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 !!!

Tuesday, July 31, 2012

Monetary Policy

The Fed announces its latest rendition of monetary policy on Wed. Aug. 1. I confess I have been
an ardent student of how money and credit both reflect and affect the US economy since my
college days in the late 1950s. All of the different projects I have done on this subject suggest
clearly to me that monetary policy has a very powerful influence on economic affairs. So, I am a
believer in the old saw that: "The Fed writes the market letter". From my perspective, the US is
in, at best, lightly charted territory with regard to monetary policy  and the outlook for the economy.
With banking system interest earning asset growth at only 4% yr/yr and with my broad measure of
financial liquidity (financial system funding capacity) growing at only 2.6% yr/yr, the risk to
sustaining economic growth at even a modest 2% in real terms is pretty high, and the ability of
the economy to grow jobs sufficiently fast to bring down the unemployment rate is low looking out
over the next year. I continue to think the Fed is gambling with the recovery and that to be on
the safe side, the Fed should step up and provide substantial incremental monetary liquidity to
the system via purchases of quality fixed income securities. Banking System Credit Chart

If bank assets and funding were growing at 6% or better, I would be much more comfortable with
the economy and the stock market. The last time the Fed tinkered with a frozen monetary base and
neglible private sector credit growth was 1937 - 38, and as you have heard, that ended badly.

Possible Gamesmanship
Back on Jul. 6, I posted that the household employment survey had 800K jobs not yet picked
up in the payrolls survey data. Jul. Post With just about three months to go before the election,
it would not surprise me if payroll jobs growth did turn out stronger than now expected as
we head up to election day. I do not know whether the Fed is aware of this discrepancy in jobs
count or whether It cares much, but I have to say it could be a factor in their reasoning if the
FOMC has been "suitably apprised"......

Even so, I would like to see the Fed step up here at some point soon to provide more liquidity to
a system which needs it.

Sunday, July 29, 2012

Gold -- Teed Up Again For QE (Say No To Godot)

The bugz have for only the 10th time over the past year rallied gold off the 1560 pivot line
(or less) in anticipation of further substantial QE by the major central banks, especially the Fed.
This week we have the Fed and the ECB with policy meetings and we also have Il Signore Draghi
trying to muster support to bend the iron will of the Bundesbank. Gold closed Fri. 7/27 just under
$1620 oz. and a fresh meme from the bugz is that the metal should be bought at $1620 to capture
a prospective big price run up as the Fed and /or the ECB finally launch big time QE programs.
Gold Price Chart A sudden sharp rise in price above $1620 is envisioned as a top side breakout
that would confirm another "breakdown" of monetary discipline.

Failure of the major CBs to come through this week with QE big time could knock the price
down for another test around $1550 -  1560. No doubt the bid has been there at those levels as
the bugz remain confident the CBs will ultimately relent and give them another large payday.

Since I think $1500 oz. is a bubble price for gold based on my fundamental and technical
work, I will continue to look for profitable shorting opportunities here and leave you to your
own devices. 

Friday, July 27, 2012

Stock Market -- Short Term

I warned in an understated fashion in the post below that the bears could get burned in this kind of
saw toothed advance and so they did. The market is building another "tooth" up, has taken out
earlier short term resistance, is showing  better price momentum, and even a little more volume.
SPX Chart

Today, the boys also rotated strongly out of Treasuries as the bottom panel of the chart, which
features the 30 yr. price, shows. It's been a few weeks since we last saw that kind of move and
it suggests an uptick in risk appetite as the week closed. Further rotation of this sort would
suggest increased staying power for the stock rally.

The $SPX has moved up to a 2.5% premium to the 25 day m/a. The guys have been clipping the
market up around 2.7% or slightly higher.

Short Run Fundamentals
My weekly cyclical fundamental indicator is showing further strength since making an interim
bottom on 6/22. A key factor in the improvement is unemployment insurance claims which have
dropped sharply here in July. Since a number of economists think the improvement may be
overstated for seasonal reasons, it is not clear how much of a factor weekly economic data are
in support the rally.

Federal Reserve Bank Credit is a little below where it was on 6/30/11 when QE 2 ended and
is down a little more in real terms. In my view, with private sector credit growth so modest,
the absence of any QE adds to fundamental risk for the market.

The Fed and The ECB -- Set To Gin up Liquidity?
A rising stock market with contested fundamental support suggests players are expecting either
a freash easing program by the Fed next week or stronger hints of same. Moreover, ECB head
Mario Draghi is talking BIG about new measures to provide liquidity to the EZ soon. First,
he has to take on the curmudgeonly, party pooping Bundesbank early next week. The latter has been heavy on the "nein" when it comes to outright buys of weak EZ sovereigns, so Mario has his
work cut out for him. Since both the US and the EZ are short on liquidity in my view, I do not
object to Ben and Mario pressing for more ease especially with fiscal policy moribund for now.

The issue for the market near term concerns how these central bank meetings and possible new
plans shape up. The evidence clearly suggests expectations by traders are running pretty high.

Tuesday, July 24, 2012

Stock Market -- Short Term

As outlined in several previous posts, I have not been impressed with the rally off the 6/1/12
low. My concerns have centered on lacklustre price momentum and volume. Price weakness
this week has brought a spate of negative and fundamental commentary to the web. My attitude
is that even though this rally has been unpersuasive so far, the sharp saw tooth pattern makes
it likely that a precisely correct call by anyone will be more a matter of luck than skill. $SPX

I would not want to call an end to the recent rally until after I have seen more technical damage
to the indicators shown on the chart.

From a fundamental point of view, there is an upcoming two day Fed FOMC policy meeting just
a week away. It is possible that there could be some intense handicapping re: further Fed
easing in the market over the next five trading days. It may well be that such handicapping has
already been contributing to the sharp chop in prices over the past six odd weeks.

Sunday, July 22, 2012

Syria -- Ugly And Getting More Threatening

The boys of sunny Syria are rolling into full scale civil war. It's Sunni vs. Shia et al, a portable
conflict with centuries of hatreds behind it. NATO is pressing the House of Assad to give way.
The Saudis would like to see the Shia Crescent broken. The Iranians are keen to keep it. The
Russians are moving bird gunships and Marines into the country. Israel is freaking out on news
that Bashar and the boys are moving their chemical and biological warfare stocks around. El Q
would like to procure CBR weaponry and it is likely that the Sunni opposition has a few guys
who are not Jeffersonian democrats and might be tempted to put any pieces of CBR stuff out
on the open market. The US surely has to be concerned as do the Russian who have some hostile
Islamic militant neighbors. Turkey -- handling both provocation and refugees -- is finding its
patience strained. And of course, Lebanon shares the explosive interfaith mix evident in Syria.

Spillover and / or intervention by outsiders could put either of  or both Saudi Arabia or Iran
into the headlines, and let us keep in mind the Sunni / Shia fault line that runs through Iraq, which
is on a strong oil output ramp up.

There are three cushion billiard shot possibilities here that could wind up putting the supply
of oil in the region into play along with the price. Stay up to date on the Syria story.

Stock Market -- Weekly

Both weekly technicals and fundamentals are creeping, slouching toward positive. And therein
lies the main concern. Market rallies with a good degree of staying power rarely have such
humble beginnings. Breadth is clearly supportive, but volume and momentum are not. It appears
that few players want to give up on it as they did during the price corrections of 2010 and 2011
and this is likely because folks do not want to be caught off base if the Fed unveils a substantive
new QE program. I have always found trying to divine the collective psyche of the Fed to be an
exercise that rarely bares fruit, and my reading of reports by others reveals considerable
uncertainty about what the Fed might unveil, if anything. I have been on the sidelines for a
couple of months now and remain there. SPX Weekly Chart

Thursday, July 19, 2012

Clean Out Day For Commodities & Oil

I completed selling out my position in the commodities basket today as the ETF reached hefty
short term overbought levels. DBC Chart For more, see yesteray's post below.

As posted on June 2, I put oil on my buy list because it was deeply oversold in the short run.
I did go long shortly after, and this time out, I gave the USO oil price tracker a shot when West
Texas crude crossed back above $80 bl. I sold out this position today primarily because the
recent run up was just too zippy relative to fundamentals for my comfort .USO Chart
I am now about 90% cash. I do have a natural gas long position which I have been nuturing,
but this a long term postion I started last year, figuring if the guys at Exxon Mobil were willing
to put large $ to work exploring for and producing gas, maybe I should, too. Whatever your
feelings about this monster company, note that few careful observers have ever thought of
them as dumb.

Since I view the economic outlook for the US as very uncertain, my attitude toward trading
has been to look at deep oversolds and very hefty overboughts as candidates for long or
short positions. I will happily return to the oil and broad commodities market when good
shorter term opportunities arise. I have been very tempted to short the hell out of the long
Treasury market, but the stars have not lined up quite right yet. I have skipped the equities
market because volume and price momentum have not been convincing, although breadth
has been strong.

Wednesday, July 18, 2012

Commodities Market & Inflation Potential

In a post on this broad market on June 4, I argued the commodities market was too oversold
to ignore and that I was looking for a long side entry on a bump up in the CRB comp. It came, I
bought the DBC ETF and enjoyed a moderate run. I am lightening up now because the market is
getting overbought short term and also because of the high volatility of commodities. CRB Chart
I lucked out some on this trade because of the drought in the midwest and plains which has
sharply punished prospects for grains.(The old saying is that "Wall Street kills the corn crop every
year",with this year shaping up as one where It has been right.)

Inflation Potential
Fuel prices have turned up along with basic foodstuffs and this is leading to a sharp  rise in my
inflation pressure gauge. It remains subdued, but when inflation pressure is ignited by upturns
in basic commodities, then you must be mindful because of the impact accelerating basic costs can
have on real household earnings and consumer confidence.

Tuesday, July 17, 2012

Stock Market -- Weekly

The post below did not make it out on Sun. 7/15 because of a severe thunderstorm that
took out the local internet and even destabilized wi fi...

My weekly cyclical fundamental indicator (WCFI) has improved sharply over the past three weeks
primarily reflecting much weaker initial unemployment insurance claims data. That labor
development can happen around the July 4 holiday, so it will take a couple of more weeks of
data on claims to see if there was a merely seasonal brightening. If claims data stay weak,
that could be a nice plus for the market. The lack of stock market upward mobility over the
past two weeks despite improved key indicator news suggests players are waiting to see if the
better claims info is purely seasonal. Other categories of the WCFI have steadied -- a good sign.

Fed Bank Credit remains around where it was when QE 2 ended on 6/30 /11. Since the market is
now no higher than it was in the spring of 2011, it continues to show that an advance may well not be
sustained without further QE. My explanation for this remains that private sector credit growth
is simply too low to sustain a market advance without perhaps a major rotation out of Treasuries.

I think we are in unchartered waters here regarding money and credit balances. The closest we
come in terms of precedent is the 1937 - 38 period and since much of the monetary and credit
data for this difficult period is reconstructed, it is unwise to be dogmatic, but maybe prudent to
be cautious in the absence of further QE.

The weekly chart is inching toward a more positive bearing but reflects the lack of bullish
conviction that would add positive price momentum that is lacking. SPX Weekly Chart

Wednesday, July 11, 2012

Shanghai Stocks -- It's Been A Tough Go

My view since early 2011 was that tight money in China would slow the economy but shake out
inflation, thus leading to a more relaxed monetary regimen and a powerful recovery for the
Shanghai Comp. I initially thought the rally would come in Half 2 '11, but after watching the
PBOC keep the squeeze on over the course of the year, it became apparent no decent rally would
be in store until year's end. I used the FXI index fund to play the rally in late 2011 and made some
money, but players have continued to wring out the market in the wake of the advance early in the
year. $SSEC Chart

From a trading standpoint, watching the China market was barely worth the time. Now, we have
the PBOC in easing mode with liquidity and lending responding positively and we have a cheap
market at around 10X earnings. The market is oversold. It has yet to turn, but it is back on my
watch list as a long.

What I learned following China carefully over the last 18 months is that my style of monetary /
economic analysis works there, but, as with so many other markets, fundamentals, even if done
reasonably well, often do not help with timing.

To squeeze down inflation and shut off a speculative real estate boom, the PBOC took yr/yr
broad money growth down from 30% to 12.5% before easing up. This cut inflation from 6.5%
down to 2.2%, but production growth was slashed from nearly 20% yr/yr to less than 10%.
China's economy boat is obviously big enough now that it takes more time to turn it around.

My Western style analytical approach now tickets China's economy to re-accelerate positively
in the autumn of this year. I see enough skepticism in the market and in the global economic
media that I am not likely to initiate a new long position until the technicals turn. If  the Boyz
Of Beijing can pull off a moderate re-ignition of growth this year, the Shanghai Composite
could add at least 30% through mid-2013. So, I'll be happy to watch along.

Stock Market -- Short Term Technical

The SPX closed right smack on the closing price uptrend line of the rally underway since Jun 1.
SPX Chart Note as well that the short term MACD is threatening to roll over. As it is, the trend
up has not been inspiring, and a downside break would badly crimp the credibility of the recent
advance. So, the bulls need to step in now to keep this baby rolling.

Sunday, July 08, 2012

Corporate Profits

Profits In Perspective
Based on a long term growth model with a base prior to WW2, SP 500 profits should be around
$90 per share in 2012. Consensus puts net per share this year at around $105. The positive and
cyclical deviation to "normal" is mild and based on past performance, would not qualify as
eyebrow raising unless SP 500 eps were to spike to $115. Profits have made a dramatic recovery
from sub-basement levels in early 2009, but current progress leaves net well below extended levels.

My primary top line growth model has the yr/yr business sales gain running about 6.7% on a monthly basis since mid - 2010. Physical output growth has moderated sharply from the strong rebound period
running into 2010, but has been a respectable 4% yr/yr over the past six months. Pricing power
has eroded sharply over the past year, especially for materials and fuels. The loss of pricing
power has been partly offset by higher volume growth until just recently.

A significant firming of the $USD over the past 12 months is going to operate as a drag factor
for a number of multinational companies, with currency translation penalties to affect both
reported sales and earnings.

Profit Margin
Profit margin factors were quite strong in favor of higher margins until mid-2011. Since then,
my price / cost index has dropped from a strong +1.4 to -2.9, indicating that an increasing
number of companies are going to show a decline in operating profit margin compared to last

Investment strategists do tend to overdramatize the outlook for profit margin. There was
damage to margin in Q2 '12, but since physical output was quite respectable compared to
last year, there has yet to be the kind of downward pressure on operating rates that do the real
heavy damage to profit margins.

The Bottom Line
Over the past couple of years of economic recovery, investors observed handsome double
digit % gains in SP 500 net per share. With a stronger dollar in hand, and with price / cost
variables deteriorating, it will be much tougher for companies to continue posting such
impressive results. +5% yr/yr for the quarter just ended might not be bad for a goodly
number of companies.

Ongoing mildly positive earnings comparisons can sustain a cyclical bull market. However,
a sharp loss in positive growth momentum in profits as may now be occurring always
rquires extra due diligence for investors.

Saturday, July 07, 2012

Stock Market -- Technical

Daily Chart
Once again, the rally in place since 6/1 was clipped hard when the SPX moved up around a 3%
premium to the 25 day m/a. Technically, the rally is still in place, but you need to take note that
the two day pullback from the 1374 close on Tue. to the close of 1355 on Fri. constituted a
failure to break above the Apr. / May '12 downtrend line. As mentioned back in the 7/3 post, a
pullback was in order, but the failure to penetrate the down line was a disappointment nonethe-
less.  $SPX daily To remain interestingly positive, the SPX needs to take out 1375 on the way
up over the next week or two.

Weekly Chart
This chart has treated me well over the past several years. I am still carrying an early May, 2012
sell signal, and even though the market has rallied, the important 12 week MACD measure has
yet to turn up and price momentum against the 40 wk m/a has not clearly reversed to the upside.
$SPX weekly I remain cautious based on the weekly chart, and if the current rally keeps perking
along, I am going to be late to the party.

Friday, July 06, 2012

Interesting Discrepancy In Jobs Count

The BLS runs two different job counts: a household survey and payrolls data. Over the long term,
the surveys diverge little, but there can be sharp divergences in the short run. The household survey
is more volatile and does not carry the documentation that the payroll data have behind it. But, the
household survey is broader and certainly more current than the payroll data as HR departments
have other pressing priorities. Most economists and investment managers follow the payroll info,
especially since it was once blessed by none other than Uncle Al Greenspan. I have long favored
the household survey because of its breadth and because it is more up to date. Well, since 10/11,
the household survey shows 2.1 mil. new jobs to only 1.3 mil. for payroll. Since the household
survey often leads payroll in timeliness, there are 800k jobs "in the can" which are not yet
reflected in the payroll data. Perhaps this discrepancy may just sit for a fair spell, and, perhaps
payroll is well understated. Since the BLS reports up through the labor secretary, a cabinet post,
and since it is a national election year, the 800K jobs discrepancy could play a role of some
sort between now and election day in early Nov. No big deal, but just something to keep in
mind, as the President may be looking for ways to put the best case he can before voters....

Tuesday, July 03, 2012

Stock Market -- Short Term

The June rally is extending into July with the SPX continuing in a confirmed short term uptrend. The
market is moderately overbought at a 3.6% premium to the the 25 day m/a, so no one should be
surprised if a little money comes off the table on Thurs., especially ahead of the employment report.
$SPX chart Note the positive cross for the extended time MACD in the first bottom panel of the
chart, but note as well that when the lines approach zero from below there can sometimes be a
stumble. If you scroll down to the 7/1 post for Sun. and click on "$NYAD" (in red), you will see
that breadth is breaking out to a new all-time high which frequently, but not always, portends a
new cycle high for the SPX.

The very bottom panel for the SPX chart shows that the broad, global stock market excluding the
US (GWL) is moving toward reversing an extended downtrend in relative strength as players are
starting to take on more risk as sentiment regarding the global economy improves and the US
dollar comes under some downward pressure.

The risk in the US stock market is elevating in my book as liquidity in the financial system is
growing far too slowly to suit me. Economic recovery momentum potential slowed significantly
in June. This would normally result in a weaker market, but there may be money in size betting
that "bad news is good news" in that further deceleration of the pace of the recovery may
result in a spanking new QE program from the Fed. That kind of guesswork is not my game
even though I would be happy to see the Fed step up and add more liquidity to the system.

Sunday, July 01, 2012

Stock Market -- Weekly

This week the focus is on the NYSE adv. / dec. line. It shows a triple top formation of the a/d
line which suggests the market may be in a make or break situation for the near term as breadth
has stalled out around the current level several times already this year. $NYAD Cumulative
breadth needs to break out top side very soon to keep the long side of the market happy.

I have also included the Value Line equal weighted stock index (top panel). The price of the
"average stock" has lagged the improvement in breadth over the past year. One reason is that
more $ has been funneled into large cap stocks. As well, volume has been more constrained,
and this indicates a lighter $ flow into equities.

My weekly cyclical fundamental indicator (WCFI) declined over the course of most of June,
but the stock market rallied strongly anyway. The SP 500 is up about 8.3% this year. The WCFI
is up only a paltry 0.2%. Clearly, market players are not behaving as slavishly toward weekly
economic data as they have been over most of the current economic recovery to date. I will
become more concerned about the discrepancy if the WCFI does not perform more strongly in
the weeks ahead should the market continue to rally.