Capital Markets & Economic Analysis

Oil Price -- For Top Guns Only

2012-02-15T19:45:00.000-05:00

Today, Iran threatened to cut off its six largest EU buyers in retaliation for the EU proposal
to embargo Iranian crude. The US does not buy Iran crude, but does have a plan on the table
to push SWIFT -- the global payments and deposits clearinghouse -- to cut the Iranian central
bank and its member banks out of the system. Such dual EU / US action would if enacted have a
serious negative economic impact for Iran, as it would take a substantial amount of time to line
up new buyers for all of its crude and establish what would be at best an inefficient and risky
new payments / deposits clearing system.

The dispute has been going on for several months and has added $20 bl. to the price of crude
by my estimate. So, Iran has been a major beneficiary as have the nervy traders who have been
long crude during an especially weak seasonal period. There is overhead resistance for crude
around the current price, so traders need to decide whether the political tiff has deepened enough
to warrant further commitment on the long side.

Since I think only the guys with superior market intelligence should be playing in this market
now, I am a bystander, and if you are tempted to play -- long or short -- it would be wise to
review whether or not you have timely access to info you need to handle a very complicated and
risky situation.

I plan to monitor the situation carefully primarily because my research suggests that WTI crude
above $95 bl. will tend to be a stronger drag on broad economic output growth.

WTI Crude

Stock Market -- Short Term

2012-02-14T16:57:00.000-05:00

The market experienced a powerful move up from the late Nov. '11 low and also when measured
from the lower, earlier Oct. '11 low. Most recently, the SP 500 is showing an overbought in the
short run and has been kissing important resistance at 1350. SPX

This is not an easy situation. The SPX has run well out ahead of my weekly cyclical fundamental
index since Oct. '11. The fundamental index is up nicely, but has been running less than half the
22.8% run up in the SPX since Oct. However, the trajectory and the breadth of the advance are
far more akin to a fresh upleg than a blow off with a dim future. In fact, the SPX could advance
another 5.5% up to 1425 over the next month or two before it turned overbought on my longer term
indicators.

Now, the chart also shows a welcome dimunition of volatility over the past couple of months.
However, the structure of the rally still leaves open the possibility of a return to significantly
increased volatility (Draw a trend line up with touches at the Oct. and Nov. lows.) As well,
the recent strong rally has mostly to do with restoration of the p/e ratio and much less to do
with near term earnings expectations, which remain tame.

So, for now, I am stuck looking for some additional testing of SPX 1350 resistance over the
next week or two and having to hold my breath on how deep a retracement could come if the
market does not blow through 1350. Not especially definitive you say? Well, you play it as it
lays.

Financial System Liquidity

2012-02-12T17:08:00.000-05:00

Overview
As in the 1930s, when banking sector credit was contracting or flat, the Fed continues to be the
primary provider of liquidity to the financial system. That measure of liquidity has been rising
modestly recently owing to the currency swap lines from the Fed to liquidity shy central banks.
The banking system's interest earning assets have been rising, but it is interesting that solid growth
of the business loan portfolio has nearly been matched by the continued accumulation of Treasuries
in the investment category. Real Estate loans, which account for 50% of bank loan exposure have
only recently stopped declining and ticked up in Jan. this year, perhaps reflecting a long awaited
recovery of construction spending. Modest improvements in credit demand have so far left the
banks with little need or appetite to bid for more deposit $.

Based on post WW 2 standards, the Fed should be raising short rates now, but with unemployment
still high and housing still very depressed, the Fed is maintaining its ZIRP. This will be interesting
to watch going forward, as the recovery of private sector loan demand continues to broaden out.
Short term business credit demand is up over 10% yr/yr, and the Fed has not seen fit to raise rates
as It always did over the post WW 2 period. Quite something.

Fed Bank Credit & Stock Market
Since the Fed is the major game in town re: liquidity, you should note the importance of the Fed's
Credit account to the market. Investors like positive momentum in Fed Bank credit and shun stocks
when the Fed has this account in flat or contraction modes. Fed Bank Credit

China -- Shanghai Composite

2012-02-10T16:48:00.000-05:00

China's huge, nearly $600 bil. stimulus program focused heavily on its industrial base and on
further broadening its infrastructure and real estate development. The Gov. threw money at
these markets to avoid a deep recession in 2009 with the result that the broad money supply M-2
had jumped to a 30% yr/yr growth rate by mid-2010. This implied the development of 20%
inflation which mostly took place in the higher end residential and commercial real estate markets.
The stock market became a source of funds to feed real estate speculation. but as economic
expansion progressed, consumer inflation accelerated sharply, forcing China to tighten money and
credit to curb the faster CPI and corral the excess real estate speculation. On a yr/yr basis, China
M-2 is now down to 12.4%, which for an economy with fast growth potential is a sensible level.

I had expected Chinese authorities to begin easing monetary policy over Half 2 '11 and the
stock market to rally as a deceleration of inflation reduced the investment return hurdle rate. China
did not begin to ease until late in 2011, and then, only slightly. There has been a bounce in a very
weak stock market, but it is hard to tell whether the bounce is simply a move in sympathy with a
global recovery of share prices or whether players are coming around to believing that China is
set to ease monetary policy further. (Naturally, the Half 2 '11 market recovery did not happen as
the market kept in a southerly direction.)

Lord knows They have the real estate developers on the run, with only middle and lower priced
residential properties getting any play from lenders. They also have monetary policy at a near
critical juncture, since further significant tightening of liquidity would not only freeze out more
real estate, but would do harm to China's output base and employment. Obviously, it would do
China little good to pump up liquidity sharply from here which could re-arouse the overbuilt
real estate sector and lead to further inflation down the road.

As many have noted, China needs badly to rebalance its economy in favor of consumption and
away from its profound over-dependence on industry and upscale property development. As well,
it needs to better control the diversity of its banking sector loan portfolios to include far more
emphasis on the development of small and mid-size business. But first, it needs to put its monetary
policy on a far more even keel.

A turn to a rather moderate monetary policy of accomodation seems needed as China passes
through 2012. Its stock market is quite reasonably priced and might benefit from a more balanced policy which does not tilt the investment players right back to the real estate and private credit
markets.

China's presumptive new leader, Xi Jinping will be in the US next week and is expected to take
up the reins of power later this year. This development could be a risk element for the Shanghai
Composite near term as Xi might want the authorities to squeeze out more inflation pressure
before he ascends. All to be seen.

Shanghai Stocks

Risk On vs. Risk Off

2012-02-08T17:14:00.000-05:00

One quick measure I use to evaluate the status of the "risk on vs. risk off " trade is to watch the
SP 500 in the form of the SPY against the long (30 yr.) Treasury. SPY:$USB

The relationship between the stock and bond market can shift around over time, but this measure
has been helpful in recent years. Note the "buy stock" points of Aug. 2010 and Oct. 2011, when
stocks rallied and the bond price faded at .75 relative strength. Note as well that when relative
strength of the SPY gets close to or exceeds the 1.02 RS level, that you get a caution sign that
stocks are perceived to be doing a little too well relative to the bond. The current RS reading for
SPY against the long guy is .95, which suggests the relationship is beginning to mature based on
the recent economic environment. Interesting stuff in the current mileu.

I would also call your attention to when the RS of the SPY breaks below the 20 day m/a with this
followed by a downturn of the "20", you also get a heads up which tells you to pay much closer
attention to the economic fundamentals.

Nasdaq Comp. Overbought

2012-02-06T17:47:00.000-05:00

The TRIN for the Naz measures buying pressure vs. selling pressure. A high TRIN reading --
the 21 day m/a exceeds 1.5 -- shows a deep oversold. A low TRIN reading below .90 shows
the Naz is overbought. The market is overbought at present. $TRINQ

Economic Indicators / Analysis

2012-02-06T16:56:00.000-05:00

Based on the coincident economic indicators, the growth of sales and production saw dwindling
momentum over most of 2011, as the output side of the US economy was slowed by negative
real income and sluggish employment gains. I think it is fair to say that without the benefit of the
2% payroll tax cut, growth would have been marginal at best. Although the payroll tax benefit is
likely to be extended for 2012 after the usual Wash. DC histrionics, it will not be incremental in
force this year. Excluding the tax cut, the real wage rate, measured yr/yr, fell from 0.7% at year
end 2010 to a low of -2% by 8/11. This awful performance has improved since Aug., with the real
wage now running at about -0.8% yr/yr through Jan. The improvement is primarily due to a
significant reduction of inflation momentum which could continue for a few more months. On the
plus side, the yr/yr growth of employment has improved from a scant 0.2% for 8/11 up to a far
more reasonable 1.7% through Jan. So, the underlying buying power of the economy is getting
better, although it is still inherently modest.

In line with somewhat improved buying power, new order rates for US business have improved
markedly since Aug. 2011, and measured by breadth of businesses with rising new order rates,
are solidly positive and suggest a re-acceleration of economic growth in the months ahead.

Measures of global economic activity are also improving in early 2012, but this heavily reflects
the contribution of stronger US new order rates.

The US banking system took a little bit of a holiday over the second half of 2011. With a slowing
economy, banks did not bid agressively for deposits or boost commercial paper outstanding. That
left the Fed as the prime supplier of incremental liquidity over the Aug. '11 - Jan. '12 period.
Perhaps with business now showing a stronger order book and construction spending now
apparently recovering, the banking system will resume providing more liquidity to the economy.

With Europe, Japan and China experiencing growth slowdowns as 2011 progressed, US export
sales have turned modestly lower since the autumn of last year and could continue to be a drag
on the US in coming months.

On balance, with real wages still negative and the banks still reluctant to step up more strongly to
support the economy, the recovery remains fragile on its internal workings, never mind if
problems in Europe take a turn for the worse or if rising mid-east tensions provoke an inflation
shock from a jump in the oil price.

Note, however, that older hands have been buying US stocks over the past several months
because they have watched underlying but modest improvement in economic fundamentals
coupled with a deceleration of inflation pressure.

Stock Market Stategy -- Adding Shorting Option

2012-02-03T17:09:00.000-05:00

The market is overbought short term, but the trend both shorter run and intermediate term are
still decidedly positive. Nevertheless, I plan to use leveraged short ETFs on signs of price
weakness probably through the remainder of the month.

I have linked to the SPX % of stocks above their 50 day m/a's. $SPX50AR I use this chart to
help me decide on long vs short decisions and watch the action of the % reading against its 10 and
25 day m/a's. I have only traded long since the end of 2008, but with three years having past
since then, it seems about right to use a more balanced strategy. Study of this chart is worth the
time, as it has been a very ok guide to the market for many years.

Inflation Potential

2012-02-01T17:24:00.000-05:00

Inflation Pressure Gauges
By Sep. 2011, inflation had accelerated to 3.9% yr/yr. As expected, it has moderated, and the CPI
registered 3.0% yr/yr through 12/11. My narrow inflation pressure gauge, which is heavily weighted
to commodities and capacity utilization %, is signaling further moderation so that the CPI could fall
to 2.0 - 2.5% in several months' time. The easing of pressure primarily reflects the decline of
commodities prices underway since May, 2011. $CRB Commodities Comp. The chart shows the
CRB is down 8.1% yr/yr, and it would need to reverse and rise above +10% yr/yr to trigger off
a substantial re-acceleration of the CPI.

My broader gauge, which includes a wide array of economic data is consistent with a yr/yr CPI
of roughly 2.5% at present. Both gauges did tick up slightly near year's end 2011.

The Real Wage
Commodities driven inflation, particularly for petroleum products, turned the real wage negative
in early 2011. Incremental FICA tax relief eased the pain, but no further increments are expected
now. Thus, unless there is an upward adjustment to wages soon, the economic recovery will remain
at risk. The wider measure of real disposable income has also been negative. Real DPI

Companies may not realize it, but since real wages which are too low can easily jeopardize
economic expansion, investors react by reducing the stock market's p/e ratio. Thus it is
that shareholders as well as labor are now being screwed by CEO focus on short term earnings
and exec bonuses and an evident lack of foresight.

Stock Market Weekly

2012-01-29T17:11:00.000-05:00

Technical
The market is overbought short term and my e-inbox suggests this issue is being widely discussed.
The thrust up in recent months has been strong enough to indicate the market has further upside a
bit down the road even if it is short term overbought. One measure I use is the 30 day m/a of NYSE
advancing stocks. When it moves up around 1800, that is evidence more upside is ahead as time
progresses, with this result holding about 85% of the time based on data running back over 20 years.
$NYA

My weekly SPX chart shows the market is still in a firm uptrend. It is overbought against the 13
wk. m/a, and I would like to see the 40 wk. m/a begin to turn decisively higher to confirm a longer
run for the market, but I am ok with it now as my 40 wk. price oscillator remains in a clear but still volatile uptrend $SPX

Fundamental
My weekly cyclical coincident indicator continues its rise off an interim low set on 9/23/11 at a
reading of 222.4. Since then the indicator has moved ahead by 7.1% to the 238.2 level paced by
lower unemployment insurance claims, and more recently, by a sharp recovery underway in
sensitive materials prices. Weekly sales and production data also continue positive. Since 9/23,
the SPX is up by 15.8%, and that may also be a sign the market is a bit overbought in the short run.

Gold Price

2012-01-27T16:40:00.000-05:00

By my indicators, the recovery in the gold price this year to date primarily reflects upturns in
the various cyclical pressure gauges or "boom / bust" measures. The monetary measures I follow
in connection with gold have been flat so far in 2012. So the betting for gold currently favors an
expectation for improved commercial demand.

As expected, the gold price did bounce off the oversold condition described late last year. It
did not test support at 1500, but has instead maintained a strong positive trajectory which led
the price to break out of the sharp downtrend line in force over the Sep. - Dec. 2011 period.
That is a positive technical development. The metal is overbought in the short term but not looking
out several months. $Gold

The speculative demand for gold continues to rise when I measure its price against the economics
for the industry ( all in cost + cash flow ). It is currently about 83% over this measure compared to
peaks of 40% in 2006 and 60% in 2008. Gold is down from the 100% premium over economic
value recorded in Sep. 2011. Gold can be expected to return down to economic value in the next
global recession.

Gold price volatility is showing preliminary signs of settling down after a tumultuous Half 2 ' 11.
If the current rally extends up toward the $1800 oz. level in the next month or two, I will look
to start shorting it again (a move not recommended for most folks). $Gold -- Shorter Term

Monetary Policy

2012-01-25T16:18:00.000-05:00

Fed policy is set as it was post 1932, when output began to recover, private credit demand was in the doldrums, deflation pressures started to ease and unemployment remained near record levels. To
supply liquidity to the system, the Fed has roughly 2 Stril. of securities and is keeping short rates
at or near zero. Historical 3 mo. T-bill yield

The Fed defends the policy in view of its dual mandate. Here, unemployment is seen as still too high
while there is deflation risk rather than serious inflation risk. Just like the 1930s.

Today, the Fed extended its ZIRP projection to the latter part of 2014. In also buying longer dated
Treasuries and mortgage backed securities, the Fed is trying to maintain housing affordability at
an attractive level and allow homeowners to refinance at historic low mortgage rates. The program
has been stymied by reluctance of lenders to make mortgage commitments that are not gilt edged,
and by a new real estate loan philosophy which emphasizes collateral value rather cash flow
servicing capability. So, just as the mortgage industry was stupidly aggressive in lending over
2003 - 2007, it is now stupidly tight in lending. The way of course to enhance collateral value
in housing is to loosen overly conservative lending standards and allow rising demand to nudge
house prices up and out of the doldrums. In a similar vein, with unemployment still very high,
borrowers are more conservative as well. The Fed is now anticipating a lengthy period will be
required to move the US out of the realestate morass.

By contrast, the post WW 2 indicators that have governed interest rate policy are about 80%
in favor of raising rates, with only the capacity utilization % running a little shy of the red zone.

ZIRP punishes savers, but is a windfall for those who refinance their mortgages. Unfortunately,
even refinance demand has been weakening in recent years, and in acknowledgement, the Fed
will keep the window around longer in the hope the market will loosen up.

Eurozone -- Amusing Surprise

2012-01-24T15:45:00.000-05:00

The EU faces strong economic headwinds this year. Most forecasters are expecting a recession.
The Markit Economics PMI data showed a steep downdraft in output since early 2011, furthered
by negative or contraction readings until the Jan. 2012 flash report.

Now, as Aristotle was fond of saying, "one swallow does not a summer make", but it is interesting
that as the EU moves into the new year, there is a sharp bounce in activity levels in evidence, and
one which comes in the wake of the ECB's massive collateralized loan program to the EU banks.
Sharp positive reversals in PMI following sizable declines in activity levels into negative
territory do not normally indicate errant positive "blips" in an ongoing, heavy duty downtrend. So,
economic headwinds and recession forecasts notwithstanding, it could be unwise to put the EU to
bed before we see more data.

Stock Market -- Short Term Fundamentals

2012-01-23T17:16:00.000-05:00

The weekly cyclical fundamental directional indicator closed out 2011 slightly below the
2010 close, for a decent match with the SP 500. The indicator has turned up sharply so far
in 2012 and this primarily reflects commencement of a seasonal rise in industrial commodities
prices as businesses add inventory to meet production schedules. US production of manufactured
goods closed out 2011 on a stronger note, but the big kicker for sensitive prices reflects some
renewal of business confidence about an eventual re-acceleration of industrial output in China
following preliminary monetary easing moves there. If the US maintains industrial output growth
and China re-accelerates, sensitive materials prices would likely trace out a seasonal rise through
mid - year, which would provide ongoing support for the US stock market. Remember, however,
that sensitive materials prices composites are available weekly, are volatile and will not conform
to the seasonal pattern if economic weakness develops. JOC/ECRI Ind. Com. Comp. (interactive)

Federal Reserve Bank Credit and the monetary base have also increased since early Dec. 2011.
Given the close attention investors have been paying to the Fed's balance sheet, this is
also a positive for stocks, but one with low future visibility and possible volatility since the
bulk of the increase in the Fed's credit offered comes from the new liquidity swap program for
the ECB and other needy central banks. For now, investors regard that support as a positive.

The unseasonable uptrend in the oil price which reflects issues in Nigeria and with Iran is not
bothering stocks for now, although a rising gasoline price, should it continue, will negatively
affect US consumer confidence before long.

One negative in my weekly cluster of indicators which is important for stocks and which has
yet to turn positive is corporate bond credit quality spreads (BAA / BBB). Spreads have been
widening since early 2011 and remain sharply larger than levels seen in mid - 2010, when the
market's p/e ratio first began to contract. Now, spreads have been more stable in recent weeks
so maybe confidence could turn there as well, but they are quite wide and not far below
levels which suggest a bet on economic decline.

Stock Market -- Price Lagging Breadth

2012-01-20T16:59:00.000-05:00

The cumulative NYSE adv / dec line made a new all time high this week -- normally a good
sign when price is lagging some. However, this time out there is a big lag. Using my Market
Tracker, the formula for the SPX turns $100 per share current earning power plus a moderate
3% inflation rate into an implied value of 1700 for the SPX. At 1315, the SPX is trading well
below the level indicated by the long term Tracker model and below its previous high set in 2007.
The 23% discount to Tracker value is primarily a reflection of a lower earnings capitalization rate
or P/E ratio (13.2X). So, there is very substantial caution among investors about how well the
future will go. Record breadth shows solid interest while the big discount to Tracker value shows
muted investor confidence. Keep this exercise in mind when assessing market potential.

Breadth & SPX Chart

And, while you're at it, note as well that the market is getting short term overbought based on the
breadth measure.

Natural Gas Price

2012-01-18T17:39:00.000-05:00

Well, if you've been watching, the price has been in free fall lately, as seasonally high levels
of supply have collided with very seasonally low levels of demand. At $2.47 per mcf, gas is
now likely being priced below all-in cost, so more producing wells will be shutting down.
Shutting in gas wells must be done with great care. It is a time consuming process. So, bringing
supply under control takes time. Even so, since this important resource is at a discount to
cost and since gas is trading nearly 40% below its 200 day m/a, I am in patient long side
accumulation mode with the idea in mind that gas will hit $5 per at some point over the next
18 months.

It is not easy to make money trading gas. I have generally done fairly well buying it below $4,
and with this latest speedy downdraft, gas is as cheap as it has been for a number of years.
there are players out there who will follow, but not likely until gas has turned and entered a
short term uptrend. Fair enough, but since I intend to be patient with this position, I am
doing some now, and for a lark, am using the gas ETF, UNG. Both gas and UNG are displayed
here.

Stock Market -- Longer Term Technical

2012-01-16T17:14:00.000-05:00

Here the focus is on the SP 500 viewed monthly and going back through the mid - 1990s. SPX
A careful look shows a couple of noteworthy caution flags including the rollover of MACD in
recent months as well as now negative momentum (shown in the link as the 10 month rate of change).
The bright spot here is the stochastic measure which does show improving short term price
momentum. The SPX experienced near bear markets in both 2010 and last year, but the 2011
decline resulted in more technical damage to the longer term picture and it is going to be very
much more difficult to expect a continuation of the cyclical bull market without the kind of
strong positive price action that would reverse especially the MACD reading. Now reversals of
that sort do occur (See 1998 and 2006 on chart), but turns to the positive need to come within a
few months time.

I also observe angle of trajectory for the stock market (best done on hard copy). The underlying
positive trajectory for the current cycle advance has flagged sharply with time which is a normal
development, but remains strong enough to support a very respectable advance over the course
this year. By the same token, the uptrend line off the 2009 low has eased to the point where
a break of trend below the SPX 1150 level over the next 3-4 months would make the bull case
awfully hard to stay with.

Stock Market -- Daily Chart

2012-01-11T16:37:00.000-05:00

My argument for weeks has been that the market is in an uptrend but that it needed to take out the
closing highs at the end of Oct. 2011 to lay any claim on further and substantial upside. There was
a period of several days over the past week where the SPX failed to take out the Oct. close of
1285, but it has now done that, and the automatic caution which comes in to play when an index
stumbles at resistance has been laid to rest. Other factors that raise caution will no doubt come
along with time, but my work does not indicate serious negative issues now.

The SPX shows a confirmed shorter run uptrend on RSI, MACD and ADX. $SPX The 200 day
price oscillator is also in an uptrend and is running positive against median as shown here. It is
important to note that the intermediate term indicator (200 day Osc.) is rather volatile and this
suggests to me when one looks forward over the next couple of months, one has to be prepared
for some degree of continuation in market volatility.

The market is a little overbought short term on my 25 day oscillator. Frankly, if this rally is to
be indicative of a longer duration upleg, it would be nice to see a relatively fast run in the SPX
up the 1325 area over the next week or so. But, you take things as they come along.

Economic Indicator -- Delivery Delay

2012-01-09T17:04:00.000-05:00

In a robust economy delays of materials and goods to manufacturers rises as vendors struggle to
meet demand. In a downtrending or weak economy, manufacturers experience far fewer delays
as vendors have supplies and are eager to ship. The ISM provides a monthly reading of % of
purchasing managers experiencing delays in deliveries of materials. ISM D / D % Chart

the D / D % for mfrs. has dropped to below 50% for the first time since the economic recovery
began in 2009. That is a warning sign of slower orders in the system. Note that the series is
volatile and does give false signals. Even so, it is a decent indicator of longer term trend and we
have to watch it carefully now to see if a recovery of delivery delays is on tap or whether
economic momentum is set to remain sluggish.

Stock Market -- Weekly

2012-01-08T18:56:00.000-05:00

Technical
The market remains in a moderate but volatile uptrend. Failure of the SPX to take out even mild
Oct. 2011 overhead resistance at 1285 over the past week should remain a source of concern for
traders and serves as a cautionary warning for the next couple of weeks. $SPX

Fundamental
The Fed is maintaining Its nearly $100 bil. liquidity swap, but as expected, it has started draining
permanent reserves following a moderate build up for the holiday season. That build up did
increase trader optimism that a new round of quantitative easing could be in the works. It will
be important to see how traders react to further, but normal seasonal shrinkage in longer term
Fed bank credit.

If sizable, additional increases in the central bank liquidity swap program are needed in the
months ahead, it would underscore rising financial stress in the EU and would not be a good
sign.

My weekly cyclical fundamental directional indicator continues to advance modestly primarily
on the strength of falling initial unemployment insurance claims. A rising directional indicator
is a positive for the market and could provide significant additional support if the breadth of
the various measures that comprise it would increase.

Economy -- Analysis

2012-01-06T17:11:00.000-05:00

1.US business sales (including construction outlays) increased by an estimated 10.1% in 2011.
   Profit margins expanded on continuing productivity gains and a positive spread of pricing
   power over compensation costs. Profits likely rose close to 15%.

2. The momentum of global economic economic expansion slowed markedly over the course
    of 2011 and the disappointing performance in offshore economies has resulted in the
    reduction of both 2011 and 2012 earnings growth estimates for the SP500. Trends in
    global production growth and trade continued to head south over most of 2011.

3. US Sales and production growth exceeded real household income growth by a significant margin
    reflecting depressed real wages and modest employment growth. Stronger retail sales over
   Half 2 '11 were financed primarily out of savings and a slight increase in borrowing. Fatter
   profit margins for business have been coming at the expense of a weak labor market. This is a
   destabilizing trend if it continues on.

4. US goods and services new order rates are improving and suggest a decently positive early
    2012 for the economy. Growth visibility beyond the opening months of this year is low
    because income growth continues to trail sales and output gains by a substantial margin.
    Pressure on the real wage has been easing as inflation pressures have been moderating.
    Note, however, the recent upturn in the gasoline price. $GASO Continuation of this trend
    will annoy consumer confidence and pressure the real wage.

5. 2011 ended with a pick up in construction spending, particularly for housing and commercial.
    That's a nice positive, especially since construction jobs can pay well. But, we'll have to
    watch the US exports picture with foreign economies losing momentum and the US dollar on
    the rise.

6. My main concerns now for this year are the weak US real wage and declining growth in the
    world exc. the US.

For an interesting stab at a real time business conditions index from the Philly Fed, go here.

Financial System Liquidity Issues

2012-01-04T17:14:00.000-05:00

Broad Measure Of Credit Driven Liquidity ($11.9 Tril.)
The loan / lease book for the banking system has been growing, but the banks have cut back on
funding. Some banks have tightened credit while others are passing up super low spread assets
reflecting the Fed's ZIRP. Liquidity remains healthy, with the ratio of Govvies to C & I loans a
comfortable 1.28 to 1. The yr/yr growth of broad liquidity at 4.7% is low enough to keep the
Fed thinking about further domestic QE.

Federal Reserve Bank Credit
FRBC has jumped by $125 bil. or 4.3% over the past month. There has been some seasonal add,
but the vast bulk of the increase to global liquidity has been in the form of liquidity swaps to
CBs requiring help in coping with the EU financial crisis. FRBC is now running modestly above
the Fed's initial target set at the end of QE 2 this past June. Future FRBC balances are not going
to be easy to guess at, but continued sharp rises in liquidity swap credit would clearly suggest
a deepening EU mess.

Money Market Funds
Since mid-2009 the Total MMF balance has been drawn down by 32% or $1.2 tril.. Current
levels are now running well below 12/07 levels before the big build up as markets weakened.
With system "sideline cash" at far more modest levels, capital market asset preference in 2012,
should it be strong, will likely come at the expense of other market sectors.

Real Estate Loan Book
Building contract awards are running 11% above last year's depressed level and construction
spending has turned up. These developments should put more real estate loans on bank books
as the year progresses.

Bank Interest Earning Asset Charts (interactive)

Stock Market -- Technical

2012-01-03T17:07:00.000-05:00

The market remains in an uptrend on both short and intermediate term accounts. However, my
argument has been that, to be more persuasive, the SPX needs to take out Oct. month end closing
high of 1285. That level proved to be formidable resistance last autumn, and wouldn't you know
the market stumbled twice today trying to get through it on the way up. So, that's twice overhead
failure in the past two months. Normally, that would be a fairly strong mechanical sell signal, but
it is possible that traders are antsy with the employment figures due out this Fri. One thing to
watch then is if the market either takes out 1285 before Fri. or stalls short of it but hangs on.
That would mean a positive surprise on Fri.could take the SPX higher.

My 25 day price oscillator indicates the SPX has moved into the low end of moderate overbought
territory, and that does set up a situation where the more jittery traders could exit forthwith, and
where the SPX could easily retreat from the current 1277 area down to 1210. Fri. and its news
will come soon enough, but traders first need to watch for an imminent fail in the upmove because
of the inability to take out that 1285 level today.

$SPX

Gold & Silver

2011-12-29T19:12:00.000-05:00

Lately, the two PMs have been caught up in the risk on vs. risk off trade, with sellers moving in
during the risk off mode to buy Treasuries and the USD. But, both gold and silver have a long
history as cyclical plays as well, with price weakness developing in anticipation of or during
economic downturns. And, trend-wise, we are in a clear economic downturn both in the US
and globally, based on the momentum of a number weekly and monthly indicators. The romance
with gold over the past 10 years has broadened out considerably in terms of rationale, so there
may even be some sellers who think the US economy is doing well enough that quantitative easing
may be off the table. Could be, but the simpler and more time tested explanation is that global
economic momentum is tilted downward and has not hit a bottom yet. Long Term Comex Gold MRCI
No doubt some are also selling gold and silver for gains to offset losses elsewhere.

Gold is in a well established shorter run downtrend and is oversold on a short term basis. By my way
of treating all volatile commodities, gold would become moderately oversold at a discount of 10%
to its 200 day m/a and more deeply oversold at a 20% discount. Both metals are at modest discounts
and both have broken cyclical uptrend lines. First step now is to see what kind of bounce comes in
gold right ahead. Next step is to see if it can maintain support at $1500 over the next several weeks.
$Gold and $Silver

More On The Long Treasury Bond

2011-12-26T17:48:00.000-05:00

You might want to read this in connection with the 12/23/11 post.

I want to discuss a little further how overbought the long guy is and how confident you have to be
of a sluggish US economy next year, one which is coupled with rapidly decelerating inflation.
Here is a link to the Long Treasury yield: $TYX

Historically, when the long Treasury yield is 20% or more below where it was in the preceding
year (52 weeks), it has not been a rewarding time to have a long position in the bond, as on a price
basis, it has moved to a deep overbought. The bond is now trading at a yield well under that of the
prior year as the chart shows, so historical evidence says caution.

The chart also shows a constant line at 3%. Let that represent 3% inflation, which is not a bad
assumption for the average over the very long term. Well, if you are an investor, you at least
want to buy the bond at a yield well above that 3% level. The chart shows the slightest of premiums
to the 3% inflation constant currently, and as you can see, you have been able to buy the bond
way cheaper often even in the low inflation environment of recent years.

Here is a link to the long T bond price (CBOE) MRCI Treas. It shows one of the great bond
bull markets in history, with the long T price advancing as US growth decelerated and inflation
fell away over the period. Note too, the risks in the near term of buying the price spikes and
not waiting for the bond to settle back down in the range.

I have traded the bond both long and short for many years. Price and yield love mean reversion
with the 200 day or 40 week m/a a good working target. To make money on the long side
from current levels the US needs to have a poor year of real economic performance. Although
I have my doubts about how well the US will do next year, the Bond is headed into it at
very extended levels.

My guess is the over the next 10 odd years, 12 month inflation will hit or exceed 3% often
enough that however low the yield might go in the next recession, it will eventually work its
way up to 6%, with the long T price eventually eroding to 100.

Stock Market -- Weekly

2011-12-25T18:09:00.000-05:00

The action is mildy positive, volatile and only slightly encouraging.

Fundamentals
The weekly cyclical fundamental directional indicator is in the slightest of uptrends and this
barely positive movement is being carried entirely by the sharp decline in unemployment
insurance claims underway since mid-Sep. The weak diffusion evident in this indicator is not
a confidence builder by any means. A stronger, broader advance in the indicator is needed to
support a sustainable uptrend in the market.

Although I do not count Federal Reserve bank credit (FBC) in this indicator, I need to mention that
the stock market has been tracking the substantial short term volatility in the credit balance
since Sep. The FBC was down in Sep., up in Oct., down big in Nov. and up strongly so far this
month. Some of the recent surge in FBC could reflect spillover from the Fed's large dollar swap
program for the EU. More likely the Fed positioned itself to flood the US system with liquidity
for the holiday season, a step They have taken many times. But, since the FBC balance is now
running high relative to Its post QE 2 plan, It is likely that They will pull liquidity from the
system in Jan., a move that traders may not like early next year. Focus on the weekly open
market operations of the Fed may annoy some readers, but you need to keep it in mind if traders
are paying attention to it ( data released on Thursdays).

Technical
I read the weekly chart as showing a mild but volatile uptrend which is nearly fully confirmed
but is not robust. It's tepid, instead. $SPX At a minimum, the market needs to briskly take out
Oct. resistance at 1285. Then we need to see the 6 and 13 week m/a's break above the 40.
Failure of the SPX to take out the 1285 level will bring on the shorts, and perhaps, do so in
droves.

I have also added a link to the SPX and its 200 day price oscillator. The oscillator shows the
same weakly positive but volatile action. A move up through the 1.02 mean would be a nice
plus here. SPX & 200 Day Osc.

Long Treasury Bond

2011-12-23T17:17:00.000-05:00

Fundamentals
Trend directional change was signaled over Mar. / Apr. 2011 in favor of a rising bond price and a
falling yield. The key, as usual, was an interim peaking of industrial commodities prices as well as
the momentum of industrial production. The deterioration of pricing / production momentum is
ending here in the short term, but industrial commodities prices have yet to reverse to the upside,
leaving the T-bond directional indicator in neutral.

The long "T" is yielding around 3% which is inside of the 12 month inflation rate of 3.4%. Thus, the
bond is forecasting further sluggish economic activity and a marked deceleration of inflation. Basically,
a bullish case for the bond in 2012 rests on the assumption of development of an economic recession
in the US coupled with a deflation prone trend to the CPI.

The bond's price is exceptionally vulnerable to even a mild uptrend of industrial commodities prices
which can be a seasonal event evident in winter if there is a modicum of growth in the global
economy. Such occurs when inventories are built as annual production schedules are set.

Technical
The bond price hit a powerful overbought over Sept. of this year on EU financial crisis fears. It
then tumbled but whipsawed back up again when hopes faded in late Oct. that the EU would settle its
crisis. The bond has weakened some recently, but is still overbought relative to the 40 wk. m/a.
$USB Watch it carefully relative to industrial commodities composites such as the DB industrial
metals ETF (top panel).

If you are yield rather than price oriented, check out the ^TNX The chart shows that it has been
unwise to be long the bond when yield is at a steep discount to the 200 day m/a.

Sentiment
Trader advisories are just below excessive bullish levels (MarketVane & Consensus Inc.).

US Economy --2012

2011-12-20T17:12:00.000-05:00

It is difficult to sketch a formidable case for real economic growth next year. Corporate profits
have been strong, but the broader measures of real average hourly earnings and real disposable
income have trended down to recession levels. Real DPI With weak real income numbers in
place, you need to make some extra assumptions to see sustained growth in real output. Business
policy on wages has been predatory, as the rate of current $ wage growth measured yr/yr has been
slashed from 3.9% in early 2009 down to 1.6% for Nov. 11. There has been enough inflation
over the past year to put the real wage down to -1.8%. You know, I do not think the US is going
to regain prosperity handing out 1-2% wage increases unless employment growth is very strong,
which as we all know, has certainly not been the case in the current recovery.

This critical weakness in the economy -- low wage growth + low employment growth -- was masked
to some extent in 2011 by a 2% payroll tax reduction. This tax cut is widely expected to be extended
in 2012, but, it will not be incremental on a yr/yr basis, so the real wage pretax will be of
paramount importance. The pressure on the real wage is expected to moderate in 2012, as inflation
seems set to decelerate further. If jobs growth continues and inflation moderates, the case for
growth will strengthen. If the real wage remains under pressure well into 2012, as now seems
the case, then consumers will have to boost credit usage and draw further on savings to keep the
economy above water. So far, households have been tapping savings but have been reluctant
to increase financial leverage. One partial offset to a weak labor market will be a significant
boost in social security payout for 2012.

As I see it now, generating another year of real economic growth will be a "squeaker" without
a much firmer labor market and a continued thawing of the private sector credit markets. This
is especially the case given that export sales -- the strongest US market -- may be set to slow
materially further in a global economy turned sluggish.

Three decent leading indicators for the economy -- industrial metals prices, the long T-bond
yield % and the index of cyclical stocks -- have all come off higher levels set earlier in the
year. Recently there has been some basing in all three -- indicating some re-ignition of hope
for 2012 among investors and traders. These are useful daily measures of sentiment about
prospects for the economy. Triple Play Chart

Corporate Profits Indicators

2011-12-16T19:48:00.000-05:00

Viewed shorter run, my profits indicators suggest a bit of caution for the first time since the
economic recovery began in 2009. The top line or sales growth proxy has flattened short term
along with a deterioration in the number of companies reporting stronger operations and new
order rates. In turn, the indicators which suggest the direction of profit margins have also shown
some loss of momentum. Profit margins expanded through most of this year reflecting a strong
performance in my pricing power vs. cost measure. The key here was a large increase in profit
per employee as companies kept hiring and wage costs low relative to an acceleration of pricing
power. My broad measure of pricing power is now decelerating relative to costs and this will
likely continue into next year. On the plus side, the typical loss of momentum in physical volume
that follows the initial recovery surge has leveled off for the time being at a moderate rate of growth.

The trickiest component among the indicators is real volume growth which can re-accelerate in
a recovery and by so doing indicate that the economic expansion may have a longer life. One
marker you can use here is the yr/yr % change of industrial production during an expansion
period. When it drops below 3%, that is a heads up. Through Nov., the yr/yr change stands at 3.7%,
compared to nearly 6% earlier in the year.

Viewed longer term, the trends of top line growth momentum and my longer term leading indicators
suggest that profits could make a cyclical peak in the final quarter of 2012, but long experience
says take this observation with a grain of salt.

Broadly, there is sufficient capital slack in terms of excess capacity and labor and a low cost
of capital to power this expansion for another 2-3 years easily. But this capacity will not likely
be realized without an improvement in employment and real wage growth and without stronger
private sector credit growth. Moreover, reflect as well on US export sales which are up 70%
since 2005 and 42% since the recent recovery began. Export sales is the growth leader for
the US among major economic sectors. Export sales have just leveled off in the short run in a
slowing global economy and sluggish performance, if it continues will impair earnings growth.

SP 500 net per share was close to $84 in 2010, and should be somewhere around $96 this
year -- a new record and nearly 15% ahead of 2010. Net per share was far stronger this year
than I had expected on the strength of better $ employee productivity. That will be hard to
replicate next year and I look for more sudued profit margin and a more modest 7% increase
to nearly $103 for eps. The consensus for net per share in 2012 is now around $107 per
Thomson Reuters.

Regular readers will recall that I believe that business' current practices of low hiring and
chintzy 1-2% wage gains, while it boosts eps and exec bonuses, cheats shareholders because
it reduces economic growth visibility and investor willingness to capitalize earnings at higher
rates.

Stock Market

2011-12-14T17:21:00.000-05:00

Looking back toward Oct. the stock market staged significant "fake out" rallies leading up to the
EU summits of Nov. 4 and Dec. 9. The summits failed to satisfy investors that the EU was set to
handle the crisis up to investor / trader expectations and the rallies have fizzled. So, the market
is headed south again although the downtrend is not yet fully confirmed while US shares are only
mildly oversold. The stock market is in risk off mode as the US dollar continues to trend up
and the Euro continues to trend down.

You will need to be careful here through the end of the year, as traders are breathing fire to have a
year's-end "Santa Claus" rally. This means that if the spinners in the EU up and say some market
friendly things, the USD will drop and the SPX will lift off and up, if only for a short while.
The Street itself may join the game of happy talk about the EU just to help stoke the fire. In this
hair trigger environment, such could happen especially since the Euro area bond traders are
about set to close the books for the year, leaving the huge tests for 2012.

My strategy here is only to play deep oversolds and overboughts. Thus, the SPX, which closed
out today at 1212, would not make it onto my radar until the roughly 1160 area, unless something
clear out of the blue happens.

$SPX

Gold

2011-12-14T12:48:00.000-05:00

I have done very well shorting the gold price over the past year, but even I have avoided the kind
of whipsaw action seen latley. Gold for the short run has become a high beta "risk on / risk off"
play. The sharp recent weakness reflects the development of a risk off trade which favors the USD
and Treasuries at the expense of the pantheon of risk on assets such as PMs, stocks, commodities
and the Euro. AS the GLD chart shows, gold is sharply oversold in the short run, and has just broken
below the 200 day m/a. The bulls and bugz are at the point of forsaking gold, something they have not done since the latter part of 2008. Gold has arrived at a key juncture and needs a sudden swing toward
risk on to give the bulls a shot. GLD

To reach a deep intermediate term oversold, GLD needs to trade below 140.

US Trade

2011-12-12T13:45:00.000-05:00

Monthly US trade data is reported with a six week lag, so it is not timely for the markets except
as confirmation of expectations. Moreover, because the data can be volatile, it must be used with
care. US trade has been very strong during the economic recovery. Imports, reflecting weaker
hydrocarbon and industrial commodites prices since the spring have been flat at around $225 bil.
per month since Mar. / Apr. of this year. Exports have trended higher since then, although short
term momentum has been slowing. Importantly, strong uptrend lines for both imports and exports
in place since the spring of 2009 have been broken in mild fashion with the release of Oct. data.
This confirms the warning of a slowdown in the weekly leading indicators and the PMI data in
evidence since early in the year when powerful momentum peaked, and may be a warning of
further loss in momentum to come.

I plan to post later this week on my profits indicators, and the newly reported softness in US
exports will be an issue for the first time during the current economic recovery. Since the early
part of 2009, US export sales have risen by a robust 50% with this strength having contributed
meaningfully to corporate profits.

Stock Market -- Short Term

2011-12-09T17:47:00.000-05:00

Fundamentals
The weekly cyclical directional indicator has been running flat since 10/21/11 following a fairly
sharp downtrend which started the week of 4/15/11. The SPX is up 1.4% since 10/21, and is down
about 8% since its 4/29 cyclical high. The tracking of the SPX to the indicator has not been bad at
at all. The major declining element within the indicator has been the composite of industrial
commodities prices. Note that sensitive materials prices have started to edge up. Going forward,
it might be wise to watch not just sensitive materials prices but new claims for unemployment
insurance as well. The positive mix is rising prices / falling claims. The more purely coincident
indicator within the broader weekly directional has been relatively steady for 2011 and signals
modest broad economic growth.

My core fundamental indicators suggest a continuing "easy money" bull market, but have not been
reliable since mid - 2010 as investors have been far more sensitive to the shorter term direction
of the weekly cyclical diectional indicator which, in turn, has been considerably more volatile
than the broad economy as well as my profits indicators. Among the core indicators, credit
quality yield spreads have worked the best. The heightened sensitivity to credit quality along
with the evident downtrend of the p/e ratio also suggest continuing investor caution about the
future in line with strong player focus on weekly economic and financial data.

Technical
The market has entered another short term uptrend which started in late Nov. The trajectory of
the advance is a little daunting, but the SPX is not yet overbought. To be convincing as more than
a quick pop, the SPX (now 1255) must cruise up to take out resistance points from 1270 through
1285. $SPX Check out the descending tops since the spring and you will see why it is critical
for the market to start attacking resistance soon.

I like to watch the trend of price momentum relative to the 200 day m/a. Development of an
uptrend here is a good sign for longer term direction. SPX & Momentum A positive but as yet
unconvincing bias is developing here as well.

I would be personally more interested in the market if the short term swings in price momentum
were to settle down some from recent levels (Check out the 12 day ROC% in the SPX chart
above). I do not need this much exitement at my tender age.
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The stock market was in cyclical bull cruise control mode until the spring of last year when
sudden but temporary weakness in the weekly economic data shattered the cruise control and
forced taders as well as investors to focus on very short term economic direction and momentum.
A repeat of same this year coupled with uncertainty about the future of the Eurozone has forced
noses down to the short run grindstone and has greatly reduced confidence regarding the visibility
of the future. the data provide no respite for this anxious mentality just yet.

Eurozone Baby Steps Along

2011-12-09T12:16:00.000-05:00

The EU summit took additional steps to manage the financial crisis within the EZ and about as
expected (see below). Communication between Germany and the ECB continues to stink, however.
It looks like Draghi got hung out to dry on his views about using the ECB to step up on the
purchases of weak sovereign credits, and he has suffered a loss of credibility in the markets on that
subject thanks to Berlin.

Bond players want the lender of last resort option for the ECB, especially with more than $1 tril.
of sovereign and euro bank refinancing ahead over the first half of 2012. Scant evidence now that
players are going to get their wish. This leaves open the possibility of further turbulence in the
EZ sovereign debt and capital markets, especially since a business downturn in Europe is going
to suppress incomes and profits which in turn, will adversely affect the tax revenues garnered by
individual countries. So, uncertainty overhang surrounding the EZ will be only partly alleviated
as we swing into 2012.

Russia Stock Market

2011-12-07T16:36:00.000-05:00

The ride has grown bumpy with gaps on the charts in recent days as allegations fly that the recent
election was rigged and as surveys show a sharp decline in PM Putin's popularity as he maneuvers
to run for the Presidency for the third time next year after securing the United Russia party
nomination recently (The UR party is also down in the polls). Following the global trend, Russia's
economy has also slowed to 4-5% annual real growth, and is running below Putin's forecasts.
Voters are also unhappy that a sharp economic recovery until recently has not led to much stronger
value to benefit ratios in pension funds (persistent underfunding). Citizen protests are the strongest
they have been for years and although there is little talk of political destabilization, stock players
need to be more careful than usual in the short run with this high beta market. At $29, the RSX is
priced for only $80 bl. oil, so the market is at a large discount to recent price positioning given that
oil is up around $100. RSX is a high risk / high reward play on a favorable resolution of the
EU crisis. RSX

I like to follow the Russian market in connection with the SPX, the oil price and industrial metals
prices.

Eurozone: So, What's It Going To Be?

2011-12-06T16:55:00.000-05:00

My view since I started looking more earnestly at the EZ problems was that it would take well over
$1 tril. of hard capital to stabilize the situation and give the broad EU a shot at survival in its
current configuration. Early this week we heard of a prospective new treaty deal which would
incorporate a new fiscal policy monitoring mechanism with substantive enforcement powers (Merkel
and her close allies). Now there are stories circulating of an additional large fund to compliment the
current ESFS, which, when both are at full strength, would total around $1.25 tril. An additional
kicker could come from an ECB infusion to the IMF ( Sarkozy and the rest of 'em).

Well, the ECB is expected to cut its rate tomorrow and then we have the big summit when the top
poobahs are to gather Dec. 8-9 to hash out the deal. The new fiscal authority looks primarily like
a way to chase countries out of the EZ as it might make a range of leaders lose their tempers. But,
if there is substance to the idea of a new and much enlarged $ stabilization authority, the summit
might not be another bust. After all, any bureaucrat worth his salt will find ways to finagle and
finesse a new fiscal directorate, even one with Germany's shadow imprimatur.

For a little more background, see the 10/18 post: EU -- How Big The Jitters? (I still think G-20
and China in particular should have done more to help out.)

IEV and $SPX chart

Stocks: And Now, The Turbo Moonshot

2011-11-30T17:27:00.000-05:00

Not just up, but UP at an 86 degree angle. My money stays in cash until we see more stability in the market. As a retired dude who has had a decent year, I do not need to play 12 day price
momentum swings of +10 to -10%. Plus 5 / minus 5 is fine by me. On my hard copy chart, the
SPX actually failed to take out the downtrend line in place since mid-Jul. -- a mechanical sell signal.

The Asian markets could light up tonight and that could carry the SPX higher tomorrow morning,
so I would not put my last dollar down on the sell signal. At any rate, since up beats down in the
market, I'll complain no further. $SPX chart

Scroll south for background on today's pop.

Central Banks: All Hands On Deck

2011-11-30T12:25:00.000-05:00

Last week's post (11/22) on global economic supply and demand provides a reasonably good
backdrop for today's coordinated easing actions by the world's major central banks (Scroll down
for the post).

Dropping rates on currency swap arrangements frees up US dollars especially to provide liquidity
support for the global financial system and particularly for the EU, which has been experiencing
not just large deposit outflows but basic money outflows as well. When S&P downgraded ratings
for 15 major banks yesterday, the CB chiefs likely decided they had to act pronto. It may well be
that even major US banks were starting to run into funding problems, but I cannot tell for sure, as
the Fed was letting some of it own balance sheet run off in recent weeks.

China also put through a mild reduction on bank reserve requirements today. This may underscore
the urgency of the actions to ease liquidity, as it did appear China was hoping to get more
confirmation that local inflation had begun to decelerate before easing policy.

As alluded to above, the Fed may be heading up the liquidity injection action as demand for
dollars has been strong through the global system recently.

The actions today reflect a long standing thesis on this blog, namely that when the credit side of
the broad money supply starts contracting, currency liquidity has to be provided to prevent a
liquidity squeeze and to ameliorate a developing credit squeeze. We see both now in Europe,
particularly in its southern tier.

However, the provision of a large flow of dollars to the EU especially is at best a credible
stopgap measure and is testimony to the danger the EU has passed into now that its financial
system is being disintermediated. There is an old saying about Italy's economy: "Situation
critical but not serious". Well, to riff off of that, I think it is fair to say that the EU's economy
is not just in critical condition but that the situation is getting serious as well. Officialdom in
the EU has to cut out the bullshit and take the hard and costly measures to save it, or be prepared
to let the markets take it apart. Time is growing very short.

Stock Market -- Short Term

2011-11-28T17:15:00.000-05:00

Yesterday, my charts showed a strongly oversold market on some measures. Moreover, the tape
had bullish implications -- strong "Black Friday" sales, a prospective IMF plan to provide low cost
credit to Italy and Spain, and a flurry of EU activity to tackle the worsening crisis. There is a large
PIIGS + Belgium debt calendar this week, so it figured the EU would try to help its sovereign credit
markets. But, I decided to let it all go, because the markets lack stability in general, and the last two
rallies in the stock market show descending tops. Moreover, the oversold was not quite deep or robust enough given the unstable market conditions. $SPX chart

So, if a rally is underway, I'll have to join up with it at a later date. My fundamental view leads me
in a similar direction. One of the essentials to sound fundamental investing and trading is to keep the
approach as simple and direct as possible. My basic approach has not worked as satisfactorily as
it should in recent months, so it is time to rethink it.

Euro Stocks -- Nearing Cyclical Bear

2011-11-24T17:51:00.000-05:00

I have long preferred to trade US stocks over Euro equities, but it is worth noting the position of
the latter now. The EU is experiencing developing economic weakness, including even Germany.
The substantial turmoil in the EU surrounding the viability of sovereign risk credits of its weaker
members could be temporarily suppressing growth, but it should be noted how close EU stocks are coming to development of a cyclical bear market which would imply that investors are looking for a more serious economic downturn. Note the chart of the Euro 350 iShares Composite: IEV

The market is approaching a deep oversold, but a sharp break below the 30 level would signify
a cyclical bear market is underway. A major test is likely for EU stocks in the weeks ahead, especially
now that Angela Merkel has again rebuffed liberalization of the ECB mandate and a move toward
the Eurobond. EU stocks rallied sharply in Oct. on the premise that the EU was set to come to grips
with its financial stresses. The discussions at G-20 in Cannes in early Nov. were ultimately viewed
as unsubstantive and investors are again losing confidence.

Global Economic Supply & Demand ***

2011-11-22T17:09:00.000-05:00

Global industrial production hit a cyclical peak in Aug. but declined by 0.4% in Sept. as both
Europe and Japan swung markedly negative. After rising rapidly from mid-2009, through Feb.
2011, production growth has been modest in 2011. Measured yr/yr, growth has slowed from an
unsustainable 12% in late 2010, down to just 5% through Sept., and is showing a significant loss
of momentum on a trend basis. With the slowing of production growth this year, a move up to an
overheated economy late next year has been averted. Global capacity utilization has eased mildly,
and sensitive materials prices have fallen a sharp 17.5% as producers have throttled back on
building materials stocks. The sharp downturn in output underway in Europe, if it continues, will
lead to the development of more slack on a global basis ahead, and will serve to remove more
pressure on inflation composites.

With fiscal stimulus programs started in late 2008 and running into 2010 now past, and with
monetary tightening in evidence through 2010 and into 2011, the global growth profile is
changing rapidly with production growth on trend to zero out or worse yr/yr by the end of 2012.
The emerging negative profile for growth suggests a significant moderation of inflation, but the
risks of coordinated fiscal and monetary policy tightening are becoming more evident, as global
purchasing manager economic activity surveys show a rapid moderation in order rates. As well,
the rebound in global trade -- a major bright spot in the economic recovery both globally and
for the US -- is flattening out and is losing positive momentum rapidly.

I can see room in the UK, EU, US and in China to ease monetary policy jointly in 2012. The
outlook for fiscal policy initiatives is dim now, so policy assist, if it develops, will be milder
and less direct. G-20 let its Nov. conclave in Cannes go by without coming to grips with a
derteriorating global economic situation, but central bankers, perhaps of necessity, are more
attentive.

The EU presents a special and possibly critical situation through 2012. Major EU banks are
too highly leveraged at 20 and 30:1. They are only now reserving for shaky PIIGS sovereign
credit. They are selling loans to meet new primary capital ratios and are experiencing withdrawals
of jumbo deposits as MMFs pull money to avoid having to "break the buck" on fund asset values.
In short, the banks are relying more heavily on the ECB for liquidity and are poorly positioned
to provide incremental credit throughout the EU, eastern Europe and Asia. So a major source
of trade credit could well be sidelined in 2012, with no heirs apparent ready to step in quickly.

Experience tells me not to be far reaching in stressing the negative just yet. This is an integrated
global economy now and is coming off the worst global downturn since the early 1930s. The
abilities of finance ministers and central bankers were successfully tested in 2009, and the
new challenges ahead could still bring a positive, coordinated response, although it is not in
evidence yet. But, time is running short to review undoing some of the policy tightening put
in place over 2010 through the present.

There is one more tough issue ahead, and that is the oil price. It is very "sticky" given the
evolving economic environment, and what's more, a new round of monetary accomodation
could set off a speculative price run up which might backfire on the global economy down
the road.
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*** For partial global supply/ demand data and for trade, see here.

Stock Market Weekly

2011-11-19T18:54:00.000-05:00

Technical
The market rallied powerfully -- nearly 20% -- over most of the course of Oct. As readers know,
I was lucky to call that bottom, and as I mentioned in an 11/8 post, I thought the $SPX would have
to take out the late Oct. high of 1285 "to keep the believers believing". Well, the latter event did
not occur, and the short term downturn now underway shows that the number of believers are
declining. I am glad I did some good guessing, but the action since early Oct. has been grotesque.
First, a 20% move up for the market in a month followed by a slower but steady fade with no
follow through off the initial impulse wave. The weekly chart is still positive but it is fading. $SPX
This is wrenching turbulence for a strongly disciplined trader like me. It is not fear or greed that is
bothersome, it is vexation at such sloppy, volatile action.

I think the market is at the point on the weekly chart where we need to see positive action very soon or
watch the SPX complete either a partial or full whipsaw of a genuinely strong lift off of the early
Oct. low since the overbought condition has been largely wrung out. I am content to let the
smarter folks handle it.

Fundamental
My weekly cyclical fundamental indicator turned down Apr. 8 of this year and hit a low point
on Oct 21. Since then, it has been drifting a little bit higher, paced by a fresh decline in new
claims for unemployment insurance and some stronger weekly retail sales and production data.
The powerful move up for the SPX in Oct. was very much out of line with the action of the
fundamental indicator. However, the downtrend of the indicator may have pretty much ended.
The big weak spot for this indicator this year has been the large decline of industrial commodities
prices since early Apr. with this composite having fallen a full 17.5% on slower global output
growth and expectations of further weakness ahead. The trends in the stock market and sensitive
materials prices have matched up decently well over the past 10 years or so. So, it may be
important to stocks to see industrial commodities do better ahead. for a recent comparison of
the two markets, try here.

Stock Market -- Liquidity

2011-11-18T16:18:00.000-05:00

Money Market Fund liquidity has been drawn down to around $2.5 tril currently compared to the
peak reserve levels of $3.6 tril. in the spring of 2009, near the cyclical bottom in the stock market.
The aggregate MMF balance now is also below Half 2 '2007 levels when the stock market made
all time highs. Funds can be drawn lower, but it is unwise to think there is much "sideline cash"
sloshing around. Moreover, Since the growth of aggregate business sales has been far more rapid
then the advance in my broad measure of credit driven liquidity during the economic recovery, there
has been full absorbtion of systemic liquidity (excluding MMFs) by the real economy over the past
two years. The systemic drain on liquidity by business has intensified in recent months because the
banks, perhaps fearing an economic slowdown, have let large deposit and commercial paper
balances run off.

For now, one has to look more closely at inter-market transfers of funds to support the stock market.
Thus, a bull run in stocks, should one occur, might be more reliant on proceeds from the sale of
of fixed income securities running from two year maturities on out. Since you have to head out to
10 year T-notes to pick up a 2% current return, and since the SP 500 yields about 2.2%, there would
be little "give up" of income for players choosing stocks. However, it is important to realize that
a bull move in stocks could materially penalize the fixed income portion of many portfolios as
funds migrate to stocks.

5 Year T-note Yield

Eurobombed

2011-11-17T16:04:00.000-05:00

Volatility has picked up in the markets again and stability is fading. I am 100% in cash now and
unless matters settle down some, plan to stay that way until I find cases where market sectors
are so badly mis-priced that a trade may be appropriate. Frankly, the volatility and the consequent
lack of continuity in the riskier portions of the financial and capital markets are proving to be
wearying and a bit dangerous as well since established techniques of trading and investing remain
workable but are subject to disruption even to disclosures from the EU which do not really
constitute news of consequence but are reiterations and rehashings of ponts investors and traders
already thought were discounted in the markets.

I'll keep the posts coming, but I am on the sidelines for now.

Oil Price -- Cashed Out

2011-11-16T13:04:00.000-05:00

Sold out my oil above a $100. Bought it well and see the profit as a gift from the gods. No
big macro message here, just a desire on my part to capitalize on an unusual contra-seasonal
run up in the price. Oil stays on my ok to trade list. For more, scroll down to the 11/6 post
on oil. NYMEX Crude

Stock Market -- Fundamentals

2011-11-14T17:30:00.000-05:00

Core Fundamentals
The key fundamentals all turned positive at the end of 2008. That indicates an "easy money" bull
was set to begin -- easy because of a strongly supportive monetary policy, and easy because of a
very positive return for risk profile. These indicators posit that the easy money bull ends when all
turn negative and not until then. In recent months, the indicator set has been running around 50%
positive and 50% negative.

But the core indicators, unlike any other period since the end of WW2, have not shielded investors
from steep corrections in both 2010 and this year. This new vulnerability reflects both the very
slow recovery of private sector credit and a continuing weak labor market despite a surge in
corporate profits as business has pushed very hard for profit margin gain via rigorous control of
payrolls, including both new hires and wage costs. Without normal private sector credit creation
and with a weak picture for household incomes, investors have been trimming the market's p/e
ratio despite the sizable gains in business productivity and profit margins.

SP 500 Market Tracker
Based on strong earnings growth and a moderate inflation level, the Tracker posits a p/e of 16.5x.
With SP 500 net per share now running at a $100 annual rate the SP 500 should be trading at 1650
as opposed to the current level of only 1252. The discount of 24.2% to Tracker value is highly
unusual and reflects investor concern that the US economic expansion is not secure and could be
vulnerable to recession and the resumption of deflation pressure. Players know that an economy
with such a slight recovery in private sector credit could suffer a relapse without strong growth
of monetary liquidity. The US has experienced a large bulk up of monetary liquidity, but investor
confidence has wained each time the Fed stopped adding such liquidity since it began its quantity
easing programs in late 2008. Investors also worry that robust profits bought in no small measure
through a weak labor market are suspect under such conditions. It is also very important to note
that weakness in the weekly leading economic indicators have developed each time after the Fed has gone on record that it was paring a program of quantitative easing. Finally, the Eurozone could well
have entered an economic downturn which would affect SP 500 profits directly and through knock
on effects.

The Here And Now
There is adequate monetary liquidity in the system to fund further economic expansion and
the credit markets continue their thaw. However, if the labor market does not firm up appreciably
as the months wear on, the sustainabiltiy of economic progression will become increasingly
suspect. and the market's p/e ratio is likely to erode further even if earnings progress. For now
then, there is not much to do but keep an eye on the economic indicators.

The market's deep discount to the SP 500 Tracker suggests powerful upside provided the
economy yields a stronger labor market and more confidence and willingness to use credit by
choice follows.

There are several other fundamental issues to tackle in subsequent posts this week.

Eurozone / Deadzone

2011-11-11T15:11:00.001-05:00

Well, G 20 came and went in early Nov. at Cannes. The new package from the Euro leaders put
no more hard money on the table. Instead, they passed the hat, and yup, no new hard money was
put on the table. Merkel raised the issue of a more compact Euro, and Berlusconi and the Italian
bond market were thrown under the bus shortly thereafter. There is a new top guy in Greece and
Italy's senate passed an austerity measure, helping to pave the way for Berlusconi's departure and
probable new technocratic leadership. So, operating on the cheap, Euro authorities have wrought
tough change on recalcitrants Greece and Italy. Perhaps tough measures like these were needed to
push the PIIGs constellation in the right direction, but the EU desperately needs to grow and here
is where the longer term focus must be.

Today, there are rumors that the ECB, which has held back on new, large bond purchases, may
be ready to buy an oversold Italian bond market in a big way to signal that Italy may have finally
stepped on the "right" course. All interesting stuff if you are trading Euro sovereigns or day
trading stocks and commodities.

The EU does seem headed into an economic downturn and you have to be careful here, as the
EU banks are dumping the weaker sovereign credits and are putting sizable portions of their
loan book up for sale to comply with new capital requirements. Private sector credit flows
within the EU will suffer as will flows to eastern Europe and even to Asia. Private sector
credit crunches tend to make economic downturns far worse, and in the case of the EU, a
diminished tax revenue take off of weaker profits and earnings, will negatively affect sovereign
budgets. So, multiple austerity measures seem poised to cast a a larger and darker shadow on
EU area profits.

By year end 2011, SP500 net per share should be running at around a $100 per share. Earlier
estimates for 2012 called for progress to $115 per share, but analysts are receiving more negative
guidance now, and the projections are working their way down to $105.

Cyclical Stocks Relative Strength

2011-11-10T17:41:00.000-05:00

I derive the relative strength of the cyclicals via dividing the MS cyclical index ($CYC) by the
$SPX. Chart. The cyclicals have lost relative strength throughout most of 2011 to date as investors
steadily lost confidence in the outlook for US and global economic growth momentum. They have
been following downtrends in various boom / bust indicators and have waived off the very strong
showing in corporate top line growth through the end of Q 3 '11. The interesting thing about the
strength of corporate sales this year has been the recovery of pricing power which has kept top
line momentum brisk even as real volume growth has moderated. The improved pricing power
has led to a significant further improvement in profit margins not only among cyclicals but the
broader corporate universe as well. Investors, wary of indicators which point to slower real
growth momentum, have been unimpressed with better pricing power on the premise that a loss
of real output growth momentum would lead to more timid pricing as companies moved to regain
market share. In fact, the chart suggests that investors were on the verge of throwing in the towel
on the cyclicals until just recently when coincident economic data showed some improvement.

In my view, a sharp break below the .68 relative strength support level seen on the chart would
strongly suggest players had abandoned the idea of meaningful economic expansion for 2012.
One very vexing factor is that the various boom / bust indicators I use to gauge the outlook for
profits accelerated up before the recession actually ended, and did so long before top line
sales growth really took off. This may reflect the fact that the US at least was coming out of
a period of price deflation and that pricing power was quite slow to kick in.

Looking toward 2012, it will be important not just to monitor real growth but inflation as well.
In this latter regard, my inflation pressure gauges have been pointing down, suggesting companies
may find a tougher pricing environment as well. This could affect the outlook for the more basic
or "rotgut" cyclicals.

Stock Market -- Short Term Technical

2011-11-08T16:31:00.000-05:00

The market remains in a confirmed short term uptrend. As expected, there was a quick correction
within the rally after the early Oct. moonshot lift off. The current trajectory is strong -- a good
sign -- and not so strong that it cannot be maintained for another couple of weeks. The market is
overbought in the short run and it would be normal for it to retrench mildly again unless this rally
is a strong impulse up that is heralding a new and sustainable advance. If the latter be so, then
price momentum can remain buoyant for a little while longer. Obviously, the $SPX will need to
take out the 10/28 rally-to-date peak of 1285 over the next week or two if it is to keep the believers
believing. $SPX

I plan to take a look at my longer term weekly chart over this weekend and post accordingly.

I have to confess I have been relying on the technicals more strongly than I normally do because
the fundamentals have been much harder to handle in the short run. More on this issue ahead.

Oil Price

2011-11-06T15:21:00.000-05:00

I exited long positions in the oil sector earlier in the year at $110 bl. In an Aug. 7 post, I put oil
back on my long side trades list, hoping to get back into oil between $70 -80. Yeah, well there
were a couple of evening NYMEX session prints at $70, but I caught it pretty well. In fact, the
oil price has recovered far better than I had hoped, and another exit may be due soon with oil up
toward $94.50 (Oil price chart).

Oil is getting moderately overbought short term, but I am also concerned that it is having a very
unseasonably strong run, since the price of oil historically has weakened over the final 10 weeks
of the fourth quarter as gasoline demand slips and as heating oil production has been ramped up.
The Saudis may want to reduce production to end the Libyan oil shortfall "patch" as Libya slowly
returns to its lifeblood industry in the wake of the revolution. Lots of angles here, but I am least
comfortable with the power of the run up in the oil price when it should be falling on seasonally
weak demand in a global economy that is running rather slow.

Back In Business, Finally

2011-11-05T11:37:00.000-04:00

The Oct. 29 pre-halloween blizzard hit our area hard. We did get our power back on Tues., but
no internet or TV until overnight last night. We laid the chainsaws down yesterday and carted off
the heavy debris, but there is a good day's worth of clean up left around the property. So, I will
start posting regularly tomorrow, Nov. 6 and tend to the final part of the clean up today. Thousands
are still without power in our general area, where the overnight temp has been dropping to 27 deg. F.
and internal temps for those without heat are in the low 40s. You can get chapped lips just sitting
around the house. Be back tomorrow.

A Measure Of Risk On vs. Risk Off

2011-10-26T19:56:00.000-04:00

Looking back over the past several years, it appears that when investors start to get nervous about
stocks, there is a rotation into the long Treasury. SPY vs. $USB. This has been an easy rotation
trade since 2007, although it has hardly worked so well over the long term. But, since it has been
working like a charm in recent years, it is well worth watching now. It reflects confidence in
the economy (a rising SPY) as against the prospect of recession / price deflation ( an up $USB).

We are now in a risk on mode, and if you look at the relationship MACD in the bottom panel, you
can see this pro-stock impulse could carry further until the relationship starts to get wobbly. In fact,
the evidence suggests that if you're a stocks player and the long Treas. starts to rise in price, you
should double check your assumptions. Best, you should look in on this chart pretty often if
equities are your game. For now, the same might be said about the long Treas., as an advancing
economy holds the promise of upticks of inflation.

If you scroll down to the early Oct. posts, you will see I argued that the stock market was deeply
oversold and that the Treas. was heavily overbought. Both reversed trend in short order, although
I would argue the bond is still overbought and vulnerable short term. But, with the volatility in
the markets, do not happily assume the bond can only go down for a while from here. Have fun.

Occupy Wall Street (OWS)

2011-10-25T17:55:00.000-04:00

This is basically a rather small protest movement. But it has received a wide and sympathetic
hearing. The protesters are burrowing in on inequities in the US economic and political system
with the prime emphasis on the unequal distribution of economic rewards and the current deeply
plutocratic drift of US politics and political influence. The main themes revolve around the
issue of fairness in economic reward and politics. As a rule, battles for fairness in US society
are long and arduous affairs. The movement has been correct not to lay out a specific agenda but
to create an atmosphere where individual Americans can reflect on the general idea of
maldistribution in the economy and top heavy political influence and draw individual conclusions.

The danger for any protest movement in the US is that it can be hijacked by the more fervent and
radical elements and wind up being marginalized in short order. This is particularly true for the political
Left which invariably comes acropper of established authority and the general public because it
tends to veer toward centralized authority and toward challenging long cherished rights to
private property and enterprise. Best OWS does not head in that direction, but remains a forum
that abides by the law. Stick with the promotion of equality of opportunity folks. So far so good.

Stock Market -- Daily Chart

2011-10-21T17:03:00.000-04:00

Back on 10/3 (below) I mentioned that the market was deeply oversold and that a shorter run
bottom was close at hand. The closing low came on 10/5 at SPX 1131. Today the SPX closed
at 1238. That's a nice 9.5% move up on a lucky call (Lucky beats smart). The SPX is now at a
5.2% premium to the 25 day m/a. That is the strongest price momentum short term overbought
since early Aug. 2009. The good news is that strong momentum overboughts of this magnitude
are far more common with bull runs rather than bear. The bad news is that the SPX is still
significantly overbought in the short term so that a degree of consolidation / retrenchment could
be in order fairly soon.

The market has entered what is called a broadening top formation -- higher closing highs, lower
closing lows. This has a number of technicians nervous because formations of this sort can end
badly with a new low or even a major breakdown. I am not a big "formations" guy because I
have seen so many of them busted over the years, but it is there and you should know about it
and you should also know that there are bears out there who rely on formations like this but
do not tell you so because such elucidation can be regarded as flaky. (The formation started in
early Aug.)

$SPX

Shanghai Stocks -- Living Down The Past

2011-10-20T16:39:00.000-04:00

My view for this year is that the Shanghai would rally over Half 2 '11 and sustain an advance well
into next year.The problem this year has been money and credit tightening to cool a very sharp
acceleration of inflation. Business profits have advanced, but the p/e ratio has declined sharply
as higher inflation forces up return hurdle rates.

The central bank (PBOC) has been running a tighter money policy for nearly 18 months, with China
M-2 now down to +12.5% yr/yr. Assuming level money velocity, we should expect 9.5% real GDP
growth with a 3.0% inflation rate. But strong credit growth has pushed up velocity, and pressure to
curtail the overheat has resulted in +9.1% real GDP yr/yr but inflation of 6.0%. Now although it
could be that inflation has just crested, the downward trajectory of the growth of money and credit
could carry real GDP growth lower too, even as inflation pressures subside.

Compared to the past 5-6 years, M-2 money growth is the lowest it has been which may add
downside risk to the real economy and profits. China has also allowed large 10-12% wage gains
this year. This firmly increases consumer purchasing power, but the wage hikes could constrain
profit margins ahead and slow down the inflation deceleration process.

Since the current downward trajectory of money and credit gowth if extended well into 2012
could damage China's economy and its real estate development markets in particular, It makes
sense to conclude the PBOC is probably closing in on starting to ease monetary policy. This has
been a troubling period for the PBOC, because unofficial or black market lending has turned
out to be larger and more vigorous than they thought (So they say). China businessmen, rather
than leave money in the bank at low deposit rates can, if they are careful, lend out excess cash on
the black or "stir fry" market at far higher rates. The tougher lenders can dishonor the families
of slow payers and use muscle as necessary to collect. At the same time, smaller businesses
are driven toward this market as more rationing of credit by the big banks freezes them out.
The PBOC would be wise not to sit on the brakes for too long, as bringing small business
borrowers back into the official fold would be more advantageous economically.

The Shanghai market closed 10/20 at critical support of 2331. It is an oversold market, but a
sustainable advance may await signals and confirmation that the central bank is prepared to
abandon monetary tightening.

I have been surprised by the weakness of the Shanghai this year, and my projection of a positive
second half turn is running out of time. Shanghai ($SSEC)

EU -- How Big The Jitters?

2011-10-18T17:31:00.000-04:00

I have long believed that the development of a Euoropean Union was worth a tremendous effort.
I have long been aware that Milton Friedman argued strongly that simple monetary union could
be fatally flawed in very stressful economic and financial times without a powerful fiscal union
as a bedrock. My experience with humanity has taught me not hold politicians to a high standard
as the political ego is vulnerable to an array of outsized venalities. So, I have not been troubled
by the struggles within the EU to try and manage their financial problems without pushing the
reduction of sovereignty envelope too far. My hope is that sovereignty can be kept as strong
and vivid as possible even as the EU confronts its difficulties.

The US stock market has suffered a strong erosion of the p/e ratio over the past 18 months, an
erosion that has taken the multiple well below the fair value level of 16.5x suitable for an
economy with moderate inflation and nicely rising earnings. Because I think that the multiple
contraction primarily reflects the erosion of investor confidence in the self sustainability of
economic recovery, I have not tried to hang any of the blame on the EU's financial problems.

But now that major EU bank deposits have been subject to periodic run off as market players
worry over bank soundness owing to PIGS sovereign debt exposure, and further, knowing that
this game can become an emotional and contagious issue, I think it now falls to the EU to
protect its financial system from further damage without delay.

In looking at the situation and on the reasonable assumption that the EU cannot immediately
indemnify all the suspect sovereign credit, the issue turns on a reasoned guess of how much
extra backing may be required to assuage worried, prickly credit markets. At this point, it
appears that additional large provision of tier 1 equity capital or a reasonable facsimile of
same for the union's banks may also be required.

Given the limitations of inter-country politics, I am hopeful the EU can muster another $1 tril.
of funding and that the non - EU members of the IMF can pony up several hundred $bil. to
be augmented by a large infusion of capital from China, with the latter to benefit handily from
a stable Europe going forward.

So, I am eager to see what the EU and G-20 can pull together over the next two odd weeks to
keep the trains running on time. I do not know what it will take in $ to settle the foreign credit
markets and I do not know whether the EU will double down on its commitments, but the
situation has deteriorated to a point where larger, major segments of the financial and
capital markets could be seriously jostled if the EU with assistance from the IMF and G-20
do not produce a workable salvage plan.

Stock Market -- Weekly

2011-10-16T17:58:00.000-04:00

Technical -- Weekly Chart
The daily SPX chart indicates a short term overbought, and the easiest thing to do would be to
flag it in a post and move on. But, the weekly chart has been more telling this year, and it is pointing
to a possible positive reversal as downtrend measures of price momentum are close to positive
reversal. Check out the trend positions of RSI, ADX +DI and 12/26 wk MACD on the chart. Note
as well that my 40 wk price oscillator has, however fitfully, also turned up. Now the market
reserves the right to whipsaw and trap the bulls here, but to me, the weekly chart implies that
players should pay extra close attention to how the next week or two play out as the market is in
its most challenging position in several months.

Short Run Fundamentals
My weekly cyclical fundamental indicator does remain in a downtrend that started in early Apr. It
rallied modestly over the month of Jul. but resumed its downtrend in early Aug. It is now running
flat since mid-Sep., and this counts as another development worthy of attention.

Conclusion
I continue to lean in the direction of the view that the sharp sell off in the market since the end of
Jul. represents a steep correction in a cyclical bull market rather than the advent of a new bear
market. But I think it is a close call and I am reluctant to throw in the towel on it because I still
see a way the economy can right itself provided the real wage and the employment situation
can build on the improvement evidenced in Sept. and the private sector credit market continues
to thaw out. But, it is getting wearying and I am beginning to wonder whether I am just being
stubborn. It remains fair to say that the burden of proof remains with the bulls.

A Note On Retail Sales

2011-10-14T16:44:00.000-04:00

Sept. retail sales advanced a strong 1.1% for the month. This was a good number, but it was not
quite as strong as it would appear since hurricane Irene so slammed the US east coast in late Aug.
that important back-to-school shopping was shifted over into Sept. Even so, when you factor in
Aug., the average monthly change was a respectable +0.55% or 6.6% annualized. More so ok
because gasoline and fuels prices have been coming down over this period, thus strengthening
the inflation adjusted number. The series can be volatile but remains in a firm uptrend going
back to the end of 2008. Interestingly, both employment and the depressed real wage did show
some improvement in Sept. as well.

Retail sales tend to get wobbly and form a plateau at the outset of a recession period. The case
for this development has not been made yet.

Stock Market -- Short Term Technical

2011-10-12T16:59:00.000-04:00

The stock market remains basically unstable. It is trading in a deep staccato pattern where active
traders often find themselves extemporizing as they go along to stay profitably in the game. The SPX
has rallied as expected from a deep oversold position (Scroll down to 10/3 post for more on that),
and closed trading today at a 3.3% premium to the 25 day m/a. Since Aug., traders have been using
+2-3% readings on the 25 day oscillator to begin selling down positions. In fact, there was some
profit taking late today as the market touched rough short term resistance. In this kind of exceedingly
choppy market, it is sometimes worthwhile to watch the standard momentum measure stochastic
indicator to spot quick changes of direction. $SPX Chart You can see on the chart that when fast
(black) breaks slow (red), direction has changed.

For long side players who are not day or swing trading, it might be best to see the market take out resistance at 1220 and look for pullbacks thereafter which take the trend of the advance down from
moonshot moves to a more sensible trajectory. That would indicate that stability was returning
to the market. There is no such evidence now and it is flat easy to get whipsawed.

Economic Indicators / Analysis

2011-10-10T17:21:00.000-04:00

The weekly leading indicator sets remain in downtrends in force since last spring. The indicators
have been sound on inflection points in the economy, bur given their high volatility, they have not
been of much use when it comes to economic activity momentum. The monthly leading indicators
I follow show a downtrend in economic momentum, but do not yet suggest a recession is
developing. The monthly indicators have overstated the case for a broad economic recovery,
and this reflects the continuation of weak construction and labor markets.

I use monthly retail sales as something of a "halfway house" between the leading and coincident
indicators. Retail spending had shaky periods in both mid 2010 and mid 2011, but monthly data
remain in a firm uptrend so far.

The weekly coincident indicator I use has been flat since Apr. this year. The monthly data set
shows a deceleration of recovery momentum to low positive levels reflecting a moderation
of the rebounds in sales and production coupled with a continued weak labor market. The sharp
acceleration of inflation experienced over Half 1 2011 seriously undercut consumer purchasing
power and confidence.

With commodities prices having fallen sharply, particularly the important fuels sector, inflation
is set to moderate. This break is much needed to rescue the real wage which has fallen off over
the course of 2011. My economic power index is comprised of the yr /yr % changes in the real
wage and civilian employment. The current reading is a weak -1.0%. That is actually a decent improvement from Aug., but is very likely too low to sustain an economic recovery.
Without faster progress of employment and an improvement in the real wage, the economy is
set to languish as we enter 2012. For comparison purposes, a healthy power index is +4.0%.
We have not seen that for the US in nearly 5 years.

Long Treasury -- Wildly Overbought

2011-10-05T17:30:00.000-04:00

The 30 yr. Treas is trading in yield down close to the previous record low levels seen during
the deep recession period of late 2008. The shorter term fundamentals -- falling industrial
commodities prices and declining production growth momentum along with dips in other
cyclical pressure gauge measures -- have supported the downtrend. The long Treas. has priced in
a thorough going recession. With the Fed's new "operation twist", there is also a firm bid under
this market as the Fed swaps out of maturing short term securities into longer dated maturities.

I link to the 30 year yield along with industrial metals prices here. Whenever the $TYX trades
at a steep discount to its 200 day m/a as it is now, you have to be very careful. the same thing
applies to when the $TYX is trading well under the comparable prior year level as it is now.
These are signals of a profoundly overbought market, when the yield can jump 100 - 150 basis
points in short order on a couple months worth of stronger economic data or the announcement
of easier fiscal or monetary policy (or better news from the EU on handling high risk sovereign
credits).

Relative to the experience of 2008, the long bond, on the current spike down in yields, is
trading way ahead of the weakening economic fundamentals it anticipates and leaves holders at
great risk if the bet fails and the economy does better. Viewed long term, this is a super volatile
market as you have fast money hedgies parking money here or leveraging shorts in low quality bonds.

Bull sentiment among advisors is also running at high levels and sentiment contrarians should
note that.

The market is unstable now and to counteract that lack of stability, I will probably wait for the
$TYX to rise and hold a bit above the 25 day m/a before shorting it (Check chart link again).

Stock Market Registering Deep Oversold

2011-10-03T17:22:00.000-04:00

The TRIN indicator measures downside vs. upside in terms of volume and breadth. A rising
TRIN shows the bears have the upper hand. I like to watch the 21 and 55 day TRIN readings to
determine how oversold the market may be. Through today, the NYSE TRIN 21 and 55 day m/a
readings are showing a heavily oversold market. Markets can of course get more oversold, but
this TRIN measure, when viewed historically, has reached levels consistent with a market that
may be close to a short term bottom. $TRIN

Stock Market -- Weekly

2011-10-02T17:06:00.000-04:00

Technical
The weekly chart shows a shorter term basing period for the SPX. However, the intermediate term trend factors still point down, so there is no sign here yet that the market is headed into positive reversal.
The OEX 100 put / call ratio is a "real money down" sentiment indicator. This indicator has been
showing consistent net put buying on a weekly basis since last XMAS, and during this cyclical bull
market has tended to drop into a net call buying postion several weeks before a sustainable market
bottom. We have yet to see this reversal. So, the weekly chart, which can turn reasonably rapidly,
remains negative for now. My experience here is not to go long with anything but very small $ until
there is some positive stirring. $SPXhttp://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=3&mn=0&dy=0&id=p52454672129

Fundamental
In early Aug., my weekly fundamental cyclical indicator resumed a downtrend started around the market high in late Apr. This indicator does contain forward looking measures such as industrial commodities prices and unemployment insurance claims, so it is forshadowing a weaker economy. The heavily coincident part of this weekly indicator does not yet show any signs of a downturn in the economy, although positive momentum has leveled off since the spring of this year. It is interesting
to note that the coincident factors like retail sales and production components have not tipped over
yet despite weakness in the more forward looking factors. In fact the coincident factors are overdue
to correct.

For more on the fundamentals, have another look at the Sep. 14 post.

Commodities Market

2011-09-29T17:08:00.000-04:00

The CRB commodities composite has been in an elegant downtrend since the end of Apr. 2011.
As most all know, evidence has been gathering since earlier in the year that the global economic
expansion was losing positive momentum. This has been the case although global production
was likely at or near an all time peak through Aug.

The commodities composites are not always captive to the same indicators for touchstones. Now,
commodities have been subject to the downtrends in place for the leading indicators and new
diffusion indices for the purchasing managers activity composites. It is momentum that has players
interested.

There is growing sentiment that the weakness in commodities has been strong enough -- the CRB
is nearly 18% off its cyclical peak -- that recession periods must be at hand for major economies.
Could be, but remember that financial players are heavy into into these markets now through
various ETF and ETN vehicles and this adds volatility to the already volatile commodities
markets.

The significant fall in the commodities composites is leading to a fairly rapid decline in my
primary inflation pressure gauge, a development needed to reduce stress on real wages in
any number of economies. This development will allow central banks more leeway in
considering policy accomodation steps.

Clearly though, this is a risky way to engage monetary policy as commodities price weakness
does suggest growing economic slack in the global basics delivery system and monetary
policymakers will have to act in a supremely timely fashion if, for example, the CRB does
continue to glide lower. But such "soft landing" feats have have been accomplished before
(viz. 1995 and 1999).

The CRB is trading right above cyclical trend support at 300 and super long term trend support
at about 280, so further sharp downside action would be an ominous sign. At 306, the index
is substantially oversold and failure to have a bounce up of consequence soon would also be
a serious matter.

CRB chart.

US Economy -- Key Longer Term Indicator Turns Shaky

2011-09-28T13:57:00.001-04:00

First, before I get to the main subject of this post, let me say that the bulk of my longer lead time
indicators remain strongly positive. These would include critical financial measures such as
monetary liquidity, interest rates and the yield curve. Not only that, but the economy is nowhere
near effective capacity while a key lagging indicator -- my short term credit supply / demand
pressure gauge -- is now just rising to an equilibrium level after several years in the doldrums.

But I am worried about one critical mainstay indicator -- the trends of real hourly earnings and of
real take home pay. Measured yr/yr, the CPI has accelerated over much of 2011while wage growth,
low to begin with, has decelerated. So, even factoring in the payroll tax cut, the real wage has zeroed
out and is trending lower yr/yr. Business has not only not adjusted wages for sharper inflation, it
has been handing out progressively smaller wage increases. I had hoped business would be more
generous as inflation picked up. They may still come to the rescue, but the real wage has reached a
point where without substantial rapid improvement, an economic downturn is likely to develope
either late this year or in 2012.

A downturn is not a lead pipe cinch since a number of factors can intervene. Inflation pressure,
which has been driven by now down trending commodities prices, could fall away rapidly (The
Fed's hope). This could lead to an improvement in confidence and perhaps even faster hiring.
As well, consumers could simply grimly expand borrowing and draw on savings to finance
more of their spending -- things they have done in the past.

But, the burden of proof has now swung from bears on the economy over to the bulls. Moreover,
I think it may well be tough to see a substantially stronger stock market without the deterioration
of the real wage being arrested. Now, note here as well, that there could be subsequent fiscal or
monetary easing tactics which might lead investors to foresee better times for the real wage
down the road. But, here too, I think, the burden of proof is now on the market bull.

The Cannes Festival -- Deux

2011-09-27T20:16:00.000-04:00

The stock market did rally over the past couple of days on stories the EU had a very large
bailout plan in the works to encompass Greece and its attendant weak sisters. This evening
Germany's finance chief Herr Schauble pissed all over the general idea and pointedly insulted
the White House for entertaining "stupid" notions about how the EU should proceed. Now
both sides have thrown down the gauntlet and without rapid repair, US - Germany relations
will tank further than they already have. The indirect attacks on Geithner may disturb the markets
in the days ahead as equities players liked the idea of a grand scheme of some sort re: the EU.

Since there are many sites and blogs out there which relish international politics, I am going
to leave this fertile new source of conflict to them to ponder and return to more basic economics
and finance.

The Cannes Festival

2011-09-25T17:25:00.000-04:00

No, not the film fete, but plenty of drama and some comedy anyway as G20 sets the 11/4 meeting
in Cannes as a deadline for confronting the EU's sovereign debt crisis, a problem severe enough
to lead to bank funding problems in the Eurozone. Already the Fed has had to commit to a large
pool of dollars on loan to the EU area to provide funding liquidity. Moreover, the US dollar
has recently rallied strongly, an event the US does not wish to see sustained. Economists, fund
managers and leading gov. officials are peppering the press with jeremiads to the need for the
EU to step up and make its intentions and plans known pronto. There are rumors and stories
that US Treas. Sec. Geithner is forcefully urging the EU to act quickly and comprehensively on
this matter and that some sort of large scale bail out plan is in the works. To underscore non-EU
concern, the IMF's chief LaGarde is saying large fund infusions may be needed if the IMF must
address solvency problems beyond Greece. This would mean the US, the UK et al would have to
pony up more $.

First step this week is to determine fact from fancy. The interesting issue here is that Geithner
is leaning hard on the EU with generalities but out in full view....

Gold & Silver

2011-09-23T17:11:00.000-04:00

Gold
Back on Aug.21, I again mentioned that I have been enjoying shorting the gold price when it
falters. I did so again over the past month via the DZZ ETN and covered today after DZZ opened
on a nice gap. DZZ chart. This was good, nicely profitable fun, but the gold price is so
ridiculously elevated and the long side players so intensely devoted to it that it is not really at
a point where my skills, as limited as they are, are very useful. I can think of good reasons why
gold would be in a bull market, but its price is absurdly high to me. $800 an oz. I can fathom and
tie to concrete economic realities. But, to me, the metal is beyond the pale at current price levels.
If I do short it again, I will use DZZ but only if gold appears to have entered a genuine bear
market. My cumulative return on my shorts since late 2010 was +52.4%.

Silver
Silver has this colorful history in the US, replete mostly with scoundrels but with a few saints
thrown in. When the silver price hijackers are quiescent, it can be an interesting investment.
When I wrote about it in early Apr. this year, the boyz were levitating it toward $50. But
those who know silver's history also know it is one of America's great crash dummies. Now
it is at $30. oz. Technically it is oversold, but like gold, is trading well above sensible
measures of economic value. Because silver is in a strong corrective phase already, I
might consider shorting it on occasions when the time looks right and stay away from the
gold. $Silver.

Gold Price -- A rescue From The Bugz Is Needed

2011-09-22T17:25:00.000-04:00

Gold broke $1750 oz. short term support today. The RSI (chart link below) is trending down
rapidly and is now around 60. The bugz have come to the rescue during this bull leg since late
2008 primarily around 50 RSI. The next sensible strong base of support is down around the
spring 2011 break out level of about $1540. The market remains moderately overbought
at 13.8% above the 40 wk m/a. The bugz will have to wave off the recent double top and the
Fed's pass on more QE along with the continued procrastination on the next tranche of the
Greek bailout package. It is stunning the market is still overbought in the intermediate term.
But let's watch to see if a rescue is on tap over the next several odd trading sessions.

Gold Chart.

Monetary Policy & The Economy

2011-09-21T16:44:00.000-04:00

At today's FOMC meet, the Fed maintained the ZIRP on Fed Funds, talked more negatively about
the economy and opted to swap out of $400 bil. short term Treasuries into longs. It will also stop
shrinking its asset backed securities holdings by reinvesting proceeds there instead of Treasuries.
No quantitative easing is involved.

The Fed decided some months back not to continue QE for the forseeable future because They
regarded the final months of QE 2 as involving an unfavorable tradeoff between rising output and
inflation. The primary driver of inflation over the past year was higher commodities prices and
especially rising petroleum sector prices. The global economic expansion has cooled considerably
recently with the result that the commodities composites have softened materially in price. Even so,
the Fed has elected to take a pass on further QE for now.

I believe the economy and confidence has improved substantially as a result of the QE programs.
Stepping away from QE does increase the risk for the economy since the private sector credit
markets are thawing very slowly, and there may not be the rising tide of liquidity to support
continued economic recovery without more QE. However, since a portion of the run up in
petrol sector prices earlier this year was likely attributable to QE 2, and, since that surge was
big enough to crimp the real wage, one can understand Fed reluctance to plow along with
another program quickly.

The foregoing shows how easy it is to gild the economic lilly on this issue. Suffice it to say that
the real economy would be best served by a fast and nervous sell off of commodities that
wrings out the speculators and which gives the economy and the Fed some breathing room.

Over the 1932 - 45 period, the Fed increased the monetary base by between 4-5 fold. there was
war time inflation and black marketeering, but the CPI did not hyperinflate. The recent economic
downturn was not at all as deep as the Great Depression, but the Fed's response has been
very aggressive. For what it is worth, Fed QE has been running awfully strong, and, it is
possible the Fed would like to hold the program in reserve for as long as it deems feasible, so
that it retains QE fire power for the future should the economy falter significantly.

Profits Indicators

2011-09-16T17:10:00.000-04:00

As the economic recovery has proceeded, quarterly profits progression hit its first inflection
point in mid 2010, following a spectacular initial rebound. Since then quarterly profits have
progressed at a powerful 15% annual rate as stronger top line growth and continuing tight
cost controls have held sway. My profits indicators through Aug. this year now suggest a
moderation of volume growth is underway but that increased pricing power has been making
up some of the momentum lost from smaller volume growth. In fact, the pricing has been
"sticky" despite the loss of volume growth momentum. Now, there is a significant differential
which has opened between the pricing of primary processors such as the oil companies
and that of intermediary goods and services providers such as food processors and a number of
manufacturers. So, the advance in pricing power means earnings fillips for early stage guys
and higher costs for most other companies. Thus, there may be some erosion to the aggregate
profit margin ahead, as more companies struggle to pass on higher costs. The banking sector
looks set to show another sizable gain in operating earnings as the loan reserve has dropped
a large $46 bil. or 17% from year ago levels.

On balance, the indicators suggest that earnings progression continues fairly strong in the
near term although the % of companies showing strong comparison reports may start to
tail off. Also, when pricing power becomes a stronger factor to earnings as it is now, the
p/e multiple for the entire market can often contract in view of the higher inflation.

Stock Market -- Technical Quickie

2011-09-15T16:42:00.000-04:00

Short term, the market is edging further into uptrend mode. It is at a critical juncture now. The
SPX is trading around 2.3% above the 25 day m/a. This is about where the bears have hit it in
recent weeks. As you'll see on the chart in a moment, there is overhead resistance in the 1200 -
1225 area, so the market will need to trade through this to gain credibility. Should the market
be on firmer footing, it can easily trade up to the 1245 area from today's close of 1209, and do
so in relatively short order.

The chart also marks the next logical resistance point up at the 1260 pivot line. But first will
come the test in the current strong resistance zone. Support remains down at 1120 - 1125.

$SPX

Stock Market Valuation

2011-09-13T20:04:00.000-04:00

The momentum of earnings recovery has eased substantially from a torrid pace but is still solidly
on track. Inflation pressures are moderating. With this immediate backdrop, the SP500 should
be trading for about 16.5x estimated 12 mos. net per share through Sept. or roughly 1550.

With global economic recovery two years along, further earnings progress is now far more
dependent on top line growth than profit margin expansion. Global leading economic indicators
peaked in positive momentum in Feb. this year. The global measures are still positive, but are
far more subdued going into Sept., which portends a sharp deceleration of economic growth
particularly for manufacturing and production. US indicators are in synch with the global trend.

Since the Spring of 2010, when leading indicators suggested a slowing of growth, the stock
market has been more sensitive to leading measures than to coincident measures. This focus
has lead to a substantial contraction of the SP500 p/e ratio, as strong earnings performance
has been offset by a growing sense of investor pessimism about the future. Specifically,
the p/e of 17.7x seen in early 2010 has eroded to 12.5x today. Moreover, the p/e ratio is
not just hit or miss the fair value level of 16.5x, but is trending down to reflect an increase
of investor guardedness about the future.

Now, earnings progress for the SP500 has outpaced that suggested by the leading indicators.
To add to the issue, earnings progression has been far smoother than the leading indicators,
which have been rather volatile. These developments plus a trend of increasing investor
pessimism make it difficult to say with confidence where the market should be trading today
and even tougher to say where it should be a year out.

The market is very reasonably priced when viewed in longer term perspective, and it has
sizable upside on improvement in shorter term fundamentals. However, experience in this
economic recovery shows clearly that the shorter term leading economic indicators and,
perhaps, the Fed have to be at your back. With an important Fed meeting ahead and the EU
wrestling to save their union now foundering around a prospective Greek default, be careful
to give the market a few weeks to sort this out in your thinking.

Stock Market -- Fundamentals

2011-09-12T20:08:00.000-04:00

Primary Indicators
When I look at the fundamentals that have been the most critical to the current cyclical bull market,
I would have to say the situation is more reminiscent of the post - 1932 Great Depression era than
at any time after WW2. As in the 1930s, the US economy and the stock market were starved for
liquidity, and the Federal Reserve was the primary provider. Thus, the Fed's liquidity activities
as captured by Fed bank credit and the monetary base, were the primary drivers of economic and
stock market recovery as was confidence in the financial system and the economy.

SP 500 profits have rebounded handsomely in a modest economic recovery. Liquidity provided the
raw material for the recovery, and the transmission to higher stock prices has occurred only during
periods when investors knew the Fed was expanding liquidity or was about to. Importantly, a
key measure of confidence -- credit quality spreads -- has exhibited the same behavoir relative
to Fed liquidity as the the stock market has.

Financial system liquidity is showing some improvement excluding the direct effects of Fed
policy, but it has been far too modest to encourage investors. As well, rock bottom short term
interest rates have not been sufficient to cushion the stock markets from steep corrections both
last year and this in the absence of quantitative easing by the Fed. In fact, the full constellation
of core fundamental indicators which underwrote every post WW2 bull market have not
provided a rising market with the stability normally observed.

For now then, quantitative easing or the lack thereof, as well as confidence factors such as
quality spreads, continue to carry the day as far as the stock market is concerned.

Other Important Measures
I watch the trend of the oil price carefully in looking at the stock market. I do not think a rising
oil price bothered stock players very much until it shot up from $85 bl. to $115 earlier this
year when the Libyan insurrection began. It has retraced much of the spike in recent months
and I would rate it as a neutral factor now.

Looking more widely, I keep a weekly cyclical fundamental directional measure. This broad
gauge measure has a forward looking bearing and it has been in a moderate downtrend since
early Apr. of this year. Specifically, it has fallen 11% since then while the market is off about
14.5% from its highs seen earlier in the year. Most of the damage to the weekly fundamental
indicator was done over the early Apr. - mid May interval. Over the past 15 months, the
correlation of the weekly indicator with it weekly SP500 counterpart has been 0.6. It is
also interesting that the strongest positive moves in the fundamental indicator match up well
with the bouts of QE in evidence over the past 2+ years.

Total US business sales and the dollar cost of production have both risen more rapidly than has
the broad measure of financial system liquidity since the economic recovery began. Thus in
effect, the capital markets have been reliant upon the draw down of liquid reserves in the form
of money market funds. Here, the draw down has been $1.1 tril. or 32% from historic high
levels seen in mid 2009, and the current level now stands below readings seen at the prior
market top in 2007. A tidy sum of fire power has already been deployed.

Stock Market Technical -- Daily Chart

2011-09-07T16:33:00.000-04:00

The SPX is in short term advance mode, with a third rally attempt to build off the short term base
of a triple low of 1124 set during Aug. If it can rally up to and a bit through the 1225 level without
being clipped sharply by the bears, the rally could have some staying power. $SPX

The rally is currently lacking the kind of confirmation I would like to see. Specifically, I would
prefer that the 25 day m/a also turn up over the next 4-5 trading days, and that any extension of the
rally remain above the 25 day m/a as it progresses.

I issue these cautionary preferences because the market remains unstable as it rises or falls in
dramatic fashion relative to the news of the day. Experience also shows that it is unusual to
have rallies with good staying power so soon after the kind of strong downward move in price
level we saw over late Jul. / Aug. From a purely technical perspective, the major reason to be
suspicious the rally might fail is that it is an against-the-house bet at this point in time. Even so,
as Mrs. Loman said of husband Willy, "attention must be paid".

Stock Market Technical -- Weekly Chart

2011-09-05T17:18:00.001-04:00

This post takes an intermediate term view of the market. Market internals turned down in early
Apr. of this year when price momentum relative to the 40 wk (200 day) m/a turned convincingly
downward following a large run up in relative standing that left the market overbought. Chart
Notice the downtrend in the price oscillator has remained intact. I will not be getting a positive
read on this indicator until there is a stronger northward move in the oscillator. I will take short
term long positions in the market during a downtrend of this sort, but reserve much larger $ longs
for those periods when intermediate term momentum is on the rise.

There are other indications of internal weakness that show up on the following SPX chart. $SPX
Note here the downtrends underway in RSI, MACD, and ADX +DI. Risk remains in the market
until these trends bottom and show some positive action.

Now the hard truth is that if the cyclical bull market remains intact, These intermediate term
signals can remain suppressed for up to another 2-3 months. That would hardly be an unusual
development.

Let me also venture beyond traditional technical analysis to discuss the trajectory of the market.
The cyclical bull in place since 3/'09 has been the most powerful one since the 1995 -2000 and
1948 - 52 runs. But, unlike those periods, this market has been more volatile, having experienced
strong price corrections in 2010 as well as this year. So, I would not be very surprised or upset
if the SPX traded down to 1050 over the next month or two given the outsized trajectory it
maintained from 3/'09 through 7/'11. I think if the current correction can be contained at 1050,
we still can talk about a cyclical bull market. I have dredged all of this up because there should by
all rights be another decent upleg to this market, and I am not prepared just yet to abandon that
idea.

As a closing note, be advised that I am not projecting a further decline in the SPX to the 1050
level in the months ahead. I have just marked 1050 as a "fail safe" point below which much
darker doings could await.

Investor Worry Near Flashpoint

2011-09-02T20:09:00.000-04:00

I like to watch the relative strength of the cyclicals to glean investor expectations regarding the
future behavoir of the economy. I have linked to the relative strength of cyclical stocks ($CYC)
compared to the SPX here.

The cyclicals were the market leaders until February, 2011. The group has weakened appreciably
since late July and a further drop in relative strength below that .685 level could signify market
players may have thrown in the towel on continued economic recovery in the US.

Economic Indicators / Analysis

2011-09-02T19:54:00.000-04:00

Using raw monthly data, I have total US business sales up by 11% yr/yr through July in current $
and +7.4% in constant $. Over this period, inventory accumulation has stayed in good balance
with sales growth. Moreover, data on store and auto sales for August were relatively strong. The big drag on the economy has continued to be construction spending which is very depressed still but in
a moderating downtrend (and is included in the total business sales figures).

However, there are some troubling signs. The breadth of new orders reported by business hit
a strong early cycle peak in January of this year and has eroded rapidly to only a nominally
positive level for August. The weekly leading economic indicators (excluding volatile price series)
has started to retreat sharply since the end of July, and, the weekly coincident indicator is showing
signs of flattening out here in August.

The payroll tax cut surely did aid employee take home pay, but deterioration in the growth of the
basic wage rate plus the acceleration of inflation over the Half 1 2011 has undermined basic
purchasing power with the real wage (tax cut included) up but 0.2% yr / yr as we headed into
September. To top off a lousy consumer picture, total civilian employment growth is up but 0.2%
yr / yr, leaving consumers to borrow more and reduce savings to maintain aggregate spending.

Potential bright spots ahead appear modest. Inflation pressures will be moderating and this will
give some lift to the real wage. Obama and the gang have crafted a jobs program and are looking
at ways to ease the homeowner's burden. The Fed awaits the Obama programs unveiling and does
have some further easing tools to deploy if pressured. However, barring a major surprise from
Obama, nothing grand seems in store, which with the poor labor market, leaves the economy
vulnerable. And, last but far from least, the GOP appears committed to sabotaging the economy
further if needs be to oust Obama. As much as I would like to see more positive leadership and
statesmanship from the White House, I have to say if a political street fight looms ahead, Obama
should drop the velvet gloves and come out swinging.

Electric Power Returns...

2011-09-01T20:01:00.000-04:00

Hurricane Irene did moderate property damage in my area, but gale force winds and wet ground
conspired to send a number of trees down. Fortunately, few homes were struck, but power and
phone lines as well as cel towers were taken down. We went five days without power, and with
the well pump out, without water as well. We made substantial use of the neighbor's pool. I am
taking the rest of the evening off, but will return to regular posting shortly.

Hurricane Bearing Down...

2011-08-27T19:53:00.000-04:00

Nope, not a financial hurricane, but a real one -- Hurricane Irene. Projections now show that
the eye of the storm will likely pass within 10-15 miles of the house. Preparations are now
underway, and since a loss of electric power is a very good bet, it may be quiet at the site for
a day or two.

--------------------------------------------------------------------------------------------------------------------
As expected, Bernanke did hold off on proposing further monetary accomodation for the economy out
at Jackson Hole. The Fed needs to have a good look at what Obama and his crew may have in mind
for fiscal stimulus on the jobs and residential real estate fronts. The Obama presentation could come
along a week or so after labor day.

Monetary Policy Dudes Gather at Jackson Hole

2011-08-25T12:12:00.000-04:00

1. The Fed knows that QE 2 led to an unfavorable trade off between economic recovery and the
inflation rate as the program progressed through mid 2011. Further, sizable QE in the near term
could be risky business for the economy and the political survival of Bernanke and even Obama.

2. The markets for private sector credit continue to thaw slowly. With the large markets for
residential and commercial real estate so slow, the Fed will have to watch liquidity barometers
carefully in the years ahead, and They may have to be prepared to use QE options from time
to time for a number of years to maintain adequate liquidity in the system as occurred over the
1932 - 45 depression era. The Fed has used a huge amount of QE ammo over the past two years
and might prefer, if possible, to move to longer term rationing.

3. The 2012 national election is roughly 14 months away. Voters are deeply concerned about the
weak labor and residential real esate markets. The Fed would probably welcome fiscal policy
assistance on these critical sectors, however belated. The Fed would prefer to see what might
be on tap in the way of new initiatives in the fiscal area before commiting to any bold monetary
action on the domestic front. And, we can all look forward to the next exciting installment of
deficit reduction buffooning ahead this autumn.

4. Last, but very far from least, is the issue of the survivability of the EU. The problems here
go well beyond orthodox monetary policy, but an important opportunity may be at hand for
Bernanke / Trichet et al to reveal Their thinking on the stabilization of the Euro area banks and
credit markets. This area is of most interest to me today.

Gold Price Going Vertical

2011-08-21T12:24:00.000-04:00

Had the gold price advance terminated around 1500, it would have completed a "garden variety"
bubble, but the bugz have their hearts set on pushing this baby ever higher. So, we now have an
eye popping overbought, with gold at a nearly 27% premium to its 200 day m/a and sporting an
MACD of +63 compared to recent peaks in the +25 - 35 range. It is like a stein of beer with way
too large a head. $GOLD chart

For the hell of it, I have been having some good and profitable fun shorting this esteemed religious
relic since last autumn. Now's a good time for me to be alert, because the bugz are throwing any
vestiges of caution to the wind as they target $2000 oz. I short only the downturn, like when
the 5day m/a starts to roll over and when the ADX +DI reverses. $Gold -- shorter term

Caution: Trades of this sort are for only the few with plenty of experience, ice water in the veins
and who can reside in front of the terminal for extended periods.

Stock Market

2011-08-19T17:18:00.000-04:00

Fundamental
My weekly cyclical fundamental indicator is right around its low points so far this year, and
further declines in the weeks ahead would put it in a downtrend. Overall for 2011, the indicator
suggests the market should be flat for the year. But, since the SPX is down 10.7% YTD, it is
clear investors are discounting a further decline of economic momentum. Clarity on this point is
difficult, because players have also been trimming the market's price earnings ratio in the wake
of sharp, fast price declines in both 2010 and this year.

Although financial system liquidity excluding the direct effects of the QE programs has been
improving, the market has yet to show that it can sustain a positive bearing in the absence of QE
or its clear prospect. Moreover, neither has economic momentum. My view since late 2010 has
been that I am more curious than bullish about the market, particularly because we knew the QE
program had a wind up date of 6/30/11. It has been a little disappointing that investors have
been indifferent to the improving private sector credit situation, something we did not see last
year when QE was needed to sustain system liquidity. Many a bull market has been maintained
without aggressive QE when private sector credit growth has been a substantial underwriter
of economic expansion.

On a long term basis of at least five years out, my fundamental approach, which is geared to not
overpaying for cyclical earnings momentum, suggests that stocks are pretty reasonable at these
levels. This is the first time this approach has generated a positive "signal" since mid 2010,
when the market sold off sharply.

Technical
The market, although deeply oversold in the short run, remains unstable and is in a confirmed
downtrend. $SPX Note from the chart that the SPX has now put in a triple closing low on a
short term basis. A mechanical buy signal was generated today because the market failed to
take out the recent closing lows. Some traders will like that close, but you can see from the chart
that next week introduces a test of whether stocks can hold important short run support or whether
it will break down into a more nearly full scale bear market. I would also call attention to the
25 day m/a. Sometimes the market bases out until the 25 m/a drops down to to a level much
closer to the base -- in this case SPX 1100 - 1125. Strong downside action next week would
obliterate that hopeful thought for the short run, but a more stable market, even if no rally can be
sustained, would be an interesting sign.

Long Treasury -- Now in Caution Zone

2011-08-17T17:19:00.000-04:00

The long T bond has done well this year reflecting a slowing in the pace of economic recovery, a
sell off in industrial commodities prices and the recent flight to quality. The T bond is now very
overbought relative to its 200 day m/a, is extended relative to its price range, and now sports
advisory sentiment which is excessively bullish (76% bullish on MarketVane).

For investors, the long T has provided a humble real return of between 2.0 -3.0% over the past
three years, so the real game here has been to trade the wide price swings in evidence over this
time. Sharp players have been able to earn up to 15% trading the unusual volatility of the market.

I am of the view the economy may do a little better than expected through year's end and also think
that industrial commodities prices will snap out of a seasonal funk over the remainder of the year.
So, I will be looking to short the long T in the weeks and months ahead.

My style of trading the Treasury is an uncommon one because it is contrarian, whereas most
traders are momentum players with very short time horizons. However, since I have been
trading bonds successfully this way for years on end, I hope you will give the price chart a
decent once over. $UBS chart

Stock Market -- No Stabilization Yet

2011-08-15T17:19:00.000-04:00

The SPX took out the rapid descent downtrend line as it continued to rally. But the market
shows no signs of stabilization yet, so it is fit to play only for the most seasoned, astute traders
who can watch the tape full time.

Up is better than down, but the curent recovery trajectory is nearly vertical and is far too steep
to be maintained. The boyz have run the shorts off the range and are feeding on the positive
momentum, but we know this will not last, and we also know that after even a mini - crash, there
can be bounces and wicked sell offs which follow quickly as the market in effect seeks to verify
a low or bottom. Check out the action of the SPX in mid 2010 here and for the modern grand daddy
of ongoing bull market crashes, have a look at the post Oct. 19, 1987 crash action here. Notice
the nearly vertical ups and downs before a rapid sell off established the bottom late in the year.

My plan is to let this market settle down and show some relative stability before jumping in long
or short. If that takes a month or two so be it.

OVERVIEW

2011-08-12T17:35:00.000-04:00

I am not ready yet to throw in the towel on this economic recovery. The short and longer range
indicators that traditionally presage an economic downturn of consequence are not in place. I
would not argue with the idea that the economy is fragile, and I would not rule out a "near death
experience" for this recovery, but for now I expect more positive than negative for the economy.

We have had a bear rundown in the stock market. For now, I see this more as a form of psychodrama
akin to the Oct. 1987 crash when players suddenly and wrongly came to believe that all options led
to an economic downturn and bear market for stocks. Back then, it was believed that either interest
rates would have to rise sharply or the US dollar would crash, with either leading to a downturn.
It is not easy now for players to see how they can "win" owning stocks in a troubled global
environment, but there is plenty of wiggle room for the economy and policy to sustain the recovery,
just as there was after the '87 blowout.

The 1987 crash not only scared investors but Main Street as well as the weekly leading economic
indicators fell for several months after it. The buffoonery over the debt ceiling and fast market
slide have hurt confidence in the short run, but these events need not be fatal.

The frustration, anger and fear felt over the past several weeks has been strong enough to warrant
an interval of 2-4 months before the stock market can right itself firmly enough to sustain another
leg up in price. Experience with sudden, steep downturns in the market suggests patience should
be in order even if I am correct that the economy will soldier on.

Stock Market -- Sold Out Short Term

2011-08-11T16:31:00.000-04:00

I mentioned on Mon. 8/8 that a hefty tradeable rally was quickly coming our way. By yesterday
it was clear that the market had reached classic, capitulation / exhaustion selling when measured
by volume, cumulative TRIN and TICK and a bevy of shorter term breadth and momentum measures.
The guys did like the fast double closing low on the SPX around 1120 as well. So we have had
two quick rallies (Tues. and today). They have been hard to trade because of the speed and vertical
trajectory.

Sold out markets do not necessarily mark definitive lows, but decent rallies generally follow. Even
so, the nearly comical volatility this week, with the herd running south then north on alternate days,
signifies a highly unstable market. There is no sure footing here. A shave and a shower can lead
you to miss 250 Dow points. There can easily be more whipsaw ahead, but with so much heavy
liquidation already behind us, it should be on a smaller scale as trader fatigue and weariness begin to
play a stronger role.

I have been trading in the markets since the mid 1960's and this is some of the dumbest, most
mindless stuff I've seen. Whether you are a bull or bear, pick your spots carefully and cut your
losses quickly.

SPX Chart

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Postscript: In my view, the FOMC decision statement of 8/9 also represented one of the dumbest
moves I have seen the Fed make in 45 years of watching the Bank in action. The clear suggestion
in the statement that a ZIRP could remain in effect at least until mid 2013 is not within the Fed's
manadate and defies elemental common sense.

Stock Market -- Uncertainty Overload

2011-08-08T20:33:00.000-04:00

Currently, the conomic indicators continue to point to shallow growth for the US, and more
recently an eventual sharp deceleration of inflation. Investors have been concerned for a good year
that the splendid corporate profits seen so far could not long outrun an economy that merely schleps
along. Now, we have official Washington on a kick to cut the budget deficit and restore fiscal
"integrity". We have an EU trying to hold itself together as it struggles to keep its weak sovereigns
afloat. We have China and other emerging economies using tight credit to rein in accelerated
inflation after a period of rapid recovery growth. In the US, for one, there are deep concerns about
a program of aggressive budget deficit cutting which could badly damage growth if enacted. Naturally,
the S&P downgrade only adds to the pressure as a clueless Washington struggles to tackle the
budget. It all adds to a reduction in clarity for the outlook regarding profits growth.

Investors gave one p/e haircut over the past year or so from 16.6 x 12 mo. earns to 14.0 x. Now,
they've moved the p/e down to 12.3. Some of this adjustment is normal handicapping for an
evident slowing of the momentum of profits from exceptional levels, but clearly, there is
concern regarding growth potential. On my long term p/e model, the p/e ratio should now be
16.4 x and the SPX should be up at close to 1500 rather the current 1119.

Players have lost patience with struggling to price in continuing large uncertainties and are
moving to re-price risk more conservatively -- If the growth may not be so good, well then I
need higher yield to earn a decent return for risk capital. And they are doing it quickly now.

Although the economy has been recovering and has been slowly broadening out, it remains
fragile and can be badly undermined by shocks like a financial crisis in the EU or dumb,
heavy handed fiscal austerity in the US. So the guys worry not only about the visibility of
recovery but its sustainability as well.

A p/e ratio for the market has high economic content, but it also has substantial psychological
content in the form of confidence about the future. When the confidence factor in valuation is
shifting, whether up or down, it is very difficult to make good market calls even when you
think you have a good handle on the fundamentals.

My indicators suggest it is too early to look for recession, but I think we need to see much more
clarity in favor of improving growth to stave off more dimunition of the market's multiple. In this
regard, you have to stay vigilent because the skies can start to start to clear as fast as they cloud up.

Now the market has grown so oversold so quickly that there should be a fast tradeable rally
coming soon enough even if it is but a "dead cat bounce".

2011-08-08T20:31:00.001-04:00

Putting Oil Back On the Trades List

2011-08-07T17:11:00.000-04:00

I exited the oil market in early Apr. with the oil price up around $110 after nearly a year of nicely
profitable long side trades ( Oil Price -- Thanks For The Memories). Playing here can be a decent
way to hedge higher heating bills for a couple of years.

Reflecting several months of flattish global industrial production, a bump up in Saudi output and the
heavily heralded end of QE 2, the oil price has taken a fair tumble down to $86+ (WTI). Oil is now
in a pronounced downtrend. It is well oversold currently and is at a key pivotal juncture in the $86
bl. area. Chart

I am adding oil to the list of long side candidates. I am ok with oil in the mid $80s, but would prefer
to see it down in a range of $70 - 80. But, since the markets often do not give us what we want,
I'll play it from the mid $80s if needs be. The weakness in global equities and PIIGS sovereign
debt has bestirred the CBs and fiscal authorities in the West. So, dispensation of calming balm
of some sort may be in order in the days and weeks ahead, and that could work to reverse the
steep downtrend in the oil price. Time now to be both alert and flexible.

Capital Markets Psychology

2011-08-05T16:51:00.000-04:00

In a number ways, the last few weeks in the markets have been a replay of May / Jun. 2010 : No
QE, shit canning of PIIGS sovereign debt, varied degrees of credit tightening in China and other
key emerging markets, plenty of "double dip" chatter. There have been some added antagonistic
elements this time out: Sheer operatic buffoonery in Washington re: the debt limit, and pursuit of
bigger debtor quarry in the EU, viz. Spain and Italy. And, of course, EU officialdom has seen as
behind the crurve during both episodes.

As with the spring of 2010, money flows into US Treasuries, and away from stocks, low quality
credits and commodities. The routine was exploded yesterday by a large sell off of stocks prompted,
I think, as much if not more by frustration and anger than sheer fear. Investors are steamed that there
has been a replay of the problems that nastily dogged the riskier markets 15 months ago. The
repeat of the same mistakes in short order is not professional.

When economic / financial problems re-occur with regularity, risk premiums on the more vulnerable
markets tend to rise, and not just for the short term. Thus, for example, we are witnessing a trend
of p/e multiple contraction for the US market as players discount a less stable global economic and
financial environment. Flip the coin and we see a dicey PM like silver trading about double
where it was in the spring of 2010 even though the global industrial economy is losing momentum.

Don't Ask Me...

2011-08-04T17:21:00.000-04:00

I did not see today coming. The blowouts in the "risk on" markets seemed all out of proportion to the
global economic environment as I see it. It is true that I have been 100% in cash since SPX 1344 on
7/27. I am very tempted to go long at some point in the days ahead, but there is a nasty, scared
"collective psyche" in the markets which I do not grasp. Besides, bottom line, the stock market is
not just oversold, but is signaling that it is moving into a sold out position. The bad news is that it
is not quite there yet and particularly so as regards volume. Since I cannot say with confidence
that this episode is a freakish short term emotional overload soon to blow over, I plan to bide my
time and see if there is something new to learn.

In yesterday's post on global economic supply / demand, I opined that the major central banks
should ease off the brakes as a sluggish global economy produces sufficient slack to lead to a
further reduction of inflation potential. I also claimed that this is a risky business and hinted that
just the right amount of monetary easing might be necessary to keep all financial speculators in
the commodities markets from piling back in on the long side and driving up costs and inflation
too rapidly. This type of thinking points to a conundrum which could increase risk aversion
generally if enough players see it. But since the fear out there now may not be nearly so
sophisticated, I'll probably content myself with trying to understand the current, pressing worry
first.
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I think the Fed likes oil a lot better at $86 bl. than at the $115 we saw earlier in the year.

US investors have flipped off the debt limit deal in dramatic fashion. With the gang of 12 from
Congress set to meet later in the year to cut spending, investors could be voting that down right
now.

Global Economic Supply & Demand

2011-08-03T16:54:00.000-04:00

The global recoveries in production and world trade for the two years ended Q 1 2011 was very
rapid and brought output and trade to new high ground. In my view, the global expansion was on its
way to overheating over the course of 2012 with a cyclical surge of inflation in prospect. Over the
past three - four months we have seen a dramatic slowing in the growth of output and trade. This
was caused by the Japan quake /tsunami damage to production in the supply chain, firmer monetary
policy by many central banks and an end to inventory hoarding by processors which saw industrial
commodities prices double.

So, the global economy has "soft landed" -- demand has slowed sharply but supply has continued to
expand, opening more of a gap between the two. The economy has come quickly off the course of
eventual serious overheat, and now the focus has shifted to how long the slowdown may last
and whether some major economies could be subject to a downturn during this slow period.

Notice as well, that with an easing of factory operating rates, global inflation thrust has backed
off markedly, particularly in the commodities markets. This has made it tougher for producers and
processors to readily generate inventory profits and is clearing the way for central bankers to have
leeway to moderate policies in favor of eventual stronger growth.

From my perspective, it looks like G-20 cooperation has been effective so far. There was powerful
stimulus and monetary accomodation in 2009 and going into 2010, and the bid to slow the rapid
pace of growth started well ahead of the overheat zone, when policy flexibility rapidly diminishes.

It is difficult to "soft land" an individual economy and, perhaps, vastly tougher to do so on a global
scale. That leaves us with the recognition that we have risky business afoot. It also suggests that
a global perspective is in order in assessing risk / return potential in all of the various markets.

I would like to add one more observation here. Central banks of size and consequence in the
world now carry a special new burden -- dealing with the vast influx of "round trip" financial
players in the commodities markets. Sustained speculative activity in these critical markets
in response to the policy drift of the major CBs can prove profitable to players on the right side
of the trade, but dangerous to the effective implementation of macro policy. At this stage of the
global expansion, moderate rather than dramatic policy gestures may be most appropriate.

For background, go here and scroll through the entire pdf file.

Stock Market -- Technical

2011-08-02T16:53:00.000-04:00

The SPX went out at a new closing low for the year, leaving the market in correction mode.
A more dangerous signal was averted today, as the SPX did not break away to the downside from
the prior closing low set in mid March. But, tomorrow is another day.

The market is around 5% below its 25 day m/a and that level of oversold has held up in every
sell off in this cyclical bull market save for May, 2010 when the 25 day price oscillator went to
-7.5%. So we are at the point where fear has mostly given way and a rally has developed, and we
now have a decent test set up regarding the seriousness of the correction so far. All well and good,
but remember that in a price correction period, the market firmly reserves the right to get itself
more oversold.

This cyclical bull has rewarded traders who go long on down spike closing lows. Because RSI
is also getting oversold, there could well be an upside pop nearly immediately ahead, but that
kind of play is not my style, as I prefer more signs of a sold out market before jumping in.

$SPX Daily

Debt Limit Melodrama Winds Up

2011-08-02T15:16:00.000-04:00

As outlined last Wed. (7/27), what Obama needed most to avoid as this operatic debate went into
the final act was large spending cap / cuts which took effect over the next 18 odd months. He did
get worked over pretty good by The House, but it looks like the prospect of much more substantive
fiscal drag has been postponed beyond the end of 2012. Excluding the Tea Party, I suspect few
legislators wanted to crunch spending until after the 2012 elections are over, especially given that
the economy has been running so sluggishly.

Stock Market -- Technical

2011-07-29T17:02:00.000-04:00

The $SPX is at a critical level regarding the cyclical uptrend in place since 3/09. It is important to
note that the trendline up has not had to be redrawn since the intermediate low of late 06/10 and a
successful test of that new line just last month. However, with the down move this week, the
trend is once again to be tested in the days ahead. Now, a sharp break below today's closing low
of 1292 would not necessarily signal the end of the curent cyclical bull. But it would mark clearly
the end of the second upleg of the market and would clearly suggest that another upleg, should we get
one, is likely to involve a less positive trajectory.

As fate would have it, it seems like a good time to test this market. The US Gov. stands in disgrace
as It toys with raising the debt limit to avoid default, and a slow US economic recovery is not just
more vulnerable to shocks, but is showing only ever so scant evidence that it could be setting up to
do better. Remember as well, adding significant fiscal drag over the next 12 months to appease the
deficit hawks via spending cuts could hurt substantially.

I have linked to the weekly $SPX chart below. Please note some interesting observations:
RSI: It is in a marked downtrend. It is currently at a weakish 47, with the more powerful and
defining rallies on the weekly chart coming at below 35.

MACD: As you would expect, it being a bull market, MACD has been above the zero line most of the
time. It is mildly negative now -- an indicator a break of trend could be at hand -- but it is also close
to a testing its trend.

ADX: +D-1 is about 16 now. The stronger rallies have come when +D-1 is down around the 10 or
below area.

Debt Limit: It's Showtime (Part 2)

2011-07-27T16:05:00.000-04:00

The latest numbing fiasco involving the raising of the debt limit for the Treasury merely extends
the damage done to the US economy and society since the beginning of the new century. The US is
on a course of eventual economic destabilization and social dissolution and it is up to Obama to
try to stem the descent even at the cost of his presidency. Issues ahead:

A US Default
The president needs to veto any and all riders to a bill authorizing an increase in the debt limit
which does not run for a minimum of 18 months and / or mandates large cuts in federal spending
and / or tax increases which would commence prior to 2013, earliest. If necessary, the president
should be prepared to unilaterally authorize the Treasury to issue additional debt to finance already
appropriated spending levels so the Treasury is not in violation of its responsibility to provide
such financing. Impeachable offense? Could be, but that's what might be needed in the worse
case.

Credit Rating Downgrade
Official Washington should wave off this issue even if the rating agencies are prepared to
downgrade US debt. It is far from clear that the US economic recovery can sustain itself without
fiscal / monetary support. Fundamental improvement toward growth sustainability is underway
but the process is so slow that large cuts in federal spending or major tax increases which come
too quickly will significantly undermine potential for further recovery.

Fiscal Restraint
Reliance on accomodative monetary policy, including even a new round of QE, is likely no
substitute for maintaining a high level of fiscal support at this delicate point in the recovery
path.

Spend More & Tax More
Not a chance of this in the current environment, but I would look contructively at raising
taxes on high income earners and using the proceeds to fund direct job creation if the private
sector is unwilling to step up hiring. If job creation can be accelerated by tax reform or tax
credit programs, I would add that to the mix.

At this juncture, it is absolutely imperative for the US government to begin the long and hard
process of reclaiming the trust of its citizens. Further fracturing of this compact will speed up
the burn time on a fuse of discontent already lit. Never forget the law of unintended consequences.

Stock Market -- Short Term Fundamentals

2011-07-25T15:10:00.000-04:00

My weekly cyclical fundamental indicator turned up sharply at the end of Aug. 2010, rising by
30% through early Apr. 2011. Over much of the same time frame, the SP 500 rose by 28% to a
new closing cyclical high of 1364 through Apr. 29. Both the market and the indicator have
weakened somewhat since the spring, although the market has held up better. Stocks have
essentially rallied during periods when the weekly indicator suggested the economy was gaining
momentum. The stock market has also moved closely with the intervals of QE by the Fed, and
when you look at the three measures it is clear that the market and economic confidence have
benefited from having the Fed's QE tailwind as support. Note as well even though QE did not
wind up until the last week or so, the Fed has described the end of the recent round for several
months.

Interestingly, both non-QE related financial liquidity and my weekly coincident economic
indicator have been inching ahead recently, but some key indicators I use in the weekly market
indicator such as sensitive materials prices, initial unemployment insurance claims and the 2 yr.
Treasury yield have not been behaving in support of a higher market. Since the latter indicators
grab more of the headlines, investors have been awaiting some of these more popular measures
to suggest that the economy is regaining positive momentum.

Stock Market -- Weekly Chart

2011-07-22T15:56:00.001-04:00

There was a nickel / dime long side trade this week, but I have wound up today with no positions
in the market. The short term trajectory of the market is positive, but unpersuasive. The failure of
the $SPX this week to take out the 1344 closing high of two weeks prior decisively despite a bounce
is a disappointment. I have long side profits for the past month or so in tow, but now I am neutral,
and that is how I read the weekly chart. $SPX

If the market continues within the evident range bound pattern, I may do some more trades, but
for major trades, we need to see the market exit the current trading range in a decisive fashion. As
matters now appear, I am stuck in neutral and will be looking for direction from the market rather
than try to anticipate the next move.

From my perspective, we remain in a cyclical bull market. Much of the substantial intermediate
term overbought we saw earlier in the year has been wiped out by the sideways move in the $SPX.
So there is not a compelling need to be defensive from a technical point of view.

If you look over the stock market posts since early Jan. of 2011, you'll see that I've had a decent
handle on direction because there have been ok signposts to work with along the way. Not so
now by my work.

European Union

2011-07-21T16:43:00.000-04:00

In my view, the EU, as unwieldy as it is, was worth a try, and I still feel that way. Let's see what
it brings over the long run, as long as most people in it want to keep it. Perhaps inexcusably, I have
been very relaxed about the financial crisis the EU is facing, figuring if there is a will there is a
way for the EU to get past this current struggle. What's worse, I have a little investment banker in
my nature and believe in sensible creative financing to meet pressing financial need, if you can gin
up people's confidence sufficiently to go along with it. The EU can always be unraveled and the
lights can always be turned out on the financially weak countries within it. All fodder for future
historians who would be called upon to document and explain the sequences of disorder and
destruction that would follow. But, this is a huge and fascinating socioeconomic experiment, and
it appears the EU, by again stepping up financial rescue and stabilization efforts, desires to press
on. More power to them, especially when you consider that the 100 years of Europe's history prior
to the founding of the EU was among the most deadly and destructive the world has ever known.

The challenges ahead are huge. The PIIGS and Belgium have dire financial problems, the ECB is
broke and the banking system is way short of needed capital. There will be strains for years, but
Europe has been rebuilt stunningly before and this time it is only the bankers and insurance
companies which are bombed out.