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, January 31, 2014

Gold Price

There is some good news and there is some tricky stuff. The good news is the gold price
has come up through trend resistance on try # six dating back to the autumn of 2012.
Moreover, there are positive trend reversals in RSI and MACD as well. Gold Chart
The top panel of the chart shows the relative strength of gold against the SPX. Non - bugz
have been rotating out of gold for a good while now and it has only been recently that the
metal has regained some footing. In fact, since the beginning of this year, traders have
been buyers of gold and Treasuries on stock market weakness. Thus, since the SPX is
getting oversold short term, a rally in stocks could drain the gold and Treasuries market
again in the short run. I would rather see gold move up independently as an inflation hedge
in an expanding global economy rather than be a safety dump for a market correction.
So for now, if you want to buy some gold with a shorter run gain in mind, you'll need to
be both pretty sure and right that the stock market is heading lower.

Taper Caper & Stocks & Bonds

The Fed's plan, not etched in stone, is to zero out the QE 3 program by the end of the year.
The tapering process is unique in the annals of the Fed and invites keen observation without
dogma baggage.

The market decline in Jan. let out pure momentum players and the well - disciplined  QE
momentum players. The monetary base will continue to grow substantially over most of
the rest of this year, but  % growth momentum of the base measured yr / yr will shrink sharply.
Moreover, the base could go flat month to month late this year or in early 2015 if the Fed
sticks to its plan. If the economy expands as the Fed hopes, many players may be ok with the
deterioration of liquidity growth, but I think you have to allow that some investors are going
to be leery as the program winds down, fearing that it will adversely affect market confidence as
well as the economy. So, some further degree of deterioration of the market's elevated p/e ratio
cannot be ruled out.

Progressive decay in the growth of monetary liquidity may not rule out a market advance
for 2014, but long experience shows that business risk begins to rise after liquidity rolls over.
In this regard both business and banker confidence will have to be monitored carefully as the
Fed executes its program.

(For a fresh daily SPX daily chart, click on the highlighted SPX lettering in the Jan. 28 post.)

Treasury Bonds
The economy may grow nicely as the Fed withdraws QE, but this expectation is debatable
enough to suggest the market for quality bonds not be written off as the Treasury market
especially will operate as a safe haven if economic momentum deteriorates and the economy
turns choppy. The T- bond rally for Jan. gives the clue.

If, as I dearly hope, the economy has been launched into a period of moderate and self -
sustaining growth, bond players will again look forward to the time when the Fed gets
around to raising short term interest rates and the bond market will find a level that
comports with a rising trend of short rates. If the Fed decides to fall behind the curve and
suppress short rates, then you can watch one and two year Treasury yields to see if the
market chooses to bypass the Fed to lift yields.

Tuesday, January 28, 2014

Stock Market -- Daily Chart

The stock market did bounce today after a sharp three day sell - off. Although there was
heavy short covering ahead of tomorrow's FOMC meeting, there was enough volume to
indicate new money buys. It is interesting to note that, once again, the SPX bounced off
the +5% line of its 200 day m/a oscillator. This represents the sixth bounce off that line
(or a little above it) since early last year when the powerful 30% run was unleashed. See
SPX vs. 200 Day m/a Oscillator

Below, there's a link to the daily SPX plus indicators. The market is in a confirmed short
term down trend with roll overs in the 10 and 25 day m/a's. But remember the SPX did
bounce off the +5% line against its 200 day m/a and note too, since the outset of last year,
SPX downturns have been reasonably well contained around the 100 day m/a. SPX Daily
The chart also shows that over the past year or so sell - downs in the SPX have been
contained in the 30's on RSI and near -10 on MACD. Torturing the data like this is no fun,
but it is important to look carefully to see if this very strong, nearly 14 month trend up is
finally in peril or not.

The guys did jump the gun on the FOMC meeting and break the tight consolidation in
place leading up to the meet. That was a mild surprise given how well the SPX held up
after making the double top up around 1848.

Monetary Policy

Short Term Interest Rates
The fundamentals to support raising short rates are not quite in place yet as there is still
a little extra economic slack and no pressure on my short term credit supply / demand
pressure gauge. The economic slack measures likely count the most in supporting the
Fed's ZIRP, but the credit demand pressure gauge has been trending down in recent months
as commercial and industrial loans at banks have lost growth momentum. Prime quality
large companies continue have free access to the commercial paper market, but smaller
businesses are still finding it tougher to secure loans.

The QE Taper Program
Treas. bond yields have fallen since very late in 2013 and stocks are down on the year to
date. The markets are pricing in further tapering of the $1tril. a year QE program ahead
based on the idea that despite stronger economic data, further and persistent curtailment
of the program will eventually lead to a slowing of economic growth. The capital markets
are also betting that the Fed will regard the bitter cold that has gripped the eastern two -
thirds of the US in Jan. as but a very temporary impediment to economic progress.

Sunday, January 26, 2014

SPX -- Weekly

Economic and profits indicators are positive. % momentum of growth of Fed's balance sheet
and monetary base are set to decay following strong positive upswings through 2013. Plan for
rapidity of decay in momentum will likely be unveiled over next few FOMC meetings and
could negatively affect the SPX's elevated p/e multiple in the weeks ahead as some investors
have been riding the surge of QE since late 2012. This is a logical but not a sure bet. Exposures
to emerging markets have been reduced as some players are concerned about a diminution in the growth of liquidity on a global basis. The curbing of the Fed's QE 3 program represents a
tightening of monetary policy and reactions in the markets should be expected. Within US
monetary policy, QE tapering is a novel development and its full impact on the markets and
the economy will require keen observation rather than economic theory dogma.

The SPX is turning down in the short term. Interestingly, declines in the premium of the SPX
to its 40 wk. m/a last year were all halted around the +5% level give or take a few basis points.
The erosion of the SPX so far this year has brought the market right down to that level. Further
weakness in the SPX ahead would violate the powerful performance trend of 2013 and could
well signal a less positive change in the market dynamic. The 'buy the dip' play in 2013 had
a clear pattern to it and it is about to be tested.

SPX Weekly

Friday, January 24, 2014

Stock Market Factors

Players failed to maintain the tight consolidation leading up to the Fed's FOMC meeting
early next week. The bravura of  "QE, who needs it?" was tweaked by traders who think
another taper down is on the table for the policy meeting and who have enjoyed last year's
$1 tril. tailwind. They have issues with a further curtailment of the QE 3 program. Profit
taking after last year's big run - up seemed in order. Nastily, the market went out today at
the low with no clear sign of where it might catch bids. Here is the factors chart: SPXhttp://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=3&mn=0&dy=0&id=p69864090460

The top panel shows the VIX or volatility index. More trouble would be indicated if the VIX
tops the 20 level and moves higher. The VIX shows but modest fear in the market now.

The next panel down shows the SPX itself. The short term trend up from Oct. '13 has been
broken. The important trend line up from Nov. '12 will be broken if next week is a down
week. The major trend line higher from the autumn of 2011 offers support at SPX 1650, and
this shows how extended the market remains despite the sell off this week. The market
stands at 4.7% over its 40 week m/a, so about half of the big overbought has been worked off
this year already.

The third panel of the chart shows the strength of the SPX vs. the 30 yr. Treas. bond. The
SPX has underperformed the bond since late 2013 and is on the cusp of rolling over in
trend following a lengthy rise of relative strength. The bond was heavily oversold by late
last year, and players who fear further shrinkage of  the QE 3 program will slow economic
progress have moved some $ back into Treasuries.

The final panel shows the index of relative strength for the cyclical stocks. It is rolling over
as investors have recently turned more defensive following a nice, extended run by the
cyclicals. Sometimes, a downturn in the RS of the cyclicals signals that further downside
action may be in store for the broad market. Sometimes not.

The horizontal line set at SPX 1700 in that portion of the chart marks my view that investors
remain too confident that all will be well this year and that the SPX should be trading at a
less grand p/e ratio.

Tuesday, January 21, 2014

Gold Price Quickie

With prospects for a better global economy for 2014 having improved, it has seemed
reasonable to expect a cyclical style bounce up in price for gold. However, there has been
a strict caution in place -- no long side trades until gold moves up and through the now
very powerful downtrend resistance line in place since Q 3 '12. That line is now around
$1250 oz. and gold failed over the past two days to take out the trend at $1250. So, it
could tank again as it has with each past failure, but today's negative action was not severe
enough to drop interest in the situation yet. Gold Price Chart

Stock Market -- Daily Chart

All of the major markets I follow most closely have been quiet so far this year. The SPX,
the queen bee of interest for the past 2 1/3 years, is a case in point. SPX Daily The market
has been consolidating so far in 2014. The double top in place since year's end triggered
a mild negative response from the tape trader types, but no sell - off of consequence. In fact,
there has been a modest "buy the dip" reaction in recent days. The bull vs. bear commentary
has been furious so far in 2014 compared to the market's lazy action. But, note on the chart
how the market went into consolidation with tops at 1800 just prior to the  last Fed FOMC
meeting in Dec. There is a similar pattern now as traders try to calibrate whether the Fed
will take additional tapering action next week or let that issue slide for another meeting or
two. This dreary period has perfectly encapsulated my expectation for very early 2014
as there are enough players to whom QE is of critical enough importance that it is tough to
place bets of consequence ahead the next FOMC statement.

This latest up - move in the SPX from Oct. last year is just holding up and the logic of a
short term double top over a rising trend suggests a resolution of consequence next week
to coincide with, of all things, the FOMC meeting. Bolder folks could come in and upset
the apple cart in the next few days, but so far the consolidation is holding up.

Save for the poor payrolls data for Dec., the economic indicators have been pointing up,
so there should be another taper coming soon unless the Fed wishes to proceed with more
caution for a spell.

Saturday, January 18, 2014

Economic & Profits Indicators

Coincident Economic Indicators
Measured yr/yr, my favorites -- industrial output, real retail sales, growth of civilian
employment and real take home pay -- improved further in Dec. to 1.7% from the
recovery low point of 1.0% in Jul. The US economy is still well below the 3.0% yr/yr
reading which signals solid well balanced growth, but we are moving in the right direction.
Growth of employment and real take home pay are inching higher but are still drags on
the economy with both needing to strengthen to underwrite decent sales and production
growth without over - reliance on credit.

Corporate Profits Indicators
The $value of industrial output measured yr/yr continues to rise and hit 5.3% in Dec. com-
pared to modest readings of 3.0% back in Apr. and May. In this era of mild inflation, 5%
growth in $ output is usually necessary to have a shot at maintaining business sector profit
margin. My selling price / cost measure was still negative for business, but offsets arrived
via higher operating rates and an uptick in productivity late in the year. I continue to look
for the $value of industrial output to rise to 6.0 - 6.5% by late 2014, a development that
would signal faster profits growth.

Financial Liquidity
Faster business sector growth currently matches private sector liquidity growth. With the
economy taking up liquidity from the private banking system, generation of excess liquidity
must come from the Fed's QE program if there is to be further strong  liquidity support for
the capital markets.

Note as well that since Fed QE programs and strong liquidity preference led to extraordinary
growth in M - 1 (cash and checkables) of 24.7% yr/yr  by Oct. 2011, the momentum of M-1
growth has declined sharply to 8% yr/yr as the economy has expanded. With continued
economic progress, M - 1 growth may well decline further, leaving the banking system the
burden of pursuing more deposits and generating more loans to help finance the economy.
The situation is ok for now, but the banks will eventually have to step up and take more
credit risk.

Thursday, January 16, 2014

30 Year Treasury % -- Long Term

The long Treas. yield has trended steadily lower since the early 1980s. It has accompanied major
downtrends in short term interest rates and the yr/yr % change of the CPI. Budget deficits
and the sharp rise in US Gov. debt outstanding over this period had no discernible effect on
the steep trend down in the 30 yr. yield. As a matter of fact, premiums built into the yield
for the rising supply of Treasuries have fallen over this period as has the premium in yield
over the inflation rate. ^TYX Chart

Trend resistance down from the latter 1980s is now around 4%. So, as has happened
periodically, the bond, at 3.77%, is close to trend resistance and a rise in the Long Guy's
yield above 4% would be weak prima facie evidence that the major run down in yield and
dramatic rise in the price of the bond would be over.

The strong case for saying the bull market in bonds is over implies a progressive return
to more normal economic activity to include an end to the Fed's ZIRP policy for short rates
as well as some increase of inflation pressure that is more than cyclical or otherwise transitory.
If the US economy can re-establish more normal growth with some increase in short rates plus
a return to 2-3% inflation, the bull run in bond prices would end, but one cannot infer from
this development that a new bond bear market is evolving. For example, in a more normal
economic environment, the 30 yr. Treas. could trade between 3.5% and 5.5% for an extended
period so long as the inflation rate remains rather moderate. In short, since the fate of the bond is
up to the future level and direction of short rates and inflation, it would likely be unwise to
jump the gun in the absence of a firm economic case.

The first thing up for now is to see if the economy is strong enough and traders have conviction
enough to finally crack that very powerful downtrend line of resistance. You will note that
players are now content to trade the bond below 4% and not challenge resistance without more
compelling evidence that it is indeed time to put the bond bull to rest.

Wednesday, January 15, 2014

SPX -- Daily Chart Quickie

Check out the Daily SPX. When you have double tops or bottoms you need to pay more
attention even if the time proximity is short and especially so when the market has featured
powerful momentum leading into the double. Traders should have pushed the SPX right
up through the 12/31 high today particularly when they dickered all day around the 1848
level. That means that most of the buy orders cleared without pushing the market higher.
Perhaps just an odd day, perhaps a warning day.

Shades Of 1937?

Herewith is a link to a new economics piece by an old line monetarist like myself who
shares my view of the need by the Fed to avoid pulling QE down and out too quickly.
Like me, Paul Kasriel is retired now after having spent many years as a top quality
financial economist out in Chicago at Northern Trust. Econtrarian

Tuesday, January 14, 2014

30 Yr. Treasury Bond Yield

The long Treas. yield % took quite a ride up in 2013. The sharp part of the ride happened
from May into Sep. and corresponded to the interval when the Fed signaled that a tapering
of its large QE 3 program might well be in the cards. Right on the heels of the Fed's first
taper indication came a strong acceleration of purchasing managers' new order data which
not only signaled faster economic growth but encouraged bond players to start to plan for
a period ahead when liquidity would be withdrawn, and, further on, the beginnings of a
rise in short term interest rates as well.

From mid - 2012 until now, the full spectrum yield curve (30yr Treas. % - 3 mo. Treas. %)
rose from a moderate 260 basis points to nearly 400 basis points. We do not often see such
a steep yield curve. It occurs when investors anticipate a marked acceleration of economic
growth and eventual rises in both the T- bill % and inflation.

Interestingly, a fast upturn in the slope of the yield curve to such a high level as 400 bp.
often signals an overshoot in the bond yield and a subsequent moderation in the yield %.

When the long T yield goes to a large premium to its 40 wk m/a or develops a 20% or better
% premium on a 52 wk ROC% basis, the Treasury market is often setting up for a rally in
prices and a drop in yields. Since Sep. of last year, both premiums have been undergoing
a work off via a stabilization of the long Treas. yield. $TYX Chart So, no sharp fall in the
yield yet as the chart shows.

The chart also reveals the Long T % is quite extended relative to the primary yield uptrend
band which emerged after mid - 2012. The spread now is 3.20% at the low end and 3.80%
at the top. This leaves substantial room for a nice long T price rally if the recent pick - up in
growth moderates in the coming few months. Something to think about.

The chart has two other panels -- industrial metal prices and the SPX. Note  how nicely the
$TYX lined up with the $GYX until this year, when the bond market began to ignore the
movement of sensitive materials prices which, by the way, happens but rarely. The bond %
is running well ahead of the industrial economy. Note also that the SPX has tended to trend
up with the long bond yield. The SPX has been using the long T% as a leading economic
indicator during this economic recovery period. If you are more of an equities person, you
might want to carefully watch the Treasury market as a falling yield may well signal a return
to 'risk off" and a sloppier stock market.

Sunday, January 12, 2014

Stock Market -- Weekly

With the exception of the past nine months, I have done an excellent job of projecting and
analyzing this bull market since the outset of 2009. I do not see a seamless transition to a
faster growing economy that will shortly no longer require the Fed's QE program to sustain
it as a done deal. So, I have a more conservative view about the capitalization of earnings
than the investor consensus, but their confidence has carried the day against my more
restrained optimism thus leaving me wrong on the recent past. The SPX just closed out last
week at 1842, and here I am thinking 1700 would be a fine upper boundary for a market
that must go through the test of a critical year as we watch how the economy holds up during
a period when the Fed may well start withdrawing liquidity support. I was happy to have
some nicely profitable oil price trades last year to salve the wound of a bad stock market call.

The link ahead is for the SP 500 index with indicators on a weekly basis. SPX The market is
in consolidation mode in the very short term but remains in the powerful 20% annual
uptrend in evidence since latter 2011. As has been the case recently, it is overbought, and is
extended, with a lengthy 50+ MACD last rivaled by 1999 when the market was carving out
the left shoulder of a grand top registered in 2000. More to the point, history shows you
need to be a little wary of such  lengthy overbought situations as have now.

The next FOMC meeting comes up in a little over two weeks and will be Ms. Yellen's first
as Fed chair. It will be interesting to see if the market stays in a fairly tight range until the
Fed tips its hand on QE and forward rate guidance. The current consolidation is signaling

Friday, January 10, 2014

Economic Indicators

The weekly leading indicator sets remain in uptrends but have been a little more volatile
because of comparatively wide swings in initial unemployment insurance claims. Low
jobs growth in Dec. might reflect severe weather, but I note that jobless claims did move
up over the Sep. - Dec. period of 2013. The monthly leading indicator was nicked in Dec.
reflecting weak new orders for commercial services but overall new order performance has
been running at nicely elevated levels since mid - 2013.

The weekly coincident economic indicator is also showing ok yr/yr progress after a slow
period over mid - year.

This remains a droopy area with slow wage growth and civilian employment growth of
only 1% yr/yr. The stronger indicator performance for sales and production along with
rising capacity utilization have yet to translate into faster jobs or wage growth when
measured on a 12 month basis. The lack of output / income balance remains a disturbing
factor in the outlook.

Using conservative assumptions regarding employment growth, it appears that total
civilian employment is running about 12 million below the level suggested by the long
term trend. That is a 7.5% shortfall and translates into a huge loss of taxable income.

Capital Slack
Despite higher operating rates, employment growth and an upturn in private sector credit
demand, there is still ample slack in the US economic system even after four years of
recovery. This translates into substantial room to grow and the economy would perform
much better with a stronger job market and a far better balance in compensation levels.
It is hard to envision an economy with a falling real wage for the rank and file humming
along happily.

Wednesday, January 08, 2014

SPX -- Relative Strength Against The World

The US stock market remains in a powerful RS uptrend against the world's other bourses
although clearly the RSI has been more range bound over the past couple of years. Note
that the US RSI index is again testing resistance against the MSWORLD index in a range of
.96 - .98 SPX vs. MSWORLD The current test comes at an interesting moment because
global economic performance excluding  the US has been picking  up a bit in relative strength
just as monthly data in the US could be set to come off a very strong short term run. As well,
since the Fed's big QE 3 program helped the relative strength of the SPX, future curtailment
of the growth of the QE program in a period of broadening global economic growth could
pose a challenge to the relative advantage of the SPX.

Saturday, January 04, 2014

Gold Price

The gold price has notched a double bottom around $1200 oz. over Half 2 '13. the bugz
are coming out of the woodwork with buy suggestions. Never mind that gold made a
triple bottom over 2012 - early 2013 before it tanked down to $1200. Gold Chart  Even so,
a double bottom will prove intriguing to technicians, and if gold can rally through down -
trend resistance at $1250 over the next couple of weeks, there could be a trade worthy rally
as gold can experience cyclical bounces even if it remains in a longer term bear market.
As discussed back on 12/12, gold had entered a low test zone with $1200 or thereabouts
the likely target. I also mentioned that it might be wise to see if gold can bounce up above
trend resistance since the failures to do so since late 2012 have been devastating to the bulls.
So, with another rally perhaps starting up, watching if gold could take out $1250 on the
way up in a decisive matter could save more angst and perhaps signal a more positive tone.

Let me end with a cautionary note for the bugz. Much is now being made of the $2.4 tril.
sitting in excess bank reserves as a result of the QE programs and the inflation potential such
may carry for the future. Yes, there could be something to this point, but keep in mind as
well  that my broad measure of private sector money / deposit growth is currently sitting
just a little more than $2 tril. under a reasonable long term trend of 6% annual growth.
The Great Recession took a huge bite out of the equation!

Thursday, January 02, 2014

Stock Market -- Need We Run It By The Fed Again?

As 2013 ran out, a goodly number of investment managers dressed the windows to show
higher equities exposure. Thus, both the Sugar Plum Fairy and Santa delivered rallies. The
market went out on a high note, was both extended and overbought short term, and, my
investor / advisory composite sentiment indicator closed out at a too bullish 66.0. With the
new year, some players can be excused for stepping up to take profits. So, maybe we are
now witnessing a normal bit of retrenchment after a dream year end close out.

Still, the Fed's first FOMC meeting comes up in late Jan. and it may also be reasonable to
expect some volatility in the next few weeks as players decide how aggressive they want to
be, especially with a new chairperson expected at the helm. Will the Fed elect to taper more
or not? Does it even matter? Such questions could take on a little more urgency as the month
wears on and especially so for the bulls whose primary focus has been the powerful QE

Here is the daily SPX chart. Note how the VIX volatility index started moving up during
the final surge in the market for 2013.