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 !!!

Monday, February 28, 2011

Stock Market -- Technical

For me, the daily chart for the SP 500 involves pure guesswork as to market direction in the
short run. Since guesswork is not my forte, I am passing making short term projections at this
time. I am still intrigued by the idea of a run down to SPX 1250 or thereabouts over the next
couple of weeks and I would be more strongly inclined to argue that case save for a rare
"down and back" around trendline which the SPX just executed ( a break below trendline and
a quick jump back above). Sometimes a "D'nB" is the base for a continuation of the uptrend, and
sometimes it is the prelude to a whipsaw. This fancy move in the SPX has not been confirmed
by the smaller cap. composites. ($SPX daily).

The weekly SP 500 chart remains trend positive but is also still overbought. ($SPX weekly).


Friday, February 25, 2011

Oil Price

I  turned positive on the oil price in the spring 2010 at $70 and followed it up by highlighting the
positive turn in relative strength for the energy stocks on 10/5 and 12/2/10. (There was a technical
case to go long oil per se before the spring of 2010, but I wanted to wait for an extended period
beyond the late 2008 cyclical low to see if the bust in the price would extend as it has often done
after very large price declines.)

The recent surge in the price of oil to $97+ bl. has brought it up to a level where it may be difficult
to sustain the price without a tight supply / demand situation that has some staying power. The Saudis
are saying that they can supplant the shut in of Libyan crude production which has come with the
hostilities there. This declaration has soothed the market in recent days, but if the Saudis do need
to push up production by 1.5 mil. bd to "cover" the shut in of Libyan crude, at least some oil
traders will stay very nervous. Yes, global carry stocks are high comparatively, but crude could
get scarcer at the margin if another OPEC mid-east producer of consequence runs into production
constraints because of the spread of political unrest. My point here is that there is $10-15 bl
vulnerability off current levels if a negative case does not play out and especially if Libya can
begin to right itself production-wise over the next couple of months. I would also suggest that if
there is additional turmoil surrounding production problems beyond the Libyan shut down, there
could be a rather dramatic political response from consuming countries who do not want to see
a bunch of NYC and London oil traders run the global economy into the ground by grandly kiting
the price of crude to lofty levels again. Do not kill the golden goose, boyz.

The oil price is moderately overbought on a near term basis and is extended relative to recent trend.
Given the volatility inherent in the price of oil, it would be silly to not  indicate that WTIC could
jump to $105 -110 bl. on speculation of a further tightening of global crude supply / demand
conditions. From a technical perspective, $110 oil would be a whopper of an overbought near
term. West Texas Crude chart.

Wednesday, February 23, 2011

Stock Market, Oil Price & Libya

Stock Market
By my charts, the SPX has fallen to trend support after breaking below the important 10 and 25
day m/a's. The market is starting to roll over, but it will take several days to get full confirmation.
Since NYMEX oil hit resitance today at $100 after a fast $12 bl. run up over the past five days,
we'll need to watch the pits tomorrow to see whether this panicky upswing in crude can break
out and perhaps lead to a more substantial breakdown of the stock market. $SPX chart.

Oil Price
The oil price has trended steadily higher since touching $70 bl. in May, 2010. It had been
observing a tight trend channel since then. The recent sprint up over the past few days represents
the first little piece of drama we have seen in a while. So, there is a spare capacity uncertainty
premium which has entered the market and the speculative handicapping could carry the oil price
higher in the short run even though there is no tangible evidence yet that global oil output will
be adversely affected by developments to date in N. Africa and Bahrain. Since the boyz are
talking their books, you need to watch the actual action at the wellheads carefully to make sure
you can x-out the magical thinking that is popping up.

Qaddafi is pulling his loyal troops and mercenaries into Tripoli. So long as the rebels block
roads east and west out of town, it is a death trap. What may be needed now is not another
grand rally up in the Green Square but a concerted military strike into Tripoli by the rebels
before Qaddafi can set up defensive perimeters. Since it is hard to say whether the rebels
and troops who have defected over to their side are well enough organized and armed to
lay siege to Qaddafi's HQ, there could be a stand-off ahead. Maybe the residents of Tripoli
can mass enough to chase the bad guys with a minimum of bloodshed, but the situation is
fast turning into a military one. It might not be a bad thing if NATO intelligence got in there
on the ground if they are not there already. There could be a lot of innocent lives at stake
if there are no appropriate limited force strike capabilities at hand.

Monday, February 21, 2011

Middle East And Beyond

There has been fighting in the streets of Tripoli over the past 24 hours. As of now, Qaddafi has
decided not to steal off quietly into the evening. Libya produces 1.8 mil. bd of crude and liquids
a day, and on site foreign producers might have to pull the plug for a while as fighting rages around.
The US crude price jumped over $5 bd today to $91+ as players began to handicap the prospects
for shut in production of significant proportions in Libya. But, concerns are growing regional in
scope as the popular revolt that kicked off in Tunisia has spread rapidly. There is sufficient idle
production capacity to cover even a full shut down of Libyan production, but the oil trading pits,
which have behaved sensibly since the first spike earlier when Egypt began to heat up, are nervous
once again.

We are now witnessing an anti - autocracy phenomenon which is still spreading and which some
fear will strike other countries in the oil rich middle east as well as in Asia. I think it is best to
keep an open mind about further contagion, but avoid letting imagination take hold too strongly.

Libya energy profile.

Friday, February 18, 2011

Stock Market Comments

My weekly fundamental coincident directional indicator remains in an uptrend started in late Aug.
2010. The indicator has lost significant momentum over the past four weeks, but is up 21.3% from
the Aug. low. The SP 500 is up 28% over the same period and has been running ahead of the
indicator over the past month or so. The correlation for the two series is running .63. The Fed
has resumed adding liquidity to the system after a several week lay off, and this has also aided
the market in recent weeks. Core fundamental indicators continue to flash an "easy money" buy
(Caution: The core indicators are not so helpful with shorter term trading).

In a 1/3/11 post on the technicals, I opined that we should see a fast, temporary sell off in the
early going of Jan. followed by a rally up to the 1350 level on the SP 500 between mid Feb. /
mid Mar. (The "500" closed on 1/3 at 1272). Well, there was no sell off of consequence in
Jan., but the market has now trended up close to the 1350 target at 1343 and is within the
the one month time window for a peak and subsequent correction. The market is overbought
on an intermediate term basis and has been for several weeks. However, the SP 500 remains
in a strong uptrend on the weekly chart and there is no clear sign that a top is at hand. My
inclination after such a strong run is to look for trend destruction rather than use the OB / OS
oscillators which are not very helpful in a strongly trending market. For now, I am staying
pat with the Jan. 3 call, which incidentally, also calls for a 7% hit to the SPX following the
interim top. I picked the mid Feb. / mid Mar. period for a peak - then-correction using my
cycle work. So, we'll see how it goes. $SPX weekly chart.

Thursday, February 17, 2011

Cyclical Socks -- Relative Strength

Among broad economic sectors, the cyclicals have provided formidable, favorable relative
performance during this cyclical bull run. As the chart link below will indicate, the momentum
of relative strength has eased as the recovery moves along. This development suggests that
investors are anticipating that the relative strength in earnings performance which the cyclicals
normally enjoy in the early going of an economic upturn will moderate further as the recovery
wears on. It also suggests that investors may be somewhat wary that increased pricing power
by the cyclicals can overcome the anticipated moderation of volume growth. It is important
to remember that as an economic upturn wears on, investors will be watching for pricing
power plays as a source of relative strength in both earnings and market leadership.

The RS index for the cyclicals is currently toppy and might require another breakout to sustain
leadership. All worth watching if your portfolio has a heavy cyclical tilt. $CYC vs. $SPX.

Tuesday, February 15, 2011

Long Treasury Bond

Back in late Jul. / mid Aug. of last year, I argued that the long Treas., then trading in the mid 130s,
was nearly a perfect short, and that there could be a surprisingly steep decline in the bond back
down to important support around 115. The bond was strongly overbought, sentiment was on the
bullish side, and most importantly, previously positive short term fundamentals were just starting
to reverse to the negative side. Since, the bond fell to about 117, an oversold level, and there are
now far more bears than bulls among advisory services. Moreover, the strong positive momentum
in retails sales, production and industrial commodities prices that have sustained the decline in
the bond's price may well decelerate some at some point in the months ahead. The long Treas.
may not be a nearly perfect long at this point, but it is on my radar as a long side trade, especially
if it were to trade down to 115 support and then bounce. I will be paying special attention to the
broad industrial commodities spot price composites. The Journal of Commerce - ECRI index is
up 25.5% since mid Jul. 2010, and could well experience sufficient seasonal weakness during
Q2 '11 to generate a nice interim rally in the bond. (long Treas. price chart).

The long Treas. yield has been constrained in recent years by the Fed's ZIRP on short term rates
and a modest rate of increase in the CPI since a deflationary cyclical low at the end of 2008.
Volatility in the bond yield has primarily reflected the shorter term momentum swings in the
pace of economic recovery, especially industrial production and commodities prices. So far
in the current recovery, the bond's yield has hit resistance up around the 4.80% level ($TYX).

Looking longer term, the bond is flirting with breaking through a multi year downtrend line at
present. However, I would take this development as no more than a very preliminary indication
that the downtrend in the bond yield could finally be ending. The case would get more interesting
if the yield on the long Treas. was to rise from the current 4.60 - 4.80% level up to and finally
through longer term resistance in the 5.20 - 5.50% level. This development would likely
occur on a cyclical tightening of monetary policy including boosts to the Fed Funds %. With
continuing economic recovery, the US could be a lot closer to that point by late 2011 provided
the recovery in private sector credit demand is well underway. We have yet to see that

Saturday, February 12, 2011

Financial System Liquidity

The banking system has backpedaled further as we move through early 2011. Not only is the
system experiencing a continuing run off of its loan book, we are now seeing a run off develop
in the system's securities portfolio as banks back away from extended maturities as interest
rates rise. On the monetary front, the Fed's program to buy Treasuries has recently been the only
game in town. Since folks have been waiting to see the banks expand their loan portfolios, it is
neatly ironic that securities holdings have started to run down as well.

A shrinking system balance sheet naturally reduces banking net revenues. To compensate, banks
are raising service fees whenever and wherever they can, and are also allowing the massive
loan loss reserve to run down in a gradual manner. And, of course, the bigger banks are generating
some profits from trading economically dubious derivatives.

Americans love irony, and the banks have been a continuing source of same. In 2005, any Tom
Dick or Harry could get a loan. Now, a half dozen years later, only Rockefellers need apply.

Friday, February 11, 2011

US Inflation -- Some Additional Thoughts

As most of you know, the US has been in a period of decelerating inflation for over 30 years now.
In fact, the US economy has become increasingly deflation prone reflecting the steep deceleration
of the CPI composite which excludes volatile fuel and food prices.

The deceleration of inflation pressure has unfolded despite occasional bouts of strong money and
credit growth.

My broad measure of money growth to include the major sources of credit funding has been on the
flat side for nearly three years. Money M-2 has increased by 16.6% over this period. But this was
offset by a substantial decline of large or "jumbo" bank deposits and the collapse of the important
commercial paper market. Since the very broad measure of money growth has been contracting
since late 2008, the Fed has been forced to buy $1.5 tril. of securities to maintain liquidity in the
system. The raw material for sustained higher inflation in the future has increased by zilch overall
over the past three years.

It is normal for commodities prices and for the CPI to accelerate up during economic recovery /
expansion periods. The pressures can be intense, but when the expansion period tops out, the
reversal to weakness in commodities prices and deceleration of the broader measures of inflation
can also be strong. Looking out 5-6 years, it takes no stretch of the imagination to envision a
cyclical peak of 5% for the CPI measured yr/yr to be followed by a return to mild price
deflation when the economic cycle heads into another downturn.

For the US, it is true that inflations of consequence start in the commodities pits and especially
so if it is fuels prices that lead the way. Over the past 30 years, the supply / demand profiles for
fuels, industrial commodities and other raw materials have seen a shift away from excess supply
to much greater balance reflecting underinvestment and a broadening of rising demands from
the faster growing emerging economies such as China. Longer term, the potential for higher
inflation in the US has increased on supply / demand grounds. Even so, It takes a series of
economic and policy circumstances playing out over an extended period of time to generate a
sustainable acceleration of peacetime inflation.

There is no shortage of debate on the web over whether inflation or deflation will prevail in
the years ahead. My position is that the marked increase in the tendency toward deflation must
first be arrested, and that if it is, there will be many hurdles to overcome if inflation pressure
is to take hold and sustain in a longer run uptrend in the years ahead.

Tuesday, February 08, 2011

China Downsizes The Monetary Dragon

At the height of Its fiscal / monetary stimulus push in 2009, China's broad money growth (M-2)
reached a staggering 29% measured yr/yr. That dubious milestone nearly co-incided with the
post bubble peak of its stock market.

If we hold money velocity flat, nearly 30% money growth in a 10% real growth economy equates
to inflation potential of nearly 20% per annum. Through successive tightenings of monetary and
credit policies, the Chinese have winnowed the growth of M-2 down to 20% yr/yr through year
end 2010. That still leaves inflation potential of 10%. In practice, as China has re-accelerated its
real growth from the 2008 lull, the velocity of money has declined, with the excess liquidity going
primarily into inflating its real estate market. China is running a CPI of 5%, with many observers
claiming the CPI is underreported and is really more like 7.5%.

I think it is likely China will have to continue to tighten  until its broad money supply declines to
15% yr/yr and inflation potential is brought down to 5% or less. So, at some point, since the
demands of the real economy eclipses money flow into the property and capital markets, China
could well experience price contraction in its property and capital markets, with the bloated
real estate sector the likely big loser. China money growth chart.

China's stock market has basically gone nowhere since the spring of 2009. There has been money
flow rotation into the real estate markets, and the strong earnings generated by corporate China
has been offset by a p/e ratio contraction stemming from rising inflation and interest rates which
push up the hurdle rate for new flows into equities. (Shanghai Composite)

Since 2012 is a year in which the top China leadership exits and the new guys come on board,
one could, if one used US politics as a guide, argue that Hu and Wen will want to go out strong
and leave the remaing mess for the new dudes to clean up. However, I am guessing that The
Party might take a dim view of such proceedings, and that Hu and Wen may be left to soldier
on by further bringing money and credit under reasonable control so that the fresh guys do not
face an immediate fire drill (no puns intended). 

So, I come out the door saying that the stock market may well be strong next year, and that
a good entry point may come later this year. The MACD intermediate term trend on the chart
link above suggests the market may be rolling down into a somewhat deeper short term correction.
If such occurs, the situation could get interesting down the road.

Monday, February 07, 2011

Inflation Potential

In the US, the CPI reached an all-time high of 220.0 in 7/08. With the rapid descent of the
economy over Half 2 '08, deflation pressure set in and the CPI fell to 210.2 in 12/08. The
inflation index has been recovering since then, and it should eclipse the prior record 220.0
level relatively soon.

Since the end of 2008, the CPI has recovered by about 2.2% per year. There has been a sharp
cyclical rise of commodities prices, including in the important fuels and foods categories, but
The CPI, exluding the volatile food and fuel sectors, has decelerated persistently since late 2006,
and recently has been increasing at only an 0.8% rate yr/yr.

It can take up to two years from the time the leading economic indicators bottom and start to
recover until the large and less volatile component of the CPI begins to accelerate to the upside.
Since the leading indicators bottomed in early 2009, the large inflation component which
excludes foods and fuels should begin to accelerate in Half  '1 2011. This development, coupled
with a volatile, ongoing cyclical rise in commodities prices, could push the yr/yr CPI to 2.5%
by year's end 2011 and upward to 3.0% on a yr/yr basis by mid-2011. Because of the powerful
volatility of commodities prices, these projections have to be seen as being in the "back of the
envelope" style -- conjecture with a degree of sophistication.

The inflation pressure gauges I use are now trending higher. These measures give heavy weight
both to commodities prices and factory operating rates and both suggest an acceleration of the
CPI from the late '10 1.5% yr/yr level up to 2.0 - 2.5% in the months ahead. It is interesting to note
that when the pressure gauges have eased off as occurred in Half '1 2010, the upward thrust
of the CPI has tailed off rapidly. Such will be less likely once the the broader, less volatile
component of the CPI starts a period of cyclical acceleration.

Saturday, February 05, 2011

Economic Indicators

The weekly leading activity indicators remain in solid uptrends but momentum has cooled
very recently reflecting some volatility in unemployment insurance claims  and in industrial
commodities prices. The monthly leading data show a very sharp acceleration in the breadth
of new orders over the past three months. The US economy is off to a firm start in 2011, although
the recent strong momentum of retail sales may cool as the quarter progresses.

My economic power index -- yr/yr% in real hourly earnings + yr/yr % in total civilian employment --
remains a paltry 1.3% before adjustment. When I add in $ of extra hours worked and the 2%
cut in payroll taxes, the EPI rises to 3.6%, which is a solid enough reading as long as you
remember that one cannot simply count on an extension of a lower payroll tax after 2011.

Civilian employment, which tends to lead the payroll data, has increased by more than 200K
in each of the past two months following an extended flat period. Should the civilian data
accelerate to the 240K per month level in the months ahead, we would have an encouraging
sign that employment growth was returning to a more nearly normal level for this stage of the
economic upturn.

The Fed has added over $40 bil. to the total of Fed Bank Credit over the past week or so. The
Fed is still running behind on a straight line projection of the QE 2 $600 bil. package, but it
is encouraging that the Fed has stopped dithering and has resumed the program. I continue to
recommend that They pick up the pace of Treasuries purchases.

Wednesday, February 02, 2011

Stock Market -- Technical

The market is continuing the second upleg of a cyclical bull which commenced 3/09.

The SP 500 is at best only mildly overbought short term. It is significantly overbought on an
intermediate term basis at a 12.7% premium to the 200 day m/a.

Over 90% of "500" stocks are trading above their respective 200 day m/a's. In a cyclical
upleg such as now, the 90% ratio can continue for an extended period of time. Confidence/
complacency as measured inversely  by the VIX volatility index is at a cycle-so-far low of
17.3 The chart below shows that when the % above 200 day m/a for the composite ($SPXA200R)
is quite high relative to a cyclically low VIX, you need to pay extra attention because it can
signify that an extended rally is growing ever more mature, in that increasing confidence is
well reflected in the price action of the market. Chart.