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 !!!

Monday, October 29, 2012

A Note On Short Term Interest Rates

The Fed's zero short term interest rate policy has, save for the Libor scandal, put the
usually hot topic of whither short rates on ice for markets players here. The US has
experienced over three years of economic recovery and it is interesting that the
indicators I track to determine whether the Fed might change the Fed Funds rate (FFR%)
 have never aligned 100% to support a rise in the FFR%. In fact, recently the positive
momentum of each of the indicators have turned to mostly flat, suggesting no cyclical
case for raising rates.

My super long term 91 day T-bill model points to a reduction of rates currently, but,
the model also suggests ongoing rate suppression as it suggests the "Bill" should be
yielding 2.4%. Savers are being punished but with positive offsets in retirement and 401k
accounts and a nascent recovery of home prices. It has been a long slog.
Threat of local power outage from the giant Hurricane Sandy storm remains.

Financial System Liquidity

Over the past 12 months, Federal Reserve bank credit has declined moderately as the
Fed largely stayed away from QE and even allowed credits to run off. The private
sector component of the banking system did step up and expand its asset base by over 5%
yr/yr. However, following the deceleration of the economic recovery into the summer,
the banking system eased off on asset expansion. With the new open ended QE 3 program
now underway, the Fed has stepped up its lending, targeting mortgage backed securities.
Thus, the Fed is again now helping to underwrite liquidity growth within the system.

The banks' primary goals over the past year have  been to maintain balance sheet liquidity
and rebuild equity capital, including by allowing the system's aggregate loan loss reserve
to deplete on business recovery and the charge off of more bad credits. Commercial /
industrial lending has been moderately strong, consumer loans have taken a slight positive
turn and the large real estate loan book has been flat. The latter reflects charge offs, loan
sales, and a keen interest in mortgage refinancing. However, public funding via asset
based securities has continued to decline.

The banks have not been working hard to fund asset expansion. Two key categories --
low / no jumbo deposits and commerial paper -- remain in decline as the banks return to
lending in a modest and gradual fashion. The Fed has judged that economic demand
conditions and the slow pace of recovery for the banking system's loan book call for
additional liquidity backstopping even as the banks continue to improve their finances
and lending activity.

Sunday, October 28, 2012

Genuine Storm Ahead

Hurricane Sandy, a massive Cat. 1 storm is now embedded in a powerful Nor' Easter
(coastal storm). It is projected to make landfall tomorrow near Atlantic City NJ (Trump
is reviewing his various damage indemnity policies). The storm will bringing drenching
rain, a possible record storm surge and high winds. The NYC transit system will be
completely shut down by 9 pm tonight EDT and Mayor Bloomberg has ordered mandatory
evacuation of the downtown financial district. The NYSE may still try to open tomorrow
for those with hipwaders and who love to walk in the rain and work in the dark.

Since my town up north is likely to lose power, this may be the last post you see for a few
days. The one saving grace I see is that the power companies will be under enormous pressure
to have the power fully up and running before election day, Nov. 6.

Saturday, October 27, 2012

Stock Market -- Weekly

The daily SPX chart has the market in correction and now the weekly chart has turned
down as well. SPX Weekly I am carrying a link to the daily SPX and its 200 day m/a
price oscillator. SPX + 200 day osc. The drop in the oscillator has been sharp enough to
trigger an intermediate term sell signal for the SPX

The basis for the sell signal does whipsaw on occasion, but when it does it usually happens
quickly. If not,  the market does tend to trend lower. If you stay with the SPX + 200 day osc.
chart, I noted last spring that when the oscillator tops +10%, the odds are only about one in
four that the market can go on to sustain new high ground. This obervation is based on nearly
30 years of data and has served me well. You will note that the SPX has declined back inside
the spring 2012 high of just over 1420 for the SPX. So, from a statistical / technical point
of view, the market has been on shaky ground since the spring spike in the price oscillator.
I need to add here that the significance of the 10% rule on the oscillator does start to fade
somewhat after a six month time period.

My weekly cyclical fundamental indicator (WCFI) has clearly turned down in recent weeks
reflecting an upturn in jobless claims and a reversal for sensitive materials prices. It is
striking that the stock market and industrial commodities prices have weakend since the first
presidential debate when Obama flopped and let Romney back in the race. Now, I think
concern over the resolution of the tax and spending issues embodied in the fiscal cliff issue
were due to bother investors and business confidence as as the deadline for resolution draws
ever more near. The Romney resurgence adds another layer of uncertainty to the fiscal cliff
problem and, as important, puts the future of Fed QE 3 into play given Romney's negative
view of Fed. policy.

If Obama were to win on Nov. 6, the fight over resolution of the fiscal cliff would clarify
and investor / trader worries over the sustainability of QE would also fall away. An
Obama victory could well trigger a relief rally and produce a whipsaw on the new sell

Friday, October 26, 2012

Oil Price

In my view, the oil price is experiencing its first normal seasonal price decline since
2006. I am looking for WTIC crude -- now around $86.25 bl. -- to fall to about $80.-
by the latter part of Dec. as gasoline demand slackens and before there is the final
ramp up for heating oil.

Next year, the oil price may again be influenced by geopolitics. With the national election
over, the US will take a much harder look at Iran's nuclear materials development program
and may even enter into bi - lateral, one on one talks with the Iranian government. Israel
plans new elections early next year, and the rightest Likud group may form an even more
conservative coalition which could lead to more provocative talk about Iran. Tehran has
also voiced an interest in curbing oil production further if tougher economic sanctions are
leveled against it. Finally, insurrection in Syria has intensified and some of the feared regional
spillover (Turkey, Lebanon) is in evidence. US / Iran direct talks, should they proceed,
will be accompanied by exceptional suspicion and mistrust built up over the past 60+ years
of run - ins of varied severity with the big fear being that Iran is simply playing for time.
A Romney presidency could well add initial bombast to the situation.

As a hedge on household costs escalating, I may again go long the oil price with a targeted
time of Dec. 2012 - Feb. 2013. That would situate me for seasonal price strength and allow
time for the geopolitical situation to develop further.

WTIC Price Chart

Wednesday, October 24, 2012

Gold Price

As it became apparent around mid-year 2012 that the Fed would move toward a new QE
program, the bugz declared a long gold trade as a cinch way toward large profits. Their
timing was exquisite as gold was sitting at very formidable support around $1550 oz.
Gold did take off as predicted, but has run into headwinds lately.

My monetary indicator for gold was negative a fair portion of the time since mid-2011,
but is now turning positive as the Fed is beginning to fulfill its promise of large open
market purchases of MBS. The gold market got nearly a five month jump on the new QE
program. My economic indicator has been in a downturn since spring 2011 based upon
an ongoing deceleration of global current $ industrial growth. This indicator has yet to
turn to the upside and has been a drag on the gold price since mid-2011 when downward
momentum firmly took hold.

the US dollar was widely expected to begin another decline on expectations of the new QE
program. It did so starting in early July this year, but has begun to firm up again in recent
weeks despite the generous QE operation the Fed has finally initiated. As the gold price chart
linked to just ahead clearly shows, the positive turn in the US dollar has chilled the gold
rally. $GOLD Chart ($GYX in the chart is an industrial metals composite.)

The US$ has surfaced as a "big dog" in the current uncertain environment which features the
fiscal cliff and election still ahead for the US, toubles and disagreement among the usual
suspects in the EZ, and no lift off in China, where the communist party is set to expel the
most prominent communist in that fabled land. So, the widely heralded large gold price
bonanza has been put on hold while the big dog US$ calls the shots. Note too, that the US
stock market rally has also been shelved since the dollar starting barking.

Tuesday, October 23, 2012

Stock Market -- Head Fake Ignored

The short run downtrend deepened today after traders ignored yesterday's late rally up to
minor support at the 50 day m/a. There is longer term trend line support at SPX 1400. In
my book, no interesting short term oversold comes along until the SPX cracks 1370 on
the chart. SPX

The media claims investors are concerned about disappointing earnings by large multi-
nationals. I am suspicious on this one since earnings potential had weakened obviously
beforehand and analysts had been trimming estimates. More likely I think is that the
more forward looking fundamentals in my weekly fundamental indicator index have lost
positive momentum in recent weeks. As well, I continue to think that investors are growing
more wary of how the politicos may handle the fast coming fiscal cliff, especially now
that the Romney campaign has revived in the polls following his most recent makeover as
a centrist. Reuters also reported today that Fed Chair. Bernanke has been telling buddies
that he is thinking about stepping down when his term expires in 2014. Welcome to the
Romney confusion. Mitt has been claiming he will replace Ben in 2014 if he is elected
president. And if he is elected, who would blame Bernanke for quitting even earlier since
Mitt has filed a no confidence vote on Bernanke already. It is doubtful the market will
be in favor of continuing Mitt vs Ben.

the Fed has finally starting expanding its balance sheet again. This is normally a  market
 positive except that the strong Jun. - Sep. rally already discounted the QE 3 kick off.

The media is going to run with the fiscal cliff and the election aftermath. On an historical
basis, consumer, business and investor confidence all remain subdued and possibly fragile.

I absolutely cannot stand people like Romney. For all I know, he may do some good things
if he wins on Nov.6. But if he does win, he will create unnecessary uncertainty, large dust
clouds for markets players and confusion. A Romney victory will see me take a far
more stripped down, nuts and bolts approach to this blog lest I get caught up in  all the
bullshit that could be headed our way.

Monday, October 22, 2012

The Street Scraps To Keep Market Up

It was a magnificently convenient day for the SPX today. The market is in a downtrend
on my short term indicators, but as fate would have it, the Boyz rallied it at the previous
10/12 low of 1429, and to compliment this fine bit of service, saw it settle at the 50 day
m/a. Sometimes, monkeyshines like this portend a significant  "save" and subsequent
rally, but often it is just a sucker's play to reel in shorts and get the tape players buzzing.


Friday, October 19, 2012

US Politics / Pragmatism

The current dreary national election campaign is scheduled to end on Nov. 6. The next
congressional election is in 2014 to be followed in 2016 by another national election. The
The "Fiscal Cliff" is set to arrive on 1/1/13. There are thus two and four year windows for
the president and the congress to quickly tackle the "Cliff" in early 2013 which would allow
about two years healing time after any "curative" action before the boyz face the electorate
again. If there is actually serious intent to take action to begin reducing the large US budget
deficit, early 2013 would appear to be the politically wise time to initiate plans to trim
the red ink.

Seasoned markets players know this and it would be natural for anxiety to rise further as
we reach the deadline. Given the still somewhat fragile nature of the recovery, political
masterminds would take small initial steps to rebalance revenues and expenditures for
2013 - 14, followed by somewhat larger measures to run over 2015 - 2020. This type
of blueprint would allow for adjustments in the economy to proceed in a more orderly
manner. It would raise economic / financial risk, but better allow the political class to
manage the political environment instead of simply kicking the can down the road. The
latter course would assure debt rating cuts and the acceleration of a festering issue --
growing income inequality. I would wager that the continued growth of income inequality
will produce further economic disequilibrium and destabilization and that when power
shifts to those who represent the less well endowed financially, the rich will be soaked at
least in proportion to the narrow breadth of economic progress if not more so.

Should Mr. Romney secure the presidency, we would have ourselves a "wild card"
situation. Romney is not just a serial flip - flopper, he is the very incarnation of the classic
American political huckster and one of the great political bullshitters of all time. Only
the good Lord knows what a character like this will do when he faces substantive
alternatives pressed upon him by angry and frightened political factions (An old pal of
mine recently said to me that Mitt will accomplish nothing as he will be too busy trying
to make up his mind). Rest assured, market players have had a good whiff of the man's
fabulous ambition and lack of conviction and principle.

The markets will have other interests in the weeks ahead, but it is likely that concerns
about management of the "Cliff" and the identities of the top political players who will
be in charge will be lurking.

Monday, October 15, 2012

US Stock Market Comment

The market has experienced a mild correction since mid - Sep. Moreover, my weekly
cyclical fundamental indicator (WCFI) has been rising over the period. The action of
the market has correlated negatively with the WCFI over the past three weeks as well,
and this counts as an unusual development. Now, since the start of the recent rally in
early Jun., the market did outperform the WCFI by a wide margin over most of the
period, so it is not unreasonable to allow for some catch - up from the short term
fundamentals. I note also that within the WCFI, sensitive materials prices have turned
flat and volatile in recent weeks and have failed to confirm an otherwise improving
economic outlook. Because industrial commodities prices can behave in accord with
micro supply / demand factors rather than macro factors over the shorter run, it is early
to claim that the upturn in mfg. and commercial order rates and retail sales will likely
prove shortlived. Even so, it may well have set some market players to wondering.

The long Treasury bond yield ($TYX) is very sensitive to industrial commodities prices
and as the SPX chart link below shows, an intial cyclical rise in the 30 yr yield has re-
cently been aborted, which suggests that bond traders are also not so sure that the economy
is setting up to do better. The short term technical indicators I use with the SPX  are
deteriorating, but the market did bounce off the 50 day m/a today, which traders who prefer
this m/a will find positive ( I prefer the 10 and 25 day ma's with a daily chart).

The loss of recovery momentum for sensitive materials prices and the fail of the 30 yr T
bond yield do provide a degree of corroboration to the idea that as we close in on the
end of calendar 2012 with likely election results not yet clear, capital markets players
may be growing more concerned about the eventual resolution of the "fiscal cliff" due up
on 1/1/13.

SPX Daily

Thursday, October 11, 2012

Stock Market Fundamentals -- Part 2

Weekly Cyclical Fundamental Indicator (WCFI)
This broad based indicator turned up in mid-Jun. after a fairly sharp decline over May
and early Jun. Weekly leading economic indicator data are weighted heavily in this
proprietary index. The WCFI trend is usually coincident with the market's direction and
it tends to forshadow the direction of the real economy. The recovery of WCFI since
mid-Jun. has been modest so far and currently suggests only a mild acceleration of
economic growth in the months ahead. The stock market has advanced at a significantly
faster rate than the WCFI since Jun. and clearly suggests the market is discounting a
stronger re-acceleration of the economy once QE 3 kicks in. The stock market is out
ahead of the short term cyclical fundamentals by up to 5% by my estimate.

Noteworthy here is that US PMI new orders data for both manufacturing and services did
turn up substantially in Sep. Additional confirmation of a postive turn in economic growth
momentum is required to keep the stock market buoyant going forward.

Corporate Sales And Profits
Sales growth momentum measured yr/yr has retreated from peak recovery levels of 10-12%
in early 2010 to a sub-par 3-4% going into Sep. of this year. Output growth has decelerated
from the spring of 2010 (see production) and pricing power momentum has fallen off since
mid - 2011. My price / cost ratio has turned slightly negative, but the primary pressure on
profit margins has come mainly from weaker volume growth. SP 500 operating earnings
have plateaued around $92 - 100 per share on an annual basis.

The stock market can advance during periods of flat to slightly down earnings so long as
potential is there for a fresh positive turn in net per share down the road and in this case
the focus has been on the new and substantial QE 3 program at hand from the Fed. Unless
QE 3 fails to bolster confidence and output growth, it is reasonable now to look for
sales to gain 6% in the year ahead and for profit margins to recover modestly. Obviously,
there are concerns such as the possibility of a US fiscal policy mishap or failure of the
ECB and Eurozone to foster economic stabilization and eventual recovery. For now, I plan
to use the 6% top line growth assumption as the key marker.

Tuesday, October 09, 2012

Stock Market Technical Quickie

The action so far this week has turned the four month rally more vulnerable. SPX Chart
Specifically, the 40 day RSI is wavering again toward down and my extended time MACD
has turned negative for the first time since the rally commenced. The SPX has dropped
below its 25 day m/a and a shaky 10 day m/a is hovering just above the 25 day. The SPX
has survived breaks of the 25 day m/a during the rally, but rescues have come fast. We'll
see. In the meantime, with the MACD turning negative and the 10 day m/a off cue, traders
need to summon up extra focus.

Monday, October 08, 2012

Stock Market Fundamentals -- Part 1

Core Fundamentals
This approach is built on economic financial data available since the end of WW 2. But,
since 2008, the US economy has behaved more like the Great Depression era of the 1930s.
My traditional core fundamentals gave a buy signal around year's end 2008. There has been
no sell signal, and the fundamentals have not shielded us against the sharp, temporary price
breaks witnessed in each of 2010, 2011 and 2012.

The economic / financial system has been liquidity starved when it comes to private sector
credit demand and funding. Recognizing this, investor confidence has tended to plunge
periodically when the Fed has stood back from providing large infusions of monetary liquidity
needed to keep the economy afloat and to stave off the onset of deflation. Fed liquidity policy
has thus been the dominant variable.

As of 9/30/12, only two of my five central variables were positive -- short term interest
rates and the trend of "bottom of the barrel" BBB bond yields. On the negative side, yr/yr %
change measures of monetary liquidity have been decelerating and the trend of credit quality
spreads between investment grade bond classes has been deteriorating. In the latter case,
players have been chasing yield with short rates so low, but have strongly preferred quality.
(The junk bond market has been an exception as players have been plainly using this sector as
an equities substitute).

Net, net the economy has been through a period of monetary quantitative tightening since mid -
2011, save for the large but temporary liquidity swap program with foreign central banks that
came around the end of last year. In my view, this is a major reason for the deterioration of
economic recovery momentum that brought the US within "spitting distance" of a more serious
downturn this past summer.

Changes Ahead
The rally in the stock market since early Jun. has reflected growing investor and trader
confidence the Fed would initiate a new new QE program which it announced in mid-Sep. and
is about to implement now. It is a major open ended QE program that will boost monetary
liquidity measures back to positive readings, and one which should aid the economic recovery
and confidence. My core indicators should thus be turning more positive where it has most
counted in this cycle. In this case, investors got out ahead of the fundamentals thanks to
"coaching" from the Fed.

If official Washington flubs the 1/1/13 "fiscal cliff" -- scheduled tax increases and "mandated"
spending cuts, -- the US economy will be harmed. Since we could face a lame duck presidency
and congress after the Nov. 6, election, it is still too early to speculate on the workout of the
"cliff." Since I favor more fiscal stimulus rather than the introduction of any more fiscal drag or
austerity, I am in a small minority and am in no way enthused about what the turkeys in D.C.
may come up with. Do no harm boys.

More on fundamentals to come over the course of the week...   

Friday, October 05, 2012

Stock Market -- Weekly

This week I show the SPX along with the NYSE weekly index of net new highs. $NYHILO
This can be a rich comparison, and I leave you to retain my settings or add your own.

The hi - lo index is another way to measure buying pressure in the market because it shows
player willingness to buy stocks at or near new 52 wk highs. So, you see a cross - section
of momentum players and not too smart players who are chasing stocks. Note the chart is
showing the hi - lo is up near resistance and very far above attractive levels. You will
observe that the market can keep rising even as the index gets toppy but that when the
momentum of the chase turns south as measured by breaks below 50 in RSI and reversals to
MACD, well then you need to pay more careful attention (RSI and MACD are now still
positive but extended).

With a three day weekend ahead, and with Syria and Turkey exchanging light artillery fire,
you cannot blame traders for taking some profits off the table as they did today. Folks will
also want to check how restive the guys are in Tehran after the wholesale traders torched
the rial this week.

I thought I might do some more extensive posting on both stock and bond market fundamentals
in the days ahead. We are right on the cusp of when QE 3 is to begin. The markets have been
discounting the new liquidity injection process, especially the stock market. Still, it is
perhaps a good time to look in more detail at governing fundamentals.

Thursday, October 04, 2012

Some Monetary Policy Issues

Power Of Talk
QE 3? Well, it has not started yet. This week the Fed allowed another $11 bil. to run off
Fed Bank Credit, bringing the total run off in FBC to $135 bil. since last Dec. It is amusing
that there are financial writers out there talking about how QE 3 is already affecting things
when there has not been any. The Fed is supposed to start up soon. It will take nearly four
months of the new program to bring FBC up to its prior peak.

Benny's Final Lap Around The Track?
The Mittster has made it quite clear that Bernanke is toast if he wins the election. It is the
least he can do for the super - right GOP guys who he threw under the bus in last night's
debate. Wall Street would not like it if Benny was cut loose, so the Mittster will hear
about it soon. If Romney is elected, it would be amusing if Benny said "Screw it, I don't
want to work for a guy who has threatened to lift my chairmanship." Whatever a Romney
presidency may create, assuredly it will create confusion.

Prime Funding Source Still Depressed
The Fed normally talks monetary policy in the context of the economy, employment and the
inflation rate. I have a far more "green eyeshade" view and regard the collapse of the market
for commercial paper as a primary reason the Fed has had to add mucho liquidity to the financial
system to keep it afloat. Comm'l Paper Outstanding (You should know that over $300 bil. of
such paper which was outstanding in 2008 was "disappeared" by the Fed through revision.)

Monday, October 01, 2012

Eurozone Status Check

Euro monetary policy is moving ever so slowly toward positive territory as central
banks battle economic weakness, credit contraction and capital flight. But the zone is
still lagging in providing the basic monetary liquidity needed to put in the cornerstone
for eventual growth. Significantly larger increments of liquidity would involve
swapping money flow for elements of sovereignty (e.g Spain currently). The EZ
economy has improved slightly recently, but all boom / bust measures remain in bust
territory. By my standards, the EZ is creeping in the right direction, but the rallies in
the $XEU and the IEV Eurostocks 350 are not fully supported by economic results on
the ground. IEV Chart

In reality, the IEV has probably rallied since early Jun. as much on the prospects for a
sizable new QE program by the Fed as anything else. Euro stocks may thus be functioning
as high beta trades as part of adding risk to a broad equities rally built not just on
the prospect of QE but its eventual success in contributung to US economic growth and
more confidence abroad as well. Fine by me, but this trade could be extra vulnerable to a
correction in the US market unless the ECB can get the aquiesence from sovereigns it does
require to be a more forceful supporter of the EZ's recovery. Note carefully as well the
current  trend of my extended time RSI for the IEV as well as the overbought status of Euro
shares on the MACD.

I read today where youth unemployment in Greece is up to 55%. And segments I see on BBC
TV tell me that humanitarian needs are creeping into the deeper suffering countries in the EZ.
You have to watch this very negative wave. To mix a metaphor, the austerian thinkers and
administrators are taking their smoke breaks ever closer to the EZ fuel dump despite the
"no smoking" signs in the area.