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 !!!

Wednesday, May 26, 2010

Stock Market In Perspective

Early last autumn, when I turned more cautious on the market, it
was on an astoundingly strong trajectory. Even after the Jan. ' 10
break, it was still on a trajectory that would have taken the SP 500
to new record highs by year's end. Not impossible, but not a good
bet, either. So, yes, the rise in the market was too steep, but it was
partly understandable given the extraordinary rebound of corporate

My SP 500 Market Tracker currently projects the index to rise 25%
from current levels to 1350 by year-end 2010 as 12 month net per
share surges higher. From a technical perspective, this would put the
market on a trajectory that is still extremely strong by price chart
standards, but the Tracker is merely assigning a moderate 16.5 p/e
to earning power in excess of $80 per share.

Now, here is where it gets more tricky. S&P profits have exceeded
those suggested by the sharp run ups in my leading indicator sets
reflecting the deep cost cutting companies have undertaken. Since
the bulk of the cost cutting is past, profit growth was bound to
moderate. Moreover, when measured on yr/yr % change, the
weekly economic leading indicators have hit and have just crossed
an inflection point, signaling that a slowing of profits growth is out
ahead. A significant slowdown in profits momentum is factored into
the $80+ per share projection for the "500". But, there is a problem.
Once the leading indicators break the initial recovery signal surge,
further upside momentum of the indicators is not only far more
mild, it is more difficult to project with confidence. On top of that,
the "fit" between the indicators and the profit trend loosens past
the inflection point of the indicators, although it must be said that
profits often do better than expected anyway.

The long and short of it is that with a sharp moderation in the trend
of the leading indicators underway, the stock market could not hold
a nearly impossibly strong price trend and has corrected since a clear
signal has been sent that profits growth is going to slow. This is
the fundamental event I warned about last autumn, an event that
came later than expected.

I am on the hook for expecting a solid year of economic and profits
recovery in 2010 and for expecting a continuation of the cyclical bull
market. Since earnings currently remain in a sharp upswing, I
think the market has overshot to the downside by 10%, although
conceding that a reaction of real consequence was required given
the extraordinary trajectory of the market from 3/09 - 4/10.

I expect a sharp recovery rally to get underway over the next 5-7
trading days. But I do see a period of uncertainty ahead for a couple
of months until we see how well the leading economic indicators

Monday, May 24, 2010

Stock Market -- Technical

The confirmed short term downtrend is obvious enough. the market
is substantially oversold and is at levels to support a rally. But, one
right an oversold market has, is to get itself more oversold. I do not
short significant oversolds, so my penchant now for a trade is to look
for a bounce / recovery, and at a minimum the preference is to first
see some stabilization in the short term price oscillators as this
development would signify a loss in negative price momentum.

The market did not make a classic serious top. The bad news is that
we have an uncharacteristically deep short term oversold for a
cyclical bull market. and that means you have to be more cautious
on the long side with perhaps a gradual fill when you get the short
term set-up you prefer.

When I look at my NYSE buying pressure vs. selling pressure
measures, the market is moderately oversold at -50 and deeply
and very reliably oversold at below -100. We are currently a
tad below -50, so this measure is still risky. My cycle work
suggests a 13 - 15 week bottoming pattern is just now upon us.
So, there could be a sharp price recovery in place by the end of
next week.

I try to keep technical and fundamental analysis separate on the
premise that when two widely different disciplines tell you the same
thing, your chances of being correct are better than when you rely
on just one discipline. But, sometimes using both techniques in
one analysis can be handy, and I plan to do that a little later this

SP 500 weekly chart.

Friday, May 21, 2010

Inflation Potential

Gauges which signal future inflation rebounded dramatically over
roughly the past year or so. However, the rebound in the pressure
gauges merely signaled from deflation to mild inflation. Moreover,
as a result of recent weakness in commodities prices, inflation
thrust has fizzled in the short run. (CRB commodities chart)

Commodities were set to be the inflation driver this year as they
were in 2009. Last year, commodities rose rapidly on a strong
global economic turnaround off very depressed levels, but that
price uptrend was broken earlier this year as traders figured
that inventory pipeline refilling would be complete by mid - 2010.
There has been extra downward pressure on the CRB recently as
China -- a major buyer of raw materials -- has been signaling it
desires to avoid overheating -- and as traders handicap a
presumed slowdown in Europe's recovery in the wake of the
recent uproar over debt addled EU members such as Greece
and Spain.

Now, note that the CRB is moving toward an oversold situation in
the short run, and note too, that commodities can be volatile.
Thus, one cannot vouchsafe a flattish CPI for more than a couple
of months.

My longer range inflation thrust measure, which keys off the US
capacity utilization rate and the leading economic indicators, is
currently very tame for 2010, but suggests a sharp acceleration
of inflation pressure in 2011 as operating rates rise significantly
further and cost pressures build broadly. These currently still
low broader measures of economic activity have indeed partially
offset the impact for the inflation picture from commodities over
the past year, but that could all change in 2011 as economic
recovery progresses.

Thursday, May 20, 2010

Stock Market -- Fundamentals

Core fundamentals -- interest rates, liquidity, confidence measures
remain positive and support continuation of an "easy money"
cyclical bull market.There has been some slippage in the indicators.
This is entirely normal and I note that the erosion is from nearly
unprecedentedly strong levels.

Corp. earnings remain in a strong uptrend and continue to accelerate
relative to the long run trend. Importantly, profits, though rising,
remain well below levels that would signal a cyclical peak and
fundamental trouble for the market.

My SP500 Market Tracker, which started to bottom a year or so
ago with a value of 655, has jumped to the 1190 level on a dramatic
recovery of earning power. For most of the cyclical bull run since
3/09, the SP 500 actual has traded at a substantial premium to the
Tracker value. With the recent sell-off, however, the market is
currently running at a 9.6% discount. So, the market is now
attractive relative to fair value as the Tracker has caught up with
and surpassed the index. Estimated Tracker value based on full
year 2010 expected earnings is just shy of 1350 and I do not have
an issue with that number at this time.

Now for a couple of secondary indicators. The sharp run-up in the
real price of oil off its 2009 low did not appear to have damaged the
market. Moreover, the oil price has recently sold off sharply along
with the stock market. Thus, the oil price indicator has not been
useful so far. The other secondary indicator concerns financial
liquidity and this requires some discussion.

The large liquidity tailwinds the stock market enjoyed over 2009
have ended. For example, combined retail and institutional money
market funds aggregated a record $3.50 tril. in 3/o9. By the end of
April, 2010 the combined mm fund total stood at $2.66 tril., or 24%
below the '09 record. In turn, the $2.66 tril. of 4/10 compares with
the $2.9 tril. on hand in mm funds at y/e 2007. In short, the large
build up of cash that occurred over the recession and the deep bear
market has been more than fully drawn down. Also note that total
system financial liquidity has been shrinking mildly while real
economic output has been rising. Thus, the liquidity tailwinds
have reversed course viv a vis the stock market, and are now
headwinds. This is a short term issue for the stock market, but
you have to be careful not to draw dire conclusions yet, since
economic recovery will prompt mm fund growth and, eventually,
private sector credit growth, which will expand the base of liquidity
available to the capital markets. However, suffice it to say that since
the Sp 500 is dramatically above the 2009 cyclical low, plenty of the
bucks available have been put into play.

Wednesday, May 19, 2010

Post Traumatic Stress & Profit Taking

One of my concerns about the stock market over recent months
has been the potential for a collective emotional backslide that
could be triggered by events that remind investors of the original
trauma of the economic / financial crisis of 2007 - early 2009.
I think it is crazy to expect that investors would skate right out of
that nightmare without experiencing subsequent shivers or
without looking back. The problems the EU is encountering and
some mild policy tightening by China have been the catalysts to
have ignited fears.

And, of course, from the 3/09 low into 4/10, the SP 500 advanced
by a staggering 80+%. That advance included the funky, out-of-
place rally of the early spring. What better time for a bunch of
traders to finally take profits?

I do not want to minimize the various problems the EU is facing
now nor do I wish to wave off China's mild tilt toward temperance.
But these are issues that are being encountered in a global economic
recovery with unprecedented monetary and fiscal support. I will
keep an eye on these problems, but as of now, I think the risks
they pose are rather mild.

I am leaning more to the diagnosis of post traumatic stress jitters
coupled with good old fashioned profit taking and portfolio
restructuring to account for the recent flight from risk taking. Yet,
you have to be respectful of these factors as a re-stoking of the old
fears and the profit motive are all too human.

Friday, May 14, 2010

Oil Price -- Interesting Moment

Greybeard traders know that oil often experiences moderate
seasonal price weakness running from late April into June / July.
The big seasonal build of petrol stocks completes in the spring
and demand eases off. Gasoline production is up about 5% this
year in the US, providing extra stock for the upcoming prime
driving season. But Jun. '10 oil has plunged from near $88 bl. in
April to close near $71.50 today. Down 18.5%, this is not your
mild seasonal dip.

Traders have concerns beyond goodly refined product supply. They
have taken note that China -- a huge crude buyer -- is inching along
toward a tighter monetary policy. they see that to preserve the EU
as it stands, southern and far eastern Europe are under pressure
from the markets to reduce budget deficits. And, they are taking into
account continuing Euro weakness and US dollar strength as the
markets adjust for a more sluggish and fractious EU vs. the US.

The crack in the oil market has penalized sector investors, but it
will also work to reduce cyclical inflation pressure and enhance the
real wage in the US which are plus factors for the economy.

The weakness in the oil price has broken its uptrend off the early
2009 cyclical low and it has brought oil down to an important
support level. The price drop is leading to development of a sharp
short term oversold condition, which might well give players a
longside shot at moderate seasonal price strength starting late in
the summer.

Right now the psychology for oil is not good what with the
realizations that Europe may grow more slowly and that China is
now snugging up on policy. We have to wait a bit on the EU, but I
doubt China is prepared to slam the door on growth. Given the
grand power of the central gov., China can play stop / go with
monetary policy far more freely than can governments in the

If you are like me, and drive and heat your home with oil, an
opportunity to hedge your cost with a long position in an oversold
oil market is worth keeping an eye on. Oil price chart.

Wednesday, May 12, 2010

Stock Market -- Technical

The normal admonition is to say beware of spike bottoms, as
long term history shows they hold up no more than 50% of the
time in bull markets. Yet, this cyclical advance has relished spike
bottoms, so traders need to have that fact in mind.

The sharp decline in the market last week wiped out the over-
boughts across the time spectrum and left the market deeply
oversold on a short term basis. The deep sell-off ended abruptly
but started gradually enough to provide trade worthy shorts
which should have been covered on Friday.

As we moved into this week, I found I no longer had a firm technical
case for urging caution as much of the excess was wrung out in
sudden fashion.

This week the market has rallied sharply from a deep short term
oversold up to neutral. The market is in a confirmed short term
downtrend, but has been strong enough this week to make it
reasonable to expect a test of the short term downtrend line, which
if breached on the upside, would be a preliminary signal that a
positive reversal might be in order.

I did have a short position coming into last week's decline. That
position was closed on 5/7. I have not jumped into the market
on the long side and will probably look to see whether there is a
confirmed positive short term reversal before coming off the

I have to warn that I am now charting off closing prices as
I am unclear as to how much of the tape on Thursday, May 6 will
turn out to involve broken and hence phantom trades. Chart.

Monday, May 10, 2010

Economic Indicators

Leading Indicators
As discussed previously, global leading economic indicators did
flatten out over the 9/09 - 2/10 period following rapid recovery
earlier last year. This was true of the eurozone and no doubt added
to creditor concerns regarding the weaker links such as Greece. The
good news is that there has been substantial improvement in more
recent months both in the eurozone and around the globe.

US weekly leading indicators have regained positive momentum
after a Jan. - Feb. '10 dip. US monthly leaders also remain strong.
The improvement in the breadth of new orders has been steady
enough, and although high, remains below record levels. The $ trend
of new orders has also accelerated sharply off the low early 2009

Yr/yr % momentum of the leading indicators may be peaking now,
but momentum has been unusually strong and signals good growth
in output and profits through Aug. '10.

My Economic Power Index is now showing recovery again. The
yr/yr change in the real wage has flattened out but is holding up
better than earlier expected, and the yr/yr change in employment,
although still negative is improving rapidly. The index looks set to
break out of a broad three year downtrend in the months ahead.
At this juncture the continuing expansion in jobs held is necessary
to sustain consumer confidence and spending. Internet job listings
have jumped in recent months and have reversed a steep downtrend
in place since late 2007.

The Business Strength Index has recovered enough to signal
that the Fed should raise short rates. However, the capacity
utilization component is still low by the Fed's reckoning, and there
has also yet to be a decisive turn in short term business credit
demand (The re-activation of swap agreements between the Fed
and Europe's central banks could also affect US monetary policy
in the short run).

There remains large slack in the US economic system and this
now includes banking system liquidity. Thus, the economic
recovery continues to have the potential to be a lengthy one.

Friday, May 07, 2010

Stock Market Update

I am away from my home office and am posting this on a remote
terminal, so I will keep it brief. Since last autumn, I have cautioned
about the stock market potential from several different perspectives.

Basically, I have argued for over a year that the advance from 3/09
represented not only a cyclical bull market, but a potentially powerful
one if anticipated strong earnings could be delivered smoothly. Even
so, by autumn of 2009, I came to regard the trajectory of the upmove
to be too strong. Not reckless, but unsustainable. This caution was
extended when the 2/10 rally broke out to new cyclical highs after
completion of a classical cyclical upleg. It marked the untimely arrival
of the "johnny-come-lateleys".

The recent sharp sell off has gone along way toward eliminating the
overheated trajectory of the market and has ended the rally from the
late arrivals. It has brought the market to a more logical place and
has eliminated the overbought condition. Chart.

Wednesday, May 05, 2010

Stock Market -- Short Term Technical

For weeks now, schooled technicians have known the market was
overbought. A correction or consolidation was thus widely
anticipated. Well, we have a correction which has quickly wiped
out the short term overbought and brought the market into a
mildly oversold condition with the SP 500 at 1166.

A bit more weakness over the next several days would lend
confirmation to the downtrend in place as the 10 and 25 day m/a's
would both be down and a longer term trendline pegged off the
3/09 and 2/10 lows would likely be broken.

So there is trendline support around 1160 on the SP 500 and there
is obvious support at 1150. A more attractive and deeper oversold
would develop down in the 1125 - 1135 range.

The abatement of selling pressure today lends hope to the idea the
market could stabilize for a spell in the days ahead, but that is a
hope only.

From a trading perspective, I would prefer to see further weakness
down to the 1125 - 1135 range before dropping the shorting
mentality and looking long again.

SP 500 chart.

Sunday, May 02, 2010

The Lever On The Way Up Is The Screw On The Way Down

Once leverage or borrowing gets into the game, the borrower needs
to generate the cash flow to service the debt and to generate
sufficient income to manage expenses and have enough left over to
get the return on equity boost leverage can bring. Credits get
shaky as debt service outlays begin to consume large portions of
cash flow. Credit quality erodes even faster when cash flow is
unstable and its visibility is called into question. Tossing about
leverage ratios without regard to how well debt is being serviced
and without a careful analysis of a borrower's income and cash
flows is an idle game.

Which brings us to the European Union where debt ratios are high
and where income / cash flow are now under pressure at the state
level. The economic recovery is but inching forward in the eurozone.
The revenue take of sovereigns is under pressure, and state
spending has been pushed higher to fund recession countermeasures
such as unemployment insurance. The problem is now being
compounded by sharply rising funding costs for Greece, Spain et al
as investors worry about debt service capability in the present
but down the road as well if greater austerity drags incomes further
down as a result of restructuring programs.

Sound thinker Edward Hugh holds forth on the subject for the
EU here.