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, October 26, 2011

A Measure Of Risk On vs. Risk Off

Looking back over the past several years, it appears that when investors start to get nervous about
stocks, there is a rotation into the long Treasury. SPY vs. $USB. This has been an easy rotation
trade since 2007, although it has hardly worked so well over the long term. But, since it has been
working like a charm in recent years, it is well worth watching now. It reflects confidence in
the economy (a rising SPY) as against the prospect of recession / price deflation ( an up $USB).

We are now in a risk on mode, and if you look at the relationship MACD in the bottom panel, you
can see this pro-stock impulse could carry further until the relationship starts to get wobbly. In fact,
the evidence suggests that if you're a stocks player and the long Treas. starts to rise in price, you
should double check your assumptions. Best, you should look in on this chart pretty often if
equities are your game. For now, the same might be said about the long Treas., as an advancing
economy holds the promise of upticks of inflation.

If you scroll down to the early Oct. posts, you will see I argued that the stock market was deeply
oversold and that the Treas. was heavily overbought. Both reversed trend in short order, although
I would argue the bond is still overbought and vulnerable short term. But, with the volatility in
the markets, do not happily assume the bond can only go down for a while from here. Have fun.

Tuesday, October 25, 2011

Occupy Wall Street (OWS)

This is basically a rather small protest movement. But it has received a wide and sympathetic
hearing. The protesters are burrowing in on inequities in the US economic and political system
with the prime emphasis on the unequal distribution of economic rewards and the current deeply
plutocratic drift of US politics and political influence. The main themes revolve around the
issue of fairness in economic reward and politics. As a rule, battles for fairness in US society
are long and arduous affairs. The movement has been correct not to lay out a specific agenda but
to create an atmosphere where individual Americans can reflect on the general idea of
maldistribution in the economy and top heavy political influence and draw individual conclusions.

The danger for any protest movement in the US  is that it can be hijacked by the more fervent and
radical elements and wind up being marginalized in short order. This is particularly true for the political
Left which invariably comes acropper of established authority and the general public because it
tends to veer toward centralized authority and toward challenging long cherished rights to
private property and enterprise. Best OWS does not head in that direction, but remains a forum
that abides by the law. Stick with the promotion of equality of opportunity folks. So far so good.

Friday, October 21, 2011

Stock Market -- Daily Chart

Back on 10/3 (below) I mentioned that the market was deeply oversold and that a shorter run
bottom was close at hand. The closing low came on 10/5 at SPX 1131. Today the SPX closed
at 1238. That's a nice 9.5% move up on a lucky call (Lucky beats smart). The SPX is now at a
5.2% premium to the 25 day m/a. That is the strongest price momentum short term overbought
since early Aug. 2009. The good news is that strong momentum overboughts of this magnitude
are far more common with bull runs rather than bear. The bad news is that the SPX is still
significantly overbought in the short term so that a degree of consolidation / retrenchment could
be in order fairly soon.

The market has entered what is called a broadening top formation -- higher closing highs, lower
closing lows. This has a number of technicians nervous because formations of this sort can end
badly with a new low or even a major breakdown. I am not a big "formations" guy because I
have seen so many of them busted over the years, but it is there and you should know about it
and you should also know that there are bears out there who rely on formations like this but
do not tell you so because such elucidation can be regarded as flaky. (The formation started in
early Aug.)

$SPX

Thursday, October 20, 2011

Shanghai Stocks -- Living Down The Past

My view for this year is that the Shanghai would rally over Half 2 '11 and sustain an advance well
into next year.The problem this year has been money and credit tightening to cool a very sharp
acceleration of inflation. Business profits have advanced, but the p/e ratio has declined sharply
as higher inflation forces up return hurdle rates.

The central bank (PBOC) has been running a tighter money policy for nearly 18 months, with China
M-2 now down to +12.5% yr/yr. Assuming level money velocity, we should expect 9.5% real GDP
growth with a 3.0% inflation rate. But strong credit growth has pushed up velocity, and pressure to
curtail the overheat has resulted in +9.1% real GDP yr/yr  but inflation of 6.0%. Now although it
could be that inflation has just crested, the downward trajectory of the growth of money and credit
could carry real GDP growth lower too, even as inflation pressures subside.

Compared to the past 5-6 years, M-2 money growth is the lowest it has been which may add
downside risk to the real economy and profits. China has also allowed large 10-12% wage gains
this year. This firmly increases consumer purchasing power, but the wage hikes could constrain
profit margins ahead and slow down the inflation deceleration process.

Since the current downward trajectory of money and credit gowth if extended well into 2012
could damage China's economy and its real estate development markets in particular, It makes
sense to conclude the PBOC is probably closing in on starting to ease monetary policy. This has
been a troubling period for the PBOC, because unofficial or black market lending has turned
out to be larger and more vigorous than they thought (So they say). China businessmen, rather
than leave money in the bank at low deposit rates can, if they are careful, lend out excess cash on
the black or "stir fry" market at far higher rates. The tougher lenders can dishonor the families
of slow payers and use muscle as necessary to collect. At the same time, smaller businesses
are driven toward this market as more rationing of credit by the big banks freezes them out.
The PBOC would be wise not to sit on the brakes for too long, as bringing small business
borrowers back into the official fold would be more advantageous economically.

The Shanghai market closed 10/20 at critical support of 2331. It is an oversold market, but a
sustainable advance may await signals and confirmation that the central bank is prepared to
abandon monetary tightening.

I have been surprised by the weakness of the Shanghai this year, and my projection of a positive
second half turn is running out of time. Shanghai ($SSEC)

Tuesday, October 18, 2011

EU -- How Big The Jitters?

I have long believed that the development of a Euoropean Union was worth a tremendous effort.
I have long been aware that Milton Friedman argued strongly that simple monetary union could
be fatally flawed in very stressful economic and financial times without a powerful fiscal union
as a bedrock. My experience with humanity has taught me not hold politicians to a high standard
as the political ego is vulnerable to an array of outsized venalities. So, I have not been troubled
by the struggles within the EU to try and manage their financial problems without pushing the
reduction of sovereignty envelope too far. My hope is that sovereignty can be kept as strong
and vivid as possible even as the EU confronts its difficulties.

The US stock market has suffered a strong erosion of the p/e ratio over the past 18 months, an
erosion that has taken the multiple well below the fair value level of 16.5x suitable for an
economy with moderate inflation and nicely rising earnings. Because I think that the multiple
contraction primarily reflects the erosion of investor confidence in the self sustainability of
economic recovery, I have not tried to hang any of the blame on the EU's financial problems.

But now that major EU bank deposits have been subject to periodic run off as market players
worry over bank soundness owing to PIGS sovereign debt exposure, and further, knowing that
this game can become an emotional and contagious issue, I think it now falls to the EU to
protect its financial system from further damage without delay.

In looking at the situation and on the reasonable assumption that the EU cannot immediately
indemnify all the suspect sovereign credit, the issue turns on a reasoned guess of how much
extra backing may be required to assuage worried, prickly credit markets. At this point, it
appears that additional large provision of tier 1 equity capital or a reasonable facsimile of
same for the union's banks may also be required.

Given the limitations of inter-country politics, I am hopeful the EU can muster another $1 tril.
of funding and that the non - EU members of the IMF can pony up several hundred $bil. to
be augmented by a large infusion of capital from China, with the latter to benefit handily from
a stable Europe going forward.

So, I am eager to see what the EU and G-20 can pull together over the next two odd weeks to
keep the trains running on time. I do not know what it will take in $ to settle the foreign credit
markets and I do not know whether the EU will double down on its commitments, but the
situation has deteriorated to a point where larger, major segments of the financial and
capital markets could be seriously jostled if the EU with assistance from the IMF and G-20
do not produce a workable salvage plan.

Sunday, October 16, 2011

Stock Market -- Weekly

Technical -- Weekly Chart
The daily SPX chart indicates a short term overbought, and the easiest thing to do would be to
flag it in a post and move on. But, the weekly chart has been more telling this year, and it is pointing
to a possible positive reversal as downtrend measures of price momentum are close to positive
reversal. Check out the trend positions of RSI, ADX +DI and 12/26 wk MACD on the chart. Note
as well that my 40 wk price oscillator has, however fitfully, also turned up. Now the market
reserves the right to whipsaw and trap the bulls here, but to me, the weekly chart implies that
players should pay extra close attention to how the next week or two play out as the market is in
its most challenging position in several months.

Short Run Fundamentals
My weekly cyclical fundamental indicator does remain in a downtrend that started in early Apr. It
rallied modestly over the month of Jul. but resumed its downtrend in early Aug. It is now running
flat since mid-Sep., and this counts as another development worthy of attention.

Conclusion
I continue to lean in the direction of the view that the sharp sell off in the market since the end of
Jul. represents a steep correction in a cyclical bull market rather than the advent of a new bear
market. But I think it is a close call and I am reluctant to throw in the towel on it because I still
see a way the economy can right itself provided the real wage and the employment situation
can build on the improvement evidenced in Sept. and the private sector credit market continues
to thaw out. But, it is getting wearying and I am beginning to wonder whether I am just being
stubborn. It remains fair to say that the burden of proof remains with the bulls.

Friday, October 14, 2011

A Note On Retail Sales

Sept. retail sales advanced a strong 1.1% for the month. This was a good number, but it was not
quite as strong as it would appear since hurricane Irene so slammed the US east coast in late Aug.
that important back-to-school shopping was shifted over into Sept. Even so, when you factor in
Aug., the average monthly change was a respectable +0.55% or 6.6% annualized. More so ok
because gasoline and fuels prices have been coming down over this period, thus strengthening
the inflation adjusted number. The series can be volatile but remains in a firm uptrend going
back to the end of 2008. Interestingly, both employment and the depressed real wage did show
some improvement in Sept. as well.

Retail sales tend to get wobbly and form a plateau at the outset of a recession period. The case
for this development has not been made yet.

Wednesday, October 12, 2011

Stock Market -- Short Term Technical

The stock market remains basically unstable. It is trading in a deep staccato pattern where active
traders often find themselves extemporizing as they go along to stay profitably in the game. The SPX
has rallied as expected from a deep oversold position (Scroll down to 10/3 post for more on that),
and closed trading today at a 3.3% premium to the 25 day m/a. Since Aug., traders have been using
+2-3% readings on the 25 day oscillator to begin selling down positions. In fact, there was some
profit taking late today as the market touched rough short term resistance. In this kind of exceedingly
choppy market, it is sometimes worthwhile to watch the standard momentum measure stochastic
indicator to spot quick changes of direction. $SPX Chart  You can see on the chart that when fast
(black) breaks slow (red), direction has changed.

For long side players who are not day or swing trading, it might be best to see the market take out resistance at 1220 and look for pullbacks thereafter which take the trend of the advance down from
moonshot moves to a more sensible trajectory. That would indicate that stability was returning
to the market. There is no such evidence now and it is flat easy to get whipsawed.

Monday, October 10, 2011

Economic Indicators / Analysis

The weekly leading indicator sets remain in downtrends in force since last spring. The indicators
have been sound on inflection points in the economy, bur given their high volatility, they have not
been of much use when it comes to economic activity momentum. The monthly leading indicators
I follow show a downtrend in economic momentum, but do not yet suggest a recession is
developing. The monthly indicators have overstated the case for a broad economic recovery,
and this reflects the continuation of weak construction and labor markets.

I use monthly retail sales as something of a "halfway house" between the leading and coincident
indicators. Retail spending had shaky periods in both mid 2010 and mid 2011, but monthly data
remain in a firm uptrend so far.

The weekly coincident indicator I use has been flat since Apr. this year. The monthly data set
shows a deceleration of recovery momentum to low positive levels reflecting a moderation
of the rebounds in sales and production coupled with a continued weak labor market. The sharp
acceleration of inflation experienced over Half 1 2011 seriously undercut consumer purchasing
power and confidence.

With commodities prices having fallen sharply, particularly the important fuels sector, inflation
is set to moderate. This break is much needed to rescue the real wage which has fallen off over
the course of 2011. My economic power index is comprised of the yr /yr % changes in the real
wage and civilian employment. The current reading is a weak -1.0%. That is actually a decent improvement from Aug., but is very likely too low to sustain an economic recovery.
Without faster progress of employment and an improvement in the real wage, the economy is
set to languish as we enter 2012. For comparison purposes, a healthy power index is +4.0%.
We have not seen that for the US in nearly 5 years. 

Wednesday, October 05, 2011

Long Treasury -- Wildly Overbought

The 30 yr. Treas is trading in yield down close to the previous record low levels seen during
the deep recession period of late 2008. The shorter term fundamentals -- falling industrial
commodities prices and declining production growth momentum along with dips in other
cyclical pressure gauge measures -- have supported the downtrend. The long Treas. has priced in
a thorough going recession. With the Fed's new "operation twist", there is also a firm bid under
this market as the Fed swaps out of maturing short term securities into longer dated maturities.

I link to the 30 year yield along with industrial metals prices here. Whenever the $TYX trades
at a steep discount to its 200 day m/a as it is now, you have to be very careful. the same thing
applies to when the $TYX is trading well under the comparable prior year level as it is now. 
These are signals of a profoundly overbought market, when the yield can jump 100 - 150 basis
points in short order on a couple months worth of stronger economic data or the announcement
of easier fiscal or monetary policy (or better news from the EU on handling high risk sovereign
credits).

Relative to the experience of 2008, the long bond, on the current spike down in yields, is
trading way ahead of the weakening economic fundamentals it anticipates and leaves holders at
great risk if the bet fails and the economy does better. Viewed long term, this is a super volatile
market as you have fast money hedgies parking money here or leveraging shorts in low quality bonds.

Bull sentiment among advisors is also running at high levels and sentiment contrarians should
note that.

The market is unstable now and to counteract that lack of stability, I will probably wait for the
$TYX to rise and hold a bit above the 25 day m/a before shorting it (Check chart link again).

Monday, October 03, 2011

Stock Market Registering Deep Oversold

The TRIN indicator measures downside vs. upside in terms of volume and breadth. A rising
TRIN shows the bears have the upper hand. I like to watch the 21 and 55 day TRIN readings to
determine how oversold the market may be. Through today, the NYSE TRIN 21 and 55 day m/a
readings are showing a heavily oversold market. Markets can of course get more oversold, but
this TRIN measure, when viewed historically, has reached levels consistent with a market that
may be close to a short term bottom. $TRIN

Sunday, October 02, 2011

Stock Market -- Weekly

Technical
The weekly chart shows a shorter term basing period for the SPX. However, the intermediate term trend factors still point down, so there is no sign here yet that the market is headed into positive reversal.
The OEX 100 put / call ratio is a "real money down" sentiment indicator. This indicator has been
showing consistent net put buying on a weekly basis since last XMAS, and during this cyclical bull
market has tended to drop into a net call buying postion several weeks before a sustainable market
bottom. We have yet to see this reversal. So, the weekly chart, which can turn reasonably rapidly,
remains negative for now. My experience here is not to go long with anything but very small $ until
there is some positive stirring. $SPXhttp://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=3&mn=0&dy=0&id=p52454672129

Fundamental
In early Aug., my weekly fundamental cyclical indicator resumed a downtrend started around the market high in  late Apr. This indicator does contain forward looking measures such  as industrial commodities prices and unemployment insurance claims, so it is forshadowing a weaker economy.     The heavily coincident part of this weekly indicator does not yet show any signs of a downturn in the economy, although positive momentum has leveled off since the spring of this year. It is interesting
to note that the coincident factors like retail sales and production components have not tipped over
yet despite weakness in the more forward looking factors. In fact the coincident factors are overdue
to correct.

For more on the fundamentals, have another look at the Sep. 14 post.