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 !!!

Saturday, March 30, 2013

SPX -- Monthly

Here's a link to the longer term SPX with indicators that you can keep or change as you
wish. SPX Monthly

For the fun of it, the SPX back through 1994 is included. The first bubble started in 1996
and the run up into 2000 is a terrific reminder of just how powerful a real bubble is. I
tend to use 1994 as a base, and from the SPX levels then, the SPX has compounded before
dividends by 7.2% per year compared to net per share of 6.6% So, excluding the bubble
and its echo (2004 - 2007), the market has done very well by my lights. To get back into
bubbly mode -- above the top of the very long term channel dating back to 1946 -- the SPX
would need to move up close to 1700 this year, at which point it would move into hyper-
extended mode again.

At the 1569 level, the SPX is getting rather extended on a cyclical as well as a longer term
basis. The risk in the market has risen sharply since that woeful low back in 3/09. Recall
too, that with the US and the global economy in slower growth modes, it is positively heroic
to project the 9.4% profit growth seen over the 1995 - 2013 era well into the future. Bull or
bear, it seems wise to scale back expectations going forward even recognizing that the bears
and other cautious folk have underestimated the ability of corporate America to wrench
continued gain in profit margin.

The behavior in MACD, notwithstanding its recent strong positive showing, is reminiscent
of well evolved cyclical mode and the 50+ is pretty high for post bubble action. On the plus
side, RSI is in a clear uptrend off the cyclical low and is not yet extended. The bottom
panel of the chart shows a 12 month momentum measure which is strong but is still running
below the "hot" 200 level when the SPX has started to veer toward trouble in the past.

I am seeing more strategists raise their projection for how the SPX will close out 2013. A
rise to the 1650 - 1700 area is gaining in popularity. This range implies an acceleration of
earnings and continued growing  investor confidence the Fed's ZIRP and large QE programs
will win out against the obvious attitudinal and economic headwinds in place. Note as
well that lots of guys out there simply play "extend a trend" which would put the SPX at
1700 at the end of this year off the autumn 2011 base.

Friday, March 29, 2013

30 Yr. Treasury %

Here is the three year weekly chart for the long Treasury yield %: $TYX

The long bond yield is in historically low ground because:
1. The 91 day T-bill is trading near 0% (ZIRP). Heavy anchor here.   
2. Over the past six months, the yr/yr CPI measured monthly has averaged slightly below
3. The CPI is in a long term downtrend and has become deflation prone. The historical
    320 basis point premium in the CPI over the long Treas. has shrunk considerably as a
     result with this process naturally aided by ongoing ZIRP.
4. Treasury bond and note yields carry a flight to quality discount and there are bids
    under the market from the Fed and retirement funds who need to begin lattering
    maturities to handle upcoming pay out demand as more boomers turn 65.

The 30 yr. Treasury Yield is now working slowly higher because:
1. Industrial commodities prices, which tend to play a major role in determining the long
    T-bond yield's direction in the short term, weakened substantially over much of 2011,
    started basing in 2012, and have drifted modestly higher recently on improved demand.
2. US and global industrial output has undergone a positive degree of acceleration here in
    2013 as major central bank QE programs take hold.

The recent uptrend in the 30 yr. yield is mild and volatile because:
There has been a degree of acceleration in US and global output this year but the momentum
 of both measures is running well below normal levels seen in established economic
expansions. Thus, sensitive materials prices and the long T-bond yield are behaving more
tentatively. A continued acceleration of industrial output would foster higher industrial
commodities prices and likely sharply higher bond yields (and lower bond prices).

Thursday, March 28, 2013

S&P 500 New High -- No Big Deal

Today, the SPX closed at a new historic high. Although overbought in the near term,
economic and financial resources are ample enough to support substantially higher
highs over the next couple of years. Not only that, but the market can progress to
significant new highs without a strain on valuation parameters provided the economic
expansion unfolds in way that allows the system to heal further and regain balance and
resilience in the wake of the large 2008 - 09 bust. Business and consumer confidence are
still relatively low, debt leverage is still relatively high, fiscal policy has become
conservative too early, and, finally, the US economy has become deflation prone on a
longer term basis. So, the Fed has to carry the ball here into on- the- ground headwinds
on the reasonable premise that its ZIRP and QE will drag the economy along until it can
clearly progress on its own without the aid of hefty monetary ease. In the wake of the
Great Depression which hit bottom in 1932, it took 14 years of tender ministrations from
the Fed before the economy was more or less fully righted. It should not take quite so
long this time out, but as a student of US economic and financial history, I am not about
to stop fretting now....

On a personal note, there were seven of us kids in my family. Of the four youngest, I was
the only one to survive childhood with this tale to include the loss of a twin. Raised by
utterly grief stricken parents, I wound up fashioning my own way to get along in life. So,
for example, I have been a big risk taker for many years, but the bad shocks monitor
is always on....

Monday, March 25, 2013

Stock Market Breadth

The chart link ahead shows the cumulative a/d line for the NYSE. It makes for some
interesting reading. NYSE Breadth

Note the nice uptrend for the past three years, but note as well that the A/D line is getting
extended once again prior to recent tops. You'll also observe the large premium of the line
over its 200 day m/a -- a warning.

The A/D line and the market tend to falter when cumulative breadth starts to get tangled up
with its 30 day m/a, an obervation that goes well back in time. For now, the A/D line is
still freely rising above the 30 day m/a, which keeps it positive.

I have also included extended time readings for MACD and RSI. Derterioration in these indicators
tend to foreshadow interim tops in breadth and share prices although the lead times can vary.
MACD has just started to roll over, and RSI has lost its its uptrend, but although toppy, has not
broken down yet.

Short term, the envelope has been well pushed.

Friday, March 22, 2013

Stock Market -- Weekly

The Fed continues to expand its balance sheet rapidly and despite the rapid upward
trajectory of credit extended, it looks like it will still be another 3-4 months before Mr.
Bernanke starts to get more avid pushback from the hawks on the board and some of the
economics staffers as well. The near-death experience of the economic recovery last
year has the inflation hawks off-balance and quiet for now. Aggressive QE creates a
strong tail wind for the market.

My weekly cyclical fundamental indicator has experienced a moderation of its uptrend
in recent weeks but is still heading higher primmarily reflecting stronger employment

About Cyprus
Cyprus is a tax haven with banks that form a payments / deposits flow hub. Banks that
specialize in payments / deposit flows must be exceptionally discrete, maintain excess
equity capital and keep low risk loan portfolios. The money is made via hefty fees that
are charged for maintaining high discretion and for allowing funds transfers that require
bankers naturally disinclined to ask probing questions. Risky lending is to be avoided
because funds transfers can and do involve occasional, troubling overdrafts for which
a large capital base is needed to smooth out those little bumps in the road. Leverage up
and make risky loans and you can be dead in a hurry, figuratively if not literally. Little
Cyprus has a bit of leverage here -- to leave what lies beneath staying beneath, so to
speak. Outsiders will need to be discrete in settling the Cyprus fracas.

Back on Mar. 10, I opined that the stock market would be moving into an intermediate top
over the subsequent two weeks ended Mar. 22. The market has turned flat in the short run,
but remains in a clear uptrend nonetheless. The SPX is overbought on price momentum as
well as on the weekly MACD and RSI indicators. SPX Weekly

Overbought markets reserve the right to get even more overbought, but this baby seems
well along.

It is interesting that as the SPX has approached its historic highs we have seen an outbreak
of coughing and foot shuffling before the bulls finally square up and take out  the old highs.
Since the market can inflict pain for all at critical junctures, a fitting alternative scenario
would be for players to squeeze the shorts into the land of the new high, shout "hooray",
high five each other in the halls, enjoy a few joyous days and then get clobbered by a sell off....

Tuesday, March 19, 2013

New Home Construction Permits

My long term track record with US housing has been a very good one. Back in late 2001,
when I was still doing investment advisory / consulting on a part time basis, I projected a
long term top in home prices for 2007 based on deteriorating demograhics. The industry
turned mad as the decade progressed and I lost interest. When I saw the totals for new home
construction at the peak over 2006 - 08, I figured there was so much over-capacity in
housing, there would be no recovery until 2011 earliest.

Right now, I think the beginnings of a new boom in housing are still about 7-8 years away
and will largely be reflecting the emergence of Gen. Y (born 1985 -2005 and nearly 80 mil.
strong) as first time buyers. Even then, the money to be made will be more from building
and modernizing homes than from home price appreciation.

Unless there is a powerful surge in immigration, I do not think underlying demand for housing
will exceed 1.7 mil. units a year. (I would welcome an aggressive and sensible program of
accelerated immigration but that is a subject for another time as it is politically fraught).

Prospective homebuyers have cut their leverage and are in better shape on a cash flow basis,
but too many younger people, many saddled with college loan debt, are low on down
payment capability.

Now, building permits have been an excellent leading economic indicator over the years, but
failed to signal properly in the present recovery because the recession hit the entire housing
business so hard. But, a recovery is emerging in the US. Housing Permits I would be
delighted to see permits rise back up to 1.5 mil. annual over the next few years. I think that is
do-able, but I would be careful to contain optimism. After all, the middle class has been
pummeled economically in recent years, and, when you think about it, mortgage finance
capability needs to be re-built.

Sunday, March 17, 2013

Inflation Potential -- Shorter Term

As will be shown, the full CPI over the past decade has been heavily influenced by changes
in the price levels of foods and fuels. The boad CPI less food and fuels has been mild
over the past decade and has been in deceleration mode. Shorter run surges and retreats of
the full CPI have largely been determined by the food and fuels components, particularly
petroleum products. CPI Chart

As the chart above shows, a vigorous "V" recovery in production and operating rates starting
in 2009 turned a deflation environment into a sharp cyclical acceleration of inflation pressure
which culminated in a surge in the CPI measured yr/yr up to 3.9% in Sep. 2011. Note the
strong role played by the price of gasoline and the far broader CRB commodities composite
in driving the CPI up well into 2011. Motorfuel / CRB (bottom panel)

The CPI has been in deceleration mode since the autumn of 2011 on slow production growth,
a flattening out of capacity utilization % and a decline of commodites prices including even
petrol fuels. Note however how the seasonally strong surge of gasoline prices has turned the
full CPI back up this year.

I think the chances favor further and cyclical inflation pressure in 2013 on faster production
growth and higher operating rates coupled with a stronger services sector. This projection
is based very heavily on a positive response from the economy to the current major QE
program by the Fed and comes with an additional stipulation that QE if sustained will also
put some stronger financial player interest back into the commodities market.

Now if there is the usual positive economic response to QE 4, an acceleration of inflation
pressure will re-introduce two issues to think about: (1) If inflation does build too quickly,
it will put even more stress on household income, further undercut confidence, and increase
risk for the economy, especially given the low wage growth in evidence and, (2) Pressures
will rise on the Fed to curtail its QE commitment, provided particularly that the CPI,
excluding foods and fuels, moves up toward 2.5% yr/yr which could be a trigger point to
slice the QE program by the Fed's own admission. A couple of things to think about.    


Saturday, March 16, 2013

Long Term: Inflation vs. Deflation Potential

The best and fastest way to get a handle on longer term inflation potential is to look at
a rolling 10 year record of growth for a broad measure of money and credit funding
instruments and then subtract annual productivity growth potential from it. In the wake
of the great recession, which saw well over $2 tril. of short term debt default or not get
rolled into new debt, the broad measure of financial liquidity growth for the past decade
has dropped to 4.1% annual. Pull out the reasonable assumption of 1.5% annual product-
ivity growth and you get inflation potential of 2.6%. It is no coincidence that inflation has
averaged just 2.2% per annum on a rolling 5 year basis through Feb. '13.

To get annual inflation potential up to 5%, the broad measure of financial liquidity in the
system would have to be about $4 tril. or nearly 26% higher than it is today. Given how
conservative banks remain, such rapid growth in credit demand soon seems rather unlikely.

To get inflation going strongly for a goodly spell requires not just fast money and credit
growth but high rates of resource utilization and a sharply elevated level of wage growth
to sustain it, all of which we saw over the great inflation period of 1965 - 80, which
incidentally was a an era of low productivity growth. Tossing in a major war might also
help get inflation going.

I would argue instead that the US economy has become deflation prone and has been so
for the past 7 - 8 years, commodity driven mini inflation surges notwithstanding. US
real growth has been very scant in real terms, resource utilization has been declining and
business has succeeded in wringing productivity from an employment base that is nearly
flat. On top, the wage in current $ has been coming down (from 3.5% to 2.1% currently).

The Fed has added nearly $2 tril. in credit to the system to re-inflate it since 2008. The
economy is, in turn, still recovering slowly with the $ value of industrial output running
nearly 24% below the long term trend. To add a little excitement to the mix, The US
Gov't is looking to join the states in cutting spending and jobs. Small wonder then that
top notch economists like Paul Krugman and Joe Stiglitz are not just dismayed but are
appalled instead. Can deflation be virtuous in a well leveraged economy such as ours?
Dream on.

The Fed needs to keep plugging away until the economy takes up more of the capital
slack in the system and shows itself as able to sustain growth on dramatically more
limited help from the Fed.

Up next: shorter term inflation potential... 

Friday, March 15, 2013

Economic & Profits Indicators

Weekly Leading Economic Indicators
The weeklies I follow moved up substantially over the Jun. '12 / Jan. '13 period, although
there was unusual volatility involving jobless claims in the wake of Hurricane Sandy. The
weeklies have flattened out since Feb., but there has been no break down of trend yet. The
pattern still suggests better economic growth through April.

Monthly Coincident Indicators
I use a combine of retail sales, production, the real after tax wage and jobs growth all
measured yr/yr to derive my coincident indicator. On this measure, 3.0% is a good
number and would indicate the economy is or can hum along nicely. Not so, recently.
For Feb., the reading was a low +1.1% and reveals a growing imbalance between sales
and production on the one hand and the income components on the other. The data is lousy
and suggests that consumers must continue to dip into savings and tap borrowing to sustain
spending. With gasoline prices dipping some here in Mar., the heavy pressure on the real
after tax wage may ease up some. It is fair to say that my view may be conservative since
consumers do have stronger borrowing power now but it is also fair to say that pressure on
real personal income will, if sustained for a while, eventually pull down consumer spending.

Profits Indicators
Stronger sales and industrial output in Feb. brought my yr/yr measure of business sales up
to nearly 4%. The price / cost ratio was slightly in favor of cost, so there could still be
companies experiencing profit margin pressures. Feb. also saw some currency translation
penalties on a stronger US$. On balance, profits were a bit lower going into Mar., but it
must be said  recent higher sales and production numbers still hold out promise for
improved quarterly earnings yr/yr.

Thursday, March 14, 2013


Back in late Jan. '13, I mentioned that a downtrending CRB commodites composite was
rallying up to trend resistance. I did not forecast it would swing through to the upside and
it did not. To my surprise, that failure did not trigger a strong negative response, either.
Players seem interested in seeing how much widespread central bank QE programs might
spur faster global growth.

As discussed just below in the post on global economic supply and demand, the global
economy, following a steep "V" shaped economic recovery over 2009-10, has settled into
a slow growth mode, with production growth only a little better than half as fast as that
seen from 2003 through spring 2008, when the CRB more than doubled from 230 to a lofty,
bubbly 480. This period featured strong economic growth by China, the major global
buyer of commodities, and aggressive inventory carry policy, as China business binged on
FIFO accounting and large cash inventory profits. China joined the other major economic
powers during the 2010 - 2012 recovery period as it too experienced decelerating growth
and had to struggle against over-inventorying in a sluggish global trade environment.
Commodities prices, after a strong rebound from late 2008 toward mid-2011, have fallen
about 20%.

The CRB chart does show an index value support level of 290 which was violated only
briefly in mid-2012. $CRB Weekly  It could be important to note that my long term chart
dating back to 1932 has trend support right around the 290 level for much of this year.

I did happen to catch the 6/12-9/12 lift in the CRB nicely, and with broadscale QE in
place, I am expecting there could be a trade worthy +20% pop in the index during the year.

Wednesday, March 13, 2013

Just In The Nick Of Time

The very broad measure of US business sales turned down for the month of Jan. and the
level of total business inventories shot up. That is classic early bad news. Viewed yr/yr,
business sales were up 2.9% in current $ and about 1.3% real. The Fed damn near lost
its gamble by holding off on further QE for a good 15 months. Fortunately, retail sales
did pick up strongly in Feb. and accelerated back up to 4.7% yr/yr, partly reflecting
strong, but temporary income growth near the end of 2012. My forward looking economic
indicators do suggest a couple of months of stronger business ahead, particularly in view
of the sharp recent improvement in goods and services new order rates from the purchasing
managers' reports. However, my weekly indicators have been on the flat side since late
Jan., so we need to see more positive follow through here.

Now, the broad business sales report for Jan. was a negative indicator for earnings
momentum. We'll get a more current reading on this score from Feb. production and inflation
data out soon. Through Jan. there was low production growth yr/yr and a continuing
deceleration of pricing power.

It is perhaps noteworthy that the large pick-up in retail sales reported today was a "yawner"
for the stock market. Experienced traders know that retail sales is a volatile series, but it
also shows that a good number may have been needed to hold the market after the recent
strong run-up.

Sunday, March 10, 2013

Stock Market -- Daily & Weekly

Back on Feb. 25 and Mar.5 I discussed the decay of key indicators and how evidence was
accumulating that the market was approaching roll-over. I also stressed there could be a
positive whipsaw which would cream the shorts such as happened near the very end of 2012.
Well, we got the whipsaw up on light volume, which equals a clear short squeeze of traders
who, seeing the SPX was approaching prior record levels, figured they could catch a pull back
as the SPX encountered major long term resistance. A breakout last week above the prior
cyclical high of SPX 1531 on expanded volume would have been more comforting for the
bulls, but may still have left the issue of taking out the historic highs unresolved. So we are
left with an overbought market pushing to take out the old highs. SPX Daily

The weekly SPX shows the market in a strong but maturing uptrend from the darker days of
autumn, 2011. Once again, the SPX has opened a large premium of 8.6% over its 40 wk m/a
and is overbought on weekly RSI and MACD. SPX Weekly

Note that the 30 yr. T-bond yield is in the top panel of the chart. It has worked well as an
indicator of economic momentum both present and short term future. The labored but still
substantial 75 basis point move up in yield since last summer when the Fed suggested new QE
would be on the way continues to suggest a modest eventual re-acceleration in the pace of
economic recovery, an eventuality to be welcomed, but one which the stock market has already
mostly discounted for now.

The technicals tell me an intermediate term top is out ahead over the next week or two, but one
has to realize that with this large, still open ended QE program in place, players may elect to
chase the market up until the Fed gets concerned that rational exuberance is beginning to turn
giddy. Make no mistake here. There are guys in this market who plan to run with the Fed even if
they get edgy about the place of the market against the economy.

Wednesday, March 06, 2013

Global Economic Supply & Demand

The global economy remains in expansion mode. That's the good news. The bad news is that
the deceleration in the rate of growth in evidence since mid-2010 remains intact on a trend
basis. Wait, it gets worse. The global economy has downshifted to a sub-normal and modest
rate of growth. Instead of 4-5% yr/yr production growth which characterized previous ongoing
expansions, we have production growth that has slipped to 2.5 - 3.0%. The global operating
rate has eased and commodities pricing has followed suit as resources are hardly strained
at the low rate of growth. There was some pick-up in the pace of production growth near
the end of 2012, but it has not been enough to reverse the continuing downtrend in momentum.
Major sectors -- the US, Eurozone, China and Japan have all contributed to the slowdown
from the heady early recovery phase of 2010. Moreover, there has been additional pressure
on the commodities markets from financial players discouraged by the slow pace of growth.

The US has finally turned stronger recently, but Euroland continues to struggle while China
is getting a subpar bang for its buck as property price speculation has revived. Japan continues
to clear the decks for an attempt to end its lengthy and debilitating deflation.

After a powerful 23% surge in the first 18 odd months, world trade measured yr/yr has settled
down into a desultory 2-3% range. This has naturally set off fears of  "currency wars" as
countries adopt accomodative monetary policies to make exports more attractive. Such could
eventually happen if these policies of greater ease fail to stimulate local economies and, in
turn, trade demand. Right now, the data show that slow growth is holding on a global basis.

As I read it, the globe is far from overheating and running the risk of ushering in a cyclical
acceleration of inflation. But, matters can change here if we begin to see some pick-up in
the growth of major economies.

For more info, check out CPB Netherlands global trade and production monitor and the global
PMI summary from JP Morgan  / Markit.

Tuesday, March 05, 2013

Gold -- Slip Out The Back, Jack

Upset in offshore economies, a more financially settled US and the continuing and major
rise in US oil output has stabilized the US dollar and even allowed for a slight rise from
historically low levels. Equities players who have been hiding in gold have been gradually
migrating back to stocks. The rotation has accelerated in popularity recently and is getting
extended. Stocks vs Gold

Stock Market / Economy #3

My argument is recent weeks is that The economy is well due to show stronger economic
data lest the rally in the market turns into just an eventually hollow play on the Fed's QE 4
program. Well economic activity data from US purchasing managers in recent days shows
a firming up in both manufacturing and services including especially new orders. On a
combined, unweighted basis, my US new orders index jumped to 57.0 in Feb. This is a
healthy reading and the strongest since Feb. 2012. Now, reflecting the timing of QE
movements by the Fed, the economy has tended to be strongest in the 4th Q / 1st Q
sequence periods of this recovery. Q4 '12 was a dud in view of the extended tardiness of
Fed liquidity policy implementation, so it was important to see some positive flow through
here in early 2013 in response to QE 4. I also liked the snapback in new orders for
non-defense capital goods which was recently reported.

Now, it may well be the economy will lose some positive momentum as it moves into Q 2
'13, but it was important to see the reaction to QE 4 and to realize that Bernanke intends to
stay with it in the months just ahead.

Based on today's strong positive action, the SPX has started to edge away from seeing the
indicators roll over to signal a correction. But, it is an overbought and extended market
and must build energetically off today's lift to develop a clear positive whipsaw that will
shamelessly rout the shorts. SPX

Monday, March 04, 2013

China Note

As discussed back in Dec. '12 and in early Jan. I argued that a recovery in the Shanghai
stock market was well overdue based on an easy money policy and the fact that the
economy had started to expand again. Following a super fast run-up that kicked off in
early Dec. '12, the market went nearly vertical until mid-Feb when word started to get
around that the economy was slowing. Then, another body blow came today when the
cabinet leaders imposed new restrictions on real estate investments including higher
down payments and capital gains taxes on sales of a variety of properties. Real estate
equities tumbled and pulled the market down. Moreover, since the Chinese use the
equities market as a way to try and build capital to play in real estate, speculators were
forced to take some money off the table.

Measured yr/yr, China's money M-2 has increased by more than 20%. No "pushing on a
string" here. The economy has responded positively and the large block of excess liquidity
has been finding its way right into the property markets. The official data on the economy,
as suspect as it may be, show that the Peoples Bank has been providing liquidity well in
excess of the needs of the real economy for at least a decade. The authorities have been
playing "catch up" with year after year of new regs to contain wild cat real esate markets.
Since the PBOC has been a steady fount of excess liquidity, the authorities, who are pressed
to provide housing for a fast growing work force, have obviously allowed the central bank
vast leeway to fund real estate development whether silly (the "ghost cities") or sensible.

The Shanghai market was overbought and due for a correction which it is getting now.
The risks to the market concern whether the authorities are dead serious this time about
curtailing real estate speculation, and more conventionally, whether China's recent ramp
up in output was a little strong relative to sustainable export demand.

The real estate game as funded by excess liquidity allows the authorities to create a small
army of mandarin buddy tycoons as well as fund needed development. So, it may be that the
new chiefs and the PBOC may stay with aggressive monetary policy until it finally shows
up in the inflation rate.

In the meantime, it is early to tell whether China over-ramped production for the short run.

My view of the Shanghai remains that it can trade up to 2700 if the economy can maintain
real economic growth in the 7% per year range. Obviously, getting there may not be a smooth
ride. Shanghai Composite