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 !!!

Monday, May 30, 2016

Stock Market -- Long Term Issues #1

It can be mighty important to gain roughly correct perspective on the long term potential for the
stock market. Looking back over the past nearly half century, I have been prescient at times and
other times I have been well off base. I have had the good fortune when I have been in the wrong
to correct the view before the errors became fatal. I do not think I have a strongly held view of
the future this time out. There are only issues instead. If you are the indulgent type, read along and
see how the series of several posts on the long term outlook planned for the next few weeks strike

I am not uncomfortable with the idea that 2009 marked a generational low for the stock market.
Stocks have been bought for growth primarily since the end of WW 2. The chart coming up shows
the SP 500 since 1950. ^GSPC  (Chart is in log form. Some of you may have click off "linear.")

The tops on the chart form a nice trend line until the 1990s when a quantum rise in the p/e ratio
took the SP 500 into large bubble mode for the first time since the 'roaring twenties.' If the trend
line from the tops in the 1950s and 60s is extended all the way to the present day, you will observe
a 'bubble echo' for the 2003 - 07 period which was followed by a deeper bust in 2008 - 09. That
bear market was the worst in many years and, lo and behold, the subsequent bull run has brought
the market again above the top of the trend line from the 1950s.

Thus, on a long run basis, the market is again hyper - extended, although less so than in 2007, and
very much less so than in 2000. The long term history of the stock market going back 200 hundred
years shows that buying hyper - extended markets, even dinky ones, is not a rewarding strategy.

The first longer term outlook issue then is that we have a very expensive market to cope with.
Secondly, there has been a significant trend break in the bull market running off the 2009 base.

There has been near term support at SPX 1800 and the rally this year has been strong enough to
reverse a downtrend and leave the market in limbo. Last year's rollover in the MACD measure
(second panel) also not a good omen at least in view of recent history.

In the next post in this series, figure we'll put some fundamental meat on the bones of the charts.
Interesting here as lead in is that the SPX has come off a lengthy period of net per share growth
that has been well above the long term average.


Saturday, May 28, 2016

SPX -- Weekly

A low risk / high return profile for the stock market comes along when the Fed fosters strong
liquidity growth and suppresses short term interest rates. Such was the case from early 2009 through
year's end 2014. Last year marked a transition period when liquidity growth slackened as the Fed
kept Fed Bank Credit and the Monetary Base flat and the Fed ended the year by raising short term
interest rates. These developments send fundamental stock market risk substantially higher and
diminish the potential for high returns. The stock market can still rise during such periods, but now
players must realistically address their individual risk tolerance as the economic expansion grows
more mature.

The best guess now is that business sales and profits are set to reverse downtrends and resume
positive direction. The price earnings ratio of 20x + is nearly fully discounting improving business
sales volume growth and modest but strengthening pricing power. So, to get fairly strong positive
lift from the current SPX 2100 level over the next year or so is  going to require good fortune on
the earnings front and some speculative zeal from market players.

The SPX chart is positive based on the indicators but is about to become more pricy. SPX Weekly

Thursday, May 26, 2016

Gold Price

As outlined in an Apr.13 post on the gold price, gold fundamentals have, on balance, turned mildly
positive. There was a nice long gold trade late in 2015 as fundamentals transitioned to positive, but
the price soon became strongly overbought, and it was reasonable to question whether gold had
come up too far too fast given the very mild improvement in the underlying fundamentals. It was
also mentioned that should the gold price break above $1,300 oz., we might have a very interesting
situation. $ Gold Daily

The chart shows the evolving powerful short term overbought position on gold and the negative
price reaction at important overhead resistance at $1,300 just as the USD (bottom panel) went
into rally mode, all at the beginning of May. Dollar players have been wagering that the dollar
will continue to strengthen should the Fed elect to raise the level of short term rates at the Jun.
FOMC meeting, if not maybe at the following one. I like the USD longer term, but its fundamentals
have not improved enough to support  a value above the high 80's in my view. That is a minority
position these days, but with the gold price  now approaching an oversold situation, gold is
on the radar screen for the next few weeks to see if it can rally off the oversold.

Monday, May 23, 2016

Oil Price

Oil supply and demand have come into reasonable balance in 2016. Unlike prior periods when
there has been an oil price bust, spare capacity at the well head is rather small, although the
Sunni Arab states are working to boost production. The production surge of 2015 has produced
an outsized global crude inventory position, but continued global economic expansion will work
slowly to reduce the overstock.

There has been a vigorous debate for months by oil price observers about the proper direction
the price should take, but given that the glut is largely now related to inventory rather than
production vs. demand, I have based my trading strategy primarily on the seasonal price pattern
for oil. Better lucky than smart is the trader adage that applies in this case.

Oil continues in a strong seasonal uptrend underway since Feb. The 50 day m/a is nicely positive
and has moved above the 200 day m/a and the oil price has been exceeding both. Oil is now
moderately overbought against its 200 day m/a, a situation not observed for quite some time. The
price is also short term overbought on MACD and RSI, although these triggers have yet to work
because of the strength of the positive trend. WTIC Daily

The oil price is now vulnerable on a seasonal basis until the latter part of July when another
period of seasonal strength would be set to begin. Springtime price vulnerability is usually not
that severe, and some players will simply hold on through this interval if basic fundamentals
continue through.

Tuesday, May 17, 2016

SPX -- Daily

The overbought readings for the SPX in both Mar. and Apr. have begun to yield some
 selling pressure. SPX Daily

This seems to be a normal development following such a strong run up in the index from the
Feb. low. The issue now is how deep the sell off will run. The chart shows short term support
around SPX 2040. A breech of that level would suggest some more pain may be on the way.
It is also worth noting that a still rising oil price is not now supporting the uptrend of the SPX
(WTIC is in bottom panel of the chart).

It is entirely possible that players may be growing apprehensive here in the face of stronger
economic and inflation data coupled with Fedspeak calling a short rate increase for June a
'live option'. Straight off, the fundamental case for hiking the FFR% in June is simply not there,
so should the FOMC elect to boost rates again, it would be about as unwarranted as was the
Dec. 15 hike. Speaking editorially, such Fedspeak, particularly from non-voting members of
the Board, only adds to market uncertainty and volatility.

If the economy can maintain a faster pace of expansion, profits will begin to recover nicely
and another 25 or 50 basis points up in short rates should not change valuation parameters
materially. I am hoping for this and do not see a compelling reason to get into a tizzy about
share prices. But since market sentiment has been growing more bearish for quite some
time, I could wind up eating those words. (Scroll for May 8 post on sentiment.)

Sunday, May 15, 2016

30 Year Treasury Yield -- Early Warning Signs

Fundamentals that suggest the direction of long bond yields are falling into place to support higher
rates (and weaker bond prices). Cyclical factors turned weak in the latter portion of 2014 and
signaled the onset of a declining trend in the $TYX.

This year there have been upturns in the manufacturing PMI and in industrial commodities prices.
The recovery in the PMI has been modest with the exception of % of companies with a rising new
orders book, which has been strong.Weekly data on physical output is experiencing a mild positive
reversal and future inflation pressure gauges have been turning up after nearly 18 months of decline.

It is important to note however, that the mild upturns in cycle pressure are coming off a very
cyclically depressed base. My Cyclical Business Strength Index, which is a broad measure of the
components of production with heavy emphasis on plant utilization, reads a low 128. In the past,
when the economy was running flat out at effective capacity, the index could register up to 145
or over 13% above current levels. History also indicates that it was often only when the index
reached upwards of 135, that the Fed would turn aggressive in tightening monetary policy. So,
the current upturn is still well 'under the radar' when it comes to measuring cyclical pressure.

Bond traders operate on such a 'hair trigger' when it comes to dumping long maturities when
cycle pressures are on the rise, that it is interesting that the recent rally in bond prices has
continued even though pressures are inching ahead. Trader reluctance to reverse course may
well reflect a consensus conviction that faster output growth is not sustainable and that it is
not worth getting whipsawed in the process. Could be, but stronger data will likely dispel
consensus convictions in a hurry.

Sunday, May 08, 2016

Stock Market Sentiment

I prefer real money down measures to study sentiment and my favorite is the all-equities put / call
ratio. A very low P / C ratio indicates the market is overly bullish and a high P/C implies players
are too bearish. A good measure to capture this portrait of sentiment is a 13 wk. m/a of the CPCE

The powerful advance in the SPX from late 2011 through mid - 2015 saw a sharp downtrend in
the CPCE that carried to very low levels by late 2014 and signaled traders were too bullish on an
intermediate term basis. The low in the 13 wk. P / C ratio coincided with the end of the gigantic
QE program by the Fed. Since then, sentiment has gradually turned less positive as the P / C ratio
trend worked persistently higher into the early autumn of last year following the first sharp sell-off
of a market correction that carried into Feb of this year. With the subsequent rally, bearishness
has eased somewhat but still remains fairly high. Note too, that the bearish trend of sentiment has
yet to reverse course but remains hanging in the balance.

The takeaway here is that from a contrarian perspective, the market has more upside to it down the
road, but that in the absence of a reversal of the P / C trend, players need to acknowledge the
potential for another sell-off  before the corrective process of the market may be fully behind us.

The bottom panel of the chart shows the NYSE TRIN indicator. This is a measure of buying vs.
selling pressure, with a high TRIN signaling selling pressre and a low TRIN indicating net buying
pressure. The heavy selling pressure in evidence since the first significant corrective hit to the
market over Half '2 '15 has tapered off substantially since then, with direction of pressure now
neutral over the past couple of months.

Friday, May 06, 2016

Presidential Politics & The Markets

The US will have a newly minted President come this Jan. The first day of full time work for any new
President involves getting together with top staff and advisors to begin development of a re-election
strategy. In getting the plan together, the key sin to be avoided is to have the economy in trouble
during the last 15 - 18 months of the first term. You want the economy humming along as best it
can during the protracted lead-in to the next election. So this means taking stock of the economy
after the inaugural festivities and delving into whether it  can be kept relatively comfortably
afloat throughout the forthcoming four years or whether there are excesses in the system best dealt
with earlier during the President's tenure. Since the markets will be aware of these excesses and how
troublesome they may become, the early going of the first term will feature strong investor focus
on official Washington.

On the assumption the US economy will drift along positively into early 2017, it will likely be the
case that the new administration will confront stronger but still mild inflation and relatively full
employment, at least on the surface. Many in the workforce now hold more than one job and as
official part timers have few benefits. Early 2017 is likely to see that there is still significant
facilities over-capacity and plenty of liquidity in the banking system. So, unlike in many post
election years, the argument to allow the economy to run out the string with the aid of perhaps
additional fiscal stimulus in the expectation that excesses can be more fully redressed after the
next election will prove far more tempting than normally. If this preliminary assessment proves
correct, it may not make that much of a difference who wins the 2016 election, at least in the very
early going.

As investors and traders we can get caught up in the election battle in the months ahead however
we may, as long as we keep in mind how quickly the re-election campaign begins.

looking at the 2016 landscape, we find a four way political spectrum situation for the first time
really since the 1912 election. As with Eugene Debbs then, we have a newly emergent left wing
in Bernie Sanders. There is a left-of-center contingent behind Hillary Clinton. Then we have the
hardcore GOP, now captained by House Speaker Paul Ryan and a new, less plutocratic GOP
running with The Donald. To make this case, Trump will need to tell Ryan to stuff it and not
give in to the Ryan ultimatum. That little twist is ahead along with perhaps several others as
we move on to the big day.

Sunday, May 01, 2016

SPX -- Daily

It has been obvious for a couple of weeks that the SPX was overbought in the short run, and now
we are again seeing some price weakness. Traders of course have taken note that the market did
fail to take out resistance again at 2100 just the other day. SPX Daily.

It is hard to quarrel with the idea the market is due a rest or even a minor pullback after such a
feverish run since Feb. Moreover, the SPX remains rather expensive based on current earning
power which continues to trundle along at around $100..With inflation and short term interest
rates at nominal levels, I will be raising my fair value target range for the SPX in Jun. to 1990-
2160 from the current range of 1870-1990. This implies that through 2017, business sales and
profits need to advance appreciably with both stronger volume and pricing power to drive higher
results. The leading economic indicators I most rely on have turned higher in the short run, and
I am reluctant to turn bearish as long as future fundamental trends are nicely positive. So, if a
big selloff is in the cards for the next couple of months, I am likely to miss it. Importantly, if
the advance indicators start to flatten or weaken at some point later in the year, basic reassment
would be in order, because the question would naturally arise whether longer term earnings
growth potential is too liberal for the times we are in. Since such a judgment might have major
negative for how stocks should viewed, I am not anxious to pre-judge the issue.

You might take note that with a weaker US dollar, some equity money might shift to play the
oil, PM and commodities markets more directly as they have positive momentum currently.
Noteworthy also is whether the oil market can retain some positive direction over the next
few months, as a period of seasonal consolidation is in order.