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