About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Thursday, January 31, 2013

Oil Price

1) My base case for the oil price in 2013 is a range of $85 - 105 bl. WTIC to be paced
primarily by stronger demand in China and the various QE programs by major central banks
which can positively influence physical demand and price speculation from financial players.

2) Political stability issues in both the Middle East and North Africa to include a re-focus on
Iran's nuclear development program could easily pop up and drive the oil price sharply and
temporarily higher.

3) The oil price at around $97.50 bl. is now at the top of a huge pennant formation dating
back to  mid - 2008 (top of downtrend line) and early 2009 (bottom of uptrend line).
Oil Price 10 Year Chart It is interesting but not at all atypical that the oil price has not been
able to take out the price bubble highs of mid - 2008 and it is at least as interesting that the
price has settled into a very leisurely trend up from the early 2009 low. This triangle or
pennant formation looks to close out late this spring in the low $90's per.

4) Near term, oil did follow its normal late year seasonal pattern and allowed those interested
in the long side to accumulate positions. This seasonal window closed in Jan. of 2013, as oil
maintained its Dec. uptrend through a normally weak seasonal period. Feb. is also a seasonally
weak month and the market could still bow to seasonal forces (Late Feb. is usually when pit
traders and pundits put the bombers out on the tarmac to attack Iran and try to jump start a
rise off a seasonal price low).

5) The oil market is presently overbought short term and this is especially noteworthy now as
there is another month of possible pronounced seasonal weakness to work through before the
ramp up for the Northern Hemisphere driving season. WTIC Technical Chart The USO
exchange traded facility is featured in the bottom panel of the chart.

Wednesday, January 30, 2013

GDP -- 2012 Was A Slow Go

The fed. gov. has many ways to play with the GDP data. That is why I stopped forecasting
it over 35 years ago. I thought Q3 '12 was a politically inspired +3.1% and with the election
over, I am not surprised that the initial report for real GDP showed a -0.6%. Enough said on this.

It can be instructive to look at the data by sector, however. Consumption in real terms was a
punk +1.9% yr/yr reflecting continued heavy maldistribution of income away from the average
wage earner. Housing investment was strong as was to be expected, but business fixed
investment was up a scant 4.3% as slow broad economic growth kept capacity utilization at
low levels. Export sales ended up the year about where they were in late 2011, as global trade
slowed sharply. Total government spending -- federal, state and local -- declined in real terms
and damaged economic performance. Calls for sharper cuts in federal spending ahead look
even more stupid.

The Fed, which largely quit QE support for the better part of 18 months, must shoulder a goodly
amount of the blame for a very sluggish economy. I warned for months that the Fed was
gambling with the recovery with an extended liquidity squeeze after mid-2011, and the punk
result for 2012 bears out the concern.

The takeaway here for policy is pretty obvious and that is: do no more harm. That means
abandon raising taxes further, make no more than slight token adjustments to federal spending,
and keep QE in place at a strong level. It also again makes it clear that the administration and
the congress need to end the bozo circus sideshows and focus instead on how the gov. might
help a struggling economy move forward at a faster rate.

Monday, January 28, 2013

Russia Stocks

Back on 12/5/12, I posted that the Russian market had some fundamental pluses in store for
2013, and that stocks had some potential. Well comrades, the market has made a fairly strong
move. Back then I pointed to the way the Russian market was shadowing the Euro stocks,
the EU being an important trade partner, and in today's update of the RTSI chart, I compare
it with the oil price. RTSI Chart  You will note that the market has no serious resistance
until the 1750 level but also note this baby is getting overbought in the short run.

Gold Price

Gold price direction fundamental indicators have turned positive over the past couple of
months following a nearly 18 month bout of weakness. With gold, I follow Fed Bank Credit,
the oil price, industrial commodities prices and global industrial production. The trends in
these indicators provide a decent enough picture of whether the gold price should be moving
up or down but viewed historically, only the oil price has provided helpful guidance on the
magnitude of swings in the gold price.

Right now the fundamentals plus my micro analysis of what the gold price should be based on
costs and a profit margin sufficient to encourage direct reinvestment suggest a gold price in a
range of $1050 - 1100 oz.

However, the gold price can also carry an enormous premium if enough investors and traders
become concerned about the potential for acute, systemic economic and financial crisis. On
the flipside, the gold price can languish when large crises are not perceived to be on the radar
as transpired over the 1983 - 2000 period.

When gold briefly topped $1900 in 2011 when fears of a Euro and EZ collapse were acute, the
crisis premium was 100% above what the ordinary fundamentals suggested. Now the crisis
premium is down to 54% as market players have become less worried about a serious blow up
in a prime economic region such as the US or the EZ.

If there is greater cyclical strength in the global economy this year, but players take this trend
as a signal that further, dramatic economic and financial upheaval may be averted or greatly
delayed, traders may opt to look for greener pastures for their money than gold even if the
ordinary fundamentals remain positive.

The daily gold chart does show the tensions in the market. Crisis fears have abated significantly
since the 2011 all-time high, but gold is nevertheless trading above the $1550 oz. support level
seen in 2012 and just as central bank chairs Bernanke and Draghi declared for fresh QE.
Daily Gold Chart

One move for traders as discussed last week (below), has been to rotate money into equities.

Friday, January 25, 2013

Stock Market -- Short Term

Weekly fundamentals continue to improve. The trend of the market remains up. The
SPX is now moderately overbought on a short term basis due to 14 day RSI and a
3% premium to the day 25 day m/a. The same holds for the intermediate term trend
based on a significant SPX premium to the 200 day m/a and the very high % of stocks
trading above their respective 200 day m/a's. SPX Chart

February could be tricky. Historically, it is a seasonally weak month and the next 9
month cycle low is due as well. Nothing biblical here, just reminders.

Rotation From Gold To Stocks

The gold price and the stock market reflect some key variables:
.... Fed policy in terms of both Fed Funds rate and monetary liquidity;
.... Leading economic indicators;
.... Trends of industrial production, sensitive materials prices and the oil price;
....  Broad measures of inflation.

Gold and stocks will often part company when investors fear severe systemic financial
problems ahead and / or when inflation is accelerating rapidly. Inflation has been a minor issue
in recent years, but fears of financial / economic armageddon have been hot button issues.

For years, smart equities players have gone long the gold market when systemic stress
anxieties have run up, and have moved back into stocks when such anxieties abate. That has
clearly been the case since the late summer of 2011 when worries about a possible collapse
of the Euro and disintegration of the EZ peaked. Since then, faster money equities players have
been rotating from gold back into stocks SPY Strength Relative To GLD

From a purely technical point of view, stocks are getting pricey relative to gold while the
SPY / GLD relative strength measure is coming up to resistance. So we are moving into an
interesting period when confidence in the potential for faster global growth in a mild and
systemically stable environment might be tested. If the idea of quiet economic progress holds
up, then the SPY / GLD ratio should easily surpass the 1.00 level this year. Keep an eye on it.

Monday, January 21, 2013

Stock Market -- Weekly

The weekly cyclical fundamental indicator has turned up sharply reflecting rising sensitive
materials prices, reduced unemployment insurance claims and a stronger coincident indicator,
which measured weekly, has increased to 2.5% yr/yr. The coincident measure is not seasonally
adjusted, but it does suggest a good start for business in the new year.

The Fed continues to add more generously to its balance sheet -- a continuing positive.

The SPX remains in a confirmed uptrend. SPX Chart. Note that 12 week price momentum has
finally started to blossom after a lengthy muted period. The 40 wk or 200 day price oscillator is
positive and on a buy signal. The 6% premium of the SPX to the moving average signifies a
mild overbought condition for the intermediate term. SPX vs. 200 Day M/A

Cycle And Seasonal
The venerable 9 month cycle low is due to arrive near mid - Feb. The seasonal pattern,
distilled from long term studies, also suggests price weakness or profit taking going into and
during Feb. (Respect, but never bet the farm on theses measures.)

One hot topic currently is that "everybody is bullish" which is taken to imply that a downsweep
could be at hand. I use a compilation method to measure bullish sentiment from several opinion
and advisory services. An index reading of 65.0 suggests opinion is too bullish and does
carry a warning of a probable price correction not far ahead. The current reading is 55.3 and is trending higher (For comparison, the index at the market low in 3/09 was 21.7).

Sunday, January 20, 2013

Stock Market -- Long Term

1) The stock market has experienced an extraordinary period over the past 16 years. There was
the classic price bubble of 1996 - 2002 and then another or "echo bubble" from 2003 - 2009.
Both markets saw very powerful cyclical earnings performance and elevated price / earnings
ratios and both ended with very large earnings declines, especially when one looks at net
per share as originally reported and to include all the writeoffs and one time charges.

2) In my view, the SP 500 remains in a long term bull market dating back to the end of WW2,
when the focus of buying stocks largely to reflect earnings and dividend growth first took hold.
We have not reached the end of this epoch yet.

3) I have attached the Yahoo! long term SP 500 with log scale. SP 500 Chart To form a band,
I would anchor the low part of the channel with 1950 and 1980 as thr bases, and for the top of
channel, I suggest drawing a trend line up from highs recorded over the late 1950s and 1960s.
The bubbles of the past 15 years exceeded the top of the upper band of the channel and the
bottom in 2009 came in about 10% over the bottom of the channel. Time will tell of course,
but the Mar. 2009 low could be a very substantial one.

4) What is interesting to me about the chart now is that the SP 500 is starting to inch up to the
top end of the channel which stands at around 1700 for 2013. The index stands at 12.6% below
the top of the channel, and wouldn't you know it, SP 500 net per share stands very close to the
top of the 1950 - 2013 channel for earnings. Viewed over the very long term, price and net
per share performance now stand in decent balance. There seems to me there is no good
reason not to look for the SP 500 to go on to new all time highs as long as the current economic
expansion stays intact.

5) The price chart also suggests to me that if it is true that grand bull markets have three clear
uplegs, then the final leg up for the "invest for growth" era could be underway. But, do not jump
too far ahead of the story. Even though the 400 industrial companies composite within the SP
500 is on to new high ground as is the NYSE A/D line, we ain't there yet for the lagging 500.

Saturday, January 19, 2013

Business Profits & The Stock Market

1) SP 500 net per share measured quarterly have been flat now for 18 months on both
decelerating sales growth and modest profit margin pressure. Leading economic
indicators, both weekly and monthly, are signaling an upturn in the US economy. My
coincident indicators (measured yr/yr) have moved up from a very sluggish 1.2% for Oct.
to 1.6% through year's end. Most important for the market, the Fed has embarked on a
strong new program of QE. Although economic data do not yet reflect the rise in the payroll
tax and how it might impact consumer spending, the indicators on balance point to faster
business sales and earnings growth. Good thing, too as it is doubtful investors are going to
stay interested in the market without confirmation from improving earnings. The market has
been discounting a bounce in sales and profits for over 6 months and it will become
increasingly vulnerable without stronger, positive news on the economy early this year.

2) SP 500 eps is now running about 22% above the very long trend line for earnings. This is
not at all unusual during an economic growth period. You should also note that during extended
periods of sales and earnings growth, net per share can stay well above the long term trend for
a lengthy period of time. Also note, that to have a long economic cycle, a range of balances
need to be struck between various measures of economic supply and demand. My view since
early 2009 is that the US, coming out of such a deep recession, has a good chance for a lengthy
expansion period, but note the prior post for drag factors that could upset the apple cart.

3) Earnings rarely rise or fall more than one very broad standard deviation from trend. When
net per share has risen well above one standard deviation over trend, the recession which
follows brings a larger than normal decline in earnings. SP 500 net earns. is now running about
$10 or 10% below the upper band of the long term channel. So, a strong year in 2013 would
set up a rather early warning signal about the cyclical durability of eps.

4) Return on equity at book value is now running about 15.5% for the SP 500. The earnings
plowback ratio is now running 67%. ROE% x Plowback = implied growth. 15.5% x 67%
gives you implicit growth of 10.4%. History does not suggest a bright new era. History does
suggest companies are retaining too much of earnings to make share buybacks and to do deals.
the huge writeoffs we have seen at the end of the past two expansion periods in this first
decade of the new century attest to that (Let's hope the Rio Tinto and Hewlett Packard fiascos
are not the opening wedge of a wave of new writeoffs resulting from dopey CEO empire
building). Shareholders would be better served by higher dividend payout ratios.

Friday, January 18, 2013

Stock Market -- 2013

The US starts the year with ample resources of physical capacity, labor and financial
capital. The country is in the midst of the most powerful liquidity cycle since the 1930s
which would normally assure both an advancing economy and stock market. Since the
inflation rate has been tame in the recovery environment, the stock market should be
trading at an elevated p/e ratio, and with $100 per share earning power, the SP 500
should be trading in a range of 1650 - 1700 and not the low 1480s.

But there are significant drag factors. The Great Recession, now more than 3 years past,
has left the private sector with a shared case of post traumatic stress syndrome. Consumers
have been spending, but have also worked to reduce debt exposure. Bankers, who threw
money at people over the 2004 - 2007 period, have just begun to slide out from hiding
under their desks and do some lending. Business as a group has been accumulating cash at
almost no return, and has been maintaining a salary policy which enriches the top guys at
firms and impoverishes the rank and file through reduced real wages for over a decade.
Even the Fed, which has greatly expanded its balance sheet as it should have during the
recovery, has instituted temporary bouts of liquidity shrinkage which have introduced
volatility into the economy and the markets and which have undermined one of the most
precious commodities in hard times -- confidence. Official Washington is meanwhile
engaged in a center vs right battle over raising taxes and cutting spending when it should
be looking at how to grow the US economy and to define its role in positioning the US
to perform well in a changing global economy. Austerity measures are for boom times,
not for times when folks are down on their luck, which they still surely are.

So, when I look at the stock market's potential for this year and next, I see strong positive
forces arrayed against large batteries of scaredy cats, corporate piggy dudes and a nation's
capital that is mired in doubts (the Fed) and political squabbles based on incorrect
perspective and destructive impulses.

Keep up your courage chairman Bernanke and maybe we can snatch victory from the jaws
of defeat.

Wednesday, January 16, 2013

Profits & Economic Indicators

Corporate Profits
Since the spring of 2010, business sales momentum measured yr/yr has declined from
+10 - 12% down to +3 - 4 as 2012 ended. Historically, when sales growth has dropped
below 5% yr/yr, it has been difficult to maintain profit margin and this time is no different
although my indicators suggest only minor pressure. Top line data is consistent with modest
progress in profits. I would also note that when my top line sales indicator drops below 5%
it signals vulnerability to further sales weakness ahead although not necessarily a recession.
Decelerating Production Growth

Forward Looking Economic Indicators
The leading indicators I follow remain in an uptrend but have been unusually volatile during
this economic recovery. No recession has been indicated, but there have been low points
in each of the past three years which have triggered QE responses from the Fed. The last
of these low points occurred in mid - 2012, and since then, the forward looking measures,
both weekly and monthly, have turned up mildly, with new orders measures for the industrial
sector improving but nominally. On balance though the forwards suggest a mild degree of
acceleration of business sales (and profits) in early 2013 (But, see final paragraph below).

Coincident Economic Indicators
Mine reflect momentum of real retail sales, production, employment growth and real wages
put on a combined basis and measured yr/yr. On my scale, +3% yr/yr for the group
represents solid growth, with +1.5% indicative of anemic growth. The US closed out 2012
with a reading of 1.6% yr/yr. That's a little better than The Oct. '12 reading of 1.2%, but is
still on the slow side.

Inflation gauges are still rather mild, but real take home pay could still take a hit of up to 2%
this year with the payroll tax returning back up to 6%. To keep retail sales growing, consumers
can hope for better wage gains this year, but may have to dip more into savings and increase the
use of credit to keep retail afloat. This change in fiscal poilicy can clearly work against Fed
QE, although we'll have to wait and see by how much.

Monday, January 14, 2013

Financial System Liquidity Factors

Cash & Checkables
The basic money supply M-1 has increased by 13.5% over the past year. When credit
demand growth is low, it is vital for the Fed to supply the system with monetary liquidity
to keep the economic recovery on track. More vigorous private sector credit demand in
2013 might well pressure the Fed to cut back on the now generous QE program.

Credit Funding & Demand
My broad measure of financial system liquidity increased by 6.4% over the past year. This is
the strongest reading since Nov. 2007 and indicates that system liquidity is finally approaching
levels needed to support economic recovery for the private sector. Note though that the strong
growth of the basic money supply has played a major role in allowing liquidity to expand
since mid - 2008 but that non - money sources of funding are now rising as well.

The banking system loan book (excluding the Fed) has been recovering modestly since early
2011, but, reflecting the depth of the past recession and tighter loan policies, is just now
at prior record levels seen in the autumn of 2008. Interestingly, by mid - 2008, the banking
system's loan book was running about $1.5 tril. or a whopping 31% over the long term growth
rate of 6%. The loan book is just about at the long term trend line now, and this signals still
tight demand as the loan book tends to jump moderately over the 6% trend during economic
expansion periods.

The Fed did push forth QE 4 partly because private sector loan growth had decelerated as
2012 wound down. The Fed is doing its bit to foster faster credit growth in 2013. I have
included an interactive chart from the Fed which you can use to measure the growth of all the
major interest earning asset categories since the mid - 1980s. Good stuff for chart buffs.
Banking System Credit Chart

Cash Reserves
The market meltdowns of 2008 - early 2009, led to a jump in the total of money market fund
(MMF) balance of roughly $700 bil. to $3.6 tril. by the spring of 2009. Over the following
two years, the MMF balance declined from the $3.6 tril level to $2.4 tril. as investors moved
back into stocks as well as buying a boat load of Treasuries and private sector bonds. MMF
balances have been relatively stable over the past 18 months, with new flows and reinvestment
proceeds going into the markets and elsewhere, but with ending balances held firm.

The total MMF balance can be drawn down further, but the recent extended stability of ending
balances does suggest that preference for capital assets may now involve rotational moves
between categories such as stocks, bonds, PMs and real estate. So, for example, a strong
stock market for this year could again come at the expense of the bond market while an expanding
economy could also draw far more resources to real estate development and investment.

Saturday, January 12, 2013

Stock Market -- Weekly

The weekly cyclical fundamental indicator continues in a mild but volatile uptrend. The
volatility is traceable to initial unemployment claims date which, in turn, reflects the
interruption of business as usual by Hurricane Sandy. Effects of this shake up should be
about complete.

The Fed has accelerated the current round of QE. This remains a positive, but it should be
noted that the FOMC is running a bit low in implementation and also that Its balance sheet
has yet to exceed the all - times highs set in late 2011 / early 2012.

I am back to the weekly for the SPX. SPX Chart I did finally get a buy signal on the this
chart this week, a signal which has come late owing to the tame momentum of the advance
over the past three months (See ROC% in chart).

I did not play this rally because I have been trading only deep oversolds on the long side.
Based on the 40 wk price oscillator, rallies from very shallow oversolds have very seldom
been powerful through history, so I am reluctant to say this current but belated buy signal
will have that much "juice" on the upside. Rallies of the sort we have seen over the past
six months are typical of an advanced cyclical bull market.

I am updating my SP 500 earnings models and will post on such one day next week along
with a longer term SPX chart.

Tuesday, January 08, 2013

China Stock Market Divergence Resolved

Last month I discussed how the Shanghai Composite remained in a pronounced bear market
even in view of rising China based indices which focused on the larger companies the
China authorities leave open to foreign investment. Using traditional western standards, the
case for anticipating a cyclical bull market fell into place in early 2012 as monetary policy
eased and economic momentum began to stabilize. Perhaps there was an awaiting of the
announcement of the new leadership and their respective portfolios before the boys hit
the green light. The Gov. appears to want to give the Shanghai index a better standing. The
exchange is pressuring listed companies to institute and pay out higher dividend rates and
authorities appear to strongly desire to limit real estate speculation all of which could provide
more stability for the highly volatile Shanghai which players have used to try and build "kittys"
to play the more highly esteemed real estate markets.

There has finally been a sharp positive turn for the index which started as 2012 drew to a close.
The impulse has been strong enough to reverse a downtrend in place for several years duration
and the market has crossed above its 200 day EMA to stand around 2275. Projections for
China's  growth vary greatly, but if you take formal assumption from the authorities of 7% real
GDP  growth, the SSEC should trade eventually up around 2700. Shanghai Composite

Monday, January 07, 2013

Commodities Market

The global economy did grow over the past 18 months, but production growth has
continued to decelerate over this period, and significant spare capcity is evident. In
China, the major buyer of a broad range of commodities, mean annual production growth
over the past decade has averaged 15% per annum. however, even with the recent pick
up in production growth to 10% yr/yr, China likely is growing along with depressed
operating rates. Slower global growth and significant excess capacity in China has
continued to pressure commodities prices. CRB Commodities Composite

There was a burst of improvement in the CRB in the early summer of 2012 as the Fed
began to talk up further QE. At about the same time, China's production growth trend
bottomed and began to improve at a modest pace. The decline in the CRB Index to the
270 level did provide a nice long side trade starting in June, but the market has given
up a fair amount of ground since in the absence of a re-acceleration of global growth.

By my stripped down econometric model, there is presently economic slack with the CRB
trading below the 320 area. With considerably stronger global production growth, the model
suggests the CRB should trade between 320 - 380 during 2013. With the index now at
295, it is evident that more slack needs to come out of the system and that speculative
financial interest in this market remains well muted now despite various QE programs.
The indicators for the CRB have a slight positive bias and interestingly, the index is putting
in a short term base right under the 50 and 200 day m/a's. It is distressing that with the
recent popularity of the "risk on" trade, the CRB has yet to again reverse to the upside.
There are many financial market types who have speculated in this market over the past 5-7
years, and, given its volatility, there are probably many cases of "burned fingers". Keep an
eye on it.

Saturday, January 05, 2013

Stock Market -- Weekly

My weekly cyclical fundamental indicator (WCFI) finished up 2012 on a strong note.
Through the first trading week in in Jan. 2013, the WCFI rose 10.8% from year end 2012.
This compares to a + 16.5% up move for the SPX. Part of the difference reflects only a
6.2% rise for the sensitive materials price component, but the bulk of the differential
stems from the QE programs from the Fed (which are not in the WCFI). The stock market
has responded very positively to the major QE effort, despite the volatility that surrounded
the fiscal cliff saga around year's end. The Fed is ambivalent about how long to push on
with the large QE now in place and has attached an inflation "string" to it, but through
history, the market has rarely failed to respond positively to sizable quantitative easing
and very low short term interest rates. The stock market is discounting an eventual
significant move up in profits for 2013 and is running well ahead of developments for
sales and earnings at this point.

This week I take a different cut. I like to watch the movement of a broad, unweighted stock
index and I prefer the Value Line Arithmetic Index ($VLE), which features over 1700 stocks. In
tandem, I keep an eye on the cumulative NYSE advance / decline line. The NYSE  A/D is
basically a very broad mid - and smaller sized capitalization measure.

The $VLE has just surged to a new all time high. It is in a strong uptrend off the 2011 interim
low, but is now moderately overbought against its 40 wk. m/a and is approaching overbought
on shorter term measures as well. $VLE Chart:  http://stockcharts.com/h-sc/ui?s=$VLE&p=W&yr=3&mn=0&dy=0&id=p55102470047 It could be niggling on my part, but
the MACD in the lower panel needs to establish a much smoother trend up in the weeks ahead
or else it would be fair to suspect the market's trend.

The bottom panel of the chart shows the strength of $VLE relative to the SP 500. Notice the
positive reversal in relative strength for the $VLE as 2012 worked to an end. This shows
action by investors to position themselves more aggressively to capitalize on the assumed
benefits to the economy and profits from QE and also is an expression of conviction that
the dollar will not rise sharply to allow foreign firms to penetrate smaller US growth sectors.

The next chart shows the cumulative weekly NYSE A/D line. It reveals that the NYSE A/D
has also reached a new all time high as well and that it is getting overbought against its
6 wk. m/a. Note too, that it is getting elevated on RSI and is also a little shaky on its MACD.
NYSE A/D Chart

The market is clearly up on price and breadth trends. The shaky MACDs may merely reflect
interference from the volatility caused by the fiscal cliff brouhaha. But as most of you know,
there is more to come on the fiscal front as there will be a request to raise the debt ceiling
(Feb.) and Obama and the Congress will have to address the mandated spending cuts in
Mar. The talk in the capitol is already getting nasty and threatening. More markets volatility
may lie ahead. As well, most US workers are going to see take home pay recede by up to
2% as the increase in the payroll tax takes hold. There could be a jolt here, too.

Friday, January 04, 2013

US Long Treasury Bond

The yield on the long guy has been trending up since 7/12. The market took its cue from
the Bernanke promise to re-engage QE programs and just as industrial commodities price
indices began to turn up. The T-bond market remains as highly sensitive to the direction
of industrial raw prices as ever. Now I use a 6 mo. momentum indicator which combines
production with sensitive materials prices to give me a a little bit of a longer term
perspective on the direction of yields. This indicator has also recently turned up but is
still comparatively quiet. Nevertheless, the fundamentals have turned in favor of higher
yields. I would note that although my production / industrial pricing indicator has turned
up, there has yet to be a decisive positive reversal of momentum on a trend basis. The
implication here is that if US and global business pick up strength in the months ahead,
the long Treasury yield could climb sharply while the bond's price falls.

I have included a long T-bond yield chart with the bond's price in the bottom panel.
30 Yr. T-Bond Yield  Note the line at the 3.50% level. Should the yield rise to 3.50%,
I'll add the bond back to my list of tradeables. Note as well the reversal of trend that has
occurred following a nearly 18 month downswing in yield. Experience says "Respect

I have also included a 5 year chart of industrial commodities input costs. The chart runs
through 11/12 and does not reflect another significant 3% jump in the index for Dec. '12.
Index Mundi IC

Both the T-bond yield and sensitive materials prices do ok as leading economic indicators
in my book.

Thursday, January 03, 2013

US Economy -- Outlook Sketchy

In terms of physical capital, the US now stands at levels seen after a garden variety
recession. Both capacity utilization and the unemployment rate have recovered significantly
from very depressed levels. So has banking balance sheet liquidity and capital bounced
back from deep lows. As all know, housing and construction activity remain depressed.
The Fed is providing ample monetary liquidity and interest rates remain low.

Viewed long term against its potential, business sales, although at an all time high, remain
about 20% below trend reflecting not only slow domestic demand growth since 2001, but
a significant loss of market share to imports. Profits, however, are around record levels
reflecting both stronger offshore growth as well as a surge in the price / cost ratio as wages
have remained painfully tame and productivity growth has been strong. So, profit margins
have been exceptional.

The economy has been recovering for about 3 1/2 years, and since the US has moved up from
a very deep bottom to levels that are normal for recession lows based on physical capital, the
economy has the potential to grow for about another 4 years if it can maintain decent balance.

Per worker real income has remained weak during the recovery from 2009, and to develop
a moderate growth scenario, demand for goods and services must accelerate to foster sales
and production rapid enough to generate at least 2% annual employment growth going
forward. The stronger level of jobs growth is needed to provide aggregate income growth
to support demand. With individual wages growing slowly, the void between income and
demand must be filled by credit growth and, perhaps, the further drawdown of household
savings.This is not an unusual challenge. After all, home and auto purchases as well as
sending kids to college are all funded with liberal amounts of borrowing. But do not forget
that confidence has recovered very slowly.

The sketchiness in the outlook reflects several factors. Wage increases of 1 - 2% are very
low and are not conducive to confidence. Individuals have also been delevering and
using debt more sparingly. Because strongly accomodative monetary policy can drive
commodities speculation, modest incomes can be punished further by even mild bouts
of accelerated inflation. And, let's not forget the banks. Lenders remain very conservative
and are clipping consumers especially with loan rates that are high relative to the cost of

Let consumers get concerned about rising gasoline prices or a stall out in the recovery of
housing prices and still low confidence levels could erode further, damaging the economy.

And let me say that collectively, business continues to act stupidly. With much better
earnings and low dividend payout ratios, CEOs are buying in stock at elevated prices but
are still accumulating far more cash than they need, which suppresses the returns earned
on assets and leads to a mal - distribution of money within the economy as shareholders and
employees do not share in the rakeoff of profits as top management does. Fat cats get but

It remains a hard grind to keep balance between income and demand reasonable enough
to generate the demand that will fill more purses and spread the return to prosperity. And,
wouldn't much stronger income growth boost tax revenues to better cope with US budget

Wednesday, January 02, 2013

Stock Market -- Technical

My favorite daily, weekly and monthly price charts closed out 2012 flat neutral, leaving
the early weeks of 2013 to signal direction. The charts basically the future a well guarded
secret. I mentioned recently that the technical side of the market might be of limited utility
in view of investor and trader pre-occupation with the fiscal cliff show and other very
short term fundamentals. With today's boffo strong opening for the year, it may be the case
that very short term senitment or emotion may dominate for a bit, as resolution of the
cliff issues have twists and turns ahead. Moreover, the initial move on taxes is a net negative
for the economy as it will reduce take home pay for most US workers owing to the shifting
of the payroll tax from 4.2% to 6.2% -- a 2% hit to income for the many around $50K.
Today's glee could see a more sober view out ahead.

The selloff in the SPX going into the end of the year reduced the angle of ascent for the rally
in place since mid - Nov. Today's spike took the SPX to a short term over - extended  point
and to enough of a premium to the 25 day m/a to invite fast money profit taking. SPX Daily
The trend band off the Nov. interim low is wide enough to allow elevated volatility.

The red horizontal line on the chart shows the cyclical high to date for the SPX, and the green
HZL line shows 5 year resistance at 1400. It is good that the SPX is spending more time above
long term resistance and it would also be nice if the SPX can take out the prior cyclical highs
in that 1460 - 1465 bracket.