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, May 30, 2008

If Colonel Sanders Was President...

Well then, if he was, chicken would cost a $100 a bucket (Bill Maher
joke). GWB and The Shooter, who was also once CEO of Halliburton,
have helped preside over a major bull market in the oil price. Even
the Commodity Futures Trading Commission, which has a Texas power
base thanks to ex-Sen. Phil Gramm and his lovely bride, has a Lone
Star hue. In short, ain't nobody at the highest echelon of US power who
wanted to maintain a low oil price.

But, consumers now see pig instead of bull, and a Democrat led Congress
is under increasing pressure to find mal-doers and scapegoats. Thus a
growing regulatory rush to find out why the oil price is in a full tilt
mania. Plus, and this is not trivial, GWB and the Shooter are out of
there next Jan. So, there is going to be more pushback as we go
forward. This week, NYMEX raised margin requirements by 10% to
show they're on board, and there will be a quiet dissection of the CFTC
to see whether they, er, inadvertently structured trading in a way to
allow some heavy duty speculation.

With the spotlight moving from Exxon-Mobil to the trading pits, all
the newer index players will need to get their attorneys to ratify
that their activities are legally up to snuff, and the chieftains of these
firms will be sitting down to make sure the boyz have everthing going
according to Hoyle.

The upshot will be an intended damper on activity which could be
very shorlived if the Congress / regulators drop the ball and do not
press on to determine if the oil pits are running the show instead of
being just part of it. Back lo in my banking days, we would call this
a "leaner", meaning the regulators were set to lean on you some.

There is also the issue of the general public getting into the
commodities market on top of pension funds who are already
crapshooting retirement money. Increasing securitization of these
markets means that a horde of less knowledgeable people can start
to spin the wheel with oil or gasoline or what have you. A good thing
it is in one respect, as securitization will give more people a chance
to hedge liabilities in a sensible way. But we all know that many
could come in simply to be fleeced.

So, yes, this new attention on the oil price is three years late, but
it could be welcome anyway.

Thursday, May 29, 2008

Stock Market -- Fundamentals

There is an interesting divergence to discuss. The stock market
did rally powerfully off the 3/08 lows into May. Meanwhile, my
SP 500 Market Tracker fell sharply from the 1275 - 1300 area
down to roughly 1220. Operating earnings as reported came in
well below the earlier consensus estimate, reflecting a flattish
US economy, slower offshore growth, and the continuing
accumulation of red ink for the SP financials sector. Whereas a
year ago, strategists were using 90 - 100 as SP 500 Index
earning power, net per share for the 12 months ended 5/08 is
likely to come in around 75. Moreover, the precursors for a
"normal" economic recovery are not yet in place, as total
system monetary and credit driven liquidity are progressing
very anemically. Add to that the fact that the inflation thrust
indicator has yet to roll over, and you have confining short term

Near 1400, the SP 500 is now trading at a hefty 14.6% premium
to the Tracker level of 1220. Now, even allowing that the SP 500
financial sector could return to profitability in the months ahead,
the market is discounting a decent second half economic bounce
as well as some deceleration of inflation.

Since the market appears significantly vulnerable without the
development of a stronger economy and a moderation of inflation
pressure, the time interval known as "very soon" is where
improving economic performance needs to start taking place.

Tuesday, May 27, 2008

Stock Market -- Technical

The short term overbought has been erased over the past two
weeks. Now, the short run position of the market is a little shaky,
as the 10 and 25 day M/As will turn south soon without a rally
to reverse the gathering damage.

the rally off the 3/08 lows was quite strong and produced a
sizable intermediate term overbought, which is still being worked
off. The recent sell down has not been deep enough to jeopardize
my key intermediate term trend indicator.

This leaves me thinking the market could correct mildly further
before I would be inclined to say equities have experienced
a bear market rally that has simply failed. I have to admit that
it is worrisome that the SP 500 quit right at the 40 wk M/A
instead of crossing it. The old SP 400 Industrial Composite, which
excludes financials and utilities, did break through its 40 wk M/A
and its "40" is stabilizing.

Long years of experience have taught me that overtrading is an
easy way to lose money. Although I am eager to figure out the
direction of the market, I plan to wait for a better technical
"read" than what I see now.

Wednesday, May 21, 2008

Notes On the Oil Price & Stock Market

Oil Price
Well, it blew right through $133 bl. today and is up $7 on the week
to date.The bull side has been out in force this week, disparaging
the idea of a "bubble" or "excess speculation" in the price. The new
mantra is that tight supply / demand fundamentals warrant a
further move to $150 a bl. with an eventual spike to $200. This
view has carried the day recently and has engendered a fresh
regard for the market. My bubble-in-force price remains $170 and
my ignorance of whether we get there remains undiminished.
I would note that the oil price is fabulously overbought now at a
whopping 37% premium to its 40 wk. M/A. Solid trading rules
have been stuffed in the drawer as players join the champagne
waltz. Stretching it, I can justify a price of $80bl. on fundamentals.
Shows you what a piker I am.

Stock Market
The two day tumble for the SP 500 broke the uptrend line off the
March, '08 lows. At its high for this recent rally, the SP 500
kissed but failed to penetrate its falling 200 day M/A. It was also
guilty of wobbling when it broke through the downtrend line from
the Oct. '08 all time high. These are warning signs, although they
are not necessarily fatal. The market's overbought condition is
being rapidly alleviated, but do not be cavalier here if long.

The rapid gunning of the oil price in recent days has folks wary
of stocks because of its inflation potential. Even so, since oil is
sensationally overbought in the short run, equities longs may
need to hang tight until there is more resolution.

Monday, May 19, 2008

US Economy -- Short term lead Indicators

On balance, the two sets of weekly leaders have fallen far enough
to signal a recession environment. As well, those indicators made
bottoms at the end of March and have bounced modestly. I am
also curious that the initial weekly unemployment insurance
claims number has not risen more sharply to date.

The monthly data I use are getting a little stale, but I am struck
by the fact that the new order breadth indices I follow, although
weak, also have not pitched down yet as is consistent with a more
full blooded downturn. As I have noted, inventories have been
well managed at the retail level and wholesale and manufacturer
inventories, while signaling a degree of involuntary build, have
not yet bloated up big time to a level that assures that heavy
additional layoffs are in store.

Friday, May 16, 2008

US Economy & Liquidity

The $ value of industrial output edged lower in April, declining to
4.1% measured yr / yr. Growth below 5% normally signals
development of pressure on profit margins and often lower
domestic profits. Since the value of production is increasing faster
than retail sales yr / yr, further weakness in production may
result as inventories may be pared down more. Retail inventories
are in decent shape, but 6% plus 12 month rates of increase for
wholesalers' and manufacturers' stocks stand out. The large
number of unsold homes remains dauntingly high, particularly
single family units.

Broad, credit driven liquidity increased by only 4.1% over the past
year, reflecting the blowout in the asset backed commercial paper
market. I like to compare this liquidity number to the change in
the $ value of production to get a measure of whether there is a
pool of excess liquidity in the economy. There isn't currently, and
that implies that the capital markets have no liquidity tailwind and
must rely on sideline cash. At this point, savings and reserves in
money market funds total over $3 tril., a tidy sum. But, remember
that the real economy competes for these funds as well as the

The growth rate of monetary liquidity remains constrained. This
ongoing modest expansion coupled with the slow growth of credit
driven liquidity continues to signal that the economy has mediocre
potential looking longer term.

Wednesday, May 14, 2008


Measured yr / yr, the CPI for April came in at 3.9%. There has
been some deceleration in 12 month momentum, as the yr /yr
reading for Jan. '08 was 4.3%. The 3.9% CPI topped the
comparable wage growth of 3.6%, keeping the real wage under
pressure. The comparison is worse when the CPI change for the
past 6 months is annualized. That works out to 5.6% and helps
explain the stress expressed by consumers in now countless
news stories.

My inflation thrust indicator has lost some of its momentum
since Feb. '08, but since this indicator is heavily driven by a
volatile commodities component, you have to be careful with it.
Fact is, the broad CRB commodities index remains in a powerful
uptrend and has yet to signal that relief for beleagured wage
earners is in sight.

As with the past two years, gasoline has spiked above its longer
term trend channel as the kick off to an expanded driving
season begins. Refiners are feeling a squeeze in the US. The
gasoline price has not matched the furious uptrend in the oil
price and petrol consumption has weakened as drivers seek ways
to cut back.

The mild deceleration of yr / yr inflation pressure has worked to
increase the p/e ratio of the SP 500 Market Tracker, but it
remains mired down in a 1275 - 1300 range reflecting earnings
weakness since mid-2007.

Not surprisingly, with inflation being driven by fuels and foods,
we are now witnessing stronger inflation pressures on a global
basis as well as deterioration in real wage growth. Global
growth is moderating, but we have yet to see the cracks in
pricing pressure that would herald a trend lower. In fact, in
the US, capacity utilization for primary materials remains high
and well above longer term averages.

Monday, May 12, 2008

Stock Market -- Technical

The market has worked off much of the short term overbought in
evidence over the past two weeks. Last week's sell-off was an
appropriate reaction, but was not of itself threatening. I still have
intermediate term indicators (6-13 weeks) on overbought readings,
but these are not always helpful in making shorter term decisions.
The market has maintained its uptrend off the March lows and
my tools do not preclude a further advance. Pieces are falling into
place to support the idea of a reversal of consequence, but the
case is still not clear. Keep in mind those intermediate term
overboughts and remember that the market is not finally clear of
the bear.

Thursday, May 08, 2008

Stock Market -- Fundamental

From my perspective, the fundamentals needed to support a
sustainable cyclical advance in stocks are moving in the right
direction, but are not fully in place yet. Moreover, there is a
chance for a fundamentals driven whipsaw later in the summer.

I like the action in intermediate and lesser quality bonds in
recent weeks, and clearly, there is a downtrend in short rates in
place. Moreover, the tax rebate checks will swell transaction
driven money supply components in the weeks ahead. So, a
tailwind for the recent rally in the market is building. However,
the broader measures of financial liquidity remain very subdued,
and, importantly, measures of monetary liquidity growth such
as Fed Bank Credit and the monetary base are just inching ahead,
and do not support strong enough growth of the basic money
supply beyond the rebates effect to support a sustainable
economics and profits lift-off. Without more meaningfully positive
turns of liquidity measures, it is possible this rally could fizzle as
the positive effects from the rebates wear off later in the summer.
It would also be helpful to the bond and stock markets if the
gradual development of global economic slack was to lead to an
easing of inflation pressures. But I cannot yet make that case,
either. So, I am stuck with a cautious view at this point, while
remaining alert to the possibility that events could take a more
positive turn. At cyclical market bottoms, indicator turns that
point to recovery are usually cut and dried. Not so now.

The SP 500 Market Tracker is saucering around 1270 - 1300.
With the "500" now close to the 1400 mark, the market is
well along in discounting a cyclical advance predicated on an
eventual earnings rebound. If the fundamentals were solidly
in place, I would say, "Hell, don't worry about the premium, the
market tends to lead the Tracker when a new advance is
underway." But, at this point, I cannot say that. I can say
though that since I have an idiosyncratic way of linking liquidity
behavoir to stocks, that you make sure to get a second opinion
if not more.

Monday, May 05, 2008

Liquidity -- Dismal April

US financial system liquidity declined in April, following several
months of modest but steady growth. Once again, the weakness
showed up in the financial services sector commercial paper market,
with outstandings falling $77 bil., or 4.7%. Banking sector interest
earning assets declined modestly on the tighter funding available.
This was no doubt disappointing for the Fed, which has again
expanded and broadened its direct lending to the sector via swaps.

Financial sector paper yields remained relatively elevated to go
along with the lower outstandings and so it appears there is ongoing
concern about valuing collateralized paper in a weaker economy,
especially within the depressed housing sector.

It appears that another $150 bil. of financial sector short paper
could come off before we see outstandings hit levels last seen back
in 2004, before the junk presses got rolling with a vengeance.
Likewise, the Fed has significant room to further expand its swap
lending programs before more pointed questions about the integrity
of its own balance sheet arise.

But, let's not minimize the problem here. Should the new pressures
on liquidity seen in April extend through the spring, the Fed will wind
up low on ammo, and other US Gov. measures may have to be brought
into play to stabilize these markets and allow the banks to resume
more normal operations.

Let me also note that Fed Bank Credit growth momentum slowed in
April, standing a puny 1.5% over the comparable level of a year ago.
Naturally, the Adjusted Monetary Base has also flattened out as a
consequence. From a liquidity perspective, monetary policy remains
tight and to some degree offsets the "ease" evident in the Fed Funds

There is economic risk in this situation, so a resumption of liquidity
recovery will be an important factor over the next month or two.

Friday, May 02, 2008

Economic Indicators

The weekly leading indicator data sets I use have flattened out in
recent weeks following steep decliness dating back to mid-2007.
These indicators are recession-consistent and the flat recent
readings have yet to challenge strong downtrends in place.

If the BEA measured inflation pressures more realistically, it is
very likely the case that real GDP was down in quarters 4'07 and
1'08. Not big downs mind you, but downs which show broadening
economic weakness in the private economy, save for powerful
export numbers.

Civilian employment data (which leads the less volatile but often far
more tardy payroll data) recovered some in April, but is up just 0.4%
yr/yr. Real wages likely declined slightly yr/yr, and this combo
underwrites the weakness in the system. Companies are moving
swiftly to dick over their huddled workers. Since, rebates are coming,
the chieftains argue, why give out nice raises in a lousy environment.
Other employment data is mixed. Help wanted web postings have
been rising nicely since yearend, but mass layoffs are up sharply, too.

If companies opt to beat their workers out of well earned raises in lieu
of the rebate money as the rebate period wears on, there will not be
much of a spur to spending.

My inflation thrust index has relaxed in recent weeks, but petrol and
broad commodities markets remain in punishing upturns relative to

The longer run indicators are marginally positive, carried primarily
by the sharp downturn of short rates. However, in terms of
confidence and growth potential, inflation remains the killer.

A stock market that is trying to discount a recovery of output and
profits growth could well struggle if inflation pressures persist.