Big Trouble In Big China?

China plans to amend its constitution to  eliminate term limits for the president.  If so, maybe
Mr. Xi can serve more than two consecutive terms. Given China's imperial legacy and the long
run for Mao and Chou, the knee jerk response from outsiders is that Mr. Xi wants those
imperial trappings and may signal a new cult. Could be. And, since this is a bull market, look
for China apologists to put a positive spin on this transition if that is all it is.

To be a contrarian, I offer a different and more dangerous assessment. Suppose the younger Party
climbers and technocrats have indicated to Xi that his generation has created an obvious financial
mess in China and that it is Xi's job to clean it up. There is no new "Great Leap Forward" for
China unless The Party straightens out the country's finances first. A genuine reform transition
would involve efforts to gain control over China's finances, specifically debt creation.
That cannot be done without creating pain and economic and financial fallout that will extend
beyond China's borders. It cannot be accomplished without a president that is in a very strong
position and who can command the Party rank and file to do the bidding necessary to turn
this enormous debt laden boat around. Mr. Xi already tried and failed to generate a super bull
market in equities to balance the debt. Recall that China had to make open market purchases to
keep its equity market afloat. And, if China continues to leverage up and create new entities to
take on its bad debt, the result will be accelerated capital flight, the destruction of its currency
and bitter recrimination from the international markets.

Now, if all Xi wants to do is to become the imperial Xi, that could have dangerous unintended
consequences as well, including an eventual and destabilizing mutiny.

Do not ignore this decision. Comments are invited and welcome.

Commodity Price Index

The last bull market in commodities ran from the end of 2001 through early 2008. Paced by very
rapid production growth in China, inventory hoarding and intense financial speculation, the CRB
rose from a low of 170 to the 470 level before collapsing over the balance of 2008. The market
staged a strong partial recovery over the 2009 - 11 period, reflecting a global economic advance
from deep recession, a massive fiscal stimulus program by China, and speculative inventory
pipeline rebuilding and the return of intense financial speculation. But, the bear market endured
until early 2016. Over 2011 - 2016, global economic growth was modest, inventories were
slowly unwound, and speculators turned strongly to financial assets.

Materials production capacity expanded rapidly over the decade through 2010, and more recent demand has not been strong enough to take up the slack. Commodities pricing has also been adversely affected by the growth of synthetics, recyclables and new production and and
consumption technologies.

For many years, there was price support for the CRB around the 170 -200 area, but a reading of
200 on the index has now become resistance!  Weekly CRB

As seen, the market has been recovering from its multi-year low of around 160 set in early 2016.
Faster global economic growth over the past couple years has not been sufficient to set off a strong
sustainable rally in the CRB. From a longer term perspective, the CRB is still in a bear market.
The current extended base looks promising, but the index has not strengthened sufficiently to
challenge longer run trend resistance. To attract stronger trader and investor interest, the CRB
needs to break above the 200 level and challenge that first significant hurdle at 230. The CRB
is at huge discounts to the stock and bond market price indices and would attract strong interest
if there is finally a stronger positive response to a swifter global economy.

Gold Price

My long term view on the gold price remains that gold will  primarily stay a range bound
trading vehicle until investors become more confident that the global economy is transitioning
from a deflation prone period into an inflationary era when global plant and service operating
rates are more easily challenged by rising world economic demand. A tighter operating
environment tends to foster stronger wage growth and stronger competition for materials and
commercial resources. The very deep global recession and modest economic recovery that
has come along in its wake has left a legacy of excess production capacity and a trend of volatile
but decelerating inflation.

Although the cyclical fundamentals for the gold price have been positive since early 2016, and
there has been a rather mild cyclical acceleration of inflation pressure, it has not apparently
been strong enough to support a sustained rise in the price of gold. Since gold began to recover
in early 2016, the interim price lows have trended higher, but clear longer term price resistance
has formed in the 1375 - 1400 area.  Weekly Gold Price

The gold price is inherently volatile and price action can far outstrip a fundamental approach
to trying to determine a reasonable price for the metal. In recent years speculative surges have
been contained even though gold has fared decently off its 2016 low. The bottom panel of the
chart shows that gold's price has been deteriorating relative to the stock market for a quite a
while. That could change if further economic growth brings increased inflation pressure going
forward.

Stock Market -- This Is A Little Odd

While folks debate the near term future of the market, I content myself with an oddity in the
market internals. The TRIN measures the amount of selling pressure in the market. A high TRIN
signals heavy selling pressure and a low TRIN signals light selling pressure (low volume per issue
sold). During the extended period of market weakness over the latter part of 2015, the 13 week
TRIN reached a high of 1.6, indicating the accumulation of heavy selling pressure.  Weekly TRIN

Notice that despite the dramatic sell-off over the earlier part of February, the 13 week TRIN has
continued to trend down to low levels, and since it's now below 1.00, suggests the continuation of
accumulated net buying pressure through 2018.

SPX -- Update

According to my cyclical valuation work, I have the SPX as fairly valued at 2610 for 2018 at 2720
through mid-2019. The modest increase in valuation product into next year reflects another year
of positive earnings direction offset by a reduction in the market's p/e ratio to reflect a higher
inflation rate of 3% by mid-2019. Although the inflation pressure gauges currently remain in
rather humble uptrends, that should change as the large fiscal stimulus programs kick in to boost
an already maturing economic expansion. there could very well be an interim period starting in
a month or two when the economy temporarily slows, and market players  run-up stock prices in
the erroneous assumption that "Goldilocks" has returned to preside over a period of more modest
growth and continuing low inflation. If such a strong rally occurs, there might be a classic
"get out " rally to reduce equity exposure.

Despite the current correction, the stock market remains strongly overbought on a long term
basis and mildly overdone in the intermediate term. The main trend of the market remains in
bullish mode with intermediate trend supports around 2600 on the SPX. Longer term trend
support stand around 2500.  SPX Weekly

Do not ask me where the market is going over the couple of weeks. However, by my conservative
trading discipline, I would give the market a hard look for a long side fling if the stochastic
measure (bottom panel of the chart) drops inside the 20 level.

Stock Market -- Historic Overbought Deflates

Yeah, well it was a market that became one of the most overbought in history. The best the bulls
could do was express some edginess the weekend before Groundhog Day (Feb.2). Little did folks
know that Punxatawny Phil  down in Pa. was not only forecasting six more weeks of winter, but
an Eagles win in the super bowl as well as a blowout of the parabolic move in the SPX that we
all witnessed in. Jan.'18. Easy come, easy go.

Now the market is assuredly on the oversold side and we'll just have to see whether the boyz can
rally around the fact that the SPX closed well off its low today or whether exhaustion has not fully
set in and there is more to go on the downside in the days ahead.

Several weeks back, I opined that if I stretched it, there was a case for the SPX to trade around
the 2610 level in 2018. That speculation immediately looked foolish as the market rocketed
above 2870 by the end of Jan. The rapid decline in the SPX to just below 2650 makes the 2610
estimate of fair value look less foolish.  SPX Daily

Market players are going to have to decide whether the prospect of higher business profits this
year will also include faster inflation and higher interest rates and what consideration of the
latter factors might do to their expectation for the SPX p/e ratio. I think it is fair to say that
most investors did not envisage crossing the p/e challenge bridge until well later in the year.
These issues may fully occupy investors if they keep their blinders on.

I happen to be entertaining a darker vision for the near term future. Not only is the US Gov't.
barely functioning, but I suspect Trump may consider some politically dangerous maneuvers
if the Mueller investigation closes in on him and his family especially. I have some fears here
involving challenges to our constitution in this era of sharp political division and given how
I view The Donald's history, I do not regard them as baseless. I also do not know whether
the serious misbehavior we see underway in Washington is bothering the market already and,
I do not know if the market will grow more troubled as matters get more heated as the Mueller
investigation proceeds. Let each of you decide how much we should pay attention to this
sad spectacle of America in worsening political conflict.
_____________________________________________________________________________

Stock Market -- More Amber Lights

As the SPX continues to surpass generational overbought records, I have a couple of more
signals to keep in mind. The SPX is now trading at a 13.4% premium to its 40 wk. moving
average. This is not a record, but history shows that when the market exceeds its 40 wk. m/a
by more than 10%, the odds are only about 1in 4 that the market will make good further progress
over the next six months or so. This signal does not imply a bear market will be coming along,
but a correction of substance is certainly not out of the question. Also, with a powerful run-up
in place, the intermediate and longer term price momentum indicators (ROC% below) are
getting extended. They also portend but do not fore-ordain a discontinuation of momentum
uptrends ahead.  SPX Weekly

The SPX has also turned parabolic in this powerful rally. It has not and need not complete
its move, but for a long term veteran of the markets, such levitation is absolutely fascinating.
I have done markets bubble measurement over the years, and it is very hard to spot one in the
early stages. The trajectory up for the SPX is a bubble trajectory, but the SPX would have to
reach 3300 this year and, perhaps, 4100 in 2019 to qualify as a fully blown market bubble.
Bubble talk does not scare many players anymore because of the idea of how much money can
be made during the flight higher. Moreover, money managers can lose accounts quickly if
they do not play the bubble. That's called career risk, and it surfaced broadly in 2000. It would
be odd indeed to have a market bubble so soon after the 1996 - 2000 event, but these are
loopy times for the US.

If the market takes a holiday for a couple of weeks just ahead, but then resumes a its strong
trend higher, central bankers should start to feel the heat to tamp down the advance. Greenspan
warned about the last bubble in late 1996, then quieted down and wound up as a drum major
leading it higher.

Finally, do not forget The Donald. He has fucked up more than party with his peculiar
obsessions.

_____________________________________________________________________________

US Dollar

I have been bullish on the dollar since the end of the deep recession of 2008-9. The long term view
was that the dollar could rise from the deeply depressed low 70s level back then to the 100 level
by 2020. I did not posit faster economic growth than the world could muster, but that the US
balance of trade would gradually improve reflecting increasing fuel efficiency, rising domestic
hydrocarbon production and a continued slowing of real consumer spending growth on the basis
of less favorable demographics. The rise in the dollar up to the 105 level by the end of 2016
represented a considerable overshoot of my projection. $USD Daily

Slow global economic growth in the intervening years led to a contraction of global trade and
favored the dollar by too large a margin. The sharp decline in the value of the dollar since the end
of 2016 reflects stronger global economic performance, stronger trade, and some deterioration of
the US trade balance. In addition, the dollar was heavily overbought by the end of 2016.

The chart reveals that the dollar sits well above longer term technical support, and it is tempting
to extend the dollar's downtrend line significantly further in the months ahead. Since the end of
fixed exchange rates way back when in the 1970s, I have often been been surprised by the strong
volatility of the dollar and the other major currencies, so far be it from me to argue that the
dollar is about to bottom out.

In my view, the dollar has dropped into a  reasonable area just below the 90 level, and with export
sales rising at a reasonable rate, I am reluctant to become too bearish now.

______________________________________________________________________________



 

Stock Market -- First Greater Fools Arrive

The bull party has become a little more crowded with the arrival of the first greater fools. Among
the pundits in this crowd are those who proclaim that there is large sideline money that has yet
to jump in but is now doing so. The story goes that even after eight years of a rising market there is
a big crowd who are suddenly afraid they going to miss a huge run-up. When this kind of thinking
becomes mainstream as it last did over 1997 - 2000, you might as well put the fundamentals down
into your desk drawer. In fairness though, the market is hardly beyond rational argument yet, and
the recent trajectory of the SPX is still too mild to suggest a genuine bubble may be forming. It is
still just a burst of enthusiasm that has brought the market to an overbought that has not been seen
in over a generation. But, with money starting to flow into weaker, less experienced hands, volatility
could start to increase.

SPX Weekly

Stock Market

As we wheel into the new year, we start off with a fabulously overbought market and one which
is also mildly overextended on a very long term basis. My most liberal valuation measure has fair
value for 2018 at SPX 2610 based on a p/e ratio of 18x and eps of $145. On this measure, the
SPX is already discounting an extension of the rising earnings trend well into 2019. I fully expect
a nasty and deep correction at some point over the next two years, although I cannot make a
credible case for such as of now, as I have many more questions about the environment ahead than
answers.

My weekly cyclical fundamental market indicator is partly forward looking and partly coincident.
It rose very sharply over most of 2016 but advanced only mildly last year. I watch it in conjunction
with the PMI diffusion index for manufacturing. The PMI rose sharply from the 50 level in mid-
2016 to the very strong 60 area by late last year. I would point out that a 60 mfg. reading has only
been reached eight times since 1985 and rarely stays there for long. So there could be a loss of
economic growth momentum over the first half of 2018. If so, it could have a negative impact
on stock market momentum. On the positive side, my inflation thrust measures have turned higher,
but are up only rather modestly. Thus, the 18x p/e is not immediately imperiled on the inflation
front.

Faster economic growth last year has reduced excess monetary liquidity in the system down to
zero. Normally, that is a warning sign, but so far, foreign inflows to US stocks have been a nicely
positive offset (It should be noted that US market cyclical tops often coincide with surges of
stock buying from abroad).

Short term interest rates are widely expected to increase by 100 basis points over the next 12 - 15
months, but that need not be a problem unless the Fed signals an extended continuation of
monetary tightening.

Interestingly, the Fed has been dragging its feet on the much heralded quantitative tightening
program and this has helped both stocks and bonds. We await whether They will turn more
aggressive this year and how the markets will react. Ms. Yellen is leaving the heavy lifting
to the new guy.

Finally, we have The Donald himself. He could behave very badly if special counsel Mueller
closes in on him of if the stock market and the economy do not treat him well.

Have a good new year and Godspeed.

SPX Weekly

Stock Market Sentiment -- Quickie

When the equities only put / call ratio reaches a low level, it reveals strong bullish sentiment among
traders, and, as such may serve as a contrarian warning. The chart link below shows how the shorter
term p / c ratio since early 2016 has been in a persistent downtrend as the market has trended
sharply higher. Traders were way too bearish late in 2015 and early in 2016, and now have become
very nearly too bullish. This, as traders have positioned for a hoped for year end 'Santa' rally.

$CPCE Weekly

Long Treasury Bond

The long T-bond will be very interesting to watch as 2018 unfolds. With inflation running down
around 2%, the bond has given up almost all of its long run 300 basis point premium to average
of the inflation rate. Bond investors have also remained skeptical that US real economic growth
will accelerate markedly enough to create sufficient pressure on extant economic slack to push
the inflation rate above the 2% average for any appreciable period of time.

The long guy has moved up from its all time low yield of 2.1% to as high as 3.2% since 2016,
before settling down to the 2.8+% level recently. Doubtless, rising short rates over the past 12-15
months have exerted upward pressure on yields, but the rise in the long bond yield % has been
very stubborn. My bond yield directional indicator has pointed to higher yield levels but it too
has cooled off recently as US production growth has remained modest and sensitive materials
prices have flattened out after rising appreciably from early 2016 through early 2017.

So far, the bond players have not grown apprehensive that the Trump / GOP tax cut plan is going
to do much to push up either growth or inflation. Moreover, there is as yet little worry that the
combination of Fed quantitative tightening (selling Treasuries and agencies) and a larger budget
deficit resulting from the tax cut plan will create sufficient supply to put extra premium in the
bond yield. Plainly the bond market is playing like they are from Missouri: Show Us!

Long Treasury Yield %

Short Term Interest Rates

Well, I have dusted off the short rates file now that the Fed has started moving off the ZIRP
policy. Since the economic recovery began in 2009, the inflation rate has averaged about 2%
per year. My super long term short rate model suggests that the 91day T-bill should have
averaged about 2 - 2.5% over this interval. Obviously the Fed, deeply concerned about nursing
the Us economy back to life and on to a more stable footing, allowed the 'Bill' yield, or risk-
free rate, to hover near zero over most of this period. The T-bill has risen up to around 1.3%
recently, so we remain in an easy money mode when compared to inflation. You can see the
same thing by comparing the low bill yield to total business sales of around 6% measured y/y.
It is interesting to note that my cyclical rate direction model only signaled that short rates should
be rising only twice over the entire 2009 - 17 period. the first time was as 2014 progressed and second time was as 2017 unfolded. It has even been a stretch this year as business shorter term
credit demand has been increasing only modestly. The long term approaches I use show that
the Fed has indeed been very easy with money but not recklessly so.

Investor expectations for the direction of short rates next year and in 2019 reveal modest projections
of higher short rates and are based on the assumption the Fed will continue to move to restore
normality to the interest rate structure on a gradual basis. It is wise to expect short rates to keep
on an upward track through 2019 provided the economy continues to expand and the inflation rates
strengthens further .

Since there is light pressure when one compares short term credit demand against the supply of
loanable funds, economic momentum and the inflation trend will be the key fundamentals going
forward. Naturally, as Mr. Powell eases into his role as the new Fed chair, markets players will
take careful note of whether changes in the Fed's approach evolve.

3M T-bill Yield

Bitcoin Goes Parabolic

Bitcoin is the most prominent of the growing list of crypto-currencies. When I first encountered
it in 2008, its foundations were shrouded in mystery, but I think it was intended as an alternative
to fiat currency which had features that suggested that, unlike fiat currency, it was designed as
an inflation hedge which could maintain its value. As such, it should hold its value over
time when adjusted for the inflation rate. With inflation low and relatively stable in recent years,
the original concept suggested that Bitcoin's price should appreciate rather modestly. However,
it has become a plaything for wealthy individual traders and investors. Now that it has become
a high flyer, Wall Street has taken an interest and and a futures market is about to be rolled out.

It may well be, that over the long term, crypto-currency may occupy a spot along with PMs
such as gold in the inflation hedge play category. At the moment, however, it is in a parabolic
price formation and that kind of price curve rarely works out for those who come in long as
the move completes. It is tough to measure parabolic price action with accuracy, but the
Bitcoin curve looks like it may be in a terminal phase, at least for the short run.  CBTC Weekly

SPX In Longer Term Perspective

Looking back nearly 25 years, it has been an impressive period for the SPX. Net per share has
compounded at 6.6% annually which is a bit above the very long term average. However, the
SPX itself has grown at 7.8% as the p/e ratio has tilted higher in recent years, reflecting not
only low interest rates and inflation, but high confidence the longer run future will bring more
attractive performance.

The market is trading above the upper band of longer term ranges starting in the early 1930s,
again reflecting rising earnings and elevated p/e ratios. Noteworthy also is that earnings are
not yet enough extended to signify a top in cyclical economic performance.

The accompanying SPX chart makes clear the dramatic recent power of the market. SPX Monthly
Measures of longer term price momentum are running as strong as they have in over a quarter of
a century and the near term reveals no indications of decay as of yet.

When the market topped the previous historic highs during 2013, it signaled the onset of a new
bull market and not just a quantum cyclical bounce off the 2009 cyclical low. However, from
a practical technical point of view, the evidence would suggest the SPX should not do much
better than at present in the near term without some degree of negative price adjustment. The
'now' should be interesting because the boyz are hoping for a nice Santa Claus rally to wrap up
the year.                                                                                                                                                                     

Continuing Bet Against Inflation

My longer term inflation pressure gauge strongly suggests some acceleration of inflation
pressure over 2018 - 19. However, the shorter term inflation pressure measure, although
hitting a low this year, has advanced only meekly despite a nearly global advance in economic
momentum. The broad CRB commodities index is up but slightly over levels seen in mid-2016.
Even the industrial commodities composites have leveled off after advancing earlier this year.
I think it is true that despite faster economic growth, there is still significant excess plant capacity
in the world, but there are a couple of other factors worth remembering. One major one has been
the very substantial over-investment in inventories in evidence for at least the past five years. I
believe excess stocks are being worked off and that as near term supply comes into better
balance with demand, commodity prices should rise a bit faster. The other big change we have
seen since the early part of this new century has been the 'financialization' of materials markets
through rapid growth of futures trading and the development of products that both traders and
investors can access without having to deal with the actual physical volumes themselves.After
the major global economic downturn of 2007- 09, materials markets have have lost favor to
the financials reflecting the continuing imbalance between materials supply / demand.

However as the slack comes out of the materials markets and inventory overhangs are cleared,
there may well be a shift in trader preferences from financials back toward materials, one which
could be much stronger than the actual improvement of materials demand vs. supply.

With prospects for faster inflation still rather humble short term, the financial markets still
hold sway. Consider the exceptional tightening of the yield curve: 30y Treas% - 2y%

The Stock Market -- Long Term

I am projecting the SPX to reach the 3550 level by 2025. This projection is for doggy growth of
about 4.2% per annum and includes a substantial price retreat and subsequent recovery around
2019 - 2020. What's worse is that I have ginned up the SPX ' earnings growth rate slightly to
account for faster foreign sales and profits growth and also for improved inventory management
by US companies.Despite the availability of highly sophisticated supply management  tools, the management of inventories by business has been too speculative over the last seven odd years.
I am also looking for modest appreciation of business pricing power as the world slowly works
off still sizable production capacity. The growth of monetary liquidity will continue to taper
down as central banks work to regain reasonable balance between the still excessive supply  of
liquidity and genuine economic demand. This will mean somewhat higher interest rates over the long run and considerably more market volatility as the days of spoon feeding the global economy with
dollops of liquidity wane. In sum, I envision a more subdued continuation of the bull market but
one with an expanded 'normal' price range.

If I was a younger guy with a couple of extra bucks, I would be looking at investment in reasonably
valued smaller capitalization companies in both the US and foreign markets. I would only trade
the US market overall after periods of substantial price weakness and, most of all, I would be
looking to invest money privately here at home.

The following chart shows the current very elevated SPX with a horizontal line at 2200 which
is the level that would provide closer to a 10% annual total return out to the projected level of
3550 in 2025. SPX Weekly

Longer Term -- Monetary Policy

It is gospel among central bankers that provision of excessive money growth over time will
eventually lead to price inflation which will tend to accelerate to levels that are unacceptable to
the execution of sound monetary policy. The period of major quantitative easing of policy in the
wake of the Great Depression and lasting until the end of WW2 swelled the monetary base hugely
and was never corrected. There were a number of factors that contributed the dramatic inflation
of the 1968 - 82 period and it can be argued that the swelling of the monetary base in years prior
probably contributed to it. Looking out longer term, today's central bankers are concerned that the
major QE programs of recent years, if not corrected in some form could provide the raw material
for a new round of major inflation at some point down the road. The thinking here is that even if
there is no immediate risk, inflation could well up again even if it is ten years out or longer.

The mammoth excess reserves that now  sit in the world's major banking systems are of major
long term concern to the central banks. Programs to reduce the size of central bank balance sheets
directly or hold them in check by paying competitive interest rates on these reserves are two
methods under review. Suffice it to say that plans can be expected to be developed which will
provide far less proportionate liquidity than investors and traders have become accustomed to
over most of the last decade. Since such tightening of policies have not been tried before on a
major scale, there are elements of sizable risk that may only become apparent as these programs
unfold.

The Fed currently plans to experiment with reducing the size of its balance sheet in the months
ahead in combination with a program of continuing to gradually increase the level of short term
interest rates as the cycle of the economic expansion cycle plays out.

With the economic depression of 2008, the world entered a pro-deflationary environment because
the preceding global economic expansion and the initial bounce of economies after the 2008-2009
downturn resulted in the development of large excess global productive capacity. The issue
of low operating rates is next on this exploration of the long term.

The Long Term -- Overview

This post begins a series of notes on the long term outlook for the capital markets and the
economy. It is based on a half century of analytic work, hopefully informed conjecture, and
of course, sprinkles of pure imagination.

I think that by 2025 - 2027, the stock market and the global economy will fall into serious
trouble. I foresee a credit crunch that bring the stock market and an overheated economy into
steep downturns. I am looking toward China to have large scale economic and financial blow-
outs that take the US and the rest of the world down with it. I also am projecting an end to a
longer term bull market in US stocks to come to a an end which will see highs that are not
surpassed for a good several years. As well I am, projecting the broad financial environment
to become increasingly volatile by 2020 if not a little sooner.

This view presumes that inflationary pressures will gradually increase going forward and bring
about a long, long overdue capital expansion cycle which will add to the world's production
capacity and thus set off central bank tightening of the credit reins.

Through this all, my deepest concern would be for China where the odds favor up and coming
technocrats who will decide to bring President Xi's expanding political power and reach to an
end. This is projected to be an introspective and deeply unsettling period.

Although I do foresee the US bull market in stocks coming to an end until 2025, I suspect an
overvalued market to have a serious decline over 2019 - 2020 as the economy shifts away from
nominal inflation and super low interest rates up toward more "normal" levels.
______________________________________________________________________________
Note On The Near Term
The SPX is getting a touch pricey...Note as well that the intermediate term stochastic (bottom
panel) rarely goes through a calendar year without heading down toward the 20 level.
SPX Weekly

Broad Stock Market (Value Line Arithmetic)

Cyclical Bull market continues and rose to new high this week.

Spurs for new up leg since early 2016: Potential for faster economic growth as major business
inventory cycle unwound....Increase in business pricing power and higher profit margin...Promise
of large tax cut program encompassing both individuals and business via Trump...Continuation
of very low and negative short term interest rates.

Looking Ahead
Momentum of real economic growth is at or near peak with slower growth ahead...Pricing power
has been disappointing this year but may improve slightly....Tax cut program could boost corporate
profits by an extra 10% over 2018 / 2019....Passing of tax cut program in full hardly assured....Fed
plans another hike to short rates and to begin shrinking excess liquidity....Private sector funding of
economy is now merely adequate with no excess of liquidity in evidence.

Valuation shows a fully valued market with little scope to tolerate an unexpected surge of inflation
pressure or more sustained rise of short term interest rates.

Fundamental conclusion : bull market with moderate return / high risk profile because of
developing tightening of liquidity.

VLE Weekly Chart

Chart shows overbought market for intermediate term...Bottom panel shows that mid and smaller
cap. stocks are starting to outperform on expectation  that tax cut program will pass muster.