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, June 27, 2013

Gold Bear

The bear market in gold has ripped along this week. The metal is down 38% from the
all time high of $1900 + set in 2011, and with the future just below the $1200 oz. mark,
the price has fallen below the all-in cost of production for the more marginal producers.
The production cost of gold has accelerated over the past decade as the sweet and easy
veins have been played out and more costly and environmentally destructive methods
have become more prevalent. With the gold price now down within hailing distance of
my $1150 oz. cost assumption, I am retiring my shorting activity on fundamental grounds
an am adding gold to my list of assets in which I might take a long position from time to

The last trend support line off the 2001 base around the $255 level extends up to around
the $1100 oz. area now. There lies the last support refuge for the gold monks who maintain
the market remains in a bull mode. As oversold as this market already is, the current
free fall chart pattern has to be causing some uncomfortable gulping over at the golden
cathedral where the monks ply their trade of spinning gold bull market stories. But, with
gold down near its production cost, that's now water under the bridge for me.

Gold Price -- Long Term Log Scale Chart

Fellow Travelers

Here is the QE buddies tandem trade: SPY, EWJ (i Shares Japan ETF). Both were up

Tuesday, June 25, 2013

China Dragon Has The Flu

The China payments and deposits system experienced a sudden liquidity freeze up earlier
in the month. First the PBOC slapped the wrists of the bankers. The squeeze intensified.
But now the PBOC, in its role of central bank lender of last resort, has agreed to provide
liquidity and stability to the short term interbank market. From personal experience as an
old banker, I can tell you that disruptions in the interbank market (daylight overdrafts)
means one or more major lenders is having liquidity problems. The PBOC vigorously
ramped up liquidity over the past two years to bring China out of a sharp economic
slowdown. There was a good, but short lived bump in growth in the latter part of 2012,
but with a slow global economy, exports fizzled. Moreover, even the Gov. has owned
up to inflating export data to Hong Kong. Thus, the surge of lending in a ramp up
to growth that flopped found borrowers with lower than projected volumes, weaker
pricing and a significant slump in debt service capability on a cash flow basis. It also
looks like real estate lending has continued to be aggressive, and since some players still
seem to like stockpiling properties rather than selling or renting them, parts of this
huge portfolio are not generating cash to service the debt.

If China's real growth potential has dropped to a range 7.0 - 7.5%, the PBOC simply
cannot provide liquidity at a rapid 20% annual growth rate. China Money Supply M2
Otherwise, real estate assets may bubble up further and the economy's debt service
capability will continue to shrink. So the reform focus should not be on China's banks
or its large and growing shadow banking system but on CP's top finance people and the
PBOC itself. As it has in the past, China can buy up underperforming loans and file
them away in a semi - official portfolio, but it cannot get past this issue without
making the PBOC and its handlers more responsible.

The China stock market started off the year beautifully, moving up with indications
of better growth. But the growth was deliberately overstated, and the early targets
were blown. Then came the liquidity freeze up, all nicely mirrored in the
Shanghai Composite.

The stock market is deeply oversold and can bounce further. The Shanghai is fairly
valued up around the 2400 level based on growth of 7% or a little better, but Xi and
Li have a long way to go to repair China's tarnished credibility.

Sunday, June 23, 2013

Stock Market - Weekly

The weekly SPX chart has rolled over and I now have an intermediate term sell signal. It
took a fair while for this signal to develop because the Apr. - May blow off in the SPX
brought the market to a hyperextended position relative to the trend channel off the Nov.
'12 interim low. SPX Weekly Chart

My weekly cyclical fundamental indicator also broke down this week, signaling modest
further deterioration in the earnings outlook.

The core fundamentals, anchored by strong growth in monetary liquidity, remain
positive on balance and no sell signal is likely to be generated here until the Fed actually
turns more fully restrictive by curtailing liquidity growth and by raising short term
interest rates. No sell signal has popped up since the cyclical bull market began, but
the indicator set  has not shielded us from substantial price corrections owing to
the Fed temporarily stopping the QE process.

I have been cautious on the market for a few months because it was so strongly overbought
and because the p/e ratio was too high relative to the earnings outlook in my view. The big
QE program has been the major positive for market players this year with only a small
minority expressing concern and some angst over how sluggish the economy is. The long
term relationship between strongly accommodative monetary policy and solid progress in
both the economy and business profits is well established in the US and the idea that the
economy could flounder with type of monetary environment we now see borders on
heresy. Nonetheless, with the key economic indicators just getting by, the difficulty
continues on.

Friday, June 21, 2013

SPX -- Daily Chart

Well overdue, the SPX has moved into correction mode. It has violated the uptrend line
running from Nov. '12, and the10 and 25 day moving averages have rolled over. With
the nasty action on both Wed. and Thurs of the past trading week, the SPX has moved
down into a modestly oversold position. Lovely symmetry suggests the SPX would
wipe out the blow off that commenced in late Apr. and roll down to test that final
break out at 1550 or thereabouts. SPX Daily Chart

From a non-technical point of view, there should be a thorough parsing of all that Bennie
said with a bull camp rising to meet the bearish reaction. My take is that Bernanke is
getting strong pushback on QE from other members of the Board and that he has tried
to quell the exuberance seen in both stock and home prices by reminding folks that QE
will end down the road. He seems to be running the gun lap of his tenure as Fed chieftain
and is trying to keep QE going until he leaves while at the same time attempting to cool
QE sensitive asset prices. I suspect that he is also becoming a hot potato for Obama via
back channels by Wall Street especially since the Fed is running the show flat out and not
them. But Bernanke knows his history lessons, too. Ending QE too early over the 1936 -37
period put the economy into a mean recession and led to a vicious 44% downer bear
market in 1937, all of which wrecked nascent confidence that built up post 1934. While he
is there, I suspect he wants to make damn sure to his satisfaction that the economy can
progress well on its own without all the monetary ease it has been getting. Looking
elsewhere in official Washington I am reminded of the title of a Ross Thomas novel:
"All The Fools In Town Are Us."

US Economic Indicators

State Of Play
I watch the yr/yr % change in a combine of four key measures -- real retail sales, production,
civilian employment and real take home pay. The economy is normally progressing at
a good rate when the yr/yr % for this quartet is 3.0%. Latest, the US ran at 1.1% for the year
through May. From an economic perspective, that is the equivalent of going 25 mph in a
60 mph zone. Economic growth momentum is at its lowest point since late 2009 when the
economy was first coming out of deep recession. Only real retail sales has shown some zip
this year, helped along by rising consumer credit and a falling savings rate. Normally,
large QE and a 0% short rate policy by the Fed would provide powerful positive impetus
to the economy. Not so this year as substantial fiscal drag and conservative, cautious
business and banking sectors retard progress. Forward looking indicators do not signal
growth acceleration ahead.

Corporate Profits Indicators
the macro measures for top line or sales growth are running about 2 - 3% yr/yr through
May. Profit margin indicators do not make for happy reading, either.  The business operating
rate is in decline as real output growth trails capacity growth by 0.4%. The selling price vs.
cost ratio is at 0.6% in favor of higher cost. And, as a general rule, it is not easy for
businesses to expand operating profit margin when annual sales growth momentum falls
below 5%. Companies can offset the margin pressures to a certain extent by increasing asset
turn via tight inventory management and by reducing employee compensation and benefits by
various measures. Then of course, there is the gambit of increasing net per share profits
by diverting cash flow and / or leveraging up to buy in shares.

Cycle Pressure Gauges And the Capital Markets
I use upwards of five distinct gauges to measure cyclical pressures in the economy. The
bottom line here is that the economy is running slow and cool and is quite a ways away from
even approaching the amber or overheating zone. The indicators in summary have not
supported an increase in Treasury bond yields or stock price / earnings ratios this year.
Rather, investors have been heavily caught up with the QE program by the Fed in ways
that are transcendent of the realities on the ground. Let's leave it said in this polite manner.

Thursday, June 20, 2013

Gold Price

Well, cousin Bennie dropped his Taper Bomb yesterday and "risk off" returned with a
vengeance. This has been an excruciating couple of days for gold aficionados. The
market had been holding above shorter term support of $1350 oz. and there was a minor
rotation out of a correcting stock market back into gold which summoned some bullish
commentary even from non-bugs. But the Taper Bomb caught the gold guys too since
it suggested that not only were there strings attached to the QE program but that the Fed
could gradually reduce it to zero over the first half of next year. other fundamental
factors have not helped. The oil price was knocked down today and my cyclical gold price
indicator has remained flat on low global production growth and overcapacity. As well,
despite the big QE programs in the US and Japan, the CPI has continued in deceleration
mode since Sep. '11.

I closed out my shorts a while back down near $1350 and have not returned because the
gold price is heavily oversold near term at a better than 20% discount to the 200 day m/a.
Even so, today's sharp break of support indicates that the apparent second leg down of
the gold bear market could have further to run before the market stabilizes and sets up
for a more tradeworthy bounce. Bugs who want to add to positions might want to wait
for the market to put in a base which it tests rather than go in after a spike low since these
bounces have not held while the rallies that were generated have grown progressively

Daily $GOLD Chart

Tuesday, June 18, 2013

Monetary Policy & Financial System Liquidity

Short Term Interest Rates
My indicator for the direction of short rates is currently 50% in favor of a cut to the
Fed Funds rate %. Since the Fed is running an effective ZIRP, there is certainly no
further policy action needed on this score.

Quantitative Easing and System Liquidity
My broad measure of financial system liquidity is running 5.9% yr/yr. This is the bare
minimum needed to grease the wheels of commerce. Broad liquidity growth has been
slowing recently after a nice round of acceleration. The loan book of the banking system
has been leveling off on flatlining production, factory orders and exports. Banks have
seen little need to expand the deposit base and have even backed away from increasing
balance sheet liquidity from already high levels. The large real estate portfolio of the
banking system remains basically flat with new initiations only offsetting charge offs.
The banks are also keeping a tight rein on personal credit and are losing market share to
other financial organizations. Total US business sales are up about 2% yr/yr, so we know
that internal cash flow growth is rather mild.

The weekly leading economic indicator series I follow were strongly positive in the
closing months of last year but have been more on the flat side point-to-point from Jan.
through early Jun. of 2013.

Low economic growth, very mild liquidity gains and a flattening of the banking system's
loan book are a recipe for extending the current QE program and not one for curtailing
it. In fact, even with a generous liquidity tail wind from the Fed, the US economy is
struggling to progress.

A final note. I have read many pieces about the QE programs which argue they are
inflationary, or are unmanageably large or that QE will produce genuine asset bubbles,
especially when taken in conjunction with the Fed's ZIRP. Little or no attention has been
paid to the  $3 tril. + in credit generated liquidity which was swept away in the Great
Recession and which QE has had to make up for to keep the economy afloat. Since its
prior 2008 peak, the broad base of financial liquidity has increased at only a 2%  annual
rate. QE has kept the deflation wolf away from the door.

Sunday, June 16, 2013

Stock Market -- Weekly

My weekly cyclical fundamental indicator (WCFI) has been sneaking down since May
10, and is about to reverse a mild uptrend underway since the onset of 2013. The
indicator has been more volatile than usual week-to-week reflecting the ups and downs
of weekly unemployment insurance claims. The weekly economic coincident indicator I
include has also let down a bit. The SPX has been drifting lower since 5/17 as well,
but it is possible that the weaker market may be more of a reflection of trader angst over
whether the Fed plans to curb the growth of the current large QE program (We'll hear later
this week from Bernanke about this issue). The market has been running well ahead of the
WCFI this year even though the WCFI is dominated by forward looking elements.

Coincidentally, Fed Bank Credit has also leveled off over the past month following a
vigorous rise. Hard to say how closely guys are watching this as well, given that the Fed
would very likely announce a program change ahead of time. But, nerves are nerves.

The trend up from Nov. '12 is still intact, but the weekly SPX chart will need to stay
comfortably above 1600 in the weeks ahead to keep the trend intact. Recent market
weakness is bringing the SPX down from a major intermediate term overbought, and the
key indicators are starting to roll over on the negative momentum. SPX Weekly Chart
My 40 week price oscillator with moving average is also showing toppiness much like
the MACD in the chart.

Thursday, June 13, 2013

Notes on Nikkei And SPX

Back on 5/23 I posted about the freakish upward move in the Nikkei since last autumn,
a surge that included noticeable price gaps as it climbed. I cautioned that the old
technical adage that all price gaps are eventually closed might well apply in this case.
The recent dramatic price correction has worked to close out the last upside gap seen
in early April. It is likely that more than a few veteran traders are set to close out
their short positions now, especially since the NIK has put in short term support at
12450. $NIKK Daily Chart

The market failed to take out long term trend resistance on the recent surge to 16000,
but it is difficult to tell how significant a development that really is since the market
was so grotesquely overbought that almost any excuse would have sufficed to book the
gains. On the dark side, note too that support levels clear down to 10000 are hardly well
established. Moreover, the NIK still sits at a big premium to its 200 day m/a. Even so,
the market is getting oversold in the short run so we could well  be headed for a period
when some of the rowdiness settles out.

Yesterday I posted a nearly wimpy analysis of how the SPX was fast approaching a
confirmation that a more full bodied correction might be underway. Having watched this
overbought market whipsaw in recent months, I thought it wise to warn more damage
needed to occur to make a more solid case, and today's pop to the upside is just an
instance of how this run has been so tricky. Check below for more and the SPX chart

Wednesday, June 12, 2013

Stock Market -- Confirmed Downtrend Near

The market has been heading down from an extended all time high of 1669 SPX. What's
left to confirm is a tipping down of the 25 day m/a coupled with a take out of the recent
closing lows of 1609 and 1612 SPX. SPX Daily Chart  Barring a fast and strong positive
turn, the technicals say lower. My argument since April is that when the SPX tops its
200 day m/a by 10% or more, it is very tough to make money on the long side over the
next six months. With the blow off move in May, the SPX went to a 12% + premium to
its 200 m/a, leaving the odds about 75% there would be unhappiness for the bulls ahead.
The extended time MACD on the chart also shows the decline is following a very sizable
overbought as well.

Why has the market been heading lower? The run up off the April closing low had mucho
powerful momentum which took the SPX up to an extended position and to a p/e ratio
that was the highest in nearly three years. When the momentum eased off, guys simply
decided to take some money off the table particularly after that last 100 point fillip in the
SPX on light volume.

The possibility of a significant correction is an intriguing one, not because of the fast
forming technical set up but more so in view of a continuing Fed ZIRP policy plus the
industrial strength QE program in place. Could all the taper talk prove one of the
bigger and more successful Fed head fakes or, perish the thought, are folks beginning to
realize they have been paying up for a decidedly mopey economy.

But before all of this, let's see if the market breaks short term price support and major
trend support over the next several odd trading days.

Monday, June 10, 2013

Long Treasury Yield %

Here is a link to the 30 yr. Treasury Yield %: $TYX Daily 3 Year Chart

The yield on the long guy has been on the rise since late Jul. 2012 as the market began
to react to the Fed's commitment to a new and larger QE program. The 30 yr. yield has
been volatile and its uptrend has been comparatively mild, but it continues to forecast
stronger economic growth and an eventual resumption of upward cyclical pressure on
the inflation rate. Lately though it has diverged from my cyclical Treas. bond yield
indicator -- Industrial output + industrial commodities prices. You can see the positive
divergence of the Treas. from sensitive materials prices by comparing it to the recent
action of the $GYX (top panel), an industial metals price composite. The $GYX is not
on board yet, obviously, but sometimes the Treas. % will move faster than measures of
cyclically sensitive prices.

The yield on the long guy is rising to quite a premium to its 200 day m/a. It is in effect
overbought on the expectation of better economic growth ahead. The Treas. % can, of
course, get even more overbought short term but you should note how the market does
not tend to tolerate wide divergences from the 200 day m/a for too very long before there
is a snap back.

Corporate bonds continued to rally into 2013 even after the Treas. reversed course last
year with the price of the bond moving into a downtrend after mid - 2012. It is interesting
to note that recently, corporate yields (including junk %s) have also began to rise in
tandem with Treasuries. The rotation within the bond market in favor of courting higher
yields has run out of steam.

Friday, June 07, 2013

Stock Market -- Weekly

The weekly SPX is still trend positive off the Nov. '12 interim low, but there has been
enough damage done to note that the weekly SPX close needs to stay above 1600 going
forward. The market remains importantly overbought on MACD and against the 40 wk
m/a. The indicators which accompany the chart are shakily positve. SPX Weekly

The weekly breadth reading of the NYSE has deteriorated recently, and, with the
cumulative adv / dec line having fallen below its 6 wk moving average, a warning shot
has been fired across the bulls' bow. NYSE A / D Line

So far, the latest and very large QE program has not yet proven strong enough to buck the
economic headwinds the US faces. Financial liquidity is growing faster than the economy
and the excess liquidity has been flowing into equities and residential real estate prices.
Stocks have been benefiting from a very high threshold of investor tolerance regarding
continued indications for a very slow economy as players hold their noses and await
better data.

Federal Reserve Bank Credit has surged enough over the past six months to not only
inflame the hawks on the Board but staff economists as well. The surges in the stock
market and in housing prices are encouraging QE push back. Stocks recently turned
effervescent and rising mortgage rates and home prices are working to reduce housing
affordability. Fed members are talking about tapering or shrinking the growth of the
program not just for economic academic reasons but to try and trim enthusiasm especially
for stocks. If the Fed had brassier balls They would challenge Obama and the Congress
overtly and more unreservedly to put some sizable stimulus on the table to push up
economic demand and employment.

My weekly leading economic indicators are quite volatile but on balance suggest the
economy can move ever so wanly forward. My price / cost ratio for business suggests
further pressure on profit margins without the intervention of more cost cutting and a
continued high level of stock buybacks to hype net per share (and top executive bonuses).

Tuesday, June 04, 2013

Stock Market Factors

Here is an update on the "quickie" guide to the stock Market. Stock Market Factors

SPX Panel
I did not expect the fast 100 point run up in the SPX recently. This move took the SPX
up to a 12% premium to the 200 day m/a in May. The odds for that kind of strong move
are about 1 in 4. The sell off since the 5/21 all time high still leaves the SPX overbought
against the 200 day m/a, but has eliminated the short term momentum overbought.

The VIX Panel
The downtrend in the VIX ratio since the late summer - early autumn of 2011 may have
ended, although it is early to tell for sure. The very mild recent bump in the VIX signals
only a modest loss of bullish confidence, but a continued move up and over the 20 level
would signal something more serious may be at hand.

The VIX will occasionally rise along with the market when players are extending long
positions but are starting to worry that they are witnessing a strongly speculative move.
We have not seen that so far as the market's p/e ratio has not lifted far enough to trigger
that sort of anxiety.

The Relative Strength Of Cyclicals
Since the start of 2012, the cyclicals have been unable to top the .75 level in relative
strength as the loss of earnings growth momentum and extended flattening of SPX net
per share have substantially tempered interest in the group. The panel also shows that
the uptrend in the RS of cyclicals that started in Aug. 2012 has run out of gas recently as
investors and traders again begin to reassess the outlook for profits. This development
is hardly fatal, but more care is required when a less aggressive, more defensive rotation
may be in store.

Stocks Vs. The Long Treasury
The broad market has substantially outperformed the Long - T since mid - 2012 when the
Fed re-introduced QE, first as concept, then as program. The fundamentals in favor of
higher Treasury yields (and lower prices) have eroded over the past two months as US
industrial production and sensitive materials have flattened out. Even so, evident rotation
from bonds to stocks has continued. It is a little odd that bond players have been less
sensitive than normal to signs of sluggish industry output.