The Commodities Market

The availability of commodities ETFs and long position mutual funds
coupled with a large bull market in commodities from 2001 - 2008
has lead to a substantial increase of interest in this area and has
re-positioned commodities from consummables to an asset class.

Over the long term, commodities have been a poor investment. The
famed CRB composite has appreciated by just 2.5% per annum since
1970. Commodities prices have tended to move in 6 year cycles, but
there have been 2 longer term bull markets in recent years: 1970 -
1980, and 2001 - 2008. There are pundits out there who maintain
that a long term or secular bull market is in place, but such claims
sorely test credulity. However, a multi year bull run in commodities
as occured over 2001 -2008 can be highly profitable for an investor
with rigorous discipline.

History shows commodities are most sensitive to interest rates and
the liquidity cycle. Now with short rates low around the world and a
new liquidity cycle underway to reflect easier monetary policy,
commodities have been moving up since Feb. '09, with this move
aided by a positive bounce in the leading economic indicators.

Since 1980, most advances in the CRB index, which closed today at
258, have been constrained in a range of 260 - 280. Breaks above that
level in 1979 and again in 2003, heralded sharp advances. So the
market is approaching important resistance, and with this test thought
near even before the global economy breaks into expansion, you can
appreciate the enthusiasm of commodites bulls as they anticipate
economic growth with the added fillip of inventory rebuilding.

I will do more on commodities going forward. Relative to the long
term trend of the CPI, commodities are indeed cheap as a class.
Below, I have linked to the CRB index chart. I would put resistance
in two close together spots -- 260 / 280 and again at 300. I would
also point out that commodities are crash prone when evidence of a
tough credit crunch emerges, as happened in 1980 and again in 2008.

CRB CHART.

Economic Indicators

The weekly and monthly leading indicators continue to move up
sharply, signaling that the US economy is setting up to recover
from deep recession. The indicators have surged from very
depressed levels, so it remains a little foggy to tell just how
imminent expansion may be. The Economic Power Index remains
positive but the index is being carried entirely by lower tax
witholding rates, unemployment insurance and the large increase
in Social Security payout. The real wage remains strong, but the
continued deterioration of employment has flattend the US
payroll pretax. Straight ahead, there will be pressure in DC to
make sure the spending stimulus dollars are being pumped out. The
very large inventory liquidation underway since late 2008 puts
the economy in a position to benefit from pipeline refilling as final
demand continues to stabilize. Continuing constraints to growth in
the short term remain strong private sector liquidity preference and
the large inventory of unsold homes ( A measure of pending home
sales is showing recovery.)

Capital slack continues to increase and is quite large with
employment, capacity utilization and business credit demand at low
levels. The Obama spending program has been designed to take up
some of this slack. If private sector interest in building liquid assets
up does not ease off some with improved confidence, then Team
Obama may look to enlarge the scope of fiscal stimulus.

No shortage of issues and worries here, but the indicators are
pointing northward, which what is needed most.

On a global basis, total output and new orders measures continue to
recover from exceptinally low levels registered around the end of
2008. these measures are a little more than half way to expansion
readings.

Stock Market

Technical
The strong rally underway since early Mar. remains intact. There
is another short term overbought in place now and the market
remains o-bought out through 13 weeks as well. The trajectory of
the rally is now verging on unusually strong. The SP500 closed
today at 945, and I would be happy if it was down somewhere
around 865-885. So, I think it is nearing a point where it is overdue
for a pull back, even though there are no indications yet of
difficulties with trend. I have linked to a chart which features an
intermediate term MACD and a 40 day RSI. Note that the RSI is
moving toward an intermediate term o-bought at 60%. CHART.

Fundamental
As readers know, I am on the hook for a cyclical bull market call.
Now, it is normal for a cyclical advance in stocks to pre-date a
positive turn in earnings (6.5 months on average). Still, the SP500
is now running about 45% above very depressed 12 months net per
share. Granted that the 12 month figure contains one unprecedented
red ink quarter -- Dec. '08 -- when companies wrote off everything
they could get away with, the 45% premium is a whopper -- large
by historic standards. In short, this baby is counting on the green
shoots to turn into stronger fibre soon. A pause in the upward
trajectory of the market for a month or two would not bother me at
all.

Longer Term Economic Indicators -- Some Uncertainty

My long term lead indicators were about as strong as they get over
the closing 5 months of 2008. They did signal strongly that the
economy could transition to recovery during Q3 ' 09. That plus
impulse may still prove correct, but a couple of troubling signs have
cropped up.

One of course is the powerful run up of the oil price so far in 2009.
It has doubled its low from early in the year as traders and some
commercial players anticipate an economic recovery. Now, the oil
price is extended and overbought short term, but one has to keep in
mind the inflationary impact that a sharply rising oil price has on the
cost structures of households and businesses.

The second point that requires attention is the real hourly wage in
the US. It remains strongly above the year ago level, but has been
flat since yearend, 2008 as wage rate moderation and mild inflation
pressure have eliminated progress. This too is a worry worthy issue
for the longer run. Right now, the tax cuts and a strong social
security adjustment are sheltering incomes. However, a rising fuel
and food bill can chew up these benefits over time. Now, in
the past, a flat real wage has often led consumers simply to borrow to
fund higher consumption. But we may not be able to count on that
in the short run this time.

These points add clouds to the outlook, but not storm clouds, at least
not yet. I have linked to a BLS chart on the real wage along with the
data. Chart.

Long Treasury Bond

I last posted on the long Treasury on 5/1/09 when the long guy was
at 4.10%. I opined then that the yield could rise to 4.50 - 4.80% in
the months ahead on economic recovery prospects. The bond yield
was in a steep uptrend then, and I was unsure how fast it could hit
4.50%. Well, the bond topped 4.60% this week before settling back
a little.

The back story is simple. In late 2008, the bond yield fell near the
2.50% level in a panic flight to quality that produced an historic
overbought. This year as fears about the economy have eased, that
extraordinary overbought has been corrected with a vengeance. A
number of directional economic indicators have started to signal an
eventual "V" turn for the economy, and one of the most sensitive
indicators for the T-bond, the industrial commodities price composite
(JOC - ECRI), has turned up.

In my view, the T-bond is getting well oversold, and I am looking for
a long trade. I use the Market Vane trader advisory sentiment
indicator as a contrarian measure. This indicator has fallen sharply
from an astounding 91% bullish in late '08 well down into the 50s
and may be on its way to a comfortable "too few bulls" reading
before long (40% or under).

A long position in the T-bond ahead would be a short term trade.
After all, if the US economy does move into recovery mode this
year, the bond could eventually go to 5.00 - 6.00% as recovery
becomes more evident.

I have included a price chart for the bond on this go around. It
shows the bond nicely oversold against the 40 wk m/a and on
RSI and weekly stochastic. It is also approaching a significant
price support level. $USB Chart.

I plan to watch the T-bond closely over the next week or two.

Stock Market -- Fundamentals

The broad fundamentals to support a cyclical advance in the stock
market remain in place. For me, these include monetary liquidity
measures, short term interest rates, the trend of BBB bond yields
and financial confidence measures (bond quality yield spreads).
Secondary measures such as the Treas. yield curve and broader
measures of financial liquidity are positive as well. The guess has
been that a cyclical low in the market would occur March - May '09.

There are strains in the shorter term, however. Specifically, the
SP500 Market Tracker has dropped to a value of only about 650
reflecting still further weakness of earnings. Net per share for the
"500" through June could come in close to $40. on a 12 month basis.
That is down 43% from the 12 months ended 6/'08, and is 57%
under the record 12 months ended 6/'07. Now, the powerful rally
that began in March of this year has brought the market a full 37%
above the Market Tracker level. So, the recovery anticipation now
built into the market is quite large based on a consideration of
hopefully trough earnings. In my view, with a moderate economic
recovery starting in Half 2 '09 earnings through 2010 can easily
rebound to $70. by the end of 2010, and the market could trade up
to 1150 - 1200.

The economic indicators as I read them continue to point to recovery
sooner rather than later this year, but even if that reading is correct,
the market has made a very large positive adjustment in the interim.
At some point in the weeks and months ahead, it would not be
unreasonable purely from a fundamentals point of view to witness a
period of consolidation / moderate correction as investors pause to
review whether the fundamentals are on the right track. Fundamentals
are not that helpful for shorter term market timing at all, but the
big premium in the "500" over the Market Tracker does invite
reflection at this time.

Oil Price -- Some Longer Term Thoughts

When viewed against the inflation rate for the past 40 years or so,
oil at around $60 bl. is reasonably priced. I think $50 is a better
number, but let's throw $10 bl. in to cover higher finding and
extraction costs for newer fields. When seen in this context, oil
is not a scarce or expensive commodity.

The oil price trend for the past 10 years presents a different
picture. My long term trend price range for 2009 is $38 - 79 bl.,
with $58.50 as a mid point. Of concern here is that the mid point
price represents nearly 15% annual growth from the 1999 base.
Implicit here is that oil at base has moved from a very cheap
energy source to one that is reasonably priced. That's ok, but
projection of a 15% price growth trend channel over the next 5
years would turn oil into an expensive energy source compared
to global GDP, household incomes and profits. As it turns out
oil was very expensive relative to broad economic measures for
most of the 2005 - 2008 era, and I believe, badly undercut global
growth just as it has in the past when the price spiked for more
than a month or two.

I am thinking now that oil above $70 bl would over time again cut
into growth and lead to further curtailment of oil demand down the
road barring large, dramatic improvement in fuel economies.

The history of the oil price since the late 1960s is one of stark
volatility with regular booms and busts, including the dramatic
bubble / bust from mid -2007 through the end of 2008. This sort
of kinetic volatility can be great fun for astute traders and even
nimble long term players, but it is a true destabilizing force on the
broader economic stage and should direct business and national
leaders to seek out a more assured and stable supply of energy.

I have ducked the "peak oil" debate and plan to do so for another
couple of years. It is still early to expend a lot of hot air on this
subject.

Looking forward, I will be happy to play opportunities in the oil
market so long as the price behaves itself and stays at moderate
levels. My philosophy is not to traffic on the long side with severely
overpriced assets or commodities except under rare circumstances
or in cases where volatility is easily managable, such as bonds.

Oil Price

The story with the oil price through most of 2009 to date has been
one of weak fundamentals and strong technicals. The dichotomy is
still with us.

There will be significant spare production capacity over 2009 - 2010.
Crude inventories or carry stocks are running high and demand
remains suppressed. Storage is becoming an issue. Nonetheless, the
oil price has rebounded far in advance of when we would normally see
a cyclical recovery of price.

There is the usual chatter about geopolitical problems, but my guess
is that we are witnessing a fundamentals recovery anticipation rally
predicated on the idea that excess capacity, which is substantial, is still
not that high compared to prior recession periods, and will be quickly
dissipated by a recovery of demand once the global economy begins
expanding. And, as I have discussed in recent weeks, the short term
leading economic signals have bounced sharply since early Mar., which
has added to bullish urgency in the oil trading pits. The second key here
is the idea that once demand rises enough to begin to push up operating
rates at the well head, we will witness an extended bull market in oil
once again as traders welcome a progressive draw down of spare
capacity.

The most common way to blow an oil price forecast based on the
fundamentals is to chalk up a miss on the demand side of the equation.
So, you have to have an undisputedly reasonable bounce in the global
economy before 2009 is out, and I suspect, what else is needed is a
low sensitivity to a rising price by consumers until the price reaches
much higher levels, say $75 - 80 bl. These are rational assumptions
but carry rather significant risk in a still uncertain environment.

On the technical side, the oil price is in an intermediate term uptrend
but is decidedly overbought with mild extension in the price. CHART.

US Economy -- Looking Ahead

The weekly leading indicators sets I track show a bottom in early
Mar. of '09 followed by a quick "V" bounce. So far, this suggests that
economic recovery can begin in Jul. of this year, in line with my
expectations going back to late 2008 (the stock market does not
carry a heavy weight in the combined set).

It is still early to look for an upturn right now. Thus, readings for
Jul. data on sales and production that are released in Aug. would show
the beginnings of an upturn, if my expectations are correct. It could
come sooner, but for now, I plan to monitor the lead indicators. The
track record for weekly data is not that smooth, and a trend, be it up
or down, can show backing and filling. Such may happen this time as
the bounce in the indicators has been strong off the get - go. I would
opine that one has to prepare for a setback or two in the weekly data
over the next couple of months. So long as there is a positive trend,
I am not likely to change my thinking.

However, I think it is fair to say that it is best to be a little anxious
over the next month or two, as there are a couple of important
differences in the current environment compared to previous
periods. One is the issue of how strong consumer preference for
liquidity may remain. Another is the large inventory of unsold new
homes. Finally, the banks and other credit intermediaries will have
to be tested if consumers do wish to spend more and come looking
for mortgages and loans.

It is unusual for leading indicators to jerk about so badly as to give
false signals, but it does happen. Thus as a defensive measure, my
plan is to monitor short term data closely to see if the indicators turn
indecisive or negative. If either happens, the trap you need to avoid
is to start thinking that re-development of a positive bearing is
right around the corner. The rule here? When an expectation is not
met, reassess, do not rationalize.

Stock Market -- Technical

The correction underway since 5/11 has wiped out the large short
term overbought, brought the market off a very substantial up
trajectory, and has knocked it off the positive trend line.

The 10 and 25 day m/a's are stilll rising and the 10 remains above
the 25, thus signaling that internal damage so far is minimal. The
SP500 has broken below the 10 m/a and is now sitting just above
the 25 m/a (Chart link below). An important test of short term
direction lies ahead this week -- Can the market stay north of a
25 day m/a?

The market remains substantially overbought on measures
running out from 6 - 13 weeks, so you have to allow for the
possibility of a further run-off in the wake of a 2 month rally.

The SP500 had a Fri. 5/15 close of 883. To me, the market remains
of interest if the "500" can close above 840 for the upcoming week
and 850 -855 in the following week. Breaks below the appointed
levels in either week would render this advance increasingly
suspect, as trajectory would no longer be consistent with a decent
intermediate term advance to run perhaps through June.

I have been cautious for the past couple of weeks, but the technicals
do not yet give me reason to be downcast about this market. So, I
plan to keep looking for entry points on the long side. SP500 Chart.

More Economic Indicators

Coincident Indicators
Viewed yr/yr, the coincident indicators are down 5.8% through Apr.
That represents a slight improvement from Mar. Only the real
wage remains positive, with employment, retail sales and production
all in deep negative territory. Viewed month-to-month, the coincident
indicators have lost some of the downward thrust, but do not yet
indicate the economy has hit bottom. The big losses to date in 2009
have come in production and employment as inventories are pared.
When measures of new orders are added in, the picture looks more
stable.

The 13.9% yr/yr decline in the dollar cost of production matches the
Mar. number and shows that non-financial profits remain depressed.

Capital Slack
Measures of capital input remain depressed across the board.
Capacity Utilization in the US is down to 69.1%, and the growth of
capacity over the past year is a scant 0.3%. With more mothballing
on tap, the physical component of capital could shrink at some point
ahead. Large production losses are also evident globally as well.
Business credit demand is starting to contract at a faster pace
reflecting reduced working capital needs.

Inflation (Deflation) Thrust
Yr/yr through Apr., the CPI declined by 0.7%. Thus, we are seeing
mild price deflation as expected. The thrust indicator looks now like
it will bottom in Jun. before turning up from deeply depressed levels.
A broader measure of inflation thrust based on monthly data could
be bottoming now.

The CPI without seasonal adjustment has been rising since Dec. '08
on higher fuels prices. However, the Apr. reading remains 3.8%
below the Jun. '08 all time high. Even so, it is wise to keep an eye on
gasoline prices and entire commodities price composites as the year
progresses.

Long Term Economic Indicators
This composite is still positive, but it has shown some deterioration
because of the rapid recovery of the inflation adjusted crude oil price
this year. Crude market players are betting on a significant recovery
of oil demand over the next 12 months even though carry or cover
stocks remain at high levels in a depressed demand environment.
As we have learned in recent years, this type of wagering can have
significant economic effects.

Stock Market -- Sabbatical Over

I took a couple of weeks off from watching the stock market with
care in the hope there would be a moderate pullback that would
put the uptrend on a more reasonable trajectory. I pointed out
back on 4/27 that if the advance powered on, it would soon take
on SP 500 resistance at 930 - 935. It got close before pulling back
modestly (chart link below). However, the market has yet to break
below the powerful trajectory I set for it in the early going of the
rally, so the two week "holiday" I took netted little.

The market remains overbought. Most advisors are looking for a
pullback, and the debate whether the rally is a cruel bear advance
or a new cyclical bull has started to heat up. The sentiment
indicators I follow have moved from "too many bears" up toward
more nearly neutral levels. So, there is still a substantial dose of
skepticism out there. The latest wrinkle in all the talk is that big
rallies yield big corrections.

As of now, my indicators say it remains a heavily overbought
market, but one which remains in an uptrend. Moreover, nothing as
yet signals a top is in. So, I'll follow along. This rally has treated me
and other longs well even though I am on the sidelines for now.

When you have a powerful move like this, you keep your interest
level up even if you are not in it every day. Chart.

Economic Indicators

Weekly Leading
The weekly lead indicators have moved up strongly since early Mar.
The indicators are on the cusp of a top side breakout, but as of now,
we can only say that they signal continued economic stabilization.
The indicators have been range bound now since Nov. ' 08 and have
moved well outside a frightening crash downtrend line that kicked
off at the end of Jun. ' 08. Yr / Yr % momentum remains deeply
negative, but continues in an improving trend.

Monthly Leading
New order breadth indicators have moved up sharply from deep
recession levels of Dec. ' 08. The composite index has jumped from
62.6 to 94.2 over the first 4 months of the year (100 = expansion).
The indicators are tracing a "V" recovery pattern, but long experience
says that backward steps can come at anytime, as new order volumes
are volatile.

Economic Power Index
This indicator remains positive, which is supportive of a recovery in
consumer spending. Measured yr / yr, the change in the current $
wage rate has begun decelerating as expected, but the real wage rate
remains very strong in light of mild deflation. The yr / yr change of
employment continues to trend lower and is weak enough to flatten
out total payroll before taking into account two positives: lower
tax witholding rates and unemployment insurance. The consumer
sector continues to benefit from sizable growth in social security
payout. The EPI has been nicely positive when averaged over the
past six months, but retail sales have only recently stabilized as
consumers build cash liquidity and tamp down debt. So, the
spend situation, while improving, remains fragile.

Profits Indicator
The first indicator for April -- industrial & commercial activity --
shows further improvement but remains below profits turnaround
levels.

Global
The global economy remains in recession territory, but monthly
data, especially for new orders, suggests a significant abatement of
weakness. The US is the leader in the improvement.

Banking System -- More Capital Needed

The stress tests have been completed and the major banks in the
system will need to raise $75 bil. in primary capital by this Fall.
That would augment system capital by 6.3% and strengthen the
capital bases of the majors who are primary dealers, market
makers and major players in the secondary and syndication
markets. Most of the tainted banks have already been named.
What these guys need to do is raise capital with the lowest
dividend cost they can to preserve cash. The thrust will be to
sell as much common as the market will bear and to convert the
higher cost preferreds. There is about $110 bil. of TARP money left.
The capital funding will be dilutive to common shareholders, but
there can be few surprises there. Other banks who are not directed
to raise capital will raise additional funds as well, subject to market
conditions.

The banking system needs the $75 bil. of new money as system
capital has remained flat, with continuing strong net interest
margin having been offset by rising loan loss reserves. The banks
also need cash liquidity, as the run off commercial loans has been
slow so far.

My estimate has been that the banks made about $1.5 tril. of
speculative loans over the past 5 years. The loans range from the
savvy and profitable to garbage. It is unwise to assume that
the industry is now free of further strong direction from Treasury
regarding capital. Another round could come if the economy does
not show signs of recovery over the next 9-12 months.

On balance the Treasury's disclosures were well advertised and
discounted prior to today's release.

Bond Market -- Corporates

Corporates experienced a powerful bull market from 1982 - 2005,
with Moody's Baa bond yields falling from the whopping 17 - 18%
yield range down to 5.5% in early 2005. It was difficult to capture
the full majesty of this run as companies called their higher coupons
as fast as they could, and investors, who prefer funds, were often
stuck with shorter maturity structures than they deserved. Only
the big players with expertise to assess individual issues got the full
measure.

Yield chasing by liquid players was intense over the late - 2000 to
mid-2005 period. Corporates then entered a bear phase as yields
rose to compensate for higher inflation. The bear phase became acute
once the recession took hold in 2008, and corporates were drubbed
in the Sep. - Dec. ' 08 panic period, as players moved into safer haven
Treasuries in droves even as inflation eased. In spectacular fashion,
the Bloomberg junk index shot up from 10.50% to over 24% yields
before recently returning to near 12.50%.

Like Treasuries, high quality corporates have been poor performers
since Mar. of this year, as players opted to take on more risk in
equities and lower quality bonds.

High quality corporates, which traded as low as 5.2% in 2005, are now
a far more reasonable 7.00% and Baa/BBBs are at 8.20 - 8.80%. So
there are solid corporates out there that are now more attractive than
Treasuries and spreads can be expected to narrow further in even a
modest economic expansion. Junk bonds are much trickier because
the economy has weakened enough to increase default risk measurably.
My cut off for junk is 10%. I'll take a look at the market when yields are
above 10%.

I have never been that comfortable trying to do valuation on corporates.
I would say that in a 3.0 - 3.5% inflation environment, that high grade
corporates would be reasonably priced above 7.0% when maturities
exceed 7 years. I strongly prefer individual issues because with careful
shopping and some basic financial analysis, one can better tailor a
portfolio to suit one's needs than can be done using funds.

Long Treasury Bond

We are in an unusual period with regard to figuring out the T-bond.
In a recession / early recovery phase of the business cycle, the yield
on the T-bond can decline as the Fed eases credit and inflation
decelerates cyclically. But here, we saw the Panic of 2008, a move by
the Fed to a ZIRP at the short end and the development of deflation
in both asset values and the CPI. So, in a sense, the fundamentals
that lead to a cyclical downturn of the T-bond yield have already
happened. And, with evidence the economy is stabilizing, the long
end of the market has gone from flight-to-quality to flight-from-
quality, all in a short time frame, as players dump Treasuries to
move into riskier assets. The Fed has a program to buy in $300
billion of Treasuries to hold rates down to support housing in
particular, but the spike in the long bond has been strong enough to
suggest players have begun to price a "supply" premium into
yields as the budget deficit widens.

The T-bond sports a 4.10%. But this can move up to 4.50 - 4.80%
in the months ahead on further signs of a firming of the economy.
Basically, with economic expansion and a return to moderate
inflation pressure, the yield on the T-bond can easily move up to
between 5.00 - 6.00% over the next year or so.

At the moment, the short term leading economic indicators point
only to a stabilizing economy, while the inflation thrust measures
remain consistent with mild delation. So, the long bond has started
to discount an economic upturn, perhaps later in the year. Again,
remember that the goodies that can push the bond yield down early
in a recovery phase have already been expended.

Importantly, industrial commodities prices, paced by copper, have
also been moving up from steep lows. As I have said many times,
the Treasury is very sensitive to the direction and momentum of
the ind. commod. composite.

In my book the 30 yr T-bond -- now at a rising premium to its 40
m/a -- is fast becoming oversold. This is the flip side to an over-
bought stock market at the moment.

Further upward pressure on the T-bond yield should provide a
short term buying opportunity to capitalize on what could become
a deep oversold. Trades such as this have been a staple for me
for many years, but are not everyone's cup of tea.

I have attached a T-bond yield chart. There is resistance up at
4.40 - 4.50%. But, since the market is already oversold, a move up
to resistance straightaway may be a dicey call. CHART ($TYX).

Monetary Policy & GDP Report

Monetary Policy
The FOMC left it unchanged today, as most had expected. With ZIRP
in hand, the focus has been on Fed liquidity support for the credit
markets. The benchmark indicators that guide the setting of the
Fed Funds rate remain deeply depressed. The credit supply /
demand pressure gauge remains very distorted. Demand is weaker
as business loans roll - off (normal), but banking system funding
remains rather tight. Hence the large liquidity injections and the
ballooning of the Fed's balance sheet.

The Fed remains committed to expanding liquidity further if the
economy keeps weakening, but of important interest as well is how
FOMC will behave if the economy extends the very recent
stabilization and then begins to expand before year's end. The
traditional indicators would suggest that a turn to tightening in terms
of rates and monetary liquidity would a good ways off, and the
Fed has many liquidity enhancing swap programs on its balance
sheet that need to be pared in a recovery. If we do see a stronger
economy later this year as I expect, the FOMC management of
the massive liquidity support will be a subject of intense interest
and speculation.

GDP Report
I saw no surprises here. The downturn is very broad and in full
flower based on the report for Q 1. Inventory liquidation was huge
as expected and it will be interesting as well to see how much further
inventories might be pared in the current Q. Another large liquidation
would likely create more bounce back potential later in the year
than is now generally perceived.

Stock Market -- A Brief Sabbatical For Me

The call-the-short-term-top "space" is packed to the rafters with
technicians and pundits. It has been a terrific rally, with many stocks
up more thean 50% from the early Mar. low. The very short term is
less interesting to me than is the time period through June. If the
market stays on this very strong trend, the SP 500, which today
closed at 857, will take out 900 and challenge the Jan. high over 930
over the next 10 trading days. Maybe, maybe not.

Traders who stay long now, if they are experienced and smart, will
have less money out and with tighter stops.

From a percentages point of view, I am more interested in waiting
over the next week or two to see what kind of support develops for
the market and whether that could provide a framework for a further
significant advance post any consolidation or pullback which could
develop over the next couple of weeks. That's also in keeping with
my philosophy of leaving a little money on the table, and, it is also in
line with my interest in looking at other topics besides the daily Dow.

Stock Market -- Fundamentals

Back on 1/3/09, I posted that my primary fundamental indicators
had turned positive. Ditto the secondary as well. I expressed some
considerable misgivings -- overbought market, unstable psychology
and my worry that a turn in earnings was still "out there" in time.
I suspected January could be bumpy, but had no idea that SP 500
operating earnings would collapse into the first ever quarterly loss
for Q 4' 08. I had a low end of the range number of $10. and it
wound up - $.o9. I also did not expect the Fed to drain so much
liquidity from the system in January, either. Blindsided on 2 counts.

Well, my indicators -- trends in short rates, liquidity measures, BBB
bond yields and confidence measure yield spreads are not likely to
turn bearish until the Fed tightens liquidity and raises short rates.
So, I am stuck on positive. My secondary indicators remain in positive
territory as well.

My longer range economic indicators continue to point to a Half 2 ' 09
economic recovery. the shorter term indicators suggest a stabilizing
economy, but not recovery yet. I have been guessing a market bottom
over Mar. - May 2009 in lieu of earnings recovery later in 2009.
So far so good on that.

My SP 500 Market Tracker has fallen to fair value of 750 in April as
12 month earnings have sunk much further. The earliest bottom in
earnings is likely after the June quarter. ( 12 mo. earns. now $45.51).

Analysts have been incinerated by a collapse in SP 500 profitability
relative to their earlier expectations and consensus going forward
through 2010 is now much more muted.

The market is at a 13% premium to the Tracker in April as investors
are again trying in a moderate way to discount the bottom of earnings
and look toward recovery. I believe investors are also rejecting the
idea of anything more than a very transitory brush with deflation.

If earnings bottom later this year and recover moderately through
2010, there is still very sizable upside in the market from current
levels. Earnings recovery up to the mundane long term trend of $70.
by the end of 2010, would get you 1155 - 1200 on the SP 500.

Now the bottom line of all of this is that we need to see those shorter
term leading economic indicators start doing a fair bit better in the
months straight ahead. Otherwise, it's back to the drawing board.

Stock Market -- Technical

I still have this rally as intact despite yesterday's peppering. There
was a sharp sell off back 3/17-18 that took the market off its rocket
trajectory, but it has remained on positive trend since and it held
important short term support yesterday.

Much of the short term overbought was taken out yesterday, but
intermediate term overboughts ranging from 6-13 weeks are in
place, so there can easily be more short term volatility ahead.

My upside target for this rally has been SP 500 850 - 900 through
the end of April. We did close at 870 on Fri. 4/17. So the market
hit nearly the mid-point of the target range. But, since the rally is
still intact, I am happy to see it meander along.

This rally has taken out important trend resistance, and though it
is quite a way from testing measures of longer term durability, I
would not just blythly call it a bear market rally even if time shows
that's what it is. Technically, it commands attention for now.

I would be inclined to write off the rally if the SP 500 takes out
the 800 - 810 level in the days ahead on further selling pressure.

Gold Price

The gold price is in weak seasonal mode, so not to make that much
of it. If the price still looks sickish by Jul / Aug, best sit up and take
note.

Gold traded very nicely against my macroeconomic directional
indicator from 1999 until Aug. 2008, when the indicator tanked on
collapses of oil and industrial commodities prices. This development
created a decisive break in the long term trend of the macro indicator.
Gold weakened too, but no major long term trend lines were broken.

The macro indicator went into recovery in late 2008 as oil and
industrial commodites stabilized and then turned up. The last time
the macro indicator was at its current level was late 2007, when gold
traded at $800 -850 oz., so the discrepancy in relative behavoir is
not so large.

My economic value estimates have gold in a range of $500 - 600. and
the main long term chart trend at $650 - 750. Gold went to a large
premium to all these measures starting at the outset of 2006 and has
maintained a premium ever since.

By my long term estimates, silver, oil, most industrial commodities and
natural gas are all dirt cheap relative to gold and my preference would
be to play rallies in these markets rather than futz with an item that has
as much as 40% price downside.

I have attached a chart for the GLD etf. When you pull it up, you'll see
a double top and a shorter term downtrend. A price of 85 is an
important pivot point and a break below 85 could get you 75. Ok, but
a more interesting time may come when gold approaches a stronger
seasonal interval as summer kicks off. Chart.

Coincident Economic Indicators

Measured yr/yr, the recession deepend through Q1 ' 09 as the
decline in the CEI expanded to -5.6%. Real retail sales showed
a stabilization pattern over the quarter, but were still down 9.8%
yr/yr, as households continued to focus on rebuilding savings
and reducing debt.

Industrial production fell again in March and is now -12.8% yr/yr.
That is steep indeed. My rule of thumb for a depression is -15.0%,
so the US is nudging closer in my view. I use that rule because it
would take a good several years to make up the deficit in production
and because a 15% yr/yr drop has such negative implications for
profits and employment. Capacity expanded at only 0.5% yr/yr
through Mar. This reflects the steepening reduction of base capital
spending in the economy.

With retail sales more stable and production in a sharp decline,
business inventories are running off and physical working capital
is shrinking. So, pipelines are emptying out and as often happens
in such a situation, job losses have accelerated, with total employment
now down 3.5% yr/yr.

The income side is becoming more mixed. Per capita cash buying
power is as strong as it has been in many years. Total payroll (in
which I include unemployment benefits) remains positive but is
losing momentum. Moreover, the number of out-of-work folks
losing benfits is on the rise. On the plus side, new lower tax
withholding rates have just kicked in. In all, cash buying power
is still above water, and this factor continues to give the economy
a shot at recovery in the months ahead.

Now, we have pent up demand building for home sales, autos,
inventories and capital spending, with home sales and autos acute.
The factors to initiate recovery are in place and are visible.
What's needed, of course, is for consumers to begin to pick up the
pace of spending a bit, so that retail can start to move up from
stabilization.

Monetary Policy -- Liquidity

The Fed has started to step on the liquidity accelerator again after
a 3 month hiatus. The growth of the basic money supply has
stalled after a rapid increase over Half 2 '08, and the Fed has
recently stepped up the expansion of the monetary base to
counterract slow M-1. The Fed should probably push for another
$100 billion of cash for the system given how slow credit is. The
new round of tax cuts and the Fed's Treasury purchase plan should
help. I scratch my head about it, but it could be the case that the
tightening in monetary liquidity we saw from 12/08 - 3/09 did
adversely affect the stock market.

The broader measure of credit-driven liquidity growth has slowed
to 0.9% yr/yr through Mar. Here, one can more readily see how the
Fed is battling weaker credit demand via a deep recession. The
banking system's loan book has declined. As you would expect, the
major shortfull has come in the real estate loan book, which is running
15% below the long term trend and will fall further behind in the
months ahead. The C&I loan book is also running off, but slowly, as
businesses keep their credit lines drawn against any possible
negative policy reviews by the banks. As a consequence, the banks
are experiencing a run-off of jumbo deposits to go along with the
reductions in commercial paper offerings. Thanks to TARP, the
system's capital book has steadied out despite the large increases
in loan loss reserves and charge-offs.

Significant expansion of the broader base of liquidity is going to
require help from a turnaround of the economy.

Stock Market Quickie

The SP 500 closed today at 857 on the SP 500. So the rally has
pushed on and is now in the 850 - 900 range I have been
envisioning for a couple of weeks. So far, the uptrend has been
steep and persistent enough not to let cautious guys waiting for
a hefty pullback to get in. I have heard every argument in the
book to fight the tape and even some of the pundits are fighting
each other in print. Interestingly, the market did take out
another important downtrend line today.

I am planning a nice three day weekend and do not intend to
think about it until next week.

Stock Market -- Technical

The current rally is a bit more than a month old. As discussed in
posts over the past two weeks, it has exhibited a rocket trajectory
and has twice vaulted to exceptional short term overbought
readings. Even after today's sharp sell off, it remains moderately
overbought.

It has been a tradeworthy rally nonetheless, and remains of interest
to me, since it has broken out from the deep downtrend lines that
bounded the action over the past 6 months. The SP 500 closed
today at 816, and the market will continue to hold my interest as
long as it stays above 790 in the days ahead. A sharp break below
that level would indicate a trajectory of more questionable import.

Only the brain dead have missed the notion that the rally did get
ahead of itself, and my e-inbox is full of warnings that it's earnings
season and that dismal reports will threaten to smack it down.

Ah, but in my perverse way, I find that the inability of sellers to
crush such a high flown market overbought signifies a change of
some sort is afoot. Going back to late 2007, short term overboughts
have been treated in a rude, quick fashion from far less lofty levels.

So, I will keep the focus light turned on, and absent a break of
consequence below SP 500 790 - 800 over the next week or so,
will look for logical completion of the rally within 850 - 900 over
the course of April.

Economic Indicators

Leading Indicators
The weekly indicator sets remain at very depressed levels but
improved over the course of March. The indicators rose up through
the deep crash downtrend lines in force since mid-2008, and when
measured yr /yr, momentum, although depressed, has improved
steadily since Nov. '08. That's a decent positive. However, the
indicators themselves have not improved enough yet to call for a
positive reversal.

The monthly indicators too are depressed, but bounced up sharply
in March, reflecting a large rise in US manufacturing order rates.
The bounce in total new order breadth is the strongest since 3/03.
One swallow does not make a summer, but I'll take it for now.

Global new order breadth remains at very low levels with no
improvement despite the rise in US manufacturing. The global
new order data does show stabilization since last Nov., however.

The Economic Power Index for The US has weakened modestly
recently following a large positive surge since last Aug., when
inflation pressure fell away and allowed the real wage to rise
markedly. The real wage is still strong by historical standards, a
continuing plus for the economy. The employment side of the ledger
has turned awful, now -3.5% yr / yr through Mar. This is of
course undercutting purchasing power and the creation of slack in
the labor market can be expected to weaken the growth of the wage.
The decline of the full Power Index overstates the case as it does
not include safety net income from a more robust social security
payout and jobless benefits. Ahead, worker compensation will benefit
from a modest reduction of tax witholding -- a plus.

On balance, the sharp increase in the real wage has worked to
stabilize the economy despite a new consumer penchant to save more.
We need to see a continued more balanced approach between
spending and saving to see the economy regain more positive traction.

New mortgage purchase applications bounced positive in Mar. on
a seasonally adjusted basis -- another small but favorable sign.

My long term leading indicator remains positive and still signals
economic recovery by mid-2009. One indicator, the real oil price, is
turning negative reflecting a substantial recovery so far in 2009. You
have to watch this closely, as a speedy rise in the oil price, if
sustained, will ultimately damage the broader economy.

The capital slack measure shows a continuing large build in idle
economic resources and underscores why a substantial and vocal
contingent of economists want to see much higher levels of pro-job
government spending.

Stock Market -- Short Term

An interesting few days lie ahead. the rally is very much intact and
the market remains very much overbought in the short run. The
boyz took profits this pm in anticipation of the jobs numbers to be
released tomorrow. The main impulse for this rally has been
recognition that the economy has been stabilizing after a steep slide.
But, Team Obama has been painting the tape green as well, and
with a positive spin having been put on G20 (big hat, small rabbits),
the team might print a jobs number tomorrow that, although
bad, is better than expected. If you are trading around this rally,
be extra light on your feet over the next couple of days.

Stock Market -- Short Term Technical

Today's sell off continued the one started on Friday, only with more
smack. It ended a plainly unsustainable rocket run up that produced
a massive short term overbought on price (the breadth overbought
reading was mundane). The market could lose a little more ground
over the next day or two and still would be well positioned to move
higher if it catches decent bids. Too early to throw up one's hands.

The short term overbought we saw last week doubled anything
I have seen for quite some time.

Corporate Profits

Profits for the nonfinancial sector for Q1 ' 09 should be lower than
for the prior quarter and down substantially from the prior year
reflecting weak output comparisons and a loss of pricing power,
with the latter especially telling for commodities producers. Ditto
foreign earnings, and, for the offshore net of US companies, we have
to tack on an additional penalty for a stronger US$.

The financial sector maintained a high level of net revenues.
Downsizing likely cut noninterest operating costs, but the flow down
to the bottom line will primarily reflect the magnitude of loan loss
reserves and securities losses from the continuing unwind of the
mortgage paper crisis. That's all guesswork at this point. Naturally,
AIG -- the current poster child for the meltdown -- could have
more bad news to report.

With SP 500 profits broadly bad, companies are cutting dividends
to conserve cash. Measured yr /yr, the Sp 500 dividend is down 16%.

12 month earning power for the "500" is now a low $45. per share.
In a moderate global economic expansion with an accompanying
reduction of finance sector loan losses, earning power could be
$75 - 85. per share in the latter part of 2010.

The drop and crash of the stock market from 2007 is every bit
warranted by the drop and crash of big company earnings. US GDP
corporate profits -- a broader measure but one which has peculiar
economic adjustments -- is down about 33% off its peak, which is
still lousy.

The SP 500 Market Tracker, which uses current 12 month eps, is
priced now at 750 and reflects the current awful state of index profits.
The current rally underway in the stock market reflects an effort
to begin discounting a more stable economy with a bit more investor
confidence about the future.

Stock Market -- Short Term Technical

Yesterday's big rally took the market up to an obscenely high
short term overbought. We saw a pullback today, but the market
is still strongly overbought and vulnerable to more selling pressure.
Such would be the case even if bull market conditions ruled.

The market is at the gate of an intermediate term rally -- 6 -13
weeks -- that could carry the SP 500 up into a congestion / resistance
zone of 850 - 900 (as opposed to today's close of 806). However, the
trajectory up from the 3/9 closing low of 677 was such a rocket it
leaves about 5% further downside before it would enter onto a more
"normal" rally trajectory.

More conservative traders looking long may well hold out to gauge
if they can enter orders at meaningfully lower prices.

The market has moved sharply outside of a strong bear market
trajectory for the first time since the fall-into-crash kicked off after
Labor Day, 2008. So, for long side players this is the most interesting
rally in months and this suggests interest may stay high for a while.

The intermediate term breadth indicators I like still have the market
in oversold territory looking out several more weeks.

Financial Liquidity & Monetary Policy

Early in the calendar year, the Fed tends to drain liquidity from
the banking system following the holiday season. This year, for
reasons not disclosed, the Fed shrunk its balance sheet by a
whopping $400 bil. This action led to a contraction of the basic
money supply and a $150 bil. contraction in my broader measure
of credit driven liquidity. For a central bank intent on easing
credit, the tightening caper makes little sense, unless they wanted
to see how the credit markets would react to so big a change.

In any event, the Fed came along this week to announce they would
buy a little over $1 tril. of paper, including $300 bil. of Treasuries.
With this and their other facilities, the potential is there to expand
their balance sheet by $1.4 tril. or 70% to a ginormous $3.4 tril.
God bless us, that's a lot of money. Piker that I am, I would have
been satisfied if they had replaced the funds they drained and added
perhaps $100 bil. more via buying Treasuries.

So as discussed in the prior post, They are creating liquidity to
support credit growth far in excess of what the US is likely to need
over the next couple of years. Perhaps these planned purchases
will help hold Treasury yields down in the short run. We'll see.

Another gambit the Fed could have tried would have been to stop
paying interest on reserves and to start charging interest instead.
That might have served to get banks to reduce their excess reserves.

Well, we have moved much further in to a new ball game in the
annals of US monetary policy. This move has the potential to help
the economy in the short run, but it also could serve as a destabilizing
force in the long run.

The Fed -- Maybe They've Gone Over The Top

Ok, the FOMC has announced it is committing to buy up to $1 tril.
additional securities, including $300 bil. of Treasuries (quantitative
easing). They want to rescue the economy and do Their bit to help
out globally. I get it. But, this latest round of monetary expansion
grievously offends my sense of proportion and balance. To
analogize, the FOMC is building this enormous casino with every
gambler's interest and amenities provided for. But, the US private
sector is looking maybe to enter the casino once in a while, and needs
but a cup to hold quarters for the slots. In short, the Fed is
seeking to replace a credit regimen that may be too large for the
times we have entered.

Inflationary? Could be. But this action will create a liquidity load
in the system that could destabilize the economy and the capital
markets, especially when it comes to shrinking this vast pool.
Monetary tightening down the road that could involve removing
$1 tril. from the system could have unintended but very disturbing
consequences, inflation notwithstanding. Restoring integrity to the
Fed's balance sheet long term could prove a daunting task indeed.

I say all of this because I do not think the economy needs this much
liquidity to recover and prosper. Savings = investment, so even if
the economy saves more at the expense of a measure of short term
growth, liquidity for longer term investment will be provided
internally. I would like to see economic growth proceed from cash and
carry to modest credit expansion, which seems far more appropriate.

I understand the fear of a deflationary spiral into depression. But I
think folks need time to reassess their priorities and to budget
accordingly. That means a blend of incremental spending and
savings should be expected rather than having everyone only
pinch pennies and wait around to be laid off.

So, I am now out of synch with this decision to build so grand a
monetary edifice. It raisies substantially the risk of unintended
economic disequilibrium and dislocation.

Coincident Economic Indicators

Viewed yr / yr, the recession deepend further. The Feb. index of
CEI was down 5.1% vs. 4.5% for Jan. All components softend. My
indicators are overstating the weakness somewhat because they do
not capture the large increase in the social security disbursement
rate. The real hourly wage remains a very strong 3.6%, which when
coupled with per capita real SS disbursement of over 5%, gives the
consumer the stongest per adult cash buying power in many years.
That remains the bright spot in the outlook.

Real per capita income growth is being undercut by the rising tide of
employment losses and a weakening job market will eventually lead to
a softening of wage rates. Short term, real retail sales is showing
stabilization, which is a hopeful sign. Seen yr/yr, real retail sales is
down about 9.9%, which continues to show how strongly consumers
are interested in boosting liquidity or savings. Short term, the
liquidity preference has weakened, and this is precisely what is needed
to restart the economy. Come April, wage earners will get another
boost from lower tax witholding rates.

Production fell a whopping 11.2% yr/yr through Feb. That means that
inventories are being liquidated relative to sales and that the pipeline
is thinning out. Weak production also reflects the dramatic decline of
US exports under way over the past half year or so.

In all, it remains premature to give up on the idea of a stronger Half 2
economy for 2009, although the outlook remains a cliffhanger.

Stock Market -- Technical

Well, the rally has moved up and past the quick sucker format and
is threatening to become more substantial. The SP 500 has risen to
an overbought at 3.1% above its 25 day m/a, so I think we now are
at a level to test bullish intentions as overboughts above 3.0% have
tended to correct within days after the rallies have topped that
modest level (past six months only).

The 25 day oscillator has broken up through a downtrend underway
since early Jan. ' 09. That's a positive as it suggests the downleg
from Jan. may be over. The 10 day m/a is rising. The 25 day m/a is
still falling and the "10" is below the 25. So, it is still only a short term
run. My 25 day indicators are turning up but do not a confirm a
rally of more consequence as yet. Chart here.

The important 40 week oscillator with 13 week smoothing may be
entering a bottoming phase. This indicator indicated a topping phase
which began in the spring of 2007, ran on, and wound up hinting at
the major top that was to come. In a similar vein, the 40 week osc.
could run on in a bottoming phase for some time as well, although
as with all things technical, it need not.

Stock Market -- Technical & Psychology

Technical
Over the past 3 days, the market has rallied from a deep oversold
up to a modest oversold. Last week, I saw it as a coin toss whether
stocks could rally or fall further to match the kind of oversold %
readings we saw last autumn. Unlike the intermittent rallies we
witnessed through much of 2008, the upsurges this year have all
been cruel sucker moves that have trapped all but the most nimble
of day traders. At the moment, the jury is out on whether this is
just another sucker-doo.

This is the 3rd time this year the market has rallied out of a deep
downtrend line. So, it will be interesting now to see whether the SP
500, which closed today at 751, can advance further, and of greater
importance, can hold above the 710 level through next week's close.
Then, we might have something more interesting.

Psychology
Market psych. has improved this week because leading banks have
pointed out that net revenues remain at high levels and that cash flows
net of reserves remain substantial. The promise here is that if
the economy is more stable and loan loss reserves are more contained,
the earnings leverage will be quite positive. As well, both the SEC and
the accounting standards board (FASB) are under tremendous
pressure from Congress to modify the ridiculous market-to-market
rules which are making banks take losses they may well not realize.
Both the FASB and SEC are now under strong pressure to respond,
pronto. Congress gets my vote on this one. Finally, it should be
noted that retail sales, a forward but not a leading indicator, are
showing some stabilization (More on this next week when the
co-incident economic indicators are reviewed).

I enjoy trying to gauge market psycology, but the recent change to
positive is a great reminder of just how fast psychology can change
and why you have to be so careful with it.

Oil Price

The oil price retains good economic value below $50 bl. The price
is giving mixed signals during this normally strong seasonal period
which can run out through March. It is well off the late 2008 crash
low of $33+, but has not been able to take out short term resistance
in the $46-47 area. At present the shorter term uptrend in evidence
since mid- Feb. '09 is the firmest to date since the price moved up off
the crash level.

Still, the price should be doing better. It is behaving atypically for a
new cyclical advance during this normal strong seasonal period, and
the failure to clear resistance puts it closer to bear market behavoir.
Since cyclical bear markets in oil typically last 12 - 18 months, the
late 2008 low looks suspicious given that the all time price high of
$147 came in mid-2008 as well as the severity of the decline in
global petroleum demand. So, although it has a good short term
technical profile and could push higher before the end of the month,
claiming that the price "bottom is in" is an against-the-house bet.

Fundamentally, despite the OPEC production cuts, inventories are
high on a seasonal basis and gasoline demand in particular remains
on the weak side. Capacity at the well head will expand moderately
this year as well. So, it could be late in this year or 2010 before
supply and demand align more favorably for price recovery.

Long positions should be attentive to how oil behaves as it winds up
the seasonal push around month's end. For a technical chart, click
here.

Economic Indicators

Weekly Leading
Weeklies are still trending down, but the momentum to the downside
has eased markedly, signaling a short term moderation in the pace
of the downturn.

Monthly Leading
New order breadth measures for Feb. again came in above the record
lows for 12/08, but downtrends persist. Monthlies also signal a
moderation of the downturn short term.

Comparable global measures are short run stable at low levels.

Economic Power Index
The real wage rate is holding up decently at 3.6% yr/yr, but the
employment rate has fallen sharply to -3.0% yr/yr, undercutting
the wage. A lower consumer tax bill at the outset of the year and
lower witholding ahead are boosting after tax incomes. The
strong real wage continues to give the economy a decent shot at
recovery this year if liquidity preference moderates in favor of
spending.

Business Strength Index
A weak 110 for Feb., with 135 indicating decent expansion. Business
output and operating rates remain at deep recession levels.

Economic Slack
Slack continues to rise as short rates are very low, operating rates
have been falling and unemployment is trending up sharply.

Profits Indicators
Continued weakness for Jan. , Feb. Suggests Q1 '09 profits will be
sharply lower yr/yr.

Inflation (Deflation) Thrust
The indicators remain consistent with the development of mild
deflation this year when measured yr/yr. Focus of market players is
likely now more directed to month-to-month changes to see if
a fresh trend might emerge.

Summary
The indicators point to an ongoing deep global recession with some
moderation in the power of the decline so far this year. Profit
margins remain under pressure from very weak sales. Within a
12 month perspective, the pricing outlook is mildly deflationary. Too
early to tell yet whether leading indicators have paused in their
decline or are signaling eventual, firmer stabilization.

Stock Market

The market has drifted down into deep oversold territory that can
as easily signal further vulnerability as a rally prelude. If investor
despair is creeping in and taking hold, the broad market can easily
drop another 8 - 10% in relatively short order. As I have discussed
in recent weeks, it is hard for fund managers to hold on for recovery
when current profitability is so very low and when a significant
rebound of earnings seems very "iffy" after plenty of disappointment
since late 2007.

At the current level of 682, the SP 500 has moved down from quite
reasonable to cheap. In my view, it is interesting from an investment
perspective for the first time in a long time. In fact, I have only traded
equities for many years and even cut back on that when the market
had its bubble over 1996 - 2002. Now since I am closing in on 70
age wise, I am not really interested in long term positions, but I do
plan to extend my time horizons well past the 2 - 4 month regime I
have followed for so long as we move forward.

For the very short run, we can only see whether there is enough of
an oversold to trigger more than a few days sucker rally or whether
fear is up enough to trigger another round of heavy selling.

Let Us See....Let Us See

I have posted a lot in recent weeks with topics in a longer term
perspective. Now it is time for a few months of careful monitoring
to see how matters shape up.

My views run as follows. The US is on the borderline of far more
serious economic trouble. Analysis of business cycles over history
precludes reaching too negative a conclusion so quickly. The longer
run leading economic indicators have been positive for nearly 6
months and I have been anticipating a recovery to to take hold over
Half 2 ' 09. Many of the objections to this view can be rejected out
of hand, save for the issue of liquidity preference. Consumers have
cut back sharply on spending to rebuild savings at the expense of the
real economy. A troubled housing industry and low affordability
has kept people away from the residential market. The real wage
per capita is strong and this has been a key to recoveries in the past.
Housing affordability has improved sharply. So, we need to see
how folks balance savings, spending and investment in the months
ahead. Continued very strong liquidity preference will only sink
the economy further. To help consumers and the financial sectors,
there is modest tax relief ahead and another Fed / Treasury
program to boost consumer and small business borrowing. This
latter program based on a $200 bil. swap for Treasuries can be
leveraged up to 5 - 1, putting up to $1 tril. in play.

Businesses are fast trimming inventories to rebalance the pipeline
after a rapid fall of sales. This rebalancing has substantially
punished production and employment, but it is well underway.

By historic measures, a Half 2 ' 09 economic and profits recovery
should see a stock market bottom between March - May right
ahead. Now just below 700, the SP 500 is very reasonable on a
decent recovery in profits through 2010. I would also point out
that my fundamental indicators flashed positive at the end of ' 08,
but weak current earnings and diminished confidence have so far
weighed heavily on the market. I am on the hook for that and will
be for some time, as those indicators would not turn negative until
the Fed tightens policy.

In my view, commodities which are now cheap, should move up
sharply over Half 2 '09. Ditto oil, which at $40 bl. is also inexpensive.
My concern would be if economic recovery brings too rapid a rise
in commodities and begins punishing consumer incomes.

Look, from my perspective, the pieces to move the economy up and
out of the ditch are in place. The battle now is with fear and public
anxiety about the future. Since consumer sentiment can turn on a
dime, I plan to move forward in viewing the environment a couple
of steps at a time.

Stock Market -- Earnings & Long Term

It appears that the 12 month operating earnings of the SP 500
could well fall 50% or more peak-to-trough in this cycle.
Specifically, net per share could fall from an all time high of more
than $91- to $45- or less by later this year. The post WW1 era and
Great Depression saw larger declines, but the present downtrend
is as bad as it gets short of economic catastrophe.

As you might imagine, steep declines of corporate profits are followed
by strong advances once the economy turns positive. Even so, with
a decline of 50% in net per share, experience shows it could take
5-6 years to recoup and see earnings move to new highs. This
observation suggests that the recent $91- peak might not be topped
until 2014-15.

I do keep a model of the SP 500 based on very long term net per
share growth of 6.45% and a p/e based on both a long view simple
average of this ratio plus one based off long run inflation. Trend
or "normalized" eps for 2009 is about $75- and the p/e ratio is
set at 16.0 - 16.5x. The model value thus has the "500" at 1200 -
1238. Thus the market, now in the mid-700s, is very reasonable
against the long term framework. But, to be realistic, it could well
take several years to see reported "500" eps back up to $75-. Thus,
you need to take the model's output as a measure of value and not
a shorter term price target. But, you also have to recognize that
development of a cyclical bull market in the wake of a very deep
decline of earnings can easily double the price low within 4-5 years.

Now I can use historical earnings and dividend data to construct
a more muted price recovery as well as one with even more punch
than that outlined just above. Much will depend on the power of
the economic recovery as well as how aggressively companies
manage their plowback of earnings and their balance sheets.

The long term model I discussed above is quite a bit more
conservative than the one that served me well from the 1985 -2007
period. I have taken the long run trend of earnings component
down from 8.5% back to the historic 6.45% in looking toward
the future. I also used a 70% earnings plowback rate with the
1985 - 2007 model and this could be high going forward. But we'll
have to see on that.

I use a long run "normalized" pattern model to try and envision
the future and as a diagnostic. The LT model of the SP 500 is
different from the Market Tracker, which relies on current 12
month earnings rather than points on a trend. If 12 month "500"
net per share drops to $45- this year as expected, the Tracker
would show a value of about 740. Grim indeed.

I plan to set the longer term stuff aside for awhile to focus more
on the shorter term environment. After all, the economy still
sits at the edge of far more serious trouble, and I need to check
in on whether my view that we can avoid catastrophe has some
merit.

Big Bank Nationalization -- No Thanks

First, a contrary view: The conventional wisdom is that the banks
need to be "fixed" to have an economic recovery. I see it the other
way around. We need to see an economic upturn start first to have
a good chance at straightening out the major banks. Recovery
implies an improvement in loan loss experience, an improvement
in bank operations cash flow and stronger investor interest. A
persistent economic decline implies all of the opposite: wider
losses, shrinking cash flows and the coup de grace for bank equities.

Overall, bank loan demand is more of a lagging indicator, since
businesses can cover early recovery working capital needs with
fast rising cash flows. In the meantime, banks can accomodate
early recovery mortgage needs straight out of the pot. Early
economic upturn provides business with a chance to reduce their
loans and for big companies to refinance short term credit with
bonds. Yes, eventually we will need the banks to finance advanced
expansion, but the early upturn comes first.

Banks follow a certain script with troublesome credits. They
increase loan loss reserves, charge off losses against those reserves
and post loan delinquencies to regulators. Banks are now being
stressed tested every day in the weak economy and will now
step up with 2 year estimates of unrecoverable loans and the hits
to capital such might involve. The US Treasury will then have a
projection of external primary capital each of the major banks
might need.

An economic upturn will bring better loan loss experience and lead
to an upward revaluation of toxic, securitized loans. It will also
greatly expand the market for selling these loans as monster bid /
ask spreads narrow.

At this point, banks would be foolish to sell those loans at large
discounts. If it wants, the Treasury can enlist private capital with
guarantees to, in effect, make a market for the junky stuff. But
an economic upturn will underwrite a far better market, as banks
can sell at reduced losses if need be and dilute equity less.

For my part, the most appropriate course for the Gov. is to
recapitalize the big banks as needed in the short run, close out
the smaller stinkers and wait for improving economic conditions.

The guys out there who are calling for an immediate takeover of
Citibank have no idea of what they are asking for. First, the Feds
would be on the hook for hundreds of billions of $ deposits. Then,
figure it will take the new top guys and directors 18 months to
figure well what they have inherited. In the meanwhile, top
divisional people will leave for better money elsewhere, leaving the
bank undermanned at a time when businesses may come a calling
to bank with a "risk free" house. Finally, there's an even darker
side: The guys at the seized bank may simply not prove very
helpful. So, taking on a big guy via a takeover should be an
absolute last resort.

The focus needs to be on re-starting the economy.

Stock Market -- Technical & Psychology

Technical
There are easier days for technical comments, but here goes. The
recent weakness in the market has brought it to a fairly deep short
term oversold, with the SP 500 about 10% below its 25 day m/a.

The "500" did close under the previous bear market low of 752
set in 11/08, but, with today's close of 743, the action was not
decisive enough to claim that a new dramatic breakaway downleg
is in force. Thus, the focus can be on whether the clear oversold is
deep enough to warrant a rebound. My 25 day price oscillator
broke down below an improving trend in force since last autumn.
That tells me not to simply proclaim a rally is imminent. My six
week adv / decline "flame" is deeply oversold and that tells me there
is a good bounce in store over the next 10 trading days.

My intermediate term indicators run out to 13 weeks. I rely heavily
on these to trade, and, they are in whipsaw mode and have been of
little help. So, I am stuck with the short run.

My weekly SP 500 chart has long term support at 800, so weekly
closes below that level would turn that chart bearish on a longer
run basis. I do note that my NYSE a/d line is a country mile above
levels seen when the SP 500 broke 800 back in 2002. Such has
been the interest in smaller cap stocks as well as the disastrous
performance of the major financials.

With so many years of looking at charts, I have developed trend
momentum trendlines that have proven helpful to me. The SP 500
did move out from under the crash line in 11/08, but has not yet
been able to clear a serious momentum downline in force since 9/08.
Recent failures to do so ratify the bear market. Chart here.

Market Psychology
The major issue in recent weeks concerns how well psychology
will hold up with corporate profits so very weak and with the
leading indicators not signaling recovery straight ahead. It is
difficult for many to summon the courage to buy stocks now even
if profits recovery is 6-7 months away because profits are so very
low.

I do not use psychology as a primary indicator because it is not at all
easy to "read" and because it can turn on a dime. I am now looking
to see whether despair may be starting to creep into the environment.
Tough read now because we are so oversold.

Coincident Economic Indicators

My favorites are the changes to the real hourly wage, employment,
real retail sales and production. Measured yr/yr, the composite of the
four stands at -4.5% for Jan. Momentum is still to the downside, but
the window for economic recovery has opened a little further. The
yr/yr change in the wage stands at a strong 3.9%. The decline of
industrial production has tumbled to -10.0% yr/yr.but that brings it
below that of retail sales at -9.7%. This means weak production has
caught up with sales and that excess inventories are therefore being
worked off. Best now would be a period of stabilization of retail
sales, which did rise 1.0% in Jan.

The economic power index -- change in the real wage plus change of
employment -- stands at 1.7% yr/yr. Compare that to the 9.7% drop in
retail sales and you can see clearly how fiercely consumers have been
building savings and going light on the plastic.

The strength of the real wage gives the US a golden opportunity to
stabilize the economy with a better balance between spending and
saving. I hope we take it, because sooner or later, a weak economy
will bring the wage down.

Inflation (Deflation) Indicators

The 12 month CPI came in at 0.0% for Jan. '09. As often discussed,
the rapid deceleration of inflation measured yr/yr primarily reflects
the Half 2 '08 blowout in the commodities markets, especially fuels.
Worth noting is that the 12 month change for the CPI ex. fuels and
foods has dipped to 1.7%.

My inflation thrust gauge is now a deflation thrust measure and
continues to point to mild 12 month CPI deflation in 2009. Another
longer term measure I follow weighs commodities less heavily but
also seems to be pointing to mild deflation (ECRI).

The CPI has fallen about 4.0% from its all time peak set 7/08. Most
economists now know that the 12 month CPI will show deflation
unless the CPI accelerates up over the next 6 months. So, from
here, there will be more focus on the month-to-month change in
the CPI to determine whether the recent sharp decline was but a
shorter term phenomenon.

The hot button component for the increase in the CPI from Dec. ' 08
was the gasoline price, which has moved up from $1.62 a gallon to
$1.92. There will be little concern unless the gasoline measure
surges much further.

Financial System Liquidity

I start this comment looking on a global basis. The very sharp
contraction in the US trade deficit over the past six months means
a large decline in US dollars flowing overseas. Most economies,
now in deep recession, would welcome additional dollars to buttress
reserve holdings in a time of stress when their own currencies
may be under pressure. The contraction of US trade adds to
sovereign risk for economies in distress now, such as eastern
Europe and Taiwan. The Fed has provided about $600 bil. in
currency swap credit lines to foreign central banks as an offset.
The growing US budget deficit and a strengthening US dollar may
also work to syphon liquidity from abroad, as foreign investors
choose US Treasuries for safe haven status. As the yuan has
weakened in China, there is evidence of some capital flow from
there to the US. The US dollar in global context poses hazards
abroad in 2009. The Fed swap lines are not that popular here as
the Fed is taking credit risk abroad. Thus the Fed has to operate
with caution here.

Over the past 6 weeks or so, the Fed has drained nearly $400 bil.
from its balance sheet. January is often a "drain" month following
the holiday season, and given the current gargantuan size of the
Fed's balance sheet, well, we're now talking big numbers on the
add and drain sides. The drain resulted in substantial shrinkage of
the monetary base and the basic money supply. The liquidity here
is still strong and not a major worry at the moment. However, the
shrinkage may have bothered some stock players. By happenstance,
it might also serve as an important message to high inflation buffs
as the Fed showed it can shrink liquidity in size every bit as fast as
it pumped it up.

The broader measure of liquidity (in which I include financial co.
commercial paper) is recovering in growth. Realistically though, we
may be at a point where increased credit demand may be required to
sustain improvement over the next year or so.

There is large excess liquidity on hand relative to the current needs
of the real economy. And that excess reflects rising deposit balances
against a 10% yr /yr decline of US production and SP 500 company
sales. The much lower need for working capital could at some
point lead to a sharp run off of C&I loans and relieve stress on bank
system liquidity and capital. We'll see. The excess liquidity described
here is normally a powerful plus for stocks, although low investor
confidence has been holding players back.

Stock Market Comment

Much of what I read blames this new round of weakness in the
market on the failure of Treas. Sec. Geithner to present a fully
fleshed out plan to corral toxic bank debt and put the system on
a sounder footing. Such may be hogwash. The Street is out after
Geithner because he represents the leading edge of more regulation
of hedge funds and other managed products. They are not going
to love Timmy.

Rather market weakness reflects the ever more obvious: Really
awful sales and earnings. Yr/yr SP 500 sales are down by more than
10%, and operating earnings for the final quarter now look to come
in below $6.00. That has knocked the wind out of the long side of
the market. Most know that Q1 '09 net per share promises to be
quite low as well, so that there can be no BS-ing about the second
half of the year: Net per share needs to bounce big time to provide
12 month eps that can bridge into a much stronger 2010. You have
to go back to 1932 / 33 to find a shortfall of earnings comparable
to what we have now. Unsure of a Half 2 '09 sharp positive turn
of earnings, investors now struggle with how to stay long on such
low current net per share.

Every stock investment manager out there has faced the challenge
of deep down earnings or worse for a particular stock or industry
sector, but none have faced such depressed earnings for the entire
market. It's gazing into the abyss and players may need more time
to adjust.

Stock Market Psychology

Basically, a waiting game continues. The global market crash over
Sept. /Oct. ' 08 was the direct reflection of a plunge in global output
and profits. In the US, the leading economic data sets I follow have
leveled off over the past 2 months, and the SP 500 has notched 70%
of its daily closes between 800 - 900 since mid - Oct. ' 08.

The market has faded since year end primarily because operating
profits have come in well below expectations. In turn, players now
know the Obama stimulus package will phase in rather slowly.
Players have also re-discovered that settling the toxic debt issue
of the banks is going to have require some creative thought not now
in evidence.

We have G-7 this weekend, but beyond that the focus should be on
another round of poor earnings reports coming in April and whether
prospective additional economic rescue steps by the Obama admin.
and others in the interim might be enough to hold the markets up.

Stock Market -- Fundamentals -- Earning Power

Late last year, everyone knew that the earnings estimates for the
SP 500 based on individual company forecasts by analysts were too
high. So, S&P took it upon itself to put all of the estimates under
review. The regular weekly update was suspended to accomodate
said review. For Q4 '08, I was well under consensus with an
estimate of $10.00 for the quarter. On 2/2, S&P published $8.19
and then one week later, came $6.33 with about 80% of the reports
in the can. Sweet Jesus, that came as a surprise, especially since
peak net per share of $24.07 was notched in Q2 '07.

Close to half of the decline in Q4'08 eps compared to that of Q4 '07
reflected an acceleration of financial sector red ink, with the
remaining 9 sectors down 21% in toto. The lower band for the
trend of earnings since the latter 1980s was $15.00 per quarter,
so the dramatic decline for the recent quarter represents a major
blowout and certainly suggests a probable new epoch of more
restrained earnings growth and profitability.

The decline in earnings for the non-financial sector has so far been
mundane and not alarming. However, this broad sector could well
see significantly weaker earnings over much of the first half of ' 09
as the full brunt of a broader, deeper recession is felt. As well,
the accountants have let many non-financials take large
"nonrecurring" write downs which in effect inflates operating eps.
In fact, total earnings as reported for the 500 companies and
which includes the writeoffs, could well be in the red for Q4 ' 09 --
an historic first for any period.

There is a temptation for investors to "low ball" eventual recovery
earnings. However, the positive earnings leverage for non-financials
is enormous when a global economic recovery takes hold. The
financials, now mired in deep red ink, are holding net revenue, and
have extraordinary positive earnings leverage once loan / securities
losses peak and begin receding. That leverage will outweigh the
effects of dilution to be expected when market conditions improve
enough to allow this sector to re-capitalize.

So, we have extremely depressed corporate earnings currently,
with the potential for a large bounce up once economic recovery takes
hold. Clearly, investors are not treating quarterly eps of $6.00 - 8.00
as the new norm, but are pricing in a substantial recovery in
earnings over much of 2009 and going into 2010. And further,
players are assuming the banking sector will be repaired enough to
provide normal assistance in an economic expansion.

Right now, we are a ways from recovery. I say Half 2 '09. Plenty of
others see no economic recovery until 2010 or even later. Some have
us in a deflationary "death spiral" that could spell a long, perilous
depression.

Oops! I have to add another no-no to my list. The other week I
added the price of gold to my grandad's list of things not to argue
about ( He fingered politics and religion). I'll add the economic
forecast to that list. Thus I leave the reader at full liberty to
his or her own economic view. But, I do have a sobering point
here: Earnings are being badly mauled in the short run, and even
if you are more optimistic such as I, you have to have a strong
regard for how bad things did turn in recent months.

Stock Market -- Fundamental Note

In the latter part of last year, the SP 500 Market Tracker was
giving readings of 1000 -1050 or well below the actual level
until the crash came starting in Sept. Then, investors gave up
on consensus earnings and tanked the market. The Tracker
closed out the year at 925, and now looks to be around 875,
on the expectation that earnings in Q1 ' 09 will again come in
under forecast. 12 month earnings could now be down around
$53, compared to the record 12 month total of $91.47 through
mid-2007. More on this subject as the week progresses.

Economic Indicators

Weekly and monthly leading indicators have stabilized over the
past two months at very low levels. There was a little slippage
toward the end of the month as jobless claims rose sharply again.
We remain on the cusp of a downturn not seen since the depression
years, and further significant weakness in the leading indicators
would signal that we may enter into a far more serious downturn.

My economic power index is at a +2.2 through Jan., primarily
reflecting yr/yr real wage growth of 3.8%. That is a strong number
and would normally make a recovery call a slam dunk. But as we all
now know, consumers are building liquidity in heavy preference to
spending, and we need to have a better balance between the two to
see recovery develop. The clock is running because with such a weak
job market, the growth of the current dollar wage can be expected to
slow. I also continue to look forward to spring, when sharply higher
housing affordability will test consumer interest. The Fed quietly
shrunk its greatly enlarged balance sheet by 18% in Jan., resulting
in a significant decline in the basic money supply. If this condition
persists, I would not be surprised to see the Fed purchase $100
bil. of Treasuries across the spectrum to inject liquidty directly
into the sytem and put some downward pressure on the yield
curve. That would further help the mortgage market.

As you can imagine, profits forecasts continue to be slashed with
the financial sector taking the heaviest hit by far. My profit model
for this sector shows an extended period of flat net revenues, fees
and operating expenses. The damage is mostly coming from loan
losses with securites losses a small but rising drag. As a group, the
major banks are well in the red. Analysts have continually
underestimated the losses. However, remember my point of a
few weeks back, banks can still be under repair in the early phase
of a recovery.

Long Treasury Bond Profile

Reflecting a continuing financial crisis and the sudden, breathtaking
descent of the economy into deep recession, Treasury yields across
the spectrum plummeted over H2 '08. Over a several week period
late last year, the 30 yr. yield dropped from 4.40% to 2.56% in a
panic flight to quality by investors.

Since then, the yield on the 30 yr. has backtracked up to 3.67%.
The short lead economic indicators have stabilized for the time
being, including sensitive materials prices, which bond traders
watch carefully. In addition there is the prospect of a large and
still growing stimulus program before the congress. Now at a cool
$900 bil., the program will surely add to Treasury new issue
volume.

At 3.67%, the 30 year carries a fat, roughly 350 bp premium to
the 3 mo. Bill, and a 366 bp premium to the 12 month inflation
rate. These are reasonable levels in the very short run as
confirmed by my long term regression pricing models.

Short term, the US economy has stabilized at a very low level.
My longer range economic indicators, which includes the now
steeply positive yield curve, suggest to me the US economy
should begin recovery by mid-year, fiscal plan notwithstanding.
At a minimum, I see a 5 month period of uncertainty ahead,
wherein the lead indicators could turn even lower, or morph
from stabilization into a more positive mode. Evidence that the
downturn in the economy will deepen further could easily send
the 30 yr Treas. yield back down toward the 2.50% level. But,
if indicators like sensitive material prices do not plunge and
begin to show signs of recovery as spring dawns, the yield on
the 30 yr will rise, perhaps to the 4.50 - 5.00% level. And that's
about the limit of my knowledge on the subject, at least for the
months ahead.

I have dwelled on the issue because the economy has invariably
responded positively to the kind of monetary stimulus that has
been applied. Ideas such as "liquidity trap" and "pushing on a
string" have proven chimerical when it comes to the US
economy. But, since short term indicators have yet to point to
recovery, I am stuck. Moreover, I just do not now know whether
liquidity preference, which been very strong, will continue in
unabated fashion or slacken some, allowing for recovery.

Two further points are worthy of note. Watch industrial
commodities prices over the price of oil. The bond market sees
a rising oil price as a tax on consumption and is more concerned
with a broad rise of sensitive materials prices. Secondly, if a large
stimulus plan is enacted, the market may begin pricing into yield
a premium for a bigger new issue calendar going forward. In
times past, that premium has been as much as 100 bp.

Back on Dec. 2, '08, I argued that the bond market, then 3.20%,
was strongly overbought and that advisory sentiment was too
bullish. In the next few weeks, sentiment grew to 91% bullish
and the market got even more overbought. We have had the
backlash in recent weeks as the 30 yr yield has shot up. The
overbought has been greatly reduced and sentiment (70 %
bullish) although high is not now acute. I have traded the
long bond for about 30 years. My suggestion is to watch the
sentiment indicators like MarketVane carefully and observe the
yield vs its 40 wk m/a. When it strays well away from the 40 wk.,
it does not do so for long. Yield chart here.

Short Term Interest Rate Profile

The 91-day T-Bill or "risk free rate" now trades between 0.00 -
0.25%. Money market funds have recently settled down at 1.75%
but yields have been in a downtrend. Despite the Fed's ZIRP
regimen, money markets have returned 5 - 6% over the past
6 months in real terms, as the CPI has experienced 4.5% deflation.
So, holders of short term quality debt have yet to be suckered.

Low short rates are warranted by the weakest economic conditions
in the post WW2 era. For example, the ISM index for manufact-
uring stands at 35.6, nearly 20 full ponts below the 55 level when
the Fed normally raises rates.

My long term regression (100 +yrs) model for the T-Bill yield
has an alpha of 1.7%, meaning that the bill should yield 1.7% at
zero 12 month inflation. The Fed, worried as it is about the
economy, has zeroed out the yield. Indeed, the real yield for
the past 6 mos. is over 4.5%.

Under normal circumstances of economic expansion and a
moderate 3% inflation rate, the Bill should yield about 4.7 - 5.0%.
This gives you a good quantitative benchmark to see how far the
Bill is below the long term capital market line. Once an
economic recovery begins, the Fed will move short rates up
much closer to the "normal" level.

So long as there is deflation in the system, many players will not feel
that pressured to pick up yield, as the Bill enhances the purchasing
power of their funds without credit risk.

In a deflationary environment, a meaningful real yield will tend to
suppress consumption and business investment as time wears on.
For now, consumers, facing bad housing, stock and job markets are
struggling to regain liquidity and build a cushion in a difficult
environment. As we head into the seasonally strong period for
housing this spring, it will be interesting to see whether liquidity
hoarding psychology will prevail in a market where affordability
has made a dramatic comeback.

More broadly, I do not know of a satisfactory rule to forecast
liquid savings, but I think it is ok to assume that when the
purchasing power of savings is rising, the personal savings rate
will tend to move back up to a longer term norm.