SPX And The Liquidity Tsunami

Well, they have gone out and done it this time. A super easy Fed with help from generous fiscal policy has allowed monetary liquidity to balloon  to 40% yr/yr, a historic record. with the economy  still depressed, the velocity of money has tanked with the extra liquidity flowing to the financial and capital markets. What's more the Fed is now apparently willing to have inflation move up over the longstanding target to foster a stronger labor market and put an end to the deflation pressure created by the rapid decline in the economy during the Covid lock down phase. Normally,with this kind of stimulus, the US economy would surge for a bit, but with the longer term potential of the economy inherently modest, the eventual recovery of money velocity will primarily reflect higher inflation. If so, we will eventually see higher bond yields, a reduced SPX p/e ratio, and, perhaps a lower value for the USD.

The stock market has been having a party. The SPX has been in a wicked sharp upturn and at a nearly

14% premium to its 40 wk. m/a is sufficiently overbought to render the market unlikely to make

substantial progress over the next six months. But, since we are dealing with such a huge swell of

liquidity, it could, however unlikely, surprise to the upside. By my reckoning, if the SPX moves

above the recent 3508 up to 3800 in the months ahead, we will be in a dangerous price bubble.

SPX Weekly

 

 

SPX -- Quickie Update

The re-opening of the US economy has been a rather muted success. Sure, business sales and
production have bounced back sharply, and my profits indicator, although still negative on a yr/yr
basis, is improving. Unfortunately, initial claims for unemployment insurance is still running at
an awful 1.3 mil. a week. From a Covid-19 perspective, the economic reopening has been a
disaster, featuring a sharp run-up in both cases and deaths. In states across the south and west,
health delivery systems are being sorely taxed with the risk of humanitarian issues on the rise in
spots like GA, FL, TX and AZ. The rise in cases  may well partly account for the rise in claims.
Across the US, many localities face risky school autumn openings because cases are rising
and testing and contact tracing have become less useful. I am not about to speculate on whether
the virus is practically out of control and whether efforts to tame it will cause additional and
substantial economic damage. So, I would not care to speculate on how well the economy and
the markets will do over the next few weeks and months. The sheer large number of dumbfucks
both in office and among the public have cost us dearly health-wise and we can only hope that
common sense will regain more footing.

The intermediate term trend indicators remain positive for the SPX. It has been range-bound for
a short period of time. The SPX is currently moderately overbought at a 6.5% premium to its
40 wk. m/a.  SPX Weekly  

SPX -- Update

Fundamentals
On balance, the US economy is showing a degree of recovery from deeply depressed levels.
Retail sales have come back nicely and output levels have moved up some. My profits ahead
indicator reads -15.4 which is awful but not as bad  as at the bottom in 2009. My business strength
indicator (BSI) is a lowly 107.9, which also exceeds the bottom in 2009 (A sound, healthy BSI
runs 140 -145). It remains very concerning that nearly 25 million people have lost their jobs and
that more recent data suggests that more upscale employees are being laid off. As the economy
continues to re-open, many more workers will be recalled, but the upscale earning jobs that are
lost will be very slow to comeback. There is huge slack in the economy, and even though raw
materials prices have been recovering, deflationary and default pressures will continue for a
while. The Fed remains just about fully accomodative, but Congress is juggling the ball here
on fiscal policy with an off-chance there could be a fuck up later this summer. So far, market
players have been letting the 2020 national election ride.

SPX Chart
The recovery uptrend from late Mar. was broken on a correction of a sharp overbought and the
SPX is now in a downtrend which is so early as to be inconclusive. The market is mildly over-
bought against the 200 day m/a, and the negative rollover in MACD bears watching. The
continued high VIX reading implies more volatility.  DailySPX

Economic / Markets Fundamentals

My primary liquidity indicators are strongly positive. This suggests that economic recovery is
not far off in time and it is supportive of the stock market. Based upon accelerating monetary
liquidity, a degree of economic recovery should begin before summer 2020 is over.

Presently, the US economy is still in a state of deep free fall with the indicators suggesting a
deeply distressed state.

With mounting sector wide defaults in prospect, further fiscal and monetary rescue efforts may
well be needed through 2020 to underwrite a very strong monetary liquidity trend and assure
the economy of a good shot at recovery.

Inflation vs. deflation measures remain in the deflation camp, but will switch over to inflationary
if recovery takes hold and strong inventory pipeline filling efforts materialize.

Eventual economic recovery will put downward pressure on Treas. and top quality bond prices
even if short rates continue at historically low levels.

Business profits measures are currently deep in the tank, but should improve as economic
recovery takes hold.

Covid-19 will remain a major wild card especially if economic reopening measures such as
social distancing and personal protection recommendations are flouted by a goodly number
of folks. With vaccines and therapeutic measures not ready tomorrow, the virus could make
a vigorous comeback and throw economic expansion possibilities into a cocked hat.

The US and other economies are going to need help from Lady Luck if slow, grinding recoveries
are to give way to strong and sustainable expansions

Consensus appears to favor SPX net per share rising from whatever depths to the $170. level
in 2021. That would put fair value at SPX 2800. Since we're already above that level, I view
the market as uninteresting except for the occasional long side trade should times come along
when obviously bubbly sentiment may falter.

SPX Daily

Let Us Hope The Dumbfucks Do Not Prevail

The US economy could decline by 20+% from peak to trough through the late summer. Even with
an expected bounce back over the last five months of this year, there could be 25-30 million people
out of work on NewYears Day, 2021. SPX profits could be down from $155. a share to $100. by
the time the year closes out. A gradual re-opening of the economy featuring regulations on
social distancing and the maintenance of sanitary places of business may secure a modest rebound
in the economy right through 2021, even with successful vaccination and improved therapeutic
programs. a significant amount of dumb political leadership and reckless individual behavior
could set the US back periodically both in terms of the battle against the virus and in the economic
realm. I hope the clear right wing foolishness we are seeing, even though aided and abetted by
Trump, does not rise to a threatening level. The general public fears Covid-19 and will be cautious
as we proceed. If warm summer air slows Covid's progression temporarily, this summer, then I
hope folks do not let their guard down. The medical experts seem to agree it could come back
with a vengeance in late autumn and this means states have to ramp up testing and contact tracing
as much as they can.

I remain concerned about deflationary pressure and its effect on debt coverage capability across
sectors of the economy. With the recent large decline in resource capacity utilization, my deflation
pressure gauge has reached the low levels seen during the Great Depression. Possible wide scale
business defaults across the globe could lead to cascades of additional bankruptcies here and
there and keep the large gaps in capacity and elevated levels of unemployment large enough to
retard economic growth for years to come.

The SPX is now wildly overvalued on 2020 fundamentals and continues to discount a recovery
in earnings power that may not arrive until 2022 or thereafter without massive pro- growth
fiscal policies. Trump is so far out of his depth that should he win re-election this November,
and should the Senate stay in GOP hands, economic and social stability could well be
threatened.

I have managed money for nearly a half century and have managed to maintain my cool through
all those years. As a New York guy, I know well how vicious this virus can be. So, I have plenty
of emotion now and can only hope folks come to treat Covid as the threat as it is.

With this rant out of the way, I plan to gather my wits again and face the future as it comes.
Watch over your selves and those who are near and dear.

Into The Valley We Go

Before the Covid-19 hit, I had fair value for the SPX at 2800 (16.5 x $170. SPX earning power).
I was a conservative fuddy-dud as the market traded above that level for much of last year, and it
surged early this year, topping out at a whopping overvalued level near 3400. We all know what
happened next. Now, economic downturn be damned, we have the SPX trading again above 2800!

The global economy has entered a deep downturn and unlike previous such instances there now is
heavy monetary and fiscal support in place to cushion the fall. Here in the US, the powerful rally
off the March low of 2200 reflects investor confidence that the economy will soon begin to
recover, especially since most states have begun processes to re-open local economies after weeks
of stay-at-home /social distancing requirements.

The re-opening processes do not comply with the guidance offered by the medical experts, and
with the virus case count still rising, the chance that the virus will infect perhaps many more
people here makes these ventures highly risky. Not only could virus case surges crash local health
systems, they could alarm enough people to force states to reconsider their choices and take
restrictive actions which could abort nascent local recoveries and create a national political crisis.
At the least, the SPX ought to pause here just to gauge whether this new nightmare could eventuate.

Polls show most people want to see the national economy re-open but also show substantial
apprehension about going out into it and risking their health and lives. Well, if there was ever a
time for Lady Luck to smile down on us, this is it.

The chart link below shows the SPX has reached a critical pass or fail spot (RSI %). The medium
term MACD is improving but still remains negative, and the longer run MACD continues
deeply negative, suggesting that the market's true longer view direction is, if not negative
yet to be decided in the weeks or months ahead. Finally, the SPX is approaching an important
test of its 40 wk. m/a.  SPX Weekly

Sotto Voce -- "Acceptable Deaths"

Pressures to re-open the US economy continue to grow. Thanks largely to the many Covid policy
failings of Team Trump, the quantum leap in various testing procedures needed to minimize flare
ups in the virus as the economy moves to open gradually and selectively are still absent. A range
of low population density states that are anxious to re-open will, if they proceed, have to do the
random testing as well as the business unit testing 'on the fly'. There will likely be flare-ups in
areas of these states, and deaths will occur.  This development will put governors in a very tight
spot as folks come back to work amid fresh outbreaks that may tax smaller regional health care
systems and require heavy remedial action. If the setbacks are not large, selected states may
move ahead with opening plans, and returning workers may be forced to gamble their lives upon
return so as not to lose their livelihoods. These local scenarios will play to a national audience
and increase the tensions and fears of the workforce. Local level safeguards galore will be needed
to mitigate the rising caseload if pressures to return to reinstating 'stay at home' policies rises
sharply.

On a national level, it would appear to be prudent to attempt to re-open the economy only
gradually and in a very coordinated manner to contain the virus damage as best as possible.
I do not know if cautious, slow programs to return to normal will undermine investor confidence
or whether markets players will 'keep the faith' through a long ordeal. I would not be shocked
to find continuing market volatility that flows from advances and setbacks along the road to
normalcy.

Deflation Pressure

I have used an inflation directional pressure gauge for nearly 50 years with good results. It
became a deflation pressure gauge over 2008 - 10 and that is what it has turned into again
recently. Basically, I watch the longer term momentum of commodity price composites along
with measures of economic slack focused on capacity utilization rates. The deflation pressure
gauge is signalling the rapid development of downward price pressure currently. So far, the
readings have not been as serious as in 2008 - 09, but we could still be early in the game. Back
in 2008, the vulnerable credits were short term, such as asset backed commercial paper. Over
$2 trillion in short term credits were wiped off the books back then with large bailouts needed for
finance companies and insurers. This time the weakness is in longer term credits ranked  BBB
and lower.

Here in the US, the Fed has jumped in and is providing massive amounts of liquidity to the
money and credit markets. Companies across a wide range of industries are also drawing down
their lines of credit at the banks. Fortunately for now, banks have maintained ample liquidity, so
there is private sector credit still available to worthy borrowers. On top of that, fiscal policy is
providing credit to smaller borrowers.

So, as I read through my e-inbox, I see a decent level of investor confidence that the Fed and
fiscal policies will provide sufficient back-stopping to ward off a spiral of deflation induced
debt liquidation .

This situation still demands close monitoring as programs to open economies may prove far
more complex and time consuming than we can readily foresee, with the consequence that
default risk may increase more rapidly than we now envision.

My 12 yr. long pressure gauge is also evidencing deflation pressure as few economies  have
been able to run flat out for long, with this coupled with the fact that the CRB Commodities
Index is now trading nearly 70% below its 2008 peak. I hope not, but there could be some
debt chickens from way back when that may come home to roost.

SPX -- Scaling Out Of This Rally

Even in a fully traumatic longer term crash, The initial rally can cut the first leg of the
decline by half. That would be around 2800 on the SPX . The 2800 level also would equate
wth fair value under fully normal conditions. We are far from normal times, so it is time for
me to exit and concentrate on what's next at my leisure.

In Wiley Coyote fashion, stocks recently went off the cliff, and shorter term, forward looking
economic indicators have done so as well. With 'stay at home' orders in effect across most of
the US and a number of foreign countries as well, all in the context of a debt laden global
economy with plenty of economic slack, it does not tax the imagination to foresee the start
of a deflationary depression replete with widespread and enabling defaults.

Central banks have their windows wide open and fiscal policies are turning very liberal, all to
limit the damage while nations struggle to contain and eventually bring the covid-19 to heel.
As we all know well, this is a tall order for a variety of reasons tied to the ugly nature of the
virus itself.

Like most everyone, I am hoping for succes over the next three to four months so the 'stay at
home' orders can be lifted and governments can begin the work of re-opening economies in
a way that can minimize future substantial flare-ups.

As time goes by, popular sentiment to re-open economies will strengthen and leaders will have
to be firm against this blowback lest economies hit the throttles prematurely and crash health-
care systems.

SPX Daily

SPX -- Thanks Guys. You Can Take It From Here

Last Sunday, I posted that a trade worthy rally in a deeply oversold market was imminent.
I caught it, and now I can sit back and watch the wizards of the financial world work whatever
magic they may have. I am sure that at some point over the next year, there will come a time
when the old cat can catch a canary again.

SPX -- Technical Update

The market remained in crash mode through 3/20. It has now moved deeply into oversold territory.
Although this is a bear market, The SPX is approaching a trade worthy point based on the impor-
tant intermediate term stochastic momentum measure (second panel on chart link below). When
both measures on this indicator decline below the 20 level, rallies normally ensue, even in a bear
market. This type of situation is fast approaching. And, as you might guess it is not for the faint of
heart.   WeeklySPX

Seen against the 40 wk m/a, the SPX is as oversold as it has been in years. Note also that the
3/20 SPX closing took out the late 2018 low, thus re-inforcing the concept of an in-force bear.
The bottom panel on the chart is a longer term MACD measure and it also is starting to turn
negative, which is not a good sign.

I plan to catch up on the fundamentals later in the week. Having hit the 80 mark, I have seen
and have been through  nasty periods when illness strikes in epidemic fashion. The current
CO-VID 19 pandemic is personally one of the scarier ones and ranks right up there with the
polio epidemics of the early 1950s.

SPX -- Technical

The recent price decline wiped out the major intermediate term overbought and left the SPX
modestly oversold.

I have fair value at 2800, so most of the substantial overvaluation was also wiped out.

The SPX remains hyper-extended on a very long term basis.

The market has decisively broken the uptrend underway since late 2018 but remains positively
extended on a trend from the 2016 low.

The intermediate term MACD is turning down and speedy positive whipsaw reversals are rare.

I like an oversold 14 week stochastic as a long side entry point but we are not there yet (See
bottom panel of linked chart below).

The high volume of the past week signals a level of downside exhaustion.

Last week's price action is indistinguishable from the onset of a crash pattern, so more cautious
players may look for a bottoming process and not jump in long just because Friday did see
the SPX reverse partially and close up from its low for the day. I make this point because
intermediate term bullish  sentiment has yet to be washed out yet.

SPX Weekly Chart

SPX -- Note

By the end of last week (Jan. 17) The SPX had become sharply overbought for the intermediate
term:
       > High RSI and Money Flow, elevated MACD. The market was then over a 10% premium
          to its 40 wk. m/a.
      > Put to Call ratio had fallen to low levels, signaling excess of optimism (bottom panel of
         chart).

When the SPX is this strongly overbought, history indicates only a 1 in 4 chance long side
players can make decent money over the next 6 - 12 months from the highs recorded.

With the new corona virus (which carries a pneumonia kicker that can be fatal) as backdrop,
edgy market players are using this new uncertainty to take profits after the recent strong leg up.
It is too early to tell the eventual economic damage from this accelerating disease.

Weekly SPX Chart 

SPX -- Notes

SPX is positive but is overbought, overvalued and hyper-extended long term.

Primary monetary liquidity measures positive and accelerating.
Earnings indicators -- Currently flat to down. Forward view suggests return of positive profits
at some point in 2020.
SPX earning power in 2020 estimated at $170.
Fair value for SPX now 2800.
SPX is currently about 16% above fair value.
P/E premium is at 2.6 multiples above fair value.
Current P/E of 19.1x reflects market player expectations of moderate profits growth coupled
with continuing easy money and low inflation.
Inflation pressure gauges have turned up but only slightly so.
----------------------------------------------------------------------------------------------------------------
Chart shows positive turn in important MACD longer range indicator (lower panel on chart).
SPX is at 8% + to 40 wk m/a. and is approaching heavy intermediate term overbought area.
Contrarian sentiment indicators (not shown) are just below too confident danger zones.
---------------------------------------------------------------------------------------------------------------
Both 2020 presidential race and renewed US / Iran conflict are in phases that are too early
for sensible market commentary and are still too much subject to conjecture.

SPX Weekly Chart

2020 -- Gateway To The Great Whatever

Four horsemen of the economic apocalypse are: high debt, deflation, default, depression. They
were on the far horizon as early as 1981. but easy money, with occasional large help from fiscal
policy, kept them at bay since then save for the major slip up in 2007-08. But, huge central bank
easing allowed the global economy to barely skirt a depression. Even then there were massive
defaults in short term credit which almost did us all in. Since then more debt has been piled on,
mainly at the long end.

So, the battle to keep the horsemen at bay is monetary and fiscal policy job #1. Bloated central
bank balance sheets have created enormous inflation potential viewed long term. But since
stringent monetary and fiscal policy needed to curb inflation might well set the horsemen free
to roam about the world, gov't policy may well remain on the easy side until inflation finally
accelerates significantly and tilts policy to tightening the reins no matter how gingerly.

So, as we enter the new decade, fending off deflation and default will be the governing worry.
With global output growth potential modest reflecting demographics and the very limited
sustainable spending power of the vast majority of the masses, gov't policies will have to
figure ways of managing the possibility of further asset inflation (stocks and bonds). On top of
this challenge, there may come a point when accomodative policies wind up having sharply
diminishing returns for growth. Hence, 'The Great Whatever.'

That's All Folks

In late September, I turned 80. According to Wall Street lore, this counts as a life well lived for
an investment guy. The most important thing I've learned so far about being 80 is the you have
to become more inventive if you want get around decently well. But learning the fine art of
compensating for advanced age is a time consuming endeavor as I am finding out. So it seems
to me like a good time to step out of the capital markets milieu. And, there is the view I have
that both bond and stock prices are bloated and now not interesting. I also think that the vast
gulf between the folks who are financially loaded and the rest of mankind is unsustainable
over time at least here  in the US. If I was a betting man, I would say that the bloats we now
see in the markets and in wealth disparity are going to be corrected over time, at least here in
the US. I hope these evening out processes are not born out of economic, financial and social
disaster, but my guess is they are on their way over the next couple of decades come what may.
I wish all the many readers of this blog so long and good luck.

Easy Does It

Confronted by weakening PMI data and tightening liquidity in the financial markets, the Fed has
reverted to another QE effort. It will buy substantial amounts of 3 month T-bills at least for the
intermediate term. As the Fed again expands its balance sheet, some funds will invariably leak
into the money supply, likely further adding the growth of the real money supply. This is a plus for
the stock market as is the Trump team's effort not to intensify the trade war with China. These
developments will help the economy although the timing in the shorter run is necessarily
imprecise give the continued deterioration in the US economy, especially in the industrial sector.
The return of QE adds significantly to inflation potential if the economy re-accelerates in growth
in the months ahead.

The 2020 national election is still more than a year away. The House seems ever more likely to
impeach Trump as soon as it can plausibly do so, but the Democrats still must settle on a
candidate and a platform to put in opposition. As of now, investors appear to favor a moderate.
Trump is presently expected to survive an impeachment trial in the Senate but could still crash
and burn by election day anyway. So, even if the economy revives somewhat, there still may
be some heavy clouds for pundits to grapple with even so.

SPX Update

My liquidity and economic indicators suggest a very modest rebound in economic performance
in the months ahead. The profit indicators call for SPX net per share to remain flattish at $160.
through year end 2019. Inflation pressure gauges suggest a continuation of quite mild acceleration
in the CPI. The short term interest rate directional is consistent with further downward pressure on
the 3 mo. T-bill rate. The SPX remains very over extended viewed long term and is still in over-
valued territory. The risk / reward profile is improving slightly as the danger of imminent recession
has eased somewhat. Longer term economic potential is still down - trending as it has been since
early 2018. China vs US trade issues may well continue to command attention in the months ahead.
It is still too early for the 2020 national election to sharply influence market behavior but it may
add significantly to market volatility next year. I have current fair value still at SPX 2650.

The SPX is still in a long running cyclical bull market. Looking a little shorter term, it has broken
the original uptrend from the late 2018 and is presently adrift. The market is not overbought, but
momentum has been fading, and failure of the MACD improve in the next few weeks would be
disconcerting. For right now, let's call it a "Ferdinand" bull.  SPX Weekly

Long Treasury Bond

To gauge direction of the long guy's yield, I watch the momentum of industrial production and the
trend of sensitive materials prices. Both have been falling over the past year in a softening world
economy, and the bond yield has followed suit. The long Treasury price is very overbought
short run, but until there is evidence that the manufacturing side of the economy is firming up on a
sustainable basis, high quality bond yields may stay distressed. My weekly fundamental cyclical
indicator remains modestly weak measured yr/yr reflecting the significant slowing of growth and
the fact that basic industrial materials prices are down sharply over the past twelve months.

I have not been interested in the bond market for quite a while as I think yield premiums for such
factors as long term inflation expectations, duration, and future supply have all been whittled
away over the course of  the very long bull market for bonds. Back in late 1980 and 1981 the
group I led was a major buyer of Treasuries. We even got several calls from the Fed inquiring
about our health. Back then, Treasuries were yielding nearly 14% and BBB utilities were up at
about  19.75%. US dollar pay CDs of Canadian subsidiaries of large US banks offered 21.5%.
I thought that was all crazy. I could buy high quality bonds that yielded more than many companies
could earn on book equity. Some Wall Street bond gurus had yields on Treasuries going to 25%!!
Well, I think we are at the other extreme now, what with the new generation of gurus calling for
zero coupon long Treasuries if the US economy weakens into recession. Lots of luck with all
that . For me, it's sayonara to bonds.

Chart for the long Treasury yield. TYX weekly

Key Economic Factors For The Markets

The growth of monetary liquidity has been shrinking until recently. The shrinkage was severe
enough to force the US economy to rely on private sector funding to underwrite growth. Recently,
the Fed has backed away from its policy of strong liquidity tightening, which was adopted to
reduce the mammoth increase in the size of the Fed's balance sheet (Fed Credit) and the flip side
swelling of excess bank reserves. Fed Credit is still so large as to represent a major long term
inflation threat, but with the economy slowing down to a crawl, the Fed has decided to relent for
now. Liquidity growth is improving, but only mildly so, and is not yet nearly strong enough to
support more than a very mild resumption of economic and profits growth. Faster monetary
liquidity growth now seems inadequate to fund both improved economic growth and sustainable
rallies in the capital markets.

The Fed is clearly leaning toward reducing short term interest rates before too long, but take
note that Wall Street is particularly bad at guessing Fed intent. If the Fed moves to cut rates
in the weeks and months ahead, there could be an additional shot of liquidity to the system as
as the Fed moves to assure an orderly transition to a lower rate structure. In this event, stocks
could receive an additional mild positive jolt.

On the other parched palm, if the Fed opts to toss caution to the wind and run with a more
liberal policy, the US Dollar will sink in value and the long dormant commodities market will
likely perk up. The gold price would receive a nice boost while the bond market could weaken
sharply, leading to a return to a distinctly positive yield curve that would no doubt surprise
folks.

The performance of the US economy in 2019 has been dicey and it is not clear now whether
an easing of the monetary reins will be sufficient to assure that the US economy will firm up
enough to satisfy expectations built in to the new, lofty level of share prices. Such may well
be the case if the Fed keeps liquidity growth mild and does not open the tap as it might if a
full fledged recession needed to be tackled.