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, January 31, 2015

SPX -- Monthly

The monthly chart for the SPX has provided pleasant and easy reading since late 2011 as
there have been no genuine, threatening moments. That has changed with the Jan. 2015
edition. SPX Monthly


The chart still shows the SPX in a cyclical bull market. More controversially, I regard the
market to be in a long range bull dating back to 1982, as I read long term market charts
epochally as outlined in the 12/30 SPX monthly post.


Chart trend lines dating back to 2011 have recently been violated, but without sustained
negative follow through. There has been an elevation in volatility, and the short run direction
of the market as measured by its 25 day m/a is essentially flat even though the longer run
direction remains up. However, there are worrisome indications now on the monthly chart.


Note the 14 month RSI. It has been in an uptrend since early 2009. it was closing in on
a substantial overbought level toward year's end 2014, but the uptrend has been broken in
recent months and has turned down. The break in RSI is a warning or cautionary sign.


Of more importance is the near break in the monthly MACD shown in the panel right below
RSI. Looking back over the past 20 years, breaks in the monthly MACD have coincided with
either significant price corrections or the development of bear markets as in both 2000 and
2007. Now, rising MACD has yet to be be violated and the market can, in turn, rally up
in the next month or so. However, since changes in trend for the monthly MACD do not
occur all that often, it is worth noting how tenuous the position of the SPX is just now.


The cyclical conditions for the development of a bear market are not in place, but a break
ahead in MACD, if only for a few months, could signal a market correction as occurred in
201l.

Monday, January 26, 2015

Oil Price

The oil price has tumbled as all know, but it has still been following the longer term seasonal pattern.
Oil is now in a respite period in a weak seasonal interval which should wind up around late Feb.
Back on Dec. 23, when WTI oil was around $55, I opined that the lack of a rally then signaled that
oil could fall to around $40 by the end of Feb. '15. before the seasonal rebound period began. Let's
see how that goes. I think oil below $40 in the near future would begin to look like mindless
overkill. Oil supply / demand fundamentals simply do not look that bad especially with the
Eurozone, Japan and China now easing monetary policy. Moreover, the price of crude is now
extraordinarily oversold relative to its 200 day m/a. $WTIC Crude

The longer term uptrend in the oil price has been broken decisively. The US rig count is dropping
off, and crude output may eventually weaken. But the cat is out of the bag here. The oil shale in
the US is still here and there is plenty of it. The technology to retrieve it has developed remarkably
and continues to arc ahead. Others will copy it or buy it. Globally, there may be a lengthy period
before the oil price scales the heights again. But, as ever, there will be trading opportunities with
the next big test set for the end of Feb. if not a little sooner.

Tuesday, January 20, 2015

$ Gold & $ Oil

Early Jan. - mid - Feb. is a positive seasonal time for the gold price. As in early 2014, gold is
again off to a strong start on the year reflecting a struggling stock market, as some equities
players drift over to play the metal. Back in Nov. I tried a very roundabout case for gold in
2015. I did not specify when, but I was thinking gold had a good shot at firming up in the
latter half of 2015.Gold Price

However, what has caught my eye this year is the relationship between the gold price and the
price of oil. The old rule of thumb here is that it should take 13 barrels of oil to purchase an oz.
of gold. So, the "standard" relative price index (RSI) for gold-to-oil should be 13 to 1. The
linked to chart that follows shows gold's RSI to oil for the past three years. Gold : WTIC Crude

As shown gold's RSI has more than doubled the long range norm of 13 to 28. This ballooning
of the RSI primarily reflects the dramatic decline in the price of crude over the past six odd
months, and leaves gold very strongly overpriced relative to the price of oil. I am mostly
interested in the gold price as an inflation hedge and since oil has been a primary leading
indicator of the inflation rate for over 100 years, gold now sits at a disturbing premium. This
is not to say that the price of gold needs to weaken dramatically, but that the gold price can be
seen as discounting a major rebound in the oil price such as has occurred during prior periods
when gold sold at more than 20 bls. It might also indicate that should the global economy,
excluding the US, firm up later in 2015 as outlined in the Nov. piece noted above, the US $
might lose strength and the oil price might bounce up on a  weaker $ and stronger oil
demand. May be worth thinking about.

Friday, January 16, 2015

Economics & Profits Indicators

Coincident Economic Indicator
Reflecting the power of stronger liquidity growth from the Fed's QE 3 program my coincident
indicator, measured yr/yr, rose from 1.0% in mid - '13 to 3.0% for Nov. '14. The +3% reading
was the strongest since early 2011, and represented solid, balanced growth. The CEI slipped
to 2.5% last month reflecting weakness in real retail sales and production following a strong
Nov. The slippage was not enough to derail the trend of improvement and I await Jan. data
to see if the trend remains intact. The CEI for the final quarter suggests real GDP growth of
2.6% yr/yr.

Economic Supply / Demand Balance
On a yr/yr basis, production increased  by 4.9% in 2014. Capacity growth however, gained by
3.2% and registered its strongest improvement since 2011. Faster capacity growth has been
tempering the rise of capacity utilization thereby lengthening the time it will take for the
economy to overheat and tamping down cyclical inflation pressure. The relative balance
between productive capacity and demand gives the Fed more time stretch out a return to
policy normalization via raising short interest rates if it so chooses. 

Business Profits Indicators
US business sales before adjustments rose an estimated 5.7% in 2014. The US was a sales
growth leader among major economies last year, so many larger US based companies with
global reach did not fare as well on the top line. The powerful rally in the US $ over the last
four months of the year led to translation losses in sales and earnings for the globals as well.
Finally, the rapid decline in oil prices and related downstream items plus weakness in
sensitive materials prices hurt the petro production sector and basic industry sales and profits.

Business pricing power eroded sharply over Half 2, especially for basic supplies producers.
Ability of the average company to increase margins was enhanced by stronger volume
growth and constrained modestly by a mild selling price / cost squeeze and rising depreciation expense.

To conclude, a year of bright promise for business profits was constrained as the year wore
on and the same constraints are carrying over into 2015.

A Nasty May Be Ahead
Knowing senior managements as I do, I would not be surprised if plenty of CEOs use the
current weakness in gasoline and fuels prices to pocket cost benefits as consumers of
energy and try to muscle wage growth lower on the pretext that wage earners are getting
an enhancement to real wages via reductions in prices at the pump and for heating and
cooling. This spares margins but undercuts purchasing power in the economy.

Thursday, January 15, 2015

Daily SPX & VIX

Here is an updated chart of the SPX plus the daily VIX (bottom panel) SPX

1) The market has broken both long term (from 2011) and shorter term trend support around
the 2000. This is the second time in three months that the SPX has broken longer term trend
support and, as you have guessed, indicates a laboring market.

2) As noted in the 1/6 post, the SPX has had trouble staying above the 2000 level since mid -
Oct. and here we are again, this time at SPX 1993.

3) However, the market has only threatened to break down in recent months and has not done
so yet. Given the powerfully consistent run up in the SPX since the latter part of 2011 with only
minor dips below trend, the market deserves respect until  there is a more decisive break.

4) On a momentum basis, the SPX is modestly oversold against its 25 day m/a for the shorter
run. The standard RSI is trending down and is approaching a somewhat deeper oversold and the
MACD is negative.

5)  The VIX -- a volatility index used by traders to measure fear in the market -- has been drifting
ever so slowly higher since Jul. with the occasional spikes when the market sells off. The low
level of the VIX  over Jun. /Jul. indicated nearly obscene player confidence and complacency
and is returning now toward more normal levels.

6) Traders who have gone long the market when the VIX has spiked above the 20 level in recent
years have been rewarded as part and parcel of a buy the dip in price strategy as the higher
VIX readings have proved transitory. Note of course that if the SPX is set to work lower, the
VIX will trend or even spike higher.

7) The broad market can be choppy over the first half of Jan. as investors tinker further with
asset allocation and portfolio equities strategy.

8) So far in 2015, my weekly fundamental indicators suggest a flat broad market relative to Dec.
and a slowdown in the erosion of sensitive materials prices (oil included). Naturally, this is only
a very quick snapshot
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I have had a fundamental buy signal on this market since early 2009. I do not use a "hold"
signal, so the "buy" stays on until I get a sell signal. The fundamental buy has not saved
players from sharp corrections in both 2010 and 2011. Further, there has been decay in
the signal as the "easy money" part of the cyclical bull has apparently past and much more
risk must now be assumed as a trade off against positive return.

Monday, January 12, 2015

Financial System Liquidity

Measured yr/yr, total system liquidity growth (including the Fed's balance sheet) grew by 6.7%.
this represents a substantial deceleration of growth from  11% early last year and reflects Fed
policy tightening via the QE 3 tapering and subsequent elimination. Liquidity growth has been
strong enough to fund faster economic and profits growth along with providing excess to to fund
the capital markets. With QE in the past, liquidity growth measured yr/yr is going to continue to
slow and should lead to more moderate sales and profits growth for business out ahead.

It is interesting to note that despite the strong liquidity gain in 2014, inflation pressure has
decelerated further instead of picking as it normally does. But, we are going through a period
global excess capacity especially in the basic materials and fuels sectors.

Note as well that cash available to larger investment organizations has been building in recent
months as policy towards equities appears to be turning more cautious. Cash ratios are up about
5.8% or $100 bil. This development is modest, but it has not been in evidence with consistency 
for quite some time.

The banking system is continuing its thaw. The loan book is growing is growing moderately.
Lenders are also expanding exposure to more conventional sectors. Balance sheet liquidity
remains exceptionally strong given that 2015 will represent the sixth year of recovery.

Tuesday, January 06, 2015

SPX -- Daily

Here is a link to the daily SPX using closing prices: SPX

 1) Both short term and long term trend support sit at SPX 2000 (long term support dates back
to late 2011). The market broke long term support at 1900 with the Oct. '14 sell off, but did
subsequently rally back into the rising price channel. Now there could be another test.

2) It is interesting that the SPX has experienced a little difficulty holding above the 2000 line
which was first crossed in late Aug. and shortly before the shutdown of the Fed's QE 3 program.

3) Nearly mindless herd behavior remains in effect as players have been drawn into steep
whipsaw action in recent months.

4) The market is a mildly oversold -2.3% below its 25 day m/a and is approaching an oversold
on RSI. The trends of RSI and MACD are down and not encouraging.

5) My argument for several months has been that without the QE program in place, fundamental
risk is now substantially higher and that return potential might be more restrained than in recent
years. An elevation of volatility is already evident.

6) I have also argued that the bulls have, since late 2011, used the powerful QE program as
a backdrop to push the p/e multiple up on the premise that low inflation and interest rates
support the idea that the discount or hurdle rate on the market would fall circa the 1960s.
Moreover, since this narrow focus strategy has been a winning one, I have pointed out that
its continuation would lead to 2500 on the SPX by the end of 2015 and a p/e of 20x.

7) But now we have to see whether the absence of the Fed at our backs will enable the
bulls to keep the narrow focus or whether other fundamental factors will work to challenge
the thrust to a higher p/e out in time. This powerful bull story has not been defeated yet.
We can see the waning of momentum in the recent action of the chart, but the kind of
sustainable trend break needed to shift the market trajectory to a less positive line and
away from the current still rapidly rising channel has yet to occur.


Sunday, January 04, 2015

Global Economic Supply & Demand

Global industrial output measured yr/yr has declined from 4% in the early spring to 3%
recently. Growth may have slipped slightly going into year end. The reaction of the
commodities markets to this dissipation of demand growth has been spectacularly negative
in my view. Commodities prices are normally volatile, but I suspect the presence of  large
financial players has added substantially to volatility over the past ten years.

The outlook for global economic demand in 2015 is admittedly hazy. The world's four major
central banks -- The Fed, ECB and the central banks of China and Japan are not all on the
same page presently when it comes to liquidity growth. The US is unwinding a program of
very substantial liquidity expansion. Japan is only now beginning to see faster liquidity
growth after a year of central bank ease. China in substance is following a stop / go policy
which just recently veered toward 'go'. The ECB, where substantially faster liquidity growth
is advertised as just around the corner, is actually reporting a mild acceleration of monetary
liquidity expansion following an awful period of stop / go policy over the past five years.

When you use liquidity as a touchstone for future economic growth as I do, the current disparate
policies of the leading central banks makes for tough going when it comes to gaining a bit
of insight on the future. Presently global demand growth is still moderating and deflation
pressure remains on the rise. However, the reactions of key equity market sectors, currencies,
commodities and various segments of the bond market to the economic situation since the
spring of 2014 has been so powerful, that I wonder if much of this fallout is simply outsized
relative to what has transpired economically. After all, we are looking at a moderation of
global production growth from 4% to 3%, not the immediate onset of recession.

If global growth does accelerate later this year because of enough of a mix of private sector
credit flow to compliment more modest liquidity expansion, there could be powerful
reversals in overpriced markets like US Treasuries and The US dollar and deeply oversold
markets such as commodities and selected currencies such as the Japan Yen.

As a final note, the decline in commodities prices in general and sensitive materials prices
in particular has been strong enough to warrant watching out for the eventual mothballing of
of production capacity in some of the many markets that comprise these groupings.

Weekly CRB Commodities Chart + Industrial Commodities