A Monetary Moment -- Possible Gamesmanship From Cousin Benny

As the debate about whether the Fed is likely to start a QE 3 program and when rolls on, I
note that the US is witnessing a strong period of quantitative tightening which has been underway
since Feb. 2012. Specifically, the Fed has allowed a bit over $100 bil. to roll off its Bank Credit
balance. That represents a strong 3.5% tightening move and brings Fed Bank Credit about $50
bil. brlow where it was at the end of QE 2 (6/30/11). This is the fourth round of liquidity
tightening in evidence since the end of 2008. Each one of these tightening moves has been
followed by a sizable easing move. The Fed needs to buy $50 bil. of Treasuries or other paper
to raise its account value to the level it promised to maintain at the end of QE 2. Moreover, if,
and this remains a big if, the EZ's central banks may need $ over the next several months, the
Fed through its currency swap line could lend up to $200 bil. more without raising eyebrows.

So, there is the potential for QE without the Fed actually having to say They are providing it.
Just a little something to keep in mind.

Eurozone Status Check

Amidst a battle with the Goths of the Bundesbank over sovereign paper purchases, ECB head
Draghi has passed on Jackson Hole to fade into theEuro haze for another week or so. The guy has
succeeded in pulling enough levers to Get the EZ's liquidity deficit moved from critical on to
serious and may not be far from restoring liquidity to a level that reduces the risk of a deflationary
downturn.

The EZ remains mired in recession and lower growth outside the zone is crimping export orders
as global trade slows to a crawl. Debt levels are shrinking on weaker demand and on forced
bank recapitalizations.The ECB must contend not only with the German monetary authorities but
with occasional bouts of capital flight. In reality the EZ has held up far better than most, myself
included, would have thought. But there are tight limits, both economic and social. Seven years of
fat has been followed by four of lean. Three more lean years is likely to prove unmanagable.

After a fast, sharp bear market from spring 2011 into the fall, Euro stocks have been trying to
establish a base in anticipation of eventual economic recovery with action and volatility heavily
reflecting perceived potential for both ECB and Fed monetary easing. Euro 350 IEV Chart Ditto
the Euro ($XEU). The IEV is getting overbought.

Further monetary easing by the ECB through bond purchases and other schemes it might try for
is just the first step for EZ recovery. The authorities will also have to lighten up on bank
recapitilization plans and plan for stimulus to avoid or cope with oncoming humanitarian issues.
A number of countries in the EZ have been pissing regularly into the well and its foundations
are rapidly corroding.

There is much more to say about the eventual geopolitical / economic status of Europe, but I'll
hold off for now as I need to figure more out concerning the US vs Germany and how to say it
politely.

Stock Market -- Weekly

Fundamentals
My weekly cyclical fundamental indicator (WCFI) continues to trend up from an interim low set around
mid-Jun. The coincident economic measure remains positve and the forward looking components
are stronger primarily reflecting lower unemployment insurance claims and a moderate recovery
of sensitive materials prices. Year-to-date, the WCFI is up 5.6% compared to 12.2% for the SPX.
A small amount of the differential in returns likely is a result of investor preference for larger cap.
issues, but the bulk of it reflects the expectation by players of some form of additional QE by the
Fed or ECB or both. Interestingly, the Fed has not announced any QE in the current economic upleg
while the WCFI was rising.

The upcoming monetary policy symposium at Jackson Hole, WY near the end of this week should
really be the ECB's show since it is the EZ which is in the more serious economic situation near
term. It is within the Eurozone where a big QE program is most critical. Naturally, investors will
listen intently to Bernanke's talk for more clarification about US QE as well. Do not discount
a significant Fed pledge to provide a sizable currency swap arrangement if it fits into the ECB's
plans as that is an "under the radar " form of QE. ECB leader Draghi needs to remember a key
rule of political economics this week, to whit: "Money talks and bullshit walks." Substantive
ECB policy action is overdue.

Technical
The SPX remains in an uptrend and that trend is supported by the primary weekly chart indicators.
SPX Weekly Chart The chart also shows the double top in place and suggests that there are only a
couple of weeks remaining in which the uptrend can successfully take out the resistance before it
exhausts itself anyway. With so many voices coming from the EZ, this week could be a bumpy one.
Ditto a Bernanke fumble.
______________________________________________________________________________
The Fed does not operate this way, but now that Romney has indicated he plans to lift Bernanke's
chairman title if elected, the Fed has to be at least fantasizing having Ben announce that, indeed,
more QE may be coming soon as a counter to Mitt's casual effrontery....

Bugz Bernanke Boogie Into Gold

Well, there were technicians who said only to buy gold if it could show some moxie clearing
resistance at $1620 oz., and they have been right so far. Bigger players such as Soros, Paulson
and Pimco Commodities are all reportedly thumbs up on the trade. It is all "on the come" ahead
of anticipated fresh QE by the Fed and perhaps a turn by the ECB as well. The recent sharp
run up is ahead of the Bernanke and Draghi speeches at the Jackson Hole, WY Fed confab
late next week. Gold Price Chart:
http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&b=5&g=0&id=p07801840825

You are on your own on this one.

Stock Market -- Daily Chart

As discussed in the Aug. 17 post (scroll down a little), the SPX did record a secondary or
double top and triggered a mechanical sell signal. SPX Daily Chart The market has registered
a minor pull back so far, but since this was from a short term price momentum overbought, the
action this week so far has been no surprise.

A double top in the SPX as shown in the chart is not to be taken lightly by any means if only
because there are traders who will take profits on such an indication. The broad channel uptrend
in the market has not been violated by a downside break. There has been only a trim from a
short term extended position. The logical move after a failure of the SPX to break out to a new
cyclical high would be to test the base uptrend line which now sits near 1380, especially given
the pronounced saw tooth pattern of the rally since early Jun. I have seen a little work over the
years which would suggest that the market is already flashing a bearish sign even with the
rather modest pull back in evidence just because of the double top formation, but I am not sure
how much to trust it.

Financial System Liquidity & Monetary Policy

QE 2 ended 6/30/11. It did increase liquidity substantially and there was a booster shot from the
Fed's temporary $100 bil. currency swap deal late in 2011. Through Jan. 2012, my broad
measure of financial system liquidity or funding was up 5.6%, close to the 6% level adequate
to fund a moderate economic expansion. Here in Aug., the yr/yr change in the same measure is
only +2.4% and trending downward.

With real estate lending, the major interest earning asset category for banks, flat as a pancake,
the bankning system remains flush with balance sheet liquidity and has been able to finance
private sector credit demand with marginal incremental funding. The US is over three years into
economic recovery and banks still remain significant net buyers of Treasuries!

Because I focus on the banking system and its funding operations, I do not count money market
funds in my financial system liquidity measure. If I did, then the yr/yr % change in total liquidity
would come in well below the 2.4% mentioned above.

The key liquidity category helping the economy stay afloat has been the more narrow measure
of monetary liquidity or cash and checkables. At year end 2011, the yr/yr growth of this
indicator was a powerful 20%. Now, with no new QE by the Fed, the yr/yr growth is down to
9.5% and could fall to 5% by year's end 2012.

Ninety years of monetary and credit data suggest the US has entered a stern trial of whether
there will be adequate funding to support continued economic expansion. I say this because
the recoveries of private sector credit demand and bank funding capacity have been too slow
so far and without a sharper pick up ahead the economy may well be prone to fail if the Fed
continues to stand idly by.

Treasury Bond Market

Longer dated Treasury yields have jumped up sharply since late July. The 10 year yield is now
up right at prior support and the surge is close to breaking the downtrend line in place since Feb.
2011. The cyclical fundamentals I watch most closely to track the Treasury market are either
basing out after a decline or are up slightly since June. In either case, the run up in yields is too
sharp to be supported by the fundamentals. Investment grade corporate bond yields are also now
moving up in sympathy. 10 Year Treas Chart With Industrial Metals Comp. & SPX

Bond market players for now apparently see the odds of further QE by the Fed as rising as we
get closer to the end of Aug. when the Fed holds its big economics / financial markets confab at
venerable Jackson Hole, WY. You can also see this in credit quality spreads which are narrowing
as players are more reluctant to sell out higher yielding, lesser quality paper. And, there is
likely some rotation out of very low yielding Treasuries into equities, where the SPX yields 40
basis point above the ten year and sports an earnings yield of 7.1%. So, this move out of
Treasuries is developing into a strong bet on a substantive QE program that is seen by the bond
guys as likely far more attractive for riskier securities. And, I think at this point, without copious
liquidity largesse in the system, riskier securities such as stocks and commodities would need
heavy continued rotation out of Treasuries to support more sustained advances.

New rounds of QE from the Fed and ECB (Draghi to speak at Jackson Hole) could further
significantly damage the Treasury and premier corporate bond markets if new QE actually is in
the cards for the Sep. '12 and beyond period.

But, let's check short term first as we have both the SPX and TNX yield at critical resistance
levels.

Stock Market -- Daily Chart

A vexing week has ended with an extra vexing close. The SPX, rather than moving up smartly
above closing rersistance, has ended a point below it. SPX Daily Chart So, as of today's close,
there is a clear double or secondary top in place. I flag today's wind up as giving a mechanical
sell signal for very short run players, and next week, some money should come off the table
early on as there will be folks who take this tidy run up only to the resistance line as a failure of
the rally. Since mechanical trade signals of this sort are very far from invincible, and since
the market is mildy overbought short term on price momentum, players who remain bullish on this
recent rallly may have to continue to sweat it out.

Stocks -- Confidence Veering Toward Complacency

The market is mildly overbought in the short run on the measures I use most often, but a couple
of indicators raise an eyebrow. Specifically, the 21 day m/a of the $TRINQ, which measures
net buying or selling pressure, is moving into overbought territory, while the $VIX or volatility
index has moved down near lows for this cyclical bull. So you have stronger buying pressure
as fear has progressively diminished. Before you check the chart, remember that when the
$TRINQ is below 1.00, there is net buying pressure in terms of positive breadth and the up -
volume behind it. $TRINQ Chart (NASDAQ Comp. is in the top panel.)

Stock Market Weekly

Weekly Chart
Belatedly, My SPX weekly chart confirmed the recent rally this week, with positive turns in
MACD and price momentum as well as a continued uptrend in RSI. SPX Weekly Chart My
proprietary 40 wk. price oscillator -- which I use to gauge how much capital to play with in
the market -- also turned positive, again belatedly. I think I mentioned several weeks back that
the recent rally, light on weekly price momentum, would bring me late to the party, and so it has.

Back on Apr. 5, I posted that the weekly chart suggested a 3 -6 month overbought for the SPX
based on a large premium it had to the 40 wk. m/a. Well, the market is little changed from the
early Apr. reading and the overbought is no longer glaring as the 40 wk has moved up under
the SPX. As discussed last month I made decent money trading deep oversolds in oil and the
broader commodites market, but I regret not playing the current rally. For equities, the experience
proved (again) that very successful disciplines do not always work.

For now, I plan to watch how the SPX handles resistance in the 1400 - 1430 range especially
since my primary gauge does whipsaw from time to time.

Fundamentals
The SPX is up about 11.8% for the year so far. My weekly cyclical fundamental indicator is
up but 5.4% on the year. I can make a case for a higher p/e ratio for the market based on
reduced inflation pressure and a still positive earnings trend, but I suspect investors have
lifted the SPX return over the short run fundamentals primarily to include the expectation that
further monetary easing may be at hand either by the Fed or the ECB or both. The premise
here is that a continued global slowdown of economic growth is really "good news" in that
 it moves the world closer to the day of new QE programs.

There can be many a slip between the cup and the lip. As a guy who is well into my "golden"
years, I have come to appreciate the sagacity of that old admonition and leave the field of
future policy speculation to the younger and more daring.

Stock Market -- Daily Chart

The Stock Market remains in a confirmed short term uptrend. Breadth and momentum are ok, but
volume has turned light again. The SPX is at enough of a premium to the 25 day m/a that you
should not be surprised if the market is clipped a little around the edges by the real short termers.
There is a mild / moderate but by no means serious overbought to contend with now.

The next step for the advance is to get through the 1400 - 1430 area on the SPX. Resistance over
the next couple of weeks could be a very important issue since it would raise the possibility of
a bearish secondary top in the wake of the original cyclical top of SPX 1419 set on 4/2/12.
However, since resistance at or mildly above 1400 would be a more or less natural development,
long side players may have to sweat it out for the short run, keeping an eye on breadth which
has been a price level leader in the current rally.

SPX Daily Chart

Stock Market -- Longer Term Technical

The downward break in the market this past spring was not deep enough to wreck the cyclical
uptrend off the Mar. 2009 low. By the same token, the advance of the SPX will again be suspect
if it does not clear the Mar. 2011 approx. 1420 prior cyclical high in decisive fashion over the
next couple of months and if it does not close out 2012 around the 1500 level. From a technical
perspective, you need to keep the market on a tight leash now because we have already seen
three distinct upwaves off that Mar. '09 low and we are now in a possible "bonus" situation
where there could be extra upside which would force a revised "wave count" should the market
continue to trend higher.

The monthly chart shows the SPX is now in a more mature cyclical phase when you consider
the MACD and price momentum indicators. SPX 10 Year Monthly Chart Notice how MACD
has flattened out and note also the deceleration of price momentum, both following the powerful
early phase of this cyclical advance.

How might we get into a "bonus" situation given especially the recent slowdown of the economy?
Well, the first thing to keep in mind is that the US economy still has ample slack in the facilities
operating rate as well as in labor supply. Moreover, there is no cyclical acceleration of inflation
or sustained upward pressure on short term interest rates that normally point to expansion peaks
and market tops. But the economy is running low on broad measures of liquidity, and without a
new, strong round of QE by the Fed or broader, more rapid private sector credit growth, the
economy is going to be left to operate off of internal fundamentals -- aggregate real wage growth
and business cash flow generation. Currently, gross real wage growth  is running at 2.2% yr/yr
with most of this reflecting job growth while business cash flow growth is now moderating
following a powerful recovery run over 2009 - 2011. So, on balance cyclical risk to the
economy is now on the rise despite the evident slack and absence of more normal pressures
that would signify overheating. The Fed's big gamble of resting QE thus rolls on.

How about the fiscal cliff, or the potential for higher taxes and mandated federal spending cuts?
In my view, it's just too early to tell now.

US Economic Outlook

The US hold on further economic recovery is tenuous at this point. There is enough residual monetary
liquidity in the system to underwrite further expansion, but the progress of the economy is near a
stall point, and without a dramatic announcement of additional easing by the Fed, a re-acceleration
of activity will depend greatly on whether consumer and business confidence might respond
positively to a narrow list of positives -- slight improvement in new order breadth indicators, a
larger than expected uptick in payroll employment and a decent rally over the past month in the
stock market. The Phila. Fed leading index shows the economy at a "fail safe" point wherein
additional loss of momentum might well signify a downturn: Philly Fed LEI Chart

My coincident economic indicators all point to a loss of momentum for the economy, but are
not flashing a sharp warning signal as yet. The yr/yr % growth of real retail sales dropped to a
low +2.5% in Jun. and further deterioration would be a very bad sign. Business has taken to
handing out very low pay increases again, and the recent pressure in fuel and food prices
will trim discretionary spending power unless confidence is there for folks to dip into savings
and increase the use of the credit card to finance stronger buying.

Fun With Jobs....

As suggested back on Jul. 6 and again in the postscript to monetary policy just below, US payroll
employment increased at a much better rate than was widely anticipated. So, readers of this
blog got a leg up on the news, and I can tell you that the "jobs kitty" has been reduced from 800K
down to 440K with today's report, thus leaving some additional leeway for stronger payroll
survey data over the next three months. The markets -- which focus on the US payrolls survey --
liked the "news" even though the entire report was not a good one.

But, now it is time to get back to some serious work, even acknowledging that payroll jobs
data could be spruced up further in the lead in to the election...