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 !!!

Tuesday, May 31, 2011

Global Economic Supply & Demand

Global industrial output is reported with a lag of several months, and global industrial production
capacity is modeled because of a lack of accurate and timely data. Global production recovered
rapidly from the early 2009 recession trough, paced by China and the other leading emerging /
developing economies. It hit a cyclical and all-time peak in Feb. 2011, then it dipped briefly
reflecting the effects of the Japan quake / tsunami, but is probably pushing into new high ground,
albeit more slowly. Production is running below the long term trend, but the gap in output -- seen
mostly in Japan, Euroland and the US --  has been closing and could be back on trend within the
next 12 months.

The dramatic recovery in output from near free fall was assisted by historically large, coordinated
monetary easing and fiscal stimulus orchestrated by G/20 and G/8. With the wind up of QE 2 in the
US in a month, much of the flow of monetary / fiscal accomodation will have been completed, and
progressive tightening -- underway already in the BRIC countries -- is scheduled to take hold.

From a practical point of view, more fiscal / monetary discipline comes at a time when the global
economy still has a reasonable amount of slack. Thus, some degree of production growth cur-
tailment leaves open the possibility that global inflation pressure, which has grown more acute
over the past six months, will subside some as more slack develops. Wishful thinking? No. Risky
business? Yes.

The clearest risk concerns swings of inventory around a trend of final demand. This is a murky
business on a global basis and involves a fair amount of guesswork in the short run, especially
since countries as well as industries have varied techniques of inventory management. 

Friday, May 27, 2011

Stock Market -- Short Term Technical

The market has been in a clear cut channel downtrend since early May. The shorts have been
right but the trade has been risky because we have yet to see the kind of break away action
that signals a correction of consequence is underway. As another illustration, the 25 day m/a
has yet to roll over and join the daily and the 10 day m/a in trending lower. Today gave a
mechanical short term sell signal because the little countertrend move up now underway could
not take out the top line of the channel down. So looking ahead, the downtrend is intact as the
market moves into next week, but sans the kiss of death. $SPX

Wednesday, May 25, 2011

US Bank Stocks

Talk about a group that has fallen from grace. The bank stock index (^BKX) is no higher now than
it was in late 1997, and is down close to 55% from its all time high near 120 set in 2007. Back then
industry profits were at an annual rate $148 bil. After two years of deep losses, banks turned into
the black in 2010, and are now earning at a $117 billion annual rate. Higher fees have helped the
recovery, but most of the bounce has come from a run down of the reserve for future loan losses.

Since there has been hardly any growth in interest earning assets for a good several years, net
interest margin before loan losses -- the largest profit category by far -- has gone nowhere. But,
with bank capital having turned up, we are starting to see some improvement in total interest
earning assets. This upturn should continue as the economic recovery progresses, allowing for
a significant regeneration of operating earnings.

The recovery of bank earnings so far has badly lagged that of corporate profits, but bank earnings
should compete more strongly with total profits as the economy progresses and lending and
profit spreads increase. As corporate entities, banks are no longer "friendly bankers" and are
now well loathed by the public for the disastrous performance and behavoir of 2007 - 2009.
Moreover, given the often outrageous behavoir of banks and their agents re: real estate, you
can figure the lawsuits will keep on coming. But, the group is cheap and you, dear readers, should
mull it over.


Shanghai Stocks -- Peoples Bank Screws Up

The Shanghai market has been dead money this year. The market p/e ratio has been receding as
China tightens money and credit to thwart the acceleration of inflation. The gov. and the central
bank -- The Peoples Bank of China -- have mucked up matters as well. The gov. has instituted
selective price controls but has provided little follow up. The PBoC says it is revamping how it
accounts for the money supply, but has reported no monetary data past the Feb. 2011figures. So
the bank has obscured how well it is doing in reducing the high rate of money growth which has
been the primary source of China's inflation. Through 2/11, China's M-2 had been reduced to a still
to high yr/yr growth of 17%+. My argument has been the PBoC needs to get that rate down inside of
15% yr/yr to relieve inflation pressure down the road. We know the economy is slowing, and we
know that global inflation pressure has eased off some with the recent sell down of commodities.
It would have been helpful to see how the central bank is progressing in taming money and
credit growth.

I have argued this year that the Shanghai stock market should be primed for a nice move up starting
later in 2011. Too bad the PBoC has fumbled the money supply / credit issue. At any rate, the
market is getting itself oversold here in the short run. So, even without the helpful fundamental
backdrop, the market may soon draw some trader interest. I would be much happier to see if
the central bank is progressing in drawing down money and credit growth, but I did want to point
out the developing oversold. Shanghai chart

The chart shows that longer term resistance is well up there at 3200, so the potential is there --
whether now or later this year as I have been expecting -- for a good sized upside pop even if
longer term issues are unresolved.

Monday, May 23, 2011

Stock Market

Yes, the market is in correction mode and yes, most technicians have spotted it and are reporting
on it. The SPX did break trend support today, but in the manner of this slow motion downturn, not
decisively and with a thud. The SPX is only mildly oversold short term, and not enough damage has been done by a longshot to get me interested on the long side. So, I'll watch and wait as I would like to
see that sharp break first to let me know there has been some real "give up".  $SPX

I have been watching liquidity in the system excluding the direct effects of QE 2, and it is improving.
That is a good sign for the economy and for Fed policy intent, as it suggests that awaited expansion of
the financial system is finally underway. It is far from clear that this development is on investor
radar screens yet. Looking out toward the end of 2011, if the economy remains fully in recovery
mode and business short term credit demand continues to perk along, the case for pushing up the
Fed Funds target rate would become very much stronger.

In another vein, I would also guess that if the market does not buckle over the next week or so
that players may be holding off on tactics to see how the employment situation stacks up. Sometimes
when there is uncertainty in the markets, the employment report serves to clear the air.

Saturday, May 21, 2011

Commercial Paper Revival Ongoing

From late 2007 through Jan. 2011, the commercial paper market -- a principal source of funding
for the economy -- collapsed by over 60%, taking nearly $1.4 tril. of liquidity out of the system.
The revival in this critical medium started last year with prime non-financial paper issuance but
has been broadening out to include financial services holding co. paper, and just recently, asset
backed paper. This is further evidence the financial system is repairing and that liquidity creation
is expanding beyond the the Fed's QE programs.

The depth of the collapse in this important market underscores once more why the Fed took such
drastic steps to restore liquidity to the system in recent years.

Comm. Paper Out. Chart

Friday, May 20, 2011

Stock Market -- Fundamental Bullet Points

> Weekly cyclical coincident indicator trending lower since early Apr. on weaker industrial
commodities prices and higher unemployment insurance claims. SP 500 has been flat over same
period. Players paying less attention to spike in claims, await the monthly jobs #.

> Monthly earnings indicator lost momentum in Apr. but remains well above year ago level.

> Oil above $95 bl. has bothered the market.

> P/e ratio on "500" continues its slow fade. Earnings have been running well ahead of real
economy, inducing some caution.

> Core fundamentals set to accelerate a fade process after Jun. 30, when monetary liquidity
gains from QE2 may terminate. No sell signal in offing, but highly positive return vs. risk profile
will see some deterioration.

> High visibility liquid reserves -- money market funds -- now far under early 2009 levels
when market bottomed.

Thursday, May 19, 2011

Stock Market

The broad stock market is in the process of unwinding a very sizable overbought when compared
to either its 200 day or 40 wk m/a. As mentioned the other day, this process is seldom interrupted
by a dramatic positive turn in the market which features some staying power. The unwinding
process can be quick as happened during Q 3 1998, or it can seem interminably long as we saw
from mid 2003 through mid 2004. In looking over data for many years, I do not find a formula
for timing this sort of relative downshifting process.

On a short term trend line basis, the market is now advancing at a fraction better than stall speed.
So, trader bulls need to see a sharper pick up in positive momentum soon lest their positions turn
I looked at this outfit the other week. As a former senior investment executive, it looked to
me that in signing up, you were giving more than you might get in terms of good info. It struck me
as a "networking" spot for middle management paper shufflers and middle level techies. I am
of course from an earlier generation, but I certainly did not need this sort of contrivance to build
a powerful rolodex.

Monetary Policy & The Markets

With the release of the FOMC's late April meeting minutes the other day, some market players
are trying to put a positive spin on the content to support stocks and commodities. It is true
that the Fed has no immediate plans to shrink its balance sheet or to raise interest rates after the
6/30 wind up of QE2. But the Fed does plan to freeze its balance sheet after 6/30. In my scheme
of interpreting monetary policy, that plan involves a tightening of liquidity for the system and
will require private sector credit demand to pick up substantial slack to underwrite continued
economic recovery. The Fed, in leveling out its balance sheet, would be on stronger ground than
it was last year, but it is gambling that the recent upturns in non-QE2 bank liquidity and system
funding will continue and carry the day. The Fed was dead wrong last year, and I hope their
judgment is better this year.

Tuesday, May 17, 2011

Out Of The long Treasury.

Back in mid Feb, I took a bullish, intermediate term perspective on the long bond. Here. Today,
I cleaned out this position for a nice profit. I held it longer than I wanted to, and the ride was bumpier
than I had hoped for, but it worked out. I regard the bond position I used  -- TLT -- as getting
overbought short term, so I could be back to it again if it corrects sharply. For now, notice the
RSI reading and the -D1 reading in the panel on the bottom of the chart.

There is a nice trend for TLT, so I could be getting out early. I might have hung around if the
$SPX had broken down badly today, but such was not the case. (See below for comments on the
SP 500).

Stock Market -- Technical

The pieces of evidence for a correction are falling into place. What's missing now is a break down
sharp enough to take the market below the uptrend line from the end of Aug. ' 10. The $SPX is
just slightly oversold at the current level and by my standards would need to fall a good 4-5% to
be interesting as a quick rebound trade. So, if it pops up from here, I will likely miss it. $SPX Chart

The market is working off an intermediate term overbought against its 200 day m/a. Momentum
has flagged enough here to leave me with a continuing mechanical sell signal. The odds of a
substantial new uptrend with some staying power developing in the absence of a further unwinding
of the intermediate term overbought are low but not negligible. So, from the vantage point of my
trading discipline, I am content to bide my time if there is no sharp sell off in the cards short term.

Saturday, May 14, 2011

Financial System Liquidity

Conventional Credit Funding
My broad measure of credit driven liquidity has started to experience volatile but accelerated
growth. Critically, measures of funding liquidity exclusive of the Fed's QE program are now
expanding. The banking system is stepping up competition for deposits and is issuing more prime,
unsecured commercial paper. Consumer credit is starting to nudge ahead and shorter term business
credit demand, led intially by premier commercial paper, has turned up clearly and is broadening
out. The banking system's loan / lease book is  still contracting, however, and this reflects a
continuing run off of the system's large real estate loan portfolio, where activity remains moribund.
Because of the weak real estate credit demand picture, we are seeing banks continue to add to the
Treasuries investment portfolio -- a rare occurrence once business lending picks up. On balance,
this is good news because some important credit demand sectors are now out of repair and are
expanding. Continuation of the expansion of the broad measure of liquidity will mitigate against
the QE concept, as it suggests the economy is becoming less reliant on direct monetary easing.

Measured yr/yr, the broad measure of liquidity has increased by 4%. This is a marked improvement
over recent months, but is far below the +10 - 12% yr/yr readings observed when the broad
measure is robust. So, the patient has improved from severe to mild anemia.

The liquidation of the banking system's real estate portfolio from its 2009 peak is approaching
$400 bil. (10% of total) and real estate loan demand is now running an extraordinary $2 tril.
below the longer term trend -- phenomenal stuff.

Money Market Funds (MMFs)
In the wake of the Great Recession and crashed markets, total MMF footings rose from $2.9 tril
to a peak of $3.5 tril. by 5/09. Since then, the total MMF fund balance has been drawn down to
about $2.5 tril., which is below levels at the peak of the economic and stock market cycles.
Naturally, these balances can be drawn down further, but it may be wise to note that the MMF
system is far from being flush with cash to drive the markets, especially when you consider that
the real economy makes demands on the same balances. Going forward, the markets might be
more dependent on the creation of private sector credit for support. Such a development would
not be unusual, but it may well increase capital market exposure to greater financial leverage.

Friday, May 13, 2011

Stocks Vs. Bonds

With the potential for a slowing in global growth, note that the long Treasury is starting to give
the SP 500 some competition:


Stock Market & Silver Price Flash points

Blogger went down for about 24 hours Wed. / Thurs. and to make matters worse the transformer
box on the utility pole down on the corner blew out. So, I lost a post and some data....

Stock Market
In the lost post, I mentioned that the $SPX was testing its uptrend line in place since 3/16. The index
broke below trend today. It is trading below the 10 day m/a and is just atop the 25 day m/a. So, the
$SPX is on the verge of a breakdown that would signify further corrective action ahead if there
is more negative follow through early next week. Next trend support, and the more important one, is
down around 1320. $SPX chart

Silver Price
I also highlighted the silver price in the now missing post because it and the SP 500 were the closest
among the stock market and commodities of interest to breaking down. Now, of course silver
broke sharply below its recent blowoff trend, but like the stock market, it sits modestly above the
intermediate trendline up from the end of Aug. 2010. So as much as I joke about silver being a
Great American crash dummy, it has yet to crack down through intermediate term support.
Silver Price

Wednesday, May 11, 2011

Stock Market & Silver Price

It has been a fiercely ambivalent few days for the markets as players try to handicap evidence
of a global slowdown of economic growth as well as the prospective full significance of the
Fed's decision to wrap up QE at the end of June. Should players buy the US dollar and Treasuries
or stick with equities, commodities and PMs?

Oil and gold are selling well above trend support, but the SP 500 and the silver price are right
down on trend support and there could be negative follow through if stocks and silver break their
respective trends on the downside. You should probably watch the action with these latter two
for insight in the days ahead as they are at flashpoints.

As well, the release of initial unemployment claims tomorrow am may play a role following
last week's unexpectedly sizable increase. A very large drop in claims might be needed to
keep equities above trend, etc.

The weakness in commodities over the past several trading days is probably welcome news
for the Fed. A deceleration of headline inflation would arrest the decline in real incomes and
pressure on real transfer payments. This positive development would partly offset diminished
liquidity growth after Jun. 30 and, if there is enough of a break in the commodities markets,
it might strengthen the Fed's hand to bring on QE 3 for 2012 (an election year) if needed.
Just speculation mind you, but do not underestimate the depth of Bernanke's economic and
political concerns in a sharply divided Washington.

Tuesday, May 10, 2011

CRB Commodity Price Composite

Commodities remain in a cyclical bull market which started in late Feb. 2009. Trader discipline
in the pits has been remarkably good until early this year when it began to break down and guys
started to chase them up. As often happens in this volatile market, last week saw a very sharp
sell-off on concerns about development of a slowdown of global economic growth based on the
various purchasing manager surveys. I do not think the sell down was sharp enough to count as
a warning of bad tidings ahead for commodities. I do think the market may prove tentative for a
good several weeks in keeping with the usual action after a sharp run up is partly crushed.

The trend band for May for the CRB is 360 - 285, so at 348, the composite is at the high end of its
predominant trading range. Moreover, given the volatility of the CRB, one cannot readily discount
a visit this year down to the bottom of the band, say in a range of 285 - 300. I would also note that
the CRB does tend to get more volatile above the 280 level, with this being true for a number of
years. Last week's quick sell off did wipe out most of a good sized overbought condition.

The CRB did enjoy a strong run from mid 2010 until just recently, and I wonder what positive
catalysts may be required going forward to sustain a sharp advance now that QE 2 is set to
wind up on Jun. 30.

My long term work suggests the CRB remains reasonably priced. There are a number of players
out there who believe that commodities are in a long term bull market. The historic performance
of the CRB going back over 40 years does not support this view. Long term bulls had their
thesis blow up on them in 2008, and if you are interested in the long term bull case, you will
need to spend goodly time on studying the supply side rather than just relying on increased
headcounts of consumers in emerging economies.


My Sense Of Uncertainty Is On The Rise

Since no one is paying me to make heroic assumptions or guesses, I am not going to make any. I
say this because I do not know how the US economy and its various markets are going to fare once
QE 2 ends on Jun. 30. If private sector credit demand were lifting off substantially now, I doubt I
would have much concern. But progress with the flow of credit has been narrow and tentative, so
I will probably wait a couple of months more to see how well it behaves.

The title of the post refers to my sense of uncertainty, because I am far from sure the broad range of
investors, including some good ones, shares it. And that's because of my unusual way of delineating
monetary liquidity from credit driven liquidity. Experience shows that economic expansion will
tend to falter once the Fed ceases adding liquidity to the system if the credit markets do not pick up
the slack in hefty fashion.

In the interim, I may place long positions only in deeply sold out markets and the occasional short
position in exaggeratedly overbought or overvalued markets. Thus, I have made four round trips
in and out of DZZ -- a gold short -- since Oct. '10 for a gain of 27% after execution costs. But
the short side has been the rarity for me and the DZZ positions were small.

I plan to keep right on posting, but I did want to get my sense of uncertainty and forbearance out in
the open to alert you of an issue and so I do not have repeat it each time out.

Friday, May 06, 2011

Economic Indicators / Analysis

Weekly Leading
Strong positive momentum ended in 3/11. Bad winter weather may have shifted some of recovery
from Q 1 to Q 2 '11, but indicators suggest slower growth to resume in Q3.

Monthly Leading
Primary business sector new orders index still is running fairly strong, but it has slipped from
powerful levels seen earlier in the year. Suggests slower economic pace by Q3.

Global Monthly Leading
The index is slowing sharply from strong levels seen in late 2010 / early 2011. The fast moderation
here reflects a loss of US new order momentum plus the widely expected weakness in Japan
in the wake of the EQ / Tsunami.

Inflation Leading
Rapid decline of commodities prices including important fuels sector in past week takes some
significant steam out of inflation potential.

Long Term Leading
The positive but moderating trend to get a lift from the recent rapid ebbing of prospective inflation.  The latter will benefit real wage and transfer payments. However, the long lead indicator will experience
further moderation going into Q3 '11 as QE 2 comes to an end and monetary liquidity begins
to flatten out. This will not create a problem for the economy if still very sluggish private sector
credit demand finally picks up steam and fully offsets the end of QE 2. For now, dependence on
QE 2 still remains important.

Economic Power Index (EPI)
Holding aside the 2% positve from lower FICA taxes to wages, the EPI is just marginally
positve and is insufficient to warrant confidence the recovery is becoming self sustaining.
Excluding temporary benefits such as the FICA cut, both real wages and employment growth
remain too slow measured yr/yr.

Q2 '11 pace of recovery may be solid enough, but the leading indicators point to moderation of
progress afterward. The US is nearly two full years into an economic recovery, and the case has
yet to be made that it can sustain without a very accomodative monetary policy as well as
direct fiscal stimulus.

Thursday, May 05, 2011

Oil Price -- $16 Bl. Skidoo

The oil price remains in a cyclical bull market. It must crack $90 on the way down to threaten the
trend. With the initial northern hemisphere gasoline build winding up, oil has entered a traditional 
weak seasonal period that could run into July. With the production halts in Libya and unrest in the
middle east, oil went into a speculative blow-off starting in 2/11 from $85 bl. and running up to
around $115 earlier this week. It had become dramatically overbought and was just $5 shy of
entering another price bubble. When crude hit my 2011 target of $110 bl., I cleaned out all of my
petro longs around 4/7 (Oil Price -- Thanks For The Memories).

The big run up in the oil price since mid-2010 was no doubt in part prompted by the announcement
of the Fed's QE 2 program. Since QE 2 ends 6/30 and there is no QE 3 in sight for now, oil may
have to trade more rigorously with industry fundamentals for a while. With indications of a slowing
of global economic growth in evidence, and with now longstanding outsized carry stocks of crude
on hand, one cannot discount further price weakness over the current seasonally slow period.

Given the volatility of  the oil price, it would be well in character for oil to fall to as low as
$85 bl. over the Jun. - Jul. '11 period. Not even a mild reach. The $85 bl. is just the merest of
guesses. I no longer have shorts in the petro sector, and plan to bide my time to see if there may
be another decent long side trade down the road.

Oil Price

Tuesday, May 03, 2011

Hi Ho Silver....

In the 4/12 post The Great Silver Levitation, I argued that drama lay ahead as the majestically
overbought metal was poised for another historic breakout. Traders ignored the overbought, and
pushed silver to nearly $50 oz. from $40. Subsequently, contract margin requirements have been
raised three times and the metal has dropped rapidly down to $41.72.

Silver remains majestically overbought and the near term bottom is not yet clearly in view.
There is chart support down in the low $30's and 200 day m/a support in the $28 - 30 oz. range.
The metal has held the 200 m/a decently since the cyclical bull started in late 2008. There is
also cyclical trend support down in the low $20s.

As I discussed in the 4/12 post, silver has turned out to be one of the great American crash
dummies over the very long term, with huge downward cascades in price coming after spectacular
run-ups. Since silver deserves respectability as an investment medium and not just as the
very occasional speculative toy, I continue to hope that when the dust settles after this round,
the market will again be appraised sanely.

I would also reiterate a suggestion I have made before. When a commodity or financial instrument
exceeds its 200 day m/a by more than 20% on a price run-up, only the most nimble traders should
mess with it on the long side.


Sunday, May 01, 2011

US Stock Market

The cyclical bull market continues. The strong showing this past week eradicates the shorter term
secondary top thesis. The market is in a confirmed short term uptrend and is supported by the
trend of my primary indicator (breadth + unweighted pricing). The one caveat I have short run is
that my NYSE weekly buying pressure indicator, although rising, is slightly short of a new cyclical
high. The $SPX is just edging into moderate overbought territory at 2.6% over the 25 day m/a. So
far this year, players have been reluctant to push the 25 day oscillator above 2.6%. If the new run
up is to be a strong one, we could expect to see the $SPX move up to close to 5.0% above the 25
day m/a.

The $SPX is running about 11.8% above its 200 day m/a. This need not be a worry, but it is a
reminder that new longs are being put on in a market that is overbought looking out beyond the
short run and one which is being chased up. $SPX chart

Core fundamentals continue positive, although some modest slippage is showing up in bond
yield quality spreads. Come 6/30, my primary liquidity indicators will start to decay if the Fed
keeps its word and does not offer a QE 3 program of some sort.

My weekly fundamental coincident cyclical indicator has been eroding since its 4/8 cyclical
peak and has broken down below trend in place since the end of Aug. 2010. This developing
sizable negative divergence to the "500" might be explained by the popular idea that the 2nd Q '11
will see a rebound in economic activity as Q1 weather related lost output is made up. Could
well be, but such should be showing up in the weekly indicator. I would note also that the
Treasury yield curve is shifting down as well as fixed income players anticipate a slower

Russia Stock Market

The Russian market had been doing well enough since I picked it up at year's end 2010. It
is ahead by 8.3% through Apr., but it did start giving up some ground during the month. Now,
on 4/29, the central bank has boosted short rates in a surprise move to counteract inflation,
which has moved up to about 9.5% yr/yr. The "back" story has it that both Medvedev and Putin
are getting nervous about their low approval ratings as inflation has crept up, and with national
elections slated for 2012, the guys are ready to foster slower growth to diminish inflation potential.
The Russian market is just now starting to diverge from strong friends it has tracked with such as
the SP 500, the oil price and my heavy industry economic indicator. So, Russia joins a list of
emerging economies contending with rising inflation as economic expansion rolls along.
Engineering economic "soft landings" is always and everywhere a tough challenge.

A break of support at 39 on the RSX would not be a good sign. RSX. Note the weakness in the
market prior to the surprise announcement by the CB -- the smarter money knew.