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, February 27, 2016

SPX -- Monthly

Fundamentals
The market carries a 'tight money sell' rating. In addition, the deceleration in monetary liquidity
growth in real terms has been substantial enough that it might only be a few months before a
recession vulnerability warning arises. Should such a warning occur soon, it does not imply that
recession is imminent, only that the economy is entirely dependent on its own internally generated
resources to fund or underwrite continued economic expansion. Since internal resources, and
especially private sector credit flows, are not leading economic indicators, the continuation of
economic growth is a much riskier proposition and is contingent on the continuation of good
balance between the forces of economic demand and the means to finance them profitably.
Empirically, the economy can expand for at least a year after the vulnerability warning pops up.

The US economy has been growing slowly and the leading indicators I follow continue to suggest
slow going. Even so, it is worth remembering that 2016 is off to a stronger start and regeneration
of improved economic growth momentum should not be dismissed out of hand. The same may be
said for business profits.

There is no case yet for saying a cyclical bear market is in the offing; only that economic risk
is about to bottom. From a stock market perspective, equities prices can still rise, but without
a stronger liquidity backdrop, market risk is now significantly higher from an economic
standpoint.

Corrective market action over Half 2 '15 has reduced valuation risk. It is too early say whether
continued slow economic growth will lead investors to demand more in dividend yield and be
unwilling to pay the current p/e ratio freight.

Monthly SPX Chart  (SPX)
As I warned late last winter, the rollover in the monthly MACD to the downside was a signal of
concern as it warned of an open ended loss of positive price momentum. Other indices have
faired more poorly, but damage to the SPX has not been that severe yet. Note that the RSI
panel in the chart shows hesitancy to break below 50 and that the market itself continues to
rally off levels a bit above 1800 on the chart. The chart holds plenty of appeal for the bears,
but I have yet to join this group.

Friday, February 26, 2016

Oil Price -- Important Seasonal Test Ahead

Producers / refiners are gearing up for the major northern hemisphere driving system. Typically,
the oil price tends to to rise strongly but irregularly from the end of Feb. through the end of Sep.
But not always. Last year the normal strong seasonal pattern was cut off during the summer as
oil production surged beyond expectations. It is perhaps unwise to make a price forecast this year.
Although oil production may have trouble surpassing that of the second half of 2015, inventories
are at high levels and it is far from clear that demand growth will surpass 2015 by much at all
given the list of reservations forecasters have about global economic growth in 2016. Still, this
represents a normally favorable period to trade oil long. The market is clearing the 50 day m/a
and is moderately oversold against the 200 day m/a. both MACD and RSI are trending up. The
USO ETF is shown in the bottom panel of the chart just ahead....$WTIC


Tuesday, February 23, 2016

Long Treasury Bond Yield %

The argument here has been that with low US economic growth, nominal inflation and near zero
short term yields, it was reasonable to see the long 30 yr. Treasury trade in a range of 3.00 - 3.50%.
The central idea has been that one needs at least 300 basis points of premium in the short run to
offer partial compensation for all that can happen to the bond market over the long term. $TYX

Well, as the chart shows, with the considerable volatility in the market, the T-bond has not spent
all that much time in the range in recent years. New financial regulation has reduced liquidity
available for market makers but even more critically, the long term downtrend in yields has
birthed a generation of market speculators who use Treasuries to hedge portfolio risk more
aggressively than in the past.

Concerns about the prospects for global economic growth and a stronger US dollar have penalized
the equity markets for months and Treasuries have been granted safe haven status as players fret
that central bankers fail to achieve an acceleration of global growth even with the provision of
ample liquidity and now negative short rates in a growing number of cases.

Because I have yet to abandon the idea that the US economy will have better economic
performance this year, I have been very leery of the bond market given the substantial risk to
the market inherent in faster than generally anticipated economic growth. I currently have no
interest in long side trades in Treasuries until 3.50% or higher, and even then, it might be a
tough go if the Fed, currently chastened by a sloppy global economic environment, reverses
course course on raising short term rates if economic growth improves in the US and inflation
momentum firms up.


Friday, February 19, 2016

SPX -- Weekly

Fundamentals
After losing growth momentum steadily through last year, the economy did much better in January.
Aristotle, a favorite of mine, reminds us that one swallow does not make a summer, and I am good
with that here. Suffice it to say the US needed a more positive month. There were improvements
in both volumes and pricing power. I also remind again that we are about a week away from when
the price of oil turns up sharply on a seasonal basis and it will be very interesting if the bounce
comes, as the oil price has been a significant drag on SPX net per share. I am still open to seeing an
'up'  year for the SPX, but be mindful that even if the economy  performs decently through 2016,
there will still be the Fed to contend with as better economic performance will encourage It to
take another shot at raising rates. There is a substantial amount of crisis mongering among
investment strategists. Since my work does not show that all the hand wringing is appropriate yet,
I conclude The Street has a case of post traumatic jitters reaching back to 2007-08. Naturally, I
hope am right.

Technical
The market has rallied strongly recently, and there is even a hint of a double bottom this year
just above SPX 1800. The market also remains significantly oversold, but make no mistake,
continued progress upward is needed to reverse an extant primary downtrend. SPX Weekly
Should the current rally continue, look for a test of whether the SPX can take out its 13 wk.
m/a on the way up.

Sunday, February 14, 2016

SPX -- Weekly

The stock market is in a primary down wave, but for both fundamental and technical reasons, I
have remained an agnostic on its true course for the remainder of the year. the US economy has
lost substantial growth momentum, but is still expanding, and the classic pre - conditions for
development of a recession are not in place. Business inventories remain high relative to sales
but are starting to run off and even a modest boost in final demand will chase the inventory to
sales ratio down. The oil price bust, which has hurt SPX net per share, is coming rapidly upon
a major seasonal low, and even a minor rally in oil will at least stabilize index earnings. The
strong US dollar which has sapped US export sales has been wavering. There are also signs that
inflation, and with it business pricing power, are bottoming. To top it off, the SPX is now quite
oversold on an intermediate term basis. SPX Weekly

My guess has been that the SPX could close out the year at 2160, but with no Fed policy tailwind
at our backs, there is no compelling reason to bank on this guess. The better course for an old
guy me like me will be to jump on rallies from deep oversold conditions as the year progresses
rather than to fret over year end 2016 guess work.

Of note on the chart is the pivotal role of SPX 1850 going back to the end of 2013 when it was
made clear that the Fed's QE 3 program was set to wind down to a close. The market could not
hold recent support at 1875, but it is interesting that it just bounced above the 1850 level. Notice
also the heavy downside volume over the past two weeks. Wishful thinking perhaps, but that
sometimes happens with part time players.

Saturday, February 13, 2016

SPX -- Valuation Note

The stock valuation measure I use is based upon the long term centered trend of earnings,
the earnings plowback % and consideration of the long term inflation trend. The model now
has the SPX at fair value in a range of 1870 - 1990. Later in the year the FV range will rise to
1990 - 2120. SPX Chart

The chart shows  the SPX was moderately overvalued through late 2014 and much of 2015.
The SPX has recently traded slightly  below FV. This reflects the fact that index net per share
has fallen below the long term trend of earnings, which has in turn reduced the plowback %.
It also reflects investor concerns about the staying power of the current economic expansion,
worries over the slowdown in China and the stability of the banking system in view of the
weakening financials of many companies in the oil and gas patch. Although these issues may
prove to be of a passing nature, there is a longer term question that may deserve more attention
as time wears on. The longer duration issue has to do with possibly re - evaluating earning
power and growth potential if global GDP growth and business pricing power are to remain
subdued for an extended period. Investors may not wish to confront this possibility now, but
the issue will surely come up for consideration if earnings potential for both the current year
and for 2017 look to be more subdued than currently forecast by the consensus. Here, I
have in mind not so much the cyclical factors, but the longer range ones. Something to think
about.

Thursday, February 11, 2016

Gold Price -- Trader Discipline Is Evaporating

As outlined in yesterday's post, gold fundamentals are shifting from negative to neutral and there
has been a strong, so far, seasonal rally. Gold can be very volatile and when its in play the action
can be spectacular. But, currently there is a mad and undisciplined chase to get long. This kind of
action is repulsive and only the most nimble of the nimble should be involved. Gold Future

Wednesday, February 10, 2016

Gold Price

Back on 11/22/15, I posted that although Gold remained in a longer term bear market, the metal
was worth your attention because of its oversold status and very bearish sentiment. Gold Price
Gold based out through year end 2015, and it has been in a strong seasonal rally this year which
has continued into Feb.

Gold fundamentals have shifted somewhat away from dead certain negative toward neutral.
US inflation momentum, measured on a yr/yr basis, may be bottoming currently, and the US
dollar, which has enjoyed a bull run to very overbought levels, has recently ebbed on speculation
the Fed is turning considerably more circumspect on how fast it will further tighten monetary
policy. Weaker stock prices on a global basis has also chilled confidence that financial upsets
can be avoided.

The rally in gold so far this year has been strong enough to break above intermediate term down
trend lines and has brought gold up to an important pivot point at 1200 oz. It has been a good
trade, but the market is now very overbought on a shorter term basis and the lift off has been
vertical enough to force traders into chasing the metal price up. $GOLD Daily

Given that gold has not been able to hold the 1200 price level for over a year now, it would not
be a surprise to see it back off and establish more solid footing before resuming the assault.

Friday, February 05, 2016

SPX -- Daily

The SPX has again found support near 1875, a level that has contained downside thrusts since
the autumn of 2014 at least on a closing price basis. SPX Daily

The latest rally attempt from a deep oversold has been a fizzle to this point, with the market not
shooting up strongly after a spike bottom as it has over the past three occasions. Of itself, the
challenge to the latest bounce off support does not cast a shadow of vulnerability, but it does
suggest there may be an alteration of the recent pattern away from single point bottoms. Testing
of support may well again be at hand. The persistent downtrend in shorter term RSI suggests
that traders who are not terrifically nimble think twice about long side bets until there is a
positive reversal in that indicator.

The broad stock market remains sensitive to the direction of the oil price which has not made
a clear bottom after months on end of bust, although, and this is worth noting, the price of oil
is fast approaching an annual low on a purely seasonal basis. Weaker petro and gas sector earnings
have not been fully offset by wider profit margins for net business consumers of product on a
macro basis, with SPX net per share under pressure just as it was over 1984 - 1986 when there was
a very sharp blowout in the crude price. It has not been helpful to the stock market this time out
as investors must contend with the economy's flirtation with deflation and an elevated p/e ratio.