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 !!!

Monday, March 30, 2009

Stock Market -- Short Term Technical

Today's sell off continued the one started on Friday, only with more
smack. It ended a plainly unsustainable rocket run up that produced
a massive short term overbought on price (the breadth overbought
reading was mundane). The market could lose a little more ground
over the next day or two and still would be well positioned to move
higher if it catches decent bids. Too early to throw up one's hands.

The short term overbought we saw last week doubled anything
I have seen for quite some time.

Thursday, March 26, 2009

Corporate Profits

Profits for the nonfinancial sector for Q1 ' 09 should be lower than
for the prior quarter and down substantially from the prior year
reflecting weak output comparisons and a loss of pricing power,
with the latter especially telling for commodities producers. Ditto
foreign earnings, and, for the offshore net of US companies, we have
to tack on an additional penalty for a stronger US$.

The financial sector maintained a high level of net revenues.
Downsizing likely cut noninterest operating costs, but the flow down
to the bottom line will primarily reflect the magnitude of loan loss
reserves and securities losses from the continuing unwind of the
mortgage paper crisis. That's all guesswork at this point. Naturally,
AIG -- the current poster child for the meltdown -- could have
more bad news to report.

With SP 500 profits broadly bad, companies are cutting dividends
to conserve cash. Measured yr /yr, the Sp 500 dividend is down 16%.

12 month earning power for the "500" is now a low $45. per share.
In a moderate global economic expansion with an accompanying
reduction of finance sector loan losses, earning power could be
$75 - 85. per share in the latter part of 2010.

The drop and crash of the stock market from 2007 is every bit
warranted by the drop and crash of big company earnings. US GDP
corporate profits -- a broader measure but one which has peculiar
economic adjustments -- is down about 33% off its peak, which is
still lousy.

The SP 500 Market Tracker, which uses current 12 month eps, is
priced now at 750 and reflects the current awful state of index profits.
The current rally underway in the stock market reflects an effort
to begin discounting a more stable economy with a bit more investor
confidence about the future.

Tuesday, March 24, 2009

Stock Market -- Short Term Technical

Yesterday's big rally took the market up to an obscenely high
short term overbought. We saw a pullback today, but the market
is still strongly overbought and vulnerable to more selling pressure.
Such would be the case even if bull market conditions ruled.

The market is at the gate of an intermediate term rally -- 6 -13
weeks -- that could carry the SP 500 up into a congestion / resistance
zone of 850 - 900 (as opposed to today's close of 806). However, the
trajectory up from the 3/9 closing low of 677 was such a rocket it
leaves about 5% further downside before it would enter onto a more
"normal" rally trajectory.

More conservative traders looking long may well hold out to gauge
if they can enter orders at meaningfully lower prices.

The market has moved sharply outside of a strong bear market
trajectory for the first time since the fall-into-crash kicked off after
Labor Day, 2008. So, for long side players this is the most interesting
rally in months and this suggests interest may stay high for a while.

The intermediate term breadth indicators I like still have the market
in oversold territory looking out several more weeks.

Friday, March 20, 2009

Financial Liquidity & Monetary Policy

Early in the calendar year, the Fed tends to drain liquidity from
the banking system following the holiday season. This year, for
reasons not disclosed, the Fed shrunk its balance sheet by a
whopping $400 bil. This action led to a contraction of the basic
money supply and a $150 bil. contraction in my broader measure
of credit driven liquidity. For a central bank intent on easing
credit, the tightening caper makes little sense, unless they wanted
to see how the credit markets would react to so big a change.

In any event, the Fed came along this week to announce they would
buy a little over $1 tril. of paper, including $300 bil. of Treasuries.
With this and their other facilities, the potential is there to expand
their balance sheet by $1.4 tril. or 70% to a ginormous $3.4 tril.
God bless us, that's a lot of money. Piker that I am, I would have
been satisfied if they had replaced the funds they drained and added
perhaps $100 bil. more via buying Treasuries.

So as discussed in the prior post, They are creating liquidity to
support credit growth far in excess of what the US is likely to need
over the next couple of years. Perhaps these planned purchases
will help hold Treasury yields down in the short run. We'll see.

Another gambit the Fed could have tried would have been to stop
paying interest on reserves and to start charging interest instead.
That might have served to get banks to reduce their excess reserves.

Well, we have moved much further in to a new ball game in the
annals of US monetary policy. This move has the potential to help
the economy in the short run, but it also could serve as a destabilizing
force in the long run.

Wednesday, March 18, 2009

The Fed -- Maybe They've Gone Over The Top

Ok, the FOMC has announced it is committing to buy up to $1 tril.
additional securities, including $300 bil. of Treasuries (quantitative
easing). They want to rescue the economy and do Their bit to help
out globally. I get it. But, this latest round of monetary expansion
grievously offends my sense of proportion and balance. To
analogize, the FOMC is building this enormous casino with every
gambler's interest and amenities provided for. But, the US private
sector is looking maybe to enter the casino once in a while, and needs
but a cup to hold quarters for the slots. In short, the Fed is
seeking to replace a credit regimen that may be too large for the
times we have entered.

Inflationary? Could be. But this action will create a liquidity load
in the system that could destabilize the economy and the capital
markets, especially when it comes to shrinking this vast pool.
Monetary tightening down the road that could involve removing
$1 tril. from the system could have unintended but very disturbing
consequences, inflation notwithstanding. Restoring integrity to the
Fed's balance sheet long term could prove a daunting task indeed.

I say all of this because I do not think the economy needs this much
liquidity to recover and prosper. Savings = investment, so even if
the economy saves more at the expense of a measure of short term
growth, liquidity for longer term investment will be provided
internally. I would like to see economic growth proceed from cash and
carry to modest credit expansion, which seems far more appropriate.

I understand the fear of a deflationary spiral into depression. But I
think folks need time to reassess their priorities and to budget
accordingly. That means a blend of incremental spending and
savings should be expected rather than having everyone only
pinch pennies and wait around to be laid off.

So, I am now out of synch with this decision to build so grand a
monetary edifice. It raisies substantially the risk of unintended
economic disequilibrium and dislocation.

Coincident Economic Indicators

Viewed yr / yr, the recession deepend further. The Feb. index of
CEI was down 5.1% vs. 4.5% for Jan. All components softend. My
indicators are overstating the weakness somewhat because they do
not capture the large increase in the social security disbursement
rate. The real hourly wage remains a very strong 3.6%, which when
coupled with per capita real SS disbursement of over 5%, gives the
consumer the stongest per adult cash buying power in many years.
That remains the bright spot in the outlook.

Real per capita income growth is being undercut by the rising tide of
employment losses and a weakening job market will eventually lead to
a softening of wage rates. Short term, real retail sales is showing
stabilization, which is a hopeful sign. Seen yr/yr, real retail sales is
down about 9.9%, which continues to show how strongly consumers
are interested in boosting liquidity or savings. Short term, the
liquidity preference has weakened, and this is precisely what is needed
to restart the economy. Come April, wage earners will get another
boost from lower tax witholding rates.

Production fell a whopping 11.2% yr/yr through Feb. That means that
inventories are being liquidated relative to sales and that the pipeline
is thinning out. Weak production also reflects the dramatic decline of
US exports under way over the past half year or so.

In all, it remains premature to give up on the idea of a stronger Half 2
economy for 2009, although the outlook remains a cliffhanger.

Tuesday, March 17, 2009

Stock Market -- Technical

Well, the rally has moved up and past the quick sucker format and
is threatening to become more substantial. The SP 500 has risen to
an overbought at 3.1% above its 25 day m/a, so I think we now are
at a level to test bullish intentions as overboughts above 3.0% have
tended to correct within days after the rallies have topped that
modest level (past six months only).

The 25 day oscillator has broken up through a downtrend underway
since early Jan. ' 09. That's a positive as it suggests the downleg
from Jan. may be over. The 10 day m/a is rising. The 25 day m/a is
still falling and the "10" is below the 25. So, it is still only a short term
run. My 25 day indicators are turning up but do not a confirm a
rally of more consequence as yet. Chart here.

The important 40 week oscillator with 13 week smoothing may be
entering a bottoming phase. This indicator indicated a topping phase
which began in the spring of 2007, ran on, and wound up hinting at
the major top that was to come. In a similar vein, the 40 week osc.
could run on in a bottoming phase for some time as well, although
as with all things technical, it need not.

Thursday, March 12, 2009

Stock Market -- Technical & Psychology

Over the past 3 days, the market has rallied from a deep oversold
up to a modest oversold. Last week, I saw it as a coin toss whether
stocks could rally or fall further to match the kind of oversold %
readings we saw last autumn. Unlike the intermittent rallies we
witnessed through much of 2008, the upsurges this year have all
been cruel sucker moves that have trapped all but the most nimble
of day traders. At the moment, the jury is out on whether this is
just another sucker-doo.

This is the 3rd time this year the market has rallied out of a deep
downtrend line. So, it will be interesting now to see whether the SP
500, which closed today at 751, can advance further, and of greater
importance, can hold above the 710 level through next week's close.
Then, we might have something more interesting.

Market psych. has improved this week because leading banks have
pointed out that net revenues remain at high levels and that cash flows
net of reserves remain substantial. The promise here is that if
the economy is more stable and loan loss reserves are more contained,
the earnings leverage will be quite positive. As well, both the SEC and
the accounting standards board (FASB) are under tremendous
pressure from Congress to modify the ridiculous market-to-market
rules which are making banks take losses they may well not realize.
Both the FASB and SEC are now under strong pressure to respond,
pronto. Congress gets my vote on this one. Finally, it should be
noted that retail sales, a forward but not a leading indicator, are
showing some stabilization (More on this next week when the
co-incident economic indicators are reviewed).

I enjoy trying to gauge market psycology, but the recent change to
positive is a great reminder of just how fast psychology can change
and why you have to be so careful with it.

Tuesday, March 10, 2009

Oil Price

The oil price retains good economic value below $50 bl. The price
is giving mixed signals during this normally strong seasonal period
which can run out through March. It is well off the late 2008 crash
low of $33+, but has not been able to take out short term resistance
in the $46-47 area. At present the shorter term uptrend in evidence
since mid- Feb. '09 is the firmest to date since the price moved up off
the crash level.

Still, the price should be doing better. It is behaving atypically for a
new cyclical advance during this normal strong seasonal period, and
the failure to clear resistance puts it closer to bear market behavoir.
Since cyclical bear markets in oil typically last 12 - 18 months, the
late 2008 low looks suspicious given that the all time price high of
$147 came in mid-2008 as well as the severity of the decline in
global petroleum demand. So, although it has a good short term
technical profile and could push higher before the end of the month,
claiming that the price "bottom is in" is an against-the-house bet.

Fundamentally, despite the OPEC production cuts, inventories are
high on a seasonal basis and gasoline demand in particular remains
on the weak side. Capacity at the well head will expand moderately
this year as well. So, it could be late in this year or 2010 before
supply and demand align more favorably for price recovery.

Long positions should be attentive to how oil behaves as it winds up
the seasonal push around month's end. For a technical chart, click

Friday, March 06, 2009

Economic Indicators

Weekly Leading
Weeklies are still trending down, but the momentum to the downside
has eased markedly, signaling a short term moderation in the pace
of the downturn.

Monthly Leading
New order breadth measures for Feb. again came in above the record
lows for 12/08, but downtrends persist. Monthlies also signal a
moderation of the downturn short term.

Comparable global measures are short run stable at low levels.

Economic Power Index
The real wage rate is holding up decently at 3.6% yr/yr, but the
employment rate has fallen sharply to -3.0% yr/yr, undercutting
the wage. A lower consumer tax bill at the outset of the year and
lower witholding ahead are boosting after tax incomes. The
strong real wage continues to give the economy a decent shot at
recovery this year if liquidity preference moderates in favor of

Business Strength Index
A weak 110 for Feb., with 135 indicating decent expansion. Business
output and operating rates remain at deep recession levels.

Economic Slack
Slack continues to rise as short rates are very low, operating rates
have been falling and unemployment is trending up sharply.

Profits Indicators
Continued weakness for Jan. , Feb. Suggests Q1 '09 profits will be
sharply lower yr/yr.

Inflation (Deflation) Thrust
The indicators remain consistent with the development of mild
deflation this year when measured yr/yr. Focus of market players is
likely now more directed to month-to-month changes to see if
a fresh trend might emerge.

The indicators point to an ongoing deep global recession with some
moderation in the power of the decline so far this year. Profit
margins remain under pressure from very weak sales. Within a
12 month perspective, the pricing outlook is mildly deflationary. Too
early to tell yet whether leading indicators have paused in their
decline or are signaling eventual, firmer stabilization.

Thursday, March 05, 2009

Stock Market

The market has drifted down into deep oversold territory that can
as easily signal further vulnerability as a rally prelude. If investor
despair is creeping in and taking hold, the broad market can easily
drop another 8 - 10% in relatively short order. As I have discussed
in recent weeks, it is hard for fund managers to hold on for recovery
when current profitability is so very low and when a significant
rebound of earnings seems very "iffy" after plenty of disappointment
since late 2007.

At the current level of 682, the SP 500 has moved down from quite
reasonable to cheap. In my view, it is interesting from an investment
perspective for the first time in a long time. In fact, I have only traded
equities for many years and even cut back on that when the market
had its bubble over 1996 - 2002. Now since I am closing in on 70
age wise, I am not really interested in long term positions, but I do
plan to extend my time horizons well past the 2 - 4 month regime I
have followed for so long as we move forward.

For the very short run, we can only see whether there is enough of
an oversold to trigger more than a few days sucker rally or whether
fear is up enough to trigger another round of heavy selling.

Tuesday, March 03, 2009

Let Us See....Let Us See

I have posted a lot in recent weeks with topics in a longer term
perspective. Now it is time for a few months of careful monitoring
to see how matters shape up.

My views run as follows. The US is on the borderline of far more
serious economic trouble. Analysis of business cycles over history
precludes reaching too negative a conclusion so quickly. The longer
run leading economic indicators have been positive for nearly 6
months and I have been anticipating a recovery to to take hold over
Half 2 ' 09. Many of the objections to this view can be rejected out
of hand, save for the issue of liquidity preference. Consumers have
cut back sharply on spending to rebuild savings at the expense of the
real economy. A troubled housing industry and low affordability
has kept people away from the residential market. The real wage
per capita is strong and this has been a key to recoveries in the past.
Housing affordability has improved sharply. So, we need to see
how folks balance savings, spending and investment in the months
ahead. Continued very strong liquidity preference will only sink
the economy further. To help consumers and the financial sectors,
there is modest tax relief ahead and another Fed / Treasury
program to boost consumer and small business borrowing. This
latter program based on a $200 bil. swap for Treasuries can be
leveraged up to 5 - 1, putting up to $1 tril. in play.

Businesses are fast trimming inventories to rebalance the pipeline
after a rapid fall of sales. This rebalancing has substantially
punished production and employment, but it is well underway.

By historic measures, a Half 2 ' 09 economic and profits recovery
should see a stock market bottom between March - May right
ahead. Now just below 700, the SP 500 is very reasonable on a
decent recovery in profits through 2010. I would also point out
that my fundamental indicators flashed positive at the end of ' 08,
but weak current earnings and diminished confidence have so far
weighed heavily on the market. I am on the hook for that and will
be for some time, as those indicators would not turn negative until
the Fed tightens policy.

In my view, commodities which are now cheap, should move up
sharply over Half 2 '09. Ditto oil, which at $40 bl. is also inexpensive.
My concern would be if economic recovery brings too rapid a rise
in commodities and begins punishing consumer incomes.

Look, from my perspective, the pieces to move the economy up and
out of the ditch are in place. The battle now is with fear and public
anxiety about the future. Since consumer sentiment can turn on a
dime, I plan to move forward in viewing the environment a couple
of steps at a time.