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, February 29, 2012

Gold Price -- Interesting Day

I looked at the gold price over the past weekend and thought that if it cleared $1800 oz. on the
way up, I would consider shorting it again. I overlooked the signals early this week that it
was having trouble with resistance at $1800, and found today quite interesting when Fed Chair
Bernanke mentioned in testimony before The House that the FOMC would have to keep the
fast improving employment situation in mind, policywise. Gold tanked apparently because some
players feared the Fed could be stepping away from further quantitative easing and this on the
day when the ECB completed another round of ECB style easing.

It remains interesting that the Fed's balance sheet has increased only modestly since mid - 2011
while foreign central bank holdings of Treasuries has also declined. This monetary indicator --
total central bank holdings of Treasuries -- has not supported a rising gold price for some time.
Now there have been other positive factors: increasing Asian demand for gold, a positive
short term reversal in forward indicators of global output growth, and the ECB's large collateral
backed loan program. So, the interesting part of today's action was the dramatic reaction to a very
hedged hint by the Fed that the size of the punchbowl could be large enough. You could infer from
today's action that some good sized gold players had QE 3 in their forecasts for the year. Keep an
eye out for further negative follow through.

Gold Price

Monday, February 27, 2012

Russia Stock Market

Russia remains a high volatility "risk on" favorite. The market remains very attuned to US stocks,
the oil price and to industrial commodities prices. The strength in Russia stocks since late 2011
reflects a global player switch to "risk on" and the the positive trifecta of the SP 500, oil and
industrial basics prices. There is now buzz here in the US that with V. Putin expected to win the
presidency, a key uncertainty will be resolved, making it less risky to invest in Mother Russia.

My take on this one is different as I think putting Putin back at the top of the Kremlin will add to
uncertainty and foster more political antagonism from Russia's growing middle class of better
educated, ambitious and anti - autocratic younger people, especially if Putin and his guys decide
to get nastier with these folks in the post election period. Of course, Putin could turn into St.
Vladimir of Kremlin Square, but the past record offers little support on this point.

The RSX composite does get overbought when that 40 day RSI gets up to or above 60% and
the market has been trading in tandem with the SP 500 and the oil price, both of which are
overbought short term (Go to chart link below for the 40 RSI).

I am avoiding Russia now. You have the market overbought and I await the post election
period to see if Putin reads his antagonists the riot act and whether a growing number of folks
will continue to be on the streets to challenege Putin's new administration. Springtime is just
up the street a little and around the corner.


Friday, February 24, 2012

Stock Market Strategy

The SP 500 closed at a new cyclical high today. For one such as I who has been bullish on the
longer term direction of the market since around the end of 2008, this is a gratifying moment.
I use a set of fundamental indicators which did work like a charm in every post WW 2 market.
But the past economic downturn -- more akin to an economic depression than a recession -- did
necessitate going back to the 1932 - 1940 Great Depression period to gain an understanding of
how a stock market recovery could take place in the wake of colossal economic damage and a
severe credit contraction. The key I found was the dramatic reversal in monetary policy to flood
the economic system with liquidity to counterract the deflationary force of credit contraction. It
worked then to support economic recovery and to slowly rebuild confidence and it worked this
time out as well. I also saw clearly that when this naked monetary easing was shut off, the
economy was prone to recession and the stock market suffered. Since we have yet to see a full
blooded resumption of private sector credit growth in the current economic recovery, I plan to
continue to monitor Fed Bank Credit and the monetary base very carefully because the evidence
continues to show that the market struggles or sells off when the Fed turns off the spigot.

The following link (from economagic) shows the monetary base from the 1931 - 1941 period.
It is perishable but I hope it holds up for a while. Economagic

Wednesday, February 22, 2012

Fundamental Stock Market Indicator

Today, I present a link to economist Ed Yardeni's fundamental stock market indicator. It is
close to my weekly cyclical market indicator, but there are some substantial differences. He
uses a consumer comfort measure and he also deploys an industrial commodities index which is
priced in US $. I use a broader more nearly dollar neutral index for commodities and an array
of leading economic indicator data that is available weekly plus a conservative weekly coincident
indicator that reflects various components of retail sales. We both weight commodities and the
initial unemployment insurance claims heavily. Yardeni model

These indicators are coincident because key elements of the data sets are not are not available
until either Thursday or Friday of each week, and some are already a week old when reported. So,
measures of this sort are not that useful for short term timing, but they provide an excellent
fundamental backdrop for the stock market on a trend basis.

Tp get Yardeni's conclusions from his work you need to be a paying subscriber.

Monday, February 20, 2012

Stock Market -- Weekly Chart

Back on 10/16/11 (archived), I posted that despite the short term uncertainties surrounding the
market then, my favorite weekly measures were starting to line up positive, and that such counted
the most in the environment. The weekly chart and indicators remain in positive mode. Check the
SPX and the supporting SPX vs. 200 day m/a. These indicators are not always that helpful in the
very short run, but I will count the market in bullish mode until I start to see signs of a breakdown
in the indicator readings.

The weekly SPX is approaching a moderate overbought against its 40 wk m/a (and the daily against
its 200 day m/a), but since none of the indicators are up in "red zone" territory, the charts shown do
not yet suggest a top is forming for the present upleg.

Both charts show up channels from early Oct. '11, and continue to suggest that there could be another
and perhaps unexpected bout of strong volatility, the narrowness of the channel since mid-Dec. '11
 notwithstanding. I would love to wish the potential for disturbing volatility away, but the
"logic" of the charts says "no".

Wednesday, February 15, 2012

Oil Price -- For Top Guns Only

Today, Iran threatened to cut off its six largest EU buyers in retaliation for the EU proposal
to embargo Iranian crude. The US does not buy Iran crude, but does have a plan on the table
to push SWIFT -- the global payments and deposits clearinghouse -- to cut the Iranian central
bank and its member banks out of the system. Such dual EU / US action would if enacted have a
serious negative economic impact for Iran, as it would take a substantial amount of time to line
up new buyers for all of its crude and establish what would be at best an inefficient and risky
new payments / deposits clearing system.

The dispute has been going on for several months and has added $20 bl. to the price of crude
by my estimate. So, Iran has been a major beneficiary as have the nervy traders who have been
long crude during an especially weak seasonal period. There is overhead resistance for crude
around the current price, so traders need to decide whether the political tiff has deepened enough
to warrant further commitment on the long side.

Since I think only the guys with superior market intelligence should be playing in this market
now, I am a bystander, and if you are tempted to play -- long or short -- it would be wise to
review whether or not you have timely access to info you need to handle a very complicated and
risky situation.

I plan to monitor the situation carefully primarily because my research suggests that WTI crude
above $95 bl. will tend to be a stronger drag on broad economic output growth.

WTI Crude

Tuesday, February 14, 2012

Stock Market -- Short Term

The market experienced a powerful move up from the late Nov. '11 low and also when measured
from the lower, earlier Oct. '11 low. Most recently, the SP 500 is showing an overbought in the
short run and has been kissing important resistance at 1350. SPX

This is not an easy situation. The SPX has run well out ahead of my weekly cyclical fundamental
index since Oct. '11. The fundamental index is up nicely, but has been running less than half the
22.8% run up in the SPX since Oct. However, the trajectory and the breadth of the advance are
far more akin to a fresh upleg than a blow off with a dim future. In fact, the SPX could advance
another 5.5% up to 1425 over the next month or two before it turned overbought on my longer term

Now, the chart also shows a welcome dimunition of volatility over the past couple of months.
However, the structure of the rally still leaves open the possibility of a return to significantly
increased volatility (Draw a trend line up with touches at the Oct. and Nov. lows.) As well,
the recent strong rally has mostly to do with restoration of the p/e ratio and much less to do
with near term earnings expectations, which remain tame.

So, for now, I am stuck looking for some additional testing of SPX 1350 resistance over the
next week or two and having to hold my breath on how deep a retracement could come if the
market does not blow through 1350. Not especially definitive you say? Well, you play it as it

Sunday, February 12, 2012

Financial System Liquidity

As in the 1930s, when banking sector credit was contracting or flat, the Fed continues to be the
primary provider of liquidity to the financial system. That measure of liquidity has been rising
modestly recently owing to the currency swap lines from the Fed to liquidity shy central banks.
The banking system's interest earning assets have been rising, but it is interesting that solid growth
of the business loan portfolio has nearly been matched by the continued accumulation of Treasuries
in the investment category. Real Estate loans, which account for 50% of bank loan exposure have
only recently stopped declining and ticked up in Jan. this year, perhaps reflecting a long awaited
recovery of construction spending. Modest improvements in credit demand have so far left the
banks with little need or appetite to bid for more deposit $.

Based on post WW 2 standards, the Fed should be raising short rates now, but with unemployment
still high and housing still very depressed, the Fed is maintaining its ZIRP. This will be interesting
to watch going forward, as the recovery of private sector loan demand continues to broaden out.
Short term business credit demand is up over 10% yr/yr, and the Fed has not seen fit to raise rates
as It always did over the post WW 2 period. Quite something.

Fed Bank Credit & Stock Market
Since the Fed is the major game in town re: liquidity, you should note the importance of the Fed's
Credit account to the market. Investors like positive momentum in Fed Bank credit and shun stocks
when the Fed has this account in flat or contraction modes. Fed Bank Credit

Friday, February 10, 2012

China -- Shanghai Composite

China's huge, nearly $600 bil. stimulus program focused heavily on its industrial base and on
further broadening its infrastructure and real estate development. The Gov. threw money at
these markets to avoid a deep recession in 2009 with the result that the broad money supply M-2
had jumped to a 30% yr/yr growth rate by mid-2010. This implied the development of 20%
inflation which mostly took place in the higher end residential and commercial real estate markets.
The stock market became a source of funds to feed real estate speculation. but as economic
expansion progressed, consumer inflation accelerated sharply, forcing China to tighten money and
credit to curb the faster CPI and  corral the excess real estate speculation. On a yr/yr basis, China
M-2 is now down to 12.4%, which for an economy with fast growth potential is a sensible level.

I had expected Chinese authorities to begin easing monetary policy over Half 2 '11 and the
stock market to rally as a deceleration of inflation reduced the investment return hurdle rate. China
did not begin to ease until late in 2011, and then, only slightly. There has been a bounce in a very
weak stock market, but it is hard to tell whether the bounce is simply a move in sympathy with a
global recovery of share prices or whether players are coming around to believing that China is
set to ease monetary policy further. (Naturally, the Half 2 '11 market recovery did not happen as
the market kept in a southerly direction.)

Lord knows They have the real estate developers on the run, with only middle and lower priced
residential properties getting any play from lenders. They also have monetary policy at a near
critical juncture, since further significant tightening of liquidity would not only freeze out more
real estate, but would do harm to China's output base and employment. Obviously, it would do
China little good to pump up liquidity sharply from here which could re-arouse the overbuilt
real estate sector and lead to further inflation down the road.

As many have noted, China needs badly to rebalance its economy in favor of consumption and
away from its profound over-dependence on industry and upscale property development. As well,
it needs to better control the diversity of its banking sector loan portfolios to include far more
emphasis on the development of small and mid-size business. But first, it needs to put its monetary
policy on a far more even keel.

A turn to a rather moderate monetary policy of accomodation seems needed as China passes
through 2012. Its stock market is quite reasonably priced and might benefit from a more balanced   policy which does not tilt the investment players right back to the real estate and private credit

China's presumptive new leader, Xi Jinping will be in the US next week and is expected to take
up the reins of power later this year. This development could be a risk element for the Shanghai
Composite near term as Xi might want the authorities to squeeze out more inflation pressure
before he ascends. All to be seen.

Shanghai Stocks

Wednesday, February 08, 2012

Risk On vs. Risk Off

One quick measure I use to evaluate the status of the "risk on vs. risk off " trade is to watch the
SP 500 in the form of the SPY against the long (30 yr.) Treasury. SPY:$USB

The relationship between the stock and bond market can shift around over time, but this measure
has been helpful in recent years. Note the "buy stock" points of Aug. 2010 and Oct. 2011, when
stocks rallied and the bond price faded at .75 relative strength. Note as well that when relative
strength of the SPY gets close to or exceeds the 1.02 RS level, that you get a caution sign that
stocks are perceived to be doing a little too well relative to the bond. The current RS reading for
SPY against the long guy is .95, which suggests the relationship is beginning to mature based on
the recent economic environment. Interesting stuff in the current mileu.

I would also call your attention to when the RS of the SPY breaks below the 20 day m/a with this
followed by a downturn of the "20", you also get a heads up which tells you to pay much closer
attention to the economic fundamentals.

Monday, February 06, 2012

Nasdaq Comp. Overbought

The TRIN for the Naz measures buying pressure vs. selling pressure. A high TRIN reading --
the 21 day m/a exceeds 1.5 --  shows a deep oversold. A low TRIN reading below .90 shows
the Naz is overbought. The market is overbought at present. $TRINQ

Economic Indicators / Analysis

Based on the coincident economic indicators, the growth of sales and production saw dwindling
momentum over most of 2011, as the output side of the US economy was slowed by negative
real income and sluggish employment gains. I think it is fair to say that without the benefit of the
2% payroll tax cut, growth would have been marginal at best. Although the payroll tax benefit is
likely to be extended for 2012 after the usual Wash. DC histrionics, it will not be incremental in
force this year. Excluding the tax cut, the real wage rate, measured yr/yr, fell from 0.7% at year
end 2010 to a low of -2% by 8/11. This awful performance has improved since Aug., with the real
wage now running at about -0.8% yr/yr through Jan. The improvement is primarily due to a
significant reduction of inflation momentum which could continue for a few more months. On the
plus side, the yr/yr growth of employment has improved from a scant 0.2% for 8/11 up to a far
more reasonable 1.7% through Jan. So, the underlying buying power of the economy is getting
better, although it is still inherently modest.

In line with somewhat improved buying power, new order rates for US business have improved
markedly since Aug. 2011, and measured by breadth of businesses with rising new order rates,
are solidly positive and suggest a re-acceleration of economic growth in the months ahead.

Measures of global economic activity are also improving in early 2012, but this heavily reflects
the contribution of stronger US new order rates.

The US banking system took a little bit of a holiday over the second half of 2011. With a slowing
economy, banks did not bid agressively for deposits or boost commercial paper outstanding. That
left the Fed as the prime supplier of incremental liquidity over the Aug. '11 - Jan. '12 period.
Perhaps with business now showing a stronger order book and construction spending now
apparently recovering, the banking system will resume providing more liquidity to the economy.

With Europe, Japan and China experiencing growth slowdowns as 2011 progressed, US export
sales have turned modestly lower since the autumn of last year and could continue to be a drag
on the US in coming months.

On balance, with real wages still negative and the banks still reluctant to step up more strongly to
support the economy, the recovery remains fragile on its internal workings, never mind if
problems in Europe take a turn for the worse or if rising mid-east tensions provoke an inflation
shock from a jump in the oil price.

Note, however, that older hands have been buying US stocks over the past several months
because they have watched underlying but modest improvement in economic fundamentals
coupled with a deceleration of inflation pressure.

Friday, February 03, 2012

Stock Market Stategy -- Adding Shorting Option

The market is overbought short term, but the trend both shorter run and intermediate term are
still decidedly positive. Nevertheless, I plan to use leveraged short ETFs on signs of price
weakness probably through the remainder of the month.

I have linked to the SPX % of stocks above their 50 day m/a's. $SPX50AR I use this chart to
help me decide on long vs short decisions and watch the action of the % reading against its 10 and
25 day m/a's. I have only traded long since the end of 2008, but with three years having past
since then, it seems about right to use a more balanced strategy. Study of this chart is worth the
time, as it has been a very ok guide to the market for many years.

Wednesday, February 01, 2012

Inflation Potential

Inflation Pressure Gauges
By Sep. 2011, inflation had accelerated to 3.9% yr/yr. As expected, it has moderated, and the CPI
registered 3.0% yr/yr through 12/11. My narrow inflation pressure gauge, which is heavily weighted
to commodities and capacity utilization %, is signaling further moderation so that the CPI could fall
to 2.0 - 2.5% in several months' time. The easing of pressure primarily reflects the decline of
commodities prices underway since May, 2011. $CRB Commodities Comp. The chart shows the
CRB is down 8.1% yr/yr, and it would need to reverse and rise above +10% yr/yr to trigger off
a substantial re-acceleration of the CPI.

My broader gauge, which includes a wide array of economic data is consistent with a yr/yr CPI
of roughly 2.5% at present. Both gauges did tick up slightly near year's end 2011.

The Real Wage
Commodities driven inflation, particularly for petroleum products, turned the real wage negative
in early 2011. Incremental FICA tax relief eased the pain, but no further increments are expected
now. Thus, unless there is an upward adjustment to wages soon, the economic recovery will remain
at risk. The wider measure of real disposable income has also been negative. Real DPI

Companies may not realize it, but since real wages which are too low can easily jeopardize
economic expansion, investors react by reducing the stock market's p/e ratio. Thus it is
that shareholders as well as labor are now being screwed by CEO focus on short term earnings
and exec bonuses and an evident lack of foresight.