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 !!!

Friday, September 29, 2017

Broad Stock Market (Value Line Arithmetic)

Cyclical Bull market continues and rose to new high this week.

Spurs for new up leg since early 2016: Potential for faster economic growth as major business
inventory cycle unwound....Increase in business pricing power and higher profit margin...Promise
of large tax cut program encompassing both individuals and business via Trump...Continuation
of very low and negative short term interest rates.

Looking Ahead
Momentum of real economic growth is at or near peak with slower growth ahead...Pricing power
has been disappointing this year but may improve slightly....Tax cut program could boost corporate
profits by an extra 10% over 2018 / 2019....Passing of tax cut program in full hardly assured....Fed
plans another hike to short rates and to begin shrinking excess liquidity....Private sector funding of
economy is now merely adequate with no excess of liquidity in evidence.

Valuation shows a fully valued market with little scope to tolerate an unexpected surge of inflation
pressure or more sustained rise of short term interest rates.

Fundamental conclusion : bull market with moderate return / high risk profile because of
developing tightening of liquidity.

VLE Weekly Chart

Chart shows overbought market for intermediate term...Bottom panel shows that mid and smaller
cap. stocks are starting to outperform on expectation  that tax cut program will pass muster.

Thursday, September 28, 2017

Trump Plan To Loot The Treasury

The Donald's tax cut plan offers a bonanza in cash for the wealthy and for business. And the
Congress has put itself up for sale as well. Ostensibly, to help defray the costs of the large tax
breaks ahead, tax loopholes will have to be closed. The lobbyists will be there with campaign
cash, sports tickets, girls and even job offers for the future with the private sector. As of this
moment, all the deficit hawks around when Obama was president appear to be on holiday.
There will be many debates and fights over these issues. All of them will be stale. After all,
the issue  of laissez-faire vs. the welfare state has been around for nearly 150 years here in the
US. There brawls will be especially nasty if the Ryan wing of the House starts talking up
entitlement spending cuts to help contain the budget deficit.

When it comes to the markets, there will be extra spin and bullshit thrown in with the strategy
pieces yet to come on stocks, bonds and gold. I leave it all to the rest my brethren to regale
you with their stories. 

Tuesday, September 26, 2017

Stock Market

I have followed the stock market since the late 1960s. I have always been a monetary liquidity guy
who like to buy when the Fed fosters a tail wind for the economy and the stock market through
providing liquidity to the system and reducing interest rates.

Finding market low points when the Fed has your back with 'easy money' has been a top priority
for me because these periods are always low risk / high return intervals. I have always been much
less concerned with trying to call market tops when the Fed has turned restrictive and liquidity
is being squeezed because I usually opt to scale back positions as the head winds intensify.

The Fed is embarking on a historic mission now. It plans not only to raise interest rates gradually,
but to shrink its balance sheet and excess reserves in the banking system. The bulls will argue
monetary policy is still accomodative, but as time rolls along, the Fed will continue to reduce
its balance sheet substantially, and the head winds will only intensify.

I am content with SPX 2500, and at the tender age of 78, I am not well motivated to do the
careful and intense research to figure out when the market will get into trouble. There are lots
of interesting things to do that do not  require such strenuous work.

Here is a link to the monthly SPX. It is overbought longer term, but the important MACD
momentum indicator remains positive.  SPX

Sunday, September 24, 2017

Long Treasury Bond Yield

The 35 year long bull market in quality bonds has been one of the greatest gifts to investors in all
history. For savvy market players, it has been like shooting fish in a barrel. Moreover, it may not
be dead yet. This is because the long term down trends in real economic growth, inflation, and the
full spectrum of investment grade interest rates have not reached decisive conclusions.The US will
likely need to experience another economic recession at some point in the years ahead before we
could be sure that deflation and zero short rates may have been banished. This is why many bond
players have not thrown in the towel despite historic lows in Treasury yields in 2016.

Since this is one of my final blog entries, it would be polite of me to offer long term guidance on
the potential for the economy in the future. But, to be truthful, I have thought for years that the
US economy had the potential to grow by 2.7% per annum based on work force growth and
productivity assumptions and, as it turns out, this view has been too optimistic. Businesses have
just been too cautious to make the long term capital commitments to assure a more productive labor
force in the wake of the huge expansion of productive capacity in the 1990s and more cautious
growth in final demand so far in this century. Even today, capacity utilization in the US is a sub-
par 77%. It could turn out that much of the excess capacity is by now uneconomic and that even
continued modest real growth will eventually trigger an unavoidable need for productivity
enhancing investment. Having been too optimistic about the economy, I leave it for actual events
to tell the story.

I have a link to the long Treasury yield for the past 5 years. In the chart you will spot a horizontal
line at 33 (3.3%). If the long bond yield  rises above that level over the next year and remains
"sticky" above 3%, that would constitute a break of the very long term down trend in yield for the
bond and would be a prima facie indication that the bull was finally winding up, but hardly a
conclusive one.   TYX Weekly

Friday, September 22, 2017

Gold Price

In the modern era, gold ownership has increased despite its extraordinary volatility. There are very
long term but hardly imposing correlations between the price of gold, accumulated  inflation, the
trend of financial liquidity and the all-in costs of producing an ounce of gold. The latter has risen
sharply over the years as it has become more difficult to find rich seams that are easy to extract.
As an asset class in the modern era, gold most often comes into favor as an inflation hedge play,
and its price can languish during extended periods of low inflation.

Gold has been advancing in volatile fashion since early 2016 on expectations of faster economic
growth  an accompanying cyclical acceleration of inflation. The global economy has been doing  better, but the underlying progress of inflation has been subdued as large excess inventories have
 had to be whittled down to size. Factory operating rates have been stable but suppressed
so that a range of materials prices have  not been swept upward in a fashion typical of a faster pace
of economic growth.

The US dollar has been weak this year as skepticism developed that low inflation would restrain
the Fed from raising short rates. Gold has reacted positively to the weaker dollar, perhaps on the
premise that dollar weakness is a harbinger of future inflation.  Gold Price (Weekly).

If the economy continues to progress and there is a quickening of business inventory accumulation,
inflation should mover higher on a cyclical basis and gold holders may profit more over time so
long as investors dot not quickly decide that the Fed will notstand by and tolerate more than a very
mild lifting of the inflation rate.

Longer term, we may need confirmation  that the global economy is transitioning away from being
deflation prone back to being inflation prone before gold becomes a sturdier holding. in the mean-
time do not loose sight of the fact that equities players may continue to prefer to rotate into gold
when the stock market gets shaky.

Wednesday, September 20, 2017


Short Rates
The Fed again declined to raise the Fed Funds Rate (FFR%) today. Maybe by Dec. '17 they will put
25 basis points on. There is only modest inflation thrust now and hurricane damage will be a
temporary drag on the real economy. The Fed has also been watching the economy work off very
large excess inventories dating back a couple of years. This cycle will have to run its course before
commercial loan demand finally begins to re-accelerate. Businesses are being a bit more circumspect
with their inventory policies so far this year.

Quantitative Tightening (QT)
The process of shrinking the Fed's balance sheet and the excess reserves in the banking system
 is scheduled to start in Oct. with $30 bil. monthly roll-offs and sales. The shrinking
process could accelerate to $50 billion month as early as some point next year. To get back to
"normal" the Fed will need to have about $2.5 tril. in securities on its balance sheet by late 2020.
If the Fed shrinks its balance sheet by $50 bil. a month, there will still be sizable excess banking
reserves in the system. After 2020, the Fed will have to get more careful with this QT program
so as not to leave the banking system short handed. This assumes that QT works in practice as
well as it does in theory. Risky business? Mais oui!

The Fed has presumably thoroughly studied the liquidity requirements of both the Treasury
and agency markets and has set parameters for when it may have to intervene short term in
the markets as well as whether there may be a sizable increase in daylight overdrafts. Theory
says things may operate smoothly, but in practice there may be spooky short term liquidity
squeezes. Will the markets begin to price in special squeeze risk premiums and could there
be disruptions to the derivatives markets? It may be wise to expect both in the early going. 

Sunday, September 17, 2017

SPX Weekly -- Longer View

In the initial economic recovery surge, US business rose to exceed 10% yr /yr. during 2011. Then
a slowdown hit which ran into late 2015. Volume growth slowed significantly and pricing power
went from 4-5% annually into negative territory. The stock market weathered this seriously
deficient performance because of the huge QE programs from the Fed and a dramatic increase in
earnings capitalization (p/e ratio). Over the course of 2015, the private sector took over from the
Fed and funded the economy. Business began to pick up sharply in early 2016 and the stock market
began a new cyclical leg up. Business sales recovered from negative momentum territory to
finish 2016 at around + 7.5% yr / yr. Very large excess inventories which dogged the economy
in recent years have been pared down sharply and earnings have recovered substantially. Sales
growth momentum, especially in retail, has slowed throughout 2017, but is at a respectable 5%
 5 % Ann. rate given low inflation.

My weekly cyclical economic indicators have been suppressed by recent hurricane damage,
but the trends through 2017 continue to suggest that further growth momentum
erosion is on tap for later this year and into 2018. At present, recently renewed broad strength in
the SPX shows that investors apparently have little concern.  SPX Weekly

The Fed still desires to "normalize" monetary policy via raising short rates further and also via
reducing the size of its balance sheet, perhaps on a systematic basis. We may be about to step
off into new territory from an historic basis. If and when the Fed proceeds on both fronts, it will
usher in era of quantitative liquidity tightening (QT). The banking system holds enormous
excess reserves from the QE programs, and it will be the surplus reserves that are cut. Even so,
if the Fed sells securities and allows others to run off, it will impact liquidity in the markets
negatively. As of today, there appears to be little concern in the markets.

The SPX continues to trend higher, but is approaching another intermediate term overbought on
RSI. Recent overboughts have only slowed down positive price momentum, but be assured some
traders are near to squeezing the sides of their chairs.

Tuesday, September 12, 2017

Market Breadth

The cumulative NYSE advance / decline line has made a new all-time high this week. NYAD Daily
The top panel shows the broad measure VLE (featured yesterday). As seen, it has failed yet to
recover its high, revealing the sharp slowdown in price momentum. The momentum of the A / D
line has also slowed but remains nicely positive (bottom panel). The chart also shows the RSI of
the A / D line. It is approaching an overbought level, which signals the market may be getting a bit
toppy for the short term.

Monday, September 11, 2017

Broad Stock Market

So far the broad stock market (1700+ stock composite) has traversed the seasonally volatile Aug. -
Nov.1 period with minor damage. There has been a hiccup in volatility, and the average stock has
under performed the large cap. SPX, but the broader market has tested its 200 day m/a in an alright
fashion  even if it is not entirely out of the woods on this important measure.  VLE Daily

There has been damage worth noting. Just over 50% of stocks are in confirmed uptrends. That
does not compare favorably with the SPX. Moreover, the broad VLE composite continues in a
lengthy 10 month downtrend in  comparison to the large cap. measure with this development
signalling investor caution concerning the economic outlook running out into 2018. Since my
weekly economic and profits indicators have been stagnant since earlier this year, the caution may
not prove unwarranted. It is also worth noting that unlike the SPX, the uptrend in the VLE has
been broken. At best, that signals the broad market may chart a fresh course which need not
be as positive as the run from early 2016.

Worries, such as some measure of armed conflict with NK, the short term negative impact of
monster storms Harvey and Irma, and political dumpster fires in the nation's capital seem to
have been set aside for now in favor of the longer standing meme of low growth, low inflation
and a high market p/e ratio that has sustained the bull market for the past several years.

Tuesday, September 05, 2017

Stock Market

I am for caution here. With a more a destructive bomb, NK has crossed a line. It is now time to try
to shoot down any further missiles it fires because it is now too dangerous to rely on guesswork
about their nuclear prowess. Who really knows whether they recognize that. Harvey storm damage
could easily reach $200 bil. and there is a an even more powerful storm (Irma) bearing down on
Florida and the coast. Potentially huge storm damage from Harvey and possibly Irma could damage
US capital stock and major relief programs could undermine the vaunted tax reform effort and
increase the complexity Congress may face in setting out a budget and raising the debt limit.
 For the market, September is going to be like watching out of shape middle aged people run
 the 100 meter high hurdles. It can be done nicely, but there could easily be falls, scrapes and

These potentially huge exogenous factors are arriving just as investors are intensifying their studies
of whether to protect portions of 2017 gains already on the books and how best to structure portfolios
for the year ahead.

The market has been struggling to maintain solid, positive momentum since the end of Feb. If it
was way overbought for the short term now, it would be easy to tell traders to book it. But the
SPX is in neutral territory for the short run, so there are likely to be opportunists even despite
some potentially nasty short term fundamental overhang.  SPX Daily