About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Thursday, February 27, 2014

Oil Price & Industry Stocks

Last year was a comparative breeze to trade oil. This year could be a little trickier. Normally,
the oil price would be primed for a seasonal lift off right now that would, with the usual mid-
year lull, take the price up to its annual high by the end of Sep. However, with severe winter
weather here in the US, WTIC crude aborted the normal seasonal decline in Jan., and is up
about $10 a bl. to the $102 area as Feb. closes out. There is no  worrisome technical over-
bought in place, but with a return to more seasonal, milder weather, there could be a decline
down to $95 bl. over the next couple of months.

I have not shelved the projection of faster global economic growth as 2014 wears on, so the
idea of some further and significant upward progress in the oil price to, say, the $120 -125
area seems doable at this point. Moreover, natural gas, which has tanked in recent days as
folks realize winter is not going to last forever, should still hold an uptrend through most of
the year.

Here is the chart for West Texas crude: $WTIC Weekly The bottom panel shows the relative
strength of the XOI oil composite which should be nearing the end of a lengthy period of
poor relative performance for the group in the wake of the 2007 - 2009 oil bubble / bust.

Tuesday, February 25, 2014

Stock Market -- Short Term

My view since early Feb. is that I would be content to see the SPX trade in a range of 1750 -
1850. As well, although no harm has been done yet, it has been fair to warn short term traders
about the inability of the SPX simply to take out the 1848 closing top which has now been
hit several times since the end of 2013.

Just why the SPX has been so balky is far from clear. Liquidity growth sponsored by the Fed
is decelerating, but is still strongly positive yr/yr. Economic data has been mixed, but the
winter has been severe over the eastern two thirds of the US as can be seen via fast rising
heating fuel and electric power usage costs. There has also been some 'risk on' diversification
into commodities, PMs and euro bourses and some safety preference for Treasuries and
corporates. The inflation rate has accelerated but is still low.

From a technical perspective, the current rally from the end of January is not unreasonable in
the short run and both RSI and MACD are positive. The % of stocks in bullish patterns is
down from earlier in 2013 but remains well above 50%. So unless there is a special data point
such as the employment report late next week or the next FOMC meeting, the SPX really should
move above 1848 resistance. After the resistance tops in earlier in Jan., there was a sharp
reaction, but here we are right back up for another test of the top line. We'll just have to see if
there is a strong warning or not.

SPX Daily

Sunday, February 23, 2014

Venezuela Quickie

With rioting and insurrection seemingly on the upswing around the globe, US media
decided to focus primarily on the battle for control of Ukraine. A profoundly rich and
tangled history is found there, but the Ukraine does not export 1.7 mil bd. of oil as does VZ,
with the US its major customer. There is big trouble in Caracas as Pres. Nicolas Maduro
tries to manage a fast deteriorating economy coupled with a growing popular reaction
to the gov.'s policies in the post - Chavez era when the living is no longer at all easy.

The US had little use for Chavez and less for Maduro. But, the stability of the oil market
is important not just to the US but globally. So, Obama and his people need to laser
attention in here pronto to look at how best to keep the oil flowing without laying on the
hated heavy hand.

Silver (And Gold)

I am guilty of turning mildly positive on the outlook for  silver and gold during the latter
part of last autumn. The idea was that these prominent PMs could rally cyclically on a
global upturn in real economic output growth and a degree of acceleration in the inflation
rate. Since mid - Nov., when the last silver post hit the blog, both metals are up about 5%.
These are doggy moves given the volatility in these markets and primarily reflect recent
issues concerning US economic growth (bad winter weather) and the outlook for China's
economy as It again starts to struggle with super high debt leverage. The inflation rate has
picked up some in the US and soon we'll see how much bounce back there is in the economy
now that the weather has finally turned more seasonable for the eastern two thirds of the

So, I think it is too early to toss in the towel on a cyclical pick up in the PM markets
until there is a better fix on the global economy as the US comes out of a nasty winter.

The chart for silver (with the gold price in the top panel) shows that silver has finally risen
above its 40 wk m/a, but has a way to go before a stronger positive reversal signal would
be at hand. $Silver

Also, here is a link to the 11/17/13 post on silver which provides additional background.

Somewhat parenthetically, advisors and other bloggers have started to rhapsodize on the
idea that the Chinese are big buyers of gold with the implication that this is very bullish for
the metal. Please! When there are big buyers in a market, there are plenty of sellers. Since
the sellers have been letting gold go easily, there needs to be a more persuasive argument
than demand from one segment of the market to entice us. No?

Thursday, February 20, 2014

Financial System Liquidity

As discussed recently, the growth of financial system liquidity has been decelerating. Yet,
it did advance by 10.5% yr / yr through early Feb. thanks primarily to the Federal Reserve.
Private sector financial liquidity improved by only 4.2% over the same period as minor
funding growth matched the combination of moderate real economic demand and continued
low inflation. Total system liquidity / credit growth in double digit % readings measured yr/yr
should provide assistance to the economy in 2014, although the past two months of economic
activity have been hampered by the adverse winter weather.

The US banking system remained on extended holiday over the past year, with total bank
credit growing only 1.3%. Banking system loan growth was a low 2.0%. Banks liquidated
securities holdings and allowed cash on hand to increase very substantially.

The system's large real estate holdings remain on the flat side, with any new loans quickly
sold out net of loan generation fees of course. The banking system is losing market share
to a variety of other credit issuers. The one o.k. spot on the asset side of the ledger was the
commercial and industrial loans category which increased by 7.6%. The banking system
remains flush with liquidity even excluding the large balance of excess reserves generated
by the Fed's QE program.

As long as the Fed continues Its current taper program, total system liquidity growth will
decelerate unless the banks step up lending and pursue deposits more aggressively. Without
a more responsive banking system, liquidity growth is headed toward drying out, leaving
risk to the economic expansion to rise. With bank capital now growing only 3% on a much
higher quality book of assets, one would think the banks might do well to come in off
holiday. Who knew custodianship could pay so well?

Wednesday, February 19, 2014

Stock Market -- Attention Please!

There it was, the SPX headed up calmly to a new all time high. But as the linked - too
chart shows, there was another failure up at resistance set by the recent double top. SPX

There were factors to concern us today: An IMF report of low growth, the Fed minutes, big
trouble in Kiev. Still, when taking out the old high should be a lay up and you get yet
another rejection, you need to pay extra attention. At the least know that there are determined
sellers up near SPX 1850 and factor that into your thinking.

Monday, February 17, 2014

SPX -- Weekly

The weekly momentum and oscillator measures I use most did tip negative around the
outset of this year. But the argument in recent weeks concerned whether the SPX would
weaken enough to signal that the leg up from late 2012 was finito. The market did bend
down but it did not break and now we are witness to a fast 'buy the dip' program that has
SPX closing in on the 1848 end of the day highs seen on either side of the new year.
Moreover, the market is right back in the strong but widened price channel it entered in
the latter part of June. What's left to be seen before the bulls again declare victory is
whether the SPX can sashay right on up and through the 1850 level over the next week or
so or if  it runs into strong headwinds of resistance near that level. There has been
technical damage here, but it has been mild, and the tenacity of the advance since late 2012
continues to command respect based on the strong bounce back over the past two weeks.

SPX Weekly

Friday, February 14, 2014

Commodities Market

Since the latter part of 2013, I have been suggesting that with a firming of global economic
growth in prospect, the commodities market might well perform better on an acceleration
of product demand. There is significant excess production capacity in the commodities
sector following a large capital investment cycle to expand output capacity in these markets
over the 2000 - 2011 period to serve the growing needs of China and other emerging
economies. However, cyclical global growth acceleration unless miniscule can lead to
rallies in the commodities markets even when excess capacity exists especially if price
deflation in these markets reflects a run off in consumer / user inventory stocks.

I have included a CRB Commodities Composite chart link in this post, but it does come with
a caveat. Price surges in the CRB in the early part of a calendar year are not uncommon
especially if winter weather has been harsh and buyers scramble to build stocks as suppliers
struggle to deliver them. This winter is a good case in point and you need to be wary of
extrapolating a significant seasonal pop into a new powerful uptrend. CRB Weekly Chart

The CRB is breaking out of a downtrend that re-commenced in 2011 and actually dates
back to 2008. My commodities macro model for the CRB advances the composite about 3%
a year and now has fair value set at 335. So, this market is seen as "undervalued" and this
has been so since the second half of 2011 as the group has been subject to continuing
capacity overhang. However, there is now a positive reversal of trend, so attention
needs be paid.

Here is the prior post on the commodities market dated Nov. 6.

Wednesday, February 12, 2014

Financial Markets & Analogy

This piece has philosophical elements, so mercifully, I shall keep it very brief. The most
popular form of analogy in the financial markets is currently the price action overlay which
is used to compare similar price behaviors from different time periods with the idea that
the prior data series may provide very useful information concerning the future direction
of the current series. The hot one now is to compare recent years' SPX price action with the
lead up to the 1929 crash. I have been using the 1932 - 37 period as an analog for the 2009 -
2014 interval for  both the economy and the stock market.

The Cambridge U. philosopher John Wisdom  had a good rule for the analogy, to wit: Analogies illuminate but mislead. Analogies are not identities. A good analogic comparison may be
quite compelling, but there are always differences between the subjects. Some disparities are
small and obvious and others can be large and veiled.

When you study price overlay comparisons, you should not just look at the precision of fit.
You have to go much further to review all of the essential fundamental and technical factors
that make the overlay compelling as opposed to being  merely random or arbitrary. This process
can be very informative and helpful for thinking about trading tactics and investment strategy
so long as you weigh the weaknesses and disparities the analogy implies and stay ever
mindful that there may be a veiled difference that will collapse the accuracy of the price overlay
the very next day.

Monday, February 10, 2014

Natural Gas & Oil Prices

The natural gas price experienced a calamitous decline over the 2008 - 2012 period, with gas
falling back to $2 per mcf  in early 2012, a price not seen since early 2002. Since then, the
market has improved on rising demand and the slow process of shutting in production at the
wellhead. Gas is just coming off a roughly seasonal uptrend with price likely carried $.60
per mcf higher by cold winter weather over the eastern two / thirds of the US. Looking out
12 months, I am projecting gas to stay primarily in a range of $3.80 - 4.80 with some
seasonal weakness expected over the Aug. - Sep. period. $NATGAS

I continue to see gas as a reasonable long term play, but I have traded it rarely because volatility
can occasionally be excessive and sudden. Since the volatility has smoothed out in recent years,
I may add it to my trading list. Indicators such as RSI have worked better over the past few years.

The significantly higher gas bill for heating this winter may have cut into consumer discretion-
ary spending.

The oil price has behaved in strongly contra - seasonal fashion so far this year as cold weather
has sparked demand for home heating oil here in the northeast. WTIC at $100 bl. is rich right
at the moment when intermediate term supply / demand is factored in. However, the price of
crude is not at all outlandish if the global economy progresses as currently expected in 2014.
(The oil price is shown in the third panel of the gas chart.)

The gasoline price has been seasonally weak so far this year as severe winter weather has cut into driving here in the US. It could become interesting as a long side trade over the next month or two
assuming the weather returns to a more nearly normal pattern. (Gasoline is shown in the bottom
panel of the chart.)

Friday, February 07, 2014

Stock Market -- Short Term

The SPX has rallied off a moderate oversold and the bounce has been strong enough to
be credible. The quick turn has taken the SPX back up in line with its positive 14 month
trend channel and has also brought it above the 100 day m/a, a measure that has mostly
contained any downside damage over the past year. The short term oversold condition has
been corrected (For more, scroll down and review the Feb. 3 post and chart).

There has been some technical damage and, from a shorter term trend following perspective,
the market is still trending down. Since the SPX did hold secondary support at 1750 and
bounce impressively, I am content for now to look at it as being in an approximate 1750 -1850
trading range. SPX Daily With Trading Range

Since there is simply no clear blueprint for how the US economy and the stock market will
behave during a lengthy period of deteriorating liquidity growth from a high level, I am
resisting the idea of being strongly opinionated about the market except to say I would not be
surprised to see some degree of erosion in the market's p/e ratio this year.

Tuesday, February 04, 2014

Emerging Markets

As risky assets with attractive yields, emerging markets bonds went right up in price with
the US stock market from the autumn 2011 low into early 2013 as the market rode the
QE in prospect / QE 3 magic carpet. It was a nice total return play in both $US and local
currencies until the Fed first raised the QE taper issue in May of 2013. JP Morgan EMB

As the chart shows, the market took a serious tumble over the spring of last year as players
wrestled with the implications for capital flows of the eventual loss of the Fed's $1tril.
liquidity program. Plus, former bond darlings such as Venezuela, Ukraine, Turkey and
Indonesia hit the skids for a variety of economic reasons. Despite the recent adverse press,
the bond composite has made a moderate recovery since the middle of last year and has
been largely range - bound around the 107.5 area. The market is at a critical point here as
it is hovering just below its 40 wk. m/a and could again be looking to the US equities market
to determine whether 'risk on' trades will remain under pressure.

With slow global economic growth in recent years as well as a deteriorating growth profile for
China, the emerging market stock composite has been in an extended trading range. EEM
A steady range bound security like EEM can be a boon for traders unafraid to play short as
well as long. The EEM composite has been hammered since the autumn when QE taper talk
fired up again and is wending its way down to another trade band low in the mid - 30s. Bet
that traders are carefully monitoring the move down toward strong support. In this regard,
since the outlook for global industrial output has improved markedly from the near stall out in
mid -2013, it may be worthwhile to keep an eye on the emerging market composite as it is
approaching an intermediate term oversold condition.

Monday, February 03, 2014

SPX -- Daily Chart

Weakness in the SPX since its late 2013 double top has intensified. There is even a baby
waterfall in place. SPX Daily The market has dropped below short term support levels
and it has broken under trend support which ran up from late Nov. '12 and extended higher
off the Jun. '13 low. The bottom panel of the chart shows the volatility index (VIX).
Increases above the 20 level on this index suggests growing caution among players.

The SPX has developed a moderate short term oversold. It is trading over 4% below the
25 day m/a and shows low RSI and MACD readings. Substantial short term technical
damage has been done, so any short term bounce is going to need to be substantial to
change negative SPX dynamics. The SPX would need to quickly move above the 1775
level to gain additional credibility as a quality bounce.