Gold & Silver

Lately, the two PMs have been caught up in the risk on vs. risk off trade, with sellers moving in
during the risk off mode to buy Treasuries and the USD. But, both gold and silver have a long
history as cyclical plays as well, with price weakness developing in anticipation of or during
economic downturns. And, trend-wise, we are in a clear economic downturn both in the US
and globally, based on the momentum of a number weekly and monthly indicators. The romance
with gold over the past 10 years has broadened out considerably in terms of rationale, so there
may even be some sellers who think the US economy is doing well enough that quantitative easing
may be off the table. Could be, but the simpler and more time tested explanation is that global
economic momentum is tilted downward and has not hit a bottom yet. Long Term Comex Gold MRCI
No doubt some are also selling gold and silver for gains to offset losses elsewhere.

Gold is in a well established shorter run downtrend and is oversold on a short term basis. By my way
of treating all volatile commodities, gold would become moderately oversold at a discount of 10%
to its 200 day m/a and more deeply oversold at a 20% discount. Both metals are at modest discounts
and both have broken cyclical uptrend lines. First step now is to see what kind of bounce comes in
gold right ahead. Next step is to see if it can maintain support at $1500 over the next several weeks.
$Gold and $Silver

More On The Long Treasury Bond

You might want to read this in connection with the 12/23/11 post.

I want to discuss a little further how overbought the long guy is and how confident you have to be
of a sluggish US economy next year, one which is coupled with rapidly decelerating inflation.
Here is a link to the Long Treasury yield: $TYX

Historically, when the long Treasury yield is 20% or more below where it was in the preceding
year (52 weeks), it has not been a rewarding time to have a long position in the bond, as on a price
basis, it has moved to a deep overbought. The bond is now trading at a yield well under that of the
prior year as the chart shows, so historical evidence says caution.

The chart also shows a constant line at 3%. Let that represent 3% inflation, which is not a bad
assumption for the average over the very long term. Well, if you are an investor, you at least
want to buy the bond at a yield well above that 3% level. The chart shows the slightest of premiums
to the 3% inflation constant currently, and as you can see, you have been able to buy the bond
way cheaper often even in the low inflation environment of recent years.

Here is a link to the long T bond price (CBOE) MRCI Treas. It shows one of the great bond
bull markets in history, with the long T price advancing as US growth decelerated and inflation
fell away over the period. Note too, the risks in the near term of buying the price spikes and
not waiting for the bond to settle back down in the range.

I have traded the bond both long and short for many years. Price and yield love mean reversion
with the 200 day or 40 week m/a a good working target. To make money on the long side
from current levels the US needs to have a poor year of real economic performance. Although
I have my doubts about how well the US will do next year, the Bond is headed into it at
very extended levels.

My guess is the over the next 10 odd years, 12 month inflation will hit or exceed 3% often
enough that however low the yield might go in the next recession, it will eventually work its
way up to 6%, with the long T price eventually eroding to 100.

Stock Market -- Weekly

The action is mildy positive, volatile and only slightly encouraging.

Fundamentals
The weekly cyclical fundamental directional indicator is in the slightest of uptrends and this
barely positive movement is being carried entirely by the sharp decline in unemployment
insurance claims underway since mid-Sep. The weak diffusion evident in this indicator is not
a confidence builder by any means. A stronger, broader advance in the indicator is needed to
support a sustainable uptrend in the market.

Although I do not count Federal Reserve bank credit (FBC) in this indicator, I need to mention that
the stock market has been tracking the substantial short term volatility in the credit balance
since Sep.  The FBC was down in Sep., up in Oct., down big in Nov. and up strongly so far this
month. Some of the recent surge in FBC could reflect spillover from the Fed's large dollar swap
program for the EU. More likely the Fed positioned itself to flood the US system with liquidity
for the holiday season, a step They have taken many times. But, since the FBC balance is now
running high relative to Its post QE 2 plan, It is likely that They will pull liquidity from the
system in Jan., a move that traders may not like early next year. Focus on the weekly open
market operations of the Fed may annoy some readers, but you need to keep it in mind if traders
are paying attention to it ( data released on Thursdays).

Technical
I read the weekly chart as showing a mild but volatile uptrend which is nearly fully confirmed
but is not robust. It's tepid, instead. $SPX At a minimum, the market needs to briskly take out
Oct. resistance at 1285. Then we need to see the 6 and 13 week m/a's break above the 40.
Failure of the SPX to take out the 1285 level will bring on the shorts, and perhaps, do so in
droves.

I have also added a link to the SPX and its 200 day price oscillator. The oscillator shows the
same weakly positive but volatile action. A move up through the 1.02 mean would be a nice
plus here. SPX & 200 Day Osc.

Long Treasury Bond

Fundamentals
Trend directional change was signaled over Mar. / Apr. 2011 in favor of a rising bond price and a  
falling yield. The key, as usual, was an interim peaking of industrial commodities prices as well as
the momentum of industrial production. The deterioration of pricing / production momentum is
ending here in the short term, but industrial commodities prices have yet to reverse to the upside,
leaving the T-bond directional indicator in neutral.

The long "T" is yielding around 3% which is inside of the 12 month inflation rate of 3.4%. Thus, the
bond is forecasting further sluggish economic activity and a marked deceleration of inflation. Basically,
a bullish case for the bond in 2012 rests on the assumption of development of an economic recession
in the US coupled with a deflation prone trend to the CPI.

The bond's price is exceptionally vulnerable to even a mild uptrend of industrial commodities prices
which can be a seasonal event evident in winter if there is a modicum of growth in the global
economy. Such occurs when inventories are built as annual production schedules are set.

Technical
The bond price hit a powerful overbought over Sept. of this year on EU financial crisis fears. It
then tumbled but whipsawed back up again when hopes faded in late Oct. that the EU would settle its
crisis. The bond has weakened some recently, but is still overbought relative to the 40 wk. m/a.
$USB  Watch it carefully relative to industrial commodities composites such as the DB industrial
metals ETF (top panel).

If you are yield rather than price oriented, check out the ^TNX The chart shows that it has been
unwise to be long the bond when yield is at a steep discount to the 200 day m/a.

Sentiment
Trader advisories are just below excessive bullish levels (MarketVane & Consensus Inc.).

US Economy --2012

It is difficult to sketch a formidable case for real economic growth next year. Corporate profits
have been strong, but the broader measures of real average hourly earnings and real disposable
income have trended down to recession levels. Real DPI With weak real income numbers in
place, you need to make some extra assumptions to see sustained growth in real output. Business
policy on wages has been predatory, as the rate of current $ wage growth measured yr/yr has been
slashed from 3.9% in early 2009 down to 1.6% for Nov. 11. There has been enough inflation
over the past year to put the real wage down to -1.8%. You know, I do not think the US is going
to regain prosperity handing out 1-2% wage increases unless employment growth is very strong,
which as we all know, has certainly not been the case in the current recovery.

This critical weakness in the economy -- low wage growth + low employment growth -- was masked
to some extent in 2011 by a 2% payroll tax reduction. This tax cut is widely expected to be extended
in 2012, but, it will not be incremental on a yr/yr basis, so the real wage pretax will be of
paramount importance. The pressure on the real wage is expected to moderate in 2012, as inflation
seems set to decelerate further. If jobs growth continues and inflation moderates, the case for
growth will strengthen. If the real wage remains under pressure well into 2012, as now seems
the case, then consumers will have to boost credit usage and draw further on savings to keep the
economy above water. So far, households have been tapping savings but have been reluctant
to increase financial leverage. One partial offset to a weak labor market will be a significant
boost in social security payout for 2012.

As I see it now, generating another year of real economic growth will be a "squeaker" without
a much firmer labor market and a continued thawing of the private sector credit markets. This
is especially the case given that export sales -- the strongest US market -- may be set to slow
materially further in a global economy turned sluggish.

Three decent leading indicators for the economy -- industrial metals prices, the long T-bond
yield % and the index of cyclical stocks -- have all come off higher levels set earlier in the
year. Recently there has been some basing in all three -- indicating some re-ignition of hope
for 2012 among investors and traders. These are useful daily measures of sentiment about
prospects for the economy. Triple Play Chart

Corporate Profits Indicators

Viewed shorter run, my profits indicators suggest a bit of caution for the first time since the
economic recovery began in 2009. The top line or sales growth proxy has flattened short term
along with a deterioration in the number of companies reporting stronger operations and new
order rates. In turn, the indicators which suggest the direction of profit margins have also shown
some loss of momentum. Profit margins expanded through most of this year reflecting a strong
performance in my pricing power vs. cost measure. The key here was a large increase in profit
per employee as companies kept hiring and wage costs low relative to an acceleration of pricing
power. My broad measure of pricing power is now decelerating relative to costs and this will
likely continue into next year. On the plus side, the typical loss of momentum in physical volume
that follows the initial recovery surge has leveled off for the time being at a moderate rate of growth.

The trickiest component among the indicators is real volume growth which can re-accelerate in
a recovery and by so doing indicate that the economic expansion may have a longer life. One
marker you can use here is the yr/yr % change of industrial production during an expansion
period. When it drops below 3%, that is a heads up. Through Nov., the yr/yr change stands at 3.7%,
compared to nearly 6% earlier in the year.

Viewed longer term, the trends of top line growth momentum and my longer term leading indicators
suggest that profits could make a cyclical peak in the final quarter of 2012, but long experience
says take this observation with a grain of salt.

Broadly, there is sufficient capital slack in terms of excess capacity and labor and a low cost
of capital to power this expansion for another 2-3 years easily. But this capacity will not likely
be realized without an improvement in employment and real wage growth and without stronger
private sector credit growth. Moreover, reflect as well on US export sales which are up 70%
since 2005 and 42% since the recent recovery began. Export sales is the growth leader for
the US among major economic sectors. Export sales have just leveled off in the short run in a
slowing global economy and sluggish performance, if it continues will impair earnings growth.

SP 500 net per share was close to $84 in 2010, and should be somewhere around $96 this
year -- a new record and nearly 15% ahead of 2010. Net per share was far stronger this year
than I had expected on the strength of better $ employee productivity. That will be hard to
replicate next year and I look for more sudued profit margin and a more modest 7% increase
to nearly $103 for eps. The consensus for net per share in 2012 is now around $107 per
Thomson Reuters.

Regular readers will recall that I believe that business' current practices of low hiring and
chintzy 1-2% wage gains, while it boosts eps and exec bonuses, cheats shareholders because
it reduces economic growth visibility and investor willingness to capitalize earnings at higher
rates.

Stock Market

Looking back toward Oct. the stock market staged significant "fake out" rallies leading up to the
EU summits of Nov. 4 and Dec. 9. The summits failed to satisfy investors that the EU was set to
handle the crisis up to investor / trader expectations and the rallies have fizzled. So, the market
is headed south again although the downtrend is not yet fully confirmed while US shares are only
mildly oversold. The stock market is in risk off mode as the US dollar continues to trend up
and the Euro continues to trend down.

You will need to be careful here through the end of the year, as traders are breathing fire to have a
year's-end "Santa Claus" rally. This means that if the spinners in the EU up and say some market
friendly things, the USD will drop and the SPX will lift off and up, if only for a short while.
The Street itself may join the game of happy talk about the EU just to help stoke the fire. In this
hair trigger environment, such could happen especially since the Euro area bond traders are
about set to close the books for the year, leaving the huge tests for 2012.

My strategy here is only to play deep oversolds and overboughts. Thus, the SPX, which closed
out today at 1212, would not make it onto my radar until the roughly 1160 area, unless something
clear out of the blue happens.

$SPX

Gold

I have done very well shorting the gold price over the past year, but even I have avoided the kind
of whipsaw action seen latley. Gold for the short run has become a high beta "risk on / risk off"
play. The sharp recent weakness reflects the development of a risk off trade which favors the USD
and Treasuries at the expense of the pantheon of risk on assets such as PMs, stocks, commodities
and the Euro. AS the GLD chart shows, gold is sharply oversold in the short run, and has just broken
below the 200 day m/a. The bulls and bugz are at the point of forsaking gold, something they have not done since the latter part of 2008. Gold has arrived at a key juncture and needs a sudden swing toward
risk on to give the bulls a shot. GLD

To reach a deep intermediate term oversold, GLD needs to trade below 140.

US Trade

Monthly US trade data is reported with a six week lag, so it is not timely for the markets except
as confirmation of expectations. Moreover, because the data can be volatile, it must be used with
care. US trade has been very strong during the economic recovery. Imports, reflecting weaker
hydrocarbon and industrial commodites prices since the spring have been flat at around $225 bil.
per month since Mar. / Apr. of this year. Exports have trended higher since then, although short
term momentum has been slowing. Importantly, strong uptrend lines for both imports and exports
in place since the spring of 2009 have been broken in mild fashion with the release of Oct. data.
This confirms the warning of a slowdown in the weekly leading indicators and the PMI data in
evidence since early in the year when powerful momentum peaked, and may be a warning of
further loss in momentum to come.

I plan to post later this week  on my profits indicators, and the newly reported softness in US
exports will be an issue for the first time during the current economic recovery. Since the early
part of 2009, US export sales have risen by a robust 50% with this strength having contributed
meaningfully to corporate profits.

Stock Market -- Short Term

Fundamentals
The weekly cyclical directional indicator has been running flat since 10/21/11 following a fairly
sharp downtrend which started the week of 4/15/11. The SPX is up 1.4% since 10/21, and is down
about 8% since its 4/29 cyclical high. The tracking of the SPX to the indicator has not been bad at
at all. The major declining element within the indicator has been the composite of industrial
commodities prices. Note that sensitive materials prices have started to edge up. Going forward,
it might be wise to watch not just sensitive materials prices but new claims for unemployment
insurance as well. The positive mix is rising prices / falling claims. The more purely coincident
indicator within the broader weekly directional has been relatively steady for 2011 and signals
modest broad economic growth.

My core fundamental indicators suggest a continuing "easy money" bull market, but have not been
reliable since mid - 2010 as investors have been far more sensitive to the shorter term direction
of the weekly cyclical diectional indicator which, in turn, has been considerably more volatile
than the broad economy as well as my profits indicators. Among the core indicators, credit
quality yield spreads have worked the best. The heightened sensitivity to credit quality along
with the evident downtrend of the p/e ratio also suggest continuing investor caution about the
future in line with strong player focus on weekly economic and financial data.

Technical
The market has entered another short term uptrend which started in late Nov. The trajectory of
the advance is a little daunting, but the SPX is not yet overbought. To be convincing as more than
a quick pop, the SPX (now 1255) must cruise up to take out resistance points from 1270 through
1285. $SPX Check out the descending tops since the spring and you will see why it is critical
for the market to start attacking resistance soon.

I like to watch the trend of price momentum relative to the 200 day m/a. Development of an
uptrend here is a good sign for longer term direction. SPX & Momentum A positive but as yet
unconvincing bias is developing here as well.

I would be personally more interested in the market if the short term swings in price momentum
were to settle down some from recent levels (Check out the 12 day ROC% in the SPX chart
above). I do not need this much exitement at my tender age.
-----------------------------------------------------------------------------------------------------------
The stock market was in cyclical bull cruise control mode until the spring of last year when
sudden but temporary weakness in the weekly economic data shattered the cruise control and
forced taders as well as investors to focus on very short term economic direction and momentum.
A repeat of same this year coupled with uncertainty about the future of the Eurozone has forced
noses down to the short run grindstone and has greatly reduced confidence regarding the visibility
of the future. the data provide no respite for this anxious mentality just yet.

Eurozone Baby Steps Along

The EU summit took additional steps to manage the financial crisis within the EZ and about as
expected (see below). Communication between Germany and the ECB continues to stink, however.
It looks like Draghi got hung out to dry on his views about using the ECB to step up on the
purchases of weak sovereign credits, and he has suffered a loss of credibility in the markets on that
subject thanks to Berlin.

Bond players want the lender of last resort option for the ECB, especially with more than $1 tril.
of sovereign and euro bank refinancing ahead over the first half of 2012. Scant evidence now that
players are going to get their wish. This leaves open the possibility of further turbulence in the
EZ sovereign debt and capital markets, especially since a business downturn in Europe is going
to suppress incomes and profits which in turn, will adversely affect the tax revenues garnered by
individual countries. So, uncertainty overhang surrounding the EZ will be only partly alleviated
as we swing into 2012.

Russia Stock Market

The ride has grown bumpy with gaps on the charts in recent days as allegations fly that the recent
election was rigged and as surveys show a sharp decline in PM Putin's popularity as he maneuvers
to run for the Presidency for the third time next year after securing the United Russia party
nomination recently (The UR party is also down in the polls). Following the global trend, Russia's
economy has also slowed to 4-5% annual real growth, and is running below Putin's forecasts.
Voters are also unhappy that a sharp economic recovery until recently has not led to much stronger
value to benefit ratios in pension funds (persistent underfunding). Citizen protests are the strongest
they have been for years and although there is little talk of political destabilization, stock players
need to be more careful than usual in the short run with this high beta market. At $29, the RSX is
priced for only $80 bl. oil, so the market is at a large discount to recent price positioning given that
oil is up around $100. RSX is a high risk  / high reward play on a favorable resolution of the
EU crisis. RSX

I like to follow the Russian market in connection with the SPX, the oil price and industrial metals
prices.

Eurozone: So, What's It Going To Be?

My view since I started looking more earnestly at the EZ problems was that it would take well over
$1 tril. of hard capital to stabilize the situation and give the broad EU a shot at survival in its
current configuration. Early this week we heard of a prospective new treaty deal which would
incorporate a new fiscal policy monitoring mechanism with substantive enforcement powers (Merkel
and her close allies). Now there are stories circulating of an additional large fund to compliment the
current ESFS, which, when both are at full strength, would total around $1.25 tril. An additional
kicker could come from an ECB infusion to the IMF ( Sarkozy and the rest of 'em).

Well, the ECB is expected to cut its rate tomorrow and then we have the big summit when the top
poobahs are to gather Dec. 8-9 to hash out the deal. The new fiscal authority looks primarily like
a way to chase countries out of the EZ as it might make a range of leaders lose their tempers. But,
if there is substance to the idea of a new and much enlarged $ stabilization authority, the summit
might not be another bust. After all, any bureaucrat worth his salt will find ways to finagle and
finesse a new fiscal directorate, even one with Germany's shadow imprimatur.

For a little more background, see the 10/18 post: EU -- How Big The Jitters? (I still think G-20
and China in particular should have done more to help out.)

IEV and $SPX chart

Stocks: And Now, The Turbo Moonshot

Not just up, but UP at an 86 degree angle. My money stays in cash until we see more stability in the market. As a retired dude who has had a decent year, I do not need to play 12 day price
 momentum swings of +10 to -10%. Plus 5 / minus 5 is fine by me. On my hard copy chart, the
SPX actually failed to take out the downtrend line in place since mid-Jul. -- a mechanical sell signal.

The Asian markets could light up tonight and that could carry the SPX higher tomorrow morning,
so I would not put my last dollar down on the sell signal. At any rate, since up beats down in the
market, I'll complain no further. $SPX chart

Scroll south for background on today's pop.

Central Banks: All Hands On Deck

Last week's post (11/22) on global economic supply and demand provides a reasonably good
backdrop for today's coordinated easing actions by the world's major central banks (Scroll down
for the post).

Dropping rates on currency swap arrangements frees up US dollars especially to provide liquidity
support for the global financial system and particularly for the EU, which has been experiencing
not just large deposit outflows but basic money outflows as well. When S&P downgraded ratings
for 15 major banks yesterday, the CB chiefs likely decided they had to act pronto. It may well be
that even major US banks were starting to run into funding problems, but I cannot tell for sure, as
the Fed was letting some of it own balance sheet run off in recent weeks.

China also put through a mild reduction on bank reserve requirements today. This may underscore
the urgency of the actions to ease liquidity, as it did appear China was hoping to get more
confirmation that local inflation had begun to decelerate before easing policy.

As alluded to above, the Fed may be heading up the liquidity injection action as demand for
dollars has been strong through the global system recently.

The actions today reflect a long standing thesis on this blog, namely that when the credit side of
the broad money supply starts contracting, currency liquidity has to be provided to prevent a
liquidity squeeze and to ameliorate a developing credit squeeze. We see both now in Europe,
particularly in its southern tier.

However, the provision of a large flow of dollars to the EU especially is at best a credible
stopgap measure and is testimony to the danger the EU has passed into now that its financial
system is being disintermediated. There is an old saying about Italy's economy: "Situation
critical but not serious". Well, to riff off of that, I think it is fair to say that the EU's economy
is not just in critical condition but that the situation is getting serious as well. Officialdom in
the EU has to cut out the bullshit and take the hard and costly measures to save it, or be prepared
to let the markets take it apart. Time is growing very short.

Stock Market -- Short Term

Yesterday, my charts showed a strongly oversold market on some measures. Moreover, the tape
had bullish implications -- strong "Black Friday" sales, a prospective IMF plan to provide low cost
credit to Italy and Spain, and a flurry of EU activity to tackle the worsening crisis. There is a large
PIIGS + Belgium debt calendar this week, so it figured the EU would try to help its sovereign credit
markets. But, I decided to let it all go, because the markets lack stability in general, and the last two
rallies in the stock market show descending tops. Moreover, the oversold was not quite deep or robust enough given the unstable market conditions. $SPX chart

So, if a rally is underway, I'll have to join up with it at a later date. My fundamental view leads me
in a similar direction. One of the essentials to sound fundamental investing and trading is to keep the
approach as simple and direct as possible. My basic approach has not worked as satisfactorily as
it should in recent months, so it is time to rethink it.

Euro Stocks -- Nearing Cyclical Bear

I have long preferred to trade US stocks over Euro equities, but it is worth noting the position of
the latter now. The EU is experiencing developing economic weakness, including even Germany.
The substantial turmoil in the EU surrounding the viability of sovereign risk credits of its weaker
members could be temporarily suppressing growth, but it should be noted how close EU stocks are coming to development of a cyclical bear market which would imply that investors are looking for a more serious economic downturn. Note the chart of the Euro 350 iShares Composite: IEV

The market is approaching a deep oversold, but a sharp break below the 30 level would signify
a cyclical bear market is underway. A major test is likely for EU stocks in the weeks ahead, especially
now that Angela Merkel has again rebuffed liberalization of the ECB mandate and a move toward
the Eurobond. EU stocks rallied sharply in Oct. on the premise that the EU was set to come to grips
with its financial stresses. The discussions at G-20 in Cannes in early Nov. were ultimately viewed
as unsubstantive and investors are again losing confidence.

Global Economic Supply & Demand ***

Global industrial production hit a cyclical peak in Aug. but declined by 0.4% in Sept. as both
Europe and Japan swung markedly negative. After rising rapidly from mid-2009, through Feb.
2011, production growth has been modest in 2011. Measured yr/yr, growth has slowed from an
unsustainable 12% in late 2010, down to just 5% through Sept., and is showing a significant loss
of momentum on a trend basis. With the slowing of production growth this year, a move up to an
overheated economy late next year has been averted. Global capacity utilization has eased mildly,
and sensitive materials prices have fallen a sharp 17.5% as producers have throttled back on
building materials stocks. The sharp downturn in output underway in Europe, if it continues, will
lead to the development of more slack on a global basis ahead, and will serve to remove more
pressure on inflation composites.

With fiscal stimulus programs started in late 2008 and running into 2010 now past, and with
monetary tightening in evidence through 2010 and into 2011, the global growth profile is
changing rapidly with production growth on trend to zero out or worse yr/yr by the end of 2012.
The emerging negative profile for growth suggests a significant moderation of inflation, but the
risks of coordinated fiscal and monetary policy tightening are becoming more evident, as global
purchasing manager economic activity surveys show a rapid moderation in order rates. As well,
the rebound in global trade -- a major bright spot in the economic recovery both globally and
for the US -- is flattening out and is losing positive momentum rapidly.

I can see room in the UK, EU, US and in China to ease monetary policy jointly in 2012. The
outlook for fiscal policy initiatives is dim now, so policy assist, if it develops, will be milder
and less direct. G-20 let its Nov. conclave in Cannes go by without coming to grips with a
derteriorating global economic situation, but central bankers, perhaps of necessity, are more
attentive.

The EU presents a special and possibly critical situation through 2012. Major EU banks are
too highly leveraged at 20 and 30:1. They are only now reserving for shaky PIIGS sovereign
credit. They are selling loans to meet new primary capital ratios and are experiencing withdrawals
of jumbo deposits as MMFs pull money to avoid having to "break the buck" on fund asset values.
In short, the banks are relying more heavily on the ECB for liquidity and are poorly positioned
to provide incremental credit throughout the EU, eastern Europe and Asia. So a major source
of trade credit could well be sidelined in 2012, with no heirs apparent ready to step in quickly.

Experience tells me not to be far reaching in stressing the negative just yet. This is an integrated
global economy now and is coming off the worst global downturn since the early 1930s. The
abilities of finance ministers and central bankers were successfully tested in 2009, and the
new challenges ahead could still bring a positive, coordinated response, although it is not in
evidence yet. But, time is running short to review undoing some of the policy tightening put
in place over 2010 through the present.

There is one more tough issue ahead, and that is the oil price. It is very "sticky" given the
evolving economic environment, and what's more, a new round of monetary accomodation
could set off a speculative price run up which might  backfire on the global economy down
the road.
-----------------------------------------------------------------------------------------------------------
*** For partial global supply/ demand data and for trade, see here.

 

Stock Market Weekly

Technical
The market rallied powerfully -- nearly 20% -- over most of the course of Oct. As readers know,
I was lucky to call that bottom, and as I mentioned in an 11/8 post, I thought the $SPX would have
to take out the late Oct. high of 1285 "to keep the believers believing". Well, the latter event did
not occur, and the short term downturn now underway shows that the number of believers are
declining. I am glad I did some good guessing, but the action since early Oct. has been grotesque.
First, a 20% move up for the market in a month followed by a slower but steady fade with no
follow through off the initial impulse wave. The weekly chart is still positive but it is fading. $SPX
This is wrenching turbulence for a strongly disciplined trader like me. It is not fear or greed that is
bothersome, it is vexation at such sloppy, volatile action.

I think the market is at the point on the weekly chart where we need to see positive action very soon or
watch the SPX complete either a partial or full whipsaw of a genuinely strong lift off of the early
Oct. low since the overbought condition has been largely wrung out. I am content to let the
smarter folks handle it.

Fundamental
My weekly cyclical fundamental indicator turned down Apr. 8 of this year and hit a low point
on Oct 21. Since then, it has been drifting a little bit higher, paced by a fresh decline in new
claims for unemployment insurance and some stronger weekly retail sales and production data.
The powerful move up for the SPX in Oct. was very much out of line with the action of the
fundamental indicator. However, the downtrend of the indicator may have pretty much ended.
The big weak spot for this indicator this year has been the large decline of industrial commodities
prices since early Apr. with this composite having fallen a full 17.5% on slower global output
growth and expectations of further weakness ahead. The trends in the stock market and sensitive
materials prices have matched up decently well over the past 10 years or so. So, it may be
important to stocks to see industrial commodities do better ahead. for a recent comparison of
the two markets, try here.

Stock Market -- Liquidity

Money Market Fund liquidity has been drawn down to around $2.5 tril currently compared to the
peak reserve levels of $3.6 tril. in the spring of 2009, near the cyclical bottom in the stock market.
The aggregate MMF balance now is also below Half 2 '2007 levels when the stock market made
all time highs. Funds can be drawn lower, but it is unwise to think there is much "sideline cash"
sloshing around. Moreover, Since the growth of aggregate business sales has been far more rapid
then the advance in my broad measure of credit driven liquidity during the economic recovery, there
has been full absorbtion of systemic liquidity (excluding MMFs) by the real economy over the past
two years. The systemic drain on liquidity by business has intensified in recent months because the
banks, perhaps fearing an economic slowdown, have let large deposit and commercial paper
balances run off.

For now, one has to look more closely at inter-market transfers of funds to support the stock market.
Thus, a bull run in stocks, should one occur, might be more reliant on proceeds from the sale of
of fixed income securities running from two year maturities on out. Since you have to head out to
10 year T-notes to pick up a 2% current return, and since the SP 500 yields about 2.2%, there would
be little "give up" of income for players choosing stocks. However, it is important to realize that
a bull move in stocks could materially penalize the fixed income portion of many portfolios as
funds migrate to stocks.

5 Year T-note Yield

Eurobombed

Volatility has picked up in the markets again and stability is fading. I am 100% in cash now and
unless matters settle down some, plan to stay that way until I find cases where market sectors
are so badly mis-priced that a trade may be appropriate. Frankly, the volatility and the consequent
lack of continuity in the riskier portions of the financial and capital markets are proving to be
wearying and a bit dangerous as well since established techniques of trading and investing remain
workable but are subject to disruption even to disclosures from the EU which do not really
constitute news of consequence but are reiterations and rehashings of ponts investors and traders
already thought were discounted in the markets.

I'll keep the posts coming, but I am on the sidelines for now.

Oil Price -- Cashed Out

Sold out my oil above a $100. Bought it well and see the profit as a gift from the gods. No
big macro message here, just a desire on my part to capitalize on an unusual contra-seasonal
run up in the price. Oil stays on my ok to trade list. For more, scroll down to the 11/6 post
on oil. NYMEX Crude

Stock Market -- Fundamentals

Core Fundamentals
The key fundamentals all turned positive at the end of 2008. That indicates an "easy money" bull
was set to begin -- easy because of a strongly supportive monetary policy, and easy because of a
very positive return for risk profile. These indicators posit that the easy money bull ends when all
turn negative and not until then. In recent months, the indicator set has been running around 50%
positive and 50% negative.

But the core indicators, unlike any other period since the end of WW2, have not shielded investors
from steep corrections in both 2010 and this year. This new vulnerability reflects both the very
slow recovery of private sector credit and a continuing weak labor market despite a surge in
corporate profits as business has pushed very hard for profit margin gain via rigorous control of
payrolls, including both new hires and wage costs. Without normal private sector credit creation
and with a weak picture for household incomes, investors have been trimming the market's p/e
ratio despite the sizable gains in business productivity and profit margins.

SP 500 Market Tracker
Based on strong earnings growth and a moderate inflation level, the Tracker posits a p/e of 16.5x.
With SP 500 net per share now running at a $100 annual rate the SP 500 should be trading at 1650
as opposed to the current level of only 1252. The discount of 24.2% to Tracker value is highly
unusual and reflects investor concern that the US economic expansion is not secure and could be
vulnerable to recession and the resumption of deflation pressure. Players know that an economy
with such a slight recovery in private sector credit could suffer a relapse without strong growth 
of monetary liquidity. The US has experienced a large bulk up of monetary liquidity, but investor
confidence has wained each time the Fed stopped adding such liquidity since it began its quantity
easing programs in late 2008. Investors also worry that robust profits bought in no small measure
through a weak labor market are suspect under such conditions. It is also very important to note
that weakness in the weekly leading economic indicators have developed each time after the Fed has gone on record that it was paring a program of quantitative easing. Finally, the Eurozone could well
have entered an economic downturn which would affect SP 500 profits directly and through knock
on effects.

The Here And Now
There is adequate monetary liquidity in the system to fund further economic expansion and
the credit markets continue their thaw. However, if the labor market does not firm up appreciably
as the months wear on, the sustainabiltiy of economic progression will become increasingly
suspect. and the market's p/e ratio is likely to erode further even if earnings progress. For now
then, there is not much to do but keep an eye on the economic indicators.

The market's deep discount to the SP 500 Tracker suggests powerful upside provided the
economy yields a stronger labor market and more confidence and willingness to use credit by
choice follows.

There are several other fundamental issues to tackle in subsequent posts this week.

Eurozone / Deadzone

Well, G 20 came and went in early Nov. at Cannes. The new package from the Euro leaders put
no more hard money on the table. Instead, they passed the hat, and yup, no new hard money was
put on the table. Merkel raised the issue of a more compact Euro, and Berlusconi and the Italian
bond market were thrown under the bus shortly thereafter. There is a new top guy in Greece and
Italy's senate passed an austerity measure, helping to pave the way for Berlusconi's departure and
probable new technocratic leadership. So, operating on the cheap, Euro authorities have wrought
tough change on recalcitrants Greece and Italy. Perhaps tough measures like these were needed to
push the PIIGs constellation in the right direction, but the EU desperately needs to grow and here
is where the longer term focus must be.

Today, there are rumors that the ECB, which has held back on new, large bond purchases, may
be ready to buy an oversold Italian bond market in a big way to signal that Italy may have finally
stepped on the "right" course. All interesting stuff if you are trading Euro sovereigns or day
trading stocks and commodities.

The EU does seem headed into an economic downturn and you have to be careful here, as the
EU banks are dumping the weaker sovereign credits and are putting sizable portions of their
loan book up for sale to comply with new capital requirements. Private sector credit flows
within the EU will suffer as will flows to eastern Europe and even to Asia. Private sector
credit crunches tend to make economic downturns far worse, and in the case of the EU, a
diminished tax revenue take off of weaker profits and earnings, will negatively affect sovereign
budgets. So, multiple austerity measures seem poised to cast a a larger and darker shadow on
EU area profits.

By year end 2011, SP500 net per share should be running at around a $100 per share. Earlier
estimates for 2012 called for progress to $115 per share, but analysts are receiving more negative
guidance now, and the projections are working their way down to $105.

Cyclical Stocks Relative Strength

I derive the relative strength of the cyclicals via dividing the MS cyclical index ($CYC) by the
$SPX. Chart. The cyclicals have lost relative strength throughout most of 2011 to date as investors
steadily lost confidence in the outlook for US and global economic growth momentum. They have
been following downtrends in various boom / bust indicators and have waived off the very strong
showing in corporate top line growth through the end of Q 3 '11. The interesting thing about the
strength of corporate sales this year has been the recovery of pricing power which has kept top
line momentum brisk even as real volume growth has moderated. The improved pricing power
has led to a significant further improvement in profit margins not only among cyclicals but the
broader corporate universe as well. Investors, wary of indicators which point to slower real
growth momentum, have been unimpressed with better pricing power on the premise that a loss
of real output growth momentum would lead to more timid pricing as companies moved to regain
market share. In fact, the chart suggests that investors were on the verge of throwing in the towel
on the cyclicals until just recently when coincident economic data showed some improvement.

In my view, a sharp break below the .68 relative strength support level seen on the chart would
strongly suggest players had abandoned the idea of meaningful economic expansion for 2012.
One very vexing factor is that the various boom / bust indicators I use to gauge the outlook for
profits accelerated up before the recession actually ended, and did so long before top line
sales growth really took off. This may reflect the fact that the US at least was coming out of
a period of price deflation and that pricing power was quite slow to kick in.

Looking toward 2012, it will be important not just to monitor real growth but inflation as well.
In this latter regard, my inflation pressure gauges have been pointing down, suggesting companies
may find a tougher pricing environment as well. This could affect the outlook for the more basic
or "rotgut" cyclicals.

Stock Market -- Short Term Technical

The market remains in a confirmed short term uptrend. As expected, there was a quick correction
within the rally after the early Oct. moonshot lift off. The current trajectory is strong -- a good
sign -- and not so strong that it cannot be maintained for another couple of weeks. The market is
overbought in the short run and it would be normal for it to retrench mildly again unless this rally
is a strong impulse up that is heralding a new and sustainable advance. If the latter be so, then
price momentum can remain buoyant for a little while longer. Obviously, the $SPX will need to
take out the 10/28 rally-to-date peak of 1285 over the next week or two if it is to keep the believers
believing. $SPX

I plan to take a look at my longer term weekly chart over this weekend and post accordingly.

I have to confess I have been relying on the technicals more strongly than I normally do because
the fundamentals have been much harder to handle in the short run. More on this issue ahead.

Oil Price

I exited long positions in the oil sector earlier in the year at $110 bl. In an Aug. 7 post, I put oil
back on my long side trades list, hoping to get back into oil between $70 -80. Yeah, well there
were a couple of evening NYMEX session prints at $70, but I caught it pretty well. In fact, the
oil price has recovered far better than I had hoped, and another exit may be due soon with oil up
toward $94.50 (Oil price chart).

Oil is getting moderately overbought short term, but I am also concerned that it is having a very
unseasonably strong run, since the price of oil historically has weakened over the final 10 weeks
of the fourth quarter as gasoline demand slips and as heating oil production has been ramped up.
The Saudis may want to reduce production to end the Libyan oil shortfall "patch" as Libya slowly
returns to its lifeblood industry in the wake of the revolution. Lots of angles here, but I am least
comfortable with the power of the run up in the oil price when it should be falling on seasonally
weak demand in a global economy that is running rather slow.

Back In Business, Finally

The Oct. 29 pre-halloween blizzard hit our area hard. We did get our power back on Tues., but
no internet or TV until overnight last night. We laid the chainsaws down yesterday and carted off
the heavy debris, but there is a good day's worth of clean up left around the property. So, I will
start posting regularly tomorrow, Nov. 6 and tend to the final part of the clean up today. Thousands
are still without power in our general area, where the overnight temp has been dropping to 27 deg. F.
and internal temps for those without heat are in the low 40s. You can get chapped lips just sitting
around the house. Be back tomorrow.

A Measure Of Risk On vs. Risk Off

Looking back over the past several years, it appears that when investors start to get nervous about
stocks, there is a rotation into the long Treasury. SPY vs. $USB. This has been an easy rotation
trade since 2007, although it has hardly worked so well over the long term. But, since it has been
working like a charm in recent years, it is well worth watching now. It reflects confidence in
the economy (a rising SPY) as against the prospect of recession / price deflation ( an up $USB).

We are now in a risk on mode, and if you look at the relationship MACD in the bottom panel, you
can see this pro-stock impulse could carry further until the relationship starts to get wobbly. In fact,
the evidence suggests that if you're a stocks player and the long Treas. starts to rise in price, you
should double check your assumptions. Best, you should look in on this chart pretty often if
equities are your game. For now, the same might be said about the long Treas., as an advancing
economy holds the promise of upticks of inflation.

If you scroll down to the early Oct. posts, you will see I argued that the stock market was deeply
oversold and that the Treas. was heavily overbought. Both reversed trend in short order, although
I would argue the bond is still overbought and vulnerable short term. But, with the volatility in
the markets, do not happily assume the bond can only go down for a while from here. Have fun.

Occupy Wall Street (OWS)

This is basically a rather small protest movement. But it has received a wide and sympathetic
hearing. The protesters are burrowing in on inequities in the US economic and political system
with the prime emphasis on the unequal distribution of economic rewards and the current deeply
plutocratic drift of US politics and political influence. The main themes revolve around the
issue of fairness in economic reward and politics. As a rule, battles for fairness in US society
are long and arduous affairs. The movement has been correct not to lay out a specific agenda but
to create an atmosphere where individual Americans can reflect on the general idea of
maldistribution in the economy and top heavy political influence and draw individual conclusions.

The danger for any protest movement in the US  is that it can be hijacked by the more fervent and
radical elements and wind up being marginalized in short order. This is particularly true for the political
Left which invariably comes acropper of established authority and the general public because it
tends to veer toward centralized authority and toward challenging long cherished rights to
private property and enterprise. Best OWS does not head in that direction, but remains a forum
that abides by the law. Stick with the promotion of equality of opportunity folks. So far so good.

Stock Market -- Daily Chart

Back on 10/3 (below) I mentioned that the market was deeply oversold and that a shorter run
bottom was close at hand. The closing low came on 10/5 at SPX 1131. Today the SPX closed
at 1238. That's a nice 9.5% move up on a lucky call (Lucky beats smart). The SPX is now at a
5.2% premium to the 25 day m/a. That is the strongest price momentum short term overbought
since early Aug. 2009. The good news is that strong momentum overboughts of this magnitude
are far more common with bull runs rather than bear. The bad news is that the SPX is still
significantly overbought in the short term so that a degree of consolidation / retrenchment could
be in order fairly soon.

The market has entered what is called a broadening top formation -- higher closing highs, lower
closing lows. This has a number of technicians nervous because formations of this sort can end
badly with a new low or even a major breakdown. I am not a big "formations" guy because I
have seen so many of them busted over the years, but it is there and you should know about it
and you should also know that there are bears out there who rely on formations like this but
do not tell you so because such elucidation can be regarded as flaky. (The formation started in
early Aug.)

$SPX

Shanghai Stocks -- Living Down The Past

My view for this year is that the Shanghai would rally over Half 2 '11 and sustain an advance well
into next year.The problem this year has been money and credit tightening to cool a very sharp
acceleration of inflation. Business profits have advanced, but the p/e ratio has declined sharply
as higher inflation forces up return hurdle rates.

The central bank (PBOC) has been running a tighter money policy for nearly 18 months, with China
M-2 now down to +12.5% yr/yr. Assuming level money velocity, we should expect 9.5% real GDP
growth with a 3.0% inflation rate. But strong credit growth has pushed up velocity, and pressure to
curtail the overheat has resulted in +9.1% real GDP yr/yr  but inflation of 6.0%. Now although it
could be that inflation has just crested, the downward trajectory of the growth of money and credit
could carry real GDP growth lower too, even as inflation pressures subside.

Compared to the past 5-6 years, M-2 money growth is the lowest it has been which may add
downside risk to the real economy and profits. China has also allowed large 10-12% wage gains
this year. This firmly increases consumer purchasing power, but the wage hikes could constrain
profit margins ahead and slow down the inflation deceleration process.

Since the current downward trajectory of money and credit gowth if extended well into 2012
could damage China's economy and its real estate development markets in particular, It makes
sense to conclude the PBOC is probably closing in on starting to ease monetary policy. This has
been a troubling period for the PBOC, because unofficial or black market lending has turned
out to be larger and more vigorous than they thought (So they say). China businessmen, rather
than leave money in the bank at low deposit rates can, if they are careful, lend out excess cash on
the black or "stir fry" market at far higher rates. The tougher lenders can dishonor the families
of slow payers and use muscle as necessary to collect. At the same time, smaller businesses
are driven toward this market as more rationing of credit by the big banks freezes them out.
The PBOC would be wise not to sit on the brakes for too long, as bringing small business
borrowers back into the official fold would be more advantageous economically.

The Shanghai market closed 10/20 at critical support of 2331. It is an oversold market, but a
sustainable advance may await signals and confirmation that the central bank is prepared to
abandon monetary tightening.

I have been surprised by the weakness of the Shanghai this year, and my projection of a positive
second half turn is running out of time. Shanghai ($SSEC)

EU -- How Big The Jitters?

I have long believed that the development of a Euoropean Union was worth a tremendous effort.
I have long been aware that Milton Friedman argued strongly that simple monetary union could
be fatally flawed in very stressful economic and financial times without a powerful fiscal union
as a bedrock. My experience with humanity has taught me not hold politicians to a high standard
as the political ego is vulnerable to an array of outsized venalities. So, I have not been troubled
by the struggles within the EU to try and manage their financial problems without pushing the
reduction of sovereignty envelope too far. My hope is that sovereignty can be kept as strong
and vivid as possible even as the EU confronts its difficulties.

The US stock market has suffered a strong erosion of the p/e ratio over the past 18 months, an
erosion that has taken the multiple well below the fair value level of 16.5x suitable for an
economy with moderate inflation and nicely rising earnings. Because I think that the multiple
contraction primarily reflects the erosion of investor confidence in the self sustainability of
economic recovery, I have not tried to hang any of the blame on the EU's financial problems.

But now that major EU bank deposits have been subject to periodic run off as market players
worry over bank soundness owing to PIGS sovereign debt exposure, and further, knowing that
this game can become an emotional and contagious issue, I think it now falls to the EU to
protect its financial system from further damage without delay.

In looking at the situation and on the reasonable assumption that the EU cannot immediately
indemnify all the suspect sovereign credit, the issue turns on a reasoned guess of how much
extra backing may be required to assuage worried, prickly credit markets. At this point, it
appears that additional large provision of tier 1 equity capital or a reasonable facsimile of
same for the union's banks may also be required.

Given the limitations of inter-country politics, I am hopeful the EU can muster another $1 tril.
of funding and that the non - EU members of the IMF can pony up several hundred $bil. to
be augmented by a large infusion of capital from China, with the latter to benefit handily from
a stable Europe going forward.

So, I am eager to see what the EU and G-20 can pull together over the next two odd weeks to
keep the trains running on time. I do not know what it will take in $ to settle the foreign credit
markets and I do not know whether the EU will double down on its commitments, but the
situation has deteriorated to a point where larger, major segments of the financial and
capital markets could be seriously jostled if the EU with assistance from the IMF and G-20
do not produce a workable salvage plan.

Stock Market -- Weekly

Technical -- Weekly Chart
The daily SPX chart indicates a short term overbought, and the easiest thing to do would be to
flag it in a post and move on. But, the weekly chart has been more telling this year, and it is pointing
to a possible positive reversal as downtrend measures of price momentum are close to positive
reversal. Check out the trend positions of RSI, ADX +DI and 12/26 wk MACD on the chart. Note
as well that my 40 wk price oscillator has, however fitfully, also turned up. Now the market
reserves the right to whipsaw and trap the bulls here, but to me, the weekly chart implies that
players should pay extra close attention to how the next week or two play out as the market is in
its most challenging position in several months.

Short Run Fundamentals
My weekly cyclical fundamental indicator does remain in a downtrend that started in early Apr. It
rallied modestly over the month of Jul. but resumed its downtrend in early Aug. It is now running
flat since mid-Sep., and this counts as another development worthy of attention.

Conclusion
I continue to lean in the direction of the view that the sharp sell off in the market since the end of
Jul. represents a steep correction in a cyclical bull market rather than the advent of a new bear
market. But I think it is a close call and I am reluctant to throw in the towel on it because I still
see a way the economy can right itself provided the real wage and the employment situation
can build on the improvement evidenced in Sept. and the private sector credit market continues
to thaw out. But, it is getting wearying and I am beginning to wonder whether I am just being
stubborn. It remains fair to say that the burden of proof remains with the bulls.

A Note On Retail Sales

Sept. retail sales advanced a strong 1.1% for the month. This was a good number, but it was not
quite as strong as it would appear since hurricane Irene so slammed the US east coast in late Aug.
that important back-to-school shopping was shifted over into Sept. Even so, when you factor in
Aug., the average monthly change was a respectable +0.55% or 6.6% annualized. More so ok
because gasoline and fuels prices have been coming down over this period, thus strengthening
the inflation adjusted number. The series can be volatile but remains in a firm uptrend going
back to the end of 2008. Interestingly, both employment and the depressed real wage did show
some improvement in Sept. as well.

Retail sales tend to get wobbly and form a plateau at the outset of a recession period. The case
for this development has not been made yet.

Stock Market -- Short Term Technical

The stock market remains basically unstable. It is trading in a deep staccato pattern where active
traders often find themselves extemporizing as they go along to stay profitably in the game. The SPX
has rallied as expected from a deep oversold position (Scroll down to 10/3 post for more on that),
and closed trading today at a 3.3% premium to the 25 day m/a. Since Aug., traders have been using
+2-3% readings on the 25 day oscillator to begin selling down positions. In fact, there was some
profit taking late today as the market touched rough short term resistance. In this kind of exceedingly
choppy market, it is sometimes worthwhile to watch the standard momentum measure stochastic
indicator to spot quick changes of direction. $SPX Chart  You can see on the chart that when fast
(black) breaks slow (red), direction has changed.

For long side players who are not day or swing trading, it might be best to see the market take out resistance at 1220 and look for pullbacks thereafter which take the trend of the advance down from
moonshot moves to a more sensible trajectory. That would indicate that stability was returning
to the market. There is no such evidence now and it is flat easy to get whipsawed.

Economic Indicators / Analysis

The weekly leading indicator sets remain in downtrends in force since last spring. The indicators
have been sound on inflection points in the economy, bur given their high volatility, they have not
been of much use when it comes to economic activity momentum. The monthly leading indicators
I follow show a downtrend in economic momentum, but do not yet suggest a recession is
developing. The monthly indicators have overstated the case for a broad economic recovery,
and this reflects the continuation of weak construction and labor markets.

I use monthly retail sales as something of a "halfway house" between the leading and coincident
indicators. Retail spending had shaky periods in both mid 2010 and mid 2011, but monthly data
remain in a firm uptrend so far.

The weekly coincident indicator I use has been flat since Apr. this year. The monthly data set
shows a deceleration of recovery momentum to low positive levels reflecting a moderation
of the rebounds in sales and production coupled with a continued weak labor market. The sharp
acceleration of inflation experienced over Half 1 2011 seriously undercut consumer purchasing
power and confidence.

With commodities prices having fallen sharply, particularly the important fuels sector, inflation
is set to moderate. This break is much needed to rescue the real wage which has fallen off over
the course of 2011. My economic power index is comprised of the yr /yr % changes in the real
wage and civilian employment. The current reading is a weak -1.0%. That is actually a decent improvement from Aug., but is very likely too low to sustain an economic recovery.
Without faster progress of employment and an improvement in the real wage, the economy is
set to languish as we enter 2012. For comparison purposes, a healthy power index is +4.0%.
We have not seen that for the US in nearly 5 years. 

Long Treasury -- Wildly Overbought

The 30 yr. Treas is trading in yield down close to the previous record low levels seen during
the deep recession period of late 2008. The shorter term fundamentals -- falling industrial
commodities prices and declining production growth momentum along with dips in other
cyclical pressure gauge measures -- have supported the downtrend. The long Treas. has priced in
a thorough going recession. With the Fed's new "operation twist", there is also a firm bid under
this market as the Fed swaps out of maturing short term securities into longer dated maturities.

I link to the 30 year yield along with industrial metals prices here. Whenever the $TYX trades
at a steep discount to its 200 day m/a as it is now, you have to be very careful. the same thing
applies to when the $TYX is trading well under the comparable prior year level as it is now. 
These are signals of a profoundly overbought market, when the yield can jump 100 - 150 basis
points in short order on a couple months worth of stronger economic data or the announcement
of easier fiscal or monetary policy (or better news from the EU on handling high risk sovereign
credits).

Relative to the experience of 2008, the long bond, on the current spike down in yields, is
trading way ahead of the weakening economic fundamentals it anticipates and leaves holders at
great risk if the bet fails and the economy does better. Viewed long term, this is a super volatile
market as you have fast money hedgies parking money here or leveraging shorts in low quality bonds.

Bull sentiment among advisors is also running at high levels and sentiment contrarians should
note that.

The market is unstable now and to counteract that lack of stability, I will probably wait for the
$TYX to rise and hold a bit above the 25 day m/a before shorting it (Check chart link again).

Stock Market Registering Deep Oversold

The TRIN indicator measures downside vs. upside in terms of volume and breadth. A rising
TRIN shows the bears have the upper hand. I like to watch the 21 and 55 day TRIN readings to
determine how oversold the market may be. Through today, the NYSE TRIN 21 and 55 day m/a
readings are showing a heavily oversold market. Markets can of course get more oversold, but
this TRIN measure, when viewed historically, has reached levels consistent with a market that
may be close to a short term bottom. $TRIN

Stock Market -- Weekly

Technical
The weekly chart shows a shorter term basing period for the SPX. However, the intermediate term trend factors still point down, so there is no sign here yet that the market is headed into positive reversal.
The OEX 100 put / call ratio is a "real money down" sentiment indicator. This indicator has been
showing consistent net put buying on a weekly basis since last XMAS, and during this cyclical bull
market has tended to drop into a net call buying postion several weeks before a sustainable market
bottom. We have yet to see this reversal. So, the weekly chart, which can turn reasonably rapidly,
remains negative for now. My experience here is not to go long with anything but very small $ until
there is some positive stirring. $SPXhttp://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=3&mn=0&dy=0&id=p52454672129

Fundamental
In early Aug., my weekly fundamental cyclical indicator resumed a downtrend started around the market high in  late Apr. This indicator does contain forward looking measures such  as industrial commodities prices and unemployment insurance claims, so it is forshadowing a weaker economy.     The heavily coincident part of this weekly indicator does not yet show any signs of a downturn in the economy, although positive momentum has leveled off since the spring of this year. It is interesting
to note that the coincident factors like retail sales and production components have not tipped over
yet despite weakness in the more forward looking factors. In fact the coincident factors are overdue
to correct.

For more on the fundamentals, have another look at the Sep. 14 post.

Commodities Market

The CRB commodities composite has been in an elegant downtrend since the end of Apr. 2011.
As most all know, evidence has been gathering since earlier in the year that the global economic
expansion was losing positive momentum. This has been the case although global production
was likely at or near an all time peak through Aug.

The commodities composites are not always captive to the same indicators for touchstones. Now,
commodities have been subject to the downtrends in place for the leading indicators and new
diffusion indices for the purchasing managers activity composites. It is momentum that has players
interested.

There is growing sentiment that the weakness in commodities has been strong enough -- the CRB
is nearly 18% off its cyclical peak -- that recession periods must be at hand for major economies.
Could be, but remember that financial players are heavy into into these markets now through
various ETF and ETN vehicles and this adds volatility to the already volatile commodities
markets.

The significant fall in the commodities composites is leading to a fairly rapid decline in my
primary inflation pressure gauge, a development needed to reduce stress on real wages in
any number of economies. This development will allow central banks more leeway in
considering policy accomodation steps.

Clearly though, this is a risky way to engage monetary policy as commodities price weakness
does suggest growing economic slack in the global basics delivery system and monetary
policymakers will have to act in a supremely timely fashion if, for example, the CRB does
continue to glide lower. But such "soft landing" feats have have been accomplished before
(viz. 1995 and 1999).

The CRB is trading right above cyclical trend support at 300 and super long term trend support
at about 280, so further sharp downside action would be an ominous sign. At 306, the index
is substantially oversold and failure to have a bounce up of consequence soon would also be
a serious matter.

CRB chart.

US Economy -- Key Longer Term Indicator Turns Shaky

First, before I get to the main subject of this post, let me say that the bulk of my longer lead time
indicators remain strongly positive. These would include critical financial measures such as
monetary liquidity, interest rates and the yield curve. Not only that, but the economy is nowhere
near effective capacity while a key lagging indicator -- my short term credit supply / demand
pressure gauge --  is now just rising to an equilibrium level after several years in the doldrums.

But I am worried about one critical mainstay indicator -- the trends of real hourly earnings and of
real take home pay. Measured yr/yr, the CPI has accelerated over much of 2011while wage growth,
low to begin with, has decelerated. So, even factoring in the payroll tax cut, the real wage has zeroed
out and is trending lower yr/yr. Business has not only not adjusted wages for sharper inflation, it
has been handing out progressively smaller wage increases. I had hoped business would be more
generous as inflation picked up. They may still come to the rescue, but the real wage has reached a
point where without substantial rapid improvement, an economic downturn is likely to develope
either late this year or in 2012.

A downturn is not a lead pipe cinch since a number of factors can intervene. Inflation pressure,
which has been driven by now down trending commodities prices, could fall away rapidly (The
Fed's hope). This could lead to an improvement in confidence and perhaps even faster hiring.
As well, consumers could simply grimly expand borrowing and draw on savings to finance
more of their spending -- things they have done in the past.

But, the burden of proof has now swung from bears on the economy over to the bulls. Moreover,
I think it may well be tough to see a substantially stronger stock market without the deterioration
of the real wage being arrested. Now, note here as well, that there could be subsequent fiscal or
monetary easing tactics which might lead investors to foresee better times for the real wage
down the road. But, here too, I think, the burden of proof is now on the market bull.

The Cannes Festival -- Deux

The stock market did rally over the past couple of days on stories the EU had a very large
bailout plan in the works to encompass Greece and its attendant weak sisters. This evening
Germany's finance chief Herr Schauble pissed all over the general idea and pointedly insulted
the White House for entertaining "stupid" notions about how the EU should proceed. Now
both sides have thrown down the gauntlet and without rapid repair, US - Germany relations
will tank further than they already have. The indirect attacks on Geithner may disturb the markets
in the days ahead as equities players liked the idea of a grand scheme of some sort re: the EU.

Since there are many sites and blogs out there which relish international politics, I am going
to leave this fertile new source of conflict to them to ponder and return to more basic economics
and finance.

The Cannes Festival

No, not the film fete, but plenty of drama and some comedy anyway as G20 sets the 11/4 meeting
in Cannes as a deadline for confronting the EU's sovereign debt crisis, a problem severe enough
to lead to bank funding problems in the Eurozone. Already the Fed has had to commit to a large
pool of dollars on loan to the EU area to provide funding liquidity. Moreover, the US dollar
has recently rallied strongly, an event the US does not wish to see sustained. Economists, fund
managers and leading gov. officials are peppering the press with jeremiads to the need for the
EU to step up and make its intentions and plans known pronto. There are rumors and stories
that US Treas. Sec. Geithner is forcefully urging the EU to act quickly and comprehensively on
this matter and that some sort of large scale bail out plan is in the works. To underscore non-EU
concern, the IMF's chief LaGarde is saying large fund infusions may be needed if the IMF must
address solvency problems beyond Greece. This would mean the US, the UK et al would have to
pony up more $.

First step this week is to determine fact from fancy. The interesting issue here is that Geithner
is leaning hard on the EU with generalities but out in full view....

Gold & Silver

Gold
Back on Aug.21, I again mentioned that I have been enjoying shorting the gold price when it
falters. I did so again over the past month via the DZZ ETN and covered today after DZZ opened
on a nice gap. DZZ chart. This was good, nicely profitable fun, but the gold price is so
ridiculously elevated and the long side players so intensely devoted to it that it is not really at
a point where my skills, as limited as they are, are very useful. I can think of good reasons why
gold would be in a bull market, but its price is absurdly high to me. $800 an oz. I can fathom and
tie to concrete economic realities. But, to me, the metal is beyond the pale at current price levels.
If I do short it again, I will use DZZ but only if gold appears to have entered a genuine bear
market. My cumulative return on my shorts since late 2010 was +52.4%.

Silver
Silver has this colorful history in the US, replete mostly with scoundrels but with a few saints
thrown in. When the silver price hijackers are quiescent, it can be an interesting investment.
When I wrote about it in early Apr. this year, the boyz were levitating it toward $50. But
those who know silver's history also know it is one of America's great crash dummies. Now
it is at $30. oz. Technically it is oversold, but like gold, is trading well above sensible
measures of economic value. Because silver is in a strong corrective phase already, I
might consider shorting it on occasions when the time looks right and stay away from the
gold. $Silver.

Gold Price -- A rescue From The Bugz Is Needed

Gold broke $1750 oz. short term support today. The RSI (chart link below) is trending down
rapidly and is now around 60. The bugz have come to the rescue during this bull leg since late
2008 primarily around 50 RSI. The next sensible strong base of support is down around the
spring 2011 break out level of about $1540. The market remains moderately overbought
at 13.8% above the 40 wk m/a. The bugz will have to wave off the recent double top and the
Fed's pass on more QE along with the continued procrastination on the next tranche of the
Greek bailout package. It is stunning the market is still overbought in the intermediate term.
But let's watch to see if a rescue is on tap over the next several odd trading sessions.

Gold Chart.

Monetary Policy & The Economy

At today's FOMC meet, the Fed maintained the ZIRP on Fed Funds, talked more negatively about
the economy and opted to swap out of $400 bil. short term Treasuries into longs. It will also stop
shrinking its asset backed securities holdings by reinvesting proceeds there instead of Treasuries.
No quantitative easing is involved.

The Fed decided some months back not to continue QE for the forseeable future because They
regarded the final months of QE 2 as involving an unfavorable tradeoff between rising output and
inflation. The primary driver of inflation over the past year was higher commodities prices and
especially rising petroleum sector prices. The global economic expansion has cooled considerably
recently with the result that the commodities composites have softened materially in price. Even so,
the Fed has elected to take a pass on further QE for now.

I believe the economy and confidence has improved substantially as a result of the QE programs.
Stepping away from QE does increase the risk for the economy since the private sector credit
markets are thawing very slowly, and there may not be the rising tide of liquidity to support
continued economic recovery without more QE. However, since a portion of the run up in
petrol sector prices earlier this year was likely attributable to QE 2, and, since that surge was
big enough to crimp the real wage, one can understand Fed reluctance to plow along with
another program quickly.

The foregoing shows how easy it is to gild the economic lilly on this issue. Suffice it to say that
the real economy would be best served by a fast and nervous sell off of commodities that
wrings out the speculators and which gives the economy and the Fed some breathing room.

Over the 1932 - 45 period, the Fed increased the monetary base by between 4-5 fold. there was
war time inflation and black marketeering, but the CPI did not hyperinflate. The recent economic
downturn was not at all as deep as the Great Depression, but the Fed's response has been
very aggressive. For what it is worth, Fed QE has been running awfully strong, and, it is
possible the Fed would like to hold the program in reserve for as long as it deems feasible, so
that it retains QE fire power for the future should the economy falter significantly.

Profits Indicators

As the economic recovery has proceeded, quarterly profits progression hit its first inflection
point in mid 2010, following a spectacular initial rebound. Since then quarterly profits have
progressed at a powerful 15% annual rate as stronger top line growth and continuing tight
cost controls have held sway. My profits indicators through Aug. this year now suggest a
moderation of volume growth is underway but that increased pricing power has been making
up some of the momentum lost from smaller volume growth. In fact, the pricing has been
"sticky" despite the loss of volume growth momentum. Now, there is a significant differential
which has opened between the pricing of primary processors such as the oil companies
and that of intermediary goods and services providers such as food processors and a number of
manufacturers. So, the advance in pricing power means earnings fillips for early stage guys
and higher costs for most other companies. Thus, there may be some erosion to the aggregate
profit margin ahead, as more companies struggle to pass on higher costs. The banking sector
looks set to show another sizable gain in operating earnings as the loan reserve has dropped
a large $46 bil. or 17% from year ago levels.

On balance, the indicators suggest that earnings progression continues fairly strong in the
near term although the % of companies showing strong comparison reports may start to
tail off. Also, when pricing power becomes a stronger factor to earnings as it is now, the
p/e multiple for the entire market can often contract in view of the higher inflation.

Stock Market -- Technical Quickie

Short term, the market is edging further into uptrend mode. It is at a critical juncture now. The
SPX is trading around 2.3% above the 25 day m/a. This is about where the bears have hit it in
recent weeks. As you'll see on the chart in a moment, there is overhead resistance in the 1200 -
1225 area, so the market will need to trade through this to gain credibility. Should the market
be on firmer footing, it can easily trade up to the 1245 area from today's close of 1209, and do
so in relatively short order.

The chart also marks the next logical resistance point up at the 1260 pivot line. But first will
come the test in the current strong resistance zone. Support remains down at 1120 - 1125.

$SPX

Stock Market Valuation

The momentum of earnings recovery has eased substantially from a torrid pace but is still solidly
on track. Inflation pressures are moderating. With this immediate backdrop, the SP500 should
be trading for about 16.5x estimated 12 mos. net per share through Sept. or roughly 1550.

With global economic recovery two years along, further earnings progress is now far more
dependent on top line growth than profit margin expansion. Global leading economic indicators
peaked in positive momentum in Feb. this year. The global measures are still positive, but are
far more subdued going into Sept., which portends a sharp deceleration of economic growth
particularly for manufacturing and production. US indicators are in synch with the global trend.

Since the Spring of 2010, when leading indicators suggested a slowing of growth, the stock
market has been more sensitive to leading measures than to coincident measures. This focus
has lead to a substantial contraction of the SP500 p/e ratio, as strong earnings performance
has been offset by a growing sense of investor pessimism about the future. Specifically,
the p/e of 17.7x seen in early 2010 has eroded to 12.5x today. Moreover, the p/e ratio is
not just hit or miss the fair value level of 16.5x, but is trending down to reflect an increase
of investor guardedness about the future.

Now, earnings progress for the SP500 has outpaced that suggested by the leading indicators.
To add to the issue, earnings progression has been far smoother than the leading indicators,
which have been rather volatile. These developments  plus a trend of increasing investor
pessimism make it difficult to say with confidence where the market should be trading today
and even tougher to say where it should be a year out.

The market is very reasonably priced when viewed in longer term perspective, and it has
sizable upside on improvement in shorter term fundamentals. However, experience in this
economic recovery shows clearly that the shorter term leading economic indicators and,
perhaps, the Fed have to be at your back. With an important Fed meeting ahead and the EU
wrestling to save their union now foundering around a prospective Greek default, be careful
to give the market a few weeks to sort this out in your thinking.

Stock Market -- Fundamentals

Primary Indicators
When I look at the fundamentals that have been the most critical to the current cyclical bull market,
I would have to say the situation is more reminiscent of the post - 1932 Great Depression era than
at any time after WW2. As in the 1930s, the US economy and the stock market were starved for
liquidity, and the Federal Reserve was the primary provider. Thus, the Fed's liquidity activities
as captured by Fed bank credit and the monetary base, were the primary drivers of economic and
stock market recovery as was confidence in the financial system and the economy.

SP 500 profits have rebounded handsomely in a modest economic recovery. Liquidity provided the
raw material for the recovery, and the transmission to higher stock prices has occurred only during
periods when investors knew the Fed was expanding liquidity or was about to. Importantly, a
key measure of confidence -- credit quality spreads -- has exhibited the same behavoir relative
to Fed liquidity as the the stock market has.

Financial system liquidity is showing some improvement excluding the direct effects of Fed
policy, but it has been far too modest to encourage investors. As well, rock bottom short term
interest rates have not been sufficient to cushion the stock markets from steep corrections both
last year and this in the absence of quantitative easing by the Fed. In fact, the full constellation
of core fundamental indicators which underwrote every post WW2 bull market have not
provided a rising market with the stability normally observed.

For now then, quantitative easing or the lack thereof, as well as confidence factors such as
quality spreads, continue to carry the day as far as the stock market is concerned.

Other Important Measures
I watch the trend of the oil price carefully in looking at the stock market. I do not think a rising
oil price bothered stock players very much until it shot up from $85 bl. to $115 earlier this
year when the Libyan insurrection began. It has retraced much of the spike in recent months
and I would rate it as a neutral factor now.

Looking more widely, I keep a weekly cyclical fundamental directional measure. This broad
gauge measure has a forward looking bearing and it has been in a moderate downtrend since
early Apr. of this year. Specifically, it has fallen 11% since then while the market is off about
14.5% from its highs seen earlier in the year. Most of the damage to the weekly fundamental
indicator was done over the early Apr. - mid May interval. Over the past 15 months, the
correlation of the weekly indicator with it weekly SP500 counterpart has been 0.6. It is
also interesting that the strongest positive moves in the fundamental indicator match up well
with the bouts of QE in evidence over the past 2+ years.

Total US business sales and the dollar cost of production have both risen more rapidly than has
the broad measure of financial system liquidity since the economic recovery began. Thus in
effect, the capital markets have been reliant upon the draw down of liquid reserves in the form
of money market funds. Here, the draw down has been $1.1 tril. or 32% from historic high
levels seen in mid 2009, and the current level now stands below readings seen at the prior
market top in 2007. A tidy sum of fire power has already been deployed.

Stock Market Technical -- Daily Chart

The SPX is in short term advance mode, with a third rally attempt to build off the short term base
of a triple low of 1124 set during Aug. If it can rally up to and a bit through the 1225 level without
being clipped sharply by the bears, the rally could have some staying power. $SPX

The rally is currently lacking the kind of confirmation I would like to see. Specifically, I would
prefer that the 25 day m/a also turn up over the next 4-5 trading days, and that any extension of the
rally remain above the 25 day m/a as it progresses.

I issue these cautionary preferences because the market remains unstable as it rises or falls in
dramatic fashion relative to the news of the day. Experience also shows that it is unusual to
have rallies with good staying power so soon after the kind of strong downward move in price
level we saw over late Jul. / Aug. From a purely technical perspective, the major reason to be
suspicious the rally might fail is that it is an against-the-house bet at this point in time. Even so,
as Mrs. Loman said of husband Willy, "attention must be paid".

Stock Market Technical -- Weekly Chart

This post takes an intermediate term view of the market. Market internals turned down in early
Apr. of this year when price momentum relative to the 40 wk (200 day) m/a turned convincingly
downward following a large run up in relative standing that left the market overbought. Chart
Notice the downtrend in the price oscillator has remained intact. I will not be getting a positive
read on this indicator until there is a stronger northward move in the oscillator. I will take short
term long positions in the market during a downtrend of this sort, but reserve much larger $ longs
for those periods when intermediate term momentum is on the rise.

There are other indications of internal weakness that show up on the following SPX chart. $SPX
Note here the downtrends underway in RSI, MACD, and ADX +DI. Risk remains in the market
until these trends bottom and show some positive action.

Now the hard truth is that if the cyclical bull market remains intact, These intermediate term
signals can remain suppressed for up to another 2-3 months. That would hardly be an unusual
development.

Let me also venture beyond traditional technical analysis to discuss the trajectory of the market.
The cyclical bull in place since 3/'09 has been the most powerful one since the 1995 -2000 and
1948 - 52 runs. But, unlike those periods, this market has been more volatile, having experienced
strong price corrections in 2010 as well as this year. So, I would not be very surprised or upset
if the SPX traded down to 1050 over the next month or two given the outsized trajectory it
maintained from 3/'09 through 7/'11. I think if the current correction can be contained at 1050,
we still can talk about a cyclical bull market. I have dredged all of this up because there should by
all rights be another decent upleg to this market, and I am not prepared just yet to abandon that
idea.

As a closing note, be advised that I am not projecting a further decline in the SPX to the 1050
level in the months ahead. I have just marked 1050 as a "fail safe" point below which much
darker doings could await.

Investor Worry Near Flashpoint

I like to watch the relative strength of the cyclicals to glean investor expectations regarding the
future behavoir of the economy. I have linked to the relative strength of cyclical stocks ($CYC)
compared to the SPX here.

The cyclicals were the market leaders until February, 2011. The group has weakened appreciably
since late July and a further drop in relative strength below that .685 level could signify market
players may have thrown in the towel on continued economic recovery in the US.