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 !!!

Tuesday, August 31, 2010

Stock Market -- Technical

We are set to steer into Sept., so let's take a look. The market is in a
clear short term downtrend. Moreover, the chart shows the SP 500
was not been able to push up through a downtrending 10 day m/a
in August -- not a good sign. The market is moderately oversold, and
it has been able to rally off this degree of oversold going back to
Jul. '09 -- not a bad sign. The "500", based on closing prices (and
factoring in the "flash crash"earlier in the year), is at the top of a
1020 -1050 support zone that goes back to Oct. 2009. The market
is in a reasonable position for a bounce, but should one ensue, it
would need to take out the 10 day m/a on the way up at the
minimum to attract much interest.

My primary longer term measure for the market has been trending
down since early in 2010, reflecting deteriorating price momentum
measured weekly. It turned positive only briefly in the early part
of the year when the market rallied. I am watching it closely now
because a rally in Sept., should one eventuate, would turn this
historically very useful measure positive. That would be a rather
amusing development, because even many of the few advisory
bulls out there have all but conceded Sept. /Oct. to the bears.
Since the market often does what inflicts the most painful
surprise to the the greatest number, a positive turn in the weeks
straight ahead would be a delight and present a nice opportunity.
Wishful thinking, maybe, but not without precedent.

Saturday, August 28, 2010

Benchmarking The Fed

Fed chair Bernanke spoke at the central bankers' annual confab in
Jackson Hole, WY yesterday. He promised further accomodative
action by the Fed should the recovery falter and should the US find
itself facing an episode of price deflation. Easiest way for the Fed to
help out is via purchase of additional financial assets. Time to
benchmark where the US is.

Business sales --retail,wholesale and mfg. -- were up over 9% yr/yr
through June. Monthly demand data including retail sales and
industrial production were up nicely in July to cap off a solid month.
As discussed earlier this week, there has been no positive inventory
cycle swing to speak of and construction remains in the dumper.
Given the large fiscal and monetary stimulus available over 2009 -
2010 ytd, the recovery should have been stronger, but it was solid
enough. Caution by households, business and the banks over the past
year have put a damper on the power of the economy, no doubt
about that.

Weekly economic data so far in August suggest the economy is now
leveling off, as signaled earlier in the year by the leading indicators.
Moreover, monetary liquidity is dissipating and broad credit driven
liquidity is relatively flat. Continuation of the deterioration of the
liquidity environment would point toward development of another
recession in 2011 if the liquidity freeze proceeds through the end of
this year.

Bernanke expressed considerable reluctance to add more liquidity to
the system without further deterioration of the economy. Logically,
this means the economy will be more dependent on rising credit
demand and the willingness of bankers to service it as we go forward.
If such does not materialize, then the economy should eventually
deteriorate and the Fed's hand will be forced. The risk here is that
private sector confidence may decline enough in a newly deterior-
ating economic environment, that further monetary easing may be of
only marginal positive significance.

It could take until the end of 2010 for this drama to play out. since I
have never seen a situation quite like this one before, I am 100% in
cash for the time being, with a short of the long Treasury all that is
on my radar as a possibility for now.
Since the Fed more than doubled the size of its balance sheet as well
the monetary base over the past 18 months, the central bank needs
some leeway to see how the fruits of its labors develop. As well, it is
clear that some of the governors of the Board appear very reluctant
to add further liquidity as there is considerable and reasonable concern
about how to manage the excess reserves if the economy proves
stronger than now anticipated. I doubt Bernanke sees this concern as
a cause for inaction, but he has some fire breathers to contend with.

Speaking of politics, the Obama administration seems to be wimping
out on the issue of a decelerating economy. Perhaps sly old Larry
Summers has some positive numbers up his sleeve, but if not, then
time may be of the essence to stand up and say the Gov't needs to
do more. Better to have fought and lost than not to fight and lose

Friday, August 27, 2010

US Economy -- Interesting Observation

Weekly data make it clear the economy has started to flatten out
since late July. I think this development was more or less widely
expected, but I am not sure all appreciate what a curious time it is
in that there has been no inventory cycle to speak of during the
recovery over the past year. Available data do not suggest that
flattish demand would trigger substantial involuntary inventory
accumulation relative to sales which would in turn set up a
classic inventory liquidation recession.

Wednesday, August 25, 2010

Economic & Strategy Review

Right now, I have long term US growth potential at a modest 2.8%
per annum. With a lower than historical growth profile, there was not
that much reason to expect a gangbusters recovery. However, in view
of the large stimulus and monetary easing programs, the recovery has
been a disappointment to date. Three of the four leading economic
indicator sets I follow have over-amped both the recession and the
recovery to date. They have been spot on with regard to profits, the
bounce of industrial production and the dramatic recovery of US and
global trade. But, they missed on the broader economy.

the recovery has been slow because the major sectors: households,
business and the banks have all been especially cautious. If there is
a single linchpin to a modest recovery path, it has been business,
which has been exceedingly slow to hire and which has kept inventory
investment very low -- up about 1% yr / yr vs a better than 9% gain
in sales.

Total US construction outlays for the US remain depressed. I have
not done much work in this area because I have been figuring that
there would be no recovery of consequence here until the middle of

After a fabulous July, which nearly made my whole year, I went to a
100% cash position in early August (8/6 post). I do not have a good
enough read on the environment ahead to put chips on the table now.
I regard July as purely a case of "better lucky than smart", but I'll
take it.

Looking forward, I think it would be wise for me to look at ways to
tamp down the leading economic indicators I use. One example would
be sensitive materials prices which have been sharply affected by the
emergence of China as a major industrial power and the broad and
growing financialization of the commodities markets. Another
example would be to look more closely at the leading indicators in
comparison to the coincident indicators (That shows the over-amping
of the leaders clearly).

I am also going to have to do a better job of sorting out folks' sense
of caution from other data. As an example, I should have taken keener
cognizance of the puny level of inventory investment earlier.

Since I have been an investments professional for over 40 years, I
hope that my current travails serve to inspire you to remember that
if the game was that easy, well, we'd all be rich.

Tuesday, August 24, 2010

The Five Year Treasury -- Gadzooks!

The 5 yr. Treas. is now trading at a paltry 1.33%. Most folks would
do better to pay off debt, have a yard sale and a garage sale and put
the unsold stuff up for sale on E-bay. Or, you could set up as a Lego
pieces broker / dealer. Chart.

Long Treasury -- Substantial Overbought

The long guy is heavily overbought against its 40 wk m/a and on
RSI, not to mention a 12 week MACD that is sailing up into
overbought territory. As the chart below will show, there is even a
price gap to be filled. The long Treas. is not quite yet a perfect short
because the trader advisory services are not yet at extremes of

There is heavy and faster moving money chasing this market. It is
running ahead of fundamentals and there is positioning long here in
anticipation of what some players see as a September / October
debacle in the stock market as stock traders bail out on a perceived
failing economic recovery.

The Treasury price is now momentum driven and will require a
strong flow of negative economic news to sustain it. It is foolish to
try to call a top in this kind of surge, but it is wise to remember that
a positive turn in economic data flow could well net you 20 price
points to the downside.

Long Treasury Chart

Friday, August 20, 2010

Stock Market -- Wicked Game Short Term

As discussed back in mid-June, the market has been tracking along
with my weekly cyclical pressure gauge (6/15 post) in a dogged
fashion. Even the July / early August rally reflected upticks in the
gauge on a significant bounce in sensitive materials prices. the
gauge has dropped sharply over the past two weeks on rising
unemployment insurance claims and a settling down of basic
materials spot prices and is now back where it was in early July.

This kind of tracking represents a wicked game because of the
variability of weekly data and the speed with which the trend can
change. Reminds one of squirrels racing around a tree: The oil
guys chase after the stock traders and vice versa. In yesterday's
post, I discussed how quickly trend can change in the bond
market as well, since the bond guys watch most elements of the
weekly cycle pressure data, too.

The intensity of the focus on short term economic data directly
reflects interest in whether the economy is set to experience a short
slowdown or whether something more serious and darker may be
in store.

There is a confirmed shorter term downtrend underway, but what
concerns me most at this juncture is that the market has weakened
enough in August to call into question the legitimacy of the rally that
started in early July and which I thought might well have marked a
clear bottom following the deep correction over May / June. I am
not suggesting further, more serious weakness. My point is rather
that a rally from here would suggest both mediocrity and volatility
and not the sort of brisk march up that would inspire much trader
confidence. SP 500 chart.

Thursday, August 19, 2010

Long Treasury Bond

Since late 2008, the long Treasury yield has had two anchors: The
Fed's ZIRP policy for short rates and low or non-existent inflation.
The Fed maintains that it intends to keep short term rates either
at zero or nominal levels for an extended period of time, and the
CPI, although having risen from its cyclical low since the economy
started to recover, remains below the all time peak level set in

The 30 yr Treasury yield did rise sharply from exceptionally
depressed levels at the end of 2008 with the uptrend continuing
right on into April, 2010. The market responded to the development
of economic recovery and sharp rises in all the cyclical pressure
gauges, with the yield running up to 4.8%.

The yield has fallen sharply since then as the leading economic
indicators have weakened and the cycle pressure gauges have eased.
Moreover, the market is now anticipating further weakness in the
economy and a likely continuing deceleration of inflation pressure.
In fact, bond market players may now be expecting that the CPI
could again go negative yr/yr on a further slowdown of the

The Treasury is overbought on technical and fundamental grounds
but the rally action is not irrational as the market is discounting
further economic weakness and is growing more confident that the
economy is near to leveling off or worse.

The trick, if you are invested in or are long the bond market on a
trade, is to realize that the market can turn on a dime if data
pointing to a fresh bounce in the economy are reported. Not only
that, but yields can run up very quickly if players perceive a
change in economic momentum to the positive. You need to pay
even closer attention now, because the Treasury market has
started to run ahead of the fundamentals, however muted they
presently are.

There has been much talk again recently about whether the
Treasury market is a bubble market. I do not find such discussions
to be useful. To be a bear on Treasuries translates into expecting
economic growth that will bring increased inflation and eventual
higher short term interest rates that will trigger substantially
higher bond yields. For that we need to see signs that the
economy is set to experience a re-acceleration of growth.

30 yr Treasury yield chart.

Wednesday, August 18, 2010

Stock Market & Financial Liquidity

I downgraded this type of work over 2001 - 02, when massive
excess liquidity gave a false buy signal for stocks. But the work
can still be effective, so I keep up on it and use it as a secondary

Measured yr/yr, the $ value of industrial production reached
its strongest % change numbers in recent months since the mid-
1990s. Compared against my broad measure of credit driven
financial liquidity, it surged, leading to a large increase in money
velocity and a consequent sharp drop of liquidity. That sort of
development is usually a negative for stocks as the real economy
draws available liquidity away from the stock market. We did see
a roughly comparable situation to the present in 1994 -1995
when strong production growth far exceeded broad financial
liquidity growth. Interestingly, the liquidity situation improved
substantially over 1995 as the momentum of production growth
eased and financial liquidity growth accelerated. This development
helped much to underwrite a strong stock market from late 1994
through mid-1998.

To see a similar development over the next 12 months, we might
look for the yr/yr growth of the $value of production to moderate to
a more sustainable but positive level and also see a marked
acceleration of private sector credit and funding growth. This
re-balancing would signify that recovery is on a more sensible
path and it would sharply reduce the liquidity deficit headwind the
stock market is now encountering. So far, however, we have yet
to see the private sector "loosen up" to conduct commerce with
more credit usage.

The foregoing might strike some readers as mere fancy footwork,
but that would be to miss an important point: Over time, the stock
market does compete with the real economy for liquidity.

Monday, August 16, 2010

Financial Liquidity & Banking System

Narrow and broad measures of money and credit driven liquidity
remain inadequate to fund continuing economic recovery if the
tighter liquidity situation persists through 2010. That is my
current "guesstimate". We are not experiencing a conventional
cyclical liquidity squeeze with fast rising short term interest rates
and overheated credit demand. Rather, we have a liquidity "freeze"
as the Fed presumably waits to see whether higher economic
demand will trigger a resumption of private sector credit demand
growth and an upturn of lending to qualified borrowers. the Fed is
jawboning the banks to lend to businesses with rising order books
and solid cash flows. If lenders and borrowers remain unresponsive
to super low interest rates, the next monetary step would be to
resume quantitative easing to support a shallow "cash and carry"

Now, monetary and the broader measure of credit driven liquidity
have both been expanding in recent weeks. Even the monetary base
has inched up. Moreover, the downtrends in private sector credit
demand -- business and households -- has eased very substantially.
All to the good, but not enough to signal sustainable positive change.

Banks have restored liquidity and are witnessing a decent recovery
of capital. They are also issuing a little more commercial paper and
are offering more large or jumbo time deposits (mostly reserve free).
The system is still carrying a massive loan loss reserve although it
has started to drift down. But, a number of banks have to be
positioned to lend moderately to high quality borrowers, including

At this stage, the tighter liquidity position of the system is probably
forcing a number of investors to make asset allocation decisions with
more limited reserves and to be tempted to follow relative strength
among asset classes even more closely. Retail money market funds
are at their lowest levels since 2006, and institutional funds have
been heavily drawn down to the tune of 25%. The latter marks a
large reversal for a business with strong underlying growth.

Wednesday, August 11, 2010

Stock Market -- Short Term Technical

Nasty doings, today. The SP 500 could not take out resistance levels
above 1120 during this recent rally. The market started to break
yesterday and blew out today with stern short term warnings. The
uptrend line off the the early July lows was broken and the standard
MACD format turned down. In addition, the "500" blew through
supportive 10 and 25 day moving averages.

The market dropped to a slightly oversold condition and a break
below 1070 -1075 on the "500" over the next 3-6 trading days would
pretty much scuttle an extension of the rally as momentum would
be unusually low to expect continuation.

SP 500 chart.

Monetary Policy -- Postscript

Today's sharp stock market sell off on the heels of yesterday's sloppy
close clearly suggests plenty of players were expecting the Fed step
up and announce further quantitative easing that would augment its
balance sheet.

The indicators I use to track Fed interest rate policy still stand 50%
in favor of a boost to the Fed Funds rate. The laggards remain a
very weak short term business credit supply / demand pressure
gauge and a still depressed capacity utilization rate. The Fed
certainly continues to figure that with a large gap between
production capacity and output, there should be little inflation
potential. The indicators are not about to signal higher rates until
such time as production re-accelerates and commercial loan demand

One interesting possibility to consider is whether the Fed would
entertain a normal seasonal addition to reserves for the upcoming
holiday season. With a slowing economy, and important November
elections ahead, the FOMC could, if it wishes, elect to add reserves
temporarily to the system starting in September and do so without
fanfare. Just a thought, but it could be a nice little tonic.

Tuesday, August 10, 2010

Monetary Policy -- Fed Sits On Its Hands

Policy remains unchanged with the exception that the Fed will
prevent the automatic shrinkage of its balance sheet by rolling
over maturing mortgage backed securities into Treasuries. The
shrinkage that occured since this past spring coincided with a
slowing of the economic recovery and left them chagrined and
surprised so they telegraphed their fresh intent ahead of time.

But the bigger issue -- slowing monetary liquidity growth and no
private sector credit growth is unresolved. This pattern, if not
favorably settled within the markets themselves, is a prescription
for serious economic trouble. The Fed is in observer mode now and
later this month will get an earful from a range of economists who
attend the KC Fed's annual economics shindig at Jackson Hole, WY.

The Fed's prior 2009 - early 2010 massive quantitative easing
was a major and calculated step to unlock monetary and credit based
liquidity and harkened back to the massive liquidity infusions used
to generate economic recovery at the bottom of the Great Depression
in 1932. So, the recent easing of policy represents an extraordinary
step by the Fed and they probably prefer not to do more monetary
easing unless they feel compelled by economic reality and political

There are a few indications that the shrinkage of private sector
borrowing may have wound down and that banks, who have been
adding jumbo deposits in recent weeks, could be preparing to step
up lending. But, this is entirely preliminary and could be reversed.

Sometimes the Fed has critical knowledge ahead of the markets and
sometimes they seem to lag the outside world and struggle to catch
up. For now, players will debate the problem and its possible
remedies, but the uncertainty will linger on.

Sunday, August 08, 2010

US Employment Situation

Private sector employment growth in the US has been in a trend
decline for a number of years now. And, when you factor out one
strong sector -- health care jobs -- the trend looks even worse.
Main factors behind the decline are: slower labor force growth,
jobs outsourcing abroad, growth in market share for imported
goods and services, and more recently, a slowing of foreign, jobs
creating business investment in the US reflecting a weaker dollar
over the past decade. In keeping with the down trend of jobs
growth, the US has also experienced a deceleration of growth in
real consumption as well, with the latter also reflecting demographic
change, too.

The very deep recession we experienced recently produced the
largest % decline in jobs measured yr/yr in many years. The
reversal in momentum from deep downtrend has been faster than
in recent recessions, but not nearly as quick as in the early post
WW2 decades.

As you will spot in viewing the chart linked to below, a positive
change in the growth of employment of more than 2% when
measured yr/yr, would be a significant achievement during this
economic recovery (chart).

Now, the longer term trend of the momentum of employment
growth suggests clearly that it could take an extended period of
time to bring the unemployed back into the fold if the factors
which underlie the trend remain in force. The issue is made the
worse by the fact that the US safety net programs have a short
term focus and work on the assumption that folks who lose their
jobs will be rapidly re-absorbed in to the ranks of the employed
as the recovery progresses.

There is talk about "structural" i.e. long term joblessness going
forward and that policies may need to be adopted to ameliorate
the problem. For my part, I would like to see how the economy
progresses over the next year or so before moving into that
activist camp because I think we need to see if companies are
going to continue to hold back on hiring as order backlogs reach
a larger scale.

Friday, August 06, 2010

Economic Indicator Summary

Business sector growth moderated in recent months, but it sustained
a solid expansion through July.

I use four sets of leading economic indicators. They all point to a
further slowing of economic growth ahead but are not in all
sufficiently weak to signal an economic downturn of consequence.
Some of the indicators have been unusually volatile owing to marked
swings in sensitive materials prices which experience seasonal
weakness during mid year.

My long term indicators are positive but are eroding as a result of
a substantial loss of growth momentum of monetary liquidity
measures. Normally, this would not be a worry in the earlier stage
of an economic recovery because it is then when private sector credit
growth begins to accelerate. The latter has yet to occur, so the
economy has to be seen as at increasing risk down the road until
there is more money / credit in play. I am more quizzical than bearish
or bullish about the liquidity issue at this point.

I also wanted to mention my economic power index, which
measures the yr/yr % change of the real wage plus civilian jobs.
+4.0% would be a good vibrant number for this index. It is now
at +0.4%, indicating only rather modest purchasing power for the
large household sector.

Revised data show the consumer to be even more eager to rebuild
liquid savings to go along with a reluctance to take on more debt.
Companies are very leery to hire and are squeezing the hell out of
the work force for every last nickel of profit margin. The banks are
tightfisted. So we are moving from a spendthrift economy to a
tightwad economy and the US needs to regain balance quickly before
it moves more fully from one mode of dysfunction to another with
potentially disastrous results.

The US economy one year into recovery is operating well below
prior peak when critical categories such as retail sales, production
and capacity utilization, construction and employment are considered.
This has all followed a frightening economic free fall experienced
over Half 2 '08 and early 2009. There has been genuine financial
impairment, a loss of confidence and a sizable further loss of trust in
governmental authorities. But, folks need to accept risk to move the
economy toward better balance despite the disappointments of
the past several years.

I am cheering hard for a return to more balanced growth, but my
money is now resting on the sidelines (See prior post).

Stock Market -- Back On The Sidelines

I seldom get chased out of long positions, but I did clear out my longs
(stocks + calls) yesterday and this morning. As mentioned back on
06/30, I took long positions with a scheduled six month time slot
with the SP 500 around 1018 - 1023. I sold out same with the SP
500 at 1115 - 1127. I operate with substantial leverage, but the
unlevered result was nearly +10%.

There was emotion in the sale. Not fear, not greed, but another
pressure -- aggravation. There was intellectual content to the
decision as well -- namely ignorance. The monetary and
credit liquidity indicators that command a strong position in my
thinking about the economy and the markets have so little
momentum that I simply cannot tell whether there will be enough
improvement to sustain economic recovery, much less the stock
market. As I see it, the Fed's decision to pull $200 bil. or 5%
out of the monetary base during the late spring looks like a mistake
as this bit of tightening leaves the liquidity situation precarious.
It is also interesting that the market tumbled shortly after that
little experiment in liquidity control and left Bernanke having to
say that the Fed can re-liquify as needed. Well, right now, it
looks like it might be needed.

So, I am back to short term time horizon trading of stocks and away
from longer time duration positions until it appears to me that
the Fed/ private sector are working to allow money and credit
sufficient to fund a more normal economic recovery as opposed to
the cliffhanger affair we have fallen prey to.

The tip off for me came after lunch yesterday when I found myself
hoping we would see a better employment picture today. As French
philosopher Albert Camus maintained : To hope is to despair. And,
friends, hope has its place in your lives, but not when it comes to the
markets and your money.

Tuesday, August 03, 2010

Oil Price -- Leaving It To The Chasers

In a post back on May 14, I argued that the oil price had experienced
weakness that went beyond the usual late spring - early summer
seasonal dip and that oil in the $71 or less a bl. area might present
a nice go long opportunity to capitalize on a positive seasonal swing
later in the summer and hedge against rising gasoline and fuel prices
should they eventuate. This hedging opportunity worked out well
and with oil now moving to a short term overbought condition for the
first time since April, I am closing out my long contract with a tidy
profit and will hope that another trading opportunity arises soon.
Oil price.

Monday, August 02, 2010

Stock Market --Technical

The rally which began at the turn of July is now into August. With 10
and 25 day m/avs moving up and the market holding above both,
there is reasonable confirmation of a short-intermediate term run.
The rally has been anything but smooth, with clear back and fill
that has allowed interested traders to reload. The market is getting
more heavily overbought short term, but it has so far weathered
prior quick overboughts during this run reasonably well.

The market has moved up to challenge intra-day resistance, and
since it is getting more overbought, there should be a challenge in
the days ahead. If the market motors through, then there is
another more formidable challenge up at 1130-35 on the SPX (1126
close today).

Since I thought the Apr. through Jun. sell off was a classic correction
I am working on the assumption that this rally is the initial phase
of an up-move that can run on into early 2011. I would also say
that this is clearly the minority view. Many traders see the rally
as a summer seasonal affair and some are saying it's just a
sucker rally. On top of this, the pundits will be out soon to warn
of the potential for a "hells bells" sell-off over Sept. - Oct.,
citing the many sell- offs that have occurred over the course of
history during the late summer - early autumn time slot. So, I
would imagine there are a reasonable number of players who plan
to show the current rally little respect.

SPX chart.