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, May 31, 2012

Keeping An Eye On The Oil Price

I have passed on some substantial price moves in oil since the global economic recovery /
expansion began in 2009, but have made very good money trading it anyway. I did not go for
the "bomb Iran" hype story, but the oil price has returned to a more normal seasonal pattern with
a mean price dip here in May. From a seasonal perspective oil tends to make a low over the
latter June - latter July period before experiencing another seasonal rise into the early autumn
to coincide with the wind up of the driving season in the northern hemisphere and the building of
heating oil stocks.

The price decline in May has been a humdinger. The Iran story has cooled, supplies are up and
global economic output momentum has cooled. Oil is moderately oversold now, but with price
descent with the kind of sharp trajectory in evidence, it is sometimes wise to stand back and
let the indicators suggest when a turn could be at hand. WTIC crude Presently, I do not care for
the free fall in MACD for oil.

As luck would have it, I outlined my view that oil could fall into a range of $85 - 90 bl. by mid -
2012 back on Mar. 29 when the price was up around $105. The downsweep in the price has
come faster and a few weeks sooner than I expected, but I am adding oil back onto my trading
list as a potential long.

Monday, May 28, 2012

Stock Market -- Short Term

Back on 5/24, the SPX fell to -5.3% the 25 day m/a. Down 5% the 25 m/a is usually a good spot
for a market bounce. We did get one this past week, but the impulse was not impressive and is
a little suspect. Moreover, the bounce did not come from the kind of "sold out" levels of breadth
and selling pressure one would like to see. The market is now mildly oversold in the short run
and I am content to see how it behaves this week. $SPX daily

My weekly cyclical indicator edged down again this past week, but has yet to show the kind of
rapid downward move which occurred in both the late spring of 2010 and 2011. Fed Bank
Credit is leveling off following a mild downturn seen earlier in the year and sits near the level
observed at the end of QE 2 in mid - 2011. The SPX sits nearly even with its level as of 6/30/11
and for those who like to keep score has yet to show it can sustain an advance without the Fed's

Sunday, May 27, 2012

Global Economic Supply & Demand

Global economic industrial output did reach a record high this spring and there is only rather
moderate excess production capacity in the system. The steep "V" shaped recession / recovery
pattern of output did produce enormous but hardly sustainable positve momentum in production
measured yr/yr over the 2010 - early 2011 interval. Since then, the pace of expansion momentum
has decelerated. Output growth yr/yr has dropped down to about 4% -- in line with the long term
average. For the financial markets, shorter term shifts in the momentum of output growth have been
as important to pricing as has the overall trend and the level of production.

Sensitive materials prices and broader commodities price composites made cycle - to - date
peaks in the spring of 2011. Ditto the oil price. Concerns have mounted to reflect no further QE
by the Fed, decelerating production growth in China, the major buyer of an array of commodities,
and the fall in Euro area production momentum from positive to negative as recession appears to
be taking hold. China appears to have just wound up a period of tight money designed to
arrest intense real estate speculation only to find just how tough it is to fine tune an economy
with a blunt instrument like monetary policy. China's industrial production declined outright in
in April, real estate prices are falling and inflation has turned more subdued. This has prompted
Premier Wen to urge an increase in targeted stimulus and further easing of monetary policy
to restore more positive economic momentum. But do not expect too much as it is doubtful
China wants to trigger off another monetary / credit bubble. The Euro zone has suffered for
two years with a squeeze of monetary liquidity. That partly reflects capital flight but also the
bizarre and dangerous machinations of former ECB chair J. C. Trichet. Euro area liquidity is
improving as the ECB acts more aggressively to liquify the economy, but it is an uphill battle
as the banks are under mandate to improve capitalization ratios, a task they are working at
via closing the loan windows. In the UK, well, the confidence fairy is a no show despite a
shiny austerity program. Finally, the US faces an oncoming political imbroglio over fiscal
policy in a national election year.

So, it is far from clear that global output growth can maintain the long term average of 4% going
forward. China has fiscal leeway to complement monetary policy, the Fed is husbanding its
resources as the political clown act warms up, and ECB chair Draghi -- no shrinking violet,
thank God -- must look at every lever he can conjure to keep the Euro area from sinking further.

The forgoing comes as no big news to the markets. The "risk off" trades are overbought, and the
"risk on" trades are oversold. Near term, I think it will be very important to see whether China
can settle its nerves and put some push behind re - invigorating its economy.

Wednesday, May 23, 2012

Long Treasury -- Priced for US / Global Recession

I have been priced out of the long side of the 30 yr. Treasury for many months. The bond, now
trading in the high $140s, is a country mile above my current preferred entry level of $115 -120.
With a yield now well inside 3.0%, the bond is priced for a deflationary recession in the US
and capital flight to the US to reflect a stronger dollar and a global economic environment that
has turned less secure. Since I turned bullish on the long Treasury in late 1980 when yields
went above 13% and have traded long umpteen times over the past 30 odd years, I am going to
leave all the remaining price upside to others. A long guy at $135 (3.50% ytm) is my absolute
upper limit.

Is this sayonara for the Treas? Nope, because there is the short side, too. I've been there a number
of times over the years. The chart shows the bond is overbought on RSI and MACD. $USB chart
Also, trader advisory sentiment is now too bullish. For example, MarketVane shows Treas. bond
bulls at 78% in their survey. Over the long term, readings of % bullish that run above 76% on
this survey generally spell trouble for those who are long the bond in the months ahead. 

Tuesday, May 22, 2012

Inflation Potential & Profit Margins

My primary inflation pressure gauge, which measures broad arrays of commodities prices and
production facility operating rates, made a cyclical peak to date in mid 2011 and has declined
sharply since then. With plant capacity utilization in the US remaining on the rise, the decline is
entirely a result of a substantial erosion of commodities prices. $CRB Composite Measured yr/yr,
the CPI has dropped from 3.9% seen for Sep. '11 to just 2.3% for Apr. '12.

What is unusual here is that sharp declines in commodities price composites tend to reflect falling
US output and operating rates. However, this time out, the weakness in commodities is much more
a reflection of a sharp loss in global economic growth momentum -- think the EU and China -- as
well as selling pressure generated by financial players who are reducing exposure to commodities
because of slower global growth. It is also likely that the sharp positive runs in the CRB in 2009
and then again from mid - 2010 through mid - 2011 reflect the two large QE programs by the
Fed, both of which encouraged traders to step up cyclical risk exposure. The upshot here is
A falling CRB no longer automatically renders the US economy immediately suspect.

However, decelerating inflation will, net - net, reduce business pricing power both here and
abroad and that development will eventually crimp profit margins to the eventual detriment of
the jobs market as employers look to cut costs. So, ultimately, falling commodities prices and
inflation will work to diminish US econmoic recovery.

Without a sharp recovery of commodities prices, the US CPI may stay in a range of 2.0 -2.5%
measured yr/yr, and if additional weakness in the EU surfaces along with some further moderation
of GDP growth in China, then the CPI could head down to 1% if the CRB continues to falter. In
fact, a break in the CPI  below 2% yr/yr could trigger another sizable QE response from the
Fed as they would become anxious about the return of deflationary pressure (It is empirically
possible to have a "virtuous" or non-harmful period of deflation, but this is not at all likely to
occur in economies which carry sizable debt leverage as does the US. Then, deflation can be

The CRB is trading down around an important support level. Traders have trimmed long
exposure to commodities and are waiting to see if global economic growth momentum keeps
decelerating. From my perspectice, the CRB is quite reasonably priced at current levels.
Moreover further significant weakness in these markets could bring new damage to the
major commoditiy producing economies such as Canada and Australia. Toronto Comp.

The US CPI is on a trend track that would take the yr/yr monthly rate down to 1% by the
end of this year provided the CRB breaks materially below current rough support around the
290 level. Since a veer toward deflation could be devastating here if not globally, I am on
full alert and looking for new monetary and fiscal initiatives from the majors, including China,
which also needs to guard against too much of a growth slowdown.

Sunday, May 20, 2012

Stock Market -- Weekly

The weekly cyclical fundamental indicator is now trending lower. Its descent is far more modest
so far than what occurred over spring / summer 2010 and 2011. The SPX, which rose far more
rapidly than the WCFI early this year is now falling at a faster clip than the WCFI and it could
well be that this process may continue if the WCFI stays under pressure. The weekly correlation
continues to run around 0.6. The major weak spot in the WCFI continues to be sensitive materials
prices as players attempt to discount a global deceleration of output growth in the short run.

Fed Bank Credit and the monetary base remain under moderate downside pressure. Here, the Fed
has reduced the currency swap program with the ECB and other affected central banks from the
$100 bil. level seen in late 2011 to $26 bil. currently. That sort of decline would normally be
greeted as a bullish economic development, but players did rally the market late last year in part
because the Fed pumped more liquidity into the global economic system. Substantive evidence
of more liquidity problems for banks within the EU can be backstopped by large dollops of
liquidity by the Fed via rapid expansion of the currency swap program without inducing
US congressional ire. Worst case is that the Fed's balance sheet is set to stop contracting.

The weekly chart for the SPX portrays a downtrend. There is minor support for the SPX just
under current levels and note that the market is now moderately oversold in the short run.
Failure of the market to mount even a modest bounce this week would not be a good sign as
oversolds of this magnitude often attract more buyers. SPX -- weekly

EU Politics / Economics
There is not a doubt in my mind that Mrs. Merkel had her tootsies held to the fire this weekend
at G8. Hollande is the new guy on the block so he has to be cautious in approaching Merkel.
However, Obama / Geithner are fed up with Merkel and Obama likely was blunt in pressing
the Germans to broaden out their EU economic regimen from such full reliance on austerity.
German political / finance chiefs often blow off the US until It gets very nasty. This a national
election year here. They got very nasty.

The EU poohbahs gather mid-week to discuss the crisis on an informal basis. Merkel will need
to do more than toss out a couple of small fish if she would like to see this new run on confidence
staunched. Listen carefully.

Friday, May 18, 2012

EU: Will Angie Cut Her Bad Boys Some Slack?

G-8 at Camp David. Discussions on the veranda in the cool of the evening. Few kind words are
spoken. Geithner set to take Wolfie Schaueble on a madcap wheel chair ride through the woods.
Merkel sees but perfunctory Pepsodent smiles from Obama. Hollande does not care for the food.
Cameron thinks wistfully of Ms. Brooks -- what a tigress!

But, the EU markets are oversold and sitting at or near tradable support. Since austerity is only
for people who can truly afford it, It is time to start to lay out a road map for how the EU might
recover and grow and offer folks something more positive than sequential bank runs as one
domino falls after another.

Time for Angie to cut her bad boys some slack...

Chart: IEV Euro 350 ans $XEU

Thursday, May 17, 2012

Gold Price Quickie

Long time readers of this blog might recall that back in Oct. 2010, I mentioned that I would begin
shorting gold periodically via buying shares of DZZ, a double short ETN. I recommended that most
folks avoid this kind of trade and I have done trades using only a small amount of capital. It was my
way to have a profitable joke on the unrelenting bull chatter of the bugz. I closed out a DZZ long
on Mon. 5/14 for a tidy profit and was interested to see that although gold weakened yesterday, it
started catching bids at $1530. I leave the field to the bulls on the premise that QE buzz is likely
set to rise. Since autumn, 2010, I have netted about 75% net of fees on the trades.( Since only dopes
broadcast short trades, expect no comment from me until after the fact, especially now that the
levered ETNs are available). DZZ chart

In the meantime, gold has moved above that important $1560 pivot. So, let's see what they do with

Wednesday, May 16, 2012

Stock Market -- Daily Chart

As is obvious, the market is in short term correction mode. I rate it as entering  moderately oversold in
the short run. The market has corrected nearly 7% from the 4/2/12 cyclical high and by conventional
standards stands as a "normal" cyclical bull market correction. So, it might get a second look down
around this 1325 level. SPX chart I happen to regard the 1325 level as important, because a sharp break below that level would close out this last bull leg running from Oct. '11 and would, on a prima facie
basis, signal the end to the cyclical advance that began in early, 2009 as we have had a three wave up - move since then.

Someone could come along and say "well, we we are going to get a fourth leg up" and that is a
possibility. Another person could come along and claim that a break down through 1325 only
signals the end of the first leg of a longer running advance which could go on for several years.
And that could be true.

But, for me, a sharp break below SPX 1325 would signal uncertainty and the need to do some
critical re-thinking about my assumptions. It would signal that something could well be going
haywire, something that needs to be tracked down and understood.

As an optimistic old guy, I am hoping we hold and bounce from this level and that further modest
progress might be in store. However, as much a virtue as hope may be, it is out of place in
this business......

Sunday, May 13, 2012

Financial System -- Liquidity Issues

Measured yr/yr, my broad measure of credit driven financial liquidity rose but 3.7% through
April, '12, and is up a scant 0.4% from mid - 2011. Monetary liquidity -- represented here by
M-1 -- accounts for about 18.5% of the broader liquidity measure. M-1 is up 18% yr/yr, but
is set to decelerate rapidly and could be down to only +4% yr/yr by the end of 2012. Short
term interest rates remain at nominal levels, but with decelerating liquidity, we are reaching
back into an era like the 1936 - 38 period, when premature liquidity tightening by the Fed
produced a damaging and wholly unnecessary recession. I think the Fed has about $100 bil. to
play with without being forced to announce a new QE program, so even though the liquidity
situation for the economy as well as the stock market is turning uglier, we are in an "early
warning" phase of an evolving liquidity squeeze. The best solution would be that extant
liquidity is sufficient to extend the economic recovery enough that banks further liberalize
lending, particularly in the real estate market. Barring that, Fed chair Bernanke, who is
gambling with the recovery right now, will be forced to put forth a new QE program of
sufficient size to keep the economy going. Many players are already assuming that such a
program will be forthcoming especially in view of the fiscal austerity set to kick in at the
end of 2012. And more so if the President and the Congress continue to bungle whatever
negotiations may take place.

Since I try to make as few assumptions as I can when looking at the economy and the markets,
my view is that fundamental risk for the economy and for stocks is on the rise and that Bernanke's
hand may well be called before year's end 2012 if the banks do not loosen up further.

Friday, May 11, 2012

Gold -- Bugz Failed To Show This Week

Earlier this month I opined the bugz were due to rally their favorite lest it drift down to pivotal
support at 1560. Well, they have not shown up and gold has started drifting down to $1560 oz.
support. The indicators are bearish on the chart, but the market is getting more oversold on an
RSI basis. Gold chart Where are these guys?

Stock Market -- Weekly Chart

After a terrific positive run of a touch past four months, the market and my key weekly indicators
have turned down. I did get an intermediate sell signal off my 40 wk. price oscillator as well this
week. SPX weekly Sometimes the signal whipsaws, but if it does, it tends to happen very quickly.
In addition the signal can often be early, but any rallies that come along, I will play with only a
minor portion of my trading capital.

The market did move down during my cycle low window period. Whether it will bottom and bounce
or move deeper into correction is not covered now by the cycle indication and only time will tell
from a cycle point of view. There usually are tradable bounces after a cycle low, but the market is
not oversold enough to be tempting to me.

Note on the chart there is a support / earlier resistance pivot line around the 1350 area. So, as we
move into next week, we are at an important short term directional point.

Thursday, May 10, 2012

ECRI -- Weekly Leading Index

The weekly leading economic indicator index from the Economic Cycles Research Institute
(subscription required for the better research) is one of several weekly measures I follow to
gauge the economic outlook. ECRI - WLI

The substantial increase in the volatility of this index since 2008 has bothered not only ECRI
but many others who follow it. I think the index has been buffeted by the tremendous volatility
of sensitive materials prices, and I suspect, by the abject collapse of US housing. Be that as it
may, the index has properly reflected the changes in momentum of US and global industrial
production as well as global trade. My guess now is that the US may stay out of recession as
long as the index does not break sharply below the 120 level.

Wednesday, May 09, 2012

Fun With NYSE Breadth -- Advances

Contrary to many market technicians, I pay a great deal of attention to breadth measures of the
NYSE. One example is to follow a 6 week m/a of advances. Over the years, the work has shown
that when the 6 week m/a does drop down to 1100 issues or a bit lower, the stock market is
significantly oversold and ready to rally $NYADV (Over 3,000 issues are traded.)

As often happens, the trend of advancing issues is strongest in the early stages of a rally and
tends to tail off as the rally progresses along. The chart shows a well established trend down is
in place for the 6 wk m/a, which at 1281, is still well above the 1100 level. I do not know now
whether advances will fall to the 1100 level soon, but that is where I would be most comfortable
going long for a trade with significant positions.

Monday, May 07, 2012

Weekly Cyclical Fundamental Indicator (WCFI)

During the current recovery, the WCFI has been the most reliable fundamental indicator of stock
market direction and momentum. It does not always work that way, but it has this time out.
The indicator has a purely economic coincident measure which is comprised of a broad array
of weekly data mostly from retail sales and production. This measure has grown in reliability
over the years because US companies have the capability to manage inventories and procurement
far more tightly. The WCFI also includes more economically forward looking measures, with
jobless claims and sensitive materials prices each receiving very large weightings.

The SP 500 (SPX) is trading just a wee bit higher than it was at the end of April, 2011. It is
important to note that the same can be said of the WCFI. Looking nearly yr/yr in this way, the
retail and production components of the indicator are are modestly higher and would be much
stronger yet if the construction materials businesses were not still so depressed. Jobless claims
are in far better shape than a year ago, a very nice positive. The nasty one has been industrial
commodities prices. This index (JOC) is down more than 13% from the 4/11 cyclical peak
and is trading even slightly below the peak levels of 2010. Since investors and traders use
sensitive materials prices as a proxy for cyclical economic momentum just ahead, the weakness
in these various industrial input components has kept players on guard.

It is also important to note that in both 2010 and 2011, cycle pressure gauges such as the global
PMI made peaks in the spring at levels just slightly higher than the current reading (Global PMI)
The PMI link also shows a loss of global economic growth momentum in the wake of the
peak readings, action which was foretold by the turns to weakness for industrial commodities
prices. JOC index via Bloomberg

The creation of industrial commodities ETFs and ETNs allows investors and traders to play
in these markets in addition to the large commercial firms and brokers. The partial
financialization of these markets by players who are already trading stocks, bonds and currencies
gives us windows on intelligence about the markets at work and the money down on the table.
It may also add to the extraordinary price volatility we have seen in many sensitive materials
prices in recent years.

The evidence so far in this cycle shows acute awareness about weekly economic data by
capital markets players with special focus on both the range of sensitive materials prices and
the level and direction of US jobless claims. It suggests that if US stocks are to end the year
significantly higher than now, jobless claims will need to fall a fair bit further and industrial
commodities prices will need to recover perhaps to reach new highs for the global recovery
cycle to date. Thus it may be that you will have some useful short term market intelligence as
the year wears on.

Thursday, May 03, 2012

Gold Note

The gold price has broken trend support here in the short run. Today, I use the Gold Trust shares
(GLD chart). As the chart shows, the bugz were venturing in long when the 12 week RSI went
down to 50, but more recently, gold has been catching bids down in the 42 -45 range of RSI. So,
it is time for the bugz to step in to support the price. But you also need to see that the recent
bounces off a depressed RSI have been weak and unsustainable. I suspect this reflects the absence
of clear and present indications of new QE programs so that gold is trading now more like an
industrial metal (check out $GYX in the bottom panel) and less like a safeguard against further
"debasement" of currency. For years now, it has been wisest to give the bugz the nod when RSI
drops below the 50 level, but one should note there is easy downside in the short term to the
$152 per share pivot line level for GLD (and $1560 oz. for gold). Let's see if the guys step up
to buy over the next several days or let it go.

Tuesday, May 01, 2012

Stock Market -- Technical

The stock market has rallied over the past week or so from a mild short term oversold. The 10
and 25 day m/a 's have turned up with the 10 close to crossing the 25 on the way up. Such a cross
would be a good sign short term. To have much credibility, the SPX needs to move up from today's
1406 and take out the 4/2/12 cyclical closing high of 1419.

I have not played this brief rally. After the extended positive run we've had, I was hoping for a
deeper oversold to hedge risk.

The market is now in the middle of a window for an intermediate term cycle low. No dice, yet,
and this is interesting because the the market failed to observe the previous cycle low scheduled
for mid - Jan. 2012. This roughly 75 - 85 trading day cycle had been working like a charm since
at least 2007. Two straight misses would invite a fresher look at cycle behavoir.

The run - up in stocks since late 2011 has brought the market up to a 10.1% premium to its 200
day m/a. There have been over a dozen trips up like this since the latter 1980s. All occurred
in cyclical bull markets. Once the market crosses the 10% premium threshold, the odds have
been running only one in four in favor of a further sharp advance over the succeeding  six months.
The other cases all involve either extended consolidation / mild correction or prelude to a
cyclical bear market.

From my perspective, speculating on a further substantial move up in stocks over the next six
months is an against - the - house bet with an only 25% modern times probability in its favor.
Now, although the positive price momentum has gone out of the market over the past month,
it is still operating on an intermediate term buy signal based on how I smooth out a 200 day
m/a price oscillator. Obviously, if this current minor rally takes out the SPX 1419 level and
continues to move up, that buy signal is likely to remain in force for a while.

Since this current cyclical bull is more than three years old, I am now as likely to go short as I
might go long and I will be most attentive when the market is either + or - 5% its 25 day m/a.

$SPX chart