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 !!!

Monday, October 28, 2013

Stock Market -- Daily Chart

As expected, the post debt ceiling fracas rally did take the SPX up to a new all time high.
The rally has brought the market into a moderately overbought position on a short term
basis and once again has the SPX up near a substantial overbought position with a six month
perspective in view. SPX Daily

Investor psychology is very positive now. Players know the market is entering a seasonally
strong period and few expect the Fed to begin a regimen of reducing the large QE program
just ahead. The rally leading up to the FOMC meeting anticipates no dicey equivocation
by the FOMC and no bluffing as well. The Fed might like to introduce some sort of temporal 
note regarding the tapering of the program in view of how the market has called its bluff,
but the earlier comments about rolling down the program hurt the bond and housing markets.
Since the Fed does not like to be boxed in like this, It will be looking for avenues to gain more
leeway before long.

Sunday, October 27, 2013

Liquidity Cycle-- Looking Ahead #3 The Stock Market

The broad measure of financial liquidity from the private sector is growing about 6%. This
is faster than the real economy is growing, so there would be some modest excess liquidity
available to dabble in stocks and other select markets. But, when you add the current large QE program from the Fed, you get a turbocharged 11% growth in liquidity. With substantial fiscal
drag in place from austerity measures, and still suppressed confidence among households,
businesses and the banks in place, the economy has been very, very slow to respond positively.
In fact, SP 500 net per share for the 12 mos. through 9/30 looks to be only about $102. That
puts the "500" up at a p/e of 17.3x and above the longer run norm. The powerful run -up in
stocks since mid - 2012 reflects two factors: 1) The economy and profits have been advancing
at a snail's pace, but this performance and the expectation for eventual improvement have been
good enough to sustain positive investor confidence ("Prosperity is just around the corner").
2) The 1 $trillion annual rate of QE from the Fed has been overwhelming enough to drive
both the optimistic and the cynical into stocks.

The year ahead will probably be the last one where investors believe in the stimulative power
of QE unless the economy responds in a more forcefully positive manner. It would be another
grievous mistake for the President and the Congress to add more austerity to fiscal policy
and it could also be fatal if business again suppresses take home pay to push up profit margins.
We can only sit back and see.

The issue of the status of the QE program is now a very big deal since there is no clear evidence
the economy will avoid lapsing into a deflationary recession without it. With such a momentous
and challenging year ahead, a p/e ratio of 10x earns. and a dividend yield of 3.6% would seem
more appropriate, but that would be to fail to grasp the current power of investor confidence.

I must confess now that I am much more interested in seeing the economy perform much
better than I am in how the stock market does. The market has performed admirably since
early 2009, but the economy has not. We are approaching a point where we desperately need
a better America. The market will take care of itself if we get one.

SPX Daily Chart

Friday, October 25, 2013

Oil Price

As anticipated in the 9/11 post on the oil price, a period of normal seasonal weakness is
underway. Without a surprise disruption, oil can remain in a seasonal downtrend right on
through the end of Feb. 2014 that could, under normal seasonal conditions, take the price
down to the $85 - 90 bl. area. Despite sluggish global economic demand over the past two
years, oil had a very strong surge over the 15 month period starting in mid -2012 and
recently ended with crude topping out over $112 bl. I think the main reason was the very
large QE program from the Fed aided by easy money from other quarters. Relative to basic
supply / demand conditions, this was a speculative but profitable run. WTIC Crude Chart

The price did fall to cyclical trend support this week and is around the 200 day m/a support
level as well. It is headed to an oversold on RSI, so may be there can be a little bounce, but
oil is far from the sorts of deep oversold readings evident in recent years.

The internals of the futures market are not bullish now. The big petro industry hedgers have
deep short positions while the large traders -- who are often wrong when positions are
outsized -- continue to maintain very large long positions. My interpretation here is that
commercial guys are looking at supply vs. demand while the big financial players are
using the global easy money background to speculate on eventual and substantially faster
economic growth. Crude Contract When the crude supply / demand picture stabilizes and
actually begins to firm, you can expect the petro guys to begin slashing the short side of the

Wednesday, October 23, 2013

30 Yr. Treasury Bond

Back in a post on 9/15, I argued that the long T- bond was deeply oversold with the
sharp rise in yield % (and consequent price weakness) reflecting the development of a
weak market brought on by concern that an accelerating economy would lead the Fed to
curtail its large bond buying program and remove a large bid under the market.

The yield on the long T has retreated since then and there has been a modest price rally.
There is further potential for the yield % to fall short term because the recent Gov. shutdown
and surprisingly weak employment growth have removed the prospect of a quick end to
the current sizable QE program.

The long side trade since mid - Sep. in the bond has been fairly tame so far. From a yield
perspective, I was thinking the T-bond could fall to about 3.3% and that the price could rise
above the $140 level for a decent profit.  30 Year T-Bond With Price In Top Panel

The key shorter term yield directional fundamental gauge I use is the combined momentum
of industrial production + industrial materials prices. This indicator has actually been on
the weak side since late 2012, and strictly speaking, the yield on the long guy should still
be sitting maybe in the 3.1 - 3.2% range. So, there is still a large premium in the yield to
reflect the consensus expectations that the economy will be growing more rapidly and that
the Fed will eventually have to begin to moderate its bond purchasing programs.

Tricky business. The bond yield can trend strongly for extended periods up or down, but
it is highly unusual for the long T to get so far out ahead of on-the-ground fundamentals.
Treasury players rarely exhibit such longer range confidence. 'End of the nose' is usually
good enough.

Sunday, October 20, 2013

Stock Market -- Weekly

Here is the weekly chart through 10/18/13: SPX Weekly

The "dip" buying has whipsawed the market again to the upside this time with good breadth
and decent volume behind it. Short term, the SPX is getting near overbought at channel tops,
but there are no other extremes. I do have an intermediate sell signal in place as of early Aug.,
but the price momentum internals on which the signal is based have merely decayed modestly
instead dropping off sharply as normally happens. The large intermediate term overbought
in the SPX since May of this year has also simply been working off slowly with no damage
 to the market.

Returning to the chart, the green horizontal line represents fair value for the SPX based on a
p/e of 16.5X normalized 2014 trend earnings of $91 per share for the index. The line is set at
1486 and the market, at 1744, is trading 17.4% above it. The premium primarily reflects the
fact that reported earnings are cyclically elevated and are coming in above the long term trend.
Investors are thus paying up now to play the cycle although the premium is hardly onerous
yet and is no doubt troubling few players at the moment.

The blue horizontal is set at 1700 with the SPX now above it. We have entered a period when
the market is trading above the top of its long term trend channel going back to the end of
WW 2. So, from the point of long term history, the SPX is starting to develop a small bit
of froth. We are not talking bubble here. Far from it. But, by the same token, it is wise to
realize that the SPX has crossed over into a high risk zone viewed over the long term.

(There is also arcane technical work which suggests the run from the 1125 area in 2011 is
complete at 1700 both price and time wise and that a period of either correction or
extended consolidation would provide the attractive symmetry to say that the first two legs
up for this cyclical bull market which started in early 2009 are in the books. This a very
interesting historical point but I would be the first to say that the market is at liberty to
override such neatness and precision.)

Friday, October 18, 2013

Liquidity Cycle -- Looking Ahead #2

Here are a couple of economic follow-ups to the overview outlined yesterday (just below).

Economic Power Index (EPI)
This index is expressed as a yr/yr % change and combines the 12 month momentum of
both the real or inflation adjusted take home wage and the change in total civilian emp-
loyment. A reading of +4.0% or higher suggests a robust, balanced economy with labor
as well as capital  being rewarded by decent productivity growth. 

The last time the EPI was up at the 4.0% level was in early 2007. Since then, no monthly
yr/yr observations have exceeded 2.0% and there have been some negative readings at
times in each of the past five years. The poor performance reflects both the very slow
pace of jobs growth and a real wage that has increased by a bit less than 1.0% per year.
Moreover, if one tosses out 2009 when the real wage was strong on a collapse of inflation,
the real wage has been eroding over 2010 - 2013. There have been strong increases in
productivity over this period, but business chieftains have disenfranchised the rank and file
in favor of rewarding shareholders and top management.

The EPI may do better in 2014 on modestly stronger jobs growth and the better take home
pay compared to this year when workers had to absorb a 2.0% increase in the payroll tax
back up to the old norm of 6.0%.

The EPI has been running about -0.5% this year and will remain a drag factor on the economy
until rising output finally pushes business to accelerate jobs and pay growth. To get this
sort of change, we may need to see capacity utilization, now around 78%, rise up and through
the 80% level. If this happens, count on higher inflation, too.

The sharp rise in business profit margin has come heavily at the expense of a sizable decline
in the real wage when it is adjusted for strong productivity growth. This a nice recipe for
the stock market in the shorter run, but will prove catastrophic longer term if sustained
as aggregate buying power weakens.

Global Economic Supply & Demand
Strong global growth through much of the past decade triggered tight supply / demand
conditions for basic materials, fuels and other commodities. This set off a large investment
cycle outside the US which substantially increased supply availability. The deep global
recession of 2008 - 09 created substantial slack which has been only partly taken up
over the past couple of years. Thus, going forward price boosts for commodities and
materials will be temporary to reflect inventory restocking with firmer trends to await
possible stronger growth in the out years of the cycle.

To get a flavor for the past 15 years for basic materials, check out the long term price
chart for copper. Comex Copper


Thursday, October 17, 2013

Liquidity Cycle -- Looking Ahead #1

The liquidity cycle is currently the strongest it has been during the economic recovery which
began in 2009. Normally when financial liquidity in the economic system accelerates, the
real economy and business profits will follow in positive fashion. With a short time lag,
stronger economic demand brings along faster inflation.

Presently, my broadest measure of financial liquidity to include Federal Reserve Bank credit
is growing a rapid 11% yr/yr. Now, looking back over the past nearly 50 years, the 11%
growth number is right up there with past periods of accelerating liquidity growth. However,
with the Fed's balance sheet at a high base, the growth rate of liquidity is set to slow
markedly over the next year even if the present QE program is maintained.

Since there are questions about how rapidly Fed only liquidity may be absorbed into the
real economy, I suspect the velocity of the liquidity will continue to decline because
confidence in the economy by consumers, banks and businesses still remains well below
normal. Looking conservatively, it is reasonable to expect that business sales in the months ahead have the potential to move up from the 3 - 4% area yr/yr  to about 6.0 -6.5%. This development would lead to faster profits growth and ultimately to a pick up of inflation from the recent
1.5 - 2.0% level to 3.0 - 3.5%. If the banks turn more aggressive and dip into excess reserves,
output and inflation could be stronger. So far, however, the banks have been very passive.

Believe me, the Fed's current $85 bil. per month securities purchase program has increased
its balance sheet to levels that are above what the Fed, including likely Bernanke, is
comfortable with. In fact, the pace of QE is now running faster than the expansion of the
monetary base did over the long 1932 - 46 stretch. Policy is thus moving the Fed into
unchartered waters, even compared to the long pull from the economic bottom of 1932. Thus
the pushback from some Fed board members and economists.

Prior to the latest cat fight over fiscal policy and the debt ceiling in DC, the leading economic
indicators I follow were flashing stronger as was new order data from purchasing managers'
surveys. The battle in DC may have rattled confidence in the very near term, but the liquidity
cycle still points to moderately faster economic growth ahead.

The Fed would dearly like to rein in the growth of its balance sheet and it also dearly wants
to avoid a 1937 scenario when a sudden extended period of "cold turkey" flattening of the
monetary base led to debacles for the economy and the stock market (The latter went down
about 45%).  Hence the "taper caper" -- the idea of slowly weaning the economy and the
markets off the big QE push. The idea of curtailing the QE program likely will present no
substantive economic growth issue if, and this is the big "if", private sector credit demand
finally responds more vigorously. Since banking system data show that the banks have
basically taken 2013 as a long holiday at the loan window, there are no assurances going

I'll use the little framework above up until the time is at hand for the Fed to put its QE
taper plan into effect.

The secret to successful use of an economic outlook framework is to look for data and
info that tends to disconfirm the base view and not just collect items that confirm it.

I plan to put up a few more posts shortly on the topic with focus on the capital and
commodities markets as well as factors that can undercut the view such as real household
incomes and the magnitude of excess physical capacity in the global system (There's a fair

Wednesday, October 16, 2013

Stock Market -- Short Term

The market has rewarded the dip buyers once again this year with a 4% SPX rally over the
past week or so as it has moved up toward the recent all-time closing high. The 10 and 25
day m/a's have turned up and the SPX shows only a modest 1.8% premium to its 25 day m/a.
Traders like the idea of the Janet Yellen selection to head the Fed and think they will have a
new friend in a very high place. Concerns about damage to confidence from the Gov't.
shutdown and nasty debate about the debt limit have been shelved and worries about a
Fed decision to curtail its QE program were set on a back burner. Players rightly concluded
the political fight in DC would not end with the worst outcome and are even speculating that
with new shutdown and debt ceiling deadlines in place for early in 2014, the Fed may have no
choice but to hold off the taper even longer.

It would be strange if the guys did not press the SPX up to a new high to celebrate the reprieve
on the present shutdown, debt ceiling worry but take care to remember the old phenomenon
of "buy the rumor, sell the fact".

One item of interest on the attached chart: Note the downtrend in the MACD. No break here
would suggest limited upside, indeed.

SPX Daily

GOP Right Wing Lands On Its Feet

The intransigence of the GOP righties pushed Obama to accept an increase in the debt
ceiling that runs only into Feb. 2014, and a re-opening of the Gov. for but a limited time.
This partial cave-in by Obama will be a drawback for him going forward with fiscal policy
and will be duly noted by foreign powers the US is currently engaging. For the GOP, they
retain their nasty options for possible use after both houses go to conference and set spending
bill appropriations.

It reminds me of GOP 1964 presidential candidate Goldwater's comment that "Extremism
in defense of virtue is no vice". The Goldwaterites got creamed back then because the
economy was growing fast, inflation and unemployment were low and liberalism was in its
hey day. Political conservatives make up about 25% of voters now, and are increasingly reaction-
ary in the classic French sense of the term -- hold back the future and bring back the past era.
As pundit Andrew Sullivan (The Dish) recently said "They (conservatives) want their president
white and the budget balanced now". The newer righties are both more militant and sharp at
building a power base.

The weak economic recovery in the wake of a deep recession has stolen US household
confidence, increased impatience with the status quo and is fertile ground for the growth of
both righty reactionary and lefty radical movements. The righties are way ahead now, but
continued subpar economic performance will bring on more interest in the left as well.

The bottom line now is the GOP's rightwing obsession with austerity to slam down gov't.
spending and reduce the budget deficit. Policies of this sort may well backfire in a slow
moving and still well leveraged economy and certainly could punish capital at risk.
That's why capital market players need to be very mindful of the power of the right.

Monday, October 14, 2013

Show Me The Deal

The economic stakes are high concerning both the spending bill and a raising of the US
debt ceiling. But the political stakes are also very high, both in terms of the Obama
presidency vs. the GOP right wing and the clear intent of the US Constitution. Rebuffed
at the end of last week, the GOP right has slipped into demagoguery and rabble rousing to
increase the political pressure and is in near breach of the Constitution regarding the
directive that the proper servicing of US sovereign debt be held sacrosanct.

It is now difficult to envision the House meekly voting out even semi - clean bills on
spending and the debt ceiling. So, I am anticipating more drama in the next couple of
days from the GOP right wing of the House to try and break the president's resolve and
I have to wonder for example whether the stock market is now too sanguine in the near
term relative to the very ugly storm which could still billow up as righties and tea partiers
are faced with having to come away virtually empty if Obama holds his ground.

And, Obama must hold his ground because he is being threatened with extortion.

So, show me the deal that will resolve the serious political dangers the US faces.

Wednesday, October 09, 2013

SPX Vs. 200 Day M/A Oscillator

Most of time, when the SP 500 gets more than 10% above its 200 day moving average,
it gets tougher to make good money on the long side in the months out ahead. That is
because history shows that 10% or higher premiums represent big time overboughts .The
last time the SPX exceeded the 10% m/a premium was in May of this year, and here we are
with the market no higher than back in May when the 200 day m/a oscillator hit its most
recent peak. SPX vs  200 Osc.

Most of the time, when the SPX does get to a big premium to its 200 day m/a, it subsequently
loses all of the premium and, when the corrective process is sharp, can go to a discount.

The SPX has so far worked off most of the recent major overbought situation without a
substantial price correction. The chart I linked to shows a downtrend in the oscillator which
has yet to make a clear bottom, so even though the large overbought has mostly disappeared,
there is still some vulnerability evident.

There are market pundits who are calling for a washout to scare the folks in Washington to
end the circus and produce a compromise that will end the gov. shutdown and resolve the
debt ceiling debate in a way favorable to the economy. Since the "drop dead" date to raise
the debt ceiling is still more than a week away there is clearly time for more brinksmanship
before the denouement or before the cans get kicked down the road for a few weeks. The
GOP is doing one of its scorch the earth routines and is also previewing its campaign for 2014
off-year elections. Obama has a more serious issue -- the very credibility of his presidency.
He needs to stand as firm as he can. Few market players want to sell way down only to have
to reverse the strategy if a "positive" deal is struck. There can be more volatility ahead.

Monday, October 07, 2013

Gov. Shut Down / Debt Ceiling Issues Seen Differently

I have no trades on the books now and am 100% in cash. Partly it is just laziness. Partly
it is that there are no trades that suit my interests. Shorting oil and going long the T-bond
are prospects but have yet to show the volatility I would like to see.

I am in the black for the year but it has been a quiet one, especially since late spring when
the SPX became strongly overbought.

So, it would be nice to see some good opportunities open up between now and the holidays.

My view on politics is that the GOP right wing continues at war with Obama personally and
is using the shutdown and debt ceiling issues to scorch the earth for as long as it can. For now,
I am assuming  that speaker Boehner will simply not vote out a clean bill on the debt ceiling
regardless of whether the votes are there or not. Since Obama can hardly compromise on a
fully extra - legal move by Boehner without damaging the spirit if not the rules of the US
Constitution and further, since giving into clearly extortionate demands would destroy the
credibility of his presidency, he has little choice but to stand back from the Boehner group.
Obama can explore raising the debt ceiling by executive fiat, but any method he might choose
could be challenged in court and would for sure get the House Of Reps. to commence
impeachment proceedings.

I suppose Boehner could have an epiphany, whip his charges into submission, and vote out
clean bills. Devoutly to be wished for...

I must add that the GOP righties do not hold Mrs. Clinton in warm regard either and see a
knock down drag fight ahead for years if necessary. It is the worst hostility coming from the
right that I have seen since the last couple of years of the Truman administration (1950 - 52),
and the Democrats very much need to start breathing fire and really go after these dangerous

Thursday, October 03, 2013

Stock Market -- Short Term

The market is threatening to roll over into correction mode for the third time since May.
As the daily chart shows, key short run indicators are trending down and the $SPX has
broken below both its 10 and 25 day m/a's. SPX Daily

You will note from the chart that breaks below the 25 day m/a over the past year have
engendered further weakness, and note too that the 10 m/a has rolled while the 25 day is
flattening and perhaps preparing to turn lower.

The increased volatility in the market since Jun. would allow the SPX to drop down to
the 1660 area before there is a threat of a shorter run trend reversal.

The SPX drew up to a major intermediate term overbought against its 200 day m/a when
the premium rose to a high +10% this spring. Since mid - May, the market has gone on
to new all - time highs, but it has been difficult to hold the gains as the SPX has moved
off a zippy tight speed line up into a lazier and more volatile pattern.

Traditional liquidity, inflation, short rate and economic indicator fundamentals remain
positive. However, the market grew fully valued over the Apr. -Sep. period and has been
vulnerable to bouts of profit taking. First, it has been the developing ambivalence by the
Fed over continuing the big QE program and now, we have the fiscal policy / debt ceiling
bullshit from official Washington to work through. Although the turkeys that comprise
the far - right in the House might ultimately relent on the debt ceiling, the group remains
nasty, destructive and cynical enough to damage the economy for as much as they can get
away with. This ensemble remains apoplectic that a man of color continues as president.

The price dips in recent months have rewarded aggressive buyers who trade. In this
emotionally charged environment, I am inclined to let the current dip play out more.

Wednesday, October 02, 2013

Gold Price

The gold price has been traveling with some old pals in recent months, namely the oil
price and the $USD (gold behaves inversely to the buck). The yellow metal did latch on to
the  seasonal rise in the price of oil this summer, and it derived benefit from the Syrian crisis
and labor unrest at the shipping point in Libya. Now, however, the US and Russia are
teaming up to remove Syria's chemical weapons and Iran's new president, Mr. Rouhani ,
is talking nice to the US in an effort to get out from underneath tough sanctions which have
hurt Iran's economy. Moreover, oil is poised for a period of seasonal weakness and with the
Syrian and Iranian threats off the table in the short run, we'll soon see if oil supply / demand
fundamentals are in tight enough alignment to mitigate a seasonal run down in the oil price
to the $85 - 90 bl. area by late Jan. of 2014. Thus the gold bulls may have to shift more
focus on to the $USD and the US debt limit fight which is just starting to roll out. Gold Chart

Gold did fail to break the downtrend in price running from Sep. 2012's $1800 level when it
recently rolled over at around the $1400 point after a strong rally in summer's months. That is
a bad sign, but since the oil price has yet to break sharply lower, gold may get to test the
downtrend line again in coming weeks. Even so, gold is drawing price action impetus from
other markets and has yet to show a supportive fundamental base in what must still be
counted as a bear market. To hold technically, gold does need to take out and rally above
the $1360 level in the weeks just ahead.