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 !!!

Wednesday, November 30, 2011

Stocks: And Now, The Turbo Moonshot

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

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

Scroll south for background on today's pop.

Central Banks: All Hands On Deck

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

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

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

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

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

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

Monday, November 28, 2011

Stock Market -- Short Term

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

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

Thursday, November 24, 2011

Euro Stocks -- Nearing Cyclical Bear

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

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

Tuesday, November 22, 2011

Global Economic Supply & Demand ***

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

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

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

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

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

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


Saturday, November 19, 2011

Stock Market Weekly

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

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

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

Friday, November 18, 2011

Stock Market -- Liquidity

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

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

5 Year T-note Yield

Thursday, November 17, 2011


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

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

Wednesday, November 16, 2011

Oil Price -- Cashed Out

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

Monday, November 14, 2011

Stock Market -- Fundamentals

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

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

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

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

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

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

Friday, November 11, 2011

Eurozone / Deadzone

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

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

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

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

Thursday, November 10, 2011

Cyclical Stocks Relative Strength

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

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

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

Tuesday, November 08, 2011

Stock Market -- Short Term Technical

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

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

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

Sunday, November 06, 2011

Oil Price

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

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

Saturday, November 05, 2011

Back In Business, Finally

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