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 !!!

Wednesday, October 29, 2014

The Long Treasury Market

A rebound this year in the long T-bond price was to be expected after the needlessly bad period
in 2013. But recovery in price has certainly exceeded my expectations, topped off by the
furious rally starting in Mid- Sep. as equities players zipped out of stocks into bonds on the
wind-up of QE and global economic growth concerns. The TLT 20+ year T-bond fund has
sold down from a panic risk-off top in recent days but does still rank as overbought against the
200 day m/a. TLT Daily

The end of QE does signal a tightening of monetary policy and that is why the long Treas. has
rallied since the get-go this year. Overbought as it may be, the TLT remains in a well established
uptrend in price.

The trading band on the TLT has narrowed in recent years from 80 - 130 to a range of 100 - 120
which contains most of the trades. This reflects the Fed's determination to keep its short term
ZIRP policy in place until the economy and the job market improve further and until there is
more evidence that the inflation rate can sustain a cyclical acceleration which would further
indicate that the US is moving on a more nearly cyclical path. Now, it must be seen how well
the economy can do without QE.

Stock Market -- SPX

As discussed in prior posts during Oct., the stock market did get itself oversold. Moreover, it
did take out short term trend resistance at 1940, and did move higher as expected. The volume
has been better and the downside leaders like the Russell 2000 small cap index have led the
way in a broad based positive response off the closing interim low of 1860 put in several
sessions ago. The market is now 2.2% overbought on a momentum basis against its 25 day m/a
and it would not be surprising to see a little consolidation near the current level of just over
SPX 1980. You will note on the chart that the market has had trouble since early Jul. holding
the 1980 level. SPX Daily

The recovery off the 1860 low has been far too rapid to be sustained for very long. In fact,
in the days ahead, the SPX could drop 2-3% from the current 1982 level and still be on a respect-
able positive trajectory.

Naturally, there is no law against the SPX continuing its current moon shot upward course
until it hits a very robust all - round overbought with the SPX topping its 25 day m/a by 5%.
That would be a little freakish since the market never sold off that much to begin with, but
traders have been headstrong to re-establish long positions. Put less politely, the herd stampeded
out in mid - Sep. and has been stampeding back in during the more recent sessions.

Friday, October 24, 2014

SPX -- Weekly

With QE expiry imminent, stock market is crossing from easy money bull with high return /
low risk profile to mundane bull with sharply elevated risk profile.

Market momentum has devolved in 2014 from powerful as seen last year to a far more modest
positive pace reflecting a lengthy adjustment to the wind up of QE. Further volatility and a
continuation of a downward adjustment cannot be ruled out given the evidence of prior periods
when large QE has ended.

Weekly Cyclical Fundamental Indicator is in a positive long term uptrend but a sharp interim
uptrend from Oct. 2013 broke down in Aug. and suggests lower business sales and profits
growth ahead.

Investor Psychology
Spirits have been lifted since J. Bullard, head of the St. Louis Fed, floated the idea last week
that QE could be extended in a more modest form. Bullard is not in the voting rotation this year
for FOMC and his idea would trigger a shit storm of conflict on the Board without evidence
of a critical economic need for further easing.

 Investors and traders are also keenly interested in the idea of seasonal strength from Nov.-May.
This rule has a good track record over the past half century and will have players carefully

With the Bullard comment, the market has recovered broadly from a short term oversold
on good volume. History shows that spike bottoms like we saw in the prior week have no
more than a 50% chance avoiding a retest.

The weekly chart of the SPX shows that the market has corrected down from a very extended
position and is no longer strongly overbought. SPX Weekly

Players who have low risk tolerance should note that the full universe of public issues still
shows that too many stocks are still in negative patterns with no positive MACD cross.

My three - six month momentum measure has been on a sell signal since early Sep. '14. This
measure has an excellent long term track rcord but has tended to whipsaw since mid - year
2013 as the "buy the dip" crowd has been very aggressive on knowledge the Fed stood behind
them with dollops of QE. It will be interesting to see whether the dip buyers prevail again now
that QE is expiring.

Wednesday, October 22, 2014

Economic Indicators

Coincident Economic Indicator -- Sept. 2014
Measured yr/yr, this important measure of US economic activity stood at 2.3%. Real sales
and production gains remain OK, but the income side of the equation is still lagging at 1.8%.
The momentum of hiring has picked up some, but the real wage rose by just 0.3% as
employers hold the line on wages. Tightfistedness at the payroll window continues to hold
back the economy. It has led to a longer and deeper period of de-leveraging by households in
the wake of the recession and has contributed significantly to a reluctance by consumers to begin
to leverage up again five years into economic recovery. Consumer Debt Service

Business Sales And Profits
Business sales in current $ have been at 6% yr/yr in recent months. Transactions volume has
been running slightly stronger than I expected, but pricing power remains anemic. Pricing has
recently turned negative for materials and energy resource providers. My selling price /
cost ratio has turned negative and is partially offsetting profit margin improvement stemming
from higher volumes. On balance, profits yr/yr are up, but would likely be stronger with a
better pricing environment.  The ongoing refusal by business to reward workers for productivity
gains inhibits both business volume and pricing power.

Liquidity Situation
The growth of the economy in current $ is exceeding that of the liquidity provided by private
finance. Hence, the capital markets are more reliant on dwindling growth of liquidity provided
by the Fed as it unwinds the QE 3 program. Portfolio manager cash reserves increased
modestly in Sep., but players are having to do more selling of securities to make new placements.
Without more QE and assuming the economy holds up in the months ahead, this process will

Tuesday, October 21, 2014

Stock Market -- SPX

The market closed today right on downtrend resistance at 1940 SPX. A top side break
through resistance would signal that the market might be reversing course while failure
would signal that the counter trend rally may have run its course. The market remains
volatile and unstable and is now trading on hopes for more QE. Daily SPX

Staying Away From China Now

I traded China stocks aggressively this year and particularly over the June - Sep. period. The
case for China was a course reversal on monetary policy back to easing over the past year or
so. Now China is tightening up on the broad measure of monetary easing and instead is using
targeted liquidity injections into its major banks. I have argued this year that China's profligacy
on monetary policy in the new century and particularly since 2009 - 2010 would eventually
necessitate a regimen of monetary stop / go to try manage growth plus control a dramatic
proliferation of real estate debt that is taxing the country's internal cash flow capabilities.
A vast shadow banking system has sprung up featuring the marketing of credit instruments
backed ultimately by real estate and managed by property trusts and companies which are
at debt servicing risk as property prices fall and land sales slow.

the recent tightening in growth of broad liquidity measures has prompted me to take to the
sidelines where it may well be appropriate to stay until there is clarification on policy and
this irrespective of the targeted liquidity injections.

Here is the chart for the Shanghai. $SSEC It may still be proper to argue that the Shanghai
deserves to trade at 2400 - 2500 as I have for several  years, but since it nearly reached that
area recently while at the same the PBOC was shifting policy gears, I took what I could get.

the post on June 3, 2014 started the idea and is attached. Big Red Dragon....

Friday, October 17, 2014

Sneak Peek Into The Abyss....

Yesterday morning I happened to be watching Bloomberg TV and Jim Bullard, President
of the St. Louis Fed, appeared as a guest. Jim is an influential guy in Fed-dom. The market
was in free fall and Jim just happened to opine that with all the turmoil, the Fed could have
a look at extending the QE program past the October demise date. He was asked to repeat
that message, which he happily did. As word swiftly got out, the stock market ended its free
fall and by today's close had rallied nearly 3%. Jim stopped the carnage for the week, and
with this trial balloon gave the Fed a fall back position if the current policy course continues to
rattle the Street. Jim did say new QE would be considerably more modest, but that fell on deaf

You will read far more 'learned' commentary about last week and you will have a chance to
peruse far more sophisticated fundamental and technical commentary than what I just said.
But, I think the Bullard remark is what did the trick. For me, it is becoming ever more difficult
to take  this business seriously, but let that be a subject for a different occasion.

In essence, and rightly or not, markets players are saying that the global economy will go kaput
and that painful and corrosive deflation may await without further dollops of stimulus from the
powers that be. With conditions in the absence of new sources of liquidity seen as so perilous,
it is fair to wonder why the SPX is trading at 16x net per share and not 10x.

If the markets (bonds included) are right, then that's some set of new clothes the emperor is

Wednesday, October 15, 2014

Stock Market -- SPX

The end of QE by the Fed has hit home. The SPX has been closing below its Aug. '14 low
and this means we are looking at a down market. The SPX has broken important trend support
dating back to the autumn, 2011 lows, so this latest and long lasting powerful upleg of the
bull market has ended. Whether this important break of trend marks the end of the cyclical
bull market in force since late winter of 2009 or merely indicates the bull is alive but now on
vacation remains to be seen. The market is now volatile and unstable and I am not about to
start throwing numbers around for the SPX. History shows that sudden endings of large QE
programs are quite negative for stocks, but since this is the very first time we have had a
period of extended tapering of the program before its conclusion, I am content to let the chips
fall where they may (no joke intended).

The indicators show the SPX, despite its partial reversal today, remains oversold in the short
run and this is further confirmed by noting that the market is over 5% below its 25 day m/a.
the trend of the SPX and both the 10 and 25 day m/a 's are down, and the market is probably
a little overextended to the down side as well. SPX Daily

So, after nearly three years, we have a new ball game.

Saturday, October 11, 2014

The Capital Markets' Own Forecast

Reflecting the Fed's very large QE program dating from late 2012, my new order index for the
US economy rose from lows of around 50 at intervals in mid - 2013 and in Jan. 2014 to a lofty
level of 66 in Aug. this year, before tipping down to a still strong 61 in Sep. Readings above
the 65 level on this diffusion index seldom are much stronger. So, there was a substantial
acceleration of business activity and profit results along this year.

However, since the spring of this year, progressively fewer stocks could match the performance
of the S&P 500 (SPX) and the relative under-performance of less than top tier capitalization
stocks began to nosedive at the end of Aug. right in line with the interim peak in new order
activity in the economy. As we all know, the SPX itself began to slide in mid-Sep. as concern
about an economic slowdown began to take hold. The Treasury bond market has seen a down-
trend in yields since the get-go in 2014, and a progressive reduction in the yield curve this
year indicates that the bond market is expecting economic progress to slow and the inflation rate
to moderate further. 10yr - 2 Mo. Yield Curve

Though not at extremes, the Treasury bonds are overbought and the stock market is now in a
growing oversold position. The US liquidity cycle has passed its peak, and economic growth
should moderate from the Aug. 2014 momentum thrust, but it does not guarantee future
economic progress will be so slow that resource utilization will stagnate or that inflation
pressure will end and deflation pressure begin.

There has to be some time given to determine how the real economy will respond to the
absence of QE. Investor psychology is now more fully defensive and this attitude could
foster further volatility in the markets until players get a handle on how the economy behaves
without its "training wheels" (expired QE).

Sunday, October 05, 2014

Monetary Base & The Stock Market

The Fed has made its balance sheet available only back as far as 1989, but the St. Louis Fed
has compiled data for the monetary base, a very close proxy for the Fed's balance sheet, back
to 1918. History shows that when the growth of the monetary base, when adjusted for inflation,
turns negative on a yr/yr basis, trouble invariably follows for the US economy and the stock
market. The lead time between when the growth of the real monetary base zeros out and trouble
for the real economy and the stock market starts can be very short as happened over the late
1930's - early 1940's or very long as occurred during the 'roaring twenties'. My work over the
many years I have been at this game suggests that the continuing availability of private sector
credit is the deciding factor as to when removal of the Fed punch bowl starts to pinch the
economy and the stock market. Fast rising short term interest rates often telegraph trouble
ahead, but when private lenders are leery of the economy, the supply of loanable funds can
begin to dry up well before short rates begin a steep ascent during an economic expansion.

I have told of these observations, because as the Fed ends QE 3 in the weeks ahead, the growth
of the monetary base will likely flatten out as will the growth of the basic money supply. Then,
as an investor in the US, the Fed will no longer have your back. The easy money part of the
bull market will have ended. The risk / return profile for the market will be less favorable
because risk will rise given the growing dependence of the economy and stocks on the
generation of private credit in the system.

The current bull market need not end. The market will have to adjust to being credit driven as
opposed to being driven by monetary liquidity. Adjustment can vary from painful to nearly
seamless depending on how well confidence in the economy holds up and whether bankers
will continue lending now that they all know the Fed does not have their backs, either.

So far, investors have adjusted to the forthcoming new period by reducing holdings in most
smaller stocks and through increasing exposure to big cap names and Treasuries. So, most
stocks are oversold in the short run and it remains to be seen whether confidence will ebb
further or if players decide the economic prospects are solid enough to move some funds
back into the market.

Wednesday, October 01, 2014

Stock Market -- Here We Are Again

The SPX has again declined to the neighborhood of it 100 day m/a. This has been the fail
safe point for all of the sell-offs since the end of 2012. SPX Daily

This is the eighth time we have seen this adventure. In the prior seven, the bears have started
growling, only to see the SPX rally on to new highs. Recalling an old Wall Street saw, My
wife said at lunch: "Yom Kippur can't come fast enough" (An old rule tells one to buy on
YK). Well, the SPX is mildly oversold in a market that has rolled over in the short run, and
we are simply going to have to wait and see if the bulls can snatch victory here for the eighth
time or whether something less positive or even outright negative is about to happen.

I have stayed with the technicals in recent posts because the pattern of the advance in the SPX
has been remarkably consistent since the end of 2012, and it has seemed unwise to start huffing
and puffing on the fundamentals until this little drama is resolved. More on the basics this