous than they
Secondary indicators remain negative. the real price of oil has
found a less ominous upward trajectory, but a continuing
advance forms a headwind for economic growth. Also, with
the broad economy advancing and the broad measure of credit
driven money growth declining, liquidity available for the
stock market is shrinking.
The market has done somewhat better over the past 6 months
than I thought it would. The trajectory of the advance has been
unimposing, but it has been strong enough so far to raise a
doubt whether the negative secondary indicator readings have
created much of a headwind.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus 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 !!!