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 29, 2009

Longer Term Economic Indicators -- Some Uncertainty

My long term lead indicators were about as strong as they get over
the closing 5 months of 2008. They did signal strongly that the
economy could transition to recovery during Q3 ' 09. That plus
impulse may still prove correct, but a couple of troubling signs have
cropped up.

One of course is the powerful run up of the oil price so far in 2009.
It has doubled its low from early in the year as traders and some
commercial players anticipate an economic recovery. Now, the oil
price is extended and overbought short term, but one has to keep in
mind the inflationary impact that a sharply rising oil price has on the
cost structures of households and businesses.

The second point that requires attention is the real hourly wage in
the US. It remains strongly above the year ago level, but has been
flat since yearend, 2008 as wage rate moderation and mild inflation
pressure have eliminated progress. This too is a worry worthy issue
for the longer run. Right now, the tax cuts and a strong social
security adjustment are sheltering incomes. However, a rising fuel
and food bill can chew up these benefits over time. Now, in
the past, a flat real wage has often led consumers simply to borrow to
fund higher consumption. But we may not be able to count on that
in the short run this time.

These points add clouds to the outlook, but not storm clouds, at least
not yet. I have linked to a BLS chart on the real wage along with the
data. Chart.

Thursday, May 28, 2009

Long Treasury Bond

I last posted on the long Treasury on 5/1/09 when the long guy was
at 4.10%. I opined then that the yield could rise to 4.50 - 4.80% in
the months ahead on economic recovery prospects. The bond yield
was in a steep uptrend then, and I was unsure how fast it could hit
4.50%. Well, the bond topped 4.60% this week before settling back
a little.

The back story is simple. In late 2008, the bond yield fell near the
2.50% level in a panic flight to quality that produced an historic
overbought. This year as fears about the economy have eased, that
extraordinary overbought has been corrected with a vengeance. A
number of directional economic indicators have started to signal an
eventual "V" turn for the economy, and one of the most sensitive
indicators for the T-bond, the industrial commodities price composite
(JOC - ECRI), has turned up.

In my view, the T-bond is getting well oversold, and I am looking for
a long trade. I use the Market Vane trader advisory sentiment
indicator as a contrarian measure. This indicator has fallen sharply
from an astounding 91% bullish in late '08 well down into the 50s
and may be on its way to a comfortable "too few bulls" reading
before long (40% or under).

A long position in the T-bond ahead would be a short term trade.
After all, if the US economy does move into recovery mode this
year, the bond could eventually go to 5.00 - 6.00% as recovery
becomes more evident.

I have included a price chart for the bond on this go around. It
shows the bond nicely oversold against the 40 wk m/a and on
RSI and weekly stochastic. It is also approaching a significant
price support level. $USB Chart.

I plan to watch the T-bond closely over the next week or two.

Wednesday, May 27, 2009

Stock Market -- Fundamentals

The broad fundamentals to support a cyclical advance in the stock
market remain in place. For me, these include monetary liquidity
measures, short term interest rates, the trend of BBB bond yields
and financial confidence measures (bond quality yield spreads).
Secondary measures such as the Treas. yield curve and broader
measures of financial liquidity are positive as well. The guess has
been that a cyclical low in the market would occur March - May '09.

There are strains in the shorter term, however. Specifically, the
SP500 Market Tracker has dropped to a value of only about 650
reflecting still further weakness of earnings. Net per share for the
"500" through June could come in close to $40. on a 12 month basis.
That is down 43% from the 12 months ended 6/'08, and is 57%
under the record 12 months ended 6/'07. Now, the powerful rally
that began in March of this year has brought the market a full 37%
above the Market Tracker level. So, the recovery anticipation now
built into the market is quite large based on a consideration of
hopefully trough earnings. In my view, with a moderate economic
recovery starting in Half 2 '09 earnings through 2010 can easily
rebound to $70. by the end of 2010, and the market could trade up
to 1150 - 1200.

The economic indicators as I read them continue to point to recovery
sooner rather than later this year, but even if that reading is correct,
the market has made a very large positive adjustment in the interim.
At some point in the weeks and months ahead, it would not be
unreasonable purely from a fundamentals point of view to witness a
period of consolidation / moderate correction as investors pause to
review whether the fundamentals are on the right track. Fundamentals
are not that helpful for shorter term market timing at all, but the
big premium in the "500" over the Market Tracker does invite
reflection at this time.

Friday, May 22, 2009

Oil Price -- Some Longer Term Thoughts

When viewed against the inflation rate for the past 40 years or so,
oil at around $60 bl. is reasonably priced. I think $50 is a better
number, but let's throw $10 bl. in to cover higher finding and
extraction costs for newer fields. When seen in this context, oil
is not a scarce or expensive commodity.

The oil price trend for the past 10 years presents a different
picture. My long term trend price range for 2009 is $38 - 79 bl.,
with $58.50 as a mid point. Of concern here is that the mid point
price represents nearly 15% annual growth from the 1999 base.
Implicit here is that oil at base has moved from a very cheap
energy source to one that is reasonably priced. That's ok, but
projection of a 15% price growth trend channel over the next 5
years would turn oil into an expensive energy source compared
to global GDP, household incomes and profits. As it turns out
oil was very expensive relative to broad economic measures for
most of the 2005 - 2008 era, and I believe, badly undercut global
growth just as it has in the past when the price spiked for more
than a month or two.

I am thinking now that oil above $70 bl would over time again cut
into growth and lead to further curtailment of oil demand down the
road barring large, dramatic improvement in fuel economies.

The history of the oil price since the late 1960s is one of stark
volatility with regular booms and busts, including the dramatic
bubble / bust from mid -2007 through the end of 2008. This sort
of kinetic volatility can be great fun for astute traders and even
nimble long term players, but it is a true destabilizing force on the
broader economic stage and should direct business and national
leaders to seek out a more assured and stable supply of energy.

I have ducked the "peak oil" debate and plan to do so for another
couple of years. It is still early to expend a lot of hot air on this

Looking forward, I will be happy to play opportunities in the oil
market so long as the price behaves itself and stays at moderate
levels. My philosophy is not to traffic on the long side with severely
overpriced assets or commodities except under rare circumstances
or in cases where volatility is easily managable, such as bonds.

Thursday, May 21, 2009

Oil Price

The story with the oil price through most of 2009 to date has been
one of weak fundamentals and strong technicals. The dichotomy is
still with us.

There will be significant spare production capacity over 2009 - 2010.
Crude inventories or carry stocks are running high and demand
remains suppressed. Storage is becoming an issue. Nonetheless, the
oil price has rebounded far in advance of when we would normally see
a cyclical recovery of price.

There is the usual chatter about geopolitical problems, but my guess
is that we are witnessing a fundamentals recovery anticipation rally
predicated on the idea that excess capacity, which is substantial, is still
not that high compared to prior recession periods, and will be quickly
dissipated by a recovery of demand once the global economy begins
expanding. And, as I have discussed in recent weeks, the short term
leading economic signals have bounced sharply since early Mar., which
has added to bullish urgency in the oil trading pits. The second key here
is the idea that once demand rises enough to begin to push up operating
rates at the well head, we will witness an extended bull market in oil
once again as traders welcome a progressive draw down of spare

The most common way to blow an oil price forecast based on the
fundamentals is to chalk up a miss on the demand side of the equation.
So, you have to have an undisputedly reasonable bounce in the global
economy before 2009 is out, and I suspect, what else is needed is a
low sensitivity to a rising price by consumers until the price reaches
much higher levels, say $75 - 80 bl. These are rational assumptions
but carry rather significant risk in a still uncertain environment.

On the technical side, the oil price is in an intermediate term uptrend
but is decidedly overbought with mild extension in the price. CHART.

Tuesday, May 19, 2009

US Economy -- Looking Ahead

The weekly leading indicators sets I track show a bottom in early
Mar. of '09 followed by a quick "V" bounce. So far, this suggests that
economic recovery can begin in Jul. of this year, in line with my
expectations going back to late 2008 (the stock market does not
carry a heavy weight in the combined set).

It is still early to look for an upturn right now. Thus, readings for
Jul. data on sales and production that are released in Aug. would show
the beginnings of an upturn, if my expectations are correct. It could
come sooner, but for now, I plan to monitor the lead indicators. The
track record for weekly data is not that smooth, and a trend, be it up
or down, can show backing and filling. Such may happen this time as
the bounce in the indicators has been strong off the get - go. I would
opine that one has to prepare for a setback or two in the weekly data
over the next couple of months. So long as there is a positive trend,
I am not likely to change my thinking.

However, I think it is fair to say that it is best to be a little anxious
over the next month or two, as there are a couple of important
differences in the current environment compared to previous
periods. One is the issue of how strong consumer preference for
liquidity may remain. Another is the large inventory of unsold new
homes. Finally, the banks and other credit intermediaries will have
to be tested if consumers do wish to spend more and come looking
for mortgages and loans.

It is unusual for leading indicators to jerk about so badly as to give
false signals, but it does happen. Thus as a defensive measure, my
plan is to monitor short term data closely to see if the indicators turn
indecisive or negative. If either happens, the trap you need to avoid
is to start thinking that re-development of a positive bearing is
right around the corner. The rule here? When an expectation is not
met, reassess, do not rationalize.

Sunday, May 17, 2009

Stock Market -- Technical

The correction underway since 5/11 has wiped out the large short
term overbought, brought the market off a very substantial up
trajectory, and has knocked it off the positive trend line.

The 10 and 25 day m/a's are stilll rising and the 10 remains above
the 25, thus signaling that internal damage so far is minimal. The
SP500 has broken below the 10 m/a and is now sitting just above
the 25 m/a (Chart link below). An important test of short term
direction lies ahead this week -- Can the market stay north of a
25 day m/a?

The market remains substantially overbought on measures
running out from 6 - 13 weeks, so you have to allow for the
possibility of a further run-off in the wake of a 2 month rally.

The SP500 had a Fri. 5/15 close of 883. To me, the market remains
of interest if the "500" can close above 840 for the upcoming week
and 850 -855 in the following week. Breaks below the appointed
levels in either week would render this advance increasingly
suspect, as trajectory would no longer be consistent with a decent
intermediate term advance to run perhaps through June.

I have been cautious for the past couple of weeks, but the technicals
do not yet give me reason to be downcast about this market. So, I
plan to keep looking for entry points on the long side. SP500 Chart.

Friday, May 15, 2009

More Economic Indicators

Coincident Indicators
Viewed yr/yr, the coincident indicators are down 5.8% through Apr.
That represents a slight improvement from Mar. Only the real
wage remains positive, with employment, retail sales and production
all in deep negative territory. Viewed month-to-month, the coincident
indicators have lost some of the downward thrust, but do not yet
indicate the economy has hit bottom. The big losses to date in 2009
have come in production and employment as inventories are pared.
When measures of new orders are added in, the picture looks more

The 13.9% yr/yr decline in the dollar cost of production matches the
Mar. number and shows that non-financial profits remain depressed.

Capital Slack
Measures of capital input remain depressed across the board.
Capacity Utilization in the US is down to 69.1%, and the growth of
capacity over the past year is a scant 0.3%. With more mothballing
on tap, the physical component of capital could shrink at some point
ahead. Large production losses are also evident globally as well.
Business credit demand is starting to contract at a faster pace
reflecting reduced working capital needs.

Inflation (Deflation) Thrust
Yr/yr through Apr., the CPI declined by 0.7%. Thus, we are seeing
mild price deflation as expected. The thrust indicator looks now like
it will bottom in Jun. before turning up from deeply depressed levels.
A broader measure of inflation thrust based on monthly data could
be bottoming now.

The CPI without seasonal adjustment has been rising since Dec. '08
on higher fuels prices. However, the Apr. reading remains 3.8%
below the Jun. '08 all time high. Even so, it is wise to keep an eye on
gasoline prices and entire commodities price composites as the year

Long Term Economic Indicators
This composite is still positive, but it has shown some deterioration
because of the rapid recovery of the inflation adjusted crude oil price
this year. Crude market players are betting on a significant recovery
of oil demand over the next 12 months even though carry or cover
stocks remain at high levels in a depressed demand environment.
As we have learned in recent years, this type of wagering can have
significant economic effects.

Tuesday, May 12, 2009

Stock Market -- Sabbatical Over

I took a couple of weeks off from watching the stock market with
care in the hope there would be a moderate pullback that would
put the uptrend on a more reasonable trajectory. I pointed out
back on 4/27 that if the advance powered on, it would soon take
on SP 500 resistance at 930 - 935. It got close before pulling back
modestly (chart link below). However, the market has yet to break
below the powerful trajectory I set for it in the early going of the
rally, so the two week "holiday" I took netted little.

The market remains overbought. Most advisors are looking for a
pullback, and the debate whether the rally is a cruel bear advance
or a new cyclical bull has started to heat up. The sentiment
indicators I follow have moved from "too many bears" up toward
more nearly neutral levels. So, there is still a substantial dose of
skepticism out there. The latest wrinkle in all the talk is that big
rallies yield big corrections.

As of now, my indicators say it remains a heavily overbought
market, but one which remains in an uptrend. Moreover, nothing as
yet signals a top is in. So, I'll follow along. This rally has treated me
and other longs well even though I am on the sidelines for now.

When you have a powerful move like this, you keep your interest
level up even if you are not in it every day. Chart.

Friday, May 08, 2009

Economic Indicators

Weekly Leading
The weekly lead indicators have moved up strongly since early Mar.
The indicators are on the cusp of a top side breakout, but as of now,
we can only say that they signal continued economic stabilization.
The indicators have been range bound now since Nov. ' 08 and have
moved well outside a frightening crash downtrend line that kicked
off at the end of Jun. ' 08. Yr / Yr % momentum remains deeply
negative, but continues in an improving trend.

Monthly Leading
New order breadth indicators have moved up sharply from deep
recession levels of Dec. ' 08. The composite index has jumped from
62.6 to 94.2 over the first 4 months of the year (100 = expansion).
The indicators are tracing a "V" recovery pattern, but long experience
says that backward steps can come at anytime, as new order volumes
are volatile.

Economic Power Index
This indicator remains positive, which is supportive of a recovery in
consumer spending. Measured yr / yr, the change in the current $
wage rate has begun decelerating as expected, but the real wage rate
remains very strong in light of mild deflation. The yr / yr change of
employment continues to trend lower and is weak enough to flatten
out total payroll before taking into account two positives: lower
tax witholding rates and unemployment insurance. The consumer
sector continues to benefit from sizable growth in social security
payout. The EPI has been nicely positive when averaged over the
past six months, but retail sales have only recently stabilized as
consumers build cash liquidity and tamp down debt. So, the
spend situation, while improving, remains fragile.

Profits Indicator
The first indicator for April -- industrial & commercial activity --
shows further improvement but remains below profits turnaround

The global economy remains in recession territory, but monthly
data, especially for new orders, suggests a significant abatement of
weakness. The US is the leader in the improvement.

Thursday, May 07, 2009

Banking System -- More Capital Needed

The stress tests have been completed and the major banks in the
system will need to raise $75 bil. in primary capital by this Fall.
That would augment system capital by 6.3% and strengthen the
capital bases of the majors who are primary dealers, market
makers and major players in the secondary and syndication
markets. Most of the tainted banks have already been named.
What these guys need to do is raise capital with the lowest
dividend cost they can to preserve cash. The thrust will be to
sell as much common as the market will bear and to convert the
higher cost preferreds. There is about $110 bil. of TARP money left.
The capital funding will be dilutive to common shareholders, but
there can be few surprises there. Other banks who are not directed
to raise capital will raise additional funds as well, subject to market

The banking system needs the $75 bil. of new money as system
capital has remained flat, with continuing strong net interest
margin having been offset by rising loan loss reserves. The banks
also need cash liquidity, as the run off commercial loans has been
slow so far.

My estimate has been that the banks made about $1.5 tril. of
speculative loans over the past 5 years. The loans range from the
savvy and profitable to garbage. It is unwise to assume that
the industry is now free of further strong direction from Treasury
regarding capital. Another round could come if the economy does
not show signs of recovery over the next 9-12 months.

On balance the Treasury's disclosures were well advertised and
discounted prior to today's release.

Tuesday, May 05, 2009

Bond Market -- Corporates

Corporates experienced a powerful bull market from 1982 - 2005,
with Moody's Baa bond yields falling from the whopping 17 - 18%
yield range down to 5.5% in early 2005. It was difficult to capture
the full majesty of this run as companies called their higher coupons
as fast as they could, and investors, who prefer funds, were often
stuck with shorter maturity structures than they deserved. Only
the big players with expertise to assess individual issues got the full

Yield chasing by liquid players was intense over the late - 2000 to
mid-2005 period. Corporates then entered a bear phase as yields
rose to compensate for higher inflation. The bear phase became acute
once the recession took hold in 2008, and corporates were drubbed
in the Sep. - Dec. ' 08 panic period, as players moved into safer haven
Treasuries in droves even as inflation eased. In spectacular fashion,
the Bloomberg junk index shot up from 10.50% to over 24% yields
before recently returning to near 12.50%.

Like Treasuries, high quality corporates have been poor performers
since Mar. of this year, as players opted to take on more risk in
equities and lower quality bonds.

High quality corporates, which traded as low as 5.2% in 2005, are now
a far more reasonable 7.00% and Baa/BBBs are at 8.20 - 8.80%. So
there are solid corporates out there that are now more attractive than
Treasuries and spreads can be expected to narrow further in even a
modest economic expansion. Junk bonds are much trickier because
the economy has weakened enough to increase default risk measurably.
My cut off for junk is 10%. I'll take a look at the market when yields are
above 10%.

I have never been that comfortable trying to do valuation on corporates.
I would say that in a 3.0 - 3.5% inflation environment, that high grade
corporates would be reasonably priced above 7.0% when maturities
exceed 7 years. I strongly prefer individual issues because with careful
shopping and some basic financial analysis, one can better tailor a
portfolio to suit one's needs than can be done using funds.

Friday, May 01, 2009

Long Treasury Bond

We are in an unusual period with regard to figuring out the T-bond.
In a recession / early recovery phase of the business cycle, the yield
on the T-bond can decline as the Fed eases credit and inflation
decelerates cyclically. But here, we saw the Panic of 2008, a move by
the Fed to a ZIRP at the short end and the development of deflation
in both asset values and the CPI. So, in a sense, the fundamentals
that lead to a cyclical downturn of the T-bond yield have already
happened. And, with evidence the economy is stabilizing, the long
end of the market has gone from flight-to-quality to flight-from-
quality, all in a short time frame, as players dump Treasuries to
move into riskier assets. The Fed has a program to buy in $300
billion of Treasuries to hold rates down to support housing in
particular, but the spike in the long bond has been strong enough to
suggest players have begun to price a "supply" premium into
yields as the budget deficit widens.

The T-bond sports a 4.10%. But this can move up to 4.50 - 4.80%
in the months ahead on further signs of a firming of the economy.
Basically, with economic expansion and a return to moderate
inflation pressure, the yield on the T-bond can easily move up to
between 5.00 - 6.00% over the next year or so.

At the moment, the short term leading economic indicators point
only to a stabilizing economy, while the inflation thrust measures
remain consistent with mild delation. So, the long bond has started
to discount an economic upturn, perhaps later in the year. Again,
remember that the goodies that can push the bond yield down early
in a recovery phase have already been expended.

Importantly, industrial commodities prices, paced by copper, have
also been moving up from steep lows. As I have said many times,
the Treasury is very sensitive to the direction and momentum of
the ind. commod. composite.

In my book the 30 yr T-bond -- now at a rising premium to its 40
m/a -- is fast becoming oversold. This is the flip side to an over-
bought stock market at the moment.

Further upward pressure on the T-bond yield should provide a
short term buying opportunity to capitalize on what could become
a deep oversold. Trades such as this have been a staple for me
for many years, but are not everyone's cup of tea.

I have attached a T-bond yield chart. There is resistance up at
4.40 - 4.50%. But, since the market is already oversold, a move up
to resistance straightaway may be a dicey call. CHART ($TYX).