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, August 28, 2014


When I set up the blog nearly ten years ago, my intention was to communicate with older
professional pals rather than spend my time on e-mail programs. about 20 guys were
involved and they all were in possession of monographs I had written over the 1980 -90
period on the major components of funds management. As a very successful money
manager, I operated on the "KISS Rule" -- Keep it simple stupid.  They had all the
short cut statistical and analytical tools I used so I did not have to re-invent the wheel
each time out with explanations .

I am going to be 75 this autumn and easily half the guys who the blog was intended for
have retired fully. Moreover the other guys have more far ranging interests. So, it
will be easy to communicate with them on a personal basis. That leaves a broad number
of followers and visitors numbering up to a 1,000 a week who read the posts.

My plan going forward is to write far fewer posts and to focus more on diagnosing the
markets rather than defending particular points of view. I am far more comfortable
doing this because I believe that people should make up their own minds and that they
prefer doing so anyway. The emphasis will be on market drivers and risk for return
both near and longer time. The writing style will remain cryptic and direct.

Wednesday, August 27, 2014

US Capital Spending

Capital spending new orders excluding defense and aircraft took big hits in the prior two recessions
but are once again in fairly strong recovery mode. Moreover, new orders have broken out to a new
high this year. New Order

The recovery track for capex orders is about 10% per off the 2009 cycle low and has accelerated
recently as higher business sector earnings are boosting cash flow. Companies have even cut back
some on share buybacks to support a higher level of spending. System capacity growth has been
recovering slowly after experiencing a rare decline over 2009 - 10, and reached +2.6% yr/yr just
recently. Capacity growth still lags output growth, but balance is slowly returning to the system
and this development acts as a damper on any cyclical acceleration of inflation.

The chart above shows that new order rates were volatile and basically range bound until very
recently. The US has not experienced a strong capex cycle since the late 1990s and has been
running on older, outdated equipment and plant. There has been a strong recovery off the
recession trough despite the extant slack in the system as companies move to modernize after
a long hiatus.

Capital goods stocks and related industrial service issues have lost ground in relative strength
against the SP 500 this year as investors have shied away in lieu of the closing out of the Fed's
QE 3 program. Understandable, but if the economy does not slow down as much as expected,
the group will retain interest because of business's need to continue to upgrade and modernize.
XLI Weekly

Monday, August 25, 2014

Gold, Oil, & The US Dollar

Gold got interesting as a long side trade in late 2013 at $1200 oz. When the US economy
does strengthen as it has on strong liquidity growth, the gold price normally gets a cyclical pop.
There may be some extra fizz in the pop if the US trade deficit widens on faster import growth and the USD weakens. The year started out that way for gold and I figured it could top $1400 by year's
end. That may still happen, but some important crimps in the story are unfolding. US oil
production is surging so strongly that it has tipped the supply / demand balance in the oil
market in favor of supply. The oil price has fallen sharply since the end of June. The weaker
price plus less demand for imported oil has resulted in a stronger dollar because the trade
picture is holding up better than expected. The weaker oil / stronger dollar combo has been
punishing the gold price and although gold is developing an oversold, there may be some more
downside because gold is at a small premium to the oil price. Gold et al Chart

Now winter blend fuels stocks will need to be built soon, so the oil price will move into what
is normally a strong seasonal period during Sept. / very early Oct. Normally, the oil price will
make a yearly high around then. This might not happen this year, but there should be some
degree of positive bounce and gold might well get a positive kicker. The oil price has broken
down from a basic rising trend dating back to mid - 2009, and this development may be very
much worth noting.

Friday, August 22, 2014

SPX -- Daily Chart

The market has regained positive footing again. It is maintaining the groove in place since late
2012, with periodic lows nearly every three months or so followed by moves up to new highs.
SPX - Daily

Bull markets are rarely boring, but this one has become so. I will not bother you with re-capping
the current picture or regale you with stories of the number of instances of seasonal weakness
that lie ahead in Sep. and Oct. Be advised only that if the pricing pattern begins to change in
a meaningful manner something important will be afoot because that is what it will take to
break this now comfortable pattern.

The one change in the broad market I would note (again) is the loss of positive momentum
relative to last year as the Fed's policy of QE winds down to zero this autumn. Incidentally,
and in regard to monetary policy, wasn't that a fine piece of tap dance choreography Ms.
Yellen executed at today's keynote for this year's confab on monetary issues in Jackson Hole
WY.? Not even the Cheyenne in their heyday could dance around the campfire like that.

Tuesday, August 19, 2014

Economic Indicators

Coincident Economic Indicator (CEI)
Measured yr/yr/ my CEI advanced just slightly more then 2.0% through Jul.  The indicator has
been flat since May after having hit a recovery period low of +1.0% in mid - 2013. I have been
hoping for better with the strong liquidity story as background. However, since business continues
to hire at a moderate rate of +1.5% and refuses to allow real wage growth, It remains a tough go.
The weak income situation combined with only moderate employment growth acts like an anchor
that bumps up and down off the bottom but holds the pace of the real economy slow. Industrial
output growth has been strong, but with modest progress at the retail level, there may be some
unwanted inventory accumulation.

Profits Indicator
My top line sales growth proxy -- the yr/yr change in the rate of the dollar value of industrial
production -- hit 7.1 % through Jul. '14. With cost growth more moderate, this suggests a
sizable rise in pretax profits, with the positive leverage coming mainly from strong physical
volume growth. The gains in sales and earnings represent what should emanate from strong
liquidity support and profits at a higher level should persist for a several more months.
However, as the post just below indicates, the strong liquidity environment is set to wane as
QE 3 winds down.

Long T-Bond Yield % Trend As Leading Indicator
The trend of the long Treasury yield % has a spotty record as a lead indicator of the trend of
economic momentum over a hefty span of years, but it has been very useful since 2007. Last
year the TYX rose sharply and correctly anticipated this year's strong improvement in
the pace of industrial output measured yr/yr. With QE growth slowing and set to zero out in
Oct. '14, the yield on the TYX has trended down steadily this year, signaling that bond
players expect the expiration of quantitative easing will lead to an eventual slowdown in the
growth of output. TYX Chart
To add some interest here, it should be noted that the TYX yield is getting "overbought"
relative to its 200 day m/a.

Sunday, August 17, 2014

Liquidity Cycle

Reflecting the supportive power of the Fed's QE 3 program, business sales measured yr/yr
have advanced from a recovery low point of  3.0% up to 7.0% through Jul. 2014. this strong
acceleration is currently underwriting faster profits growth for the SP 500 companies of over
$30. per share per quarter from the $25. level.

However, a negative reversal is now underway in total liquidity growth (including the Fed's
balance sheet). So far yr/yr growth in liquidity has declined from a cyclical peak of 11.6%
earlier this year to 8.9% yr/yr through early Aug. Thus, it is likely that at some point in
late 2014, business sales momentum will have made at least an interim peak and be set to
decelerate. The ramp up of liquidity growth starting with the onset of QE 3 has led to a
muted acceleration of inflation.

The bond market, save for the junk sector, is enjoying the run down of QE, with players
figuring that the expected lower growth of liquidity will lead to an easing of economic growth,
reduced inflation stimulus, and a postponement of the day when the Fed ends its ZIRP and
begins to raise short term interest rates. Sluggish retail sales data for July also helped the stock
market this week as traders, who were concerned about an economy which could overheat,
welcomed the sign of a more leisurely pace to economic expansion.

Although I am concerned about how the US economy will perform as QE is zeroed out, the
slower pace of retail sales was a little surprising and also suggests that there maybe a minor
round of lower inventory investment ahead as the pace of sales at the wholesale level has
been quite a bit faster than retail. It may well be too early to buy off on a slowdown story
this soon, but it is worthwhile to keep it mind.

Relative Strength of the SPDR 500 vs. the long Treasury price: SPY: $USB

Tuesday, August 12, 2014

Stock Market

Since the end of 2011, SPX net per share has moved up a little over 17%. The market has soared
though with investors adding a little over 4 multiples to the p/e ratio to bring it a touch over 17x
latest 12 mo. earns. This jump in valuation constitutes a major upswing in market player
confidence. The key driver appears to have been the Fed's ZIRP on short rates and the provision
of ample liquidity. Looking back to the close of 2011, it took nearly two years for these policies
to breath life into the progression of of earnings, which appears to be on a stronger course in
2014. Now, the Fed is steadily unwinding the big QE 3 program, and with better business
performance and rising credit demand, has taken to suppressing short term rates to hold the
ZIRP at least until the easing program is fully zeroed out late this year. Measured yr/ yr,
total system liquidity growth is still very strong relative to economic progress but the liquidity
situation is likely to continue deteriorating well into 2015. The private  financial sector has
stepped up to provide more liquidity in the form of credit, but, as it does so, the hawks on the Fed Board will greatly increase pressure to end the ZIRP and raise rates.

Inflation has decelerated substantially since 2011, and with the economy progressing modestly,
investors have cut the rate at which they discount future streams of earnings and dividends. This
too, has allowed the p/e multiple to expand. Now, typically when there is rapid growth of
liquidity, profits respond but so does inflation with a lag. There has been a mild pick up in
CPI momentum recently but not enough to be troublesome yet.

From 12/11 through 12/13, the SPX compounded at a nearly 24% annual rate. The market is
up this year so far but it is running far below the 24% rate and many smaller stocks are down
on the year.

With net per share growth stronger, and monetary policy in transition away from super
accomodation, it is logical to expect p/e ratio contraction well into 2015, unless of course
investors want to press the advantage of a lengthy transition in monetary policy toward
normalcy to full if not reckless advantage. The fundamentals are very good now, but are
headed, gracefully I hope, downhill.

I have continued to regard the gradual reduction of the QE program as an experiment with
risks to the market and the economy and not as a done deal transition to a smooth continuation
of the economic expansion. I watch economic momentum very closely.

Friday, August 08, 2014

SPX -- Daily Chart

The low test zone for the current short term downtrend is SPX 1900 - 1930 based on several
different support markers. So, with today's rally, the SPX has closed slightly above the zone,
but it is too early to tell whether there is a positive reversal underway or if there is further testing
and even a downside breakaway in store. SPX Daily

The market at -1.5% the 25 day m/a is slightly oversold, and both RSI and MACD are negative.
Most of the time, I look for trend reversals to enter positions and this would be one of them. 

The market is still holding the groove it has been in since mid - 2012 when QE 3 by the Fed
was first promised. However, with this program now running ever closer to the zero level, we
have moved quite a ways fundamentally from then and as tempting as it may be to figure the
groove will hold and the SPX is, indeed, near another rally point, conditions are turning less
favorable as the Fed cuts the power of the liquidity tailwind.

Wednesday, August 06, 2014

Oil Price -- Unexpected Fade

Since mid-2009 WT oil has traded primarily in a rising trend channel of 11% per year and
mostly within a $18 - 20 bl. range. The range for Aug. is set at $99 - 119. WTIC today at
roughly $96.50 has slipped below the low end of the channel for the first time in five years.
Despite the chaos in Libya and potential concerns for the long term potential output from
Iraq and Iran, there seems to be a little surplus developing at the wellhead despite rising
demand. And, the culprit may be none other than the US which has fast rising domestic
production and which is cutting Its imports. Late Jul. / Aug. is generally a seasonally firm
time for the oil price followed by a strong seasonal pop in Sep. WTIC is trailing the seasonal
pattern. Crude Chart

This is the first little warning of a shift in the dynamics of oil supply / demand since the deep
recession of 2008 and it bears watching. Oil supply overhang carries significant implications
for inflation, the US dollar, and consumer real incomes and confidence. Naturally, sloppy
oil pricing and a stronger dollar are unintended economic sanctions for Russia as well as
oil developers in general.

Given the volatility inherent in the industry since the 1970's, it is too early to make a big deal
out of it, but sometimes change sneaks up on you.

Tuesday, August 05, 2014

Ukraine Vs. Russia

It has been more than a month since the UKR army began to make military inroads against the
separatist rebels in the east. I have kept on eye on this because the UKR forces have been
operating close to the Russian border in an effort to interdict or shut down supply lines to the
rebels from Russia. The catastrophic downing of MH 17 drew attention away from the ongoing
campaign, but UKR military progress has been a surprise to many and it has in turn prompted
Russia to put up to a dozen fully outfitted infantry battalions along the border in the contested
area. Now Russia may only have been drawing the UKR forces in close to have the option
to conduct a cross -border combat operation that does not strain logistics and also wears down
the UKR military.

The Ukraine economy is still suffering and Kiev is become more unsettled politically. On the
other hand, Russia is experiencing a little economic rebound after businesses there over-
estimated the negative effects of sanctions imposed to date upon demand. Exports remain
understandably weak, but Russian authorities are not under immediate pressure to escalate
military activity to keep the populace distracted from observing the continuing failure of
economic policy to curb the deterioration of the Russian economy.

The situation could turn more serious if the UKR military keeps progressing in breaking up
the separatists' hold in the east and is able to seal off more of the border.This would raise the
cost of an eventual Russian incursion into the Ukraine considerably and it may lead Putin
to exercise the option of limited invasion to force the UKR military back.

It is hard to say how much the action in eastern Ukraine has bothered the major markets in
the weeks since the UKR military began offensive operations. But now that Russia has
moved fully combat ready units to the border, and is preparing its own sanctions program
against the West, the situation may command a little bit more attention.

Friday, August 01, 2014

SPX Daily Chart -- Cliffhanger

As expected the SPX did register an interim top in Jul. No genius here as there were a fair
number of people looking for a near term top. The fates conspired to engineer a most interesting
end to the week. Thurs. had a raft of heavy profit taking that saw the SPX fall sharply. Selling
continued today until the market hit key support levels, and then like magic, the SPX caught
bids and set off a short squeeze. At the end, The SPX rallied above that "golden" support near
the 100 day m/a and also closed very near major trend support around 1930. Quite a feat!
Here's the chart: SPX Daily

Despite the sharp recent sell -down, the market remains in the groove it has followed since
Sep. 2012 when the big QE 3 program was set up. All the sell offs since then that reached
trend support and the 100 day m/a produced near term oversolds that turned into solid dips
to buy. The Street wants you to feel this way come Mon. Had the SPX blown through all
this support, no end of technicians would have flipped bearish. No way to send people off on

So, over the next week or two perhaps we get to see whether despite receding QE and the
prospect of an eventual  end to ZIRP, players want to resume pushing the market up on a
strong course or whether the guys decide to take it easier and acknowledge rising risk.

The market is in a clear short run downtrend and is mildly oversold. it is also unstable
despite today's close above the low.