About Me

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

Sunday, April 28, 2013

Stock Market -- Weekly

The "average stock" is up about 50% since the dark interim period at the height of the US
fiscal fight in 2011 and when the EZ was in heavy crisis mode. The market has blown past my
modestly uptrending weekly cyclical fundamental indicator and 12 month corporate profits,
which are up only about 10% over this interval. The market has even outdone the Fed,
which has let its balance sheet expand by 15% since the late summer of 2011. Also, over
the same period, credit quality spreads between investment grade issues have not narrowed
at all, an uncommon development in an advanced strong cyclical bull market.

The advance in stocks reflects an upward revaluation of the price earnings ratio to reflect
both continued US economic expansion and low inflation. But, this period has not been much
of a sweet spot at all in the economy given the scant progress of profits and but modest
growth which has also had a few shaky moments.

Normally a cyclical bull market turns increasingly risky as short term rates rise, inflation
accelerates and liquidity growth subsides. There is none of that in sight now. The risk
such as it is comes from a strongly advancing market contrasted with an underperforming
economy. The danger here is clear. Rising confidence which is overriding rather mediocre
economic / business performance can evaporate quickly if unpleasant realities intrude.
The shock absorber of strong fundamental performance is simply not there.

This week I look at the non-capitalization weighted Value Line Arithmetic and the broad NYSE
a/d line. First up is the $VLE

The VLE has made new all time highs in successive years and strongly outperformed the SPX
until mid - 2011. Since then relative performance has been more checquered but when the VLE
has lost its performance edge, the general market has tended to suffer. Note that the VLE
has started to lose relative strength again against the SPX (bottom panel) and that index RSI
and MACD have begun rolling over as well. Also, be advised that this index, as volatile as it
can be, can well take its sweeet time making an interim top and that should stronger economic
data come along , it can reverse positively against the SPX.

Next, let's move on to the NYSE advance / decline line. $NYAD The a/d line remains in a
strong uptrend and has been underscoring the strong nature of the cyclical advance. The a/d
line has recently successfully tested its important 6 wk. m/a. and the broad market is going
to keep on rising as long as the a/d line stays over the 6 wk m/a. Trouble usually does not
start until cumulative breadth gets tangled up with its near term m/a, and when it does, well
that can be a bell ringer. Note as well that the a/d line is running at a hefty premium to its 40
week m/a.

Friday, April 26, 2013

Russia Stocks

Starting back in early Dec. last year I gave the Russian market a little tout. There
was a good trade there, but on Jan. 28 I posted the market was clearly overbought.
However, to my surprise, the market has dogged it since then what with a difficult
early winter economy and an oil price that has basically been flat since year's end
2012. The market did a little better this week on a rebound in the oil price and it
is still oversold. I continue to mull over the prospects for the oil price, so if oil
bounces up some more, I may well miss a corresponding rally in the volatile Russian
stocks until I have more solid bearings around the petroleum market. RSX Etf

Thursday, April 25, 2013

China Stocks

There was a long overdue but handsome long side trade in China in the latter part of
2012, but it was cut short early this year. Longer term technicals suggested that the
Shanghai Compositie could be sliding out from underneath a longer run downtrend, but
this was undermined by disappointing economic performance.

China's industrial output did accelerate over the latter part of 2012, but as I mentioned
back on Mar. 8, there was some concern production had ramped up too rapidly relative
to both internal demand and trade. That appears to have been the case particularly as
regards global trade which has been expanding very slowly. As a consequence, the
longer run record of industrial output growth for China still shows a downtrend to be
in place, despite the recent 8.9% reading for production measured yr/yr. China Production

With output growth slowing, the recovering stock market failed to take out resistance and
correction ensued. I have been thinking that China stocks are very reasonably priced even
for 7% real GDP growth, and so I was surprised at the sharpness of the correction and
the very strong focus market players have put on the trend of economic momentum. The
volatility in a still comparatively rapidly expanding economy signals muted confidence
in China's potential going forward. For now, it would appear that players like myself
have to put extra weight on shorter term economic momentum, which is not an easy thing to
do when you are a half a world away such as myself.

I have linked to the S&P China etf -- GXC.These are major companies that allow foreign
investment. This index has been in a volatile uptrend since the autumn of 2011, but note
that formidable resistance has formed up at the 77.5 level. (The Shanghai is in the top panel.)
GXC Chart & Spdr China Fact Sheet

Wednesday, April 24, 2013

Gold Price -- The New Battlefield

The onset of a bear market has shifted the gold bull / bear battlefield downward from
the $1800 -1550 oz. range to a new range $1550 - 1350. This range could stay in place
for many months to come but may well not given gold's volatility and the speculative
interest in it from both bulls and bears. The metal is bouncing back from a classic
bout of climatic selling that brought it to a very deep short term oversold position. The
vertical nature of the rebound cautions that even if there is decent recovery rally, the
road back will likely include some sharp sell offs.

New resistance up at $1550 ranks as technically formidable. Support at the $1350 level
is far less secure as is secondary support down at $1250 oz.

The gold price has tanked off the 2011 high despite positive monetary indicators, so that
very powerful prop since gold began its run early in the prior decade has been knocked
out. My global industrial output growth indicator is moving up far too slowly to
support an ebullient gold market and as the chart link ahead will show, gold is still
trading at a premium to the oil price, since 13 barrels of oil per ounce of gold is probably
a good longstanding rule of thumb. Gold Chart

The gold monks who toil at the abbey will continue to busy themselves with devising new
bullish scenarios, but a period of dreary sub-par global growth and subdued inflation
pressure which we are living through now is not conducive to a strong market for precious
metals as there are no nasty edges to capture, just the blah outlook instead.

Saturday, April 20, 2013

Stock Market -- Weekly

My weekly cyclical fundamental indicator (WCFI) hit a cyclical peak in the latter part
of  Mar. It has been weaker since then, and so it may be noteworthy that the stock market
has adjusted back down to levels seen a month or so ago. The coincident indicator
portion  of the WCFI has been advancing over the past year, but its momentum has been
slight compared to the first three years of recovery. The forward looking component of
the WCFI rose sharply over the late Nov. '12 - late Mar. '13 interval but has been weak
and volatile since reflecting the unsettled readings on jobs loss claims. However, on a
more heavily smoothed basis, the leading economic indicator component of the WCFI
is also around a cyclical high. Even so, the choppy week-to-week action of the WCFI
reduces visibility for the stock market and has induced some edginess among players.

The mild pullback in the market since the Apr. 11 all time high does bring it back
more in line with the evidence of a slowing economy and also goes to somewhat
assuage my concern that the big QE program would drive stocks up willy nilly even if
the tempo of the economy had slowed.

The weekly chart shows that the cyclical bull market continues to move along. It does
remain extended vs. the 40 week m/a and sits about 7% above the trendline underscoring
advances since the early autumn of 2011. the indicators are deteriorating, and without
another positive whipsaw soon, there will be an intermediate sell signal forthcoming for
the market. SPX Weekly

Friday, April 19, 2013

Stock Market -- Daily Chart

Back on Mar. 10, I projected the market would make an interim top over the latter part
of the month. But, the SPX did not make a short term top until Apr. 11. Even so, the SPX
is right back down around where it was when I wrote the Mar. piece. So, it was not the
worst of calls.

The signature difficulty of the current upleg underway since late Nov. have been the
two positive whipsaws -- one near the end of 2012, and one in late Feb.-- that took the
SPX higher just as it looked as if a correction was about to set in. Those two whipsaws
have told experienced players not to be wise asses about the rally and to respect it.

Now, the SPX did survive a test of the rally uptrend line in place just the other day. But,
the SPX is once again setting up to roll over and because of the prior two wicked whipsaws
one is reluctant to say: "This is it; this is the start of an overdue round of profit taking."
Probably one should wait to see if enough weakness develops to lead the 10 day m/a
below the 25 day m/a before one cautions more vigorously. But, even then, we would
be looking at a market well down from the recent Apr. 11 all time high. No one is going
to clap for you if that happens.

The market has been moving higher really since early Jun. '12, and, it did become strongly
overbought against its 200 day m/a -- rarely a bullish omen. But, as I have feared, it
may be that players feel they have a specific immunity against a material pullback because
of the aggressive QE program by the Fed. As you know, fighting the Fed has not worked
that often in the US particularly when the Fed is being strongly accomodative.

If there is another whipsaw up in the cards, watch carefully to see if the SPX fails to
to take out the recent high of 1593. More ahead from me over the next few days....

Daily SPX

Thursday, April 18, 2013

US Dollar -- Please Not Again

Viewed against the major currencies the US dollar has been in a long term decline
ever since then Fed Chair. Volcker was suckered into a strong dollar policy over 1983-
86 following the deep global recession of the early 1980s. The US, Germany and Japan
were supposed to form a three engine complex to pull the globe out of recession, but
Japan and Germany both broke the deal and went their typical mercantilist way. Between
1980 - 85, the dollar nearly doubled in value and the US lost a tremendous amount of
competitive position which it never regained. Long Term US$ Dollar Chart

In the Clinton - Rubin era circa 1995, the US grandly encouraged another strong dollar
era, with the USD this time climbing 50%. This stupid move was also disastrous for the
US competitive position as it paved the way for aggressive mercantilism from China.

A strong dollar favored foreign investment and off-shoring, but it greatly undercut US
export potential, reduced the base of production and led to a downshift of earnings
potential for the US work force.

Over the past decade, the USD again went into sharp decline as players realized the depth
of the erosion in the US trade position and as new Fed chair Bernanke politely attacked
China mercantilism.

The dollar remains in a bear market, but has been range bound over the past five years as
trade fundamentals have improved and as interest in the currency as a safe haven has

By Its deeds, the US has made it clear that it is not interested in a strong dollar policy and
has no desire to repeat the disasters of the 1980s and 1990s.

Barring another dumb and furious rally in the dollar, the US should see its trade position
gradually improve in this decade on continued rather moderate consumer demand, a shift
in manufacturing to more specialized products, a rebound in hydrocarbon production and
growth potential and further development of new services and technologies. Whether that
is good enough to stabilize our currency remains to be seen. As well, the US will have to
make sure it remains far less tolerant of foreign mercantilism than it has in the past.

Market players, fearful of an unsettled eurozone and stresses that may develop in China
if it does indeed opt to better diversify its economy may continue to eye the dollar as a
prospective safe haven and will be keeping an eye on Japan as it tries to overcome a
punishing long term deflation. A little mild upward pressure on the dollar is no big deal,
but a powerful rally would be most unwelcome at this point as it would ultimately
negatively affect US employment. Thanks, we do not need that.

Wednesday, April 17, 2013

Oil Price

The elongated volatility of the oil price has provided some nice trades for me over
the past couple of years, but the last 4-5 months of action have proven tougher in that
I have had a couple of long side trades that needed to be cut short with just nickel /
dime profits.

The "bomb Iran" story, a staple of early-in-the-year efforts by pit traders to gin up the
oil price for seasonal support simply did not materialize this year. Netanyahu won a
squeaker in Israel, Obama pushed the critical time for an Iran nuke bomb out to 2014,
and the last round of talks of EU folks with Iran ended sans threats and recriminations.
Finally, the US has been occupied with NK and the battery of threats from "Kim Young

So, oil has wound up behaving contra-seasonally, with oil losing positive traction as the
Iran rumor mill fizzled after January and trader concerns shifted to prospects for slower
demand growth from China and a modest safe haven rise in the dollar. Daily Oil

I do not think China's economic performance so far this year has been disappointing as
many apparently have, and the recent strength in the US$ has been nothing to write home
about. Even so, the sharp drop in the price of oil this month calls into question my view
that oil should trade between $85 - $115 bl. this year, and it may be the wiser course
to step back from being as confident as I have been to take a deeper look at oil price
behavior especially since a price below $90 does undercut the mild cyclical uptrend in
place since late 2008. Besides, since oil is just mildly oversold now, patience may not
be a bad thing. Three Yr. Oil Price

Tuesday, April 16, 2013

Corporate Profits

On a yr/yr basis, my business sales models have improved in recent months from the
low 2-3% range seen around the turn of the year up to the 4-5% through March. The
growth is a little uneven but is volume driven. Pricing power remains muted and my
price / cost model has slipped, particularly for the more basic materials and
manufacturing companies. The recent slippage in business hiring may help some
companies offset reduced pricing power.

From a macro perspective, profits were again subdued in the recent quarter although
the trend month-to -month improved significantly so that March may have bailed out
more than a few performance comparisons for businesses. My expectation for full year
profits is for moderate progress based on an eventual move up in top line growth to 6%
or a little better. To get there, we may need to see a stronger inflation and pricing power.

Revision of production series data by the Fed shows there is a little more slack in the
system than was indicated last year. The new Fed data also show a little faster growth
of productive capacity. This suggests that if the economy does regain more growth
momentum, the eventual development of cost inefficiences will be milder.

Economic / Financial Liquidity Factors

US Economy
Measured yr/yr, my coincident economic indicator set was up just 1%, held down by
further deceleration of real retail sales, weak real take home pay and yr/yr growth of
civilian employment by just 0.9%. Industrial output was the one bright spot and that
was powered by higher electricity generation needed for cold weather. With the further
slowing of retail sales, industrial production could be curtailed in the future if inventory
adjustmetns are needed. Underlying economic purchasing power has declined on slow
employment growth and weak earnings. Consumers are going to need to borrow more this
year and / or drain savings to maintain modest retail sales growth. Home construction is
a bright spot but remains low. The much larger export sales sector has improved modestly
recently, but is not much higher than a year ago. Overall, the economy is sluggish and lacks

Financial System Liquidity
The Fed continues with its major QE program, and that's a good thing since the broader
measure of financial liquidity or funding has actually declined over the past two months
as the banks have adequate deposits and continue to prefer building capital and liquidity.
Total interest earning assets for the banking system are up a mere 4.4% yr/yr and total
loan demand is up even less at 4.1%. The banking system is drifting back to join
corporate business as a drag factor on real economic progress.

Friday, April 12, 2013

Gold Bear

With today's big sell off, the gold price slipped into bear territory as it is now about 23%
below the all-time high set in Half  2 '11. The sell down took gold below the previously
firm support level in the $1550 - 1555 oz. area and also sank it below important trend
line support of $1525. By my estimate, that takes the safehaven premium down to a still
substantial 29%. Weekly Gold

The gold decline took out secondary support at the $1500 level, leaving the next interesting
support measure down around $1350 oz. Since I never had a firm fundamental handle on why
it went up so high in the first place, I defer to others to explain the recent action with precision.

The gold bugz did get the wind knocked out of them today. There was reason to be cautious
after Goldman Sachs recommended clients short gold earlier in the week, but the severity of
the hit had to be a shock. So now the bugz bull strategy establishment will have to re-tool and
try and wrest the momentum away from the sellers. As the indicators for the GLD ETF show,
the market is strongly oversold in a clearly negative trend. GLD

From a strategy point of view, remember the rule about not trying to catch "falling knives"
and also the rule about working hard to avoid value traps -- that which suddenly looks cheap
but is not. Finally, keep in mind that in a bear market one should think first about selling the
rallies instead of buying the dips and declines. Good luck!

Thursday, April 11, 2013

Stock Market Factors

The "Factors" update offers some quick perspective on the market in terms of risk /
return. Stock Market Factors

SPX Panel
The Cyclical bull rolls along. The strong price action this week re-introduces a mild
overbought on short term price momentum and brings the SPX to a major overbought
when seen against its 200 day m/a. The % premium here is presently 10.2. Now the
premium can go higher than 10%, but this has happened rarely and the odds the market
will perform strongly after the SPX does clear the 10% level are only about 25% within
a rough six month time frame. So, it is not a bad time to take stock of your objectives
and, if you are a more balanced trader, keep an eye out for shorting opportunities.

VIX Panel
As the bull market has advanced since the autumn of 2011, volatility expectation has sunk
and investor confidence has risen. The VIX is currently at 12.2. A very low VIX of 10.0
would indicate that market players are not just confident, but are smugly so as back in 2007
before the trouble started. So, the bulls do not yet think they have it nailed but they have it
going in that direction. The VIX can stay low for goodly periods so the trick remains to
look for the sudden upturns that may well warn.

Relative Strength Of The Cyclicals Panel
When the cyclicals outperform, investors are looking for improved profits as the cyclical
companies have the earnings leverage in an economic expansion. The cyclicals relative
strength index has lost its uptrend recently and has been flattish since the end of Jan. Players
have been adding more defensive holdings while staying in the market with the Fed's QE
program operating as the tailwind. I would prefer to see the cyclicals adding to relative

SPX Vs. Long Treasury
The relative strength of the SPX has edged above resistance, but you can see that some
players are sticking with Treasuries on the basis of an economy that has recently slowed.
This week has brought some resurgence back to stocks, but a failure of stocks to continue to
to outperform the very low yielding Treasury bond would not be a good sign.

Tuesday, April 09, 2013

Stock Market -- Daily Chart

The cyclical bull market remains in force. The sharp, shorter run uptrend from the Nov.
'12 interim low remains in force, too. The momentum measures of overbought have been
cooling with the very recent flattening of the market around record levels. The minor
price breaks that have been seen since the end of 2012 have turned out to be dips which
quickly found bids. The indicators I have been watching have been faltering but have yet
to yield the breaks that would suggest trouble is finally en route. I have been figuring the
market would already be in correction by now, but rather than say "Oh, it's just around the
corner" I am more prone to inquire about the missed call.

My weekly cyclical fundamental indicator has turned more volatile recently, but is only at
a level consistent with readings from late-Jan. / early Feb. Players have been excusing
the slowing of economic progress, perhaps to give the economy the benefit of the doubt in
view of the continuing strength of the Fed's QE program. Tricky business.

SPX Daily

Saturday, April 06, 2013

Gold Price -- More Comment & Some Conjecture

Using a small amount of trading capital, I have been shorting the dips in the gold price
very profitably since Oct. '10. It has been my contention that the Gold price confirmed a
price bubble back in 2011 when it first topped $1,500oz. In my view, the bubble run
started in late 2005 when gold rose above the $500 level. Since you have to allow a
3-4X move up in a price bubble, I put gold up at a top range of $1,500 - 2000, although
I did not hold out a lot of hope for $2,000.

Now is not a good time to short gold since it is oversold, and as discussed in the post
immediately below, the bugz have been successful at staunching declines around well
defined support at $1550oz. I have no interest in going long gold as I will find profitable
and safer trades elsewhere, but if the metal fails to rally further ahead, I would have a
significant interest in shorting it again should it break the $1525 level decisively.

Gold has gone up on a parabolic with the $1900 + level seen in 2011 representing a near
perfect ending to the run. History shows that it can be very difficult to fully resuscitate a
completed parabolic that has moved into correction mode. Here is the longer term chart
for gold. Monthly Gold Price

The parabolic move in gold is longer and less vertical than the 1976-80 parabolic which
came shortly after the gold price was deregulated in the US. Note the initial big rally in
the metal that came later in 1980 after the parabolic up was completed. Note as well the
dramatic fail that took place when the bugz could not ring in a new high. Looking far right
on the chart, you'll see a similar failed rally up to $1800oz. last year. The point here is that
continued rally fails above the current rough $1550 support level could lead to a big
correction as the safehaven premium in gold contracts. Now this is all informed and not
idle conjecture, but it is conjecture nonetheless.

For now, the bugz have to rally gold further off the recent $1550 area of support and hope
enough scary things happen economically and financially to take out formidable resistance at

Thursday, April 04, 2013

Gold Price

In the 1/28/13 post on the gold price I suggested that the mellow metal could suffer in the
current year. The gist was that continued global economic expansion this year without
a heavy financial crisis environment could lead to a further reduction in gold's crisis or
safehaven premium even though the cyclical and monetary indicators in support of the gold
price could well be positive. Jan. 28 Gold Post

As it turns out, there may have been something to this idea. The bullion price has dropped
about 7% over this period and the current short run read for the global economy is for modest
real output growth and with inflation mild as well. Cyprus gave gold a short term bump, but
the metal  has sold down sharply this week and for now, the safehaven premium has fallen to
about 34% (Check 1/28 post for more).

The gold price now stands down around a critical support level at 1550. It has moved into
oversold territory and is trading right where the gold bugz have been able to get some
positive reversal leverage, although each bounce in price since late summer, 2011 has been
progressively milder. So, price resistance levels have been falling as well, and the gold
price without a fast rescue could well slip into bear territory. Gold Price

Let's see if the bugz come in again on a rescue mission. If I was a gold bull I probably would
not get too upset unless the gold price drops below my longer term trend support line now at
1525. To be charitable, support below that level is down around 1350, and that has yet to
withstand a challenege.

Wednesday, April 03, 2013

Eurozone Status Check

Measured yr/yr, EZ industrial output has been mildly underwater since a new downturn
accelerated in late 2011. This, coming on top of an incomplete recovery from the 2008 -
2009 deep recession, has resulted in a zone-wide rise of unemployment to the 12% level.
The more recent economic downturn reflects the intense liquidity squeeze imposed by the
ECB in the wake of a deceleration of the broad deposit base and credit growth as the bank
pursued inflation in 2010 which, realistically, had nowhere to go but down, anyway.

The liquidity situation bottomed in the middle of 2011 and has been improving reasonably
steadily since. If left on trend, there should be monetary and broader deposit bases that
are sufficient to underwrite noticeable EZ economic improvement by the latter part of 2013.
There is a risk to this assessment and that is that a liquidity trap is now being observed
reflecting hefty austerity programs in the more troubled countries coupled with regulatory
changes in banking which are forcing banks to allow loans to run off to reduce financial
leverage and build liquidity. Over the past few years, EZ credit outstanding has fallen by
$300 bil. easily (This data does not include deposit and credit info. post the ridiculous
and vengeful official actions brought against Cyprus, actions that could reduce EZ deposits
and shift more of the loan book beyond the EZ.) A better economy should follow the much
stronger liquidity environment, but the aforementioned impediments could stretch out the

The euro area stock market remains nearly 35% below its 2008 peak, and has been in a
broad trading range since mid -2010 when the Greek crisis and the monetary liquidity
squeeze both took hold. IEV Euro 350 Longer Term 

The second IEV chart in the deck compares the IEV with the euro, the German ETF EWG
and the SPX. The IEV has entered a short term downtrend and both it and the EWG are at
risk of violating their respective uptrend courses from mid-2012. The euro has already
given way. The classical cyclical timetable, which interests me, would suggest better
euro area stock performance come this autumn. IEV 2010 -2013

US interest in the EZ is mixed. Some players think they see substantial longer term value
in EZ stocks given the very substantial discount to the 2008 highs, while many other players
see too many impediments to growth. The Cyprus affair is regarded as rank official
stupidity by most senior and successful investment players, myself included.

Monday, April 01, 2013

Economics Quickie

The ISM purchasing managers' manufacturing activity composite for Q1 2013 was positive and
came in just slightly under 53.0. However, if the current large QE program underway is to be
considered worth its salt the ISM mfg. reading needs to move up to the 56 - 57 area for a
good several months. ISM Mfg.