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, July 30, 2015

Commodities Market

Statistically, the CRB Commodities Index is dirt cheap on an historical basis. The index is now
just slightly north of 200. Since the early 1970s, 180 - 200 on the index has marked the bottoms
on the chart. Years back, I developed a macro model to figure out an equilibrium price where
supply and demand for commodities are in reasonable balance and where  the price includes
enough  profit margin sufficient to encourage future supply to grow along with demand. Here in
2015 the fair value price is running around 350 on the index. $CRB Chart

the CRB is trading at a large discount to fair value. This suggests a goodly number of raw
commodities producers are now running in the red and can only be cash flow positive if
there are sizable depreciation and depletion allowances and / or paid - in subsidies to keep
people employed (a not uncommon practice in foreign economies). Big discounts to fair
value in the commodities markets usually occur during recession periods such as in late 2001
and 2008 - 09. Now, we have a different situation. Global demand is growing at about half
the rate it needs to grow to allow depressed operating rates to rise enough to equilibrate the
markets. The 2002 - 2008 boom in commodities prices brought along with it a large cycle of
commodities capacity expansion. Moreover, with global monetary policy accomodative
since 2009, producers have been reluctant to shut - in capacity. The problem of excess capacity
relative to demand has been clearly apparent since early 2012. On top of too much capacity in
the business, we have to add the unwinding of long positions built up in commodities by both
financial players and speculators. Long futures positions in the markets often reached 3 times
what they were at the beginning of the last boom in 2002.

Viewed over the last 40 odd years, the CRB index is sold out and in distress given rising
operating costs and notwithstanding large productivity gains. The timing of price recovery
for commodities, as cheap as they are, is hard to figure. More of the marginal producers
and more of the diehard speculators may have to be stripped out of the equation. The low
global demand growth has yet to show much acceleration and a strong US $ is also a drag
on the market. Thus, a decline in the CRB index down to the 180 level cannot be ruled before
there is improvement.

Commodities are on my watch list and I may try long positions in the DBC commodities
tracking ETF (bottom panel of chart above) when it looks like a short run uptrend may be

Sunday, July 26, 2015

Oil Price

Oil is about to move into a seasonally strong period which normally lasts through the end of
Sep. - beginning of Oct. Such periods can be exciting but do not normally top the Mar. - Apr.
interval for lift off power. The onset of a seasonally strong period does not look like a happy
moment on the chart. WTIC Weekly

The oil price held up very well through the normally weak late spring - early summer period,
but has broken down sharply since. The Iran nuke deal has been a negative, as has a bit of
firming in the US rig count, fresh debate over the prospective size of the of excess capacity at
the wellhead, and a general decline in commodities. The bear market in oil was re-affirmed
when the price recently failed to break above  its 40 wk. m/a. An oversold condition is
developing with important shorter term support at $45 WTIC.

I had been guessing back in the spring that oil could, after the oncoming bout of seasonal weak-
ness, rise to $70 bl. in the early autumn of this year, but that now looks like quite a stretch and
would likely require not yet apparent extra factors to come into play beyond the seasonal lift.

Sunday, July 19, 2015

SPX -- Weekly

The SPX bounced nicely last week to close very slightly below its all time high. Moreover, it
remained clear of the 40 wk. m/a on the plus side. SPX Weekly

The cyclical bull market has grown more tenuous, however. The SPX is no longer following a
clear uptrend line and has steadily lost momentum. It has been making new highs, but they
have been so minor that the market has basically been adrift. Moreover, the breadth of the market,
measured by the percentage of stocks in clear positive momentum price patterns, is sharply
lower than at the start of the year.

The SPX is not not materially overbought against its 40 wk. m/a and has not been so for months.
the 40 wk is also still progressing higher, although it is starting to flatten out compared to the
prior year.

In all, the chart is unimpressive but is not yet near negative, and on the old saw that one should
never sell a dull market, players have just been going along with it even though the SPX has
been drifting.

On balance, the fundamentals are positive, but the situation on this score is tenuous as well.
Broadly, resources are in place to support continuation of real progress in the economy through
2016 in my view, but the progress we are witnessing is quite modest. Measured yr/ yr my
coincident economic indicator has declined from a healthy 3% at the outset of 2015 to an
anemic  1.6% through June. My monthly and weekly leading economic indicators signal a pick up
in growth for  Half 2 '15, but the readings are, shall we say, unprepossessing. SPX net per share
continues to trail the prior year, with weakness in the energy sector more than offsetting gains
elsewhere. Even excluding oil and gas, pricing power is modest, and many companies are
experiencing lower productivity growth since business is now geared for faster volume gains
which have yet to materialize.

There is an investor patience factor at work here as well. The market p/e ratio is elevated.
But with cash yielding near zero and bond market yields drifting higher, many players appear
reconciled for now to hold  equities portfolios to pick up the 2.1% yield and to play the
share buyback and merger lotteries as well as chase positive earnings surprise (viz. Netflix
and Google shares).


Thursday, July 16, 2015

Gold Price

The gold price appeared to have a broken a down trend running back to 2012 earlier this year.
The Jan. rally was better than I expected, but it was unable to hold.  Gold Price Daily

As the year has progressed, gold has been unable to rally from $1200 oz. support as it did
at the outset of 2015, and support at $1200 has recently turned into resistance. I reckon that
at around $1145, gold is now trading a little below the all-in cost of production for a fair
portion of the mining group with any number of mines now cash flow positive only because
of depreciation / depletion considerations. The gold price is now mildly oversold and a minor
bounce may be in the cards.

Global industrial output has been growing only at around 2% in recent years and this has
not been fast enough to put any real substantial upward pressure on factory operating rates.
Consequently, global inflation pressure has trended down to modest levels. Moreover, the
recent blowout of the oil price reflecting a supply glut has been a sore spot for gold players,
since in modern times, strong run-ups in the price of oil have tended to be a very substantial
factor in leading periods of accelerating inflation.

I have been looking for faster economic growth over the second half of 2015 and have thought
this might trigger some positive price action in the gold market. However, global liquidity
growth going into Half 2 '15 has continued restrained especially in the US and China, and the
economic benefits to both countries have been more muted so far than I expected. Thus, for the
present, global output continues to grow but not yet fast enough to signal that capacity
utilization is about to swing higher on a cyclical basis.

The gold price is volatile enough that you do not have to catch the bottom tick to make good
money on the long side. Faster industrial output growth should trigger a decent gold rally, but
you have to hover over the output data as it comes in because the liquidity support for the
global economy is restrained enough that you cannot be sure yet whether the pop in global
output will come soon.

Friday, July 10, 2015

Iran & Nukes

It is high time the US wraps up the talks with the Iran on the latter's nuclear development program.
Iran gets the lion's share of media attention in the propaganda wars with all the "Death to America"
talk. What is less well known is the existence of deep set contempt for Iran here. So, if the
US closes out the talks with Iran without an agreement, there may be some nasty politicizing
here, but it will pass soon enough. Obama has only 18 months left to his term, and in my opinon
he can better spend that time on other matters if the US does not get the strong deal it needs
from Iran right quick. I bring this matter up because I think the political goodwill that has allowed
these talks to continue under the radar for many months is about to run out, thus creating some
concession pressure in Iran's favor that will be received very poorly in the US and could damage
Obama's standing if goodies to Iran creep into an agreement.

With an agreement on the Iran nuclear program and an early end to sanctions, it is estimated
that Iran could ramp up oil production to 1 million bd within one year after the sanction
covering oil is lifted. In a world with excess oil supply at present, that is worth noting as such a
development may not be fully discounted in the market. If there is no deal, Lord knows
what will happen to Iranian output as it is very difficult to say what the standing of the
sanctions program will look like given the number of parties represented at the talks as well
as those hovering close on the sidelines.

Thursday, July 09, 2015


My primary fundamentals are all trending negative, save for short term interest rates. On the
wise premise that you should not signal "buy" or "sell" until the indicators say so, the "easy
money" buy signal, as frayed as it is, still does not signal it is time to significantly reduce
equity exposure. Though there is no "sell" in place, market risk is elevated because history
shows the SPX does not perform well during periods following the the termination of very
large bouts of quantitative easing such as occurred this past autumn.

My secondary indicators are, on balance, positive. For openers, there is excess liquidity in the
system relative to the current needs of the real economy, which now features modest real growth
and minimal inflation. As well, there is a steep positive slope to the yield curve (30 yr Treas. % -
3mo. Bill Yield). This shows no real pressure on the economy from the Fed. In like manner,
short term rates are way below my measure of economic momentum measured yr/yr. Too, my
business profits leading indicators have turned modestly positve in recent months. Finally, the
price of oil is not in a rapid uptrend, which can destabilize the economy.

More broadly, there is still slack in the US economy and no danger of immediate overheating.
In my mind, that leaves the odds favorable for a another cyclical up leg for this market, with
timing of origination far from clear as the market may have to get past increases to short rates

The momentum of the SPX since last autumn when QE 3 ended has fizzled out.  SPX Daily
The SPX has actually entered a short term corrective phase and is mildly oversold against its
25 day m/a. As well, it is sitting on its 200 day m/a which itself is flattening. The key short run
RSI and MACD indicators are also down trending, and the VIX volatility (fear) index is
approaching a short term oversold. There is not a classical sharp short term oversold in place
now, but the market is approaching it. The SPX has drifted off the uptrend lines in place
dating back to late 2011, and is now still nearly 3% above linear support at 2000. Not Quite
out of the woods yet.

Monday, July 06, 2015

Sweet Jesus : Greece And China

The ECB, as lender of last resort, opted today to continue its emergency liquidity assistance to
to the beleagured Hellenic Republic to support minimal commerce. With a "no" vote on pro -
austerity bailout programs from the 'Troika' by Greek citizens, The Greek PM deftly outflanked
Teutonic rectitude and forced the EZ players to either blow off Greece and put the country much
further along toward formal default on its $540 billion debt or to sit down with Greek negotiators
to hammer out a new deal which would swap some level of debt forgiveness for additional
austerity. The Greek people are strongly behind the Tsiparis regime, and major non- euro
power centers will not take kindly to seeing the disintegration of Greek society. If Mrs. Merkel
and the eurocrats in Brussels cannot conjure up a marketable story that Greece is truly a unique
case in desperate need of loan forgiveness and beneficence, they are truly worthless as politicians.
Merkel is inviting a veritable shit storm of criticism from both official sources and social media
if  she cuts Greece loose in its time of need. If the European Union wishes to dump Greece
forthwith, load the Greek wagon with debt forgiveness and sufficient liquidity to help them have
a fighting chance to begin to restore their economy. Germany has a chance to create a decent 'final
solution' this time out.

Party officials are in panic mode to prop up the Shanghai as it crashes. I have no idea whether
they will succeed, but since so many retail investors have been sucked in by the recent run -
up in the market, they must be concerned that social unrest could be out ahead and that what's
left of the more conservative old guard could drum up support for a counterstrike against
leadership that is seen as moving too quickly to alter the economic order.

My view for months has been the Shanghai should trade around 2800, and it is quite something
to my tired eyes to see the Gov. in there trying to hold the market up at such an overpriced level.
Daily Shanghai  (Note, however, that a short term oversold has developed).