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 !!!

Tuesday, January 31, 2017

SPX -- Daily

The SPX has been essentially flat since mid - Dec. when the strong post - election rally hit a heavy
duty short term overbought. Since then, the key indicators shown on the chart have been fading
just as they did after momentum peaked in the first two up legs of the recovery that began early
in 2016. SPX Daily

Interestingly, the action over the past year shows that decay in the momentum of the SPX does
not signal trouble ahead until the market breaks its 25 day m/a. Then the market has grown less
stable and eventually results in a sharper dip that tests the 200 day m/a. No one can be sure that
this pattern will be repeated in the weeks ahead, but I have found it interesting because at some
point it would be logical for traders to hesitate and seek confirmation that the economy remains
on a positive track and that the new administration is going to pursue sensible policies. The Trump
guys also have the option of moving fast to secure the stimulative and foreign earnings repatriation
programs they seek or waiting for a time to secure a better economic environment both for the
2018 and 2020 elections.

New Yorkers know that the Donald is an egomaniac who does some positive things and some
very destructive things. Since he has apparently decided to be himself as president, folks who
are learning about him as they go along will need to adjust to all the dumpster fires he creates.
For all I know, there may be a little witness distress building now, although the market action
is not yet evidencing it since the market's progress mirrors that of the pattern of the past year.

Friday, January 27, 2017

Stock Market Summary

It has been a long, rather slow economic expansion cycle. S&P profits started strong, but hit a snag
in late 2014, and net per share is only now likely to trend up to new highs. The big story has been
the dramatic increase in the SPX p/e ratio since the end of 2011. Investors have been confident
enough in the Federal Reserve to backstop real economic growth, however anemic on an historic
basis, to direct their attention to the policy of super low interest rates supported by nominal inflation
to lower the discount rate on future cash flows from stocks and thereby hike the p/e ratio. It has
been a repeat of the 1960s despite the tepid economic and productivity growth.

The end of quantitative easing by the Fed as 2014 wound up launched a negative adjustment
process for the economy and stocks, but as private sector liquidity remained moderately positive
enough to fund ongoing cyclical expansion, the economy and the stock market regained a new lease
on life early last year with enough promise to support a rise in stocks to new highs. SPX Monthly

it is not clear that the economy and profits would support much of any gain in stocks this year,
but investors have been energized by the promises of the new Trump administration to foster
stronger economic growth in the years straight ahead and have revised outlooks to reflect faster
profits growth and the expectation that inflation will be tame enough not to drive the Fed to jack up
interest rates too quickly. For investors, it is not the best of all worlds, but it is good enough.

There is capital slack in output capacity and ample liquidity in the banking system to support
a good two years of faster economic growth, but the labor market has already tightened and it
remains to be seen whether new demands on labor can be satisfied given elevated skill set
requirements, a lack of worker mobility and eventual stronger wage demands.

So far, we do not have blueprints of new fiscal stimulus programs, possible negative Trump
forays into restricting trade and the willingness of the Fed to cut the new crew enough slack
to pull it off. Big questions, yes, but investor confidence has remained unphased.

We also have a stock market that is running about 5% above fair value and one that has to be
sensitive to the tradeoff between growth and inflation given the high dependence of investors
on seeing interest rates that remain modest by historical standards.

Sunday, January 22, 2017

Update Of Liquidity Cycle

Back on 12/12/16, I posted an upbeat view of monetary policy and the liquidity cycle.  liquidity
It is appropriate to update this document now. Two series I watch to gauge the amount of primary
system liquidity that are provided by the Fed are Fed Bank Credit (the Fed's balance sheet) and
the monetary base. With the end quantitative easing as 2014 closed out the Fed froze these two
series. I believe this closing of the liquidity spigot played a role in slowing down the US economy
and the stock market over the past two years. The US stayed out of recession mainly because of
the more than adequate growth of private sector funding. However, as part of its efforts to raise
short term interest since late 2015, the Fed has constricted the growth of its balance sheet by nearly
$50 billion and the monetary base by nearly $400 billion. During the Fed's QE programs,  the
banking sector saw its excess reserves skyrocket. The reductions in primary liquidity over the
past year lead to a draw in these reserves.  Excess Reserves

The size of the reductions in primary liquidity are unprecedentedly large and would normally be
considered as catastrophic for the economy and the financial markets because of the withdrawal of
liquidity. The Fed is apparently not troubled as the reserves are way in excess of  what banks are
required to hold. Still the Fed is withdrawing liquidity so it is incumbent on analysts to monitor
this situation going forward for possible system wide effects such as development of an undertow
for the economic expansion. Important as well is that the Fed may not feel constrained to add to
its balance sheet if it sees this step as necessary to keep the expansion intact.

Tuesday, January 17, 2017

SPX -- Daily

Short run business / economic data have continued to move positively, but the SPX has been
trading basically flat for the past month. The simplest explanation of course is that the strong
post election rally brought the market up to near term overbought levels and that it has been
in consolidation mode since.  SPX Daily

Price momentum has gone from strong up down to neutral levels as the market settles in near
its 25 day m/a. The indicators have turned down, but no break has yet occurred. As discussed back
on Jan. 2 (scroll down), the pattern of the market advance since early 2016, if it follows through,
suggests continued chop to be followed by a sell down to test to the 200 day m/a. This pattern could
take a couple of months to complete and is based partly on my assumption that players are
exercising bullish zeal in relatively short doses and have not been ready to throw caution to the
wind. The SPX is trading now about 5.6% above the 200 day m/a. In zippier times, when the guys
have been very enthused, the market has ridden up to in excess of 10% of the "200".

The large shifts in political power in the US in the wake of the election point initially toward a
more business friendly environment. I think the new crew is a good thirty years late in terms
of relevance, but most others see it differently. But more importantly for the year upon us, the
market has already blessed us with a good eight year run, economic slack has been cut during
the expansion, and the Fed is now tightening, albeit gradually. It may be tougher to do well
chasing stocks up now then it was when the Fed had our back as They did most of the time since

Sunday, January 15, 2017

Market Psychology & SPX Weekly

Market Psychology
Following the strong post-election rally, the market has lapsed into a 2260 - 2280 range on the SPX
since mid-Dec. Toward the end of last week, Bloomberg featured quips from US dollar traders that
suggested: "Where is my stimulus?" or emerging impatience as the lead-in to inauguration day
wears on. So far, The Donald has offered growth negatives such as the idea that drug prices be
subject to haggling and the hit on Lockheed for padded costs. Meanwhile, the Congress is fast
tracking repeal of the ACA -- a negative for health care business volumes. There is a contretemps
with China over the status of Taiwan and a crackling good dumpster fire involving Russia's hack
of the DNC and subsequent developments. Get used to it. The stimulus programs will be announced
in due time, but we're talking Trump here and you have to take the goodies along with all the other
horseshit and troubles that will inevitably come. So, markets players patience is being tested and
all will have to wade through the Trump crap. And then there is the Fed who may have to face
programs that ultimately raise inflation potential.

SPX Weekly
The SPX continues its bull run from 3/2009. It is now nearing a moderate overbought against its
13 and 40 wk. moving averages, and is moving into overbought territory on RSI and MACD. There
is room to run on the upside, but such will involve investors relaxing more of the caution they have
displayed since the end of 2014 when the Fed ended the QE programs. Near term business
fundamentals will continue to weigh heavily on the action and players who are counting styrongly on
a new pro-business environment to produce more positive market action will have to keep spirits
up.   SPX Weekly

Tuesday, January 10, 2017

Gold Price

The argument here back on 12/7 was that the economic fundamentals continued positive and
that the blow out in the  market over Half 2 '16 left the metal sharply oversold. I also did some
complaining about how difficult it has become to trade gold because the futures market has been
grandly inflated by large pools of hot money over the past 15 years. Well, the market has rallied
here in the early going this year and the deep oversold is being remedied reflecting a weaker
dollar and a flat stock market since mid-Dec. Inflation fundamentals have also picked up on the
basis of stronger US and China economic activity. The US dollar weakness has probably done
the most to carry the day.

The gold price is approaching its 50 day m/a and is also approaching the $1200 level. That $1200
price has served as a resistance point in recent years and when it is pierced with conviction, can
extend a rally.  Gold Price

I have a macro argument that the fundamentals for the USD will strengthen further over the long
term. It is a view I have held since the early aftermath of the deep recession of 2008-09, but it
calls for very gradual improvement in the dollar's standing. At this point, I regard fair value for the
dollar to be around 90 - 92, but it has been running ahead of schedule since the Fed first tightened
policy in 2014 by ending QE programs. Perhaps USD vulnerability will increase out ahead if
inflation continues to firm and the US trade position weakens further.

Saturday, January 07, 2017

SPX -- Weekly

The argument here over the past three years is that the market can rise in sustainable fashion even
without  the strong tailwind of primary liquidity growth from the Fed. In positive cases like this,
the private sector assumes the role of funding economic growth and a rising stock market through
internally generated funds and through the credit window via banks and other credit intermediaries.
Both the economy and the stock market struggled for the past nearly two years after the Fed shut
off the spigots. But, as this past year wore on, the economy has slowly recovered its footing
and the market has moved along with it. So, a positive economic environment has been regained
and can be sustained so long as major imbalances do not develop. The labor market is obviously
tightening, but there is slack in production and some in the services component as well. By today's
computer analytic capabilities, business inventories remain elevated, but have fallen to manageable
levels. Bank balance sheets remain liquid, so there is ample lending capacity available. Inflation
has been accelerating but remains modest. The Fed is now more active, but short rates are
accommodative as rates remain negative in real terms. So long as the economy can grow moderately
without triggering off both stronger inflation and rounds of tightening by the Fed, the stock market
p/e ratio, although very generous, is primarily vulnerable only to troubling external events.

I still want to see business sales fulfill the promise of the forward indicators and continue to
improve in performance. As well, I have my biases, and with a global economy not yet that far
out the tank, I have serious concerns about a Trump administration and how well they can
manage the path to genuine stability. Pundits and strategists continue to regard the incoming
crew positively, but, if I may speak colloquially, I fear this group can fuck things up to a

The weekly chart remains positive, but an intermediate term overbought condition is developing.
SPX Weekly

Thursday, January 05, 2017

Global Economic Supply & Demand

Despite moderate global economic recovery over 2009 - mid-2014, excess production capacity
remains a worldwide problem. Following a period of intermittent inventory restocking during the
during this period, the capacity excesses resurfaced with a vengeance as global production and
trade slowed over the past nearly two years. Emerging market production began to improve
in early 2016, and the rest of the world has gradually followed suit, signaling a return from very
slow growth and deflationary pressure to prospective moderate growth.

Historically, bouts of inflation start in the commodities sector. Over the past year, a broad measure
of industrial commodities has jumped by over 27%, paced by a partial recovery in fuels prices. The
even broader CRB commodities market has recovered by nearly 15% over the past 12 months.
$CRB Weekly

The commodities markets have seen capacity reductions in various sectors since 2014, but excess
remains. My long term macro model for the CRB composite has breakeven in a range of 300-
335, with the low end of the range reflecting the positive impact of lower oil and fuel prices on
the cost structures of non-fuels commodities production.

Even so, with stronger global industrial output growth underway, commodities prices can
recover further, and should global production rise from the low of 1% seen in early 2016,
back toward more nearly respectable 2.5% during this year, the CRB can rise substantially more
and put added pressure on a rising inflation rate. That would strongly suggest more upward
pressure on interest rates and downward pressure on the p/e ratio of the stock market.

Monday, January 02, 2017

SPX -- Daily

The Trump rally reached a short term overbought around mid-month. Since then, the SPX has
been correcting and has moved down to a neutral on a momentum basis although RSI and MACD
are declining. The pattern of the market's rally since early 2016 has been one of a sharp up move
followed by an extended topping process and completed by corrective action down to test the
200 day m/a.  SPX Daily

If the pattern holds suit, it may be early in the "topping" process, but the corrective phase likely
would not run its course until the first couple months of the new year are completed. In this scenario,
the Trump plans for the economy would hit a bump as market players assess how truly likely it
is to pass muster with the Congress and, encompass another Fed policy meeting as well.

But, just as history shows stock market patterns change, so might this one as well, with the
opening weeks of 2017 to tell the tale. Given the period of political testing that surely lies ahead,
I merely suggest that you keep continuation of the 2016 rally pattern in mind.

And speaking of politics, the Trump crew will be facing another issue. Pushing the economy to
grow faster in the shorter term when it is already well along in employment and when signs of
faster inflation are evident invite an eventual economic overheating and possible subsequent
recession that, depending on timing, could be politically damaging to The Donald's re-election
chances. If instead, the new administration acts in a leisurely fashion and allows for a degree
of disappointed expectations to take hold in the economy and the stock market in 2017, he
might wind up in better shape in 2020, should he choose to run again. Believe me, this
discussion will take place if it has not already concluded.

Sunday, January 01, 2017

SPX -- Monthly

The market closed out the year nicely positive. My projection for the SPX, made 15 months ago, was
that the market would close out at 2160. Instead, it finished the year at 2238 or 20.7 estimated 2016
net per share. I foresaw rising earnings, but not the premium multiple. I expect net per share for the
SPX to rise to $120 - 130 for 2017, but accord only a p/e ratio of 17.6x based on a rise in the
inflation rate to 2.4% and a few more hikes in short rates. So, this puts fair value at about 2200 for
the SPX, or nearly 6% below the 2016 close. This value is well below the consensus range of
SPX 2300-2500, and reflects an adjustment to the p/e ratio for a pick up of the inflation rate,
something most other forecasters give short shrift to. I also assume that earnings benefits that
might flow from a Trump policy of fiscal stimulus will more likely arrive in 2018, and allow
risks to earnings from possible Trump restrictive trade and immigration policies not included in the
consensus calculations.

Now, one has to recognize that the SPX itself is on trend, when extended, to rise to 2500 by the
end 2017. Playing 'extend a trend', however implicitly, is no small pastime of Wall Street, so there
is a neat fit with the strong idea that the new administration is going to be very business friendly.

With the old adage that 'the trend is your friend' in mind, and with no red flags yet on probable
SPX net per share and the vigor of inflation, many investors and traders will probably go along
with this high powered projection. You might keep in mind that the SPX could decline this
month to 2100 and not upset the apple cart.

Monthly Chart
The chart shows a continuing cyclical bull but one with very subdued momentum since the end
of 2014. That's when the Fed tightened policy substantially by freezing the monetary base and
its own balance sheet. it also reflects a down wave in economic activity and in profits which has
started to reverse recently. Importantly, the monthly MACD has experienced a positive cross-
over and is trying to lift. The bottom panel shows a broad range oscillator and reveals the
best entry points for this market (when the oscillator falls below 50%). At present, the
oscillator is moving up toward an overbought.  SPX Monthly

Oh yeah. Happy New Year.