I have been priced out of the long side of the 30 yr. Treasury for many months. The bond, now
trading in the high $140s, is a country mile above my current preferred entry level of $115 -120.
With a yield now well inside 3.0%, the bond is priced for a deflationary recession in the US
and capital flight to the US to reflect a stronger dollar and a global economic environment that
has turned less secure. Since I turned bullish on the long Treasury in late 1980 when yields
went above 13% and have traded long umpteen times over the past 30 odd years, I am going to
leave all the remaining price upside to others. A long guy at $135 (3.50% ytm) is my absolute
upper limit.
Is this sayonara for the Treas? Nope, because there is the short side, too. I've been there a number
of times over the years. The chart shows the bond is overbought on RSI and MACD. $USB chart
Also, trader advisory sentiment is now too bullish. For example, MarketVane shows Treas. bond
bulls at 78% in their survey. Over the long term, readings of % bullish that run above 76% on
this survey generally spell trouble for those who are long the bond in the months ahead.
Wednesday, May 23, 2012
Tuesday, May 22, 2012
Inflation Potential & Profit Margins
My primary inflation pressure gauge, which measures broad arrays of commodities prices and
production facility operating rates, made a cyclical peak to date in mid 2011 and has declined
sharply since then. With plant capacity utilization in the US remaining on the rise, the decline is
entirely a result of a substantial erosion of commodities prices. $CRB Composite Measured yr/yr,
the CPI has dropped from 3.9% seen for Sep. '11 to just 2.3% for Apr. '12.
What is unusual here is that sharp declines in commodities price composites tend to reflect falling
US output and operating rates. However, this time out, the weakness in commodities is much more
a reflection of a sharp loss in global economic growth momentum -- think the EU and China -- as
well as selling pressure generated by financial players who are reducing exposure to commodities
because of slower global growth. It is also likely that the sharp positive runs in the CRB in 2009
and then again from mid - 2010 through mid - 2011 reflect the two large QE programs by the
Fed, both of which encouraged traders to step up cyclical risk exposure. The upshot here is
A falling CRB no longer automatically renders the US economy immediately suspect.
However, decelerating inflation will, net - net, reduce business pricing power both here and
abroad and that development will eventually crimp profit margins to the eventual detriment of
the jobs market as employers look to cut costs. So, ultimately, falling commodities prices and
inflation will work to diminish US econmoic recovery.
Without a sharp recovery of commodities prices, the US CPI may stay in a range of 2.0 -2.5%
measured yr/yr, and if additional weakness in the EU surfaces along with some further moderation
of GDP growth in China, then the CPI could head down to 1% if the CRB continues to falter. In
fact, a break in the CPI below 2% yr/yr could trigger another sizable QE response from the
Fed as they would become anxious about the return of deflationary pressure (It is empirically
possible to have a "virtuous" or non-harmful period of deflation, but this is not at all likely to
occur in economies which carry sizable debt leverage as does the US. Then, deflation can be
devastating).
The CRB is trading down around an important support level. Traders have trimmed long
exposure to commodities and are waiting to see if global economic growth momentum keeps
decelerating. From my perspectice, the CRB is quite reasonably priced at current levels.
Moreover further significant weakness in these markets could bring new damage to the
major commoditiy producing economies such as Canada and Australia. Toronto Comp.
The US CPI is on a trend track that would take the yr/yr monthly rate down to 1% by the
end of this year provided the CRB breaks materially below current rough support around the
290 level. Since a veer toward deflation could be devastating here if not globally, I am on
full alert and looking for new monetary and fiscal initiatives from the majors, including China,
which also needs to guard against too much of a growth slowdown.
production facility operating rates, made a cyclical peak to date in mid 2011 and has declined
sharply since then. With plant capacity utilization in the US remaining on the rise, the decline is
entirely a result of a substantial erosion of commodities prices. $CRB Composite Measured yr/yr,
the CPI has dropped from 3.9% seen for Sep. '11 to just 2.3% for Apr. '12.
What is unusual here is that sharp declines in commodities price composites tend to reflect falling
US output and operating rates. However, this time out, the weakness in commodities is much more
a reflection of a sharp loss in global economic growth momentum -- think the EU and China -- as
well as selling pressure generated by financial players who are reducing exposure to commodities
because of slower global growth. It is also likely that the sharp positive runs in the CRB in 2009
and then again from mid - 2010 through mid - 2011 reflect the two large QE programs by the
Fed, both of which encouraged traders to step up cyclical risk exposure. The upshot here is
A falling CRB no longer automatically renders the US economy immediately suspect.
However, decelerating inflation will, net - net, reduce business pricing power both here and
abroad and that development will eventually crimp profit margins to the eventual detriment of
the jobs market as employers look to cut costs. So, ultimately, falling commodities prices and
inflation will work to diminish US econmoic recovery.
Without a sharp recovery of commodities prices, the US CPI may stay in a range of 2.0 -2.5%
measured yr/yr, and if additional weakness in the EU surfaces along with some further moderation
of GDP growth in China, then the CPI could head down to 1% if the CRB continues to falter. In
fact, a break in the CPI below 2% yr/yr could trigger another sizable QE response from the
Fed as they would become anxious about the return of deflationary pressure (It is empirically
possible to have a "virtuous" or non-harmful period of deflation, but this is not at all likely to
occur in economies which carry sizable debt leverage as does the US. Then, deflation can be
devastating).
The CRB is trading down around an important support level. Traders have trimmed long
exposure to commodities and are waiting to see if global economic growth momentum keeps
decelerating. From my perspectice, the CRB is quite reasonably priced at current levels.
Moreover further significant weakness in these markets could bring new damage to the
major commoditiy producing economies such as Canada and Australia. Toronto Comp.
The US CPI is on a trend track that would take the yr/yr monthly rate down to 1% by the
end of this year provided the CRB breaks materially below current rough support around the
290 level. Since a veer toward deflation could be devastating here if not globally, I am on
full alert and looking for new monetary and fiscal initiatives from the majors, including China,
which also needs to guard against too much of a growth slowdown.
Sunday, May 20, 2012
Stock Market -- Weekly
Fundamental
The weekly cyclical fundamental indicator is now trending lower. Its descent is far more modest
so far than what occurred over spring / summer 2010 and 2011. The SPX, which rose far more
rapidly than the WCFI early this year is now falling at a faster clip than the WCFI and it could
well be that this process may continue if the WCFI stays under pressure. The weekly correlation
continues to run around 0.6. The major weak spot in the WCFI continues to be sensitive materials
prices as players attempt to discount a global deceleration of output growth in the short run.
Fed Bank Credit and the monetary base remain under moderate downside pressure. Here, the Fed
has reduced the currency swap program with the ECB and other affected central banks from the
$100 bil. level seen in late 2011 to $26 bil. currently. That sort of decline would normally be
greeted as a bullish economic development, but players did rally the market late last year in part
because the Fed pumped more liquidity into the global economic system. Substantive evidence
of more liquidity problems for banks within the EU can be backstopped by large dollops of
liquidity by the Fed via rapid expansion of the currency swap program without inducing
US congressional ire. Worst case is that the Fed's balance sheet is set to stop contracting.
Technical
The weekly chart for the SPX portrays a downtrend. There is minor support for the SPX just
under current levels and note that the market is now moderately oversold in the short run.
Failure of the market to mount even a modest bounce this week would not be a good sign as
oversolds of this magnitude often attract more buyers. SPX -- weekly
EU Politics / Economics
There is not a doubt in my mind that Mrs. Merkel had her tootsies held to the fire this weekend
at G8. Hollande is the new guy on the block so he has to be cautious in approaching Merkel.
However, Obama / Geithner are fed up with Merkel and Obama likely was blunt in pressing
the Germans to broaden out their EU economic regimen from such full reliance on austerity.
German political / finance chiefs often blow off the US until It gets very nasty. This a national
election year here. They got very nasty.
The EU poohbahs gather mid-week to discuss the crisis on an informal basis. Merkel will need
to do more than toss out a couple of small fish if she would like to see this new run on confidence
staunched. Listen carefully.
The weekly cyclical fundamental indicator is now trending lower. Its descent is far more modest
so far than what occurred over spring / summer 2010 and 2011. The SPX, which rose far more
rapidly than the WCFI early this year is now falling at a faster clip than the WCFI and it could
well be that this process may continue if the WCFI stays under pressure. The weekly correlation
continues to run around 0.6. The major weak spot in the WCFI continues to be sensitive materials
prices as players attempt to discount a global deceleration of output growth in the short run.
Fed Bank Credit and the monetary base remain under moderate downside pressure. Here, the Fed
has reduced the currency swap program with the ECB and other affected central banks from the
$100 bil. level seen in late 2011 to $26 bil. currently. That sort of decline would normally be
greeted as a bullish economic development, but players did rally the market late last year in part
because the Fed pumped more liquidity into the global economic system. Substantive evidence
of more liquidity problems for banks within the EU can be backstopped by large dollops of
liquidity by the Fed via rapid expansion of the currency swap program without inducing
US congressional ire. Worst case is that the Fed's balance sheet is set to stop contracting.
Technical
The weekly chart for the SPX portrays a downtrend. There is minor support for the SPX just
under current levels and note that the market is now moderately oversold in the short run.
Failure of the market to mount even a modest bounce this week would not be a good sign as
oversolds of this magnitude often attract more buyers. SPX -- weekly
EU Politics / Economics
There is not a doubt in my mind that Mrs. Merkel had her tootsies held to the fire this weekend
at G8. Hollande is the new guy on the block so he has to be cautious in approaching Merkel.
However, Obama / Geithner are fed up with Merkel and Obama likely was blunt in pressing
the Germans to broaden out their EU economic regimen from such full reliance on austerity.
German political / finance chiefs often blow off the US until It gets very nasty. This a national
election year here. They got very nasty.
The EU poohbahs gather mid-week to discuss the crisis on an informal basis. Merkel will need
to do more than toss out a couple of small fish if she would like to see this new run on confidence
staunched. Listen carefully.
Friday, May 18, 2012
EU: Will Angie Cut Her Bad Boys Some Slack?
G-8 at Camp David. Discussions on the veranda in the cool of the evening. Few kind words are
spoken. Geithner set to take Wolfie Schaueble on a madcap wheel chair ride through the woods.
Merkel sees but perfunctory Pepsodent smiles from Obama. Hollande does not care for the food.
Cameron thinks wistfully of Ms. Brooks -- what a tigress!
But, the EU markets are oversold and sitting at or near tradable support. Since austerity is only
for people who can truly afford it, It is time to start to lay out a road map for how the EU might
recover and grow and offer folks something more positive than sequential bank runs as one
domino falls after another.
Time for Angie to cut her bad boys some slack...
Chart: IEV Euro 350 ans $XEU
spoken. Geithner set to take Wolfie Schaueble on a madcap wheel chair ride through the woods.
Merkel sees but perfunctory Pepsodent smiles from Obama. Hollande does not care for the food.
Cameron thinks wistfully of Ms. Brooks -- what a tigress!
But, the EU markets are oversold and sitting at or near tradable support. Since austerity is only
for people who can truly afford it, It is time to start to lay out a road map for how the EU might
recover and grow and offer folks something more positive than sequential bank runs as one
domino falls after another.
Time for Angie to cut her bad boys some slack...
Chart: IEV Euro 350 ans $XEU
Thursday, May 17, 2012
Gold Price Quickie
Long time readers of this blog might recall that back in Oct. 2010, I mentioned that I would begin
shorting gold periodically via buying shares of DZZ, a double short ETN. I recommended that most
folks avoid this kind of trade and I have done trades using only a small amount of capital. It was my
way to have a profitable joke on the unrelenting bull chatter of the bugz. I closed out a DZZ long
on Mon. 5/14 for a tidy profit and was interested to see that although gold weakened yesterday, it
started catching bids at $1530. I leave the field to the bulls on the premise that QE buzz is likely
set to rise. Since autumn, 2010, I have netted about 75% net of fees on the trades.( Since only dopes
broadcast short trades, expect no comment from me until after the fact, especially now that the
levered ETNs are available). DZZ chart
In the meantime, gold has moved above that important $1560 pivot. So, let's see what they do with
it.
shorting gold periodically via buying shares of DZZ, a double short ETN. I recommended that most
folks avoid this kind of trade and I have done trades using only a small amount of capital. It was my
way to have a profitable joke on the unrelenting bull chatter of the bugz. I closed out a DZZ long
on Mon. 5/14 for a tidy profit and was interested to see that although gold weakened yesterday, it
started catching bids at $1530. I leave the field to the bulls on the premise that QE buzz is likely
set to rise. Since autumn, 2010, I have netted about 75% net of fees on the trades.( Since only dopes
broadcast short trades, expect no comment from me until after the fact, especially now that the
levered ETNs are available). DZZ chart
In the meantime, gold has moved above that important $1560 pivot. So, let's see what they do with
it.
Wednesday, May 16, 2012
Stock Market -- Daily Chart
As is obvious, the market is in short term correction mode. I rate it as entering moderately oversold in
the short run. The market has corrected nearly 7% from the 4/2/12 cyclical high and by conventional
standards stands as a "normal" cyclical bull market correction. So, it might get a second look down
around this 1325 level. SPX chart I happen to regard the 1325 level as important, because a sharp break below that level would close out this last bull leg running from Oct. '11 and would, on a prima facie
basis, signal the end to the cyclical advance that began in early, 2009 as we have had a three wave up - move since then.
Someone could come along and say "well, we we are going to get a fourth leg up" and that is a
possibility. Another person could come along and claim that a break down through 1325 only
signals the end of the first leg of a longer running advance which could go on for several years.
And that could be true.
But, for me, a sharp break below SPX 1325 would signal uncertainty and the need to do some
critical re-thinking about my assumptions. It would signal that something could well be going
haywire, something that needs to be tracked down and understood.
As an optimistic old guy, I am hoping we hold and bounce from this level and that further modest
progress might be in store. However, as much a virtue as hope may be, it is out of place in
this business......
the short run. The market has corrected nearly 7% from the 4/2/12 cyclical high and by conventional
standards stands as a "normal" cyclical bull market correction. So, it might get a second look down
around this 1325 level. SPX chart I happen to regard the 1325 level as important, because a sharp break below that level would close out this last bull leg running from Oct. '11 and would, on a prima facie
basis, signal the end to the cyclical advance that began in early, 2009 as we have had a three wave up - move since then.
Someone could come along and say "well, we we are going to get a fourth leg up" and that is a
possibility. Another person could come along and claim that a break down through 1325 only
signals the end of the first leg of a longer running advance which could go on for several years.
And that could be true.
But, for me, a sharp break below SPX 1325 would signal uncertainty and the need to do some
critical re-thinking about my assumptions. It would signal that something could well be going
haywire, something that needs to be tracked down and understood.
As an optimistic old guy, I am hoping we hold and bounce from this level and that further modest
progress might be in store. However, as much a virtue as hope may be, it is out of place in
this business......
Sunday, May 13, 2012
Financial System -- Liquidity Issues
Measured yr/yr, my broad measure of credit driven financial liquidity rose but 3.7% through
April, '12, and is up a scant 0.4% from mid - 2011. Monetary liquidity -- represented here by
M-1 -- accounts for about 18.5% of the broader liquidity measure. M-1 is up 18% yr/yr, but
is set to decelerate rapidly and could be down to only +4% yr/yr by the end of 2012. Short
term interest rates remain at nominal levels, but with decelerating liquidity, we are reaching
back into an era like the 1936 - 38 period, when premature liquidity tightening by the Fed
produced a damaging and wholly unnecessary recession. I think the Fed has about $100 bil. to
play with without being forced to announce a new QE program, so even though the liquidity
situation for the economy as well as the stock market is turning uglier, we are in an "early
warning" phase of an evolving liquidity squeeze. The best solution would be that extant
liquidity is sufficient to extend the economic recovery enough that banks further liberalize
lending, particularly in the real estate market. Barring that, Fed chair Bernanke, who is
gambling with the recovery right now, will be forced to put forth a new QE program of
sufficient size to keep the economy going. Many players are already assuming that such a
program will be forthcoming especially in view of the fiscal austerity set to kick in at the
end of 2012. And more so if the President and the Congress continue to bungle whatever
negotiations may take place.
Since I try to make as few assumptions as I can when looking at the economy and the markets,
my view is that fundamental risk for the economy and for stocks is on the rise and that Bernanke's
hand may well be called before year's end 2012 if the banks do not loosen up further.
April, '12, and is up a scant 0.4% from mid - 2011. Monetary liquidity -- represented here by
M-1 -- accounts for about 18.5% of the broader liquidity measure. M-1 is up 18% yr/yr, but
is set to decelerate rapidly and could be down to only +4% yr/yr by the end of 2012. Short
term interest rates remain at nominal levels, but with decelerating liquidity, we are reaching
back into an era like the 1936 - 38 period, when premature liquidity tightening by the Fed
produced a damaging and wholly unnecessary recession. I think the Fed has about $100 bil. to
play with without being forced to announce a new QE program, so even though the liquidity
situation for the economy as well as the stock market is turning uglier, we are in an "early
warning" phase of an evolving liquidity squeeze. The best solution would be that extant
liquidity is sufficient to extend the economic recovery enough that banks further liberalize
lending, particularly in the real estate market. Barring that, Fed chair Bernanke, who is
gambling with the recovery right now, will be forced to put forth a new QE program of
sufficient size to keep the economy going. Many players are already assuming that such a
program will be forthcoming especially in view of the fiscal austerity set to kick in at the
end of 2012. And more so if the President and the Congress continue to bungle whatever
negotiations may take place.
Since I try to make as few assumptions as I can when looking at the economy and the markets,
my view is that fundamental risk for the economy and for stocks is on the rise and that Bernanke's
hand may well be called before year's end 2012 if the banks do not loosen up further.
Friday, May 11, 2012
Gold -- Bugz Failed To Show This Week
Earlier this month I opined the bugz were due to rally their favorite lest it drift down to pivotal
support at 1560. Well, they have not shown up and gold has started drifting down to $1560 oz.
support. The indicators are bearish on the chart, but the market is getting more oversold on an
RSI basis. Gold chart Where are these guys?
support at 1560. Well, they have not shown up and gold has started drifting down to $1560 oz.
support. The indicators are bearish on the chart, but the market is getting more oversold on an
RSI basis. Gold chart Where are these guys?
Stock Market -- Weekly Chart
After a terrific positive run of a touch past four months, the market and my key weekly indicators
have turned down. I did get an intermediate sell signal off my 40 wk. price oscillator as well this
week. SPX weekly Sometimes the signal whipsaws, but if it does, it tends to happen very quickly.
In addition the signal can often be early, but any rallies that come along, I will play with only a
minor portion of my trading capital.
The market did move down during my cycle low window period. Whether it will bottom and bounce
or move deeper into correction is not covered now by the cycle indication and only time will tell
from a cycle point of view. There usually are tradable bounces after a cycle low, but the market is
not oversold enough to be tempting to me.
Note on the chart there is a support / earlier resistance pivot line around the 1350 area. So, as we
move into next week, we are at an important short term directional point.
have turned down. I did get an intermediate sell signal off my 40 wk. price oscillator as well this
week. SPX weekly Sometimes the signal whipsaws, but if it does, it tends to happen very quickly.
In addition the signal can often be early, but any rallies that come along, I will play with only a
minor portion of my trading capital.
The market did move down during my cycle low window period. Whether it will bottom and bounce
or move deeper into correction is not covered now by the cycle indication and only time will tell
from a cycle point of view. There usually are tradable bounces after a cycle low, but the market is
not oversold enough to be tempting to me.
Note on the chart there is a support / earlier resistance pivot line around the 1350 area. So, as we
move into next week, we are at an important short term directional point.
Thursday, May 10, 2012
ECRI -- Weekly Leading Index
The weekly leading economic indicator index from the Economic Cycles Research Institute
(subscription required for the better research) is one of several weekly measures I follow to
gauge the economic outlook. ECRI - WLI
The substantial increase in the volatility of this index since 2008 has bothered not only ECRI
but many others who follow it. I think the index has been buffeted by the tremendous volatility
of sensitive materials prices, and I suspect, by the abject collapse of US housing. Be that as it
may, the index has properly reflected the changes in momentum of US and global industrial
production as well as global trade. My guess now is that the US may stay out of recession as
long as the index does not break sharply below the 120 level.
(subscription required for the better research) is one of several weekly measures I follow to
gauge the economic outlook. ECRI - WLI
The substantial increase in the volatility of this index since 2008 has bothered not only ECRI
but many others who follow it. I think the index has been buffeted by the tremendous volatility
of sensitive materials prices, and I suspect, by the abject collapse of US housing. Be that as it
may, the index has properly reflected the changes in momentum of US and global industrial
production as well as global trade. My guess now is that the US may stay out of recession as
long as the index does not break sharply below the 120 level.
Wednesday, May 09, 2012
Fun With NYSE Breadth -- Advances
Contrary to many market technicians, I pay a great deal of attention to breadth measures of the
NYSE. One example is to follow a 6 week m/a of advances. Over the years, the work has shown
that when the 6 week m/a does drop down to 1100 issues or a bit lower, the stock market is
significantly oversold and ready to rally $NYADV (Over 3,000 issues are traded.)
As often happens, the trend of advancing issues is strongest in the early stages of a rally and
tends to tail off as the rally progresses along. The chart shows a well established trend down is
in place for the 6 wk m/a, which at 1281, is still well above the 1100 level. I do not know now
whether advances will fall to the 1100 level soon, but that is where I would be most comfortable
going long for a trade with significant positions.
NYSE. One example is to follow a 6 week m/a of advances. Over the years, the work has shown
that when the 6 week m/a does drop down to 1100 issues or a bit lower, the stock market is
significantly oversold and ready to rally $NYADV (Over 3,000 issues are traded.)
As often happens, the trend of advancing issues is strongest in the early stages of a rally and
tends to tail off as the rally progresses along. The chart shows a well established trend down is
in place for the 6 wk m/a, which at 1281, is still well above the 1100 level. I do not know now
whether advances will fall to the 1100 level soon, but that is where I would be most comfortable
going long for a trade with significant positions.
Monday, May 07, 2012
Weekly Cyclical Fundamental Indicator (WCFI)
During the current recovery, the WCFI has been the most reliable fundamental indicator of stock
market direction and momentum. It does not always work that way, but it has this time out.
The indicator has a purely economic coincident measure which is comprised of a broad array
of weekly data mostly from retail sales and production. This measure has grown in reliability
over the years because US companies have the capability to manage inventories and procurement
far more tightly. The WCFI also includes more economically forward looking measures, with
jobless claims and sensitive materials prices each receiving very large weightings.
The SP 500 (SPX) is trading just a wee bit higher than it was at the end of April, 2011. It is
important to note that the same can be said of the WCFI. Looking nearly yr/yr in this way, the
retail and production components of the indicator are are modestly higher and would be much
stronger yet if the construction materials businesses were not still so depressed. Jobless claims
are in far better shape than a year ago, a very nice positive. The nasty one has been industrial
commodities prices. This index (JOC) is down more than 13% from the 4/11 cyclical peak
and is trading even slightly below the peak levels of 2010. Since investors and traders use
sensitive materials prices as a proxy for cyclical economic momentum just ahead, the weakness
in these various industrial input components has kept players on guard.
It is also important to note that in both 2010 and 2011, cycle pressure gauges such as the global
PMI made peaks in the spring at levels just slightly higher than the current reading (Global PMI)
The PMI link also shows a loss of global economic growth momentum in the wake of the
peak readings, action which was foretold by the turns to weakness for industrial commodities
prices. JOC index via Bloomberg
The creation of industrial commodities ETFs and ETNs allows investors and traders to play
in these markets in addition to the large commercial firms and brokers. The partial
financialization of these markets by players who are already trading stocks, bonds and currencies
gives us windows on intelligence about the markets at work and the money down on the table.
It may also add to the extraordinary price volatility we have seen in many sensitive materials
prices in recent years.
The evidence so far in this cycle shows acute awareness about weekly economic data by
capital markets players with special focus on both the range of sensitive materials prices and
the level and direction of US jobless claims. It suggests that if US stocks are to end the year
significantly higher than now, jobless claims will need to fall a fair bit further and industrial
commodities prices will need to recover perhaps to reach new highs for the global recovery
cycle to date. Thus it may be that you will have some useful short term market intelligence as
the year wears on.
market direction and momentum. It does not always work that way, but it has this time out.
The indicator has a purely economic coincident measure which is comprised of a broad array
of weekly data mostly from retail sales and production. This measure has grown in reliability
over the years because US companies have the capability to manage inventories and procurement
far more tightly. The WCFI also includes more economically forward looking measures, with
jobless claims and sensitive materials prices each receiving very large weightings.
The SP 500 (SPX) is trading just a wee bit higher than it was at the end of April, 2011. It is
important to note that the same can be said of the WCFI. Looking nearly yr/yr in this way, the
retail and production components of the indicator are are modestly higher and would be much
stronger yet if the construction materials businesses were not still so depressed. Jobless claims
are in far better shape than a year ago, a very nice positive. The nasty one has been industrial
commodities prices. This index (JOC) is down more than 13% from the 4/11 cyclical peak
and is trading even slightly below the peak levels of 2010. Since investors and traders use
sensitive materials prices as a proxy for cyclical economic momentum just ahead, the weakness
in these various industrial input components has kept players on guard.
It is also important to note that in both 2010 and 2011, cycle pressure gauges such as the global
PMI made peaks in the spring at levels just slightly higher than the current reading (Global PMI)
The PMI link also shows a loss of global economic growth momentum in the wake of the
peak readings, action which was foretold by the turns to weakness for industrial commodities
prices. JOC index via Bloomberg
The creation of industrial commodities ETFs and ETNs allows investors and traders to play
in these markets in addition to the large commercial firms and brokers. The partial
financialization of these markets by players who are already trading stocks, bonds and currencies
gives us windows on intelligence about the markets at work and the money down on the table.
It may also add to the extraordinary price volatility we have seen in many sensitive materials
prices in recent years.
The evidence so far in this cycle shows acute awareness about weekly economic data by
capital markets players with special focus on both the range of sensitive materials prices and
the level and direction of US jobless claims. It suggests that if US stocks are to end the year
significantly higher than now, jobless claims will need to fall a fair bit further and industrial
commodities prices will need to recover perhaps to reach new highs for the global recovery
cycle to date. Thus it may be that you will have some useful short term market intelligence as
the year wears on.
Thursday, May 03, 2012
Gold Note
The gold price has broken trend support here in the short run. Today, I use the Gold Trust shares
(GLD chart). As the chart shows, the bugz were venturing in long when the 12 week RSI went
down to 50, but more recently, gold has been catching bids down in the 42 -45 range of RSI. So,
it is time for the bugz to step in to support the price. But you also need to see that the recent
bounces off a depressed RSI have been weak and unsustainable. I suspect this reflects the absence
of clear and present indications of new QE programs so that gold is trading now more like an
industrial metal (check out $GYX in the bottom panel) and less like a safeguard against further
"debasement" of currency. For years now, it has been wisest to give the bugz the nod when RSI
drops below the 50 level, but one should note there is easy downside in the short term to the
$152 per share pivot line level for GLD (and $1560 oz. for gold). Let's see if the guys step up
to buy over the next several days or let it go.
(GLD chart). As the chart shows, the bugz were venturing in long when the 12 week RSI went
down to 50, but more recently, gold has been catching bids down in the 42 -45 range of RSI. So,
it is time for the bugz to step in to support the price. But you also need to see that the recent
bounces off a depressed RSI have been weak and unsustainable. I suspect this reflects the absence
of clear and present indications of new QE programs so that gold is trading now more like an
industrial metal (check out $GYX in the bottom panel) and less like a safeguard against further
"debasement" of currency. For years now, it has been wisest to give the bugz the nod when RSI
drops below the 50 level, but one should note there is easy downside in the short term to the
$152 per share pivot line level for GLD (and $1560 oz. for gold). Let's see if the guys step up
to buy over the next several days or let it go.
Tuesday, May 01, 2012
Stock Market -- Technical
The stock market has rallied over the past week or so from a mild short term oversold. The 10
and 25 day m/a 's have turned up with the 10 close to crossing the 25 on the way up. Such a cross
would be a good sign short term. To have much credibility, the SPX needs to move up from today's
1406 and take out the 4/2/12 cyclical closing high of 1419.
I have not played this brief rally. After the extended positive run we've had, I was hoping for a
deeper oversold to hedge risk.
The market is now in the middle of a window for an intermediate term cycle low. No dice, yet,
and this is interesting because the the market failed to observe the previous cycle low scheduled
for mid - Jan. 2012. This roughly 75 - 85 trading day cycle had been working like a charm since
at least 2007. Two straight misses would invite a fresher look at cycle behavoir.
The run - up in stocks since late 2011 has brought the market up to a 10.1% premium to its 200
day m/a. There have been over a dozen trips up like this since the latter 1980s. All occurred
in cyclical bull markets. Once the market crosses the 10% premium threshold, the odds have
been running only one in four in favor of a further sharp advance over the succeeding six months.
The other cases all involve either extended consolidation / mild correction or prelude to a
cyclical bear market.
From my perspective, speculating on a further substantial move up in stocks over the next six
months is an against - the - house bet with an only 25% modern times probability in its favor.
Now, although the positive price momentum has gone out of the market over the past month,
it is still operating on an intermediate term buy signal based on how I smooth out a 200 day
m/a price oscillator. Obviously, if this current minor rally takes out the SPX 1419 level and
continues to move up, that buy signal is likely to remain in force for a while.
Since this current cyclical bull is more than three years old, I am now as likely to go short as I
might go long and I will be most attentive when the market is either + or - 5% its 25 day m/a.
$SPX chart
and 25 day m/a 's have turned up with the 10 close to crossing the 25 on the way up. Such a cross
would be a good sign short term. To have much credibility, the SPX needs to move up from today's
1406 and take out the 4/2/12 cyclical closing high of 1419.
I have not played this brief rally. After the extended positive run we've had, I was hoping for a
deeper oversold to hedge risk.
The market is now in the middle of a window for an intermediate term cycle low. No dice, yet,
and this is interesting because the the market failed to observe the previous cycle low scheduled
for mid - Jan. 2012. This roughly 75 - 85 trading day cycle had been working like a charm since
at least 2007. Two straight misses would invite a fresher look at cycle behavoir.
The run - up in stocks since late 2011 has brought the market up to a 10.1% premium to its 200
day m/a. There have been over a dozen trips up like this since the latter 1980s. All occurred
in cyclical bull markets. Once the market crosses the 10% premium threshold, the odds have
been running only one in four in favor of a further sharp advance over the succeeding six months.
The other cases all involve either extended consolidation / mild correction or prelude to a
cyclical bear market.
From my perspective, speculating on a further substantial move up in stocks over the next six
months is an against - the - house bet with an only 25% modern times probability in its favor.
Now, although the positive price momentum has gone out of the market over the past month,
it is still operating on an intermediate term buy signal based on how I smooth out a 200 day
m/a price oscillator. Obviously, if this current minor rally takes out the SPX 1419 level and
continues to move up, that buy signal is likely to remain in force for a while.
Since this current cyclical bull is more than three years old, I am now as likely to go short as I
might go long and I will be most attentive when the market is either + or - 5% its 25 day m/a.
$SPX chart
Sunday, April 29, 2012
Stock Market -- I Am Still On The Sideline
One rule I follow is when I foresee twists and turns ahead in a piece that I am about to write, I
lack a clear, definite point of view. So rather than belabor the outlook for the market with a
lengthy discourse, suffice it to say that I remain cautious and happy to sit on my hands.
When I look at the technical work, the "perfect" path would be for the market to sell down sharply
this week, then rally reasonably quickly to a minor cyclical high with this to be followed by a
couple of weeks of consolidation before prospects for a more substantial correction take shape
sometime in June.
However, since tthe market very seldom rewards one with exactly what one thinks should
happen, I am going to continue to take it easy, not argue with anyone, and see if the action gives
me some better clues.
lack a clear, definite point of view. So rather than belabor the outlook for the market with a
lengthy discourse, suffice it to say that I remain cautious and happy to sit on my hands.
When I look at the technical work, the "perfect" path would be for the market to sell down sharply
this week, then rally reasonably quickly to a minor cyclical high with this to be followed by a
couple of weeks of consolidation before prospects for a more substantial correction take shape
sometime in June.
However, since tthe market very seldom rewards one with exactly what one thinks should
happen, I am going to continue to take it easy, not argue with anyone, and see if the action gives
me some better clues.
Wednesday, April 25, 2012
Monetary Policy
The Fed issued its FOMC policy statement today. Its intent is to keep short rates low all
the way out to late 2014 and to be on standby to provide increased monetary liquidity if
the economic recovery falters.
Post WW 2 indicators are now 75% in favor of the Fed raising short rates. Only capacity
utilization is below the threshold, and that by a scant 1.5 percentage points. But, the Fed has
fears. My broad credit driven measure of funding liquidity is up only 4.3% yr / yr. and about
80% of that increase is attributable to the prior QE 2 program of liquidity injection. In turn,
even with much improved housing affordability, banks and mortgage financiers are heavily
shading lending decisions in favor of collateral value rather than cash flow adequacy and
stability. Raising short rates would trigger long rate increases in the short run. That
would make mortgages more expensive, reduce housing affordability and could scare the
banks into even more conservative lending practice. This all would increase the supply of
housing on the market and introduce more intense deflationary pressure.
With a platform of low interest rates, the Fed is banking on an eventual recovery of the
housing market as well as a continuation of a non-residential construction upturn. Stronger
housing and real estate financing needs would expand credit driven liquidity in the economy
and reduce the need by the Fed to resort to quantitative easing. It would ultimately force
lenders to compete more aggressively for funding and begin to put upward pressure on
market short rates. As of now, the Fed thinks this process could take another two years before
private sector credit demand is robust enough to warrant more constrictive monetary policy.
Of course, if the housing / construction markets stage a stronger than expected recovery and
if it comes sooner than the Fed anticipates, well then you can kiss ZIRP to late 2014 good bye.
the way out to late 2014 and to be on standby to provide increased monetary liquidity if
the economic recovery falters.
Post WW 2 indicators are now 75% in favor of the Fed raising short rates. Only capacity
utilization is below the threshold, and that by a scant 1.5 percentage points. But, the Fed has
fears. My broad credit driven measure of funding liquidity is up only 4.3% yr / yr. and about
80% of that increase is attributable to the prior QE 2 program of liquidity injection. In turn,
even with much improved housing affordability, banks and mortgage financiers are heavily
shading lending decisions in favor of collateral value rather than cash flow adequacy and
stability. Raising short rates would trigger long rate increases in the short run. That
would make mortgages more expensive, reduce housing affordability and could scare the
banks into even more conservative lending practice. This all would increase the supply of
housing on the market and introduce more intense deflationary pressure.
With a platform of low interest rates, the Fed is banking on an eventual recovery of the
housing market as well as a continuation of a non-residential construction upturn. Stronger
housing and real estate financing needs would expand credit driven liquidity in the economy
and reduce the need by the Fed to resort to quantitative easing. It would ultimately force
lenders to compete more aggressively for funding and begin to put upward pressure on
market short rates. As of now, the Fed thinks this process could take another two years before
private sector credit demand is robust enough to warrant more constrictive monetary policy.
Of course, if the housing / construction markets stage a stronger than expected recovery and
if it comes sooner than the Fed anticipates, well then you can kiss ZIRP to late 2014 good bye.
Tuesday, April 24, 2012
Commodities Market
With 1932 as a base, commodities price composites have trended moderately higher. Given the
extraordinary volatility of commodites, the top part of the historic price channel has tended to
run at 2x the bottom or base trend line. The last two huge spikes up in price took place in 1980
and 2008. For the CRB index ($CRB), The base trend line up to the historic mid - point describes
a range of 290 - 445. At 301 presently, the CRB broad commodities index is trading only slightly
above the longer term trend. Now I also use an economic model based on what I think is a
sensible production cost curve + mark - up, and that has the CRB "fairly valued" at 325 - 330.
The CRB did experience a crash over the mid - 2008 to early 2009 interval when it fell 57%.
Since then, the market has staged a cyclical bull advance until Mar. of this year, when the
market started to break below trend. $CRB Chart
The weakness in the market since May, 2011 reflects decelerating economic growth in China --
a prime commodities buyer in the world market, a downturn within the EU and not least, the
end of large scale QE by the Fed, which, no doubt, prompted plenty of speculative interest
over the early 2009 - mid - 2011 period.
Since mid - 2011, global production growth has decelerated further and has been moderate
enough not to chew up excess capacity in rapid fashion. This has cooled speculative trading
and inventory stocking in the commodities markets.
It is noteworthy that China has begun the process of loosening the monetary reins. This could
help the commodities market going forward, but players still need to be careful as China is likely
to move cautiously in the wake of a troublesome real estate price boom triggered by the
monetary excesses seen over 2009 - 2010 when it put on a huge credit driven stimulus program.
The CRB is trading down near both long and intermediate term support in the 290 - 295 area. the
market is oversold and is reasonably valued at the current level. On the flip side, a sharp break
below support could be an alarming development as it would suggest players are growing
more concerned about a fizzling out of global real growth going forward.
extraordinary volatility of commodites, the top part of the historic price channel has tended to
run at 2x the bottom or base trend line. The last two huge spikes up in price took place in 1980
and 2008. For the CRB index ($CRB), The base trend line up to the historic mid - point describes
a range of 290 - 445. At 301 presently, the CRB broad commodities index is trading only slightly
above the longer term trend. Now I also use an economic model based on what I think is a
sensible production cost curve + mark - up, and that has the CRB "fairly valued" at 325 - 330.
The CRB did experience a crash over the mid - 2008 to early 2009 interval when it fell 57%.
Since then, the market has staged a cyclical bull advance until Mar. of this year, when the
market started to break below trend. $CRB Chart
The weakness in the market since May, 2011 reflects decelerating economic growth in China --
a prime commodities buyer in the world market, a downturn within the EU and not least, the
end of large scale QE by the Fed, which, no doubt, prompted plenty of speculative interest
over the early 2009 - mid - 2011 period.
Since mid - 2011, global production growth has decelerated further and has been moderate
enough not to chew up excess capacity in rapid fashion. This has cooled speculative trading
and inventory stocking in the commodities markets.
It is noteworthy that China has begun the process of loosening the monetary reins. This could
help the commodities market going forward, but players still need to be careful as China is likely
to move cautiously in the wake of a troublesome real estate price boom triggered by the
monetary excesses seen over 2009 - 2010 when it put on a huge credit driven stimulus program.
The CRB is trading down near both long and intermediate term support in the 290 - 295 area. the
market is oversold and is reasonably valued at the current level. On the flip side, a sharp break
below support could be an alarming development as it would suggest players are growing
more concerned about a fizzling out of global real growth going forward.
Monday, April 23, 2012
Stock Market -- Daily Chart
The caution light has been on for a couple of weeks now. The daily chart of the SPX shows a
breakdown is underway following the powerful rally from late Nov. '11. SPX Chart
The market is 1.9% below its 25 day m/a. In bull runs, going long at -2% to -3% the 25 day m/a
is an ok deal, so that would be the first test here. The safer bets have been at 5% or more below
the 25 day m/a. My cycle work, which has been less reliable over the last 6 - 9 months, suggests
a cycle low should be chalked up over the next 10 odd trading days (Grab a grain of salt). A
"normal" correction following an interim strong bull run of several months duration would run
5 - 7% and would take the SPX down into the 1320 - 1350 range. Unfortunately, since 2010, the
market has been in more of a feast or famine mode (risk on vs. risk off), and price corrections
off of nice run ups have approximated -15% to -20%.
It would be lovely to rally decisively from the current modest oversold, but no one should be
surprised to have to come to grips with a 5% move below the 25 day m/a given the volatility
seen in the market over the past two years.
Note that the bottom panel of the chart shows the long Treasury which has been catching bids
recently. Long side interest in the 30 yr. bond has been a good measure of risk off trading in
the capital markets.
At this point, I plan to wait and watch for a couple of weeks as I have not yet abandoned the
idea that the market could re-start up again by then following a period of mild correction or
consolidation.
breakdown is underway following the powerful rally from late Nov. '11. SPX Chart
The market is 1.9% below its 25 day m/a. In bull runs, going long at -2% to -3% the 25 day m/a
is an ok deal, so that would be the first test here. The safer bets have been at 5% or more below
the 25 day m/a. My cycle work, which has been less reliable over the last 6 - 9 months, suggests
a cycle low should be chalked up over the next 10 odd trading days (Grab a grain of salt). A
"normal" correction following an interim strong bull run of several months duration would run
5 - 7% and would take the SPX down into the 1320 - 1350 range. Unfortunately, since 2010, the
market has been in more of a feast or famine mode (risk on vs. risk off), and price corrections
off of nice run ups have approximated -15% to -20%.
It would be lovely to rally decisively from the current modest oversold, but no one should be
surprised to have to come to grips with a 5% move below the 25 day m/a given the volatility
seen in the market over the past two years.
Note that the bottom panel of the chart shows the long Treasury which has been catching bids
recently. Long side interest in the 30 yr. bond has been a good measure of risk off trading in
the capital markets.
At this point, I plan to wait and watch for a couple of weeks as I have not yet abandoned the
idea that the market could re-start up again by then following a period of mild correction or
consolidation.
Tuesday, April 17, 2012
US Economic Indicators
Sales
In current $ terms, US business sales are running about 7.0 - 7.5% yr/yr through Q1 '12. This is
down from the very strong +10% we saw through much of 2011. Deceleration reflects essentially
flat export sales since last summer, lower CPI price momentum yr/yr, and a large decline in
power generation, which reflects a very seasonably warm 2012 to date. Inventories and sales have
remained in good balance. It is important to note that export sales make up about 15% of total
sales and that sales continue to be hampered by a weak EU and slower growth in China.
Input Costs
Over the past year, the pricing vs. costs spread has improved modestly. Labor costs are still
low relative to business pricing despite faster hiring as the real wage remains negative. Businesses
also continue to benefit from large net interest savings on very low credit costs. Potential for
further profit margin improvement in the shorter run is growing more constrained as pricing
momentum has been weakening relative to wage costs particularly.
Quick Output vs. Income Measure
US business output in real terms is up about 4% yr/yr. My economic power index ( yr/yr %
change in the real wage plus yr/yr % change in total civilian employment) is up a scant 0.9%.
The burden of this unfavorable spread has fallen hardest on household savings, with the
savings rate being drawn well down to finance higher consumption. Measured yr/yr, total
employment has been ranging around +1.7% so far in 2012. These have been the strongest
totals since early 2007, or right before the economy started to hit the skids. the progress in
total employment measured month to month has been the strongest since early 2010, and
given the very uneven progress of employment growth so far in this recovery, it would not be a
surprise to see slower jobs growth ahead, although I hope I am wrong and that jobs progress
will chug along at a healthy rate.
Inflation Potential
My inflation thrust indicator made a cyclical peak in Apr. 2011. By Sep. of last year the CPI
had accelerated to 3.9% yr/yr. The inflation thrust indicator dropped sharply over the Apr. -
Dec. 2011 time frame and has remained suppressed. The CPI has decelerated to 2.7% yr/yr
in the meantime, and must continue decelerating if business holds wage increases at 2%
going forward. Otherwise, the income side of the economy could remain sluggish and leave
the economy vulnerable. It is not healthy to have to continue to count on the draw down of
savings and the use of the credit card to finance higher consumption.
In current $ terms, US business sales are running about 7.0 - 7.5% yr/yr through Q1 '12. This is
down from the very strong +10% we saw through much of 2011. Deceleration reflects essentially
flat export sales since last summer, lower CPI price momentum yr/yr, and a large decline in
power generation, which reflects a very seasonably warm 2012 to date. Inventories and sales have
remained in good balance. It is important to note that export sales make up about 15% of total
sales and that sales continue to be hampered by a weak EU and slower growth in China.
Input Costs
Over the past year, the pricing vs. costs spread has improved modestly. Labor costs are still
low relative to business pricing despite faster hiring as the real wage remains negative. Businesses
also continue to benefit from large net interest savings on very low credit costs. Potential for
further profit margin improvement in the shorter run is growing more constrained as pricing
momentum has been weakening relative to wage costs particularly.
Quick Output vs. Income Measure
US business output in real terms is up about 4% yr/yr. My economic power index ( yr/yr %
change in the real wage plus yr/yr % change in total civilian employment) is up a scant 0.9%.
The burden of this unfavorable spread has fallen hardest on household savings, with the
savings rate being drawn well down to finance higher consumption. Measured yr/yr, total
employment has been ranging around +1.7% so far in 2012. These have been the strongest
totals since early 2007, or right before the economy started to hit the skids. the progress in
total employment measured month to month has been the strongest since early 2010, and
given the very uneven progress of employment growth so far in this recovery, it would not be a
surprise to see slower jobs growth ahead, although I hope I am wrong and that jobs progress
will chug along at a healthy rate.
Inflation Potential
My inflation thrust indicator made a cyclical peak in Apr. 2011. By Sep. of last year the CPI
had accelerated to 3.9% yr/yr. The inflation thrust indicator dropped sharply over the Apr. -
Dec. 2011 time frame and has remained suppressed. The CPI has decelerated to 2.7% yr/yr
in the meantime, and must continue decelerating if business holds wage increases at 2%
going forward. Otherwise, the income side of the economy could remain sluggish and leave
the economy vulnerable. It is not healthy to have to continue to count on the draw down of
savings and the use of the credit card to finance higher consumption.
Sunday, April 15, 2012
Stock Market -- Weekly
Fundamentals
As discussed back on 3/23, my Weekly Cyclical Fundamental Indicator (WCFI) began to lose
positive momentum in March after rallying steadily since late 2011. This trend continued into
early April to be followed by a decline this week on an unexpectedly large increase in initial
unemployment insurance claims. So the WCFI uptrend has been broken. The coincident economic
component of the indicator has held up alright, but the forward looking elements -- industrial
commodities prices and unemployment insurance claims -- have run out of gas. Since I smooth the
claims data as do most folks who use it, The WCFI may remain suppressed for a few weeks.
Fed Bank Credit and the adjusted monetary base remain at or near levels seen at mid - year
2011. Monetary Base
The short run flat / weakish WCFI and the absence of QE may prove challenging to market
players who have relished strong positive momentum in both short run fundamentals and
monetary accomodation since the cyclical bull market began. The modest but progressive
improvement in private sector credit demand has yet to capture investor favor whose sense
of confidence has been rooted in Fed QE and positive cycle pressure gauge readings.
Technical
The strong uptrend evident in the weekly SPX price chart and in related indicators was
fractured this week. It had been "hit or miss" whether the SPX could squeeze out a bit more
upside here in April, and this week's sell off did damage. There are few saving graces on
the chart. The SPX did not break below its 13 wk. m/a, MACD although teetering did not
reverse and my 40 wk. price oscillator (not shown) fell to support. The chart has not reversed,
but it is getting ugly. SPX Weekly
Conclusion
Advanced cyclical bull markets run on credit driven and not monetary liquidity and can also
excuse a week or two of sloppy economic data. This behavoir marks confidence. We have
yet to see that in this cycle. Ditto Europe.
As discussed back on 3/23, my Weekly Cyclical Fundamental Indicator (WCFI) began to lose
positive momentum in March after rallying steadily since late 2011. This trend continued into
early April to be followed by a decline this week on an unexpectedly large increase in initial
unemployment insurance claims. So the WCFI uptrend has been broken. The coincident economic
component of the indicator has held up alright, but the forward looking elements -- industrial
commodities prices and unemployment insurance claims -- have run out of gas. Since I smooth the
claims data as do most folks who use it, The WCFI may remain suppressed for a few weeks.
Fed Bank Credit and the adjusted monetary base remain at or near levels seen at mid - year
2011. Monetary Base
The short run flat / weakish WCFI and the absence of QE may prove challenging to market
players who have relished strong positive momentum in both short run fundamentals and
monetary accomodation since the cyclical bull market began. The modest but progressive
improvement in private sector credit demand has yet to capture investor favor whose sense
of confidence has been rooted in Fed QE and positive cycle pressure gauge readings.
Technical
The strong uptrend evident in the weekly SPX price chart and in related indicators was
fractured this week. It had been "hit or miss" whether the SPX could squeeze out a bit more
upside here in April, and this week's sell off did damage. There are few saving graces on
the chart. The SPX did not break below its 13 wk. m/a, MACD although teetering did not
reverse and my 40 wk. price oscillator (not shown) fell to support. The chart has not reversed,
but it is getting ugly. SPX Weekly
Conclusion
Advanced cyclical bull markets run on credit driven and not monetary liquidity and can also
excuse a week or two of sloppy economic data. This behavoir marks confidence. We have
yet to see that in this cycle. Ditto Europe.
Wednesday, April 11, 2012
Stock Market -- Daily Chart
My view over the past two weeks has been that I did not see a top in view but that caution was
warranted because the market was overbought on an intermediate term basis. So, let's look at the
damage in recent days.
The very strong uptrend from the late Nov. '11 low was fractured with a sharp downside break to
a powerful uptrend line. My view has been that extended run ups at that level of trajectory rarely
last for more than 3 - 4 months without a break. This one extended just a touch beyond 4 months.
Since powerful uptrends like the one just witnessed can resume after a break and consolidation
of several weeks, the break this week is not necessarily a death knell. But, you have to be prepared
to give a situation like this a month or so to resolve even though the overbought condition has been
reduced.
The SPX chart will also show trend breaks for the 40 day RSI and a special intermediate term
MACD. Obviously further downside in these measures cannot be ruled out. $SPX
In the short run we need to watch the movements of the SPX's 10 and 25 day m/a's. A dip in the 10
below the 25 followed by a dip in the 25 can signal more downside. As of today, the market has
not dropped far enough below the 25 day m/a to signal more trouble ahead.
Note as well that SPX 1350 is pivotal as it has offered both short term support and resistance.
To muddy the waters further, you can draw a trendline up from the Oct. '11 low of SPX 1100.
This line now implies downside for the SPX to near the 1300 level and would if tested confirm
the high volatility mode in which the advance originated.
Finally, the cycle work indicates the market should move into a bottoming process over the
next 2 weeks. There was an approx. 84 day cycle in operation for the SPX from 2007 through
the early part of 2011. The cycling has since shortened to 70 -75 trading days. You should note
that the run in the market over the past 4 months blew right through these cycle measures if
only to remind us never to bet the farm on such work.
warranted because the market was overbought on an intermediate term basis. So, let's look at the
damage in recent days.
The very strong uptrend from the late Nov. '11 low was fractured with a sharp downside break to
a powerful uptrend line. My view has been that extended run ups at that level of trajectory rarely
last for more than 3 - 4 months without a break. This one extended just a touch beyond 4 months.
Since powerful uptrends like the one just witnessed can resume after a break and consolidation
of several weeks, the break this week is not necessarily a death knell. But, you have to be prepared
to give a situation like this a month or so to resolve even though the overbought condition has been
reduced.
The SPX chart will also show trend breaks for the 40 day RSI and a special intermediate term
MACD. Obviously further downside in these measures cannot be ruled out. $SPX
In the short run we need to watch the movements of the SPX's 10 and 25 day m/a's. A dip in the 10
below the 25 followed by a dip in the 25 can signal more downside. As of today, the market has
not dropped far enough below the 25 day m/a to signal more trouble ahead.
Note as well that SPX 1350 is pivotal as it has offered both short term support and resistance.
To muddy the waters further, you can draw a trendline up from the Oct. '11 low of SPX 1100.
This line now implies downside for the SPX to near the 1300 level and would if tested confirm
the high volatility mode in which the advance originated.
Finally, the cycle work indicates the market should move into a bottoming process over the
next 2 weeks. There was an approx. 84 day cycle in operation for the SPX from 2007 through
the early part of 2011. The cycling has since shortened to 70 -75 trading days. You should note
that the run in the market over the past 4 months blew right through these cycle measures if
only to remind us never to bet the farm on such work.
Tuesday, April 10, 2012
US Economy -- Analysis
If this was a normal economic recovery which came in the wake of a moderate recession, it would
probably be ok to posit that economic expansion will end around mid-2013 to be followed by an
economic recession of six months' duration. This idea would fit with the old, well established
presidential cycle as well. But what we have is a rather mild recovery coming in the wake of a
mild depression or severe recession, take your pick. My measure of capital slack, which
incorporates excess production capacity, proximity to full employment, short term business credit
supply and demand and short term interest rates has, in the aggregate, only recovered about 50%
of the slack between the cyclical low point and full, effective capacity and employment. In short,
there is substantial slack or idle resources in the system which in my view is sufficient to underwrite
another 3-5 years of continuous economic expansion.
Historically, to generate an economic downturn prior to when the economy's resources are maxed
out in the shorter run, conditions are required which generate a liquidity squeeze in the system
either because the Fed drains monetary support or because the banks remain overly wary in
providing financing to an otherwise viable period of growth. And, I guess, you can have some of
both with banks following the Fed's lead.
Now, I am of the view that the economy can keep right on expanding as long as there is enough
slack and the system can maintain reasonable balance especially between money and credit and
output and income. The Fed has maintained the money / credit balance with QE programs to
underwrite the economy while the private sector credit situation repaired. Ditto the US Gov't
stimulus and bail out programs just prior to the outset of recovery. The balance between output
and income has been far less favorable as business has opted not to reward worker productivity
but to hand out 1 - 2% wage increases instead and ultimately force consumers to draw on savings.
Except for real estate, private sector credit demand is recovering decently enough and the need
for Fed QE intervention has been slackening. To secure an economic recovery which can extend
in lengthy fashion, business must step back from the trough, pay its work force substantially better
and make sure it is adequately resourced to handle higher levels of business. Failing that, there
is no compelling reason to expect consumers to keep up their end of the bargain -- and keep it
up they have -- if you look at the critical real retail sales chart.
A final and important point. With the private sector credit situation repairing decently after the
financial blowout of 2008, it would be unfortunate for investors to throw a tantrum now because
of no apparent new QE, and trash the stock market again as happened in 2010 and 2011. This
would only serve to undermine business and consumer confidence and set back the time when
the economy can be self sustaining.
probably be ok to posit that economic expansion will end around mid-2013 to be followed by an
economic recession of six months' duration. This idea would fit with the old, well established
presidential cycle as well. But what we have is a rather mild recovery coming in the wake of a
mild depression or severe recession, take your pick. My measure of capital slack, which
incorporates excess production capacity, proximity to full employment, short term business credit
supply and demand and short term interest rates has, in the aggregate, only recovered about 50%
of the slack between the cyclical low point and full, effective capacity and employment. In short,
there is substantial slack or idle resources in the system which in my view is sufficient to underwrite
another 3-5 years of continuous economic expansion.
Historically, to generate an economic downturn prior to when the economy's resources are maxed
out in the shorter run, conditions are required which generate a liquidity squeeze in the system
either because the Fed drains monetary support or because the banks remain overly wary in
providing financing to an otherwise viable period of growth. And, I guess, you can have some of
both with banks following the Fed's lead.
Now, I am of the view that the economy can keep right on expanding as long as there is enough
slack and the system can maintain reasonable balance especially between money and credit and
output and income. The Fed has maintained the money / credit balance with QE programs to
underwrite the economy while the private sector credit situation repaired. Ditto the US Gov't
stimulus and bail out programs just prior to the outset of recovery. The balance between output
and income has been far less favorable as business has opted not to reward worker productivity
but to hand out 1 - 2% wage increases instead and ultimately force consumers to draw on savings.
Except for real estate, private sector credit demand is recovering decently enough and the need
for Fed QE intervention has been slackening. To secure an economic recovery which can extend
in lengthy fashion, business must step back from the trough, pay its work force substantially better
and make sure it is adequately resourced to handle higher levels of business. Failing that, there
is no compelling reason to expect consumers to keep up their end of the bargain -- and keep it
up they have -- if you look at the critical real retail sales chart.
A final and important point. With the private sector credit situation repairing decently after the
financial blowout of 2008, it would be unfortunate for investors to throw a tantrum now because
of no apparent new QE, and trash the stock market again as happened in 2010 and 2011. This
would only serve to undermine business and consumer confidence and set back the time when
the economy can be self sustaining.
Sunday, April 08, 2012
Stock Market -- Short Term Fundamentals
Weekly Cyclical Fundamental Indicator (WCFI)
The WCFI did tick up in the past week, but is exactly even with the Mar. 2 reading. Since that
point, the SPX has advanced 2%. The main reason the WCFI did not advance over the past month
is moderate weakness in cyclically sensitive materials prices (see 3/23 post for more). WCFI
flatness over the past four weeks challenges the uptrend underway since late 2011 and also
may reflect the pattern of stronger cyclical economic momentum seen over the 4Q / 1Q intervals
in recent years (see 4/6 post just below). The moral here is to watch industrial commodities
prices like copper in the period just ahead.
Quantitative Easing And Two Track Credit Results
The Fed has been cutting back the currency swap line to foreign CBs and its balance sheet has
retreated to levels seen at the end of QE2 on 6/30/11. Those players who have only wanted to
trade long with QE at their backs must now confront the recent retreat of Fed Bank Credit.
The banking system's real estate loan book has not grown over the past year, but lending
excluding real estate has advanced by 10.3 %, powered primarily by a sharp recovery in
shorter term business loans to fund rising working capital needs. The construction market is
turning around, so bank mortgage, lease and real estate development financing should eventually
improve, although the process is obviously still being impeded by writeoffs and foreclosures
in the still troubled housing sector.
When there is no QE, investors must satisfy themselves that private sector credit growth is
adequate to fund continuing progress for the real economy. That time is at hand now as well.
The WCFI did tick up in the past week, but is exactly even with the Mar. 2 reading. Since that
point, the SPX has advanced 2%. The main reason the WCFI did not advance over the past month
is moderate weakness in cyclically sensitive materials prices (see 3/23 post for more). WCFI
flatness over the past four weeks challenges the uptrend underway since late 2011 and also
may reflect the pattern of stronger cyclical economic momentum seen over the 4Q / 1Q intervals
in recent years (see 4/6 post just below). The moral here is to watch industrial commodities
prices like copper in the period just ahead.
Quantitative Easing And Two Track Credit Results
The Fed has been cutting back the currency swap line to foreign CBs and its balance sheet has
retreated to levels seen at the end of QE2 on 6/30/11. Those players who have only wanted to
trade long with QE at their backs must now confront the recent retreat of Fed Bank Credit.
The banking system's real estate loan book has not grown over the past year, but lending
excluding real estate has advanced by 10.3 %, powered primarily by a sharp recovery in
shorter term business loans to fund rising working capital needs. The construction market is
turning around, so bank mortgage, lease and real estate development financing should eventually
improve, although the process is obviously still being impeded by writeoffs and foreclosures
in the still troubled housing sector.
When there is no QE, investors must satisfy themselves that private sector credit growth is
adequate to fund continuing progress for the real economy. That time is at hand now as well.
Friday, April 06, 2012
The Fed, The Economy & Stocks
The Fed -- Uneven Accomodation
In recent years, the Fed has provided roughly $2 tril. of liquidity to an economy that was sorely
in need of it. The process has been uneven to say the least. The first surge of more than $1 tril.
came during the latter part of 2008. The Fed then withdrew $400 bil. at the begininning of 2009,
which resulted in the final tanking of the bear market in stocks in early 2009. Then, the Fed went
on another tear, adding nearly $550 bil. to the system through mid - May 2010 (QE1). the next
program -- QE2 -- injected nearly $600 bil. into the system over the 11/10 - 6/11 time frame.
The Fed then added another $100 bil. dollop in currency swaps in late 2011.
Economy -- Surges & Stalls
The economic recovery has roughly followed the path of the Fed's liquidity addition programs.
Over late 2009 - present, my cyclical pressure gauges have been strongest over the Q4 / Q1
intervals and weaker over the Q2 / Q3 periods when quantitative easing has been on hold. We
are now in an interval when QE is on hold.
Stock Market -- Deep Corrections In A Cyclical Bull
The steep market corrections came during Q2 / Q3 in both 2010 and 2011 as leading economic measures and cycle pressure gauges faltered. Fresh QE rescued the market in both latter 2010
and 2011 with positive carryovers into the new year.
Bonus Times For The Bears
In both 2010 and last year, flare ups over weak sovereign credits in the EU periphery became
acute over the Q2 / Q3 intervals. It's Q2 2012, and Spain, with its addled banking system and
generally weak private sector credit situation is steaming into view.
Looking Forward
My cycle pressure gauges and forward looking indicators have eased some after a strong start
to the year. QE is in abeyance and the EU's economic discontents can resurface in warmer spring
weather when folks find it more congenial to take to the streets. Private sector credit demand in
the US is continuing to recover but may not be quite strong enough yet to fully underwrite further
economic recovery. Given how economic and investor confidence seem to reflect the status
of QE activity, another Q2 / Q3 stock market swoon cannot be discounted. The market is now
overbought, so a 5-7% decline could come along and be normal. When I say "swoon", I have in
mind the much deeper corrections experienced over the past two years.
Crystal ball gazing is not my forte. I would not argue with anyone who foresees a normal,
moderate price correction ahead, and I hope we do not get another large corrective dip. In the meanwhile, I may well be stuck for another six months with having my core fundamental
indicators still positive and with a continuing cyclical bull market call still on the table even
if the "risk off" siren calls get loud.
How about more QE? Fed chair Bernanke would take a lot of political heat and criticism if
he went ahead with further QE if the economic recovery started to flounder. But, if I read him
right, I doubt he would hesitate and I think he could get the votes from the board. I also think
the Fed would dearly like to avoid another splashy program if It possibly can. By the way, if
another QE round becomes an issue soon, you know Obama will be in Ben's corner.
In recent years, the Fed has provided roughly $2 tril. of liquidity to an economy that was sorely
in need of it. The process has been uneven to say the least. The first surge of more than $1 tril.
came during the latter part of 2008. The Fed then withdrew $400 bil. at the begininning of 2009,
which resulted in the final tanking of the bear market in stocks in early 2009. Then, the Fed went
on another tear, adding nearly $550 bil. to the system through mid - May 2010 (QE1). the next
program -- QE2 -- injected nearly $600 bil. into the system over the 11/10 - 6/11 time frame.
The Fed then added another $100 bil. dollop in currency swaps in late 2011.
Economy -- Surges & Stalls
The economic recovery has roughly followed the path of the Fed's liquidity addition programs.
Over late 2009 - present, my cyclical pressure gauges have been strongest over the Q4 / Q1
intervals and weaker over the Q2 / Q3 periods when quantitative easing has been on hold. We
are now in an interval when QE is on hold.
Stock Market -- Deep Corrections In A Cyclical Bull
The steep market corrections came during Q2 / Q3 in both 2010 and 2011 as leading economic measures and cycle pressure gauges faltered. Fresh QE rescued the market in both latter 2010
and 2011 with positive carryovers into the new year.
Bonus Times For The Bears
In both 2010 and last year, flare ups over weak sovereign credits in the EU periphery became
acute over the Q2 / Q3 intervals. It's Q2 2012, and Spain, with its addled banking system and
generally weak private sector credit situation is steaming into view.
Looking Forward
My cycle pressure gauges and forward looking indicators have eased some after a strong start
to the year. QE is in abeyance and the EU's economic discontents can resurface in warmer spring
weather when folks find it more congenial to take to the streets. Private sector credit demand in
the US is continuing to recover but may not be quite strong enough yet to fully underwrite further
economic recovery. Given how economic and investor confidence seem to reflect the status
of QE activity, another Q2 / Q3 stock market swoon cannot be discounted. The market is now
overbought, so a 5-7% decline could come along and be normal. When I say "swoon", I have in
mind the much deeper corrections experienced over the past two years.
Crystal ball gazing is not my forte. I would not argue with anyone who foresees a normal,
moderate price correction ahead, and I hope we do not get another large corrective dip. In the meanwhile, I may well be stuck for another six months with having my core fundamental
indicators still positive and with a continuing cyclical bull market call still on the table even
if the "risk off" siren calls get loud.
How about more QE? Fed chair Bernanke would take a lot of political heat and criticism if
he went ahead with further QE if the economic recovery started to flounder. But, if I read him
right, I doubt he would hesitate and I think he could get the votes from the board. I also think
the Fed would dearly like to avoid another splashy program if It possibly can. By the way, if
another QE round becomes an issue soon, you know Obama will be in Ben's corner.
Thursday, April 05, 2012
Stock Market -- Weekly Chart
The weekly chart for the SPX continues positive both trend and indicator - wise, although there is
some wear from the recent loss of price momentum. The market remains moderately overbought for
the intermediate term (out to 3 - 6 months), but the indicators continue to show some leeway for
more positive price action through month's end, although the thrust of this move is rather well along.
SPX
I have also linked to the SPX against its 200 day price oscillator. The oscillator measure also
remains positive, but is close to one standard deviation above the mean. There is room for the
market and the oscillator to carry higher, but I should caution that oscillator movements above
one SD happen rather infrequently (the last one being in 2009, when there was tremendous thrust).
SPX & 200 day osc.
I plan to look at the economic fundamentals for stocks in the days ahead. There are elements
of transition to a more normal environment, but the bigger picture still shows the US is far
from fully normal on a cyclical basis.
some wear from the recent loss of price momentum. The market remains moderately overbought for
the intermediate term (out to 3 - 6 months), but the indicators continue to show some leeway for
more positive price action through month's end, although the thrust of this move is rather well along.
SPX
I have also linked to the SPX against its 200 day price oscillator. The oscillator measure also
remains positive, but is close to one standard deviation above the mean. There is room for the
market and the oscillator to carry higher, but I should caution that oscillator movements above
one SD happen rather infrequently (the last one being in 2009, when there was tremendous thrust).
SPX & 200 day osc.
I plan to look at the economic fundamentals for stocks in the days ahead. There are elements
of transition to a more normal environment, but the bigger picture still shows the US is far
from fully normal on a cyclical basis.
Tuesday, April 03, 2012
Gold Price
Despite the downtrend underway, the gold bugz might sustain a rescue effort if they can keep the price
above the $1620 - 1630 area. Gold took another hit today when the Fed's FOMC minutes indicated
that further QE is on the back burner. This should not be a surprise, but it knocked the wind out of
the market anyway, with gold trading down again at very short term support of around $1645 oz.
For more, scroll down a couple of days. Gold Price
above the $1620 - 1630 area. Gold took another hit today when the Fed's FOMC minutes indicated
that further QE is on the back burner. This should not be a surprise, but it knocked the wind out of
the market anyway, with gold trading down again at very short term support of around $1645 oz.
For more, scroll down a couple of days. Gold Price
Oil Price -- Taking Care
Oil has experienced a mild break in the uptrend started at the end of Sep. '11. On top, both the 10
and 25 day m/a's have rolled over with oil struggling to get back above them near term. I have
argued that geopolitics involving Iran make it tough to have a trading edge here, and I have recently
reminded that we are in a strongly positive seasonal period for oil. Even so, keep an eye out
because there is short term technical damage underway. $WTIC
and 25 day m/a's have rolled over with oil struggling to get back above them near term. I have
argued that geopolitics involving Iran make it tough to have a trading edge here, and I have recently
reminded that we are in a strongly positive seasonal period for oil. Even so, keep an eye out
because there is short term technical damage underway. $WTIC
Friday, March 30, 2012
Stock Market --Technical
The stock market has been on a strong tear since late Nov. '11. Run ups at this angle of trajectory
often end after 3 - 4 months, with more extended high angle runs reserved for the opening legs of
cyclical bull markets and not ones with a reasonable degree of maturity. That said, there is no
clear technical reason now apparent for concluding that that the advance should end soon, only
that it would be wisest to look for more modest progress and some volatility ahead.
Daily Chart
The chart describes a sharp but nevertheless low volatility advance in progress and one which has
seen moderate overboughts quickly brought to heel by mild retreats and consolidations. Daily SPX
Weekly Chart
The weekly SPX has been my mainstay for the current run. The indicators displayed with the
weekly chart are all in positive mode, and moreover suggests that the SPX could squeeze out a
couple of more weeks of upside before the indicators get a little too lofty. Weekly SPX
Note that on the weekly chart, I compare the SPX to its 40 wk. m/a. And here, there is a solid
moderate overbought condition which is powerful enough based on history to switch on the
amber or caution light.
often end after 3 - 4 months, with more extended high angle runs reserved for the opening legs of
cyclical bull markets and not ones with a reasonable degree of maturity. That said, there is no
clear technical reason now apparent for concluding that that the advance should end soon, only
that it would be wisest to look for more modest progress and some volatility ahead.
Daily Chart
The chart describes a sharp but nevertheless low volatility advance in progress and one which has
seen moderate overboughts quickly brought to heel by mild retreats and consolidations. Daily SPX
Weekly Chart
The weekly SPX has been my mainstay for the current run. The indicators displayed with the
weekly chart are all in positive mode, and moreover suggests that the SPX could squeeze out a
couple of more weeks of upside before the indicators get a little too lofty. Weekly SPX
Note that on the weekly chart, I compare the SPX to its 40 wk. m/a. And here, there is a solid
moderate overbought condition which is powerful enough based on history to switch on the
amber or caution light.
Thursday, March 29, 2012
Oil Price
Traditionally, the oil price experiences its longest and deepest period of seasonal weakness
between early Oct. and mid - Dec. The market tends to rally around the new year, but often
weakens again through the end of Feb. The latest Oct. - Feb. interval saw a powerful counter-
seasonal move with the price rising from $75 bl. to $110 before settling down in recent weeks.
The trading pits did an amazing job of kiting "bomb Iran fever" into an exceptional price rally.
The traders likely made good money and I guess Iran did, too. Recently, both the CIA and Israel's
Mossad have come out to pooh pooh the idea while the Saudis have decried the run up in the price as econmically dangerous and have even reminded folks they have spare capacity. Now, we also have renewed chatter about western countries tapping strategic reserves to curtail the sharply rising
gasoline price.
The oil price has faded modestly recently because the attack Iran senarios are fading in
popularity and it suddenly seems like a less likely event. The interesting issue here is that Mar.
and Apr. normally represent very strong seasonal months for oil as gasoline refining expands
and inventories are built ahead of the peak driving season for the northern hemisphere.Recent
oil price action shows the market is again moving in a manner out of synch with the seasonals.
From a fundamental point of view, I have been thinking of oil in 2012 trading in a range of $80 -
$100 bl. The market has made a liar out of me already, but the chart link ahead is signaling that
oil might have further downside despite the current positive seasonal bias. At this point, I am
guessing that if oil drops further to around $85 - 90 by mid - year I might give it a look as a
long position. I have stayed away from this market since the "bomb Iran" drumbeat started
because I have been figuring one almost needs insider knowledge of the antagonists as well as
the big boys in the trading pits to have an edge. For now, I'll bide my time. $WTIC
between early Oct. and mid - Dec. The market tends to rally around the new year, but often
weakens again through the end of Feb. The latest Oct. - Feb. interval saw a powerful counter-
seasonal move with the price rising from $75 bl. to $110 before settling down in recent weeks.
The trading pits did an amazing job of kiting "bomb Iran fever" into an exceptional price rally.
The traders likely made good money and I guess Iran did, too. Recently, both the CIA and Israel's
Mossad have come out to pooh pooh the idea while the Saudis have decried the run up in the price as econmically dangerous and have even reminded folks they have spare capacity. Now, we also have renewed chatter about western countries tapping strategic reserves to curtail the sharply rising
gasoline price.
The oil price has faded modestly recently because the attack Iran senarios are fading in
popularity and it suddenly seems like a less likely event. The interesting issue here is that Mar.
and Apr. normally represent very strong seasonal months for oil as gasoline refining expands
and inventories are built ahead of the peak driving season for the northern hemisphere.Recent
oil price action shows the market is again moving in a manner out of synch with the seasonals.
From a fundamental point of view, I have been thinking of oil in 2012 trading in a range of $80 -
$100 bl. The market has made a liar out of me already, but the chart link ahead is signaling that
oil might have further downside despite the current positive seasonal bias. At this point, I am
guessing that if oil drops further to around $85 - 90 by mid - year I might give it a look as a
long position. I have stayed away from this market since the "bomb Iran" drumbeat started
because I have been figuring one almost needs insider knowledge of the antagonists as well as
the big boys in the trading pits to have an edge. For now, I'll bide my time. $WTIC
Wednesday, March 28, 2012
Gold Price Observations
The cyclical uptrend in the gold price off the late 2008 cyclical low of $720 oz. remains intact.
The breakdown line for the trend is now around $1620 - 30. Gold, today at $1658. is still above
water.
The 10 wk. RSI is getting a little droopy under 50. The chart link shows the Gold Bugz have often
come in to buy the metal when the 10 wk RSI is around 50, and, if you check the ADX chart in the
bottom panel, you'll see the Bugz have been ready to jump in at +DI 20 in recent years. $GOLD
The intermediate term MACD does show a downtrend underway off last year's high, but further
weakness in price will be needed to re-affirm it.
The chart also shows the gold price pivoting off the $1560 oz. level over the past 12 months.
Since the price has been unable to move back above its 40 wk m/a in recent weeks, a move
down to the pivot to test support cannot be ruled out.
My fundamental indicators, which imply price direction but not price level, have been flat
since mid-year, reflecting a steady Fed Bank Credit account, a volatile but firmer US$, and a
weaker level of sensitive materials prices.
I also watch the price of gold relative to that of oil carefully. At 15.8 barrels to the ounce, it
is well below peak levels but is still elevated on a longer term basis.
My financial armageddon angst meter has gold running with a 44% premium. That implies
plenty of downside, if, God forbid, the global financial / economic environment should settle
down for a year or two. My all in mining cost + sensible commercial mark up measure has gold
as tragically overpriced, still.
With China and India big money printers and gold buyers, I am toying around with ways to
make handicapping the gold price less US$ centric. Keep you posted.
The breakdown line for the trend is now around $1620 - 30. Gold, today at $1658. is still above
water.
The 10 wk. RSI is getting a little droopy under 50. The chart link shows the Gold Bugz have often
come in to buy the metal when the 10 wk RSI is around 50, and, if you check the ADX chart in the
bottom panel, you'll see the Bugz have been ready to jump in at +DI 20 in recent years. $GOLD
The intermediate term MACD does show a downtrend underway off last year's high, but further
weakness in price will be needed to re-affirm it.
The chart also shows the gold price pivoting off the $1560 oz. level over the past 12 months.
Since the price has been unable to move back above its 40 wk m/a in recent weeks, a move
down to the pivot to test support cannot be ruled out.
My fundamental indicators, which imply price direction but not price level, have been flat
since mid-year, reflecting a steady Fed Bank Credit account, a volatile but firmer US$, and a
weaker level of sensitive materials prices.
I also watch the price of gold relative to that of oil carefully. At 15.8 barrels to the ounce, it
is well below peak levels but is still elevated on a longer term basis.
My financial armageddon angst meter has gold running with a 44% premium. That implies
plenty of downside, if, God forbid, the global financial / economic environment should settle
down for a year or two. My all in mining cost + sensible commercial mark up measure has gold
as tragically overpriced, still.
With China and India big money printers and gold buyers, I am toying around with ways to
make handicapping the gold price less US$ centric. Keep you posted.
Monday, March 26, 2012
Corporate Profits Indicators
Sales Growth
Measured yr/yr, total business sales growth slowed appreciably toward the end of 2011 and
into early this year, with top line momentum decelerating from better than +10% to a touch
above 7%. Another "top line" proxy I use is the $ value of industrial production. That measure
was 8.8% yr/yr in 3/11 and slid down to just 6.0% by year's end.
However, there has been a positive reversal in available data so far for this year. For example,
the $ value of industrial output has accelerated yr/yr to stand at 7.1% through Feb. even though
power generation -- an important input -- has declined with warmer weather this winter.
With the first quarter set to wind up at week's end, it would appear that top line growth should
be sufficiently strong to avoid broadscale profit margin erosion from fixed costs.
Cost inputs
On balance, materials costs were little changed from the prior year. This is a plus to profit
margin. There was, however an acceleration of the labor cost component owing to higher staffing
levels, but it was rather mild, as the real wage remained below year ago levels.
Net Per Share
My macro indicators suggest earns. per share for the SP 500 should rise close to 10% for
Q 1 '12 viwed yr/yr. Keep in mind though that I am using just two months' worth of data.
Banking Sector Earnings
Now popularly viewed as a moral scourge upon all of us innocents, bank sector earnings do
continue to recover. Viewed yr/yr, interest earning asset balances are now rising as is net
margin. The loan loss reserve has now dropped another 18.5% or $38 bil for a major positive
lift to the sector's bottom line. There are still concerns about litigation and CDS derivatives
and banks are fighting to raise fees whenever and wherever they can, which no doubt, is not
doing the industry's image any favors. Recent action of the group. $BKX
Measured yr/yr, total business sales growth slowed appreciably toward the end of 2011 and
into early this year, with top line momentum decelerating from better than +10% to a touch
above 7%. Another "top line" proxy I use is the $ value of industrial production. That measure
was 8.8% yr/yr in 3/11 and slid down to just 6.0% by year's end.
However, there has been a positive reversal in available data so far for this year. For example,
the $ value of industrial output has accelerated yr/yr to stand at 7.1% through Feb. even though
power generation -- an important input -- has declined with warmer weather this winter.
With the first quarter set to wind up at week's end, it would appear that top line growth should
be sufficiently strong to avoid broadscale profit margin erosion from fixed costs.
Cost inputs
On balance, materials costs were little changed from the prior year. This is a plus to profit
margin. There was, however an acceleration of the labor cost component owing to higher staffing
levels, but it was rather mild, as the real wage remained below year ago levels.
Net Per Share
My macro indicators suggest earns. per share for the SP 500 should rise close to 10% for
Q 1 '12 viwed yr/yr. Keep in mind though that I am using just two months' worth of data.
Banking Sector Earnings
Now popularly viewed as a moral scourge upon all of us innocents, bank sector earnings do
continue to recover. Viewed yr/yr, interest earning asset balances are now rising as is net
margin. The loan loss reserve has now dropped another 18.5% or $38 bil for a major positive
lift to the sector's bottom line. There are still concerns about litigation and CDS derivatives
and banks are fighting to raise fees whenever and wherever they can, which no doubt, is not
doing the industry's image any favors. Recent action of the group. $BKX
Friday, March 23, 2012
Stock Market -- Weekly
Technical
The current bull run, as captured in the weekly chart, remains intact. SPX The market is at a 10%
price premium to its 40 wk m/a and remains moderately overbought. For reference value only,
note that the SPX eclipsed the 40 wk m/a by 14% in late 2009 and by 12% in early 2011.
Weekly Cyclical Fundamental Indicator (WCFI)
The WCFI remains in an uptrend which started in mid - Nov. '11. The range of positive markers
within the indicator composite has steadily broadened out, but the momentum has gone flat. One
reason is that weekly unemployment insurance claims have leveled off following several months
of sharp improvement (not an abnormal development), and the other reason concerns the flattening
out of the sensitive materials price composite. JOCIINDX It is worth noting that this index is a
multi - currency measure with global application. I mention this because the index has lost positive
momentum here in Mar. during a normally seasonally strong time with this development a
reflection of trader handicapping of indications of a further slowing of industrial output in China,
normally a huge buyer of industrial commodities over the first half of the calendar year. This is
the first "heads up" I've had on the WCFI for a good several months.
Federal Reserve Liquidity Sponsorship
Fed. Bank Credit and the monetary base have been contracting here in Mar. as the Fed has
reduced the currency swap line with the ECB and other needy central banks. The stock market
has advanced so far this month, but players have been very sensitive to the Fed's QE capers over
the course of the current cyclical bull.
The current bull run, as captured in the weekly chart, remains intact. SPX The market is at a 10%
price premium to its 40 wk m/a and remains moderately overbought. For reference value only,
note that the SPX eclipsed the 40 wk m/a by 14% in late 2009 and by 12% in early 2011.
Weekly Cyclical Fundamental Indicator (WCFI)
The WCFI remains in an uptrend which started in mid - Nov. '11. The range of positive markers
within the indicator composite has steadily broadened out, but the momentum has gone flat. One
reason is that weekly unemployment insurance claims have leveled off following several months
of sharp improvement (not an abnormal development), and the other reason concerns the flattening
out of the sensitive materials price composite. JOCIINDX It is worth noting that this index is a
multi - currency measure with global application. I mention this because the index has lost positive
momentum here in Mar. during a normally seasonally strong time with this development a
reflection of trader handicapping of indications of a further slowing of industrial output in China,
normally a huge buyer of industrial commodities over the first half of the calendar year. This is
the first "heads up" I've had on the WCFI for a good several months.
Federal Reserve Liquidity Sponsorship
Fed. Bank Credit and the monetary base have been contracting here in Mar. as the Fed has
reduced the currency swap line with the ECB and other needy central banks. The stock market
has advanced so far this month, but players have been very sensitive to the Fed's QE capers over
the course of the current cyclical bull.
Wednesday, March 21, 2012
Stock Market -- Investor Confidence Measures
Confidence has improved since last autumn but remains on the subdued side. The market does
continue moderately overbought, but the idea that players are zealously bullish is nonsense.
Price / Earnings Ratio
The market is trading around 14.5 x 12 mos. net per share through 3/31. In an economic recovery
with rising earnings and low interest rates and inflation, the SP 500 should be trading up at 16.5x
or 1585.
Credit Quality Spreads
The ratio of top quality corporate yields to lesser light BBBs stands at .69. By past standards that
ratio should stand up toward .85 at this juncture of an economic expansion.
Comparison To Treasuries
The earnings / price yield % for the SP 500 measures the return on equity at market value. The
e/p yield is now running 6.8% compared to the 10 yr. Treas. in a range of 2.0 - 2.5%. The e/p
yield is at a substantial premium. Naturally, a near zero short rate is holding yields on longer
maturities down, but preference for quality and perceived low risk remains very high.
Market Volatility
I did a good job at laying out the unfolding of the recent powerful rally in the market, but, so
far, volatility has come a in fair bit lower than I had anticipated. The chart link ahead compares
the SPX with its 12 day ROC% and the VIX, or volatility premium inherent in index options.
$SPX The chart's top panel shows a sharp decline in short term price volatility and the bottom panel shows a hefty decline in the VIX or "fear" index. A VIX reading in a range of 10 - 15 reveals
a decent level of market confidence. Should the VIX drop down to 10 and stay there for a
goodly number of weeks, we would be entitled to say that investors have grown both smugly
confident and highly complacent. We are not there, yet.
continue moderately overbought, but the idea that players are zealously bullish is nonsense.
Price / Earnings Ratio
The market is trading around 14.5 x 12 mos. net per share through 3/31. In an economic recovery
with rising earnings and low interest rates and inflation, the SP 500 should be trading up at 16.5x
or 1585.
Credit Quality Spreads
The ratio of top quality corporate yields to lesser light BBBs stands at .69. By past standards that
ratio should stand up toward .85 at this juncture of an economic expansion.
Comparison To Treasuries
The earnings / price yield % for the SP 500 measures the return on equity at market value. The
e/p yield is now running 6.8% compared to the 10 yr. Treas. in a range of 2.0 - 2.5%. The e/p
yield is at a substantial premium. Naturally, a near zero short rate is holding yields on longer
maturities down, but preference for quality and perceived low risk remains very high.
Market Volatility
I did a good job at laying out the unfolding of the recent powerful rally in the market, but, so
far, volatility has come a in fair bit lower than I had anticipated. The chart link ahead compares
the SPX with its 12 day ROC% and the VIX, or volatility premium inherent in index options.
$SPX The chart's top panel shows a sharp decline in short term price volatility and the bottom panel shows a hefty decline in the VIX or "fear" index. A VIX reading in a range of 10 - 15 reveals
a decent level of market confidence. Should the VIX drop down to 10 and stay there for a
goodly number of weeks, we would be entitled to say that investors have grown both smugly
confident and highly complacent. We are not there, yet.
Tuesday, March 20, 2012
Long Treasury Bond
Back toward the very end of 2011, I put on my "Dutch Uncle" hat to warn of the risks of a long
positions in the 30 yr Treasury for 2012 ( See 12/26, 12/23 posts). Back then, the situation for
the market had not turned negative, but it did so in Jan.
For about 45 years now, it has been my argument that the best determinant for turns and trend in
the Treasury bond market was a combination of the momentum of industrial production plus that
of sensitive materials prices. I use a 6 mo. annualized measure as well as a weekly trend measure.
Both turned up starting in January which signals a rising long T yield. As it has so far turned out,
the rise in yield although a sharp one, has been muted by trader expectations that China -- a very
heavy hitter in the industrial commodites business -- will continue to experience more moderate
production growth. This development has been a drag on the normal sharp seasonal rise in
sensitive materials prices which has become a trademark of China's very large industrial base.
In short, the damage to the Treasury bond could have been far worse.
I am not interested in this market now. I would look to buy the long T about 60 basis points up
in yield as a trade, and since the US is experiencing a more advanced, albeit moderate economic
recovery, I would like to see the yield at a more substantial premium to my very long term
3% inflation benchmark. The chart link gives you the picture.
positions in the 30 yr Treasury for 2012 ( See 12/26, 12/23 posts). Back then, the situation for
the market had not turned negative, but it did so in Jan.
For about 45 years now, it has been my argument that the best determinant for turns and trend in
the Treasury bond market was a combination of the momentum of industrial production plus that
of sensitive materials prices. I use a 6 mo. annualized measure as well as a weekly trend measure.
Both turned up starting in January which signals a rising long T yield. As it has so far turned out,
the rise in yield although a sharp one, has been muted by trader expectations that China -- a very
heavy hitter in the industrial commodites business -- will continue to experience more moderate
production growth. This development has been a drag on the normal sharp seasonal rise in
sensitive materials prices which has become a trademark of China's very large industrial base.
In short, the damage to the Treasury bond could have been far worse.
I am not interested in this market now. I would look to buy the long T about 60 basis points up
in yield as a trade, and since the US is experiencing a more advanced, albeit moderate economic
recovery, I would like to see the yield at a more substantial premium to my very long term
3% inflation benchmark. The chart link gives you the picture.
Friday, March 16, 2012
Economic Indicators / Analysis
I use a very stripped down version of the coincident economic indicator to include real retail
sales, industrial output, civilian employment and the real wage. Measured yr/yr, this indicator
was a positve but modest 2.1% for Feb. '12. This compares to a much stronger 3.9% reading
for the 12 mos. ended Feb. '11. The indicator captures the substantial erosion of recovery
momentum over the past year. On a positive note, the momentum of the coincident indicator has
been improving since late 2011 on stronger sales, production and employment.
For the prior month, both real retail sales and production came in with moderate readings -- 4.0%
for production and 3.6% for retail. These are solid enough after 30 months of economic recovery.
The yr/yr pace of increase in employment has moved up to 1.8% -- its best showing during the
recovery -- but 2% or a little stronger would be more representative of a nicely improving labor
market. The real wage declined yr/yr by 1.0% through Feb. and is still too weak to provide
solid support for consumer confidence. Under normal circumstances, where business properly
recognizes stronger labor productivity, the real wage should be advancing by 2% and the current
dollar measure by 5%. Imagine the outrage in the executive suites of corporations if directors
were handing out real wages that were headed down.
The US economy has ticked up here in early 2012, but a continuing negative real wage casts a
large cloud over the visibility of the economy going forward.
sales, industrial output, civilian employment and the real wage. Measured yr/yr, this indicator
was a positve but modest 2.1% for Feb. '12. This compares to a much stronger 3.9% reading
for the 12 mos. ended Feb. '11. The indicator captures the substantial erosion of recovery
momentum over the past year. On a positive note, the momentum of the coincident indicator has
been improving since late 2011 on stronger sales, production and employment.
For the prior month, both real retail sales and production came in with moderate readings -- 4.0%
for production and 3.6% for retail. These are solid enough after 30 months of economic recovery.
The yr/yr pace of increase in employment has moved up to 1.8% -- its best showing during the
recovery -- but 2% or a little stronger would be more representative of a nicely improving labor
market. The real wage declined yr/yr by 1.0% through Feb. and is still too weak to provide
solid support for consumer confidence. Under normal circumstances, where business properly
recognizes stronger labor productivity, the real wage should be advancing by 2% and the current
dollar measure by 5%. Imagine the outrage in the executive suites of corporations if directors
were handing out real wages that were headed down.
The US economy has ticked up here in early 2012, but a continuing negative real wage casts a
large cloud over the visibility of the economy going forward.
Thursday, March 15, 2012
Stock Market -- Daily Chart
The SPX closed today at a new cyclical high of 1403. The advance underway since late Nov. '11
is running on the sort of steep trajectory that seldom lasts more than 3-4 months before it hits its
expiration date and fades to a lower plane. So, that would be late March at the outside. The present
fast updraft of a few days duration could carry the SPX up to the 1430 area over the next week or so.
The market is overbought on measures running out even beyond 60 days, but none of the overbought measures are as yet outrageous. SPX
As mentioned in the 3/13 post below, with cash reserves modest, a rising market might claim funds
from the bond (Treasury) and PM sectors (gold). Such has been in evidence this week.
is running on the sort of steep trajectory that seldom lasts more than 3-4 months before it hits its
expiration date and fades to a lower plane. So, that would be late March at the outside. The present
fast updraft of a few days duration could carry the SPX up to the 1430 area over the next week or so.
The market is overbought on measures running out even beyond 60 days, but none of the overbought measures are as yet outrageous. SPX
As mentioned in the 3/13 post below, with cash reserves modest, a rising market might claim funds
from the bond (Treasury) and PM sectors (gold). Such has been in evidence this week.
Wednesday, March 14, 2012
Retail Sales -- Quick Note
Retail sales including for restaurants is classified as a coincident economic indicator, but
it really lies somewhere between a leading economic indicator and a coincident one. There is
decent retail sales data going back to shortly after WW 2, but most services stick with the
reformulated data from 1992. At any rate, retail tends to trend fairly steadily higher during
periods of economic expansion, and you should note when the retail trend shifts lower or starts
to sputter. These are usually solid warnings the economy is edging toward difficulty. The
trend of sales is solidly up for now: retail sales chart
it really lies somewhere between a leading economic indicator and a coincident one. There is
decent retail sales data going back to shortly after WW 2, but most services stick with the
reformulated data from 1992. At any rate, retail tends to trend fairly steadily higher during
periods of economic expansion, and you should note when the retail trend shifts lower or starts
to sputter. These are usually solid warnings the economy is edging toward difficulty. The
trend of sales is solidly up for now: retail sales chart
Tuesday, March 13, 2012
Stock Market -- Fundamentals
Primary Fundamentals
These are measures I use to determine when we have an "easy money" bull market which features
high return for the assumption of low risk. The stock market entered the latest "easy money" era at
the end of 2008, and this reading remains in force today. All five indicators need to turn negative
before the era ends and that has yet to occur. The only period in modern history that rivals the
current one for duration is the early 1932 - early 1937 era when the conomy and the stock market
benefited from a super accomodative monetary policy to arrest a depression.
As with the '32 - '37 interval, the market has provided a high return, but accomodative monetary
actions did not shelter investors from periodic sharp corrections (2010 and 2011 in the current
epoch). The volatility then as now reflected low investor confidence levels as well as concerns
about the durability of monetary and fiscal ease. In this sense, the current bull has been very much
different from the post WW 2 markets.
The volatility may continue going forward as it has yet to be seen whether the market can advance
in the absence of overt QE policy. Moreover, as 2012 winds down, discussion could also build
around the idea of tightening fiscal policy for 2013 and beyond. Investors have to be prepared for
that.
I doubt my primary indicators will all turn negative in 2012 if only because the Fed is keeping
the "risk free" 91 day T - bill rate between 0.0 - 0.25%. So, the primary bull case will be there
through the year, but, the volatility may be there as well.
Secondary Measures
I watch liquidity available for stocks as well as the trend of the oil price very carefully. On my
reading, liquidity in support of further stock market strength is low now, and it may well be that
to send the market substantially higher, players may have to swap out of bonds especially but
also PMs and selected commodities to free up funds for stocks. Importantly, private sector
credit growth is recovering and if banks eventually begin competing more vigorously for funds,
there will be more liquidity available for stocks.
The price of oil has been kited up by threats from Israel, the US and the EU on one side and Iran
on the other regarding Iran's nuclear development programs with the prospect of conflict and a
possible oil supply shortage to worry over. So far, Iran has been the prime beneficiary. The
rise in the gasoline price is hurting Obama substantially and he may eventually either have to
tap the SPR or tell Israel to shut the hell up or both. Intentionally or not, Israel is now meddling
directly in US politics and They will pay for that down the road if I know my US.
Without further threats to or from Iran re: the oil supply, the current price range of $105 - 110 bl.
seems a bit too high.
These are measures I use to determine when we have an "easy money" bull market which features
high return for the assumption of low risk. The stock market entered the latest "easy money" era at
the end of 2008, and this reading remains in force today. All five indicators need to turn negative
before the era ends and that has yet to occur. The only period in modern history that rivals the
current one for duration is the early 1932 - early 1937 era when the conomy and the stock market
benefited from a super accomodative monetary policy to arrest a depression.
As with the '32 - '37 interval, the market has provided a high return, but accomodative monetary
actions did not shelter investors from periodic sharp corrections (2010 and 2011 in the current
epoch). The volatility then as now reflected low investor confidence levels as well as concerns
about the durability of monetary and fiscal ease. In this sense, the current bull has been very much
different from the post WW 2 markets.
The volatility may continue going forward as it has yet to be seen whether the market can advance
in the absence of overt QE policy. Moreover, as 2012 winds down, discussion could also build
around the idea of tightening fiscal policy for 2013 and beyond. Investors have to be prepared for
that.
I doubt my primary indicators will all turn negative in 2012 if only because the Fed is keeping
the "risk free" 91 day T - bill rate between 0.0 - 0.25%. So, the primary bull case will be there
through the year, but, the volatility may be there as well.
Secondary Measures
I watch liquidity available for stocks as well as the trend of the oil price very carefully. On my
reading, liquidity in support of further stock market strength is low now, and it may well be that
to send the market substantially higher, players may have to swap out of bonds especially but
also PMs and selected commodities to free up funds for stocks. Importantly, private sector
credit growth is recovering and if banks eventually begin competing more vigorously for funds,
there will be more liquidity available for stocks.
The price of oil has been kited up by threats from Israel, the US and the EU on one side and Iran
on the other regarding Iran's nuclear development programs with the prospect of conflict and a
possible oil supply shortage to worry over. So far, Iran has been the prime beneficiary. The
rise in the gasoline price is hurting Obama substantially and he may eventually either have to
tap the SPR or tell Israel to shut the hell up or both. Intentionally or not, Israel is now meddling
directly in US politics and They will pay for that down the road if I know my US.
Without further threats to or from Iran re: the oil supply, the current price range of $105 - 110 bl.
seems a bit too high.
Sunday, March 11, 2012
Financial System Liquidity & Stock Market
Fed Bank Credit
The Fed's currency swap line fell again in the past week as EU liquidity jitters continue to
lighten. FBC is now about flat for the year and is up at only a 4% annual rate since mid-2011.
Unless there is a sudden worsening within the EU banking sector requiring more US$ infusion,
FBC is likely to flatten out or even drift a bit lower. So far since 2009, the stock market has
tended to grow uncomfortable without Fed QE at its back.
Banking System Liquidity
Measured yr/yr, my broad measure of credit driven liquidity stands +4.6%. Much of this increase
directly reflects Fed QE. The loan book for the banking system is also up 4.6% yr/yr and the
recovery in loan demand is rising with all major sectors now participating. Banks are flush
with liquidity and have been able to expand the loan book and Treasury holdings at the same time.
Thus, there has been little emphasis on competing for deposits or issuing holding company
commercial paper which tend to expand the broad liquidity pool. With the Fed not now providing
QE support, rises in bank lending and the broad deposit base to 6% yr/yr would leave me more
comfortable with the stock market, although system private sector lending is finally showing
some decent acceleration. Hard to tell yet whether the stock market is taking much notice.
Money Market Funds (Cash Reserves)
MMFs in aggregate increased by roughly $50 bil. in late 2011 and early this year but this build
has largely been drawn down in recent weeks. Further support for the stock market, should it
come, may reflect draws on the large Treasury and the small PM markets.
The Fed's currency swap line fell again in the past week as EU liquidity jitters continue to
lighten. FBC is now about flat for the year and is up at only a 4% annual rate since mid-2011.
Unless there is a sudden worsening within the EU banking sector requiring more US$ infusion,
FBC is likely to flatten out or even drift a bit lower. So far since 2009, the stock market has
tended to grow uncomfortable without Fed QE at its back.
Banking System Liquidity
Measured yr/yr, my broad measure of credit driven liquidity stands +4.6%. Much of this increase
directly reflects Fed QE. The loan book for the banking system is also up 4.6% yr/yr and the
recovery in loan demand is rising with all major sectors now participating. Banks are flush
with liquidity and have been able to expand the loan book and Treasury holdings at the same time.
Thus, there has been little emphasis on competing for deposits or issuing holding company
commercial paper which tend to expand the broad liquidity pool. With the Fed not now providing
QE support, rises in bank lending and the broad deposit base to 6% yr/yr would leave me more
comfortable with the stock market, although system private sector lending is finally showing
some decent acceleration. Hard to tell yet whether the stock market is taking much notice.
Money Market Funds (Cash Reserves)
MMFs in aggregate increased by roughly $50 bil. in late 2011 and early this year but this build
has largely been drawn down in recent weeks. Further support for the stock market, should it
come, may reflect draws on the large Treasury and the small PM markets.
Tuesday, March 06, 2012
Global Economic Supply & Demand ***
After a flat spell over much of Half 1 '11, global industrial production did rebound moderately
over the second half of the year to wind up about 5.5% above year end 2010. Reflecting a
recovery of the global operating rate, industrial commodities prices have turned up in 2012.
Measured yr/yr, global industrial output growth has decelerated from the powerful 12% level
set in the initial recovery phase in early 2010 down to the 5.5% level and the trend of
decelerating growth likely continued into early this year. By my estimates, the slowdown of
output growth in 2011 was not sufficient to create substantial economic slack. Thus if global
industrial output growth were to re-accelerate over the course of this year, the supply / demand
situation could tighten considerably, which could send industrial commodities prices sharply
higher as well government bond yields.
Global purchasing manager data indicate a sharp acceleration of output in early 2012, including
for new orders. There is a positive skew to the data reflecting stronger manufacturing and
services output for the US which counts heavily in the measure. But Brazil, India and Russia
also showed stronger coupled with moderate growth for China and Japan. the EU remained
weak, but not weak enough to throw the world off a moderate growth course. More QE programs
by central banks showed up in the second half of 2011 including large liquidity building loan
programs from the ECB.
In my view, the QE programs do build business as well as stock market confidence, and the
absence of further significant monetary easing as the year progresses could adversely affect
the performance of individual economies to varying degrees, although one has to be careful not
to jump the gun here. For example, in the US, banks are lending again. The trend is moving in
the right direction, but is not yet strong enough to warrant saying further QE is unnecessary to
support growth. In the EU, it is far from clear how rapidly banks can adjust to the huge flow
of liquidity and move toward a modicum of normality given the evident restraints in place.
The trend of the oil price will play a major role for global growth this year. the current sharp
uptrend appears hardly sustainable without fresh indications that there will be substantial
supply problems.
Global stock markets have been very positively attuned to strong global economic growth
momentum. With potential overheating in store should strong growth eventuate and sustain,
this might be a year when investors should actually cheer a considerably more moderate
course.
---------------------------------------------------------------------------------------------------------
*** I use the CPB Netherlands economic data freely and strongly suggest you keep an eye on it
as well (scroll down for industrial output and tour the site).
over the second half of the year to wind up about 5.5% above year end 2010. Reflecting a
recovery of the global operating rate, industrial commodities prices have turned up in 2012.
Measured yr/yr, global industrial output growth has decelerated from the powerful 12% level
set in the initial recovery phase in early 2010 down to the 5.5% level and the trend of
decelerating growth likely continued into early this year. By my estimates, the slowdown of
output growth in 2011 was not sufficient to create substantial economic slack. Thus if global
industrial output growth were to re-accelerate over the course of this year, the supply / demand
situation could tighten considerably, which could send industrial commodities prices sharply
higher as well government bond yields.
Global purchasing manager data indicate a sharp acceleration of output in early 2012, including
for new orders. There is a positive skew to the data reflecting stronger manufacturing and
services output for the US which counts heavily in the measure. But Brazil, India and Russia
also showed stronger coupled with moderate growth for China and Japan. the EU remained
weak, but not weak enough to throw the world off a moderate growth course. More QE programs
by central banks showed up in the second half of 2011 including large liquidity building loan
programs from the ECB.
In my view, the QE programs do build business as well as stock market confidence, and the
absence of further significant monetary easing as the year progresses could adversely affect
the performance of individual economies to varying degrees, although one has to be careful not
to jump the gun here. For example, in the US, banks are lending again. The trend is moving in
the right direction, but is not yet strong enough to warrant saying further QE is unnecessary to
support growth. In the EU, it is far from clear how rapidly banks can adjust to the huge flow
of liquidity and move toward a modicum of normality given the evident restraints in place.
The trend of the oil price will play a major role for global growth this year. the current sharp
uptrend appears hardly sustainable without fresh indications that there will be substantial
supply problems.
Global stock markets have been very positively attuned to strong global economic growth
momentum. With potential overheating in store should strong growth eventuate and sustain,
this might be a year when investors should actually cheer a considerably more moderate
course.
---------------------------------------------------------------------------------------------------------
*** I use the CPB Netherlands economic data freely and strongly suggest you keep an eye on it
as well (scroll down for industrial output and tour the site).
Sunday, March 04, 2012
Risk On Vs. Risk Off
Key series such as the real wage and bank lending are still subdued enough that I am not yet
convinced the economic recovery is self-sustainable. So, I continue to watch the relative strength
of the SP 500 (SPY) against the long Treasury ($USB). A rising RSI for the SPY tells me that
investors continue to have confidence in the economy, while a falling RSI messages that confidence
has started to wain. The RSI for the SPY against the bond continues to advance, but the progress
is far enough along that investors are going to be watching their own calculations of risk on vs.
risk off more carefully going forward. SPY vs. Long Treas.
convinced the economic recovery is self-sustainable. So, I continue to watch the relative strength
of the SP 500 (SPY) against the long Treasury ($USB). A rising RSI for the SPY tells me that
investors continue to have confidence in the economy, while a falling RSI messages that confidence
has started to wain. The RSI for the SPY against the bond continues to advance, but the progress
is far enough along that investors are going to be watching their own calculations of risk on vs.
risk off more carefully going forward. SPY vs. Long Treas.
Friday, March 02, 2012
Stock Market -- Weekly
The market remains in a clear intermediate uptrend. On a 40 week basis, it is approaching a
moderate overbought at a 9.1% premium to the 40 wk m/a, and it is closing in on an overbought
reading on the 12 wk RSI. Price momentum is also losing some steam. $SPX
My weekly cyclical directional indicator continues to trend up, fueled in no small measure by the
strongly improving trend of initial unemployment claims. Now you have to be careful with the
claims measure since it tends to plateau for periods after strong improvement. No clear indication
of this yet, but it is time to keep it in mind, as stock players look to this leading measure for
direction.
Now, and perhaps importantly, Fed Bank Credit, after jumping by more than $100 bil. in late
2011 on a re-opened currency swap line primarily to the ECB, has been flattening out here in
2012, as foreign central banks now apparently have adequate US $ liquidity. The monetary
base in the US, which follows the trend of Fed Credit and is closely watched by stock players,
is still rising -- a market positive -- but it too may flatten out before long. If projections for
private sector credit growth are firming, stock players may be less interested in FBC and the MB.
However, the slow thaw in private sector credit may keep some major players fixed on Fed
Credit, and if that figure stays flat, well, some nervousness may set in before long.
moderate overbought at a 9.1% premium to the 40 wk m/a, and it is closing in on an overbought
reading on the 12 wk RSI. Price momentum is also losing some steam. $SPX
My weekly cyclical directional indicator continues to trend up, fueled in no small measure by the
strongly improving trend of initial unemployment claims. Now you have to be careful with the
claims measure since it tends to plateau for periods after strong improvement. No clear indication
of this yet, but it is time to keep it in mind, as stock players look to this leading measure for
direction.
Now, and perhaps importantly, Fed Bank Credit, after jumping by more than $100 bil. in late
2011 on a re-opened currency swap line primarily to the ECB, has been flattening out here in
2012, as foreign central banks now apparently have adequate US $ liquidity. The monetary
base in the US, which follows the trend of Fed Credit and is closely watched by stock players,
is still rising -- a market positive -- but it too may flatten out before long. If projections for
private sector credit growth are firming, stock players may be less interested in FBC and the MB.
However, the slow thaw in private sector credit may keep some major players fixed on Fed
Credit, and if that figure stays flat, well, some nervousness may set in before long.
Wednesday, February 29, 2012
Gold Price -- Interesting Day
I looked at the gold price over the past weekend and thought that if it cleared $1800 oz. on the
way up, I would consider shorting it again. I overlooked the signals early this week that it
was having trouble with resistance at $1800, and found today quite interesting when Fed Chair
Bernanke mentioned in testimony before The House that the FOMC would have to keep the
fast improving employment situation in mind, policywise. Gold tanked apparently because some
players feared the Fed could be stepping away from further quantitative easing and this on the
day when the ECB completed another round of ECB style easing.
It remains interesting that the Fed's balance sheet has increased only modestly since mid - 2011
while foreign central bank holdings of Treasuries has also declined. This monetary indicator --
total central bank holdings of Treasuries -- has not supported a rising gold price for some time.
Now there have been other positive factors: increasing Asian demand for gold, a positive
short term reversal in forward indicators of global output growth, and the ECB's large collateral
backed loan program. So, the interesting part of today's action was the dramatic reaction to a very
hedged hint by the Fed that the size of the punchbowl could be large enough. You could infer from
today's action that some good sized gold players had QE 3 in their forecasts for the year. Keep an
eye out for further negative follow through.
Gold Price
way up, I would consider shorting it again. I overlooked the signals early this week that it
was having trouble with resistance at $1800, and found today quite interesting when Fed Chair
Bernanke mentioned in testimony before The House that the FOMC would have to keep the
fast improving employment situation in mind, policywise. Gold tanked apparently because some
players feared the Fed could be stepping away from further quantitative easing and this on the
day when the ECB completed another round of ECB style easing.
It remains interesting that the Fed's balance sheet has increased only modestly since mid - 2011
while foreign central bank holdings of Treasuries has also declined. This monetary indicator --
total central bank holdings of Treasuries -- has not supported a rising gold price for some time.
Now there have been other positive factors: increasing Asian demand for gold, a positive
short term reversal in forward indicators of global output growth, and the ECB's large collateral
backed loan program. So, the interesting part of today's action was the dramatic reaction to a very
hedged hint by the Fed that the size of the punchbowl could be large enough. You could infer from
today's action that some good sized gold players had QE 3 in their forecasts for the year. Keep an
eye out for further negative follow through.
Gold Price
Monday, February 27, 2012
Russia Stock Market
Russia remains a high volatility "risk on" favorite. The market remains very attuned to US stocks,
the oil price and to industrial commodities prices. The strength in Russia stocks since late 2011
reflects a global player switch to "risk on" and the the positive trifecta of the SP 500, oil and
industrial basics prices. There is now buzz here in the US that with V. Putin expected to win the
presidency, a key uncertainty will be resolved, making it less risky to invest in Mother Russia.
My take on this one is different as I think putting Putin back at the top of the Kremlin will add to
uncertainty and foster more political antagonism from Russia's growing middle class of better
educated, ambitious and anti - autocratic younger people, especially if Putin and his guys decide
to get nastier with these folks in the post election period. Of course, Putin could turn into St.
Vladimir of Kremlin Square, but the past record offers little support on this point.
The RSX composite does get overbought when that 40 day RSI gets up to or above 60% and
the market has been trading in tandem with the SP 500 and the oil price, both of which are
overbought short term (Go to chart link below for the 40 RSI).
I am avoiding Russia now. You have the market overbought and I await the post election
period to see if Putin reads his antagonists the riot act and whether a growing number of folks
will continue to be on the streets to challenege Putin's new administration. Springtime is just
up the street a little and around the corner.
RSX
the oil price and to industrial commodities prices. The strength in Russia stocks since late 2011
reflects a global player switch to "risk on" and the the positive trifecta of the SP 500, oil and
industrial basics prices. There is now buzz here in the US that with V. Putin expected to win the
presidency, a key uncertainty will be resolved, making it less risky to invest in Mother Russia.
My take on this one is different as I think putting Putin back at the top of the Kremlin will add to
uncertainty and foster more political antagonism from Russia's growing middle class of better
educated, ambitious and anti - autocratic younger people, especially if Putin and his guys decide
to get nastier with these folks in the post election period. Of course, Putin could turn into St.
Vladimir of Kremlin Square, but the past record offers little support on this point.
The RSX composite does get overbought when that 40 day RSI gets up to or above 60% and
the market has been trading in tandem with the SP 500 and the oil price, both of which are
overbought short term (Go to chart link below for the 40 RSI).
I am avoiding Russia now. You have the market overbought and I await the post election
period to see if Putin reads his antagonists the riot act and whether a growing number of folks
will continue to be on the streets to challenege Putin's new administration. Springtime is just
up the street a little and around the corner.
RSX
Friday, February 24, 2012
Stock Market Strategy
The SP 500 closed at a new cyclical high today. For one such as I who has been bullish on the
longer term direction of the market since around the end of 2008, this is a gratifying moment.
I use a set of fundamental indicators which did work like a charm in every post WW 2 market.
But the past economic downturn -- more akin to an economic depression than a recession -- did
necessitate going back to the 1932 - 1940 Great Depression period to gain an understanding of
how a stock market recovery could take place in the wake of colossal economic damage and a
severe credit contraction. The key I found was the dramatic reversal in monetary policy to flood
the economic system with liquidity to counterract the deflationary force of credit contraction. It
worked then to support economic recovery and to slowly rebuild confidence and it worked this
time out as well. I also saw clearly that when this naked monetary easing was shut off, the
economy was prone to recession and the stock market suffered. Since we have yet to see a full
blooded resumption of private sector credit growth in the current economic recovery, I plan to
continue to monitor Fed Bank Credit and the monetary base very carefully because the evidence
continues to show that the market struggles or sells off when the Fed turns off the spigot.
The following link (from economagic) shows the monetary base from the 1931 - 1941 period.
It is perishable but I hope it holds up for a while. Economagic
longer term direction of the market since around the end of 2008, this is a gratifying moment.
I use a set of fundamental indicators which did work like a charm in every post WW 2 market.
But the past economic downturn -- more akin to an economic depression than a recession -- did
necessitate going back to the 1932 - 1940 Great Depression period to gain an understanding of
how a stock market recovery could take place in the wake of colossal economic damage and a
severe credit contraction. The key I found was the dramatic reversal in monetary policy to flood
the economic system with liquidity to counterract the deflationary force of credit contraction. It
worked then to support economic recovery and to slowly rebuild confidence and it worked this
time out as well. I also saw clearly that when this naked monetary easing was shut off, the
economy was prone to recession and the stock market suffered. Since we have yet to see a full
blooded resumption of private sector credit growth in the current economic recovery, I plan to
continue to monitor Fed Bank Credit and the monetary base very carefully because the evidence
continues to show that the market struggles or sells off when the Fed turns off the spigot.
The following link (from economagic) shows the monetary base from the 1931 - 1941 period.
It is perishable but I hope it holds up for a while. Economagic
Wednesday, February 22, 2012
Fundamental Stock Market Indicator
Today, I present a link to economist Ed Yardeni's fundamental stock market indicator. It is
close to my weekly cyclical market indicator, but there are some substantial differences. He
uses a consumer comfort measure and he also deploys an industrial commodities index which is
priced in US $. I use a broader more nearly dollar neutral index for commodities and an array
of leading economic indicator data that is available weekly plus a conservative weekly coincident
indicator that reflects various components of retail sales. We both weight commodities and the
initial unemployment insurance claims heavily. Yardeni model
These indicators are coincident because key elements of the data sets are not are not available
until either Thursday or Friday of each week, and some are already a week old when reported. So,
measures of this sort are not that useful for short term timing, but they provide an excellent
fundamental backdrop for the stock market on a trend basis.
Tp get Yardeni's conclusions from his work you need to be a paying subscriber.
close to my weekly cyclical market indicator, but there are some substantial differences. He
uses a consumer comfort measure and he also deploys an industrial commodities index which is
priced in US $. I use a broader more nearly dollar neutral index for commodities and an array
of leading economic indicator data that is available weekly plus a conservative weekly coincident
indicator that reflects various components of retail sales. We both weight commodities and the
initial unemployment insurance claims heavily. Yardeni model
These indicators are coincident because key elements of the data sets are not are not available
until either Thursday or Friday of each week, and some are already a week old when reported. So,
measures of this sort are not that useful for short term timing, but they provide an excellent
fundamental backdrop for the stock market on a trend basis.
Tp get Yardeni's conclusions from his work you need to be a paying subscriber.
Monday, February 20, 2012
Stock Market -- Weekly Chart
Back on 10/16/11 (archived), I posted that despite the short term uncertainties surrounding the
market then, my favorite weekly measures were starting to line up positive, and that such counted
the most in the environment. The weekly chart and indicators remain in positive mode. Check the
SPX and the supporting SPX vs. 200 day m/a. These indicators are not always that helpful in the
very short run, but I will count the market in bullish mode until I start to see signs of a breakdown
in the indicator readings.
The weekly SPX is approaching a moderate overbought against its 40 wk m/a (and the daily against
its 200 day m/a), but since none of the indicators are up in "red zone" territory, the charts shown do
not yet suggest a top is forming for the present upleg.
Both charts show up channels from early Oct. '11, and continue to suggest that there could be another
and perhaps unexpected bout of strong volatility, the narrowness of the channel since mid-Dec. '11
notwithstanding. I would love to wish the potential for disturbing volatility away, but the
"logic" of the charts says "no".
market then, my favorite weekly measures were starting to line up positive, and that such counted
the most in the environment. The weekly chart and indicators remain in positive mode. Check the
SPX and the supporting SPX vs. 200 day m/a. These indicators are not always that helpful in the
very short run, but I will count the market in bullish mode until I start to see signs of a breakdown
in the indicator readings.
The weekly SPX is approaching a moderate overbought against its 40 wk m/a (and the daily against
its 200 day m/a), but since none of the indicators are up in "red zone" territory, the charts shown do
not yet suggest a top is forming for the present upleg.
Both charts show up channels from early Oct. '11, and continue to suggest that there could be another
and perhaps unexpected bout of strong volatility, the narrowness of the channel since mid-Dec. '11
notwithstanding. I would love to wish the potential for disturbing volatility away, but the
"logic" of the charts says "no".
Wednesday, February 15, 2012
Oil Price -- For Top Guns Only
Today, Iran threatened to cut off its six largest EU buyers in retaliation for the EU proposal
to embargo Iranian crude. The US does not buy Iran crude, but does have a plan on the table
to push SWIFT -- the global payments and deposits clearinghouse -- to cut the Iranian central
bank and its member banks out of the system. Such dual EU / US action would if enacted have a
serious negative economic impact for Iran, as it would take a substantial amount of time to line
up new buyers for all of its crude and establish what would be at best an inefficient and risky
new payments / deposits clearing system.
The dispute has been going on for several months and has added $20 bl. to the price of crude
by my estimate. So, Iran has been a major beneficiary as have the nervy traders who have been
long crude during an especially weak seasonal period. There is overhead resistance for crude
around the current price, so traders need to decide whether the political tiff has deepened enough
to warrant further commitment on the long side.
Since I think only the guys with superior market intelligence should be playing in this market
now, I am a bystander, and if you are tempted to play -- long or short -- it would be wise to
review whether or not you have timely access to info you need to handle a very complicated and
risky situation.
I plan to monitor the situation carefully primarily because my research suggests that WTI crude
above $95 bl. will tend to be a stronger drag on broad economic output growth.
WTI Crude
to embargo Iranian crude. The US does not buy Iran crude, but does have a plan on the table
to push SWIFT -- the global payments and deposits clearinghouse -- to cut the Iranian central
bank and its member banks out of the system. Such dual EU / US action would if enacted have a
serious negative economic impact for Iran, as it would take a substantial amount of time to line
up new buyers for all of its crude and establish what would be at best an inefficient and risky
new payments / deposits clearing system.
The dispute has been going on for several months and has added $20 bl. to the price of crude
by my estimate. So, Iran has been a major beneficiary as have the nervy traders who have been
long crude during an especially weak seasonal period. There is overhead resistance for crude
around the current price, so traders need to decide whether the political tiff has deepened enough
to warrant further commitment on the long side.
Since I think only the guys with superior market intelligence should be playing in this market
now, I am a bystander, and if you are tempted to play -- long or short -- it would be wise to
review whether or not you have timely access to info you need to handle a very complicated and
risky situation.
I plan to monitor the situation carefully primarily because my research suggests that WTI crude
above $95 bl. will tend to be a stronger drag on broad economic output growth.
WTI Crude
Tuesday, February 14, 2012
Stock Market -- Short Term
The market experienced a powerful move up from the late Nov. '11 low and also when measured
from the lower, earlier Oct. '11 low. Most recently, the SP 500 is showing an overbought in the
short run and has been kissing important resistance at 1350. SPX
This is not an easy situation. The SPX has run well out ahead of my weekly cyclical fundamental
index since Oct. '11. The fundamental index is up nicely, but has been running less than half the
22.8% run up in the SPX since Oct. However, the trajectory and the breadth of the advance are
far more akin to a fresh upleg than a blow off with a dim future. In fact, the SPX could advance
another 5.5% up to 1425 over the next month or two before it turned overbought on my longer term
indicators.
Now, the chart also shows a welcome dimunition of volatility over the past couple of months.
However, the structure of the rally still leaves open the possibility of a return to significantly
increased volatility (Draw a trend line up with touches at the Oct. and Nov. lows.) As well,
the recent strong rally has mostly to do with restoration of the p/e ratio and much less to do
with near term earnings expectations, which remain tame.
So, for now, I am stuck looking for some additional testing of SPX 1350 resistance over the
next week or two and having to hold my breath on how deep a retracement could come if the
market does not blow through 1350. Not especially definitive you say? Well, you play it as it
lays.
from the lower, earlier Oct. '11 low. Most recently, the SP 500 is showing an overbought in the
short run and has been kissing important resistance at 1350. SPX
This is not an easy situation. The SPX has run well out ahead of my weekly cyclical fundamental
index since Oct. '11. The fundamental index is up nicely, but has been running less than half the
22.8% run up in the SPX since Oct. However, the trajectory and the breadth of the advance are
far more akin to a fresh upleg than a blow off with a dim future. In fact, the SPX could advance
another 5.5% up to 1425 over the next month or two before it turned overbought on my longer term
indicators.
Now, the chart also shows a welcome dimunition of volatility over the past couple of months.
However, the structure of the rally still leaves open the possibility of a return to significantly
increased volatility (Draw a trend line up with touches at the Oct. and Nov. lows.) As well,
the recent strong rally has mostly to do with restoration of the p/e ratio and much less to do
with near term earnings expectations, which remain tame.
So, for now, I am stuck looking for some additional testing of SPX 1350 resistance over the
next week or two and having to hold my breath on how deep a retracement could come if the
market does not blow through 1350. Not especially definitive you say? Well, you play it as it
lays.
Sunday, February 12, 2012
Financial System Liquidity
Overview
As in the 1930s, when banking sector credit was contracting or flat, the Fed continues to be the
primary provider of liquidity to the financial system. That measure of liquidity has been rising
modestly recently owing to the currency swap lines from the Fed to liquidity shy central banks.
The banking system's interest earning assets have been rising, but it is interesting that solid growth
of the business loan portfolio has nearly been matched by the continued accumulation of Treasuries
in the investment category. Real Estate loans, which account for 50% of bank loan exposure have
only recently stopped declining and ticked up in Jan. this year, perhaps reflecting a long awaited
recovery of construction spending. Modest improvements in credit demand have so far left the
banks with little need or appetite to bid for more deposit $.
Based on post WW 2 standards, the Fed should be raising short rates now, but with unemployment
still high and housing still very depressed, the Fed is maintaining its ZIRP. This will be interesting
to watch going forward, as the recovery of private sector loan demand continues to broaden out.
Short term business credit demand is up over 10% yr/yr, and the Fed has not seen fit to raise rates
as It always did over the post WW 2 period. Quite something.
Fed Bank Credit & Stock Market
Since the Fed is the major game in town re: liquidity, you should note the importance of the Fed's
Credit account to the market. Investors like positive momentum in Fed Bank credit and shun stocks
when the Fed has this account in flat or contraction modes. Fed Bank Credit
As in the 1930s, when banking sector credit was contracting or flat, the Fed continues to be the
primary provider of liquidity to the financial system. That measure of liquidity has been rising
modestly recently owing to the currency swap lines from the Fed to liquidity shy central banks.
The banking system's interest earning assets have been rising, but it is interesting that solid growth
of the business loan portfolio has nearly been matched by the continued accumulation of Treasuries
in the investment category. Real Estate loans, which account for 50% of bank loan exposure have
only recently stopped declining and ticked up in Jan. this year, perhaps reflecting a long awaited
recovery of construction spending. Modest improvements in credit demand have so far left the
banks with little need or appetite to bid for more deposit $.
Based on post WW 2 standards, the Fed should be raising short rates now, but with unemployment
still high and housing still very depressed, the Fed is maintaining its ZIRP. This will be interesting
to watch going forward, as the recovery of private sector loan demand continues to broaden out.
Short term business credit demand is up over 10% yr/yr, and the Fed has not seen fit to raise rates
as It always did over the post WW 2 period. Quite something.
Fed Bank Credit & Stock Market
Since the Fed is the major game in town re: liquidity, you should note the importance of the Fed's
Credit account to the market. Investors like positive momentum in Fed Bank credit and shun stocks
when the Fed has this account in flat or contraction modes. Fed Bank Credit
Friday, February 10, 2012
China -- Shanghai Composite
China's huge, nearly $600 bil. stimulus program focused heavily on its industrial base and on
further broadening its infrastructure and real estate development. The Gov. threw money at
these markets to avoid a deep recession in 2009 with the result that the broad money supply M-2
had jumped to a 30% yr/yr growth rate by mid-2010. This implied the development of 20%
inflation which mostly took place in the higher end residential and commercial real estate markets.
The stock market became a source of funds to feed real estate speculation. but as economic
expansion progressed, consumer inflation accelerated sharply, forcing China to tighten money and
credit to curb the faster CPI and corral the excess real estate speculation. On a yr/yr basis, China
M-2 is now down to 12.4%, which for an economy with fast growth potential is a sensible level.
I had expected Chinese authorities to begin easing monetary policy over Half 2 '11 and the
stock market to rally as a deceleration of inflation reduced the investment return hurdle rate. China
did not begin to ease until late in 2011, and then, only slightly. There has been a bounce in a very
weak stock market, but it is hard to tell whether the bounce is simply a move in sympathy with a
global recovery of share prices or whether players are coming around to believing that China is
set to ease monetary policy further. (Naturally, the Half 2 '11 market recovery did not happen as
the market kept in a southerly direction.)
Lord knows They have the real estate developers on the run, with only middle and lower priced
residential properties getting any play from lenders. They also have monetary policy at a near
critical juncture, since further significant tightening of liquidity would not only freeze out more
real estate, but would do harm to China's output base and employment. Obviously, it would do
China little good to pump up liquidity sharply from here which could re-arouse the overbuilt
real estate sector and lead to further inflation down the road.
As many have noted, China needs badly to rebalance its economy in favor of consumption and
away from its profound over-dependence on industry and upscale property development. As well,
it needs to better control the diversity of its banking sector loan portfolios to include far more
emphasis on the development of small and mid-size business. But first, it needs to put its monetary
policy on a far more even keel.
A turn to a rather moderate monetary policy of accomodation seems needed as China passes
through 2012. Its stock market is quite reasonably priced and might benefit from a more balanced policy which does not tilt the investment players right back to the real estate and private credit
markets.
China's presumptive new leader, Xi Jinping will be in the US next week and is expected to take
up the reins of power later this year. This development could be a risk element for the Shanghai
Composite near term as Xi might want the authorities to squeeze out more inflation pressure
before he ascends. All to be seen.
Shanghai Stocks
further broadening its infrastructure and real estate development. The Gov. threw money at
these markets to avoid a deep recession in 2009 with the result that the broad money supply M-2
had jumped to a 30% yr/yr growth rate by mid-2010. This implied the development of 20%
inflation which mostly took place in the higher end residential and commercial real estate markets.
The stock market became a source of funds to feed real estate speculation. but as economic
expansion progressed, consumer inflation accelerated sharply, forcing China to tighten money and
credit to curb the faster CPI and corral the excess real estate speculation. On a yr/yr basis, China
M-2 is now down to 12.4%, which for an economy with fast growth potential is a sensible level.
I had expected Chinese authorities to begin easing monetary policy over Half 2 '11 and the
stock market to rally as a deceleration of inflation reduced the investment return hurdle rate. China
did not begin to ease until late in 2011, and then, only slightly. There has been a bounce in a very
weak stock market, but it is hard to tell whether the bounce is simply a move in sympathy with a
global recovery of share prices or whether players are coming around to believing that China is
set to ease monetary policy further. (Naturally, the Half 2 '11 market recovery did not happen as
the market kept in a southerly direction.)
Lord knows They have the real estate developers on the run, with only middle and lower priced
residential properties getting any play from lenders. They also have monetary policy at a near
critical juncture, since further significant tightening of liquidity would not only freeze out more
real estate, but would do harm to China's output base and employment. Obviously, it would do
China little good to pump up liquidity sharply from here which could re-arouse the overbuilt
real estate sector and lead to further inflation down the road.
As many have noted, China needs badly to rebalance its economy in favor of consumption and
away from its profound over-dependence on industry and upscale property development. As well,
it needs to better control the diversity of its banking sector loan portfolios to include far more
emphasis on the development of small and mid-size business. But first, it needs to put its monetary
policy on a far more even keel.
A turn to a rather moderate monetary policy of accomodation seems needed as China passes
through 2012. Its stock market is quite reasonably priced and might benefit from a more balanced policy which does not tilt the investment players right back to the real estate and private credit
markets.
China's presumptive new leader, Xi Jinping will be in the US next week and is expected to take
up the reins of power later this year. This development could be a risk element for the Shanghai
Composite near term as Xi might want the authorities to squeeze out more inflation pressure
before he ascends. All to be seen.
Shanghai Stocks
Wednesday, February 08, 2012
Risk On vs. Risk Off
One quick measure I use to evaluate the status of the "risk on vs. risk off " trade is to watch the
SP 500 in the form of the SPY against the long (30 yr.) Treasury. SPY:$USB
The relationship between the stock and bond market can shift around over time, but this measure
has been helpful in recent years. Note the "buy stock" points of Aug. 2010 and Oct. 2011, when
stocks rallied and the bond price faded at .75 relative strength. Note as well that when relative
strength of the SPY gets close to or exceeds the 1.02 RS level, that you get a caution sign that
stocks are perceived to be doing a little too well relative to the bond. The current RS reading for
SPY against the long guy is .95, which suggests the relationship is beginning to mature based on
the recent economic environment. Interesting stuff in the current mileu.
I would also call your attention to when the RS of the SPY breaks below the 20 day m/a with this
followed by a downturn of the "20", you also get a heads up which tells you to pay much closer
attention to the economic fundamentals.
SP 500 in the form of the SPY against the long (30 yr.) Treasury. SPY:$USB
The relationship between the stock and bond market can shift around over time, but this measure
has been helpful in recent years. Note the "buy stock" points of Aug. 2010 and Oct. 2011, when
stocks rallied and the bond price faded at .75 relative strength. Note as well that when relative
strength of the SPY gets close to or exceeds the 1.02 RS level, that you get a caution sign that
stocks are perceived to be doing a little too well relative to the bond. The current RS reading for
SPY against the long guy is .95, which suggests the relationship is beginning to mature based on
the recent economic environment. Interesting stuff in the current mileu.
I would also call your attention to when the RS of the SPY breaks below the 20 day m/a with this
followed by a downturn of the "20", you also get a heads up which tells you to pay much closer
attention to the economic fundamentals.
Monday, February 06, 2012
Nasdaq Comp. Overbought
The TRIN for the Naz measures buying pressure vs. selling pressure. A high TRIN reading --
the 21 day m/a exceeds 1.5 -- shows a deep oversold. A low TRIN reading below .90 shows
the Naz is overbought. The market is overbought at present. $TRINQ
the 21 day m/a exceeds 1.5 -- shows a deep oversold. A low TRIN reading below .90 shows
the Naz is overbought. The market is overbought at present. $TRINQ
Economic Indicators / Analysis
Based on the coincident economic indicators, the growth of sales and production saw dwindling
momentum over most of 2011, as the output side of the US economy was slowed by negative
real income and sluggish employment gains. I think it is fair to say that without the benefit of the
2% payroll tax cut, growth would have been marginal at best. Although the payroll tax benefit is
likely to be extended for 2012 after the usual Wash. DC histrionics, it will not be incremental in
force this year. Excluding the tax cut, the real wage rate, measured yr/yr, fell from 0.7% at year
end 2010 to a low of -2% by 8/11. This awful performance has improved since Aug., with the real
wage now running at about -0.8% yr/yr through Jan. The improvement is primarily due to a
significant reduction of inflation momentum which could continue for a few more months. On the
plus side, the yr/yr growth of employment has improved from a scant 0.2% for 8/11 up to a far
more reasonable 1.7% through Jan. So, the underlying buying power of the economy is getting
better, although it is still inherently modest.
In line with somewhat improved buying power, new order rates for US business have improved
markedly since Aug. 2011, and measured by breadth of businesses with rising new order rates,
are solidly positive and suggest a re-acceleration of economic growth in the months ahead.
Measures of global economic activity are also improving in early 2012, but this heavily reflects
the contribution of stronger US new order rates.
The US banking system took a little bit of a holiday over the second half of 2011. With a slowing
economy, banks did not bid agressively for deposits or boost commercial paper outstanding. That
left the Fed as the prime supplier of incremental liquidity over the Aug. '11 - Jan. '12 period.
Perhaps with business now showing a stronger order book and construction spending now
apparently recovering, the banking system will resume providing more liquidity to the economy.
With Europe, Japan and China experiencing growth slowdowns as 2011 progressed, US export
sales have turned modestly lower since the autumn of last year and could continue to be a drag
on the US in coming months.
On balance, with real wages still negative and the banks still reluctant to step up more strongly to
support the economy, the recovery remains fragile on its internal workings, never mind if
problems in Europe take a turn for the worse or if rising mid-east tensions provoke an inflation
shock from a jump in the oil price.
Note, however, that older hands have been buying US stocks over the past several months
because they have watched underlying but modest improvement in economic fundamentals
coupled with a deceleration of inflation pressure.
momentum over most of 2011, as the output side of the US economy was slowed by negative
real income and sluggish employment gains. I think it is fair to say that without the benefit of the
2% payroll tax cut, growth would have been marginal at best. Although the payroll tax benefit is
likely to be extended for 2012 after the usual Wash. DC histrionics, it will not be incremental in
force this year. Excluding the tax cut, the real wage rate, measured yr/yr, fell from 0.7% at year
end 2010 to a low of -2% by 8/11. This awful performance has improved since Aug., with the real
wage now running at about -0.8% yr/yr through Jan. The improvement is primarily due to a
significant reduction of inflation momentum which could continue for a few more months. On the
plus side, the yr/yr growth of employment has improved from a scant 0.2% for 8/11 up to a far
more reasonable 1.7% through Jan. So, the underlying buying power of the economy is getting
better, although it is still inherently modest.
In line with somewhat improved buying power, new order rates for US business have improved
markedly since Aug. 2011, and measured by breadth of businesses with rising new order rates,
are solidly positive and suggest a re-acceleration of economic growth in the months ahead.
Measures of global economic activity are also improving in early 2012, but this heavily reflects
the contribution of stronger US new order rates.
The US banking system took a little bit of a holiday over the second half of 2011. With a slowing
economy, banks did not bid agressively for deposits or boost commercial paper outstanding. That
left the Fed as the prime supplier of incremental liquidity over the Aug. '11 - Jan. '12 period.
Perhaps with business now showing a stronger order book and construction spending now
apparently recovering, the banking system will resume providing more liquidity to the economy.
With Europe, Japan and China experiencing growth slowdowns as 2011 progressed, US export
sales have turned modestly lower since the autumn of last year and could continue to be a drag
on the US in coming months.
On balance, with real wages still negative and the banks still reluctant to step up more strongly to
support the economy, the recovery remains fragile on its internal workings, never mind if
problems in Europe take a turn for the worse or if rising mid-east tensions provoke an inflation
shock from a jump in the oil price.
Note, however, that older hands have been buying US stocks over the past several months
because they have watched underlying but modest improvement in economic fundamentals
coupled with a deceleration of inflation pressure.
Friday, February 03, 2012
Stock Market Stategy -- Adding Shorting Option
The market is overbought short term, but the trend both shorter run and intermediate term are
still decidedly positive. Nevertheless, I plan to use leveraged short ETFs on signs of price
weakness probably through the remainder of the month.
I have linked to the SPX % of stocks above their 50 day m/a's. $SPX50AR I use this chart to
help me decide on long vs short decisions and watch the action of the % reading against its 10 and
25 day m/a's. I have only traded long since the end of 2008, but with three years having past
since then, it seems about right to use a more balanced strategy. Study of this chart is worth the
time, as it has been a very ok guide to the market for many years.
still decidedly positive. Nevertheless, I plan to use leveraged short ETFs on signs of price
weakness probably through the remainder of the month.
I have linked to the SPX % of stocks above their 50 day m/a's. $SPX50AR I use this chart to
help me decide on long vs short decisions and watch the action of the % reading against its 10 and
25 day m/a's. I have only traded long since the end of 2008, but with three years having past
since then, it seems about right to use a more balanced strategy. Study of this chart is worth the
time, as it has been a very ok guide to the market for many years.
Wednesday, February 01, 2012
Inflation Potential
Inflation Pressure Gauges
By Sep. 2011, inflation had accelerated to 3.9% yr/yr. As expected, it has moderated, and the CPI
registered 3.0% yr/yr through 12/11. My narrow inflation pressure gauge, which is heavily weighted
to commodities and capacity utilization %, is signaling further moderation so that the CPI could fall
to 2.0 - 2.5% in several months' time. The easing of pressure primarily reflects the decline of
commodities prices underway since May, 2011. $CRB Commodities Comp. The chart shows the
CRB is down 8.1% yr/yr, and it would need to reverse and rise above +10% yr/yr to trigger off
a substantial re-acceleration of the CPI.
My broader gauge, which includes a wide array of economic data is consistent with a yr/yr CPI
of roughly 2.5% at present. Both gauges did tick up slightly near year's end 2011.
The Real Wage
Commodities driven inflation, particularly for petroleum products, turned the real wage negative
in early 2011. Incremental FICA tax relief eased the pain, but no further increments are expected
now. Thus, unless there is an upward adjustment to wages soon, the economic recovery will remain
at risk. The wider measure of real disposable income has also been negative. Real DPI
Companies may not realize it, but since real wages which are too low can easily jeopardize
economic expansion, investors react by reducing the stock market's p/e ratio. Thus it is
that shareholders as well as labor are now being screwed by CEO focus on short term earnings
and exec bonuses and an evident lack of foresight.
By Sep. 2011, inflation had accelerated to 3.9% yr/yr. As expected, it has moderated, and the CPI
registered 3.0% yr/yr through 12/11. My narrow inflation pressure gauge, which is heavily weighted
to commodities and capacity utilization %, is signaling further moderation so that the CPI could fall
to 2.0 - 2.5% in several months' time. The easing of pressure primarily reflects the decline of
commodities prices underway since May, 2011. $CRB Commodities Comp. The chart shows the
CRB is down 8.1% yr/yr, and it would need to reverse and rise above +10% yr/yr to trigger off
a substantial re-acceleration of the CPI.
My broader gauge, which includes a wide array of economic data is consistent with a yr/yr CPI
of roughly 2.5% at present. Both gauges did tick up slightly near year's end 2011.
The Real Wage
Commodities driven inflation, particularly for petroleum products, turned the real wage negative
in early 2011. Incremental FICA tax relief eased the pain, but no further increments are expected
now. Thus, unless there is an upward adjustment to wages soon, the economic recovery will remain
at risk. The wider measure of real disposable income has also been negative. Real DPI
Companies may not realize it, but since real wages which are too low can easily jeopardize
economic expansion, investors react by reducing the stock market's p/e ratio. Thus it is
that shareholders as well as labor are now being screwed by CEO focus on short term earnings
and exec bonuses and an evident lack of foresight.
Subscribe to:
Posts (Atom)