About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Monday, September 30, 2013

SPX -- Monthly Chart

Today closes out Sep. 2013, so I thought I would take a look at the monthly chart.

Technical
This is a cyclical bull market which has carried the SPX to a new all time high recently. The
market is extended on a cyclical basis off the 3/09 low and is also very extended within a
long term band that carries back to the end of WW 2. It can definitely go higher but once the
SPX rises above the 1700 - 1750 into hyper - extended territory, history strongly suggests the
market could be bought considerably more cheaply within the next five years. SPX Monthly

Note also how extended the monthly readings for MACD, RSI and Williams %R are getting.
Note as well how far above these indicators are from excellent possible buy points. From a
technical perspective, this is a well advanced bull market, which if it continues to move
higher without a substantial breather, is going to force participating investors to accept sharply
higher long run risk.

Fundamentals
Now we get to the fascinating part. Tops in the market coincide with economic expansions
with elevated cycle pressure measures and high rates of resource utilization. At these points,
broad money / credit growth is normally at +10% yr/yr or higher and short term interest rates
are at least 5% and in uptrend mode to counter a credit supply / demand pressure gauge that
is running at strong positive levels in favor of demand. Finally, inflation is in cyclical
acceleration mode. The current US economy still has ample resources to grow, moderate
cycle pressure gauge readings, only 6% funding growth, a low credit supply / demand
pressure gauge of a mere +1.4, a ZIRP on short term interest rates and very low inflation.

So, the stock market is rather fully extended, but the economy is not. There is slack to
support economic expansion for a good several more years.

What we do not know is whether the economy can realize its expansion potential without
continued substantial quantitative easing from the Fed. This epoch is not like any time
since WW 2. Stocks wise, it matches up with 1932 - 36. The market crashed in 1937 when
the Fed removed QE and allowed a slight rise of interest rates. the analogy has 2014 match-
ing up with 1937 and there could be trouble if the Fed tapers down QE to zero next year
and consumers, businesses and bankers lack the confidence to transition the economy to
self - sustaining expansion.

Friday, September 27, 2013

Stock Market -- Daily Chart

The latest leg of the bull advance has been underway since latter Nov. 2012. SPX Daily
The market could not hold the 11/12 - 6/13 speed line and a fairly tight up channel has
given way to a milder and more volatile advance, but the broad trend is intact. The
current, still minor corrective action of the SPX is from a short term overbought position
and if the more volatile price action remains in force, the SPX could drop further into the
low 1650s area without wrecking the new up leg underway since later in Jun.

The moderation in basic trend and the step up in volatility plainly reflect the introduction
of sterner talk from the Fed about eventually curtailing the large QE3 program. The FOMC
did extend the QE thrust at its Sep. meeting, but some Board members continue the rounds
of harping about its eventual curtailment before many moons have passed.

The US fiscal policy / debt ceiling circus is well underway and there is an obvious stronger
level of mutual contempt between Obama and his allies in the Congress and the GOP right
wing. The ugliness on display is welling up fast and it now seems like there may be a
stunning crescendo of invective yet to come. I do not think investors have taken the show at all
seriously so far, as more zigs and zags in debate and tactics likely remain ahead. If there is
a battle over the debt ceiling which seems headed straight for the eleventh hour, there could
be nasty reactions in the bond and stock markets that come suddenly and late in the game.

Tuesday, September 24, 2013

Junk Bonds

The junk market has been struggling since earlier in the year as yields have been buffeted
by rising Treasury rates. Junk price indices have rallied recently on signs of a stronger
economy and hoped for better fixed charge coverage and could get some further play if
traders grow more confident that the Fed will resist curtailing its large QE program for
a while longer. However,the Bloomberg high yield index is sitting down around 6.50%
and is carrying a small premium to an array of investment grade bonds which can be had
to yield between 5 - 6%. That now smaller quality differential spread does not present junk
players with a favorable comparable risk / return profile for now. Bloomberg High Yield

Sunday, September 22, 2013

US Stock Market

Fundamentals
The more critical directional fundamentals -- growth of monetary liquidity, near zero short
rates and confidence -- remain positive for the market (Confidence is reflected in the trends
of narrowing credit quality spreads and a rising p/e ratio). My broad measure of money +
credit funding growth has exceeded the demands of the real economy, thus leaving excess
system liquidity to flow into the current favorites of equities and housing. A substantial loss
of earnings growth momentum has yet to significantly inhibit the market's advance and a
rising oil price has so far been well accommodated.

My weekly cyclical fundamental indicator has regained positive traction in both forward
looking and coincident categories, but a degree of caution is still advisable given the scant
growth of consumer and business incomes.

The Fed is keeping its large QE 3 program in place for now, but It is harassing the market
with threats of curtailing and eventually zeroing out this effort if the economy can show
sustainably faster growth. The specter of winding down QE does seem aimed at inhibiting
speculation in stocks.

Below par cyclical inflation does provide theoretical support to the market's p/e ratio of
16x+, but the market is tending toward full value as earnings progress remains subdued.

The President and the Congress have another circus planned for just ahead with the
rebellious right wing of the GOP so far unwilling to vote out clean budget and debt ceiling
bills and with Obama prepared to veto what is on the table now. Because the major players
are more coldly angry now, it would not be a surprise to see stocks become more volatile
in the weeks coming up. However, since the players may put more cards on the table by
the end of the forthcoming week, it is still early for strong pessimism. This is ugly stuff
with a heavy undercurrent of race coming from the right.

Technical
The strong advance in the stock market throughout 2013 to date has so far been a winning
hand in an against-the-house bet on technical grounds and the heavily overbought nature
of the market since May has yet to produce the odds-on deeper correction that big time
overboughts generally set up. SPX Weekly Chart


Wednesday, September 18, 2013

Monetary Policy -- Going The Fed One Better

I have argued over the course of most of this year that there was no economic case to end
or curtail the Fed's major QE program. I also discussed earlier in the year how pressure
to reduce the QE program would rise by mid - 2013 as the Fed's balance sheet rose to the
top of the range for QE programs dating back to late 2008. There is no doubt in my mind
that a number of Fed staffers got very nervous about that, leading to "hall talk", babbling
over lunch, and leaks to The Street and the media which in turn precipitated the "taper talk".
The "taper" stuff was a dumb and costly idea and it is a shame that key board members such
as Bernanke, Bullard, Dudley, Evans and Yellen put up with it. Dumber still that so many
Wall Streeters ran with it and spun it.

I think the truth is that not only does the economy have to perform a lot better to warrant the
reduction of monetary stimulus but that a decision to curb stimulus will prove a risky bet
until well after the economy is functioning normally with income and credit flows that are
well recognized as adequate to sustain the economy in the absence of highly accommodative
monetary policy.

The risk to the stock market and the economy of a premature curtailment of QE remains
very large in my view. QE has been there to keep confidence up and the deflationary
wolf away from the door.

I am sure Bernanke would like to eat out in Wash. DC on others' tabs but, as he completes
his valedictory lap, it would be nice if he called out the Congress again for their recklessness
in mishandling fiscal policy and, nice as well, if Obama got behind him.

Tuesday, September 17, 2013

Corporate Profits Indicators

Sales
Over the past few months, my sales growth indicator has moved up to around 4% yr/yr
from 3%. The very long term average for yr/yr  sales growth is about 6.5% and the current
measure is running lower both in terms of volume growth and pricing. My expectation for
the current year, set at the outset of 2013, was for a 6% yr/yr gain through Dec. So far,
both volume and pricing have fallen below the estimate. Historically, it has been hard
to maintain profit margins when 12 month growth comes in below the 5% level. On the
plus side, the leading indicator sets I follow suggest at least a mild acceleration of volume
growth ahead.

Profit Margin
The work continues to suggest mild pressure on the operating profit margin through Aug.
Facilities operating rates have been down ever so slightly over much of 2013 and this has
worked as a modest drag on profit margins. My sales vs. cost ratio has been running about
-0.4% which means that pricing has not been recouping operating cost. My productivity
measure has been flat this year, too. Productivity growth has naturally slowed appreciably
over the past two years following the dramatic improvement seen over 2009 - 10. If sales
do pick up in the final quarter of the year as now suggested, companies can recover some
of the modest pressure on margins seen so far in 2013.

S&P 500 Net Per Share
I have been hoping that SP500 eps would rise 6.5% to about $103 per share this year. Net
per share could actually do a little better owing to factors such as lower cost of capital and
share buybacks, but $103 of pure operating profits would be fine given drags on sales
growth and operating margins seen over most of 2013.

The stock market often heads for trouble when SP 500 net per share rises above the top of
the very long term range of trend earnings such as happened in 2000 and 2007. The top of
the long range trend channel is now running about $120. The economic recovery is now
over four years in duration, but profits are running well below the top of the long term
range owing to how deeply depressed eps was at the bottom of the recession and the fact
sales growth has moderated markedly since mid - 2012.


Sunday, September 15, 2013

30 Yr. Treasury Bond -- Deep Oversold

My weekly fundamental indicator for the Treasury bond suggests mild price weakness
for the year to date. The bond has been swept lower in price since late last year with the
heftiest part of the decline coming since the late spring when the Fed began to talk about
curtailing the growth of the large QE program. Market players fear the loss of a large
bid the under the market if the Fed tapers, and have been buying into the idea that the
economy should accelerate ahead. The 91 day Bill has stayed near zero and inflation
pressure has been mild, but the yield curve has steepened sharply as investors prepare
for the return to a faster growth environment.

From a technical perspective the bond is deeply oversold relative to its 40 wk. m/a and
bond advisory bullish sentiment has been evaporating rapidly  $USB Chart With the next
Fed policy meeting due up in but a few days, and bearish bond sentiment as high as its been
since early 2011, there could be a quick long side trade here if the Fed skips the taper and
focuses on an economy which has yet to exhibit the sort of balanced growth envisioned in
their forecast. Moreover, if the Fed, under political pressure, decides to curb the QE program
and investors  review the Fed's comments and decide the action is premature, the bond price
could benefit anyway. Keep an eye out.

Wednesday, September 11, 2013

Oil Price

The oil price has had a very fine  run from a seasonal low point in mid - 2012. As with stocks
and home prices, the oil price has benefited substantially from the significant excess liquidity
generated via the Fed's QE program. With global economic growth having been slow over
most of the past 15 months, the ongoing supply / demand situation has simply not been
strong enough to support the nearly 40% increase in the oil price we have seen since mid -
2012. This is currently a seasonally strong period for the price of oil, but this interval is
only likely to run for another two to three weeks before the industry moves into a period
of seasonally weaker demand.

The global economy has started to firm up very recently, but this is well discounted by the
current price of around $107 bl. Oil traders will be looking carefully at the status of the
Fed QE program particularly since the price is currently quite elevated seasonally. I do not
think the economic case is there to support curtailing the QE program, but all the "taper talk"
from the Fed suggests this program may become tainted politically because of the wrong-
headed pushback it has received. The next FOMC policy meeting is a week away.

How about the situation with Syria? To get a sizable spike up in the oil price out of the
Syria situation would ultimately likely require not just the start of a US attack on Syrian
military targets but retaliation from Syria and / or its partners that would in some way
imperil a significant quantity of oil production. Consult with your local geopolitical
expert for more.

The COT reports from the futures market shows continuing very large long positions by
the major  speculative traders who tend to be wrong more often than not when they have
outsized positions on the books. This action has been mostly a play on support from QE
rather than Syria worries.

There could be a big payoff for long side oil players if an attack on Syria heralds a more
dangerous supply situation, but recognize the crude price is extended on the eve a period
of seasonally weak demand. WTIC Oil Price

Monday, September 09, 2013

Stock Market -- Daily Chart

Back on 8/19, I posted that the SPX had trend support down in the 1630 - 1640 area.
The market closed at 1646 on the 19th but it was not until the final week of Aug. that
the SPX dropped to the trend test area. As fate would have it, the PMI data for US mfg.
and that of other nations was published right after Labor Day. The numbers were strong
and were followed by good services PMI's as well. Players liked these strong readings and
have rallied the stock market since 9/3. Other cares and woes have been set aside in the
process as the SPX has moved up from a mild short term oversold. SPX Daily

The rally has taken the SPX up through the important 10 and 25 day ma's. The 10 day
has turned up and there will be stronger trending support for this rally if the 25 day turns
up and if a rising 10 day can also move above the 25.

The bull run from Nov. 2012 remains in place as the market has been registering higher
highs and higher lows throughout the year. But note that as the rally has matured, the
advance of the SPX has lost considerable momentum since May reflecting much stronger
Fed talk about QE tapering and, perhaps an accelerated rise in long term bond yields.

The market is trading at a 7.2% premium to the 200 day m/a, so some of the hefty
intermediate overbought in place since the spring has been worked off. The guys have
been in there to buy the dips and the SPX has not experienced the stronger negative
action which far more often than not follows a heavy duty intermediate term overbought.
If you have been long over the course of the year to date, you have beaten well established
odds.

My thought over the past month or two has been that the SPX up at the 1700 level should
prove a formidable challenge for the bulls on both technical and fundamental grounds, but
the price action even recently has yet to support this conjecture.











Sunday, September 08, 2013

Purchasing Managers Surveys -- Unconfirmed Bright Spot

US purchasing manager survey data for new orders and general activity have picked up
strongly over the past two months. That news should qualify as a significant  plus for
the US economy. However, the data does not square well with weekly forward looking
indicators and weekly coincident indicator activity which suggest a slow pace of growth
going forward. The discrepancy here represents a very unusual development. I have
teased the weekly data at great length and I can reduce the discrepancy only somewhat.
Because I have respect for all the data series involved, and further, because each of the
series can be volatile in the short run, I am not going to blanket judge the play out ahead.
New industrial production data will be available next week from the Fed, and it should
show a good increase for Aug. if the PMI surveys have it right.

One additional matter though, and that is the continuing grim news about employment and
the real wage. Couple that with a progressive loss of internal cash flow growth momentum
from business and you have a picture where the PMI survey data, if on the mark, could
provide genuine re-invigoration to a sluggish economy. 

Thursday, September 05, 2013

Basic Materials Stocks

This group is driven by expectations regarding global economic momentum and the pace
of industrial commodities prices. Performance relative to the broader market has really
suffered over the past two years reflecting subpar global growth momentum and a
weakening of sensitive materials prices which reflects the slow growth and falling
capacity utilization. With evidence in hand that the global economy has recently been
firming up, the group has began to do better against the stock market. Basics Vs. SPY

The improving relative strength of the smokestack companies reflects investor bets that
the economy is set to do better. But note that the supply / demand balance for the industry
does not favor dramatic output pricing leverage as it did over the 2003 - 2008 period
when rapid industrial expansion paced by China gobbled up excess capacity. Investment
in basic materials such as copper has been catching up. Over the past year, popular
industrial commodities indices are up about 8%. That is pretty mild, but is still better
than the inflation rate.

Trading wise, sensitive materials prices have been getting a favorable play as the year
closes out and winter sets in (Companies set manufacturing schedules for the year ahead).
The relative strength of this group has been in a pronounced downtrend since mid - 2011
but is closing in on a possible positive reversal. Keep an eye on it.

Here is the 15 year track record for the XLB spdr against the SPY. XLB Long Term  

Wednesday, September 04, 2013

Syria Risks

So far, the debate in the US about whether we should launch a missile attack on Syrian
military and related installations has been more calm, intelligent and enlightening than I
expected it would. The public, weary of war and increasingly skeptical that any US military
action in Islamic dominated countries is worth a dime or a drop of our blood, remains
largely unmoved. The majority here do not want such an attack.

A 60 day time limited attack on Syria focused on the military would do tremendous damage
to the place even if it primarily involves cruise missiles. Do not be fooled into thinking that
concentrated bombing is but a "drive by".

So it remains good that the public seems demanding and that critics are probing the
administration's case forcefully. It is also good that Obama and his crew are going to have
to work harder to make their case and for them to realize the political risks involved.

Maybe no attack will occur then, but if one does proceed as currently outlined, there could
be substantial retaliation and blowback to come from Syria and its allies. Even Russia is
reported to be inserting a few warships into the waters off Syria. Cruise missiles soaring
above or around Mother Russia's gunboats is not a recipe for carefree days on the Med.

I push the risk issue a little because these are troubled times with leaders in many countries
under pressure to have their economies perform better. And, with largely subpar global
economic performance for the past five years, patience and temperament are getting a little
frayed among the folks and their leaders. This is a tough time, a very tough time, to risk
widening a war based on deep hatreds that go beyond Syria's immediate borders.



Monday, September 02, 2013

Stock Market -- Weekly

Technical
Back on Aug. 4, with the SPX trading above 1700 at an all time high, I mentioned that
the market was again in an extended position and that it was significantly overbought
on an intermediate term basis. The downtrend underway since then has partially relieved
both the extended and overbought readings, but it leaves the SPX with negative indicator
readings for the intermediate term. SPX Weekly

What is striking about the chart is the very high levels of MACD seen this summer. MACD
readings of 50.0 or above are not routine, pedestrian events but reflect top levels only seen on
the weekly chart during powerful momentum runs in bull markets. Not surprisingly, such
excesses often foreshadow sharp, temporary corrective phases which lie not too far ahead in
time. The recent positive whipsaw in the MACD reading was a rather unusual occurrence
and showed how anxious players were to capitalize on the Fed's large QE program. Risky
business from a technical point of view.

Fundamental
The more recent instances of Fedspeak suggests They will cut down on QE if the economy
firms and perhaps leave well enough alone if the economy remains sluggish. A continuation
of sluggish sales growth by the corporate sector implies low or no earnings growth. That the
market is no higher than in May suggests investors may now be feeling a little boxed in and
anxious that there is no clear game plan for them to follow to take the market higher.

When the latest QE was first initially put into the sketch stage in mid - 2012, the market
rallied a good five months before it was actually implemented. So, with liquidity
tightening now hanging over our heads and with no clarity yet as to when and by how
much liquidity will be parsed (let alone if it will be anytime soon), players could take some
additional time out to try and handicap just where the Fed may be headed and whether
positions should be trimmed with the upcoming pathway less manifestly bullish. Call it
an adjustment to the appearance of clouds in the crystal ball.

Sunday, September 01, 2013

Syria And Beyond...

The US dropped atom bombs on Japan. It used Napalm and highly toxic Agent Orange
defoliant in Vietnam. It used white phosphorous --"Shake & Bake"-- in Iraq. So why
worry about Assad using sarin gas and inflammable chemical agents in Syria especially
since the US has been unwinding war exposure? Well, chemical warfare, although
very risky, is underestimated as a weapon and stands as a terrific instrument of terror.
Now that Assad, in a fight to the death with Sunni rebels, has opened and deployed
from his chemical warfare goodies box, the seals have been broken and the security and
further use of the weapons have no taboos.

Big dogs can take out Assad's air force, missiles and heavy weapons or at the least fully
neutralize them. Securing the chemical stuff is a very different matter, particularly if the
US or others want to neutralize it. Putin, acting grandly as the champion of Assad, should
be saying : "Holy shit, the Chechens could get this stuff and use it on us." Ditto Iran,
which will have to fear another Sunni led chemical weapons attack if  this stuff gets out.
Then there are the obvious dangers to the US, Europe's capitals, Israel and Syria's other
neighbors.

So far, the big dogs seem willing to let this civil war, based on some of the deepest hatreds
known to man, play out and perhaps end with a ghastly conflagration. Obama has been
stumbling along with the chemical warfare issue and has invited the Congress to debate
whether the US should strike Assad and his men via cruise missile attacks. Of course
a debate will be an ugly affair and mostly beside the point when the world's focus should
be on those horrendous weapons. We can only hope this debate will further enlighten people
to the dangers involved as the war grinds on and how big a challenge we will face if
those weapons are not neutralized and fall into the wrong hands. If control is lost as it
may well be, we can look forward to having Amazon eventually put up pages of sharp
fashion, anti-toxic chemical suits with matching masks and sneakers.