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, 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.