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 !!!

Thursday, December 29, 2011

Gold & Silver

Lately, the two PMs have been caught up in the risk on vs. risk off trade, with sellers moving in
during the risk off mode to buy Treasuries and the USD. But, both gold and silver have a long
history as cyclical plays as well, with price weakness developing in anticipation of or during
economic downturns. And, trend-wise, we are in a clear economic downturn both in the US
and globally, based on the momentum of a number weekly and monthly indicators. The romance
with gold over the past 10 years has broadened out considerably in terms of rationale, so there
may even be some sellers who think the US economy is doing well enough that quantitative easing
may be off the table. Could be, but the simpler and more time tested explanation is that global
economic momentum is tilted downward and has not hit a bottom yet. Long Term Comex Gold MRCI
No doubt some are also selling gold and silver for gains to offset losses elsewhere.

Gold is in a well established shorter run downtrend and is oversold on a short term basis. By my way
of treating all volatile commodities, gold would become moderately oversold at a discount of 10%
to its 200 day m/a and more deeply oversold at a 20% discount. Both metals are at modest discounts
and both have broken cyclical uptrend lines. First step now is to see what kind of bounce comes in
gold right ahead. Next step is to see if it can maintain support at $1500 over the next several weeks.
$Gold and $Silver

Monday, December 26, 2011

More On The Long Treasury Bond

You might want to read this in connection with the 12/23/11 post.

I want to discuss a little further how overbought the long guy is and how confident you have to be
of a sluggish US economy next year, one which is coupled with rapidly decelerating inflation.
Here is a link to the Long Treasury yield: $TYX

Historically, when the long Treasury yield is 20% or more below where it was in the preceding
year (52 weeks), it has not been a rewarding time to have a long position in the bond, as on a price
basis, it has moved to a deep overbought. The bond is now trading at a yield well under that of the
prior year as the chart shows, so historical evidence says caution.

The chart also shows a constant line at 3%. Let that represent 3% inflation, which is not a bad
assumption for the average over the very long term. Well, if you are an investor, you at least
want to buy the bond at a yield well above that 3% level. The chart shows the slightest of premiums
to the 3% inflation constant currently, and as you can see, you have been able to buy the bond
way cheaper often even in the low inflation environment of recent years.

Here is a link to the long T bond price (CBOE) MRCI Treas. It shows one of the great bond
bull markets in history, with the long T price advancing as US growth decelerated and inflation
fell away over the period. Note too, the risks in the near term of buying the price spikes and
not waiting for the bond to settle back down in the range.

I have traded the bond both long and short for many years. Price and yield love mean reversion
with the 200 day or 40 week m/a a good working target. To make money on the long side
from current levels the US needs to have a poor year of real economic performance. Although
I have my doubts about how well the US will do next year, the Bond is headed into it at
very extended levels.

My guess is the over the next 10 odd years, 12 month inflation will hit or exceed 3% often
enough that however low the yield might go in the next recession, it will eventually work its
way up to 6%, with the long T price eventually eroding to 100.

Sunday, December 25, 2011

Stock Market -- Weekly

The action is mildy positive, volatile and only slightly encouraging.

The weekly cyclical fundamental directional indicator is in the slightest of uptrends and this
barely positive movement is being carried entirely by the sharp decline in unemployment
insurance claims underway since mid-Sep. The weak diffusion evident in this indicator is not
a confidence builder by any means. A stronger, broader advance in the indicator is needed to
support a sustainable uptrend in the market.

Although I do not count Federal Reserve bank credit (FBC) in this indicator, I need to mention that
the stock market has been tracking the substantial short term volatility in the credit balance
since Sep.  The FBC was down in Sep., up in Oct., down big in Nov. and up strongly so far this
month. Some of the recent surge in FBC could reflect spillover from the Fed's large dollar swap
program for the EU. More likely the Fed positioned itself to flood the US system with liquidity
for the holiday season, a step They have taken many times. But, since the FBC balance is now
running high relative to Its post QE 2 plan, It is likely that They will pull liquidity from the
system in Jan., a move that traders may not like early next year. Focus on the weekly open
market operations of the Fed may annoy some readers, but you need to keep it in mind if traders
are paying attention to it ( data released on Thursdays).

I read the weekly chart as showing a mild but volatile uptrend which is nearly fully confirmed
but is not robust. It's tepid, instead. $SPX At a minimum, the market needs to briskly take out
Oct. resistance at 1285. Then we need to see the 6 and 13 week m/a's break above the 40.
Failure of the SPX to take out the 1285 level will bring on the shorts, and perhaps, do so in

I have also added a link to the SPX and its 200 day price oscillator. The oscillator shows the
same weakly positive but volatile action. A move up through the 1.02 mean would be a nice
plus here. SPX & 200 Day Osc.

Friday, December 23, 2011

Long Treasury Bond

Trend directional change was signaled over Mar. / Apr. 2011 in favor of a rising bond price and a  
falling yield. The key, as usual, was an interim peaking of industrial commodities prices as well as
the momentum of industrial production. The deterioration of pricing / production momentum is
ending here in the short term, but industrial commodities prices have yet to reverse to the upside,
leaving the T-bond directional indicator in neutral.

The long "T" is yielding around 3% which is inside of the 12 month inflation rate of 3.4%. Thus, the
bond is forecasting further sluggish economic activity and a marked deceleration of inflation. Basically,
a bullish case for the bond in 2012 rests on the assumption of development of an economic recession
in the US coupled with a deflation prone trend to the CPI.

The bond's price is exceptionally vulnerable to even a mild uptrend of industrial commodities prices
which can be a seasonal event evident in winter if there is a modicum of growth in the global
economy. Such occurs when inventories are built as annual production schedules are set.

The bond price hit a powerful overbought over Sept. of this year on EU financial crisis fears. It
then tumbled but whipsawed back up again when hopes faded in late Oct. that the EU would settle its
crisis. The bond has weakened some recently, but is still overbought relative to the 40 wk. m/a.
$USB  Watch it carefully relative to industrial commodities composites such as the DB industrial
metals ETF (top panel).

If you are yield rather than price oriented, check out the ^TNX The chart shows that it has been
unwise to be long the bond when yield is at a steep discount to the 200 day m/a.

Trader advisories are just below excessive bullish levels (MarketVane & Consensus Inc.).

Tuesday, December 20, 2011

US Economy --2012

It is difficult to sketch a formidable case for real economic growth next year. Corporate profits
have been strong, but the broader measures of real average hourly earnings and real disposable
income have trended down to recession levels. Real DPI With weak real income numbers in
place, you need to make some extra assumptions to see sustained growth in real output. Business
policy on wages has been predatory, as the rate of current $ wage growth measured yr/yr has been
slashed from 3.9% in early 2009 down to 1.6% for Nov. 11. There has been enough inflation
over the past year to put the real wage down to -1.8%. You know, I do not think the US is going
to regain prosperity handing out 1-2% wage increases unless employment growth is very strong,
which as we all know, has certainly not been the case in the current recovery.

This critical weakness in the economy -- low wage growth + low employment growth -- was masked
to some extent in 2011 by a 2% payroll tax reduction. This tax cut is widely expected to be extended
in 2012, but, it will not be incremental on a yr/yr basis, so the real wage pretax will be of
paramount importance. The pressure on the real wage is expected to moderate in 2012, as inflation
seems set to decelerate further. If jobs growth continues and inflation moderates, the case for
growth will strengthen. If the real wage remains under pressure well into 2012, as now seems
the case, then consumers will have to boost credit usage and draw further on savings to keep the
economy above water. So far, households have been tapping savings but have been reluctant
to increase financial leverage. One partial offset to a weak labor market will be a significant
boost in social security payout for 2012.

As I see it now, generating another year of real economic growth will be a "squeaker" without
a much firmer labor market and a continued thawing of the private sector credit markets. This
is especially the case given that export sales -- the strongest US market -- may be set to slow
materially further in a global economy turned sluggish.

Three decent leading indicators for the economy -- industrial metals prices, the long T-bond
yield % and the index of cyclical stocks -- have all come off higher levels set earlier in the
year. Recently there has been some basing in all three -- indicating some re-ignition of hope
for 2012 among investors and traders. These are useful daily measures of sentiment about
prospects for the economy. Triple Play Chart

Friday, December 16, 2011

Corporate Profits Indicators

Viewed shorter run, my profits indicators suggest a bit of caution for the first time since the
economic recovery began in 2009. The top line or sales growth proxy has flattened short term
along with a deterioration in the number of companies reporting stronger operations and new
order rates. In turn, the indicators which suggest the direction of profit margins have also shown
some loss of momentum. Profit margins expanded through most of this year reflecting a strong
performance in my pricing power vs. cost measure. The key here was a large increase in profit
per employee as companies kept hiring and wage costs low relative to an acceleration of pricing
power. My broad measure of pricing power is now decelerating relative to costs and this will
likely continue into next year. On the plus side, the typical loss of momentum in physical volume
that follows the initial recovery surge has leveled off for the time being at a moderate rate of growth.

The trickiest component among the indicators is real volume growth which can re-accelerate in
a recovery and by so doing indicate that the economic expansion may have a longer life. One
marker you can use here is the yr/yr % change of industrial production during an expansion
period. When it drops below 3%, that is a heads up. Through Nov., the yr/yr change stands at 3.7%,
compared to nearly 6% earlier in the year.

Viewed longer term, the trends of top line growth momentum and my longer term leading indicators
suggest that profits could make a cyclical peak in the final quarter of 2012, but long experience
says take this observation with a grain of salt.

Broadly, there is sufficient capital slack in terms of excess capacity and labor and a low cost
of capital to power this expansion for another 2-3 years easily. But this capacity will not likely
be realized without an improvement in employment and real wage growth and without stronger
private sector credit growth. Moreover, reflect as well on US export sales which are up 70%
since 2005 and 42% since the recent recovery began. Export sales is the growth leader for
the US among major economic sectors. Export sales have just leveled off in the short run in a
slowing global economy and sluggish performance, if it continues will impair earnings growth.

SP 500 net per share was close to $84 in 2010, and should be somewhere around $96 this
year -- a new record and nearly 15% ahead of 2010. Net per share was far stronger this year
than I had expected on the strength of better $ employee productivity. That will be hard to
replicate next year and I look for more sudued profit margin and a more modest 7% increase
to nearly $103 for eps. The consensus for net per share in 2012 is now around $107 per
Thomson Reuters.

Regular readers will recall that I believe that business' current practices of low hiring and
chintzy 1-2% wage gains, while it boosts eps and exec bonuses, cheats shareholders because
it reduces economic growth visibility and investor willingness to capitalize earnings at higher

Wednesday, December 14, 2011

Stock Market

Looking back toward Oct. the stock market staged significant "fake out" rallies leading up to the
EU summits of Nov. 4 and Dec. 9. The summits failed to satisfy investors that the EU was set to
handle the crisis up to investor / trader expectations and the rallies have fizzled. So, the market
is headed south again although the downtrend is not yet fully confirmed while US shares are only
mildly oversold. The stock market is in risk off mode as the US dollar continues to trend up
and the Euro continues to trend down.

You will need to be careful here through the end of the year, as traders are breathing fire to have a
year's-end "Santa Claus" rally. This means that if the spinners in the EU up and say some market
friendly things, the USD will drop and the SPX will lift off and up, if only for a short while.
The Street itself may join the game of happy talk about the EU just to help stoke the fire. In this
hair trigger environment, such could happen especially since the Euro area bond traders are
about set to close the books for the year, leaving the huge tests for 2012.

My strategy here is only to play deep oversolds and overboughts. Thus, the SPX, which closed
out today at 1212, would not make it onto my radar until the roughly 1160 area, unless something
clear out of the blue happens.



I have done very well shorting the gold price over the past year, but even I have avoided the kind
of whipsaw action seen latley. Gold for the short run has become a high beta "risk on / risk off"
play. The sharp recent weakness reflects the development of a risk off trade which favors the USD
and Treasuries at the expense of the pantheon of risk on assets such as PMs, stocks, commodities
and the Euro. AS the GLD chart shows, gold is sharply oversold in the short run, and has just broken
below the 200 day m/a. The bulls and bugz are at the point of forsaking gold, something they have not done since the latter part of 2008. Gold has arrived at a key juncture and needs a sudden swing toward
risk on to give the bulls a shot. GLD

To reach a deep intermediate term oversold, GLD needs to trade below 140.

Monday, December 12, 2011

US Trade

Monthly US trade data is reported with a six week lag, so it is not timely for the markets except
as confirmation of expectations. Moreover, because the data can be volatile, it must be used with
care. US trade has been very strong during the economic recovery. Imports, reflecting weaker
hydrocarbon and industrial commodites prices since the spring have been flat at around $225 bil.
per month since Mar. / Apr. of this year. Exports have trended higher since then, although short
term momentum has been slowing. Importantly, strong uptrend lines for both imports and exports
in place since the spring of 2009 have been broken in mild fashion with the release of Oct. data.
This confirms the warning of a slowdown in the weekly leading indicators and the PMI data in
evidence since early in the year when powerful momentum peaked, and may be a warning of
further loss in momentum to come.

I plan to post later this week  on my profits indicators, and the newly reported softness in US
exports will be an issue for the first time during the current economic recovery. Since the early
part of 2009, US export sales have risen by a robust 50% with this strength having contributed
meaningfully to corporate profits.

Friday, December 09, 2011

Stock Market -- Short Term

The weekly cyclical directional indicator has been running flat since 10/21/11 following a fairly
sharp downtrend which started the week of 4/15/11. The SPX is up 1.4% since 10/21, and is down
about 8% since its 4/29 cyclical high. The tracking of the SPX to the indicator has not been bad at
at all. The major declining element within the indicator has been the composite of industrial
commodities prices. Note that sensitive materials prices have started to edge up. Going forward,
it might be wise to watch not just sensitive materials prices but new claims for unemployment
insurance as well. The positive mix is rising prices / falling claims. The more purely coincident
indicator within the broader weekly directional has been relatively steady for 2011 and signals
modest broad economic growth.

My core fundamental indicators suggest a continuing "easy money" bull market, but have not been
reliable since mid - 2010 as investors have been far more sensitive to the shorter term direction
of the weekly cyclical diectional indicator which, in turn, has been considerably more volatile
than the broad economy as well as my profits indicators. Among the core indicators, credit
quality yield spreads have worked the best. The heightened sensitivity to credit quality along
with the evident downtrend of the p/e ratio also suggest continuing investor caution about the
future in line with strong player focus on weekly economic and financial data.

The market has entered another short term uptrend which started in late Nov. The trajectory of
the advance is a little daunting, but the SPX is not yet overbought. To be convincing as more than
a quick pop, the SPX (now 1255) must cruise up to take out resistance points from 1270 through
1285. $SPX Check out the descending tops since the spring and you will see why it is critical
for the market to start attacking resistance soon.

I like to watch the trend of price momentum relative to the 200 day m/a. Development of an
uptrend here is a good sign for longer term direction. SPX & Momentum A positive but as yet
unconvincing bias is developing here as well.

I would be personally more interested in the market if the short term swings in price momentum
were to settle down some from recent levels (Check out the 12 day ROC% in the SPX chart
above). I do not need this much exitement at my tender age.
The stock market was in cyclical bull cruise control mode until the spring of last year when
sudden but temporary weakness in the weekly economic data shattered the cruise control and
forced taders as well as investors to focus on very short term economic direction and momentum.
A repeat of same this year coupled with uncertainty about the future of the Eurozone has forced
noses down to the short run grindstone and has greatly reduced confidence regarding the visibility
of the future. the data provide no respite for this anxious mentality just yet.

Eurozone Baby Steps Along

The EU summit took additional steps to manage the financial crisis within the EZ and about as
expected (see below). Communication between Germany and the ECB continues to stink, however.
It looks like Draghi got hung out to dry on his views about using the ECB to step up on the
purchases of weak sovereign credits, and he has suffered a loss of credibility in the markets on that
subject thanks to Berlin.

Bond players want the lender of last resort option for the ECB, especially with more than $1 tril.
of sovereign and euro bank refinancing ahead over the first half of 2012. Scant evidence now that
players are going to get their wish. This leaves open the possibility of further turbulence in the
EZ sovereign debt and capital markets, especially since a business downturn in Europe is going
to suppress incomes and profits which in turn, will adversely affect the tax revenues garnered by
individual countries. So, uncertainty overhang surrounding the EZ will be only partly alleviated
as we swing into 2012.

Wednesday, December 07, 2011

Russia Stock Market

The ride has grown bumpy with gaps on the charts in recent days as allegations fly that the recent
election was rigged and as surveys show a sharp decline in PM Putin's popularity as he maneuvers
to run for the Presidency for the third time next year after securing the United Russia party
nomination recently (The UR party is also down in the polls). Following the global trend, Russia's
economy has also slowed to 4-5% annual real growth, and is running below Putin's forecasts.
Voters are also unhappy that a sharp economic recovery until recently has not led to much stronger
value to benefit ratios in pension funds (persistent underfunding). Citizen protests are the strongest
they have been for years and although there is little talk of political destabilization, stock players
need to be more careful than usual in the short run with this high beta market. At $29, the RSX is
priced for only $80 bl. oil, so the market is at a large discount to recent price positioning given that
oil is up around $100. RSX is a high risk  / high reward play on a favorable resolution of the
EU crisis. RSX

I like to follow the Russian market in connection with the SPX, the oil price and industrial metals

Tuesday, December 06, 2011

Eurozone: So, What's It Going To Be?

My view since I started looking more earnestly at the EZ problems was that it would take well over
$1 tril. of hard capital to stabilize the situation and give the broad EU a shot at survival in its
current configuration. Early this week we heard of a prospective new treaty deal which would
incorporate a new fiscal policy monitoring mechanism with substantive enforcement powers (Merkel
and her close allies). Now there are stories circulating of an additional large fund to compliment the
current ESFS, which, when both are at full strength, would total around $1.25 tril. An additional
kicker could come from an ECB infusion to the IMF ( Sarkozy and the rest of 'em).

Well, the ECB is expected to cut its rate tomorrow and then we have the big summit when the top
poobahs are to gather Dec. 8-9 to hash out the deal. The new fiscal authority looks primarily like
a way to chase countries out of the EZ as it might make a range of leaders lose their tempers. But,
if there is substance to the idea of a new and much enlarged $ stabilization authority, the summit
might not be another bust. After all, any bureaucrat worth his salt will find ways to finagle and
finesse a new fiscal directorate, even one with Germany's shadow imprimatur.

For a little more background, see the 10/18 post: EU -- How Big The Jitters? (I still think G-20
and China in particular should have done more to help out.)

IEV and $SPX chart