About Me

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

Wednesday, April 30, 2014

Oil Price And Industry Stocks

In the last review on Feb. 27, I made an odd call that the oil price could weaken in the next
few months, perhaps to $95 bl., but that industry stocks could do well on the promise of
faster global economic growth and a more stable uptrend in the price of natural gas. This
turned out to be a good and profitable guess.

It could be time to be a bit more edgy about the oil situation. The price of oil is entering a
seasonal period of consolidation / weakness that could last well into July before the normal
final seasonal push higher commences. Not surprisingly then, the uptrend in the WTI crude
price which began early this year has been broken. $WTIC Daily Chart

There is a primary trend channel of $18 per bl. high to low that has been in play since mid -
2009. The current low for the trend channel is now about $95 - 96. Because there is more
supply on hand than I thought there might be now, and because we are moving into a more
challenging period on a seasonal basis, it might not be unreasonable to check and see if
oil can hold the longer term uptrend over the next month or two. Sound overwrought? Well
if you trade oil it might not be at all if there is continuing inventory overhang.

The bottom panel of the chart shows the relative strength of the $XOI oil composite against
the SP 500 Spyder. You can see the stark positive reversal here but note that the relative
strength of the group is just turning a little wobbly after a nice run against the broader market.
Could be the group is setting up to cool off.

Monday, April 28, 2014

Long Treasury Bond Yield %

My main message on the long guy for 2013 was that the run up in the yield was way too
rapid. Players received another warning at year's end when the long T failed to take out
the long term downtrend in yield at 4%. There has been a nice rally in the long bond this
year, with the yield coming down from the 3.95% level to 3.45%. $TYX

The chart shows an important and longstanding fact. When the yield travels too far up or
down from its 200 day m/a, count on a reversal before long. Spreads of 50 basis point often
signal it is time to begin to watch for a reversal in trend. Note that now the long T yield has
moved inside the 200 day m/a. This suggests that the risk to long positions in the bond has
begun to rise.

Note as well the red horizontal line on the chart. In this era of ZIRP and low inflation, I have
used the 3% line to sell long side trades and leave a couple of $ on the table. The green
horizontal line at 3.50% is appropriate for longer term players in this era. It warns the yield
is too low and the price too high to warrant long term positions given that  the ZIRP / low
inflation era is likely to have a rather limited duration.

I use the combined momentum of industrial output and sensitive materials prices to provide
a yield directional indicator for the long bond. This indicator has been quiescent since early
2012 and has only just started to perk up again. With better output growth and some firming
of industrial materials prices in evidence, the long T yield may begin to reverse to the upside
before long.

Friday, April 25, 2014

Stock Market -- Weekly

It remains a cyclical bull with a third wave up from autumn 2011 still intact. The market
continues in a consolidation period, although a head and shoulders top could form as well as
a low momentum secondary top up near SPX 1890. Volume has been fading as has momentum
although NYSE  breadth is holding up well. The SPX is 4.8% above its 40 wk m/a which indicates
a moderate but not worrisome overbought. My intermediate term momentum oscillator turned
bearish at year's end, but there has been no break of consequence yet in the SPX. The
attached chart shows that both RSI and MACD have also been trending down without any
serious result, either. SPX Weekly

The SPX is fully valued and some players no doubt do not care for the Fed's QE taper down
program. The local fundamentals remain positive save for the taper. The situation in Ukraine
has not blown up yet, but both sides have been injecting more troops and hardware along
the potential "hot zone" in the far east of the country. A Russian invasion in and of itself
could disturb risk capital and there could be a wider disturbance if an invasion were to
introduce stronger economic warfare against Russia with retaliation likely. Russia's
credibility is shot, so traders will be focusing primarily on ground action if any in the days

Wednesday, April 23, 2014

Stock Market Fundamentals -- Update

This post builds on the 4/21 Monday post -- just below.

Directional Fundamentals
The Fed's M-1 basic  money supply (cash & checkables) stands at about $2.75 trillion. It has increased by roughly $1.2 trillion since the QE programs first began in late 2008 and I would
estimate about $700 billion of this increase reflects the flow of $ from QE into the transactional
part of the financial system with the bulk of the remainder of the $3 trillion + QE money sitting
in the excess reserve account the Fed holds for banks.  Excess Reserves

Over the past half dozen years, M-1 in current $ has grown at a ripping 12%. That represents
10.3% growth when adjusted for inflation. Based on very long term relationships, the strong
basic money growth has been a powerful stimulant for the stock market. Since real  M-1 may
benefit in a lagged way from QE even as it winds down, I plan to watch this indicator going
forward as well as the lazy way of just trying to match up market performance with the size
of the Fed's balance sheet. The velocity of M-1 seen against the economy has declined sharply
reflecting the modest US recovery from near depression conditions, but since companies have
been so successful in boosting profit margins, the stock market has benefited greatly from
the powerful monetary liquidity support despite the downshift in money velocity.

When broadly measured, if transactional financial liquidity grows faster than the economy,
excess liquidity is generated, and this can be a major support for stocks as well so long as the
economy is positive and investor confidence is reasonable. The monetary and economic
turmoil of the 1999 - 2012 period greatly disturbed the longstanding relationship between
stocks and surplus liquidity, but recent data suggest matters may finally be returning to normal.
One factor to keep in mind here is that more vigorous economic growth if accompanied
by a cyclical acceleration of inflation can sharply reduce liquidity available to the capital
markets. My excess liquidity indicator has declined from a moderate 3.0 level seen last year to
a slightly positive 1.0 currently as the economy has perked up.

Using mundane economic, profits and dividend growth assumptions, it is easy to make a
reasonable case for a 15 p/e ratio. To argue for the current 17.4 p/e, you have to assume
inflation and interest rates will remain non-threateningly low and that profits growth will
exceed the long term rate of 6.5% per annum. So a narrow focus of this sort can net you
a premium valuation so long as you waive off certain micro and macro risks. Steadily
rising profit margins reflect growing imbalances centered around seriously skewed income
distribution and under-investment in facilities and people that will make stable progress in
the US more difficult in the future. The transition away from QE remains a work in progress
and the ability to efficiently mange monetary policy in a post QE world is a question mark. 
Moreover, major foreign economies -- the Eurozone and China --  are in the throes of change 
which involve major challenges. These are all hard factors to ignore and do not fit easily
into the textbook concepts of stock market valuation.

Monday, April 21, 2014

Stock Market Fundamentals

Directional Fundamentals
A strong "easy money" positive remains in place. Primary liquidity measures continue to
grow in outsized fashion. T-bills trade a few basis points over the 0% level. Corporate bond
prices are in an uptrend. Profits are growing. Inflation is low.

Even with a successful full taper of the QE program and an eventual rise of short term interest
rates, the yield curve may not  flatten out enough to signal an eventual downturn in the economy
until as late as 2017.

But there are risks. The US economy is growing as the Fed tapers, but we cannot be sure
business / banker confidence will hold up as the Fed zeros out the growth of its balance sheet.
If the economy manages well, we will see the Fed eventually abandon ZIRP and begin
to move rates higher. This could lead to sharp gains in rates at the shorter end of the maturity
spectrum and such might suppress the market's p/e ratio. The specter of an eventual return
to a more nearly normal monetary policy operation -- tighter liquidity band and a cyclical rise
of short rates -- may already be causing some caution in the stock market, leaving players
leery of an eventual price correction. This is why Ms. Yellen is directing her verbal ammo toward
keeping the short end of the curve from getting ahead of where the Fed would like to see it.

SPX profits rose sharply over 2009 - early 2012, with 12 mos eps coming close to the top of
a very long range band. If profits regain stronger momentum over 2014 - 2015, we could see
earnings back up to the top of a rising band which would normally signal a very mature market
and economic expansion. But for now, this idea may be a little far ahead of the story.

The SPX is relatively fully valued at about 17.4 x latest 12 mos. net per share. The p/e ratio
is above norm on cyclically elevated earnings. The SPX is trading at 20.8 x normalized
long term trend earnings, which is up at a level not seen that often. Can investors push these
valuation measures higher? They have done so in the past and surely can this time. If such
happens, recognize that fundamental risk will rise sharply and there will be players who
start searching more diligently for risky assets with more appealing risk / return tradeoffs.

Thursday, April 17, 2014

Inflation Potential

US inflation has decelerated very sharply from a cyclical 2011 peak of 3.9% yr/yr down to 1.5%
recently. With a sluggish economic expansion, capacity utilization is up but one percentage
point over this interval, thereby putting very little cyclical pressure on pricing. As well,
commodity prices remain well below levels seen in 2011 despite the recent upturn. $CRB
A rise of inflation pressure can be "validated" when wages rise concommetantly, but the
US wage has remained quite subdued. Also, since businesses can try and recapture their
rising capital costs via higher pricing, little pressure has come from this area reflecting
the Fed's ZIRP on short rates and tame long term interest rates. Finally, when you consider
that significant economic slack is still extant in the Eurozone and China, businesses  are
wary of raising prices lest market share be lost.

On a global basis, new order rates have moved up moderately over the past three quarters
and my inflation pressure gauge, which gives heavy weight to both commodities prices and
operating rates, has also been rising over this period. However, the pressure gauge, which
foretells the future direction of the CPI, has only begun to exhibit the momentum and power
which normally accompanies a firming business environment. The upshot is that the CPI so
far remains well muted although some acceleration can be expected if the pressure gauge
continues to rise from here as expected.

Wednesday, April 16, 2014

Economic & Profits Indicators

Coincident Economic Indicator (CEI)
My CEI is an amalgam of four measures -- production, real retail sales, civilian employment
and real earnings and is presented on a yr/yr % change basis. A reading of +3% implies
reasonable and balanced economic growth. Through March, the CEI ran 2.1% or at two thirds
speed. Output vs. income showed decent balance and the full measure was far better than the
stall speed interim low of 1% set in Jul. '13. The 2.1% reading for Mar. represents a positive
break from a downtrend which had been in place since early 2011. With a very strong liquidity
tailwind still in place, the CEI should eventually recover further up to 3% yr/yr sometime this

I also follow export sales and construction spending carefully. Export sales are recovering
from a flat period over 2012 -- early 2013 and construction spending is relatively strong
with the exception of the public sector where much larger infrastructure investment is
sorely needed.

The US economy has benefited substantially from the winding down of fiscal restraints
which dogged late 2012 and all of 2013.

Profits Model 
Measured yr/yr, top line business growth was 4.5% for the first Q of this year, down slightly
from the final Q of 2013 on tough winter weather. Normally, it is not easy to maintain
profit margin when business growth drops below 5% yr/yr. Moreover, costs grew more
than did pricing power. There was a positive offset in that hiring trailed real output growth
by a moderate degree. Excluding share buybacks, operating earnings were tame.

Although I think it is fair to be concerned about the economic effects of the eventual
elimination of QE, I am still looking for top line growth in the US to reach 6 - 6.5% yr/yr
by late 2014. So far this year, the shortfall shows primarily in very modest pricing power.

Sunday, April 13, 2014

Ukraine vs. Russia

Key economic data show Russia is on a pronounced glide path to recession. Ukraine is an
economically and financially broken country. Since patriotism can often be the last refuge
of scoundrels, I, unlike many US investors, take potential armed conflict in eastern UKR
seriously. UKR's prior leader looted the country and Putin and his guys have yet to find
policies to reverse a clear economic slide. And, you do not put 40k troops with attack craft
on your neighbor's border for the hell of it. As much as the West may hope these two proud
countries can settle differences peaceably, actions on the ground in stressed areas even if
carefully choreographed can subvert detailed plans once some shooting starts. Since Putin
and Lavrov have pissed away credibility with the West, the markets may focus more on
activity at ground zero if matters heat up. Hope all goes rationally and peaceably.

Russia? I'll take Kissin and Pletnev over Putin and Lavrov any day.

Test For Global Stock Market (Excluding US)

So far this year, players have chipped away at the elevated p/e ratio of the US market. With
QE headed into eclipse or worse, This should come as no surprise. In recent years, US
stocks simply killed it against the rest of the world, but change has been occurring slowly
as seen in the relative strength  of the MSCI World (Ex. US) vs. the SPX.

The relative strength index for the global market without the US has been trending weaker
but note the extended base in place since the middle of 2012. Note also that the downtrend
could now be reversing to the upside. Finally, check out how the MSCI world index has
tended to lose ground in the spring time, a period when the SPX has been vulnerable on a
seasonal basis. If the US market corrects further over this year's second quarter and the
MSCI World holds up in relative strength, that could be a real telling sign that investors are
inclined to continue to look more favorably at the international scene. Moreover, with better
global growth, mild pressure on the US$, and upturns in oil and other commodities tentatively
underway, interest abroad could pick up again even if the higher beta MSCI World falters
a bit this spring on a weaker SPX. 

Friday, April 11, 2014

Stock Market -- Sixteen Month Bull Run On Life Support Again

The current up leg runs back to late 2012. A tight, powerful up channel broke down in Jun.
2013 after the QE taper concept was first introduced by the Fed. Since, the market has
experienced a somewhat milder and more volatile up channel. There were downward breaks
in Oct.'13 and again in early Feb. Both were quickly repaired and the rally continued. There
was another break today. The market has also held up very well against its 100 day m/a. But,
it broke below the "100" again today. The SPX is modestly oversold in a short term down-
trend. SPX Daily Chart

The SPX has been through several breaks like the current one only to bounce back from
the rough area of trend support and I regard the current situation as critical but not serious
as of yet. Obviously, to avoid another whipsaw to the upside, we need to see further and
extended technical damage over the next week or so . I  would also point out that the more
deeply oversold NASDAQ Comp. closed out today right out on its rising trend line of 4000.
These declines in index prices to support levels will not be lost on seasoned traders who will
watch the tests just ahead with great interest.

The beginning of this third up wave in the current cyclical bull market began in the Fall of
2011. This longer term trend was last tested toward the end of 2012. As of now, the SPX
at 1816 must hold above the 1760 - 1775 area to see the current wave stay intact. The major
focus as we swing into next week will be on whether the market will whipsaw again, but
since the longer run trend has not been tested for over a year, you may want to keep the
lower, longer term support levels in mind as well.

Tuesday, April 08, 2014

SPX -- Daily Chart

I am spending more time on the SPX short term, but the chart is interesting. SPX Daily
The market is still hovering around 1850. There is a confirmed short run downtrend
underway with a slight oversold reading. But as you can see, SPX 1850 has turned from
being a resistance level into support. There was no reassuring bounce today, but some
players will like the fact that the SPX is holding the new support and has not broken down.
Amusing stuff.

Sunday, April 06, 2014

Economic Indicators

My expectation for 2014 has been that corporate / business sales should grow by 6 - 6.5%
and that profits should do even better via improved operating leverage and a firming of
pricing power. Output growth in real terms was stunted in Jan. with the bad weather, but
appears to be improving both in terms of production and new order flow. The surprise so
far this year has been the continuing low rate of inflation and the negative consequences for
business pricing power. So far this year, my pricing / cost ratio has been modestly negative
which normally makes it difficult to increase operating profit margin. However, in the
finance sector, credit growth is expanding which will boost net interest margins and fees
could rise from stronger underwriting and M&A activity (Bank stocks have done a little
better than the broad market since autumn 2013).

Despite the outlook for stronger global economic growth over the first half of this year,
my inflation pressure gauges have been dormant as operating rates have yet to rise fast
enough to offset capacity slack, particularly in China. In turn, here in the US, wage
growth remains low although real incomes are rising because inflation has been so low.
That is OK for the real economy now, but the low wage growth could easily be pressured
in real terms if  cyclical inflation pressures finally emerge.

More on profits and my coincident economic indicator later next week.

Saturday, April 05, 2014

Watch The NASDAQ Composite

The SPX took a good lick on Fri., 4/4, but is still holding its uptrend off the late Jan. '14 low.
Not so the NASDAQ which is in a confirmed short term downtrend and which just broke
below its 100 day m/a for the first time since the autumn of 2012. Since the NASDAQ has
been a strong leader among broad market sectors, you'll need to watch it to see if it proves
contagious to the other major sectors like the critical SPX. $COMPQ Daily

The NASDAQ is moving down toward an oversold condition but is not there yet and carries
trend support down around 4000. Given the occasional high volatility of this market and
the fact that confidence lost is not quickly regained here, further weakness would be no
surprise as this has been hometown for momentum players.

Friday, April 04, 2014

NASDAQ Comp. Skids In Relative Strength

The NASDAQ, weighted up with techs, net service and an assortment of other high flyers,
has accelerated to the downside compared to The SPX in recent weeks. The frothy ones are
being clipped as momentum players, remembering 1999 - 2000 especially, have moved to
take some money off the table. You have to watch this kind of action. Sometimes it merely
heralds a rotation out of the high beta, high risk game into more stable names and then there
are those times when 'de-risking' grows contagious and the broader market suffers as well.

Emphasis on the hot stocks started to get into 'chase 'em up' mode over last summer and
peaked in early Mar. Since, there has been a clear break in the RS trend line of the NASDAQ
which sees it retreating rapidly to the RS trading band of recent years. NASDAQ Rel. St.

From a short term perspective, this trade is getting oversold, but given the contagion underway
and still extant profits to be secured, the NASDAQ RS line could easily fall back into the
trading band of recent years (See chart).

Also keep in mind with the NASDAQ that if a more general market pullback is getting started,
the 'NAZ" can often lag the SPX when the next upturn gets underway.

Tuesday, April 01, 2014

Market Breadth -- Short Term Overextended

Here, I use a daily NYSE cumulative breadth chart with a Keltner channel measure.$NYAD
The chart is a little curious as the price momentum of the market has been rather dull so far
in 2014 while breadth has been fairly strong. That says small upticks in price as sellers are
not shy. But, note as well that the A/D line is getting rather overextended against its Keltner
band, a condition that suggests a new round of price consolidation ahead.

The SPX has received a nice boost from Ms. Yellen's pro - easy money 'pep talk' on Monday
just past. Her fingers are perfectly fine so far although she is playing with fire.