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 !!!

Friday, March 28, 2008

Corporate Profits

US corporate profits rose by 2.5% yr/yr through Q4 '07 to $1.57
trillion. Domestic profits fell 6.5% to $1.17 tril. and earnings from
abroad surged 42.8% to $397 bil.

The major reason for down US profits was the large $85 bil. hit
to the financial sector reflecting the big loan losses and writeoffs
incurred. That left financial profits down at the$400 bil. level.
But, with a broadening economic slowdown underway, non-
financial profits began to slide over the second half of the year,
declining at a an 8.2% annual rate.

The surge in offshore earnings reflected stronger growth compared
to the US, and the beneficial effects of a significantly weaker US $
via translation gains.

Looking forward, the financial sector will experience additional
writedowns through mid-2008, but could bounce back sharply by
late in the year, since the bulk of the losses were absorbed in the
final months of 2007. With a broadening of the economic downturn,
non-finance profits seem set to weaken further, with a bottom
point not likely until well into the second half of this year.

Moreover, since the global economy is losing growth momentum,
it is difficult to step up and call for another big 40% up year from
foreign operations.

My figuring leaves the outlook for earnings this year more muted
than consensus. By the way, analysts have turned to cutting
estimates again as the year progresses.

Now, if you remember how the game works, if the economy begins
to regain some positive traction by Q3 of this year, The Street will
shift focus to 2009, and will likely put up some dazzling estimates.

For now though, earnings appear on course to lose more momentum.
I'll be particularly interested to see how well offshore profits come
in over the first two Qs of the current year.

Wednesday, March 26, 2008

Liquidity Factors

Recent data suggest the Fed has changed policy to a more full blooded
easing. It has been reducing the FFR% and now appears to be adding
some monetary liquidity to the system. The Fed has "sterilized" the vast
bulk of its term swap facilities to banks and primary dealers by having
the Open Market Desk sell Treasuries in amounts comparable to what
it has swapped out in exchange for the very much less liquid private
sector finance paper. Still, total Fed Bank Credit has been growing
more rapidly since last autumn. Specifically, total Fed Bank Credit has
grown at a 5.6% annual rate over the past six months. This compares to
a paltry 1.3% annualized rate of growth for the prior six months. This
development, coupled with falling short rates constitutes an important
positive for the economy down the road.

The much broader measure of credit driven liquidity has also begun to
accelerate in growth, rising at a 4.7% annual rate since mid-2006. The
improvement here has come far more slowly, mainly reflecting
continued weakness in the asset-backed commercial paper market.
The Fed has also been concerned about the large rate spreads that have
opened up for A2/P2 and lesser paper against prime paper. Moreover,
private sector paper continues to trade at yield levels well above short
Treasuries as investors continue to fly to quality. In short, there have
been improvements in liquidity, but the system remains far off kilter.

The liquidity improvements to date were far too tepid to stave off an
economic downturn and are still shy of what's needed to help put the
economy on a much stronger footing, but you need to be aware that the
system is repairing despite the gravity of so many comments in the
media. Ditto the banking system where loans are improving modestly
along with a decent recovery of primary capital.

Monday, March 24, 2008

US Economy

It is silly to compete with all the learned economic forecasts
out there. So, I will provide but a brief sketch of what my
indicators suggest:

Cyclical growth potential is now negative at -0.2% reflecting
weakening employment and a modest contraction of the real wage.

Shorter term leading economic indicators are weakening further,
but so far signal only a shallow downturn.

Performance of my longer term indicators over the past eighteen
months are consistent with development of a recession and very
sluggish period through mid-2009.

The longer term indicators are turning decidedly positive now.

My profits indicators require more than normal elucidation.
Financial service revenues and net revenue spreads before
chargeoffs have slowed, but are decent. The chargeoffs as all
know have been huge and will be a factor through mid-2008.
The "average" non-financial is experiencing mild margin pressure
in US ops. but offshore earnings have been strong and may
just be starting to show some wear and tear.

Analysts expect SP 500 net per share to jump to 100 in
sustainable earning power by the end of 2008. That looks too
high from today's perspective ( current 12 mos. eps of 81.25).

Inflation thrust, recently dominated by commodities action,
has hit a brick wall, at least for the short run. That's a positive
for the real wage, confidence and the stock market's p/e multiple.

Based on long term history, the cut in the Fed Funds rate to
2.25% is enough to help underwrite an eventual economic
recovery (Better than 50% off the cyclical peak of 5.25%).

Thursday, March 20, 2008

Stock Market Quickie

The market powered ahead again today. I pointed out the
interesting oversold earlier in the week and have also
discussed how damaging the frothy run -up in commodities
was to the market p/e and real incomes. We have witnessed
a sharp break in oil and other key rotgut that sharply
demotes the shorter term inflation outlook and has triggered
a nice relief rally in stocks.

The break in the commodities composites, the mini - blowout in
gold and the bounce in the $USD are short term pluses for the
equities market. How long this sudden ugly turn for commods and
the metals will last is too hard to say right now. However,
with the US in a downturn and energy usage dropping, it should
come as no surprise that we are seeing corrections in hard
assets and commods. I have commented frequently on the froth
in these markets in past weeks.

It would be amusing if the primary dealers were now long the $USD
in the wake of the Fed's decision to fund their liquidity needs.
Almost as if the Fed was going long the US dollar to break the
bubbling in commods and hard assets. But we know nothing like
that ever happens, right?

I am going to swing away from the super shorter term commentary to
focus on the evolving environment in the months ahead. But I do
thank the boyz on the Street for the profitable bounce.

Tuesday, March 18, 2008

Stock Market

As posted on Sun. 3/16, the rally potential straight ahead
was decent enough. The market again plumbed the SP 500 low
test zone of 1260 - 1270 on Monday before pulling up on
basket trades, but today the action was far stronger and
broader. Yesterday's horrendous breadth put my selling
pressure gauge into very strong oversold territory.

The low test zone has been hit several times since mid -
January and today's action built around another 75 bp cut by
FOMC to cut the Fed Funds Rate (now 2.25%) was impressive
enough, but from a chart perspective it is still anyone's
guess whether the bears come in again and trash the rally.

There is obviously an economic downturn underway in the US,
and the hard asset/commodities crowd may have been looking
for a bigger cut in the FFR% to feed their bubbly markets.
Gold tanked this afternoon from the $1000 oz. level to $976.
I point this out, because disenchantment by the pro-inflation
crowd could help the stock market.

From my perspective,the Fed has done quite enough for awhile
in cutting rates and in liquifying the credit markets. Time
comes around once in a while to stop and survey the handiwork
to date. The Fed also needs to get nastier with Paulson and GWB.
The latter two have been functioning in this crisis like FEMA
did after Katrina. I have mentioned in prior posts that in a
crisis like this, the regulators need to allow lenders not
only to book only cash losses, but to spread them out over time
to maintain liquidity and capital. Paulson has simply not
grasped the bigger picture and has failed to use the regulatory
levers at hand properly. Sermon over.

Sunday, March 16, 2008

Stock Market -- Technical Note

The week ahead will be a short one and it is likely to be
dominated by fundamental factors. The US markets are closed
for Good Friday, and Mon. - Thurs. are packed with financial
and economic news. Bear Stearns, Goldman, Lehman and Morgan
Stanley are set to report quarterly results, FOMC meets on
Tues., and there are reports coming on production and housing.

So, a minute out for a technical item. The stock market is
moderately oversold on price oscillators out through three
months, and interestingly, my buy and sell pressure gauges
(based on breadth) are in deep oversold territory. The latter
are six week measures and tend to revert to the mean more
rapidly than not. So, even though bear conditions prevail for
now, the chances for a countertrend rally are decent.

Tuesday, March 11, 2008

Stock Market / Fed's Expanding Role

As I write this, the market has rallied powerfully out of
the 1/08 low test zone. News this morning that the Fed is
expanding its role in liquifying the credit market triggered
a massive short squeeze and follow through by traders eager
to join the rally.

This bounce interrupts a breakaway downtrend and puts in a
short term double bottom. The rally has brought the SP 500
from a deep short term oversold to a modest one. The double
bottom is an encouraging sign in the short run, but since
powerful, brief rallies are a hallmark of a bear market, it
is too early to tell whether more extended positive action is
in order.

Today, the Fed announced expansion of its special term credit
facilities to $400 billion. It has increased these facilities
by $340 billion in less than a week. Banks and primary dealers
can offer less liquid, lower quality debt to the Fed for Treas-
uries after the private stuff has been given an appropriate
haircut. So far, the Fed has "sterilized" these acquisitions
by selling Treasuries in the open market, with the result that
the liquidity pool has improved in quality, but not in size. It
will proceed with this dual process going forward, but the new
larger scope of transactions will give them some "cover" to add
permanent reserves as needed.

Financial corp. commercial paper has contracted by roughly $550
billion since peaking in early August, 2007. Much of this
contraction is mortgage backed paper. This market has struggled
since the sub-prime crisis broke. With only a slight recovery in
outstandings and a recent new spike in quality spreads, the Fed
felt called upon to act. The $400 million in Treasuries offered
as an effective swap equals 24% of outstanding financial corp.
commercial paper. That does provide a more secure lifeline for
illiquid players in the market.

The broad measure of system liquidity I use is flat with August,
2007 levels. Without rapid improvement, the economy will remain
at considerable risk and this may eventually force the Fed to add
more permanent reserves, inflation risk notwithstanding. The new
line of term financing also allows the Fed more time to see if
the high flying commodities markets break.

Monday, March 10, 2008

Down In Flames...The Street Chuckles

Yes, the market was hammered today, but more about that in
a moment. Today, NY Gov. Eliot Spitzer (D), a stilted,
sanctimonious first termer, said he had been fingered via wire
tap for bringing a hooker down to DC for an evening of
salacious R&R. That's a felony violation of the Mann Act.
You may remember Spitzer's tireless prosecution of Street
baddies during the 2001 - 2003 market bust, when he was NY
state attorney general. Not beloved on The Street, he left
the guys laughing during an otherwise tough day.

Back to the stock market. The SP 500 made a new down cycle
closing low of 1275 today, and is now slightly above the
1260 -1270 low test zone carved out by the e-mini future back
in January. Be watchful here, as the SP500 is in breakaway
down mode again on the basis of closing prices, but is also
oversold enough to attract positive interest. Technicians are
going to watch tomorrow's action with considerable scrutiny and
so should you if you are a trader.

Thursday, March 06, 2008

Stock Market Comment

Well, as it turns out, the SP500 could not hold nicely above
my Market Tracker, as discussed yesterday. Today's close of
1304, brings the "500" much closer to the 1280 - 1300 range of
the Tracker.

As discussed this past Friday, the week's end sell off set up
the bears for control this week. They got the upper hand today,
a move signaled by the poor action of the financials throughout.

An oversold condition is developing, and my selling pressure
gauge is rising quickly. Further weakness in the market over
the next 5-7 trading days would produce a deep and tradable
oversold on this important measure.

The new 2008 closing low on the SP500 will have a number of
technicians speculating about a decline to the important low
test zone of 1260 - 1270. I sure cannot discount the
possibility of another breakaway move. It would be scary
but would also spell opportunity.

My proxy for the "average stock" is the unweighted Value Line
Arithmetic index of 1700+ issues ($VLE). This index did not
make a new yearly low today and is trading above long term
support going back to last spring. It may only be that the
index is less heavily freighted by the financials than the
SP500, but it's better realtive performance is worth noting.

Wednesday, March 05, 2008

Stock Market -- Fundamentals

The SP500 Market Tracker has now dropped into a range of 1280-
1300. Accelerating inflation suppresses the p/e multiple and
analysts have resumed cutting estimates. Today's SP500 close of
1334 might indicate some willingness on the part of investors to
anticipate a better economic environment later in the year. The
market has held well above the intraday spike low in the 1260 -
1270 area since January even as the Market Tracker has continued
to move lower. Hardly conclusive, but worth noting.

The liquidity environment does not support a sustainable bull market.
Both monetary and credit driven liquidity are growing at subpar rates.
Importantly though, sideline and portfolio cash in aggregate are
running at high levels. Looking forward, monetary liquidity will
increase by more than 10% for a spell starting in late spring as $150
billion in IRS rebate checks are mailed out. The sideline cash and
rebates are positives, but are not indicative a stronger underlying
trend of system liquidity needed to sustain economic and profits
growth over time.

Credit quality spreads in the bond market are still widening, with
intermediate quality bond yields topping 8% and still rising. Concern
over the depth and duration of an economic downturn are still
evident. That's not a positive for stocks.

My long term dividend discount model has the SP500 fairly valued at
1410. The 5.4% discount of today's 1334 close to the DDM fair value
is also worthy of note and is a reflection of a modest degree of
investor concern for the long term.

I continue to watch the oil market and the broader commodities
composites. The powerful uptrends in evidence here are suppressing
stock prices. Rising oil / commodities have pushed up inflation,
punished real take home pay, eroded the market multiple and have
restricted the Fed in supplying liquidity to the economy. The
oil / commodities booms are in highly speculative stages, but
blow-offs of this sort can be very confounding when you are
looking for suggestions of tops.

Monday, March 03, 2008

Gold Price -- The Bubble Draweth Nigh

Gold printed slightly above $990 oz. today before an after-
noon close of $982. By my reckoning, if gold closes above
$1000 oz. any time over the next year or so, then it is in
a price bubble that could reach $1500. The $1500 price
would be a triple over the early 2006 price of $500.

If gold does cross the bubble threshold of $1000, there is
no compelling reason that it must advance to $1500 or any
price in between. Bubbles occur rarely in any market and a
double or triple over the breakout price ($500 oz. in this
case) is a reasonable range for an unreasonable price move.

If gold does enter the bubble range, it does, prima facie,
suggest substantial price upside. With the upside potential
comes large downside price risk, which I would now put at
$250 - 400 oz.

You can make good money in a bubble on the long side as long
as the fundamentals are positive. Danger comes especially
when fundamentals diverge from a rising price. But large
downside can also occur in moments of doubt which can trigger
panic even if the fundamentals do not head south. These are
facets of a high return / high risk market.

My gold price macroeconomic indicator remains in a pronounced
uptrend for now.

The near term technical situation is interesting. Gold is
strongly overbought, and is just completing a 13 month long
parabolic upmove. The situation suggests a range of short term
possibilities running from consolidation to sharp correction.

The macroeconomic indicator is available only weekly. If you are
playing the gold market and want some daily reference, I would
watch the oil price and a broad range of industrial commodities

Scroll down to the end of the 2/25/08 post on gold and you
will find a chart link that may be of interest. Good luck.