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, February 28, 2013

Stock Market -- Monthly

The cyclical bull market running from 3/09 continues to roll on. The SPX monthly chart
(linked to below) also shows the SPX is getting overbought against its 9 mo. m/a as well
as on a monthly stochastic measure. Market momentum has been decelerating as the advance
has moved along, with this development being typical of a cyclical upmove that is no longer
fresh. The market is extended on the price band up from mid-2011, but the momentum
measure is well under levels that would signify a blow-off top. SPX Monthly

I do not ascribe great significance to the fact that the SPX has been closing in on its previous
all-time peak. My argument for several years has been that the US economy has the capital
resources in place to see the economy advance for another few years. It has been slow
going, and particularly frustrating since business has opted to continue to mal-distribute
income generated. The Fed's periodic experiments to curtail QE have slowed progress and
now fiscal policy seems to be set on putting further hurdles in place with new austerity
measures. Economic risk is higher than normal now, but no recession is currently indicated.

the Fed has a strong QE program underway since this autumn and US economic history clearly
suggests that economic expansion, now very tepid, should re-accelerate soon, thus paving the
way for further advances in the SPX as the year wears on. I am presently not comfortable that
current QE has not already spirited the broad economy and would like to see more positive data
soon. I have argued my case for an uninteresting market based solely on QE without positive
economic follow-through.

Investor confidence, as measured by a recently expanding p/e ratio, has been on the rise based
on QE, but remains significantly below a level that would reflect solid but hardly exuberant
confidence. With QE and room for the economy to grow without serious inflation pressure,
the SPX should be trading in a range 1650 - 1700 with $100 per share earning power in the

Wednesday, February 27, 2013

Oil Price

Longer Term
The oil price has not been able to hold above the downtrend line set by connecting the 2008
bubble top and the 2011 Libya coup top. The cyclical uptrend from the late 2008 bottom was
broken in 2011 effectively ending the cyclical price recovery story, at least for the time being.
WTIC 5 Year Chart Over the past nearly two years, there has been a narrowing trading range
market which has presented  both long and short trading opportunites but in an environment
that has grown more tame with time. This is not atypical post price bubble behavior, especially
for the oil market.

Shorter Term
I have done alright trading the oil price over past couple of years, and even though the market's
movements have grown less dramatic, I do have a keen interest in oil this year, as I have been
thinking there would be more pressure from NATO and Israel to deal with the Iranian nuclear
program in 2013. We are, however, off to an inauspicious start so far. Israeli voters have
slapped Bibi around pretty well and Obama has put up Chuck Hagel as Defense Sec. Chuck has
little patience with the Israeli political lobby in the US, is critical of US military adventures in
the Mid-east and is aware of the risks in a military confrontation with Iran. Nevertheless, reports
do indicate Iran is getting ever closer to turning out bomb grade nuclear material, and, even if
neither the US or Israel opt to try and take out much of Iran's program, there will be tough talk
after the UN offers a compromise, talk that is tough enough to get the oil traders interested in
pushing up the oil price. Moreover, the war in Syria continues to turn more violent with
widening but still moderate spillover.

The oil price is at a periodic seasonal low point with refinery changeover to warmer weather
gasoline blends winding up. Predicting bombing runs on Iran has been a staple of trader tactics
for nearly a decade, and the boyz like to gear up the buzz at the end of each Feb. With the oil
market set to move into a seasonally strong period, it might be worthwhile to see how all the
market players and pundits may try and "amp" it. WTIC The chart indicators say it is still a
bit early, so keep an eye out if this is a market that interests you.

Monday, February 25, 2013

Stock Market -- Warning Flags Short Term

The stock market can still whipsaw to the upside as it did in late 2012, but evidence that
it could well be rolling over is accumulating. SPX I prefer the weekly chart, but since it
was a bit tardy with signals over the last half of 2012, I am watching the daily chart now
and will post  the weekly and monthly views at week's end. I should mention that my
weekly cyclical fundamental indicator has been edging lower as February has proceeded.

Saturday, February 23, 2013

Stock Market / Economy -- #2

This post can be tacked on to the 2/15 entry (scroll down) which was a comment that
indicated the US economy should re-accelerate quickly in view of the strong, positve action
of the stock market over the past 8 months or else a fundamental disconnect between the
market and the economy will develope.

My coincident economic indicator, which pools sales, production, jobs and income
growth measured yr/yr, was a lowly +1.2% for Jan. The indicator does include an
adjustment for the restoration of the payroll tax which does not affect the wage rate but
does reduce take-home pay. My business sales growth measure for Jan. was +3.7% yr/yr
and reflected both low volume and pricing growth. Since it is tough for companies to
maintain profit margins in this sort of slow growth environment without additional cost
cutting that could hit jobs, fundamental business risk is being elevated.

In the US rare are the times when low short rates and a large, fresh injection of liquidity
fails to stimulate a stronger economy. I think a re - acceleration of growth needs to occur
right quick or we can open a debate about whether fiscal policy is now too restrictive in
an era of above normal unemployment coupled with income inequality / mal-distribution.

In my reading of recent weeks, I note a number people are bullish on stocks because of QE
4 and also do not seem to mind that much that the economy has been so sluggish. The theme
seems to be that since the Fed is so easy and desires higher asset values that players simply
have no recourse but to be in the equities game on the long side. It's easy to talk that way
when the market is on the rise and other portfolio managers are buying and threatening to
leave one behind at the station and, since faster business growth is not yet clearly overdue,
the "simply go with the Fed" pundits seem to be the wise ones. And then, there are the
brazen guys who may be going along just because a run up is a run up, smart or not.

My point is that if QE 4 is a fail as far as faster growth is concerned, we have a disconfirm
of the normal and perhaps a very different ball game then we have seen for quite some time.
I am hoping we do not get the fail.

Thursday, February 21, 2013

Stock Market -- Short Term

With yesterday's release of the 1/13 FOMC policy meeting notes, the Fed poured a full
cup of uncertainty into the punchbowl (See the 2/20 post just below). It came as news to
an overbought, extended stock market which was experiencing momentum loss anyway. So,
traders have lined up to book profits after an extended positive run since early, Jun. '12.
The SPX has broken below its 10 and 25 day moving averages although the latter two have
yet to roll over. My extended time MACD which had clear sailing since the end of Nov. '12
is still positive, but it is operating on a wing and a prayer now. In the upcoming SPX chart link
I also show the money flow index (MFI), a price and volume based relative strength index.
One use for the MFI is when it begins to trend down ahead of the market, especially if it
is from an uptrend that made an overbought reading. SPX With MACD & MFI

I also have linked to a five panel chart that shows the SPX with some risk measures.
SPX & Indicators The SPX portion of the chart shows the market against its 200 day m/a.
It reached a nearly 9% premium just the other day at 1530. That sort of premium represents
a significant overbought. The top panel of the chart shows the VIX or volatility index.
Readings down around 10 signify a confident, complacent market. You'll need to see whether
the VIX moves up further to clear 20, as that would warn of a correction. I would also call
your attention that price corrections which begin off a low VIX / high confidence reading
can get nasty. The fourth panel down measures the relative strength of the SP 500 ETF vs.
the long Treasury price. It is toppy at resistance in the 1.05 area and reveals a possible
transition to "risk off" mode by equities players. The bottom panel of the chart shows the
relative strength of cyclicals against the SPX. The clear uptrend here which signals growing
confidence in the earnings outlook is now being challenged via the Fed's new caution about
the future of QE 4.

Wednesday, February 20, 2013

The Fed: Let's Try For The Best Of Both Worlds

Minutes of the late Jan. FOMC meeting show a Fed planning to keep the large QE program
going, but in deference to the inflation hawks, plans are afoot to look over alternatives
which feature possible modifications that could wind up reducing the $ volume of QE.
Has the Board lost its collective nerve? Well, not quite yet as I will endeavor to point out.
First, let me say uneqivocally that I regard this kind of ambivalence as bullshit. The
instruments the Fed has at its disposals are large hammers and not the tools one could use to
fine tune anything. You either need the bigger hammer or you do not.

The game here as I see it is that the Fed desires to push QE 4 along but is afraid that strong
liquidity flow into the financial system could weaken the dollar and set off hefty speculation
by financial types in the oil and commodities markets. I doubt the Fed stays up late nights
worrying about what the prices of gold and silver might do except in so far as rallies in
PMs  might re-inforce the speculation in oil and commodities. The Fed's concern here is that
a run-up in commodites will accelerate inflation and pinch real incomes which are already
under pressure from the recent increase in the payroll tax. By crying wolf as they allow the
beast to roam, the FOMC hopes to keep folks from running up the prices in the oil / fuels
complex via concern that the Fed may curtail QE and leave the guyz with unsustainably long
speculative positions. The Fed has spooked the PM market by adding strings to the QE $
program, but oil and gasoline players were more nervy and so the FOMC has now trotted out
its QE curtailment in "potentcy" as Aquinas might have said. This could be clever stuff as
long as the Fed does not have to cry wolf but rarely.

I see the progress the economy has made off its lows in 2009, but I am not yet convinced
economic expansion has reached self sustain mode. therefore, I am still happy to see the Fed
with a robust QE program.

The Fed has punished the gold players since latter 2012: GLD Gold Trust ( Yes, a big
test of support could lie ahead).

Monday, February 18, 2013

Stock Market -- Weekly

This week I return to the broad, unweighted Vale Line -A index and the NYSE advance -
decline line. I use these two measures in tandem as a sort of informal model of the stock

First up is the Value Line 1700 + issues chart. $VLE  By this measure, the market is trading
at an all-time high. Using the Sep. 2011 low, my trend work suggests this market is over-
extended on the upside for the first time since the spring of last year. No red light here, but an
amber warning signal. The VLE is also overbought on RSI and MACD, and the weekly
price momentum indicator is just coming off an overbought +20%. The market is on a rising
trend, but this is a very mature rally.

Next we turn to the NYSE weekly A/D line. $NYAD The chart includes the VLE in the top
panel. Here again, we have an uptrend in breadth which is also making new highs. We also
have an overextended market reading and overbought indications for stochastic RSI (momentum)
and plain RSI. The stock market when rising tends to start to have difficulties when the
weekly A/D line begins to get tangled with its own 6 week moving average. It is running free and
clear above the 6 m/a now, and a toppy suggestion is not likely to come unless the A/D line
starts to break down against  its 6 wk. m/a. Keep this in mind.

The Fed remains on a relatively vigorous QE program, with the QE trend remaining strongly
positive after a slow start last autumn. The weekly cyclical fundamental indicator has eased off
modestly in the past couple of weeks as sharp progress in the reduction of new unemployment
claims and in sensitive materials prices has ebbed. Continuing progress in stocks in the past
few weeks represents a divergence to the WCFI, but note as well that stock price momentum
has started to slow.

Friday, February 15, 2013

Stock Market / Economy

The rally in the market to a new cyclical high over the past seven months primarily reflects
the expectation that substantial new QE by the Fed would eventually translate into faster
business sales and earnings growth. Now the QE4 program of liquidity infusion did not
get going until early Nov. 2012. In turn, my weekly cyclical fundamental index (WCFI)
 -- a forward looking measure as far as the economy is concerned -- began to recover in
June. On balance, the advance in the stock market has mirrored the WCFI, but the economy
has yet to confirm the WCFI with an acceleration in growth. I have not been so concerned
with this issue because I figured that since QE 4 did not start in earnest until early Nov., it
would be best to tack on a 3-4  month lead time to the unofficial onset of QE before looking
for faster economic progress. Well, we are there now, and it is fair to look for the economy to
start performing better PDQ (quickly).

Sales and production data for Jan. '13 were not good, and it appears that the business
inventory sales / ratio is running a little higher than earlier in the recovery. Moreover,
US trade data for Dec. '12 showed both imports and exports to be flat on an extended basis.
And, to cap off matters, the WCFI has started to flatten out as well in recent weeks following
a strong initial start (Confirms the recent loss of momentum in stocks).

I do not find the stock market at all interesting as a long unless we not only see business sales
pick up soon, but get on a track that would begin to lift US sales out of the 3 - 4% pattern we
have seen for months. For me, it is unwise to bother putting capital at risk for more than a
short term trade unless I think I can earn a 10% return per annum at the minimum. The
prospect of 3 - 4% top line growth for US business is not likely to support the return hurdle
I use. The SP 500 is trading around 15X 12 month earnings and a slow struggle, modest growth
muddle - through is not going to be good enough.

The US economy needs to start performing pronto.

Weekly SPX Chart

Tuesday, February 12, 2013

Strategists Warn On Bonds

Way back in 1981, I was SVP and chief investment officer for NYC based and since long
gone Irving Trust (1 Wall St.). Relative to our size, the trust unit was among the biggest
bond buyers in the US. Sentiment was so bearish, I used to get the occasional phone
call from an economist on Fed Chairman Volcker's personal staff inquiring about my
job standing and whether I still liked the bond market. My stock answer was that I was on
tenuous ground but still a buyer as bonds were 1) yielding more than most companies
earned on their equity and 2) with a blended bond portfolio, we could earn out our clients'
capital inside of five years (There were call protected corporates available for 18%). It
was not the last time I faced career risk in buying bonds, but it was the most memorable.

The bull market in bonds was one of the greatest and most durable in history and also one
of the easiest to trade ever known -- far easier to trade than stocks or currencies or just
about anytrhing else. It was simply like shooting fish in a barrel.

looking at the very, very long term for bonds, it is easy to note that yields are at or near
historically low levels, and it is hardly difficult to wisely surmise that yields will not
stay so low forever. So,what to watch for.

From a finance perspective, bond yields have had two anchors: 1) a long term decline in
short term Treasury yields, and 2), a long term deceleration of inflation. A lengthy bull
market in bonds has  instilled such investor confidence that the "spread" between the 30 yr.
Treasury yield and the consumer price index measured yr/yr has shrunk dramatically.

The US 91 day T-bill now yields 0.07%. Even with economic recovery, the 36 month
centered CPI is but 2.3%. With low inflation and the Fed's ZIRP policy on the Fed Funds
Rate (FFR%), it makes perfect sense for bond yields to be low.

Now, despite an achingly slow path, the US economy is moving toward more normal
bounds and is very gradually recovering the ability to self sustain. It can still certainly
backslide, but within the next year or two, economic expansion may be stable enough
for the Fed to not only have curtailed liquidity infusions but to raise short term interest
rates. Ending ZIRP will send a shudder to the bond market, and yields might be
expected to rise dispropotionately to the initial moves up in the FFR%. as bond players
assume there will be more upside to the FFR% over time. This series of events will be
a strong bear signal for bonds at least on a cyclical basis.

But, rest assured, the near collapse of the financial system and the damage to the economy
that came with the near economic depression of 2008 - 2009 created great caution that is
only slowly dissipating and which can be set back by premature Fed tightening, stepped up
fiscal austerity or the continued punishment of the wage earner.

In the meantime, I will be watching my favorite standbys -- the direction of industrial
commodities prices and the 6 mo. % momentum of industrial production.

Sunday, February 10, 2013

Financial System Liquidity

1) My broad measure of credit driven liquidity or bank funding capacity is continuing to
show accelerated growth and is now up 6.8% yr/yr. This is good news for the economy
and it is also nice to see that all major funding categories are finally on the rise. The basic
M-1 money supply is still contributing to broader liquidity growth, but it is counting for
proportionally less as time moves on.

2) Banking system total interest earning assets are up about 6% yr/yr, the minimum rate
I would like to see to sustain economic expansion. The banking system's loan book is up
about 5%, held back by continued ever so modest expansion of the real estate book as
housing activity and real estate development remain well below pre - recession levels
and as banks concentrate on booking fees for mortgage refinancing and portfolio quality

3) Fed Bank Credit has been expanding rapidly in recent months via the new QE program,
but assets on the Fed's book are up but 2.9% yr/yr. Since broad business sales growth rose
only 3 - 4% over the past year, the slow pace of QE measured on a 12 month basis did the
economy no favors. The practically wise course for the Fed would be to stick with the
now more rapid QE program until business and private sector credit demand strengthen
and confidence increases to levels which can allow self - sustaining economic growth.

4) Recently, the annual growth of broad credit driven liquidity did exceed the advance in
business sales measured yr/yr, thus allowing liquidity to flow beyond the needs of the
real economy and primarily into equities. This flow of liquidity was last seen in late 2009
and is a measure of how tight the banking system has been in extending credit to the private
sector. Excess liquidity relative to real economic demand only helps stocks when investor
confidence is reasonably strong which it has been since mid - 2012 when the Fed first
signaled new QE. Folks have been happy to buy stocks on the premise that major new QE
from the Fed will lead to faster business growth. But, such must begin to unfold soon to
keep confidence levels up.

5) Money market fund (MMF) balances were drawn down heavily from mid - 2009 through
2011 as money flowed into the capital markets with some also finding its way into the
purchase of goods and services. Since the end of 2011, fund balances have remained
fairly steady even with scant returns on MMFs. If fund participants have invested or spent
their discretionary cash, future moves in the capital markets are more likely to remain
strongly rotational.

Friday, February 08, 2013

Stock Market Factors

The SPX closed out today at a new cyclical high to confirm the uptrend. The market is
moderately overbought against the 25 day m/a as well as against the 200 day m/a. The
SPX stands 8.2% above the 200 day m/a. Your careful attention is required when the SPX
goes to a 10% premium to its 200 m/a. The market remains extended in price compared
to its price channel up from Nov. '12. SPX And Indicators

The top panel shows the VIX or volatility index. Traders often use the VIX to measure fear
and complacency in the market. You can peg an uptrend in the market off the late Sep. 2011
interim low through the present and note that the VIX has been trending down over this period
suggesting rising confidence. When the VIX falls to a reading of 10.0, investors are seen as
smugly complacent. The current reading is now a low 13.2. When the VIX rises, players are
thought to be growing fearful. When the VIX crosses 20.0 on the way up, you should take note
as well.

My advisory / polling sentiment indicator is excessively bullish at a reading of 65.0. Over
the last couple of weeks. the index has moved up from the mid - 50s to a range of 61.0 - 63.5.
Opinion is indeed starting to warn of optimism that is cruising toward the fringe of exuberance.

The first of the bottom panels in the chart compares the relative strength of the SPX etf to the
long Treasury. Rising strength indicates players are in "risk on mode". This ratio is again up
to the substantial resistance levels seen back in 2011. No reason the ratio cannot motor up
through resistance, but good reason to know we are there now.

The final lower panel looks at the relative strength of cyclicals against the broad market and
is a good gauge of investor opinion regarding SPX earnings potential. This is an important
measure because: 1) earnings leverage resides with the cyclicals; and 2) Players like relative
strength in earnings when structuring portfolios. The uneven uptrend in the ratio shows how
carefully investors are weighing earnings potential this year.
We in the New York area are experiencing our fourth annual "Storm Of The Century", this
time in the form of a blizzard tabbed as "Nemo"... Hope the power stays on, but if not, the
next post will be a few days out.

Thursday, February 07, 2013

Stock Market -- Daily Chart

The market rally, which has been humming along since mid - Nov. has hit overhead
resistance on the SPX just under the 1515 level. The market is working off a short term
overbought condition and has yet to move into a situation which would generate strong
warning signals that a significant correction may be at hand. The SPX is mildly extended
on a three month price channel basis now bounded by 1450 - 1490 and could fall to test
the 1450 - 1460 area in the short run without violating the base uptrend line in place since
mid - Nov. Since the short term seasonals call for weakness in Feb., and since a nine
month cycle price low is due this month, you may want to switch off from cruise control to
manual for a spell if you have been coasting mentally through the recent advance. SPX Daily

Wednesday, February 06, 2013

Global Economic Growth Momentum

Global real growth momentum tends to decelerate as an economic recovery gains in maturity.
Boom / bust indicators show powerful recovery momentum surges in both 2009 and 2010,
but growth did decelerate persistently and substantially from there when measured yr/yr and
seemed destined to start courting contraction as late as Jul. 2012. Global PMI

The global leading indicator, based on new business order flows and sensitive materials
prices, turned more positive in Aug. of last year. Its momentum suggests an end to the
deceleration of real growth, but the pick up in momentum so far has been modest and needs
to firm up further to support the profits growth acceleration which is currently being
discounted by the world's major stock markets. Moreover, with a number of countries now
employing QE programs by their central banks, global demand should strengthen enough to
support a  revival of trade to avoid the development of conflicts centered around
accusations of deliberate currency devaluation which can ultimately undermine economic
stability. A substantial re-acceleration of global trade is needed as an important safety
valve in the economic growth equation for 2013.

Sunday, February 03, 2013

Commodities -- Important Resistance level Ahead

It has been my view that with broadscale central bank QE in place, the global economy
should soon experience a reversal in growth momentum from negative to positive. In
2008, the CRB Commodities Index experienced a price bubble top of near 475 before
crashing to long term support around the 200 level in early 2009. There was a strong
recovery out into 2011, but the CRB has languished since then as China, the major
commodities consumer, experienced a sharp deceleration of growth. With Beijing now
showing better production numbers, the CRB has been drifting higher again recently,
and at 305, is set to challenge the five year downtrend line in place since the 2008 top.

Index indicators for the CRB show the index is slowly turning positive, so speculation
about whether it can take out the longer run downtrend is not idle. CRB Index Chart

A break above the downtrend does not by itself imply a new longer term advance may be
in store. Commodities are too volatile for that. Moreover, the CRB would have to take out
the 370 level interim high set in Apr. 2011 to solidify the bull case.

The 320 line on the chart does reflect my judgment that 320 represents minimal long term
fair value for the index based on a macro view of the curve of production costs. It would
be disappointing not to see the CRB hit the 320 level this year especially since continued
global economic growth should be sufficient to wipe out the small amount of excess
commodities production capacity which is still apparent.

Friday, February 01, 2013

US Monetary Policy -- Looking Ahead

I keep a carefully drawn chart of Fed Bank Credit. Since the Fed first moderated QE in late
2008, they have worked hard to keep the flow of credit within a $250 bil. band. At the
present rate of expansion, Fed Credit will exceed the top of the growth band near mid -
2013. They may just allow the flow of liquidity to go  right on and exceed the top of
the band by a handsome margin, but chances are that if the economy is expanding and the
unemployment rate is coming down, more of the voting governors are going to take issue
with the current powerful trend up in credit flow and there will be a stronger voice behind
the idea of scaling down but not eliminating the QE program. FBC Chart (PDF p.7) 

This very possible surge of concern about Fed expansiveness is not a done deal, but it is
a contingency for equities and bond investors as well as currency traders that needs to be
kept in mind.