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, October 15, 2019

That's All Folks

In late September, I turned 80. According to Wall Street lore, this counts as a life well lived for
an investment guy. The most important thing I've learned so far about being 80 is the you have
to become more inventive if you want get around decently well. But learning the fine art of
compensating for advanced age is a time consuming endeavor as I am finding out. So it seems
to me like a good time to step out of the capital markets milieu. And, there is the view I have
that both bond and stock prices are bloated and now not interesting. I also think that the vast
gulf between the folks who are financially loaded and the rest of mankind is unsustainable
over time at least here  in the US. If I was a betting man, I would say that the bloats we now
see in the markets and in wealth disparity are going to be corrected over time, at least here in
the US. I hope these evening out processes are not born out of economic, financial and social
disaster, but my guess is they are on their way over the next couple of decades come what may.
I wish all the many readers of this blog so long and good luck.

Sunday, October 13, 2019

Easy Does It

Confronted by weakening PMI data and tightening liquidity in the financial markets, the Fed has
reverted to another QE effort. It will buy substantial amounts of 3 month T-bills at least for the
intermediate term. As the Fed again expands its balance sheet, some funds will invariably leak
into the money supply, likely further adding the growth of the real money supply. This is a plus for
the stock market as is the Trump team's effort not to intensify the trade war with China. These
developments will help the economy although the timing in the shorter run is necessarily
imprecise give the continued deterioration in the US economy, especially in the industrial sector.
The return of QE adds significantly to inflation potential if the economy re-accelerates in growth
in the months ahead.

The 2020 national election is still more than a year away. The House seems ever more likely to
impeach Trump as soon as it can plausibly do so, but the Democrats still must settle on a
candidate and a platform to put in opposition. As of now, investors appear to favor a moderate.
Trump is presently expected to survive an impeachment trial in the Senate but could still crash
and burn by election day anyway. So, even if the economy revives somewhat, there still may
be some heavy clouds for pundits to grapple with even so.

Saturday, September 28, 2019

SPX Update

My liquidity and economic indicators suggest a very modest rebound in economic performance
in the months ahead. The profit indicators call for SPX net per share to remain flattish at $160.
through year end 2019. Inflation pressure gauges suggest a continuation of quite mild acceleration
in the CPI. The short term interest rate directional is consistent with further downward pressure on
the 3 mo. T-bill rate. The SPX remains very over extended viewed long term and is still in over-
valued territory. The risk / reward profile is improving slightly as the danger of imminent recession
has eased somewhat. Longer term economic potential is still down - trending as it has been since
early 2018. China vs US trade issues may well continue to command attention in the months ahead.
It is still too early for the 2020 national election to sharply influence market behavior but it may
add significantly to market volatility next year. I have current fair value still at SPX 2650.

The SPX is still in a long running cyclical bull market. Looking a little shorter term, it has broken
the original uptrend from the late 2018 and is presently adrift. The market is not overbought, but
momentum has been fading, and failure of the MACD improve in the next few weeks would be
disconcerting. For right now, let's call it a "Ferdinand" bull.  SPX Weekly


Sunday, August 11, 2019

Long Treasury Bond

To gauge direction of the long guy's yield, I watch the momentum of industrial production and the
trend of sensitive materials prices. Both have been falling over the past year in a softening world
economy, and the bond yield has followed suit. The long Treasury price is very overbought
short run, but until there is evidence that the manufacturing side of the economy is firming up on a
sustainable basis, high quality bond yields may stay distressed. My weekly fundamental cyclical
indicator remains modestly weak measured yr/yr reflecting the significant slowing of growth and
the fact that basic industrial materials prices are down sharply over the past twelve months.

I have not been interested in the bond market for quite a while as I think yield premiums for such
factors as long term inflation expectations, duration, and future supply have all been whittled
away over the course of  the very long bull market for bonds. Back in late 1980 and 1981 the
group I led was a major buyer of Treasuries. We even got several calls from the Fed inquiring
about our health. Back then, Treasuries were yielding nearly 14% and BBB utilities were up at
about  19.75%. US dollar pay CDs of Canadian subsidiaries of large US banks offered 21.5%.
I thought that was all crazy. I could buy high quality bonds that yielded more than many companies
could earn on book equity. Some Wall Street bond gurus had yields on Treasuries going to 25%!!
Well, I think we are at the other extreme now, what with the new generation of gurus calling for
zero coupon long Treasuries if the US economy weakens into recession. Lots of luck with all
that . For me, it's sayonara to bonds.

Chart for the long Treasury yield. TYX weekly

Sunday, July 14, 2019

Key Economic Factors For The Markets

The growth of monetary liquidity has been shrinking until recently. The shrinkage was severe
enough to force the US economy to rely on private sector funding to underwrite growth. Recently,
the Fed has backed away from its policy of strong liquidity tightening, which was adopted to
reduce the mammoth increase in the size of the Fed's balance sheet (Fed Credit) and the flip side
swelling of excess bank reserves. Fed Credit is still so large as to represent a major long term
inflation threat, but with the economy slowing down to a crawl, the Fed has decided to relent for
now. Liquidity growth is improving, but only mildly so, and is not yet nearly strong enough to
support more than a very mild resumption of economic and profits growth. Faster monetary
liquidity growth now seems inadequate to fund both improved economic growth and sustainable
rallies in the capital markets.

The Fed is clearly leaning toward reducing short term interest rates before too long, but take
note that Wall Street is particularly bad at guessing Fed intent. If the Fed moves to cut rates
in the weeks and months ahead, there could be an additional shot of liquidity to the system as
as the Fed moves to assure an orderly transition to a lower rate structure. In this event, stocks
could receive an additional mild positive jolt.

On the other parched palm, if the Fed opts to toss caution to the wind and run with a more
liberal policy, the US Dollar will sink in value and the long dormant commodities market will
likely perk up. The gold price would receive a nice boost while the bond market could weaken
sharply, leading to a return to a distinctly positive yield curve that would no doubt surprise
folks.

The performance of the US economy in 2019 has been dicey and it is not clear now whether
an easing of the monetary reins will be sufficient to assure that the US economy will firm up
enough to satisfy expectations built in to the new, lofty level of share prices. Such may well
be the case if the Fed keeps liquidity growth mild and does not open the tap as it might if a
full fledged recession needed to be tackled.

Tuesday, July 02, 2019

SPX -- Mid - Year, 2019

The SPX has reached an interesting point at present and from several perspectives. My forward
looking economic indicators have been signaling a slowdown in real growth was in prospect for
well over a year (confirmed). The business profits indicators have been warning of a flattening
of profits over much of the same period, and with a trend of weakening pricing power, profits for
the second half of the year could dip lower. On the flip side, the Fed has backed off further from
major quantitative tightening of excess system reserves and this has led to an improvement in the
growth of monetary liquidity. Moreover, the Fed and other major central banks have indicated
they may be prepared to cut short term interest rates, especially if trade disputes continue to
suppress economic growth. The improvement in the trend of monetary liquidity is a market
positive for sure, but the timing of such a turn as a a market support and booster is hard to gauge.

From my perspective, as the SPX approaches the 3000 level, it is becoming increasingly over-
valued and is overbought against its 40 wk m/a, which by the way, has yet to turn up in a
meaningful way. To top it off, the SPX is threatening to reverse positively on its very important
longer term MACD measure (bottom panel of the chart).  SPX Weekly

Market players are arguing briskly about prospects for the remainder of 2019 and for good
reason.








Tuesday, June 25, 2019

Gold Price

Gold made a significant low around the end of 2015. By my pro-inflation indicators, the gold price
gain reflects partial recoveries in the price of oil and other industrial commodities. The US dollar
has weakened slightly in value over this time frame. As gold cycled along. it has scored steadily
higher lows, but has not experienced a sharp price breakout until recently.  Gold Price

The global economy has slowed in growth over the past year, and inflation has actually de-
celerated. It appears  then that the recent sharp rise in the gold price reflects a multi-cushion
billiard shot. As the economy has slowed and as US-China trade war tensions have continued,
major central banks are signaling they are prepared to ease monetary and credit conditions as
may be needed to keep the global economic expansion intact if even at a more moderate pace.
There is a geopolitical issue as well that could have major consequences for economies and
inflation too. I naturally refer to the stand-off between the US and Iran, with Iran now
suffering economic decline as a result of formidable sanctions imposed on the Its economy with
special focus on oil sales, Its cash inflow lifeline. Iran has rebuffed talking about how to get
sanctions relief and has grown belligerent instead. The US and Iran have have experienced
skirmishes before, but now we have strong economic sanctions in play coupled with Iran's
strengthened military capabilities. Iran can now make big time trouble not only in the Gulf
but across the Middle East as well. Rising tensions not only reflect Trump "reality TV"
bluster but an Iran that is being seriously squeezed economically with no visible off-ramp it
could easily tolerate. There are several ways this issue might be resolved short of military
action, but rash behavior in the Gulf area could easily touch off an incident where tension
could quickly turn into a fire fight. Many interested parties will be at G-20 this weekend in
Osaka this and the US v. Iran has been forced on to the docket.

There are some prospects for higher inflation ahead, but since visibility of said process is
currently zilch, gold players have to be careful not to get carried away with enthusiasm just
riding the current hype and keep eyes peeled on the fundamentals as they unfold.

Note that the chart shows the strongest weekly RSI for gold in several years. It is overbought.

Sunday, May 12, 2019

SPX -- Update

If the trade spat with China deepens, market players may want to re-assess their expectations for
the SPX. Additional punitive actions by both countries will nick earnings estimates for the
market, and likely higher inflation may cause investors to trim the SPX p/e ratio. China has
been running an elaborate stall on meeting the substantial reforms to Its economic policies and
practices demanded by team Trump. The week ended with anger expressed by both sides. Trump
promises deeper tariffs, but it might be more prudent for both sides to let the situation cool off
for a while so that tempers can be brought into check.

The SPX was overbought on a short term basis as we entered last week, so the escalation of
trade tensions provided a convenient excuse for traders to take some profits in the wake of the
furious run up in the market since late 2018.

My primary monetary liquidity measures suggest caution on economic and profits growth
estimates through 2020, and my weekly cyclical fundamental indicators remain on the flat side
dating back to early 2018. Fundamental support to raise short term interest rates further has
waned some because capacity utilization measures have eased and because my short term credit
supply / demand ratio is below levels that signal demand overheat. For now, I am keeping my
fair value estimate for the SPX at 2650.

To win re-election, Trump needs to press the Fed to keep short rates low and to be careful with
the continued application of tariffs on China. The Street is counting on him to do this. The
guys want to keep the market on the rise and also worry about what the Democrats might do
with tax rates on the wealthy and on business if they win big next year.

SPX Weekly

Tuesday, April 16, 2019

SPX -- Up Beats Down

The market has exceeded my expectations so far this year. At Christmas time 2018, the SPX was
sitting at 2350 and I posted that it was reasonably priced with a fair value set at 2650. I still
think this is a sound estimate of fair value and now regard the SPX as modestly overpriced. My
views on the economy have changed little since the Mar. 14 post (just below), and as I have
thought more about the fundamental outlook, I realize I could make a late cycle "thread the
needle" forecast of SPX 3000 based on low inflation and interest rates and an economy that
improves just enough over the next 12 months to produce some further slight improvement in
earnings, all underwritten by a continuation of sharply rising private sector short term credit
growth. This type of scenario would create a clear cut overpriced and well overextended SPX.
On top of all that, I think we can say with assurance that Trump will try to do whatever he
believes will keep the market  trending higher through 2020.

But, to be honest, we have had a damn fine run from the brink of disaster in 2009 and I am
more than happy with 2650 on the SPX. Moreover, I am finding it all boring and am perfectly
content to let others gild the lily.

A few years back, Tim Geithner, former head of the New York Fed, who partnered with Fed
Chairman Ben Bernanke and Treasury Secretary Jim Paulsen to engineer a bailout of the
financial system in 2008-09, said: "We saved the economy, but we lost the country." Prophetic
words indeed, and maybe the truth if Trump wins another four year term. Thinking about
what it may take  to build something decent and good in the US for future generations is
not boring like the stock market has become, and it's where I am spending my time these days.

Monday, March 04, 2019

Looking Ahead....

From my perspective, the outlook for the US economy is getting a little dicey. my favorite
financial liquidity measures have deteriorated markedly over the past year or so. Fed Bank Credit
and the Monetary Base continue to shrink. Real or inflation adjusted M-1 growth has been
declining and is now barely in positive territory. There is not sufficient financial liquidity in the
US system to support both real economic growth and a rising stock market on a sustainable basis.
On the plus side, private sector credit growth is still positive and short term interest rates have not
increased enough to assure development of a recession in the US. As well, the economic slow-
down may have suppressed some of the financial liquidity measures temporarily provided the
economy can regain more positive footing in the months ahead. In short, economic trouble may
lie ahead but it is not a lead pipe cinch. One also may reason that if more economic red flags
appear, The Fed may intervene with additional liquidity and cuts to short term rates. This is a
reasonable assumption, given Trump's willingness to challenge The Fed openly along with a
supporting cast of risk capital managers.

There is now a consensus that the US and China may strike a trade deal. If so, this will remove
an obvious negative for the global economy and it might help the prospects for US business
and corporate profits out through 2020 and beyond. But damage has been done to the US base
of liquidity and it remains an open question whether there will be enough benefit to put the US
economy on a more solid footing.

If a trade deal with China is struck, it will of course be quite interesting to see the details and
whether any concessions China may have made will be enforceable. Trump let economic issues
with China out of the bag, and if the deal lets China off the hook enforcement wise, figure the
Democrats will look for ways to make an issue of it.

If I was a younger guy actively managing money, I would likely be stuck selling the recent
rally and building a cash kitty to await improvement in the US liquidity environment.

The SPX chart still shows a near term overbought condition and trouble staying above the
2800 level.  SPX Daily


Wednesday, February 20, 2019

SPX -- Update

Back on Christmas '18, I opined that the stock market was quite reasonable down at 2350 and
that I was comfortable with SPX 2650 as a fair value call for 2019 - 2020. The market has
already jumped over that level, but I am not inclined to increase the fair value assumption at this
point in time. The evidence continues to point to decelerating US and  global economic and
profits growth in the year ahead and there is but a smattering of excess financial liquidity in the
system to fuel the stock market ahead as the real economy has been gobbling up the modest
liquidity available. On the bright side, inflation pressure has moderated and the Fed has taken Its
foot off the break. The up trends in interest rates in evidence in 2018 have broken down, thus
confirming the Fed's more dovish tone. But there is plenty that could still go wrong. There could
be a nasty Brexit, the US and China could still screw up the trade talks, and the global economy
could slow further and faster of its own. I am also a little nervous that there is such hard and fast
consensus that the inflation rate will not misbehave but stay gentle. I also do not like the wild
swings in investor sentiment in view since late 2017. In summary, I am conservative on SPX
earning power through 2020 and am carrying a lower p/e ratio estimate in the 2650 fair value
number (SPX eps projected around $160).

For the short term, the SPX is getting overbought and continues to have an unnaturally steep
positive trajectory.  SPX Daily

Monday, February 18, 2019

True China Giant Goes To His Rest

Li Rui joined the the communist party in China in 1937. He witnessed the entire revolution and
as a former confidante of Mao, he saw the dark side of the Chinese moon. He died a few days ago
at the age of 101. Betrayed years ago by his wife, he carried on, preaching against authoritarianism,
and as a demonstration of how that ugly centralized power continues today, his daughter announced
she will boycott his funeral. Know your enemy.....Li Rui Obit NY Times

Wednesday, January 30, 2019

Monetary Policy

The economic indicators suggest The Fed should keep short term interest rates trending higher.
Economic growth has been solid, capacity utilization continues to grind slowly higher and
business short term credit demand has strengthened substantially over the past 12 - months.
these conditions offer classic support for pushing short rates higher. The labor market has
tightened appreciably, and although there is still excess productive capacity in the system, it is
difficult at best to be confident that its deployment will prove economic. So, bowing to very
intensive criticism, The Fed  has opted to follow a more temperate course in the hopes that
continued US economic growth will not lead to a substantial cyclical acceleration of inflation.

 The economy may experience slower real growth this year compared to 2018, but the addition
of additional production capacity cannot lag to far behind, less an imbalance in favor of economic
demand develops.

The Fed is also planning to operate monetary policy with "ample reserves". This statement implies
that continued quantitative tightening, or the reduction of  the size of Its balance sheet, will likely
proceed far more judiciously than over the past two years. On its face, this statement opens the
door to potentially dramatically higher rates of inflation further out ahead as global excess capacity
is eventually used up. Fed Chair Powell's rather inglorious capitulation to all the forces that wish
to party on leave him with the hope that maybe the inflationary thrust will be the worry of
subsequent Fed leaders.

In the short run, a growing real economy is making full use of available monetary liquidity. In
conditions such as this, it is normally difficult to sustain a powerful upthrust in stocks. Without
a significant slowdown in the pace of economic expansion, large equities players will have to
sell other assets if they wish to sharply bolster commitments to stocks.

What happens if the strong consensus for only continued modest inflation proves faulty and
inflation pressure again perks up? Powell will look like a real turkey as the Fed has to begin to
turn the boat around.

Wednesday, January 16, 2019

Stock Market -- The Thundering Herd

Going into Christmas, the herd was stampeding downhill. Following the holiday, the herd has
reversed course and is now on a moonshot trajectory (75 degree angle of ascent). The Fed was
brought under assault from many quarters for running too tight a monetary policy as the year
wore down and it relented on interest rate policy. One can argue that chair Powell had no genuine
theoretical premise for the policy of gradually but steadily raising short rates, and the Fed has
ceded control over rate setting to the demands of risk capital for now.

In my last post, I posited that the SPX had reached reasonable levels down at 2350 and I briefly
sketched out a rationale for saying 2650 was an OK fair value estimate for the 2019 - 2020
period. The post-Christmas spike low and moonshot rally is statistically suspect, but lo and
behold, the SPX has been running back up toward the 2650 level. I find this performance to be
astounding and the emotional roller coaster that market players have been on over the past 12 -
14 odd months to be something of a bad joke.

It would be comforting to me at least if investors began to pause in the weeks ahead to review
what they have wrought and to take stock in a calmer assessment of what uncertainties and
opportunities may lie ahead.

SPX Weekly