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 !!!

Sunday, January 29, 2012

Stock Market Weekly

The market is overbought short term and my e-inbox suggests this issue is being widely discussed.
The thrust up in recent months has been strong enough to indicate the market has further upside a
bit down the road even if it is short term overbought. One measure I use is the 30 day m/a of NYSE
advancing stocks. When it moves up around 1800, that is evidence more upside is ahead as time
progresses, with this result holding about 85% of the time based on data running back over 20 years.

My weekly SPX chart shows the market is still in a firm uptrend. It is overbought against the 13
wk. m/a, and I would like to see the 40 wk. m/a begin to turn decisively higher to confirm a longer
run for the market, but I am ok with it now as my 40 wk. price oscillator remains in a clear but still volatile uptrend $SPX

My weekly cyclical coincident indicator continues its rise off an interim low set on 9/23/11 at a
reading of 222.4. Since then the indicator has moved ahead by 7.1% to the 238.2 level paced by
lower unemployment insurance claims, and more recently, by a sharp recovery underway in
sensitive materials prices. Weekly sales and production data also continue positive. Since 9/23,
the SPX is up by 15.8%, and that may also be a sign the market is a bit overbought in the short run.

Friday, January 27, 2012

Gold Price

By my indicators, the recovery in the gold price this year to date primarily reflects upturns in
the various cyclical pressure gauges or "boom / bust" measures. The monetary measures I follow
in connection with gold have been flat so far in 2012. So the betting for gold currently favors an
expectation for improved commercial demand.

As expected, the gold price did bounce off the oversold condition described late last year. It
did not test support at 1500, but has instead maintained a strong positive trajectory which led
the price to break out of the sharp downtrend line in force over the Sep. - Dec. 2011 period.
That is a positive technical development. The metal is overbought in the short term but not looking
out several months. $Gold

The speculative demand for gold continues to rise when I measure its price against the economics
for the industry ( all in cost + cash flow ). It is currently about 83% over this measure compared to
peaks of 40% in 2006 and 60% in 2008. Gold is down from the 100% premium over economic
value recorded in Sep. 2011. Gold can be expected to return down to economic value in the next
global recession.

Gold price volatility is showing preliminary signs of settling down after a tumultuous Half 2 ' 11.
If the current rally extends up toward the $1800 oz. level in the next month or two, I will look
to start shorting it again (a move not recommended for most folks). $Gold -- Shorter Term

Wednesday, January 25, 2012

Monetary Policy

Fed policy is set as it was post 1932, when output began to recover, private credit demand was in the doldrums, deflation pressures started to ease and unemployment remained near record levels. To
supply liquidity to the system, the Fed has roughly 2 Stril. of securities and is keeping short rates
at or near zero. Historical 3 mo. T-bill yield

The Fed defends the policy in view of its dual mandate. Here, unemployment is seen as still too high
while there is deflation risk rather than serious inflation risk. Just like the 1930s.

Today, the Fed extended its ZIRP projection to the latter part of 2014. In also buying longer dated
Treasuries and mortgage backed securities, the Fed is trying to maintain housing affordability at
an attractive level and allow homeowners to refinance at historic low mortgage rates. The program
has been stymied by reluctance of lenders to make mortgage commitments that are not gilt edged,
and by a new real estate loan philosophy which emphasizes collateral value rather cash flow
servicing capability. So, just as the mortgage industry was stupidly aggressive in lending over
2003 - 2007, it is now stupidly tight in lending. The way of course to enhance collateral value
in housing is to loosen overly conservative lending standards and allow rising demand to nudge
house prices up and out of the doldrums. In a similar vein, with unemployment still very high,
borrowers are more conservative as well. The Fed is now anticipating a lengthy period will be
required to move the US out of the realestate morass.

By contrast, the post WW 2 indicators that have governed interest rate policy are about 80%
in favor of raising rates, with only the capacity utilization % running a little shy of the red zone.

ZIRP punishes savers, but is a windfall for those who refinance their mortgages. Unfortunately,
even refinance demand has been weakening in recent years, and in acknowledgement, the Fed
will keep the window around longer in the hope the market will loosen up.

Tuesday, January 24, 2012

Eurozone -- Amusing Surprise

The EU faces strong economic headwinds this year. Most forecasters are expecting a recession.
The Markit Economics PMI data showed a steep downdraft in output since early 2011, furthered
by negative or contraction readings until the Jan. 2012 flash report.

Now, as Aristotle was fond of saying, "one swallow does not a summer make", but it is interesting
that as the EU moves into the new year, there is a sharp bounce in activity levels in evidence, and
one which comes in the wake of the ECB's massive collateralized loan program to the EU banks.
Sharp positive reversals in PMI following sizable declines in activity levels into negative
territory do not normally indicate errant positive "blips" in an ongoing, heavy duty downtrend. So,
economic headwinds and recession forecasts notwithstanding, it could be unwise to put the EU to
bed before we see more data.

Monday, January 23, 2012

Stock Market -- Short Term Fundamentals

The weekly cyclical fundamental directional indicator closed out 2011 slightly below the
2010 close, for a decent match with the SP 500. The indicator has turned up sharply so far
in 2012 and this primarily reflects commencement of a seasonal rise in industrial commodities
prices as businesses add inventory to meet production schedules. US production of manufactured
goods closed out 2011 on a stronger note, but the big kicker for sensitive prices reflects some
renewal of business confidence about an eventual re-acceleration of industrial output in China
following preliminary monetary easing moves there. If the US maintains industrial output growth
and China re-accelerates, sensitive materials prices would likely trace out a seasonal rise through
mid - year, which would provide ongoing support for the US stock market. Remember, however,
that sensitive materials prices composites are available weekly, are volatile and will not conform
to the seasonal pattern if economic weakness develops. JOC/ECRI Ind. Com. Comp. (interactive)

Federal Reserve Bank Credit and the monetary base have also increased since early Dec. 2011.
Given the close attention investors have been paying to the Fed's balance sheet, this is
also a positive for stocks, but one with low future visibility and possible volatility since the
bulk of the increase in the Fed's credit offered comes from the new liquidity swap program for
the ECB and other needy central banks. For now, investors regard that support as a positive.

The unseasonable uptrend in the oil price which reflects issues in Nigeria and with Iran is not
bothering stocks for now, although a rising gasoline price, should it continue, will negatively
affect US consumer confidence before long.

One negative in my weekly cluster of indicators which is important for stocks and which has
yet to turn positive is corporate bond credit quality spreads (BAA / BBB). Spreads have been
widening since early 2011 and remain sharply larger than  levels seen in mid - 2010, when the
market's p/e ratio first began to contract. Now, spreads have been more stable in recent weeks
so maybe confidence could turn there as well, but they are quite wide and not far below
levels which suggest a bet on economic decline.

Friday, January 20, 2012

Stock Market -- Price Lagging Breadth

The cumulative NYSE adv / dec line made a new all time high this week -- normally a good
sign when price is lagging some. However, this time out there is a big lag. Using my Market
Tracker, the formula for the SPX turns $100 per share current earning power plus a moderate
3% inflation rate into an implied value of 1700 for the SPX. At 1315, the SPX is trading well
below the level indicated by the long term Tracker model and below its previous high set in 2007.
The 23% discount to Tracker value is primarily a reflection of a lower earnings capitalization rate
or P/E ratio (13.2X). So, there is very substantial caution among investors about how well the
future will go. Record breadth shows solid interest while the big discount to Tracker value shows
muted investor confidence. Keep this exercise in mind when assessing market potential.

Breadth & SPX Chart

And, while you're at it, note as well that the market is getting short term overbought based on the
breadth measure.

Wednesday, January 18, 2012

Natural Gas Price

Well, if you've been watching, the price has been in free fall lately, as seasonally high levels
of supply have collided with very seasonally low levels of demand. At $2.47 per mcf, gas is
now likely being priced below all-in cost, so more producing wells will be shutting down.
Shutting in gas wells must be done with great care. It is a time consuming process. So, bringing
supply under control takes time. Even so, since this important resource is at a discount to
cost and since gas is trading nearly 40% below its 200 day m/a, I am in patient long side
accumulation mode with the idea in mind that gas will hit $5 per at some point over the next
18 months.

It is not easy to make money trading gas. I have generally done fairly well buying it below $4,
and with this latest speedy downdraft, gas is as cheap as it has been for a number of years.
there are players out there who will follow, but not likely until gas has turned and entered a
short term uptrend. Fair enough, but since I intend to be patient with this position, I am
doing some now, and for a lark, am using the gas ETF, UNG. Both gas and UNG are displayed

Monday, January 16, 2012

Stock Market -- Longer Term Technical

Here the focus is on the SP 500 viewed monthly and going back through the mid - 1990s. SPX
A careful look shows a couple of noteworthy caution flags including the rollover of MACD in
recent months as well as now negative momentum (shown in the link as the 10 month rate of change).
The bright spot here is the stochastic measure which does show improving short term price
momentum. The SPX experienced near bear markets in both 2010 and last year, but the 2011
decline resulted in more technical damage to the longer term picture and it is going to be very
much more difficult to expect a continuation of the cyclical bull market without the kind of
strong positive price action that would reverse especially the MACD reading. Now reversals of
that sort do occur (See 1998 and 2006 on chart), but turns to the positive need to come within a
few months time.

I also observe angle of trajectory for the stock market (best done on hard copy). The underlying
positive trajectory for the current cycle advance has flagged sharply with time which is a normal
development, but remains strong enough to support a very respectable advance over the course
this year. By the same token, the uptrend line off the 2009 low has eased to the point where
a break of trend below the SPX 1150 level over the next 3-4 months would make the bull case
awfully hard to stay with.

Wednesday, January 11, 2012

Stock Market -- Daily Chart

My argument for weeks has been that the market is in an uptrend but that it needed to take out the
closing highs at the end of Oct. 2011 to lay any claim on further and substantial upside. There was
a period of several days over the past week where the SPX failed to take out the Oct. close of
1285, but it has now done that, and the automatic caution which comes in to play when an index
stumbles at resistance has been laid to rest. Other factors that raise caution will no doubt come
along with time, but my work does not indicate serious negative issues now.

The SPX shows a confirmed shorter run uptrend on RSI, MACD and ADX. $SPX  The 200 day
price oscillator is also in an uptrend and is running positive against median as shown here. It is
important to note that the intermediate term indicator (200 day Osc.) is rather volatile and this
suggests to me when one looks forward over the next couple of months, one has to be prepared
for some degree of continuation in market volatility.

The market is a little overbought short term on my 25 day oscillator. Frankly, if this rally is to
be indicative of a longer duration upleg, it would be nice to see a relatively fast run in the SPX
up the 1325 area over the next week or so. But, you take things as they come along.

Monday, January 09, 2012

Economic Indicator -- Delivery Delay

In a robust economy delays of materials and goods to manufacturers rises as vendors struggle to
meet demand. In a downtrending or weak economy, manufacturers experience far fewer delays
as vendors have supplies and are eager to ship. The ISM provides a monthly reading of % of
purchasing managers experiencing delays in deliveries of materials. ISM D / D % Chart

the D / D % for mfrs. has dropped to below 50% for the first time since the economic recovery
began in 2009. That is a warning sign of slower orders in the system. Note that the series is
volatile and does give false signals. Even so, it is a decent indicator of longer term trend and we
have to watch it carefully now to see if  a recovery of delivery delays is on tap or whether
economic momentum is set to remain sluggish.

Sunday, January 08, 2012

Stock Market -- Weekly

The market remains in a moderate but volatile uptrend. Failure of the SPX to take out even mild
Oct. 2011 overhead resistance at 1285 over the past week should remain a source of concern for
traders and serves as a cautionary warning for the next couple of weeks. $SPX

The Fed is maintaining Its nearly $100 bil. liquidity swap, but as expected, it has started draining
permanent reserves following a moderate build up for the holiday season. That build up did
increase trader optimism that a new round of quantitative easing could be in the works. It will
be important to see how traders react to further, but normal seasonal shrinkage in longer term
Fed bank credit.

If sizable, additional increases in the central bank liquidity swap program are needed in the
months ahead, it would underscore rising financial stress in the EU and would not be a good

My weekly cyclical fundamental directional indicator continues to advance modestly primarily
on the strength of falling initial unemployment insurance claims. A rising directional indicator
is a positive for the market and could provide significant additional support if the breadth of
the various measures that comprise it would increase.

Friday, January 06, 2012

Economy -- Analysis

1.US business sales (including construction outlays) increased by an estimated 10.1% in 2011.
   Profit margins expanded on continuing productivity gains and a positive spread of pricing
   power over compensation costs. Profits likely rose close to 15%.

2. The momentum of global economic economic expansion slowed markedly over the course
    of 2011 and the disappointing performance in offshore economies has resulted in the
    reduction of both 2011 and 2012 earnings growth estimates for the SP500. Trends in
    global production growth and trade continued to head south over most of 2011.

3. US Sales and production growth exceeded real household income growth by a significant margin
    reflecting depressed real wages and modest employment growth. Stronger retail sales over
   Half 2 '11 were financed primarily out of savings and a slight increase in borrowing. Fatter
   profit margins for business have been coming at the expense of a weak labor market. This is a
   destabilizing trend if it continues on.

4. US goods and services new order rates are improving and suggest a decently positive early
    2012 for the economy. Growth visibility beyond the opening months of this year is low
    because income growth continues to trail sales and output gains by a substantial margin.
    Pressure on the real wage has been easing as inflation pressures have been moderating.
    Note, however, the recent upturn in the gasoline price. $GASO  Continuation of this trend
    will annoy consumer confidence and pressure the real wage.

5. 2011 ended with a pick up in construction spending, particularly for housing and commercial.
    That's a nice positive, especially since construction jobs can pay well. But, we'll have to
    watch the US exports picture with foreign economies losing momentum and the US dollar on
    the rise.

6. My main concerns now for this year are the weak US real wage and declining growth in the
    world exc. the US.

For an interesting stab at a real time business conditions index from the Philly Fed, go here.

Wednesday, January 04, 2012

Financial System Liquidity Issues

Broad Measure Of Credit Driven Liquidity ($11.9 Tril.)
The loan / lease book for the banking system has been growing, but the banks have cut back on
funding. Some banks have tightened credit while others are passing up super low spread assets
reflecting the Fed's ZIRP. Liquidity remains healthy, with the ratio of Govvies to C & I loans a
comfortable 1.28 to 1. The yr/yr growth of broad liquidity at 4.7% is low enough to keep the
Fed thinking about further domestic QE.

Federal Reserve Bank Credit
FRBC has jumped by $125 bil. or 4.3% over the past month. There has been some seasonal add,
but the vast bulk of the increase to global liquidity has been in the form of liquidity swaps to
CBs requiring help in coping with the EU financial crisis. FRBC is now running modestly above
the Fed's initial target set at the end of QE 2 this past June. Future FRBC balances are not going
to be easy to guess at, but continued sharp rises in liquidity swap credit would clearly suggest
a deepening EU mess.

Money Market Funds
Since mid-2009 the Total MMF balance has been drawn down by 32% or $1.2 tril.. Current
levels are now running well below 12/07 levels before the big build up as markets weakened.
With system "sideline cash" at far more modest levels, capital market asset preference in 2012,
should it be strong, will likely come at the expense of other market sectors.

Real Estate Loan Book
Building contract awards are running 11% above last year's depressed level and construction
spending has turned up. These developments should put more real estate loans on bank books
as the year progresses.

Bank Interest Earning Asset Charts (interactive)

Tuesday, January 03, 2012

Stock Market -- Technical

The market remains in an uptrend on both short and intermediate term accounts. However, my
argument has been that, to be more persuasive, the SPX needs to take out Oct. month end closing
high of 1285. That level proved to be formidable resistance last autumn, and wouldn't you know
the market stumbled twice today trying to get through it on the way up. So, that's twice overhead
failure in the past two months. Normally, that would be a fairly strong mechanical sell signal, but
it is possible that traders are antsy with the employment figures due out this Fri. One thing to
watch then is if the market either takes out 1285 before Fri. or stalls short of it but hangs on.
That would mean a positive surprise on Fri.could take the SPX higher.

My 25 day price oscillator indicates the SPX has moved into the low end of moderate overbought
territory, and that does set up a situation where the more jittery traders could exit forthwith, and
where the SPX could easily retreat from the current 1277 area down to 1210. Fri. and its news
will come soon enough, but traders first need to watch for an imminent fail in the upmove because
of the inability to take out that 1285 level today.