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, December 29, 2013

Stock Market -- Fundamentals

In yesterday's post on the market's technicals I described the stocks as "bubble eligible".
Since the autumn 2011 low, the SPX is up over 67%. This reflects modest economic and
earnings growth coupled with a sharp deceleration of inflation which has reduced the discount
rate for stocks and sharply boosted the p/e ratio. On top, the Fed has kept short rates negligible
and has flooded the system with liquidity through its aggressive QE 3 program. Logic would
suggest further modest economic growth, continued very low inflation, ZIRP and ongoing QE
could well keep the market on a bubble trajectory, other things held equal. However, if the
US and the large remainder of the global economy can maintain or even increase the recent
faster pace of real growth, then inflation pressure may be elevated and the Fed and perhaps
other central banks would curtail and, perhaps, ultimately eliminate the large liquidity
infusions. In this case, earnings performance should improve markedly, but there could well
be downward adjustments to the market's price / earnings multiple to reflect faster inflation
as well as a diminishing speculative interest as the QE tailwind for  the market fizzles.

Looking at 2014, there will be less fiscal restraint both regarding spending and taxes and this
development should strengthen basic US economic potential. The trend of the momentum of
my coincident economic indicators has recently turned up, and it is good to see that the
weekly leading economic indicators have continued to move higher since Q 3 '12. So, as we
move into 2014, there is enough economic promise to look for somewhat higher inflation
and to expect the Fed may maintain a QE taper program, at least for a while. The implication
here is that investors may need to prepare to see some p/e ratio erosion as well as a bit of
leakage away from US equities to offshore stock markets and, perhaps, commodities and PMs.

Looking out through mid - 2015, the critical issue is to have determined whether the US
economic expansion can sustain itself without QE and the promise of negligible short rates
for years to come. If not, a sharply elevated market based on more QE and ZIRP will
eventually be seen as a Potemkin Village on Wall Street.

Saturday, December 28, 2013

Stock Market 2014 -- Technical Stuff

Seen in long term perspective, the current cyclical bull market is exhibiting early characteristics
of an emerging secular bull. It started in 2009 from a historically very depressed base and
has maintained a trajectory over the past four years that is consistent with the early phases of
a secular bull. The SP 500 is also hyper-extended compared to very long term price channels
and given its continuing trajectory, is now bubble-eligible. This is a very unusual development
for the US stock market.

The SP 500 (SPX) has experienced 20% annual gains in price compounded off the 2009 low
and has maintained this powerful rate of ascent since the autumn of 2011 as increasing
investor confidence allowed the p/e ratio to continue to expand. This sort of consistent strong
price progress above the very long term channel top is unusual but is not without precedent
(viz. 1995 - 2000).

It is now simply too early to tell whether this is a price bubble of some considerable magnitude
or whether corrective events will alter the trajectory of the market sufficiently to eliminate
the bubble as a probable outcome.

The SPX will roll into 2014 on zippy momentum with a weekly MACD measure near +50.
Powerful annual finishes usually set the stage for market corrections of consequence in the
following year, although stocks may not get dumped until the May - Aug. interval as positive
momentum can continue for several months into the new year. The SPX is extended and
overbought on an intermediate term basis and could correct  to the low 1700s in the early going
without cracking the +20% annual price trend. SPX Weekly

Confidence and sentiment measures are running very high.

Thursday, December 26, 2013

Oil Price

Whether long or short (See Nov.25 Oil Price), oil was my baby to trade in 2013. With
this post, I attempt to put the oil price into a broader context.

Despite its usual volatility, the oil price has been in a nice cyclical uptrend since the first
half of 2009, and has been trading in a $18 per bl. channel since then. The channel markers
for the current month are $97 - 115 bl. Oil is set to turn seasonally weak again from the
second week or so of Jan. 2014 through the end of Feb.. I had been thinking for quite a
while that oil could well fall to $85 by the end of Feb. 2014, but with a firmer tone to the
global economy, I am now not so sure. Perhaps a dip to the high $80s would be a better bet.
At any rate, the oil price has been compounding at a 10% annual clip since the middle
of 2009. This compares to a 15% pace over the 2000 -2008 period when global growth,
with China in particular, was faster. If the global economy is nearing a faster velocity for
the next couple of years as many expect, we ought to see the oil price accelerate out of the
current $18 bl. channel even before consideration of any supply disruptions. WTIC Crude

The oil and gas group has underperformed the broad SP 500 by a fairly wide margin over
the past five years despite the superior performance of the oil price to the CPI. Yes, it is
true that natural gas has been a drag on oil company earnings over this same period, but the
gas price has improved rather sharply since early 2012. Right now, investors are smitten
with rotating into the cyclicals and technology but the oil / gas complex might not be too
far behind in a firmer global economy. ^XOI vs. SP 500

Monday, December 23, 2013

Final Checkpoint Ahead -- Economy, Stocks

Longer term readers will recall I have been using the 1932 - 37 period as an analogue
for the current recovery. Not only did the decline of US industrial output clearly reach
depression levels, but the recovery was supported by powerful quantitative easing and
a nearly zero T-bill rate. The stock market rebound from the lows in 1932 was very
strong, and by early 1937 at an interim peak, the SP 500 commanded a p/e multiple of
18X. Then the roof fell in as the Fed ended QE, the economy went into recession and
the market dropped 55%. As a bow to 1937, Bernanke has opted for a QE taper rather
than cold turkey in the hope that a transition to more normal open market activity will
avoid a bust. This is a pure experiment as there is no evidence it will work. Even now,
the private credit system, which must pick up the liquidity slack as the Fed winds down
QE, shows scant signs of life.

Investors have put their faith in the idea it will work and that the economy will self -
sustain expansion as confidence in the markets and with households, businesses
and banks rises to make it happen. That's what stock players are paying 17x current
earnings to see and that's what you read in most of the market commentary presently.

For me, this is a momentous time. I hope the Fed is correct and a taper period is just the
right medicine to move the economy to self sustainability rather than a deflationary and
highly risky period. As we enter 2014, we see that there is current strong liquidity
support, slightly improved momentum in final demand and continuing jobs growth.
We will also be five years out from the deep trauma of near financial and economic
collapse, and so one hopes the post trauma stress syndrome will have eased sufficiently
to allow the US to get on with its business on a firmer footing.

If the Fed's plan works, there will be a battery of new issues to concern ourselves with.
However, recovery from individual / group trauma is a psychological / sociological
affair and not a primarily econometric one, so if I seem to be running a little behind the
herd, it is because I am going to continue to study how well the US can get past this
final, emotional checkpoint.

Thursday, December 19, 2013

Economic & Profits Indicators

Coincident Activity Indicator
Measured yr/yr, my coincident economic indicator has moved from 1.0% in Jul. to 1.6%
through Nov. That says the economy is now operating a little better than one half speed before
inventory investment. A review of the indicators that make up the composite shows that
low wage and employment growth have retarded sales and production growth and have
increased the volatility of both of the latter. Thus, faster sales and production growth
may prove sporadic without faster employment and real wage growth. Businesses, prideful
of cost cutting to raise profit margins, are thus contributing to a suppression of future sales
and production growth via the steady hammering of a still weak labor market. Smart on a
company by company level, but damaging in the aggregate.

Profits Indicators
As the year has progressed, my measure of US business sales growth has moved up to 4.3%
yr/yr compared to a low 3.0% level seen this spring. Pricing power has been eroding,
so the price / cost ratio has been tilting in favor of costs at the expense of profitability.
Productivity has started to edge higher again on faster volume gains and operating rates
have been moving up with both helping to at least partially offset the effects of rising
costs. Looking top down, capacity utilization is not quite yet high enough to trigger a
round of more aggressive capacity expansion. Thus even though business cash flow growth
has been modest, there have been plenty of funds on hand to buy back shares.

Forward indicators suggest profits should continue rising going into next year, but the US
will need faster household income growth to underwrite moderate sales and production
growth through the year.

Tuesday, December 17, 2013

Inflation -- A Quick Way To Look Forward

For well over 100 years, inflation has tended to start up first in the commodities sector.
Moreover, since the processing of commodities can often be energy intensive, it is no
less important to keep an eye on the fuels sector when watching for inflation (or deflation
for that matter).

The chart link ahead looks at the CRB commodities composite with special focus on the
52 week rate of change and also includes in the bottom panel the behavior of the wholesale
gasoline price in recent years. CRB With 52 Wk. ROC + Gasoline

The inflation rate has decelerated sharply since Sept. 2011. The chart shows an ongoing
downtrend in the CRB since the spring of that year and also shows that the gasoline price
although volatile has been range bound. Inflation pressure starts to build when the 52 wk.
ROC% accelerates up and can move sharply higher in the wake of the development of a
strong uptrend in the CRB's ROC%.

Various leading economic indicators are pointing to faster global economic growth ahead.
Thus, even though the balance of economic supply  / demand has remained tilted in favor of
supply, you can use this chart to monitor if there are stronger developments for the leading
edge of inflation pressure, which, as you can see, remains pretty quiet for now.

The horizontal line on the chart for the CRB stands at 325 and reflects my macro based
estimate of when commodities supply / demand will come into balance. Note how far the
index is now running below equilibrium. With the world still deeply in debt, it is easy to
see by observing the chart why central bankers have been so concerned about trying to
keep the deflationary wolf away from the door and why fiscal austerity policies are so very

Stock Market Breadth

Market breadth continues to rise to confirm an ongoing cyclical bull market. Breadth
continues to make new highs, but note how the uptrend in the cumulative A/D line has
been fading since the Fed raised the issue of tapering its QE 3 program in May and since
there has been a sharp upswing in the long Treasury yield as well. The more interest rate
sensitive sectors and funds have lost considerable momentum since the spring of this year,
leaving the A/D line with a much milder trajectory. NYSE Cumulative A/D

Breadth has been edging a little closer to trouble, but it has not reached it yet even though
the A/D line has broken the normally important 30 day m/a on several recent occasions. A
break below the 145K line just ahead could signify something more serious as that would
would herald more downside after a period of just slightly higher highs since May. Note as
well that the RSI for the A/D line is trending down, but note too that touches of RSI
down around the 30 level in recent years have proven to be decent 'buy' markers.

Sunday, December 15, 2013

SPX -- Weekly

The Fed's QE 3 liquidity program has been the major force behind the market's powerful
rise over the past year. The SPX has lost momentum since this spring when Bernanke
first introduced the idea of curtailing the growth of securities purchases within the program.

The market's p/e ratio has powered higher this year, but it is interesting to note that corporate
bond quality yield spreads have not narrowed nearly as one should expect in an ongoing and
solid economic expansion. Naturally, this divergence reflects the far keener interest in equities
over bonds on display through 2013.

Market players have become very mildly defensive ahead of next week's FOMC meeting set
for Dec. 17 - 18. There is increasing brave talk among investors that the economic recovery
is fast becoming self - sustaining and that QE is fast becoming redundant, but short term
price action since this spring when tapering the program was first broached suggests ongoing
very keen interest in what the Fed may have to say next week.

The current leg of this cyclical bull dates back to Aug. - Sep. of 2011. The market has followed
a strong trajectory over this period with the band for the rising SPX set at about 150 basis
points. The market has not kissed the bottom of that band since late 2012, thus allowing a
strong overbought condition to develop. Here is the SPX Weekly Chart. The tops of the
trading band match up reasonably well with the tops in the Keltner channel shown in the chart
and you will note the drawdowns which have happened when the SPX has hit or slightly
exceeded the Keltner channel tops. Interesting that the market is just re-entering the channel
with the FOMC meeting dead ahead.

Thursday, December 12, 2013

Stock Market -- Daily Chart

The SPX is edging away from consolidation toward correction. SPX Daily There has
been a small break below the little shelf of support at 1780 - 1782, the RSI and MACD
indicators are heading down and the VIX (bottom panel) is headed up while the SPX has
edged below the 10 and 25 day m/a s. Nothing nasty yet, but watch carefully.

Players would like a sugar plum ending to the year -- a graceful move up to close out a big
2013 on a high note. But, taper from the Fed worries notwithstanding, there are folks
who are cleaning out losers and others who are quietly rotating issues within their
portfolios to be ready on day one for 2014. So, you cannot count on the sugar plums.

Gold -- Entering Low Test Zone

Back on Nov. 1, I posted that gold had failed to take out trend resistance at $1350. It
fell sharply afterward. Yesterday, gold could not take out down trend resistance at $1260.
They hit it again today. Since it has been in a bear market from the summer of 2011, and
since another year's end is just ahead, it is a case of "gold be gone" for some players as
speculative interest has been wrung out. Others may be concerned that QE failed to
generate faster inflation, and some are likely worried that the expected tapering of QE by
the Fed will eventually boost the US$ and create another low growth / nominal inflation

Now, history shows that  PMs can be in a long term bear market but still have nicely
profitable rallies when cyclical pressures pick up. The global economy does have a strong
liquidity tailwind, the US leading economic indicators have recently accelerated and my
inflation pressure gauges have stopped falling. Now the global economy has been plagued
by weak demand growth and excess capacity. Somewhat stronger real economic growth will
put a little upward pressure on operating rates, and so there could be modest upward pressure
on inflation rates. I do not think we know if curtailing quantitative easing over a twelve
month period will harm the economy or not, but there is surely a chance for faster growth
in the interim and perhaps a revival of a degree of inflation pressure. Such should help
PM prices, perhaps enough for a good rally.

However, with "give up" selling in gold maybe still underway, I say let's see if gold can hold
support again down around $1200 and see further if the metal can rally through the down
trend line. Gold Weekly

Tuesday, December 10, 2013

Liquidity Cycle

My broad measure of financial system liquidity, excluding direct QE from the Fed, rose by
6.3% over the past year. Thus, private sector funding topped total demand from the economy
by a modest margin, allowing a small amount of excess liquidity to flow into the capital and
real estate markets. When you add in the QE 3 program, the yr/yr change in liquidity provided
jumps to 11.9 %. Even though the QE securities purchases are primarily filtered through the
banking system, there has been heavy liquidity support for the markets with stocks and
housing prices being the notable beneficiaries.

Private sector loan demand did pick up just recently, but the banking system has been loafing
along for the past year, with total interest earning assets having risen by just 2.2% and the
system's loan book by 2.6%. This meager output from the banks is far below normal for an
economic recovery approaching a duration of around 4.5 years and shows the economy's
reliance on the QE programs from the Fed as the banking system continues to repair. Yet,
other sources of private credit such as shadow banking are taking share from the banks, and
so it is fair to wonder how bankers have been filling their time at the office.

Going forward, if the economy can sustain faster growth momentum, business and household
sector cash flows will improve, but the banks are going to need to step up lending activity if
the economy is to able to grow decently without the unprecedented QE support.

From a policy perspective, the Fed is officially following employment growth and the inflation
rate as primary policy parameters. However, it would indeed be very risky for the US economy
if the QE program is eliminated before private credit creation begins functioning more normally.

Sunday, December 08, 2013

Business Indicators

I do have a measure that suggests the momentum of business sales and profits out six
months in time. The outlook for US business sales volumes looking out through mid - 2014
has been improving nicely in recent months, and physical sales volumes measured yr/yr
have been edging higher since Aug. of this year. The breadth of new orders receive by
business -- an admittedly volatile series -- has also improved by 11% over the past six
months compared to the prior six. All good news for volume.

However, the business pricing power measure has not improved over the past year and this
suggests that the ability of companies to raise prices on expected higher volume looks
rather limited going forward. It will not take much in the way of stronger business pricing
to overcome the growth of primary business costs such as labor, but potential for such a
development is not up on the radar screen presently. The poor environment for pricing
does reflect the modest volume growth US business has been experiencing and the fact that
capacity utilization still remains modestly below the 80% level when more sustainable
pricing power normally develops.

If volume growth accelerates further into 2014, businesses should find it easier to raise
price points. However, investors need to keep in mind that when inflation does pick up,
investment rate of return assumptions normally also rise with the result that p/e ratios can
decline. The erosion to the market formula can be offset to the extent business price
increases fall to the bottom line and are not absorbed by higher costs.

Wednesday, December 04, 2013

Stock Market -- Daily Chart

It has been a couple of weeks since I last posted on the SPX daily. As expected, traders
could not resist pushing the index up to a new round number all - time high of SPX 1800, but
upward thrust ended quickly as Nov. closed out. The sharp trend line up from the Oct. 8
interim low has been broken here in early Dec. and whatever else you might have in mind,
it is usually wise to observe the market more carefully once such happens. SPX Daily

The recent action is consistent with either a consolidation phase or the outset of a price
correction. Regarding the latter, we have yet to see the kind of breakaway price movement
that would herald something nastier.

As indicated in the post on the weekly chart just below, I expect more volatility in the
market between now and the end of the year as players appear very sensitive to whether
economic data is strong (bearish) or tepid (bullish), and also as to whether there will be
further bad behavior from official Washington. The handicapping of the prospect for how
long QE will be extended based on economic data flow may remain intense.

The next Fed policy meeting is set for Dec. 17 - 18. Since it would be un - sportsman like
conduct for the Fed to throw in a 'taper' plan a week ahead of Christmas, we may have to
keep our breath baited until the next meeting in late Jan. 2014, to get the whole enchilada
on Fed thinking.

I did add the VIX volatility measure in the bottom panel of the chart. Should there be a
move up toward the 20 level in the weeks ahead, it may suggest the betting is swinging
toward an early rather than a later curtailment of QE. I plan to discuss the QE issues in more
detail closer to year's end.

Sunday, December 01, 2013

Stock Market Weekly -- 3 Year View

The market has basically been running up with the expansion of Fed Bank Credit via
the QE 3 program. The advance has "outdistanced" itself from a technical perspective,
and with official Washington again moving toward center stage in terms of both the
budget fight and monetary policy, there could be some volatility in the weeks ahead
as players try to handicap the interplay of oncoming economic data news and the doings
 in the Capitol. SPX Weekly