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 !!!

Sunday, April 24, 2016

Liquidity Cycle

The liquidity cycle is moving into its latter stage when funding for the economy and the capital
markets is more strongly dependent on private sector credit. The Fed's balance sheet and the
monetary base have been flat for the past 15 months. The growth of the basic money supply has
been decelerating from very high levels since late 2011, and is now around 5% yr/yr. Thus, M-1,
though shrinking, remains a source of support the economy. Total private sector funding growth
remains around 5% yr/yr. It exceeds the demands of the real economy which, in sum, has been
growing at about 3%. So, excess liquidity is being generated, which with negligible short term
interest rates and inflation, continues as a source of support for both equities and bonds so long
as investor confidence is not seriously shaken.

It appears that when the Fed raised short rates late in 2015, it triggered a very temporary liquidity
squeeze as fixed income managers of varied stripes went to vault cash to avoid losses on cash
equivalent securities. The monetary base wound up shrinking by about $350 billion in Jan. of the
current year. The funds have subsequently been re-placed. Only God knows who may have made
money on these stunts, and sadly enough, it may have made the sell-off in equities in Jan. worse
than it need have been. It will be interesting and important to see whether folks 'bury' funds again
the next time the Fed pushes up rates. Bonus compensation programs can add excitement to the
game. No?

It is important to note that when the Fed freezes its balance sheet and the monetary base, both
economic and stock market risk rise. The collapse of the oil price notwithstanding, the stock market
and the economy have struggled since late 2014, when the huge QE 3 program ended. The
transition away from monetary-driven liquidity to credit-driven has been difficult. Hopefully,
the recent rise in the short term leading economic indicators signals a brighter time ahead.

Friday, April 22, 2016

Silver -- The Crash Dummy Abides

The silver price is venturing off its second major crash in the past 35 or so years. Silver Monthly
Price bottoms of $5. oz. were not uncommon historically, but over the past decade, silver price
lows have lifted, as the cost of mining the stuff has ascended steadily, with breakeven probably
somewhere near $14 oz.

Silver fundamentals are akin to gold, but silver is also more sensitive to commercial and industrial
demand. The silver weekly chart compares its price to that of industrial metals in the top panel of
the foregoing. Silver Weekly

There has been a blowout in the commodities sector since the spring of 2011 as large supply /
demand imbalances developed mainly because of a strong deceleration of global production
growth with China's rapid descent leading the way among sizable economies. The painful process
of rationalizing supply via shutting in production is now well underway. US short term leading
economic indicators have been improving so far this year and China industrial output has
strengthened with a weaker currency. The US dollar has also stabilized after a very sharp rise
starting in 2014, the oil price has strengthened and inflation potential, albeit modest, is on the rise.
So, there has been a recent bounce in the silver price as traders speculate this heavily oversold
market may finally see some sunshine. The improvement in silver fundamentals has been modest,
and economists are very concerned about just how well the global economy will hold up this
year. Silver is modestly overbought, but is clearly in play for now.

Sunday, April 17, 2016

SPX -- Weekly

The SPX continues to rally off the double bottom of earlier in the year, but, not surprisingly, has lost
some of the strong positive momentum that has characterized this move. SPX Weekly

Obvious downtrends in key indicators shown on the chart are in positive reversal mode after
months of heading south. The SPX has entered an intermediate term uptrend, but not without
caveats. Notice the RSI in the top panel. It has had trouble clearing +60 during the rallies that have
occurred over the past 15 months. This suggests the overboughts have been modest and not
healthy in the sense that vulnerability has been a continuous question. As well, note that the 13 wk.
m/a has yet to challenge the 40 wk. The last such challenge came at the end of 2015 and the
failure set the stage for the poor beginning of the current year.

The indicators on the chart do not show a current intermediate term overbought condition, and
over 3000 chart patterns are nicely positive. However, this measure seldom gets more positive
than it is currently, which suggests very full participation in the advance.

Business sales and profits continued their decline on a yr/yr basis through Q1 '16. SPX net per
share continues to run about $100. at an annual rate. The bright side here is that the weekly
leading economic indicators I follow as well as the monthly PMI new orders reports have turned
clearly positive, suggesting stronger US economic performance as 2016 progresses. This is a very
welcome development. In addition, the yr/yr growth of real monetary liquidity, although sliding
in momentum, is still strong, especially given the chronological age of the current economic

The stock market has clearly benefited from the sharp, seasonal rise in the price of oil in recent
months. The oil price is set to transition into a seasonal consolidation phase just ahead. Given the
on again, off again nature of industry chatter about the possibility of oil production constraints,
price volatility out until Aug. or so may be stronger than usual and this could play into the stock
market narrative.

Wednesday, April 13, 2016

Gold Price

Gold Fundamentals have edged into positive territory since late 2015. The CPI measured yr/yr has
probably made a significant low. The oil price has been rising nicely on a seasonal basis, and even
industrial commodity prices have moved a little higher after after an extended basing period. The
dollar is hanging tough after a pronounced rise, but has lost its positive momentum after reaching
unwarrantedly overbought levels. In all though, the improvements have been modest so far, and
unsurprisingly, the rise in the gold price has stalled in the short term.

Forward inflation indicators are still depressed but are edging higher, and gold would likely
benefit if only global economic growth momentum was not so subdued. World industrial output
has had trouble clearing 2% on the upside over the past year, and adjusting for global excess
production capacity via plant shut-ins is a slow and painful process.

Based on its 200 day m/a, gold has reversed a lengthy downtrend and is now in positive mode.
$Gold Daily

Gold is working off a heavy short term overbought according to the important RSI measure and
may still be slightly over bought on the 14 wk. RSI (Not shown). Stories are making the rounds
about an OPEC production freeze, but since this type of story is typical of post oil price bust
periods, betting the ranch on an actual output freeze now may not serve as well as noting that
the oil price is about to enter a period of seasonal price consolidation to last a couple of months.

The next important resistance level for the gold price is $1300 oz. If gold were to hit that level
any time this year, it would herald what could be the start of a more durable advance.

Thursday, April 07, 2016

SPX -- Daily

It has been evident since late Mar. that the rally in place since mid - Feb. had become overbought.
The setback this week suggests that a corrective move may be underway, but it is too early to tell
whether or not it will be a significant move or not. Price momentum began to fade late last month,
and the break in the clear, sharp shorter term uptrend came early this week. SPX Daily

For possible hints on short run direction, you may want to focus on the RSI indicator in the top
panel of the chart to see how the market behaves if and when this indicator drops down to the
50 level (neutral). The bottom panel of the chart features the daily oil price. The stock market
has been tracking the oil price closely this year as a higher oil price signals better earnings
performance for both the oil sector and the SPX. Both oil and the SPX were so deeply oversold
this year, that one perhaps should give not up on either too quickly. As well, shorter term leading
economic indicators are on the rise for the US, so the desultory earnings expected for the first
quarter may not be indicative of results for the year for both the SPX and oil.

The current fair value bands for the SPX are featured on the chart as well (1870 - 1990). Plainly,
investors have been looking for a positive turn in earnings as the year progresses.

Saturday, April 02, 2016

Oil Price Update

The strong seasonal rally in the oil price should run out to the latter part of April, but when such a
seasonal run is underway, strong price momentum ends early in the month. Experienced traders
started dumping a little early, mainly I think, because the price failed at its 40 wk. or 200 day m/a.
Weekly WTIC

The rally in oil from early Feb. did take out the nearly two year price down trend line as well as the
13 wk. m/a. Although these were encouraging developments for the bulls, the key test would be at
the 40 wk. m/a as discussed in the March 9 post. A failure to take out the 40 wk. m/a in the spring
of 2015 was the kiss of death for the rally last year, and the failure to take out this resistance level
this year cannot be counted as a good omen. Even so, it might be wise to watch this market for a
little while longer before throwing in the towel. After all, this winter's price washout came on very
heavy volume and at price levels nearly 50% below break even for the industry.

The bottom panel  of the  weekly chart shows the 52 wk. rate of change for WTIC crude. The
Fed is watching this indicator to help it gauge the direction of inflation momentum, and if the
indicator improves further up to the zero level or better as the year progresses, this would go a fair
way in lifting the near deflation readings registered recently on the CPI measured yr / yr.