Commodities Market

Statistically, the CRB Commodities Index is dirt cheap on an historical basis. The index is now
just slightly north of 200. Since the early 1970s, 180 - 200 on the index has marked the bottoms
on the chart. Years back, I developed a macro model to figure out an equilibrium price where
supply and demand for commodities are in reasonable balance and where  the price includes
enough  profit margin sufficient to encourage future supply to grow along with demand. Here in
2015 the fair value price is running around 350 on the index. $CRB Chart

the CRB is trading at a large discount to fair value. This suggests a goodly number of raw
commodities producers are now running in the red and can only be cash flow positive if
there are sizable depreciation and depletion allowances and / or paid - in subsidies to keep
people employed (a not uncommon practice in foreign economies). Big discounts to fair
value in the commodities markets usually occur during recession periods such as in late 2001
and 2008 - 09. Now, we have a different situation. Global demand is growing at about half
the rate it needs to grow to allow depressed operating rates to rise enough to equilibrate the
markets. The 2002 - 2008 boom in commodities prices brought along with it a large cycle of
commodities capacity expansion. Moreover, with global monetary policy accomodative
since 2009, producers have been reluctant to shut - in capacity. The problem of excess capacity
relative to demand has been clearly apparent since early 2012. On top of too much capacity in
the business, we have to add the unwinding of long positions built up in commodities by both
financial players and speculators. Long futures positions in the markets often reached 3 times
what they were at the beginning of the last boom in 2002.

Viewed over the last 40 odd years, the CRB index is sold out and in distress given rising
operating costs and notwithstanding large productivity gains. The timing of price recovery
for commodities, as cheap as they are, is hard to figure. More of the marginal producers
and more of the diehard speculators may have to be stripped out of the equation. The low
global demand growth has yet to show much acceleration and a strong US $ is also a drag
on the market. Thus, a decline in the CRB index down to the 180 level cannot be ruled before
there is improvement.

Commodities are on my watch list and I may try long positions in the DBC commodities
tracking ETF (bottom panel of chart above) when it looks like a short run uptrend may be
developing.

Oil Price

Oil is about to move into a seasonally strong period which normally lasts through the end of
Sep. - beginning of Oct. Such periods can be exciting but do not normally top the Mar. - Apr.
interval for lift off power. The onset of a seasonally strong period does not look like a happy
moment on the chart. WTIC Weekly

The oil price held up very well through the normally weak late spring - early summer period,
but has broken down sharply since. The Iran nuke deal has been a negative, as has a bit of
firming in the US rig count, fresh debate over the prospective size of the of excess capacity at
the wellhead, and a general decline in commodities. The bear market in oil was re-affirmed
when the price recently failed to break above  its 40 wk. m/a. An oversold condition is
developing with important shorter term support at $45 WTIC.

I had been guessing back in the spring that oil could, after the oncoming bout of seasonal weak-
ness, rise to $70 bl. in the early autumn of this year, but that now looks like quite a stretch and
would likely require not yet apparent extra factors to come into play beyond the seasonal lift.

SPX -- Weekly

Technical
The SPX bounced nicely last week to close very slightly below its all time high. Moreover, it
remained clear of the 40 wk. m/a on the plus side. SPX Weekly

The cyclical bull market has grown more tenuous, however. The SPX is no longer following a
clear uptrend line and has steadily lost momentum. It has been making new highs, but they
have been so minor that the market has basically been adrift. Moreover, the breadth of the market,
measured by the percentage of stocks in clear positive momentum price patterns, is sharply
lower than at the start of the year.

The SPX is not not materially overbought against its 40 wk. m/a and has not been so for months.
the 40 wk is also still progressing higher, although it is starting to flatten out compared to the
prior year.

In all, the chart is unimpressive but is not yet near negative, and on the old saw that one should
never sell a dull market, players have just been going along with it even though the SPX has
been drifting.

Fundamental
On balance, the fundamentals are positive, but the situation on this score is tenuous as well.
Broadly, resources are in place to support continuation of real progress in the economy through
2016 in my view, but the progress we are witnessing is quite modest. Measured yr/ yr my
coincident economic indicator has declined from a healthy 3% at the outset of 2015 to an
anemic  1.6% through June. My monthly and weekly leading economic indicators signal a pick up
in growth for  Half 2 '15, but the readings are, shall we say, unprepossessing. SPX net per share
continues to trail the prior year, with weakness in the energy sector more than offsetting gains
elsewhere. Even excluding oil and gas, pricing power is modest, and many companies are
experiencing lower productivity growth since business is now geared for faster volume gains
which have yet to materialize.

There is an investor patience factor at work here as well. The market p/e ratio is elevated.
But with cash yielding near zero and bond market yields drifting higher, many players appear
reconciled for now to hold  equities portfolios to pick up the 2.1% yield and to play the
share buyback and merger lotteries as well as chase positive earnings surprise (viz. Netflix
and Google shares).









 

Gold Price

The gold price appeared to have a broken a down trend running back to 2012 earlier this year.
The Jan. rally was better than I expected, but it was unable to hold.  Gold Price Daily

As the year has progressed, gold has been unable to rally from $1200 oz. support as it did
at the outset of 2015, and support at $1200 has recently turned into resistance. I reckon that
at around $1145, gold is now trading a little below the all-in cost of production for a fair
portion of the mining group with any number of mines now cash flow positive only because
of depreciation / depletion considerations. The gold price is now mildly oversold and a minor
bounce may be in the cards.

Global industrial output has been growing only at around 2% in recent years and this has
not been fast enough to put any real substantial upward pressure on factory operating rates.
Consequently, global inflation pressure has trended down to modest levels. Moreover, the
recent blowout of the oil price reflecting a supply glut has been a sore spot for gold players,
since in modern times, strong run-ups in the price of oil have tended to be a very substantial
factor in leading periods of accelerating inflation.

I have been looking for faster economic growth over the second half of 2015 and have thought
this might trigger some positive price action in the gold market. However, global liquidity
growth going into Half 2 '15 has continued restrained especially in the US and China, and the
economic benefits to both countries have been more muted so far than I expected. Thus, for the
present, global output continues to grow but not yet fast enough to signal that capacity
utilization is about to swing higher on a cyclical basis.

The gold price is volatile enough that you do not have to catch the bottom tick to make good
money on the long side. Faster industrial output growth should trigger a decent gold rally, but
you have to hover over the output data as it comes in because the liquidity support for the
global economy is restrained enough that you cannot be sure yet whether the pop in global
output will come soon.

Iran & Nukes

It is high time the US wraps up the talks with the Iran on the latter's nuclear development program.
Iran gets the lion's share of media attention in the propaganda wars with all the "Death to America"
talk. What is less well known is the existence of deep set contempt for Iran here. So, if the
US closes out the talks with Iran without an agreement, there may be some nasty politicizing
here, but it will pass soon enough. Obama has only 18 months left to his term, and in my opinon
he can better spend that time on other matters if the US does not get the strong deal it needs
from Iran right quick. I bring this matter up because I think the political goodwill that has allowed
these talks to continue under the radar for many months is about to run out, thus creating some
concession pressure in Iran's favor that will be received very poorly in the US and could damage
Obama's standing if goodies to Iran creep into an agreement.

With an agreement on the Iran nuclear program and an early end to sanctions, it is estimated
that Iran could ramp up oil production to 1 million bd within one year after the sanction
covering oil is lifted. In a world with excess oil supply at present, that is worth noting as such a
development may not be fully discounted in the market. If there is no deal, Lord knows
what will happen to Iranian output as it is very difficult to say what the standing of the
sanctions program will look like given the number of parties represented at the talks as well
as those hovering close on the sidelines.

SPX

Fundamentals
My primary fundamentals are all trending negative, save for short term interest rates. On the
wise premise that you should not signal "buy" or "sell" until the indicators say so, the "easy
money" buy signal, as frayed as it is, still does not signal it is time to significantly reduce
equity exposure. Though there is no "sell" in place, market risk is elevated because history
shows the SPX does not perform well during periods following the the termination of very
large bouts of quantitative easing such as occurred this past autumn.

My secondary indicators are, on balance, positive. For openers, there is excess liquidity in the
system relative to the current needs of the real economy, which now features modest real growth
and minimal inflation. As well, there is a steep positive slope to the yield curve (30 yr Treas. % -
3mo. Bill Yield). This shows no real pressure on the economy from the Fed. In like manner,
short term rates are way below my measure of economic momentum measured yr/yr. Too, my
business profits leading indicators have turned modestly positve in recent months. Finally, the
price of oil is not in a rapid uptrend, which can destabilize the economy.

More broadly, there is still slack in the US economy and no danger of immediate overheating.
In my mind, that leaves the odds favorable for a another cyclical up leg for this market, with
timing of origination far from clear as the market may have to get past increases to short rates
first.

Technical
The momentum of the SPX since last autumn when QE 3 ended has fizzled out.  SPX Daily
The SPX has actually entered a short term corrective phase and is mildly oversold against its
25 day m/a. As well, it is sitting on its 200 day m/a which itself is flattening. The key short run
RSI and MACD indicators are also down trending, and the VIX volatility (fear) index is
approaching a short term oversold. There is not a classical sharp short term oversold in place
now, but the market is approaching it. The SPX has drifted off the uptrend lines in place
dating back to late 2011, and is now still nearly 3% above linear support at 2000. Not Quite
out of the woods yet.

Sweet Jesus : Greece And China

Greece
The ECB, as lender of last resort, opted today to continue its emergency liquidity assistance to
to the beleagured Hellenic Republic to support minimal commerce. With a "no" vote on pro -
austerity bailout programs from the 'Troika' by Greek citizens, The Greek PM deftly outflanked
Teutonic rectitude and forced the EZ players to either blow off Greece and put the country much
further along toward formal default on its $540 billion debt or to sit down with Greek negotiators
to hammer out a new deal which would swap some level of debt forgiveness for additional
austerity. The Greek people are strongly behind the Tsiparis regime, and major non- euro
power centers will not take kindly to seeing the disintegration of Greek society. If Mrs. Merkel
and the eurocrats in Brussels cannot conjure up a marketable story that Greece is truly a unique
case in desperate need of loan forgiveness and beneficence, they are truly worthless as politicians.
Merkel is inviting a veritable shit storm of criticism from both official sources and social media
if  she cuts Greece loose in its time of need. If the European Union wishes to dump Greece
forthwith, load the Greek wagon with debt forgiveness and sufficient liquidity to help them have
a fighting chance to begin to restore their economy. Germany has a chance to create a decent 'final
solution' this time out.

China
Party officials are in panic mode to prop up the Shanghai as it crashes. I have no idea whether
they will succeed, but since so many retail investors have been sucked in by the recent run -
up in the market, they must be concerned that social unrest could be out ahead and that what's
left of the more conservative old guard could drum up support for a counterstrike against
leadership that is seen as moving too quickly to alter the economic order.

My view for months has been the Shanghai should trade around 2800, and it is quite something
to my tired eyes to see the Gov. in there trying to hold the market up at such an overpriced level.
Daily Shanghai  (Note, however, that a short term oversold has developed).

SPX -- Monthly

The argument here since last autumn has been that the end of the huge Fed QE 3 tailwind to
the economy  and the stock market would involve  penalties for both. So far, resulting economic
and market difficulties have not been major. The US economy slowed down as expected, and
deceleration of progress was made worse by severe winter weather and labor difficulty work
stoppages. With the Fed having frozen its balance sheet, financial system monetary liquidity  
growth is slowing markedly,  and the economy is becoming far more reliant on internally
generated cash flows and private sector credit growth to fund further progress. Transitions of
this sort have occurred frequently and successfully throughout US history but they can be very
difficult during those times when the economy and confidence have been heavily dependent on
large liquidity support. In turn, the SPX has lost its positive momentum and is trading on a par
with its highs seen last Nov.

My weekly leading economic indicators have recovered and suggest a mild rebound for the
economy during the second half of 2015. When measured yr/yr, business sales and earnings
should also improve modestly. As for the stock market, my "easy money buy signal", in
force since very early 2009, will likely end late in 2015 if the Fed starts to raise short term
rates as is now widely expected.

Speaking as a funds manager and not a retiree, when the "easy money buy" comes to an end,
it would be time for me to acknowledge increased cyclical fundamental risk and reduce exposure
to stocks.

No buy signal does not imply a market top but it does say to me that it is time to
activate strategy and tactics to reduce exposure to stocks because the secondary indicators I
use during these periods are far less reliable than the primary ones and because fundamental
risk will likely rise further. I should note that a goodly number of fund managers would not
agree with this approach, finding it too conservative.

I have added a link for the SPX Monthly Chart. It shows the SPX to be down on its 10 month
m/a, RSI and price momentum in downtrends, and most disquieting, a roll over to the down-
side for MACD. It may be too early to consider that roll - down in MACD a kiss of death.
The reason is that  the economic expansion does not yet exhibit the maturity in terms of
resource and capital utilization that would prompt such a perspective.

More On China Stocks -- Shanghai

First up, let's look at the monthly Shanghai for the longer run dating back to the mid - 1990s.
Shanghai Composite

In 1995, the Shanghai was in the area of 700. If you figure a 10% annual compound return, that
works out to about 4700 currently, which is just where the Shanghai is sitting. The issue here is that
China is no longer logging 10% growth and is struggling to achieve 7% annual growth. With a
forward look, the base at 4700 is too high for an economy with a pronounced decelerating growth
trend. The index has a large component of pure speculative interest.

Note also that the monthly RSI shows an overbought reading nearly right up there with the
bubble top of 2007. Now since China's book profits have grown significantly since then, the
p/e ratio on the market is considerably lower now than back during the bubble top, but even
so, this is not a cheap market as it was in mid - 2014 at the 2000 level. Note also that the very
high RSI readings up near 80 or above since the mid - '90s have served as good warning lights.

Now comes the weekly chart for the Shanghai. $SSEC The top panel of the chart compares the
Shanghai with the S&P SPDR index ETF for China. There is not a long history here, but the
$SSEC has tended to top out in relative strength against the GXC in the 50 - 55 area (the last
time was 2007).

China has a long history of domestic turmoil and is the graveyard of prognosticators. Apropos,
the US State Dep't and the CIA keep their fingers crossed for stability and hope for the best.
Now, with Mr. Xi trying to shift gears on economic and financial policy, China is going into one
of those times when its "social contract" -- its citizens tolerate  the the Party in exchange for
continuing prosperity -- may be tested for one of the few times in the past 35 years.

China Stock Market

I made a nice call on China stocks in Jun. 2014. The key premise was that a slowing economy
would lead the PBOC to ease monetary policy and re-liquify the system. I believe that longer
term, the Chinese have preferred to invest and speculate in real estate, and that the destruction
of the China stock bubble going into the 2008 - 2009 global recession only served to reinforce
the preference for real property. The weakness in the residential real estate market over the
past year was partly a result of tougher policy by official China in the real estate area, so when
China began to ease monetary policy in late 2014 and encourage equity investment, the change
in policies left real estate to languish and invited speculative spirits back into equities. This
was a pleasant surprise for the equity market since monetary policy has not been strongly
accomodative at all by China standards. So, net - net, mild easing plus changes in official policy
has lead to a windfall for stock players. GXC (With The Shanghai in the top panel).

It is interesting that the PBOC's change to ease has been moderate and controlled, for it is
likely not strong enough to trigger heavy speculative lending to business and real estate as
seen in the past. In this regard, since the new easier money policy has been slow to roll out,
improvement in China economic performance has been deferred until Half 2, 2015.

Over the years I have mentioned  that when The Shanghai is strong, the action can get wild
and undisciplined. The chart above, which features the S&P ETF of a broad index of investment
grade equities (GXC), looks tame in performance compared to the wild and wooly Shanghai
shown in the top panel of the chart. With the GXC there has been a  major tradeoff of volatility for
positive return against the Shanghai in a strongly positve market environment.

The GXC has been in bull mode since late 2011 and its pattern more resembles the SPX than the
Shanghai. The recent jump in price to $100 for the GXC brought it closer to its all - time high
of 113 set in the bubble high of late 2007. The stock has been correcting, but it remains mildly
extended and overbought. Earnings have progressed over the last seven years, so the stock is
much cheaper than it was at the peak in 2007.

It is good that China has embarked on controlled money and credit easing, and that from a
policy point of view, it is trying to encourage a larger, more liquid equities market. China has
also curbed its mercantilist impulse and seeks to diversify its economy away from excessive
emphasis on industrial development. I am hopeful that with slower growth the populace
can adjust its expectations calmly and will not require the authorities in Beijing to sop up
anger with nationalism and a round of regional imperialism.

SPX -- Daily

It was mentioned in a 6/10 post on the SPX that since the market held the shorter term shelf
of support at 2080, it might be worthwhile to see how it performed given widespread bearish
sentiment on both technical and fundamental grounds. The SPX has rallied enough off of
2080 support to turn the 25 day m/a positive, so it continues to require added attention given
the surprise move relative to sentiment. SPX

Key indicators of SPX behavior continue to show decelerating price momentum and recent
rallies that have tended to sputter out in mildly fitful fashion. Many strategists and other close
observers believe it is high time for a healthy correction. May be so, but it is also clear that
there exists a steadfast cadre of players who argue that the economy is progressing, that
weakness in SPX net per share is but temporary, and that a premium p/e ratio is well warranted
given prospects for a continuation of an extended period of low inflation and interest rates.
Newer players to the game may not be aware of the sway that this thesis of support for higher
and rising p/e ratios held in the market of the 1960s and very early 1970s. The view is often
encapsulated by the "Rule of 20", which claims that SPX p/e = 20 - the 12 month inflation
rate. With inflation very low and interests rates non - threatening, players who support this
idea see the market as reasonably priced.

I have issues with the "Rule of 20". Mostly, I am concerned that the rule should be based on
a longer view of inflation potential where there is considerably more room for debate than with
short run inflation measures.

Just know now that the "Rule of 20" is in vogue currently and has yet to be defeated by the
facts on the ground.

US Monetary Policy

Short Term Interest Rates
The classical cyclical economic case for raising short rates has weakened since latter 2014
with a more sluggish economy and awaits a return to stronger economic growth. Market rates
at the very short end of the curve are near record lows and support the Fed's ZIRP. With the
economy in its sixth year of recovery, capital slack in the system has been greatly reduced,
but there are presently no compelling imbalances in  resource utilization. The Fed has time
to watch for an improved economy before taking action.

Fed Generated Liquidity
The tapering and close out processes for QE 3 have adversely affected economic growth
and stock market progress in 2015. Since the Fed has not acknowledged these developments,
it is hard to say how aware policymakers are of the connection. I suspect it has been discussed
within the Fed and has made a few members of the FOMC more cautious about raising rates.

 The Fed has let over $35 bil. of assets run off Its books in recent months. This may have
bothered Treasury and stock market players some, and the Fed may allow some further modest
run - off. However, since seasonal system liquidity needs will firm up after the summer, it
may well be that the Fed will add back as much as $50 bil. to its book by this autumn. If so,
the markets may like that.

SPX -- Daily

The SPX rallied sharply today off 2080 shorter term resistance. Since so many players have
recently been looking for a price correction of substance, it might be wise to see how this
bounce plays out over the next few days. SPX

The key to extending the pop in the SPX is whether the market can break above the 25 day
m/a followed by enough forward power to turn the "25" higher. Such action would no doubt
change a few minds among the consensus that the market should erode further to test
support at the Mar. low of SPX 2040.

Note however, that the rallies so far this year have been losing momentum.

Long Treasury Bond

I turned bearish on the long -T around mid - Feb. of this year largely on technical grounds.
The TLT was above 130 at the time and very overbought. It is now at about 117.5 and the
overbought has vanished. TLT

The fundamentals I use to get a good sense of direction for the bond market have eroded only
slightly and current data are insufficient to signal a clear bearish reversal. I conclude that not
only was the market overbought earlier in the year, but that weakness in TLT likely also
reflects expectations that future inflation will strengthen and that the Fed has it strongly in
mind to raise benchmark short term interest rates over the next six to nine months. The sharp
weakness in the TLT price seen since Feb. of 2015 may also involve trader worry over liquidity
in the market once it becomes more apparent the Fed is finally getting ready to pull the trigger
on rates.

From mid - 2012 through late 2013, TLT fell in price from above 120 down to the 97 - 98
area all on expectations that the Fed would end QE 3 and raise short rates. Bond pricing
fundamentals remained positive over this entire period, and when traders realized their fears
were not going to be realized, they took the bond up from the high 90s to above 135 early
this year. The moral here is that we need to say a sustainable step in economic growth
with enough momentum to bring additional pricing pressure and firmer credit demand before
it can be stated with confidence that T - bond price fundamentals have made a decisive
cyclical turn for the worse.

US Economy -- At Fail Safe Point

Over 100 years of monetary, economic and stock market data show conclusively that when
the monetary base adjusted for inflation flattens out or declines for an extended period, bad
things happen to the economy and the stock market. The time between the end of growth of
the base and trouble varies considerably with the key variables being the strength of private
sector credit supply and demand. When the Fed has tightened up on liquidity, the economy
and the stock market can continue to flourish so long as borrowers can avail themselves of
ample credit.

When the Fed made it clear it was ending the very  large QE 3 program after the tapering
process, I argued that there would be an economic slowdown that carried well into 2015 and
that the prospects for the economy would largely depend on confident borrowers and lenders.
The unfolding economic slowdown witnessed since late 2014 has been made worse by bad
winter weather, a large decline in drilling for oil during an emerging supply glut and a couple
of other very transitory factors.

The slowing of sales and production growth this year has reached an economic fail safe point
in that further weakness may well invite economic recession. In short, the economy needs to
do better soon and it is unwise not to follow its direction very carefully going forward lest you
get caught with excess risk exposure. The adjusted monetary base has been flat since Aug. 2014.
The Fed has held short rates at the zero bound level, but It has tightened liquidity and policy
very appreciably.

So, before we worry about when and by how much the Fed may raise rates, we need to make
sure the economy is not about to dip into a downturn. The weekly leading economic indicator
I use has been improving since the end of Mar. this year, and this suggests we should see
some improvement in business sales and production come Jun. Moreover, the banking sector
has ample liquidity to underwrite rising credit demand in support of economic growth going
forward. Even so, be from Missouri on this one (Show me the growth).

----------------------------------------------------------------------------------------------------------------
The Philadelphia Fed leading economic index has fallen to 1%. There have been periods in
the past when the index has fallen below 1% but has subsequently recovered, leaving the
economy to grow further but note when the index has not recouped. Leading Indicator

SPX Weekly -- Cliffhanger

Technical
The SPX remains in a cyclical bull dating back to early 2009. However, progress of the strong
leg up from autumn, 2011 has grown more halting. After reaching a dramatic overbought on the
weekly chart near mid - 2014, the momentum of the SPX has deteriorated gracefully but per-
sistently, and now has now slowed to a crawl. SPX Weekly

Very supportive uptrend lines dating back to the fall of 2011 and Oct. 2014 have been violated
and although the market has not been overbought for months, it has become very tightly range
bound and gives the appearance of being "toppy". There are a growing number of good quality
technicians and strategists who are concerned the SPX is moving toward an intermediate term
breakdown. The persistency of the erosion in price momentum mitigates against an imminent
negative turn but can easily lead one to conclude that a negative adjustment is immanent and
perhaps not that far off in time.

Fundamental
Not all the bulls have the same perspective, and there is a goodly cluster of players who think
the market can "thread the needle" and eventually develop an additional leg up without having
a nasty or deep price correction. The case they represent has it that the economy will regain
positive traction and that any cyclical acceleration of inflation will be mild enough to lead the
Federal Reserve to boost short rates in a way that is spaced out enough and slow enough
as to not substantially undercut the SPX p/e ratio as profits recover positive momentum. They
see the Fed as being in "fine tuning" mode with the FOMC desiring to gradually restore
monetary policy toward more normal footing without triggering off a disruptive stampede out
of fixed income securities. Moreover, the guys know 2016 is a national election year and
may be figuring, wisely I think, that the Fed may desire to avoid calling too much attention to
Itself next year.

This sort of fancy reasoning tends to come along in the latter stages of a bull market and is
often quite beguiling. It also helps explain why the market has not sold off sharply already in
anticipation of further credit tightening, and highlights the need many players have to see first
whether the economy can regain sufficient momentum to trigger off Fed tightening alarm bells.

How's that for tap dancing around an issue?

Stock Market -- SPX

The powerful 20% annual price momentum that drove the market higher from late 2011 until
well into 2014 has dissipated. The very large QE program of the Fed ended in the autumn of
last year. As expected, my proxy for business sales growth has declined from 7.1% y/y at 7/'14
down to about 1.5% y/y through April. S&P 500 net per share has rolled over to the downside.
The erosion of sales and earnings fundamentals reflects falling system liquidity growth that
preceded it coupled with bad winter weather and a sharp fall in oil and gas prices.

Comparatively, the SPX has been advancing at a modest 6% annual pace since very late 2014.
Erosion of US business has taken a heavy toll on the market's progress but has yet to break it.
The p/e ratio on 12 mos. net per share through Q 1 '15 is a hefty 19x. Plainly, investors expect
better times ahead.

My core fundamentals have been slipping, but may well not turn out to hit an "end of easy
money" sell signal until late this year or early 2016. The "easy money" buy signal has been
in place since early 2009, but it has not protected investors and traders from some sharp
sell - offs as occurred in 2010, 2011, and 2012 when QE programs tailed off temporarily.
Now, we see not only eroding liquidity growth but humble business performance as well.
I expect to see some bounce back in the business environment, and my weekly leading
economic indicator has been improving since early March this year. However, it still remains
to be seen whether private sector liquidity growth can remain strong enough to support business
confidence now that the Fed has frozen its balance sheet.

The elevated p/e multiple has been supported by zero bound short term interest rates and
the pronounced deceleration of inflation of recent years. If business does pick up as now
indicated, inflation pressure may intensify and the Fed will then have to confront the decision
of when to raise short term rates. Given how poorly the economy has behaved since the end
of QE 3, the Fed may want to give the issue of raising short rates considerable thought before
it proceeds. Even if the tone of business and consumer confidence remains satisfactory in the
wake of a hike in short rates, investors may well still face a challenge to the logic of such
an elevated p/e.

SPX Daily

Long Treasury Bond

In a Feb. 11, '15 post I argued the long Treasury was too pricey. The TLT ishares 20 yr T
had experienced a nearly parabolic price rise and had moved up to a gaping premium over
its 200 day m/a. I viewed a price of 105 (3.5% yield) as more sensible given how inflation
can fluctuate over the longer run.

the long T price has been in corrective mode since the early part of Feb. of this year and is
now clearly oversold for the short term. TLT shares have actually dropped to a slight discount
to the 200 day m/a for the first time since late 2013 and there may be some shorter term price
support in the $115 - 120 area.

The weakness in TLT for much of this year reflects not only the correction from a glaring
overbought condition but some mild erosion of price direction fundamentals, most notably
a minor bounce in sensitive materials prices paced by a partial recovery in the crude price.
The Fed is holding to its ZIRP, but market players have grown concerned that the central
bank may abandon its policy and push up short rates later in the year. Bond traders are also
starting to worry about liquidity in the market if higher short rates and inflation lead to a rush
for the exits (In the spring of 2013, TLT dropped relatively quickly from the 116 level down
below 100 during the ensuing months).

I need to see quite a bit more of how economic performance unfolds this year before I would
consider a long side Treasury trade, and even then would probably want to wait to see if TLT
can make it back under 105.

Inflation Expectation Quickie

A fast way to measure inflation expectations in the US is to look at the strength of the
commodities market (CRB Index) relative to the price of the 30 year Treasury ($USB).
Initial inflation momentum usually starts in the commodities pits and is often picked up
down the road via a weaker Treasury market. $CRB / $USB

A relative strength index of 2.8x would be a conservative measure of long term equilibrium.
With the current reading at a depressed 1.48x, it is easy to see how heavily wrung out the
inflation anticipation is in the markets and how large a correction favoring commodites
could come with an acceleration of global economic growth. Something to keep in mind
as watch to see whether US economic growth is set to rebound and whether global growth
will gain further increased traction.

Oil Price

The oil price has maintained its rally since mid - March. The rotary rig count is now down 50%
y/y and speculation that large excess US crude supply might end before long has continued to
strengthen. The oil business has now entered a period of mild seasonal weakness following the
strong initial driving season gasoline build. Long side players are now without the strong
seasonal and now have an oil price that is registering the first overbought reading since prior
to the crash. $WTIC

It is interesting that the oil price at $60WTI is fast approaching the bottom of the long term uptrend   
channel dating back to the late 1990s. With oil now overbought, some players may look extra
carefully to see if the bottom boundary (now $62 bl.) might serve as new resistance or treat it as
a non - issue in the expectation that oil is returning to its long term wide uptrend range.

My guess has been that oil could reach $70 at the end of Sep. '15 as a seasonal peak on improved
demand. It is still very much a guess too, since my expectation that global economic demand
would firm up as 2015 progressed has yet to be confirmed.

The shale oil business allows drillers to re-start drilling and production in comparatively short
order. Thus, with the oil price now much higher now than at the bottom of the crash, traders need
to stay vigilant for that day out there in time when the rig count stabilizes and then begins to
recover as these events may act as a drag on the oil price.