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 !!!

Thursday, September 30, 2010

US Dollar & China

US Dollar
Back in early June I argued that the dollar was getting overbought and wondered if it
would test longstanding resistance at 92 ($USD). Well it did not and it turned down
shortly after. Traders have been shorting the dollar on the premise of renewed
quantitative easing by the Fed and the credible assumption that othe major central
banks may not be prepared to follow suit. There are now a few reasons to think
about taking a long position in the dollar over the next few weeks. 1) It is deeply
oversold. ($USD Chart). 2) Based on recent signals from the Fed, it is far from
clear whether They would want to provide massive quantitative easing if the economy
falters, or whether they might move in a far more modest, piecemeal fashion (which
I believe they should do anyway). 3) I still think it could take another six months or so
before financial stress in the global economy unwinds enough to rule out another
"risk off" flight-to-quality rally in the dollar.

Since I started the blog in 2005, I have argued that China's heavy handed policy of
mercantilism was no longer appropriate and would harm them just as Japan's very
aggressive mercantilist trade policies hurt them. China has been far too slow to
install policies which would bring better balance to their own economy and It has
let the Party fatcats feast off the trade profits at the expense of its workforce. The
policy of rapid money growth within China to maintain the dollar peg produced a
stock market bubble in 2007 from which they have not recovered, and has fostered
speculation in real estate which could eventually become increasingly difficult to
control. Money growth has been so rapid that if I was a Chinese local, I would
regard the yuan as play money.

Trade tensions with the US are rising. Matters may quiet down after the  US election,
but China / US relations are now headed firmly downhill. The shame of it all
is that although China's GDP may now rank #2 in the world, its per capita income
is not even in the top 100. That represents piss poor progress.

I have attached a link to a piece by China based economist Mike Pettis which
discusses the formidable challenges China faces if it is to re-balance its economy
appropriately. Well worth reading. Pettis on China.

Monday, September 27, 2010

Global Stock Market

Following a hellish, large decline in 2008, the global market -- as
measured by exchange values -- has recovered sharply from the
cycle lows in early 2009, but still remains a little more than 50%
below the 2008 high.

Last year, all the major exchanges achieved positive rates of return,
and 73% of them outperformed the US market as investors bet
heavily on the markets of faster growing, more volatile economies. It
was a banner year for global investing and enticed most US market
sages to recommend strong participation in foreign markets in 2010.

This year has been tougher going. Only 64% of the world's exchanges
are positive so far in 2010 and 48% of them have underperformed the
US. The relative strength of global markets has improved markedly
since late Apr. 2010, as US economic and profits growth prospects
are seen as slowing (For Apr. 2010, only 11% of foreign bourses
were stronger than the US for the first four months of the year).

The US market has fared well in Sept. Short term cycle indicators
have improved some and investors have responded favorably to the
Fed's promise to backstop the economy should it appear to falter.
This has served to re-invigorate interest in foreign markets, with
the global index outperforming the US in Sept.

The Dow Jones Global Exchange Index has failed to get through
strong overhead resistance since the cyclical bottom of the market
in early 2009. The market is presently moving up toward the 600
resistance level on the Index, and is also starting to signal a more
positive trend for relative performance.

Strongest markets are: Jakarta, Colombo, Sensex, Istanbul, KL,
Manila, Santiago, Caracas and Bangkok. The Nordics are doing well,

Dow Global chart.

Saturday, September 25, 2010

Quantitative Easing

Since Aug. 2008, the Fed has increased the monetary base by a factor
of 2.2 via purchases of financial assets. This was done to refloat the
economy during the massive recession and to help generate economic
recovery during a period of private sector credit contraction. This has
excited reams of pro and con commentary. Interestingly, it has been a
far smaller version of what the Fed did during the Great Depression
period when it increased the monetary base by a factor of nearly 5.5
times over 1932 - 46 to generate economic recovery during an
extended period of debt "deleveraging". The Fed steamed right along
with this policy during WW2 to backstop the war effort as well.

During the 1932 - 46 period, the Fed also kept short term interest
rates exceedingly low, much like today. Over this same period,
inflation compounded at 2.7% per annum, and the purchasing power
of the dollar contracted as funds left in short term risk free assets
failed to generate returns sufficient to "cover" inflation. However,
the bond market did provide yields above the inflation rate and the
stock market recovered dramatically. Investors had ample
opportunity to protect their assets during this period despite the
extraordinary and sustained easing of monetary policy.

The super accomodative monetary policy of 2008 - present was
designed by the Fed to provide the same initial boost in liquidity
It provided in the dark days of 1932. The Fed would dearly like
to avoid the sort of super quantitative easing it provided over 1932-
46. The decline in US production during the recent recession was
roughly only a third of that sustained during the Depression, so
more serious inflation could develop this time if the Fed does not
maintain sensible balance in trying to coax the current economic
recovery along. Yet, if private sector credit demand remains
subdued, the Fed may have little recourse but to provide further
liquidity to support the economy and prevent deflation pressures
from taking further hold.

Thursday, September 23, 2010

Inflation Vs. Deflation

Inflation in the US has been trending down now for 30 years(Chart).
As seen on the chart, the downtrend has not been a narrow, smooth
one as inflation -- driven periodically by surges and declines in
commodities prices -- is volatile. However, the chart shows clearly
that this data series (yr/yr % chge) is becoming deflation prone at
cyclical low points. This is not a welcome development for an
economy that has grown much more strongly levered by debt over
the same period, as collateral values become more suspect in such
an environment, which, in turn, is an impediment to further growth
of private sector credit.

The consumer price index (CPI) has recovered from a cyclical low
point registered at the end of 2008, but remains slighly below its all-
time high reading set in Jul. 2008. So, technically speaking, the US
is still in a deflationary period, which will not end until the CPI starts
rising above its old high.

The recovery of the CPI since YE 2008 pre-dated the end of the
recession, but was a normal enough cyclical move which was
correctly captured by the inflation pressure gauges I use. However,
the gauges have flattened out over the course of 2010. This reflects
the leveling off of commodities prices coupled with a further
unwinding of inflation pressures excluding the volatile but critical
food and fuel measures. After all, there is still a large amount of slack
in the US economy.

There has been a moderate pick up in commodites prices this month
but it is easy to understand the Fed's concern about the spectre of a
return to a declining CPI (deflation) if the economy does not begin to
re-accelerate in growth.

My longer term inflation pressure gauge -- built off the momentum of
the leading economic indicators and the trend of capacity utlization --
is still signaling further recovery of the CPI over the remainder of this
year and into 2011, but it has lost substantial momentum since the
spring of this year.

My long term inflation potential measure still has inflation set to
rise eventually to near 3.5% a year, but that too has eased reflecting a
dip in the long term (10 yr.) growth of the broader money supply.

The economy has entered its second year of recovery and it is not
unusual to witness a loss of growth and inflation momentum. Since my
principal economic leading indicators are still consistent with
continued economic recovery, I have not abandoned the idea that
inflation pressure will re-emerge in this cycle. However, I have this
view on a short leash as I strongly prefer to see improved financial
liquidity conditions and a lessening of strong private sector caution

Continued strong consumer, bank and business caution would put the
US on the razor's edge of economic decline and renewed deflation
pressure. Thus, you have to take developments month by month and
see if folks do finally "loosen up" a little.

So it is that the Fed is holding further quantitative easing in abeyance.
It would greatly prefer to see the economy loosen up and see credit
flowing to meet rising demand without further intervention on its part.
As discussed in the prior post, I would like to see the Fed  begin to
ease up moderately now and certainly hold off on a massive bout of
additional easing as the latter could be quite obviously problematic.

Tuesday, September 21, 2010

Monetary Policy -- FOMC 9/21 Meeting

Short Term Interest Rates
No change. The indicators I use to suggest whether rates should be
increased remain at 50% in favor of a lift. Fed sees too much slack
in the economy to raise rates now.

My super long term interest rate model suggests that the 91 day T-bill
should be priced to yield 3.4% presently. The spread between the
model and the .15% yield on the bill reflects the large slack still
extant in the economy and the Fed's concern that the CPI is weak on a
cyclical basis.

In a convoluted statement that appears logically inconsistent to the
layman, the Fed gave itself more leeway to add liquidity to the system
in the months ahead under the premise that a rising CPI was too weak
for this point in the recovery cycle. The Fed sees this view as
consistent with the idea that deflation pressure could re-emerge and
create difficulties for the credit market (collateral values).

The Fed made it clear that it does not wish to shrink its balance sheet
and the monetary base at this time. That is fine. However, the FOMC
has leeway to expand its balance sheet on a seasonal basis when it
wants to. I would also advise the Fed to plan to expand its balance
sheet at a 6% annual rate until it sees a clear positve turn in private
sector credit demand in order to maintain minimum liquidity growth
as we go forward.

Right now, the Fed is providing sizzle without the steak when it comes
to liquidity.

Monday, September 20, 2010

Stock Market -- Technical

If you have followed the blog over the past month, then you know I
anticipated this most delightful rally. There were promising technical
undepinnings at the end of Aug., but what captured my attention was
so many bulls were conceding a bad Sep. /Oct. interval.

Well, we've had this nice rally. The short term uptrend has been
confirmed, and today the market blew through resistance to the
upside, leaving an apparently clear path for a continuation of the
the rally.

The market is at an interesting point. On my 25 day price oscillator,
we have reached the strongest overbought in about one year's time.
As the chart link below will show, the SP 500 is also getting over-
bought on RSI as well. The routine expectation here is that the
market is due for a pull-back soon. The possible kicker is that should
it get further overbought against the 25 day m/a, it might well be
signaling that a stronger advance is in the offing. I say this also
because my smoothed 40 wk oscillator has turned positive as well.
This latter indicator does whipsaw once in a while and it is not the
best for short term timing, but it has helped me make good money over
the years, both long and short.

SP 500 chart.

Friday, September 17, 2010

Economic Indicators

The weekly leading indicators I follow most closely have turned up
over the past few weeks, but further strength is needed ahead before
one could plausibly conclude the economy may be regaining some
momentum. However, up beats down in this case.

Disappointingly, The Fed has again shrunk the monetary base here
in Sep. There is much speculation that the Fed plans to wait until
after the mid-term election in early Nov. to provide another large
dollop of quantitative easing. This speculation has fueled the gold
price for sure. I do not know whether such speculation has any merit.
I do however think a strong round of seasonal liquidity injections
would serve well.

Weekly coincident data suggest the economy has flattened out through
mid - Sep from the latter part of Jul. The ECRI monthly coincident
also declined slightly for Aug., following 8 straight months of progress.
My own "stripped down" set of coincident indicators fared a bit better
in Aug. on gains in employment, production and real retail sales.
However, the clear takeaway is that the economy started to lose
growth momentum in Aug.,with this development coming about 4
months after the leading indicators experienced a cycle-to-date top.

Viewed yr /yr, my coincident indicators were up 2.7%. Momentum
has been decelerating primarily because of a flattening in retail
sales after a strong bounce from 12/08 through 4/10. Consumers
have not only operated on a cash and carry basis in the aggregate, but
have been building savings as well.

Total civilian employment has flattened out in recent months. The
economy did add 1.3 million jobs from 12/09 through 6/10. That is a
big number, but represents only about a recovery of 16.3% of jobs
lost. That large deficit plus a slowdown on the jobs front in recent
months has proven very costly to the Obama administration.

My primary profits indicator did rise in Aug. for the 14th straight
month. Yr / yr, momentum is decelerating, but this is a widely
expected development. Profits have continued to progress nicely
through Aug.

Thursday, September 16, 2010

Exquisitely Poised...............

The NASDAQ Comp. has made several trips up to the 2300 level in
recent months, only to be turned back by selling pressure. Well, it's
there again, with a cliffhanger 9/16 finish at 2303. Chart.

There is confirmation of the NASDAQ advance in the short run, but the
market is approaching a short term overbought. Logic says the market
should absorb more of the overhead resistance without great damage
before advancing to higher ground up and through 2300. But, logic
and stock price movements do not always happily coalesce.

Place your bets!

Wednesday, September 15, 2010

A Look At China

I downgraded the China stock market early in the year because I
felt a cost / price squeeze could develop on profit margins because
of the sharp acceleration of wage growth. Profits have held up
better than I expected as productivity gains appear to have been
relatively strong. However, the Shanghai Composite slipped into
a substantial correction, anyway, and remains with a bear profile.

Foreign investment, limited already by regulation, has been even
more limited as China took steps to curtail a major real estate boom
and head off an acceleration of inflation. I think the Chinese have
stayed clear of the stock market to pursue the residential and
commercial real estate markets which have been more rewarding.

Since the economy has been growing briskly, and tighter real estate
lending standards are in place, I think it might worth tracking the
stock market more closely again. Political tensions between the
US and China over trade issues and the value of the yuan may also
intensify in the months ahead, so it might be worthwhile to watch
the Shanghai for that reason as well.

Based upon China's long term economic performance and potential,
I still think the Shanghai should trade around the 3250 - 3500
area. It is at a sizable discount now, but has rallied some in recent
months. The link below shows a bearish chart with the market now
struggling to improve on RSI. Failure to regain postive momentum
could signal a retest of the lows seen a bit earlier in the year, but,
let's keep an eye on it.


Monday, September 13, 2010

Stock Market -- Short Term

The market has been in a trading range for the past four months,
with most of the action confined to 1040 - 1130 on the SP 500.

Stocks have been in rally mode since the end of Aug., and the
market has been pushing higher to get confirmation of a more
durable rally. The SP 500 has been closing in on resistance at the
1130 level, and most traders are eager to see if the current upturn
can successfully challenge and break through resistance to the

My Weekly Cycle Pressure Gauge -- a decent fundamental
coincident indicator of the market -- has also been in a tight range
since early Jun. after falling sharply from the end of Apr. This
tells me that players remain especially sensitive to key weekly
data such as sensitive materials prices, unemployment insurance
claims, market short rates and monetary conditions. The gauge
has increased by 2.5% during Sep., and has reinforced the stock

The pressure gauge will probably improve a bit more over the
next week or two, but not enough to signal that the economy --
now running flat -- is about to start lifting again.

When it comes to the weekly gauge, periods like this, when the
gauge has minor bouts of volatility but remains essentially
trendless, can be very frustrating and can last for extended
periods, such as occurred for lengthy intervals in 2004, 2005 and

On the technical side, the challenges right ahead are to see if the
25 day m/a for the SP 500 turns up and whether the market can
break through 1130 resistance. To make the situation more
complicated for traders, the 14 day RSI would get into overbought
territory on a near term run up and through 1130.

SP 500 chart .

Thursday, September 09, 2010

US Trade

One success of G-20 in the face of the 2008-09 global economic
meltdown was to obtain agreement from players to keep the trade
windows open. The recovery in US and in global trade has been
outstanding. However, old issues that plagued the trade front over
most of the past decade have resurfaced.

China continues to run an agressive mercantilist policy. Even
when it locates a business outside of China, such as in Iraq or in
Africa, the facilities are primarily staffed by Chinese. Since
employment looks to be a substantial political issue within the US
in the coming years, so it is logical to expect that the issue of
China's large export subsidies will be revived within US political
circles as well as pressure from the US for China to open its
markets further. EU trade also took a heavy beating from China
in 2009. So, I would expect a more contentious period ahead
between the US and China and also within the EU, where
German exports are undermining domestic recoveries in
troubled European states. I can understand tolerance of
mercantilist economic policies when a country is just emerging
as an industrial player, but The US has put up with China's
damaging policies far too long. It will be interesting to see how
much mercantile trade issues heat up in 2011 and whether the
US congress readies itself to be more forceful with China.
Since Geithner has been a patsy on this issue, it may fall to the
senate to do the heavy lifting.

Monday, September 06, 2010

Stock Market Fundamentals

There was a marked deterioration of market fundamentals from late
2009 through July, 2010. The apparent negative impact on the
prospects for economic growth and for the stock market happened
very quickly and with a vengeance.

As I have discussed, the Fed shrunk its balance sheet and the monetary
base over the Feb.-Jul. 2010 period. Specifically, the monetary base
was cut by a large 7.3%. I do not think the Fed was being malevolent.
I believe they wanted to get a jump on their "exit strategy" in
anticipation of the development of private sector credit growth and the
eventual tapping of the $1 tril. + in excess reserves in the banking
system. Well, as you know, private sector credit demand, rather than
increasing vigorously, continued to wind down further, and this left
an economy and stock market exposed to a liquidity freeze.

By late April, my weekly cyclical pressure gauge, which includes
liquidity measures, started a tumble, paced by a sharp 13% decline in
my sensitive materials price composite. The reaction in the stock
market was immediate and sharply negative as it moved right along
with the decline of the weekly pressure gauge.

My SP 500 Market Tracker, based on rolling 12 months eps and an
inflation driven regression model for the market p/e, kept right on
rising and today stands at 1300 fair value for the "500." However,
the divergence between the earnings based Tracker and the weekly
pressure gauge was resolved by investors smack in favor of the
weakening pressure gauge on the premise that it was signaling that
earnings would eventually roll over.

The situation has improved somewhat since the end of July. The
monetary base is expanding again and even the broader measure
of credit driven liquidity has experienced some recovery as banks
bid for large deposits. The cycle pressure gauge has leveled off and
actually turned up sharply last week on a nice pop in sensitive
materials prices.

What is interesting here is that when system liquidity is squeezed or
frozen for an extended period , you get a recession and a bear
market in stocks. This liquidity squeeze / freeze lasted only five
months, but it produced significant negative results anyway.

Just how chastened the Fed is is anyone's guess, but it appears that
if the Fed wants to keep the recovery going, it will allow the
monetary base to expand moderately at least until cyclical private
credit demand recovers.

For now, it looks like stock players are going to watch Fed activity
re: liquidity, and weekly economic data like materials prices and
unemployment insurance claims carefully.

At 1105, the stock market is reasonably valued as you do not have
to have above normal earnings and dividend growth over the
longer term to earn decent returns. But we obviously have to see
a timely and favorable resolution of the frozen liquidity situation
to see a positive pay off. The Fed has made a healthy down
payment in recent weeks, and players will be looking for more.

Sunday, September 05, 2010

Stock Market -- Short Ride In A Fast Machine

Back on Tues. I opined that a rally in September would fulfill one of
the market's favorite pastimes -- catching the greatest number of
folks flatfooted. Bingo! We get one, but this is a tricky move and has
more "fool ya" potential.

As mentioned on 8/31, a tradeworthy oversold was at hand and
stocks have swung quickly to a mild overbought. But the market
was unable to take out the April - early August downtrend line,
closing about on the line. You can expect some guys will sell out
early on 9/7, with that indiscretion as the basis. Secondly, even if
the market holds up next week, we may have to wait as long as a
week after to get full confirmation of a shorter term uptrend.
Finally, the trajectory of last week's shot upward is too rapid to
continue without a pullback.

My intermediate term momentum indicator -- an oscillator based
off the 40 week m/a -- has been an effective tool for charting
direction over the years. It can be slow to signal change,
but has the merit of whipsawing seldom. The smoothed value is
starting to base after an extended deciline, and means attention
should be paid to whether a long side opportunity might be
nearing. I also note that the 21 day TRIN and the weekly OEX
put / call ratio have been signaling a "sold out" market for
several months (the institutional players have, in sum, been
net call buyers, whereas they are traditionally net put buyers to
hedge out long positions).

As readers know, I played the July rally to the hilt, but I did not
think another opportunity would come along very fast, and if
last week's mini-rocket is the prelude to a nice upside move,
well that would be delightful.

Friday, September 03, 2010

Economic Indicators

Leading Indicators
As most all know, the weekly indicator sets I follow declined sharply
from the end of April through mid-July before flattening out. Of note
here were a swift move up in unemployment insurance claims and a
fast move down in sensitive materials prices, both of which have
stabilized for now. The monthly new orders breadth index made a
cycle-to-date peak in May and, although still in positive territory,
has fallen sharply through August. There is a slowdown at hand,
but the indicators do not yet suggest clearly how damaging it will be.

Real Time measures now show the economy has flattened out in
August following a strong July period, when retail sales and
industrial production lead the way. There is no indication yet that
a downturn is underway, but the leading indicators do suggest that
at least transient weakness is ahead.

My long term leading indicators have lost substantial ground
since late 2008 and would suggest a pronounced economic down
turn could occur unless the monetary and financial liquidity
components begin turning up by late in 2010.

The Economic Power Index (yr/yr % changes in the real hourly
wage and civilian employment) has finally turned positive but
remains depressed reflecting a net loss of seven million jobs and
a low real wage rate. The index has not yet progressed enough to
support a decent economic recovery without dependence on
government assistance programs or an upturn in household credit

The Capital Slack Measure remains well below normal levels
with super low short rates, high unemployment and capacity
utilization more than five full points under "average".

Looking over all the monthly economic series I follow, I would say
that we have recovered only about 40% of the ground lost in the
past, deep recession as low private sector confidence has
engendered a strong sense of caution throughout. And this we
just have to watch. It is fine and dandy to be prudent, but too
much forbearance will produce a dysfunctional economy with
far more on the line than most folks realize.

The foregoing did not make for pleasant reading, but I would be
much more comfortable with the economic situation nonetheless
if financial system liquidity was growing and was not de facto
frozen, as that can be deadly if it proceeds too long.