SPX -- Up Beats Down

The market has exceeded my expectations so far this year. At Christmas time 2018, the SPX was
sitting at 2350 and I posted that it was reasonably priced with a fair value set at 2650. I still
think this is a sound estimate of fair value and now regard the SPX as modestly overpriced. My
views on the economy have changed little since the Mar. 14 post (just below), and as I have
thought more about the fundamental outlook, I realize I could make a late cycle "thread the
needle" forecast of SPX 3000 based on low inflation and interest rates and an economy that
improves just enough over the next 12 months to produce some further slight improvement in
earnings, all underwritten by a continuation of sharply rising private sector short term credit
growth. This type of scenario would create a clear cut overpriced and well overextended SPX.
On top of all that, I think we can say with assurance that Trump will try to do whatever he
believes will keep the market  trending higher through 2020.

But, to be honest, we have had a damn fine run from the brink of disaster in 2009 and I am
more than happy with 2650 on the SPX. Moreover, I am finding it all boring and am perfectly
content to let others gild the lily.

A few years back, Tim Geithner, former head of the New York Fed, who partnered with Fed
Chairman Ben Bernanke and Treasury Secretary Jim Paulsen to engineer a bailout of the
financial system in 2008-09, said: "We saved the economy, but we lost the country." Prophetic
words indeed, and maybe the truth if Trump wins another four year term. Thinking about
what it may take  to build something decent and good in the US for future generations is
not boring like the stock market has become, and it's where I am spending my time these days.

Looking Ahead....

From my perspective, the outlook for the US economy is getting a little dicey. my favorite
financial liquidity measures have deteriorated markedly over the past year or so. Fed Bank Credit
and the Monetary Base continue to shrink. Real or inflation adjusted M-1 growth has been
declining and is now barely in positive territory. There is not sufficient financial liquidity in the
US system to support both real economic growth and a rising stock market on a sustainable basis.
On the plus side, private sector credit growth is still positive and short term interest rates have not
increased enough to assure development of a recession in the US. As well, the economic slow-
down may have suppressed some of the financial liquidity measures temporarily provided the
economy can regain more positive footing in the months ahead. In short, economic trouble may
lie ahead but it is not a lead pipe cinch. One also may reason that if more economic red flags
appear, The Fed may intervene with additional liquidity and cuts to short term rates. This is a
reasonable assumption, given Trump's willingness to challenge The Fed openly along with a
supporting cast of risk capital managers.

There is now a consensus that the US and China may strike a trade deal. If so, this will remove
an obvious negative for the global economy and it might help the prospects for US business
and corporate profits out through 2020 and beyond. But damage has been done to the US base
of liquidity and it remains an open question whether there will be enough benefit to put the US
economy on a more solid footing.

If a trade deal with China is struck, it will of course be quite interesting to see the details and
whether any concessions China may have made will be enforceable. Trump let economic issues
with China out of the bag, and if the deal lets China off the hook enforcement wise, figure the
Democrats will look for ways to make an issue of it.

If I was a younger guy actively managing money, I would likely be stuck selling the recent
rally and building a cash kitty to await improvement in the US liquidity environment.

The SPX chart still shows a near term overbought condition and trouble staying above the
2800 level.  SPX Daily

SPX -- Update

Back on Christmas '18, I opined that the stock market was quite reasonable down at 2350 and
that I was comfortable with SPX 2650 as a fair value call for 2019 - 2020. The market has
already jumped over that level, but I am not inclined to increase the fair value assumption at this
point in time. The evidence continues to point to decelerating US and  global economic and
profits growth in the year ahead and there is but a smattering of excess financial liquidity in the
system to fuel the stock market ahead as the real economy has been gobbling up the modest
liquidity available. On the bright side, inflation pressure has moderated and the Fed has taken Its
foot off the break. The up trends in interest rates in evidence in 2018 have broken down, thus
confirming the Fed's more dovish tone. But there is plenty that could still go wrong. There could
be a nasty Brexit, the US and China could still screw up the trade talks, and the global economy
could slow further and faster of its own. I am also a little nervous that there is such hard and fast
consensus that the inflation rate will not misbehave but stay gentle. I also do not like the wild
swings in investor sentiment in view since late 2017. In summary, I am conservative on SPX
earning power through 2020 and am carrying a lower p/e ratio estimate in the 2650 fair value
number (SPX eps projected around $160).

For the short term, the SPX is getting overbought and continues to have an unnaturally steep
positive trajectory.  SPX Daily

True China Giant Goes To His Rest

Li Rui joined the the communist party in China in 1937. He witnessed the entire revolution and
as a former confidante of Mao, he saw the dark side of the Chinese moon. He died a few days ago
at the age of 101. Betrayed years ago by his wife, he carried on, preaching against authoritarianism,
and as a demonstration of how that ugly centralized power continues today, his daughter announced
she will boycott his funeral. Know your enemy.....Li Rui Obit NY Times

Monetary Policy

The economic indicators suggest The Fed should keep short term interest rates trending higher.
Economic growth has been solid, capacity utilization continues to grind slowly higher and
business short term credit demand has strengthened substantially over the past 12 - months.
these conditions offer classic support for pushing short rates higher. The labor market has
tightened appreciably, and although there is still excess productive capacity in the system, it is
difficult at best to be confident that its deployment will prove economic. So, bowing to very
intensive criticism, The Fed  has opted to follow a more temperate course in the hopes that
continued US economic growth will not lead to a substantial cyclical acceleration of inflation.

 The economy may experience slower real growth this year compared to 2018, but the addition
of additional production capacity cannot lag to far behind, less an imbalance in favor of economic
demand develops.

The Fed is also planning to operate monetary policy with "ample reserves". This statement implies
that continued quantitative tightening, or the reduction of  the size of Its balance sheet, will likely
proceed far more judiciously than over the past two years. On its face, this statement opens the
door to potentially dramatically higher rates of inflation further out ahead as global excess capacity
is eventually used up. Fed Chair Powell's rather inglorious capitulation to all the forces that wish
to party on leave him with the hope that maybe the inflationary thrust will be the worry of
subsequent Fed leaders.

In the short run, a growing real economy is making full use of available monetary liquidity. In
conditions such as this, it is normally difficult to sustain a powerful upthrust in stocks. Without
a significant slowdown in the pace of economic expansion, large equities players will have to
sell other assets if they wish to sharply bolster commitments to stocks.

What happens if the strong consensus for only continued modest inflation proves faulty and
inflation pressure again perks up? Powell will look like a real turkey as the Fed has to begin to
turn the boat around.

Stock Market -- The Thundering Herd

Going into Christmas, the herd was stampeding downhill. Following the holiday, the herd has
reversed course and is now on a moonshot trajectory (75 degree angle of ascent). The Fed was
brought under assault from many quarters for running too tight a monetary policy as the year
wore down and it relented on interest rate policy. One can argue that chair Powell had no genuine
theoretical premise for the policy of gradually but steadily raising short rates, and the Fed has
ceded control over rate setting to the demands of risk capital for now.

In my last post, I posited that the SPX had reached reasonable levels down at 2350 and I briefly
sketched out a rationale for saying 2650 was an OK fair value estimate for the 2019 - 2020
period. The post-Christmas spike low and moonshot rally is statistically suspect, but lo and
behold, the SPX has been running back up toward the 2650 level. I find this performance to be
astounding and the emotional roller coaster that market players have been on over the past 12 -
14 odd months to be something of a bad joke.

It would be comforting to me at least if investors began to pause in the weeks ahead to review
what they have wrought and to take stock in a calmer assessment of what uncertainties and
opportunities may lie ahead.

SPX Weekly

SPX -- Update

Santa was a no show, contrary to my hopes. Instead, and through Christmas Eve, we have an SPX
in fee fall on a bear chart, as players who were wildly enthusiastic at the outset of the year, turned
panicky toward the very end. I would suggest against trying to call a bottom to this panic until
some degree of stabilization shows up. The decline in the SPX below its 200 day m/a has been
steep enough to render the market deeply oversold on an intermediate term basis, but history
shows declines of this magnitude have further downside to go as often as not.  SPX Daily

Everyone knows about concerns regarding a slowdown of US economic growth in the context of
slowing global economic demand. We also know that the US vs. China trade spat could intensify,
and that there are issues in Europe including Brexit, Italy and socio-political worries. We now
also have The Donald threatening the Fed and exhibiting inconsistency on a wide range of
domestic and foreign policy issues. Overt meddling with the Fed is inherently dangerous.

Even if the US economy slows down significantly over 2019 - 20, as long as no clear warnings of
recession show up, the SPX is reasonably priced on basic fundamentals so long as businesses
continue to show positive cash flow and the financial system can retain most of its current
relatively strong position. Based on the fundamentals, I would not quibble with assigning fair
value of 2650 to the SPX through early 2020. However, investors need to watch the Fed like
hawks to assure themselves that They are not removing liquidity too quickly through the QT
program.

I did argue last year that the 2019 - 20 interval would involve a deep sell - off in the market.
History shows that strong declines tend to occur every 7 - 9 years, and the market is running
overdue. I do not know whether the current free fall pattern is the kick off or not. I would be
delighted if we could make it through the Trump term ending in early 2021 at 2500.