More On Monetary Policy...

The FOMC cut the FFR% by 25 bp to 2.0%. This was probably the
consensus. The statement should be read as a shift of FOMC to a
more balanced assessment of economic growth potential vs.
inflation potential. The door has hardly been closed on further rate
cuts, but the "tilt" toward a more neutral policy is unmistakable, as
is the implication of the heavy weight to be placed on"reading"
incoming economic data and monitoring the standing of a still stressed
financial system.

For more, read yesterday's entry immediately below.

Monetary Policy

The Fed has started a two day meeting on monetary policy with
results to come tomorrow afternoon.

It's an interesting time for a meeting. The Fed has slashed the Fed
Funds Rate dramatically over the past six months. The cuts to the
FFR% match the severity of the blowout of shorter term business
credit demand resulting from the collapse of key components within
the broad financial service sector of the commercial paper market.
There has been a moderate offset to the $600 billion plus decline
in commercial paper outstandings via a nearly $300 billion increase
in commercial and industrial loans by banks, but this rise underscores
the stresses in the financial markets, because much of this paper is
comprised of levered and other low quality loans that are caught up
in a stalled deal pipeline. Viewed historically, the fast decline of the
FFR% is well out of proportion to the weakening of economic demand
witnessed so far. Moreover, weakening demand in the US economy
has been accompanied by an acceleration of inflation, that,
in itself, has contributed substantially to the slowing of the real
economy.

In short, the Fed's action has been apposite to the turmoil within the
financial service sector, but perhaps well overdone relative to the
broader economy and the inflation underway.

Now, fresh reads on critical economic data will become publicly
available over the next week. No doubt, the Fed has advanced
soundings, and if the fresh info does not paint a much darker
picture of the economy, then it is fair to wonder if perhaps a pause
period on the FFR% might be appropriate. After all, narrowing of
selected quality yield spreads, stronger bond market volume, and
a recent flattening out of the weekly leading economic indicators
all suggest relief of pressures, whereas the inflation situation is less
benign. In addition, the Fed knows the Treasury is starting to
distribute the tax rebates enacted earlier.

I long ago gave up trying to analyze the psyche of the FOMC, but
I think one has to be struck by the outsized cuts in the FFR%
relative to the real growth / inflation environment.

US Dollar ($USD)

Currency speculation is not my forte, so take the following with as
much salt as you see fit.

First, I always look at the USD in terms of whether it is attractive
to hold domestically. Principal terms of reference are Fed Open
Market activity and whether there is a real rate of interest on
dollars left on deposit. I do not look at the "cookie jar" dollar
concept, as money is meant to be put to work, even if as savings
rather than spending. On balance, Fed Bank Credit has been grow-
ing modestly now for several years to correct for the long period
of excess monetary liquidity growth engineered by the Greenspan
Fed. With monetary liquidity creation now well controlled, I do not
see a threat to the dollar from this quarter. The 91-day T-bill yield
of only 1.3% compares unfavorably to an inflation of 4.0%, as does
the 2.9% yield on prime 90 day commercial paper. A dollar saved
in low risk assets is losing its purchasing power, and there is only
the need for liquidity as a rationale for keeping the dollar on tap in
the US. The situation is not going to change until the T-bill and the
inflation rate begin to come into better balance.

Not surprisingly, the USD has come down in value relative to other
senior currencies since 2000 reflecting a low interest rate regimen by
the US coupled with a moderate but persistent acceleration of
inflation. Now, there is increasing speculation that with a weaker UK
economy and prospective decelerating growth across the EU, the
relative attractiveness of the dollar might increase as offshore
interest rates moderate. This is a sensible thought, since the US has
led the other majors in growth weakness and rate cuts, and could lead
later this year and next with better growth and short rate increases.

I do not mind the low relative value of the USD, since it is now the only
check we have on still rampant Asian mercantilism, but I would not
argue with a mild upward push in value for a six month - one year
trade. I would like to see evidence of an improving "real" yield on
short term paper here before getting on a go long the dollar band-
wagon.

Stock Market -- Technical

As expected, we did witness profit taking in the early going last
week, but it was surprisingly muted, especially given that the
SP 500 failed to take out key resistance on Fri. 4/18.

The market did take out that resistance by a whisker this Fri. to
close at a new rally high near 1398. Importantly, there is top - of-
channel resistance at 1400 dead ahead. A closing break above
1400 by the SP 500 next week would be a small piece of evidence
that a positive reversal of consequence is underway.

As of now, short and intermediate term uptrends are in place,
with the market laboring under a moderate short term overbought
condition. Morever, the market is extended enough in the short run
to take a correction of nealy 3.5% without fracturing the positive
trend underway since mid- March. This situation brings up the
same caution mentioned last Fri. about being disciplined and careful
not to chase. Since the rally is a good ways away from being in a
confirmed, sustainable uptrend, it is wise to keep the bear market
admonition that rallies are excuses to sell firmly in mind.

There is some interesting "buzz" circulating on the fundamentals side
of the markets, and I plan to use the next week or two to put the
focus of the blog on these issues.

Oil Price -- How Crazy Can It Get?

Light Sweet Crude hit $119.50 bl. today. Not a bad move, given
that crude touched $50 in Jan. '07. For my part, this is simply
another market mania evolving into a price bubble. And my
charts say the bubble level is $170 bl., double the breakout from
the long term trend of $85 bl. back in Sep. '07. Whether the price
extends up to $170 or not, I have no idea. Saxo Bank's strategist
has oil hitting $175 by late '08 and sees chaotic economic and
currency conditions as a result. A further sharp run-up in price
from the current level will turn the background noise of consumer
discontent into a roar, with unpredictable consequences, save for
eventual retribution for OPEC. Piggy Asian food exporters are now
also trying to cartelize the export of rice and grains, with this latest
insult serving to create increasingly widespread unrest among the
world's poor, who cannot afford these prices.

There is no shortage of managers of large pools of funds out there
who think they can enjoy the run and manage their risk in rapid
market conditions. Morever, if you are a manager who grows fearful
as the price of oil edges ever higher, you can lose your accounts if
manic attitudes remain after the plug has been pulled.

If you are playing this market, you best make damned sure you
know what you are doing because a concert of unexpected bad news
can easily take $40 - 50 bl. off your position and crush you out.

Stock Market -- Technical (SP 500 @ 1390)

Well, the shorter term trend is up, and the intermediate term
trend has turned up as well. The market has broke above the
downtrend line running back to 12/07 and is very close to
challenging the down line running from the 10/07 high.

The market is now moderately overbought short term. The
current advance has taken out all shorter run resistance save
for a close just under 1400 on the SP 500. That failure to wipe
out the 1395-1400 level set off selling today, and we could see
some more on Monday as some of the ruthless players take profits.

It is a tricky time now, as there is enough of an up-channel off
the 3/08 lows to withstand a sharp 30 - 40 point downdraft in
the SP 500 before you could claim with assurance that the
bears were back.

Chasing on the long side could be risky next week until we see
what the bears have in store.

Stock Market -- Technical

Officially, I guess, the current advance off the March lows counts as
a bear market rally. Shorter term trend indicators are positive. The
SP 500 at 1365 is mildly overbought relative to the short run trend.
The index also faces several discrete resistance levels from 1370
clear up to 1400. The weekly intermediate term indicators are also
rounding positive, suggesting further upside may lie ahead. These
largely momentum indicators have been trending negative since Jan.
of this year, so reversals require mention. I also like the weakening
in the 15 month-long uptrend in the $VIX.

But, look, first things first. Let's see how well the market starts to
challenge resistance, remembering that in a bear market, signs of
weakness in a countertrend rally often summon swift retribution
from the bears.

I am also watching the oil price relative to the stock market. The
stock rally has fared ok recently against a rising oil price, but there
is no shortage of players out there who act to crimp the market's
p/e ratio when inflationary pressures are evident.

For an intermediate term look at the SP 500, click here.

Business Inventories

Through 2/08, total business inventories growth has accelerated
to 8.7% annualized. That is much faster than the growth of final
demand, so we are now seeing some involuntary inventory
accumulation. Ballooning inventories can make a downturn far
worse if they are not brought quickly to heel. So far in this cycle,
inventory management has been keen, and one might expect a
fast adjustment. However, you need to watch inventory data
very carefully once a downturn has started, because it can be a big
risk factor in the outlook. Fortunately, end-stage or retail inventories
do seem to be under good control, at least through February.

BS Warning

2008 is national election year, and with all that is at stake among the
political players and their minions and friends, you will find that even
independent economists and analysts are not immune to "spinning" for
their favorites. Most of the BS is deliberate but some springs forth
from the unconscious, so to speak. When reading the economists and
pundits on the US and its problems, get a second opinion.

GE Sends A Jolt

As a huge and widely diversified cyclical company, GE is widely
regarded for its comparative stability and its ability to manage
earnings to a forecast. So, the eps shortfall, mild as it was, shocked
the large players who have big positions in the stock. It did not help
that CEO Immelt gave a lame explanation for the shortfall and its
failure to warn analysts ahead of time will cost them points.

But, come on, Bernanke and other economists have been warning
for months that growth was at risk. At any rate, I bring this up
because the GE announcement spooked investors who were
supposed to be looking through the first quarter to recovery later in
the year. With the bulk of Q1 earnings reports ahead, folks might start
wondering that if GE can have "unexpected" trouble, then how many
other disappointments lie lurking in the tall weeds. Shows you that
investor nervousness and concern may still be hovering.

Stock Market Fundamentals

The SP500 Market tracker continues to sit around the 1300 level.
So, with the "500" now trading 1350-1360, investors have been
endeavoring to look beyond the current situation to a brighter
future. Short rates are falling, monetary liquidity is expanding
more rapidly, the yield curve is positive, intermediate quality and
junk bond yields have been inching down, and all know the US is
in for a round of tax rebates designed to provide a mild spur to
consumption. Investors also likely expect that there will be some
degree of positive swing to earnings of the financials later in the
year.

But there are significant uncertainties. Earnings estimates are still
being cut, and the present quarterly earnings reporting period is
being carefully watched to gauge the breadth and depth of eps
shortfalls. Moreover, the commodities price boom , although
narrowing, is still intact, leaving the risk of further inflation
pressure going forward. The financial system in the US is widely
perceived as remaining under duress, and key indicators such as
short term yield quality spreads and the very slow improvement
in the growth of credit driven liquidity reflect the pressures within
the system.

For now, I am watching the inflation potential inherent in the
ongoing round of heavy speculation in commodities most closely,
as a continuing surge in fuels and other basics would damage the real
economy further. At this point I doubt I would mind much if the
Fed decided to take a pass on cutting short rates again for a while
to assess its handiwork to date. I think it is fair to wonder if that
might jolt the commodities speculators enough to allow underlying
supply / demand fundamentals to regain more focus and attention.

Stock Market -- Technical

The urgent oversold discussed in the mid-March posts on the market
did yield a strong and tradable rally. My six week selling pressure
gauge, which hit deep oversold levels during the middle of last month,
has since moved into neutral territory. The market is also moderately
overbought against its 25 day m/a at +3.3%. The 25 m/a has also
upticked, a positive indication.

Early in the day, the SP 500, which closed around 1373, did move up to
test resistance above 1380. The test failed. This triggered a mechanical
short term sell signal for some short term traders. As well, the market
has been unable to close decisively above a closing price only downtrend
line (1368 today). All perhaps minutiae in the long run, but not to short
term players.

Now the market is close to an intermediate term positive turn in my book,
so I think the action this week may be important.

From an inter-market perspective, the rapid recovery of the oil price
from its recent $100 bl. low back above $109 is something to keep in
sharp focus. Oil and gasoline prices remain in firm longer term uptrends
and that price action is inflationary, which is, in turn, a threat to the
stock market p/e ratio.

I link to an SP500 chart below and plan to comment on the technical
tea leaves later in the week. Click.

Economic Indicators

Weekly leading indicator sets made new cyclical lows. The peak to current
declines are large enough to signal a substantial downturn could be underway.

The monthly data for March show a continuing downturn. They suggest
ongoing pressure on US profit margins, but are not yet weak enough to signal
that a recession is underway. The employment picture is consistent with
development of a recession, but production and new order activity are not.

The monthly global indicators show the world economy slowing toward
modest expansion, with the US leading the way down. Since private sector
activity levels for production and services are below prior year levels, it
will be interesting to see how much profits earned abroad offset weaker US
profits among US multinationals.

As recently discussed, US longer term indicators have turned positive, but
remain subdued. Underlying purchasing power to support the US economy
continues at -0.5% measured yr/yr. This is comprised of -0.1% for total
employment and -0.4% for the real wage. Growth of current $ wages has started
to slow as is normal in a downturn. Fortunately, inflation pressure has
subsided as we move into April, although the longer run trend is still intact.
Since the end of WW2, steep economic declines have been associated with
yr/yr drops of underlying purchasing power of -3 to-4%.

Inflation Potential

The broad market for commodities has eased off in recent weeks
following a very powerful run. The weakness has taken momentum
out of my inflation thrust indicator. Now, as it turns out, a degree
of weakness in the broader market is not uncommon during the
spring months, and would not normally be worth much comment
except that it has come at a time of growing evidence of a global
economic slowdown, paced by a weakening US economy. Moreover,
an increasing number of market commentators have been pointing
out how frothy these major sub-components have become, not
the least of which is the oil price. I have pointed out several times
how overextended the major components are in recent months,
so I find it may be intriguing to see if there is more downside
follow-through ahead.

The oil price, a major driver of inflation, remains in an ominous
uptrend that threatens economic stability. At close to $101 bl.,
it is off roughly 10% from recent top prints, but really needs
to break and stay below $100 a bl. to provide a stronger case
that the speculative fever may have broken. At present levels
we are still in mania-land.

The wobbly picture for commodities has shaken the gold price
down from the $1000 oz. la-la land and has also helped the
stock market, which has had to contend with weaker earnings
and accelerating inflation.