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, October 28, 2010

More On Value Of Cyclicals' Relative Strength

I am here adding a bit more on to yesterday's post re: the relative strength line for
MSCI's $CYC index. I view the relative strength line as a decent indicator of the
market's expectation for economic momentum potential. I think it ranks somewhere
between a leading and a coincident indicator since it keys off not just pricing power
for cyclicals (leading) but full profit potential (coincident) as well. The RS line
is not used by economists as a formal economic or profits indicator, but it does
reflect the opinion of the market's players. Since the "smart money" by definition
moves into and out of stock sectors first, it is wise to watch for changes of trend in
the RS line of all stock sectors and industry groups and to also ask yourself whether
investors know something you do not. $CYC RS index chart.

Wednesday, October 27, 2010

Cyclical Socks -- Relative Strength

Among the broader stock groupings, the cyclicals have been the leaders in the cyclical bull
market, with the $CYC measure of relative strength nearly doubling against the SP 500
since the market started up in 3/09. However, the relative strength line has flattened out
since April despite continuing strong sector earnings as investors ponder whether the
economy will be strong enough in 2011 to generate relative strength in earnings sufficient
to secure superior relative price action for the group. The weekly leading economic
indicators, which fell sharply from 4/10 into early Aug. have been recovering. My
monthly profits indicators are still positive, but momentum has decelerated since mid -
year. so, there is some uncertainty building about relative performance potential for the
group, although we have not seen the kind of break that would signify that investors have
begun to give up on the cyclicals. Chart.

The chart shows clearly that relative strength for the $CYC has been consolidating and
that the extended period of flatness without a new positive breakout could easily be
read as a topping process. A downward break in performance, should one occur, would
not necessarily confirm a top for the entire stock market. Rather, it might only mean that
the outlook for earnings for cyclicals is no longer so positive relative to other sectors.

This point about cyclicals is worth keeping in mind as the group could suffer badly in
relative strength if investors decide that economic recovery will be slow enough to
warrant much broader diversification and a lower exposure to very cyclically
sensitive earnings.

The ability of the cyclicals to hold up in relative strength so far in 2010 shows that
investors have been curious about the prospects for an economic "double dip"
recession, but have by no means bought off on it.

Sunday, October 24, 2010

Stock Market -- Attention Please

The SP 500 generated a short term mechanical sell signal on Fri., 10/22, when it failed
to take out the interim high of 1185 made back on Mon., 10/17. Friday's close was 1183.
Sometimes, a failure of this sort simply portends a couple of sloppy days before the
uptrend resumes, and sometimes it signals that a more significant downtrend may be at
hand. Because of the latter factor, short term players should proceed with extra diligence in
the days ahead. Here is the SP 500 chart and notice the 8/2 - 8/9 period before the sell-off

Coincidentally, my weekly fundamental business cycle pressure gauge did hit a 22 week
high on 10/22. However, it has lost most of its upward recovery momentum over the course
of Oct. which might not go unnoticed before long despite the excitement about a much
anticipated new round of monetary easing by the Fed. Again, not a warning, but a "heads up".

Friday, October 22, 2010

Economic Indicators

After rising from late Aug. through early Oct., the weekly leading indicators have leveled
off leaving the recent improving trend unpersuasive. The  weekly coincident indicators
remain essentially flat and have not sustained progress since the end of Jun. My heavy
industry indicator -- steel output -- made a cycle-to-date peak in Aug. and has been
tailing off.

The monthly coincident economic indicators are on the flat side as well with the
exception of retail sales, which has firmed up over the past two months and will help
the Q3 GDP report.

One factor which has contibuted to the flattening out of the data has been a round of
quantitative tightening by the Fed which, by various measures, has been in effect since
Feb. 2010 (monetary base especially).

There has been no positive turn yet in private sector credit demand. On the plus side,
here are a couple of factors: The banks have amped up the deposit base somewhat, and
the system wide loan loss provision has finally started coming down. That reserve
has dropped over $17 bil. or 7.3% since this past spring. Let us be thankful for little

With a deterioration in positive momentum of the recovery, the stage is set for the
Fed to put up or shut up for awhile on fresh easing, and the stage setting is ripe for
an interesting couple of months for a lame duck Congress as well.

Wednesday, October 20, 2010

Stock Market & Financial Liquidity

For recent 12 month periods over 2010, total financial liquidity growth has been 
between 1-2% or barely above the inflation rate. For the 12 month period ended 6/10,
total Us business sales rose by more than 9%, as did the $ value of industrial output.
Thus, the velocity of money + credit rose sharply and liquidity declined. Relative to the
growth of the economy, liquidity has been in "deficit" since early 2010. The strain on
liquidity peaked around Jul. 2010, and has been improving sharply as 12 month economic
growth momentum has eased. The absorption of liquidity by the real economy has been a
headwind factor for the stock market this year. The situation is improving but is still a
drag factor on stocks.

Financial system liquidity growth made a cyclical top over  Half 1 2007, and trended
down from 10% yr /yr back then to an astounding -3.5% in early 2010 when measured on
a comparable basis. As mentioned above, the liquidity situation has turned positive in
recent months as the worst of the contractions of private sector lending and funding has
ended. This process may well improve further as banks are stepping up funding growth
and liquidity would accelerate sharply if private sector credit demand rebounds.

The moderation in the recovery of business sales and production momentum is not
unusual after the initial sharp bounce that ends a recession, and so long as it remains
moderately positive, further liquidity improvement would be normal as credit demand
responds. These processes should eventually alleviate the liquidity strain on the stock
market over the next 12 months. Further quantitative easing of monetary liquidity by
the Fed will be a plus, obviously.

Now, you have to keep in mind that the liquidity analysis is but one facet of looking at
the stock market. If economic momentum slows too much, then profit margins will
decline and earning power will be hurt. That would not be good. However, if the
recovery proceeds even at a mild pace, then liquidity should follow suit, which
would eventually roll into a nice tailwind for the stock market.

The visibility of liquidity growth going forward is not nearly as good and clear as
it has been after most post recession periods. I have a positive stance on this issue, but
we really need to see how the Fed plans to manage quantitative easing and the
credit situation as 2010 draws to a close. Not to make a pun, but the Fed needs to get
off the dime on these issues soon.

Over the past 50 years, economic growth has been fueled more by the expansion of
credit per se than money per se. But, form 1933 - 50, in the wake of the Great
Depression, it was money growth more than credit which drove the economy. the
stock market can rise in either environment, but it would sure be helpful to glean
the drivers going forward and that the Fed needs to address pronto.

Tuesday, October 19, 2010

Stock Market Note

This quick note updates yesterday's post on the short term technical situation. Today's
sharp sell-off breaks the uptrend line going back to the end of Aug., 2010. As I noted
yesterday, a break of the short term trend (based on daily closing prices) would signal
that traders need to take the market's short term overbought condition more seriously.
Scroll down to yesterday's post and click on "Chart" for an update.

Monday, October 18, 2010

Stock Market -- Short Term Technical

The rally underway since the end of Aug. remains solidly on track. It displays a sensible
trajectory and is confirmed by rising 10 and 25 day m/a's. The NYSE adv / dec line is
closing in on a new all time high and my Buying Pressure Gauge is at a cyclical high.
My 40 wk. oscillator reading remains solidly positive and is only slightly overbought
for the intermediate term.

The market is overbought short term, but no topping process is yet underway. However,
the RSI and MACD readings are extended enough to warrant that traders take careful

My cycle work suggests a low point over the next 7 - 10 trading days, but the market
has hardly set up yet for a decline. Experience here suggests not altering a positive view
until there is a crack in the current rising trend line based on closing prices.


Friday, October 15, 2010

Energy Sector

The relative performance of energy stocks has been a substantial disappointment in the
current cycle, particularly so for 2010, when industry operating earnings were projected
as relatively strong on a comparative basis. Now, many non-energy producers have done
very well with earnings in 2010, and the oil price has not matched earlier expectations,
either. Importantly, nat. gas price realizations have been continually suppressed by ongoing
excess supply.

However, the relative performance of energy provider stocks has recently improved
sharply on a firming of oil prices and a possible extended basing interval for nat. gas.
The performance of the sector is noteworthy because a lengthy downtrend of relative
performance has recently ended following successful testing of a bottom. Consider:

Note as well that the energy providers often have stronger pricing power as an
economic recovery progresses.

The Bernanke Hint...

Today, in Boston during a parlay on monetary policy in a low inflation era, Fed chair BB
again made it clear that further financial asset purchases by the Fed would be a continuing
policy option to keep the economy out of the clutches of deflation. But he made it clear
that since quantitative easing was indeed high octane stuff, the Fed would need to be
both cautious and careful in using it. Since floating the idea of additional QE this summer,
the Fed has observed a fast decline in the value of the dollar since mid-year, and more
recently a sharp jump in the oil price. The US probably wants a lower dollar to foster
continuing good exports performance, but there is no way the Fed or the Treasury wants a
large, disorderly slide. The speed and depth of the dollar's recent slide tells them care is
needed with QE. So too with the oil price. A big QE could trigger a run-up in oil which
would badly punish consumer discretionary purchasing power and help undercut any
value to QE. The Fed has received stern warning from the markets concerning the risks
of large scale QE going forward.

Retail Sales

Sales rose 0.6% in Sep., extending the recovery off the 12/08 trough. Retail has been
progressing rather moderately and has not exhibited as strong a bounce as might have
been expected following the steep decline in sales over Half  2 '08. I had an aggressive
8% growth target for 2010, but it now seems unlikely sales will do nearly that well.
Part of the reason for the shortfall reflects the continuing very low inflation rate -- 1.1%
yr / yr -- but it is clear that consumers remain cautious. Retail Sales Chart.

Thursday, October 14, 2010

Junk Bonds

Junk is now trading slightly inside of 8%, and some new issues have fetched 7.5%. That
is a far cry from the 25% yield level the Bloomberg High Yield Index sported at the height
of the financial crisis in late 2008. I thought the junk market was terrific when yields went
above 15% in 2008 because you could earn out your capital within 5 years time. Not often
do you get deals like that!

Increasing confidence in this market has perked right along. The economy has been
recovering, the Fed says it will backstop the recovery with additional liquidity, and It has
pledged to keep short rates low for an extended period. So the market has been drawing in
funds from big and small players alike as the yield hungry feast on this sector.

Being a stingy guy, I do not like to put capital at risk unless I think the potential is there
to earn 10% a year. If I buy junk now, I pick up only 8% in current return or less, and am
in the position of having to see the market rally mildly but regularly going forward. Since
junk yields are subject to business, inflation, interest rate and supply risk, I get edgy
buying junk inside of 9.75% as a matter of principle.

Junk bonds can rally in price for a spell even after the Fed reverses course on monetary
policy and begins to raise short term rates, so many players no doubt feel they have a
"cushion" of time to squeeze out more price gains from holdings.

Still, if you own junk bonds and have been doing well, it is probably a good time to
review whether these issues still meet your strategic goals. For now the trend remains
your friend. Chart.http://stockcharts.com/h-sc/ui?s=MHCAX&p=W&yr=3&mn=0&dy=0&id=p49435614194

Wednesday, October 13, 2010

Financial System Liquidity

As discussed in recent posts, the monetary base has been shrinking. The Fed has also
shrunk its balance sheet in recent months as well. Even so, financial system liquidity has
improved some since mid-year owing partly to an acceleration of basic money M-1 and
modestly faster time deposit growth within the banking system. Private sector credit
demand continues to shrink, so the banks have been using increased deposits to buy
shorter term securities. Annual growth of M-1 has been 6.6% yr / yr and the same for the
past six months on an annualized basis. The growth of M-1 is critical to provide offset to
a broad base of funding, which is up but 1.2% yr/yr. More banks have been expressing a
willingness to increase loan portfolios, but there have been few takers. Households in
the aggregate are operating on a cash and carry basis, and business has yet to expand its
inventory commitment by more than a small margin.

The Fed is actively exploring how to increase money within the system and is now
widely expected to disclose a plan either early next month or at its mid-Dec. policy
meeting. Since the trend of the monetary base forshadows that of M-1 money (cash and
checkables), the Fed is running low on time to fund continuing recovery in the face of
private sector credit contraction. There has been dissension and vigorous debate on
the Board about providing more liquidity because doing so could make policy
execution far more difficult when credit demand finally does turn up and accelerate.

The guesses about Fed intent range from occasional piecemeal asset purchases out to
a grand "nuclear" infusion of $2 tril., which would increase total system liquidity
an extraordinary 17.5%. Most guesses by observers put the size of a new round of
liquidity infusion within a range of $500 bil. - $1 tril. My advice to the Fed is to go
the piecemeal route. Start out with a sizable asset purchase of between $100 -200 bil.
and state clearly that the Fed stands ready to provide limited but substantial further
assistance if and as needed to sustain economic recovery.

Saturday, October 09, 2010

Gold Price -- Looking To Short

I have gold in a price bubble. Gold closed out the week at $1345 oz. From my study of
financial bubbles, I can make a case for a bubble top in gold of $1500. There is sound
empirical evidence for this view and I would submit that arguments for a much higher
gold price rest on flimsy evidence. So, I am ok with a further run of gold up to $1500,
and I would have to say that calling for a further dramatic upmove above $1500 is more
guesswork than anything else.

My plan going forward is to use a small part of my trading capital to gradually initiate
a position in a leveraged gold short fund such as DZZ. I will primarily use technical
analysis to help me follow through on the plan, and expect to complete most of the
purchase over the next six months or so. I am not at all proud of getting chased out of
the position from time to time which you must do when you are short and the asset you
are shorting is as volatile as the gold price.

I believe there is large, fast money on the long side of gold and that the uncertain
financial / economic environment may well draw more fast money in. I also think
that when folks start to turn negative on gold, you can easily see a 50 - 70% decline
over a 12 month period.

I do not think most players out there should even contemplate such a strategy as I
am going to deploy. Too risky and tough to execute particularly in the early going
when gold is attracting so much positive attention.

Here is the DZZ chart. I shall keep you posted periodically.

Friday, October 08, 2010

Economic Indicators

The weekly coincident activity indicator has been on the flat side since Jul. (DJ-BTMU).

The weekly leading economic indicator sets have been improving since the end of Aug.
and suggests the US economy may experience a re-acceleration of growth in early 2011.
The monthly leading indicator for Sep. shows a continuing deceleration in the % of
companies experiencing new order flow. The downtrend has been in effect since Jun.
and has been as steep as  the May - Aug. decline in the weekly leading suggested it
would be. New order rates are wanly positive, not negative, and if the new uptrend in
the weekly leading indicators holds up, should improve before long.

The Global monthly leading index has yet to turn negative but it does show a marked
slowdown of growth since Apr. of this year. as the effects of fiscal stimulus programs
wind down. The loss of momentum in global growth underlies the recent development
of trade tensions as nations seek to shield domestic output from exports. These tensions
are "normal" in the wake of deep global recession and will require continuing
attention from G-20 and maturity from national leaders.

My profits indicators were strong in Jul. and Aug. but did show some evident
moderation in Sep. And so it may be that Q4 '10 profits may come along more modestly
as well.

The Economic Power Index has been improving steadily since the end of 2009.
However, at +1% yr / yr,  it is still too low to support more than low growth in
the current economic environment of reduced private sector credit demand. The
The real wage rate component of the index is still positive but has slowed sharply
from late 2009, as slack in the labor market keeps wage progress slow. The main
positive has been the steady improvement in civilian employment growth, which
registered the first positive yr / yr comparison in Sep. since early 2008. The total
index looks a little better if longer work week hours and overtime are added in.

There remains very sizable capital slack in the system. The rate of capacity
utilization is still below levels seen at the bottom of most recessions and total
employment is still dramatically below the prior cycle peak despite the addition
of 1.6 million jobs off the low point. Finally, the $ level of short term private
sector credit demand remains well below the prior peak and continues to
validate nominal short rates.

If you scroll down the DJ-BTMU link to the longer term chart, you can see that
although the US economy has made a partial "V" shaped recovery, it remains  a
long ways below the 2007 high of this index.

Wednesday, October 06, 2010

Stock Market -- Technical

The rally since the end of Aug. remains intact. However, it is clearly overbought in
the short run. My 6 week breadth flame indicator is a +87. A reading of +100 suggests
a strong short term overbought, with a + 50 to indicate a mild overbought. My buying
pressure index has advanced strongly in this rally to a new cyclical high as has the
NYSE adv. /dec. line -- good signs. My intermediate term 40 week oscillator has
turned up and its smoothed moving ave. has been rising for several weeks -- another
good sign. As the chart link shows, the 13 week m/a is closing in on a rising 40 week
m/a -- I like that too. Chart.

The chart also indicates a rather mild and volatile uptrend off the early Jul. and end
of Aug. lows. If this pattern holds, you can have a continuing advance with some steep
downdrafts thrown in. That would not be a happy pattern and may be an unlikely one,
but that is what is shaping up now.

There has been an 85 trading day cycle that has been in effect at least since the middle
of 2007. Of the cycles I look at, this one has been reasonably reliable. The next low
in this cycle is slated for late Oct. Since lead-ins to these lows have been relatively
gradual, the cycle suggests that the market might retreat over the last two weeks of
this month (Remember pay attention to cyclic movements, but never bet the farm on


Tuesday, October 05, 2010

Stock Market Fundamentals

The last detailed post on the fundamentals was Tues. 7/27/10. I concluded then that I
was still positive on the market, but very watchful. The major issues remain strong
private sector caution resulting in household, business and bank cash hoarding along
with private sector credit contraction and a Fed that misread the economy in early
2010 via curtailing monetary liquidity in anticipation of a turn around in private sector
credit demand that has yet to materialize.

Despite the massive simulus programs and initial large easing by the world's major
banks, we have a global economic slowdown which includes the US and a de facto
liquidity freeze in the US financial system. The freeze has left the US economy to
recover primarily via internally generated funds, and this has been hampered by the
ongoing strong private sector caution in evidence.

The Fed has opted to hold off on providing additional monetary liquidity as it has
been awaiting the loosening up of caution and the advent of a more normal credit
cycle to underwrite moderate economic expansion.

My core fundamentals have gone from being tremendously positive over the first
half of 2009 to moderately positive now. Moreover, the trend is moving toward
less positive as we go along. What's more is that there is still the issue of whether
and when the Fed will see fit to  resolve the liquidity freeze and by how grand a
means (As discussed last week, the Fed has in effect put an ace up its sleeve by
trimming the monetary base by 9% or nearly $200 bil. this year).

Since there is no evidence the economy can grow without a measure of financial
liquidity growth, I plan to go fully negative on the stock market by this year's end
if the liquidity freeze extends and is unresolved.

My stock market fundamental coincident indicator -- the weekly cycle pressure
gauge -- has improved modestly since July when the market correction ended. The
strong run in stocks in recent weeks is likely due more to speculation about a
new round of quantitative easing by the Fed later this autumn than the behavoir
of the indicator.

The US has the potential for an extended bull market in stocks but this may well
not happen if folks remain too uptight about the economy and if the Fed does not
"man up" and inject more liquidity if that's needed.

Saturday, October 02, 2010

"Watch What They Do................"

Veteran Fed watchers like the old expression "Watch what They do, not what They say."
Various Fed governors have talked extensively about a new round of quantitative easing.
The new conventional wisdom is that the Fed plans to begin a fresh plan of easing right
after the Nov. elections. But, the Fed has been tightening since Feb. 2010, and continued
to do so through the last reporting date of 9/22. Specifically, the Fed has shrunk the
monetary base by nearly $200 bil. or 9% since Feb. This regrettable and record move
did the recovery no good and damaged the stock market.

Now, if there is a new round of quantitative easing, the first $200 bil. will only bring
the monetary base back to where it was in 2/10 and will not count as easing at all but
will only end the punishing squeeze the Fed applied over much of 2010.

Traders across most US markets are smitten with the prospects for a new round of
fresh monetary liquidity. With trader attention focused on what the Fed could be
planning for early Nov., you might want to keep in my mind that they have tightened
liquidity by a substantial margin as prelude.

Friday, October 01, 2010

Gold Price

A couple of pals of mine talked me into playing the gold market over what was roughly
the 1975-80 time frame. Those were terrific trades, but as I met more gold players, I
found that aside from the momentum players, these were different folks. Let's just say
that if they were earthlings, then I was from Mars. I have never forgotten the range of
differences in world view that existed between the gold guys and myself. There are
such sharp points of departure that I realized that to belong with the goldies, I would
have to occupy alternate worlds. I've always found enough opportunities in my areas of
interest, that I have not attempted to re-enter Goldland. I did think gold made decent
sense as an investment over 2001 - 2005 because it was undervalued. Since then though
things have been getting out of hand. I even did a nice SLV silver trade in early 2009,
but for the most part, other markets have offered fertile enough ground. With that as
prologue, I'll make a couple of observations about the stuff.

I thought gold was a little toppy at $1250 in Jun. of this year, but the upleg has been
maintained and extended. Gold is obviously short term overbought on RSI, but less
so on MACD and against its 200 day m/a. My fundamental macro-directional
indicator has turned up moderately in recent months, but there may be up to $100 oz.
in short term exitement in the price now. My "proprietary" frothometer now has gold
at about a 55% premium compared to the base trend going back to 2001. That is
a big premium and is a warning that gold is now very extended, much as it was in mid-
2008 and in the spring of 2006. I am also still of a mind that the leg up which began
in Feb. of this year is the last one before a much larger correction. So far, that last
observation has proven off-base.

If there are gold players in the audience, then I hope these comments are of interest.

Gold Chart.