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 !!!

Saturday, August 27, 2011

Hurricane Bearing Down...

Nope, not a financial hurricane, but a real one -- Hurricane Irene. Projections now show that
the eye of the storm will likely pass within 10-15 miles of the house. Preparations are now
underway, and since a loss of electric power is a very good bet, it may be quiet at the site for
a day or two.

As expected, Bernanke did hold off on proposing further monetary accomodation for the economy out
at Jackson Hole. The Fed needs to have a good look at what Obama and his crew may have in mind
for fiscal stimulus on the jobs and residential real estate fronts. The Obama presentation could come
along a week or so after labor day.

Thursday, August 25, 2011

Monetary Policy Dudes Gather at Jackson Hole

1. The Fed knows that QE 2 led to an unfavorable trade off between economic recovery and the
inflation rate as the program progressed through mid 2011. Further, sizable QE in the near term
could be risky business for the economy and the political survival of Bernanke and even Obama.

2. The markets for private sector credit continue to thaw slowly. With the large markets for
residential and commercial real estate so slow, the Fed will have to watch liquidity barometers
carefully in the years ahead, and They may have to be prepared to use QE options from time
to time for a number of years to maintain adequate liquidity in the system as occurred over the
1932 - 45 depression era. The Fed has used a huge amount of QE ammo over the past two years
and might prefer, if possible, to move to longer term rationing.

3. The 2012 national election is roughly 14 months away. Voters are deeply concerned about the
weak labor and residential real esate markets. The Fed would probably welcome fiscal policy
assistance on these critical sectors, however belated. The Fed would prefer to see what might
be on tap in the way of new initiatives in the fiscal area before commiting to any bold monetary
action on the domestic front. And, we can all look forward to the next exciting installment of
deficit reduction buffooning ahead this autumn.

4. Last, but very far from least, is the issue of the survivability of the EU. The problems here
go well beyond orthodox monetary policy, but an important opportunity may be at hand for
Bernanke / Trichet et al to reveal Their thinking on the stabilization of the Euro area banks and
credit markets. This area is of most interest to me today. 

Sunday, August 21, 2011

Gold Price Going Vertical

Had the gold price advance terminated around 1500, it would have completed a "garden variety"
bubble, but the bugz have their hearts set on pushing this baby ever higher. So, we now have an
eye popping overbought, with gold at a nearly 27% premium to its 200 day m/a and sporting an
MACD of +63 compared to recent peaks in the +25 - 35 range. It is like a stein of beer with way
too large a head. $GOLD chart

For the hell of it, I have been having some good and profitable fun shorting this esteemed religious
relic since last autumn. Now's a good time for me to be alert, because the bugz are throwing any
vestiges of caution to the wind as they target $2000 oz. I short only the downturn, like when
the 5day m/a starts to roll over and when the ADX +DI reverses. $Gold -- shorter term

Caution: Trades of this sort are for only the few with plenty of experience, ice water in the veins
and who can reside in front of the terminal for extended periods.

Friday, August 19, 2011

Stock Market

My weekly cyclical fundamental indicator is right around its low points so far this year, and
further declines in the weeks ahead would put it in a downtrend. Overall for 2011, the indicator
suggests the market should be flat for the year. But, since the SPX is down 10.7% YTD, it is
clear investors are discounting a further decline of economic momentum. Clarity on this point is
difficult, because players have also been trimming the market's price earnings ratio in the wake
of sharp, fast price declines in both 2010 and this year.

Although financial system liquidity excluding the direct effects of the QE programs has been
improving, the market has yet to show that it can sustain a positive bearing in the absence of QE
or its clear prospect. Moreover, neither has economic momentum. My view since late 2010 has
been that I am more curious than bullish about the market, particularly because we knew the QE
program had a wind up date of 6/30/11. It has been a little disappointing that investors have
been indifferent to the improving private sector credit situation, something we did not see last
year when QE was needed to sustain system liquidity. Many a bull market has been maintained
without aggressive QE when private sector credit growth has been a substantial underwriter
of economic expansion.

On a long term basis of at least five years out, my fundamental approach, which is geared to not
overpaying for cyclical earnings momentum, suggests that stocks are pretty reasonable at these
levels. This is the first time this approach has generated a positive "signal" since mid 2010,
when the market sold off sharply.

The market, although deeply oversold in the short run, remains unstable and is in a confirmed
downtrend. $SPX  Note from the chart that the SPX has now put in a triple closing low on a
short term basis. A mechanical buy signal was generated today because the market failed to
take out the recent closing lows. Some traders will like that close, but you can see from the chart
that next week introduces a test of whether stocks can hold important short run support or whether
it will break down into a more nearly full scale bear market. I would also call attention to the
25 day m/a. Sometimes the market bases out until the 25 m/a drops down to to a level much
closer to the base -- in this case SPX 1100 - 1125. Strong downside action next week would
obliterate that hopeful thought for the short run, but a more stable market, even if no rally can be
sustained, would be an interesting sign.

Wednesday, August 17, 2011

Long Treasury -- Now in Caution Zone

The long T bond has done well this year reflecting a slowing in the pace of economic recovery, a
sell off in industrial commodities prices and the recent flight to quality. The T bond is now very
overbought relative to its 200 day m/a, is extended relative to its price range, and now sports
advisory sentiment which is excessively bullish (76% bullish on MarketVane).

For investors, the long T has provided a humble real return of between 2.0 -3.0% over the past
three years, so the real game here has been to trade the wide price swings in evidence over this
time. Sharp players have been able to earn up to 15% trading the unusual volatility of the market.

I am of the view the economy may do a little better than expected through year's end and also think
that industrial commodities prices will snap out of a seasonal funk over the remainder of the year.
So, I will be looking to short the long T in the weeks and months ahead.

My style of trading the Treasury is an uncommon one because it is contrarian, whereas most
traders are momentum players with very short time horizons. However, since I have been
trading bonds successfully this way for years on end, I hope you will give the price chart a
decent once over. $UBS chart

Monday, August 15, 2011

Stock Market -- No Stabilization Yet

The SPX took out the rapid descent downtrend line as it continued to rally. But the market
shows no signs of stabilization yet, so it is fit to play only for the most seasoned, astute traders
who can watch the tape full time.

Up is better than down, but the curent recovery trajectory is nearly vertical and is far too steep
to be maintained. The boyz have run the shorts off the range and are feeding on the positive
momentum, but we know this will not last, and we also know that after even a mini - crash, there
can be bounces and wicked sell offs which follow quickly as the market in effect seeks to verify
a low or bottom. Check out the action of the SPX in mid 2010 here and for the modern grand daddy
of ongoing bull market crashes, have a look at the post Oct. 19, 1987 crash action here. Notice
the nearly vertical ups and downs before a rapid sell off established the bottom late in the year.

My plan is to let this market settle down and show some relative stability before jumping in long
or short. If that takes a month or two so be it.

Friday, August 12, 2011


I am not ready yet to throw in the towel on this economic recovery. The short and longer range
indicators that traditionally presage an economic downturn of consequence are not in place. I
would not argue with the idea that the economy is fragile, and I would not rule out a "near death
experience" for this recovery, but for now I expect more positive than negative for the economy.

We have had a bear rundown in the stock market. For now, I see this more as a form of psychodrama
akin to the Oct. 1987 crash when players suddenly and wrongly came to believe that all options led
to an economic downturn and bear market for stocks. Back then, it was believed that either interest
rates would have to rise sharply or the US dollar would crash, with either leading to a downturn.
It is not easy now for players to see how they can "win" owning stocks in a troubled global
environment, but there is plenty of wiggle room for the economy and policy to sustain the recovery,
just as there was after the '87 blowout.

The 1987 crash not only scared investors but Main Street as well as the weekly leading economic
indicators fell for several months after it. The buffoonery over the debt ceiling and fast market
slide have hurt confidence in the short run, but these events need not be fatal.

The frustration, anger and fear felt over the past several weeks has been strong enough to warrant
an interval of 2-4 months before the stock market can right itself firmly enough to sustain another
leg up in price. Experience with sudden, steep downturns in the market suggests patience should
be in order even if I am correct that the economy will soldier on.

Thursday, August 11, 2011

Stock Market -- Sold Out Short Term

I mentioned on Mon. 8/8 that a hefty tradeable rally was quickly coming our way. By yesterday
it was clear that the market had reached classic, capitulation / exhaustion selling when measured
by volume, cumulative TRIN and TICK and a bevy of shorter term breadth and momentum measures.
The guys did like the fast double closing low on the SPX around 1120 as well. So we have had
two quick rallies (Tues. and today). They have been hard to trade because of the speed and vertical

Sold out markets do not necessarily mark definitive lows, but decent rallies generally follow. Even
so, the nearly comical volatility this week, with the herd running south then north on alternate days,
signifies a highly unstable market. There is no sure footing here. A shave and a shower can lead
you to miss 250 Dow points. There can easily be more whipsaw ahead, but with so much heavy
liquidation already behind us, it should be on a smaller scale as trader fatigue and weariness begin to
play a stronger role.

I have been trading in the markets since the mid 1960's and this is some of the dumbest, most
mindless stuff I've seen. Whether you are a bull or bear, pick your spots carefully and cut your
losses quickly.

SPX Chart

Postscript: In my view, the FOMC decision statement of 8/9 also represented one of the dumbest
moves I have seen the Fed make in 45 years of watching the Bank in action. The clear suggestion
in the statement that a ZIRP could remain in effect at least until mid 2013 is not within the Fed's
manadate and defies elemental common sense.

Monday, August 08, 2011

Stock Market -- Uncertainty Overload

Currently, the conomic indicators continue to point to shallow growth for the US, and more
recently an eventual sharp deceleration of inflation. Investors have been concerned for a good year
that the splendid corporate profits seen so far could not long outrun an economy that merely schleps
along. Now, we have official Washington on a kick to cut the budget deficit and restore fiscal
"integrity". We have an EU trying to hold itself together as it struggles to keep its weak sovereigns
afloat. We have China and other emerging economies using tight credit to rein in accelerated
inflation after a period of rapid recovery growth. In the US, for one, there are deep concerns about
a program of aggressive budget deficit cutting which could badly damage growth if enacted. Naturally,
the S&P downgrade only adds to the pressure as a clueless Washington struggles to tackle the
budget. It all adds to a reduction in clarity for the outlook regarding profits growth.

Investors gave one p/e haircut over the past year or so from 16.6 x 12 mo. earns to 14.0 x. Now,
they've moved the p/e down to 12.3. Some of this adjustment is normal handicapping for an
evident slowing of the momentum of profits from exceptional levels, but clearly, there is
concern regarding growth potential. On my long term p/e model, the p/e ratio should now be
16.4 x and the SPX should be up at close to 1500 rather the current 1119.

Players have lost patience with struggling to price in continuing large uncertainties and are
moving to re-price risk more conservatively -- If the growth may not be so good, well then I
need higher yield to earn a decent return for risk capital. And they are doing it quickly now.

Although the economy has been recovering and has been slowly broadening out, it remains
fragile and can be badly undermined by shocks like a financial crisis in the EU or dumb,
heavy handed fiscal austerity in the US. So the guys worry not only about the visibility of
recovery but its sustainability as well.

A p/e ratio for the market has high economic content, but it also has substantial psychological
content in the form of confidence about the future. When the confidence factor in valuation is
shifting, whether up or down, it is very difficult to make good market calls even when you
think you have a good handle on the fundamentals.

My indicators suggest it is too early to look for recession, but I think we need to see much more
clarity in favor of improving growth to stave off more dimunition of the market's multiple. In this
regard, you have to stay vigilent because the skies can start to start to clear as fast as they cloud up.

Now the market has grown so oversold so quickly that there should be  a fast tradeable rally
coming soon enough even if it is but a "dead cat bounce".

Sunday, August 07, 2011

Putting Oil Back On the Trades List

I exited the oil market in early Apr. with the oil price up around $110 after nearly a year of nicely
profitable long side trades ( Oil Price -- Thanks For The Memories). Playing here can be a decent
way to hedge higher heating bills for a couple of years.

Reflecting several months of flattish global industrial production, a bump up in Saudi output and the
heavily heralded end of QE 2, the oil price has taken a fair tumble down to $86+ (WTI). Oil is now
in a pronounced downtrend. It is well oversold currently and is at a key pivotal juncture in the $86
bl. area. Chart

I am adding oil to the list of long side candidates. I am ok with oil in the mid $80s, but would prefer
to see it down in a range of $70 - 80. But, since the markets often do not give us what we want,
I'll play it from the mid $80s if needs be. The weakness in global equities and PIIGS sovereign
debt has bestirred the CBs and fiscal authorities in the West. So, dispensation of calming balm
of some sort may be in order in the days and weeks ahead, and that could work to reverse the
steep downtrend in the oil price. Time now to be both alert and flexible.

Friday, August 05, 2011

Capital Markets Psychology

In a number ways, the last few weeks in the markets have been a replay of May / Jun. 2010 : No
QE, shit canning of PIIGS sovereign debt, varied degrees of credit tightening in China and other
key emerging markets, plenty of "double dip" chatter. There have been some added antagonistic
elements this time out: Sheer operatic buffoonery in Washington re: the debt limit, and pursuit of
bigger debtor quarry in the EU, viz. Spain and Italy. And, of course, EU officialdom has seen as
behind the crurve during both episodes.

As with the spring of 2010, money flows into US Treasuries, and away from stocks, low quality
credits and commodities. The routine was exploded yesterday by a large sell off of stocks prompted,
I think, as much if not more by frustration and anger than sheer fear. Investors are steamed that there
has been a replay of the problems that nastily dogged the riskier markets 15 months ago. The
repeat of the same mistakes in short order is not professional.

When economic / financial problems re-occur with regularity, risk premiums on the more vulnerable
markets tend to rise, and not just for the short term. Thus, for example, we are witnessing a trend
of p/e multiple contraction for the US market as players discount a less stable global economic and
financial environment. Flip the coin and we see a dicey PM like silver trading about double
where it was in the spring of 2010 even though the global industrial economy is losing momentum.

Thursday, August 04, 2011

Don't Ask Me...

I did not see today coming. The blowouts in the "risk on" markets seemed all out of proportion to the
global economic environment as I see it. It is true that I have been 100% in cash since SPX 1344 on
7/27. I am very tempted to go long at some point in the days ahead, but there is a nasty, scared
"collective psyche" in the markets which I do not grasp. Besides, bottom line, the stock market is
not just oversold, but is signaling that it is moving into a sold out position. The bad news is that it
is not quite there yet and particularly so as regards volume. Since I cannot say with confidence
that this episode is a freakish short term emotional overload soon to blow over, I plan to bide my
time and see if there is something new to learn.

In yesterday's post on global economic supply / demand, I opined that the major central banks
should ease off the brakes as a sluggish global economy produces sufficient slack to lead to a
further reduction of inflation potential. I also claimed that this is a risky business and hinted that
just the right amount of monetary easing might be necessary to keep all financial speculators in
the commodities markets from piling back in on the long side and driving up costs and inflation
too rapidly. This type of thinking points to a conundrum  which could increase risk aversion
generally if enough players see it. But since the fear out there now may not be nearly so
sophisticated, I'll probably content myself with trying to understand the current, pressing worry
I think the Fed likes oil a lot better at $86 bl. than at the $115 we saw earlier in the year.

US investors have flipped off  the debt limit deal in dramatic fashion. With the gang of 12 from
Congress set to meet later in the year to cut spending, investors could be voting that down right

Wednesday, August 03, 2011

Global Economic Supply & Demand

The global recoveries in production and world trade for the two years ended Q 1 2011 was very
rapid and brought output and trade to new high ground. In my view, the global expansion was on its
way to overheating over the course of 2012 with a cyclical surge of inflation in prospect. Over the
past three - four months we have seen a dramatic slowing in the growth of output and trade. This
was caused by the Japan quake /tsunami damage to production in the supply chain, firmer monetary
policy by many central banks and an end to inventory hoarding by processors which saw industrial
commodities prices double.

So, the global economy has "soft landed" -- demand has slowed sharply but supply has continued to
expand, opening more of a gap between the two. The economy has come quickly off the course of
eventual serious overheat, and now the focus has shifted to how long the slowdown may last
and whether some major economies could be subject to a downturn during this slow period.

Notice as well, that with an easing of factory operating rates, global inflation thrust has backed
off markedly, particularly in the commodities markets. This has made it tougher for producers and
processors to readily generate inventory profits and is clearing the way for central bankers to have
leeway to moderate policies in favor of eventual stronger growth.

From my perspective, it looks like G-20 cooperation has been effective so far. There was powerful
stimulus and monetary accomodation in 2009 and going into 2010, and the bid to slow the rapid
pace of growth started well ahead of the overheat zone, when policy flexibility rapidly diminishes.

It is difficult to "soft land" an individual economy and, perhaps, vastly tougher to do so on a global
scale. That leaves us with the recognition that we have risky business afoot. It also suggests that
a global perspective is in order in assessing risk / return potential in all of the various markets.

I would like to add one more observation here. Central banks of size and consequence in the
world now carry a special new burden -- dealing with the vast influx of "round trip" financial
players in the commodities markets. Sustained speculative activity in these critical markets
in response to the policy drift of the major CBs can prove profitable to players on the right side
of the trade, but dangerous to the effective implementation of macro policy. At this stage of the
global expansion, moderate rather than dramatic policy gestures may be most appropriate.

For background, go here and scroll through the entire pdf file.

Tuesday, August 02, 2011

Stock Market -- Technical

The SPX went out at a new closing low for the year, leaving the market in correction mode.
A more dangerous signal was averted today, as the SPX did not break away to the downside from
the prior closing low set in mid March. But, tomorrow is another day.

The market is around 5% below its 25 day m/a and that level of oversold has held up in every
sell off in this cyclical bull market save for May, 2010 when the 25 day price oscillator went to
-7.5%. So we are at  the point where fear has mostly given way and a rally has developed, and we
now have a decent test set up regarding the seriousness of the correction so far. All well and good,
but remember that in a price correction period, the market firmly reserves the right to get itself
more oversold.

This cyclical bull has rewarded traders who go long on down spike closing lows. Because RSI
is also getting oversold, there could well be an upside pop nearly immediately ahead, but that
kind of play is not my style, as I prefer more signs of a sold out market before jumping in.

$SPX Daily 

Debt Limit Melodrama Winds Up

As outlined last Wed. (7/27), what Obama needed most to avoid as this operatic debate went into
the final act was large spending cap / cuts which took effect over the next 18 odd months. He did
get worked over pretty good by The House, but it looks like the prospect of much more substantive
fiscal drag has been postponed beyond the end of 2012. Excluding the Tea Party, I suspect few
legislators wanted to crunch spending until after the 2012 elections are over, especially given that
the economy has been running so sluggishly.