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, March 28, 2007

The Fed's Concerns

Fed chair Bernanke spoke to the Joint Economic Committee
of Congress today. His concerns:

1. The labor market is tight. Capacity Utilization for
primary processing of basic feedstocks and materials is
very high. Growth of capacity utilization in the US is
low across the board. This combo of factors pushes the
Fed to sit tight and say some prayers that cash rich
corporate America starts spending more on development.
(Europe has a similar problem with labor. The available
workforce does not have the skills needed by growing
businesses. The tech sector is on the verge of blowing
orders because they are coming up short in skilled labor.)

2. Inflation excluding food and fuels is high relative to
target and is proving stickier than the Fed thought it would
be. On top, fuel prices are rising again. The inflation
situation pushes the Fed to sit tight as well.

3. The subprime mortgage market fiasco has surprised them. Oh,
the Fed knew full well that the tightening of monetary policy
would prompt a rise in delinquencies and foreclosures, but
they likely did not bargain for the collapse of credit
underwriting standards and outright fraud that is putting so
much additional pressure on the market. The Fed and the FDIC
among other regulators now have no choice but to embrace
regulatory reform. This will add to the problems in junk credit
markets for the forseeable future, because financial organizations
tend to freeze asset generation until the new regs. are spelled
out and understood. The junk asset-backed credit markets will
suffer. The Fed would like to sit tight on this, too, but they
will have to monitor carefully for spillover effects to the general

This is the first tough stretch for the Bernanke Fed. We'll see how
they handle it.

Tuesday, March 27, 2007

Stock Market -- Technical

Readers of this blog by now know that my approach to technical
analysis is far more artful than mechanical. Being artful
involves working with principle and discipline and, in the case
of this type of analysis, idle tea leaf reading is hopefully

The approaches I use do not give buy and sell signals. But on
occasion I am struck by configurations that are worth mentioning.
The various market charts I follow all show a downdraft in the
25 day m/a. The market would look less vulnerable if the 25
day m/a had popped up on the recent rally. That simple dvergence
is a bright yellow caution light in my scheme.

Secondly, and again, artfully, the rally would have more of a
positive bias if the the SP500 were to fall from today's 1428
down to 1420 - 1410 before moving ahead at a reasonable pace.
That would distinguish it from the kind of madcap short covering
we saw last week.

Another factor is the ADX (shown on linked chart). The whipsaw
action there since late in December is a bit disturbing. Chart.

Sunday, March 25, 2007

Stock Market -- Technical

To be upfront, I am not sure what to make of this market.
From my perspective, it still looks unstable, despite the
double bottom between the vertical down and the vertical up.

The internal supply demand indicators, the longer term
momentum oscillator and the buying and selling pressure
gauges leave me with the impression that the market could be
in the same topping pattern it started before the rude sell-off
at February's end. But, no table pounding from me.

First things first, and that suggests it would be nice to see
the market stabilize over the next week or two.

Friday, March 23, 2007

Tuesday, March 20, 2007

Stock Market Fundamentals

The SP500 Market Tracker is about 1550 for March,'07.
The market is nearly 9% below the Tracker at 15.9 x
expected 12 mos. earns (through Mar.). With lower
inflation since mid-2006, the market should be at 17.5x.
The worry is more about the earnings outlook than
inflation. Earnings estimates have been cut, and first
quarter net per share could come in only 5% above prior
year for the "500" and below the Q2 '06 level.

The market model based on the monetary base remains
positive, but the appreciation in the market since the
end of 2005 is considerably stronger than the model
suggests. This is no longer an uncommon development and
reflects investor attention on the growth of credit
driven liquidity which had been accelerating steadily
until just recently. There are a couple of factors worth
noting here. First, money and credit growth most closely
tied to transactional demand within the economy has
slowed appreciably this year. Secondly, with bank funding
needs having eased some, broader measures of money growth
are slowing, especially finance company sales of asset-
backed paper (reflects slower economy and sub-prime mortgage

As I have discussed in a number of posts, the economy can
be very vulnerable once credit driven liquidity starts to
slow or recede, AND if the Fed chooses to let it unwind
and not add reserves to the system in a decisive manner.
The US is at that point now. It is a high risk point in any
US business cycle.

So with earnings estimates coming down and liquidity at issue
investors have moved to discount the earnings cuts and ponder
whether the shallow dip in the road might be a prelude to a

It would be a breeze here for the Fed to ease if capacity growth
was accelerating nicely and a dose of monetary liquidity would
push the economy into a higher but more balanced growth mode.
Such was the case in 1995 -- the last big "soft landing" play.
It is not the case now, as capacity growth continues to lag that
of demand growth potential. To ease now, the Fed would be
gambling not only that productivity growth would soar, but that
capacity growth would finally accelerate. Perhaps the FOMC will
shed some light on this issue at tomorrow's meeting.

I came into 2007 cautious on the stock market and I remain so. The
absence of balance between economic supply and demand remains and
continues to leave me with more questions than answers.

Tuesday, March 13, 2007


As discussed in the 12/27/06 post on gold and the USD, gold,
then $628 oz., was in a strong seasonal mode and could run some
if it could take out $640-650 resistance. It was also noted that
the positive seasonal window could run through Jan. Gold did
oblige, rising to close to $700 oz. in late February before
selling down to the current level of $643. Gold is now in a
seasonally weak period that could last through April.

Gold remains in a long term bull market, moving in nice tandem
with the broader grouping of industrial commodities pricing.
These markets have all enjoyed positive demand growth and very
high operating rates, as capacity additions involve long lead
times. The impetus to gold from the growth of monetary liquidity
has slowed appreciably from late 2004, but the strong liquidity
underpinning from the late 1990s through 2004 paved the way for
a powerful industrial economy that has only recently begun to
slow. The oil price was also a major factor in gold's rise, but
has likely been a drag since mid-2006, as the oil market
has moved into a better balance of supply vs. demand.

For the gold price to hold the accelerated uptrend underway since
mid-2005, gold must hold above $640 - 650 oz. over March and April.
A break below this rising support line would suggest gold might
return to the more modest uptrend it established from 2001
through mid-2005. It will be interesting to see how gold fares
during this period of seasonal weakness.

My macro indicator for gold declined from mid-2006 through October,
but is now trending up. The trend trajectory suggests gold could
be around $550 for the end of the year, and implies that the
gold price excess generated over the past fifteen months has not
been fully wrung out. The macro indicator prices gold as primarily
an inflation hedge asset and not as a geopolitcal play or as a haven
during times of financial stress. There is no shortage of gold bug
sites that play up the latter two avenues of interest.

The macro indicator has a modest positive trajectory now because of
a quiet oil price and also because the monetary liquidity
indicator component remains in a sluggish uptrend. As I have discussed,
I think the Fed would like to hold off giving the economy a goose
for as long as it can this year. Obviously, if the global markets
continue to reflect the slowing of global liquidity in place, the Fed
and other central banks may have to relent. There are no doubt gold
players who are betting strongly on that very point, while hoping their
baby does not go out with the bath water in the interim.

Friday, March 09, 2007

Economic Comments

The leading indicator sets are consistent with real growth
of 1.5 - 2.5%. Order rate measures for both manufacturing
and services signify mild growth, but remain in downtrends.
Employment, as measured by the larger, more current household
survey, shows no growth in jobs since 12/06, reflecting
weakness in construction and manufacturing. Measured yr/yr,
employment growth is up 1.8% and hourly wages rose 4.1%.
The 12 month employment and wage data support economic growth,
but the recent flattening in jobs growth is of concern. So, I
would conclude we are headed for a Spring showdown as far as
economic direction is concerned. When the economy is slow, mixed
readings from various data series are common, so it is not easy
to maintain perspective from one news release to the next. It is
not appropriate to be complacent but still too early to be alarmed.

Tuesday, March 06, 2007

Stock Market -- Short Term Perspective

Today's big up move extends the market's instability.

Can there be a "V" bottom -- a one day lead in to a positive
move without a retest or a period of base building? Sure can.
It is an against the house bet, but not a foolish or even
unreasonable one. Note though that investors have tended to be
more circumspect about jumping long on a significant dip since
the 2000 - 2002 bear.

The market remains oversold in the short run.

The market is also in a seasonally weak period, with sharpest
risk coming up over the second half of this month. Interestingly,
since the market nearly made a double bottom in early 2003 before
the big take-off, it is worth remembering that the four year cycle
low could occur in early in 2007 rather than 2006 as most players
had previously expected. If so, the SP500 could easily fall another
7-8% over the next several weeks. Cycles are usually too imprecise
to warrant being dominant in one's thinking, but the savvy player
keeps aware of them.

As I have said since near year's end, I am in 100% cash equivalent
because I seek some resolution regading how the economy might play
out over the eighteen odd months. I am not bearish, just cautious.
During periods like this, I usually sequester the spread between the
short rate yield and the inflation rate and play the options market
at hopefully opportune moments.

Monday, March 05, 2007

Stock Market

The Boyz on The Street tried to turn it around today by
purchasing signal baskets of stocks like the Dow 30, but
to little avail. The SP500 broke critical short term support
at 1380, thus ratifying the turn in the market.

The short term trend is down, but the market has developed a
substantial short term oversold condition. At this point, only
traders with acute timing sense should be trading ahead of the

My intermediate term indicators (30 days +) have turned down and
are flashing a strong caution. Moreover, the trends in the buying
and selling pressure gauges are still gradual enough to suggest
that any further correction and subsequent base building period
could take several months, although the depth of any further
correction need not be severe. The intermediate term technicals
have yet to reach comfortable oversold levels.

The fundamentals remain positive, but are more subdued as earnings
estimates may be trimmed ahead of the end of Q1 '07. Risk levels
remain elevated as the US economy continues to pass through the
slowdown phase. However, housing and business inventory corrections
have been well underway.

As discussed in prior posts since 12/06, I remain cautious on the
market and have stayed fully in cash since late last year. Unlike
many players, I am still most curious about whether a resumption of
stronger economic growth a little later this year will be balanced
enough to allow for continuation of a cyclical bull market into
and through 2008. I still think that will be the more important
question this year.

The sets of leading economic indicators I follow continue to point
to ongoing growth at a subdued pace. The one surprise with these
indicators has been the volatility recently seen in the services
sector. I suspect sensitivity to fuels and materials prices may be
especially important here.

Thursday, March 01, 2007

Stock Market

It took no less than Uncle Al to remind players that trying
to soft land a maturing economic expansion carries risk. He
focused on weakness in manufacturing and production and to
point out that the economy is not immune from downturn. That
sent the export driven Asian stock markets into a tizzy and
knocked the US market off its smooth running uptrend. Yes, we
saw panic selling on Tues. and on the open today. Yes, there
is evidence of climatic selling. Yes, the SP500 tested important
support around 1380 today and bounced up nicely. Yes, the
market has turned down.

Got to be the first kid on the block to have THE right answer
for the short run? Go for it. Me, I am in no such hurry. I am
content to wait a couple of days for the market to exhaust the
furious bull vs bear fight and stabilize. Let's give everyone
the weekend to sort their thoughts out.

At this point my internal supply / demand indicators suggest
only that a shorter run overextended position is being corrected.
It is a down market, but the work does not suggest yet that it
is a broken market. The fundamental indicators are still tracking
positive, but business risk levels remain elevated as I have
discussed, and the recent sharp downdraft in stock prices indicates
a substantial hit to confidence. Again, my vote is to give everyone a
pass until Monday so we can assess the fragility of the collective
psyche. Too much zigging and zagging right now.