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 !!!

Sunday, December 30, 2007

Stock Market -- Fundamental

As 2007 closes out, my SP500 Market Tracker has continued
to weaken, putting current fair value around 1400. That
reading is down from the all-time high of around 1600 set
in July, 2007, with the decline reflecting a 7% cut to
the consensus 2007 earnings estimate, and a sharp contraction
of the multiple to adjust for a ramp up of inflation
pressure. My profits indicators outside of the financial
sector actually strengthened a bit in Q4 '07, but financial
sector earnings have been slashed for CDO related loan losses.
Moreover, banks may warn of more losses for late 2007 after
the books have been closed and the auditors speak up.

The weekly leading economic indicators continue to decline and
are warning of a possible downturn. I am looking forward to
the ISM data on new orders for both manufacturing and services
due out next week to see how the monthly leading numbers shape
up. December may have been quieter for inflation, but the
inflation thrust gauge remains in a strong uptrend as we pass
into 2008.

The SP500 is trading at 1478, or a 5.6% premium to fair value.
A stronger liquidity injection by the Fed and declining short
rates have a number of investors and traders trying to discount
an eventual improvement in the fundamentals later in the year
just ahead, but the choppy price action off the 11/26/07 low
makes clear that there are plenty of players not yet on board.

The SP500 carries an earnings yield of roughly 6% presently.
That translates to a nice premium over the 91-day T-bill yield,
but there is still decent quality 5% short money out there, so
the market's e/p yield, although positive, is still modest.

Dividend growth continues strong -- up 10.9% yr/yr -- and the
dividend discount model I use has the SP500 fairly valued for
the long term at 1405.

There is no excess liquidity in the US financial system above
the needs of the real economy, so the stock market will remain
heavily dependent on managers' portfolio cash for support.

The continuing economic uncertainty surrounding near term
output growth and inflation potentials could well extend through
the first quarter of 2008, and it would not be a surprise
for the stock market to remain on edge and listless as a result.
I am not uncomfortable thinking in a range of 1400 - 1550 for
the SP500, nor am I uncomfortable with the idea of elevated

I do think that springtime 2008 will bring an improvement in
confidence, a topic I'll discuss soon.

Wednesday, December 26, 2007

Liquidity Factors

Finance sector commercial paper issuance in the US has
fallen from a historic peak of $2.2 tril. set in early Aug.
2007 to about $1.6 tril. currently, primarily reflecting the
collapse in the asset backed segment of the market. This
has shut off the yield spread funding of longer dated CDO
and other types of high risk long paper. For the past
six months, the broad measure of credit driven funding or
liquidity has grown at a 2.0% annual rate, compared to an
8.6% AR over Half 1'07. Since the commercial paper market has not
bottomed yet, we can look forward a little and say that the broad
measure of liquidity ($11 tril.+) is not growing fast enough to
sustain economic expansion and heavier trouble will result if
liquidity growth does not improve. the matter has been made more
pernicious by the fact that accelerated inflation has been
gobbling up what liquidity has appeared.

Viewed yr/yr, the matter is less dire, as liquidity has risen
about 6.5%. So there has been enough of a longer term tailwind
to sustain the economy, but that will run down with time.

With the new TAFs added in, Fed Bank lending to the banking
system is around $900 bil., up roughly 6.0% yr/yr, with the vast
bulk of this increase coming in recent weeks. This high powered
monetary liquidity plus the cuts to the FFR% form the base of the
Fed's plan to keep the economy growing and to encourage a step-up
in funding and lending by the banks. Under the best of cirumstances,
this will not work overnight and it's no small wonder the Fed has
pushed the prospect of faster economic growth out until the second
half of 2008.

Dry, arcane stuff you say? A clear 3-6 month window of uncertainty
you say? Right on both counts. Will the Fed have to do more?
Could well be they will. Were They too slow to act? Probably. Was
Their concern about inflation misplaced? Doesn't look so yet.

Measured yr/yr, the $ cost of production is up just about as much
as the broad measure of liquidity. This means no liquidity
tailwind for the capital markets and increased reliance on portfolio
cash and perhaps a new source -- the sovereign wealth fund.

On an annual basis, the US is now exporting about $120 bil. less in
$ through the trade window. This means you have to keep an extra
careful watch on the smaller less well developed countries that
have increased reliance on exporting to the US. Eastern Europe
comes to mind.

Monday, December 24, 2007

Economic Indicators

The weekly leading economic indicators have been trending
down since July, and have fallen enough below those peaks
to move the economic expansion light from green to amber.
This is a tricky situation, since we had similar moves in
1987 and 1998 without a resulting downturn. Those two periods
were ones of financial crisis, but matters did settle out
favorably for the US economy. Such could well happen this time
too, but there has been enough damage to the readings to
warrant more concern.

The inflation thrust indicator has been flat over the past
month, but it remains in a strong uptrend, paced by oil and
basic agriculturals. The CPI inflation of 4.3% yr/yr through
November wiped out the growth in the average wage, and
the increase of inflation pressure has damaged the economy
as a result. Rising deliquencies on consumer credit cards is
likely also a result of faster inflation. Consumers have
probably been a little slow to re-work budget priorities with
the rises in energy and grocery bills.

The longer term economic indicators have turned from negative
to mixed. Real M-1 growth is still negative, the real wage is
under pressure and the real price of oil remains in an uptrend.
Positively, the Fed is stepping up liquidity infusion, at least
for the short run, and short rates are trending down. I might
add that despite the bevy of negative headlines, the banking
system is functioning and growing.

Since I am a growth freak, I have my fingers crossed.

Friday, December 21, 2007

Stock Market -- Technical

As was indicated in the 12/17 post on the market, it needed
to catch bids this week to put it on a recovery trajectory
that was sensible. The initial responses were very tentative
earlier in the week, but today's action was more robust and
broad. From a short run perspective, there's nothing to do
but let it go through the holidays and see if it can muster
further upside consistency. That first run up from the 11/26
low was a joke, being nearly vertical (See prior recent comments).

I plan to put some posts together in the days ahead regarding
2008, toward which we are slouching along.

Monday, December 17, 2007

Stock Market -- Technical

In the 12/6 post on the stock market, it was mentioned that
the anticipated rally had materialized, but that the rocket
like trajectory was simply too strong. It was mentioned that
a sharp sell off was in the offing, as seasoned traders were
not likely to ride the rocket much longer. And so, the
market behaved and delivered a heavy sell off. The market is
mildly oversold in the very short run, and I am intrigued that
my six week selling pressure gauge is once again in significant
oversold territory. That suggests to me that there will be
another try at a rally before the year is out.

At 1445, the SP500 needs to hold around this level in the days
right ahead to put it on a suitable trajectory up from the
Nov. 26 low. Further sharp weakness from here would suggest
another retest of lows down around 1400 -1410. That's the easy
call, but we've had enough of a sell off already to bring in
some buying interest now. So, I'd watch the action carefully
over the next day or two to see whether the bulls are ready or

Wednesday, December 12, 2007

Monetary Policy -- Plan B (Bailout)

Today the Fed and a quartet of other central banks announced
a coordinated effort to accelerate the process of rebuilding
credit driven liquidity. The details have been widely reported,
so no need to repeat them here. But, observations are in

The $40 billion term auction facility plus the $24 billion
currency swap arrangements adds substantially to monetary
liquidity. This is a plus for the economy down the road. It is
also mildly inflationary and brings the Fed to the brink of
abandoning a policy of bringing down the long term growth of
monetary liquidity from the high levels of the bubble years
(1992 - 2003). It is a setback for the Fed.

Creation of this facility partially separates the liqudity
aspect of monetary policy from the rate setting aspect. This
will complicate the process of analyzing policy.

The TAF gives the Fed substantial flexibility to manage liquidity
in the system independent of month to month FOMC activity geared
to managing the FFR%.

Because the Fed can increase the $ amount of these facilities if
needed, it is a strong prompt to the banks to resume a more
normal level of lending and to service qualified credits. The
Fed is obviously unhappy with the slow pace of private sector
credit / funding growth and wants to protect against defaltion
of asset values secured by credit. Time will tell how well it

A strong positive response from the banking system would allow
the Fed to roll up these faciliities easily and return to normal
operations. But, why jump ahead of the story?

The de-linking of this announcement today from the FOMC meeting
relects longstanding protocol, creates a new protocol and was
also an expression of Fed disdain for The Street and the banks
who abandoned any semblance of credit underwriting integrity
in the the CDO market. I would have enjoyed "perp walks" for
banks to the discount window instead of this more anonymous

Tuesday, December 11, 2007

Monetary Policy

The FOMC moved to cut the FFR% and DR% by 25 bp each today.
The FFR% now stands at 4.25%. That was the consensus view
among pundits going into the meeting. The stock market threw
a tantrum. Players were expecting 50 bp cuts. They had noticed
the large 150 bp spread between the 91 day Bill rate and were
encouraged by "dovish" Fedspeak from Board members in recent

I am not much of a psychoanalyzer of the Fed, so I will not try
to divine why They did exactly what They did. But, I do think it
is fair to say that it is understandable that a number of players
felt snookered.

The longstanding policy variables did suggest a cut, especially
the weakening of the ISM manufacturing survey and a modest downturn
in the capacity utilization rate. The situation was not without
some ambiguity, as short term business credit demand remains
robust. Here though, the recent surge in C&I loans is likely more
a reflection of interim financing for deals still stuck in the

Besides a strong C&I book, home equity and mortgage loans are ticking
up at banks, although both are well off the trends seen in recent
years. The decline in the commercial paper market has slowed sharply
as well. So the system is functioning. Higher risk credits are priced
at much larger spreads over solid, investment grade credits -- as they
should be in a sluggish economy.

The Fed has been adding monetary liquidity more generously to the
system in recent weeks, but this may be only a seasonal development
which could continue into early January, 2008.

Friday, December 07, 2007

Economic Indicators & S&P 500 Market Tracker

My leading economic indicator composite continues in a
downtrend. It has not fallen far enough to signal the
advent of an economic downturn, but unless the composite
stabilizes soon, we'll have to entertain that idea in Q1
'08. Significant declines in this indicator gave false
downturn signals twice over the past 50 years -- 1987 and
1998 -- which, interestingly, were both periods of turmoil
in the financial and capital markets. So, one can still
get a recession signal and have it backfire if unsettled
financial conditions return to stability in a timely
enough fashion. Frustrating? Well, remember Aristotle's
reminder not to demand more perfection from a subject than
it admits of.

Yr/Yr employment growth continues at a paltry 0.5% and the
real wage continues to grow below 1.0%. These conditions
reinforce a very sluggish economy.

My long lead economic indicators do not present a pretty
picture either. Continued low real growth of Federal Reserve
Bank Credit and weak real M-1 have implied economic
vulnerability the moment credit driven liquidity slackened,
which it has in dramatic fashion since July. The real oil
price continues to rise, punishing broader consumption, and
capacity utilization has lost its uptrend. The bright spot
is that short rates are trending lower. Moreover, the Fed
has stepped up the buying of securities, but we'll have to
wait a month or two to see if this is other than a temporary
seasonal push.

The SP500 market Tracker continues to slip, and is now assigning
fair value for the "500" in a range of 1460 - 1500. Analysts
continue to chip away at earnings estimates, and the pace of
inflation measured yr/yr has accelerated. Thus, both earnings
and the p/e are under pressure.

Thursday, December 06, 2007

Stock Market

The oncoming rally discussed in recent Stock market posts
has turned into a rocket off the deep oversold mentioned in
the 11/18 post. At 1507, the SP500 faces trend resistance up
around 1520. The market is mildly overbought, but the
trajectory is too strong, indicating a chase to get in.
Players are betting heavily on a minimum 25 bp cut to the FFR%
at the 12/11 FOMC meeting and like the "freeze" on many sub-
prime ARMs announced by GWB / Paulson, because it will likely
stretch out the drain on lender capital over several years.

Some time over the next week or two there should be a sharp
downdraft as short term players take some chips off the table
and leave investor resolve to be tested.

Tuesday, December 04, 2007

Braille Economics

Braille economic analysis is what I resort to when the crystal
ball gets too murky. It consists of moving your way into the
future by grappling with the economic data and inching your
way along. Besides, no one is paying me to make forecasts now.
Forty plus years of investing and trading has taught me that
you do not have to be the first kid on the block to know what's
going to happen to make good money and / or dodge bullets. (One
important key to success in the businesses of investing and
trading is to learn how to dodge bullets.)

I have not bought into the recession camp. It is slow out there
now in the US and maybe getting slower. But I have yet to see the
sort of broad imbalances between production and consumption that
signal an involuntary build of inventories that leads to plant
down time and furloughs. Customarily, excess inventory is a
linchpin for a down cycle. The bad news here is that inventory
data on the broad economy comes late in the reporting of
monthly data. Two further points: Many businesses have the
supply chain management capability to control inventories rather
well. But, employment gains and real earnings progress has been
scant this year, so it may not take gaudy inventory excess to
usher in a downturn. So I inch along....

Unlike many economists, I remain concerned about inflation. As
I discussed a short time back, we did have a blowoff in the oil
price. The recent $10 bl. correction is a help, but oil remains
in an ominous uptrend that will sap most households of
purchasing power if it persists.

THE ODD ITEM: The new US NIE asserts that Iran is aggressively
developing fissionables but does not appear to have an active nuclear
weapons development program underway. WHATEVER, this document does
undercut the ability of GWB and the Shooter to kite the oil price
for the boyz in the great Southwest. Maybe less swagger from these
two will help settle down the oil market.