If Colonel Sanders Was President...

Well then, if he was, chicken would cost a $100 a bucket (Bill Maher
joke). GWB and The Shooter, who was also once CEO of Halliburton,
have helped preside over a major bull market in the oil price. Even
the Commodity Futures Trading Commission, which has a Texas power
base thanks to ex-Sen. Phil Gramm and his lovely bride, has a Lone
Star hue. In short, ain't nobody at the highest echelon of US power who
wanted to maintain a low oil price.

But, consumers now see pig instead of bull, and a Democrat led Congress
is under increasing pressure to find mal-doers and scapegoats. Thus a
growing regulatory rush to find out why the oil price is in a full tilt
mania. Plus, and this is not trivial, GWB and the Shooter are out of
there next Jan. So, there is going to be more pushback as we go
forward. This week, NYMEX raised margin requirements by 10% to
show they're on board, and there will be a quiet dissection of the CFTC
to see whether they, er, inadvertently structured trading in a way to
allow some heavy duty speculation.

With the spotlight moving from Exxon-Mobil to the trading pits, all
the newer index players will need to get their attorneys to ratify
that their activities are legally up to snuff, and the chieftains of these
firms will be sitting down to make sure the boyz have everthing going
according to Hoyle.

The upshot will be an intended damper on activity which could be
very shorlived if the Congress / regulators drop the ball and do not
press on to determine if the oil pits are running the show instead of
being just part of it. Back lo in my banking days, we would call this
a "leaner", meaning the regulators were set to lean on you some.

There is also the issue of the general public getting into the
commodities market on top of pension funds who are already
crapshooting retirement money. Increasing securitization of these
markets means that a horde of less knowledgeable people can start
to spin the wheel with oil or gasoline or what have you. A good thing
it is in one respect, as securitization will give more people a chance
to hedge liabilities in a sensible way. But we all know that many
could come in simply to be fleeced.

So, yes, this new attention on the oil price is three years late, but
it could be welcome anyway.

Stock Market -- Fundamentals

There is an interesting divergence to discuss. The stock market
did rally powerfully off the 3/08 lows into May. Meanwhile, my
SP 500 Market Tracker fell sharply from the 1275 - 1300 area
down to roughly 1220. Operating earnings as reported came in
well below the earlier consensus estimate, reflecting a flattish
US economy, slower offshore growth, and the continuing
accumulation of red ink for the SP financials sector. Whereas a
year ago, strategists were using 90 - 100 as SP 500 Index
earning power, net per share for the 12 months ended 5/08 is
likely to come in around 75. Moreover, the precursors for a
"normal" economic recovery are not yet in place, as total
system monetary and credit driven liquidity are progressing
very anemically. Add to that the fact that the inflation thrust
indicator has yet to roll over, and you have confining short term
circumstance.

Near 1400, the SP 500 is now trading at a hefty 14.6% premium
to the Tracker level of 1220. Now, even allowing that the SP 500
financial sector could return to profitability in the months ahead,
the market is discounting a decent second half economic bounce
as well as some deceleration of inflation.

Since the market appears significantly vulnerable without the
development of a stronger economy and a moderation of inflation
pressure, the time interval known as "very soon" is where
improving economic performance needs to start taking place.

Stock Market -- Technical

The short term overbought has been erased over the past two
weeks. Now, the short run position of the market is a little shaky,
as the 10 and 25 day M/As will turn south soon without a rally
to reverse the gathering damage.

the rally off the 3/08 lows was quite strong and produced a
sizable intermediate term overbought, which is still being worked
off. The recent sell down has not been deep enough to jeopardize
my key intermediate term trend indicator.

This leaves me thinking the market could correct mildly further
before I would be inclined to say equities have experienced
a bear market rally that has simply failed. I have to admit that
it is worrisome that the SP 500 quit right at the 40 wk M/A
instead of crossing it. The old SP 400 Industrial Composite, which
excludes financials and utilities, did break through its 40 wk M/A
and its "40" is stabilizing.

Long years of experience have taught me that overtrading is an
easy way to lose money. Although I am eager to figure out the
direction of the market, I plan to wait for a better technical
"read" than what I see now.

Notes On the Oil Price & Stock Market

Oil Price
Well, it blew right through $133 bl. today and is up $7 on the week
to date.The bull side has been out in force this week, disparaging
the idea of a "bubble" or "excess speculation" in the price. The new
mantra is that tight supply / demand fundamentals warrant a
further move to $150 a bl. with an eventual spike to $200. This
view has carried the day recently and has engendered a fresh
regard for the market. My bubble-in-force price remains $170 and
my ignorance of whether we get there remains undiminished.
I would note that the oil price is fabulously overbought now at a
whopping 37% premium to its 40 wk. M/A. Solid trading rules
have been stuffed in the drawer as players join the champagne
waltz. Stretching it, I can justify a price of $80bl. on fundamentals.
Shows you what a piker I am.

Stock Market
The two day tumble for the SP 500 broke the uptrend line off the
March, '08 lows. At its high for this recent rally, the SP 500
kissed but failed to penetrate its falling 200 day M/A. It was also
guilty of wobbling when it broke through the downtrend line from
the Oct. '08 all time high. These are warning signs, although they
are not necessarily fatal. The market's overbought condition is
being rapidly alleviated, but do not be cavalier here if long.

The rapid gunning of the oil price in recent days has folks wary
of stocks because of its inflation potential. Even so, since oil is
sensationally overbought in the short run, equities longs may
need to hang tight until there is more resolution.

US Economy -- Short term lead Indicators

On balance, the two sets of weekly leaders have fallen far enough
to signal a recession environment. As well, those indicators made
bottoms at the end of March and have bounced modestly. I am
also curious that the initial weekly unemployment insurance
claims number has not risen more sharply to date.

The monthly data I use are getting a little stale, but I am struck
by the fact that the new order breadth indices I follow, although
weak, also have not pitched down yet as is consistent with a more
full blooded downturn. As I have noted, inventories have been
well managed at the retail level and wholesale and manufacturer
inventories, while signaling a degree of involuntary build, have
not yet bloated up big time to a level that assures that heavy
additional layoffs are in store.

US Economy & Liquidity

The $ value of industrial output edged lower in April, declining to
4.1% measured yr / yr. Growth below 5% normally signals
development of pressure on profit margins and often lower
domestic profits. Since the value of production is increasing faster
than retail sales yr / yr, further weakness in production may
result as inventories may be pared down more. Retail inventories
are in decent shape, but 6% plus 12 month rates of increase for
wholesalers' and manufacturers' stocks stand out. The large
number of unsold homes remains dauntingly high, particularly
single family units.

Broad, credit driven liquidity increased by only 4.1% over the past
year, reflecting the blowout in the asset backed commercial paper
market. I like to compare this liquidity number to the change in
the $ value of production to get a measure of whether there is a
pool of excess liquidity in the economy. There isn't currently, and
that implies that the capital markets have no liquidity tailwind and
must rely on sideline cash. At this point, savings and reserves in
money market funds total over $3 tril., a tidy sum. But, remember
that the real economy competes for these funds as well as the
markets.

The growth rate of monetary liquidity remains constrained. This
ongoing modest expansion coupled with the slow growth of credit
driven liquidity continues to signal that the economy has mediocre
potential looking longer term.

Inflation

Measured yr / yr, the CPI for April came in at 3.9%. There has
been some deceleration in 12 month momentum, as the yr /yr
reading for Jan. '08 was 4.3%. The 3.9% CPI topped the
comparable wage growth of 3.6%, keeping the real wage under
pressure. The comparison is worse when the CPI change for the
past 6 months is annualized. That works out to 5.6% and helps
explain the stress expressed by consumers in now countless
news stories.

My inflation thrust indicator has lost some of its momentum
since Feb. '08, but since this indicator is heavily driven by a
volatile commodities component, you have to be careful with it.
Fact is, the broad CRB commodities index remains in a powerful
uptrend and has yet to signal that relief for beleagured wage
earners is in sight.

As with the past two years, gasoline has spiked above its longer
term trend channel as the kick off to an expanded driving
season begins. Refiners are feeling a squeeze in the US. The
gasoline price has not matched the furious uptrend in the oil
price and petrol consumption has weakened as drivers seek ways
to cut back.

The mild deceleration of yr / yr inflation pressure has worked to
increase the p/e ratio of the SP 500 Market Tracker, but it
remains mired down in a 1275 - 1300 range reflecting earnings
weakness since mid-2007.

Not surprisingly, with inflation being driven by fuels and foods,
we are now witnessing stronger inflation pressures on a global
basis as well as deterioration in real wage growth. Global
growth is moderating, but we have yet to see the cracks in
pricing pressure that would herald a trend lower. In fact, in
the US, capacity utilization for primary materials remains high
and well above longer term averages.

Stock Market -- Technical

The market has worked off much of the short term overbought in
evidence over the past two weeks. Last week's sell-off was an
appropriate reaction, but was not of itself threatening. I still have
intermediate term indicators (6-13 weeks) on overbought readings,
but these are not always helpful in making shorter term decisions.
The market has maintained its uptrend off the March lows and
my tools do not preclude a further advance. Pieces are falling into
place to support the idea of a reversal of consequence, but the
case is still not clear. Keep in mind those intermediate term
overboughts and remember that the market is not finally clear of
the bear.

Stock Market -- Fundamental

From my perspective, the fundamentals needed to support a
sustainable cyclical advance in stocks are moving in the right
direction, but are not fully in place yet. Moreover, there is a
chance for a fundamentals driven whipsaw later in the summer.

I like the action in intermediate and lesser quality bonds in
recent weeks, and clearly, there is a downtrend in short rates in
place. Moreover, the tax rebate checks will swell transaction
driven money supply components in the weeks ahead. So, a
tailwind for the recent rally in the market is building. However,
the broader measures of financial liquidity remain very subdued,
and, importantly, measures of monetary liquidity growth such
as Fed Bank Credit and the monetary base are just inching ahead,
and do not support strong enough growth of the basic money
supply beyond the rebates effect to support a sustainable
economics and profits lift-off. Without more meaningfully positive
turns of liquidity measures, it is possible this rally could fizzle as
the positive effects from the rebates wear off later in the summer.
It would also be helpful to the bond and stock markets if the
gradual development of global economic slack was to lead to an
easing of inflation pressures. But I cannot yet make that case,
either. So, I am stuck with a cautious view at this point, while
remaining alert to the possibility that events could take a more
positive turn. At cyclical market bottoms, indicator turns that
point to recovery are usually cut and dried. Not so now.

The SP 500 Market Tracker is saucering around 1270 - 1300.
With the "500" now close to the 1400 mark, the market is
well along in discounting a cyclical advance predicated on an
eventual earnings rebound. If the fundamentals were solidly
in place, I would say, "Hell, don't worry about the premium, the
market tends to lead the Tracker when a new advance is
underway." But, at this point, I cannot say that. I can say
though that since I have an idiosyncratic way of linking liquidity
behavoir to stocks, that you make sure to get a second opinion
if not more.

Liquidity -- Dismal April

US financial system liquidity declined in April, following several
months of modest but steady growth. Once again, the weakness
showed up in the financial services sector commercial paper market,
with outstandings falling $77 bil., or 4.7%. Banking sector interest
earning assets declined modestly on the tighter funding available.
This was no doubt disappointing for the Fed, which has again
expanded and broadened its direct lending to the sector via swaps.

Financial sector paper yields remained relatively elevated to go
along with the lower outstandings and so it appears there is ongoing
concern about valuing collateralized paper in a weaker economy,
especially within the depressed housing sector.

It appears that another $150 bil. of financial sector short paper
could come off before we see outstandings hit levels last seen back
in 2004, before the junk presses got rolling with a vengeance.
Likewise, the Fed has significant room to further expand its swap
lending programs before more pointed questions about the integrity
of its own balance sheet arise.

But, let's not minimize the problem here. Should the new pressures
on liquidity seen in April extend through the spring, the Fed will wind
up low on ammo, and other US Gov. measures may have to be brought
into play to stabilize these markets and allow the banks to resume
more normal operations.

Let me also note that Fed Bank Credit growth momentum slowed in
April, standing a puny 1.5% over the comparable level of a year ago.
Naturally, the Adjusted Monetary Base has also flattened out as a
consequence. From a liquidity perspective, monetary policy remains
tight and to some degree offsets the "ease" evident in the Fed Funds
Rate.

There is economic risk in this situation, so a resumption of liquidity
recovery will be an important factor over the next month or two.

Economic Indicators

The weekly leading indicator data sets I use have flattened out in
recent weeks following steep decliness dating back to mid-2007.
These indicators are recession-consistent and the flat recent
readings have yet to challenge strong downtrends in place.

If the BEA measured inflation pressures more realistically, it is
very likely the case that real GDP was down in quarters 4'07 and
1'08. Not big downs mind you, but downs which show broadening
economic weakness in the private economy, save for powerful
export numbers.

Civilian employment data (which leads the less volatile but often far
more tardy payroll data) recovered some in April, but is up just 0.4%
yr/yr. Real wages likely declined slightly yr/yr, and this combo
underwrites the weakness in the system. Companies are moving
swiftly to dick over their huddled workers. Since, rebates are coming,
the chieftains argue, why give out nice raises in a lousy environment.
Other employment data is mixed. Help wanted web postings have
been rising nicely since yearend, but mass layoffs are up sharply, too.

If companies opt to beat their workers out of well earned raises in lieu
of the rebate money as the rebate period wears on, there will not be
much of a spur to spending.

My inflation thrust index has relaxed in recent weeks, but petrol and
broad commodities markets remain in punishing upturns relative to
wages.

The longer run indicators are marginally positive, carried primarily
by the sharp downturn of short rates. However, in terms of
confidence and growth potential, inflation remains the killer.

A stock market that is trying to discount a recovery of output and
profits growth could well struggle if inflation pressures persist.

More On Monetary Policy...

The FOMC cut the FFR% by 25 bp to 2.0%. This was probably the
consensus. The statement should be read as a shift of FOMC to a
more balanced assessment of economic growth potential vs.
inflation potential. The door has hardly been closed on further rate
cuts, but the "tilt" toward a more neutral policy is unmistakable, as
is the implication of the heavy weight to be placed on"reading"
incoming economic data and monitoring the standing of a still stressed
financial system.

For more, read yesterday's entry immediately below.

Monetary Policy

The Fed has started a two day meeting on monetary policy with
results to come tomorrow afternoon.

It's an interesting time for a meeting. The Fed has slashed the Fed
Funds Rate dramatically over the past six months. The cuts to the
FFR% match the severity of the blowout of shorter term business
credit demand resulting from the collapse of key components within
the broad financial service sector of the commercial paper market.
There has been a moderate offset to the $600 billion plus decline
in commercial paper outstandings via a nearly $300 billion increase
in commercial and industrial loans by banks, but this rise underscores
the stresses in the financial markets, because much of this paper is
comprised of levered and other low quality loans that are caught up
in a stalled deal pipeline. Viewed historically, the fast decline of the
FFR% is well out of proportion to the weakening of economic demand
witnessed so far. Moreover, weakening demand in the US economy
has been accompanied by an acceleration of inflation, that,
in itself, has contributed substantially to the slowing of the real
economy.

In short, the Fed's action has been apposite to the turmoil within the
financial service sector, but perhaps well overdone relative to the
broader economy and the inflation underway.

Now, fresh reads on critical economic data will become publicly
available over the next week. No doubt, the Fed has advanced
soundings, and if the fresh info does not paint a much darker
picture of the economy, then it is fair to wonder if perhaps a pause
period on the FFR% might be appropriate. After all, narrowing of
selected quality yield spreads, stronger bond market volume, and
a recent flattening out of the weekly leading economic indicators
all suggest relief of pressures, whereas the inflation situation is less
benign. In addition, the Fed knows the Treasury is starting to
distribute the tax rebates enacted earlier.

I long ago gave up trying to analyze the psyche of the FOMC, but
I think one has to be struck by the outsized cuts in the FFR%
relative to the real growth / inflation environment.

US Dollar ($USD)

Currency speculation is not my forte, so take the following with as
much salt as you see fit.

First, I always look at the USD in terms of whether it is attractive
to hold domestically. Principal terms of reference are Fed Open
Market activity and whether there is a real rate of interest on
dollars left on deposit. I do not look at the "cookie jar" dollar
concept, as money is meant to be put to work, even if as savings
rather than spending. On balance, Fed Bank Credit has been grow-
ing modestly now for several years to correct for the long period
of excess monetary liquidity growth engineered by the Greenspan
Fed. With monetary liquidity creation now well controlled, I do not
see a threat to the dollar from this quarter. The 91-day T-bill yield
of only 1.3% compares unfavorably to an inflation of 4.0%, as does
the 2.9% yield on prime 90 day commercial paper. A dollar saved
in low risk assets is losing its purchasing power, and there is only
the need for liquidity as a rationale for keeping the dollar on tap in
the US. The situation is not going to change until the T-bill and the
inflation rate begin to come into better balance.

Not surprisingly, the USD has come down in value relative to other
senior currencies since 2000 reflecting a low interest rate regimen by
the US coupled with a moderate but persistent acceleration of
inflation. Now, there is increasing speculation that with a weaker UK
economy and prospective decelerating growth across the EU, the
relative attractiveness of the dollar might increase as offshore
interest rates moderate. This is a sensible thought, since the US has
led the other majors in growth weakness and rate cuts, and could lead
later this year and next with better growth and short rate increases.

I do not mind the low relative value of the USD, since it is now the only
check we have on still rampant Asian mercantilism, but I would not
argue with a mild upward push in value for a six month - one year
trade. I would like to see evidence of an improving "real" yield on
short term paper here before getting on a go long the dollar band-
wagon.

Stock Market -- Technical

As expected, we did witness profit taking in the early going last
week, but it was surprisingly muted, especially given that the
SP 500 failed to take out key resistance on Fri. 4/18.

The market did take out that resistance by a whisker this Fri. to
close at a new rally high near 1398. Importantly, there is top - of-
channel resistance at 1400 dead ahead. A closing break above
1400 by the SP 500 next week would be a small piece of evidence
that a positive reversal of consequence is underway.

As of now, short and intermediate term uptrends are in place,
with the market laboring under a moderate short term overbought
condition. Morever, the market is extended enough in the short run
to take a correction of nealy 3.5% without fracturing the positive
trend underway since mid- March. This situation brings up the
same caution mentioned last Fri. about being disciplined and careful
not to chase. Since the rally is a good ways away from being in a
confirmed, sustainable uptrend, it is wise to keep the bear market
admonition that rallies are excuses to sell firmly in mind.

There is some interesting "buzz" circulating on the fundamentals side
of the markets, and I plan to use the next week or two to put the
focus of the blog on these issues.

Oil Price -- How Crazy Can It Get?

Light Sweet Crude hit $119.50 bl. today. Not a bad move, given
that crude touched $50 in Jan. '07. For my part, this is simply
another market mania evolving into a price bubble. And my
charts say the bubble level is $170 bl., double the breakout from
the long term trend of $85 bl. back in Sep. '07. Whether the price
extends up to $170 or not, I have no idea. Saxo Bank's strategist
has oil hitting $175 by late '08 and sees chaotic economic and
currency conditions as a result. A further sharp run-up in price
from the current level will turn the background noise of consumer
discontent into a roar, with unpredictable consequences, save for
eventual retribution for OPEC. Piggy Asian food exporters are now
also trying to cartelize the export of rice and grains, with this latest
insult serving to create increasingly widespread unrest among the
world's poor, who cannot afford these prices.

There is no shortage of managers of large pools of funds out there
who think they can enjoy the run and manage their risk in rapid
market conditions. Morever, if you are a manager who grows fearful
as the price of oil edges ever higher, you can lose your accounts if
manic attitudes remain after the plug has been pulled.

If you are playing this market, you best make damned sure you
know what you are doing because a concert of unexpected bad news
can easily take $40 - 50 bl. off your position and crush you out.

Stock Market -- Technical (SP 500 @ 1390)

Well, the shorter term trend is up, and the intermediate term
trend has turned up as well. The market has broke above the
downtrend line running back to 12/07 and is very close to
challenging the down line running from the 10/07 high.

The market is now moderately overbought short term. The
current advance has taken out all shorter run resistance save
for a close just under 1400 on the SP 500. That failure to wipe
out the 1395-1400 level set off selling today, and we could see
some more on Monday as some of the ruthless players take profits.

It is a tricky time now, as there is enough of an up-channel off
the 3/08 lows to withstand a sharp 30 - 40 point downdraft in
the SP 500 before you could claim with assurance that the
bears were back.

Chasing on the long side could be risky next week until we see
what the bears have in store.

Stock Market -- Technical

Officially, I guess, the current advance off the March lows counts as
a bear market rally. Shorter term trend indicators are positive. The
SP 500 at 1365 is mildly overbought relative to the short run trend.
The index also faces several discrete resistance levels from 1370
clear up to 1400. The weekly intermediate term indicators are also
rounding positive, suggesting further upside may lie ahead. These
largely momentum indicators have been trending negative since Jan.
of this year, so reversals require mention. I also like the weakening
in the 15 month-long uptrend in the $VIX.

But, look, first things first. Let's see how well the market starts to
challenge resistance, remembering that in a bear market, signs of
weakness in a countertrend rally often summon swift retribution
from the bears.

I am also watching the oil price relative to the stock market. The
stock rally has fared ok recently against a rising oil price, but there
is no shortage of players out there who act to crimp the market's
p/e ratio when inflationary pressures are evident.

For an intermediate term look at the SP 500, click here.

Business Inventories

Through 2/08, total business inventories growth has accelerated
to 8.7% annualized. That is much faster than the growth of final
demand, so we are now seeing some involuntary inventory
accumulation. Ballooning inventories can make a downturn far
worse if they are not brought quickly to heel. So far in this cycle,
inventory management has been keen, and one might expect a
fast adjustment. However, you need to watch inventory data
very carefully once a downturn has started, because it can be a big
risk factor in the outlook. Fortunately, end-stage or retail inventories
do seem to be under good control, at least through February.

BS Warning

2008 is national election year, and with all that is at stake among the
political players and their minions and friends, you will find that even
independent economists and analysts are not immune to "spinning" for
their favorites. Most of the BS is deliberate but some springs forth
from the unconscious, so to speak. When reading the economists and
pundits on the US and its problems, get a second opinion.

GE Sends A Jolt

As a huge and widely diversified cyclical company, GE is widely
regarded for its comparative stability and its ability to manage
earnings to a forecast. So, the eps shortfall, mild as it was, shocked
the large players who have big positions in the stock. It did not help
that CEO Immelt gave a lame explanation for the shortfall and its
failure to warn analysts ahead of time will cost them points.

But, come on, Bernanke and other economists have been warning
for months that growth was at risk. At any rate, I bring this up
because the GE announcement spooked investors who were
supposed to be looking through the first quarter to recovery later in
the year. With the bulk of Q1 earnings reports ahead, folks might start
wondering that if GE can have "unexpected" trouble, then how many
other disappointments lie lurking in the tall weeds. Shows you that
investor nervousness and concern may still be hovering.

Stock Market Fundamentals

The SP500 Market tracker continues to sit around the 1300 level.
So, with the "500" now trading 1350-1360, investors have been
endeavoring to look beyond the current situation to a brighter
future. Short rates are falling, monetary liquidity is expanding
more rapidly, the yield curve is positive, intermediate quality and
junk bond yields have been inching down, and all know the US is
in for a round of tax rebates designed to provide a mild spur to
consumption. Investors also likely expect that there will be some
degree of positive swing to earnings of the financials later in the
year.

But there are significant uncertainties. Earnings estimates are still
being cut, and the present quarterly earnings reporting period is
being carefully watched to gauge the breadth and depth of eps
shortfalls. Moreover, the commodities price boom , although
narrowing, is still intact, leaving the risk of further inflation
pressure going forward. The financial system in the US is widely
perceived as remaining under duress, and key indicators such as
short term yield quality spreads and the very slow improvement
in the growth of credit driven liquidity reflect the pressures within
the system.

For now, I am watching the inflation potential inherent in the
ongoing round of heavy speculation in commodities most closely,
as a continuing surge in fuels and other basics would damage the real
economy further. At this point I doubt I would mind much if the
Fed decided to take a pass on cutting short rates again for a while
to assess its handiwork to date. I think it is fair to wonder if that
might jolt the commodities speculators enough to allow underlying
supply / demand fundamentals to regain more focus and attention.

Stock Market -- Technical

The urgent oversold discussed in the mid-March posts on the market
did yield a strong and tradable rally. My six week selling pressure
gauge, which hit deep oversold levels during the middle of last month,
has since moved into neutral territory. The market is also moderately
overbought against its 25 day m/a at +3.3%. The 25 m/a has also
upticked, a positive indication.

Early in the day, the SP 500, which closed around 1373, did move up to
test resistance above 1380. The test failed. This triggered a mechanical
short term sell signal for some short term traders. As well, the market
has been unable to close decisively above a closing price only downtrend
line (1368 today). All perhaps minutiae in the long run, but not to short
term players.

Now the market is close to an intermediate term positive turn in my book,
so I think the action this week may be important.

From an inter-market perspective, the rapid recovery of the oil price
from its recent $100 bl. low back above $109 is something to keep in
sharp focus. Oil and gasoline prices remain in firm longer term uptrends
and that price action is inflationary, which is, in turn, a threat to the
stock market p/e ratio.

I link to an SP500 chart below and plan to comment on the technical
tea leaves later in the week. Click.

Economic Indicators

Weekly leading indicator sets made new cyclical lows. The peak to current
declines are large enough to signal a substantial downturn could be underway.

The monthly data for March show a continuing downturn. They suggest
ongoing pressure on US profit margins, but are not yet weak enough to signal
that a recession is underway. The employment picture is consistent with
development of a recession, but production and new order activity are not.

The monthly global indicators show the world economy slowing toward
modest expansion, with the US leading the way down. Since private sector
activity levels for production and services are below prior year levels, it
will be interesting to see how much profits earned abroad offset weaker US
profits among US multinationals.

As recently discussed, US longer term indicators have turned positive, but
remain subdued. Underlying purchasing power to support the US economy
continues at -0.5% measured yr/yr. This is comprised of -0.1% for total
employment and -0.4% for the real wage. Growth of current $ wages has started
to slow as is normal in a downturn. Fortunately, inflation pressure has
subsided as we move into April, although the longer run trend is still intact.
Since the end of WW2, steep economic declines have been associated with
yr/yr drops of underlying purchasing power of -3 to-4%.

Inflation Potential

The broad market for commodities has eased off in recent weeks
following a very powerful run. The weakness has taken momentum
out of my inflation thrust indicator. Now, as it turns out, a degree
of weakness in the broader market is not uncommon during the
spring months, and would not normally be worth much comment
except that it has come at a time of growing evidence of a global
economic slowdown, paced by a weakening US economy. Moreover,
an increasing number of market commentators have been pointing
out how frothy these major sub-components have become, not
the least of which is the oil price. I have pointed out several times
how overextended the major components are in recent months,
so I find it may be intriguing to see if there is more downside
follow-through ahead.

The oil price, a major driver of inflation, remains in an ominous
uptrend that threatens economic stability. At close to $101 bl.,
it is off roughly 10% from recent top prints, but really needs
to break and stay below $100 a bl. to provide a stronger case
that the speculative fever may have broken. At present levels
we are still in mania-land.

The wobbly picture for commodities has shaken the gold price
down from the $1000 oz. la-la land and has also helped the
stock market, which has had to contend with weaker earnings
and accelerating inflation.

Corporate Profits

US corporate profits rose by 2.5% yr/yr through Q4 '07 to $1.57
trillion. Domestic profits fell 6.5% to $1.17 tril. and earnings from
abroad surged 42.8% to $397 bil.

The major reason for down US profits was the large $85 bil. hit
to the financial sector reflecting the big loan losses and writeoffs
incurred. That left financial profits down at the$400 bil. level.
But, with a broadening economic slowdown underway, non-
financial profits began to slide over the second half of the year,
declining at a an 8.2% annual rate.

The surge in offshore earnings reflected stronger growth compared
to the US, and the beneficial effects of a significantly weaker US $
via translation gains.

Looking forward, the financial sector will experience additional
writedowns through mid-2008, but could bounce back sharply by
late in the year, since the bulk of the losses were absorbed in the
final months of 2007. With a broadening of the economic downturn,
non-finance profits seem set to weaken further, with a bottom
point not likely until well into the second half of this year.

Moreover, since the global economy is losing growth momentum,
it is difficult to step up and call for another big 40% up year from
foreign operations.

My figuring leaves the outlook for earnings this year more muted
than consensus. By the way, analysts have turned to cutting
estimates again as the year progresses.

Now, if you remember how the game works, if the economy begins
to regain some positive traction by Q3 of this year, The Street will
shift focus to 2009, and will likely put up some dazzling estimates.

For now though, earnings appear on course to lose more momentum.
I'll be particularly interested to see how well offshore profits come
in over the first two Qs of the current year.

Liquidity Factors

Recent data suggest the Fed has changed policy to a more full blooded
easing. It has been reducing the FFR% and now appears to be adding
some monetary liquidity to the system. The Fed has "sterilized" the vast
bulk of its term swap facilities to banks and primary dealers by having
the Open Market Desk sell Treasuries in amounts comparable to what
it has swapped out in exchange for the very much less liquid private
sector finance paper. Still, total Fed Bank Credit has been growing
more rapidly since last autumn. Specifically, total Fed Bank Credit has
grown at a 5.6% annual rate over the past six months. This compares to
a paltry 1.3% annualized rate of growth for the prior six months. This
development, coupled with falling short rates constitutes an important
positive for the economy down the road.

The much broader measure of credit driven liquidity has also begun to
accelerate in growth, rising at a 4.7% annual rate since mid-2006. The
improvement here has come far more slowly, mainly reflecting
continued weakness in the asset-backed commercial paper market.
The Fed has also been concerned about the large rate spreads that have
opened up for A2/P2 and lesser paper against prime paper. Moreover,
private sector paper continues to trade at yield levels well above short
Treasuries as investors continue to fly to quality. In short, there have
been improvements in liquidity, but the system remains far off kilter.

The liquidity improvements to date were far too tepid to stave off an
economic downturn and are still shy of what's needed to help put the
economy on a much stronger footing, but you need to be aware that the
system is repairing despite the gravity of so many comments in the
media. Ditto the banking system where loans are improving modestly
along with a decent recovery of primary capital.

US Economy

It is silly to compete with all the learned economic forecasts
out there. So, I will provide but a brief sketch of what my
indicators suggest:

Cyclical growth potential is now negative at -0.2% reflecting
weakening employment and a modest contraction of the real wage.

Shorter term leading economic indicators are weakening further,
but so far signal only a shallow downturn.

Performance of my longer term indicators over the past eighteen
months are consistent with development of a recession and very
sluggish period through mid-2009.

The longer term indicators are turning decidedly positive now.

My profits indicators require more than normal elucidation.
Financial service revenues and net revenue spreads before
chargeoffs have slowed, but are decent. The chargeoffs as all
know have been huge and will be a factor through mid-2008.
The "average" non-financial is experiencing mild margin pressure
in US ops. but offshore earnings have been strong and may
just be starting to show some wear and tear.

Analysts expect SP 500 net per share to jump to 100 in
sustainable earning power by the end of 2008. That looks too
high from today's perspective ( current 12 mos. eps of 81.25).

Inflation thrust, recently dominated by commodities action,
has hit a brick wall, at least for the short run. That's a positive
for the real wage, confidence and the stock market's p/e multiple.

Based on long term history, the cut in the Fed Funds rate to
2.25% is enough to help underwrite an eventual economic
recovery (Better than 50% off the cyclical peak of 5.25%).

Stock Market Quickie

The market powered ahead again today. I pointed out the
interesting oversold earlier in the week and have also
discussed how damaging the frothy run -up in commodities
was to the market p/e and real incomes. We have witnessed
a sharp break in oil and other key rotgut that sharply
demotes the shorter term inflation outlook and has triggered
a nice relief rally in stocks.

The break in the commodities composites, the mini - blowout in
gold and the bounce in the $USD are short term pluses for the
equities market. How long this sudden ugly turn for commods and
the metals will last is too hard to say right now. However,
with the US in a downturn and energy usage dropping, it should
come as no surprise that we are seeing corrections in hard
assets and commods. I have commented frequently on the froth
in these markets in past weeks.

It would be amusing if the primary dealers were now long the $USD
in the wake of the Fed's decision to fund their liquidity needs.
Almost as if the Fed was going long the US dollar to break the
bubbling in commods and hard assets. But we know nothing like
that ever happens, right?

I am going to swing away from the super shorter term commentary to
focus on the evolving environment in the months ahead. But I do
thank the boyz on the Street for the profitable bounce.

Stock Market

As posted on Sun. 3/16, the rally potential straight ahead
was decent enough. The market again plumbed the SP 500 low
test zone of 1260 - 1270 on Monday before pulling up on
basket trades, but today the action was far stronger and
broader. Yesterday's horrendous breadth put my selling
pressure gauge into very strong oversold territory.

The low test zone has been hit several times since mid -
January and today's action built around another 75 bp cut by
FOMC to cut the Fed Funds Rate (now 2.25%) was impressive
enough, but from a chart perspective it is still anyone's
guess whether the bears come in again and trash the rally.

There is obviously an economic downturn underway in the US,
and the hard asset/commodities crowd may have been looking
for a bigger cut in the FFR% to feed their bubbly markets.
Gold tanked this afternoon from the $1000 oz. level to $976.
I point this out, because disenchantment by the pro-inflation
crowd could help the stock market.

From my perspective,the Fed has done quite enough for awhile
in cutting rates and in liquifying the credit markets. Time
comes around once in a while to stop and survey the handiwork
to date. The Fed also needs to get nastier with Paulson and GWB.
The latter two have been functioning in this crisis like FEMA
did after Katrina. I have mentioned in prior posts that in a
crisis like this, the regulators need to allow lenders not
only to book only cash losses, but to spread them out over time
to maintain liquidity and capital. Paulson has simply not
grasped the bigger picture and has failed to use the regulatory
levers at hand properly. Sermon over.

Stock Market -- Technical Note

The week ahead will be a short one and it is likely to be
dominated by fundamental factors. The US markets are closed
for Good Friday, and Mon. - Thurs. are packed with financial
and economic news. Bear Stearns, Goldman, Lehman and Morgan
Stanley are set to report quarterly results, FOMC meets on
Tues., and there are reports coming on production and housing.

So, a minute out for a technical item. The stock market is
moderately oversold on price oscillators out through three
months, and interestingly, my buy and sell pressure gauges
(based on breadth) are in deep oversold territory. The latter
are six week measures and tend to revert to the mean more
rapidly than not. So, even though bear conditions prevail for
now, the chances for a countertrend rally are decent.

Stock Market / Fed's Expanding Role

As I write this, the market has rallied powerfully out of
the 1/08 low test zone. News this morning that the Fed is
expanding its role in liquifying the credit market triggered
a massive short squeeze and follow through by traders eager
to join the rally.

This bounce interrupts a breakaway downtrend and puts in a
short term double bottom. The rally has brought the SP 500
from a deep short term oversold to a modest one. The double
bottom is an encouraging sign in the short run, but since
powerful, brief rallies are a hallmark of a bear market, it
is too early to tell whether more extended positive action is
in order.

Today, the Fed announced expansion of its special term credit
facilities to $400 billion. It has increased these facilities
by $340 billion in less than a week. Banks and primary dealers
can offer less liquid, lower quality debt to the Fed for Treas-
uries after the private stuff has been given an appropriate
haircut. So far, the Fed has "sterilized" these acquisitions
by selling Treasuries in the open market, with the result that
the liquidity pool has improved in quality, but not in size. It
will proceed with this dual process going forward, but the new
larger scope of transactions will give them some "cover" to add
permanent reserves as needed.

Financial corp. commercial paper has contracted by roughly $550
billion since peaking in early August, 2007. Much of this
contraction is mortgage backed paper. This market has struggled
since the sub-prime crisis broke. With only a slight recovery in
outstandings and a recent new spike in quality spreads, the Fed
felt called upon to act. The $400 million in Treasuries offered
as an effective swap equals 24% of outstanding financial corp.
commercial paper. That does provide a more secure lifeline for
illiquid players in the market.

The broad measure of system liquidity I use is flat with August,
2007 levels. Without rapid improvement, the economy will remain
at considerable risk and this may eventually force the Fed to add
more permanent reserves, inflation risk notwithstanding. The new
line of term financing also allows the Fed more time to see if
the high flying commodities markets break.

Down In Flames...The Street Chuckles

Yes, the market was hammered today, but more about that in
a moment. Today, NY Gov. Eliot Spitzer (D), a stilted,
sanctimonious first termer, said he had been fingered via wire
tap for bringing a hooker down to DC for an evening of
salacious R&R. That's a felony violation of the Mann Act.
You may remember Spitzer's tireless prosecution of Street
baddies during the 2001 - 2003 market bust, when he was NY
state attorney general. Not beloved on The Street, he left
the guys laughing during an otherwise tough day.

Back to the stock market. The SP 500 made a new down cycle
closing low of 1275 today, and is now slightly above the
1260 -1270 low test zone carved out by the e-mini future back
in January. Be watchful here, as the SP500 is in breakaway
down mode again on the basis of closing prices, but is also
oversold enough to attract positive interest. Technicians are
going to watch tomorrow's action with considerable scrutiny and
so should you if you are a trader.

Stock Market Comment

Well, as it turns out, the SP500 could not hold nicely above
my Market Tracker, as discussed yesterday. Today's close of
1304, brings the "500" much closer to the 1280 - 1300 range of
the Tracker.

As discussed this past Friday, the week's end sell off set up
the bears for control this week. They got the upper hand today,
a move signaled by the poor action of the financials throughout.

An oversold condition is developing, and my selling pressure
gauge is rising quickly. Further weakness in the market over
the next 5-7 trading days would produce a deep and tradable
oversold on this important measure.

The new 2008 closing low on the SP500 will have a number of
technicians speculating about a decline to the important low
test zone of 1260 - 1270. I sure cannot discount the
possibility of another breakaway move. It would be scary
but would also spell opportunity.

My proxy for the "average stock" is the unweighted Value Line
Arithmetic index of 1700+ issues ($VLE). This index did not
make a new yearly low today and is trading above long term
support going back to last spring. It may only be that the
index is less heavily freighted by the financials than the
SP500, but it's better realtive performance is worth noting.

Stock Market -- Fundamentals

The SP500 Market Tracker has now dropped into a range of 1280-
1300. Accelerating inflation suppresses the p/e multiple and
analysts have resumed cutting estimates. Today's SP500 close of
1334 might indicate some willingness on the part of investors to
anticipate a better economic environment later in the year. The
market has held well above the intraday spike low in the 1260 -
1270 area since January even as the Market Tracker has continued
to move lower. Hardly conclusive, but worth noting.

The liquidity environment does not support a sustainable bull market.
Both monetary and credit driven liquidity are growing at subpar rates.
Importantly though, sideline and portfolio cash in aggregate are
running at high levels. Looking forward, monetary liquidity will
increase by more than 10% for a spell starting in late spring as $150
billion in IRS rebate checks are mailed out. The sideline cash and
rebates are positives, but are not indicative a stronger underlying
trend of system liquidity needed to sustain economic and profits
growth over time.

Credit quality spreads in the bond market are still widening, with
intermediate quality bond yields topping 8% and still rising. Concern
over the depth and duration of an economic downturn are still
evident. That's not a positive for stocks.

My long term dividend discount model has the SP500 fairly valued at
1410. The 5.4% discount of today's 1334 close to the DDM fair value
is also worthy of note and is a reflection of a modest degree of
investor concern for the long term.

I continue to watch the oil market and the broader commodities
composites. The powerful uptrends in evidence here are suppressing
stock prices. Rising oil / commodities have pushed up inflation,
punished real take home pay, eroded the market multiple and have
restricted the Fed in supplying liquidity to the economy. The
oil / commodities booms are in highly speculative stages, but
blow-offs of this sort can be very confounding when you are
looking for suggestions of tops.

Gold Price -- The Bubble Draweth Nigh

Gold printed slightly above $990 oz. today before an after-
noon close of $982. By my reckoning, if gold closes above
$1000 oz. any time over the next year or so, then it is in
a price bubble that could reach $1500. The $1500 price
would be a triple over the early 2006 price of $500.

If gold does cross the bubble threshold of $1000, there is
no compelling reason that it must advance to $1500 or any
price in between. Bubbles occur rarely in any market and a
double or triple over the breakout price ($500 oz. in this
case) is a reasonable range for an unreasonable price move.

If gold does enter the bubble range, it does, prima facie,
suggest substantial price upside. With the upside potential
comes large downside price risk, which I would now put at
$250 - 400 oz.

You can make good money in a bubble on the long side as long
as the fundamentals are positive. Danger comes especially
when fundamentals diverge from a rising price. But large
downside can also occur in moments of doubt which can trigger
panic even if the fundamentals do not head south. These are
facets of a high return / high risk market.

My gold price macroeconomic indicator remains in a pronounced
uptrend for now.

The near term technical situation is interesting. Gold is
strongly overbought, and is just completing a 13 month long
parabolic upmove. The situation suggests a range of short term
possibilities running from consolidation to sharp correction.

The macroeconomic indicator is available only weekly. If you are
playing the gold market and want some daily reference, I would
watch the oil price and a broad range of industrial commodities
prices.

Scroll down to the end of the 2/25/08 post on gold and you
will find a chart link that may be of interest. Good luck.

At Least It Closed Off The Lows...

Back in the turbulent 1970s when I commuted to and fro from
Wall St., I would catch the 5:39 home from Grand Central. I
would frequently stop in the bar car for a smoke and a Dewars
on-the-rocks. The bar car would be raucous after another of
the many down days for the stock market, and the joke was to
have one of the many brokers hop aboard and proclaim "At least
it closed off the lows!"

At last week's close, both bulls and bears seemed fatigued. I
was looking for a quiet week ahead. Instead we got a strong
rally up to important resistance, a day of top action, and then
a sharp sell off that broke the suspiciously mild uptrend
underway since the Jan. '08 low. What can one say but that it
was a typical bear market action. The field is open for the
bears in the week ahead. We'll see what they can muster.

A word about sentiment. My e-in box is cluttered with sentiment
charts showing there are many more bears than bulls. The
contrarian implication is that a buy point is near. But I
remember talking with fabled technician Joe Granville years ago
and Joe reiterated a favorite of his: "In a bear market, the
bears are right." That stuck with me over the years. I have always
taken it to mean that heavy bearish sentiment will ultimately
point to a rally, but that a hefty, tradable rally need not come
right as the bears get heavily bearish. It can take a couple of
months.

With obvious increased inflation pressure, my SP 500 Tracker has
dropped to 1300 fair value.

I am hoping for a more solid bottom for this market at some point
over the March - April interval. I think we are going to need
some help from a cool off in the mania for commodities to get it.

Inflation

The inflation thrust indicator is spiking to one of its
highest levels in over 25 years. This is consistent with a
continuation of inflation above 4% measured yr/yr. The
broader measures of inflation such as the CPI remain
highly sensitive to the indicator, signaling that commodities
continue to drive inflation. Non-commodity measures of retail
inflation have yet to incorporate costs and expectations that
are evident when retail inflation is more mature and less
sensitive to shorter term pressures in commodities prices.
The pass through of commodity price momentum has been moderate
so far. All of this is consistent with the early stage
development of deeper and more persistent inflation.

The Fed has been easing the FFR% aggressively despite the
upward pressure on commodities because it believes that a
deeper and more pervasive inflation psychology has yet to start
to blossom. The Fed has also so far opted not to provide the
monetary liquidity needed to support a materially stronger
economy. This is a "thread the needle" policy. The Fed cuts
rates in a weak short term credit environment but does not
liquify, thereby gambling that the commodities markets will
give way to deteriorating economic momentum before a broader
and more serious economic downturn develops. Old Fed hands
would be impressed with the cleverness of the scheme but would
also caution that it could well be folly to try such fancy
fine tuning.

So far the Fed's gambit has not worked, and without development
of a commodities downturn / correction real soon, the Fed could
face a more daunting time and get itself into hot water
politically.

Gold Price ($941 0z.)

My macroeconomic indicator supports an uptrend in the gold
price, primarily reflecting the powerful run up in the oil
price over the last 13 months. The strong price action in
the grain and edible oil pits is a supplemental plus.

The gold price was weak today as the US Treasury put its
support behind the IMF plan to sell 400 tons of gold this
April to raise capital. There have been some hints Congress
might go along with the proposal this time.

The gold price is at a critical juncture. There is a mania
developing, and I see gold just at the point where the action
could become increasingly raucous and more volatile if the
sharp uptrend continues. I think the same can be said for the
oil price, where speculative interest remains quite vibrant.

I have linked to a gold price chart below. Note that although
the MACD trend remains positive, it is very elevated. That
sort of MACD pattern signifies increasing downside price risk
as the price moves ahead.

Here is the link to the chart.

Stock Market -- Short Technical Note

The price triangles that show up on the charts of most of
the market composites were not decisively eradicated this
week as I thought they might be. The bears are tired and so
are the bulls. Now since the triangles are running out of
real estate on the charts, some directional would seem finally
at hand. Most discussions revolve around a positive breakout
vs. a breakdown (The breakdown argument looked to be set to
carry the day until Friday's last 30 minutes of trade, when
bigger players bid on baskets and creamed the shorts). The
other possibility is that the market simply remains in a
frustrating period of price compression that drags on. Folks
are so used to wrenching volatility that such an eventuality
seems remote to most. But, it could happen, and confirm the
old adage about the market following the path of maximal
frustration in the short run. We shall all see soon enough.

Stock Market -- Fundamental

My SP500 Market Tracker has dropped from the 1340-1350 area
down to 1325. This is entirely a reflection of the acceleration
of inflation, which now stands at 4.3% yr/yr. Short term
earnings expectations have steadied, and the consensus forecast
for '08 SP500 eps has been raised ever so slightly. That tiny bump
is the first positive one following months of cuts.

Economic data for January show a flattish economy and do not
confirm a recession is underway. The weekly leading economic
indicators have shown more stability as well. However, since the
indicators have fallen hard enough since last July to be
consistent with the development of a recession, the jury is still
out.

Last year's financial crisis blew a $600 billion hole in liquidity.
The yr/yr change in credit driven liquidity has dropped sharply to
5.2%. This compares to a yr/yr change of 6.7% for the $ cost of
production, which has been strongly influenced by a higher inflation
rate. Net, net, the real economy is draining liquidity via higher
inflation, leaving the capital markets primarily dependent on
portfolio and money fund cash for support.

At the current 1360 level, the SP500 is treading water relative to
recent earnings and inflation readings.

Commodities And..........

Trade in broad swaths of the commodities markets this week
is extending recent gains. Raw industrials have also re-
joined the party. As many an old hand in these markets can
tell you, trader discipline is starting to break down as
the folks chase after rising prices. Broad composites such
as the CRB were cheap in relative terms for many years
following the bust in the 1980s. Now, these composites are
getting expensive on a relative basis although they are not
yet at extremes. It is clear that the strong industrial
economies of Asia are playing a major role in fostering the
boom, but it is equally clear that there is a horde of
speculators on board as well.

Commodities booms carry the seeds of their own destruction,
not just because they coax out more supply, but because central
banks are eventually forced to contract liquidity to stem the
inevitable inflation surge. In full, such enforcement actions
have been tepid so far, leaving the field still open.

As discussed previously, in larger, more stable economies where
wage rates are more settled, a commodities driven acceleration of
inflation punishes real incomes and can result in deteriorating
economic growth. This corrective process is not fast moving,
but should not be ignored.

The yields on longer dated Treasuries are ratcheting up now as
markets adjust to faster inflation. The increased inflation
pressure also tends to suppress the market's p/e multiple even
as commodities producers may experience outsized earnings gains.

The global economy is slowing, and some economies such as China's
where inflation has topped 7%, may have to tighten more aggressively
at some point.

For now, There is not a strong fundamental case to say the broad
commodities market is headed for a fall. There may be seasonal
weakness in the spring, and there may also be greater volatility
reflecting the risks of inventory hoarding. The main factor to
watch short term may well be trader sentiment, especially given
the growing intensity of speculative activity, and the fact that
many of the sub-sectors are very overbought.

Strange Stuff, Sentiment

I have listened to the bearish and the downcast in the
final stages of major negative market/episodes such as 1974
and 1982. That's when the depression and collapse talk rises
to a feverish din. Perhaps it is all the negative vibe on the
web, but the fear stories are bordering on hysteria now, even
though the bottom has yet to fall out of the economy. Strange
stuff indeed. As all know, the economic situation has been
deteriorating here in the US, and uncertainty shrouds the
outlook. Yet sentiment seems either over the top negative or
grossly cynical. Not what you would expect until after the
spit has hit the fan big time. I am hoping that the black
cloud blows over during the next six weeks, since it would be
unfortunate if folks stampeded when it is not clear they should.

Comments on Commodities & The Stock Market

COMMODITIES

Difficult inflation periods are invariably initiated by surges
in commodities prices for such elementals as fuels, raw materials
and basic foodstuffs such as cereals and oils. Today, the CRB
commodities index made a new high near 385 on strength in
fuels and agriculturals. Commodities are up over 20% yr/yr,
and this continuing rise has fostered an acceleration of US
inflation as well as boosts in the price level for a number of
other economies. With US wages rising more slowly than the
general price level, take home pay is falling in real terms --
a clear recession threat.

The slowing of global economic activity has led to a mild
contraction of industrial materials prices since this past autumn
but the more general range of basic prices has continued to
surge. I have included a chart of the CRB. Have a look.

From a traders perspective, this is a bullish chart, but it shows
a powerful overbought on price momentum and relative to the
40 wk M/A. Now some seasonal weakness can be expected by spring,
but this index needs to lose substantial momentum if slower growing
economies like the US are to have a shot at a growth pick-up this
year and next.

STOCK MARKET

Today was a little wicked. It was set up yesterday when the broad
market could not break through the downtrend line in place since
12/07. In typical bear fashion, players came in to sell the rally of
recent days. There is still money on the table, so the directional
test I wrote about on Tuesday has not been resolved yet.

Notes On Liquidity & The Stock Market

Liquidity

As the Fed expands its TAF, the FOMC dumps Treasuries and
cuts REPOs. The net result is negligible growth in basic
monetary liquidity measures such as Fed Bank Credit and the
Adjusted Monetary Base. The broader measure of credit driven
liquidity (in which I include commercial paper) did expand
a bit more quickly in January. However, both monetary
and the broader measure of liquidity are not growing fast
enough to sustain economic expansion. Thus the Fed continues
to run a high risk policy regarding prospects for the real
economy.

Stock Market

For the SP500, there is shorter term trend resistance in the
1360 - 1370 area. Earlier in the day, as the market pushed over
1360, the sellers came in, driving the "500" back down near
yesterday's 1339 close. But, with a late afternoon rally, the
market managed to close up decently on the day, thus setting
up a prospective directional test for the final days of this week.

Uh Oh -- Liquid Gold (Alkylate)

The longer term trend has the retail price of gasoline in
the US going to $3.50 a gallon at some point in 2008. Some
industry experts speculate that such will happen this spring
during the seasonal bump in gasoline prices and reflecting the
need to add a costly additive called alkylate. The conversion from
MTBE to alkylate for summer driving was ordered in 2005, and
observers argue that the sharp spring spikes in the gasoline
price over the past three years relect the new additive which
spot trades 15 - 20% above gasoline. Refiners have added capacity
to crack out alkylate, but the spot market remains fairly large.

Industry gurus often are not any better than most in forecasting
fuels prices, so there's hardly any assurance this story will
hold up. But it is worth noting nonetheless, as another gasoline
price spike would be most unwelcome in an economy already being
suppressed by the rapid run-ups in petrol products over the past
year.

Stock Market & The Valley

The old adage is: "The market never looks across the valley."
The bear market underway is in the process of trying to
assess how deep the economic valley will be and also how wide.
Meanwhile, I am experiencing personal alarm bells. First, I
am spending a much larger than normal amount of time trying
to break down the uncertainty in the outlook. Secondly, I am
pushing numbers and find myself gilding the lillies, another
bad sign. All of this tells me that if I catch the bottom, it
will be a miraculous event.

My leading economic indicators have pitched downward, signaling
a downturn in the near term. My inflation thrust indicator is
still accelerating on a yr/yr basis. Liquidity measures are
tight. longer term economic indicators are improving but still
have a negative bias. My SP500 Market Tracker still stands at
1340 - 1360 fair value and implies that The Market's earnings
expectations for 2008 are quite subdued and that a quick and
positive turnaround in earnings is not expected now.

The monster oversold I discussed through much of January was
largely eradicated by last week's bumptious rally. This week's
downdraft is a bear market move -- sell the rally -- and it
leaves the market heading into moderate oversold territory.

Could the market slip down to the 1260 - 1270 low test zone
for a temperature check? Sure could. In the meantime, since I
remain comfortable that the market's fate may not clarify until
the end of March, I am going to try and not be too fidgety.

Economic & Profits Indicators

The broad economy has flattened out over the past 3-4
months as measured by consumer spending, production,
employment and real wages. Inventories have been tightly
managed, but even so, the US is vulnerable to a downturn.
Housing development activity remains in a steep downtrend
and starts are likely to drop below the 1 mill. mark on
an annual rate basis -- typical for a housing recession.
As I have discussed, inflation has sapped consumer spending
power and since companies have been too tightfisted in
adjusting pay levels, recovery of purchasing power likely
awaits an easing of inflation pressure. Individual company
managements may be prideful of maintaining wage discipline, but
collectively, the discipline is working to bring down the
economy.

Federal Reserve Bank Credit and the broader measure of credit
driven liquidity are not growing fast enough to support
sustainable growth. Fast falling short rates is a positive
for the future as is the recent weakening of the oil price. On
balance, however, the Fed is running a risky policy short term
when it comes to growth, and if the economy falls into a downturn
in this a national election year, there will be all hell to pay
at the Fed.

The proposed minimal $150 billion stimulus program to provide
rebates to household taxpayers is essentially a fuels subsidy, but
it will help folks with their budgets.

Profits, excluding the financial sector, are coming in better than
expected. The average US commercial or industrial enterprise is
struggling to maintain margins in a slow environment, but tech
companies have had a very strong year and oil producers are
experiencing dramatically higher crude lifting margins. Financials
are in the red collectively. Earnings for nonfinancials from
overseas operations remain fairly strong. Looking ahead, the first
half of '08 will reflect the weaker US economy and slower growth
abroad.

Stock Market -- Fundamental Landscape Part 2

As outlined in Part One of this thread (see below 1/25), the
fundamental environment for stocks remains markedly risky
reflecting the Fed's reluctance to liquify the economy as It
cuts rates. Rate cuts may eventually coax broader credit and
liquidity growth, but liquidity is now not sufficient to
support meaningful economic expansion. This does not mean that
the stock market must decline. It is a discounting mechanism,
and if enough players see growth not too far down the road,
stocks can advance even if the current environment carries
significant risk. I am not just curious about this current
unusual environment, but cautious as well.

After topping out a touch over 1600 in July, 2007, my SP500
Tracker has declined to the 1360 - 1380 area. Higher inflation
has suppressed the multiple, and the consensus earnings estimate
for the "500" for the twelve months ended 3/31/08 has dropped
nearly 14% to about 84.80. As it turns out, speculation the Fed
will again cut the FFR% and DR% at tomorrow's FOMC meeting has
brought the "500" composite back up to levels near the Tracker.

I have to confess I have some longer term concerns about the
stock market as well. These concerns have to do with the longer
run growth potential of profits and dividends. With the low
dividend payout of the "500", profits need to grow at 8-9% per
annum to hold the current p/e range. Since the US demograhics
no longer support robust consumer spending and housing investment,
earnings sources will have to be continually diversified both
to other sectors within our economy as well as abroad. So far,
corporate US has done admirably well moving earning capital
abroad, and US managers will need to remain strategically alert.
One key to US success here will be if countries with rising
wealth and high savings rates program acceleration of domestic
spending and rely less on export growth. Such is no wise assured.
In addition, if a falling US dollar remains a wellspring of
offshore growth for US companies, the US equities market may not
be much of a beneficiary as lower levels on the dollar will
prompt higher inflation and could lead eventually to overwhelming
demand for currency realignment.

Returning to the present, I am likely to be stuck in caution mode
for a while longer. I think my views on liquidity are idiosyncratic
enough that the market could well ignore them. I do not mind being
wrong as long as I catch on before it's too late.

Quick Stock Market Comment

As mentioned on the 24th (see below), the rally in the
market would need to see the SP500 take out 1360 trend
resistance on Fri. the 25th. The "500" moved up from
the previous 1352 close to 1360 - 62, but lost momentum
then. This triggered a sell signal for a number of chart
watchers. The market sold off sharply over the day
following the failed test. As I have discussed, there
might be no shortage of sell-the-rally players despite
the recent sharp oversold.

Friday's action suggests further weakness at the outset
of the coming week, but you have to be careful not to make
too much of a one day retreat from resistance. Just keep
Friday's action in mind if you are trading.

Stock Market -- Fundamental Landscape Part 1

Let me start with the liquidity cycle. I can tell you
straight off that there is no prior period in the modern
era that comes very close to matching this one. We are
thus in an environment with unusual elements. Short term
interest rates are falling and broad, credit driven
liquidity is barely growing (1.0% over the past six months).
This is unusual, but not unprecedented. What is new, is that
even with a weakening economy, the Fed is maintaining a very
tight rein on the growth of monetary liquidity. So, although
the price of credit is falling, liquidity remains scarce.
Through its TAF, the Fed has bought $50 billion of crummy
quality bank paper, but it has had the FOMC drain the
markets of a nearly comparable amount of Treasuries and repos.
It is trying through the TAF and lower rates to coax the
credit markets back to life. There has been some success, but
progress remains slow and the process is fragile.

By holding back on infusions of liquidity into the banking
system, the Fed is still seeking to contain commodities driven
inflation pressures, but in doing so, it is keeping the economy
at considerable risk. The message to me is that further
economic weakness short term is tolerable to the Fed if it
results in breaking the uptrend in commodities prices where there
is strong speculative interest. Some Wall St. guys like Jim Cramer
may well see the Fed as composed of loosely hinged academics who
are testing academic suppositions at the expense of the real
world.

The risk here is that if economic weakness intensifies short term,
lenders will grow even more risk averse, and there will be an
acceleration of "downcycling" to the detriment of the economy. This
would, in turn, force the Fed to slash rates further and pour
liquidity into the system. But, if the lower rates work now to coax
borrowers in, and the banks use their new flexibility to fund more
and provide more credit, well then, the plan might work. It is all
in the timing, as they say.

The lead economic indicators are still trending down and are consistent
with the development of an economic downturn. A downturn may not yet
be "a lock" but the indicators are moving that way. There is some
evidence that inflation pressures may be easing, and such easing could
become more pronounced if the economy develops more slack.

There is substantial economic uncertainty here and a fair measure of
downside risk. Bernanke is running a significant gamble,and if
commodities prices do not crack over the next month or two, he may
be forced to re-think it.

The stock market has started to price in a recession and not just a
sharp slowdown, preferring to think the Fed's gamble may well fail.

More on this landscape issue in the days ahead.

Stock Market -- Short Term

New e-mails are rolling in. Last week they told me the US
market was seriously oversold. This week, they are telling
me we put in a solid bottom and because the oversold was so
deep, the market is poised to run on the upside for months. I
agree with the deep oversold condition. Coming into this week,
my six week selling pressure gauge was about as oversold as it
gets. Readings at this level are consistent with strong rallies
even in bear markets. The SP500 is still nearly 5% below the 25
day M/A, so it is still oversold.

The SP500 closed today around 1353, and must take out 1360 in the
next day or two to signal a short run reversal to the upside.
It may be a nice test, as we have witnessed a super quick run-up
from the 1260 - 1270 area, which is, by the way, the new low test
zone. There is also chart resistance around 1375.

From my perspective, it is now timely to take a longer view of the
market, which is what I'll do in the next post or two.

Some Quick Thoughts

The Fed's action today to cut the FFR% by 75 bp to 3.50%
was intended to curtail a global meltdown in stocks and
lower quality bonds.

The Fed has remained stingy on the liquidity front. Fed
bank credit is up only 3.2% yr/yr through last week even
with its TAF. It is hard to stimulate an economy with
Fed credit actually down in real terms. Let's see the
liquidity situation this Thurs. in the wake of the cuts.

The cut in the FFR% cements the screwing of the saver and
is a negative for US dollar holders.

The stock market did bounce on the news, but so did the oil
price. Overnight, oil traded at $86.11 a bl. There were prints
above $90 in late day trading. A stock rally that brings
stronger oil and commodities prices will simply punish
consumers further.

I am taking tomorrow off. Be back Thursday.

The 1/21/08 Global Sellathon

The SP500 closed at 1325 on Friday, the 18th, and in keeping
with today's sellathon, the SP500 E mini was printing down
between 1260 - 1270. A little touch of panic. The foreign
markets get a crack at it again overnight.

The US stock market has stopped its pussyfooting around. The
drop in the E mini says traders are pricing in an economic
downturn of consequence, with profits to fall sharply as
2008 unfolds. As I have pointed out, the leading economic
indicators have fallen far enough from peak levels to signal
a recession, but further downside thrust in the indicators
may be required to seal the deal.

At this point, we need to track the more or less coincident
indicators to see if the economy is about to "cycle down." By
that I mean weakening employment and incomes which beget lower
sales and production, which in turn foster another round of
job losses, and so on. I watch real retail sales, real spendable
earnings, production and household employment. On balance here,
the economy is stagnating, with employment growth and real
spendable earnings up about 0.2% yr/yr.

The "average" stock is down a little over 20% since the 2007
highs. So it is a bear market as far as I am concerned. The
market was in panic mode today but is also very deeply oversold.
The bet is being made that recession and likely resultant
additional credit losses are coming. My SP500 Market Tracker
sits at around 1375 and does not immediately envision the leaner
times the market now expects. When the market starts to trade
well away from the Tracker, I focus most heavily on near term
fundamentals to see if the market's view is being confirmed or
if It is overshooting (to the downside in this case).

Feeling a bit queasy? Stay well puckered and try some Prilosec...
Good stuff for acid reflux.

Stock Market -- Good Luck!

The e-mails are rolling in. The message is that we have a
deeply oversold market on any number of counts. Agreed.
We are also in a bear market with a breakaway downleg that
just started this week when the SP500 took out important
support at 1375. Had we held support and not gone bear, I
would be as happy as the next guy to play this deep oversold
on the long side. But, in bear formations, oversolds are
inherently dangerous. The simple reason is that with bear
prints on the chart, oversolds can get even more oversold.

So I plan to leave the buy side to the young and the restless
and those older dudes who believe they have a nose for these
things. Rest assured, that whence comes the bounce, there
will be a fair number of folks who will sell into the rally.

My plan will be to look to short overboughts in the interim.
I will not be on the long side until my momentum oscillators
have turned positive. I wouldn't dream of arguing with the
timers who want in on the long side now, but I do not like
the breakaway action.

I have linked to a weekly chart. It will show a deep oversold
on MACD and RSI. It also shows a "death cross" with the 13
wk M/A having turned below the 40 and with the 40 wk M/A also
having turned down. The market has also blown through the 69
wk M/A containment or "safety valve" line. Chart.

I intend to watch the oil price closely relative to both stocks
and gold. A sharp break in the oil price would work to alleviate
the pressures on incomes and inflation.

Gold Price

The weekly gold price macroeconomic indicator reached new
peaks in late 2007, although it has settled down recently.
The microeconmic indicator has also reached record levels
reflecting higher extraction costs.

The gold price has become more volatile relative to both
indicators since 2005, as speculative interest has intensified
greatly. At $902. oz, gold is in a mania staging area after
a sharp run up over half 2 '07. It is reminiscent of the
period running from latter 2004 through mid-May 2005, when gold
ran up from $460 to an interim peak of $735. The top in May
completed a parabolic up move. Gold went into a mania staging
area then when the price topped $600, but quickly fizzled. At
present, gold must top $930 soon to move into a more robust
mania. Many gold prognosticators see gold at $1000. oz in 2008.
Should gold move quickly up to $1000 in the next few months, it
would move into full bubble mode, with large upside and massive
downside when the bubble pops.

My macro indicator has started to diverge negatively from the
gold price trend, so it will be interesting to see whether gold
can stay strong or whether a correction might be in store. Gold
is on another parabolic up move dating from early 2007, and the
curve is set to bend back in Feb. 2008, suggesting that a top of
consequence could be coming soon.

The monetary component of the macro indicator was signaling
inflation of 5-6% for a good decade, but with high US and
Asian productivity growth, it never happened. Since 2004, that
indicator has turned far more somber, and is now pointing to
a deceleration of US inflation several years out, down to
1-2%. The shorter term inflation thrust indicator is still
pointing up, but has lost a little momentum.

Given that gold is in a mania staging area, it carries both high
upside and downside risk, depending on the degree of speculative
fever.

I include a link to a weekly gold chart. Note when you look how
extended the MACD formation is to the upside. Chart.

Stock Market

Today's tumble left the SP500 down at 1400. As I have discussed,
the auditors have arrived at the banks and internal audits are
in full swing at the investment banks. The pressure will be on
to make a clean breast of the CDO mess, including reserving for
likely future losses. The trick here is to recognize the heavy
losses, but not be stupid about it. That is, as the soon to be
arriving regulators and examiners will point out, spread some of
the pain out over time to soften the blow to capital adequacy.
Consumers are also reading over their home heating bills for a
chilly December and are paying more at the pump. Folks will need
a month or two to sort out priorities and look for ways to
conserve and save. The economists are throwing stimulus plans out
there and the economy will likely take center stage in the
presidential races as the pretenders pander away with growth
programs. Bernanke will face sharp questioning at the upcoming
Humphrey-Hawkins testimony as a Democrat Congress berates a Bush
appointee. And, Sweet Jesus, the media, they'll play it all up
to a fare thee well.

The market is rounding into a tradable oversold, but the emotion
level is cranking up not just on the Street, but across the land
as the media happily scares the crap out of people with a drumbeat
of negativity.

My guess is that the swirl of negative emotion about the economy
may not exhaust itself for another two months or so. This means
continued volatility for a spell and the pressures on trader and
investor discipline could be intense. The folks who succeed in this
pressure cooker are the ones who keep their cool and force those
wily and powerful emotions fear and greed into the background. Gird
up, as the legion of thumbsuckers and pantspoopers may still be
growing.

The $100 Kiss

Last week oil kissed the $100 bbl. mark. It was an expensive
kiss, since oil has trended lower since. The weakness in the
market reflects the dawning of the realization that oil demand
could trend below expectations over Half 1 '08 on a rapidly
slowing US economy and the prospect that big stakeholders in
US growth such as Japan, China and Canada may face slower growth.

The rapid rise in the oil price over the course of 2007 undermined
the US economy and the Fed's efforts to provide stimulative support
as higher fuel prices were a major factor in depressing spendable
earnings in real terms.

Continue to keep a close eye on fuels prices over the first half
of the year.

Stock Market

Technical

Yesterday's closing low of 1390 on the SP500 confirmed that
we are in a down market off the summer and autumn 2007 highs.
A close below spring '07 support around 1375 would open the
issue of a breakaway down and bear market.

The 1390 close yesterday took the market more than 5% below
the 25 day m/a. As discussed often, that kind of deep oversold
has been a clarion call to rally in recent years. The bulls were
in today, but it was likely the Street and major institutions
buying baskets of stock to move others in off the sidelines. I
say that from long experience and after having noted the weak
positive breadth.

Barring a major immediate advance, my buying and selling pressure
gauges are likely to show a sizable and tradable oversold at some
point over the next two weeks.

I have also pointed out that rallies we would see over the second
half of 2007 would grow weaker as we went along. The last one in
the latter part of December was particularly wicked, because it
established a sensible trajectory only to roll over last week.

For the moment, I am going to shelve my expectation of a range
bound market (SP500 1400 - 1500) to reflect yesterday's fresh
closing low.

To recap, the US market is in a down phase that came very close to
a major break. Today's rally is from a deep oversold which could
turn into a nice tradable move if the market stays lame and builds
a base for a week or two. A sharp break in the "500" below 1375
would suggest more trouble is in store for River City.

Fundamental

The analysts remain busy cutting estimates for both 2007 and 2008.
With inflation pressure also still evident, my SP500 Tracker has
dropped to, gulp, 1375. That's a steep move down from the 1600 level
seen back in July.

For a daily SP500 chart, go here.

Economic Indicator Update

The weekly leading indicators have stabilized but remain
in firm downtrends. The monthly leading indicator through
12/07 dropped sharply again. The monthly re-caps the weeklies
but also includes a large downward hit for the breadth of
new orders in the manufacturing sector.

The monthly jobs report was plug ugly. The broad household
survey showed a sizable decline in jobs and a sharp uptick in
the unemployment rate to 5.0%. Measured yr/yr, jobs growth was
a scant 0.2%. This coupled with a 4.1% yr/yr gain in the average
wage gives underlying support for current dollar growth of
4.3% for the economy. Adjusted for inflation, it zeros out.
Inflation is canceling out the very modest growth potential.

Talk of a 50 bp cut in Fed Funds and a possible stimulus
package from GWB and his group will do little to help the
economy if inflation pressure continues to intensify.
Unfortunately, my inflation thrust indicator remains in a
sharp uptrend.

Manufacturing Dip

The ISM released its purchasing managers' report for the US
manufacturing sector for 12/07 today. The full index declined
well more than was generally expected, and the index for new
orders fell sharply. The export order component was not
spared, either. The data is consistent with a contraction of
manufacturing activity, and the sharply weaker new orders
index bodes ill for the near term future.

The ISM index fell to 47.7. Contraction in manufacturing can
start when the index falls below 50.0, and profit margins do
not hold up below the 50.0 level, either. A decline in this
index to the 43 - 44 area is thought consistent with development
of a recession. The one positive sign was that inventories
do not yet appear to be bloating up.

The drop in this monthly index is consistent with the weekly
leading indicators which have been trending significantly lower
since July, 2007.

Traditionally, the Fed has responded to weakness of this
magnitude in the manufacturing sector with cuts to the FFR%.

The sell off in the stock market reflects investor realization
that deterioration of profit margins is widening.

Oil Price -- Major 2008 Issue

The global oil industry is lacking in data transparency
and timeliness, and, with the re-emergence of the issue of
"peak" oil production, has become highly politicized among
geologists, petroleum economists and consultants. So, with
oil, I spend more time on the price charts over shorter periods
of time than I do chasing down oil supply / demand stories.

As we head into the new year, I am struck by how overbought
this market is. I'll provide a link in a moment, but suffice it
to say, the oil price is moving toward a moment when a price
correction would be overdue. Consider the weekly chart with
some six month measures.

If the price does correct in the next month or two, it will
reflect not only a global economic slowdown, but prospects for
substantial new production from a variety of fields to come this
year and next and to total 3-4 mill. b/d net of declines from
existing producing fields (You might want to check in at www.
econbrowser.com for an attempt to look at the industry objectively.)

When the price of oil is rising sharply in real terms, it is
difficult for large net consuming economies to adjust readily to
the price trend, even when supply is adequate. So, a break in the
oil price and a down period would help consumers and businesses
greatly in efforts to adjust to the preceding price shock.

For 2008, I think it will be important to catch a break in the
oil price for the global ecoonomy and the capital markets. The
trend of oil over the past 12 months would be increasingly ominous
if it were to continue.

Stock Market -- Fundamental

As 2007 closes out, my SP500 Market Tracker has continued
to weaken, putting current fair value around 1400. That
reading is down from the all-time high of around 1600 set
in July, 2007, with the decline reflecting a 7% cut to
the consensus 2007 earnings estimate, and a sharp contraction
of the multiple to adjust for a ramp up of inflation
pressure. My profits indicators outside of the financial
sector actually strengthened a bit in Q4 '07, but financial
sector earnings have been slashed for CDO related loan losses.
Moreover, banks may warn of more losses for late 2007 after
the books have been closed and the auditors speak up.

The weekly leading economic indicators continue to decline and
are warning of a possible downturn. I am looking forward to
the ISM data on new orders for both manufacturing and services
due out next week to see how the monthly leading numbers shape
up. December may have been quieter for inflation, but the
inflation thrust gauge remains in a strong uptrend as we pass
into 2008.

The SP500 is trading at 1478, or a 5.6% premium to fair value.
A stronger liquidity injection by the Fed and declining short
rates have a number of investors and traders trying to discount
an eventual improvement in the fundamentals later in the year
just ahead, but the choppy price action off the 11/26/07 low
makes clear that there are plenty of players not yet on board.

The SP500 carries an earnings yield of roughly 6% presently.
That translates to a nice premium over the 91-day T-bill yield,
but there is still decent quality 5% short money out there, so
the market's e/p yield, although positive, is still modest.

Dividend growth continues strong -- up 10.9% yr/yr -- and the
dividend discount model I use has the SP500 fairly valued for
the long term at 1405.

There is no excess liquidity in the US financial system above
the needs of the real economy, so the stock market will remain
heavily dependent on managers' portfolio cash for support.

The continuing economic uncertainty surrounding near term
output growth and inflation potentials could well extend through
the first quarter of 2008, and it would not be a surprise
for the stock market to remain on edge and listless as a result.
I am not uncomfortable thinking in a range of 1400 - 1550 for
the SP500, nor am I uncomfortable with the idea of elevated
volatility.

I do think that springtime 2008 will bring an improvement in
confidence, a topic I'll discuss soon.