Long Treasury Bond Profile

Reflecting a continuing financial crisis and the sudden, breathtaking
descent of the economy into deep recession, Treasury yields across
the spectrum plummeted over H2 '08. Over a several week period
late last year, the 30 yr. yield dropped from 4.40% to 2.56% in a
panic flight to quality by investors.

Since then, the yield on the 30 yr. has backtracked up to 3.67%.
The short lead economic indicators have stabilized for the time
being, including sensitive materials prices, which bond traders
watch carefully. In addition there is the prospect of a large and
still growing stimulus program before the congress. Now at a cool
$900 bil., the program will surely add to Treasury new issue
volume.

At 3.67%, the 30 year carries a fat, roughly 350 bp premium to
the 3 mo. Bill, and a 366 bp premium to the 12 month inflation
rate. These are reasonable levels in the very short run as
confirmed by my long term regression pricing models.

Short term, the US economy has stabilized at a very low level.
My longer range economic indicators, which includes the now
steeply positive yield curve, suggest to me the US economy
should begin recovery by mid-year, fiscal plan notwithstanding.
At a minimum, I see a 5 month period of uncertainty ahead,
wherein the lead indicators could turn even lower, or morph
from stabilization into a more positive mode. Evidence that the
downturn in the economy will deepen further could easily send
the 30 yr Treas. yield back down toward the 2.50% level. But,
if indicators like sensitive material prices do not plunge and
begin to show signs of recovery as spring dawns, the yield on
the 30 yr will rise, perhaps to the 4.50 - 5.00% level. And that's
about the limit of my knowledge on the subject, at least for the
months ahead.

I have dwelled on the issue because the economy has invariably
responded positively to the kind of monetary stimulus that has
been applied. Ideas such as "liquidity trap" and "pushing on a
string" have proven chimerical when it comes to the US
economy. But, since short term indicators have yet to point to
recovery, I am stuck. Moreover, I just do not now know whether
liquidity preference, which been very strong, will continue in
unabated fashion or slacken some, allowing for recovery.

Two further points are worthy of note. Watch industrial
commodities prices over the price of oil. The bond market sees
a rising oil price as a tax on consumption and is more concerned
with a broad rise of sensitive materials prices. Secondly, if a large
stimulus plan is enacted, the market may begin pricing into yield
a premium for a bigger new issue calendar going forward. In
times past, that premium has been as much as 100 bp.

Back on Dec. 2, '08, I argued that the bond market, then 3.20%,
was strongly overbought and that advisory sentiment was too
bullish. In the next few weeks, sentiment grew to 91% bullish
and the market got even more overbought. We have had the
backlash in recent weeks as the 30 yr yield has shot up. The
overbought has been greatly reduced and sentiment (70 %
bullish) although high is not now acute. I have traded the
long bond for about 30 years. My suggestion is to watch the
sentiment indicators like MarketVane carefully and observe the
yield vs its 40 wk m/a. When it strays well away from the 40 wk.,
it does not do so for long. Yield chart here.

Short Term Interest Rate Profile

The 91-day T-Bill or "risk free rate" now trades between 0.00 -
0.25%. Money market funds have recently settled down at 1.75%
but yields have been in a downtrend. Despite the Fed's ZIRP
regimen, money markets have returned 5 - 6% over the past
6 months in real terms, as the CPI has experienced 4.5% deflation.
So, holders of short term quality debt have yet to be suckered.

Low short rates are warranted by the weakest economic conditions
in the post WW2 era. For example, the ISM index for manufact-
uring stands at 35.6, nearly 20 full ponts below the 55 level when
the Fed normally raises rates.

My long term regression (100 +yrs) model for the T-Bill yield
has an alpha of 1.7%, meaning that the bill should yield 1.7% at
zero 12 month inflation. The Fed, worried as it is about the
economy, has zeroed out the yield. Indeed, the real yield for
the past 6 mos. is over 4.5%.

Under normal circumstances of economic expansion and a
moderate 3% inflation rate, the Bill should yield about 4.7 - 5.0%.
This gives you a good quantitative benchmark to see how far the
Bill is below the long term capital market line. Once an
economic recovery begins, the Fed will move short rates up
much closer to the "normal" level.

So long as there is deflation in the system, many players will not feel
that pressured to pick up yield, as the Bill enhances the purchasing
power of their funds without credit risk.

In a deflationary environment, a meaningful real yield will tend to
suppress consumption and business investment as time wears on.
For now, consumers, facing bad housing, stock and job markets are
struggling to regain liquidity and build a cushion in a difficult
environment. As we head into the seasonally strong period for
housing this spring, it will be interesting to see whether liquidity
hoarding psychology will prevail in a market where affordability
has made a dramatic comeback.

More broadly, I do not know of a satisfactory rule to forecast
liquid savings, but I think it is ok to assume that when the
purchasing power of savings is rising, the personal savings rate
will tend to move back up to a longer term norm.

Gold -- The Mania Is Back

Gold did cross $925 oz. today as a strong rally continues. On my
long term chart, gold is now back in the mania zone, a prelude to
re-emergence of another price bubble. When gold crossed $1000
in Mar. '08, it moved into bubble territory. Instead of a powerful
bubble run up to $1500 oz., gold topped, entered a 27% bear
market, and surprised many, myself included. Now, we are seeing
gold move up sharply again, as players worry about perceived
inflationary threats from global easy money and fiscal stimulus
programs designed to pull the world out of a deepening recession.
The underlying theme here is that the worse matters get with
the economy, the more that stimulus will be applied, and the
greater will be the eventual inflation and debasement of currencies
once the global economy recovers. There is no shortage of players
in gold for the awaited bubble phase.

Interesting stuff. My Irish grandfather, a vaunted professional
gambler, always told me to never argue religion or politics. Great
advice and to that I would add not to argue with gold buffs.

My macro indicator for gold has it worth about $650 oz. So, I
would say that if you are into gold, have the upside target you
prefer, but keep in mind there is $300 oz. downside price risk
to the bet and even $50 for the short run.

1.Monetary Policy 2.New Bank Bailout Plan

Monetary Policy
The Fed's FOMC concludes its regular meeting tomorrow. The Fed
has so far put in a ZIRP regimen, infused the system with a very
large amount of basic monetary liquidity, and through a $1.3
tril. expansion of its balance sheet, has further liquified the system
via loan/swap programs. The basic money supply now has a sensible
5 year growth rate of 6%, and the Fed's programs have replaced the
$1 tril. originally lost in the commercial paper market. The much
broader measure of credit driven liquidity I use is now but $200 bil.
short of a decent 6% 12 month rate of growth. The Fed has about
done its job and should now be only in standby mode. Realistically,
if the liquidity in place cannot put the economy on a sounder footing
over the next 5-6 months, it just may not happen, because that
would mean that cash liquidity preference for consumers, business
and banks was just too strong.

2. New Bank Bailout
Hints and trial balloons from industry and Beltway sources suggest
the Obama admin. may unveil a new program to purchase non
performing and toxic debt from banks and related entities at some
point over the next 7-10 days. To avoid shrinking bank capital
well below a level needed to service our very large economy, the
Feds will ultimately have to offer equity capital which does not
further significantly deplete bank cash flow. In fact, if Team
Obama goes ahead with the program, they would be smart to
swap cheaper equity for the very dear TARP money. In response,
the US needs a massive taxpayer shitstorm to force everyone's
hand so all can see the mess and what needs to be done.

Stock Market -- Technical

What's clear is that the market has been trending down since its
1/6 high close of 935 on the SP 500. Where we're headed in the
short run is not clear in my view. There was a steep low of 805
on Mon. 1/20. that produced a reasonably deep oversold and a
quick bounce which has had no follow through. The bears have
had no luck in recent days, and the market has drifted out from
underneath a short term down line, leaving us with a now
moderate oversold condition.

The market is interesting now because my intermediate term
indicators are close to turning nicely positive despite the weakness
we've seen since early Jan. Since I rarely short oversold situations,
I am hoping for a positive turn for a trade.

Had the market rally stayed intact beyond the 1/6 high point,
It would have strongly suggested to me that the market was
starting to come out of the woods. Instead, the selloff killed off
that notion for the time being and leaves the market in bear
territory. I also note that the SP 500 remains far below its
40 wk m/a, and this leaves me wondering whether any rallies
can sustain until that 40 wk moves down closer to current
levels.

From a trading perspective, the long side has been home only
for the heroic in recent months as there have been few solid
set-ups of the sort that more conservative traders might favor.
The sharp break following the 1/6 top did provide an ok
set-up for a short index trade.

I am happy to watch and wait in the days ahead...

For SP 500 chart, click.

US Banking System -- Long Term

Over the 2004-08 period, bank loans/leases expanded rapidly,
running up from $4.4 tril. to over $7 tril. This ballooning of loan
exposure is far more rapid than a sensible growth trend would
indicate, and it has left the banks vulnerable to continued large
loan losses in a weak economy. Lest they be fairly accused of
hiding earnings and dividend payout from shareholders, banks
cannot book higher loan loss reserves for the hell of it. Moreover
since senior executive compensation is based on earnings
progress, there is a reluctance among bank execs to bolster
reserves until evidence they should becomes more compelling.
Even if you are an insider with a large loan book right under your
nose, it is not so easy as you might think to accurately discern
what may go bad in the year ahead.

Because loans rose so far above a sensible trend over 2004-08, I
think it is fair to say quality standards were quite relaxed and
that there could be up to $1.5 tril. in loans that could go bad if
the economy stays so weak. Losses of such a staggering
magnitude would wipe out bank equity capital and leave the
system insolvent. I know I do not know whether the banks could
wind up with a loss of such a magnitude, but it seems plain that
vulnerability to further substantial losses seems likely enough.

If the Obama team and bank regulators deem it necessary to
secure bank capital, some sort of consolidated standby facility
would seem most appropriate as the risks of abuse are large
if banks are allowed to dump loans ahead of the normal loan
loss accrual process. By the same token, regulators would likely
be best served by securing authority to force merge or shut
down the basket cases.

Now, the US economy can expand for a good 12-18 months
without recourse to heavy loan growth as recovering business
cash flows normally can meet recovering working capital needs.
Similarly, the residential market is so depressed, that early
stage recovery will not strain the mortgage market. Thus,
when the economy stabilizes and begins to move forward, there
will be substantial time to assess more fairly the banking system's
exposure to the credit "bubble" of 2004-2008. This is more
fodder for the standby facility case.

There is great concern now about the soundness of the banking
system, but the more pressing issue is stabilization of the
economy and asset values and that is where the primary
policy focus should be.

US Banking System

With the recent price weakness in Citbank and Bof A, there has been
a flurry of official and unofficial commentary about a bank rescue
package. Today,Treas. sec'y. nominee Geithner suggested an assistance
package of some sort for financials would be soon forthcoming from the
new Obama administration. So, what are the issues?

The private banking system has about $1.4 tril. of equity capital,
including the recently allocated portion of the TARP funds. Loan losses
have been accelerating, and will be around $150 bil. for 2008. The
surge in loan losses wiped out industry profits last year, and we are
now also seeing a rise in losses on securities, although this number is
still small.

At this point, loan losses are too large to allow banks to increase
capital via retained profits, and access to the equities market is
prohibitively expensive for those banks needing to raise equity
capital. Moreover, with the economy very weak, loan losses are
expected to continue rising for the time being.

A very thorny issue carries forward, too. Toxic real estate loan and
securities exposure in the industry continues. The utterly valueless
stuff is being written off, but there is likely substantial exposure to
paper that has no market to mark to, but which has some economic
value nonetheless. Individual bankers are loathe to overbook losses
here, especially since economic value will rise in a recovery.

There is a fear that without some sort of resolution that enables
regulators, economists and investors to pronounce banks "healthy"
again, the banks will not be able to underwrite economic recovery
in the normal fashion.

While on holiday around year's end Congress got an earful about the
weak economy and many members were upbraided for signing off
on TARP. Thus it may be that a grand bailout scheme for the banks
will create an uproar with voters unless there are vast protections
for taxpayers.

When banks are forced to issue high coupon preferreds for the
TARP money, that drains cash flow and dilutes the common
shareholders. More of same will provide a long term cushion to
taxpayers, but will drain earnings enough to substantially inhibit
banks from growing capital internally.

So, IF there indeed has to be a rescue package to restore the
Goodhousekeeping seal of approval to the banks, regulators will
have to look long and hard at ways to protect taxpayers but
reliquify the system at a lower capital cost to the banks. So,
perhaps they will look at convertibles, warrants and sub-class
commons as options.

If a deal is to be done, there must be a depth of transparency that
leaves precious few unanswered questions. Failure to do that will
haunt us all well into the future.

US Economy Recap

Let's review some indicators that coincide with the level of economic
activity. Real retail sales have accelerated to the downside over the
past 6 months and were down 9.8% yr/yr through December '08.
The weakness in industrial production is catching up, as it has
fallen 7.8% yr/yr. This would indicate there is more inventory
liquidation ahead. Civilian employment is down 2.0% yr/yr
through Dec. and is set to fall further as productivity has tumbled in
the wake of a sudden, rapid fall in output. Real earnings per worker
has risen sharply since mid-'08 as businesses have allowed wages to
continue rising while the CPI inflation rate has declined sharply. Total
payroll is trending down in growth reflecting shorter hours and the
3 million jobs lost over the past year. Overall, the composite of my
4 coincident indicators is a -4.0% yr/yr -- a deep drop.

The sharp decline in retail sales relative to the strength in real
earnings indicates clearly that consumers are continuing to hoard
liquidity or build savings during this downturn. Debt service ratios
for consumers are also now turning down cyclically.

US construction outlays remain in the dumper paced by a record
breaking decline in residential construction.

US trade is contracting rapidly, with both imports and exports
falling. Imports have the sharper downward tilt because of the blow
out of the oil price. As the trade deficit closes, the flow of dollars into
foreign coffers is shrinking which will pressure official reserve
positions.

My top down corporate profits indicators are off the most over
the past 12 months since the end of WW2.

The Business Strength Index -- a measure of operating rates
and business output levels-- stands at 106.0. This compares to
readings of 135.0 - 140.0 when the economy is in mid-expansion
mode. The 106.0 reading is the lowest in 27 years.

In the short run, the primary risk to the economy is the scramble
by consumers to hoard liquidity even with real earnings strong.
Without development of a better balance between consumption
and savings, the economy is likely to cycle down significantly
further, creating a far darker future.

On the brighter side, the weekly leading indicator sets have been
stabilizing at very low levels since the end of Nov.'08. I have my
fingers crossed.

US Economy, Stock Market & Obama

Time to get a few things off my mind...

US Economy
As I view the world, all the pieces are in place for an economic
recovery to begin by mid-2009, if not a little sooner. I say this
even holding a fiscal stimulus plan aside. There may be tough months
ahead, and the recovery may be anemic in the early going, but the
right things have been done to make it happen, from money
liquidity through real take home pay through rapidly increasing
housing affordability. Even if you go back to the dark days of 1932,
the economy finally responded positively and strongly to an easy
money policy. That's my operating plan for the economy. From
here on in, I check to see whether things will be different this time
and, if so, in what ways.

Stock Market
I cannot argue with the idea the market might retest the Nov. lows
over the next couple of months. But, looking out 12-15 months, I think
the SP 500, now stewing about at 840 or so, should rise to around
1325 as deflation pressures are shaken off and earnings rebound.

Obama
The guy takes office next week, and even though the new ship of state
has yet to set sail, barnacles are adhering to it. As I see it, his
primary mission is to rebuild our peoples' trust in the US Gov't. by
leading through integrity and common sense. That's why he was
elected. He needs to treat our citizens like concerned adults and restore
rapport before too many of us drift away.

So it is that I object to his use of focus groups. I object to allowing
Hillary to spin that large ball of cotton candy about "smart power" at
her confirmation hearing to be Sec'y of State. I also think he needs to
dump Geithner, pronto, as his tax evasion was inexcusable. The time
is such that we can no longer afford doofusses like Willie or W. You see,
this guy has to be good, has to engage us and challenge us for the
stakes are much higher going forward. And the big challenge, the one
many presidents fail, is he has to trust us too. Hope you have the
wind at your back, Mr. Obama...

Inflation, No-flation, Deflation

My inflation thrust indicator was signaling passage from 12 month
inflation to price stability (no-flation). Now, it has moved into even
lower ground, suggesting an eventual 12 month CPI which is
negative (deflation). Moreover, barring a significant rally in the
commodities markets in the months ahead, the indicator is
suggesting a deepening of deflation pressure over the first half of
2009. I take this analysis with a large grain of salt and so should you.
Commodities prices have dominated inflation momentum so far in
the new century, and being both volatile and difficult to predict, leave
us with unusually limited visibility when it comes to conjecture about
the prospective inflation (deflation) rate.

Current emerging deflation pressure largely reflects falling global
economic demand and production operating rates rather than the
emergence of large new sources of supply. Global economic demand
lost altitude so fast over the past 4-5 months that inventories
accumulated involuntarily. So, inflation hedge supply management
has turned into an inventory liquidation adjustment, with this
especially true for newer economic powers like China that lag in
inventory management techniques.

There is a "quickie" way to measure inflation expecations in the
markets. Simply divide the CRB commodities composite ($CRB) by
the long Treasury bond price ($USB). A rising trend signals that
expectations favor accelerating inflation. A falling trend signals the
opposite. The chart link below shows the rapid decline of inflation
expectations since mid-'08. Note too, the recent basing underway.
Chart is available daily here.

Gold / Silver

The gold macroeconomic indicator I use as a gold price directional
broke down sharply over Half 2 '08 and in so doing, decisively
broke below the long term uptrend in place since 1999. The index
has fallen back to levels last seen near the end of 2006, when gold
was trading $600 - 650oz. The decline in this indicator reflects the
collapse in both the oil price and a composite of industrial commodities
prices. These tank jobs far offset an improvement in the monetary
component.

The gold price led the indicator down from its plus $1000 Mar. '08
high and tracked the indicator well until the end of Oct. '08 where
a major divergence started. Gold started heading back up and the
indicator continued to sink. The ratio of the gold price to the
indicator is the highest it has been since the 1979-81 period.

The gold market, seeing the global easing of monetary conditions and
the nearly global announcements of fiscal policy stimulus programs
turned into inflation anticipation mode this past autumn. The sharp
seasonal sell-off in the dollar from the latter part of Nov. '08 through
late Dec. lent considerable encouragement to the gold rally.

Now, whenever global economic recovery commences, both oil and
industrial commodities prices will surely rally. But, with sizable slack
building in the global economy presently, it could take a fair while
before inflation turns serious, if at all. So, sustaining a gold rally will
take an effort of will and courage by the bulls in the interim.

Gold remains too rich for my blood, and whatever the upside over the
next year or two, I see a good $200 oz. price risk from the present
$825 - 830 area.

I remain interested in trading silver with the long side entry point
below $10 oz. Silver, unlike gold, trades much closer to economic
value. Gold continues to carry a huge premium over its economic
value.

The SLV silver etf chart is here.

Economic Indicators

Weekly Leading
As previously discussed, the two weekly indicator sets have plunged
since 6/08. That implies deep output and profits weakness for Q4
'08 and the current quarter, too. Both data sets are showing stability
for Dec. '08. We saw this last spring as well, only to see them do a
Wiley Coyote cliff drop after June. The recent stability needs
attention. it did help the stock market last month and gave the
T-bond a frisson of doubt as well.

Monthly Leading
Here I monitor the breadth of new orders across industry and
commercial. For the US, these indicators are deep in the red and the
composite total is still falling. Ditto global. Heavy duty pressure on
profit margins is indicated.

Economic Power Index
This index (real wage plus change of employment yr/yr) continues to
recover. It hit 1.7% in Dec. compared to a deep -2.5% near mid - '08
when inflation was ravaging the wage. Weak retail sales implies
consumers remain more interested in building savings than in
spending. So far, 3 million US jobs have been lost. History says that
retail should start doing a little better in the months ahead.

Omnibus Cycle Pressure Gauge
I devised this one over 20 years ago to track the Treasury market.
It includes production, commodities prices, the CPI, the 91-day T-bill
yield and other measures. It has fallen over 50% since mid-'08 and
ratifies the plunge in Treasury yields. I use weekly data pieces of it
to trade bonds. (For another such measure, click here.)

Capital Slack
There's plenty of it and it is growing now that bank C&I loans appear
to have rolled over. In a deep recession, business loans can roll off
to the tune of 25%. Credit slack joins rising unemployment and low
and falling operating rates to indicate large and growing under-
utilization of capital. Not for nothing that the Obama team is pushing
hard for a big stimulus package.

On balance, the economy is still on the cusp of catastrophic trouble.
The economic power index may be an interim peak level, but it
joins easy money and growing liquidity to form the traditional
base for recovery. Whether we stave off bigT trouble depends on
how consumers balance spending and savings in the months ahead.

Corporate Profits...

All of the "top down" indicators for nonfinancial profits I use have
taken the steepest drops in decades and point to sharp down
earnings for Q4 '08 and likely for Q1 '09 as well. The declines in
the indicators pitched steeply downward in Sept. '08, marking
a sharp change in the outlook for profits in short order. Small
wonder the stock market crashed during the same interval.

Now, the market is discounting a bad earnings quarter, so results
and corporate guidance looking forward as released will disclose
how ready investors are to sit through bad numbers now in lieu of
prospective recovery later in the year. On average, a market
bottom discounts the initial upswing in the earnings cycle by 6
months. So, even if the stock market does treat the oncoming
earnings news with a rude sell-off, one should not readily conclude
that the year is lost based on the current reports.

Stock Market -- Longer Term Issues

The bear market which started in the autumn of 2007 has been
dramatic enough to badly fracture long term bull trend lines
which ran from 1982 and 1987. The market at its recent low point
dropped down into the center of a broad 50+ year range, a range
it had eclipsed to the upside over the 1997 - 2007 period. As a
consequence, there is simply no close parameter guidance to
follow going forward.

To me, this situation implies that the fundamental dynamics that
powered one of the greatest bull markets in history are no longer
aligned, and that a new epoch for stocks has begun. The great bull
was powered by faster than historic earnings growth, rising ROE%,
and downtrends of inflation and interest rates which elevated p/e
ratios. Investor confidence, heightened by such superb basics,
was strong enough to suppress risk premia and produce a roaring
bull which ended in major highs for small and mid - cap stocks
well above the highs for the large cap group, which peaked in 2000.

When you have a new ball game, you have to put aside the gambits
that powered the old one and look forward only. I see a period
ahead of lower global economic growth, difficult to manage volatility
in inflation and a range of burgeoning fiscal, monetary, financial and
trade imbalances which will wreak further havoc if not contained
and managed. At the least then, I see a higher risk premium for
stock investment going forward, which mean lower earnings
capitalization or p/e ratios. The potential for economic and
markets instability going forward is phenomenal in the post WW2
era.

The most pressing issues at hand are: 1) the swift contraction of
asset values underway globally and 2) high volatility for many cost
factors of production vs inflexible wage structures -- Too many
folks can go from comfortable to underwater in to short a time when
costs are allowed to escalate rapidly vs. the wage. In this latter
regard, tax rate cuts and rebates only subsidize the sharp cyclical
upswings in the cost of living.

More as we go along. Suffice it to say for now that much work lies
ahead in charting the course going forward. I have never been much
for buy and hold. As a money manager, It was my view that a good
stock picking system ought to turn 1/3 of the portfolio over every
year. If I was a young guy interested in investing for the longer
term now, I would anticipate wide swings in asset allocation geared
as much to dodging bullets as to seizing opportunity. You cannot get
rich dodging bullets, but you can stay solvent.

Stock Market Fundamentals

In an 11/13/08 post on the market, I mentioned that my favorite
fundamentals were "just shy of turning fully bullish". I was waiting
for confidence measures, particularly a group of doggie BBBs, to
reverse to the downside in yield to confirm the change. That strong
confirmation came this week with a sharp downward break in
collective yield for the group. So, confidence continues to return to
the capital markets.

My primary indicators are simple -- trend of market short rates,
trends of monetary liquidity and the basic money supply, trend of
yields of the low rung of investment grade credits, and yield quality
spreads. These measures are computed over monthly periods and
when all the readings are positive, history shows clearly that stocks
tend to rise substantially thereafter. No "sell" signal will come until
all indicators are negative at once.

My secondary indicators are also bullish: postive slope to the yield
curve, liquidity in excess of what the economy demands and earnings
which have fallen below trend on a cyclical basis. The latter factor
rquires explanation. When 12 month earnings turn down in a
recession period, the stock market goes down until earnings fall below
the long term trend. Once earnings are below trend, the guarantee of
a bear market ends as investors seek to anticipate recovery.

Now I do have misgivings about the timing of the positive turn of
market fundamentals. I would be happier to see a retest of the
Nov. '08 lows at some point over the next 4 months on the
premise that a deep cyclical bear market ought to run a good 16 - 17
months from the prior top (10/07 in this instance). I worry that with
the Obama inauguration and announcement of a big fiscal stimulus
plan a few weeks ahead, the market may have bought the rumor and
be getting ready to sell the fact shortly thereafter. Secondly, I
have reservations about the upside potential of this market reflecting
my view that economic recovery could very muted for a good
several years befor a new take off phase develops. Finally, the
timing of the change in fundamentals could have been better -- the
market is overbought short term.

Stock Market & Economy

If this be but a nasty variant of an ordinary business cycle, I would
say the environment is an easy call from here. Specifically, my
indicators point to a steep further economic downturn through
mid-2009, followed by a moderate economic expansion that could
continue for several years. In this world, the stock market would
most likely bottom Mar. - Apr. of '09, followed by an upturn in
corporate profits by Sep. '09 and the first hike in the Fed Funds rate
at some point in half 1 '10. Commodities would turn up over half 2
'09 and inflation would re-accelerate from a very low level by late
'09. Piece of cake.

But, my range of indicators also suggests to me that the US is
flirting with economic disaster. The key word here is "flirting". It is
far from clear to me that consumers are going to behave as
positively and predictably as they have in prior downturns and
readily jump in and lead the charge to recovery. Consumer
hesitation to spend in the months ahead can lead to further
downcycling and subsequent considerable difficulty in turning
things around. Real incomes have been punished too long for most
and wealth has fallen rapidly, especially for the upscale folks. Debt
levels continue on a high plane and take up substantial income. So,
I think it is reasonable to wonder whether they are going to be so
eager to spend and borrow in 2009. Moreover, if they remain
reticent, I doubt monetary and fiscal policy will prove so
enticing to them. Realistically, and looking at the household sector
on an individual basis, it would be kind of dumb for folks to jump
into heavy spend and borrow mode.

It is easy enough to envisage recovery where consumers exhibit
much greater balance between spending and saving. On the
surface, that's one way to finesse the issue and maybe that's how
it will work out. But, it will need to happen soon, lest a weak
economy and job picture leads to further forbearance.

Production, trade and employment all seem primed to contract
in the months ahead, but the stock market can endure that if
consumers show some signs of putting spending on a more even
keel and if prospective homebuyers show more interest this
coming spring.

For now, I'll probably go along with the framework outlined in the
first paragraph of the post, but I will not stay with it long if we
continue to see folks shunning the shops as we have been.

Economy & Liquidity

During periods of recession, it is right as rain for consumers, banks
and businesses to rebuild cash and cash equivalent liquidity. Since a
serious downturn can add more uncertainty to the outlook, the
rebuilding of liquidity can intensify during such times.

Real personal wages have rapidly turned positive in this quarter
as inflation has subsided quickly and dramatically. Normally, when
the real wage improves, spending quickly follows, and the desire to
build liquidity slowly wanes. So far, that has not happened, as
spending has remained weak and liquidity balances are rising. This
is partly attributable to the shock of a rapid decline in the economy
since late summer, but it may also reflect a desire by householders to
add to savings to offset sinking 401k and home values. If the latter is
so, then we might expect the period of liquidity enhancement to be
stronger and last longer than in prior recession periods, despite low
available rates on savings. The test of liquidity preference is
underway now, since the real wage has recovered quickly, with the
normal expectation of higher spending to follow now in the spotlight.
I would also say if consumers as a group plan to alter budgets to
accomodate more cash on hand to offset losses in asset values, that
stimulative monetary and fiscal programs may not be very
effective for a while until liquidity cushions are fattened further. I
would also point out since 2005, 2 million boomers cross the age 60
threshold annually, when liquidity preference naturally increases.

Banks are not liquid, and the natural process of improvement is to
allow loans to run off and liquid investments to rise. This process
has actually been slow to get underway. Banks are also taking
massive loan writedowns each quarter. This restains capital growth
and it is likely that the bulk of the rest of the TARP program will have
to be released to banks and other credit intermediaries to rebuild
capital. A big test for both consumers and the banks will come this
spring when more nearly affordable homes are prospected by
folks looking to buy (Improved affordabiltiy reflects both lower
prices and mortgage rates).

Business sector liquidity was well repaired after the 2001-02
downturn. However, my profits indicators have fallen dramatically,
and non-financials may want to further shore up liquidity if cash
flows sink as now expected.

As a recession winds down, the capital markets can rally nicely even
as sectors rebuild liquidity, as investors see such a process as normal
and healthy. The hitch comes in if consumers, banks and business
are seen as too zealous in propping liquidity, for that would mean
that recovery may be further afield then expected.

I take the dramatic weakness in the capital markets over the past 15
months as a sign that fundamental changes may be in store and that
one should treat the tried and true assumptions with more reserve.

A first stop for me vis a vis the economy is to watch consumer
spending now that the real wage has recovered sharply.

Stock Market -- Short Term Technical

The rally resembles a duck in flight which has evaded a full load
of buckshot, but which was clipped by a BB or two. There is another
load of buckshot en route, and the duck needs to gain altitude rather
quickly to avoid a nasty hit. Less prosaically, the market has
worked off a sizable short term overbought, and needs to move
ahead quickly to keep long side trader interest. Confirmation of
a rally of substance remains elusive, and the trajectory has flagged
to a critical level. Last Wed. it was mentioned that it was ok to
allow for the work -off of the heavy overbought but now we need
to see if this bird can gain some altitude before impatience brings it
down.

Financial System Liquidity

As prior discussed, the steep downturn in the global economy since
Sept. '08 shredded Federal Reserve efforts to resuscitate broad
liquidity in the financial system. The commercial paper market
resumed a steep drop, and banks lost large institutional deposits as
players moved to the safety of Treasuries. My broad measure of
credit driven liquidity is now down about $120 bil. below this past
summer and stands only +1.5% measured yr/yr. The Fed has been
buying top quality financial commercial paper to prop up the system,
but large deposits continue to roll off, curtailing the Fed's latest
efforts. 90 day a2/p2 commercial paper trades infrequently and at
a horrendous 6.25%+.

Monetary liquidity has been soaring -- +11.5% yr/yr -- as the Fed
primes the pump. The data is biased up as smaller banks leave
some excess reserves in sweep accounts, but the basic money supply
is moving in the right direction. From a cyclical perspective, the
narrow money supply typically leads the broader credit driven
aggregates in time, and when the economy is rather weak the
recovery of private credit can lag. This is particularly the case when
the residential market is in distress. We know we have the most
depressed residential market we have seen in many years.

In the residential area, there is also the likelihood that deflationary
psychology is growing -- why buy now when house prices are headed
lower and job security is a factor?

The new Obama admin. may well review how to increase already
improving housing affordability further.

At least the Fed is on the case with allowing money to grow in the
system. that's where you have to start to repair the tatters. It is
genuinely too bad that Bernanke was so slow to turn to growing
monetary liquidity.

Even though the broad measure of liquidity is up but 1.5% yr/yr,
there is excess liquidity in the economy overall. The $ value of
production is down 4.5% yr/yr through Nov. That leaves my
excess economic liquidity index at +6.0. Such a reading is normally
very positive for stocks, but I now keep this as a secondary
indicator since it failed badly during the bear market period of
2001 - 2002. However, it has been a good support measure over
the long run so we need to keep it very much in mind.

Stock Market -- Short Term Technical

The short term uptrend is gaining firmer footing now as the
25 day m/a is set to join a rising 10 day m/a. However, the
SP 500 is strongly overbought in the very short run following
yesterday's ZIRP rally, courtesy of the Fed. Note also on the
chart link below that the "500" has not taken out two previous
interim peaks of recent weeks at 910-911, indicating resistance
and hesitancy. It is tempting to say that a healthier rally would
have easily blown through that level, but first we need to
see how well the market handles the short run overbought.

The ADX indicator is set to turn positive (+D1 to go through -D1),
but note the weakening momentum line in black. That is not a
confidence builder either. Chart.

Policy & The Economy

"Outlier" economic data have policymakers in "all hands on deck "
mode. A collapse in residential construction, weakening home
values, tumbling retail sales and an outright 3.5% decline in the
CPI in recent months are alarming because they are slipping
outside the boundaries of weakness seen in business downturns
over the past 50 years. This is risky business for a US economy
operating with record high debt leverage across most sectors.
Similar situations are playing out to varying degrees across the
globe. A sudden turn to thrift to offset a weak home value, a down
401k and worries over job security make great sense to most on
an individual basis, but policy makers fear the consequences should
the majority of folks get in on the act.

I think the hard reality is that as this massive 80 million strong "baby
boomer" generation matures, the momentum of consumer spending
growth in real terms has slowed and has been boosted by debt
accumulation. As the boomer generation greys, it is going to be
tougher to drive discretionary spending in the US. Were it not for
the current difficult circumstances, I think it would be true to say
that the task of promoting strong consumer spending will only get
tougher over the next decade. Heck, Gen X ,which is following the
boomers into prime spending years is only half its size.

So today the Fed went to ZIRP -- cutting the FFR% to between
0.0 - 0.25%, and promising to inject money into the system more
directly, as the banks have tighter credit policies, inadequate capital
and more substantial loan losses to book. The aim is to force people
to give up their liquidity and step up their spending. Savers are to
suffer and thrift is to be thwarted. On top of this the incoming Obama
admin. is planning massive fiscal stimulus to stabilize a deteriorating
economy. Again, these policy actions are being played out globally.

The fear policymakers share is that failure to act dramatically could
produce an uncontrolled, deflationary economic tailspin with the
end result being substantial economic damage and possible social and
political turmoil. Maybe so, maybe not.

Since consumers have endured very substantial and broadscale
shocks. I think it will be tougher to turn them around this time and
that people with newly revised budgets will resume a higher level
of spending as and when those budgets permit. It is going to take a
little time to rebuild confidence and even a modicum of trust.
Moreover, I am concerned about how well recovery / expansion can
be sustained. Freewheeling commodities markets could surge as
economies recover and again jeopardize confidence and real incomes.
Relatedly, The Fed and the Gov. will face a heavy challenge to manage
policy once inflation pressures resurface.

The message : Tougher to turn the economy...More modest results
whence it turns...Tougher to mange an orderly and durable expansion.

Stock Market -- Quick Comment

Well, the bears did come in on Tues. after the sharp rally to
overbought at Mon.'s close. But they really did not do enough
damage this week to upend the rally. Just a little back and fill.
So we carry the drama into next week with an eye to whether
the market could morph into a plus Santa finish for the year.
Uptrend not confirmed yet for the shorter run in my book.

Inflation Hedge Trade

What I call the inflation hedge trade goes as follows: Be short the
US dollar and be long oil and perhaps a PM like gold or silver.
This has been a popular trade from time to time over the past
35 years, and was a dominant one in this decade so far. It is a
tricky business, more like a 3 cushion billiard shot than a straight
pop of the 8 ball into the corner pocket.

There is evidence over time that a weakening of the dollar goes
with a rise in the oil price, while a sronger dollar pairs up with a
weaker oil price. The US tends to be a cyclical leader and when it
cuts short rates to bolster growth, the trade deficit may widen
relatively, leading to a weaker US$. In turn, US oil import demand
picks up, and the price is shaded to the upside as a way to hedge
a weaker dollar. Timing is far from exact and markets psychology
plays a major role. This trade was a powerhouse over most of
the decade and was spectacular once it became evident that the
Fed would cut rates to ease a gathering financial crisis in 2007. It
came acropper this year when spreading global financial market
turmoil triggered a flight to the dollar and when oil subsequently
crashed on lower demand and a powerful US dollar rally.

One other fact, the pools of money in this game -- hedge funds,
pension funds with "alternative" investment authority and a
bevy of mutual funds and ETFs devoted to these sectors -- is
huge and far larger than anything seen in modern times. It's not
just primary dealers and old line speculators anymore.

The $USD has weakened so far in December (seasonally typical)
and sure enough oil is rebounding and gold and silver have come on
board. Importantly, oil refineries have run their heating oil and
are set to shut down for maintenance in Jan. to get ready to run
gasoline for the spring. So early in the year can be seasonally
strong for oil. Thus, the guyz have the trade going -- short the
dollar, long oil and maybe gold for good measure. Traders know
oil could rally to $60 + in Jan. without challenging the downtrend.
Moreover the $USD is at trend support and a break here during
the month will whip up the oil pit. This can be crazy stuff, since
there can be little change in bedrock fundamentals in the interim.

From a macro economic perspective, this inflation hedge trade is
harmless as long as it runs for a month or two more. But
development of another sustained strong run up in oil will not be
harmless and will eventually punish a weakened global economy
further.

Stock Market -- Technical

Short Term
Well, here we are again. Another potent rebound from severely
distressed levels, although not quite a rocket. At 910, the SP 500
is overbought short term for just the second day in nearly 2
months at 3.8% above the 25 day m/a. Not only have such
overboughts been rare over the past 3 months, but have been
quickly crushed as well. Good rally durability test straight ahead.

I would like to see the market and its 10 day m/a above the 25 m/a
and see the 25 m/a turn up as well. I would also like to see the +D1
on the Wilder ADX rise above the -D1 as well. Chart here.

Intermediate Term
The NYSE breadth flame index -- runs back 12 weeks -- hit a deep
oversold at -154 on 10/24 and is now just a tad oversold at -20. The
14 week stochastic will need a strong close this week to turn positive.
It has been on a "sell" trend since 5/16/ 08. The smoothed 40 week
price oscillator has been on a "sell" since 7/4/08 and is now just
slightly below the last cyclical bear market low registered in late
2002. That's interesting in itself. When the market turns truly
bullish, the NYSE breadth flame mentioned above can run on
overbought for weeks -- a healthy sign indeed. We have not seen
that since late 2006.

Sentiment
Most contrarian measures I follow show bearish sentiment. It is
curious that Market Vane 's advisory sentiment is still at 40%
bulls compared to readings in the low to mid 20's during 2002
and early 2003. Market Vane's Treasury bond bullish sentiment
hit a rare 89% bullish last week. You see that only at market
tops. A sell-off in Treasuries might help the stock market as it
would suggest a flight from quality back toward riskier assets.

Psychology
Bernanke, Paulson, W. and Obama have all been furiously
"painting" the tape green over the past two weeks. they have the
sheep and the dogies a' runnin' with a continuous stream of
supportive comments. I don't blame them and, as mentioned
last Friday, it would be nice for all players to take a time out to
think on whether the economy is truly headed off the cliff.

Stock Market Comment

Americans love irony and I am no exception. And so with the all
the seriously bad economic news of recent weeks, the stock
market is trying to steady if not rally. It is a discounting
mechanism and the crash that started over two months ago
has correctly foretold the bad news emanating forth. So, I have
been amused this week by the thought that since the economy
has moved to the cusp of peril (See comments in earlier post),
wouldn't it be something if the market decided to hold off on a
rapid pursuit lower to see if the US and the rest of the major
economies are actually going to go over the cliff into the abyss
or whether we have a deep but managble recession to contend
with. Look, it would be unusual if such a serious economic
situation did not start with a bear market that lasted a good
16 -17 months and which carried into 2009. Moreover, after all
the carnage, now might be a good time for investors to pause to
decide whether all economic hell is about to break loose or not.
This is especially so with a new president coming on board, a
strong congressional majority in hand and a thumbs up from
voters to try and forcibly stimulate the economy and perhaps
massively so. And of course there is the issue, prevalent in
recessions since WW2, that the system has its own self correcting
mechanisms. So why not spend the holidays mulling whether
the wolf is really at the door?

I have had many more good hunches than bad over the years.
But I have had enough bad ones not to trust them but to tend to
the trading and investing disciplines instead and save the hunches
for conversation over drinks. At any rate, I thought I would
pass this little piece of irony along...

Economic Indicators

Weekly Leading Indicators
Both data sets for the economy have been in free fall since June. The
declines -- measured peak to trough so far -- are the steepest since
the Great Depression days. Yes, the stock market influences the
declines, but weakness is broad based, with a collapse in sensitive
materials prices and a surge in initial unemployment claims very
notable. Global indicators are also now falling steeply.

My weekly and monthly inflation pressure gauges remain in free fall
as well and are now consistent with the development of modest
deflation measured yr. on yr.

Monthly Leading Indicators
Manufacturing and commercial new orders measures have simply
tanked since Aug. '08, including US export orders. The total index,
a diffusion measure, has fallen from a strong 142.0 in Jan. '04 to
the current paltry 63.3.

Economic Power Index
This measure is improving. The yr/yr real wage has turned positive
as wage growth has so far held up and inflation pressure is abating
rapidly. The change in yr/yr employment has accelerated to the
downside, however at -1.7%. The combined index is a -0.5% yr/yr
and is up from the cycle low to date of -2.5% set in Jul. '08. The
sharp deterioration of this index from the business cycle peak of
+3.9% set in Jan. '07 correctly foreshadowed the sharp pullback in
consumer spending we have seen. Now, spending and production
levels for the consumer market are very weak as householders
strive to build liquidity and control borrowing. A sharp rise in the
unemployment rate is underway, and that could undermine wage
growth going forward. But, if the damage remains slight, then
purchasing power will mend further. I would also note that
with mortgage rates lower and housing prices still trending down
that affordability is rising very quickly.

Capital Slack
A fast rising unemployment rate and falling operating rates in the
business sector reflect sharply growing slack. The low level
of short term rates overstates the case for slack in the financial
sector as bank business loan exposure is still high relative to
bank liquid investment levels. But liquidity will improve as the
downturn wears on.

Financial Stress
There is more to come here. Troubled home loans are still rising.
Commercial real estate loan losses and C&I loan write offs are
both to rise. On a global level, the bust in commodities prices is
going to add more pressure for countries and companies
dependent on resources, materials and cash crops. Governments
can be expected to inject more funds into the system.

Summary
We are on the cusp of danger here. The then neophyte Fed kept
the monetary base flat for a dozen years leading up to the 1929
crash and subsequent depression. It went after the inflation from
WW 1 with a vengeance. The current Fed kept the monetary
base flat in real terms for most of the 2004 - 2008 period to
correct the Greenspan profligacy. The collapse of credit driven
liquidity growth over the past 15 months and the belated turn
to adding monetary liquidity by the Fed leaves us vulnerable.

Maybe we can afford a few more months of deep economic
weakness, but those short term leading indicators for growth
and for inflation do need to begin improving well before winter
is out or else we could slide into a deeper, more pervasive
decline. We are now presuming heavily on the size, stability,
diversity and resiliency of the US economy. Do not underestimate
that power, but watch those short term indicators like hawks.

US Treasury Bond

Currently trading at 3.2%, the yield on the 30 yr. Treasury has
dropped at the fastest rate in history in recent weeks. This
decline reflects weakening global production and a collapse of
industrial commodity prices. More broadly, it bespeaks a fast
flight to quality across the Treasury yield spectrum as investors
and traders, concerned over fast gathering economic weakness
in a world of high debt leverage, scramble to safety and liquidity.

The Treasury market is now dramatically overbought. Moreover,
bullish sentiment on the market has reached dangerous levels,
registering 82% bullish on Marketvane. This is not just a short
term overbought, but a longer term overbought as well based on
my 12 month oscillator. Looking back over the past twenty odd
years, the yield on the 30 yr. could fall a bit further to the 2.8 -
3.0% area before it would signal a typical and major cyclical low.

Now, the recent action in the Treasury market has been no more
crazy than what other markets have exhibited. As well, the 30 yr.
carries a 300 -320 basis point premium to the 91 day bill in
yield, and at 3.2%, provides a suitable premium to inflation,
which is sinking fast. Even so, the market has become very
risky in that a turn of investor confidence in the prospect
of eventual economic recovery could badly punish long
Treasury holders should players move out of Treasuries to
more typically risky assets.

The measures I use to gauge confidence in the economy and in
the financial system are drawn from the actions within the
capital markets themselves. So there is no way except by a
guess that I could tell whether confidence is returning before
the markets move in the right direction (More on guesses and
hunches in the next post).

For a chart of the 30 yr. Treasury yield, click.

Stock Market

Over the past week, the market has staged a furious rally off the
11/20 lows, with the SP 500 having risen 19.1%. It was a good
week for very short term traders looking for upside action. The
action remains to0 violent for me, and I look toward next week
to see if a more sustainable pattern may develop or whether this
surge up is just another ill fated rocket in an ongoing deep bear
market. I learned the hard way long ago to be very wary of
spike bottoms, period.

Short term, the market is graded neutral, having quickly overcome
a deep oversold. Upmoves of substance do get overbought rather
quickly, but the higher ground is not given up easily. So, it remains
to be seen whether this latest surge may have some meaningful
staying power. It would be helpful as well to see stronger upside
volume. Looking out 10 - 13 weeks, the market remains heavily
oversold.

The last deep downdraft, which took the SP 500 to a low point of
752 on 11/20 carried the market down over 50% from the 10/07
closing all time high of 1565. It galvanized the Fed into further
supportive action, and brought the Obama team out in a hurry to
promise a decisive, positive fiscal policy response come inauguration.
That the Christmas shopping season kicks off this week is, of
course, purely coincidental.

When it comes to the stock market, or any market for that matter, I
am by disposition not a nibbler when it comes to investing. It's easy
enough to nibble on the long side in top quality companies in a deeply
discounted market. Not my style. Either you like the market or you
don't. In that regard, I continue to watch credit quality spreads and
the trend of lesser light fixed incomes carefully.

Corporate Profits

Over the past 15 months, corporate profits, as measured by the
SP 500's earnings have fallen by about 1/3. There are now indications
that peak to trough earnings for this cycle could be down by more
than 50%.

Most of the decline in profits so far reflects the loan and securities
losses sustained by the financial services sector. The financial
component of the SP 500 will likely wind up moderately in the red
for 2008. Commercial banks / thrifts were only nominally profitable
in Q3 '08. When common dividends are deducted, retained earnings
from operations declined. So, prior to the TARP program to inject
capital directly into the banks, they would have had to cap off the
loan book. Now, continuing loan losses are keeping financials from
generating capital internally. Moreover, with broader economic
weakness in evidence, loan loss provisions for C&I loanswill rise as
may losses on CDS swaps.

Profit indicators for the large nonfinancial group started to tumble
in earnest in Sept. '08. Peak quarterly profits for the entire SP 500
hit an index value of 24.06 in Q2 '07. The index was about 16.35
for the recent quarter, and with nonfinancial profits now in decline,
the index could fall to the 10. - 12. area over the next 6 months,
barring an earlier than expected economic turnaround. If this
deeper weakness develops, my SP 500 Market Tracker will
likely begin to recede again in the interim.

My longer term economic indicators continue to point to the
development of economic recovery starting around mid - 2009.
With the extra earnings leverage of falling loan loss provisions
that would accompany an economic rebound, the quarterly net per
share index for the entire SP 500 could easily rebound to the 20.
level by late next year or early 2010.

Stock Market -- Short Term

The market has edged out of vertical crash mode, but with
the week long mini-crash through yesterday, remains in a
downtrend that is about 50% faster than a more "normal" bear
market. In the early stages of this bear, you could count on a
rally when the SP 500 fell about 5% below its 25 day m/a. Since
the bottom fell out in Sept., rallies, such as today's sharp advance,
tend to start after the "500" falls more than 15% below the 25 day
m/a. The few short term overboughts we've seen recently have
been atacked within a day or two. So, conditions remain treacherous
and dangerous even for folks looking for exposure of only a few
days.

Comments : Oil Price & Stock Market

Oil Price
Oil closed a little below $50 bl. today. My analysis of cost
factors (supply) and purchasing power (demand) indicates oil is
reasonably priced at $50 bl. So, be it a day or longer, oil under
$50 brings back cheap energy. I have added it to my list of
items to trade long or short. How low can it go? Who the hell knows?
The clowns that brought us $147 bl. can bring it lower, I guess. I
did receive an e-mail from a seasoned and successful markets
player last week who opined that oil would go to $10 bl. Be that as
it may, I am back in the energy game after a hiatus to give the
crazies their shot. Oil is now so deeply oversold, I am leaning toward
a long position, but as with any commodity, I am strictly a trend
follower.

In a similar vein (no pun intended), I have added silver back
to my list of tradables. Gold humpers are sleazy, sanctimonius and
very snooty. Silver hawkers are merely sleazy and are much easier
to take. Besides the silver price is also now reasonable.


Stock Market
As feared, yesterday's sharp fall in the market heralded another
breakaway to the downside. There is a broad consensus jelling
in the community around the idea that a deep, prolonged downturn
in the economy is underway. The failure of the SP 500 to hold
the 830 -840 support zone has dashed hopes and left the market
in a steep short term downtrend. I'll return to this issue tomorrow.

Stock Market

Fundamentals
Of all things, my SP 500 Market Tracker has moved up from the
1000 level to the 1050 - 1075 range. This is because the p/e ratio
is allowed to expand as inflation pressures abate. Market players
are having none of it. Today the "500" closed around 807, which
is nearly 25% below the mid-point of the Tracker's current range.

Players are tacking on a large business risk premium in looking
at market prospects. The fear is that a sharper downturn will
imperil earning power and dividends for the corporate sector.
Few are now waiting for the next round of estimate cuts. The
psychology through today is that the current downturn could
be severe enough to lead to much higher levels of unemployment,
sharply falling profits and possibly deflation, which if not quickly
contained, could wreak economic havoc. Even the Fed is now
looking for a minimum 12 month recession with a consequent
return to price stability. For seasoned Fed watchers, the
colloquial equivalent is having Bernanke yell: "Holy crap, the
damn may break. Head for the hills!".

What many fear is an era of frugal chic whereby consumers keep
spending very restrained and businesses start hoarding cash.

The recent downdraft in the economy has been sudden and steep.
There's no debating that. Whether the decline is more reflective
of a temporary shock or the beginning of a more difficult to control
downturn is too tough a call for me at this point. My long term
economic indicators suggest a recovery to develop by mid - 2009,
and the next step is to watch how the short term leading indicators
behave. These data sets are currently very weak and if they
remain so into Feb. ' 09, it will be tough not to turn more bearish
on the economy.

I remain a step away from turning positive on the market. I
continue to monitor credit quality yield spreads and the trend of
intermediate quality bond yields to see if confidence flickers back to
life.

Technical
The market broke to new lows today, flummoxing the hopes of those
who thought a bottom was forming. Let's see whether this is another
breakaway downleg in the days ahead. That "bottom" formation we
saw through yesterday was too neatly manicured (See 11/18 post).

Stock Market -- Technical

the market got close to rally mode during the middle of last week
but since has faded back. The bottom testing actions of recent
weeks are pat and off-putting as well. Even so, my 25 day
momentum oscillator continues to drift higher although in an
uncomfortably broad bracket. So, I think I will wait to see if
this oscillator trend is broken by a sharp retreat. If not, then
I will hang in there looking for a positive change of trend.

One Less Bag In The Cart...

Retail sales in Oct. fell nearly 3% from Sept., and, when viewed
yr/yr adjusted for inflation, were down about 9% from Oct. ' 07.
That's the worst yr/yr performance in over 40 years, but not by
much. There were comparable spikes down in the recessions of
1974-75 and 1980, with both following inflation shocks that
sent real take home pay down. Results of sales for the past month
follow that pattern of retrenchment that comes in the wake of
persistent inflation pressure on the wage.

The spike down in retail ratifies a deep downturn in the economy
as consumers recast budgets and defer spending on signs of
gathering job losses. Nothing unprecedented here, but you have
watch spending most carefully now to see whether the down spike
in spending is the beginning of a more intense but still temporary
retrenchment or the onset of a sea change in consumption. The
retail sales blows outs of 1974-75 and 1080 were equally stunning
and raised comparable questions.

The demographics are not nearly as good now as in those prior
periods, and debt service requirements are stiffer. So, even if
the US is working through a temporary shock, an eventual
bounceback in sales may be milder. For the short run, with inflation
pressure rapidly abating, it is best to focus on how serious a
likely ratcheting up in the jobless count will be.

This is ugly news as we head into the economically important
holiday season.

Stock Market

Technical
A weak mid-day market did not decisively break below low test
zones. This triggered a fierce rally to close it out. My reading and
my e-mails tell me there are far more folks interested in calling
an interim bottom and rally, so the quick express ride up from the
basement was no surprise.

I have no money in the market now, so I am not looking to sell a
rally. For my part, the market will have to carry higher and hold
higher ground to produce a tradable trend. Specifically, I would like
to see the SP 500 move up above its 25 day m/a and see the 25 go
higher as well . The market has not been able to hold above the 25
day m/a for more than a day at a time since August. Chart

Fundamental
My indicators are just shy of turning fully bullish. I am interested in
watching the trend of Baa bond yields plus my own list of less
secure Baa's to see if confidence is returning to the capital markets,
but since I do this over one month time intervals, I am not going
to get a signal until around November's end. Suffice it to say yields
are moving in the right direction now, particularly at the short end
(2-5 yrs). If stocks continue to rally with lesser quality corporates,
I will miss a bottom of some consequence by waiting. I have other
reservations as well, but let's wait until then.

In the meantime, let's see whether today's rally has some power to it
or whether it will be the 5th fizzle since 10/10.

Financial System Liquidity

The broad, credit driven measure of liquidity is up 1.8% yr/yr.
My weekly lending proxy -- banking system credit + commercial
paper in force -- is up a scant 2.2% yr/yr. Realistically, these
paltry gains would likely not have been achieved without the massive
liquidity supports extended by the Fed and Treasury, including the
recent Fed program to purchase commercial paper. The collapse
of the comm. paper market over the last 15 months has been the
dominant negative factor within the credit system. The rapid drop
of paper in force has forced the contraction of downstreaming asset
backed loan participations to smaller banks and likewise the
upstreaming of deposits to buy large bank holding company paper.
Total bank lending has risen appreciably in part because banks
have been unable to move loan participations out to nonbank
financial outfits and foreign banks as well. The banking system has
remained functional and has absorbed the sharp rise in loan losses,
but it has clearly been sheltered from the worst ravages of the
unwinding of the commercial paper market by the Fed and Treasury.

However, one has to take note also that when an economy falters,
private sector credit demand weakens as capital projects are shelved
and working capital needs ease. The guys who really need the loans in
an economic downturn have cash flow problems and are not the
ones the banks want to see. So, slow private sector credit creation
and demand are typical in a downturn, but the large shifting of
risk to the public arena is not.

The Fed has finally allowed monetary liquidity to expand rapidly to
offset the weak credit situation. This effort is a cardinal step in
paving the way for an eventual economic recovery. The expansion
of the basic money supply has been very rapid, advancing at a 20.3%
annual rate over the past 3 months, but growth of the basic money
supply has been so low over the past 5 years that it may need to be
allowed to expand at a continued rapid pace for a while longer to
sustain the economy in the face of such sluggish private sector
credit creation. Long term readers of the blog know how often I
have cautioned that reliance on credit to drive the economy can be
disastrous if monetary liquidity is not injected quickly once the
well of credit starts to dry.

The Fed is moving in the right direction now on liquidity, but
Bernanke was way, way too slow in stepping up on this score.

Economic Indicators

Recent economic data confirm the sudden tumble in the stock
market over the past 7 weeks.

Weekly leading Indicators
The rapid further decline in the weekly data sets portend a deep
and perhaps lengthy downturn. The steep fall in the weeklies is in
no small measure due to the blow out in sensitive materials prices.
Because these industrial commodities markets were bubbly and are
unwinding rapidly, I have some reservations about whether this
specific action overstates the case to the downside. But since
operating rates have fallen sharply in primary processing, we have
to respect the trend.

Monthly Leaders
The breadth measures of new orders received across the economic
spectrum have tanked over the past two months and are bearish for
the economy in the short run. We are seeing a global downturn here,
with the US the leader to the downside.

Economic Power Index
This index has improved slightly to about - 1.8% compared to recent
readings of -2.0 to -2.5%. Nominal wages are still holding up, and
pressure on the real wage is receding from a deceleration of inflation
pressure. However, since job losses have increased in momentum,
recovery of a depressed real wage is being somewhat undercut.
Creation of more slack in the labor market could eventually lead to
a softening of wage growth. Capital Slack -- a measure which
econometrically combines short term interest rates, the operating
rate and the employment rate -- is widening appreciably.

More Stimulus
President-elect Obama has under development a comprehensive
stimulus package to go forth to Congress upon his inauguration. It
is logical to assume that program component trial balloons may be
floated for assessment in the weeks ahead. Obama will need to
proceed carefully so as not to undermine W., as lame a duck as there
ever has been. Good test for Obama in journeying through the
corridors of power.

Gold Price ($740. 0z)

Gold remains mired in a cyclical bear market, down about 28%
from an historic peak set earlier in the year. Gold is hardly
immune from recession periods. It can fall 30-40% off cycle
peak levels in a moderate downturn and 50% when the recession
is broad and deep.

My macroeconomic directional indicator hit an all time peak in
July, and followed the high in gold by about 4 months. The
indicator has fallen sharply since July, and is back down to levels
seen about 15 months ago. the sharp decline in the indicator reflects
major price weakness in oil and a broad basket of industrial
commodities. At the micro level, gold production has not been
rising but commercial demand has weakened. It is also of interest
that US dealers were deluged with gold jewelry for resale when gold
cracked the $1000 oz. level.

The gold price remains quite volatile, but it has fallen below the mania
cut-off line. So I would say the metal is losing the high return for the
assumption of high risk profile. Barring the development of an extended
deep global downturn, gold could well fall to the $650 oz. level, with a
further $150 downside to $500 oz. if we find the global economy in the
deep yogurt.

I would be pleased to add gold to my list of tradable options should it
fall to the $650 level. I played the game eagerly in the late 1970s out
of the London market, but have found less stressful but equally
rewarding alternatives since 2001 when gold made its move.

The bugz are freaking over the recent large expansion of the US
monetary base and look forward to an inflationary future for the US
and a weak dollar. I have this as an important memo item only for
now, as experience shows that the Fed can shrink the base quickly
when signs point to a more positive economic environment.

The gold macro indicator is better for direction than for actual price,
but for your interest, it now suggests a price 0f $680 oz.

2008 Election -- 2

One of the few advantages to being a senior citizen is that you stop
caring all that much about what others think of your views. I did
vote for RR in 1980 and 1984, but this year I hope we have a good
old fashioned throw the rascals out result, wherein the GOP is
blown out the water and left to repair its tattered self in the
wilderness for a couple of years. I find Sen. Obama impressive
enough, but what stuck most in my craw was the way the GOP
seemed to revel in its stupidity, even as the GREAT MESS unfolded.
We need vibrant parties to carry on the US electoral traditions,
not the GOP numbskulls who have held the reins since 2001.

The gathering plutocracy in the US will undermine the very fabric
of our democracy. We need to see better balance in the returns
on capital and labor than what we have witnessed over the past 25
years, and we need to see the corporate mandarins divide the take
more equiblybetween chieftains and the folks who work for them.

I do not have strong views as to what will happen today, but I
am hoping the Dems kick ass thoroughly.

Inflation Situation

Since registering a major interim peak this June, my inflation
pressure gauge has taken the steepest plunge in decades. This
reflects the heavy weighting given to commodities prices as an
inflation leader. The commodities composites have simply tanked.

Technically, the major commodities composites are deeply oversold
and remain as mercurial as ever. But if commodities stay low or go
lower, the long term evidence is consistent with 12 month inflation
going to zero from 4.9% posted for September. This would imply
some month-to-month declines in the CPI going forward. Frankly,
if the main commodites composites weaken significantly further,
then the inflation thrust would be better called deflation thrust.

The outlook for rapid deceleration of inflation primarily reflects
a sharp weakening in demand for basics rather than a blend of
rising production capacity and a mild weakening of demand.

The rapid decline underway in the weekly economic leading
indicators suggests an extended period of depressed economic
demand lies ahead. But the case is not quite so clear cut. That is
because the leading indicator measures include sensitive raw
materials prices which have dropped off the cliff, but partly as a
result of the unwinding of large speculative positions in futures
and hefty inventory speculation by users and suppliers. Now, the
economic shock effects of the financial crisis are obvious enough
for now. However, since economic shocks do not always translate
into longer running difficulties, one needs to be careful not to
jump too far ahead in one's thinking. I am not trying to pull a
bullish chestnut out of the fire here, but am merely pointing out
that sudden reversals of economic fortune can, on occasion, be
shortlived. And, do not forget how volatile oil, petrol and other
commodities can be.

Stock Market -- Technical

The SP 500 has come out from its crash trend line. The much
broader Value Line Arithmetic, a good 1700+ issue proxy for
"the average stock", exited its crash trend line today. However,
and based on closing prices, the SP 500 has yet to break out from
a far less dramatic downtrend line running from 10/13. So, trend
line-wise, the market is not out of the woods quite yet in the
short run.

The SP 500 has been showing basing at intraday 835-840 since
10/10, a good sign. The short term momentum oscillator is
improving, although still negative. The market is now moderately
oversold near term at -3.8% to the 25 day m/a. Note , however,
that rallies have only proceeded from deep oversolds of more than
-15% since the crash kicked off in Sept. Continuation of the latest
advance off the 10/27 closing low of 848 in the days ahead would
be another positive sign, indicating the market can move ahead
without having to first fall to agonizingly deep oversolds.

The 10 day m/a is starting to stabilize, while the 25 day m/a is
still in retreat. I like set ups when the market and the 10 day m/a
move up through the 25. You can be whipsawed here, but not
that often.

Intermediate and long term indicators remain negative and
deeply oversold. Since these are primarily early stage trend
following indicators, turns would not come quickly given the
depth of the oversold readings.

On balance, the market remains treacherous although there
has been some short term improvement.

SP 500 daily chart is here.

Monetary Policy

As was widely expected, the FOMC today cut the FFR% to 1.0%.
The longstanding cornerstone indicators suggested as much, and
the Fed indicated increased confidence that, with weakening
economic demand and falling operating rates, inflation would
subside to a low level over the next several quarters. They might
have spooked the markets had They not cut. Also, such forbearance
might have handed Sen. Obama another stick to use to whup
the GOP establishment.

The move will backfire if it is the proximate cause for a sell-off in
the US$ and sharp rally in the oil price. Should the latter occur,
it would ultimately put more cost pressure into a weakened system.

Stock Market -- Brief Comment

The SP 500 closed today around 908 and based on closing prices
is putting in a short term base around the 900 level (Link to
chart below). That's the good news. The bad news is that the
market has yet to wiggle out from underneath the crash trend line
drawn from the 1213 level of 9/26 from whence the deepest part
of the recent decline commenced. In short, from a technical
perspective, the market is still in crash mode and needs to repair
further to exit it. So, for the moment the market situation remains
both fluid and unstable.

I still need fresher earnings data, but it looks like the Market
Tracker has the SP 500 fairly valued in a 1000 - 1025 range. This
represents the first time the market has fallen well inside the
Tracker since the crash of 1987. Then, however, earnings were
still trending nicely higher, whereas now, investors are trying to
gauge how weak earnings may be over the next 3 to 6 months based
on the quick acceleration in the business downturn in evidence
recently.

A daily chart of the SP 500 based on closing prices may be found
here. Note that the market is still deeply oversold relative to the
25 day m/a.

Oil Price

A weakening US economy is spearheading an expected sharp
contraction in global economic growth and consequent
substantial moderation of oil demand. With excess crude
capacity now rising markedly, the oil price is weakening. The
industry has yet to enter a typical bust following the boom
period. The dramatic 52% plunge in the oil price since the
summer high prints of $145 bl. reflects the popping of a
speculative frenzy in this market. Oil never reached the full
scale bubble price of $170 bl., but the market was bubbly and
destructive enough.

OPEC will meet later this week to look at cutting its output to
arrest the price plunge. Experienced hands know that it is
primarily the Saudis who can "afford" cuts, and that whatever
actual production curtailment may come will fall to them and
their accountants. In the meantime, oil demand is likely to
fall further.

There are now forecasts of $50 -60 a bl. for early 2009. These
projections merely extend the crash trendline in place since
July and recognize that oil price busts have toted 60% on
occasion in the past. These projections are a bit steep based
on the fundamentals, but are not so when you consider the
shakeout underway among the new generation of commodites
investors who got caught up in the champagne waltz up to $145.

Near $70 bl., oil is now as deeply oversold as it was ridiculously
overbought at this summer's high. No grey bearded trader would
be shocked at a $10 -20 bl. pop in price over the next couple of
weeks.

For a weekly price chart, click here.

Corporate Profits

The indicators I track to gauge the outlook for non-financial profits
have nosedived over the past 6 weeks. Physical output has
deteriorated and pricing power has weakened substantially. Q 3
'08 will reflect just a minor portion of the weaker outlook. But
Q 4 '08 and next year's Q 1 will likely reflect more fully the
damage to profitability underway. There are still pockets of
strength offshore, and a weaker yr/yr comparison for the US $
will help, but broadscale earnings weakness is presently in the
cards. Financial sector profits remain dismally low as loan losses
and seccurities writeoffs remain large. Q 4 ' 07 was a disaster
for the financial sector and perhaps the current quarter will not
be as bad.

Corporate profitability has improved significantly since the late
1980's, and there is no evidence yet that profitability is set to
retreat to very long term norms. However, the next few quarters
could well test the longer term trend, especially since pricing
power has been such a strong feature of profits growth over the
past half dozen years ( oil & gas and basic materials especially).
To be more specific, SP 500 quarterly profits need to hold well
above the 15.0 level for the next several quarters, as that is the
low end of a broad range trend band in force for over 20 years.
I dwell on this because if it looks like yearly profit growth is set to
slow from 8.5% on average to a lower rate, then investors will
ultimately adjust the index price until the dividend yield is
high enough to offer an attractive rate of total return. I bring
this up now, because many corporations have already done so
many of the tasks that can reasonably be done to enhance
profitability.

It has been my view that the recent sharp decline in stock
prices has not been irrational, but has been a reaction to a
fast turn for the worst in the outlook for profits in the months
ahead.

Stock Market -- Technical

High instability and volatility has made a mockery of my attempts
to analyze the technical standing of the market. A rally did start
right in the middle of the timeframe where I expected one to
start, but we got up 25.7% on the SP 500 trough to peak over
3 trading days -- Fri. through Tues. -- followed by a steep fall and
then another push up today. The 25.7% move was a good year's
work, never mind 3 days. The market remains deeply oversold,
but the lack of stability has so far made it worthwhile for only the
most astute day traders. The market may need up to a good 5-6
trading days to sort itself out as to short term direction.

US Banking System & Liquidity

The banks have expanded the book of interest earning assets by
10% over the past year. If a credit crunch has been on in this sector,
you could fool me. The crunch as it were has come in the primary
capital account, which, despite $ billions in new capital raised, has
grown by only 5%. Large increases in loan loss reserves have
greatly impeded capital growth as has a reduction of fees earned
because of sharply reduced deal flows. The suppression of growth
of capital has reduced bank liquidity sharply at the margin (the
ratio of Treasuries to C&I loans has increased substantially). With
the economic downturn deepening, loan losses will remain high,
and, since bank stocks are trading at very depressed prices, capital
was set to be starved further. Hence the gov.' s $250 billion "bail
in" via the acceptance of 5% preferred stock from the banks. This
development will increase system primary capital by more than
20% and will add immediately to bank liquidity. The feds have gone
for a large expansion in bank capital because they know there are
further loan losses ahead, and they want to keep the system
more liquid and able to grow.

Bank holding companies and their various up and down stream
conduits relied heavily on the commercial paper market to fund
mostly real estate, but, deal transactions as well. The paper market
in financials has declined by more than 35% or $800 billion over
the past 15 months. With this source of funding mainly closed off,
you can again see the gov. thinking on capital infusions and the
need for the Fed to make a market in commercial paper.

Banks have been tightening lending standards and with a weak
economy, private sector credit demand has fallen off. So, it will
be a while before we see how efficiently the system functions with
its new supports.

Over the past 6 months, my boad measure of credit driven
liquidity has increased at a paltry 0.8% annualized. To counteract
the freeze on liquidity, the Fed has moved to add well over $600
billion to its own balance sheet to liquify markets. As I warned in a
number of prior posts, the Fed took a huge gamble in withholding
net liquidity infusion for so long.

The Fed's action is a plus for the economy a bit down the road, but
viewed long term, this massive infusion of liquidity will be
extraordinarily destabilizing to the economy and the capital markets
if the Fed does not begin liquidating massive amounts of securities
as soon as it conveniently can. With the economic challenges the
US faces in the short run, the threats from a grossly expanded
Federal Reserve balance sheet should be viewed as a critical "memo
item" on your checklist.

Stock Market & Panic Of 2008

Stock Market
It was a mild down day in the end. But there was a trough to peak
swing of 1000 Dow points during the session. Thus it is that
traders have a strong interest in this deeply oversold market. I
try to observe the rules of the classic Sicilian trader: Never disclose
your positions or intent, and never offer advice. However, with
option premiums so high, some traders may well buy and write
against their positions. These fellows are acquiring downside
protection and income and if they go a little out of the money, they
may not care if positions are called away. A mere passing thought.

The crash in the market reflects the fact that investors have been
lowering expectations for profits and have been doing so in a rapid
manner. Not irrational action in my book since it could well be that
earnings may prove disappointing for this quarter and for Q1 '09.
However, further dramatic downside action in the days ahead
might be evidence that bearishness is getting ahead of itself.

The Panic Of 2008
There are new nostrums to end the panic in the air -- having
central banks guarantee international interbank lending and using
taxpayer money to buy equity positions in banks to bolster
primary capital directly. The first looks awfully unwieldy and I
regard the latter -- direct investment -- exceedingly dimly.
The ability of governments to manage properly a program such as
this over time seems heavily in question (Think post office and
FEMA). The Fed and the Treasury have so many $ irons in the
fire already, that it is reasonable to wonder how easily they can
unwind these programs in the future without causing further
dislocation. I also remain very wary of allowing lame ducks in the
US so much leeway in their closing days. But the tinkering will
go on.

Economic Indicators

Long Term Indicators
This indicator set started turning negative over the course of 2004
and bottomed in terms of breadth in October, 2007. Since then, it
began to inch along positively, and turned robustly positive over the
summer of 2008. The timing of economic turns is hardly precise, but
the best guess now is that the domestic part of the US economy will
enter recovery mode in the spring of 2009. In turn, I would have to
rate the development of a cyclical bull market in stocks as still a
couple of months away based on long term considerations.

Looking at the key indicators -- short rates, trend of monetary
liquidity and inflation potential -- I have a number of questions about
the strength and durability of a US economic recovery, but I will
hold off on those until we are further on in time.

Shorter Term Lead Indicators
The weekly indicator sets peaked in mid-2007. They fell sharply
into the early spring of 2008, whereupon they bounced up in lieu
of the tax cut stimulus package. The economy held up far better
than the indicators suggested they would in view of strong and
rising export sales, superb inventory management by business and
the aforementioned stimulus package.

The indicators turned down again sharply in June. The stimulus
package proved only a temporary fix, and with real final demand
falling more broadly, supply managers could not keep up, and
wholesaler inventories bumped up. We are also now seeing a
weakening of orders of manufactured goods for export. These
developments plus the emotional shocks stemming from the
financial panic suggest further deepening of the downturn in
the US ahead.

Economic Power Index
This index is deceptively simple. I add the yr/yr % change of
real earnings to the yr/yr% in total employment. Declines of
2.0% or more are consistent with the development of severe
downturns. This index dropped down into the -2.0 to -2.5 %
range during the Sept. quarter, reflecting a negative real wage
and accelerating job loss (1 million jobs lost in 12 months). Now
with inflation receding, I expect some improvement in the real
wage in the months ahead, but the weakness in this index is
sobering. Moreover, with banks tight on lending across the board,
the power index assumes more importance as it cannot easily
be offset by heavier leveraging.

So, the indicators say it could be a hard go for a good several
months. Hence the bearish comments from Fed chair Bernanke
and the speedy 50bp cut in Fed Funds to 1.5%.

Stock Market

Fundamentals
Well, the panic has extended to the stock market. Its recent
descent has turned closer to vertical, but the reaction has not
been irrational. As discussed in the last update on fundamentals
on 9/23, the SP 500 Market Tracker had fallen to a value of 1025.
At that time, the SP 500 was trading at a whopping 17% premium
to this measure of fair value. Then, investors were looking at
80.0 annual earning power for the index vs. roughly 68.0 for the
12 months through 9/08. With a suddenly deepening downturn,
investors have lost confidence in the 80.0 number and have pushed
its realization further out in time.

All of my earnings indicators have been weakening as US production
has been falling as well as have industrial price realizations. This
suggests more earnings disappointments across an array of sectors.
On the plus side, my inflation thrust indicators have sunk rapidly,
so the Tracker p/e multiple will start to be adjusted upward. The
Tracker needs fresh data, but for now, I am going with roughly
1000 for the SP 500. So, I have the market now trading at fair
value, with no premium for a quick return up in earnings.

Technical
As outlined in the 10/4 technical look post, I am on the hook as
calling for a substantial and tradable rally to start sometime over
the next five trading days. That would befit the market's very
oversold position. This "call" is based on six week breadth
indicators that have proven reliable over the years. So, I'll go
with that. It won't be nearly as helpful a call if the rally comes
within the next five trading day timeframe but from much lower
levels. But, I'll take it anyway.

Stock Market -- Technical

As most technicians will tell you, the stock market is now
substantially oversold. As a guess, we are due for a rally of
several weeks duration to begin either this week or in the early
going next week. My selling pressure gauge -- a moving average
of NYSE decliners -- is near strong oversold levels. This one has
worked best in the decline since autumn '07.

It is still too early to tell whether this is a routine cyclical bear
market or whether something more serious is afoot. If one were
to allow for a rally over a few weeks in the short run, there
could well be another sell off that carries the SP 500 (1099 10/3
close) down to around the 1000 level by the latter part of
November. That would represent a nasty enough cyclical bear,
but if we put in a 1000 low seven weeks out, the chart would
give even odds it was a good bottom that would hold. For now,
I think it is reasonable to re-visit the issue then before delving
into darker scenarios.

Looking right ahead, the technicals suggest to me development
of a decent, tradable rally over the next 3 - 7 trading days. If a
rally does come along, I would note that traders have been
getting very edgy once the SP 500 gets about 2% above its
25 day m/a. That would put a provisional top in around the
1225 - 1250 level.