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 !!!

Friday, November 29, 2013

Stock Market Weekly -- 20 Year View

This week I link to a 20 year view of the SPX (1993 - 2013). SPX Weekly Over this period,
the SP 500 has returned about 7.2% annually before dividends.  Despite some extraordinary
interim volatility, the long term performance is pretty decent. SPX net per share also rose at
about a 7.2% annual rate over the 20 year interval, and that latter trend is moderately above
the long term average. It is also an interesting time slice because the p/e ratio back in the early
1990s was elevated on cyclical earnings as it is presently.

To maintain adequate return on both assets and capital, the SP500 companies managed their
business portfolios very aggressively, often preferring to buy rather than build, as well as
using a greater proportion of cash flow to buy in common stock. They have benefited very
substantially from refinancing borrowings at steadily lower interest rates and have cut their
pension contributions by raising actuarial rates of return and where possible freezing the
traditional defined benefit and contribution plans by substituting 401ks in their stead. To
maintain return on assets, most companies have struggled to boost asset turnover but have
been very successful in using technologies and in running very tight ships on labor costs
to boost profit margins. This has been strong performance in an increasingly globalized market
place where newer,  lower cost competition has been chipping away at pricing power.
Moreover, business failures are written off aggressively at the end of economic expansion
periods. Investors, who prize current operating earnings above all, have graciously overlooked
the mammoth write-offs that crop up over recession intervals. Some folks may think the top managements of big companies are pretty smart, but when you look at the huge write-downs
that have been taken, you cannot help but conclude that the boyz are not that smart. But, they
are smart enough to pay themselves kings' ransoms while leaving table scraps for the rank and

Remember the old formula for return on equity %. It goes as follows: Profit margin x asset
turnover = return on assets x total financial leverage = ROE%. For many companies, the
focus has been on boosting profit margin and on maintaining leverage via share buybacks
and refinancing ever more cheaply via lower interest rates. I should also add that by
exhausting plant, some companies have been able to boost asset turns (sales divided
by total assets).

Looking forward, with interest rates around historic lows, the bulk of gains from lower
rates has been achieved, and aging plant will eventually have to be replaced. There will also
be a little pressure to fund pensions more heftily as the boomers retire and finally, it will
be increasingly more difficult to keep pushing profit margins higher via leaning on the
work force as the fat has largely been trimmed, leaving the bone and sinew. Before long many
companies will be looking at the need to re-work business strategies.

On the technical side, the indicators which accompany the chart  show a strongly overbought
 and extended position for the SPX.

Thursday, November 28, 2013

Strategy & Chicago Fed National Activity Index

Each month, The Chicago Federal Reserve presents an index of 85 economic indicators
which can be very helpful in diagnosing economic growth momentum and inflation potential.
The 3 month average of the indicator is compared against a longer run measure of real
economic growth. Statistically, monthly data is detrended and shown as an oscillator around
the longer run measure. CFNAI

The recovery cycle has been weak because the index has had trouble staying above the trend
line. Moreover, moves in the index above trend have followed after QE programs from the Fed.
Note how close the economy came to dipping into recession in 2012 before the Fed came to the
rescue with QE3 and notice the struggle the index has experienced staying above trend in 2013
reflecting fiscal austerity measures on both taxes and spending. The combination of QE 3 and
slow economic progress has triggered excess liquidity which market players have poured into
the stock market to ramp up the p/e ratio on faint progress in earnings.

There have been upward flutters of cyclical inflation, but the index has yet to approach the
levels of strength typical of a period when more sustained inflation pressure can develop.
The inflation situation has been very tame in recent years because  modest economic growth
momentum has not taxed a global supply base which grew sharply over the 2004 - 2012
period. with an economic supply / demand balance favorable to lower inflation, commodities
including fuels as well as PMs like gold and silver have fared poorly compared to equities.

Now, looking out to 2014, it would seem that with the liquidity support under the economy
and likely less fiscal stress, depressed asset categories such as commodities and PMs ought
to do better relative to stocks as economic expansion could be strong enough to push up
operating rates enough to generate more positive interest in these depressed groups. If QE 3
without the countervailing fiscal stress is worth its salt, the CFNAI should be able to hit
readings of +0.4 - +0.6 for several months as 2014 rolls along.

Interest in run of the mill inflation hedge plays such as oil, gold and commodities as a class
has been insufficient to turn the tide this year as economic demand vs. supply has yet to
firm up enough to move the needles positively.

Wednesday, November 27, 2013

Corporate Profits & Capital Spending

Profits drive business cash flows and those flows plus the raising of additional funds help
drive capital spending. S&P 500 profits momentum has been very sluggish over the
past two years on modest physical volume growth and the erosion of pricing power.
With more sharply limited cash flow growth, managements have become more reluctant
to upgrade extant facilities and start new ones. Instead, there has been greater executive
suite interest in buying in stock to bolster earnings. The order book for civilian capital
goods excluding aircraft has turned down again. New Orders

Following a lengthy period of capacity growth in the 1990s, the bookend recessions for
the prior decade have left the monthly order book for basic capital goods no higher than
it was in the year 2000. Normal life depreciation measures tell you that companies are
managing more and more with aging facilities and are squeezing the labor force hard to
extract efficiencies and force workers to accept slight compensation gains in a still slack
labor market.

The recent developments of a selling / price cost squeeze and reduced productivity have
darkened the outlook for capital goods.

Monday, November 25, 2013

Oil Price

I closed out a handsomely profitable oil market short position today. The traditionally weak
late autumn seasonal period may well give way to a bounce over the next month and the
market itself has been stabilizing at a technically oversold position. The internal structure
of the futures market indicates to me that there are still way too many financial players who
are long this market, but from a contrarian viewpoint, that does not preclude a rally. I have
not factored the Iran deal on Their nuclear enrichment programs into the decision as more
detail is needed. There still could be another nice shorting opportunity on the oil price come
mid - Jan. 2014 that could see WTI crude drop down to about $85, but that is still a way's off.
WTI Crude Chart

Wednesday, November 20, 2013

Economic & Profits Indicators

Leading Economic Indicators
The weekly measures I follow accelerated up from mid - 2012 through mid - 2013. There
were dips around Hurricane Sandy (It destroyed over $40 bil. of the US capital stock) and
the timetable to see an acceleration of economic growth may also have been disrupted by
the put - back of the 2% of the payroll tax and US gov't. sequestration programs, but we
did finally see much stronger PMI data in recent months plus mild pick-ups in retail sales,
payroll employment and industrial production. More lately though, the weekly leading
data have flattened out disappointingly and thus suggest a slower period for the economy
not too far down the road.

Coincident Economic Indicator
Measured yr/yr, my coincident indicator has improved slightly, but at +1.5% is still only half
the +3.0% yr/yr reading that would signal solid, balanced expansion. The slow pace for this
indicator continues to reflect sluggish employment growth and a - 0.9% reading for real take
home pay. Looking ahead, the effects of the payroll tax increase of Jan. this year should
continue to dissipate and the real wage before taxes may creep a bit higher with very low
inflation pressure.

Corporate Profits Monitors
My macro measure for US business sales has picked up modestly in recent months to about
4.3% yr/yr. Volume growth has accelerated, but pricing power remains very subdued not just
in the US but globally. The pricing / cost measure remains mildly unfavorable which
suggests continuing pressure on operating profit margins. As well, productivity has dipped
slightly in recent months. The large US export sales sector is up but 2.7% over the past 18
months and this remains a major factor behind slower earnings growth momentum in recent
years. Large share buy back programs continue to inflate reported SP 500 profits.

The current strong liquidity cycle, buttressed by the Fed's QE 3 program, should be good
enough to see my top line growth measure for business sales accelerate to about 6.5% on
a 12 months basis. The business sector has done a little better recently, but is still well
under the pace needed to restore stronger operating earnings growth.

Tuesday, November 19, 2013

Figuring China's Shares

Following the destruction of China's stock market bubble after 2007, investing and
speculating in the local real estate markets has been the big game in town. The Shanghai
Composite never recovered the bubble sheen after the crash and is still trading nearly 65%
below its peak. Since then, only fools have rushed in where Chinamen have feared to tread.
Even in its heyday, the Shanghai was primarily a vehicle to build cash kittys to play the
real estate market. There have been some good stock market trades over the past five years,
but it has been evident that those mercantilist goldbrickers Hu and Wen were not interested
in establishing bona fide capital markets. As you have been reading, mr. Xi , the new
president, is starting to fashion a long term plan to legitimize China's capital markets and
to determine the role of the yuan in the global currency markets.

So, I have been re-benchmarking the Value of China's shares by admittedly top down
western techniques. I have dropped the Shanghai index and am currently using the S&P
China SPDR tick: GXC. This ETF represents a very broad composite of established and
tradable shares and has been up and running since 2007 GXC Chart

By its own admission, China does not revere the accuracy of its macro data and reams of
micro data as well. This lack of precision suits my back of the envelope style of model
building anyway and the results are I think, reasonable enough. With 7% GDP growth
as the principal assumption, I rate the GXC as fairly priced at a value of 80, a level it has
struggled to reach in recent years. I also see the GXC as offering some significant longer
term value down around 65 (Check the chart link).

The recent quick run - up to near the 80 mark on the GXC reflects a positive reception to
the new Xi / Li reform program which is bigger, broader and more liberal than many were
expecting. It does not reflect the acceptance by investors that China can indeed grow at
7% or better in real terms going forward. Indeed, China has threatened its own economic
future by allowing far too rapid liquidity and credit growth since 2000. Messrs. Hu and Wen
and their deputies have put the country in harm's way well before such formidable issues
had to arise.

The chart shows the market has gone from a deep oversold as I highlighted back on Jun.25
and has now moved into short term overbought territory. With a new regime now starting out
to mold a "better" China, some volatility and economic sector vulnerability would be normal.
I am very keen on seeing what if any reform will come to the PBOC, China's central bank.

China is making previously restricted "A" shares available through new ETFs (See tick ASHR).
Let's let these babies season up for awhile before adding any to the potential shopping list.

Sunday, November 17, 2013


Yes, I have been guilty of calling the silver price "the great American crash dummy" from
time to time, and for those who know the history of the metal's price going back to the
latter 1800s, well then you know that the appellation has been well deserved. But, the
silver buffs are a colorful  and interesting lot and do not share the turgid sanctimony of the
gold bugs. There may be nothing interesting here immediately, but if continued efforts by
the major monetary policy chieftains to re-inflate their economies ever bear fruit, silver
could be interesting, as its ups and downs in price nicely mirror the cycle pressure gauges
I have used profitably over the years. What silver needs to get some positive interest going
is evidence of faster industrial output growth coupled with upturns in sensitive materials
prices, and rising commodities and inflation. Cooler economic activity and a decline in
the US CPI from 3.9% in Q '3 2011 down to 1.2% yr/yr recently have been killers for
the silver price. Silver Weekly Chart

I need to say straightaway my cycle pressure gauges have been quiet by and large this year
save for the purchasing manager business strength measures in recent months. The chart
link above does reveal that this pocket of strength has not gone unnoticed by the PM players.

I do have an industry pricing model for silver which I have upgraded recently to reflect
the higher costs of retrieving ores in general, and I put a price of about $18.25 per oz. as
representing a reasonable value for silver. So, at $20.77 oz. silver is hardly bloated in
price as it was when it traded near $50 in the spring of 2011.

From a technical perspective, a little caution is in order with silver. The price is still
trending down and the summer lows under $20 may still be subject to a retest. Even so,
I'll keep an eye on it. I have done no more than a handful of silver trades over the years,
but have been treated very well.

Friday, November 15, 2013

Stock Market -- Daily Chart

The cyclical bull market broke out of a consolidation phase this past week as presumptive
new Fed chair Janet Yellen gave a vigorous defense of Fed policy including maintaining
the QE program until the economy firms up and appears self-sustaining. In her confirmation
hearing on Thurs. 11/14, she poured it on with the full knowledge that the production data to be
released on Fri. would be sloppy, and in the current giddy logic of stock players, the weak
data only re-enforced the conviction that QE would stick around for longer to support stocks.
She was outspoken in favor of Fed accommodation for the economy even as The Street paints
the Fed into a corner on QE.

Looking ahead, SPX 1800 and DJIA 16K are within easy reach and traders might enjoy
racking up these milestones. The SPX is not more than mildly overbought viewed in the
short run, but remains strongly overbought with a six month horizon as the average is again
approaching a 10% premium to the 200 day m/a.

The action still seems innocently speculative and not cynically so as was observable as the
late 1990s bubble inflated. I think we all know that sentiment remains very bullish and that
confidence is high. The trade is quite crowded now but the desire to stay long with the
big QE program in force has proven hard to resist.

Here's the daily chart: SPX  The horizontal line at 1700 SPX denotes the top of the long
term price channel dating back to the end of WW 2. So, the market is now getting into
hyper-extended territory for the first time since 2007 and this recent surge above super long
term trend resistance is what is triggering the talk around the web about a new market bubble.

Coincidentally, the 1700 level is now trend support for the current run.

Thursday, November 14, 2013

Investor Expectations For Growth, Inflation

Output & Profits Growth
A fast, efficient way to gauge what investors are looking toward regarding output and
profits growth is the relative strength of cyclical stocks. That's because the main swing
factor for both output and profits growth is how well cyclical companies will fare in the
environment ahead. The RS of the cyclicals sector reflects the collective expectation of
how strong or weak investors think the economy will be. $CYC Relative Strength

Market players have favored cyclical stocks since the summer of 2012 as they accepted
the idea that the Fed's new and large QE effort would lead to faster growth for the economy
and profits. There was noticeable hesitation over the first half of the current year on slower
economic progress and then initial concern about whether the Fed would cut back on QE.
But stronger economic data in recent months plus increased confidence that no cutback of
QE is imminent has returned the cyclicals to favor. The group is overbought now on an RS
basis but that condition can sometimes run on for awhile.

It is interesting to note that in a more mature economic recovery, cyclicals tend to be more
reliant on pricing power for positive earnings leverage than earlier in the cycle when rising
volume and a return of operational efficiency can carry the day. Keep this idea in mind since
the chart below also shows many investors see inflation and pricing power for business as
being rather tame ahead.

When inflation accelerates up, it generally starts in the commodities pits. As well, longer
duration bond prices can be very sensitive to rising inflation. Thus, a quick and easy way to
gather the wisdom of the markets regarding inflation potential is to look at the relative
strength of a commodities price index to a bond price measure, such as the 30 yr . Treasury.
CRB RS To 30 yr Treas.

The chart shows how this ratio anticipated the sharp deceleration of cyclical inflation pressure
from Sep. 2011 at 3.9% yr/yr down to 1.2% recently. The chart also indicates that QE from
the Fed has so far led to a conviction that only a very mild recovery of cyclical inflation
may lie ahead. So, the CRB / Treas. chart is less bullish on stronger pricing power for
business than is the $CYC / SPX chart. Interesting, as I say.

Normally, an acceleration of real output growth in the business sector comes with a decent
size uptick in pricing power. Let's see if commodities start to firm before long or if the
recent pick up in output is but transitory.

Sunday, November 10, 2013

Stock Market -- Weekly

The economic recovery appears to have picked up some speed recently, but the apple of
the investor eye remains the ongoing powerful round of QE from the Fed. Fed Bank Credit
has now expanded by more than $1 tril. over the past year. That's an increase of nearly 36%.
Perhaps coincidentally, the SPX has risen by nearly 42% since mid-2012 when the Fed
opened the the door to new QE. Since the economy has tended to struggle without the QE
during the recovery period, the issue of when the Fed may begin to curtail the growth of its
balance sheet remains a topic of intense interest. The market remains driven by speculation
and not value with players assuming there are still a goodly number of greater fools out there.

The SPX remains in a cyclical bull market dating from 3/09. SPX Weekly Longer term
trend support is now around the 1700 level SPX. The chart shows the market is
overbought on RSI, MACD and the 52 wk. rate of change measure as well. The old rule
of thumb going back many years is to be careful when the yr/yr momentum gets up near
30%. The market is also getting extended on a 20 wk. price channel (Keltner).

Scroll down to the 11/3 post on the equities only put to call ratio ($CPCE). Sentiment is
very strongly bullish and confidence remains high (low $VIX). This chart shows that
bullish regard is getting a little intense for comfort.

Wednesday, November 06, 2013

Beijing And The Big Red Liquidity Machine

The market for established, tradeable equities is coming up to important price resistance
just as the Party Bigs are gathering to look at reform issues. S&P China SPDR (GXC)

Back on 6/25 I posted that the Shanghai was deeply oversold just after the PBOC was
punishing its big banks and dealers by intervening in the overnight markets. My view
then as now is that the PBOC must begin to operate with greater discipline if more serious
problems are not to follow upon a five year period of extraordinary liquidity and debt growth.
China M-2 money has compounded 22% annually since 2008. China Dragon Flu 6/25

Most analysts agree that China needs to reset economic priorities away from reliance on
industrial investment / mercantilism toward building a larger and more stable consumer
economy. All well and good. My concern is with run - away real estate markets which can
only be sensibly controlled by more restrictive monetary and credit policies that have to be
reset to align with China's self professed goals of 7.5% real growth and controlled price
inflation. I'll judge the Plenum at hand by whether the Boys are up to slowing down the
Big Red Liquidity Machine.

Commodities Market

From 2001 through mid-2008 the CRB commodities index sailed from a low of 170 to a
new all-time high of 475. The rapid rise reflects the effects of strong global demand coupled
with a long lag in productive capacity investment. After the deep global recession, the CRB
recovered substantially from a downturn low of 210 up to the 370 level on a sizable bounce
in final demand and re-inventorying led especially by China. Over the 2001 - 2011 interval,
a new investment cycle began to support rising commodities output. With a build up in
capacity and much lower global economic growth (2% per annum) over the past two years,
capacity excesses have developed and the CRB has been languishing. CRB Chart

The negative demand / supply imbalance has left the market teetering upon entering a long
term downtrend. The chart for the CRB is admittedly bearish as it stands with suggestion of
greater weakness ahead if the CRB breaks decisively below important support at the 270 level.

Interestingly perhaps is recent evidence that global industrial and commercial output may be
setting up to enter a period of faster growth with a move from 2% up 3%. Global PMI Comp.
This observation is not without some reservations. First, remember that purchasing manager
data is volatile and not so predictable short term. As well, it is far from clear that a shift from
low global growth to a more moderate level will be sufficient to lead to a period of recovery for
the commodities market.

Still it is an interesting time as demand may be picking up just as the CRB is about to test support.
Moreover, financial players have likely been flushed out of this market as they rotate into stocks,
which has been the big game in town for the past two years.

Sunday, November 03, 2013

Sentiment -- CBOE Equities Only Put / Call Ratio

I like to watch the $CPCE as a sentiment indicator because it reflects real money put to
work in the options market and not just opinion. A downtrend in the $CPCE shows that players
are becoming increasingly bullish. There is clutter even on a weekly chart, so I have included
6 and 13 week m/a's.  $CPCE Weekly

Sentiment is not just strongly bullish on a shorter term basis, but from a longer term perspective
as well since the $CPCE moving averages have been rolling down trend wise since the major
intermediate market low back in 2011. Note as well that the $CPCE weekly trends match up
well with the $VIX or volatility index in the bottom panel of the chart.

The chart also shows the wisdom of being more careful with stocks in the shorter term when
you spot clustering of low p/c ratios over a short duration and when the m/a's move down
toward that .60 level.

Players are becoming increasingly bullish and complacent.

Friday, November 01, 2013

Noteworthy Short Term Fails For Gold and Oil

The gold price has been in a quiet, almost 'under the radar' rally since early summer.
Down trending indicators have bottomed and show modest positive action. A big test
came this week when gold confronted trend resistance at the $1350 oz. level. It failed
to take it out and quickly lost $37 on the lack of success. It thus remains in the 'dead
cat bounce' category until it can push up through the down line and rise above short
term resistance at $1350. Gold Price The bear has yet to be upended in the short run.

The oil price remains in a robust period of seasonal weakness, and broke trend support off
the 2012 level of $80 bl. this week. I expected a little tougher battle, but news of rising
supply trumped that. My hope has been that continuing seasonal weakness would carry oil
down to $85 in early 2013. That might provide a terrific long side trade, and would also be
a nice plus for the consumer who is already enjoying a weaker gasoline price. Oil Price
Oil is coming off very quickly and you will note the weekly RSI is moving smartly to an
oversold position. This does not dim my hope, but it is time to be more watchful now for a
bounce in the weeks ahead.

Probable Big Challenge For The Fed

In the absence of strongly stimulative fiscal policy to create economic demand and
employment, I have been a supporter of a large QE program from the Fed to promote
some growth and keep us from a deflationary recession. As we move in to 2014, the
latest QE program will have added about $1 tril. in liquidity support to the financial
system. Fed Bank Credit Chart The latest very large QE program has been heavily
offset by restrictive, anti - growth fiscal policy with the latter undercutting potential
demand growth. With more scrapping to come on fiscal policy as 2013 wears down,
QE may have to be extended into next year. I do not think the Fed thought such would
be necessary when it kicked off the latest initiative. Moreover, I also believe that
continuing the program for more than another few months will find the Fed in a position
where it will become increasingly difficult to conduct a well balanced monetary policy
where liquidity excesses can be trimmed without rather painful results for the economy
as well as for the markets. Because it may well be necessary to provide additional direct
liquidity support over the next five or so years, the wiser course for the Fed may be to trim
the very large current program in favor of a dramatically milder one and to aggressively
pursue pushing the President and the Congress to adopt growth fiscal policies if and as
needed. The Fed needs to get this message out there so the media can develop pro - growth
storylines to challenge the rest of official Washington. Such lobbying by the Fed will
create ire in DC and threats of retribution, but this necessary challenge by the central bank
will leave them in a better managerial position long-term.

The Congress has ignored the economic realities to play to their respective constituencies
while counting on the Fed to bail them out on growth. It has not worked very well and it
is high time for the Fed to call the Congress out on it by fostering challenges from the public
on the eve of an off year election. Since Bernanke is the short timer, it would be best for him
to step up and warn emphatically that the Fed can no longer shoulder this burden alone.