About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, December 27, 2006

2007...Part 5 -- Gold & The US Dollar


The gold price ($628. oz.) is in a seasonally strong period
presently. This interval normally lasts through late Jan. /
early Feb. of the succeeding year. For the current rally in
gold to have any real "pop" short term, it needs to take out
overhead in the $640-650 oz. area. Sluggish oil and industrial
commodities prices probably have inhibited speculation so far.

My gold macro-model has gold fairly valued now at $520. I can
make a decent case for gold to go to $550 by yearend 2007, so
gold bugs and bulls will have to look elsewhere for a rationale
for the current price, much less a sharply higher one. Reasoning
from my model, gold made a blow-off top just above $730 this year
reflecting the culmination of a lengthy period of inflationary
monetary policy by the Fed that dates back to the late 1990s.
Since the end of 2004, monetary policy in terms of monetary
liquidity growth has been tight. My view is that the Fed will
keep policy firm for as long as it can next year, before easing
to pave the way for a stronger economy in 2008. So, that leaves
me suggesting that there could be large but temporary downside
price risk in gold after the seasonally strong period winds up
later this winter.

US Dollar

I have a simplistic view on the dollar: If folks in the US should
not hold dollars, neither should foreigners. You can put dollars
to work now at no or nominal risk and earn 5.25%. That translates
into a positive after tax return adjusted for inflation. Moreover,
the Fed has kept the printing press in the "slow go" mode now
for nearly two years. Domestically, the dollar is fine. This
contrasts sharply with mid-2004, when short rates were 1.00%,
inflation was accelerating and the Fed was only just entering into
tightening mode. From my perspective, it makes little economic
sense for foreigners to dump dollars now.

Looking at 2007, it may well be that dollar fundamentals slip some
later in the back half of the year, but this slippage may be

Tuesday, December 26, 2006

2007...Part 4...The Stock Market

In a 1/20/06 post on the stock market, I opined that the
market had the potential to rise significantly in 2006, with
the SP 500 reaching 1380-1405. We are up through that level
and did see some closing prints slightly above a revised
projection of 1425. All in all, it was a good call.

I also indicated I thought the market could rise into January
of 2007, before a nasty and substantial correction of 15-20%
ensued, primarily as a result of an acceleration in economic
growth and concerns for higher short rates and inflation.

At this point, the economic outlook is more muddled than I had
hoped. The inventory corrections that follow a slowing of final
demand may not yet have run their course, and the improvements
to real consumer incomes I anticipated as inflation waned may
not yet have boosted confidence and spending as much as I had
hoped. In fact, my macro profit indicators have clearly flattened
out as of late, and are not confirming general expectations for
final quarter 2006 earnings.

I am cautious about the outlook for stocks in general over the
first nine months of 2007, but I am not in any position now to
lay out a strong case for a 15-20% decline. So, rather than
push the conjecture, I am now content to forego the decline
projection and track developments as they move along until
I get a better sense of fundamentals and emerging trend.

I would say at this point that my caution extends well into 2007
because It is still early to say how good the balance between
economic supply and demand may turn out. In this cycle, growth
of productive capacity has proceeded slowly relative to output,
and even with recent modest upticks in growth, capacity is still
trailing output growth potential, which gives the economy an
inflationary bias.

There is another difficult issue which concerns me regarding
corporate profits and the stock market. This has to do with
the US trade position which has recently improved. If the trade
deficit is set to level off, as may occur, then the flow of
dollar liquidity abroad will flatten out, and this could
eventually stunt the profit growth of US multinationals as
the global economy adjusts.

Tuesday, December 19, 2006

2007...Part 3 -- Interest Rates & Bond Market

Short Term Rates

Well, it is a 5.25% market at the short end. My super
long term short rate model pegs the Fed Funds Rate at
about 4.25%. The current FFR 100 basis point premium
reflects both the recent rapid deceleration of inflation
coupled with fundamentals which support a continuation
of a 5.25% FFR, recognizing that said fundamentals do
now tilt slightly toward ease. I continue to expect the
Fed to hold at 5.25% with a bias toward tightening if the
economy holds up as I anticipate. For the short run, we
still have to see how much of an inventory adjustment will
take place in the wake of the slowing of the economy.

Short rates at 5.25% offer a positive after tax, inflation
adjusted return. There is now no economic compulsion to
spend or invest money. Maintaining a positive offering to
savers is important if the US is to regain better balance
between savings and spending, as it keeps the internal value
of the dollar stable. I suspect this is a secondary objective
of the Fed.

As mentioned in the previous post on monetary policy, I think
the Fed wants to avoid easing for as long as it can. However,
I plan to follow the financial market fundamentals closely and
will point out changes as they occur.

Bond Market

I have paid scant attention to the bond market over the past
eighteen months. By my lights, the market has been overvalued,
and not worth the time. I have missed a couple of good trades
but trades in equities more than made up for it.

The long Treasury at 4.70% provides a modest premium over
inflation of 2.0-2.5%. So, the market is ok to trade now, but
investors need a solid 300 basis points minimum over the CPI to
warrant long term positions given the uncertainties of interest rate
risk in the long run. You can earn 5.25% now nearly risk free,
so why saddle yourself with pre-maturity risk to principal that
comes with extending out? One can sing a different tune if the
economy is headed for a lengthy period of price stability or
some deflationary pressure, but that is not the view I support.

The bond market has proven to be most sensitive to the momentum
of industrial production and industrial commodities prices. I
use a combined measure computed on a six month annualized rate
of change basis. This measure had readings of +10 - 12% over the
first half of 2006, but has tailed off to a 2.7% annual rate over
the second half of the year -- hence the strong rally in the bond
market since May. Since my best guess is that this measure will
strengthen significantly later in 2007 and especially in 2008, I
would expect bond yields to trend up certainly by the third
quarter of next year if not sooner.

The powerful rally in high yield or junk bonds over the past six to
seven months coupled with an ongoing small spread between top quality
and intermediate corporates suggests the bond market is not concerned
about recession, inverted Treasury yield curve notwithstanding.
Rather, it appears there is considerable speculation that the US
economy is losing its inflationary bias in the intermediate term.

Sunday, December 17, 2006

2007...Part 2 -- Monetary Policy

Best here to briefly fast forward to 2008, first. This
upcoming national election year in the US currently looks
to be wide open across the board. All the more reason for
the Federal Reserve to desire to fly under the political
radars and not have either growth, inflation or the Fed Funds
Rate become "hot button" political issues. Thus for the Fed,
2007 is the year to do what might be necessary to have the
economy straightened up and flying right through 2008.

Working backward, the Fed would prefer to tighten in the early
part of next year if needs be, and it would prefer to loosen
up on the monetary reins in the second half of '07, provided
a "goose" to the economy would usher in a more balanced 2008.

The growth of industrial production and the strain it puts on
capacity utilization and resources at large is a key factor
in the setting of monetary policy. The Nation's operating rate
is likely to finish out 2006 around 82%. The growth of US
capacity has been inching up, but is still a little below 2.5%
yr/yr. The Fed wants the economy to grow but not reach effective
capacity of 85-86% until very late in 2008. Now since inflation
pressures tend to accelerate when the operating rate exceeds
82%, the Fed would likely most prefer to see production growth
stay modest for a while in the hope that nudges up in the
operating rate would push business to expand capacity
sufficiently to keep a reasonable balance, particularly in 2008.
Can the Fed fine tune with such precision? Do not bet on it.
However, since I believe this bit of analysis of Fed intent
is as right as rain, I suspect if policy tweaks are needed,
tight comes before loose.

Friday, December 15, 2006

2007...Part 1 -- Environment Overview

It's a "backseat year" for me...

There are years when it is fun to be out front and make
economic and financial forecasts and predictions. I did
pretty well on this score over the 2003-06 period. The
truth is that being in the forecast game is a pain in the
ass as it tends to force you to keep thinking about what
you said as events unfold. For 2007, I am slipping into
"humble" mode -- just a simple seeker of truth. So, I
take a back seat to those braver than I. The key here
for me is to make projections and forecasts when it is
easy to do so, ie. when you have a compelling case. Not
so for me as I look at next year.

I peg US economic growth potential at 2.75% on a longer
range basis. That'a low number for me, and it reflects
my expectation of slow labor force growth ahead and a
more moderate pace of productivity growth. It might not
be so easy to to hit 2.75% next year. The US may go into the
year with housing and commercial inventory overhang and a
consumer whose real wage is just beginning to recover. The
areas of positive intrigue are trade and business technology.
US exports have been sloppy in recent months but remain in
a strong uptrend, and the recovery in technology is just
now approaching levels where it might be wise for producers to
expand capacity. For now, I am content to view the outlook

The macro-indicators I follow to track profits growth are
deteriorating as the year comes to an end, and although
still in positive territory, are close to levels that
normally suggest a flattening of profit margins and the
potential for some negative surprises. Since I do not have
a strong case for a rapid, positive turnaround, I currently
view profit prospects for 2007 as much more subdued than
in recent years.

My longer term inflation indicator has tumbled since 2006
and is in a firm downtrend as we roll toward 2007. This
suggests we should go into next year with a benign inflation
environment. Even so, there are issues. US productive
capacity growth has picked up a little more to 2.4% yr/yr
through Nov. '06. That is nice, but capacity growth still
trails longer run economic potential which, in my book,
adds inflationary bias to the economy, despite productivity
gains. Moreover, capacity utilization in the extraction and
primary stage processing sectors is running high, with little
capacity growth yet in evidence. Couple these concerns with
a backdrop of firm global growth and rising capacity utilization
and you have inflation "in potentcy" as Thomas Aquinas liked
to say. So, I do not see a clear shot at saying inflation will
not be a problem next year. Hence, I am in the back seat on
this one, too.

We have completed nearly five years of economic recovery. The
years when business around the world is easily building its
book of business are the pleasant years of rising confidence
and expectations. But history suggests these periods have
rather finite durations, and I suspect 2007 may usher in an
interval when a maturing global expansion may produce some
events that begin to challenge confidence. I do not have
a bag of "surprises" to lay out, just a sense that it might
be wise for business and financial / capital market players
to switch off of cruise control and get back to day to day
manual operation and vigilance.

I am planning several more posts on the 2007 environment for
the various markets before '06 runs out.

Wednesday, December 13, 2006

Trade, Oil And China

The jump in the US trade deficit over the past two years
primarily reflects a rising oil bill. Not only did oil
rise sharply in price since 2004, but the US also added
substantially to its strategic petroleum reserve. The
sharp drop in the monthly deficit in October reported
yesterday resulted from the recent weakness in the oil
market. The chances now seem reasonable that the
deterioration of the US trade position will either end
or be substantially ameliorated for the next several
quarters as US growth may trail global growth in a world
with the oil supply / demand balance still in favor of supply.
A continuing sizable trade deficit will provide ample
liquidity to the global financial system, but the growth
of such may be at a trickle compared to the $100 billion
annual increments witnessed in recent years. This
expected slowing of liquidity increments may start to
affect marginal offshore credits adversely as 2007 progresses.

Control of the US Congress has passed back to the Democrats.
Old hands will hold leadership posts, but the new arrivals
are far more skeptical of the economic policies of recent years,
particularly free trade and globalization. I doubt we are
looking at a new crop of wild eyed populists, but rather a
group more intent on sensible inquiry into policies that may be
seen as hurting US jobs and wages. Moreover, small business, whose
views on the US trade stance have been continually rebuffed by
the staunchly plutocratic Bush administration, may find a more
sympathetic ear with Democrats. Couple this with a high oil
import bill compared to just a few years back and you have a
recipe for a far more prickly period regarding trade issues.

Treasury Sec. Paulson (good cop) and Fed chief Bernanke (bad cop)
are off to China this week with a high level delegation to
discuss economic and political issues with senior Chinese officials.
This could be a strange series of meetings, since the Chinese have
to admit that both Paulson and Bernanke could be lame ducks in
what is shaping up as an open race for the roses in 2008. Moreover,
antagonism toward China's economic policies has increased
substantially here in the US, and will receive greater voice in
the next couple of years unless China and other Asian mercantilists
suddenly reverse course and accelerate the opening of their
markets and push for stronger consumption at home. To add to the
tension, Europe, no slouch when it comes to protectionist policies,
is also voicing some concerns about Asian economic policies.

I bring all of this up because as Bush 43 fades into the sunset,
there could be some interesting and provocative discussions of
trade policies over the next couple of years that could just
be raw enough to upset the capital and currency markets from
time to time. Major Asian economies are well past the "take off"
stage, so mercantilism is now pointedly self serving. If all
the players, US and Europe included, are interested in cooperation
and compromise, a transition to a more balanced global economy
is feasible without substantial destabilizing events. Otherwise,
the road through, say 2011, could have some unhappy bumps.

Sunday, December 10, 2006

Monetary Policy

The Fed meets this Tuesday to discuss monetary policy.
The FOMC is widely expected to leave the Fed Funds Rate
at 5.25%.

The short rate indicators I track most closely are starting
to tilt toward ease, but not persuasively. Short term business
credit demand momentum is slowing but is still strong. Production
is slowing but services have perked up. Upward pressure on
capacity utilization has eased, but development of slack is not
assured. Finally, my short term credit demand vs supply pressure
gauge has eased some, but a fair portion of the easing up in
the reading reflects faster growth in the supply of loanable
funds. I guess if I was in the Fed's shoes now I might want
to leave the FFR% unchanged just because it looks easy to make a
mistake or a misread that could result in whipsawing the markets
within a few months. In short, a change here might involve too
fine a call.

The FOMC has expanded basic monetary liquidity for the holiday
season. It started the process late in the year and It may have
acted with even more forbearance had not cash and checkables
fallen to such low levels in the system.

Friday, December 08, 2006

Economic Notes


The US employment report for Nov. shows continuing
moderate jobs growth, a 4% yr/yr hourly wage increase
and a slightly faster weekly wage take. With inflation
now low, the real wage has again moved up modestly. The
labor market remains tight reflecting the ongoing slow
growth of the labor force (0.8% yr/yr). The improvement
in the real wage since this summer reflects a move up in
the nominal wage from a 3.5%AR to 4.0% and a break from
the sharp fall off in fuels prices.

A firm employment picture is helping to cushion the effects
on the economy of slowdowns in construction and manufacturing
output. An improving real wage is a decent leading indicator
of consumption growth. No guarantees obviously, since
confidence needs to hold up so that consumers do not seek to
bank all of the wage improvement.

Leading Indicators

The leading indicator sets I follow are consistent with the
notion that the economy should continue growing, but the
data is mixed with regard to the pace of growth. The broad
services sector seems to be gaining some momentum, while
construction and manufacturing show no turnaround yet,
reflecting inventory excess. On balance, it looks like more
slow-go ahead.

To see a view of the outlook for global economic growth
based on a weighted compilation of purchasing manager
reports, click here.

Thursday, December 07, 2006

Stock Market

The intermediate overbought condition of the market I
have been discussing in recent weeks has eased slightly
but remains very much in force. Since I give this
kind of overbought six to eight weeks to work off, it
looks like the caution light could be on until year's end,
barring a sharp sell-off that is tightly time-compressed.
Now, my primary indicators are proprietary internal
supply / demand measures, but the weekly chart of the SP500
shows the overbought in more conventional technical terms.
For a view of this chart, which features RSI and MACD
indicators, click here.

Friday, December 01, 2006

Stock Market & Other Thoughts

In a Nov. 13 note on the market, I opined that it would be
ripe for a correction this week reflecting the very low
level of selling pressure. Exceedingly low selling pressure
reflects investor ebullience and an overbought condition.
Instead, we got volatility and a slight decline week over week.
So, from my perspective, the market still needs a breather.
It can come with a sharp correction or a couple of weeks of
range bound movement. I am looking for developmet of a better
balance between advancers and decliners.

This week revealed increased player apprehension regarding
prospects for an economic "soft landing". Investors were jostled
by negative construction and manufacturing data as well as a
slow early-mid November showing for retail sales. To have a
soft landing this time out, the benefits to incomes and non-
energy corporate profits from a marked deceleration of inflation
need to kick in on the spending side to arrest faltering
demand before it hits employment and confidence. I have not
abandoned the soft landing scenario yet since the regenerative
capabilities of the economy are still intact, especially the
positive liquidity picture. There is no squeeze on.

Last weekend, the first Siberian Slammer engulfed most of Alaska
in below zero weather. The Slammer has moved east and southward,
sending temps down along its path and helping crude oil to kick
off a seasonal strong period with a 7% price gain. This too is
a nettlesome issue for stock players since it's too early to tell
how strong an oil seasonal we will get. It can help energy issues
but it can impair the market's p/e and economic confidence if it
gets too zippy to the upside.

My SP500 Tracker suggests a market of 1425 based on near term
earnings and inflation prospects. At a current discount of 2% to
the Tracker, the market has not caught up with the acceleration
up in fair value that came with the break of inflation pressure.
Moreover, since an intermediate term overbought has developed
in the "500", the market could lose more ground to the Tracker
over the short run. We'll see.

Tuesday, November 28, 2006

US Dollar

The dollar dropped sharply in FX late last week, reflecting
a sharp rise in the Fed's portfolio through repo activity.
The primary dealers who handle FOMC orders are also major
FX market makers. So, the dealers are anticipating the Fed
will now go on to provide additional, needed liquidity for the
holiday season. I have pointed out over the course of the
year that the Fed would need to be poised to provide
liquidity should business credit demand fall off. Now
data show a flattening in mortgage generation and a sudden
$12 billion dip in C&I loan demand. In addition, currency
and checkables in the system have been running at low levels.
To round out the preamble, dealer FX earnings help pay the rent,
and dealers count on some volatility in the dollar to make it
happen. Dollar volatility has been restrained this year until
lately, and the dealers are pushing their advantage.

At present, the Fed, as most economic observers, sees slow
economic growth in this quarter followed by a recovery back
to 3.0 - 3.5% growth as 2007 progresses. Moreover, since
there has not yet been a decisive break in the uptrend of
inflation less commodities prices, the Fed may provide seasonal
liquidity for the current holiday season in as measured a fashion
as it can.

The dollar is headed to oversold levels, but it can clearly go
lower. In fact, at 83 and change, the $USD is only a tad over 3
points above major long term support at 80. I do not have a
strong view of whether the dollar will fall to long term support,
but I suspect if it does, the test would receive tremendous
attention, as a decisive break below support would excite traders
and foreign holders of dollar denominated assets. For a $USD
chart, click here.

Tuesday, November 21, 2006

Gold -- Further Thoughts & Conjecture

This article is a supplement to yesterday's post on the
gold price.

Let me start with the macro-indicators I follow to track
gold. First is the activity of the Fed's Open Market Committee.
The Fed's Treas./gov.related/repo portfolio determines the
growth of monetary liquidity. Growth of this portfolio is an
important precursor of inflation and the direction of the US
dollar. From 1998 through 2004, the FOMC portfolio compounded
at a 9.2% annual rate. That was rapid and strongly inflationary
growth. It set up the trashing of the US$D and helped trigger
the bull market in gold. Since the end of 2004, the FOMC
portfolio has compounded at a low 2.8%. So the Fed has been
tightening up on monetary liquidity. For the entire 1998 -
2006 period to date, the portfolio has grown 7.2% annually --
still on the high side -- but the inflation potential is
coming down and the case for a stable US$D has improved.
One reason gold tends to do well late in each calendar year
and early into the next is the fact that the Fed tends to
add extra liquidity to the system for the holiday season.
That has yet to occur this season.

The second main factor I follow is a broad composite of
sensitive materials prices. With global economic recovery and
then expansion, this index has moved up sharply since 2002
and is still holding a firm uptrend. However, this industrial
commodities composite has been flat since the spring of this
year mainly reflecting a slowing of economic growth. The index
does have a moderate seasonal bias favoring late autumn -
winter. So far, the composite is treading water.

The oil price is the third major factor I track regarding gold
as it is an inflationary linchpin. As you know, oil has been
retreating since this summer. The oil price has a strong
seasonal component favoring December - February. It remains
to be seen whether the first good cold snap will trigger a
significant price rally.

I would have to say that the gold price has diverged markedly
from my composite macro-indicator in 2006, the retreat from
the blow-off May high notwithstanding. With the recent rally
in gold, that divergence is accelerating again. Now, since
there is abundant historical evidence documenting the
occasional high volatility of gold, no one can say this
current seasonal rally will not be fulfilled. I would say
to watch FOMC activity, and how oil and sensitive prices hold
up if you are long, since I think there is $100 - 120 per oz.
downside price risk.

As mentioned yesterday, gold enthusiasists with a geopolitical
bent might do well to watch the current political struggle in
Lebanon. Today's assassination of Pierre Gemayel only
underscores the growing instability in this small but critical
corner of the world.

Monday, November 20, 2006

Gold Price -- $621oz.

The long term price uptrend dating back to 1999 remains
intact. The gold price price became hyperextended at the
outset of this year. The price has corrected substantially
since the May cycle peak of $734oz., but the hyperextension
uptrend still appears intact. To get back into the long term
channel, gold now would have to drop a little inside of $560.

The market has held support well at $575 so far in the second
half of 2006, and this has led traders and mavens to regard
the normal November - February period of seasonal strength in
gold as an opportunity to add to positions in the early going
(see chart).

My micro fundamental model still has the equilibrium gold price
at $470. The macroeconomic price model remains in an uptrend
dating back to year end 1998, but has been flat for six months
and continues to suggest a gold price only in the range of
$500 - 520. The indicators show a modest increase in monetary
liquidity, flat sensitive materials prices and a drop in the
oil price. So my reading of the fundamentals do not yet support
a rising gold price short term. At this point the analysis suggests
that if you want to buy gold for the short run, you may have to count
on other seasonal players to join you.

There is a complicated geopolitical tension situation slowly
unfolding in Lebanon as I recently discussed. That might be worth
watching (see note of 11/13).

Tuesday, November 14, 2006

Liquidity Situation

The Fed has been slow to provide incremental monetary
liquidity to the system for the forthcoming holiday
season. So far, the Fed has been wary in view of
continuing very strong bank loan growth. The real
estate loan book of the banking system continues to
grow at close to 10% yr/yr as banks pick up residential
re-fi business and enjoy strong demand for commercial
real estate mortgage and development needs. Moreover,
despite the economic slowdown, commercial and industrial
loan demand has remained very brisk, now reflecting the
sharp rise in order backlogs for long completion cycle
real estate and commercial aviation projects. Even
HELOCs, or home equity loans, have accelerated after a
lengthy quiet period. Banks have also added moderately
to Treasury positions as well. Overall, the larger
measures of bank funding have grown 9.1% yr/yr in aggregate.

When broad liquiidity growth exceeds broad economic growth
as it has been doing in recent months, some of the excess
tends to find its way into the stock market, as it has this
time out. I have to admit that the working capital needs
for the long completion cycle projects caught me by
surprise, leaving a significant extra fillip to excess

Monday, November 13, 2006

Two Notes


The stock market is slightly overbought short term and
is manifestly overbought for the intermediate term (6 -8
weeks). The SP 500 could well move up in the recent hesitant
fashion for another 10 -12 trading days, but by then a
correction will be well due. I say this because my six week
selling presure gauge, although trending down, is at low
levels reflecting a powerful advance in the NYSE cumulative
a/d line. This is a caution flag as regards the next
couple of weeks.


The pro-Syria ministers in the Lebanon cabinet have taken
a hike as Lebanon's leader Seniora prepares a legal bill
to pursue the alleged ringleaders of the Hariri assasination.
One of these guys is Assad of Syria's brother and another
is his brother-in-law. Hezbollah has suggested it could
take to the streets in protest and the Christian and Druze
contingents are openly angry with Nasrallah and the Boyz.
The UN troops south of the Litani river have a heavy
French contingent and Chirac remains coldly furious over the
killing of his close buddy Raffik Hariri. Syria will be
put out about all of this and the long distance puppetmaster
Iran may also have plans to deflect Lebanon. Nasrallah
in particular will be under pressure to shine as the jack-
in-the-box troublemaker after the fiasco he precipitated
this summer. This is a sensitive area and a sensitive time.
Be alert.

Wednesday, November 08, 2006


GWB's runaway plutocracy has been lassoed by the public.
They have sent in the Dems to be a counterweight and to
probe the administration's conduct. Both parties have
power now, particularly if the VA senate seat holds up
for the Dems. The voters in their wisdom have created
a horse race for 2008. The pundits are left to analyze
it all to a fare thee well.

What is left unanswered is what kind of political shape
the public is in. Folks across the fence have become so
antagonized and frustrated with each other that talking
politics and political ideas has become a no-no. Too
many people out there have become closeminded and that is
a bad thing, as Martha might suggest.

I'll feel better when people start talking again about
these issues and when politics can return as a fit
subject in the community. The great divide started with
the Johnson / Nixon years and has widened and intensified
ever since. We are at the point where it is sensible
to ask whether differences on the major issues are so deep
that they cannot be reconciled. If so, that would be a
bitter and miserable outcome.

While the parties duke it out in DC and try to gain
ascendency, I'll be watching to see if folks can be moved
to sit around the table and again discuss the issues
in a context of all realizing we are in the same large

Sermon over.

Friday, November 03, 2006

The US Dollar

I traded currencies over the 1975-1980 period. I
stopped because I had more pressing priorities. I did
alright with it, but it often gave me a headache and a
strained bladder because it was not smart to wander
away from active screens. Globally, ForEx is one of
the biggest games in town and has become ever so

I will not be returning to trade, but the subject of the
dollar is interesting. My view of the dollar is too
simplistic for the average ForEx whiz, but thinking about
it rounds out the view.

To me, the dollar retains value if a dollar saved earns a
decent premium over the rate of inflation here and if the
Fed is not printing too much currency. Regarding the latter,
I watch FOMC activity and the monetary base. The FOMC has
been stingy for months now, and with a 91 day T-Bill yield
of 5.1% against an inflation rate now around 3%, the dollar seems
ok to me. I think the record will show the dollar tends to
hold its value when there is a decent real risk free rate
available. The dollar tends to fall when the Fed accelerates
the growth of the basic money supply and when the T bill %
falls relative to, or worse, down through the inflation

It is obviously important that monetary policy should protect
the value of savings, and provide that stability through time.
Deviations should be brief and only reflect the need to counter
significant economic risk.

Many observers believe the exchange value of the dollar must
fall sharply to reflect our large and growing deficit on
current account. The simple idea being that the world is
approaching a point where there are so many dollars offshore
that the dollar must eventually fall relative to other
key currencies as well as to gold -- sort of a hefty discount
for excess. Surely the dollar should fall in relative value
if it is poorly maintained at home. Whether the exchange
value should plummet even if we maintain a good standard at
home eludes me.

But, since a fair number of visitors to this site are currency
players, I'll stick my two cents worth in on occasion.

Employment Situation -- Observations

Based on the employment report through October, the
labor force grew 1.3% measured yr/yr. That represents
slightly faster growth than in the recent past, but it
is rather slow. This modest growth limits US economic
potential, and with more Boomers set to retire in the
years ahead, growth of the labor force will remain
constrained. Importantly, the slow growth of the labor
force also takes pressure off the Fed to provide economic
stimulus and leaves it more leeway to attend to inflation.

Growth of civilian employment has accelerated in recent
months, and was up 1.9% yr/yr through October. the service
sectors have strengthened, as falling fuel costs have led
to stronger bookings, particularly in the growing export

With employment outpacing the growth of the labor force, the
unemployment rate has dropped to 4.4%. This is low, and signifies
a tighter labor market. Because hiring has picked up nationwide
as the economy in total has slowed, productivity growth has slipped
and unit labor costs have accelerated. Corporate profits have
still progressed nicely, because pricing power has improved.
Profit margins may not fare as well in the months ahead, because
inflation pressures have receded and pricing power will follow
suit. On the plus side, wages are rising around 4% yr/yr, and
with less inflation pressure, basic consumer purchasing power
is improving quickly. In all, wage earners can probably sustain
real economic growth of about 3%. That represents the strongest
reading in a number of months.

Note that I have referred to employment data from the BLS monthly
survey of households in preference to the payroll data. The
former is far more fresh and tends to lead the latter.

Wednesday, November 01, 2006

Stock Market

As mentioned in posts of 10/13,10/16 and 10/24, the
stock market rally had become overbought and mildly
overextended as well. The overbought is now in the
process of being corrected.

The rally reflected a recovery of the market's p/e
ratio as investors began to factor in a deceleration
of inflation in an expanding but slowing economy.
But since the 10/26 interim high, the market has
weakened as evidence has accumulated that the economy
is slowing more rapidly than expected. This provided
a nice rationale for a bout of profit taking.

I have cautioned about a slowing economy for some
months as have most observers. The ISM report
for manufacturing supply managers released today
showed a drop from October's 52.9 to just 51.2%. This
confirms sluggish manufacturing. Readings below 45%
often signify recession. So the index has a fair way
to drop before a downturn would be an issue, but the
downtrend in this index has reached a point which has
induced jitters in the market. Also of interest here
is the fact that the Fed has often cut the Fed Funds
rate when this ISM index has dropped below 50%. If
the next reading of the index in early Dec. drops
below 50%, talk of a Santa Claus rate cut will no
doubt perk up and it would be interesting to see how
the Bernanke Fed might react.

For now I am stuck with a continuing expectation of
slow growth as the leading indicators I follow have yet
to show the kind of break that would suggest something more
serious might be in store.

That leaves me with the view that we are merely witnessing
the unwinding of an overbought situation.

Tuesday, October 24, 2006

Monetary Policy And a Stock Market Comment

Most everyone expects the Fed will leave the Fed Funds
Rate unchanged at 5.25% when the FOMC winds up a two day
meeting tomorrow. This time, the fundamentals the Fed tracks
most closely line up to support leaving the FFR% as is. I
doubt the staff at the Fed was happy to see the Board go
for the pause as early as It did, but the fundamentals have

The breadth of short rate sensitive economic growth experienced
a cycle peak in mid - 2004, just as the Fed elected to raise rates.
The deterioration of breadth -- number of industrial sectors
encountering slower growth -- has been more gradual than in prior
cycles when the Fed was raising rates. This large component of
the cyclical economy is now much closer to levels that would signal
the Fed it should reduce the FFR%. However, unless there is a sudden
steepening of the slowdown, the Fed may feel no compulsion to ease up

Looking more broadly, the Fed must contend with two factors. It
needs to make a guesstimate whether the economic effects of a
protracted but gradual round of tightening have been fully
reflected in the economy, and it also needs to study to what
extent the sharp recent deceleration of inflation may engender
growth via a boost to real incomes and confidence. Finally,
since available data indicate continued very slow growth of US
productive capacity, the Fed needs to factor in a longer range
inflationary bias to the economy.

The growth of monetary liquidity has all but halted since the
summer. The Fed has tightened on the liquidity front to counter
the acceleration in growth of credit driven liquidity reflecting
strong bank lending expansion. All well and good, so long as the
central bank remembers to reverse course if and when credit growth

The stock market is slightly less overbought in the
very short run, but is also now overbought on my six to thirteen
week indicators. Moreover the measures of sentiment I watch have
deteriorated as well. The trend is up but it is well recognized.

Sunday, October 22, 2006

Leading Economic Indicators

The leading indicator data sets I follow continue to
point toward slow growth for the US economy. New order
diffusion indices covering both manufacturing and the
service sectors are positive but subdued. The recent
volatility in the services sector new order index is
interesting, because the sector has been more stable
than the more intensely cyclical manufacturing sector.
It may well be that the run-up in the oil price
experienced from late Nov. ' 05 through mid - July
took a toll on profit margins and confidence in this
sector, where pricing power can lag rising costs.

Monday, October 16, 2006

Stock Market Update

The SP500 at 1369 is now not only overbought short term,
but is getting extended as well. There has been talk that
investment managers could be ready to chase stocks, but
there is no evidence from the tape to support the story.
If managers are going to maintain discipline, the market
will struggle over the next week or two. A sharp move up
from here would be the first tangible evidence that the
tight discipline is breaking down. Back in my heyday as
a chief investment officer, it was great to see 'em go up
when they should, but annoying when your guys and others
would start chasing, since that could bring unwanted
volatility down the road.

Friday, October 13, 2006

Stock Market Overbought Short Term

The SP500 has reached overbought levels for the short
run. If you are a short term player, then take note.
Bring up the chart here.

Monday, October 09, 2006

Stock Market Update

The market has worked steadily higher through the
spooky season. Investment managers have shown remarkable
discipline, not chasing the market when it gets 2.0 - 2.5%
above its 25 day M/A, and coming back in on the dips.
So the pace has been cautious and deliberate, and chief
investment officers have had little to yell about. It
remains a low volatility period, plodding along in a disciplined
fashion. Portfolios are being diversified away from
energies and commodities as the relative earnings performance
of these sectors appears set to lag the broad market.

The Fed is on hold as inflation momentum dissipates and the
economy falls into a slower growth mode.Investors are slowly
and deliberately coming around to accepting a successful
soft landing and are beginning to look forward to a strong
seasonal period spanning November through January.

The Democrats seemed to have gained some momentum in recent
weeks, but even if they capture one or both of the houses,
the market will settle for a gridlock scenario.

There has been talk of an October surprise all year. In the
early going, it was widely thought that Bush/Rummy would
bring troops home. The gold bugs remain firm that there could
be a pre-election raid on Iran, but that situation seems to be
processing through the rewards vs. economic sanctions route
for now.

My guesses for surprises are November events -- more troops to
Iraq and a possible Rummy resignation, coupled with more intense
fighting there. These events could raise concerns about the
budget and the US dollar and might disappoint the bond and stock

For now, I am stuck with the soft landing picture, but one with
possible fiscal complications later in the year.

Monday, October 02, 2006

Economic Indicators

A look at the varied sets of economic indicators I track
shows we should expect further slowing of growth, but the
indicators have as yet to experience the sort of downward
break that would herald a severe slowdown or recession. As
one might suspect, the coincident economic indicators are
starting to flatten out and lose momentum measured year over

The continuing rallies in high yield or junk bonds and in
intermediate corporates also indicate that investor confidence
in the economy remains intact.

Saturday, September 30, 2006

Gold Update

Gold remains in a long term bull market. Chartwise,
I view the metal as extended by about $50.

Gold has been trending lower on my weekly chart since
the $730+ oz. blow-off top in May. One would have to
allow that the big thrust up since July, 2005 has not
yet been defeated. That would occur if gold fell below
$570. over the next several weeks.

The weekly gold macroeconomic indicator has been trending
down since mid-summer and is now just slightly above
the yearend 2005 level. Weakness primarily reflects the
drop in the oil price over this period coupled with a
further tightening of Federal Reserve bank credit.
Despite the slowing US economy, the basket of cyclically
sensitive materials prices I also include has held up
well. The macro indicator now suggests a price of $500 -
510. for gold, down slightly from the peak $520. seen
earlier in the year.

I guess gold is holding nearly $100 oz. above the base
$500 indicated by the model because gold players are
expecting that a softening economy will push the Fed to
begin accelerating liquidity growth reasonably soon. At
the worst, the Fed will probably add liquidity before
long if only to underwrite the forthcoming holiday season.
There is no shortage of gold bulls still looking for a
big pop in the metal from a geopolitical crisis involving
Iran's nuclear fuels program. But that scene is quiet

October is often a weak month for gold on a seasonal basis
as it is for oil. The gold market could still respond
positively if the Fed picks October as the month to ease up
on liquidity suppression for a stretch. The primary dealers
through which the Fed works are also the main market makers
in currencies. A weakening dollar may well tip off the gold
traders when the Fed does loosen up.

I view the short term outlook for gold as a coin toss now.
If you have an interest in gold or are considering taking a
long position, compare your return projections against my
view that there is clear downside risk up to a $100 oz. if
the positives you perceive do not pan out in the weeks ahead.

Wednesday, September 27, 2006

Oil Market -- How Is Your Luck?

Oil price bulls are breathing easier this week. Crude
has held support around the $60 bl. level and has bounced
to the upside, buttressed by rumblings of concern by OPEC
and the newly fashionable idea that the US has finagled the
crude price down temporarily to support Republican re-election
chances in November. There is also talk that Iran's nuclear
plans will resurface soon as a hot item that may spark some

Interestingly, crude is just entering its weakest seasonal
period. Moreover, seen in a wider time frame, the outlook
for crude supply / demand is not favorable for the bulls
without incidents that might trigger panic buying, as inventories
remain very high. I would also have to say that I believe
there is better support in the low to mid $50's than at $60 bl.

But, oil is oversold and we cannot begrudge it more in the way
of a bounce. Over the next couple of weeks it could go to the
$67-68 area without violating the downtrend in place. As I
say, "How is your luck?".

Saturday, September 23, 2006

Falling Knives -- Oil & Gas


The oil price has fallen sharply since the panicky
hedge buying ended in late June. the powerful and
dynamic uptrend in place since 2003 has been broken
decisively. Cover stocks are at or near multi year
highs and there is fresh supply coming onstream in
2007. However, capacity utilization at the wellhead
is still running high.

It is a new ball game, and players need to adjust
accordingly. There is substantial trend support now
in the low to mid $50s per bl. and if oil stays on
the weak side, that would be the next interesting area.
As often as not commodities make spike bottoms as
opposed to lengthy basing periods, so traders need to
be mindful that a sudden turn around to the plus side
could mark a low. Let the falling knife fall if you
want to come in long and think now whether you want a
base to look at or whether you are willing to play a
spike with a stop under it. Barring some major new
event, the fundamentals will be fuzzily negative
reflecting the cover stock overhang and the headwind
of a slow economy.

Nat. Gas

Gas has collapsed from the late 2005 high of $15. mcf.
It is down nearly 70% and has caught hedgies in its
volatile clutches. There is very long term trend support
and several year base support in a range of $4.00 - 5.00.
There is a seasonally strong month straight ahead. There
is still a storage overhang. Let the knife fall. Think
through whether a spike up is for you if there is no
flag waving base. Recognize a drop to $4.00 would not
surprise any seasoned trader. Recognize also that a
bounce up to $5.50 - 6.00 mcf. next month would still
have gas in a bear market.

Best of luck.

Tuesday, September 19, 2006

Monetary Policy

The Fed is widely expected to keep the Fed Funds rate
steady at 5.25% at tomorrow's FOMC meeting. Based on
traditional rate setting data, a conservative could
still make a case for a higher Fed Funds rate. Data
available through early September show industrial
activity and business loan demand at strong levels.
Moreover, unit labor costs have accelerated sharply
to 5% yr/yr. So, if the FOMC elects to stay in the
"pause" mode, they will be continuing to work off
their economic forecast.

Reflecting the sizable weakness in broad commodities
composites, my longer term inflation indicator -- a
twelve month % ROC measure -- is about to fall below
year earlier levels for the first time since 2001.
From this perspective, the Fed is on sounder footing.

Fed Bank Credit and the monetary base have been flat
since May '06, as the Fed has wrung out Greenspan's
last hurrah, when he let Fed Credit expand at a
rapid 5% rate over a short interval in late '05 -
early '06. However, with the economy having slowed,
BB must be careful to cushion it with a reasonable
expansion of the Fed's portfolio to meet the holiday

Monday, September 18, 2006

Stock Market Diagnostic

With the moderation of inflation pressure underway, my
S&P 500 Market Tracker is accelerating to the upside.
By October, the Tracker could cross the 1400 mark on
the "500." The main reason is that the Tracker is
quickly translating more modest inflation into a higher
p/e ratio (the twelve month earnings estimate is running
a little below consensus). So the Tracker says the market
is adjusting to prospects for less inflation pressure
more slowly during this often nervous seasonal period.

The "500" is running modestly ahead of my monetary base
model. I interpret this to mean that investors are betting
on a benign monetary policy going forward. The monetary
base has been on the flat side since May, '06. Soon, the
base will be due for a seasonal expansion to accomodate the
holiday season, and the market appears to be anticipating

My dividend discount model has been in a strong uptrend
for several years reflecting the excellent 10% growth of
the S&P 500's dividend. The model's value trails that of
the "500", because over the long run, it seems too risky
to posit a continuation of 10% dividend growth. However,
the market is not at enough of a permium to this model to
warrant much concern now.

The premium of the S&P 500's earnings / price yield has
narrowed further relative to the "risk free rate" (91-day
T-bill yield %), but not enough to trigger a warning.


Investors are counting on a continuation of good progress
for earnings and dividends through 2006, and are betting the
Fed will not take action which could damage the market.
Investors are also more cautious about the degree of
deceleration of inflation in the short run, which is
holding back the market.

Long term, investors are exhibiting no caution about the
prospects for earnings and dividend growth, but such
lack of caution is not yet overdone.

Friday, September 15, 2006

Economic Comment

As expected, the US economy continues to show signs it
will slow further. Measured yr/yr, the $ value of
production continues to rise faster than does consumer
spending. Inventory accumulation although still moderate
is accelerating. This all suggests further moderation of
production, a headwind for materials prices and a
deceleration of profits growth. The latter should be more
pronounced in Q4 '06, as last year's Q3 results were
hurt by Katrina and Rita.

The production side of the economy has been growing faster
than has the broad measure of liquidity (my M-3 proxy). This
liquidity deficit has constrained the stock market. Over
the next several months, the real economy may well require
less liquidity, leaving a positive residual for the stock
market. This does not assure a stronger market, but it would
certainly not hurt.

The yr/yr% measure of the CPI has dropped through its twelve
month moving average, confirming a moderation of inflation.
Moreover, the sharp decline of fuels and some key materials
prices so far this month reinforces the idea.

Thursday, September 14, 2006

Stock Market -- The Seasonal Nasty Is Here

Investorus Nervousa is at hand. The symptoms can last into
early October. This is one of the more delicate times of the
year, so we'll see how the current rally holds up against
the usual case of the September Willies.

Monday, September 11, 2006

9/11 -- Remembrance After All

It is the pensiveness and forbearance of people in the
greater New York area that you most notice on 9/11 days.
We go about our business, but we know there are thousands
of people in our midst who are brimming with grief. We
do not know who as we mix with all the strangers around us.
We give everyone a wide berth. There is silence on this day
even with everyone at work, the kids in school, all the
stores open. And even if we are free of immediate loss, we
think back to that shimmering late summer morning five
years past. We have moved on, but the shock has not worn off;
each anniversary brings it back along with the sadness and
for most, the deep anger.

Going forward, it is that anger that most concerns me. It is
very powerful in us, but subtle. Perhaps it was exploited by
GWB to move the country to attack Iraq. I do not know. Ask him.
What I do know, as I read about how foreigners have lost their
regard for us and how we are seen as the primary danger in the
world, is that they too sense the anger. But, they underestimate
it, for they have seen only the wrath of an insouciant, spoiled
dilletante who inhabits our White House. They have not seen the
America I know lash out in earnest.

So on this day of quiet remembrance, it my hope that time will
pass peacefully enough to allow the fury within to dissipate and
that our enemies will not underestimate us......

Thursday, September 07, 2006

Oil Comment

The oil market is trading well down from the $70-72bl
needed to sustain the powerful uptrend underway since 2003.
As discussed prior, this is a weak seasonal period for oil,
but the dip is a reminder of the speculative arc of pricing
over this period, as players anticipated hurricanes and
varied geopolitical difficulties seen as bullish for oil.
We may get the storms, both in the Gulf and with Hurricane
Khameini, but take this little dip as a reminder that with
oil cover stocks at multi year highs, processors will
crush the market if they cut back further on disaster hedge

The weekly chart has turned bearish, taking out support running
back into 2005. Click.

The monthly chart I have attached needs some compression to show
perfectly how oil has just come off a parabolic up extending back
to the late 1990s when it was a mere $10 bl. This chart also suggests
that oil needs a natural or geopolitical disaster to return to
that powerful uptrend. Click.

Tuesday, September 05, 2006

Stock Market -- Seasonal & Technicals


Historically, the period that runs roughly from post-Labor
Day through the end of October is one of stock market
vulnerability. Knowledgeable market players know this all
too well. It is an edgy time when strategists can even
pressure themselves to look for negatives or to overemphasize
minor ones. In this way, they look good if the seasonals
hold to form. In a like manner, many investors and traders
tend to adopt a more critical or stand-offish attitude. To
boot, there are players out there who think the well respected
four year cycle low, "due" in 2006, has not played out yet.
Occasionally, the seasonal lore has weighed heavily enough
to create a self-fullfilling prophecy.


The technical view as I see it is not at all so bleak and is
out of synch with the seasonal view. I have to affirm that
the market is mildly overbought short term on price level,
and moderately overbought based on my A/D oscillator. But,
these readings are not at all ominous. As I read the tea leaves,
the market is in an uptrend that can last into 12/06
reflecting a positive turnaround underway in key internal supply/
demand factors coupled with an uptick in my longer term
momentum measure. I see the SP500 eclipsing the 1326 interim
peak established in May and eventually moving up to challenge
trend resistance of 1350 - 1375 later in the year. I also
suspect that as the rally matures, there will be a strong
albeit temporary rotation back into the small and mid cap

This piece can serve as a technical companion to last week's
"Out Of Synch" post (8/30).

Wednesday, August 30, 2006

Out Of Synch?

My view for some time has been that we would have a period
of slower economic growth and lower inflation over the 2nd
half of 2006. Inflation potential has diminished significantly
although you cannot take it for granted, since the acceleration
of inflation in this cycle has been driven by commodities prices,
which are inherently more volatile than the broader economy. I
foresaw slow economic growth but no recession in the cards.
In the US, recessions begin after the economy has hit effective
capacity, overheats and undergoes a liquidity squeeze engineered
by the Fed and carried out by the banks and credit markets. No
such conditions hold sway today. There is still idle capacity,
inflation is set to cool and the banks have money to lend.

As expected, the leading economic indicators have weakened, not
enough to signal a downturn, but enough to raise eyebrows. My
view has been that lower inflation would boost real incomes,
confidence and spending before the ax fell. The inflation
primarily reflects hoarding and not overheat. I am
staying with this view and will sweat it out for a while.

To compound my felony, I have posited that 2007 would see a
stronger economy, re-ignition of inflation, and an end to the
"pause" period by the Fed. Next year is a between elections year
and may be an ok time for the Fed to go after inflation further.

Unlike most observers, I expect the stock market to progress in
a reasonably steady manner through the end of this year into the
beginning of 2007 before a top of consequence ensues and the
broad market falls by 15-20% as the environment turns hostile.

The more standard view of the market's prospects is for a rather
weak September and early October followed by a rally of substance
that could carry well into 2007, if not beyond.

One lovely thing about this business is that you get to see whether
you were right or not and to what extent.

I wrote this little screed because it was on my mind and I knew
it would bug me every time I sat down to write something. I am
going to let go for now and re-visit the projection around the
end of the year.

Thursday, August 24, 2006

Geopolitical Tension Eases

The Iranian response to the UN Security Council package
re Iran's nuclear enrichment program was accompanied by
wide ranging war games in Iran and not further provocation.
A round of diplomacy may lie ahead as neither side has
definitively closed the door to further discussions.
The tenor of discussions on both sides suggests each is
laying the groundwork to blame the other if it winds up
that Iran moves on with its enrichment activities and faces
sanctions of some consequence as a result. However, no
resolution of the issue is likely right away.

The UN must accelerate efforts to bring a large multinational
force on board in Lebanon to defuse further the tension between
Israel and Hezbollah. So far, both sides are acting with
reasonable forbearance.

My intent is to get back to trading.

Tuesday, August 22, 2006

Oil Price ($72.65 bl)

The foiled terror plot to blow up in-flight commercial
aircraft scheduled for intercontinental transit from
London to the US created concern demand for J-9 fuel
would fall sharply and turned a normally seasonally
strong month into a weak one for oil -- at least month
to date.

The crude price has bounced this week from an oversold
and must hold $70 - 72 over the next month to maintain
the fierce uptrend underway since the spring of 2003.
Crude has also dropped inside the upper channel line
for its advance running back to 1999. Crude has had
trouble holding above that latter line for long since
the year 2000. Importantly, the issue of whether crude
can maintain the super strong three year trend or will
slide back into a much broader trading range could
well be decided over the next two months.

From a long term perspective, the seasonal outlook for
crude strongly suggests weakness from now through the end
of October. However, that could obviously change if the
US hurricane season spawns a bad one that damages
production or if Iran and the UN Security Council tangle
badly in the weeks ahead. The point here is that some
special event or series of same will likely be needed to
keep crude strong through October.

Wednesday, August 16, 2006

Envisioning Goldilocks

The stock market as well as bonds are buying into The
Fed's view of a slowing of economic growth coupled with
less inflation pressure. I focus on stock market factors in
this comment, as I am still not interested in bonds, which
I see as overvalued.

My SP500 Market Tracker shows the following readings for the
SP500 (now 1295):


The Tracker did catch the spring dip and the subsequent recovery
in the market. The model has steadily rising profits over this
period with the volatility entirely explained by changes to the
yr/yr CPI%. With the sharp drop of the CRB Commodities Index over
the past 5 days, August is at least off to a good start for a
favorable inflation reading.

By my analysis, the fitful rally underway since mid-June primarily
reflects short covering and the expenditure of portfolio cash
reserves. My broad M-3 equivalent money measure is up 9.0% yr/yr
through July, while the yr/yr change in the $ value of production
is up 9.2% over the same interval. Although this has been a good
environment for profits and dividend growth, the real economy has
drained liquidity from the financial markets. The bottom line
is that the stock market likely needs both slower growth and
inflation to sustain an uptrend.

Moreover, if the M-3 equivalent measure begins to lose steam, The
Fed will have to move in quickly to provide monetary liquidity to
avoid a squeeze. An easy way to turn a soft landing into a harder
one is for the Fed to be late with this step.

Inflation in the new century has been driven by commodities prices,
especially fuels. Because commodities are so volatile, stock
players need to remember that changes in the levels of commodities
composites can quickly add to or diminish stock values. Oil has
dropped about 10% in price over the past month. It is oversold in
a seasonally strong period at present, so stock players have to
watch it closely. Note, positively, that since the production side
of the economy has been growing faster than consumption in past
months, inflation does face a headwind until production and
consumption come into better balance.

The earnings / price yield for the SP500 is now 6.3% This compares
to a 5.1% yield on the 91-day T-bill (risk free rate). The spread
is positive -- normally good for equities -- but rather thin. So,
again we see the importance of maintaining reasonable growth coupled
with more progreess in reducing inflation.

The yield curve is flat. This does not bother me as long as the banks
are lending, and lending they are at a good clip. Note though that in
an economy where production growth slows, credit demands moderate
and banks get edgier about lending. This brings us back to the point
made earlier: The Fed has to be ready to move on a slowing of credit
demand and liquidity growth.

The moral of the story is that engineering a soft landing which segues
into a "goldilocks" period is no mean feat. Recognize the elevated
risk potential.

Tuesday, August 15, 2006

Brief Stock Market Note

Strong rally today. My basic trend index, which measures
demand vs supply in the market, has not yet turned positive
so I am on the sidelines. Geopolitical risk remains high,
although a significant short term component of that risk
will settle out if the cease fire holds in Lebanon.

Hezbollah did its jack in the box routine to unsettle Israel
and do some strategic damage as well. It has been a bust to
date. They failed to lure Israel in to a guerilla style
battle in So. Lebanon, hit Haifa but no other strategic
targets, and now face a 30K man armed force which will
take up residence south of the Litani. Iran has pumped
about $5 billion into this operation over the years and
when it really needed Hezbollah to distract Israel from
Iran's nuclear program, Nasrallah and the boyz flopped.
Iran may hold Nasrallah's tootsies to the fire in the days
and weeks ahead, as it plays out its own nuclear program
cards. So, Nasrallah may get another shot short term, which
means this situation could remain live.

Thursday, August 10, 2006

Changing Tactics

The stock market did provide a profitable rally to trade
over the 7/18 - 8/3 period, for which I am thankful. But
my view is now more cautious for the short run. My basic
trend index -- which measures buying pressure net of
selling pressure and is not a price index -- has remained
in a waterfall decline since making its high on 5/9 of
this year. the main reason has been the strong down volume
behind the declining issues over so many days since 5/9. It
suggests a relatively steadily deepening oversold for the
broad market reflecting pressure on small and midcap issues
and positive rotation into the more narrow SP500. I have
no problem with a rotation toward big caps, but I do have a
problem when the key broad barometer I use does not confirm
a positive turn in the market. At this point, I think risk
a bottom and stay out of the market until my basic index
shows some authority to the upside. For reference, the
1700+ issue Value Line Arithmetic ($VLE), a non cap weighted
index, is a price index I like.

I am also happiest trading when things going on out there in
the world are not nagging at me. I am concerned about Iran's
adventurism in Lebanon and how It will express its decision on
the incentives vs sanctions deal re its nuclear fuels program
set for Aug. 22. My concern here is that Iran, now on quite
a geopolitical roll, will overplay its hand with consequences
not good. This is a personal decision and not one I would offer
as advice to others. I have no insider insights to share on
this, just a deep concern.

If in the interim the market gets itself into high gear one way
or the other, I may trust its wisdom and play. But for now I
am in cash and on the sidelines until the geopolitical faultlines
clarify some. I will of course keep up the blog.

Tuesday, August 08, 2006

FOMC Meeting

The several cyclical indicators that correlate best with
changes to the Fed Funds Rate all remain strong, although
growth momentum has either rolled over or is peaking. By
my reading, the FOMC should elect to raise the FFR% yet

Should the Fed elect to pause the FFR% at the present level
or perhaps signal a pause is in effect after one final boost
today, they would be operating more on an economic forecast
than on data in the can. Such a move would not be without
precedent, although the Fed usually prefers not to use a
forecast as its decision tool. The forecast that might drive
such a decision would be that the slowing of housing and
consumer spending is sufficient to lead to a slowing of
manufacturing and production growth coupled with an interim
peaking of capacitiy utlization and an eventual sharp
reduction in the growth of business short term credit demand.
These are realistic expectations, but one may have to allow the
FOMC leeway to seek a little more in the way of confirmation.

Monday, August 07, 2006

Gold Comment ($660oz.)

Gold has entered its strong seasonal period to reflect
higher commercial demand for the forthcoming holiday
and South Asia wedding seasons.

My macroeconomic gold price indicator, which went flat
for several weeks right after gold came off its May, '06
parabolic top, is again trending up, albeit modestly.
This model suggests a fair value for gold of $515 - 520oz.
With the global economy to slow further, the best bet
to keep the indicator trending up in the short run is
if oil, also in a seasonally strong period, continues to

In a 7/6/06 note on gold, I mentioned that gold would be very
overbought if it rose from its then current price of $633 up
to the $665 - 670 area. It did, and the profit takers came
in with a vengeance when the overbought was achieved.

With gold now in the $660 range on a rising 200 day M/A, the
upside limit goes to $685 - 690. First of course, gold would
have to push through last resistance up around $670.

Now that gold is off that parabolic run, traders are resorting
to more normal technical disciplines. This factor plus the
current elevated price of gold relative to fundamentals suggests
continued price volatility likely lies ahead.

Thursday, August 03, 2006

Stock Market

I started out the year thinking the SP500 would wind up
2006 up about 12% to 1400, and that progress to that mark
would be relatively smooth. I have been around far too long
to take projections of this sort too seriously, preferring
instead to re-visit them for diagnostic purposes.

Right now, the market is running about 4.5% behind the
projection on a straight line basis. Given moderate volatility
standards, that is no big deal. However, the diagnosis is
of interest. The economy and corporate earnings have proceeded
about as expected. Inflation has been stronger than anticipated,
with the prices of oil and gasoline the main culprits. This
latter development has resulted in some additional shrinkage
of the p/e multiple.

Now, the economy is slowing reflecting further weakness in housing
and sluggish consumer spending. No surprises there. With the
consumer and housing slow, the production and business service sectors
can be expected to follow suit. Yr/yr % earnings comparisons will
dwindle some in the second half of the year, but the chances for a
strong market would still be pretty good if inflation pressures
were to diminish. That would allow the Fed to pause rates and
would bolster the case for a significant bump up in p/e.

The strong trend of commodities prices during the current economic
recovery has added substantially to corporate earnings, particularly
in the areas of oil and gas and industrial materials. But this same
trend has also driven the inflation rate up, resulting in
retardation of the p/e multiple. As it now stands, the strong
price trend for the commodities market overall remains in place.
Now a downshift of inflation normally follows an economic
slowdown, and there are still five months to go in 2006. At the
same time, I would have to say that the tenacity of the push in
fuels and materials prices has been something to behold, especially
since bull moves in commodities can be easily tripped up by the
development of speculative inventory imbalances.

Looking toward 2007, I am still of the mind that a decline approaching
bear market proportions is in the cards. I am guessing that the Fed
will pause short rates before this critical November off-year
election, but that It will resume raising rates at some point
next year as the economy again strengthens and inflation pressure

Friday, July 28, 2006

Economic Comment

The flash GDP report showed the economy grew at only a
2.5%AR for Q2, confirming expectations for a slowdown.
Viewed yr/yr, the broad economy grew by about 6.5 - 7.0%.
This compares to yr/yr growth of dollar production of
9.0% and suggests there is inventory in the system
which could be worked off in the current quarter via
reduced production growth schedules. In turn, that may
take some pressure off industrial commodity prices, but,
it will also result in potential earnings shortfalls among
the industrial and commercial service sectors.

The stock market also took heart this week from a weaker
oil price, which reflects growing appreciation of how very
high cover stocks are.

But note that the US is just moving into a seasonally strong
period for commodities and energies, so even though a slowing
industrial sector can weigh on the commodities markets, it
in no wise follows that significant inflation moderation is a
done deal. Click here to see recent April - July lulls in commodities
price action.

Thursday, July 27, 2006

"On The Way.....Wait"

Grizzled army vets will recognize the expression above as the
communication by an artillery or rocket battery that a round has
been fired. Hezbollah / Syria / Iran are calling the shots in the
beleagured country of Lebanon at present. They likely have plans that
may scuttle the current round of negotiations regarding a ceasefire
between Israel and Hezbollah and open the way to further expose Israel's
vulnerability to attack from the north. I suspect Hezbollah may have
missiles that can be fired from well north of the Litani river and
which can strike hard well into the Israeli heartland. Such a development
would greatly increase tension and danger not only in Israel and
Lebanon, but beyond.

Iran bankrolls Hezbollah and is simply calling in markers -- "Time to
earn your keep." Syria is on Iran's pad, too and is in it for the revenge.
I believe Iran wants to show the West and others on the UN Security
Council just how much clout it can wield in the Mid-East. By putting
Israel in greater danger, its message is that it can cause profound
upset in this troubled region, and that the US and others must think
long and hard about the imposition of sanctions on Iran should it elect
to proceed with its uranium enrichment programs. In short, is it worth
a broad Mid-East war to sanction Iran?

Iran promised to respond to the UN sponsored package of incentives vs.
sanctions re its nuclear programs by August 22. That gives it a little
over three weeks to have Hezbollah further increase tension and peril
within the region. As Iran sees it, this will greatly increase their
bargaining power when it comes time to talk turkey on its nuclear

I lay this all out to highlight the potential for sharply increased
volatility in the capital and energy markets in the weeks ahead. All
players need to be extra diligent about positions and interests as
events unfold.

Iran accuses the US and Israel of seeking to remake the Middle East
in a way that suits them. What we are seeing is blowback from Iran
and Syria as well as Iran's declaration that it is now to be seen as a
very big player in the region. If I am right that Iran has a nasty card
or two to play prior to August 22, market players must be prepared
for another round of escalation should Israel and the US decide on a
strong reaction.

I hope I am wrong about all of this, but it just seems like straightforward geopolitical hardball to me. It need not end badly. Iran, with its additional
leverage could secure a deal acceptable to all in exchange for curbing
Hezbollah and working to cool strife in Iraq. But, since no one player
controls all the pieces on the board, matters can slip out of hand once
Iran puts its next strategic piece into play.

Monday, July 24, 2006

Stock Market -- Technical

As discussed in the July 18 post, the broad market is oversold
and due for a rally even though the basic trend is weak. Analysis
is complicated by the fact of rotation. Risk aversion has grown
since the May 09 - 10 market top. Players have moved out of small
and mid-cap stocks more aggressively than they have with the large
caps, as represented by the SP500. Through Friday 7/21, The SP
Midcap was 12.8% off the May '06 high and the SP Smallcap was down
13.9%. This compares to a 6.4% decline for the SP500.

Going into today, the SP500 is up modestly from its 6/13 low and only
mildly oversold in the short run. The weekly chart shows a deeper
oversold on a 6 - 12 week basis. The broader market is deeply oversold
across both the short and intermediate terms, with the NYSE TRIN at
a high 1.22 for the 60+ trading day span since the May top. This reflects
the compressed strong selling pressure in the small / midcap universe,
especially among the cyclicals, including business technology.

Going forward, the case for a rally reflects the strong oversold condition
of the broad market plus entry into a brief seasonally strong period which
could run out through US Labor Day (9/04). The SP500 could provide
continuing leadership, as the mood of increased risk aversion may not
reverse so quickly.

My primary indicators show a down market. Thus even if a tradable rally
is developing, it is simply unclear whether it would be durable enough
to reverse the downtrend. The work I do with NYSE breadth measures shows
that selling pressure has been trending up since early in the third
quarter of 2005, while buying pressure has naturally been trending down.
Since these volatile trends could extend for another 8 - 10 weeks before
resolving, I intend to be reserved about making market direction calls
beyond the very short term.

Tuesday, July 18, 2006

Stock Market -- Technical (SP500: 1227)

Back in April, I mentioned that the stock market looked best
suited to go sharply lower. In May, I put a guesstimate of
1200 as a low point for the SP 500.

I am not a sharp enough technician to know whether the market
will drop down to 1200 or not. My work indicates that the
market is weak and is growing progressively oversold. My
quandary is that my primary indicators are pointing lower,
but some key measures of oversold conditions indicate we are
very close to a tradable low.

So, as a guess, I'll go along with the idea of a low in the next
four to six trading days followed by a healthy rally.

At any rate, I am looking to go long, but since timing is not
my forte, I will wait for an upturn and some confirmation that
long is the right side of the trade.

Friday, July 14, 2006

Window Into Vulnerability

Like many others, I have been keeping up with the geopolitcal
developments of the past few weeks. There were no real surprises
until yesterday when a souped-up Katyusha rocket fired by Hezbollah
struck well into the port city of Haifa. That Hezbollah and perhaps
Hamas might now have even mildly upgraded weapons systems puts a
dangerous new spin on the Israeli - Arab conflict.

Israel will obviously want to re-establish buffer zones in southern
Lebanon as well as Gaza. Moreover It must make a fresh assessment
of its vulnerability to rocket fire, and It will want to probe
Hezbollah and Hamas positions to discern whether It may be
subject to other upgraded weapons. At a minimum, Israel will
want to establish large enough buffer zones to better protect
population concentrations. The hits on Haifa put the President of
Iran's recent comments about the destruction of Israel and Zion
into a more concrete context.

Of course, Israel always knew this day would come, when its
vulnerability to larger scale destruction would become more apparent.
To me, it adds a major new element of uncertainty to the usually
precarious mid-east military calculus.

Perhaps near term Israel can chase Hezbollah and Hamas far enough
away from its borders to secure its position and bring the
several hundred thousand Israelis up from shelters. Longer term,
Israel will have to look at how it might disable these two
hostile factions because allowing them too much proximity to its
borders could prove extremely dangerous if we are at the beginning
of an era when terror can bring heavier destructive payloads.

The easy thing for a veteran investment professional and trader like me
is to sound worldy about the current crisis and advise that we have
seen it all before and to be ready to jump on opportunities that may
come up as geopolitical tensions further rattle nerves in the markets.
But, critical differences arise from time to time, and we may have one
now with Israel in a tighter squeeze than usual.

I'll be lokking at the markets over the weekend, but I plan to study
the Israel vs. terror groups conflict with even more emphasis.

Wednesday, July 12, 2006

Banking System

The investment portfolio of the banking has remained on the
flat side over the past year, with banks concentrating on
expanding loans and leases. The big movers have been C&I
(business) loans and the real estate book, with both advancing
13.5% yr/yr.

With indices of mortgage origination and refinance down
substantially over the past year, it is evident that banks are
growing market share in the financing of real estate. C&I
loans have reached a level relative to the banks' investment
portfolio, where it may be expected that banks may begin to
size up loan opportunities more cautiously as system liquidity
has run down rapidly since mid-2004. Liquidity depletion is
not worrisome and has proceeded in a normal cyclical fashion,
but it is time for a "heads up" nonetheless.

Banks have funded the sharply expanded credit opportunities with the
sale of jumbo deposits -- up over 20% yr/yr -- and commercial paper,
which has increased by more than 15%.

The Fed has eased up on the brake for primary monetary liquidity,
having moved from substantive tightness through most of 2005 to
a more neutral stance. So far, I would rate this a sound move,
as demand for short term business credit can run down quickly
once an economic slowdown takes hold. Failure to anticipate
such a development can result in a painful liquidity squeeze.

Thursday, July 06, 2006

Gold Note ($633oz)

Both gold and oil are moving into strong seasonal pricing
periods that run from July into October. Commercial demand
for both strengthens into the autumn.

My gold macro indicator, which jumped higher last autumn,
has progressed slowly in 2006 and has been flat since the
mid-May blowoff top for gold. Since an economic slowdown
is developing and since the Fed has moved liquidity up
only modestly this year, the best bet for gold would be
a strong showing from oil and natural gas prices as we
progress into Fall.

I noticed in browsing various sites that bullish sentiment
for gold has jumped at an astronomic pace since the recent
quick bottom and upturn in price. The gold gurus have been
piling on to the bandwagon.

My micro economic work on the gold market puts fair value
at $450-460 an oz. The macro work puts fair value at $500 -
525oz. On a short term technical basis I have gold as strongly
overbought at $665-670oz.

Wednesday, July 05, 2006

Interest Rate Profile / Bond Market

By my nearly 100 year regression model of short rates vs.
the consumer price index (CPI), Fed Funds should be 5.75%
rather than the current 5.25%. The Fed is pricing off key
GDP account deflators which yr/yr have moved up to 3.0%
and suggest an FFR% of 5.25%. Since I believe the CPI,
despite its many flaws, is a more realistic inflation
estimate, I conclude short rates are still on the low side,
and provide a negligible incentive to save.

Based on data at hand, short rates should still be trending
higher. However, and as mentioned in the 6/29 note, such
may not be the case by the mid-August FOMC meeting, as the
economy is slowing. In fact, my bevy of cycle pressure gauges
are nearing breakdowns, signaling milder growth ahead.

The national yr/yr CPI through May is 4.1%, about the same as
for the New York metro area. With 4% inflation, there is little
incentive for me to buy bonds, and I have stayed away from this
market for over a year. With 4% inflation, I would like to see
a US Treasury at 7% instead of the current 5.27%.

The yield curve is essentially flat in the Treasury market. A
flat yield curve normally suggests a significant slowing of economic
growth is at hand. This is because a flat to inverted yield curve
signals a liquidity squeeze is developing and that credit
availability is coming into question. Such is not the case now.
The US economy is slowing, but credit remains ample. Thus the
flat yield curve represents not so much a dark view of economic
prospects as it does the opinion of the market that a moderate
economic slowdown will reduce inflation pressure and ultimately
allow the Fed to ease again. This is born out by the continuing
tight yield spread between top quality corporates and "A" rated
intermediate bonds. The forecast implicit in current bond yields
goes beyond what I would care to sign on to at present.

The long Treasury has been rangebound between about 4.25% and 5.50%
since 2003. The market has been very sensitive to the momentum of
production growth and the trend of industrial commodity prices over
this period. Accelerating production growth and rising industrial
prices have lead to rising yields, and decelerating production
growth and quiet or declining industrial prices have provided
the bond market rallies. We may be moving into a period of
lower production growth and quieter industrial pricing that could
last for several months. So, there could be a rally in bonds. I
doubt it will carry far if the Fed keeps short rates on a plateau
which I suspect is the course it will follow. A more powerful
bond price move could occur if the economic momentum decreases too
sharply, but my indicators do not suggest that drastic a slowdown
at this point.

Friday, June 30, 2006

Oil Market & Sector

The peak driving season is well underway in the US, and
afterward, in the autumn will come the heating oil season.
In keeping, oil has entered a period of seasonal strength
which can run late into autumn. The oil price bulls are
out in force and the stocks are drawing more enthusiastic
support from analysts and pundits. There's the hurricane
season to worry over and, just to make it interesting,
the heavies on the Security Council have asked Iran to
respond to their proffered basket of goodies vs. sanctions
proposal re Iran's nuclear fuels program by July 5.

The hurricane season is a case of que sera sera. Iran
reacted positively to the goodies, but has been stalling
on responding, so the first pressure point there in a while
comes up this next Wed. the 5th.

This seasonal period for oil may be interesting not only for
issues that may affect supply, but demand as well, as an
uptrending price may, at some point, trigger much more
vigorous conservation efforts which could well come on top of
slower global economic growth. Demand for oil has been
taken as relatively inelastic. Nothing could be further from
the truth. Folks everywhere now know that the real price of
oil has jumped and shows no sign of receding. So, if you are
long the oils and the service companies keep the demand side
of the equation in firm view.

Investment managers tend to sell decelerating earnings
Since oil stock earnings are very leveraged to
price, oil not only needs to rise in price this season, it needs
to rise a lot, say to $80 - 85 a bl. by late 2006 to keep the
yr/yr earnings momentum of the oil stocks at a high enough
level to maintain solid outperformance relative to the broad
stock market. That's another good strategic reason for you to
watch how demand responds to price.

To stay in the powerful uptrend underway since mid-2003, the oil
price needs to stay above $68 a bl. in the month ahead.

Now, a couple of charts. The first is a daily for WTI crude. Sure
enough, the bulls have kicked off the season. Note the nice upturn
of MACD, but note as well that the price is approaching a short
term overbought and important resistance. Click now.
The second chart is a weekly of WTI. The top panel shows the
52 week price momentum.

Wednesday, June 28, 2006

Monetary Policy

The FOMC is widely expected to raise the FFR% another 25
basis points to 5.25% tomorrow, 6/29. The cyclical case
for higher short term rates is still in place based on data
at hand. However, with the leading economic indicators
now signaling more modest growth ahead, a further increase
or hikes to the FFR% cannot be taken for granted beyond
this end-of-June meeting. The Fed will have a battery
of flash reports for economic activity in June to look
over at the meeting, and this fresh data can be expected
to color comments released with the rate decision.

On the liquidity front, the FOMC has tamed the Greenspan
volatilty in the Fed.'s portfolio and in the monetary base,
with both now trending in line with a shift of restrictive to
neutral. This is a favorable development from a tactical
point of view.

Tuesday, June 20, 2006

US Economy

Following the devastation of hurricanes Katrina and Rita
in the twilight of 2005, most economists posited a sharp
rebound over the first half of 2006, as business returned to
normal and large storm damage insurance and Federal Gov. funds
went to work. And, that's exactly what we got, with the
yr/yr dollar value of production rising to a strong 8.6%. The
Federal Reserve did not "mop up" any excess liquidity, but
the real economy did. With production growth rising faster than
capacity over most of this period, inflation accelerated, driven
by already high global operating rates for oil and industrial materials.

Unwisely, I suspect, analysts raised earnings estimates for both
2006 and '07, based on the strong showing of the economy over
most of the first half of this year.

The shorter term economic indicator sets I follow point to slower
economic growth over most of the rest of this year. Moreover,
my longer lead time indicators also point to moderation of
growth ahead.

I watch the trend of capacity utilization very carefully, because
that is a critical variable for the Fed in setting monetary policy.
In the wake of the 2001 recession, capacity utilization dropped
to nearly 74% by early 2003. Those very low readings were the
worst since the brutal washout of 1981-82, and reflected a steep
decline for US manufacturing. Since Q2 '03, the US operating rate
has recovered to nearly 82%, and if the recovery trend continued
as is, the economy would hit effective capacity and strong overheat
conditions by the end of 2007. The main or underlying reason has
been the slow growth of capacity in the wake of such a steep
recession for manufacturing.

A six to nine month slowdown for the economy would take some of the
heat off inflation potential. Moreover, capacity growth may accelerate
in the interim since producers may not want to risk the chance of
losing market share a year or two out because they have no new
capacity to meet a higher level of orders.

I think the scheme outlined above is pretty much what the Fed is
aiming for. To stay out of the political fray, the Fed may want to
pause raising the FFR% ahead of Nov. '06 elections. That would
give them 2007 to tighten further if need be, so that when the
2008 presidential election rolls around, they may again be able
to stay out of the political limelight.

My shorter term inflation indicators have softened in June, and
the longer term reading continues to show a moderate downtrend.
But these are volatile series, with a wide band of commodities
prices playing a major role. In this regard, it is easy to see
why the Fed has insistently jawboned the commodities markets in
recent weeks. Breaks in oil and other key materials would make
the Fed's job easier.

Tuesday, June 13, 2006

Just A Thought....

Well, the gold munchkins will not be calling Mr. Bernanke
"helicopter Ben", at least for a couple of weeks. And, Maria
Bartiromo, CNBC's sensuous, langorous reportress, may even
be having second thoughts about getting Ben all riled up
with her scoop about his feeling misunderstood concerning
the implications of monetary policy. The aftermath, of
course, has been the "Maria bears all" episode for the

Wait, there was a thought here. I got it. I suspect the main
target for all the tough Fed talk about inflation is the price
of crude oil. It is a primary capital input for many businesses
and when it inflates, the effects are infectious. The boys at
the NYMEX were planning a glorious run for crude this summer,
what with the hurricane season and Iran tripped out on its
show of power. Good for the NYMEX guys and the oil producers,
not so good for most of the rest of us. And so the Fed, knowing
the market is currently awash in crude, may have taken aim at
this market, hoping to scare folks away and induce a sell-off.
That would also help a little to unsettle Pres. Ahmgonnabebad of
Iran. Just a thought....

Sunday, June 11, 2006

Gold -- $608 oz.

Gold macro fundamentals turned up sharply as early as 1998
and were strong through 2005, save for the 2001-2002
recession period. The main factor has been the inflationary
growth of central bank credit, followed by the price of oil
which rose an unexpectedly strong 65% since the end of 2004.
I believe a temporary sharp jump in Federal Reserve Credit in
the wake of Hurricanes Katrina and Rita helped spark the recent
gold mania. Without good productivity growth in the US, China
and Japan during the current global economic expansion, US
CPI readings could be steady at 4.5% instead of the 3.5%

My gold macro indicators have started slowing in 2006, and
have not had anywhere near the momentum to support the parabolic
run in the gold price up to $732 oz. in May. As expected over a
$100 per oz has come off the gold price since then. The Fed
presently plans rather moderate liquidity growth, and global
system liquidity growth could be further constrained by
evidently growing liquidity tightness in Japan and the ECU.
Moreover, the US trade deficit has recently flattened out, which
crimps liquidity flows in emerging economies especially.

A major issue in the US concerns the continuing strong growth of
real estate lending. It should start slowing soon as housing, the
major sector, has been weakening. BUT, it has not shown up yet.
This keeps credit driven liquidity strong. The Fed has been allowing
basic monetary liquidity to inch up to counter an expected slowing
of the broader credit driven liquidity. This may be smart policy as
it will allow a smoother transition to a milder Fed policy once
private sector credit reacts to a slowing US economy. The growth of
the broad money supply has supported gold, but this may end as the
economy loses some more momentum.

On balance, the macro fundamentals suggest an eventual further retreat
for gold, perhaps down to the $525 - 550 oz. range. This may not
come immediately as gold has found trend support at $608 and is
heavily oversold short term. Moreover the hurricane season is here and
resolution of the course of Iran's nuclear fuels program remains
unresolved. Under circumstances of damaging storms and/or a decision
by the UN Security Council to reject Iran's position and impose a
program of economic sanctions, we could easily see spikes in oil
and petrol which might entice the gold players to run the market up
again. Finally, my macro indicators are cyclical and do not cover the
large grain markets. It's quiet there now, but you never know.

A short term bounce in gold is growing overdue. Since the metal has
not tended to make gradual tops or bottoms in this cycle, I have been
using the 5 day M/A against the 10 to tell me when a turn may be at hand.