Gold & Silver

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

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

More On The Long Treasury Bond

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

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

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

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

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

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

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

Stock Market -- Weekly

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

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

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

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

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

Long Treasury Bond

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

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

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

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

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

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

US Economy --2012

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

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

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

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

Corporate Profits Indicators

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

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

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

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

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

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

Stock Market

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

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

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

$SPX

Gold

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

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

US Trade

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

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

Stock Market -- Short Term

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

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

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

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

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

Eurozone Baby Steps Along

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

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

Russia Stock Market

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

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

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

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

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

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

IEV and $SPX chart

Stocks: And Now, The Turbo Moonshot

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

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

Scroll south for background on today's pop.

Central Banks: All Hands On Deck

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

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

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

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

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

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

Stock Market -- Short Term

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

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

Euro Stocks -- Nearing Cyclical Bear

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

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

Global Economic Supply & Demand ***

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

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

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

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

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

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

 

Stock Market Weekly

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

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

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

Stock Market -- Liquidity

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

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

5 Year T-note Yield