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, July 31, 2016

Oil Price

The last post on the oil price was back on May 23, when it was argued that oil was vulnerable on a
seasonal basis. Oil did enter a seasonal decline and it was also mentioned that the bulls might wait
until the end of July before dusting off the chart. So, here we are.

There are things about the spring - early summer weakness in the oil price that are a little bit
disconcerting. First, long side speculative interest in oil when the price rallied up near $50 bd. was
very nearly at record levels. Bullish, money down sentiment was way too strong in a market when
the fundamentals suggest a careful, tentative approach to rallies in view of continued sizable global
inventories. This may have set the market up for a larger than expected seasonal flop of  nearly 20%.
Second, the intermediate term weekly chart showed the first nearly strong overbought for oil in
several years. $WTIC Weekly Third, the MACD reading has turned negative, and the 40 wk. m/a
no longer supports a rising market. Since Aug. can be a choppy month seasonally, long side traders
may hold off on significant new commitments until later this month. It may also be the case that
the Brexit induced rally in the US dollar bothered oil players.

The recent heavier than expected pressure on the oil price as speculative longs are run off suggests
that even if oil gets its big and final annual seasonal lift over Sep. - mid-Oct., the price recovery may
well fall sharply short of the $60 level that looked like a 'do' earlier this year.

Tuesday, July 26, 2016

Liquidity Cycle

With the Fed's balance sheet and the monetary base now flat for the past 18 months, the private
sector is the primary provider of liquidity to the system. Total private funding measured yr/yr has
moved up to 5.6%. The banks are not avidly chasing liquidity with jumbo deposits down slightly
and commercial paper offerings running flat and way below pre-recession levels. With short term
interest rates at nominal levels, M - 1 money supply has been growing nicely as folks have
little incentive to move funds out on the curve. With the Fed not providing any tail wind, risks
to the capital markets are elevated, but given the modest needs of the economy, there is excess
liquidity to fund speculation in the capital markets as long as confidence holds up. Recent economic
data suggest the economy is firming up, and if a strengthening trend is developing, excess liquidity
will decline and the Fed may ultimately wish to raise the Fed Funds rate again. Short term lead
economic indicators support this view, so one has allow that investor and trader confidence may
receive a challenge in the months ahead. If the Fed begins to telegraph this view, players may
again shorten maturities enough to actually shrink the monetary base and give some traders a scare.
However, since the economy is still well below levels suggesting the development of an overheating
situation, the Fed may maintain an extended purview to encompass international issues such
as Brexit etc. and leave off any warnings for now.

As 2015 wore on, markets players took about $170 billion off the tables, but with stocks and
bonds higher in 2016 so far, that money flowed back into the markets. Given the relative
stability of money market funds in recent years, market action in the short term may continue
to be rotational pending news from the Fed.

Friday, July 22, 2016

SPX -- Weekly

My weekly cyclical fundamental indicator turned up in Feb.'16 and continues to improve. The
inflation pressure gauges also turned up during the winter and are trending higher, although the
recent firming of the US dollar has trimmed the momentum of the gauges. The business strength
indicator is now firming, but remains below levels that signal the building of broad cyclical
momentum and pricing pressures in the economy. In, sum, the environment for business sales
and profits is getting better but is still subdued. The idea that the stock market can rise further
even though growth is restrained because inflation and interest rates are so low is gaining an
ever wider audience currently but is far from 'gospel'.

Back in my college days, and after an evening out, we would hit the old Blue Comet Diner in Bryn
Mawr, PA. We would order medium rare cheeseburgers and home fries, and if we were feeling that
a bit of extravagance was deserved, we'd go for having gravy ladled out over the burgers and fries.
To the point, if the 2009 - 2014 phase of the bull market was the burger and fries part, the
current market is the gravy. That's about as serious as I can be, at least for today.

The chart is nicely positive and has extended the rally from Feb. to new highs. The SPX is headed
for an intermediate term overbought but is not there yet in a robust fashion. Interestingly, the SPX
could fall sharply to the 2040 area before the current uptrend was violated.  SPX Weekly

Sunday, July 17, 2016

Thoughts On 2016 National Election #2

The Democrats have made significant progress on trying to integrate the left-of-center wing
(Obama, Clinton) with a young, revived progressive wing (Sanders). They plan to join forces to
combat The Donald and the GOP, and have reached extensive compromises on party platform
and policy. It is still early to tell whether Bernie's people will gravitate into the party or remain
aloof, seeking to form a new base for the election in 2020. Hillary, for her part has been pulled
way left from where she stood a year ago. If she is elected president and begins backsliding,
the party's unity may unravel as Bernie and Elizabeth Warren may get right in her face if she
does not co-opt them. It will be critical for Hillary to court those younger folks who are
debt burdened underemployed college grads and are moving into the family formation years.
It will not be good enough if the Democrats stick only with older liberal whites and Afro -
Americans and Hispanics. In turn, young, progressive  folks need to behave themselves if
they protest the Trump campaign as now seems likely.

The GOP has made no progress toward unifying the establishment and its elites with Trump's
hard right, strongly nationalist followers. Trump blew a hole in the GOP establishment, showing
them to be interested primarily, if not exclusively in serving the needs of the rich and very
upscale. The GOP elite has so far shown itself too purist and hidebound to accept these folks
and Trump, ever the egomaniac and demagogue, has yet to introduce positive ideas to his
dis-affected white followers, preferring to play on their fears and prejudices. He may never do
so even if he wins the presidency, leaving it to others within the party who must "discover" all
the many loyal mid and downscale Republicans and how they have been betrayed by the
guardians of the wealthy.

The old Chinese curse is heavily upon us: We live in interesting times.

Friday, July 15, 2016

Better Lucky Than Smart

Back in a post on Sep. 27, 2015, with the SPX trading below 1900, I claimed that the SPX could
close out 2016 at 2160 or even a little higher. Folks were not bullish back then, so it was a nervy
call. Moreover, since 2016 is not over yet, who knows whether the SPX, now at 2161, will hold
up. Even worse, the reasoning behind the call was not strong, since the US economy and SPX
net per share has under-performed my expectations for the year by a wide margin to date.
Nevertheless, with the economy just starting to do a little better now, I am going to take some
credit. But there may be a cautionary moral here.

For old timers such as me, who know even that the market can hold up when the oil price tanks,
the suppression of earnings since late 2014 borders upon unnerving. Profits potential for the SPX
companies is finally improving, but top line or sales performance is still very subdued and it is
fair to say that market players ought to be more concerned than they are. Since the 1960's, it
has been popular to hold to the idea that the SPX p/e ratio varies in inverse relation to how the
inflation rate is performing in the economy. In this case, the very low CPI is translating into an
elevated p/e, buttressed surely by historically low interest rates. But the p/e ratio has historically
been a measure of investor confidence, too. If the low inflation and interest rates reflected an
economy that was expanding decently fueled by strong productivity growth, may be one need
not worry about a high market multiple. But the economy has moved along only slowly in a
shaky global environment with increasing social stresses evident. One can make the case that
there may be more monetary easing and even some fiscal stimulus ahead, but in classical terms,
one can also argue that the SPX is already discounting a sizable profits recovery, and one is
free to wonder what the market, strong since earlier in the year, can do for an encore near term.
SPX Daily

Wednesday, July 13, 2016

SPX -- Daily (2152)

The post Brexit rally since late Jun. has brought the SPX to record closing highs and has extended
the uptrend underway since Feb. of this year. The B of E stands prepared to provide additional
liquidity as does the ECB. The Fed has been standing down from further tightening and doubtless
stands ready to provide dollar swap lines if and as needed. The Brit. Gov. may be fashioning
fiscal stimulus plans, the Clinton platform has stimulus plans and a Trump presidency might lay
out trickle down tax cuts. Short rates and bond yields remain near historic lows. US forward
economic indicators have been positive since Feb. and all the happy talk about monetary ease
and new fiscal stimulus programs has for now relieved the market of its dependence on rising oil

I have raised my fair value model, based on the longer term earnings trend and earnings plowback
percent, to SPX 1990 -2120 to stand through mid - 2017. SPX net per share must rebound sharply
from below $100 to near $130 by the end of 2017, and plowback, now suppressed by weak earns.
must rebound. The SPX has sailed above fair value primarily because inflation has remained so
low and because bonds are regarded as uncompetitive. There is a wide reservoir of patience for
earnings to recover.  SPX Daily

Out of it all, it is super low interest rates and inflation that has contributed the most to make
SPX behavior haywire by historic standards. The p/e ratio reflects supreme investor confidence
that all will wind up to the good. (There is also the small matter that no one pays equities
managers for having very large cash ratios when there is any life in the market.)

Sunday, July 10, 2016

Gold, Silver -- Overbought On Record Speculative Interest

The cyclical economic and inflation case for these metals is ever so mildly positive. However, Brexit
has helped trigger upsets and concerns ranging from the British Pound and the Brit property market
to the solidity of the EU and the stability of the euro banks. On top, the Yuan has been weakening
again. Safe haven demand for gold has been on the rise and the silver market is being carried up
with it in classic 'poor man's gold' fashion. I do not have indicators for PM flights like these that I
trust because nothing captures the volatility of the PM markets. The technicals now command my
desk instead. I note also that in the futures market, long side interest from large speculators has
shot up to record levels for gold and silver. If you are enamored, check out the wide range of
bug's sites.

the weekly chart shows an uptrend from late 2015 sold-out low with price now in top of rising
channel. Market supported by positive reversal in 40 wk, m/a, but is clearly overbought on an
intermediate term basis. Premium in price to the 40 wk. m/a is an elevated 14.7% but is nowhere
near an exalted level.  Gold Weekly

The silver chart is much like the one for gold, except it is more grand in that the RSI overbought
is higher for silver and its premium to the 40 wk m/a is a zippy 30%.  Silver Weekly

Friday, July 08, 2016

SPX -- Weekly

Forward looking economic indicators continue to suggest the US economy will perform better over
Half 2 '16. Since I prefer the household survey of jobs obtained over the payroll report, I regard
the large - 287K - increase in employment reported today to be of less significance than the fact
that the household survey shows only nominal progress in employment since this spring, with this
latter measure more accurately reflective of the slow progress of the economy this year. Better
sales and production data are needed to firm up the case that the economy is again moving forward
at a better pace. Moreover, with the unemployment rate already under 5%, what is needed now is
better productivity growth rather than strong jobs growth and this requires more nearly full staffs
to expeditiously handle a larger order flow both in manufacturing and commercially.

A post Brexit rally has brought the SPX to a slight new closing high. The move to a new high
confirms a continuation of the rally began in Feb., albeit one which is now on a considerably more
restrained trajectory. Note especially the bounce in the MACD off its following 'red line' in the
chart just ahead. SPX Weekly  In short, the SPX dodged a bullet (Brexit).

The SPX and the indicators on the chart show a positive reversal around Feb. of this year and
continuation of an intermediate term uptrend. The market is nearly 5% above the 40wk. m/a
but is not seriously overbought on the weekly indicator readings. My suspicion is that should
this advance continue, it will prove volatile as the market is trading well above the trend line
set by the Feb. / Jun. lows. This baby is building in some roller coaster potential.

Wednesday, July 06, 2016

Economy, SPX, Long Treasury

US Economy Comment
By the indicators, the US economy steadily lost growth momentum potential from mid-2014 right
into 2016. My weekly leading economic indicators have been rising since Feb. of this year, and
now monthly leading and coincident measures are rising. As well, my future inflation pressure
gauges have been advancing since Feb. after a number of months of decline. The US industrial
base fell to low, near recession levels going into 2016 but appears to be firming modestly. The
weakening economy from mid-2014, aided and abetted by a bust in the oil price, has lead to
a significant decline in profitability and earnings, too. Lead indicators suggest profits may soon
start to do better. The Fed badly misjudged the negative impact the cessation of QE would have
on economic activity and compounded the error by raising short rates in late 2015. With ongoing
decent private sector liquidity growth, the economy may finally be righting itself after a fallow
period. Indications of stronger growth could turn out to be a flash in the pan, but if not, then
the real economy and recovering pricing power will put downward pressure on the excess liquidity
which has sustained the capital markets for many months.

Stocks and Bonds
Since late 2014, as profits  prospects and inflation pressures waned, the smart bet was to prefer the
long Treasury over the SP 500. $USB vs. SPY High quality bond prices have firmed as the economy
slowed, inflation pressures abated, and the Fed was forced to put a cap on further tightening. Even
though forward economic and inflation measures have strengthened since earlier in the year, players
have been interested in giving the edge to bonds on a trend basis despite the volatility. So much so,
that even the 30 yr. Treasury at a 2.15% yield is trading inside the yield on the SP 500.

Viewed longer term, both the S&P and the long Treasury price are overvalued. However, if the
economy is indeed regaining some sustainable traction, stock players will fret over future
monetary policy, but long Treasury buyers may even have more to worry over.

Ever since the Fed announced it would taper and then close out its huge QE 3 program as 2014
wound up, I have been concerned how well the US economy would fare without the very large
large tailwind. Here we are 18 months later, and the best I can do is cross my fingers that the
economy can progress decently with private sector funding support. If it can, the ballgame will
change markedly in various markets.