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 29, 2010

Thanks Go Out....

Back in the 1980s, when I sported my pinstripe suits, paisley and
rep stripe ties along with the tassel top loafers, I gave a lot of talks
and speeches to professional investment groups, clients and did
many an interview on TV and with the print media in my travels as
a chief investment officer. Along the way, I built an impressive
rolodex to go along with a strong track record.

I retired from the corporate world in 1990 but did stay active for
years as a consultant and investment advisor. I had the talent for
the work, but a personality more suited to being a forest ranger.
I happily left that fast moving world and all I have left of its
trappings is a fondness for kiltie tassel tops -- a trademark.

I enjoy staying under the radar and have done a touch more than
zippo to publicize the blog. I do not use a counter other than the
"profile visits" provided by Blogger, so I do not know how many
folks actually read the blog.

So I was delighted to receive a link from a reader directing me to a
professional organization which reads the blog and thinks well of my
efforts. Link here. Scroll down to #7. That is good company to be in,
and the Katz organization is quite interesting if you nose around
their site. HT to David on this one.

The investment business was very good to me over the years, and it
is my turn to give a little back. Thanks again.

Wednesday, January 27, 2010

President Obama After A Year

The Obama 2008 campaign platform featured an intriguing mix of
spending and investment programs (energy, education) coupled with
tax initiatives on Social Security and the upscale earner designed to
maintain a semblance of fiscal balance and to thwart an egregious
mal-distribution of income. There was also an expectation of a peace
dividend from the winding down of military action abroad (Iraq).

Between the wind-up of the campaign in the summer and his first
day in office, there was a tectonic shift in the environment. A huge
financial crisis emerged and the economy went into free fall. TARP
and related programs took up more than $700 bil. Then, there was
an emergency stimulus program of nearly $800 bil. designed to
offset the disappearance of at least $1 tril. in US sales. At their
leisure, historians will debate the merits of these programs, but
prudence suggested taking major action to keep an economic
free fall from becoming uncontrolled.

So, Obama, no economic seer, was "future shocked." He knew in
early 2009 that the recession was cutting so deep that even with
correctice actions, he stood to lose the super majority in the senate
come the 2010 mid-term election when the incumbent party
would normally lose seats anyway.

He elected a slow roll out of the stimulus program to buttress
chances in 2010, and went forward with a big ticket health reform
program to use his first year goodwill and the super majority in the
senate. But he miscalculated on the tremendous negative response
of voters to the bailout of the financial system and the additional
large run-up in the budget deficit from the stimulus program. To
make matters worse, he let his own party dawdle along with the
plan and wasted time trying to snag GOP votes.

The financial underpinnings of his campaign are shot to hell. The
voters are tossing out incumbents across the board and with relish
in the off-year and special elections. so he has gone from bright
young fellow who could do some good to prospective fall guy.

A sensible plan B is easy in outline -- when you have nothing in
front of you but crates of lemons, make lemonade. Measure up and
confront the voters in a straightforward manner and cut yourself
plenty of slack as you try to do your bit to guide the country out of
the morass of steep hits to the economy, the budget and the
wellsprings of voter anger, low confidence and mistrust. Do not
use the SOTU tonight to tell folks you have it wired. Tell them
you are going to make the best lemonade you can.

Tuesday, January 26, 2010

Monetary Policy, The Banks & Bernanke

Monetary Policy
While economists and markets savants worry over the inflation
potential they see as inherent in the dramatic growth of aggregate
Federal Reaserve Bank credit, the Fed continues to battle a
decline in the broad based measure of credit driven liquidity as
adjusted for inflation. To counterract the continued unwinding of
private sector credit, the Fed has had to expand Fed credit and the
monetary base to provide sufficient monetary liquidity to support
economic recovery.

The basics I look at to determine rate setting are now running about
70% in favor of leaving the 0.0 - 0.25% Fed Funds rate unchanged.
Over most of 2009, these measures were 100% in favor of not
changing the ZIRP. The breadth of the recovery in manufacturing
has improved substantially and is strong now. However, the system
operating rate remains very low. Moreover, short term business
credit demand continues to run off. My short term business credit
supply /demand pressure gauge is weak. With a reading of less than
-10 heralding a large imbalance in favor of supply, the gauge is just
shy of -12. It can be risky, disruptive and difficult to shrink reserves
when credit demand is falling, and I think the Fed would prefer to
see short term business loan demand turn up before tightening.

With over $1 tril. in excess reserves on hand, the Fed is apparently
considering targeting the rate it pays on such reserves (now 0.25%).
It is also considering a term structure for these reserves to
manage them better as the economy recovers further and as credit
demand revives.

The Banks
The system continues to contract, with total footings off 3.6% yr/yr.
With an expected ongoing run off of business C&I loans, bank
system liquidity has improved markedly. This had to happen to
put the banks in better shape to lend going forward, and there is
no sign yet that liquidity improvement has peaked. Higher fees,
trading profits and a slowing in the growth of the loan loss reserve
account is allowing some improvement in capital position.

How About Benny?
Whoever or whatever you are in the world, you can be replaced.
With one third of the senate set to stand for re-election in 2010,
and with an angry electorate in evidence, some senators will feel
compelled to denounce Bernanke and not vote to re-confirm him.
All well and good. He deserves to get his nose rubbed in it for
lax regulation. But, Sens. Reid and McConnell best get their counts
right, because not re-confirming Benny would create a bad vibe
concerning the independence and integrity of the Fed.

Friday, January 22, 2010

Shanghai Express -- In The Roundhouse

Last summer's post on the Shanghai Composite happened to nearly
catch the top for the market. I thought the market was fairly valued
but way overbought. The overbought has been worked off slowly,
but I'll return to that.

During the even darker days of late 2008, China was the first of the
major economies to step up to counter economic free fall with a
massive dose of fiscal stimulus ($584 bil. -- well over 10% of GDP)
and a round of very easy money by directing the banks to lend
aggressively. Reported data indicate the program did arrest China's
nosedive. But with rapid recovery has come a cyclical re-acceleration
of inflation. A substantial but undisclosed amount of the lending went
into speculative asset acquisition schemes ranging from inventory
speculation to real estate. Now, China is looking to regain control
over bank lending to curb speculation and to remove some of the
inflation stimulus. The investment side of the economy was the main
beneficiary of the stimulus. Factory operating rates are on the rise
but some careful observers are concerned about new plant to come
on stream in the wake of the investment surge.

The market stalled out last summer partly because 2Q and 3Q
earnings trailed recovery expectations but mainly because the
"action" moved from the equities market to the real estate market
as players leveraged stock gains to move into both residential and
commercial properties.

There is pundit talk out there that China is devloping a bubble
economy. I do not have the data base to confim that kind of view,
but common sense tells you that bank loan losses are going to rise,
that reserves held at the PBoC will need to increase and that the
banks may eventually have to add more capital in the wake of
the lending spree.

For now, China is trying to put trim in the sails to avoid a more
awkward battle with inflation and asset speculation down the road.
Cannot blame them for that. The ripple effect has been to
stifle the commodities markets in the short run as players wonder
about the effects of a possibly more muted China economy on global

My view has been that the $SSEC is fairly valued in a range of 3200-
3500. The market closed today at 3128 and is coming close to a test
of the 40 wk. m/a. The RSI is around 51 and is thus still well above
a ripe oversold reading under 30, but the RSI trend is down. All in
all, we are at the point where we see how real China concerns
actually are. Folks will be watching since China is in the lead among
the majors in grappling with whether and how to exit its big
stimulative programs.

A fall in the Shanghai index RSI to under 30 would in my view set
up a nice rally opportunity via the various etfs available $SSEC

China is planning a bullet train connection twixt Beijing
and Shanghai...Construction to begin shortly...Seems
now that I should retire the "Shanghai Express"
phrase for a new one...

Thursday, January 21, 2010

Stock Market -- Technical

Since the latter part of 9/09, I have been suggesting using a degree
of caution regarding the stock market. Some reasons are technical
and some have been fundamental. I have not forseen anything fatal
ahead, just the need to realize the market has come very far very
quickly and that there has been some slippage in the fundamental

Today, the SP 500 cracked the uptrend line under this mild rally
which has been underway since late October and which has barely
earned the term "rally". We now have a slight oversold condition
with no confirmation that the shorter term trend has actually
turned down. Just a caution light for the break below the 10 and 25
day m/a's. Now, the SP 500 closed at 1116 today, and a break under
1100 would give a stronger signal that further weakness is likely.

I have also mentioned that shorter term cycles ranging out to 15
weeks suggest a bottom in early February. Never bet the farm on
cycles, but keep them firmly in view. The pattern since late 10/09
has been to jump on even the slightest hint of an oversold. The
current one, as mild as it is, is the deepest since late October, so if
the boyz do not come piling back in on the long side pronto, we may
have picked up a pointer.

By my discipline, the "500" would get interesting below 1095.
So, I plan to keep an eye on the action over the next week or so.

SP 500 chart.

Friday, January 15, 2010

Stock Market Fundamentals -- Caution Signal

With a mildly positive retail environment over the past year plus
a powerful recovery of export sales, the $ value of industrial
production is recovering rapidly. Through 12/09, $ production is
up 0.6% following several months of deep negative readings. On
the other hand, the broad measure of credit driven liquidity is
down 1.8% yr/yr reflecting a contraction in private sector credit
demand. As a consequence, the US is now running a liquidity
deficit instead of the large measures of excess liquidity seen earlier
in the year. So a major tailwind for the stock market has now turned
into a mild headwind. That development coupled with a rapid rise
in the price of oil above $75 signals caution based on my indicators.
The liquidity and oil price measures are secondary indicators and
would be far more fearsome were the US in an advanced state of
expansion with monetary tightening and with short term interest
rates in sharp ascent. Even so, for the stock market to maintain
buoyancy in a period of economic liquidity deficit, investors must
find it has special relative appeal and be willing to sell off other
assets to divert funds into equities. With cash / near cash holdings
low, a likely candidate would be bonds. And, such might happen, but
that is a very tricky call.

When I look at the stock market over the longer run compared to
the aggregate growth of credit driven liquidity over the comparable
period, that ratio remains well below levels seen at major market
tops. So, I am talking caution rather than bear. Moreover, as the
recovery proceeds and private sector credit demand rises, the stress
on liquidity may ease nicely and return the stock market to a much
more favorable position.

Since few analysts do this kind of work anymore, my concerns
might prove to be but a quaint artifact. But, think it over

Thursday, January 14, 2010

Retail Sales -- True Test Of Strength Comes in 2010

As fate would have it, the initial report for US monthly retail sales
for 12/09 hit my projection of $353 bil. exactly. Yr/yr, the gain in
monthly sales was 5.4%.

The monthly peak was $380 bil. set in 11/07. After that sales
weakened gradually in 2008, until there was a precipitous fall
over the final four months of the year. In an economic recovery,
retail sales can start off gradually, which is what happened this
past year. However, I am now looking for sales to rise 7-8% in
2010 as employment improves and consumer confidence with it.
This is the kind of sales acceleration we should see based on the
strength of the leading indicators and pent up demand built
over 2008 - 2009. A rise in retail in line with my projection would
bring sales back up to the prior 11/07 peak. I am looking for
progressive strength in retail as 2010 wears on and I would
regard a significant shortfall, like perhaps a 5% gain, as a major
disappointment. My guess is that I fall at the high end of the range
among retail sales forecasts.

Wednesday, January 13, 2010

US Trade & Oil

The global leading economic indicators have been signaling a "V"
shaped recovery since early 2009. Still, it is a mild surprise to
observe how strongly US trade accounts have responded and in so
timely a manner. Since both imports and exports substantially
overshot the weakening of the US economy in early 2008, It has
been tempting to think trade would undershoot in the early days
of recovery. Not so.

Owing perhaps to cumulative dollar weakness plus the more nearly
synchronous nature of this cycle, US exports have increased at a
26% annual rate since last spring and clearly represents the
strongest of major US output sectors.

Imports have also accelerated off the spring '09 low and have been
especially strong in recent months reflecting higher oil and fuels

Surely, part of the strength in each category reflects inventory
pipeline refilling, but the joint progress has been dandy enough to
allay fears of broad based protectionism which can dog a deep
global downturn. So far, so good.

There may well be an issue going forward concerning the
composition of US imports. The US is early in recovery, but the oil
price is already running at a high level. If the oil price trend
continues, it may divert consumer spending away from non-fuel
goods and services, which could negatively affect non-fuel
exporters. In the same vein, you have to remember that sharply
higher oil prices will pressure profit margins of oil-dependent
exporters such as China and India.

So, one issue regarding the recovery of global trade and broader
recovery for that matter will be how well OPEC and the non-OPEC
national companies manage oil prices. Looking back to 1970, the
record has been dismal, with intermittent booms and busts in
price. Since the supply picture has improved significantly in
recent years, OPEC / NOCs have the capability to provide better
supply / demand balance over the next few years if they are
smart about it. Since the track record of oil price management
has been disastrous since control passed from the "seven sisters"
to the present cartel, experience indicates oil and gas price
management going forward should remain an area of concern for
both advanced and emerging economies.

Friday, January 08, 2010

Economic Indicators

Leading Indicators
The pace of recovery of the weekly leading indicators for the US
has re-accelerated following a flat period (late Sep. - early Nov.)
The weeklies are now running a little stronger than I expected.
The monthly indicators are also running stronger mainly reflecting
a recent surge in % of mfrs. reporting higher order rates. The
commercial side of the economy is running positive, but the
momentum of new orders has tailed off over the past two months.
On balance, the new order picture is stronger now but less even.

Looking globally, the world economy is growing, but the pace of
improvement in new orders has leveled off since Aug. following
a positive burst earlier in 2009. The US and China are showing
the broadest improvement in recovery, especially in manufacturing.

Profits Indicators continue on a sharp recovery path save for
finance where lower loan volumes and higher loan loss reserves
are penalizing results. Still, the financial sector may be modestly in
the black currently compared to enormous losses posted a year

Inflation Indicators
Gauges of future inflation are rising strongly and are signalling
that economic recovery will bring a cyclical acceleration of
inflation pressure. A stronger commodites market now leads
the way, but global capacity utilization has also turned up.

Economic Power Index
This index has weakened further. The yr/yr % growth of wages
has moderated in a weak labor market and the real wage has
turned down on a yr/yr basis, having been eclipsed by the 12
month inflation rate. The rate of decline of civilian employment
has started to moderate yr/yr, but remains formidable. On a
month to month basis, job losses are moderating and may be
entering a bottoming period.

From a political perspective, the Obama administration has 10
months to do its part to husband the economy along toward
jobs growth and a lower unemployment rate. It will likely
release the bulk of the stimulative program spending and target
additional measures to promote jobs growth this year. Pure
politics suggests that the economic recovery best be far
enough along by May to show a positive turn in employment
followed by subsequent declines of the unemployment rate to ward
off the GOP. Chief economic advisor Larry Summers is good
at this kind of statistical fire drill.

Wednesday, January 06, 2010

Sector Portrait -- Materials ($XLB)

Above all, investment managers like to buy relative strength in
earnings. With China and most of the other industrial economies
in recovery mode after deep recession, analysts look for basic
materials or "smokestack" companies to post gains in profits
for 2010 that far outstrip the earnings potential for the broad

The keys here are recovering volumes and prices which give the
basic producers sizable earnings leverage over a large base of fixed
cost. True to form, industrial commodities prices are trending up
and are well above prior year levels.

For large players, the $XLB is a momentum game which feeds on
volume recovery and pricing, with pricing getting the edge in
emphasis. The group tends to do well early in each year when
re-order rates and pricing are seasonally strong.

With China now a large player in heavy industry, investors have
a greater interest in this group than at any time since the 1970s,
and it is favored as a pricing power play.

I have linked to a relative price strength chart for the $XLB as
compared to the SP 500. Notice the recent seasonal breakout in
RS but notice too that this trade is getting overbought short - term.
Remember as well that historically at least, this group often loses
its advantage as the big earnings gains are being posted. Players
still regard them as "rotgut" cyclical plays.


Tuesday, January 05, 2010

Commodities Market

Commodities prices are clearly cyclical, but do not match up with
business cycles fundametals with precision. However, with signs of
global economic recovery abundant and with accomodative monetary
policy in place, an advance in commodities prices is a typical enough
development. Observers have pointed out that commodites prices
follow 3 and 6 year cycles as well as a 40 wk. cycle. These tracking
methods are also imprecise. Historically, it has been important to
track commodities prices against the CPI over longer term periods
such as 10 year intervals because such measures reveal where the
pricing power is in an economy. As a last introductory comment,
major inflations most often start with a powerful, sustained surge
in commodites prices, especially energy.

Over the past 10 years, broad commodities composites have held
their own with the CPI, and have surged ahead over the past 12
months. Commodities consumption has declined relatively in
modern broadly diversified economies, and periodic supply /
demand tightness in the materials area must be contrasted with
a pool of surplus labor that has developed via globalization. In
short, it is tougher to generate commodities-led inflation when
labor costs lag so substantially even if monetary policy is more
expansive than its longer run measure.

Commodities composites are interesting now because prices have
surged through long term resistance levels. These surges can last
from 12 - 30 months and can be rewarding to speculators who now
have a large cadre of fellow players who can engage in the markets
through a variety of ETFs and ETNs.

Below is link to the CRB commodity composite chart with a 6 month
or intermediate term perspective. It is a postive view. If you are
intrigued by the idea of the 40 week or 10 month cycle, watch now
because a downdraft is due. If such was to unfold, it would shift
the trend trajectory to a less elevated level. CHART.

Sunday, January 03, 2010

Stock Market -- Technical

As fate would have it, market behavoir over the latter part of Q 4
'09 exquisitely concealed its likely direction as we start 2010.
Naturally, a nice long weekend has probably served only to make
traders more fidgety.

Short Term
The SP 500 entered a mild uptrend in late Oct. It closed out the
year right on the trend line, spent most of the time over Nov. -
Dec. in extreme price compression and did it all on light volume.
Mid and smaller cap. measures did far better, as players used
Dec. to anticipate the positive "January effect."

The market is "neutral" in the short term -- neither overbought
or oversold.

My price oscillator off the 25 day m/a has become increasingly
compressed since the spring of '09, with players buying on ever
more shallow dips and taking profits on ever more humble blips.
This exceptional nine month long pennant formation closes out
the week of Jan. 11 - 15 and could herald more price volatility.

Over the past three odd years, the market has exhibited a
pattern of lows set every 15 - 17 weeks. The next low point is
due in early Feb. '10.

Intermediate Term (6 - 26 weeks)
The market remains in a sharp uptrend on the weekly charts
dating back to the Mar. '09 lows. As with the shorter term
daily chart, the uptrend will be tested right at the outset of
the new year.

The market is significantly overbought on all intermediate
measures and is showing discomfitting flatness of momentum
on my weekly price oscillator which is run off the 40 wk m/a.
I generally skip the long side of the market when this smoothed
measure levels out as it has often signified a topping process.

Long Term
The monthly charts show a powerful advance in progress, but
one which is now rapidly becoming overbought. The internal
momentum measure is strongly positive and leaves room for a
moderate price correction that would not turn the charts bearish.

Looking ahead, we continue to have the same issue to contend
with that beset thinking over the final quarter of '09. The
trajectory of this advance has been so strong off the 3/09 low
that we could witness a churning, consolidating market for a
good 4-5 months before you would have historical warrant to
to begin to question its pedigree as a cyclical advance.
Something to keep in mind.

$SPX weekly chart.