Stock Market -- Cliffhanger

Well, today it was American Home Mortgage (AHM), writer of
Alt - A loans (scant credit underwriting required). Going,
going, gone. Now I guess the market could really have blown
out on this, but instead it fell to a rough short term
support area (low test zone), with key composites just near
the Friday, 7/27 close.

So, the boyz left it until tomorrow to decide whether we go
lower or whether enough is enough. More bad news of the sort
we had today should have led to a clean break to a lower level.
I call it a cliffhanger because the market held so near the
7/27 low, and like an adventure serial, we have to tune in
tomorrow to see whether the market holds.

1450 - 1460 for the SP500 is an interesting support area for
several chart reading reasons. My preference would be for a
healthy 10% shakeout from the highs seen earlier in the
month. But, I have seen enough technical surprises over the
past four months not to bank on anything.

Stock Market -- Fundamental & Technical

Funamental

The SP500 Market Tracker remains fairly valued at 1550 - 1560.
I doubt I'll review the Tracker again until Q2 '07 eps reports
are more nearly complete. With the SP500 closing today around
1483, the market is getting cheaper, with concerns about
decelerating liquidity growth a main concern. Data through
mid-July shows that my broad M-3 proxy has been flat for the
past six weeks. This kind of shortfall does not always bother
the market, but it appears to be a source of concern now.

I note as well that the Fed drained liquidity over the past
week, so sell offs in certain markets are not scaring Them, yet.

Remember, the bigger earnings estimates for 2007 are back loaded,
with a sizable step-up in earnings power envisaged for Q4 '07
and running into 2008. The economy needs faster growth and a
stable inflation environment to provide a big long side trade in
the months ahead. So far, capacity growth may be too small to
support faster growth without more inflation pressure.

Technical

The market did respond to the improvement in fundamentals from
06/06 through 06/07, but it strained technical measures and
rules of thumb in doing so.

Short term, the market is unstable and further weakness cannot
be ruled out. I think it would be dumb to think the SP500 just
could not sink 10% off its high down to the 1395 level with players
worried about liquidity and how to "properly" re-price assets for
more risk.

For now, the market is moderately oversold. A more interesting
oversold for the SP500 would be around 1460-65, where it briefly
touched today. A successful retest of that low would clarify the
outlook.

Since I have but a very few "turn on a dime" technical indicators,
I am willing to give the market a week or two to sort itself out
before considering positioning.

I have been cautious on the market this year, concerned that a pick
up in the economy might bring some re-acceleration of inflation that
would dampen the p/e multiple. That test is still ahead, and I have
passed up some good trades in the interim. But, I like to be on
familiar, comfortable ground when trading and so far this has not
been my year.

Long Treasury

I did close out a long position with an ok profit. Cannot
tell whether I am leaving money on the table or not. The
big oversold of a few weeks back that caught my eye is nearly
worked off. The economic fundamentals behind the Treasury are
deteriorating, with industrial commodities and now capacity
utilization both on the rise. I suspect a number of hedge funds
have unwound a major trade: long junk and short the Treasury.
Junk has moved up 100 basis points in yield since late May,
and Treasuries have likely benefited from short covering. The
renewed upward move in the 91 day T-Bill yield to close to 5.0%
suggests the panic in the junk sectors has eased some.

One factor worth noting is that bullish sentiment on the outlook
for the long Treasury price is rather subdued, as measured by
MarketVane. At 45% advisory sentiment bullish, this measure is
in the lower register and suggests keeping track of the bond from
a contrarian perspective.

Stock Market -- Fundamentals

The SP500 Market Tracker has the SP500 fairly valued in
the 1550 - 1560 range (now 1552). The upward thrust of
the Tracker has lost considerable momentum in recent months
reflecting a leveling off of yr /yr inflation readings (thus
leading to a flattening of the p/e ratio) and a projected
modest rising earnings trend. A look at the risk factors:

My forward inflation gauge is continuing to rise but has been
blunted over the past two months by a downdraft in gasoline
prices. Not enough of a break yet to signal relaxing one's
guard. Capacity expansion in the US continues too low relative
production growth potential. This remains a concern.

The leading economic indicators I track most closely have firmed
up substantially in recent months, suggesting a re-acceleration
of growth. My long term indicators -- real average earnings and
the monetary base, are still subdued.

On the monetary side, credit driven liquidity remains the primary
driver of stock prices. Viewed yr /yr, this indicator remains
strong, but growth is moderating.

Credit driven liquidity growth exceeds that of the real economy,
so for now, there is a good tailwind for stocks.

My top down earnings indicators are not impressive for the economy
as a whole. In Q 2 '07. The dollar value of all production was up
only about 4.5%. This suggests that many companies are struggling to
maintain profit margins. But there are important offsets: a weak
dollar, growing offshore operating earnings for US based companies,
strong pricing power in basic and heavy industry and better than
anticipated lifting results for the oils. Tech and export driven
companies are also showing decent comparisons. However, unless we
start to see the dollar value of production growth accelerate,
stock market breadth could prove quite vulnerable.

Widening credit spreads have occured in the junk markets, but spreads
have been maintained elsewhere. So far, crunch conditions have
been narrowly focused.

The SP500 has an earnings / price yield of 5.8%. With high quality
short term paper available at 5.25 - 5.50%, the e/p yield is nothing
to wtite home about.

The monetary policy indicators I watch most closely have turned up,
signaling that odds of an increase in short rates are rising.
Since the Bernanke Fed is less formulaic and more discretion prone
than the Greenspan Fed, take it as an advisory and not a prediction.

Feeling funny about this market? This is not an elegant mosaic of a
bull market. It is butt ugly instead, mostly because as a credit
driven market, it lacks the balances it needs to allow even bulls
to sleep that well at night.

Stock Market -- Technical

Last week the market broke out of a month long period of price
compression to minor new highs. On a twenty plus year long term
chart, the SP500 remains in an uptrend. Ditto for the periods
measured from the cyclical 2002 and mid-2006 interim lows.
At around 1550, the SP is trading slightly above mid-range in a
1700-1300 long term range.

Some of my key intermediate term indicators have failed this time
out, signaling tops that turned out to be but very temporary
respites. Even my momentum oscillator, which keys off the 40 week
m/a and is very reliable, whipsawed once. This all tells me to be
careful what I say about the future. The rally has been a real ass
kicker for those interested in the significant squiggles.

At this point, I do think it is fair to say that although we are
tracking an up market on most all counts, it is a very elevated
market and one that could experience a rapid and substantial
price correction without breaking major uptrend lines. All the
guyz know this. If you're long trades now, you have to be not just
smart but quite diligent as a decline, should one come, could
easily be fast enough to shoot or blow up many of the trailing
stops in place. Armed with cell phones and laptops, the big hitters
are in the action even if at the beach (as many are).

I have linked to the weekly SP500 below. Note the elevation of the
MACD and the fact that the market is dancing near the top of a
20 week price channel. Chart.

Liquidity Update

Not surprisingly, the banking industry's real estate loan
book -- to include home equity loans -- has flattened out
since February, 2007. In typical lagged fashion, bank
funding growth has also slowed, with this huge measure of
liquidity actually declining slightly in the month of
June. Data on hedge fund lending capability is much harder
to come by, but the CMO sub prime and CDO junk markets have
been roiled enough to figure there is more caution. The
banking industry's C&I loan book is hopping. It is a safe
estimate that half of the volume gain here over the past twelve
months is deal related. On balance, credit driven liquidity,
which has supported all markets, is just starting to show some
growth momentum loss, with the riskiest markets paying the
heaviest price to date.

Keep in mind also that monthly data are showing a pick up in
industrial and commercial output and order flows for the US.
Since real economic activity lays first claim on available
liquidity, there could be some more pinching of flows available
for markets investment and speculation in the months ahead. It
is early in the game, but stay focused and do not automatically
dismiss the idea that your favorites will be exempt. Remember
the old Wall Street adage : "When they raid the whorehouse, they
arrest the piano player, too."

Stock Market -- Technical

The price compression period underway for the past several
weeks has eliminated the shorter term overbought and
extended conditions for the market. Despite flashing caution
lights, the market has been bending, but has not broken.

So we find we have a US market that is still trending higher
from its mid-2006 interim low, but one which is still elevated
enough to suffer a sharp correction without losing the trend.

To make matters more interesting, periods of price compression
in the market can last for a good several months and need not
be wound up quickly with a break out or a break down in price.

Stealing Time

The wife and I are on a working vacation. The wind-up comes
this weekend when we finish helping our youngest set up shop.
My daughter is just zipping along, but I must confess that
wife and I are pooped by about 7pm each evening.

The stock market has entered a period of price compression
so I doubt I am missing anything too much. Most of the
overbought that accumulated in late spring has been worked
off.

I expect to be back on line this Monday, July 9, if not a
day or so sooner.