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 !!!

Sunday, September 30, 2012

Stock Market Quickie...

The rally in the SPX up to a new cyclical high since Jun. has proceeded with a fair degree
of form regularity. It has saw toothed along and every challenge down to the 25 day m/a
has resulted in a bounce off the 25 day or a quick upmove if the 25 day was penetrated to
the downside. Note as well that such penetrations have been shallow. Well, the SPX is
once again down around its 25 day m/a. As well, my extended time MACD is also showing
a challenge to the uptrend in place there. Without a nice upward bounce in the SPX this
week, we may be looking at a rally that is either changing character, or worse, ending.

SPX Chart

Saturday, September 29, 2012

Stock Market -- Monthly Chart

Here is a link to the decade long monthly SPX:

A cyclical bull market from Mar. 2009 remains in place. The market is moderately overbought
compared to its 10 mo. m/a. When measured on momentum, the market is also moderately
overbought, and when you check the bottom panel -- stochastic measure -- the market is starting
to approach an overbought level.

Longer run MACD is positive and the thin premium reflects the drag effect of the near bear
market in 2011. Note the slight negative dip to MACD last year.

The SPX has cleared all resistance levels save for the all time peak level recorded in the
latter part of 2007. There is current trend support for the SPX down around the 1400 level.
If the SPX can hold the current trend off the 2009 low, it would take out the all-time high
by Feb. / Mar. 2013. However, The VIX volatility or "fear" index is quite suppressed, and
this indicates a fair degree of complacency in the market. Note that over the past 10 years,
the VIX has not often stayed at the current suppressed level for very long. This suggests that
a price correction may not be that far off and that projected extension of the current uptrend
line may be dubious. VIX

Thursday, September 27, 2012

Stock Market -- Daily Chart

The positive run from early June is getting ragged, but it is still intact thanks to the bounce
off the 25 day m/a today. The SPX is not overbought on price momentum in the short run
but is a little overbought on the 40 day RSI and my extended MACD, which as you'll see,
is shaky. SPX Chart

I have also included the 30 yr. Treasury price in the bottom panel of the above link. The SPX
has generated a much better relative return so far this year, but has been smoked by the 30 yr
when you take year end 2010 as a base. You will note how strongly the 30 yr has performed
over the past 18 months even as the economy has continued to expand. I regard the 30 yr as
way overpriced for the true longer term, and have no plans to look at a long side trade until the
bond gets down below 135 (3.50% YTM). There is a large slug of potential equities money in
the Treasury market, but players remain quite cautious on the durability of the US recovery. You
can see that in how well the bond has held up as well as in the continuation of wide credit
quality spreads within the conventional investment grade bond sector and also with ongoing p/e
multiple suppression for the SPX.

News On Jobless Claims, Employment

Two interesting items which helped the stock market today:

Jobless Claims
Unemployment insurance claims for the prior week dropped to 359K. In a recent post (scroll
down), I mentioned jobless claims -- a good weekly leading economic indicator and one which
stocks players watch carefully -- needed to fall from the 380K+ area back down to 360K to
hold the rally. Moreover, I think claims need to stay around 360K, or even better, pierce that
level to the downside to support further gains in stocks. Take a careful look at weekly jobless
claims for 2012 here. Further improvement is something just short of overdue.

Payroll Employment
Back on Jul.6, I posted that payroll jobs growth was about 800K short of the more current and
broader household survey. Details Subsequent reports from BLS dropped the discrepancy to
414K jobs in favor of the household survey, and a new benchmark revision of payroll data
from BLS claims the payroll numbers have been 386K too light over the pasy year. This will
eventually force upward revisions to a number of economic time series when the final benchmark
numbers are officially posted early next year. In the interim, it gives the Obama guys a fresh and
positive talking point toward the election and and the new data helps a little with economic
strategizing and market sentiment in the short run.

Note however, that business remains an extraordinary cheapskate in handing out wage increases
to the rank and file and that resulting poor income growth keeps the economy far more tenuous
than needs be.

Tuesday, September 25, 2012

Commodities Market -- Short Term Failure

After an extended sell down running from Apr. '11 through Jun. of this year, the commodities
market experienced a sharp rebound until just recently on the wings of speculation that major
central banks were prepared to engage in a new round of easing (which they subsequently did).

During the last sharp downward break this year, the CRB index did fall through very long term
support at the 290 level on its way to 270. That was not a good sign, but it left the market deeply
enough oversold to entice players (including yours truly) to come in on the long side. The
recent rally from the early summer lows was a strong 18.5%. However, the CRB did fail to
take out resistance at the 320 level. CRB Chart That is a disappointment on technical grounds
and, for me, it was also disappointing fundamentally as my long term value model for the CRB
had the index as reasonably priced at 320. I read the flop at 320 as an expression of trader
concern over whether the newest programs of monetary policy QE will work to restart global
economic growth just ahead.

Although I did sell out my long position of the DBC commodites ETF over Jul. 18 - 19 as posted,
I still have an interest in this market from the long side. We do have the QE programs in play, and
the chart does show a clear positive break above the downtrend in the CRB from Apr. of last
year. However, and this is not shown on the chart, the recent interim high in the CRB of 320 does
fall on a longer term downtrend line running from the Jul. 2008 blow off top near 475. The
fail of the CRB to take out long term trend resistance at 320 adds heavier weight to that level and
increases the gravity of betting against the longer term direction of this market especially since
the 2011 - 12 price correction took out cyclical trend support.

Fundamentally, the largely downward price action of the CRB since Apr. 2011 not only reflects
the loss of global economic growth momentum since then, but it also suggests the overall
situation of global commodities supply / demand may be more balanced in terms of supply growth
than I have expected.

For now, I am content to see if a substantial oversold condition develops for the CRB before
dusting off looking for a long side commodities ETF to play.

Sunday, September 23, 2012

Stock Market -- Weekly

My weekly cyclical fundamental indicator (WCFI) fell slightly last week, but remains in a mild uptrend. The SPX has outpaced the WCFI by a significant margin since the early Jun. start to
the recent rally. Despite the new QE program, Fed Bank Credit remains in a firm downtrend.
This downtrend is widely expected to reverse shortly with the fresh QE and it is anticipation
of that event which has been the primary support for the rally. With very short term fundamentals
 unimpressive, the rally in the market remains "on the come" fundamentally.

The weekly SPX shows a well established up move in the market with confirmation from the
indicators. The market is moving into overbought territory, but there is no "bell ringer" signal
as yet that profits need to be booked. SPX Chart

Thursday, September 20, 2012

QE 3 In The 11th Hour....

If QE 3 is to buttress the economic expansion, it has come at a late hour, a few new
economic data points show. First, initial unemployment claims is a good weekly
leading indicator for the economy. The trend of improvement has clearly stalled out:
IUIC weekly chart. Claims are running 382K a week and to support a continuation of
the recent advance in stocks, claims are going to have to drop to and sustain the 360K
level in the months ahead.

Markit's PMI flash report for Sept. manufacturing shows the sector is bumping along at
minimally positive levels. Markit Flash Mfg. Scroll to page 2 and you will see a bright
spot, namely a slight increase in new orders for Sept. An acceleration of the rise in new
orders would be a positive for the stock market as well as for the economy.

Wednesday, September 19, 2012

Oil Price

Reflecting seasonal supply / demand patterns, the oil price normally experiences strong
postive price action in the late winter / early spring and from the end of Jul. through the
end of Sept. Weak periods run from late Apr. through late Jul. and from Oct. through the
end of Feb. in the succeeding year.

The oil price did have a nice seasonal run up this summer, and as we approach the month
of October, when seasonal weakness normally develops, the market has started to sell down
after reaching a notable short term overbought. $WTIC chart

The sell off in the oil price this week, although abrupt, is certainly not beyond the pale of
normal seasonal activity. Despite evidence of decelerating global economic and trade growth
this year, the oil price managed a strong, postive, seasonal run this past summer, no doubt
heightened by pressure that  Israeli PM "Bibi" Netanyahu has been applying to the Obama
administration over progress Iran is allegedly making in developing weapons grade nuclear
material. The warm Romney / Ryan embrace of "Bibi" and the Likud group may have
encouraged traders as well. But, the "bomb Iran" story has again quieted down, and the
Mittster has been gaffing his way down in the polls. In addition, the rumor mill now has it
that the Saudis could step up output to calm the market.

For now then, I am simply going on the assumption that the oil price may be headed for further
and perfectly normal seasonal weakness that could run for several months. A lower oil price
would facilitate the efficacy of the recent monetary easing actions of major central banks. It
might be the case that the 2008 - 09 collapse of WTI crude from $145 bl. down to $30 has
proven instructive to OPEC, but you cannot count on this. Note also that the normal month for
traders to have bombers on the tarmac to go and take out Iran's nuclear facilities is Feb. when
oil makes its usual annual seasonal low, but do not be shocked if "Bibi" makes a final push
to kite the oil price ahead of the US election in Nov.

The $80 - 100 bl. price range depicted on the chart represents my longstanding best guess for
the oil price parameters in 2012.

Monday, September 17, 2012

US Business / Profits

US history shows that rare are the times when the economy fails to respond positively to
monetary stimulus. And that is a good thing now, because the economy has lost enough
progress momentum to be concerned. The weekly leading indicators are pointing mildly
and fitfully upward as are the measures of real personal income. But, measured yr/yr,
industrial output growth and real retail sales growth, although positive, are low enough to
warrant pause. Similar can be said for my top down profits indicators such as the $value
of industrial output and the recent PMI reports. Here we see that growth momentum has
slowed to levels consistent with the development of profit margin pressures on top of the
low physical output growth.

The Fed's new QE 3 is substantial enough to support a significant re-acceleration of output
growth as well as an eventual fresh bounce in the "headline" inflation rate. But, the transition
from a sputtering economy to one which progresses smoothly can take a couple of months
depending particularly on consumer and business confidence. (The relative flattening of
production in 2012 suggests companies are already well mindful of maintaining inventory

The stock market can move up during periods of this sort as long as investors remain
confident that monetary easing will work and even if profits level off for a brief period of
time. The positive bias to the market can also remain in place even if profits begin to lag a
recovery of volume growth because of lingering pressure on margins.

What is not clear is what will happen if business ratchets down further in the interim instead
of just gracefully leveling for a relatively brief period. Such could occur if the economy's
dynamics turn out weaker than the Fed expected and the further monetary easing comes too
late to save the day. There may be just enough forward momentum in the economy to moot
the former case, but rest assured that investors and traders will now be looking for good
news and not the negative news that prompted the Fed to ease. Bad news is no longer
"good news" but plain old bad news instead.

Friday, September 14, 2012

Stock Market -- Daily Chart

The SPX has decisively broken through significant resistance at the 1420 area and has cleared
out a double top formation. The market is moderately overbought in both the short and intermediate
term and is well extended above the trading band which has dominated the rally since early Jun.
So, we may well have a mini - blowoff to a new cyclical high which calls for a little backslide
but which is still likely to test higher ground ahead. The indicators do not suggest anything very
threatening is imminent from a purely technical point of view. SPX Daily Chart

Thursday, September 13, 2012

Monetary Policy -- The New Open End QE

The Fed has opted to revert to the script it followed after the economy hit bottom in 1932 during
The Great Depression. This time it has going to provide $40 bil. of mortgage backed securities
purchases a month until further notice. In a weak credit demand environment, the Fed is the primary
provider of liquidity to the financial system. Without this liquidity, the economy could well have
tipped over into a deflationary depression with catastrophic economic consequences. QE is a
strong lifeline for the economy. It is perhaps a necessary condition for continued economic
recovery, but, as we have seen since 2009, it is hardly a sufficient condition for robust economic

Since late 2008, the Fed has been expanding Fed Bank Credit periodically and primarily within a
$300 bil. band range. The very low end of the range has been hit in 2/2009, 11/2010 and here in
Sep. 2012. "Test" contractions of liquidity have preceded each major new wave of QE. The
contractions have become progressively less destructive to the recovery but have slowed it
down each time out. The Fed has not hesitated to allow liquidity it provides to exceed the top of
its $300 bil. annual range, but subsequently moves to rein it in. With the recent nearly $100
bil. drawdown of its balance sheet, the Fed can buy $40 bil. a month of securities over the next
12 months without overtaxing its silent, internal discipline.

Remember too, that the Fed still has operant currency swap lines with foreign central banks.
Should an offshore crisis precipitate a sudden, large demand for US$, the Fed will stand ready
to supply the $.

In the short run, there is still a risk the Fed waited too long to add fresh liquidity and the
economy could "break bad" on the downside. The Fed gambled with the economy as it did in
the three prior years and there is no assurance It will get away with it this time.

A large open end QE program such as the Fed is initiating does carry another economic risk.
If the labor market continues to respond slowly, QE induced financial speculation in the fuels
and other sectors of the commodities market could force the inflation rate higher, and if
business keeps wages growing very slowly, then real incomes could decline, which would
short circuit much of the benefit to growth that QE might otherwise bring.

Finally, let's assume the Fed keeps its $40 bil. monthly stipend in place over the next full
year or so and that the economy does respond rather favorably. If such were to occur, the
economy would feature considerably lower levels of slack. This development would then
put the US in more advanced expansion mode, when cyclical pressures could lead the
markets to push interest rates higher and the increased level of resource utilization could well
lead to a more normal and broader cyclical acceleration of inflation.

The first step with this new program is to see if the US can muster new confidence to avoid
"breaking bad" in the months just ahead.

Wednesday, September 12, 2012

Shanghai Stocks -- The Big Round Trip

Despite phenomenal economic growth over the first decade of the new century, the Shanghai
Composite is no higher now than it was over the 2001 - 02 period when the index first topped
the 2000 level. Shanghai Comp. Long Term It has been a classic mercantilist market boom/ bust
which goes on to the resmes of Hu Jintao and Wen Jibao, who, as long term readers of the blog
know, are not two of my favorite political characters. Now the new guys coming along have to
work to build and realize capital. And, word has it, they appear to be MIA currently. Over the
Hu / Wen years the money supply compounded somewhere near 18% annually, far in excess
of what a liberal measure like 10% real economic growth would warrant. Yes, vast sums went
into building physical capital, but real estate development including the famous "ghost cities"
soaked up the bulk of the excess liquidity, with the stock market serving as a speculative
stepping stone to build war chests for the real estate game. There is the obvious question of
whether physical capital and labor can generate the returns needed to service the glittering
new spectacle China has become. Family have recently returned from China armed with
photos of the most spectacular and modern urban settings ever seen.

I have made a little money trading China stocks, but the market has been a side show to the
development which has taken place. Hope the new guys, wherever they may be, do a better
job of building capital markets that befit China's emerging place in the world.

Sunday, September 09, 2012

Stock Market Weekly

The market rally since early June has been paritally confirmed by an ongoing uptrend in my weekly
fundamental indicator (WCFI) which turned up just after mid - Jun. I say "partially confirmed" because the SPX has made a new cyclical high but the WCFI has not as sensitive materials prices have not
kept pace with stocks. The SPX rally has been far sharper than the recovery of the WCFI. There is
nothing in the broader set of economic data to support SPX strength. I conclude there continues to be
speculation of further QE by the Fed. The WCFI points only to rather mildly positve stock market
action ahead.

There are folks who are paid to divine what the Fed may do with monetary policy in the near
future. I have long thought it was kind of dopey to ruminate so hard on what a room full of folks
might conclude about monetary policy. I think it is interesting that despite all the talk about easing,
including Bernanke's comments, the Fed's balance sheet has been shrinking significantly since the
end of Feb. It appears the Fed has been able to paper over a tightening of policy by continually
discussing further easing. The reality of Fed policy says "sell" not "buy", and it could well prove
positively ruinous if the Fed keeps on tightening during an era when they have been prime providers
of liquidity to the US economy. At a minimum, the Fed needs to buy up to $60 bil. of securities
before long even if it chooses not to pursue further QE or violate promises made during QE 2
concerning credit it will extend.

Note, however, that since 2008, the Fed has usually shrunk liquidity for a period before it has
moved into significant add mode.

The market is in a solid intermediate term uptrend. It is not seriously overbought but the logic of
the move since early Jun. suggests it is getting extended in the very short run.The weekly indicators
support the rise, although some key measures such as MACD kicked in rather late. SPX Weekly
Keep on eye on RSI (top panel) and watch the ADX in the bottom panel. A +DI of 30 (green)
and a -DI of 10 (red) could well signal a tradeworthy overbought.
I note also that the old SP 400 large cap industrials is up around its old all time weekly high in
the 1950 area set in 2000 at the height of the market bubble. This is a rather interesting
development. Industrial's net per share is well above where it was back in 2000 but it trades
more humbly today, sans the bubble p/e ratio. I owe you a chart on this one. Since year's end
1995 and right before the market went into bubble mode, the old SP 400 has compounded at 6.5%
per year before dividend return. Not bad for a risk asset.

Thursday, September 06, 2012

Eurozone Status Check

The ECB bond buying program, assuming it is fully activated, will reduce troubled sovereigns'
borrowing costs across the yield curve and strengthens banking and insurance sector balance sheets.
Although it will be fully sterilized on a documentable basis, the program will add liquidity to the EZ financial system via reduced capital outflows and eventually via money multiplier effects within the
banking system. It is not a robust QE program, but it will nudge recovering EZ liquidity along further.
The three year maturity limit on ECB purchases reduces the bank's interest rate risk, but balance
sheet quality will suffer with the purchase of riskier assets. It will have the Fed to backstop it
during critical periods. The program is but one of a long line of steps that will be required to keep
the EZ intact, and the time it took to get the program and the restrictions on QE testify to how
difficult and long the road ahead toward refurbishment of the EZ will be.

There was further erosion of the EZ economy in Aug., and with liquidity and confidence in the
system low, this should come as no surprise.

The Euro 350 iShares index has been rebounding and is up toward important resistance just as
the Euro market is getting overbought short term. As of today, the market remains in a post
cyclical bear event trading range, which highlights the importance of testing resistance ahead.
IEV 350 Chart

Markets players in the US are growing more weary and discouraged by the glacial pace of
reform in the EU / EZ. I still remain hopeful that more progress can be made although there is
no light at the end of the tunnel yet.

Tuesday, September 04, 2012

Post Labor Day Update

US Economy
From mid - 2010 through mid - 2011, the yr/yr change in the real wage went from +2% down to
-2%. In line for the same period, real retail sales went from +8% down to about +3%. By the
middle of 2012, lower inflation allowed the real wage to recover to modest positive territory,
and improving yr/yr real wage momentum does support a better retail sales outlook as we move
into fall, as does the yr/yr % change in employment which has also accelerated since mid -2011.
But, improvement in consumer purchasing power has been modest, as businesses continue to
trade on a weak labor market with pitiably low wage increases. Thus the potential for the main
engine of the economy although positive has been heavily compromised. Construction spending, an
area with powerful recovery leverage, has been doing moderately better, but its contribution
has been partially offset by a flattening of export sales with the latter reflecting a stronger US $
and far more modest global demand.

Monetary Policy
The Fed has been winding up to pitch another QE fastball, but that is all that It has been doing.
The continued official talk of "more easing as needed" has kept the risk markets afloat, but it
has also not done the economy any favors since QE talky talk has led to speculation in the
oil market, which eventually harms real incomes via higher fuel prices. By delay in the short
run, the Fed has been undercutting the eventual economic benefits of QE.

Stock Market
The boyz have yet to sell the evident double top in place with any urgency, as players do not
want to miss a QE program that could be large enough to trigger a sharp upleg. Patience was
tried today on a worse than expected PMI mfg. report and downward price pressure left the
market at a "roll over" point SPX Daily Chart If you are long the market on a QE speculation,
you will have to continue to gut it out as the ECB and the Fed should be heard from over the
next six trading days.