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, May 30, 2014

Stock Market -- Weekly

The cyclical bull market continues with a lift in recent weeks out of congestion to a new high.
The market is moderately overbought relative to its 40 wk. m/a at a 6.5% premium. RSI has
reversed positive but without a pull back of consequence this year, The SPX RSI is again
approaching an overbought reading. The MACD has reversed a downtrend in place for most
of the year, but remains high by long term standards. Even so, a 12 wk. MACD does not
whipsaw that often. SPX Weekly

The bottom panel of the chart shows the VIX or volatility index. The current very low reading
of 11.40 suggests a high degree of complacency among traders and investors. Unfortunately,
the VIX may not give much warning of impending trouble by rising with the market. In
recent years, it has tended to lurch up when sentiment changes, and now, it may need to speed
up to 20 before the caution light goes on for many players.

The red horizontal line at SPX 1800 signifies when the SPX is hyper-extended on a very long
term basis. The SPX is now nearly 7% above that line and suggests that price risk is very
high and rising. I have never been long the market unhedged during the very few intervals in
history when the SPX is so extended. The green horizontal line at SPX 1485 gives its value
16.5X long term trend earnings which is currently $90 per SPX share. Investors are thus
paying a nearly 30% premium for cyclically elevated earnings. It is an expensive and risky

My weekly cyclical fundamental indicator (WCFI) is up about 5.5% this year to date compared
to a 4.1% advance for the SPX. The stock market trounced the performance of the WCFI from
its deep interim low in 2011, but so far this year performed more in line with this forward
looking indicator. this may be happenstance, but so far in 2014, the market has payed much
closer attention to fundamentals on the ground than in recent years when SPX momentum
more naly matched the power of the Fed's QE program.

Tuesday, May 27, 2014

Gold Price

My view since the last couple of months of 2013 has been that global economic performance
should improve in 2014 and that, even if gold is in a long term bear market following the
bursting of the price bubble starting in latter 2011, the gold price was entitled to a counter -
trend cyclical rally in 2014. I did not assign a price objective, but I have been thinking it
could rise to around $1450 oz. by year's end off that low base of 1200 set late in the year.
And there was a good rally to kick of this year which carried the metal to 1380 before it tailed
off. Gold Price Daily Chart

Gold can be very volatile, so I did not think too much about the action in recent weeks. I have
been watching gold against the oil price and I think in March gold probably got a little
overpriced relative to oil as well as on its own RSI. The downdraft in the gold price now
has it approaching an oversold level and maybe also moving back in line with the oil price.
Well I have not changed my mind on prospects for gold this year, and I like the supportive
trends in oil and sensitive materials prices ($DJAIN on the chart). Even my inflation thrust
indicator is moving a little bit higher.

The amusing surprise with gold so far this year is that geopolitical tensions and uncertainties
are on the rise around the world, but there has been little discernible portfolio hedging in
favor of adding to gold ownership. the gold bugz used to feast on this stuff.

Wednesday, May 21, 2014

Stock Market

The short term uptrend in the SPX broke late last week, but the market has hung modestly
above a rising 25 day m/a, so despite the trend line warning, it is still technically rising. The
SPX is trading steadily in the bottom half of the band set in Jun. 13 but it has not broken
down. Price momentum has been barely positive in recent months and there has been more
whipsaw action. The SPX has been bending but not breaking, and to celebrate, the VIX, or
volatility  index, has been trending down to very low levels signifying rising confidence.
SPX Daily (VIX index in bottom panel).

The Fed's QE program is subject to steady tapering and it appears it will zero out before
the end of 2014. Clearly, momentum players have lightened positions in their favorite
momentum stocks and that could drag on intermittently as QE winds down. On the plus
side, the private banking sector is providing more credit which it must do if the economy is
to grow once QE is over. The focus on QE has been strong enough that it is tough to tell
how mindful investors are of a positive transition from monetary stimulus to credit.

Monetary liquidity growth, although starting to fade, is still strong enough to drive faster
economic performance this year, but realistically, we have yet to see that. This means that
the stronger earnings projected for 2014 are under a little cloud. Investor patience does
remain buttressed by continuing very low short term interest rates and an inflation rate that
is not threatening to the p/e multiple.

The QE taper experience has the US in an experimental situation and as far I am concerned,
the market is holding up remarkably well given that there are risks in the environment that it
is very difficult to quantify as we move to a flat Fed balance sheet.

Monday, May 19, 2014

Long Treasury Yield % -- Caution Flag

The long T yield % rose up to levels in 2013 that made little fundamental sense. There has
been a substantial and warranted retracement this year until just recently in my view. $TYX

The chart shows a clear and inviting downtrend in the long T % since the outset of the year.
But, some reservations are in order. The yield has gone from a large premium to the 200 day
m/a to a growing discount. This signals a move from a bond which was strongly oversold in
2013 to one which is increasingly overbought. The yield on the bond is now below 3.50%
and long term bond players should not be carrying net long positions at this level. Because
I still hold to the view that the US economy should do quite a bit better over the course of
2014, a cyclical uptrend in the yield dating back to the summer of 2012 when The Fed put
QE 3 into play is appropriate and is being tested now following a period when  the yield
was badly overextended to the upside. Lastly, as the bottom panel of the chart shows, sensitive
materials prices have turned up and this usually adds some upside pressure to the long bond

I may change my mind out ahead about whether the powerful liquidity cycle still underway
will fail to boost the economy, but for now I think a good range for the long T should be
about 3.40 - 3.90 %.

Friday, May 16, 2014

Economic & Profits Indicators

Coincident Economic Indicator (CEI)
When my CEI hits 3% yr/yr, it usually shows moderate growth with a reasonable balance
between output and income. For all of 2013, the CEI averaged a paltry +1.3%. the average so
far for this year through April is +1.6% for a modest improvement. The most distressing factor
last year was the poor performance in the real wage. This year's tough winter weather
notwithstanding, I think the cumulative effect of a depressed real wage last year has led to a
deceleration of real retail sales this year which has been a drag on the performance of the CEI
for 2014 to date. As well, the momentum in the growth of civilian employment was low in
2013 and this also contributed to a lack of progress in aggregate spending power.

This year the real wage has done better as has employment growth, so the potential to see the
CEI pick up in growth somewhat is there. However, businesses are still not doing the hiring
and paying well enough to get the economy on a more substantial and sustainable footing.

Business Profits
S&P 500 net per share rose about  2-3% yr / yr in Q1 '14. With unseasonably cold weather in play,
utilities led the way. My US sales proxy increased by 4.5% for the quarter, and experience shows
with that kind of modest growth, it is tough to maintain profit margins before the beneficial
effects of share buybacks. Pricing power was again subdued and the price / cost ratio likely
retreated. On the plus side, April may have been the best month so far in 2014 on a yr/yr basis.

Looking back at late 2013, analysts were expecting SP 500 earnings per share to rise by at
least 10%. We are going to have to see much better operating performance from here to
reach 10% or better profit growth.

Wednesday, May 14, 2014

Stock Market --Daily Chart

With a move to new high this week, the SPX has developed a short term uptrend with
a rising 25 day m/a underneath it. the low that anchors the trend is the 1816 level set
in April. The market is slightly overbought and the trajectory of the advance is modest.
The SPX sits about mid - range of the rising channel dating back to late Jun. last year
and has been struggling to stay above the mid - mark. SPX Daily

The market is still in a powerful uptrend range that dates back to late 2012 when the Fed's
big QE program of $85 bn. securities purchases was initiated. The Fed's balance sheet
expanded by near 37% in 2013, strong liquidity support for a last year's 30% rise in the
SPX. Fed Bank Credit has expanded at a 20% annual rate so far in 2014, but players know
it is being wound down steadily but rapidly. It may be mere happenstance, but the slow
rise in the SPX since the end of 2013, appears to reflect the modest progress in net per share
rather than a still powerful but dwindling tail wind from the Fed. If this is indeed the case, then
the powerful uptrend for the SPX in place since late '12 is likely to break down as the year
wears on.

The web has its share of continuing bull cycle stories and a growing number of correction
ahead and full bear stories. It is still a bull market with defining new highs and ascending
lows, and its still a mild economic expansion with an experimental monetary policy
regarding liquidity management. And, you have to pay up to play it long. Right now, the
critical supports are in the SPX 1845 - 1860 area.

Sunday, May 11, 2014

Financial System Liquidity

The growth of total financial system liquidity continued to moderate in Apr. but remaians
a hefty 10% yr/yr. Transactional liquidity, which excludes the large volume of excess or free
reserves, grew at 6.3% over the period. Because growth has been mild and inflation low,
transactional liquidity growth has left a modest excess above the needs of the real economy
which has been a small positive for the capital markets. Banking system balance sheet liquidity
(excluding excess reserves) has moved lower as lending has picked up but is still ample by historic

The Fed is slowly easing into a period of short term interest rate suppression as shorter range
credit demand has swung more vigorously positive. Even so, with idle resources in the
economic system and a short term credit supply / demand pressure gauge at only +2.5 in
favor of demand, the Fed is meeting its ZIRP commitment without real strain in the
financial markets yet.  

Breadth of loan categories seeing expansion is improving save for residential real estate
where lending standards have yet to be loosened appreciably. Banks are doing cash flow
test lending now rather than collateral value only lending, but young home buyers face stern

Thursday, May 08, 2014

SPX-- Daily Chart

the SP 500 is up about 1.5% for the YTD. Resistance in this slow moving market has moved
from SPX 1850 up to 1880. Realistically, for the short term the market is essentially trendless
and adrift. There is a wide-band uptrend in place since the end of Jun. 13, and in the past few
weeks,the SPX has been operating in the lower portion of that band as momentum has faded.
The 25 day m/a is flattening out and MACD and RSI trends are drifting lower. Even breadth
has begun to flatten out. SPX Daily Chart

But, despite this weak internal showing, the market remains in an upwave dating back first
to late 2012 and before that to the latter part of 2011. It is the third leg - up to a cyclical bull
which started in Mar. 2009.

With the Fed's QE tapering program well underway, the QE momentum players are cashing in  
and have been hitting the momentum stocks like the dot.coms very hard. Many investors are
now hedging on a positive fundamental environment by rotating into more defensive areas.
One popular move is to "hide cash" by moving into utility stocks as a defensive tactic at
a time when bond yields have been falling and power output has been seasonally strong.
(The bottom panel of the chart shows the strength of the SP 500 relative to the utilities.)
Some of this defensive behavior no doubt is due to the severe winter experienced in the US
but likely also reflects degrees of investor concern over how well the economy will do as
the QE program is wound down to zero.  Keep in mind that this unique experiment is being conducted with a p/e multiple on the SPX of over 17x. Remarkable confidence is being
shown when you consider we are working with theory and not tried and true rote.

Monday, May 05, 2014

Gold Relative To Oil

The old rule of thumb is that 13 barrels of oil buys you an ounce of gold. It is an important
relationship because periods of accelerating inflation over the past 130 years frequently get
rolling because of booms in the oil price and the remainder of the petro sector. the relationship
between the oil price and the price of gold was shelved as the first decade of the new century
wore on because of  high volatilty of each of the price series. Interestingly, however there
has been a return to the 13x ratio recently $GOLD / $WTIC

The oil price has made a cyclical recovery since a bubble collapse over the second half of
2006 and the gold price is much lower in the wake of a bubble bust starting over Half 2 of
2011. Given the importance of oil and petrol to inflation, perhaps it should lead the price
of gold by at least a little bit.

Since the old rule of thumb has recently been restored, I am willing to say that most of the
financial / monetary / economic crisis premium built into the price of gold over the past five
years has been wrung out. There has an important reset, one worth keeping in mind if you
are a gold aficionado.

Sunday, May 04, 2014

Stocks vs. Treas. Bonds & "Sell In May"

Stocks have traditionally been vulnerable as springtime wears on because that is normally
when the Fed is completing the unwinding of liquidity it has provided seasonally for the
prior holiday season. Sometimes the drought is made worse by larger than seasonally expected
tax payments. Even with the QE programs, M-1 money supply has had flat spots in the spring.
Now as it turns out, the weekly leading economic indicators have been weak or flat during the
spring months since 2010. Seasoned traders will sometimes take money off the equties table
and plunk it down in longer dated Treasuries during these periods. SPY Spyder vs. $USB

I point this out because M-1 has been flat since late Feb. this year and also because the
weekly leading economic indicators are showing a little weakness here owing primarily to
a jump in initial jobless claims. So the bond market has firmed not only because basic
liquidity is tighter but also because the QE taper is very well underway, with the latter
reflecting concern among some players that economic growth may slow down the road as
a result.

I do not want to make big deal out of this seasonal liquidity and economic indicator weakness
but you should be aware of it. The longer term issue -- whether the taper of QE down to zero
will adversely affect economic growth down the road -- needs a few more months of
evidence from incoming data before it becomes interesting.