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, June 30, 2010

Stock Market -- Going Long

Since I have not made a big mistake in a long time, I am entitled to
one. So, I am entering long stock market orders with a six month
time horizon and should complete by the end of this week. In my
view, the market is pricing in a cyclical downturn of earnings to
commence before the end of 2010. My indicators do not show that
and it will likely be a number of months before they would. I have
no argument with a slowdown or a back up of business inventories
for a few months. But, I think the economic recovery will persist.
The market is developing a deep oversold in the short run, and
with $80 of annual earning power in the cards for the SP 500
this year, stocks are reasonably priced currently. If the market
weakens further or churns about over the remainder of the
summer, I will write against my longs, book some income, and
lower my break evens. I will also do some very short term trades,
both long and short in equities and fixed income as well.

Since this is not a blog about my portfolio, I plan to return to
the more universal type of comment in upcoming posts.

Tuesday, June 29, 2010

Long US Treasury -- Getting Overbought

Yes, the 30 yr. Treas. is getting overbought on its 40 wk m/a and on
12 wk RSI. The sentiment indicators I follow have moved well into
"too many bulls" territory as well. So, the bond is setting up as a
short on technical grounds, but given the strong price momentum,
I would like to see sentiment get more extreme. $USB chart.

Parenthetically, it is rather ironic to see this bond moving to a major
overbought when so many market pundits and observers had written
it off as done for earlier in the year.

Sunday, June 27, 2010

Gold Price


The gold price remains in a solid uptrend off its late 2008 low of
$700 oz. It is moderately overbought against the 40 wk m/a, but
is capable of a larger premium based on past experience. As the
chart shows, it is getting overbought on weekly RSI and MACD,
although trends of these measures are positive. $GOLD. I would
also suggest that at $1256, the gold price is getting extended on
the 5 year chart as well.

For the fun of it, I developed a little "Frothometer" for gold, and
it currently indicates a moderate level of froth and, it suggests that
matters get bubbly above $1300 oz. in the near term.


My gold macro-directional indicator had trended up reasonably
consistently since the latter part of 2008, but the advance did
break off at the end of 04/10, primarily reflecting weakness in
the industrial commodities and oil price parts of the indicator.
These components are stabilizing in the short run, but the gold
price has diverged positively from the full indicator to the tune
of about $60 oz. That represents a significant but not unprecedented


There is growing near term price risk in gold, but the risk is not
yet at "screamer" levels. Folks interested in gold should take note.

I have linked to a chart (below) which shows the relative strength
of gold compared to the platinum price in recent years. Notice how
gold has started to outperform platinum in recent weeks. This
may suggest that interest in gold is presently more a consequence
of investor concern about global financial / economic stability.

Friday, June 25, 2010

Stock Market -- Short Term Technical

As suggested in the 06/04 post on the market, there was a good
long side trade to be had the week starting 06/07. But it was a
very short term affair as I had to respect how quickly the profit
taking came in after the market reached a mild overbought on price.
That was certainly not an encouraging sign.

I am on the sidelines now and merely plan to watch whether a
decently tradeable short term trend will develop. It would not
surprise me if a period of price compression is on the way that could
last for a few weeks. If such happens, the eventual break from the
compression period will provide a better opportunity, although
price range narrowing rarely tips you off on which way the market
will break.

As of today, the market is trading about midway between a
level that would signal a positive break to the upside and another
decline to test the support zone (1050 on the SP 500). Take your

SP 500 chart.

Wednesday, June 23, 2010

Monetary Policy

The Fed left rates unchanged today as everyone figured they would.
At present, the case for raising rates is 50% based on time tested
indicators of Fed behavior. The main issues in the way of hiking
rates concern the low rate of capacity utilization and the fact that
private sector shorter term credit demand has yet to turn up.

As an illustration of still low capacity utilization, consider USA steel
output. In mid-2008, output was running at 2,155K tons and the
industry operating rate topped 90%. When the economy went into
free fall later in the year, steel output fell to 990k tons by 04/09,
and cap. util. fell to 40%. Now, steel output is running 1,800K and
the operating rate is up to about 75%. More intense cost and pricing
pressures arise once the steel operating rate crosses 83% or so.
Since steel output appears to be moderating now, it will be a while
before price increases intensify again. Ditto, globally.

Both business short term credit demand and consumer credit (excl.
mortgages) fell sharply from mid-2008 through early 2010. Both
sectors are showing signs of stabilization in recent months, but no
upturns are in place.

The Fed bides its time until there is some indication of tighter
resource utilization and more sustainable inflationary pressure.

Monday, June 21, 2010

Energy Sector Relative Strength

The energy sector has badly underperformed the SP 500 since the
popping of the oil price bubble in 2008. Relative performance of
the energy sector has outrun the deep down trend line from 2008,
but, as is interesting, it is threatening to break out of a tight down
trend line dating back 12 months. The recent bounce in the oil price
and the apparent basing of the natural gas price are helping as is
the passing of the peak in merger arbitrage of the Exxon / XLO
deal. The broad group is doing ok despite hits to BP and Anadarko,
so a breakout above trend may be of interest. Chart.

Friday, June 18, 2010

Economic Comment

Economic recovery in the US and globally has been mild, especially
when compared to the strong rebounds in the leading indicators,
factory orders, and the various weekly and monthly cyclical pressure
gauges I use. all these measures plunged after mid-2008 and did
rebound about as strongly through the end of April, this year. In
fact, my coincident indicators -- real wage and retail sales plus
industrial production and civilian employment -- are up but 3.2%
yr/yr through 4/10 and remain well below pre-recession peaks.
Not the strength here the leading indicators and pressure gauges
would suggest.

Given the mild recovery, the indicators should not have been so
strong. Interestingly, the BIG "V" of the indicators / gauges does
measure up very nicely with the behavior of the trade accounts
since mid - 2008. Total US trade (imports + exports) fell nearly
40% from mid- 2008 to the 4/09 trough, and has rebounded by
25% since. There is also a BIG "V" in US factory orders over the
same interval. Other major economies have also experienced
powerful swings in trade, but in all cases, exports are netted out
against imports in computing country GDPs so that the immense
swing in global trade is heavily muted when you view final
demand around the globe.

The rebound in US export sales since 4/09 has dwarfed the
recoveries in other major output categories. Thus one issue that
comes up is whether the recent weakness in the weekly pressure
gauges discussed in the Tues. post may reflect the start of
moderation in export sales. And when the recent sharp decline
of sensitive raw materials prices is factored in, it may be fair to
opine that the rebound in global trade is set to moderate.

A slowdown of export and import growth for the US likely would
not have nearly the impact on GDP overall that the current
weakness in the weekly leading indicators such as that of the ECRI
would suggest, although export sectors would clearly be affected.

I lay this suggestion out as a possible alternative to the "double dip"
scenarios now being widely circulated. And, I also suggest that
the volatility in the trade accounts globally may have added
substantially to the volatility of the various indicator sets.

Wednesday, June 16, 2010

Stocks -- Cyclicals Leadership

Cyclicals were the hands down leaders in the first phase of the
cyclical bull run. But that leadership has lost substantial momentum
as investors have been discounting an eventual moderation in the
very strong pace of earnings recovery for cyclical companies. What
may be a more important now is whether the cyclicals can avoid a
sharp downturn in relative strength, as that might well signify that
investors are losing substantial confidence in the economic recovery
story. Although relative strength of the cyclicals has flattened out in
2010, we have yet to see that sort of destructive behavior as the
chart link shows.

Tuesday, June 15, 2010

Stock Market & Weekly Cyclical Pressure Gauge

The weekly cyclical pressure gauge (WCPG) draws from an
array of weekly economic data such as sensitive materials prices,
unemployment insurance claims, the 2 year Treas. yield and
selected short rate data. It rarely leads the stock market. The
stock market leads the WCPG far more often. However, lead
and lag times are so close, that the WCPG is best seen as a
rough coincident indicator of the stock market and as such is
not useful for short term market timing. It does have considerable
value in helping to de-mystify the actions of the market in the
short run and it can be especially helpful when it is trending.

The WCPG made a cycle-to-date peak of 226.0 on 4/30/10.
Since then it has trended sharply lower to 204.4 as of 6/11. The
stock market went right down with it. Now, the market has been
rallying over the past week or so, and I read this as a statement
that the WCPG will soon improve. Moreover, it is doubtful that
the market will continue to rally unless the WCPG bottoms and
begins to recover relatively soon. Such a recovery would tend to
confirm a market advance, but risk is there whenever the market
front runs the indicator.

Below I show the extraordinary action of the WCPG since the last
cycle top in mid 2007.

Cycle Top, 7/07.......................................288.0
Pre-Plunge, 7/08.....................................255.9
Cycle Trough, 3/09.................................109.4
New Cycle Peak To Date, 4/30/10..........226.0
Last Reading, 6/11/10............................204.4

This has been the most volatile period for this indicator in modern
history and it underscores the market crash / rapid price recovery
evidenced over the mid - 2008 - April, 2010 period. Truly extra-
ordinary stuff. Although the WCPG could easily remain volatile well
into 2011, it is hard to imagine such volatility would come close to
rivaling what we have seen since mid-2008.

Notice also how far below the 2007 peak the indicator remains
despite its surge off the 3/09 low. This is a nice measure of just
how far an economic recovery may have to travel to bring new
peaks in its cyclical components. There remains substantial
slack in the US economy.

I will keep you up to date on this indicator and how it fares against
the stock market going forward, as such an exercise may have
diagnostic value.

Friday, June 11, 2010

Monetary Policy -- Short Term Liquidity Squeeze

My broad measure of credit driven financial liquidity has been flat
since late 2007, with money M-2 growth offset by the collapse of
the financial co. commercial paper market and a $250 billion roll -
off of no reserve jumbo deposits in the banking system. In essence,
a contraction of private sector credit has been offset by a large
increase in monetary liquidity as evidenced by the sizable gains
in Fed bank credit, the monetary base and M-1.

The dramatic easing of monetary policy has been essential to
source the economy in the early stage of economic recovery. A
major recovery of business sector cash flow and and personal
income buttressed by counter cyclical fiscal moves has been
sufficient to fund recovery so far without reliance on private sector
credit growth.

However, since late 2009, monetary liquidity in the system has
flattened out as the Fed has wound down special credit facilities
and the program of straightforward quantitative easing. No problem
there provided that private sector credit demand has turned around
and is growing. But it is not, so a liquidity squeeze is developing
in the financial system, which if extended substantially further, will
damage the economy and the capital markets.

If credit is not growing, a year of no real M-1 growth may be long
enough to assure recession. So, if the Fed wants to keep the economy
out of trouble, then it will have to inject more money into the system
or watch credit growth resume or allow some of both, and it may
need to do so well before the end of the year.

Normally, a liquidity squeeze of a few months duration does no
substantial economic harm. I bring the issue up because it just may
not be wise to assume the Fed is properly attuned to the risk.
In this regard, it is interesting to note that Bernanke has recently
been verbally prodding the banks to do some lending. The Fed
would like to avoid adding more liquidity directly and have the
private economy begin to source credit for a portion of its growth

Thursday, June 10, 2010

Tomorrow Is Just Another Important Day

Well, we have experienced several spirited one day bounces since
the stock market correction started in late April. Today's pop
has better technical underpinnings, but it will just be another
temporary respite if we do not see some follow through over the
next several sessions. The boyz will be watching the overnight
action abroad and the US futures as the book gets moved. The
market closed today right at its downtrend line. It would have
been more bullish had it taken out the trend line. Moreover,
Friday could see some selling as some of the boyz net out for
fear that Upper Slobovia or some other EU province may
announce debt roll over concerns over the week end. Good
test of the market straight ahead....Chart.

Monday, June 07, 2010

US Dollar

The volatility of the major currencies against one another since the
inception of floating exchange rates in the 1970s continues to amaze
me. My long held suspicion is that the dealers run 'em up and down
over time to turn a nice profit and cover all the overhead.

At any rate, the USD has been on a tear lately at the expense of most
of the other majors and the Euro in particular. You are no doubt well
briefed on the problems the EU is having as well as the changeover in
PM status in Japan which might favor a weaker Yen.

The USD is now overbought 0n 40 day RSI, and is getting extended
against its current uptrend. It is also overbought against its 50 day
m/a. It stands at important 18 - 20 month resistance as well. Thus,
the game of chasing the dollar up has reached an important testing
point. Should the nervousness about the EU persist, and should
Japan start talking the Yen down, the next critical resistance
level for the dollar is at $USD 92 -- a level which runs back to 2005.

$USD chart.

Friday, June 04, 2010

Stock Market -- Technical

The past two week period was the 13 - 15 wk. cycle bottom time
frame. The market should have begun to rally over the past few
days. No such thing. I am looking to go long next week anyway as
my NYSE adv. / dec. oscillator is signaling a tradeworthy oversold.

I still keep track of the TRIN indicator. It is not as useful a measure
as once it was. The NYSE TRIN represents volume per declining
share divided by volume per advancing share. When the ratio is
above 1.00, net selling pressure is indicated. When the 21 day TRIN
tops 1.50, it indicates heavy selling pressure. I have linked to a
chart of the NYSE TRIN with 21 and 40 day moving averages. The
TRIN action over the past month suggests a build toward climactic
selling (today), and the 21 and 40 day averages are fabulously
oversold, topping or matching levels seen in the big bear days of
2008. Just nutty stuff. Chart.

Economic Indicators

The monthly leading economic indicators, which key heavily on
new orders, remain strong. The weekly leading indicator sets
made interim cyclical highs at the end of April and were quite
weak in May. Notable were lower stock and sensitive materials
prices and an unexpected increase in initial unemployment ins.
claims. (The weeklies have a time edge on the monthlies.)

The increases in the weekly leader data sets from cycle troughs to
recent peaks were the strongest on record and, I believe , reflected
the strongest ever readings on my long term leading indicators. The
longer term indicators are positive but have lost momentum. The
main reasons for more modest longer term readings are an easing in
the growth of the real wage and in the advance of monetary liquidity.
So, a loss of momentum in the short term weekly data was to be
expected, but the sharp turn to weakness is a surprise. Moreover,
further sharp weakness in the near term would in my view raise
suspicion about the viability of the recovery. At this stage, I am
planning to wait until mid-July to cross that bridge.

there are plenty of scary stories out there, but what has caught my
attention has been the strength of total new factory orders ( up 20%
yr / yr) relative to US final demand. This is a very uneven
comparison even after one takes into account the strong export
order book and consequent sales. The suggestion here is that the
inventory pipelines could be getting filled more rapidly than final
sellers desire.

Wednesday, June 02, 2010

Not Quite Loafing

Posting has been light over the past couple of weeks. I have taken
a little time out to enjoy my retirement, supervise some property
clean up from the winter storms, and do some thinking about how
best to portray the likely economic / financial environment for the
rest of 2010. I think I am closing in on the latter, so the posting
pace should pick up soon. I use a bunch of boom / bust type
economic and financial indicators to do my work, and looking back,
the volatility these indicators have exhibited has been extraordinary
since mid - 2008. The indicators show a "V" pattern pretty much
across the board, but that "V" appears to have broken off, so now
the job is to get the right handle going forward and to do so without
overreacting and, avoid heavy reliance on verbal hedging.