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 !!!

Saturday, December 29, 2012

Wall St. Finally Sends A Little Message...

Them's supposedly in the know were saying earlier in the week that the stock market
had already discounted a topple over the fiscal cliff, with the idea being that official
Washington would quickly patch everything up in very early Jan., 2013. As the chart
link below shows, not everyone appears to have received this meassage. Not only
was the SPX weak into the close on Fri., but the futures market kept right on tumbling
into early evening. SPX Future

The sell off took out short term support, knocked off the better part of the rally gain from
Nov. and left the SPX future at levels seen back in late Mar. of this year.

Perhaps this pounding of the market will impress the Congress enough to take some action
to curb apparent overdue and mounting anxiety about the fiscal cliff. At any rate, the boyz
in the capitol are running out of places to hide.

The schedule in the Senate now calls for a vote on cliff legislation tomorrow, Sun. 12/30.
The vote could reflect a deal betweern the two Senate caucuses or failing that, perhaps
an up or down vote on a heavily streamlined Obama proposal. If a deal is announced,
it may come before the SPX future resumes trading. Check your screens.

Thursday, December 27, 2012

When Go Long The Yen

Every few years, I will go against a very popular trade. In Oct. 2010, I started using a
small amount of capital to short the gold price via DB's DZZ offering (goes up in price
when gold goes down). That plus the very occasional futures trade has enabled me to
double my money on my initial gold short. I suggested back then that this was not a trade
that was suitable for most, that it was my way of having fun against the pro - gold super

The JP Yen is now in free fall mode as a resuscitated LDP talks the Yen down to break
the deflation and start moving JP exports more heavily. The currency has been rapidly
sold down and is now rather deeply oversold. So, I have added it to my list of potential
long positions for the next month or two. If it starts to work, maybe I will add some
leverage to the position. Check out the chart of the JPY ETF

I plan to wait out the tank job now in force and look for some technical underpinning
for a long position.

Japan has come to be known as the land of the setting sun. Mr. Abe wants to defer the

Tuesday, December 25, 2012

SPX -- Weekly Chart

I use weekly charts as a very important aid in determining how much capital to allocate to
the equity market. The oversold in Nov. was not deep enough to capture my interest and the
indicators I rely on most are all not yet positive owing to the sluggish 12 wk. ROC or
price momentum measure. SPX Weekly Chart  I also pay careful attention to the behavior
of a 40 week price oscillator. You can do about the same with a daily SPX chart and a
200 day m/a oscillator shown here via Index Indicators. This latter chart shows a weak
upturn in the smoothed 200 day m/a oscillator for the SPX. Neither the 200 day or 40 wk.
m/a oscillators have been strong enough to confirm an intermediate term positve reversal.
So, I blew this one and if the market continues to rally, I'll have to decide whether to chase
it (ugh!)

If you return to the II chart of the SPX and the 200 day m/a oscillator you will note that there
is a downtrend in place for the oscillator itself. Looking back over the past 25 - 30 years,
that downtrending pattern in the oscillator is usually not a good sign for bulls. One way to
get around this type of situation is to look for a positve reversal of the downtrend in the
oscillator which is strong enough to create a reversal that breaks the downtrend line to the
upside. History says the longs usually get hurt while waiting, although there are two very
interesting counter - examples, namely Q 3 2010 and Q 4 2011, when rapid sell offs were
followed by powerful positive action in line with QE developments by the Fed.

Sunday, December 23, 2012

Final Week Of 2012

The US economy rebounded some in Nov. My weekly cyclical fundamental indicator is
up nicely here in December and the Fed stepped up with a large securities purchase this
past week. The table would appear set for continuation of rallies by riskier assets with
only a hint so far about concern for slipping over the fiscal cliff. The odds are low now
to avoid hopping over, but there is still a chance for a deal or a motion to move the cliff
further out in time. Weekly Markets Chart

10 Year Treasury (Top Panel)
The 10 year is up slightly in price for the YTD and should be trading down sharply now
on the basis of strengthening production and sensitive materials prices. So, as of tonight,
the bond guys are leaning toward a negative fiscal cliff outcome with taxes set to rise
enough to cut into economic growth next year.

SP 500 Index (2nd Panel)
Positive for the year, but the vast bulk of the gain came in the opening months. The market
suffered from an extended economic slowdown over much of 2012, but has rallied recently
on better economic news and the return of the Fed to QE. Stocks so far show no real anxiety
about the fiscal cliff. (Because it is so late in 2012, fund managers with a calendar year
performance bogey are loathe to sell lest a non-punitive fiscal deal is reached.) SPX still
yet to prove it can stay above 1400 resistance.

US Dollar (3rd Panel)
The USD started a downtrend right as Fed Chair Bernanke began to pound the table for more
QE around early Jun. Dollar bears are holding off now because a nasty fiscal cliff spill
could punish not only the US but the global economy as well.

Gold Price (Bottom Panel)
The gold price can be shaky around year - end, but I think the bugz do not like the inflation
control strings on the new QE program and have their positions under review. The sharp
drop in the gold price over the final months of the year does invite the question of whether
the bugz know something about the fiscal cliff that other markets do not.

The Risk To Raising Income Tax Rates

In my view, US history shows that the biggest risk to raising tax rates is that political
forces can conspire to keep raising them over time to the point where the wealthy and the
successful can, in effect, wind up working for others to whom income is redistributed.
The elixir of tax rate boosts spurs politicos to find ways to spend the revenues and reduces
incentives to manage government spending. Solid fiscal conservatives can accept raising
taxes to fund national security and other emergencies as well for funding government
investment programs that enhance longer term growth potential and wind up paying for
themselves. Here in the new century the major evident funding requirements are for
consumption via social insurance and medical care outlays. The revenues will feed back
quickly into the economy, but unless there are sensible cost management controls, serving
the income and medical needs of the huge Boomer cohort, allocation of resources to
these sectors could create imbalances which might damage the economy in the lon run.
Top Marginal Income Tax Rate Through History

So, as most economists recognize, there will have to be tough balances struck between not only
revenues and outgo but between sectors requiring resources. Our problem is compounded
by the fact that the US has not run up a large surplus to meet the needs ahead and is instead
running a large budget deficit in a fragile economy in which the budget shortfall reflects
inadequate cumulative revenue generation.

Budget management going forward is going to be a dominant socio-economic issue, and
there may be wisdom in making a modest initial down payment on the eventual restoration
of fiscal integrity in the near term.

The problem now is that the House GOP is trafficking in an alternate socio-political  reality
of which "never raise tax rates" is but one facet. And, the GOP is using that leverage they have
in the House to try and force a set of social and political judgments on a society which is not
 by and large accepting of this regimen.

I hope that GOP members of the House are verbally savaged over the holidays in their districts
so that they return to DC with a far more balanced perspective regarding the fast approaching
fiscal cliff. Minority movements in the US are often right, but this one is not. This one is
tyranny, and what should concern us is that minority tyrannies in the US can last for a long
time if the power base remains intact. Serious business is this.

Wednesday, December 19, 2012

US Financial System Liquidity

In this post, I take a little different approach to the issue of financial system liquidity.
Over the 2000 - mid 2008 period, US bank financial assets grew at a rate of 9.4%
annually. This dramatic growth was sufficient to fund a major boom in real estate
plus moderate levels of economic expansion and inflation. Then came the grand bust in
both the economy and finance. Since the middle of 2008, total bank credit has grown
by 1.1% per year, with this lowly rate of growth supported and backstopped by a $2 tril.
expansion of credit by the Federal Reserve Bank. When you toss in the Fed's $2 tril.,
total bank system credit has compounded by only 3.7%. That is still a low number, and
if you use total cash and credit to determine the velocity of "money", compared to GDP,
there has been a modest increase in a relatively well balanced MV = PT equation. There
has been no "liquidity trap", but the modest growth of total financial system liquidity
and the economy reflects the damage done to supply and demand for credit within the
private sector since the deep recession.

The new round of large QE the Fed is set to start is in large measure intended to assist
a still very conservative commercial banking system that has been intent on maintaining high
balance sheet liquidity and on re-building capital. The banks have been very slow to
return to normal cash flow analysis as a basis for credit decisions and away from collateral
value based lending. Solid borrowers with strong income and cash flow profiles are
still finding it difficult to to obtain credit, especially in the real estate sectors. Obviously,
one cannot lay off the slow growth of private sector credit entirely on the banks. Housing
affordability measures are very strong assuming borrowers can put 20% down on a home
purchase. The 20% down hurdle is going to remain a barrier for a goodly of number of
applicants whose incomes have grown very slowly since 2008.

The plan for QE 4, which could be quite large if the Fed steps up buying MBS as well as
Treasuries, is to speed the thawing of private sector credit growth. Prior QE programs
have helped with the tahwing out process and so we'll see if the new round of support will
push bank lender confidence higher in the year ahead.

Monday, December 17, 2012

Stock Market -- Daily Chart

The SP 500 is in a confirmed short to intermediate term rally. It is now mildly overbought
only on shorter term price momentum, but has the potential to run significantly further on the
extended time shorter run indicators shown. SPX Chart

The trendline support for the rally is inconclusive and will remain so until the SPX can move
decisively above resistance / congestion in the 1460 - 1470 area on the SPX. In fact, even if
the SPX was to close out 2012 in the 1475 - 1500 area, it would still not be entirely above
suspicion on a cyclical trend basis, given my admittedly conservative reading. I do not
intend this as a bearish comment on the chart because there may just be sufficient momentum
in the current rally to bring the SPX above 1475 by year's end.

The reality here could well be that very short term fundamental factors could be the key to
seeing an extension of the rally through 12/31/12. My weekly cyclical fundamental indicator
has reversed nicely to the positive side, and, as of this writing, all is not lost yet regarding
the avoidance of heading over the fiscal cliff. By the same token, you have to keep in mind
that deals can get blown up in the 11th hour, and that even if effective compromises are
struck, investors and traders may not like the results very much.

Saturday, December 15, 2012

Economic Indicators

Coincident Indicators
There was improvement in this data set for Nov. on better real retail sales, industrial
production and a reduction of pressure on the real wage reflecting weaker fuels prices.
Measured yr/yr, the coincidents rose by a combined 1.6% compared to +1.2% for Oct.
Moderate growth is signaled at +3.0%, so economic momentum remains subdued.

One issue to check closely going forward is the ratio of inventory to sales for business
which has jumped through Oct., indicating an imbalance between sales and production.
The build up of inventories to sales is the largest since early 2010, but is not yet critical.
Business I/S (Scroll down a little bit.)

Corporate Profits Indicators
My sales growth measures are running about +3 - 4% yr/yr. Volume growth has eased and
pricing power has come down substantially over the past 15 months. There has been an erosion
of profit margins outside of the financial sector as the premium of selling price over costs
has nearly evaporated. Banking sector earnings  and the profit margin are strong as a reduced
loan loss reserve continues to add to profitability and book ROE%. Corporate profits have
flattened out.

Inflation Potential
My primary inflation thrust indicator fell sharply from mid - 2011 through mid - 2012. Over
this same period, the 12 month CPI dropped from 4.0% to a low of 1.6%. Inflation has
picked  up modestly over the latter half of this year measured yr/yr, but the thrust indicator
remains quiet for now.

Next year could be a different story. There will be QE 4. China, the major buyer of commodities,
could well move back to faster growth. Finally, I expect the US to return to pressuring Iran to
give up on weaponizing its nuclear materials. Wholesale Gasoline Spot Price

Thursday, December 13, 2012

Gold Price

The gold price pulled out of a mild bear market in June of this year following heavy hints
from Fed chair Bernanke of further QE to come and ECB chair Draghi who set out open
ended liquidity back up support for seriously troubled EZ members.

My monetary and economic indicators remain negative for the gold price, but the monetary
component will shift positive in 2013 as the Fed re-opens the monetary tap. The very clear
loss  of growth momentum for the industrial side of the global economy has yet to reverse to
the upside.

With the fiscal cliff issue unresolved, the bugz have been treading lightly with gold, concerned
that possible significant austerity in the US could well have negative global repercussions.
The bugz have merely joined large segments of the capital markets that are on cliff watch.

Of particular interest with gold is the Fed's idea that QE 4 could be suspended and, possibly,
temporarily reversed if US inflation accelerates markedly. This control for the new policy
adds risk for QE - based speculators in PMs and commodities. As well, although there is
substantial slack in the US labor market, such may not be the case with regard to plant
capacity utilization. In the depths of the recent recession, the US operating rate fell to 68%,
a level not seen except before WW 2. Capacity use has recovered to around the 78% area
since, and once it crosses 80%, it is wise to start looking for a cyclical and not merely
commodities driven acceleration of inflation. Since capacity growth is exceptionally low
now, the US economy could get into a tighter capacity utilization mode if there is a major
positive response by the economy to the new QE program. The Fed is now freer to respond
to that and that could move gold fanciers into a riskier position.

In the world of the gold bugz, much is made of the "destruction" of currency value and the
presumed very large inflation potential of the Fed's QE programs. Now, I have a much
broader view of money and credit, and by my calculation, all the Fed has done so far
with the $2 tril. it has added to its balance sheet is replace most of the slightly more than
$2 tril. in short term credit that has evaporated over the 2007 - 12 period. Had the Fed
not done that, some of us would be selling apples dirt cheap to others. But, by current
convention, the Fed's QE actions are seen far differently by many.

I have linked to a gold price chart and you will note there is short term price support at $1660
and significant support at $1550 oz. Clearly evident resistance is at $1800. Gold Price Chart

Wednesday, December 12, 2012

Update of 12/5 Russia Chart

$RTSI Link

US Monetary & Fiscal Policy

The Fed has moved on to QE 4. QE 3 was a place holder wherein the Fed was supposed
to buy $40 bil. a month of MBS a month. It has been running behind in fulfillment, but
maybe it will make it up quickly. With QE 4, the Fed will continue the MBS purchase
program, and It will add $45 bil. a month in Treasury note and bond purchases starting in
Jan. 2013. It will continue the program until the inflation rate edges up to 2.5% and /or
the unemployment rate declines to 6.5%. With these guideposts, QE is designed to support
the labor market by providing liquidity behind an economic expansion until unemployment
falls to a more reasonable range and to protect the real wage from the ravages of an
inflation induced by commodities speculation if players use the large increments in monetary
liquidity to pour into the commodities markets, especially fuels and foods. In short, the Fed,
with this new controlled QE program is not going to issue a "blank check" for guys to chase up
commodities prices with impunity as occured from early 2009 through mid - 2010. The
inflation consequences of hefty rallies in commodities prices have penalized the real wage
over the past couple of years in concert with reduced current $ wage growth as businesses
moved in to exploit a weak labor market. This move by the Fed is a positive for the stock
and commodities markets, but the inflation limit control factor adds more risk to the
equation, risk that would normally reflect boosts to short term rates (which the Fed does not
now plan to raise soon.).

Obama has failed to sweet talk the GOP into the 21st century. So as the Nation's chief
executive, it falls to him to kick ass with gusto over in the GOP side of the House. As
much as I would like to see that, putting on income constraints for 2013 to raise more
tax revenue requires a very light touch else the weakest part of the economy -- household
income -- could be punished enough to create some significant drag for the economy. I
am particularly concerned about restoring the 2% cut in the payroll tax.

The polls show that folks do not mind raising taxes on the wealthy and deplore the idea
of trims to Social Security and Medicare. Both the president and the Congress have to
free themselves from lobby driven and ideological constraints to figure out ways to sensibly
corral the world's most expensive health care delivery system, a system that is highly
inefficient. Soaking the rich is not the solution. Intelligent cost management is. Neither the
Dems or the GOP seems ready to tackle this urgent task yet.

There is a decent level of investor confidence that official Wash. DC will work out a
deal on the cliff which will be punitive short term in but a minor way. A fast 700 points off the
Dow would hasten the process of closure, but barring a tantrum on Wall Street, the show
along the Potomac may just drag on.

Monday, December 10, 2012

Monetary Policy -- Clarity Needed On Liquidity

The Fed will update us on monetary policy this Wed. Dec. 12. Operation Twist winds up
at the end of this year, and the Fed is running out of short term Treasuries to swap out for
longer dated  T-notes and bonds. The Fed needs to indicate whether They will elect to
continue expanding the longer dated Treasuries and whether They will buy same outright
to do so. The Fed should also explain the irregularity of QE 3 MBS purchases and why
They have been running 50% below the purchase pledge made in Sep.. Bernanke will also
face questions regarding Fed policy options viv a vis the fiscal cliff.

My broad measure of credit driven financial liquidity continues to expand, but measured
yr/yr, it is still growing  slowly and could be inadequate to support an expanding economy
without a QE program that provides sufficient monetary liquidity to offset the very slow
rate of credit funding growth. Bernanke's persistent criticism of the very conservative
lending practices of banks reflects his awareness of the issue.

Based on the growth of monetary liquidity in the financial system this year, the real economy
should have performed better. But stock market  and economic performance both lost
substantial momentum after the large $100 bil. currency swap the Fed put on in late Dec. '11
ran off by springtime and the Fed allowed its balance sheet to contract. So, there does
appear to be a confidence factor that reflects Fed policy and intent. But note also that money
M-1 grew only at a 2.4% annual rate over the past three months. The three month time frame
is admittedly a short one, but the deceleration of growth in the basic money supply is exactly
what one should expect after an extended period of a $ flat Fed balance sheet (Fed Bank Credit
is now around where it was at the end of QE 2 on 6/30/11).

Friday, December 07, 2012

US Economic Indicators

On balance, the economic indicators are ever so mildly positive and  the trend downturn in
momentum for these various indicator composites bodes ill for 2013 without more quanti-
tative accomodation by the Fed, more aggressive lending by the banks and a willingness by
businesses to pay a living wage instead of handing out 1 - 2% wage increases to so many
workers. For business to stop impovershing the work force, The Fed and the banks need to
provide liquidity and credit to underwrite enough economic growth to help alleviate the
large slack in the labor market. Right now, cheapskate CEO's are damaging economic
potential. Official Washington needs to tread very lightly tightening fiscal policy next year.

Recovery progress has broadened out and the credit markets are thawing, but the economy
should still need policy assistance next year to draw more resources back into the game.

Weekly Leading Indicators
The WLI I follow suggest that the economy is set either to grow slightly or possibly flatten out.
The trend of the WLI shows persistent growth deceleration from 2010 (confirmed by actual
performance). The volatility of the WLI has attenuated but is still above average on an
historical basis.

Monthly Leading Indicators
New orders measured by breadth have also been decelerating since 2010 and, like the weekly
leading indicators, are now less volatile. Improvement in orders is clear since the lull in mid-
year but has recently flattened out as manufacturing has lost momentum.

Weekly Coincident Incicators
The WCI composite is flat since making a cyclical peak in April.

Monthly Coincident Indicators
Fresher data will be available over the next couple of weeks, but my set of coincident
measures is up just 1.2% yr/yr compared to a normal solid growth measure of 3.0% yr/yr.
Distressingly, the real wage has been decelerating since late 2009, and is currently again
in negative territory. The recent expansion of consumer credit only partly reflects some
improvement to consumer confidence as many folks are using credit to buy essentials as well.
The Economic Research Institute uses indicators similar to the ones I use to argue that the
US is aleady in recession. ECRI has been good at cycles over the years although many
economists take issue with Their current call. ECRI's The Tell - Tale Chart is worth a read.

Longer Range Indicators
The longer term downtrend of real earnings because of very low wage increases for the rank
and file remains disturbing. At best, too many folks are being pushed to use credit to buy the
necessities. Continued pressure on the real wage undermines the visibility of the economic
recovery and increases business risk. A rising oil price has penalized real earnings and a
very sharp spike in oil / petrol prices could be fatal. A tougher stance from the US toward
Iran is likely next year and could well have economic consequences.

Fed bank credit and the monetary base have changed little for over a year. QE 3 has been
more nearly a dud so far, with the Fed having only fulfilled 50% of its QE pledge to date.
Private sector credit growth and broader measures of financial liquidity are improving, but
I think it is risky not to push QE 3 harder until credit and credit - driven liquidity show
more acceleration.

An ongoing ZIRP and positive yield curve would normally be cause for celebration of an
economic recovery / expansion. But the sluggish trend of broad liquidity expansion does
undercut the reliability of  ZIRP and the yield curve. The slope of the yield curve has
come down this year as a strong Treasury market reveals investor concern about the
economy's potential.

Thursday, December 06, 2012

US Stocks Out Of Favor -- Trade Is Getting Crowded

Back in June of this year, when the Fed made clear its intentions to start a new QE program,
foreign stocks began to outperform the US market. US basic economic fundamentals and profits
performance has deteriorated over the second half of the year. Yet, by some measures such as
comparative PMI data, the US has continued to be one of the stronger economies. Moreover,
the QE 3 program is off to a very slow start. The ability of the Fed to buy up MBS at attractive
prices has proven a tougher than expected go, and mortgage lenders are not passing on the
lower rates in the secondary market to borrowers. Experienced observers wonder whether the
Fed may choose to modify the QE program. Even so, the US dollar has weakened  since the
announcement of QE 3, putting US equities at a competitive diasadvantage that so far has
interested traders more than decent relative fundamentals. As well, buying foreign stocks
is a way to reduce short term risk exposure to the still unresolved fiscal cliff issue. Note,
however, that the relative strength line for foreign stocks is beginning to reveal that this trade
is getting crowded in the short run on extended RSI and MACD.

The chart linked to below shows the RS line for SPDR World - ex US (GWL) against the SPY
and also features the PS bearish dollar fund (UDN)which rises when the USD falls. GWL/SPY

Wednesday, December 05, 2012

Stocks -- A Push From Russia

Russia plans to privatize another and very substantial $100 billion of Its industry next
year. Bloomberg mentioned that Russia may retain Goldman Sachs  to provide support
for the effort. So, there may be another push coming to interest outside capital in the
Russian market.

The RTSI index is up slightly on the year even though the economy has held up better than
most forecasters expected given Russia'a economic ties to the EU. Among larger economies,
the Russian market does have a very low -- 5 x earnings ratio. Fact is though that the economy.
though growing consistently, has experienced both a deceleration of economic growth
momentum and an acceleration of inflation pressure up to 6.5% currently. With investors
wary of capitalizing earnings too generously, the p/e for Russia is not that cheap given the
inflation scenario. Russia GDP

I have traded the Russia etf RSX in the past as a high beta way to play a rising oil price.
Oil is still critical to Russia's economy and budget and because I think 2013 could be a
volatile year for oil given turmoil in the mideast and the likely return of US focus to Iran's
nuclear program, the Russian stock market could have a couple of strong price rallies as
the oil traders seek to handicap developments in the greater middle east. In addition, a
large broadening of industry privatization and, perhaps, support from Goldman's bankers
and research for Russian equities, could add some excitement to the market next year.

I have linked to the RTSI index below. The market is nearing another positive turn
following a recent correction. You should also compare the RTSI to the oil price and to
the S&P EURO STOXX 50 (both of the latter are on the chart). RTSI Chart

Next year could see the US and Russia on different sides of major geopolitcal developments.
Many Americans wish Russia could be more like the US. But, Russia is Russia. I love the
music, dance, literature and the older architecture, but not the politics. I am not fully at ease
with Russia, but great nation, great people.

Monday, December 03, 2012

China Stocks Divergence

China has operated through most of this year with easier monetary policy and, in line,
the economy has been performing better over the past 4-5 months. So has the pricing of
residential real estate. The real estate market remains at the center of speculative interest
in China as the Shanghai Exchange index continues in a bear market despite easier money
and an improving economy. Major investors and traders around the globe remain
focused on the quality, big cap liquid names (GXC) which have fared better than the
broader SSEC. China remains a tough market to trade. SSEC with GXC In Top Panel

Stock Market -- Daily Chart

The uptrend underway since mid - Nov. is intact, but is not well defined. There is not as
yet solid confirmation for the short - intermediate trend although the indicators are moving
toward positive. Traders so far have shown no inclination to worry about a retest of the
recent spike low and rally, a development that has grown more common during the cyclical
bull. The SPX 1400 line is the last important resistance level to take out decisively. The
SPX has been unable to hold above the 1400 level with much consistency since late 2007.
So, staying power above 1400 remains a big deal. SPX Daily Chart

Friday, November 30, 2012

Stock Market -- Monthly

I have stayed away from the long side of the stock market since the spring of this year.
I have found it far easier to profitably trade oil and commodities. Based on my trading
disciplines, I have no good reason to play in the stock market presently. I am a trader
now, but if I was a longer term player I would be careful in here. This is not a garden
variety cyclical bull market and we have seen some mean quirks. The environment in
the shorter run is a dicey one on the fundamentals even holding the fiscal cliff aside.

By my lights, monetary policy still remains at best wanly positive. The Fed is adding
liquidity to the system at only a modest rate and Fed Bank Credit, adjusted for inflation,
is down for the past 12 months. That is a recipe for recession unless private sector credit
driven liquidity growth is robust, which it is not. Presently, neither Fed QE or bank funding
is growing rapidly enough to have confidence the economy will not stumble.

I have a baseline case for decent economic and profits growth for 2013, but funding for the
economy needs to pick up very soon if the baseline is to work out. The Boyz in Wash. DC
are still meandering toward the fiscal cliff. How much damage They will do to the economy
is still largely an unknown, but I would note that neither side has continuation of the payroll
tax cut as an item to be maintained. If US consumers lose that cut in 2013, it will punish
real incomes and will weaken the base case I have.

Business top line sales growth has decelerated sharply since 2011 and profit margins are
under mild pressure on operating slack even though the price / cost profit margin measure I
use is holding up. Since Hurricane Sandy likely negatively affected business in Nov., we may
actually have to wait well into Jan.'13 before we can see whether the deterioration in sales
and profits momentum is likely to continue or reverse positively. This bit of due diligence
will be required regardless of the outcome of the fiscal cliff.

SPX Monthly Chart
Check out the monthly SPX  The chart shows the SPX remains in a cyclical uptrend on a
monthly basis. It is not overbought against its rising 10 month m/a, and the MACD reading
continues positive although extended. The momentum measure is positive. It has grown more
subdued recently but is still not far below overbought levels. Lastly, the stochastic measure
shows a negative violation  in price momentum which deserves attention as it could be
forshadowing a downward turn in the market.

Tuesday, November 27, 2012

Capital Goods / Industrial

This broad sector has underperformed the stock market since the spring of 2011. From
then, the momentum of the growth of industrial production and business sales has slowed
markedly, with the now rather important book of export sales curbed by slower economic
growth offshore US and a stronger dollar. Industrial output in the US has flattened out in
2012, and factory operating rates have fallen. Business has responded very quickly, with
new orders for capital goods (excluding aircraft & defense) having tumbled this year until
just recently. New Order

The chart shows data through 9/12, but there was another and significant increase in orders
for Oct. Note as well that the chart shows excessively rapid growth of new orders from the
1992 - 2000 period, driven by the broad tech sector, the internet and "dot.com" booms and the
very large build out of wireless telecom. With execess capacity on hand since 2000, capital
goods orders have been range bound, and it is quite something to see how fast orders tanked
this year as operating rates softened.

This recent improvement in orders reflects the positive reaction of business to the early
expectation / follow through of the Fed's QE 3 program. The capital goods / heavy industry
 sectors are interesting long term because with so little growth of capacity since 2000, plant
and equipment is aging and is due for substantial overhaul. The sector could well experience
better economic and stock market performance over the year ahead if the resolution of the
fiscal cliff issues in the near term is not onerous.

S&P XLI Spyder price and Relative Strength Chart

Sunday, November 25, 2012

SP 500 Weekly Chart

The way I read the weekly chart, I should probably wait up to a couple of weeks before
taking a significant long position in the market even though the indicators are inching
toward positive. SPX Weekly

Saturday, November 24, 2012

Stock Market Comments

Reflecting the global trend, US business sales growth has steadily lost momentum over the
past 18 months reflecting a deceleration of volume growth and a loss of pricing power. Profit
margins have ebbed modestly on a deterioration of the selling price / cost ratio  for business.
More recently, the US operating rate for business has also ebbed modestly, which further
curbs efficiency. Recession in Europe and sharply slowing growth in main Asian economies
have significantly curtailed US export sales momentum.

It has been my argument that by shrinking the prime base of monetary liquidity since mid -
2011, the Federal Reserve was gambling with the US economic recovery. Fortunately, since
the basic money supply in the US financial system did not suffer a loss of growth momentum
below danger levels while private sector credit growth began to expand modestly, the system
has not sustained the kind of liquidity privation that assures a full blown recession. There has
been damage, but so far, luck has been a lady for the Fed.

Monetary policy regarding liquidity has reversed from negative to positive. When there is a
deep downturn and low business and consumer confidence, a QE program can take up to a
year to foster recovery, but, when there has been only an economic slowdown with no large
loss of confidence, QE can bring support far, far more rapidly. Still, the Fed should speed up
Its program as it is behind schedule.

Ongoing QE and grinding improvement in private sector credit demand set a more positive base
case for the US economy in 2013. There may well be a hit to growth next year from resolution
of the fiscal cliff issue, but it is still too early to tell how large a penalty there will be. The
sensible course is for official Washington to strike a deal which both sides can crow about but
which does minimal economic damage to the real economy through mid - 2014. We'll see.

My core fundametals signal a positive environment for stocks next year provided the Fed does
not welch on its QE commitment. Stock market volatility should increase between now and
early Jan. as the President and  the Congress work their wills with the fiscal cliff.

When I look at cash reserves in the system, I think funds are already heavily deployed. Thus,
for the stock market to have a strong year, money is going to have to come out of the bond
market which has been a huge beneficiary of the deep recession / slow, painful recovery we
have witnessed over the past 5 years.

The market has been in sharp recovery mode over the past week. The tradable price
momentum oversold has been wiped out. The market has also been in a saw tooth down
pattern which should be tested this coming week on heavier volume. The price bounce is still
too young to have turned my indicators. I note however, that contrary to longer term history,
the market has been able to rally off the sharp down spikes in price over much of the current
cyclical bull advance as changes in trader sentiment have appeared to happen very rapidly. I
would love to see a retest of the recent low, but traders have been far less cautious during this
market. SPX Daily Chart

Tuesday, November 20, 2012

Call Me Old Fashioned...

Today was a dud following yesterday's big advance. Big one day upmoves without positive
follow - through the next few days are off-putting. Sometimes a big one day move during
a downturn reflects fast short covering by traders caught flatfooted by a positive news item
and sometimes it reflects positive interest but with a lack of conviction. It is like a band
wagon that only goes for a couple yards before encountering challenges. At any rate, if you
are freshly long, watch carefully for some decent follow-through in the days ahead.

Oil Price
My plan has been to go long oil near year's end or in early 2013. The oil market is in its
weakest seasonal period of the year and I was hoping that with global economic activity
still very sluggish, I could take a long position and pick up oil with WTIC down in the
75 - 80 area over the next month or two with an eye toward holding it through 9/13, as I
think US attention will re-focus on Iran and its nuclear program now that the election is over.
I am assuming Iran is providing financial encouragement to Hamas now to message the West
that It can make trouble and create some war fatigue in Israel. But, I think the US will
return to the Iran nuke issue next year anyway.

The oil price is having a counter - seasonal rally here as traders play with Israel vs Hamas
and the newly positive vibe on settling the fiscal cliff issue here in the US. I do not want to
be piggy and wait for $80 bl. or lower, but I'll probably sit on my hands for a spot longer.

WTIC Chart

Saturday, November 17, 2012

Stock Market -- Daily Chart

I am now seeing a rash of "ok now to buy the correction" strategy pieces. It is true that we
have witnessed a "garden variety" type price correction. Moreover, I have been looking to see
what traders might do if the SPX fell 5% below its declining 25 day m/a. It did so this week
and there was a minor bounce. Finally, on Fri. just passed, House Speaker Boehner (R-OH)
indicated that revenues were on the table re: the fiscal cliff issue. That comment served to
cool fears that the US would head pell mell right over the cliff into deep austerity. So, since
the market has hit a more respectable oversold, there may be some positive carry into the
coming week, so long as nothing else of material consequence intervenes ( Gaza, bad vibe
on the Sunday talk shows etc.). I note as well that the Fed moved in late in its reporting period
last week to buy a large slug of MBS as well as some Treasuries. That probably did not go
unnoticed by traders (and was also overdue).

However, the SPX did experience a fast breakaway down move in recent weeks and it is
often the case that the market can bounce after the quick break down only to move back for a
retest of the low to verify support is really there. Keep that in mind.

I have linked to the daily SPX chart and you will note the top panel features the relative
strength of the SP 500 against the long Treasury. I would be watching this carefully as well
since the economy is sluggish enough to keep my weekly and monthly fundamental indicators
for the long T price in positive territory. How sluggish are things? Plenty. When the US economy
is humming along at a moderate pace my coincident economic indicator should be running
around +3.0% yr/yr. The reading for Oct. was +1.2% -- low and sloppy.

SPX Daily Chart

Wednesday, November 14, 2012

Stock Market Quickie

A tough Obama line on the fiscal cliff, ugliness in the streets in some southern EZ capitals
and, not to be outdone, Israel bombs Hamas and launches tank fire down into Syria from
the Golan. The US stock market is now in breakaway down mode, and the road map on
breakaways is unfortunately sketchy. The SPX is approaching a decently tradable 5%
discount to its 25 day m/a. The action in recent days shows failure to hold positive moves
early in the day, but with a deeper oversold now at hand, a stronger test of intent is ahead.
SPX Daily

Tuesday, November 13, 2012

Eurozone Status Check

Critically needed monetary liquidity growth is wavering after a modest advance.
The broader money supply remains negative in real terms as EZ private sector credit
continues to decline. The EZ recession-- still mild --  has been slowly deepening and
broadening. The Euro and the stock market remain well off lows based on the
promise of sizable securities purchases from the ECB (If only the needy would ask
for it).

Euro stocks as a group outperformed the US market in the recent rally from early Jun.
even though the Euro weakened against the US$ and fundamentals fared worse compared
to the US. The recent strong comparitive equities performance in the EZ is far too
sophisticated a move for a guy like me who sits a wide ocean apart from Euroland.

IEV and $XEU chart

Sunday, November 11, 2012

Stock Market -- Weekly

In summary, the shorter term fundamentals suggest a flat / slightly weak market which
could turn positive at the drop of a hat. The weekly cyclical fundamental indicator has
edged down moderately from early Oct. It has not lost much ground in the last couple of
weeks, and, looking across the values, there is a little more stability. The Fed has been
missing in action on QE 3 in recent weeks. With the election out of the way, perhaps the
Fed will find a postive groove in the weeks ahead. With the holidays coming, the Fed
will need to add liquidity to the system for seasonal reasons even if They are having
second thoughts on the QE 3 program. Resumption of QE will be supportive of stocks.
Right now, the Wash. DC official players are speeding toward the fiscal cliff, but matters
can always change quickly and positively if a deal is struck which metes out the economic
damage in a gradual fashion. Expect a sky clouded by trial balloons from Wash. and a
multitude of of suggestions from our many wizardy pundits.

My weekly SPX chart still has us in a down market that is still significantly above the
kind of deep oversold which would signal that a strong rally may be close at hand. Again,
we also see a market which has fallen below the longer term cyclical trend (This also
happened in early Jun. '12, but we had a quick "down and back"). Weekly SPX

I have also linked to the NYSE advance - decline chart. It is a weekly chart and notice
that a 6 wk m/a of -1000 has yielded nice buy signals. Notice as well that market
advances have proceeded without the 6 wk m/a having to hit -1000 (Apply your own
parameters). Weekly $NYAD with weekly $NYA

Friday, November 09, 2012

Time For Obama To Kick Some Ass

Most traders and invesment people think official Washington will find a few ways to
circumvent the upcoming fiscal cliff. I do not share that view. Instead, I see a wider
political battle over who governs -- the House of Representitives or the White House --
that could end with a fiscal cliff dive. Today, House Speaker Boehner (R - OH) not
only drew a hard line in the sand on maintaining the full income tax rate structure but
linked a prospective bargain to an upcoming vote on the US debt ceiling which could
come in Feb. 2013. Obama's line in the sand is a bit more squiggly, but top Democrats in
the Senate are drawing a firmer line on tax rates as are WH spokesmen. But Boehner
threw down the gauntlet by threatening to use the debt ceiling issue as a blackmail

The easy thing to advise here is to figure there will be deals that settle the matter for
a goodly period but that the markets could be volatile until the deals are clear. However,
since I believe the House wishes to govern the country rather than the President, I
think Obama will have to confront them head on not only because the presidency is being
challenged but also because he will lose the support of his party and most of the country
if he fails to stand up to this unenlightened group of House conservatives and Tea Party
zealots. His academic specialty was constitutional law, and surely he must recognize when
the presidency is being challeneged. So, I see him vetoing any deal if he does not get what
he wants. In this regard, he has already made clear his willingness to agree to a range of
spending cuts.

When 2013 opens, there is a good possibility the US will go over the cliff unless the House
caves in on taxes and agrees to slim down the future defense budget. Moreover, not only
must Obama take his case to the country but he must also make clear to House members he
will use the levers of the executive branch to punish their districts if they will not budge on
raising high earner tax rates.

You know, in the US, race is never far below the surface socially and politically. The wealthy
white folks who run the GOP have their political views to which they are entitled, but to me,
there is the clear undercurrent of heavy aversion to taking leadership from a man of color and
especially from a guy who is clearly brighter and more articulate than they are. This racial
element and paranoia it engenders greatly increases the obstinacy of the House GOP. Not
only that, but the white guys know Obama does not want to appear "uppity" and "ornery" lest
he be seen as a bad ass dude who needs to be corraled. Obama has avoided this sort of
confrontation so far, but it may well be unavoidable now if Boehner and his guys decide the
public will ultimately support the white folks in a showdown. How Obama has maintained
his poise with these guys is quite something.

Unless the GOP caves on increasing tax revenues, it will be high time for Obama to kick some

Wednesday, November 07, 2012

Stock Market Comment

In the immediate aftermath of the election, official Washington is abuzz about restoring
fiscal integrity and resolving the cliff (1/1/13 expiration of tax cuts and mandated spending
cuts). Business leaders are clamoring for a budget deficit reduction accord so they can
run their business plans more effectively. However, any fix worthy of the name will do
damage to the real economy.

Monthly new order rates through Oct. in the US are trending up but suggest modest growth.
The global situation is more precarious, with nominal growth indicated but butttressed by
the US. My weekly forward looking economic indicators rose from Jun. - early Oct. but
have now eased down and may well continue under modest pressure over the next few
weeks. No hint yet of a more serious erosion in the outlook.

From a pragmatic political point of view, now is a good time to secure some revenue
increases and cut fiscal spending in selected areas since there will not be another election
until Nov. 2014, two years hence.

With Washington now newly reverential toward reaching a budget deal in a fragile global
economy, one can easily understand an extension of the correction in the stock market. And,
to add worry to woe, the EZ is showing economic slippage again (Germany) while here at
home, the Federal Reserve has yet to move on QE 3 with any brio or consistency.

The Fed needs to get moving on QE 3. Obama and the Congress need to signal fast that any
budget accord will kick in proressively with only mild penalties for growth next year to
avoid damaging consumer and business fundamentals and confidence. The EZ? Well, I
will return to that later in the week.

I include the daily SPX chart with the post. SPX The downtrend is clear and confirmed by
the indicators. The market is not substantially oversold, but is at a level that may prove
tempting to a range of short term traders.

Monday, November 05, 2012


Hurricane Sandy was everything they said it was going to be. In our town, we had a nearly
100% power blackout. Prior to the storm, I had arranged to have a fine young man come and
install a 7000 watt generator over Thanksgiving. Bad timing. Instead, I had to quickly
refurbish two, old, large kerosene heaters and zip around and under fallen trees and power
lines to pick up kerosene cannisters. They worked fine at keeping the home reasonably
warm, but the house smells like a refinery. There is another big nor 'easter bearing down on
us with the promise of some snow. I call our utility SC & D Co. (Silence, Cold and Darkness).
Since they are not the most reliable guys around, let me squeeze in a post between storms.

The stock market is still technically in correction mode, although the SPX has found support
a bit above 1400. My weekly cyclical fundamental indicator has been running flat in recent
weeks and the Fed has been conning us about QE 3, as total Fed Bank Credit has also turned
flat and is well below mid - 2011 levels at the end of QE 2.

The presidential election is tomorrow and we hope for a clean result sans an army of rival
litigators and trips to the courts. I am voting for Obama but I would not wager on a victory for
him. If Mitt The Bullshitter wins, there will be new layers of uncertainty to work through
regarding both fiscal and monetary policy and the market may turn volatile as players hustle
to try and handicap the new environment.

The oncoming nor 'easter is going to be nasty, but I am inclined to think the power in our
area will hold up, and plan some catch up posts.

To finish up with a note on the hurricane. I grew up in a lovely community down along the
bay on Long Island. The family contended with some serious hurricanes with torrential
rainfall which caused some mild flooding. With Sandy, the old homestead wound up under
five feet of water, and the flood continued for another mile inland. The roads are still

Monday, October 29, 2012

A Note On Short Term Interest Rates

The Fed's zero short term interest rate policy has, save for the Libor scandal, put the
usually hot topic of whither short rates on ice for markets players here. The US has
experienced over three years of economic recovery and it is interesting that the
indicators I track to determine whether the Fed might change the Fed Funds rate (FFR%)
 have never aligned 100% to support a rise in the FFR%. In fact, recently the positive
momentum of each of the indicators have turned to mostly flat, suggesting no cyclical
case for raising rates.

My super long term 91 day T-bill model points to a reduction of rates currently, but,
the model also suggests ongoing rate suppression as it suggests the "Bill" should be
yielding 2.4%. Savers are being punished but with positive offsets in retirement and 401k
accounts and a nascent recovery of home prices. It has been a long slog.
Threat of local power outage from the giant Hurricane Sandy storm remains.

Financial System Liquidity

Over the past 12 months, Federal Reserve bank credit has declined moderately as the
Fed largely stayed away from QE and even allowed credits to run off. The private
sector component of the banking system did step up and expand its asset base by over 5%
yr/yr. However, following the deceleration of the economic recovery into the summer,
the banking system eased off on asset expansion. With the new open ended QE 3 program
now underway, the Fed has stepped up its lending, targeting mortgage backed securities.
Thus, the Fed is again now helping to underwrite liquidity growth within the system.

The banks' primary goals over the past year have  been to maintain balance sheet liquidity
and rebuild equity capital, including by allowing the system's aggregate loan loss reserve
to deplete on business recovery and the charge off of more bad credits. Commercial /
industrial lending has been moderately strong, consumer loans have taken a slight positive
turn and the large real estate loan book has been flat. The latter reflects charge offs, loan
sales, and a keen interest in mortgage refinancing. However, public funding via asset
based securities has continued to decline.

The banks have not been working hard to fund asset expansion. Two key categories --
low / no jumbo deposits and commerial paper -- remain in decline as the banks return to
lending in a modest and gradual fashion. The Fed has judged that economic demand
conditions and the slow pace of recovery for the banking system's loan book call for
additional liquidity backstopping even as the banks continue to improve their finances
and lending activity.

Sunday, October 28, 2012

Genuine Storm Ahead

Hurricane Sandy, a massive Cat. 1 storm is now embedded in a powerful Nor' Easter
(coastal storm). It is projected to make landfall tomorrow near Atlantic City NJ (Trump
is reviewing his various damage indemnity policies). The storm will bringing drenching
rain, a possible record storm surge and high winds. The NYC transit system will be
completely shut down by 9 pm tonight EDT and Mayor Bloomberg has ordered mandatory
evacuation of the downtown financial district. The NYSE may still try to open tomorrow
for those with hipwaders and who love to walk in the rain and work in the dark.

Since my town up north is likely to lose power, this may be the last post you see for a few
days. The one saving grace I see is that the power companies will be under enormous pressure
to have the power fully up and running before election day, Nov. 6.

Saturday, October 27, 2012

Stock Market -- Weekly

The daily SPX chart has the market in correction and now the weekly chart has turned
down as well. SPX Weekly I am carrying a link to the daily SPX and its 200 day m/a
price oscillator. SPX + 200 day osc. The drop in the oscillator has been sharp enough to
trigger an intermediate term sell signal for the SPX

The basis for the sell signal does whipsaw on occasion, but when it does it usually happens
quickly. If not,  the market does tend to trend lower. If you stay with the SPX + 200 day osc.
chart, I noted last spring that when the oscillator tops +10%, the odds are only about one in
four that the market can go on to sustain new high ground. This obervation is based on nearly
30 years of data and has served me well. You will note that the SPX has declined back inside
the spring 2012 high of just over 1420 for the SPX. So, from a statistical / technical point
of view, the market has been on shaky ground since the spring spike in the price oscillator.
I need to add here that the significance of the 10% rule on the oscillator does start to fade
somewhat after a six month time period.

My weekly cyclical fundamental indicator (WCFI) has clearly turned down in recent weeks
reflecting an upturn in jobless claims and a reversal for sensitive materials prices. It is
striking that the stock market and industrial commodities prices have weakend since the first
presidential debate when Obama flopped and let Romney back in the race. Now, I think
concern over the resolution of the tax and spending issues embodied in the fiscal cliff issue
were due to bother investors and business confidence as as the deadline for resolution draws
ever more near. The Romney resurgence adds another layer of uncertainty to the fiscal cliff
problem and, as important, puts the future of Fed QE 3 into play given Romney's negative
view of Fed. policy.

If Obama were to win on Nov. 6, the fight over resolution of the fiscal cliff would clarify
and investor / trader worries over the sustainability of QE would also fall away. An
Obama victory could well trigger a relief rally and produce a whipsaw on the new sell

Friday, October 26, 2012

Oil Price

In my view, the oil price is experiencing its first normal seasonal price decline since
2006. I am looking for WTIC crude -- now around $86.25 bl. -- to fall to about $80.-
by the latter part of Dec. as gasoline demand slackens and before there is the final
ramp up for heating oil.

Next year, the oil price may again be influenced by geopolitics. With the national election
over, the US will take a much harder look at Iran's nuclear materials development program
and may even enter into bi - lateral, one on one talks with the Iranian government. Israel
plans new elections early next year, and the rightest Likud group may form an even more
conservative coalition which could lead to more provocative talk about Iran. Tehran has
also voiced an interest in curbing oil production further if tougher economic sanctions are
leveled against it. Finally, insurrection in Syria has intensified and some of the feared regional
spillover (Turkey, Lebanon) is in evidence. US / Iran direct talks, should they proceed,
will be accompanied by exceptional suspicion and mistrust built up over the past 60+ years
of run - ins of varied severity with the big fear being that Iran is simply playing for time.
A Romney presidency could well add initial bombast to the situation.

As a hedge on household costs escalating, I may again go long the oil price with a targeted
time of Dec. 2012 - Feb. 2013. That would situate me for seasonal price strength and allow
time for the geopolitical situation to develop further.

WTIC Price Chart

Wednesday, October 24, 2012

Gold Price

As it became apparent around mid-year 2012 that the Fed would move toward a new QE
program, the bugz declared a long gold trade as a cinch way toward large profits. Their
timing was exquisite as gold was sitting at very formidable support around $1550 oz.
Gold did take off as predicted, but has run into headwinds lately.

My monetary indicator for gold was negative a fair portion of the time since mid-2011,
but is now turning positive as the Fed is beginning to fulfill its promise of large open
market purchases of MBS. The gold market got nearly a five month jump on the new QE
program. My economic indicator has been in a downturn since spring 2011 based upon
an ongoing deceleration of global current $ industrial growth. This indicator has yet to
turn to the upside and has been a drag on the gold price since mid-2011 when downward
momentum firmly took hold.

the US dollar was widely expected to begin another decline on expectations of the new QE
program. It did so starting in early July this year, but has begun to firm up again in recent
weeks despite the generous QE operation the Fed has finally initiated. As the gold price chart
linked to just ahead clearly shows, the positive turn in the US dollar has chilled the gold
rally. $GOLD Chart ($GYX in the chart is an industrial metals composite.)

The US$ has surfaced as a "big dog" in the current uncertain environment which features the
fiscal cliff and election still ahead for the US, toubles and disagreement among the usual
suspects in the EZ, and no lift off in China, where the communist party is set to expel the
most prominent communist in that fabled land. So, the widely heralded large gold price
bonanza has been put on hold while the big dog US$ calls the shots. Note too, that the US
stock market rally has also been shelved since the dollar starting barking.

Tuesday, October 23, 2012

Stock Market -- Head Fake Ignored

The short run downtrend deepened today after traders ignored yesterday's late rally up to
minor support at the 50 day m/a. There is longer term trend line support at SPX 1400. In
my book, no interesting short term oversold comes along until the SPX cracks 1370 on
the chart. SPX

The media claims investors are concerned about disappointing earnings by large multi-
nationals. I am suspicious on this one since earnings potential had weakened obviously
beforehand and analysts had been trimming estimates. More likely I think is that the
more forward looking fundamentals in my weekly fundamental indicator index have lost
positive momentum in recent weeks. As well, I continue to think that investors are growing
more wary of how the politicos may handle the fast coming fiscal cliff, especially now
that the Romney campaign has revived in the polls following his most recent makeover as
a centrist. Reuters also reported today that Fed Chair. Bernanke has been telling buddies
that he is thinking about stepping down when his term expires in 2014. Welcome to the
Romney confusion. Mitt has been claiming he will replace Ben in 2014 if he is elected
president. And if he is elected, who would blame Bernanke for quitting even earlier since
Mitt has filed a no confidence vote on Bernanke already. It is doubtful the market will
be in favor of continuing Mitt vs Ben.

the Fed has finally starting expanding its balance sheet again. This is normally a  market
 positive except that the strong Jun. - Sep. rally already discounted the QE 3 kick off.

The media is going to run with the fiscal cliff and the election aftermath. On an historical
basis, consumer, business and investor confidence all remain subdued and possibly fragile.

I absolutely cannot stand people like Romney. For all I know, he may do some good things
if he wins on Nov.6. But if he does win, he will create unnecessary uncertainty, large dust
clouds for markets players and confusion. A Romney victory will see me take a far
more stripped down, nuts and bolts approach to this blog lest I get caught up in  all the
bullshit that could be headed our way.

Monday, October 22, 2012

The Street Scraps To Keep Market Up

It was a magnificently convenient day for the SPX today. The market is in a downtrend
on my short term indicators, but as fate would have it, the Boyz rallied it at the previous
10/12 low of 1429, and to compliment this fine bit of service, saw it settle at the 50 day
m/a. Sometimes, monkeyshines like this portend a significant  "save" and subsequent
rally, but often it is just a sucker's play to reel in shorts and get the tape players buzzing.


Friday, October 19, 2012

US Politics / Pragmatism

The current dreary national election campaign is scheduled to end on Nov. 6. The next
congressional election is in 2014 to be followed in 2016 by another national election. The
The "Fiscal Cliff" is set to arrive on 1/1/13. There are thus two and four year windows for
the president and the congress to quickly tackle the "Cliff" in early 2013 which would allow
about two years healing time after any "curative" action before the boyz face the electorate
again. If there is actually serious intent to take action to begin reducing the large US budget
deficit, early 2013 would appear to be the politically wise time to initiate plans to trim
the red ink.

Seasoned markets players know this and it would be natural for anxiety to rise further as
we reach the deadline. Given the still somewhat fragile nature of the recovery, political
masterminds would take small initial steps to rebalance revenues and expenditures for
2013 - 14, followed by somewhat larger measures to run over 2015 - 2020. This type
of blueprint would allow for adjustments in the economy to proceed in a more orderly
manner. It would raise economic / financial risk, but better allow the political class to
manage the political environment instead of simply kicking the can down the road. The
latter course would assure debt rating cuts and the acceleration of a festering issue --
growing income inequality. I would wager that the continued growth of income inequality
will produce further economic disequilibrium and destabilization and that when power
shifts to those who represent the less well endowed financially, the rich will be soaked at
least in proportion to the narrow breadth of economic progress if not more so.

Should Mr. Romney secure the presidency, we would have ourselves a "wild card"
situation. Romney is not just a serial flip - flopper, he is the very incarnation of the classic
American political huckster and one of the great political bullshitters of all time. Only
the good Lord knows what a character like this will do when he faces substantive
alternatives pressed upon him by angry and frightened political factions (An old pal of
mine recently said to me that Mitt will accomplish nothing as he will be too busy trying
to make up his mind). Rest assured, market players have had a good whiff of the man's
fabulous ambition and lack of conviction and principle.

The markets will have other interests in the weeks ahead, but it is likely that concerns
about management of the "Cliff" and the identities of the top political players who will
be in charge will be lurking.

Monday, October 15, 2012

US Stock Market Comment

The market has experienced a mild correction since mid - Sep. Moreover, my weekly
cyclical fundamental indicator (WCFI) has been rising over the period. The action of
the market has correlated negatively with the WCFI over the past three weeks as well,
and this counts as an unusual development. Now, since the start of the recent rally in
early Jun., the market did outperform the WCFI by a wide margin over most of the
period, so it is not unreasonable to allow for some catch - up from the short term
fundamentals. I note also that within the WCFI, sensitive materials prices have turned
flat and volatile in recent weeks and have failed to confirm an otherwise improving
economic outlook. Because industrial commodities prices can behave in accord with
micro supply / demand factors rather than macro factors over the shorter run, it is early
to claim that the upturn in mfg. and commercial order rates and retail sales will likely
prove shortlived. Even so, it may well have set some market players to wondering.

The long Treasury bond yield ($TYX) is very sensitive to industrial commodities prices
and as the SPX chart link below shows, an intial cyclical rise in the 30 yr yield has re-
cently been aborted, which suggests that bond traders are also not so sure that the economy
is setting up to do better. The short term technical indicators I use with the SPX  are
deteriorating, but the market did bounce off the 50 day m/a today, which traders who prefer
this m/a will find positive ( I prefer the 10 and 25 day ma's with a daily chart).

The loss of recovery momentum for sensitive materials prices and the fail of the 30 yr T
bond yield do provide a degree of corroboration to the idea that as we close in on the
end of calendar 2012 with likely election results not yet clear, capital markets players
may be growing more concerned about the eventual resolution of the "fiscal cliff" due up
on 1/1/13.

SPX Daily

Thursday, October 11, 2012

Stock Market Fundamentals -- Part 2

Weekly Cyclical Fundamental Indicator (WCFI)
This broad based indicator turned up in mid-Jun. after a fairly sharp decline over May
and early Jun. Weekly leading economic indicator data are weighted heavily in this
proprietary index. The WCFI trend is usually coincident with the market's direction and
it tends to forshadow the direction of the real economy. The recovery of WCFI since
mid-Jun. has been modest so far and currently suggests only a mild acceleration of
economic growth in the months ahead. The stock market has advanced at a significantly
faster rate than the WCFI since Jun. and clearly suggests the market is discounting a
stronger re-acceleration of the economy once QE 3 kicks in. The stock market is out
ahead of the short term cyclical fundamentals by up to 5% by my estimate.

Noteworthy here is that US PMI new orders data for both manufacturing and services did
turn up substantially in Sep. Additional confirmation of a postive turn in economic growth
momentum is required to keep the stock market buoyant going forward.

Corporate Sales And Profits
Sales growth momentum measured yr/yr has retreated from peak recovery levels of 10-12%
in early 2010 to a sub-par 3-4% going into Sep. of this year. Output growth has decelerated
from the spring of 2010 (see production) and pricing power momentum has fallen off since
mid - 2011. My price / cost ratio has turned slightly negative, but the primary pressure on
profit margins has come mainly from weaker volume growth. SP 500 operating earnings
have plateaued around $92 - 100 per share on an annual basis.

The stock market can advance during periods of flat to slightly down earnings so long as
potential is there for a fresh positive turn in net per share down the road and in this case
the focus has been on the new and substantial QE 3 program at hand from the Fed. Unless
QE 3 fails to bolster confidence and output growth, it is reasonable now to look for
sales to gain 6% in the year ahead and for profit margins to recover modestly. Obviously,
there are concerns such as the possibility of a US fiscal policy mishap or failure of the
ECB and Eurozone to foster economic stabilization and eventual recovery. For now, I plan
to use the 6% top line growth assumption as the key marker.

Tuesday, October 09, 2012

Stock Market Technical Quickie

The action so far this week has turned the four month rally more vulnerable. SPX Chart
Specifically, the 40 day RSI is wavering again toward down and my extended time MACD
has turned negative for the first time since the rally commenced. The SPX has dropped
below its 25 day m/a and a shaky 10 day m/a is hovering just above the 25 day. The SPX
has survived breaks of the 25 day m/a during the rally, but rescues have come fast. We'll
see. In the meantime, with the MACD turning negative and the 10 day m/a off cue, traders
need to summon up extra focus.

Monday, October 08, 2012

Stock Market Fundamentals -- Part 1

Core Fundamentals
This approach is built on economic financial data available since the end of WW 2. But,
since 2008, the US economy has behaved more like the Great Depression era of the 1930s.
My traditional core fundamentals gave a buy signal around year's end 2008. There has been
no sell signal, and the fundamentals have not shielded us against the sharp, temporary price
breaks witnessed in each of 2010, 2011 and 2012.

The economic / financial system has been liquidity starved when it comes to private sector
credit demand and funding. Recognizing this, investor confidence has tended to plunge
periodically when the Fed has stood back from providing large infusions of monetary liquidity
needed to keep the economy afloat and to stave off the onset of deflation. Fed liquidity policy
has thus been the dominant variable.

As of 9/30/12, only two of my five central variables were positive -- short term interest
rates and the trend of "bottom of the barrel" BBB bond yields. On the negative side, yr/yr %
change measures of monetary liquidity have been decelerating and the trend of credit quality
spreads between investment grade bond classes has been deteriorating. In the latter case,
players have been chasing yield with short rates so low, but have strongly preferred quality.
(The junk bond market has been an exception as players have been plainly using this sector as
an equities substitute).

Net, net the economy has been through a period of monetary quantitative tightening since mid -
2011, save for the large but temporary liquidity swap program with foreign central banks that
came around the end of last year. In my view, this is a major reason for the deterioration of
economic recovery momentum that brought the US within "spitting distance" of a more serious
downturn this past summer.

Changes Ahead
The rally in the stock market since early Jun. has reflected growing investor and trader
confidence the Fed would initiate a new new QE program which it announced in mid-Sep. and
is about to implement now. It is a major open ended QE program that will boost monetary
liquidity measures back to positive readings, and one which should aid the economic recovery
and confidence. My core indicators should thus be turning more positive where it has most
counted in this cycle. In this case, investors got out ahead of the fundamentals thanks to
"coaching" from the Fed.

If official Washington flubs the 1/1/13 "fiscal cliff" -- scheduled tax increases and "mandated"
spending cuts, -- the US economy will be harmed. Since we could face a lame duck presidency
and congress after the Nov. 6, election, it is still too early to speculate on the workout of the
"cliff." Since I favor more fiscal stimulus rather than the introduction of any more fiscal drag or
austerity, I am in a small minority and am in no way enthused about what the turkeys in D.C.
may come up with. Do no harm boys.

More on fundamentals to come over the course of the week...   

Friday, October 05, 2012

Stock Market -- Weekly

This week I show the SPX along with the NYSE weekly index of net new highs. $NYHILO
This can be a rich comparison, and I leave you to retain my settings or add your own.

The hi - lo index is another way to measure buying pressure in the market because it shows
player willingness to buy stocks at or near new 52 wk highs. So, you see a cross - section
of momentum players and not too smart players who are chasing stocks. Note the chart is
showing the hi - lo is up near resistance and very far above attractive levels. You will
observe that the market can keep rising even as the index gets toppy but that when the
momentum of the chase turns south as measured by breaks below 50 in RSI and reversals to
MACD, well then you need to pay more careful attention (RSI and MACD are now still
positive but extended).

With a three day weekend ahead, and with Syria and Turkey exchanging light artillery fire,
you cannot blame traders for taking some profits off the table as they did today. Folks will
also want to check how restive the guys are in Tehran after the wholesale traders torched
the rial this week.

I thought I might do some more extensive posting on both stock and bond market fundamentals
in the days ahead. We are right on the cusp of when QE 3 is to begin. The markets have been
discounting the new liquidity injection process, especially the stock market. Still, it is
perhaps a good time to look in more detail at governing fundamentals.

Thursday, October 04, 2012

Some Monetary Policy Issues

Power Of Talk
QE 3? Well, it has not started yet. This week the Fed allowed another $11 bil. to run off
Fed Bank Credit, bringing the total run off in FBC to $135 bil. since last Dec. It is amusing
that there are financial writers out there talking about how QE 3 is already affecting things
when there has not been any. The Fed is supposed to start up soon. It will take nearly four
months of the new program to bring FBC up to its prior peak.

Benny's Final Lap Around The Track?
The Mittster has made it quite clear that Bernanke is toast if he wins the election. It is the
least he can do for the super - right GOP guys who he threw under the bus in last night's
debate. Wall Street would not like it if Benny was cut loose, so the Mittster will hear
about it soon. If Romney is elected, it would be amusing if Benny said "Screw it, I don't
want to work for a guy who has threatened to lift my chairmanship." Whatever a Romney
presidency may create, assuredly it will create confusion.

Prime Funding Source Still Depressed
The Fed normally talks monetary policy in the context of the economy, employment and the
inflation rate. I have a far more "green eyeshade" view and regard the collapse of the market
for commercial paper as a primary reason the Fed has had to add mucho liquidity to the financial
system to keep it afloat. Comm'l Paper Outstanding (You should know that over $300 bil. of
such paper which was outstanding in 2008 was "disappeared" by the Fed through revision.)

Monday, October 01, 2012

Eurozone Status Check

Euro monetary policy is moving ever so slowly toward positive territory as central
banks battle economic weakness, credit contraction and capital flight. But the zone is
still lagging in providing the basic monetary liquidity needed to put in the cornerstone
for eventual growth. Significantly larger increments of liquidity would involve
swapping money flow for elements of sovereignty (e.g Spain currently). The EZ
economy has improved slightly recently, but all boom / bust measures remain in bust
territory. By my standards, the EZ is creeping in the right direction, but the rallies in
the $XEU and the IEV Eurostocks 350 are not fully supported by economic results on
the ground. IEV Chart

In reality, the IEV has probably rallied since early Jun. as much on the prospects for a
sizable new QE program by the Fed as anything else. Euro stocks may thus be functioning
as high beta trades as part of adding risk to a broad equities rally built not just on
the prospect of QE but its eventual success in contributung to US economic growth and
more confidence abroad as well. Fine by me, but this trade could be extra vulnerable to a
correction in the US market unless the ECB can get the aquiesence from sovereigns it does
require to be a more forceful supporter of the EZ's recovery. Note carefully as well the
current  trend of my extended time RSI for the IEV as well as the overbought status of Euro
shares on the MACD.

I read today where youth unemployment in Greece is up to 55%. And segments I see on BBC
TV tell me that humanitarian needs are creeping into the deeper suffering countries in the EZ.
You have to watch this very negative wave. To mix a metaphor, the austerian thinkers and
administrators are taking their smoke breaks ever closer to the EZ fuel dump despite the
"no smoking" signs in the area.

Sunday, September 30, 2012

Stock Market Quickie...

The rally in the SPX up to a new cyclical high since Jun. has proceeded with a fair degree
of form regularity. It has saw toothed along and every challenge down to the 25 day m/a
has resulted in a bounce off the 25 day or a quick upmove if the 25 day was penetrated to
the downside. Note as well that such penetrations have been shallow. Well, the SPX is
once again down around its 25 day m/a. As well, my extended time MACD is also showing
a challenge to the uptrend in place there. Without a nice upward bounce in the SPX this
week, we may be looking at a rally that is either changing character, or worse, ending.

SPX Chart

Saturday, September 29, 2012

Stock Market -- Monthly Chart

Here is a link to the decade long monthly SPX:

A cyclical bull market from Mar. 2009 remains in place. The market is moderately overbought
compared to its 10 mo. m/a. When measured on momentum, the market is also moderately
overbought, and when you check the bottom panel -- stochastic measure -- the market is starting
to approach an overbought level.

Longer run MACD is positive and the thin premium reflects the drag effect of the near bear
market in 2011. Note the slight negative dip to MACD last year.

The SPX has cleared all resistance levels save for the all time peak level recorded in the
latter part of 2007. There is current trend support for the SPX down around the 1400 level.
If the SPX can hold the current trend off the 2009 low, it would take out the all-time high
by Feb. / Mar. 2013. However, The VIX volatility or "fear" index is quite suppressed, and
this indicates a fair degree of complacency in the market. Note that over the past 10 years,
the VIX has not often stayed at the current suppressed level for very long. This suggests that
a price correction may not be that far off and that projected extension of the current uptrend
line may be dubious. VIX

Thursday, September 27, 2012

Stock Market -- Daily Chart

The positive run from early June is getting ragged, but it is still intact thanks to the bounce
off the 25 day m/a today. The SPX is not overbought on price momentum in the short run
but is a little overbought on the 40 day RSI and my extended MACD, which as you'll see,
is shaky. SPX Chart

I have also included the 30 yr. Treasury price in the bottom panel of the above link. The SPX
has generated a much better relative return so far this year, but has been smoked by the 30 yr
when you take year end 2010 as a base. You will note how strongly the 30 yr has performed
over the past 18 months even as the economy has continued to expand. I regard the 30 yr as
way overpriced for the true longer term, and have no plans to look at a long side trade until the
bond gets down below 135 (3.50% YTM). There is a large slug of potential equities money in
the Treasury market, but players remain quite cautious on the durability of the US recovery. You
can see that in how well the bond has held up as well as in the continuation of wide credit
quality spreads within the conventional investment grade bond sector and also with ongoing p/e
multiple suppression for the SPX.

News On Jobless Claims, Employment

Two interesting items which helped the stock market today:

Jobless Claims
Unemployment insurance claims for the prior week dropped to 359K. In a recent post (scroll
down), I mentioned jobless claims -- a good weekly leading economic indicator and one which
stocks players watch carefully -- needed to fall from the 380K+ area back down to 360K to
hold the rally. Moreover, I think claims need to stay around 360K, or even better, pierce that
level to the downside to support further gains in stocks. Take a careful look at weekly jobless
claims for 2012 here. Further improvement is something just short of overdue.

Payroll Employment
Back on Jul.6, I posted that payroll jobs growth was about 800K short of the more current and
broader household survey. Details Subsequent reports from BLS dropped the discrepancy to
414K jobs in favor of the household survey, and a new benchmark revision of payroll data
from BLS claims the payroll numbers have been 386K too light over the pasy year. This will
eventually force upward revisions to a number of economic time series when the final benchmark
numbers are officially posted early next year. In the interim, it gives the Obama guys a fresh and
positive talking point toward the election and and the new data helps a little with economic
strategizing and market sentiment in the short run.

Note however, that business remains an extraordinary cheapskate in handing out wage increases
to the rank and file and that resulting poor income growth keeps the economy far more tenuous
than needs be.

Tuesday, September 25, 2012

Commodities Market -- Short Term Failure

After an extended sell down running from Apr. '11 through Jun. of this year, the commodities
market experienced a sharp rebound until just recently on the wings of speculation that major
central banks were prepared to engage in a new round of easing (which they subsequently did).

During the last sharp downward break this year, the CRB index did fall through very long term
support at the 290 level on its way to 270. That was not a good sign, but it left the market deeply
enough oversold to entice players (including yours truly) to come in on the long side. The
recent rally from the early summer lows was a strong 18.5%. However, the CRB did fail to
take out resistance at the 320 level. CRB Chart That is a disappointment on technical grounds
and, for me, it was also disappointing fundamentally as my long term value model for the CRB
had the index as reasonably priced at 320. I read the flop at 320 as an expression of trader
concern over whether the newest programs of monetary policy QE will work to restart global
economic growth just ahead.

Although I did sell out my long position of the DBC commodites ETF over Jul. 18 - 19 as posted,
I still have an interest in this market from the long side. We do have the QE programs in play, and
the chart does show a clear positive break above the downtrend in the CRB from Apr. of last
year. However, and this is not shown on the chart, the recent interim high in the CRB of 320 does
fall on a longer term downtrend line running from the Jul. 2008 blow off top near 475. The
fail of the CRB to take out long term trend resistance at 320 adds heavier weight to that level and
increases the gravity of betting against the longer term direction of this market especially since
the 2011 - 12 price correction took out cyclical trend support.

Fundamentally, the largely downward price action of the CRB since Apr. 2011 not only reflects
the loss of global economic growth momentum since then, but it also suggests the overall
situation of global commodities supply / demand may be more balanced in terms of supply growth
than I have expected.

For now, I am content to see if a substantial oversold condition develops for the CRB before
dusting off looking for a long side commodities ETF to play.

Sunday, September 23, 2012

Stock Market -- Weekly

My weekly cyclical fundamental indicator (WCFI) fell slightly last week, but remains in a mild uptrend. The SPX has outpaced the WCFI by a significant margin since the early Jun. start to
the recent rally. Despite the new QE program, Fed Bank Credit remains in a firm downtrend.
This downtrend is widely expected to reverse shortly with the fresh QE and it is anticipation
of that event which has been the primary support for the rally. With very short term fundamentals
 unimpressive, the rally in the market remains "on the come" fundamentally.

The weekly SPX shows a well established up move in the market with confirmation from the
indicators. The market is moving into overbought territory, but there is no "bell ringer" signal
as yet that profits need to be booked. SPX Chart

Thursday, September 20, 2012

QE 3 In The 11th Hour....

If QE 3 is to buttress the economic expansion, it has come at a late hour, a few new
economic data points show. First, initial unemployment claims is a good weekly
leading indicator for the economy. The trend of improvement has clearly stalled out:
IUIC weekly chart. Claims are running 382K a week and to support a continuation of
the recent advance in stocks, claims are going to have to drop to and sustain the 360K
level in the months ahead.

Markit's PMI flash report for Sept. manufacturing shows the sector is bumping along at
minimally positive levels. Markit Flash Mfg. Scroll to page 2 and you will see a bright
spot, namely a slight increase in new orders for Sept. An acceleration of the rise in new
orders would be a positive for the stock market as well as for the economy.