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 !!!

Friday, March 30, 2012

Stock Market --Technical

The stock market has been on a strong tear since late Nov. '11. Run ups at this angle of trajectory
often end after 3 - 4 months, with more extended high angle runs reserved for the opening legs of
cyclical bull markets and not ones with a reasonable degree of maturity. That said, there is no
clear technical reason now apparent for concluding that that the advance should end soon, only
that it would be wisest to look for more modest progress and some volatility ahead.

Daily Chart
The chart describes a sharp but nevertheless low volatility advance in progress and one which has
seen moderate overboughts quickly brought to heel by mild retreats and consolidations. Daily SPX

Weekly Chart
The weekly SPX has been my mainstay for the current run. The indicators displayed with the
weekly chart are all in positive mode, and moreover suggests that the SPX could squeeze out a
couple of more weeks of upside before the indicators get a little too lofty. Weekly SPX
Note that on the weekly chart, I compare the SPX to its 40 wk. m/a. And here, there is a solid
moderate overbought condition which is powerful enough based on history to switch on the
amber or caution light.

Thursday, March 29, 2012

Oil Price

Traditionally, the oil price experiences its longest and deepest period of seasonal weakness
between early Oct. and mid - Dec. The market tends to rally around the new year, but often
weakens again through the end of Feb. The latest Oct. - Feb. interval saw a powerful counter-
seasonal move with the price rising from $75 bl. to $110 before settling down in recent weeks.
The trading pits did an amazing job of kiting "bomb Iran fever" into an exceptional price rally.
The traders likely made good money and I guess Iran did, too. Recently, both the CIA and Israel's
Mossad have come out to pooh pooh the idea while the Saudis have decried the run up in the price  as econmically dangerous and have even reminded folks they have spare capacity. Now, we also have renewed chatter about western countries tapping strategic reserves to curtail the sharply rising
gasoline price.

The oil price has faded modestly recently because the attack Iran senarios are fading in
popularity and it suddenly seems like a less likely event. The interesting issue here is that Mar.
and Apr. normally represent very strong seasonal months for oil as gasoline refining expands
and inventories are built ahead of the peak driving season for the northern hemisphere.Recent
oil price action shows the market is again moving in a manner out of synch with the seasonals.

From a fundamental point of view, I have been thinking of oil in 2012 trading in a range of  $80 -
$100 bl. The market has made a liar out of me already, but the chart link ahead is signaling that
oil might have further downside despite the current positive seasonal bias. At this point, I am
guessing that if oil drops further to around $85 - 90 by mid - year I might give it a look as a
long position. I have stayed away from this market since the "bomb Iran" drumbeat started
because I have been figuring one almost needs insider knowledge of the antagonists as well as
the big boys in the trading pits to have an edge. For now, I'll bide my time. $WTIC

Wednesday, March 28, 2012

Gold Price Observations

The cyclical uptrend in the gold price off the late 2008 cyclical low of $720 oz. remains intact.
The breakdown line for the trend is now around $1620 - 30. Gold, today at $1658. is still above

The 10 wk. RSI is getting a little droopy under 50. The chart link shows the Gold Bugz have often
come in to buy the metal when the 10 wk RSI is around 50, and, if you check the ADX chart in the
bottom panel, you'll see the Bugz have been ready to jump in at +DI 20 in recent years. $GOLD

The intermediate term MACD does show a downtrend underway off last year's high, but further
weakness in price will be needed to re-affirm it.

The chart also shows the gold price pivoting off the $1560 oz. level over the past 12 months.
Since the price has been unable to move back above its 40 wk m/a in recent weeks, a move
down to the pivot to test support cannot be ruled out.

My fundamental indicators, which imply price direction but not price level, have been flat
since mid-year, reflecting a steady Fed Bank Credit account, a volatile but firmer US$, and a
weaker level of sensitive materials prices.

I also watch the price of gold relative to that of oil carefully. At 15.8 barrels to the ounce, it
is well below peak levels but is still elevated on a longer term basis.

My financial armageddon angst meter has gold running with a 44% premium. That implies
plenty of downside, if, God forbid, the global financial / economic environment should settle
down for a year or two. My all in mining cost + sensible commercial mark up measure has gold
as tragically overpriced, still.

With China and India big money printers and gold buyers, I am toying around with ways to
make handicapping the gold price less US$ centric. Keep you posted.

Monday, March 26, 2012

Corporate Profits Indicators

Sales Growth
Measured yr/yr, total business sales growth slowed appreciably toward the end of 2011 and
into early this year, with top line momentum decelerating from better than +10% to a touch
above 7%. Another "top line" proxy I use is the $ value of industrial production. That measure
was 8.8% yr/yr in 3/11 and slid down to just 6.0% by year's end.

However, there has been a positive reversal in available data so far for this year. For example,
the $ value of industrial output has accelerated yr/yr to stand at 7.1% through Feb. even though
power generation -- an important input -- has declined with warmer weather this winter.

With the first quarter set to wind up at week's end, it would appear that top line growth should
be sufficiently strong to avoid broadscale profit margin erosion from fixed costs.

Cost inputs
On balance, materials costs were little changed from the prior year. This is a plus to profit
margin. There was, however an acceleration of the labor cost component owing to higher staffing
levels, but it was rather mild, as the real wage remained below year ago levels.

Net Per Share
My macro indicators suggest earns. per share for the SP 500 should rise close to 10% for
Q 1 '12 viwed yr/yr. Keep in mind though that I am using just two months' worth of data.

Banking Sector Earnings
Now popularly viewed as a moral scourge upon all of us innocents, bank sector earnings do
continue to recover. Viewed yr/yr, interest earning asset balances are now rising as is net
margin. The loan loss reserve has now dropped another 18.5% or $38 bil for a major positive
lift to the sector's bottom line. There are still concerns about litigation and CDS derivatives
and banks are fighting to raise fees whenever and wherever they can, which no doubt, is not
doing the industry's image any favors. Recent action of the group. $BKX

Friday, March 23, 2012

Stock Market -- Weekly

The current bull run, as captured in the weekly chart, remains intact. SPX The market is at a 10%
price premium to its 40 wk m/a and remains moderately overbought. For reference value only,
note that the SPX eclipsed the 40 wk m/a by 14% in late 2009 and by 12% in early 2011.

Weekly Cyclical Fundamental Indicator (WCFI)
The WCFI remains in an uptrend which started in mid - Nov. '11. The range of positive markers
within the indicator composite has steadily broadened out, but the momentum has gone flat. One
reason is that weekly unemployment insurance claims have leveled off following several months
of sharp improvement (not an abnormal development), and the other reason concerns the flattening
out of the sensitive materials price composite. JOCIINDX It is worth noting that this index is a
multi - currency measure with global application. I mention this because the index has lost positive
momentum here in Mar. during a normally seasonally strong time with this development a
reflection of trader handicapping of indications of a further slowing of industrial output in China,
normally a huge buyer of industrial commodities over the first half of the calendar year. This is
the first "heads up" I've had on the WCFI for a good several months.

Federal Reserve Liquidity Sponsorship
Fed. Bank Credit and the monetary base have been contracting here in Mar. as the Fed has
reduced the currency swap line with the ECB and other needy central banks. The stock market
has advanced so far this month, but players have been very sensitive to the Fed's QE capers over
the course of the current cyclical bull.

Wednesday, March 21, 2012

Stock Market -- Investor Confidence Measures

Confidence has improved since last autumn but remains on the subdued side. The market does
continue moderately overbought, but the idea that players are zealously bullish is nonsense.

Price / Earnings Ratio
The market is trading around 14.5 x 12 mos. net per share through 3/31. In an economic recovery
with rising earnings and low interest rates and inflation, the SP 500 should be trading up at 16.5x
or 1585.

Credit Quality Spreads
The ratio of top quality corporate yields to lesser light BBBs stands at .69. By past standards that
ratio should stand up toward .85 at this juncture of an economic expansion.

Comparison To Treasuries
The earnings / price yield % for the SP 500 measures the return on equity at market value. The
e/p yield is now running 6.8% compared to the 10 yr. Treas. in a range of 2.0 - 2.5%. The e/p
yield is at a substantial premium. Naturally, a near zero short rate is holding yields on longer
maturities down, but preference for quality and perceived low risk remains very high.

Market Volatility
I did a good job at laying out the unfolding of the recent powerful rally in the market, but, so
far, volatility has come a in fair bit lower than I had anticipated. The chart link ahead compares
the SPX with its 12 day ROC% and the VIX, or volatility premium inherent in index options.
$SPX The chart's top panel shows a sharp decline in short term price volatility and the bottom panel shows a hefty decline in the VIX or "fear" index. A VIX reading in a range of 10 - 15 reveals
a decent level of market confidence. Should the VIX drop down to 10 and stay there for a
goodly number of weeks, we would be entitled to say that investors have grown both smugly
confident and highly complacent. We are not there, yet.

Tuesday, March 20, 2012

Long Treasury Bond

Back toward the very end of 2011, I put on my "Dutch Uncle" hat to warn of the risks of a long
positions in the 30 yr Treasury for 2012 ( See 12/26, 12/23 posts). Back then, the situation for
the market had not turned negative, but it did so in Jan.

For about 45 years now, it has been my argument that the best determinant for turns and trend in
the Treasury bond market was a combination of the momentum of industrial production plus that
of sensitive materials prices. I use a 6 mo. annualized measure as well as a weekly trend measure.
Both turned up starting in January which signals a rising long T yield. As it has so far turned out,
the rise in yield although a sharp one, has been muted by trader expectations that China -- a very
heavy hitter in the industrial commodites business -- will continue to experience more moderate
production growth. This development has been a drag on the normal sharp seasonal rise in
sensitive materials prices which has become a trademark of China's very large industrial base.
In short, the damage to the Treasury bond could have been far worse.

I am not interested in this market now. I would look to buy the long T about 60 basis points up
in yield as a trade, and since the US is experiencing a more advanced, albeit moderate economic
recovery, I would like to see the yield at a more substantial premium to my very long term
3% inflation benchmark. The chart link gives you the picture.

Friday, March 16, 2012

Economic Indicators / Analysis

I use a very stripped down version of the coincident economic indicator to include real retail
sales, industrial output, civilian employment and the real wage. Measured yr/yr, this indicator
was a positve but modest 2.1% for Feb. '12. This compares to a much stronger 3.9% reading
for the 12 mos. ended Feb. '11. The indicator captures the substantial erosion of recovery
momentum over the past year. On a positive note, the momentum of the coincident indicator has
been improving since late 2011 on stronger sales, production and employment.

For the prior month, both  real retail sales and production came in with moderate readings -- 4.0%
for production and 3.6% for retail. These are solid enough after 30 months of economic recovery.
The yr/yr pace of increase in employment has moved up to 1.8% -- its best showing during the
recovery -- but 2% or a little stronger would be more representative of a nicely improving labor
market. The real wage declined yr/yr by 1.0% through Feb. and is still too weak to provide
solid support for consumer confidence. Under normal circumstances, where business properly
recognizes stronger labor productivity, the real wage should be advancing by 2% and the current
dollar measure by 5%. Imagine the outrage in the executive suites of corporations if directors
were handing out real wages that were headed down.

The US economy has ticked up here in early 2012, but a continuing negative real wage casts a
large cloud over the visibility of the economy going forward.

Thursday, March 15, 2012

Stock Market -- Daily Chart

The SPX closed today at a new cyclical high of 1403. The advance underway since late Nov. '11
is running on the sort of steep trajectory that seldom lasts more than 3-4 months before it hits its
expiration date and fades to a lower plane. So, that would be late March at the outside. The present
fast updraft of a few days duration could carry the SPX up to the 1430 area over the next week or so.

The market is overbought on measures running out even beyond 60 days, but none of the overbought measures are as yet outrageous. SPX

As mentioned in the 3/13 post below, with cash reserves modest, a rising market might claim funds
from the bond (Treasury) and PM sectors (gold). Such has been in evidence this week.

Wednesday, March 14, 2012

Retail Sales -- Quick Note

Retail sales including for restaurants is classified as a coincident economic indicator, but
it really lies somewhere between a leading economic indicator and a coincident one. There is
decent retail sales data going back to shortly after WW 2, but most services stick with the
reformulated data from 1992. At any rate, retail tends to trend fairly steadily higher during
periods of economic expansion, and you should note when the retail trend shifts lower or starts
to sputter. These are usually solid warnings the economy is edging toward difficulty. The
trend of sales is solidly up for now: retail sales chart

Tuesday, March 13, 2012

Stock Market -- Fundamentals

Primary Fundamentals
These are measures I use to determine when we have an "easy money" bull market which features
high return for the assumption of low risk. The stock market entered the latest "easy money" era at
the end of 2008, and this reading remains in force today. All five indicators need to turn negative
before the era ends and that has yet to occur. The only period in modern history that rivals the
current one for duration is the early 1932 - early 1937 era when the conomy and the stock market
benefited from a super accomodative monetary policy to arrest a depression.

As with the '32 - '37 interval, the market has provided a high return, but accomodative monetary
actions did not shelter investors from periodic sharp corrections (2010 and 2011 in the current
epoch). The volatility then as now reflected low investor confidence levels as well as concerns
about the durability of monetary and fiscal ease. In this sense, the current bull has been very much
different from the post WW 2 markets.

The volatility may continue going forward as it has yet to be seen whether the market can advance
in the absence of overt QE policy. Moreover, as 2012 winds down, discussion could also build
around the idea of tightening fiscal policy for 2013 and beyond. Investors have to be prepared for

I doubt my primary indicators will all turn negative in 2012 if only because the Fed is keeping
the "risk free" 91 day T - bill rate between 0.0 - 0.25%. So, the primary bull case will be there
through the year, but, the volatility may be there as well.

Secondary Measures
I watch liquidity available for stocks as well as the trend of the oil price very carefully. On my
reading, liquidity in support of further stock market strength is low now, and it may well be that
to send the market substantially higher, players may have to swap out of bonds especially but
also PMs and selected commodities to free up funds for stocks. Importantly, private sector
credit growth is recovering and if banks eventually begin competing more vigorously for funds,
there will be more liquidity available for stocks.

The price of oil has been kited up by threats from Israel, the US and the EU on one side and Iran
on the other regarding Iran's nuclear development programs with the prospect of conflict and a
possible oil supply shortage to worry over. So far, Iran has been the prime beneficiary. The
rise in the gasoline price is hurting Obama substantially and he may eventually either have to
tap the SPR or tell Israel to shut the hell up or both. Intentionally or not, Israel is now meddling
directly in US politics and They will pay for that down the road if I know my US.

Without further threats to or from Iran re: the oil supply, the current price range of $105 - 110 bl.
seems a bit too high.

Sunday, March 11, 2012

Financial System Liquidity & Stock Market

Fed Bank Credit
The Fed's currency swap line fell again in the past week as EU liquidity jitters continue to
lighten. FBC is now about flat for the year and is up at only a 4% annual rate since mid-2011.
Unless there is a sudden worsening within the EU banking sector requiring more US$ infusion,
FBC is likely to flatten out or even drift a bit lower. So far since 2009, the stock market has
tended to grow uncomfortable without Fed QE at its back.

Banking System Liquidity
Measured yr/yr, my broad measure of credit driven liquidity stands +4.6%. Much of this increase
directly reflects Fed QE. The loan book for the banking system is also up 4.6% yr/yr and the
recovery in loan demand is rising with all major sectors now participating. Banks are flush
with liquidity and have been able to expand the loan book and Treasury holdings at the same time.
Thus, there has been little emphasis on competing for deposits or issuing holding company
commercial paper which tend to expand the broad liquidity pool. With the Fed not now providing
QE support, rises in bank lending and the broad deposit base to 6% yr/yr would leave me more
comfortable with the stock market, although system private sector lending is finally showing
some decent acceleration. Hard to tell yet whether the stock market is taking much notice.

Money Market Funds (Cash Reserves)
MMFs in aggregate increased by roughly $50 bil. in late 2011 and early this year but this build
has largely been drawn down in recent weeks. Further support for the stock market, should it
come, may reflect draws on the large Treasury and the small PM markets.

Tuesday, March 06, 2012

Global Economic Supply & Demand ***

After a flat spell over much of Half 1 '11, global industrial production did rebound moderately
over the second half of the year to wind up about 5.5% above year end 2010. Reflecting a
recovery of the global operating rate, industrial commodities prices have turned up in 2012.
Measured yr/yr, global industrial output growth has decelerated from the powerful 12% level
set in the initial recovery phase in early 2010 down to the 5.5% level and the trend of
decelerating growth likely continued into early this year. By my estimates, the slowdown of
output growth in 2011 was not sufficient to create substantial economic slack. Thus if global
industrial output growth were to re-accelerate over the course of this year, the supply / demand
situation could tighten considerably, which could send industrial commodities prices sharply
higher as well government bond yields.

Global purchasing manager data indicate a sharp acceleration of output in early 2012, including
for new orders. There is a positive skew to the data reflecting stronger manufacturing and
services output for the US which counts heavily in the measure. But Brazil, India and Russia
also showed stronger coupled with moderate growth for China and Japan. the EU remained
weak, but not weak enough to throw the world off a moderate growth course. More QE programs
by central banks showed up in the second half of 2011 including large liquidity building loan
programs from the ECB.

In my view, the QE programs do build business as well as stock market confidence, and the
absence of further significant monetary easing as the year progresses could adversely affect
the performance of individual economies to varying degrees, although one has to be careful not
to jump the gun here. For example, in the US, banks are lending again. The trend is moving in
the right direction, but is not yet strong enough to warrant saying further QE is unnecessary to
support growth. In the EU, it is far from clear how rapidly banks can adjust to the huge flow
of liquidity and move toward a modicum of normality given the evident restraints in place.

The trend of the oil price will play a major role for global growth this year. the current sharp
uptrend appears hardly sustainable without fresh indications that there will be substantial
supply problems.

Global stock markets have been very positively attuned to strong global economic growth
momentum. With potential overheating in store should strong growth eventuate and sustain,
this might be a year when investors should actually cheer a considerably more moderate
*** I use the CPB Netherlands economic data freely and strongly suggest you keep an eye on it
as well (scroll down for industrial output and tour the site).

Sunday, March 04, 2012

Risk On Vs. Risk Off

Key series such as the real wage and bank lending are still subdued enough that I am not yet
convinced the economic recovery is self-sustainable. So, I continue to watch the relative strength
of the SP 500 (SPY) against the long Treasury ($USB). A rising RSI for the SPY tells me that
investors continue to have confidence in the economy, while a falling RSI messages that confidence
has started to wain. The RSI for the SPY against the bond continues to advance, but the progress
is far enough along that investors are going to be watching their own calculations of risk on vs.
risk off more carefully going forward. SPY vs. Long Treas.

Friday, March 02, 2012

Stock Market -- Weekly

The market remains in a clear intermediate uptrend. On a 40 week basis, it is approaching a
moderate overbought at a 9.1% premium to the 40 wk m/a, and it is closing in on an overbought
reading on the 12 wk RSI. Price momentum is also losing some steam. $SPX

My weekly cyclical directional indicator continues to trend up, fueled in no small measure by the
strongly improving trend of initial unemployment claims. Now you have to be careful with the
claims measure since it tends to plateau for periods after strong improvement. No clear indication
of this yet, but it is time to keep it in mind, as stock players look to this leading measure for

Now, and perhaps importantly, Fed Bank Credit, after jumping by more than $100 bil. in late
2011 on a re-opened currency swap line primarily to the ECB, has been flattening out here in
2012, as foreign central banks now apparently have adequate US $ liquidity. The monetary
base in the US, which follows the trend of Fed Credit and is closely watched by stock players,
is still rising -- a market positive -- but it too may flatten out before long. If projections for
private sector credit growth are firming, stock players may be less interested in FBC and the MB.
However, the slow thaw in private sector credit may keep some major players fixed on Fed
Credit, and if that figure stays flat, well, some nervousness may set in before long.