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 !!!

Tuesday, December 30, 2008

Stock Market & Economy

If this be but a nasty variant of an ordinary business cycle, I would
say the environment is an easy call from here. Specifically, my
indicators point to a steep further economic downturn through
mid-2009, followed by a moderate economic expansion that could
continue for several years. In this world, the stock market would
most likely bottom Mar. - Apr. of '09, followed by an upturn in
corporate profits by Sep. '09 and the first hike in the Fed Funds rate
at some point in half 1 '10. Commodities would turn up over half 2
'09 and inflation would re-accelerate from a very low level by late
'09. Piece of cake.

But, my range of indicators also suggests to me that the US is
flirting with economic disaster. The key word here is "flirting". It is
far from clear to me that consumers are going to behave as
positively and predictably as they have in prior downturns and
readily jump in and lead the charge to recovery. Consumer
hesitation to spend in the months ahead can lead to further
downcycling and subsequent considerable difficulty in turning
things around. Real incomes have been punished too long for most
and wealth has fallen rapidly, especially for the upscale folks. Debt
levels continue on a high plane and take up substantial income. So,
I think it is reasonable to wonder whether they are going to be so
eager to spend and borrow in 2009. Moreover, if they remain
reticent, I doubt monetary and fiscal policy will prove so
enticing to them. Realistically, and looking at the household sector
on an individual basis, it would be kind of dumb for folks to jump
into heavy spend and borrow mode.

It is easy enough to envisage recovery where consumers exhibit
much greater balance between spending and saving. On the
surface, that's one way to finesse the issue and maybe that's how
it will work out. But, it will need to happen soon, lest a weak
economy and job picture leads to further forbearance.

Production, trade and employment all seem primed to contract
in the months ahead, but the stock market can endure that if
consumers show some signs of putting spending on a more even
keel and if prospective homebuyers show more interest this
coming spring.

For now, I'll probably go along with the framework outlined in the
first paragraph of the post, but I will not stay with it long if we
continue to see folks shunning the shops as we have been.

Sunday, December 28, 2008

Economy & Liquidity

During periods of recession, it is right as rain for consumers, banks
and businesses to rebuild cash and cash equivalent liquidity. Since a
serious downturn can add more uncertainty to the outlook, the
rebuilding of liquidity can intensify during such times.

Real personal wages have rapidly turned positive in this quarter
as inflation has subsided quickly and dramatically. Normally, when
the real wage improves, spending quickly follows, and the desire to
build liquidity slowly wanes. So far, that has not happened, as
spending has remained weak and liquidity balances are rising. This
is partly attributable to the shock of a rapid decline in the economy
since late summer, but it may also reflect a desire by householders to
add to savings to offset sinking 401k and home values. If the latter is
so, then we might expect the period of liquidity enhancement to be
stronger and last longer than in prior recession periods, despite low
available rates on savings. The test of liquidity preference is
underway now, since the real wage has recovered quickly, with the
normal expectation of higher spending to follow now in the spotlight.
I would also say if consumers as a group plan to alter budgets to
accomodate more cash on hand to offset losses in asset values, that
stimulative monetary and fiscal programs may not be very
effective for a while until liquidity cushions are fattened further. I
would also point out since 2005, 2 million boomers cross the age 60
threshold annually, when liquidity preference naturally increases.

Banks are not liquid, and the natural process of improvement is to
allow loans to run off and liquid investments to rise. This process
has actually been slow to get underway. Banks are also taking
massive loan writedowns each quarter. This restains capital growth
and it is likely that the bulk of the rest of the TARP program will have
to be released to banks and other credit intermediaries to rebuild
capital. A big test for both consumers and the banks will come this
spring when more nearly affordable homes are prospected by
folks looking to buy (Improved affordabiltiy reflects both lower
prices and mortgage rates).

Business sector liquidity was well repaired after the 2001-02
downturn. However, my profits indicators have fallen dramatically,
and non-financials may want to further shore up liquidity if cash
flows sink as now expected.

As a recession winds down, the capital markets can rally nicely even
as sectors rebuild liquidity, as investors see such a process as normal
and healthy. The hitch comes in if consumers, banks and business
are seen as too zealous in propping liquidity, for that would mean
that recovery may be further afield then expected.

I take the dramatic weakness in the capital markets over the past 15
months as a sign that fundamental changes may be in store and that
one should treat the tried and true assumptions with more reserve.

A first stop for me vis a vis the economy is to watch consumer
spending now that the real wage has recovered sharply.

Tuesday, December 23, 2008

Stock Market -- Short Term Technical

The rally resembles a duck in flight which has evaded a full load
of buckshot, but which was clipped by a BB or two. There is another
load of buckshot en route, and the duck needs to gain altitude rather
quickly to avoid a nasty hit. Less prosaically, the market has
worked off a sizable short term overbought, and needs to move
ahead quickly to keep long side trader interest. Confirmation of
a rally of substance remains elusive, and the trajectory has flagged
to a critical level. Last Wed. it was mentioned that it was ok to
allow for the work -off of the heavy overbought but now we need
to see if this bird can gain some altitude before impatience brings it

Thursday, December 18, 2008

Financial System Liquidity

As prior discussed, the steep downturn in the global economy since
Sept. '08 shredded Federal Reserve efforts to resuscitate broad
liquidity in the financial system. The commercial paper market
resumed a steep drop, and banks lost large institutional deposits as
players moved to the safety of Treasuries. My broad measure of
credit driven liquidity is now down about $120 bil. below this past
summer and stands only +1.5% measured yr/yr. The Fed has been
buying top quality financial commercial paper to prop up the system,
but large deposits continue to roll off, curtailing the Fed's latest
efforts. 90 day a2/p2 commercial paper trades infrequently and at
a horrendous 6.25%+.

Monetary liquidity has been soaring -- +11.5% yr/yr -- as the Fed
primes the pump. The data is biased up as smaller banks leave
some excess reserves in sweep accounts, but the basic money supply
is moving in the right direction. From a cyclical perspective, the
narrow money supply typically leads the broader credit driven
aggregates in time, and when the economy is rather weak the
recovery of private credit can lag. This is particularly the case when
the residential market is in distress. We know we have the most
depressed residential market we have seen in many years.

In the residential area, there is also the likelihood that deflationary
psychology is growing -- why buy now when house prices are headed
lower and job security is a factor?

The new Obama admin. may well review how to increase already
improving housing affordability further.

At least the Fed is on the case with allowing money to grow in the
system. that's where you have to start to repair the tatters. It is
genuinely too bad that Bernanke was so slow to turn to growing
monetary liquidity.

Even though the broad measure of liquidity is up but 1.5% yr/yr,
there is excess liquidity in the economy overall. The $ value of
production is down 4.5% yr/yr through Nov. That leaves my
excess economic liquidity index at +6.0. Such a reading is normally
very positive for stocks, but I now keep this as a secondary
indicator since it failed badly during the bear market period of
2001 - 2002. However, it has been a good support measure over
the long run so we need to keep it very much in mind.

Wednesday, December 17, 2008

Stock Market -- Short Term Technical

The short term uptrend is gaining firmer footing now as the
25 day m/a is set to join a rising 10 day m/a. However, the
SP 500 is strongly overbought in the very short run following
yesterday's ZIRP rally, courtesy of the Fed. Note also on the
chart link below that the "500" has not taken out two previous
interim peaks of recent weeks at 910-911, indicating resistance
and hesitancy. It is tempting to say that a healthier rally would
have easily blown through that level, but first we need to
see how well the market handles the short run overbought.

The ADX indicator is set to turn positive (+D1 to go through -D1),
but note the weakening momentum line in black. That is not a
confidence builder either. Chart.

Tuesday, December 16, 2008

Policy & The Economy

"Outlier" economic data have policymakers in "all hands on deck "
mode. A collapse in residential construction, weakening home
values, tumbling retail sales and an outright 3.5% decline in the
CPI in recent months are alarming because they are slipping
outside the boundaries of weakness seen in business downturns
over the past 50 years. This is risky business for a US economy
operating with record high debt leverage across most sectors.
Similar situations are playing out to varying degrees across the
globe. A sudden turn to thrift to offset a weak home value, a down
401k and worries over job security make great sense to most on
an individual basis, but policy makers fear the consequences should
the majority of folks get in on the act.

I think the hard reality is that as this massive 80 million strong "baby
boomer" generation matures, the momentum of consumer spending
growth in real terms has slowed and has been boosted by debt
accumulation. As the boomer generation greys, it is going to be
tougher to drive discretionary spending in the US. Were it not for
the current difficult circumstances, I think it would be true to say
that the task of promoting strong consumer spending will only get
tougher over the next decade. Heck, Gen X ,which is following the
boomers into prime spending years is only half its size.

So today the Fed went to ZIRP -- cutting the FFR% to between
0.0 - 0.25%, and promising to inject money into the system more
directly, as the banks have tighter credit policies, inadequate capital
and more substantial loan losses to book. The aim is to force people
to give up their liquidity and step up their spending. Savers are to
suffer and thrift is to be thwarted. On top of this the incoming Obama
admin. is planning massive fiscal stimulus to stabilize a deteriorating
economy. Again, these policy actions are being played out globally.

The fear policymakers share is that failure to act dramatically could
produce an uncontrolled, deflationary economic tailspin with the
end result being substantial economic damage and possible social and
political turmoil. Maybe so, maybe not.

Since consumers have endured very substantial and broadscale
shocks. I think it will be tougher to turn them around this time and
that people with newly revised budgets will resume a higher level
of spending as and when those budgets permit. It is going to take a
little time to rebuild confidence and even a modicum of trust.
Moreover, I am concerned about how well recovery / expansion can
be sustained. Freewheeling commodities markets could surge as
economies recover and again jeopardize confidence and real incomes.
Relatedly, The Fed and the Gov. will face a heavy challenge to manage
policy once inflation pressures resurface.

The message : Tougher to turn the economy...More modest results
whence it turns...Tougher to mange an orderly and durable expansion.

Friday, December 12, 2008

Stock Market -- Quick Comment

Well, the bears did come in on Tues. after the sharp rally to
overbought at Mon.'s close. But they really did not do enough
damage this week to upend the rally. Just a little back and fill.
So we carry the drama into next week with an eye to whether
the market could morph into a plus Santa finish for the year.
Uptrend not confirmed yet for the shorter run in my book.

Thursday, December 11, 2008

Inflation Hedge Trade

What I call the inflation hedge trade goes as follows: Be short the
US dollar and be long oil and perhaps a PM like gold or silver.
This has been a popular trade from time to time over the past
35 years, and was a dominant one in this decade so far. It is a
tricky business, more like a 3 cushion billiard shot than a straight
pop of the 8 ball into the corner pocket.

There is evidence over time that a weakening of the dollar goes
with a rise in the oil price, while a sronger dollar pairs up with a
weaker oil price. The US tends to be a cyclical leader and when it
cuts short rates to bolster growth, the trade deficit may widen
relatively, leading to a weaker US$. In turn, US oil import demand
picks up, and the price is shaded to the upside as a way to hedge
a weaker dollar. Timing is far from exact and markets psychology
plays a major role. This trade was a powerhouse over most of
the decade and was spectacular once it became evident that the
Fed would cut rates to ease a gathering financial crisis in 2007. It
came acropper this year when spreading global financial market
turmoil triggered a flight to the dollar and when oil subsequently
crashed on lower demand and a powerful US dollar rally.

One other fact, the pools of money in this game -- hedge funds,
pension funds with "alternative" investment authority and a
bevy of mutual funds and ETFs devoted to these sectors -- is
huge and far larger than anything seen in modern times. It's not
just primary dealers and old line speculators anymore.

The $USD has weakened so far in December (seasonally typical)
and sure enough oil is rebounding and gold and silver have come on
board. Importantly, oil refineries have run their heating oil and
are set to shut down for maintenance in Jan. to get ready to run
gasoline for the spring. So early in the year can be seasonally
strong for oil. Thus, the guyz have the trade going -- short the
dollar, long oil and maybe gold for good measure. Traders know
oil could rally to $60 + in Jan. without challenging the downtrend.
Moreover the $USD is at trend support and a break here during
the month will whip up the oil pit. This can be crazy stuff, since
there can be little change in bedrock fundamentals in the interim.

From a macro economic perspective, this inflation hedge trade is
harmless as long as it runs for a month or two more. But
development of another sustained strong run up in oil will not be
harmless and will eventually punish a weakened global economy

Monday, December 08, 2008

Stock Market -- Technical

Short Term
Well, here we are again. Another potent rebound from severely
distressed levels, although not quite a rocket. At 910, the SP 500
is overbought short term for just the second day in nearly 2
months at 3.8% above the 25 day m/a. Not only have such
overboughts been rare over the past 3 months, but have been
quickly crushed as well. Good rally durability test straight ahead.

I would like to see the market and its 10 day m/a above the 25 m/a
and see the 25 m/a turn up as well. I would also like to see the +D1
on the Wilder ADX rise above the -D1 as well. Chart here.

Intermediate Term
The NYSE breadth flame index -- runs back 12 weeks -- hit a deep
oversold at -154 on 10/24 and is now just a tad oversold at -20. The
14 week stochastic will need a strong close this week to turn positive.
It has been on a "sell" trend since 5/16/ 08. The smoothed 40 week
price oscillator has been on a "sell" since 7/4/08 and is now just
slightly below the last cyclical bear market low registered in late
2002. That's interesting in itself. When the market turns truly
bullish, the NYSE breadth flame mentioned above can run on
overbought for weeks -- a healthy sign indeed. We have not seen
that since late 2006.

Most contrarian measures I follow show bearish sentiment. It is
curious that Market Vane 's advisory sentiment is still at 40%
bulls compared to readings in the low to mid 20's during 2002
and early 2003. Market Vane's Treasury bond bullish sentiment
hit a rare 89% bullish last week. You see that only at market
tops. A sell-off in Treasuries might help the stock market as it
would suggest a flight from quality back toward riskier assets.

Bernanke, Paulson, W. and Obama have all been furiously
"painting" the tape green over the past two weeks. they have the
sheep and the dogies a' runnin' with a continuous stream of
supportive comments. I don't blame them and, as mentioned
last Friday, it would be nice for all players to take a time out to
think on whether the economy is truly headed off the cliff.

Friday, December 05, 2008

Stock Market Comment

Americans love irony and I am no exception. And so with the all
the seriously bad economic news of recent weeks, the stock
market is trying to steady if not rally. It is a discounting
mechanism and the crash that started over two months ago
has correctly foretold the bad news emanating forth. So, I have
been amused this week by the thought that since the economy
has moved to the cusp of peril (See comments in earlier post),
wouldn't it be something if the market decided to hold off on a
rapid pursuit lower to see if the US and the rest of the major
economies are actually going to go over the cliff into the abyss
or whether we have a deep but managble recession to contend
with. Look, it would be unusual if such a serious economic
situation did not start with a bear market that lasted a good
16 -17 months and which carried into 2009. Moreover, after all
the carnage, now might be a good time for investors to pause to
decide whether all economic hell is about to break loose or not.
This is especially so with a new president coming on board, a
strong congressional majority in hand and a thumbs up from
voters to try and forcibly stimulate the economy and perhaps
massively so. And of course there is the issue, prevalent in
recessions since WW2, that the system has its own self correcting
mechanisms. So why not spend the holidays mulling whether
the wolf is really at the door?

I have had many more good hunches than bad over the years.
But I have had enough bad ones not to trust them but to tend to
the trading and investing disciplines instead and save the hunches
for conversation over drinks. At any rate, I thought I would
pass this little piece of irony along...

Economic Indicators

Weekly Leading Indicators
Both data sets for the economy have been in free fall since June. The
declines -- measured peak to trough so far -- are the steepest since
the Great Depression days. Yes, the stock market influences the
declines, but weakness is broad based, with a collapse in sensitive
materials prices and a surge in initial unemployment claims very
notable. Global indicators are also now falling steeply.

My weekly and monthly inflation pressure gauges remain in free fall
as well and are now consistent with the development of modest
deflation measured yr. on yr.

Monthly Leading Indicators
Manufacturing and commercial new orders measures have simply
tanked since Aug. '08, including US export orders. The total index,
a diffusion measure, has fallen from a strong 142.0 in Jan. '04 to
the current paltry 63.3.

Economic Power Index
This measure is improving. The yr/yr real wage has turned positive
as wage growth has so far held up and inflation pressure is abating
rapidly. The change in yr/yr employment has accelerated to the
downside, however at -1.7%. The combined index is a -0.5% yr/yr
and is up from the cycle low to date of -2.5% set in Jul. '08. The
sharp deterioration of this index from the business cycle peak of
+3.9% set in Jan. '07 correctly foreshadowed the sharp pullback in
consumer spending we have seen. Now, spending and production
levels for the consumer market are very weak as householders
strive to build liquidity and control borrowing. A sharp rise in the
unemployment rate is underway, and that could undermine wage
growth going forward. But, if the damage remains slight, then
purchasing power will mend further. I would also note that
with mortgage rates lower and housing prices still trending down
that affordability is rising very quickly.

Capital Slack
A fast rising unemployment rate and falling operating rates in the
business sector reflect sharply growing slack. The low level
of short term rates overstates the case for slack in the financial
sector as bank business loan exposure is still high relative to
bank liquid investment levels. But liquidity will improve as the
downturn wears on.

Financial Stress
There is more to come here. Troubled home loans are still rising.
Commercial real estate loan losses and C&I loan write offs are
both to rise. On a global level, the bust in commodities prices is
going to add more pressure for countries and companies
dependent on resources, materials and cash crops. Governments
can be expected to inject more funds into the system.

We are on the cusp of danger here. The then neophyte Fed kept
the monetary base flat for a dozen years leading up to the 1929
crash and subsequent depression. It went after the inflation from
WW 1 with a vengeance. The current Fed kept the monetary
base flat in real terms for most of the 2004 - 2008 period to
correct the Greenspan profligacy. The collapse of credit driven
liquidity growth over the past 15 months and the belated turn
to adding monetary liquidity by the Fed leaves us vulnerable.

Maybe we can afford a few more months of deep economic
weakness, but those short term leading indicators for growth
and for inflation do need to begin improving well before winter
is out or else we could slide into a deeper, more pervasive
decline. We are now presuming heavily on the size, stability,
diversity and resiliency of the US economy. Do not underestimate
that power, but watch those short term indicators like hawks.

Tuesday, December 02, 2008

US Treasury Bond

Currently trading at 3.2%, the yield on the 30 yr. Treasury has
dropped at the fastest rate in history in recent weeks. This
decline reflects weakening global production and a collapse of
industrial commodity prices. More broadly, it bespeaks a fast
flight to quality across the Treasury yield spectrum as investors
and traders, concerned over fast gathering economic weakness
in a world of high debt leverage, scramble to safety and liquidity.

The Treasury market is now dramatically overbought. Moreover,
bullish sentiment on the market has reached dangerous levels,
registering 82% bullish on Marketvane. This is not just a short
term overbought, but a longer term overbought as well based on
my 12 month oscillator. Looking back over the past twenty odd
years, the yield on the 30 yr. could fall a bit further to the 2.8 -
3.0% area before it would signal a typical and major cyclical low.

Now, the recent action in the Treasury market has been no more
crazy than what other markets have exhibited. As well, the 30 yr.
carries a 300 -320 basis point premium to the 91 day bill in
yield, and at 3.2%, provides a suitable premium to inflation,
which is sinking fast. Even so, the market has become very
risky in that a turn of investor confidence in the prospect
of eventual economic recovery could badly punish long
Treasury holders should players move out of Treasuries to
more typically risky assets.

The measures I use to gauge confidence in the economy and in
the financial system are drawn from the actions within the
capital markets themselves. So there is no way except by a
guess that I could tell whether confidence is returning before
the markets move in the right direction (More on guesses and
hunches in the next post).

For a chart of the 30 yr. Treasury yield, click.

Friday, November 28, 2008

Stock Market

Over the past week, the market has staged a furious rally off the
11/20 lows, with the SP 500 having risen 19.1%. It was a good
week for very short term traders looking for upside action. The
action remains to0 violent for me, and I look toward next week
to see if a more sustainable pattern may develop or whether this
surge up is just another ill fated rocket in an ongoing deep bear
market. I learned the hard way long ago to be very wary of
spike bottoms, period.

Short term, the market is graded neutral, having quickly overcome
a deep oversold. Upmoves of substance do get overbought rather
quickly, but the higher ground is not given up easily. So, it remains
to be seen whether this latest surge may have some meaningful
staying power. It would be helpful as well to see stronger upside
volume. Looking out 10 - 13 weeks, the market remains heavily

The last deep downdraft, which took the SP 500 to a low point of
752 on 11/20 carried the market down over 50% from the 10/07
closing all time high of 1565. It galvanized the Fed into further
supportive action, and brought the Obama team out in a hurry to
promise a decisive, positive fiscal policy response come inauguration.
That the Christmas shopping season kicks off this week is, of
course, purely coincidental.

When it comes to the stock market, or any market for that matter, I
am by disposition not a nibbler when it comes to investing. It's easy
enough to nibble on the long side in top quality companies in a deeply
discounted market. Not my style. Either you like the market or you
don't. In that regard, I continue to watch credit quality spreads and
the trend of lesser light fixed incomes carefully.

Tuesday, November 25, 2008

Corporate Profits

Over the past 15 months, corporate profits, as measured by the
SP 500's earnings have fallen by about 1/3. There are now indications
that peak to trough earnings for this cycle could be down by more
than 50%.

Most of the decline in profits so far reflects the loan and securities
losses sustained by the financial services sector. The financial
component of the SP 500 will likely wind up moderately in the red
for 2008. Commercial banks / thrifts were only nominally profitable
in Q3 '08. When common dividends are deducted, retained earnings
from operations declined. So, prior to the TARP program to inject
capital directly into the banks, they would have had to cap off the
loan book. Now, continuing loan losses are keeping financials from
generating capital internally. Moreover, with broader economic
weakness in evidence, loan loss provisions for C&I loanswill rise as
may losses on CDS swaps.

Profit indicators for the large nonfinancial group started to tumble
in earnest in Sept. '08. Peak quarterly profits for the entire SP 500
hit an index value of 24.06 in Q2 '07. The index was about 16.35
for the recent quarter, and with nonfinancial profits now in decline,
the index could fall to the 10. - 12. area over the next 6 months,
barring an earlier than expected economic turnaround. If this
deeper weakness develops, my SP 500 Market Tracker will
likely begin to recede again in the interim.

My longer term economic indicators continue to point to the
development of economic recovery starting around mid - 2009.
With the extra earnings leverage of falling loan loss provisions
that would accompany an economic rebound, the quarterly net per
share index for the entire SP 500 could easily rebound to the 20.
level by late next year or early 2010.

Friday, November 21, 2008

Stock Market -- Short Term

The market has edged out of vertical crash mode, but with
the week long mini-crash through yesterday, remains in a
downtrend that is about 50% faster than a more "normal" bear
market. In the early stages of this bear, you could count on a
rally when the SP 500 fell about 5% below its 25 day m/a. Since
the bottom fell out in Sept., rallies, such as today's sharp advance,
tend to start after the "500" falls more than 15% below the 25 day
m/a. The few short term overboughts we've seen recently have
been atacked within a day or two. So, conditions remain treacherous
and dangerous even for folks looking for exposure of only a few

Thursday, November 20, 2008

Comments : Oil Price & Stock Market

Oil Price
Oil closed a little below $50 bl. today. My analysis of cost
factors (supply) and purchasing power (demand) indicates oil is
reasonably priced at $50 bl. So, be it a day or longer, oil under
$50 brings back cheap energy. I have added it to my list of
items to trade long or short. How low can it go? Who the hell knows?
The clowns that brought us $147 bl. can bring it lower, I guess. I
did receive an e-mail from a seasoned and successful markets
player last week who opined that oil would go to $10 bl. Be that as
it may, I am back in the energy game after a hiatus to give the
crazies their shot. Oil is now so deeply oversold, I am leaning toward
a long position, but as with any commodity, I am strictly a trend

In a similar vein (no pun intended), I have added silver back
to my list of tradables. Gold humpers are sleazy, sanctimonius and
very snooty. Silver hawkers are merely sleazy and are much easier
to take. Besides the silver price is also now reasonable.

Stock Market
As feared, yesterday's sharp fall in the market heralded another
breakaway to the downside. There is a broad consensus jelling
in the community around the idea that a deep, prolonged downturn
in the economy is underway. The failure of the SP 500 to hold
the 830 -840 support zone has dashed hopes and left the market
in a steep short term downtrend. I'll return to this issue tomorrow.

Wednesday, November 19, 2008

Stock Market

Of all things, my SP 500 Market Tracker has moved up from the
1000 level to the 1050 - 1075 range. This is because the p/e ratio
is allowed to expand as inflation pressures abate. Market players
are having none of it. Today the "500" closed around 807, which
is nearly 25% below the mid-point of the Tracker's current range.

Players are tacking on a large business risk premium in looking
at market prospects. The fear is that a sharper downturn will
imperil earning power and dividends for the corporate sector.
Few are now waiting for the next round of estimate cuts. The
psychology through today is that the current downturn could
be severe enough to lead to much higher levels of unemployment,
sharply falling profits and possibly deflation, which if not quickly
contained, could wreak economic havoc. Even the Fed is now
looking for a minimum 12 month recession with a consequent
return to price stability. For seasoned Fed watchers, the
colloquial equivalent is having Bernanke yell: "Holy crap, the
damn may break. Head for the hills!".

What many fear is an era of frugal chic whereby consumers keep
spending very restrained and businesses start hoarding cash.

The recent downdraft in the economy has been sudden and steep.
There's no debating that. Whether the decline is more reflective
of a temporary shock or the beginning of a more difficult to control
downturn is too tough a call for me at this point. My long term
economic indicators suggest a recovery to develop by mid - 2009,
and the next step is to watch how the short term leading indicators
behave. These data sets are currently very weak and if they
remain so into Feb. ' 09, it will be tough not to turn more bearish
on the economy.

I remain a step away from turning positive on the market. I
continue to monitor credit quality yield spreads and the trend of
intermediate quality bond yields to see if confidence flickers back to

The market broke to new lows today, flummoxing the hopes of those
who thought a bottom was forming. Let's see whether this is another
breakaway downleg in the days ahead. That "bottom" formation we
saw through yesterday was too neatly manicured (See 11/18 post).

Tuesday, November 18, 2008

Stock Market -- Technical

the market got close to rally mode during the middle of last week
but since has faded back. The bottom testing actions of recent
weeks are pat and off-putting as well. Even so, my 25 day
momentum oscillator continues to drift higher although in an
uncomfortably broad bracket. So, I think I will wait to see if
this oscillator trend is broken by a sharp retreat. If not, then
I will hang in there looking for a positive change of trend.

Friday, November 14, 2008

One Less Bag In The Cart...

Retail sales in Oct. fell nearly 3% from Sept., and, when viewed
yr/yr adjusted for inflation, were down about 9% from Oct. ' 07.
That's the worst yr/yr performance in over 40 years, but not by
much. There were comparable spikes down in the recessions of
1974-75 and 1980, with both following inflation shocks that
sent real take home pay down. Results of sales for the past month
follow that pattern of retrenchment that comes in the wake of
persistent inflation pressure on the wage.

The spike down in retail ratifies a deep downturn in the economy
as consumers recast budgets and defer spending on signs of
gathering job losses. Nothing unprecedented here, but you have
watch spending most carefully now to see whether the down spike
in spending is the beginning of a more intense but still temporary
retrenchment or the onset of a sea change in consumption. The
retail sales blows outs of 1974-75 and 1080 were equally stunning
and raised comparable questions.

The demographics are not nearly as good now as in those prior
periods, and debt service requirements are stiffer. So, even if
the US is working through a temporary shock, an eventual
bounceback in sales may be milder. For the short run, with inflation
pressure rapidly abating, it is best to focus on how serious a
likely ratcheting up in the jobless count will be.

This is ugly news as we head into the economically important
holiday season.

Thursday, November 13, 2008

Stock Market

A weak mid-day market did not decisively break below low test
zones. This triggered a fierce rally to close it out. My reading and
my e-mails tell me there are far more folks interested in calling
an interim bottom and rally, so the quick express ride up from the
basement was no surprise.

I have no money in the market now, so I am not looking to sell a
rally. For my part, the market will have to carry higher and hold
higher ground to produce a tradable trend. Specifically, I would like
to see the SP 500 move up above its 25 day m/a and see the 25 go
higher as well . The market has not been able to hold above the 25
day m/a for more than a day at a time since August. Chart

My indicators are just shy of turning fully bullish. I am interested in
watching the trend of Baa bond yields plus my own list of less
secure Baa's to see if confidence is returning to the capital markets,
but since I do this over one month time intervals, I am not going
to get a signal until around November's end. Suffice it to say yields
are moving in the right direction now, particularly at the short end
(2-5 yrs). If stocks continue to rally with lesser quality corporates,
I will miss a bottom of some consequence by waiting. I have other
reservations as well, but let's wait until then.

In the meantime, let's see whether today's rally has some power to it
or whether it will be the 5th fizzle since 10/10.

Tuesday, November 11, 2008

Financial System Liquidity

The broad, credit driven measure of liquidity is up 1.8% yr/yr.
My weekly lending proxy -- banking system credit + commercial
paper in force -- is up a scant 2.2% yr/yr. Realistically, these
paltry gains would likely not have been achieved without the massive
liquidity supports extended by the Fed and Treasury, including the
recent Fed program to purchase commercial paper. The collapse
of the comm. paper market over the last 15 months has been the
dominant negative factor within the credit system. The rapid drop
of paper in force has forced the contraction of downstreaming asset
backed loan participations to smaller banks and likewise the
upstreaming of deposits to buy large bank holding company paper.
Total bank lending has risen appreciably in part because banks
have been unable to move loan participations out to nonbank
financial outfits and foreign banks as well. The banking system has
remained functional and has absorbed the sharp rise in loan losses,
but it has clearly been sheltered from the worst ravages of the
unwinding of the commercial paper market by the Fed and Treasury.

However, one has to take note also that when an economy falters,
private sector credit demand weakens as capital projects are shelved
and working capital needs ease. The guys who really need the loans in
an economic downturn have cash flow problems and are not the
ones the banks want to see. So, slow private sector credit creation
and demand are typical in a downturn, but the large shifting of
risk to the public arena is not.

The Fed has finally allowed monetary liquidity to expand rapidly to
offset the weak credit situation. This effort is a cardinal step in
paving the way for an eventual economic recovery. The expansion
of the basic money supply has been very rapid, advancing at a 20.3%
annual rate over the past 3 months, but growth of the basic money
supply has been so low over the past 5 years that it may need to be
allowed to expand at a continued rapid pace for a while longer to
sustain the economy in the face of such sluggish private sector
credit creation. Long term readers of the blog know how often I
have cautioned that reliance on credit to drive the economy can be
disastrous if monetary liquidity is not injected quickly once the
well of credit starts to dry.

The Fed is moving in the right direction now on liquidity, but
Bernanke was way, way too slow in stepping up on this score.

Friday, November 07, 2008

Economic Indicators

Recent economic data confirm the sudden tumble in the stock
market over the past 7 weeks.

Weekly leading Indicators
The rapid further decline in the weekly data sets portend a deep
and perhaps lengthy downturn. The steep fall in the weeklies is in
no small measure due to the blow out in sensitive materials prices.
Because these industrial commodities markets were bubbly and are
unwinding rapidly, I have some reservations about whether this
specific action overstates the case to the downside. But since
operating rates have fallen sharply in primary processing, we have
to respect the trend.

Monthly Leaders
The breadth measures of new orders received across the economic
spectrum have tanked over the past two months and are bearish for
the economy in the short run. We are seeing a global downturn here,
with the US the leader to the downside.

Economic Power Index
This index has improved slightly to about - 1.8% compared to recent
readings of -2.0 to -2.5%. Nominal wages are still holding up, and
pressure on the real wage is receding from a deceleration of inflation
pressure. However, since job losses have increased in momentum,
recovery of a depressed real wage is being somewhat undercut.
Creation of more slack in the labor market could eventually lead to
a softening of wage growth. Capital Slack -- a measure which
econometrically combines short term interest rates, the operating
rate and the employment rate -- is widening appreciably.

More Stimulus
President-elect Obama has under development a comprehensive
stimulus package to go forth to Congress upon his inauguration. It
is logical to assume that program component trial balloons may be
floated for assessment in the weeks ahead. Obama will need to
proceed carefully so as not to undermine W., as lame a duck as there
ever has been. Good test for Obama in journeying through the
corridors of power.

Wednesday, November 05, 2008

Gold Price ($740. 0z)

Gold remains mired in a cyclical bear market, down about 28%
from an historic peak set earlier in the year. Gold is hardly
immune from recession periods. It can fall 30-40% off cycle
peak levels in a moderate downturn and 50% when the recession
is broad and deep.

My macroeconomic directional indicator hit an all time peak in
July, and followed the high in gold by about 4 months. The
indicator has fallen sharply since July, and is back down to levels
seen about 15 months ago. the sharp decline in the indicator reflects
major price weakness in oil and a broad basket of industrial
commodities. At the micro level, gold production has not been
rising but commercial demand has weakened. It is also of interest
that US dealers were deluged with gold jewelry for resale when gold
cracked the $1000 oz. level.

The gold price remains quite volatile, but it has fallen below the mania
cut-off line. So I would say the metal is losing the high return for the
assumption of high risk profile. Barring the development of an extended
deep global downturn, gold could well fall to the $650 oz. level, with a
further $150 downside to $500 oz. if we find the global economy in the
deep yogurt.

I would be pleased to add gold to my list of tradable options should it
fall to the $650 level. I played the game eagerly in the late 1970s out
of the London market, but have found less stressful but equally
rewarding alternatives since 2001 when gold made its move.

The bugz are freaking over the recent large expansion of the US
monetary base and look forward to an inflationary future for the US
and a weak dollar. I have this as an important memo item only for
now, as experience shows that the Fed can shrink the base quickly
when signs point to a more positive economic environment.

The gold macro indicator is better for direction than for actual price,
but for your interest, it now suggests a price 0f $680 oz.

Tuesday, November 04, 2008

2008 Election -- 2

One of the few advantages to being a senior citizen is that you stop
caring all that much about what others think of your views. I did
vote for RR in 1980 and 1984, but this year I hope we have a good
old fashioned throw the rascals out result, wherein the GOP is
blown out the water and left to repair its tattered self in the
wilderness for a couple of years. I find Sen. Obama impressive
enough, but what stuck most in my craw was the way the GOP
seemed to revel in its stupidity, even as the GREAT MESS unfolded.
We need vibrant parties to carry on the US electoral traditions,
not the GOP numbskulls who have held the reins since 2001.

The gathering plutocracy in the US will undermine the very fabric
of our democracy. We need to see better balance in the returns
on capital and labor than what we have witnessed over the past 25
years, and we need to see the corporate mandarins divide the take
more equiblybetween chieftains and the folks who work for them.

I do not have strong views as to what will happen today, but I
am hoping the Dems kick ass thoroughly.

Monday, November 03, 2008

Inflation Situation

Since registering a major interim peak this June, my inflation
pressure gauge has taken the steepest plunge in decades. This
reflects the heavy weighting given to commodities prices as an
inflation leader. The commodities composites have simply tanked.

Technically, the major commodities composites are deeply oversold
and remain as mercurial as ever. But if commodities stay low or go
lower, the long term evidence is consistent with 12 month inflation
going to zero from 4.9% posted for September. This would imply
some month-to-month declines in the CPI going forward. Frankly,
if the main commodites composites weaken significantly further,
then the inflation thrust would be better called deflation thrust.

The outlook for rapid deceleration of inflation primarily reflects
a sharp weakening in demand for basics rather than a blend of
rising production capacity and a mild weakening of demand.

The rapid decline underway in the weekly economic leading
indicators suggests an extended period of depressed economic
demand lies ahead. But the case is not quite so clear cut. That is
because the leading indicator measures include sensitive raw
materials prices which have dropped off the cliff, but partly as a
result of the unwinding of large speculative positions in futures
and hefty inventory speculation by users and suppliers. Now, the
economic shock effects of the financial crisis are obvious enough
for now. However, since economic shocks do not always translate
into longer running difficulties, one needs to be careful not to
jump too far ahead in one's thinking. I am not trying to pull a
bullish chestnut out of the fire here, but am merely pointing out
that sudden reversals of economic fortune can, on occasion, be
shortlived. And, do not forget how volatile oil, petrol and other
commodities can be.

Thursday, October 30, 2008

Stock Market -- Technical

The SP 500 has come out from its crash trend line. The much
broader Value Line Arithmetic, a good 1700+ issue proxy for
"the average stock", exited its crash trend line today. However,
and based on closing prices, the SP 500 has yet to break out from
a far less dramatic downtrend line running from 10/13. So, trend
line-wise, the market is not out of the woods quite yet in the
short run.

The SP 500 has been showing basing at intraday 835-840 since
10/10, a good sign. The short term momentum oscillator is
improving, although still negative. The market is now moderately
oversold near term at -3.8% to the 25 day m/a. Note , however,
that rallies have only proceeded from deep oversolds of more than
-15% since the crash kicked off in Sept. Continuation of the latest
advance off the 10/27 closing low of 848 in the days ahead would
be another positive sign, indicating the market can move ahead
without having to first fall to agonizingly deep oversolds.

The 10 day m/a is starting to stabilize, while the 25 day m/a is
still in retreat. I like set ups when the market and the 10 day m/a
move up through the 25. You can be whipsawed here, but not
that often.

Intermediate and long term indicators remain negative and
deeply oversold. Since these are primarily early stage trend
following indicators, turns would not come quickly given the
depth of the oversold readings.

On balance, the market remains treacherous although there
has been some short term improvement.

SP 500 daily chart is here.

Wednesday, October 29, 2008

Monetary Policy

As was widely expected, the FOMC today cut the FFR% to 1.0%.
The longstanding cornerstone indicators suggested as much, and
the Fed indicated increased confidence that, with weakening
economic demand and falling operating rates, inflation would
subside to a low level over the next several quarters. They might
have spooked the markets had They not cut. Also, such forbearance
might have handed Sen. Obama another stick to use to whup
the GOP establishment.

The move will backfire if it is the proximate cause for a sell-off in
the US$ and sharp rally in the oil price. Should the latter occur,
it would ultimately put more cost pressure into a weakened system.

Thursday, October 23, 2008

Stock Market -- Brief Comment

The SP 500 closed today around 908 and based on closing prices
is putting in a short term base around the 900 level (Link to
chart below). That's the good news. The bad news is that the
market has yet to wiggle out from underneath the crash trend line
drawn from the 1213 level of 9/26 from whence the deepest part
of the recent decline commenced. In short, from a technical
perspective, the market is still in crash mode and needs to repair
further to exit it. So, for the moment the market situation remains
both fluid and unstable.

I still need fresher earnings data, but it looks like the Market
Tracker has the SP 500 fairly valued in a 1000 - 1025 range. This
represents the first time the market has fallen well inside the
Tracker since the crash of 1987. Then, however, earnings were
still trending nicely higher, whereas now, investors are trying to
gauge how weak earnings may be over the next 3 to 6 months based
on the quick acceleration in the business downturn in evidence

A daily chart of the SP 500 based on closing prices may be found
here. Note that the market is still deeply oversold relative to the
25 day m/a.

Tuesday, October 21, 2008

Oil Price

A weakening US economy is spearheading an expected sharp
contraction in global economic growth and consequent
substantial moderation of oil demand. With excess crude
capacity now rising markedly, the oil price is weakening. The
industry has yet to enter a typical bust following the boom
period. The dramatic 52% plunge in the oil price since the
summer high prints of $145 bl. reflects the popping of a
speculative frenzy in this market. Oil never reached the full
scale bubble price of $170 bl., but the market was bubbly and
destructive enough.

OPEC will meet later this week to look at cutting its output to
arrest the price plunge. Experienced hands know that it is
primarily the Saudis who can "afford" cuts, and that whatever
actual production curtailment may come will fall to them and
their accountants. In the meantime, oil demand is likely to
fall further.

There are now forecasts of $50 -60 a bl. for early 2009. These
projections merely extend the crash trendline in place since
July and recognize that oil price busts have toted 60% on
occasion in the past. These projections are a bit steep based
on the fundamentals, but are not so when you consider the
shakeout underway among the new generation of commodites
investors who got caught up in the champagne waltz up to $145.

Near $70 bl., oil is now as deeply oversold as it was ridiculously
overbought at this summer's high. No grey bearded trader would
be shocked at a $10 -20 bl. pop in price over the next couple of

For a weekly price chart, click here.

Friday, October 17, 2008

Corporate Profits

The indicators I track to gauge the outlook for non-financial profits
have nosedived over the past 6 weeks. Physical output has
deteriorated and pricing power has weakened substantially. Q 3
'08 will reflect just a minor portion of the weaker outlook. But
Q 4 '08 and next year's Q 1 will likely reflect more fully the
damage to profitability underway. There are still pockets of
strength offshore, and a weaker yr/yr comparison for the US $
will help, but broadscale earnings weakness is presently in the
cards. Financial sector profits remain dismally low as loan losses
and seccurities writeoffs remain large. Q 4 ' 07 was a disaster
for the financial sector and perhaps the current quarter will not
be as bad.

Corporate profitability has improved significantly since the late
1980's, and there is no evidence yet that profitability is set to
retreat to very long term norms. However, the next few quarters
could well test the longer term trend, especially since pricing
power has been such a strong feature of profits growth over the
past half dozen years ( oil & gas and basic materials especially).
To be more specific, SP 500 quarterly profits need to hold well
above the 15.0 level for the next several quarters, as that is the
low end of a broad range trend band in force for over 20 years.
I dwell on this because if it looks like yearly profit growth is set to
slow from 8.5% on average to a lower rate, then investors will
ultimately adjust the index price until the dividend yield is
high enough to offer an attractive rate of total return. I bring
this up now, because many corporations have already done so
many of the tasks that can reasonably be done to enhance

It has been my view that the recent sharp decline in stock
prices has not been irrational, but has been a reaction to a
fast turn for the worst in the outlook for profits in the months

Thursday, October 16, 2008

Stock Market -- Technical

High instability and volatility has made a mockery of my attempts
to analyze the technical standing of the market. A rally did start
right in the middle of the timeframe where I expected one to
start, but we got up 25.7% on the SP 500 trough to peak over
3 trading days -- Fri. through Tues. -- followed by a steep fall and
then another push up today. The 25.7% move was a good year's
work, never mind 3 days. The market remains deeply oversold,
but the lack of stability has so far made it worthwhile for only the
most astute day traders. The market may need up to a good 5-6
trading days to sort itself out as to short term direction.

Wednesday, October 15, 2008

US Banking System & Liquidity

The banks have expanded the book of interest earning assets by
10% over the past year. If a credit crunch has been on in this sector,
you could fool me. The crunch as it were has come in the primary
capital account, which, despite $ billions in new capital raised, has
grown by only 5%. Large increases in loan loss reserves have
greatly impeded capital growth as has a reduction of fees earned
because of sharply reduced deal flows. The suppression of growth
of capital has reduced bank liquidity sharply at the margin (the
ratio of Treasuries to C&I loans has increased substantially). With
the economic downturn deepening, loan losses will remain high,
and, since bank stocks are trading at very depressed prices, capital
was set to be starved further. Hence the gov.' s $250 billion "bail
in" via the acceptance of 5% preferred stock from the banks. This
development will increase system primary capital by more than
20% and will add immediately to bank liquidity. The feds have gone
for a large expansion in bank capital because they know there are
further loan losses ahead, and they want to keep the system
more liquid and able to grow.

Bank holding companies and their various up and down stream
conduits relied heavily on the commercial paper market to fund
mostly real estate, but, deal transactions as well. The paper market
in financials has declined by more than 35% or $800 billion over
the past 15 months. With this source of funding mainly closed off,
you can again see the gov. thinking on capital infusions and the
need for the Fed to make a market in commercial paper.

Banks have been tightening lending standards and with a weak
economy, private sector credit demand has fallen off. So, it will
be a while before we see how efficiently the system functions with
its new supports.

Over the past 6 months, my boad measure of credit driven
liquidity has increased at a paltry 0.8% annualized. To counteract
the freeze on liquidity, the Fed has moved to add well over $600
billion to its own balance sheet to liquify markets. As I warned in a
number of prior posts, the Fed took a huge gamble in withholding
net liquidity infusion for so long.

The Fed's action is a plus for the economy a bit down the road, but
viewed long term, this massive infusion of liquidity will be
extraordinarily destabilizing to the economy and the capital markets
if the Fed does not begin liquidating massive amounts of securities
as soon as it conveniently can. With the economic challenges the
US faces in the short run, the threats from a grossly expanded
Federal Reserve balance sheet should be viewed as a critical "memo
item" on your checklist.

Friday, October 10, 2008

Stock Market & Panic Of 2008

Stock Market
It was a mild down day in the end. But there was a trough to peak
swing of 1000 Dow points during the session. Thus it is that
traders have a strong interest in this deeply oversold market. I
try to observe the rules of the classic Sicilian trader: Never disclose
your positions or intent, and never offer advice. However, with
option premiums so high, some traders may well buy and write
against their positions. These fellows are acquiring downside
protection and income and if they go a little out of the money, they
may not care if positions are called away. A mere passing thought.

The crash in the market reflects the fact that investors have been
lowering expectations for profits and have been doing so in a rapid
manner. Not irrational action in my book since it could well be that
earnings may prove disappointing for this quarter and for Q1 '09.
However, further dramatic downside action in the days ahead
might be evidence that bearishness is getting ahead of itself.

The Panic Of 2008
There are new nostrums to end the panic in the air -- having
central banks guarantee international interbank lending and using
taxpayer money to buy equity positions in banks to bolster
primary capital directly. The first looks awfully unwieldy and I
regard the latter -- direct investment -- exceedingly dimly.
The ability of governments to manage properly a program such as
this over time seems heavily in question (Think post office and
FEMA). The Fed and the Treasury have so many $ irons in the
fire already, that it is reasonable to wonder how easily they can
unwind these programs in the future without causing further
dislocation. I also remain very wary of allowing lame ducks in the
US so much leeway in their closing days. But the tinkering will
go on.

Thursday, October 09, 2008

Economic Indicators

Long Term Indicators
This indicator set started turning negative over the course of 2004
and bottomed in terms of breadth in October, 2007. Since then, it
began to inch along positively, and turned robustly positive over the
summer of 2008. The timing of economic turns is hardly precise, but
the best guess now is that the domestic part of the US economy will
enter recovery mode in the spring of 2009. In turn, I would have to
rate the development of a cyclical bull market in stocks as still a
couple of months away based on long term considerations.

Looking at the key indicators -- short rates, trend of monetary
liquidity and inflation potential -- I have a number of questions about
the strength and durability of a US economic recovery, but I will
hold off on those until we are further on in time.

Shorter Term Lead Indicators
The weekly indicator sets peaked in mid-2007. They fell sharply
into the early spring of 2008, whereupon they bounced up in lieu
of the tax cut stimulus package. The economy held up far better
than the indicators suggested they would in view of strong and
rising export sales, superb inventory management by business and
the aforementioned stimulus package.

The indicators turned down again sharply in June. The stimulus
package proved only a temporary fix, and with real final demand
falling more broadly, supply managers could not keep up, and
wholesaler inventories bumped up. We are also now seeing a
weakening of orders of manufactured goods for export. These
developments plus the emotional shocks stemming from the
financial panic suggest further deepening of the downturn in
the US ahead.

Economic Power Index
This index is deceptively simple. I add the yr/yr % change of
real earnings to the yr/yr% in total employment. Declines of
2.0% or more are consistent with the development of severe
downturns. This index dropped down into the -2.0 to -2.5 %
range during the Sept. quarter, reflecting a negative real wage
and accelerating job loss (1 million jobs lost in 12 months). Now
with inflation receding, I expect some improvement in the real
wage in the months ahead, but the weakness in this index is
sobering. Moreover, with banks tight on lending across the board,
the power index assumes more importance as it cannot easily
be offset by heavier leveraging.

So, the indicators say it could be a hard go for a good several
months. Hence the bearish comments from Fed chair Bernanke
and the speedy 50bp cut in Fed Funds to 1.5%.

Tuesday, October 07, 2008

Stock Market

Well, the panic has extended to the stock market. Its recent
descent has turned closer to vertical, but the reaction has not
been irrational. As discussed in the last update on fundamentals
on 9/23, the SP 500 Market Tracker had fallen to a value of 1025.
At that time, the SP 500 was trading at a whopping 17% premium
to this measure of fair value. Then, investors were looking at
80.0 annual earning power for the index vs. roughly 68.0 for the
12 months through 9/08. With a suddenly deepening downturn,
investors have lost confidence in the 80.0 number and have pushed
its realization further out in time.

All of my earnings indicators have been weakening as US production
has been falling as well as have industrial price realizations. This
suggests more earnings disappointments across an array of sectors.
On the plus side, my inflation thrust indicators have sunk rapidly,
so the Tracker p/e multiple will start to be adjusted upward. The
Tracker needs fresh data, but for now, I am going with roughly
1000 for the SP 500. So, I have the market now trading at fair
value, with no premium for a quick return up in earnings.

As outlined in the 10/4 technical look post, I am on the hook as
calling for a substantial and tradable rally to start sometime over
the next five trading days. That would befit the market's very
oversold position. This "call" is based on six week breadth
indicators that have proven reliable over the years. So, I'll go
with that. It won't be nearly as helpful a call if the rally comes
within the next five trading day timeframe but from much lower
levels. But, I'll take it anyway.

Saturday, October 04, 2008

Stock Market -- Technical

As most technicians will tell you, the stock market is now
substantially oversold. As a guess, we are due for a rally of
several weeks duration to begin either this week or in the early
going next week. My selling pressure gauge -- a moving average
of NYSE decliners -- is near strong oversold levels. This one has
worked best in the decline since autumn '07.

It is still too early to tell whether this is a routine cyclical bear
market or whether something more serious is afoot. If one were
to allow for a rally over a few weeks in the short run, there
could well be another sell off that carries the SP 500 (1099 10/3
close) down to around the 1000 level by the latter part of
November. That would represent a nasty enough cyclical bear,
but if we put in a 1000 low seven weeks out, the chart would
give even odds it was a good bottom that would hold. For now,
I think it is reasonable to re-visit the issue then before delving
into darker scenarios.

Looking right ahead, the technicals suggest to me development
of a decent, tradable rally over the next 3 - 7 trading days. If a
rally does come along, I would note that traders have been
getting very edgy once the SP 500 gets about 2% above its
25 day m/a. That would put a provisional top in around the
1225 - 1250 level.

Tuesday, September 30, 2008

Comments On The Financial Mess

Knowing they would get a second act, Congress went into full
turkey mode yesterday, with the House calling a vote on the
Paulson plan when they knew the votes were not there. Ms.
Pelosi alerted all put buyers with her damning speech of GWB
and the gang. With the ensuing big blow down in the market,
the House was looking to scare everyone enough to soften up
the public to make this ugly bill more palatable.

With "only" a 12 vote swing needed to create the new gov.
broker / dealer, they can now add some features ordinary
folk might like and hope they can swing it later in the week.

The same dumb banker guys who gave away money in 2005-
2006 are now in panic mode, sucking their thumbs, pooping
their pants and not lending to anyone. There are also plenty
of bankers just playing possum and waiting to see if an agency
does come along to help them take out their trash.

The SEC and, perhaps, even the accountants, are warming to
the idea that mark-to-market accounting may not be such a
hot idea for assets that have no market. Too bad the horse is
long gone from the barn.

Americans, from left through right are steamed to beat the
band. Passage of the Paulson plan with its enormous
commitment of taxpayer capital, will leave a legacy of
profound bitterness toward the gov. One can only hope the
few smart guys left in banking will take their cue if the plan
passes into law and start lending again to deserving borrowers.

The market recouped some of its losses today on hopes the
bailout plan will pass. The gang will be back in DC on Thursday
perhaps to marshall up the forces for a new vote in the House
on a sweetened deal. That will keep hope alive in some hearts.

I do not know whether this plan's moment has passed or not,
but I do know that we all need to get past it one way or the
other to get back to business.

Sunday, September 28, 2008

Stock & Corporate Bond Markets

I am headed out later today for a family birthday celebration and
will miss the release of the provisional bailout plan targeted to
circulate before the markets open in Asia this evening. I note only
that the original two and a half page Paulson version has
mushroomed to over one hundred pages (devil in the details).

The stock market is but mildly oversold in the short run, but
6 -13 week measures show we are moving toward a tradable
oversold. I would prefer another down week to produce a
more formidable set-up, but one has to allow that the plan
to remove known toxic debt from the private system might
serve as a short term palliative to a bruised market. As you
might imagine, the suspension of shorting of financials now
ongoing could temper any bounce we may see.

The corporate bond market took a major hit last week with
yields on many issues jumping by 100 basis points or more.
So we have a handsome short term oversold condition here.
The Bloomberg junk bond index closed out Fri. 9/26 at
15.02%. It helps you understand why junk bonds have that
appellation, but it is also a signal to savvy credit analysts that
one can, if one chooses wisely, earn out one's capital in nearly
5 years via the issuer's own cash.

The next 24 hours should be interesting enough....

Friday, September 26, 2008

The Panic Of 2008

I try to avoid journalistic hyperbole, and I have disdain for the
pundits who have been yelling "Panic!" for months on end.
However, It appears the financial system has finally entered
panic mode. Interbank lending is actually up a remarkable 12%
yr/yr, but has started dipping here in September. Quality
yield spreads at the short end of the market are now well above
what one might expect during a recession period that also features
mild stress on the financial system. Finally, the Fed is starting to
carry over its large liquidity infusions week to week to sustain
banking system liquidity and capital adequacy ratios. The evidence
of the past two weeks does underscore the sense of fright that
Paulson and Bernanke have been giving off. The apparent
novelty of Paulson's plan reflects the fact that questionable
collateralized loan obligations suffuse the system and cannot be
easily isolated and contained.

Bankers hung in there for quite some time over the past year,
but the recent spate of high profile financial services firm
collapses has left them finally undone here in September. A
financial panic can abate rather quickly if the offending virus
is contained and removed from the system in a timely manner
by resolute action. The Paulson plan for all its manifest faults
would provide the gov. the flexibility to traverse the system
to vacuum up the viral paper. It is far more efficient than
dealing with troubled companies on an ad hoc basis. If toxic
loans are bought in widely, it could foster a conviction among
bankers that risks to the system in toto are being addressed.
But alas, info. on the execution of the plan is so lacking that,
if enacted within the next week or so, we would only know
that the gov. is doing business as usual -- throwing money at
a problem.

I do not know if a financial panic left unattended would burn out
quickly enough to spare most sectors and leave our political
and economic systems intact. So I can appreciate people wanting
to take "constructive" action on the problem quickly. My plan
as a trader is to make the fewest number of assumptions I can
in the weeks ahead as authorities move to try to contain the
panic. False assumptions are big killers of portfolio value.

Interestingly, when you look at the devastation underway in the
private sector financial and corporate debt markets, the stock
market stands almost alone as an enterprise not engulfed in the
panic. Perhaps the market has more wisdom than one might
have thought. But there could be a fast 15 - 20% down here if
the difficulties in the financial system are not soon contained.
Also of interest, is that my e-mail inbox is filling up with pieces
advocating a big relief rally if some form of rescue is implemented.
Fascinating time.

Wednesday, September 24, 2008

All Roads Lead To Rome...But..

Paulson is working hard to get the clearence to set up a $700 bil.
broker / dealer on the taxpayers' pad. He might even add a unit
to do merchant banking -- taking stinky credits for equity. That
is one road we all have to travel to get to Rome, so to speak.

We also need to watch the economy itself, and in so doing,
work to keep the rescue plan as separate as we can. Whether
the plan gets off the ground or not, it and the path of the
economy will eventually converge.

Even if Paulson gets most of what he wants and the plan kicks
off soon, we are still looking at a weak economy in which bankers,
relieved though they may be, will not be going out and up to the
corner to hand out cheap loans. If the plan can get the wheels
turning, they will turn slowly early on.

We also have to watch the blowback effects of the plan. This
would include its effects on longer term interest rates, currencies
and commodities prices (the inflation hedge trade). Already,
for example, we have seen mortgage rates jump up with long
Treasury yields as investors factor in more supply of the
latter to digest.

Finally, we have to watch the fate of the rescue plan itself in
the days ahead. Many folks are very angry about this, Congress
is distressed, and the two presidential candidates are super
wary (Would I rather be President or a stand-up guy who
has the courage to speak my mind?) When it comes to
legislation, the wheels can come off small wagons easily, and
since this a huge wagon requiring lots of wheels, well...

Tuesday, September 23, 2008

Stock Market -- Fundamentals

The SP 500 Market Tracker has dropped further in Sept. and is
now at 1025 fair value based on 12 month earnings and inflation
readings. The earnings index has fallen from an annual rate of
around 90.0 in mid-2007 to 69.0 presently. The vast bulk of
the carnage has been in the financial sector, but as production
growth slows globally, more sectors have been implicated. The
p/e ratio for the Tracker has contracted as well over this period
as inflation accelerated sharply until just recently (Rising
inflation raises the investment hurdle rate and suppresses the
market multiple).

The SP 500 is trading at around 1200 at posting time. I think
the market is discounting a return to 80.0 earning power for the
"500" and is probably shading the p/e ratio more for future net
per share risk than for inflation. The 80 number has been the
assumption through much of 2008 as investors figured there
would be an end to the bleeding in the financial sector this year
and some bounceback in non-finacial earnings. The direction of
the economy is a challenge to those assumptions, so the 17%
premium in price of the "500" over the Tracker probably
should not be taken lightly.

My forward looking indicators continue to improve, but the
positive trend of monetary liquidity still suggests a sustainable
improvement in economic activity and profits could be a good
9 months out in time.

One important set of indicators -- credit quality spreads -- are
moving the wrong way reflecting a sharp rise in the price of
risk across the board. Not only is confidence in the global
financial system and economy low now, the US credit markets
are in lockdown mode, with all eyes on the Paulson bailout
plan. This is a bad plan on constitutional, economic and
financial grounds, but the hope appears to be that enactment
in modified form will be materially better than inaction. At
any rate, a positive turn in credit quality spreads would
strengthen the case for equities considerably.

Monday, September 22, 2008

Bailout Proposal Blowback

In recent days I have argued that this plan makes no economic
sense and that whatever Paulson / Bernanke cook up to try to
unchoke the financial markets, it better not chase everyone
back into the inflation hedge trades. Well, BINGO! Today, the
US dollar fell dramatically against the Euro, and the price of oil
soared $25 bl. to close to $130. On top of this, Congress, shoved
into a corner by receiving a three page bailout document a week
before adjournment for the election, has wisely decided to vet
this document thoroughly, and of course, to start adding lights,
decorations and tinsel to the world's most expensive Christmas

From my perspective, a lameduck administration and Congress
have no business trying to do a massive, far ranging program
of this sort. That should be the work of a new administration
and a new Congress, both set for Jan. 2009. And it should not
be a case of act in haste and repent at leisure. If the markets
cannot wait a few months for a sensible overhaul of US priorities,
the system is simply too fragile to "fix" and a large outlay of
funds in the short run will simply be wasted.

The credibility of GWB and his guys is being shredded again
with this latest blowback. It is time for the candidates for
president to find their voices and to tell voters what
initiatives would best serve US interests instead of hiding
behind a badly discredited administration.

My concern after today is that more folly lies ahead in
the short run, but I would also ask you to accept my apology
for the editorial. I promise to get back to business.

Saturday, September 20, 2008

The Paulson $700 billion Plan

Treas. Sec'y Paulson has opted to follow the advice of some
Democrats and independent economists and wants Congressional
approval to buy up to $700 billion of CMOs, mortagages and
related debt from domestically HQ'd financial institutions. The
hope is that by buying up these toxic loans in a reverse auction
(lowest offers accepted), confidence might return to seized up
financial and capital markets.

There is no stable or reliable market for this paper, and values,
when assigned, have an arbitrary air. I am confident looking at
actual loss experiences net of foreclosure proceeds in housing
plus realistic measures of home price declines that the actual
pool of mortgages viewed discreetly is worh considerably more
than the paper is being valued in securitized form.

From a pure economic perspective, the bailout program does
not make sense, so I do not know whether the alleviation of
so much suspect paper will end the seized up condition in the
markets. I hope so. I also hope that Congress and / or the
Treasury manadates the de-securitization of this paper and that
it buys the tranches it needs to complete this process. I would
also urge regulators to view the value of such securitized assets
remaining on the books of intermediaries in terms of their
economic value. If I was a bank CEO stuck with this paper, I
would be loathe to give it up for less than it was worth only
then have to raise capital dilutively. This deal stinks, and as
readers of the blog know, I have several times argued against
mark to market pricing for all esoteric assets.

So far the banking system has held up well, keeping capital
intact through raising additional funds to cover losses. This
auction process conceived by Mr. Paulson will be a major test
for the system and if panicky banks over - dump the toxic
paper at the Treasury, the system will be liquid although
significantly capital impaired.

Friday, September 19, 2008

Stock Market -- Technical

The furious two day relief rally brought the market back from
deep short term oversold to neutral. Today's advance was
strong enough to preclude an automatic bout of heavy profit
taking by short run players on Monday ahead. Clearly though
the current trajectory up is not going to last too long before
money flys off the table. Remember as well the normal admonition
regarding the untrustworthiness of spike bottoms such as we
saw Thursday.

If the enthusiasm does spill over into next week, I would expect
some traders to start cashing in about 2% above today's close.
The SP 500 went out today at 1255, so I would look for some
nastinesss to set in around the 1280 level.

Thursday, September 18, 2008

Still Far From The Madding Crowd...

Earlier today (see below) I briefly discussed attempts by
central bankers to corral rampant fear over the perceived
deterioration of the global financial system. I also pointed
out that gov't officials here and elsewhere would no doubt
continue tinkering to find ways to curb this fear. So, I come
back in from doing some repair work on my driveway to
see new UK and US curbs on short selling and a hint from
Treas. Sec'y Paulson about a new gov. agency to buy up
the sour real estate and related loans at distressed prices
from banks with the aim of restoring transparency,
stability and, hopefully, vibrancy to the system. If this is
a go, it will rquire congressional approval and could be
very expensive. Stock traders and investors loved the
idea and rallied the market strongly.

I have been around long enough to know that financial
people have been at least as scared as the dark days of
early to mid 1982 when the international debt market
imploded. Even if today was the peak fear day, rest
assured that plenty of folks will remain shaky / quakey
for weeks.

The Fed and Paulson have to go about their business of
shoring up the system but be mindful that they want to
avoid sending players full tilt into inflation hedge plays
that would drive up commodities, re-ignite inflation and
ultimately punish income and profits.

We had a spike low in the stock market today. I have
hardly ever bought those and did not do so today, as I
prefer to see the market stabilize and put in a base, if
even a small one.

Oh, yeah. there's more hard work ahead on the driveway.

Far From The Madding Crowd...

Right after I post this piece, I am heading out to do some blacktop
repair on the driveway to beat the cooler weather and the falling
of the leaves.

Speaking of falling, investor and trader fears are obviously
rampant concerning whether the global financial system is getting
unhinged and is near ready to fall apart. The central banks have
poured liquidity into the system in recent days. The feds have chipped
away heavily at "systemic risk" with the takeovers of Fannie, Freddie
and the doleful AIG. But, really, if folks want to blow up the system
via a panic, massive liquidity infusions will not, in the end, stop the
madness. Moreover, stepping too heavily on the monetary pedal
may only trigger another and damaging round of inflation hedge
speculation. Government authorities around the world may be
forced to do further tinkering if fears do not abate, but at this
point, I intend to let this gael blow over when it will and see if folks
really are as scared as they think they are.

A quick way to track the machinations of a worried financial crowd
is to watch the 3 month US Treasury yield. Chart is here. You can
also track the moment to moment action at $IRX.

Tuesday, September 16, 2008

1. Monetary Policy, 2. AIG

Monetary Policy
Bedrock fundamentals of monetary policy such as the trends of
production and capacity utilization (both down) and private
sector data from purchasing managers did lend support to a
mild cut in the Fed Funds Rate from the current level of 2%. I
did not anticipate one because the FFR% is low enough already
and also because the Fed may not wish to touch off more long
side speculation in commodities and short side interest in the
US $. Since the acceleration of inflation over much of 2007 and
2008 reflected a bubbly surge in commodities, the recent sharp
sell down in same will bolster real incomes and relieve pressure
on profit margins for many businesses. As I see it, the important
work for the Fed now is to provide a sensible, moderate growth
path for monetary liquidity.

The apparent stupidity of this once high quality company in
recent years has been breathtaking. And here now we have a
$1 trillion enterprise at death's door sitting down with the Fed
to arrange financing to give it time to figure out a survival plan.
On top, this is taking place during the closing 50 or so days of
a presidential election. So, AIG is holding a gun on Bernanke and
Paulson. If the feds flip these creeps off and the markets tank,
the election could go up for grabs. So the feds are stuck with
trying to keep AIG afloat in a way that finesses the bailout issue
at least until after the election. I am sure discussions are
rather interesting.

Monday, September 15, 2008

Liquidity Situation

As we rolled into September, the liquidity situation was still on the
tight side. My proxy for credit driven liquidity is up by only 3%
yr / yr. This is too small an increase to fund economic expansion.
Monetary liquidity via Federal Reserve Bank Credit was up only
about 4% over the same period. Low liquidity growth reflects
the economic downturn, bank reticence to lend, and a still rather
conservative policy of lquidity injection by the Fed. If you deflate
the changes to liquidity by a roughly 5% inflation rate, the tightness
in the system is all the more noteworthy.

With Lehman in Ch. 11, it will likely have to liquidate a sizable
portion if not all $600 plus billion of its asset book. A goodly amount
of the book will present no problems, but there will be significant
difficulties with the subprime and other "toxic" paper it holds. As
well, Lehman may have to stop funding its pet SIVs and other
conduits. In recognition, the Fed cobbled together a pool of funds
from the 10 major banks of $70 bil. and added $70 billion itself via
the repo market today to provide liquidity to unwind the Lehman
book and those of its debtors. But this is all temporary and does
not constitute a departure in policy. There is also a scramble to
provide short term funding for AIG, the huge insurer, which needs
to raise capital. Since the Fed and Treasury now have to manage
a large portion of junky paper on their books via bailout, they may
have rejected a Lehman survival guarantee to preserve
remaining integrity in an uncertain environment.

The Fed is now skating on very thin ice regarding its liquidity
policy. Weakness in retail sales, rising business inventories and
falling production point to a deepening of economic difficulty, and
the Fed probably should step up liquidity infusion moderately
to avoid prolonging the downturn. The commodities driven
inflation fever has broken for now, so the Fed may have a
"window" to add some $ dough to the system.

Wednesday, September 10, 2008

Gold Price ($759 oz.)

Gold remains in a wicked downtrend, now trading about 27.5%
below the all time high of $1034 set in Mar. ' 08. It has fallen
out of the mania phase, as inflation hedge players leave the
market. The metal is quite oversold, but has yet to stabilize.
Old line traders would tell you it could fall to $700 0z. or
about 20% below the 40 wk m/a before coming to rest. But,
with a volatile play like gold, there's not much telling.

The gold price macroeconomic directional indicator has fallen
sharply since making an all time high on July 4. This weakness
reflects sharp sell downs of oil and industrial commodities. By
peaking at $1034 oz. back in March, gold correctly discounted the
rapid deceleration of key inflation indicators. The macro indicator
is close to a breakdown for the first time since early 2001. Since
it has been a good directional indicator for gold over the years, it
will bear close watching now.

In order for gold to break the long term uptrend, it would have to
take out $620 - 640 oz. in the weeks ahead. Cold consolation for the
gold bulls out there.

For now, I am interested in seeing whether gold can bounce from
its oversold condition back toward $800, which would signal that
that there are still aggressive players in the game.

gold as an investment turns interesting to me down around the
$600 - 650 area. So, it is still well out of my league. I will be
watching to see if gold does get pushed down 20% below its 40 wk
m/a to the $700 area. For a streetTRACKS GLD chart, please
click here.

Monday, September 08, 2008

Fannie / Freddie -- Comments and Alert

Several weeks back, unnamed US Gov. officials told the NY Times
that putting Fannie and Freddie into a gov't conservatorship was
a "live" option. That gave the attentive an opportunity to dump
remaining equity holdings and derivatives, and foreclosed a
Bear Stearns fiasco for shareholders. As of last Friday, only
"rise from the ashes" players should have had long positions.

I guess the Gov. had hoped it could kick the can down the road
until next Jan. when a new administration would have had to deal
with it. But rising yield spreads to Treasuries and concerns about
rolling over the paper forced Bush's hand.

Like you, I have read the terms of the deal and many of the
comments ushered forth. In a nutshell, we the citizens must secure
the liquidity of the mortgage market and underwite the value of
our homes as needed.

By my reading of US demograhics, the market for housing will
remain subdued for another 8 - 10 years, before the large Gen Y
cohort starts moving into its prime home buying years. Yes, pent-
up demand is building, so there will be a recovery in sales and in
construction at some point in the next year or two, but it will be
moderate. Moreover, the days of sustained rapid home price
appreciation may not return for years.

The alert I have in mind concerns the amount of liquidity that
the Fed may have to provide to mop up errant Freddie / Fannie
paper. Some are guessing this could reach up to $25 billion. This
is managable, especially if the Fed starts unwinding primary
dealer liquidity support in Jan. '09 as they have indicated. The
Fed has been stingy with liquidity since 2004, as it moved to
water down Greenspan's egregious excesses. But the markets
will watch what They do carefully, since rapid liquidity infusion
might only re-excite the commodities markets and get the big
money back to thinking about hedging inflation. A train of events
of this sort would punish householders, the housing market and
the economy at large.

Fannie / Freddie -- Comments and

Friday, September 05, 2008

Economic & Inflation Indicators

The weekly leading indicator sets remain in sharp downtrends and
continue to herald an ongoing downturn.

The monthly new orders indicators indicate only mild contraction in
the US and are being heavily supported by a strong export book,
especially in manufactured goods.

The economic power index ( 12 month changes in real wages + total
employment) remains moderately negative but did show some
improvement in August as there was a slight pick up in wage growth
and a deceleration of inflation. The pick up in the EPI is a hopeful sign.
The EPI understated economic purchasing power in recent months
because I did not include the tax rebates, which are now running down
in size.

My "quickie" coincident indicators portray a weak economy -- lower
real wages, retail sales, total employment and production. Averaged
out, the indicators are down 2% yr / yr.

The inflation thrust gauge made a cyclical peak in July and is now headed
sharply lower reflecting the large downdraft in the commodites market.
First beneficiaries should be the real wage and consumer confidence. The
deceleration of inflation -- largely commodities driven -- comes in the wake
of a rapid global economic slowdown.

Thursday, September 04, 2008

Stock Market

Yesterday I suggested that we take note that the weakish market
uptrend had rolled over. I did not anticipate such a fast and forceful
drop would result today. The SP 500 closed out around 1236, and
that's close enough to the low test zone of 1200 - 1215 running back
through late 2005 to invite bear inquiries and to test it out again.

I do not often try to play the commentator, but it appears the weak
action in the market since the sharp rally peak in May of this year
suggests investors are concerned the tax rebates have not been
effective enough in stimulating the economy and that the still large
credit quality yield spreads in the fixed income market are garnering
negative attention re: the financial system.

At any rate, if we do see a test of the lows in that 1200 - 1215 bracket
on the "500", there would be a deep enough short term oversold to
make the sitiuation rather interesting although risky.

Wednesday, September 03, 2008

Technical Notes

Stock Market
The shorter term trends under the daily action are rolling over.
Take Note and scroll down to Fri. 8/29 entry for chart link of
SP 500. Note breaks below 10 and 25 day m/a readings and
today's dip of the 10 below the 25. Looking out through 13 weeks,
the technical ducks are not lined up in a commanding order, so
the short term action may get more attention than usual.

Treasury Bond Market
Bullish advisory sentiment is creeping up, with Market Vane
showing 71% bulls. This is not alarmingly high, but the reading
is tilted enough to warrant a heads-up.

Oil Price
As expected, oil has dropped to support at around $110 bl. where
the price is getting sticky. More interesting pivotal support lies
below at $100 bl. I am still guessing $90 by late in the year.

Friday, August 29, 2008

Stock Market -- Short Term Technical

The broad market has entered a period of price compression, and
it is neither overbought or oversold. I find it very difficult to get
any sort of edge in a market like this and almost always allow the
compression period to resolve before taking a trade. Ahead in
September we have a period of seasonal weakness to traverse,
and that is likely keeping some money on the sidelines. From
my perspective, it is still an up market based on its position
relative to the 10 and 25 day m/a's. Obviously though, there
is clear short term overhead resistance, so the powder shall
remain dry.

The daily SP 500 chart is here.

Wednesday, August 27, 2008

US Economic Outlook

First off, I think it is going to take a year or so to straighten out the
statistical mess building in the GDP accounts. Measured yr / yr,
the GDP price inflator advanced a paltry 1.9% through Q2 '08.
That compares to a 5.6% advance for the CPI. The use of the
modest deflator enables the BEA to show real growth over the
past year, which is unlikely with the CPI over 5%. So, at some
point, the Gov. will have to come cleaner on the data. This all
might await the departure of GWB and his crew.

So, we have a weak economy with housing development and
retail sales -- durables particularly -- the main culprits. Total
Gov. spending has been a slight positive offset. A bigger plus has
been good inventory management, with retail running an especially
tight ship. The biggest offset to a weak consumption / housing
picture has been the strong performance of export sales, which
has helped keep production and employment levels from falling
more sharply.

The shorter term lead indicators remain in firm, strong downtrends.
The longer term indicators have turned progressively more positive.
We have lower short rates, a positively sloped yield curve, a sharp
downward break in fuels prices and a Fed that is moving to add
monetary liquidity to the system, however gingerly. The longer lead
indicators are mediocre when it comes to timing, but my guess is
that a return to sustainable 3% real growth could be a good year out
in time. If commodities prices were to fall significantly further, this
would likely allow the Fed to speed up reliquifying the economy, and
would shorten the time frame for recovery worth the name.

The economy is deriving some benefit currently from the tax rebates.
The bulk of this program will have passed before very long, leaving
some vulnerability in its wake. In addition, with global growth
decelerating, the US export book will eventually reflect the global

The two vital elements I see are inflation and Federal Reserve
flexibility. The surge of inflation over the past year has punished the
economy. Wage growth has actually been slowing, so real take home
pay has been hit hard. A slow global economy needs to work to
suppress the commodities speculation party to relieve inflation
pressure on wages and profit margins. A hefty deceleration of the
inflation rate would allow for a recovery of real purchasing power, and
would further allow the Fed to operate more freely to open the spigot

I would have to say that the earnings estimates I see for late 2008
running through 2009 do look too high at present. But I suspect that
the big players in the stock market are making some allowance for

I rarely us the GDP accounts for macro analysis because of the wide
lattitude the White House uses in playing around with the price
deflators. These accounts can be helpful in looking over sector
comparative performance. I prefer the Fed's production series and
a host of monthly series, especially those that are privately sourced.

Ok. Enough of the big picture. Back to the grind for a spell.