I have not done a major liquidity cycle piece since 2008, when I wrote to mark the bottom of
the last liquidity cycle. This is a general, context setting piece and I plan to do more focused ones
going forward. But first, let's establish the general themes of the expanding part of a liquidity
cycle:
Liquidity
The prior liquidity cycle bottomed over 04/2007 - 06/08 period as the Federal Reserve completed
the process of draining reserves from the financial system as a deep credit crunch took hold. The
new liquidity cycle began over Half 2 '08. The current up-wave in the cycle is the strongest since
the wake of the Great Depression, and, like then, has been highly dependent on quantitative easing
to furnish the liquidity to turn the economy around. Although cycles of growth of monetary liquidity
can stay positive for long periods of time, momentum tends to peak in the early part of a cycle. (The
most recent lengthy liquidity cycle took place over 1982-89 in the wake of a global economic bust.)
The Fed has moved from slashing short term rates to an extended ZIRP which could last for a nearly
four year period if the recovery is shallow. The Fed has also reserved the option of additional
QE if it deems a tepid, unsteady economic recovery warrants it.
Markets players have greatly overdramatized the financial consequences of QE in this cycle. When
one looks at the broader measures of money and credit funding, one sees that the $2 tril. of QE has
not fully offset the liquidation of funding from other major sources such as no reserve jumbo
bank deposits and commercial paper to name just two.
Short Term Business Credit Demand
This factor has its own cycle and plays into the broader liquidity cycle. Rising loan demand is
a key element in Fed policy to raise rates, and the prospect of falling loan demand is central to
development of an accomodative monetary policy. From its peak in late 2008, business short
term credit demand was liquidated by an astounding 26%, and has only recently began to turn
higher. Credit demand vs the supply of loanable funds will not even move up to equilibrium
levels for another few months, at which time the Fed should think more carefully about Its ZIRP.
Corporate Profits
A postive turn in the liquidity cycle leads a rebound in corporate profits by roughly six months.
The profit cycle turned up in early 2009 from extremely depressed levels and the jump in profits
has been the strongest since the early post WW2 recovery. At this point, the strength of the
present liquidity cycle indicates profits could continue expanding well into 2014. On this
analysis, the Fed would need to dramatically reduce Reserve Bank Credit before alarm bells
would go off in the years straight ahead. (Just remember there are other important determinants of
profits as well.)
Special Note: There is prima facie evidence in this cycle that even freezing Reserve Bank Credit
without a more robust round of private sector credit demand in place could damage business
confidence and possibly the economy. When the Fed winds up QE 2 on 6/30, it will be very
important to see how confidence and the economy is affected. I'll be less concerned if we see
private sector credit demand picking up the slack. Keep that May - Aug. 2010 slowdown interval
in mind.
Inflation
Cyclical acceleration periods of inflation follow upturns in the liquidity cycle. The lag time here
can be a year or longer. A powerful liquidity cycle such as the US is now experiencing does not
assure a strong cyclical acceleration of inflation to follow. There are simply too many other key
variables to consider. But it is safe to say that a strong liquidity cycle does raise a red flag about
inflation and should force analysts to look long and hard at all of the determinants of inflation
including global economic supply/ demand and operating rates, the trend of commodities prices,
credit and wage rates to name the majority of factors. In this regard, it is important to note that the
US is coming off the most depressed operating base since the Great Depression, has a continuing
weak labor market and is less susceptible to the inflationary potential of rising commodities
prices than are many other economies.
Thursday, April 28, 2011
Wednesday, April 27, 2011
Monetary Policy -- 4/27 FOMC Wrap Up
The Fed plans to roughly freeze Reserve Bank Credit following the 6/30 wind-up of QE 2.
From there it will go into flex mode, either reducing the FBC balance or supplementing it as
incoming economic and inflation data may suggest. They have left the data trend benchmarks
as well as how They would manage the balance sheet undefined. This will intensify The Street's
focus on data flow and will give free rein to conjecture about future policy regarding liquidity
management.
The FFR% probably stays in lock down mode until later in the year when it may receive
more serious attention. The Treasury 1 yr closed today at 0.22%. Thus the immediate reaction
from investors is to go along with a continuing ZIRP.
From there it will go into flex mode, either reducing the FBC balance or supplementing it as
incoming economic and inflation data may suggest. They have left the data trend benchmarks
as well as how They would manage the balance sheet undefined. This will intensify The Street's
focus on data flow and will give free rein to conjecture about future policy regarding liquidity
management.
The FFR% probably stays in lock down mode until later in the year when it may receive
more serious attention. The Treasury 1 yr closed today at 0.22%. Thus the immediate reaction
from investors is to go along with a continuing ZIRP.
Tuesday, April 26, 2011
Monetary Policy
Quantitative Easing
The profile of the US economy shows that it remains strongly leveraged, is experiencing a long
term slowdown of real growth and is an economy that has become increasingly deflation prone.
Since letting matters unravel of their own accord as happened over the 1928 - 32 period is not
a popular option, we are stuck with governmental policies designed to keep the economy afloat.
These have included a super accomodative monetary policy, bail out mechanisms for the troubled
financial sector and a liberal fiscal policy wherein lower taxes and higher spending levels have
been put in place to offset a sharp increase in private sector savings and private sector deleveraging.
(Banking system loan book).
The economy is recovering, but it is not yet clear it can sustain the recovery process. Unemployment
remains very high and the private sector has yet to resume a more normal pattern of credit demand
expansion. Political pressure and the urgings of a number of economists are pushing government
to end the policies of super monetary accomodation and the generous fiscal support. To make the
matter more complicated, markets have focused strongly on the Fed's quantitative easing program
to the exclusion of the broader picture of still falling system funding when you factor out the growth
of the basic money supply. Thus, there has likely been unnecessarily strong speculation in the
commodities markets which has pushed up inflation and which is making it more difficult for the
Fed to sustain its QE programs.
For my part, if US real growth is set to remain on the modest side and if total private sector credit
demand continues muted, I do not take strong issue with idea that the Fed might have to do
substantial additional QE in the years ahead. By the same token, QE tactical implementation
may have to be modified if the QE is indeed spiriting commodities speculation. Not to do so
could result in continuing QE which turns counter productive vis a vis economic growth.
So, it could be the case that the Fed might elect to shelve QE again to see how the economy and
inflation behave. If they quit QE on 6/30 when the program expires, it could work out just
right. But if the economy begins to stall, we may find a return to QE again in 2012 on a more
modest scale. I must say in defence of the anti - QE crowd, that the Fed did inject such a large
amount of liquidity over the past nearly three years that policy implementation is running well
ahead even when compared to a reasonably aggressive long term QE program which could, say,
run out to 2020. Reserve Bank Credit
Looking out to next year, the Fed may also have to take into account what might transpire with
regard to fiscal policy. My inclination is to think there will be plenty of big talk in DC, but
that spending constraints and tax increases might not kick in until 2013, if then. If there is
a genuine thrust to reduce the budget deficit over the next year or two, the Fed might also
have to consider saving some QE "ammo" for that time.
Fed Funds Rate
My indicators are now running about 80% in favor of having the FOMC elect to lift the FFR%
target rate. If the economy continues to progress and the fresh uptrend in business short term
credit demand remains on track, the indicators will be 100% on the side of having the FOMC
lift rates by late in the year. Moreover, if QE is put on the shelf after 6/30, the Fed will have
leeway to temporarily drain reserves to foster an FFR% hike if it so chooses. This would mark
the first time in over four years that the Fed would be in a credible position to pull the trigger on
raising Fed Funds.
The profile of the US economy shows that it remains strongly leveraged, is experiencing a long
term slowdown of real growth and is an economy that has become increasingly deflation prone.
Since letting matters unravel of their own accord as happened over the 1928 - 32 period is not
a popular option, we are stuck with governmental policies designed to keep the economy afloat.
These have included a super accomodative monetary policy, bail out mechanisms for the troubled
financial sector and a liberal fiscal policy wherein lower taxes and higher spending levels have
been put in place to offset a sharp increase in private sector savings and private sector deleveraging.
(Banking system loan book).
The economy is recovering, but it is not yet clear it can sustain the recovery process. Unemployment
remains very high and the private sector has yet to resume a more normal pattern of credit demand
expansion. Political pressure and the urgings of a number of economists are pushing government
to end the policies of super monetary accomodation and the generous fiscal support. To make the
matter more complicated, markets have focused strongly on the Fed's quantitative easing program
to the exclusion of the broader picture of still falling system funding when you factor out the growth
of the basic money supply. Thus, there has likely been unnecessarily strong speculation in the
commodities markets which has pushed up inflation and which is making it more difficult for the
Fed to sustain its QE programs.
For my part, if US real growth is set to remain on the modest side and if total private sector credit
demand continues muted, I do not take strong issue with idea that the Fed might have to do
substantial additional QE in the years ahead. By the same token, QE tactical implementation
may have to be modified if the QE is indeed spiriting commodities speculation. Not to do so
could result in continuing QE which turns counter productive vis a vis economic growth.
So, it could be the case that the Fed might elect to shelve QE again to see how the economy and
inflation behave. If they quit QE on 6/30 when the program expires, it could work out just
right. But if the economy begins to stall, we may find a return to QE again in 2012 on a more
modest scale. I must say in defence of the anti - QE crowd, that the Fed did inject such a large
amount of liquidity over the past nearly three years that policy implementation is running well
ahead even when compared to a reasonably aggressive long term QE program which could, say,
run out to 2020. Reserve Bank Credit
Looking out to next year, the Fed may also have to take into account what might transpire with
regard to fiscal policy. My inclination is to think there will be plenty of big talk in DC, but
that spending constraints and tax increases might not kick in until 2013, if then. If there is
a genuine thrust to reduce the budget deficit over the next year or two, the Fed might also
have to consider saving some QE "ammo" for that time.
Fed Funds Rate
My indicators are now running about 80% in favor of having the FOMC elect to lift the FFR%
target rate. If the economy continues to progress and the fresh uptrend in business short term
credit demand remains on track, the indicators will be 100% on the side of having the FOMC
lift rates by late in the year. Moreover, if QE is put on the shelf after 6/30, the Fed will have
leeway to temporarily drain reserves to foster an FFR% hike if it so chooses. This would mark
the first time in over four years that the Fed would be in a credible position to pull the trigger on
raising Fed Funds.
Sunday, April 24, 2011
Stock Market
Technical Quickie
The $SPX is rolling up on its Feb. 18 cyclical high, and it is about time to see whether there is a
decent up move at hand or whether the market may be describing an unhappy secondary top to finish
up the run from late Aug. '10. I make it an issue because the market is already more than two months
past that Feb. high. $SPX
Fundamentals
The weekly cyclical coincident indicator is flattening out here in the short run and like the $SPX is
running just under what is its cycle peak so far. I am not surprised here. Two important indicators
that form the composite are unemployment insurance claims (UIC) and industrial commodities prices.
From late Aug. last year, claims fell rapidly from the 500K level down below 390K for several
weeks earlier this year. That's a strong 23% decline and it is hardly surprising that UIC has landed
on a little plateau. Industrial commodities surged since mid 2010, and a period of seasonal
sloppiness / weakness should not surprise experienced watchers.
This week we have the novelty of a FOMC policy meeting followed by a press briefing conducted
by BB himself. Since some of the FOMC members do not have that good a grasp of how money
and credit work in the economy, I would not expect a brilliant give and take session. However,
the markets could be on the quiet side until this little circus winds up.
The $SPX is rolling up on its Feb. 18 cyclical high, and it is about time to see whether there is a
decent up move at hand or whether the market may be describing an unhappy secondary top to finish
up the run from late Aug. '10. I make it an issue because the market is already more than two months
past that Feb. high. $SPX
Fundamentals
The weekly cyclical coincident indicator is flattening out here in the short run and like the $SPX is
running just under what is its cycle peak so far. I am not surprised here. Two important indicators
that form the composite are unemployment insurance claims (UIC) and industrial commodities prices.
From late Aug. last year, claims fell rapidly from the 500K level down below 390K for several
weeks earlier this year. That's a strong 23% decline and it is hardly surprising that UIC has landed
on a little plateau. Industrial commodities surged since mid 2010, and a period of seasonal
sloppiness / weakness should not surprise experienced watchers.
This week we have the novelty of a FOMC policy meeting followed by a press briefing conducted
by BB himself. Since some of the FOMC members do not have that good a grasp of how money
and credit work in the economy, I would not expect a brilliant give and take session. However,
the markets could be on the quiet side until this little circus winds up.
Friday, April 22, 2011
Inflation Potential
Consumer Price Index:
Yr/yr % 12 months (Mar.)....2.7%
12 month (Smoothed)..........1.7
36 month (Smoothed)..........1.7
Inflation pressure gauges began to re-accelerate in mid 2010, largely reflecting a very sharp rise
of commodities prices since then. Chart
It is typical for inflation pressure gauges to rise fairly sharply when the economy enters a new recovery period. With rising sales and production, capacity utilization recovers in a "V" pattern and commodities
prices rise on higher final demand and the refilling of inventory pipelines.
New cyclical bouts of inflation seem invariably to begin with rising commodities prices and we are
seeing that now. Countries where fuel, food and basic industrial goods form an especially large part
of the consumer spending $ such as China and India are being hit hard. In the US, spending for such
basics constitutes a far smaller part of budgets. Moreover, the US is an extremely efficient
processor of such goods. Even so, inflation is accelerating.
Viewed historically, the US inflation pressure gauges are now in uptrends which are too sharp to
have proven sustainable in the past. So one has to be careful in straightlining the kind of momentum
we have seen recently (See $CRB chart above).
The broad and more important CPI measured to exclude fuels and foods has also finally turned up
after a lengthy period of deceleration which actually runs back to 2006. This measure is up 1.2%
yr/yr, and I would look for it to accelerate right into 2012 as the more basic cost pressures are
passed on. This too, is a perfectly normal development.
Wage growth tends to follow the CPI in the cycle, and consumer spending is not necessarily badly
affected by a falling real wage so long as employment is growing and folks do not mind using
credit to sustain their spending. People have been reluctant to borrow in this recovery, and
consumer confidence is often adversely affected by a sharp rise in fuels prices such as we are
witnessing now, save for natural gas.
The dynamic at work now suggests that a cyclical acceleration of inflation may be more muted
than one might expect unless the there is a rapid catch up phase in the wage or folks loosen up
more in using credit to finance purchases beyond autos and homes. At the same time, it would be
very unusual if the "headline" CPI (which includes fuels and foods) did not reach 3.0% yr/yr
and stay at or above that level for a goodly period. Failure of the CPI to behave thusly would
not be such a healthy sign as it would signify consumer caution perhaps substantial enough to
suppress overall econmic growth.
US Treasury bond yields rose sharply over the five month period ending Feb. '11. It is
interesting that the market has since been stabilizing despite the continued upward pressure of
the inflation pressure gauges I use. The bond market action suggests speculation that the
fast recent rise in fuels prices will bother consumer confidence and spending. The longer
Treasury market is hardly an infallible indicator, but is a damn good one, and well worth
watching to see if the economy is slowing and if the inflation pressure gauges might be set
to ease. We'll see.
Yr/yr % 12 months (Mar.)....2.7%
12 month (Smoothed)..........1.7
36 month (Smoothed)..........1.7
Inflation pressure gauges began to re-accelerate in mid 2010, largely reflecting a very sharp rise
of commodities prices since then. Chart
It is typical for inflation pressure gauges to rise fairly sharply when the economy enters a new recovery period. With rising sales and production, capacity utilization recovers in a "V" pattern and commodities
prices rise on higher final demand and the refilling of inventory pipelines.
New cyclical bouts of inflation seem invariably to begin with rising commodities prices and we are
seeing that now. Countries where fuel, food and basic industrial goods form an especially large part
of the consumer spending $ such as China and India are being hit hard. In the US, spending for such
basics constitutes a far smaller part of budgets. Moreover, the US is an extremely efficient
processor of such goods. Even so, inflation is accelerating.
Viewed historically, the US inflation pressure gauges are now in uptrends which are too sharp to
have proven sustainable in the past. So one has to be careful in straightlining the kind of momentum
we have seen recently (See $CRB chart above).
The broad and more important CPI measured to exclude fuels and foods has also finally turned up
after a lengthy period of deceleration which actually runs back to 2006. This measure is up 1.2%
yr/yr, and I would look for it to accelerate right into 2012 as the more basic cost pressures are
passed on. This too, is a perfectly normal development.
Wage growth tends to follow the CPI in the cycle, and consumer spending is not necessarily badly
affected by a falling real wage so long as employment is growing and folks do not mind using
credit to sustain their spending. People have been reluctant to borrow in this recovery, and
consumer confidence is often adversely affected by a sharp rise in fuels prices such as we are
witnessing now, save for natural gas.
The dynamic at work now suggests that a cyclical acceleration of inflation may be more muted
than one might expect unless the there is a rapid catch up phase in the wage or folks loosen up
more in using credit to finance purchases beyond autos and homes. At the same time, it would be
very unusual if the "headline" CPI (which includes fuels and foods) did not reach 3.0% yr/yr
and stay at or above that level for a goodly period. Failure of the CPI to behave thusly would
not be such a healthy sign as it would signify consumer caution perhaps substantial enough to
suppress overall econmic growth.
US Treasury bond yields rose sharply over the five month period ending Feb. '11. It is
interesting that the market has since been stabilizing despite the continued upward pressure of
the inflation pressure gauges I use. The bond market action suggests speculation that the
fast recent rise in fuels prices will bother consumer confidence and spending. The longer
Treasury market is hardly an infallible indicator, but is a damn good one, and well worth
watching to see if the economy is slowing and if the inflation pressure gauges might be set
to ease. We'll see.
Wednesday, April 20, 2011
Stock Market -- Technical
A cyclical bull market remains in force running off the early 3/09 cycle low.
The second upleg which began at the end of Aug. 2010 has experienced a break of trend
but did not break down substantially. The rally underway since 3/17/11 will lack substance
until the market challenges the previous closing high (1343 set 2/18 in the case of the $SPX).
The market lacks a bankable short term trend and is short term neutral when measured in terms
of short run overbought or oversold.
The market has been in the process of working off a substantial intermediate term overbought
condition in terms of premium to the 200 day or 40 wk m/a. Historically, it has been difficult
to sustain major new uptrends when this process is underway. One example of this type of
analysis can be seen here.
I smooth off the market vs. the 40 wk. oscillator and when it trends down, I get a mechanical
sell signal which experience has taught me to respect. Thus, for the interim, I am not likely to
initiate a long side equities trade unless the market falls to a fairly deep short term oversold.
Frustratingly, it can take as long as 6 - 9 months after I get an intermediate mechanical sell
signal for the market to have unwound enough relative to the 40 wk. m/a to produce a solid,
reliable intermediate term buy signal.
I would also say that I have not liked the comparative action of the CBOE equities put / call
ratio to the OEX 100 put/call ratio. The CBOE equities options players have been strongly
net long over much of this year, while the larger players have been strongly net short with
the OEX p/c ratio so far in 2011, indicating major activity to hedge long positions. For
pictures of OEX p/c activity, click and scroll here.
The second upleg which began at the end of Aug. 2010 has experienced a break of trend
but did not break down substantially. The rally underway since 3/17/11 will lack substance
until the market challenges the previous closing high (1343 set 2/18 in the case of the $SPX).
The market lacks a bankable short term trend and is short term neutral when measured in terms
of short run overbought or oversold.
The market has been in the process of working off a substantial intermediate term overbought
condition in terms of premium to the 200 day or 40 wk m/a. Historically, it has been difficult
to sustain major new uptrends when this process is underway. One example of this type of
analysis can be seen here.
I smooth off the market vs. the 40 wk. oscillator and when it trends down, I get a mechanical
sell signal which experience has taught me to respect. Thus, for the interim, I am not likely to
initiate a long side equities trade unless the market falls to a fairly deep short term oversold.
Frustratingly, it can take as long as 6 - 9 months after I get an intermediate mechanical sell
signal for the market to have unwound enough relative to the 40 wk. m/a to produce a solid,
reliable intermediate term buy signal.
I would also say that I have not liked the comparative action of the CBOE equities put / call
ratio to the OEX 100 put/call ratio. The CBOE equities options players have been strongly
net long over much of this year, while the larger players have been strongly net short with
the OEX p/c ratio so far in 2011, indicating major activity to hedge long positions. For
pictures of OEX p/c activity, click and scroll here.
Tuesday, April 19, 2011
S&P Downgrades US Debt
S&P still rates US sovereign debt AAA, but has downshifted the rating from stable to negative
to account for lack of meaningful progress by Official Washington (OW) to take steps to reduce
an outsized budget deficit. The poignant irony here of course is that lax practice by S&P and
Moody's credit raters, helped to make the recent severe recession deeper than it might have been.
Street people who have been around a long while and remember what true AAA credits look like,
long ago gave up thinking of US debt as AAA, not with the steady and large accumulation of unfunded
liabilities the US has created.
But S&P is on to something here, and that is a growing investor concern that the US will need a
strong plan to reverse its deficit once the economy seems to be advancing on a self-sustaining basis.
S&P is perhaps correctly suggesting that continual ideological bickering within OW concerning
budget priorities will eventually weaken investor confidence once it becomes more clear that
the eoconomy can progress without such large deficits in support of continuing recovery / expansion.
And, I think there are serious players in the markets who would agree. No one expects draconian austerity measures for 2012 (a national election year) or even for 2013 for that matter.
But people will be looking for a credible, balanced plan to be in place to begin closing the
deficit meaningfully certainly by 2013 if not sooner.
By 2020, the 80 million strong Boomer cohort will be between the ages of 55 - 75, and by 2030,
the bracket will be 65 - 85. So, between 2020 and 2040, there will an historically large call on
entitlement payout for income maitainance and the medical bills which are sure to come in
profusion. OW has known all of this since the 1970 census and the passage of Medicare which
preceded it.
There will be many more budget fixes needed if the US is to honor the intent of these programs
and the US might even find it expedient to not worry about its AAA rating down the road if it
helps get the US through one of the largest fiscal challenges of all time. It all will take some
monumental doing and I am hoping in the process that the US will begin to look long and
hard at ways to insure faster and even more productive growth to provide faster revenue stream
growth.
to account for lack of meaningful progress by Official Washington (OW) to take steps to reduce
an outsized budget deficit. The poignant irony here of course is that lax practice by S&P and
Moody's credit raters, helped to make the recent severe recession deeper than it might have been.
Street people who have been around a long while and remember what true AAA credits look like,
long ago gave up thinking of US debt as AAA, not with the steady and large accumulation of unfunded
liabilities the US has created.
But S&P is on to something here, and that is a growing investor concern that the US will need a
strong plan to reverse its deficit once the economy seems to be advancing on a self-sustaining basis.
S&P is perhaps correctly suggesting that continual ideological bickering within OW concerning
budget priorities will eventually weaken investor confidence once it becomes more clear that
the eoconomy can progress without such large deficits in support of continuing recovery / expansion.
And, I think there are serious players in the markets who would agree. No one expects draconian austerity measures for 2012 (a national election year) or even for 2013 for that matter.
But people will be looking for a credible, balanced plan to be in place to begin closing the
deficit meaningfully certainly by 2013 if not sooner.
By 2020, the 80 million strong Boomer cohort will be between the ages of 55 - 75, and by 2030,
the bracket will be 65 - 85. So, between 2020 and 2040, there will an historically large call on
entitlement payout for income maitainance and the medical bills which are sure to come in
profusion. OW has known all of this since the 1970 census and the passage of Medicare which
preceded it.
There will be many more budget fixes needed if the US is to honor the intent of these programs
and the US might even find it expedient to not worry about its AAA rating down the road if it
helps get the US through one of the largest fiscal challenges of all time. It all will take some
monumental doing and I am hoping in the process that the US will begin to look long and
hard at ways to insure faster and even more productive growth to provide faster revenue stream
growth.
Stock Market Vs Bond Market
I primarily use my weekly fundamental coincident indicator to see how it matches up with the
weekly action of the stock market. But the indicator tells a tale regarding the bond market as well.
The indicator is a forward looking compilation of weekly data that suggests probable economic momentum in the very short term. So, when the indicator weakens or flattens out, it tends to help
the bond market more than the stock market. In addition, when the oil price rises fast enough to
lead to an acceleration of inflation which eclipses the momentum of the average hourly wage, the
bond market takes that as a sign the economy may weaken. Such has happened recently in both cases,
so it is interesting to compare the relative strength of the SP 500 against the long Treasury.
SPY vs. $USB
You will note the chart shows the SPY in a toppy mode while the long bond, with the bondos
sensing a coming loss of economic momentum, is trying to put in a short term price bottom.
The weekly coincident indicator can follow a random walk in the very short run, so the
the leveling off of the indicator may only mark a temporary respite before the indicator resumes
its uptrend. If not, and the economy is set to turn a bit more sluggish down the road, the bond
may gain in relative favor. Watch carefully over the next several weeks.
Note as well that the chart shows when the Fed stopped quantitative easing toward winter's end
in 2010, stocks followed in the spring with a significant correction while the bond rallied
strongly. There, that's another good reason to watch stocks vs. bonds in the weeks ahead.
weekly action of the stock market. But the indicator tells a tale regarding the bond market as well.
The indicator is a forward looking compilation of weekly data that suggests probable economic momentum in the very short term. So, when the indicator weakens or flattens out, it tends to help
the bond market more than the stock market. In addition, when the oil price rises fast enough to
lead to an acceleration of inflation which eclipses the momentum of the average hourly wage, the
bond market takes that as a sign the economy may weaken. Such has happened recently in both cases,
so it is interesting to compare the relative strength of the SP 500 against the long Treasury.
SPY vs. $USB
You will note the chart shows the SPY in a toppy mode while the long bond, with the bondos
sensing a coming loss of economic momentum, is trying to put in a short term price bottom.
The weekly coincident indicator can follow a random walk in the very short run, so the
the leveling off of the indicator may only mark a temporary respite before the indicator resumes
its uptrend. If not, and the economy is set to turn a bit more sluggish down the road, the bond
may gain in relative favor. Watch carefully over the next several weeks.
Note as well that the chart shows when the Fed stopped quantitative easing toward winter's end
in 2010, stocks followed in the spring with a significant correction while the bond rallied
strongly. There, that's another good reason to watch stocks vs. bonds in the weeks ahead.
Saturday, April 16, 2011
Continued Inflation Pressure In China
To underwrite its economic recovery in late 2008, China undertook a massive economic stimulus
program and allowed the growth of credit and money to proceed at extraordinarily rapid rates.
From mid 2008 through early 2011, China's benchmark M-2 money supply increased by an
astounding 64%. Even factoring in 10% growth per year in real output, China allowed creation
of a liquidity pool consistent with inflation of 15% per year. Now, much of this excess liquidity
was mopped up by residential and commercial real estate, but plenty was still left on hand to
support an inflation surge in basic goods and services. Officially CPI rose 5.4% yr/yr in Mar.,
but seasoned observers would argue that inflation was more likely about 8%. Wages have been
rising rapidly in a policy move to boost consumer spending, but the surge in food prices, a highly
sensitive issue with the populace, is up around at least 11% yr/yr, an intolerable development.
China is opting for broad and strict price controls to compliment ever tightening credit standards
in an effort to curtail the growth of money, and it may also further loosen the yuan / USD peg
to further curtail the growth of money and credit via allowing the yuan to rise in value.
The growth of M-2 has has fallen from over 30% yr/yr as of late 2009 down to 17% presently.
and given the underlying inflation pressures now extant, the gov. may need to push M-2 down
closer to 10% and keep it there for a while even if the growth of the real economy tails down
further as a result. Imposition of price controls and a loosening of the currency peg indicate
clearly that China's gradualist approach has not worked.
The gov. through its far reaching purchasing agencies will have to absorb the differential
between market prices and controlled prices and those agencies will be under pressure to
buy wisely if they wish to avoid working at a cabbage farm in central China.
To me the crowning irony is that observers widely expect the yuan to appreciate if and
when the currency peg is loosened. I regard the yuan as play money -- growing twice as fast
as the real economy with a large negative real interest rate. But, since so little of the stuff
is convertible, it has a bizarre "scarcity value" internationally.
My thinking regarding the stock market remains that it will have some good appeal when
the Boyz nail down the growth of the money stock and remove the sizable inflation potential
from the system. Some players are jumping the gun, reasoning that a stronger yuan will
invite speculative capital flow into the market.
Shanghai stock market $SSEC.
program and allowed the growth of credit and money to proceed at extraordinarily rapid rates.
From mid 2008 through early 2011, China's benchmark M-2 money supply increased by an
astounding 64%. Even factoring in 10% growth per year in real output, China allowed creation
of a liquidity pool consistent with inflation of 15% per year. Now, much of this excess liquidity
was mopped up by residential and commercial real estate, but plenty was still left on hand to
support an inflation surge in basic goods and services. Officially CPI rose 5.4% yr/yr in Mar.,
but seasoned observers would argue that inflation was more likely about 8%. Wages have been
rising rapidly in a policy move to boost consumer spending, but the surge in food prices, a highly
sensitive issue with the populace, is up around at least 11% yr/yr, an intolerable development.
China is opting for broad and strict price controls to compliment ever tightening credit standards
in an effort to curtail the growth of money, and it may also further loosen the yuan / USD peg
to further curtail the growth of money and credit via allowing the yuan to rise in value.
The growth of M-2 has has fallen from over 30% yr/yr as of late 2009 down to 17% presently.
and given the underlying inflation pressures now extant, the gov. may need to push M-2 down
closer to 10% and keep it there for a while even if the growth of the real economy tails down
further as a result. Imposition of price controls and a loosening of the currency peg indicate
clearly that China's gradualist approach has not worked.
The gov. through its far reaching purchasing agencies will have to absorb the differential
between market prices and controlled prices and those agencies will be under pressure to
buy wisely if they wish to avoid working at a cabbage farm in central China.
To me the crowning irony is that observers widely expect the yuan to appreciate if and
when the currency peg is loosened. I regard the yuan as play money -- growing twice as fast
as the real economy with a large negative real interest rate. But, since so little of the stuff
is convertible, it has a bizarre "scarcity value" internationally.
My thinking regarding the stock market remains that it will have some good appeal when
the Boyz nail down the growth of the money stock and remove the sizable inflation potential
from the system. Some players are jumping the gun, reasoning that a stronger yuan will
invite speculative capital flow into the market.
Shanghai stock market $SSEC.
Friday, April 15, 2011
S&P Profits & The Market Tracker
S&P Profits
The super powerful quarterly profits recovery surge ran from year end 2008 through mid 2010.
Analysts have been raising estimates over the past six months and we are now looking at 14%
projected annual growth of quarterly profits clear through 2012. This implies 10-12% top
line growth and a modest further improvement in profit margins and is basically straightlining
recent strong yr/yr sales growth out until the completion of 2012. There is no evidence at hand
that this happy expectation will not be fulfilled. But, however you slice it, it is a tall order, and
when you run through the internal dynamics of the economy, it becomes clear that that all points
of potential conflict are resolved positively. Moreover, the projection involves an extension of
the more rapid sales growth seen in the earlier phases of recovery right into a much more mature
phase of an economic expansion.
S&P 500 Market Tracker
Based on realistic 12 month S&P earnings of $87 per share through 4/11, the Tracker has the
SP 500 fairly valued at about 1435, as opposed to today's close of 1320. The Tracker p/e
ratio is 16.5x. The market has consistently rejected so high a p/e since the spring of 2010,
when an economic slowdown invited fear of a "double dip" recession over the May - Aug. interval
of 2010. The S&P is currently trading at 15.2 x 4/11 net per share as investors continue to
price in a p/e ratio discount for a significant degree of perceived economic uncertainty. Earnings
have progressed well in the recovery, but investors have appeared easily spooked by short run
economic indications that could threaten the rebound in profits. As well, the poor performance
of the stock market over the May - Aug. period of last year happened to coincide with the Fed's
experiment of ending quantitative easing. This anxiety could carry over while the Fed and
market players sort out options for when the next round of quantitative easing ends on 6/30/11.
At a p/e of 15.2, the market remains reasonably priced, but is far from being cheap.
The super powerful quarterly profits recovery surge ran from year end 2008 through mid 2010.
Analysts have been raising estimates over the past six months and we are now looking at 14%
projected annual growth of quarterly profits clear through 2012. This implies 10-12% top
line growth and a modest further improvement in profit margins and is basically straightlining
recent strong yr/yr sales growth out until the completion of 2012. There is no evidence at hand
that this happy expectation will not be fulfilled. But, however you slice it, it is a tall order, and
when you run through the internal dynamics of the economy, it becomes clear that that all points
of potential conflict are resolved positively. Moreover, the projection involves an extension of
the more rapid sales growth seen in the earlier phases of recovery right into a much more mature
phase of an economic expansion.
S&P 500 Market Tracker
Based on realistic 12 month S&P earnings of $87 per share through 4/11, the Tracker has the
SP 500 fairly valued at about 1435, as opposed to today's close of 1320. The Tracker p/e
ratio is 16.5x. The market has consistently rejected so high a p/e since the spring of 2010,
when an economic slowdown invited fear of a "double dip" recession over the May - Aug. interval
of 2010. The S&P is currently trading at 15.2 x 4/11 net per share as investors continue to
price in a p/e ratio discount for a significant degree of perceived economic uncertainty. Earnings
have progressed well in the recovery, but investors have appeared easily spooked by short run
economic indications that could threaten the rebound in profits. As well, the poor performance
of the stock market over the May - Aug. period of last year happened to coincide with the Fed's
experiment of ending quantitative easing. This anxiety could carry over while the Fed and
market players sort out options for when the next round of quantitative easing ends on 6/30/11.
At a p/e of 15.2, the market remains reasonably priced, but is far from being cheap.
Wednesday, April 13, 2011
Obama Fiscal Policy
The GOP / Rep. Ryan deficit reduction plan is mere cynical BS. The Obama plan is more
realistic, but it still falls far short of adequately bracing the public for the hard road ahead
vis a vis entitlements and especially Medicare and Medicaid. As the Boomers age, the volume of
medical services will rise and fees seem likely to continue to exceed the inflation rate. With no
national economic growth strategy in place, it is likely that medical entitlements payout will
grow faster than the overall revenue take, forcing a continuous re-jiggering of budget priorities.
The medical insurance system provides precious little incentive to search out ways to improve
dramatically the productivity and efficiency of health services delivery.
So, you can ultimately abandon Medicare / Medicaid or retain it with rigorous cost containment
measures which ultimately force providers to increase productivity to maintain profitability and
allows the recalcitrants to try to compete in the limited market of those who can afford the full freight. The Obama failing on this round was not to confront the public regarding the longer term limitations of the health entitlement programs.
It may be true as some believe that medicine has a shallow learning curve, that time and
technological development will not provide substantially faster, better and cheaper service. Well,
it should be out in the open and everyone should have a say on how best to meet the demands
of an extraordinary period ahead, as the Boomers shuffle along into the sunset.
People have paid tax dollars into these programs and commitments have been made. High time to
open up the issue to everyone and not keep it under political wraps.
realistic, but it still falls far short of adequately bracing the public for the hard road ahead
vis a vis entitlements and especially Medicare and Medicaid. As the Boomers age, the volume of
medical services will rise and fees seem likely to continue to exceed the inflation rate. With no
national economic growth strategy in place, it is likely that medical entitlements payout will
grow faster than the overall revenue take, forcing a continuous re-jiggering of budget priorities.
The medical insurance system provides precious little incentive to search out ways to improve
dramatically the productivity and efficiency of health services delivery.
So, you can ultimately abandon Medicare / Medicaid or retain it with rigorous cost containment
measures which ultimately force providers to increase productivity to maintain profitability and
allows the recalcitrants to try to compete in the limited market of those who can afford the full freight. The Obama failing on this round was not to confront the public regarding the longer term limitations of the health entitlement programs.
It may be true as some believe that medicine has a shallow learning curve, that time and
technological development will not provide substantially faster, better and cheaper service. Well,
it should be out in the open and everyone should have a say on how best to meet the demands
of an extraordinary period ahead, as the Boomers shuffle along into the sunset.
People have paid tax dollars into these programs and commitments have been made. High time to
open up the issue to everyone and not keep it under political wraps.
Tuesday, April 12, 2011
Let's Hear The Man Out
Mr. Obama is slated to give a major address to the nation tomorrow evening regarding fiscal
policy and budget management. Ahead lies a battle with a GOP newly revitalized by the "Tea
Party" -- a rising, powerful group of reactionary airheads. Now, we all know the US cannot
go on borrowing willy nilly forever, and we know that at some point, genuine wisened adult
supervision will be needed to fashion policy that meets our commitments in a rounded, sensible
way.
Mr. Obama sees political opportunity here. He has sold out the Left and the young independents
who put him over the top in 2008, and he now appears to be moving toward the political Center
to counter the emergent legion of wingnuts on the Right. But, I do think he desires to stand firm
on entitlement programs, on paring back the military and on using taxpayer money to develop
energy sources that would give the US much better balance.
The longest running scam in the history of US fiscal policy over the past 50 odd years has been to
lay out budget plans which overstate revenue growth. So, at bottom, I will be listening most
carefully to Obama's views regarding the management of the revenue side of the budget. It is
assumed he will be discussing raising taxes to fund programs, but I am much more interested
in how the Feds view the longer term growth potential for the economy, and whether Obama
will put the fiscal policy issue into broader context. Over the long run, it can make a huge
difference to fiscal policy if necessary programs to accelerate growth potential, ranging from
more focused but expanded immigration to underwriting domestic investment and productivity,
get top billing along with the "slash and burn" cuts to wasteful spending.
There is a crossroads ahead for the US, and when it comes up fast as they so often do, it has
to be wisdom and luck on our side if we are to take the best path. Let's here the man out.
policy and budget management. Ahead lies a battle with a GOP newly revitalized by the "Tea
Party" -- a rising, powerful group of reactionary airheads. Now, we all know the US cannot
go on borrowing willy nilly forever, and we know that at some point, genuine wisened adult
supervision will be needed to fashion policy that meets our commitments in a rounded, sensible
way.
Mr. Obama sees political opportunity here. He has sold out the Left and the young independents
who put him over the top in 2008, and he now appears to be moving toward the political Center
to counter the emergent legion of wingnuts on the Right. But, I do think he desires to stand firm
on entitlement programs, on paring back the military and on using taxpayer money to develop
energy sources that would give the US much better balance.
The longest running scam in the history of US fiscal policy over the past 50 odd years has been to
lay out budget plans which overstate revenue growth. So, at bottom, I will be listening most
carefully to Obama's views regarding the management of the revenue side of the budget. It is
assumed he will be discussing raising taxes to fund programs, but I am much more interested
in how the Feds view the longer term growth potential for the economy, and whether Obama
will put the fiscal policy issue into broader context. Over the long run, it can make a huge
difference to fiscal policy if necessary programs to accelerate growth potential, ranging from
more focused but expanded immigration to underwriting domestic investment and productivity,
get top billing along with the "slash and burn" cuts to wasteful spending.
There is a crossroads ahead for the US, and when it comes up fast as they so often do, it has
to be wisdom and luck on our side if we are to take the best path. Let's here the man out.
The Great Silver Levitation
Silver occupies a wonderfully colorful niche in US history, and silver aficionados have a clarity
of purpose and a frankness seldom seen in most other markets. The current levitation in price, the
first dramatic one in over 30 years, has rewarded silver's champions and the assorted traders who
have been in on its rise.
Within the markets however, silver has been one of the Great American crash dummies for over
120 years at least. Because of my fondness for America's colorful silver scoundrels, I hope that
the metal experiences a better fate this time out.
I bought some at $10 and change an oz. in 2009 and sold it at about $17.50. I think there is a good
economic value case for silver at $11-15.00 oz. and enjoy the occasional trade because the silver
guys are a special lot. However, silver at $40 is now 52.5% over its 200 day m/a. Since
seasoned successful traders are reluctant to go long commodities when they exceed their 200
day m/a's by more than 20%, silver is without question majestically overbought on the cusp of
an historic breakout. Drama lies ahead....
Silver
of purpose and a frankness seldom seen in most other markets. The current levitation in price, the
first dramatic one in over 30 years, has rewarded silver's champions and the assorted traders who
have been in on its rise.
Within the markets however, silver has been one of the Great American crash dummies for over
120 years at least. Because of my fondness for America's colorful silver scoundrels, I hope that
the metal experiences a better fate this time out.
I bought some at $10 and change an oz. in 2009 and sold it at about $17.50. I think there is a good
economic value case for silver at $11-15.00 oz. and enjoy the occasional trade because the silver
guys are a special lot. However, silver at $40 is now 52.5% over its 200 day m/a. Since
seasoned successful traders are reluctant to go long commodities when they exceed their 200
day m/a's by more than 20%, silver is without question majestically overbought on the cusp of
an historic breakout. Drama lies ahead....
Silver
Sunday, April 10, 2011
US Monetary & Fiscal Policy
Monetary Policy
With three months to run until the Fed winds up the QE 2 $600 bil. Treasuries buy program, the
broad measure of credit driven liquidity will need to accelerate markedly higher in level to
warrant abandoning QE, except perhaps on a short term "test" basis. The banking system has
so far just been too slow to come around and business and consumers have remained very cautious
in using credit. Perhaps it will turn out that the normal flow of credit finance is set to resume, but
there is precious little evidence to date that such is the case.
There are volumes of articles on the web suggesting the Fed has been reckless in providing what
will turn out to be a little over $2 tril. of credit to the financial system during the crisis and the
recovery looking out to 6/30/11. Yet, since the end of 2008, the broadest measure of financial
liquidity has declined from $15.1 tril. to $14.1 tril. Only the Good Lord knows how badly things
may have wound up without that very large infusion of money. Moreover, should private sector
credit demand finally accelerate at full throttle, the Fed has it well within its means to shrink its
balance sheet substantially.
Fiscal Policy
The public is primarily interested in a restoration of the job market and a stabilization and eventual
recovery of the residential real estate market. Federal budget deficit slashing in this very difficult
economy is a lower priority. But now both the President and the Congress have deficit trimming
fever. There is $38 bil. in spending cuts on the table now, and likely more forthcoming given the
climate in official Washington. Planned spending cuts as they accumulate will create genuine
fiscal drag in the years ahead and will reduce the real growth rate of the economy as they pile
up. Budget battles will also highlight the cultural and class warfare that is gathering considerable
steam. It will be interesting political theatre and would be quite diverting if the economic recovery
was firmly established. Meanwhile, the public will likely stay focused on jobs and housing and
will base their confidence accordingly.
With three months to run until the Fed winds up the QE 2 $600 bil. Treasuries buy program, the
broad measure of credit driven liquidity will need to accelerate markedly higher in level to
warrant abandoning QE, except perhaps on a short term "test" basis. The banking system has
so far just been too slow to come around and business and consumers have remained very cautious
in using credit. Perhaps it will turn out that the normal flow of credit finance is set to resume, but
there is precious little evidence to date that such is the case.
There are volumes of articles on the web suggesting the Fed has been reckless in providing what
will turn out to be a little over $2 tril. of credit to the financial system during the crisis and the
recovery looking out to 6/30/11. Yet, since the end of 2008, the broadest measure of financial
liquidity has declined from $15.1 tril. to $14.1 tril. Only the Good Lord knows how badly things
may have wound up without that very large infusion of money. Moreover, should private sector
credit demand finally accelerate at full throttle, the Fed has it well within its means to shrink its
balance sheet substantially.
Fiscal Policy
The public is primarily interested in a restoration of the job market and a stabilization and eventual
recovery of the residential real estate market. Federal budget deficit slashing in this very difficult
economy is a lower priority. But now both the President and the Congress have deficit trimming
fever. There is $38 bil. in spending cuts on the table now, and likely more forthcoming given the
climate in official Washington. Planned spending cuts as they accumulate will create genuine
fiscal drag in the years ahead and will reduce the real growth rate of the economy as they pile
up. Budget battles will also highlight the cultural and class warfare that is gathering considerable
steam. It will be interesting political theatre and would be quite diverting if the economic recovery
was firmly established. Meanwhile, the public will likely stay focused on jobs and housing and
will base their confidence accordingly.
Friday, April 08, 2011
Stock Market
Fundamentals
The weekly fundamental coincident indicator remains in a firm uptrend, although positive
momentum has dissipated some in recent weeks. The stock market has not kept pace with the
weekly indicator. There has been a degree of rotation back into the markets of faster growing
economies, and, in the case of the SP 500, there has been rotation into the smaller cap. sector.
Even so, the market has not been bouyed by improving short term fundamentals.
I use the oil price as a longer term leading economic indicator. With WTIC at $112+ bl. and
trending higher, the longer term outlook for economic and profits growth is deteriorating. It is
not so easy to say conclusively that the recent run up in the price of crude has punished the market,
but the sudden surge of 30% in the petrol sector since the SP 500 made a cyclical high on 2/18/11
alerts traders that cost pressures are building for companies, and it also may well be the case that
aggressive hedgies are rotating out of stocks into petrol sector futures.
Technical
On my weekly chart, the $SPX is flirting with rolling over to the downside. The inability of the
recent rally to decisively take out resistance at the prior cyclical peak of 1343 is not encouraging
either. $SPX
Psychology
Earnings reports for Q 1 lie just ahead. with few negative pre-announcements, players are hanging
around in positions to see if earnings might top expectations enough to squeeze out more upside
action.Tricky business.
The weekly fundamental coincident indicator remains in a firm uptrend, although positive
momentum has dissipated some in recent weeks. The stock market has not kept pace with the
weekly indicator. There has been a degree of rotation back into the markets of faster growing
economies, and, in the case of the SP 500, there has been rotation into the smaller cap. sector.
Even so, the market has not been bouyed by improving short term fundamentals.
I use the oil price as a longer term leading economic indicator. With WTIC at $112+ bl. and
trending higher, the longer term outlook for economic and profits growth is deteriorating. It is
not so easy to say conclusively that the recent run up in the price of crude has punished the market,
but the sudden surge of 30% in the petrol sector since the SP 500 made a cyclical high on 2/18/11
alerts traders that cost pressures are building for companies, and it also may well be the case that
aggressive hedgies are rotating out of stocks into petrol sector futures.
Technical
On my weekly chart, the $SPX is flirting with rolling over to the downside. The inability of the
recent rally to decisively take out resistance at the prior cyclical peak of 1343 is not encouraging
either. $SPX
Psychology
Earnings reports for Q 1 lie just ahead. with few negative pre-announcements, players are hanging
around in positions to see if earnings might top expectations enough to squeeze out more upside
action.Tricky business.
Thursday, April 07, 2011
Oil Price -- Thanks For The Memories
Back on 12/16/10, I guessed that oil could hit $110 bl. in 2011. We are there. And, I am gone
from this market on the long side after nearly a year of very profitable trades. I leave the chasing
to those of stouter heart. Oil is added to my list of potential shorts for some point in 2011.
At $110, oil only needs to travel up to $120 to return to a price bubble. It is in an uptrend now
that shall grow increasingly ominous for the global economic expansion and for the world's
major stock bourses.
Oil is now very strongly overbought. Oil price chart.
from this market on the long side after nearly a year of very profitable trades. I leave the chasing
to those of stouter heart. Oil is added to my list of potential shorts for some point in 2011.
At $110, oil only needs to travel up to $120 to return to a price bubble. It is in an uptrend now
that shall grow increasingly ominous for the global economic expansion and for the world's
major stock bourses.
Oil is now very strongly overbought. Oil price chart.
Wednesday, April 06, 2011
Stock Market -- Fundamentals
When my core fundamental indicators all flash positive, it normally denotes the onset of a
high return / low risk cyclical bull market in stocks. I call it an "easy money" bull because it
reflects an accomodative monetary policy and it normally covers the powerful early segment of
a cyclical advance in stocks. The core indicators have supported the market's advance for over
two years.
There was a notable exception, however. This occured from the end of Apr. 2010 through the
end of Jun. 2010, when the market sold off heavily in response to the temporary withdrawal of
monetary liquidity injections by the Fed. I did not get a signal that the early phase of the bull market
had ended. That would have required all of the indicators to turn negative whereas only the
liquidity measures did. However, this was a frustrating period because the sell off that took place
over Apr. / Jun. last year was outsized relative to the normal behavoir of the market when an
"easy money" signal holds sway.
When I look forward to the wrap up of QE2 at the end of this Jun., it could turn out that all of
the core indicators turn negative save for short term interest rates, which the Fed could elect to
suppress. Experience over the past two years has shown that the Fed can withraw liquidity from
the system without forcing up short rates provided private sector credit demand is quiescent.
I raise these points because if the Fed votes not to enlarge its balance sheet for an extended
period after 6/30/11, some traders may elect once more to take money off the table from the
stock and commodities markets even though some of the key evidence that normally marks the
end of an "easy money" bull may well be absent.
The issue of the direction of monetary liquidity after Jun. 30 is a factor which may weigh on
market players minds between now and then. As a trader, I can adjust to bumpy capital and
commodities markets as can most other seasoned players. However, I do have a darker
concern which has to do with whether market turbulence, should it occur, could negatively
affect business confidence, hiring and investment. It may be coincidence, but hiring did
suffer after the Fed pulled the plug on QE1 late last winter.
More is in store on these thorny issues in the weeks ahead.
high return / low risk cyclical bull market in stocks. I call it an "easy money" bull because it
reflects an accomodative monetary policy and it normally covers the powerful early segment of
a cyclical advance in stocks. The core indicators have supported the market's advance for over
two years.
There was a notable exception, however. This occured from the end of Apr. 2010 through the
end of Jun. 2010, when the market sold off heavily in response to the temporary withdrawal of
monetary liquidity injections by the Fed. I did not get a signal that the early phase of the bull market
had ended. That would have required all of the indicators to turn negative whereas only the
liquidity measures did. However, this was a frustrating period because the sell off that took place
over Apr. / Jun. last year was outsized relative to the normal behavoir of the market when an
"easy money" signal holds sway.
When I look forward to the wrap up of QE2 at the end of this Jun., it could turn out that all of
the core indicators turn negative save for short term interest rates, which the Fed could elect to
suppress. Experience over the past two years has shown that the Fed can withraw liquidity from
the system without forcing up short rates provided private sector credit demand is quiescent.
I raise these points because if the Fed votes not to enlarge its balance sheet for an extended
period after 6/30/11, some traders may elect once more to take money off the table from the
stock and commodities markets even though some of the key evidence that normally marks the
end of an "easy money" bull may well be absent.
The issue of the direction of monetary liquidity after Jun. 30 is a factor which may weigh on
market players minds between now and then. As a trader, I can adjust to bumpy capital and
commodities markets as can most other seasoned players. However, I do have a darker
concern which has to do with whether market turbulence, should it occur, could negatively
affect business confidence, hiring and investment. It may be coincidence, but hiring did
suffer after the Fed pulled the plug on QE1 late last winter.
More is in store on these thorny issues in the weeks ahead.
Tuesday, April 05, 2011
Cyclical Socks -- Relative Strength
The RS indicator for the cyclicals normally gives you a good sense of how the market views the
prospects for the broad economy in terms of direction and momemtum. The RS indicator is near
a 30+ plus year high recently set, but is exhibiting hesitation in 2011 after leading the broader
market higher during the recent upleg. The energy group has been the big game in town in recent
months, and the hesitation of the cyclicals RS indicator may only reflect some rotation into the
oils sector as a pricing power earnings play. However, the RS action of the cyclicals now bears
watching because a topping process there could have a spillover effect for the market overall.
$CYC RS chart.
prospects for the broad economy in terms of direction and momemtum. The RS indicator is near
a 30+ plus year high recently set, but is exhibiting hesitation in 2011 after leading the broader
market higher during the recent upleg. The energy group has been the big game in town in recent
months, and the hesitation of the cyclicals RS indicator may only reflect some rotation into the
oils sector as a pricing power earnings play. However, the RS action of the cyclicals now bears
watching because a topping process there could have a spillover effect for the market overall.
$CYC RS chart.
Sunday, April 03, 2011
Stock Market -- Technical Check Item
The market is trending up again, with stronger signs of confirmation in place for the short run.
However, since there was a nearly six month run-up to the mid Feb. high before the recent dip
in price, it is not at all unreasonable to keep an eye out to see if the market might make a secondary
top over the next few weeks, or whether it will just gambol along higher. There is no special
technical reason to look for a top except that we have already witnessed an extended run up and
there have been plenty of occasions over the years when the first rally attempt after a major move
turns out to be a dud that carries a stronger warning. $SPX
However, since there was a nearly six month run-up to the mid Feb. high before the recent dip
in price, it is not at all unreasonable to keep an eye out to see if the market might make a secondary
top over the next few weeks, or whether it will just gambol along higher. There is no special
technical reason to look for a top except that we have already witnessed an extended run up and
there have been plenty of occasions over the years when the first rally attempt after a major move
turns out to be a dud that carries a stronger warning. $SPX
Saturday, April 02, 2011
Gold Price (And A little on Oil, Too)
My macro and micro economic indicators continue to place gold as fairly valued at between
$650 -750 oz. At $1428 oz., There remains a huge financial armageddon premium in the price.
The macroeconomic directional indicator has been confirming a rising gold price since late
2008, in line with the trend of gold. The directional indicator has been very good in suggesting
the proper trend for gold, but obviously understates the market's perception of gold's value.
My 10 year base technical trendline for gold now stands at $820 oz. This suggests that there is
a little over $600 of armageddonish froth in the price. This compares to only $100 of such froth
at the end of 2008.
Over the past 10+ years, gold has performed most closely to the oil price in terms of the power
of price momentum among the macro indicators. Both have advanced about 5x over the past 10 or
so years. Since the heavy inflations experienced by most of the major economies over the past
100 - 120 years all started in the fuels trading pits, there is precedent for the oil / gold "tie".
Moreover, there are traders who use the developments in the petroleum sector to speculate on
gold. Over the past 10 years, when an ounce of gold buys 13 or more barrels of oil, oil has been
cheap relative to gold. When gold has only purchased 7-8 barrels of oil, it is gold that has been
the better performer in subsequent periods. Gold has been expensive relative to oil since late
2008.
West Texas crude at $108 is only about $12 bl. below an area that I would rate as a bubble zone.
Activity in this market remains intensely speculative given the very large carry stocks of crude
that are available. Thus to say that gold has been expensive relative to crude in recent years is
not to suggest that crude is a bargain. Far from it.
To confound matters in oil vs. gold, oil is now overbought against its 40 wk m/a, while gold,
which has been muddling along since the autumn, is not overbought on a comparable basis.
Back in Dec. 2006, I begged off embracing a stocks forecast for 2007. My argument was that the
globe had experienced a tranquil period of rising confidence and that naturally building economic
imbalances were bound to upset the tranquility and high confidence. The sentiment was spot on
but understated shall we say. Now, going forward, we have a chance for a less volatile period
and a recovery of business confidence which could extend out 4-5 years as the global economy
repairs. I am curious whether gold will hold its strength if a calmer economic climate eventuates
as I expect.
Gold price (chart)
$650 -750 oz. At $1428 oz., There remains a huge financial armageddon premium in the price.
The macroeconomic directional indicator has been confirming a rising gold price since late
2008, in line with the trend of gold. The directional indicator has been very good in suggesting
the proper trend for gold, but obviously understates the market's perception of gold's value.
My 10 year base technical trendline for gold now stands at $820 oz. This suggests that there is
a little over $600 of armageddonish froth in the price. This compares to only $100 of such froth
at the end of 2008.
Over the past 10+ years, gold has performed most closely to the oil price in terms of the power
of price momentum among the macro indicators. Both have advanced about 5x over the past 10 or
so years. Since the heavy inflations experienced by most of the major economies over the past
100 - 120 years all started in the fuels trading pits, there is precedent for the oil / gold "tie".
Moreover, there are traders who use the developments in the petroleum sector to speculate on
gold. Over the past 10 years, when an ounce of gold buys 13 or more barrels of oil, oil has been
cheap relative to gold. When gold has only purchased 7-8 barrels of oil, it is gold that has been
the better performer in subsequent periods. Gold has been expensive relative to oil since late
2008.
West Texas crude at $108 is only about $12 bl. below an area that I would rate as a bubble zone.
Activity in this market remains intensely speculative given the very large carry stocks of crude
that are available. Thus to say that gold has been expensive relative to crude in recent years is
not to suggest that crude is a bargain. Far from it.
To confound matters in oil vs. gold, oil is now overbought against its 40 wk m/a, while gold,
which has been muddling along since the autumn, is not overbought on a comparable basis.
Back in Dec. 2006, I begged off embracing a stocks forecast for 2007. My argument was that the
globe had experienced a tranquil period of rising confidence and that naturally building economic
imbalances were bound to upset the tranquility and high confidence. The sentiment was spot on
but understated shall we say. Now, going forward, we have a chance for a less volatile period
and a recovery of business confidence which could extend out 4-5 years as the global economy
repairs. I am curious whether gold will hold its strength if a calmer economic climate eventuates
as I expect.
Gold price (chart)
Friday, April 01, 2011
Economic Indicators / Analysis
Weekly and available monthly leading economic indicators are giving early, preliminary
indications that the momentum of the advance in the indicators may be leveling off. More data
observations will be needed in the weeks ahead to confirm whether such is truly the case.
The Economic Power Index (EPI), when left au natural or unadjusted, remains weak. This index
combines the yr/yr % changes in the real wage and total civilian employment. Through Mar. 2011,
it stands at a mere 0.6% and reflects pressure on the real wage and continued sluggish employment
growth. A strong EPI reading would be on the order of 4.0%. When we toss in the cut in the FICA
tax and overtime hours, the EPI reads 3.6%, but the index will lose more than half of this reading
next year even assuming that the FICA cut stays in place. So, the EPI is for now artificially strong
and the unadjusted index is awfully low for this stage of an economic recovery. To get a more
sustainably strong EPI, we need to see an improving real wage and much faster employment
growth.
In what I hope will not turn out to be a piggy move, the current $ hourly wage was actually cut
slightly in Mar. as no doubt a few businesses figured they could trim the wage now that workers
have the FICA cut in hand.
I would also call attention to how businesses may be factoring leading indicators data into their
planning. Last spring, when the leading indicators started to flatten out, jobs were quickly cut
and employment did not reach a new cyclical high until Feb. this year. If such caution continues,
hiring plans may be crimped again if the indicators slow down as happened last year.
Now, I have to confess that the way I compute labor productivity shows that although per worker
output has increased markedly off trough levels seen in 2009, it has just begun to surpass levels
seen back in 2008, before the economic free fall started, so I have to temper my contempt for
how employers have treated the rank and file compensation-wise in recent years.
I have said next to nothing about the construction markets over the past 3-4 years. I have not liked
the fundamentals in this business for some years. However, the industry is in a full fledged
depression, one that has lasted as long as I thought it would, but which has declined far more
and which has cut more deeply into the economy than I ever imagined it would. It proves the
old adage that when you are early to see things will turn bad, they still turn out worse than even
you thought they might.
But, it is probably time to dust off the fundamentals for these markets. After all, at its peak, it
was a $1.2 tril. industry.
indications that the momentum of the advance in the indicators may be leveling off. More data
observations will be needed in the weeks ahead to confirm whether such is truly the case.
The Economic Power Index (EPI), when left au natural or unadjusted, remains weak. This index
combines the yr/yr % changes in the real wage and total civilian employment. Through Mar. 2011,
it stands at a mere 0.6% and reflects pressure on the real wage and continued sluggish employment
growth. A strong EPI reading would be on the order of 4.0%. When we toss in the cut in the FICA
tax and overtime hours, the EPI reads 3.6%, but the index will lose more than half of this reading
next year even assuming that the FICA cut stays in place. So, the EPI is for now artificially strong
and the unadjusted index is awfully low for this stage of an economic recovery. To get a more
sustainably strong EPI, we need to see an improving real wage and much faster employment
growth.
In what I hope will not turn out to be a piggy move, the current $ hourly wage was actually cut
slightly in Mar. as no doubt a few businesses figured they could trim the wage now that workers
have the FICA cut in hand.
I would also call attention to how businesses may be factoring leading indicators data into their
planning. Last spring, when the leading indicators started to flatten out, jobs were quickly cut
and employment did not reach a new cyclical high until Feb. this year. If such caution continues,
hiring plans may be crimped again if the indicators slow down as happened last year.
Now, I have to confess that the way I compute labor productivity shows that although per worker
output has increased markedly off trough levels seen in 2009, it has just begun to surpass levels
seen back in 2008, before the economic free fall started, so I have to temper my contempt for
how employers have treated the rank and file compensation-wise in recent years.
I have said next to nothing about the construction markets over the past 3-4 years. I have not liked
the fundamentals in this business for some years. However, the industry is in a full fledged
depression, one that has lasted as long as I thought it would, but which has declined far more
and which has cut more deeply into the economy than I ever imagined it would. It proves the
old adage that when you are early to see things will turn bad, they still turn out worse than even
you thought they might.
But, it is probably time to dust off the fundamentals for these markets. After all, at its peak, it
was a $1.2 tril. industry.
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