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 !!!

Thursday, April 27, 2006

Oil Market

Oil rose to a record $75+ a barrel late last week. That is
close to 86% above its economic value in a balanced environment
with 3 million bd of capacity cushion. Cushion is negligible
reflecting contingency building of larger cover stocks by
processors, market participants seeking inventory profits and
non-oil market speculators.

The recent spurt in the price set off a political hullabaloo
in the US, and has set drivers again thinking of conservation,
as gasoline affordability has deteriorated rapidly. The crude
price has backed off to about $71.50.

In using industry fundamentals, I have not done badly at all on
guessing direction of the crude price, but the upswings have
been stronger than anticipated and the downswings have been weaker.

We are entering a brief seasonally weak period, and crude must
hold $64-65bl to keep the very sharp upturn underway since the
autumn of 2003 intact. The trend band for this May is $81-64bl
using late 2003 as a base and the longer term band is $70-38bl.

At my tender age, I am a conservative player and am effectively
priced out of this market on the long side above $45 a bl.,
just as I am priced out of gold above $450.

For a slightly different chart take on this market, click here.

Sunday, April 23, 2006

Interesting Profits Picture

My top down corporate profits model indicates strong S&P
500 operating profits for Q1 '06. Yr/yr sales growth
accelerated significantly from late 2005, reflecting a
rebound in output in the wake of the storms plus a
continued broadening of pricing power. Sales were easily
strong enough relative to costs to allow a number of
companies to show higher pretax profit margins. In
addition, oil price realizations also accelerated,
likely producung strong inventory profits for the
integrated producers. About one third of the SP500
companies have reported quarterly results so far, and
surprise has been positive by far.

Varied sets of leading indicators point to a slower
economy in the current quarter. Moreover, profits in
last year's Q2 were strong. So, I'd be a little
reluctant to jack up the estimates for the current
quarter even though The Street may do so. The oil
price will remain difficult to project. Over the
past eighteen months the yr/yr price change has
varied from 15% to 60%.

Tuesday, April 18, 2006

Credit Driven Liquidity

The Federal Reserve has achieved some success in slowing the
growth of its prime focus monetary aggregates M-1 and M-2.
Part of the reason growth of these aggregates has slowed is
that banks have simply changed emphasis in how credit growth
is being funded.

Bank lending and leasing has been growing far faster than the
economy over the past eighteen months reflecting a sharp
acceleration of commercial and industrial loan growth as well
as a continued strong real estate loan book (mortgages and
development loans). Although growth of home equity loans has
slowed sharply, yr/yr growth of the real estate loan portfolio
tops 12.0% and has been trending higher so far this year.

Of interest now is that evidence of a slowdown in the housing
market has begun to accumulate. Should this continue as is
now widely expected, the real estate component of credit
demand at the banks will begin to slow, and this will reduce
the growth of bank funding, since the real estate portfolio
is by far the major component of the banking system's loan

The Fed has to be on this like white on rice, because a slowing
of bank funding growth without a corresponding easing of
basic monetary liquidity can establish conditions that may well
lead to a liquidity squeeze and consequent damage to the
economy and the stock market.

Most real estate loans are still longer term, and it is the C&I
loan book that the Fed watches most closely in setting the Fed
Funds rate. The book of shorter term business loans is still
zipping along, and when momentum in this category rolls over,
the Fed normally stops tightening. Now, the Fed has to watch
both categories closely, because too rapid a slowing of the
growth of the real estate book could produce an unwanted
drag on liquidity. Time to watch all of this more closely.

A primary funding vehicle for banks is commercial paper issuance.
This category, which includes collateralized or asset backed
paper has grown rapidly over the past two years. The Fed
regularly releases data for the commercial paper markets on its
web site, and for a nice update from Haver Analytics click here.

Saturday, April 15, 2006

Monetary Liquidity

The two precursors of basic monetary liquidity in the
US are the Adjusted Monetary base and Federal Reserve Credit.
As you know, they are both very close in content. Both have
flattened out since late January, 2006.

These series are fallible indicators of the markets. They work
best when interest in monetary policy is intense, as it has been
since mid-2004. It is not easy to trade this data, as the
primary dealers on the Street experience the data as order flow
and can act on it the fastest.

Interestingly, the big cap stock averages have returned to mid-
Jan. ' 06 levels. One plausible interpretation is that players
are getting a little edgy about monetary policy following the
major liquidity infusion which ran from late Oct. '05 through
early Jan. '06. In short, some players are now less enthused
the Fed will stop raising short rates right ahead.

The US Dollar has also fared a little better since the Fed took
its foot off the gas in Jan. In fact, $USD fundamentals are
currently nicely positive although there is concern that
the dollar will prove vulnerable once the Fed stops raising

The gold market normally gets jittery when the Fed steps back
and lets its own portfolio flatten out in $ terms. Both gold
and oil did sell off sharply after then chairman Uncle Al
pared back Fed Credit as January unwound. But both have
been on a tear recently, with the Iran - US trash talking
contest in full swing ( Note that Iran likes high oil
prices as does GWB's and The Shooter's Texas oil buddies).

Next couple of weeks will be interesting regarding these
liquidity forerunners as this data will further clarify
Fed intent.

Thursday, April 13, 2006

Stock Market Technical

S&P 500:1288

Well, it's spring break for school kids this week and it is
quiet.My work shows another extended period of compression in
the market based on my momentum and A/D indicators, with the
latter adjusted daily for TRIN. The compression period extends
back to mid - December, '05. This suggests to me that the market
is setting up for another significant move, although the current
period of frustration could last until the end of this month.

It is so tempting to say that we'll see a sharp break to the
downside this time, especially since a traditionally weak seasonal
period lies ahead. Moreover, the broader market still looks
overbought to me. One measure I like is the Value Line Arithmetic
Index ($VLE). It is not capitalization weighted
and besides the SP500 stocks includes the majority of popular
midcaps as well as top smaller caps. The weekly is here.
The trend is strong (ADX black line) but the MACD below is starting
to weaken. You will note the index has made a big move since last

But, happily, I find it easier to avoid certain temptations at my
tender age. So, I merely note that we seem due for some tradable action
up or down soon.

Friday, April 07, 2006

Bond Market -- Again

In the immediate prior post, I mentioned that the bond market
is in a cyclical bear phase but that the long Treasury was
oversold short term (April 4).

As I study it, I realize that the market is proving capable of
considerable volatility. I am thinking about the very sharp
and temporary run-ups in the $TYX yield that happened in the spring
seasons of both 2004 and 2005. So, the $TYX which crossed over and
closed above 5.00% today, could easily rise another 30-50 basis
points in a hurry if the players are in panic mode as they now
appear to be.

There's a long side trade coming on the Treasury price ($USB)
but I think I will make no attempt to catch the falling knife but will
wait instead for the makings of a positive turn in MACD and the stochastic.

I have been playing in the bond market as trader and investor since
early 1970. The behavoir of the market over the last two - three
years is a bit ditzy or dotty in my view, almost as if there's a new
generation of bulls coming in just as a major sea change is forming.

Tuesday, April 04, 2006

Bond Market

1. The bond market remains in a cyclical bear phase.

2. Note, however, that the long Treasury is now significantly
oversold. The chart of the $USB shows o/s on RSI and the stochastic, but observe as well how far the price is below its 200 day m/a.

3. To view the long Treasury yield in longer term perspective, click here.
The bond yield is moving up to test long term downtrend lines. Over the
past two decades, the tests have provided excellent buying opportunities.

4. The market is approaching an important crossroads. If the current
cyclical bear phase in the yield remains intact, the downtrend lines
may well be violated and this would be a prima facie warning that the
long term bull market in bonds could be coming to an end.

5. Since the current economic expansion began, the bond market has been
sensitive to the trend of commodity industrial raw materials prices and
less so to the CPI and energy feedstock prices. Spot industrials
remain in an uptrend, but have moderated recently. Even so, the bond
market has been weakening, suggesting a broadening out of focus,
perhaps to include the oil price as well as ongoing moderate economic
expansion in the face of rising short rates.

6. One continuing concern I have regarding the bond market is the
possibility that once the Fed is done raising rates, the FFR%
could be kept at a plateau level, as the economy might well
continue to expand with growth of economic demand and supply rounding
into decent balance. I suspect that in such an environment, players
might opt to put some risk premium back into bond yields.

7. I have stayed away from the bond market for the past year, primarily
because I think it is overvalued, with too little premium in Treasury
yields to reflect interest rate risk, supply risk and future long
term inflation potential.

8. If the market does show signs of bouncing from the current oversold
condition, I might go long for a fast trade, but that would be it.