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, January 30, 2009

Gold -- The Mania Is Back

Gold did cross $925 oz. today as a strong rally continues. On my
long term chart, gold is now back in the mania zone, a prelude to
re-emergence of another price bubble. When gold crossed $1000
in Mar. '08, it moved into bubble territory. Instead of a powerful
bubble run up to $1500 oz., gold topped, entered a 27% bear
market, and surprised many, myself included. Now, we are seeing
gold move up sharply again, as players worry about perceived
inflationary threats from global easy money and fiscal stimulus
programs designed to pull the world out of a deepening recession.
The underlying theme here is that the worse matters get with
the economy, the more that stimulus will be applied, and the
greater will be the eventual inflation and debasement of currencies
once the global economy recovers. There is no shortage of players
in gold for the awaited bubble phase.

Interesting stuff. My Irish grandfather, a vaunted professional
gambler, always told me to never argue religion or politics. Great
advice and to that I would add not to argue with gold buffs.

My macro indicator for gold has it worth about $650 oz. So, I
would say that if you are into gold, have the upside target you
prefer, but keep in mind there is $300 oz. downside price risk
to the bet and even $50 for the short run.

Tuesday, January 27, 2009

1.Monetary Policy 2.New Bank Bailout Plan

Monetary Policy
The Fed's FOMC concludes its regular meeting tomorrow. The Fed
has so far put in a ZIRP regimen, infused the system with a very
large amount of basic monetary liquidity, and through a $1.3
tril. expansion of its balance sheet, has further liquified the system
via loan/swap programs. The basic money supply now has a sensible
5 year growth rate of 6%, and the Fed's programs have replaced the
$1 tril. originally lost in the commercial paper market. The much
broader measure of credit driven liquidity I use is now but $200 bil.
short of a decent 6% 12 month rate of growth. The Fed has about
done its job and should now be only in standby mode. Realistically,
if the liquidity in place cannot put the economy on a sounder footing
over the next 5-6 months, it just may not happen, because that
would mean that cash liquidity preference for consumers, business
and banks was just too strong.

2. New Bank Bailout
Hints and trial balloons from industry and Beltway sources suggest
the Obama admin. may unveil a new program to purchase non
performing and toxic debt from banks and related entities at some
point over the next 7-10 days. To avoid shrinking bank capital
well below a level needed to service our very large economy, the
Feds will ultimately have to offer equity capital which does not
further significantly deplete bank cash flow. In fact, if Team
Obama goes ahead with the program, they would be smart to
swap cheaper equity for the very dear TARP money. In response,
the US needs a massive taxpayer shitstorm to force everyone's
hand so all can see the mess and what needs to be done.

Monday, January 26, 2009

Stock Market -- Technical

What's clear is that the market has been trending down since its
1/6 high close of 935 on the SP 500. Where we're headed in the
short run is not clear in my view. There was a steep low of 805
on Mon. 1/20. that produced a reasonably deep oversold and a
quick bounce which has had no follow through. The bears have
had no luck in recent days, and the market has drifted out from
underneath a short term down line, leaving us with a now
moderate oversold condition.

The market is interesting now because my intermediate term
indicators are close to turning nicely positive despite the weakness
we've seen since early Jan. Since I rarely short oversold situations,
I am hoping for a positive turn for a trade.

Had the market rally stayed intact beyond the 1/6 high point,
It would have strongly suggested to me that the market was
starting to come out of the woods. Instead, the selloff killed off
that notion for the time being and leaves the market in bear
territory. I also note that the SP 500 remains far below its
40 wk m/a, and this leaves me wondering whether any rallies
can sustain until that 40 wk moves down closer to current

From a trading perspective, the long side has been home only
for the heroic in recent months as there have been few solid
set-ups of the sort that more conservative traders might favor.
The sharp break following the 1/6 top did provide an ok
set-up for a short index trade.

I am happy to watch and wait in the days ahead...

For SP 500 chart, click.

Thursday, January 22, 2009

US Banking System -- Long Term

Over the 2004-08 period, bank loans/leases expanded rapidly,
running up from $4.4 tril. to over $7 tril. This ballooning of loan
exposure is far more rapid than a sensible growth trend would
indicate, and it has left the banks vulnerable to continued large
loan losses in a weak economy. Lest they be fairly accused of
hiding earnings and dividend payout from shareholders, banks
cannot book higher loan loss reserves for the hell of it. Moreover
since senior executive compensation is based on earnings
progress, there is a reluctance among bank execs to bolster
reserves until evidence they should becomes more compelling.
Even if you are an insider with a large loan book right under your
nose, it is not so easy as you might think to accurately discern
what may go bad in the year ahead.

Because loans rose so far above a sensible trend over 2004-08, I
think it is fair to say quality standards were quite relaxed and
that there could be up to $1.5 tril. in loans that could go bad if
the economy stays so weak. Losses of such a staggering
magnitude would wipe out bank equity capital and leave the
system insolvent. I know I do not know whether the banks could
wind up with a loss of such a magnitude, but it seems plain that
vulnerability to further substantial losses seems likely enough.

If the Obama team and bank regulators deem it necessary to
secure bank capital, some sort of consolidated standby facility
would seem most appropriate as the risks of abuse are large
if banks are allowed to dump loans ahead of the normal loan
loss accrual process. By the same token, regulators would likely
be best served by securing authority to force merge or shut
down the basket cases.

Now, the US economy can expand for a good 12-18 months
without recourse to heavy loan growth as recovering business
cash flows normally can meet recovering working capital needs.
Similarly, the residential market is so depressed, that early
stage recovery will not strain the mortgage market. Thus,
when the economy stabilizes and begins to move forward, there
will be substantial time to assess more fairly the banking system's
exposure to the credit "bubble" of 2004-2008. This is more
fodder for the standby facility case.

There is great concern now about the soundness of the banking
system, but the more pressing issue is stabilization of the
economy and asset values and that is where the primary
policy focus should be.

Wednesday, January 21, 2009

US Banking System

With the recent price weakness in Citbank and Bof A, there has been
a flurry of official and unofficial commentary about a bank rescue
package. Today,Treas. sec'y. nominee Geithner suggested an assistance
package of some sort for financials would be soon forthcoming from the
new Obama administration. So, what are the issues?

The private banking system has about $1.4 tril. of equity capital,
including the recently allocated portion of the TARP funds. Loan losses
have been accelerating, and will be around $150 bil. for 2008. The
surge in loan losses wiped out industry profits last year, and we are
now also seeing a rise in losses on securities, although this number is
still small.

At this point, loan losses are too large to allow banks to increase
capital via retained profits, and access to the equities market is
prohibitively expensive for those banks needing to raise equity
capital. Moreover, with the economy very weak, loan losses are
expected to continue rising for the time being.

A very thorny issue carries forward, too. Toxic real estate loan and
securities exposure in the industry continues. The utterly valueless
stuff is being written off, but there is likely substantial exposure to
paper that has no market to mark to, but which has some economic
value nonetheless. Individual bankers are loathe to overbook losses
here, especially since economic value will rise in a recovery.

There is a fear that without some sort of resolution that enables
regulators, economists and investors to pronounce banks "healthy"
again, the banks will not be able to underwrite economic recovery
in the normal fashion.

While on holiday around year's end Congress got an earful about the
weak economy and many members were upbraided for signing off
on TARP. Thus it may be that a grand bailout scheme for the banks
will create an uproar with voters unless there are vast protections
for taxpayers.

When banks are forced to issue high coupon preferreds for the
TARP money, that drains cash flow and dilutes the common
shareholders. More of same will provide a long term cushion to
taxpayers, but will drain earnings enough to substantially inhibit
banks from growing capital internally.

So, IF there indeed has to be a rescue package to restore the
Goodhousekeeping seal of approval to the banks, regulators will
have to look long and hard at ways to protect taxpayers but
reliquify the system at a lower capital cost to the banks. So,
perhaps they will look at convertibles, warrants and sub-class
commons as options.

If a deal is to be done, there must be a depth of transparency that
leaves precious few unanswered questions. Failure to do that will
haunt us all well into the future.

Sunday, January 18, 2009

US Economy Recap

Let's review some indicators that coincide with the level of economic
activity. Real retail sales have accelerated to the downside over the
past 6 months and were down 9.8% yr/yr through December '08.
The weakness in industrial production is catching up, as it has
fallen 7.8% yr/yr. This would indicate there is more inventory
liquidation ahead. Civilian employment is down 2.0% yr/yr
through Dec. and is set to fall further as productivity has tumbled in
the wake of a sudden, rapid fall in output. Real earnings per worker
has risen sharply since mid-'08 as businesses have allowed wages to
continue rising while the CPI inflation rate has declined sharply. Total
payroll is trending down in growth reflecting shorter hours and the
3 million jobs lost over the past year. Overall, the composite of my
4 coincident indicators is a -4.0% yr/yr -- a deep drop.

The sharp decline in retail sales relative to the strength in real
earnings indicates clearly that consumers are continuing to hoard
liquidity or build savings during this downturn. Debt service ratios
for consumers are also now turning down cyclically.

US construction outlays remain in the dumper paced by a record
breaking decline in residential construction.

US trade is contracting rapidly, with both imports and exports
falling. Imports have the sharper downward tilt because of the blow
out of the oil price. As the trade deficit closes, the flow of dollars into
foreign coffers is shrinking which will pressure official reserve

My top down corporate profits indicators are off the most over
the past 12 months since the end of WW2.

The Business Strength Index -- a measure of operating rates
and business output levels-- stands at 106.0. This compares to
readings of 135.0 - 140.0 when the economy is in mid-expansion
mode. The 106.0 reading is the lowest in 27 years.

In the short run, the primary risk to the economy is the scramble
by consumers to hoard liquidity even with real earnings strong.
Without development of a better balance between consumption
and savings, the economy is likely to cycle down significantly
further, creating a far darker future.

On the brighter side, the weekly leading indicator sets have been
stabilizing at very low levels since the end of Nov.'08. I have my
fingers crossed.

Wednesday, January 14, 2009

US Economy, Stock Market & Obama

Time to get a few things off my mind...

US Economy
As I view the world, all the pieces are in place for an economic
recovery to begin by mid-2009, if not a little sooner. I say this
even holding a fiscal stimulus plan aside. There may be tough months
ahead, and the recovery may be anemic in the early going, but the
right things have been done to make it happen, from money
liquidity through real take home pay through rapidly increasing
housing affordability. Even if you go back to the dark days of 1932,
the economy finally responded positively and strongly to an easy
money policy. That's my operating plan for the economy. From
here on in, I check to see whether things will be different this time
and, if so, in what ways.

Stock Market
I cannot argue with the idea the market might retest the Nov. lows
over the next couple of months. But, looking out 12-15 months, I think
the SP 500, now stewing about at 840 or so, should rise to around
1325 as deflation pressures are shaken off and earnings rebound.

The guy takes office next week, and even though the new ship of state
has yet to set sail, barnacles are adhering to it. As I see it, his
primary mission is to rebuild our peoples' trust in the US Gov't. by
leading through integrity and common sense. That's why he was
elected. He needs to treat our citizens like concerned adults and restore
rapport before too many of us drift away.

So it is that I object to his use of focus groups. I object to allowing
Hillary to spin that large ball of cotton candy about "smart power" at
her confirmation hearing to be Sec'y of State. I also think he needs to
dump Geithner, pronto, as his tax evasion was inexcusable. The time
is such that we can no longer afford doofusses like Willie or W. You see,
this guy has to be good, has to engage us and challenge us for the
stakes are much higher going forward. And the big challenge, the one
many presidents fail, is he has to trust us too. Hope you have the
wind at your back, Mr. Obama...

Tuesday, January 13, 2009

Inflation, No-flation, Deflation

My inflation thrust indicator was signaling passage from 12 month
inflation to price stability (no-flation). Now, it has moved into even
lower ground, suggesting an eventual 12 month CPI which is
negative (deflation). Moreover, barring a significant rally in the
commodities markets in the months ahead, the indicator is
suggesting a deepening of deflation pressure over the first half of
2009. I take this analysis with a large grain of salt and so should you.
Commodities prices have dominated inflation momentum so far in
the new century, and being both volatile and difficult to predict, leave
us with unusually limited visibility when it comes to conjecture about
the prospective inflation (deflation) rate.

Current emerging deflation pressure largely reflects falling global
economic demand and production operating rates rather than the
emergence of large new sources of supply. Global economic demand
lost altitude so fast over the past 4-5 months that inventories
accumulated involuntarily. So, inflation hedge supply management
has turned into an inventory liquidation adjustment, with this
especially true for newer economic powers like China that lag in
inventory management techniques.

There is a "quickie" way to measure inflation expecations in the
markets. Simply divide the CRB commodities composite ($CRB) by
the long Treasury bond price ($USB). A rising trend signals that
expectations favor accelerating inflation. A falling trend signals the
opposite. The chart link below shows the rapid decline of inflation
expectations since mid-'08. Note too, the recent basing underway.
Chart is available daily here.

Monday, January 12, 2009

Gold / Silver

The gold macroeconomic indicator I use as a gold price directional
broke down sharply over Half 2 '08 and in so doing, decisively
broke below the long term uptrend in place since 1999. The index
has fallen back to levels last seen near the end of 2006, when gold
was trading $600 - 650oz. The decline in this indicator reflects the
collapse in both the oil price and a composite of industrial commodities
prices. These tank jobs far offset an improvement in the monetary

The gold price led the indicator down from its plus $1000 Mar. '08
high and tracked the indicator well until the end of Oct. '08 where
a major divergence started. Gold started heading back up and the
indicator continued to sink. The ratio of the gold price to the
indicator is the highest it has been since the 1979-81 period.

The gold market, seeing the global easing of monetary conditions and
the nearly global announcements of fiscal policy stimulus programs
turned into inflation anticipation mode this past autumn. The sharp
seasonal sell-off in the dollar from the latter part of Nov. '08 through
late Dec. lent considerable encouragement to the gold rally.

Now, whenever global economic recovery commences, both oil and
industrial commodities prices will surely rally. But, with sizable slack
building in the global economy presently, it could take a fair while
before inflation turns serious, if at all. So, sustaining a gold rally will
take an effort of will and courage by the bulls in the interim.

Gold remains too rich for my blood, and whatever the upside over the
next year or two, I see a good $200 oz. price risk from the present
$825 - 830 area.

I remain interested in trading silver with the long side entry point
below $10 oz. Silver, unlike gold, trades much closer to economic
value. Gold continues to carry a huge premium over its economic

The SLV silver etf chart is here.

Friday, January 09, 2009

Economic Indicators

Weekly Leading
As previously discussed, the two weekly indicator sets have plunged
since 6/08. That implies deep output and profits weakness for Q4
'08 and the current quarter, too. Both data sets are showing stability
for Dec. '08. We saw this last spring as well, only to see them do a
Wiley Coyote cliff drop after June. The recent stability needs
attention. it did help the stock market last month and gave the
T-bond a frisson of doubt as well.

Monthly Leading
Here I monitor the breadth of new orders across industry and
commercial. For the US, these indicators are deep in the red and the
composite total is still falling. Ditto global. Heavy duty pressure on
profit margins is indicated.

Economic Power Index
This index (real wage plus change of employment yr/yr) continues to
recover. It hit 1.7% in Dec. compared to a deep -2.5% near mid - '08
when inflation was ravaging the wage. Weak retail sales implies
consumers remain more interested in building savings than in
spending. So far, 3 million US jobs have been lost. History says that
retail should start doing a little better in the months ahead.

Omnibus Cycle Pressure Gauge
I devised this one over 20 years ago to track the Treasury market.
It includes production, commodities prices, the CPI, the 91-day T-bill
yield and other measures. It has fallen over 50% since mid-'08 and
ratifies the plunge in Treasury yields. I use weekly data pieces of it
to trade bonds. (For another such measure, click here.)

Capital Slack
There's plenty of it and it is growing now that bank C&I loans appear
to have rolled over. In a deep recession, business loans can roll off
to the tune of 25%. Credit slack joins rising unemployment and low
and falling operating rates to indicate large and growing under-
utilization of capital. Not for nothing that the Obama team is pushing
hard for a big stimulus package.

On balance, the economy is still on the cusp of catastrophic trouble.
The economic power index may be an interim peak level, but it
joins easy money and growing liquidity to form the traditional
base for recovery. Whether we stave off bigT trouble depends on
how consumers balance spending and savings in the months ahead.

Thursday, January 08, 2009

Corporate Profits...

All of the "top down" indicators for nonfinancial profits I use have
taken the steepest drops in decades and point to sharp down
earnings for Q4 '08 and likely for Q1 '09 as well. The declines in
the indicators pitched steeply downward in Sept. '08, marking
a sharp change in the outlook for profits in short order. Small
wonder the stock market crashed during the same interval.

Now, the market is discounting a bad earnings quarter, so results
and corporate guidance looking forward as released will disclose
how ready investors are to sit through bad numbers now in lieu of
prospective recovery later in the year. On average, a market
bottom discounts the initial upswing in the earnings cycle by 6
months. So, even if the stock market does treat the oncoming
earnings news with a rude sell-off, one should not readily conclude
that the year is lost based on the current reports.

Tuesday, January 06, 2009

Stock Market -- Longer Term Issues

The bear market which started in the autumn of 2007 has been
dramatic enough to badly fracture long term bull trend lines
which ran from 1982 and 1987. The market at its recent low point
dropped down into the center of a broad 50+ year range, a range
it had eclipsed to the upside over the 1997 - 2007 period. As a
consequence, there is simply no close parameter guidance to
follow going forward.

To me, this situation implies that the fundamental dynamics that
powered one of the greatest bull markets in history are no longer
aligned, and that a new epoch for stocks has begun. The great bull
was powered by faster than historic earnings growth, rising ROE%,
and downtrends of inflation and interest rates which elevated p/e
ratios. Investor confidence, heightened by such superb basics,
was strong enough to suppress risk premia and produce a roaring
bull which ended in major highs for small and mid - cap stocks
well above the highs for the large cap group, which peaked in 2000.

When you have a new ball game, you have to put aside the gambits
that powered the old one and look forward only. I see a period
ahead of lower global economic growth, difficult to manage volatility
in inflation and a range of burgeoning fiscal, monetary, financial and
trade imbalances which will wreak further havoc if not contained
and managed. At the least then, I see a higher risk premium for
stock investment going forward, which mean lower earnings
capitalization or p/e ratios. The potential for economic and
markets instability going forward is phenomenal in the post WW2

The most pressing issues at hand are: 1) the swift contraction of
asset values underway globally and 2) high volatility for many cost
factors of production vs inflexible wage structures -- Too many
folks can go from comfortable to underwater in to short a time when
costs are allowed to escalate rapidly vs. the wage. In this latter
regard, tax rate cuts and rebates only subsidize the sharp cyclical
upswings in the cost of living.

More as we go along. Suffice it to say for now that much work lies
ahead in charting the course going forward. I have never been much
for buy and hold. As a money manager, It was my view that a good
stock picking system ought to turn 1/3 of the portfolio over every
year. If I was a young guy interested in investing for the longer
term now, I would anticipate wide swings in asset allocation geared
as much to dodging bullets as to seizing opportunity. You cannot get
rich dodging bullets, but you can stay solvent.

Saturday, January 03, 2009

Stock Market Fundamentals

In an 11/13/08 post on the market, I mentioned that my favorite
fundamentals were "just shy of turning fully bullish". I was waiting
for confidence measures, particularly a group of doggie BBBs, to
reverse to the downside in yield to confirm the change. That strong
confirmation came this week with a sharp downward break in
collective yield for the group. So, confidence continues to return to
the capital markets.

My primary indicators are simple -- trend of market short rates,
trends of monetary liquidity and the basic money supply, trend of
yields of the low rung of investment grade credits, and yield quality
spreads. These measures are computed over monthly periods and
when all the readings are positive, history shows clearly that stocks
tend to rise substantially thereafter. No "sell" signal will come until
all indicators are negative at once.

My secondary indicators are also bullish: postive slope to the yield
curve, liquidity in excess of what the economy demands and earnings
which have fallen below trend on a cyclical basis. The latter factor
rquires explanation. When 12 month earnings turn down in a
recession period, the stock market goes down until earnings fall below
the long term trend. Once earnings are below trend, the guarantee of
a bear market ends as investors seek to anticipate recovery.

Now I do have misgivings about the timing of the positive turn of
market fundamentals. I would be happier to see a retest of the
Nov. '08 lows at some point over the next 4 months on the
premise that a deep cyclical bear market ought to run a good 16 - 17
months from the prior top (10/07 in this instance). I worry that with
the Obama inauguration and announcement of a big fiscal stimulus
plan a few weeks ahead, the market may have bought the rumor and
be getting ready to sell the fact shortly thereafter. Secondly, I
have reservations about the upside potential of this market reflecting
my view that economic recovery could very muted for a good
several years befor a new take off phase develops. Finally, the
timing of the change in fundamentals could have been better -- the
market is overbought short term.