US Dollar -- $USD

I did make a good call on the dollar in early 2008 (saw it higher), but
Forex is not a game of interest to me. So currency posts are very few
and far between.

The dollar has lost ground since early in the year. The Fed has
provided strong money liquidity growth and is running an effective
ZIRP with Fed Funds %. Meanwhile, my inflation pressure gauges,
after bottoming early in the year, are moving up and the CPI without
seasonal adjustment is higher than at y/e 2008 on a lift in petrol
prices. So, the dollar supply has been increasing and money left on
deposit is earning a negative rate of return. The purchasing power of
the dollar is declining in the US, and with global economic recovery in
prospect, no need to blame traders for exiting the dollar, even though
the supply of dollars moving offshore has declined dramatically.

Internal or domestic fundamentals for the dollar will not improve
until basic money growth moderates and short term interest rates
turn positive in real terms. Economic recovery here will bring that
moment closer, but it is a ways off for now.

The $USD is moving toward an oversold position in the forex
market for the first time since early 2008, so a rebound in the next
several weeks cannot be ruled out despite the internal fundamentals.

Here is a link to the weekly $USD.

Gold -- Around $1,000oz.

Well, here we are at $1,000 again. And, here we are at resistance
again, as well. It is fair to say though that the market is not heftily
overbought as it was on its two prior trips to this historic level.

Gold is in an uptrend off 10/08 low, but to confirm from here, the
price needs to take out $1,000 oz. with some authority over the next
five odd weeks.

Gold remains in a mania price zone, and to get into full bubble
territory, we would need to see a sharp break above $1,100 in the
weeks ahead. The market is now mildly overbought.

My gold macroeconomic directional indicator made a low in 12/08
and has been in a relatively strong uptrend since. The fit of the
price of gold to the indicator is somewhat off over the past three
years reflecting price surges in gold within the first five months of
each year that were well out of proportion to the rising indicator
values. The "fit" over the longer run is much closer.

My work shows a basic economic value for gold in a range of $500 -
550 oz. If I push the data using the macro indicator or gold's
relationship to the dollar, I can wring out $700. So, I am unable to
account for about $300 oz. or 30% of the gold price. The "premium"
in the price may have something to do with fears of both inflation
and financial instability, but this concern is not felt with consistency.
I would also note that gold players have followed China's economy
and stock market with very focused interest since last autumn.

At any rate, I would have to say that unless gold can blow well
through the $1000 level before year's end 2009, it is going to look
vulnerable on the long term chart.

Stock Market -- Technical Observations

The stock market remains in a powerful cyclical uptrend in effect
since 3/09. Price momentum has eased measurably as the market
has advanced, but this is a normal dvelopment. My internal market
measure -- cumulative advance / decline plus unweighted prices
has run far stronger than the SP 500, a good sign.

The market exhibits a modest overbought short term and a stronger
one based on 6-13 week reads. An early bull market hallmark does
involve an extended price advance coupled with a substantial and
continuing intermediate term overbought. In a period such as this,
I find it difficult to pick interim tops and corrections when the short
term momentum of the market does not behave audaciously.

25-40 day measures of RSI are around 60% and do suggest the
recent loss of positive momentum may extend ahead. There are not
sufficient disconfirmations from other favored measures to signal
that a significant price correction may lay right ahead.

Because the SP 500 has lagged the broader, unweighted price
measures of the market, it could take another month or two
before the "500" confirms a major positive cyclical reversal.

My reading of the charts suggests that even if a 5-7% price pullback
does lie ahead in upcoming days and weeks, there could well be
another extended but more moderate upleg in price to follow. To
continue this conjecture, I would have to say I am more confident
another upleg lurks out there than I am that we would escape with
a mere 5-7% correction.

The two sentiment measures I follow most closely, the trader
advisories of Market Vane and Consensus Inc., are both a country
mile below levels that would signify "too many bulls".

SP 500 chart is here.

Economic Indicators

Leading Indicators
The two sets of weekly indicators remain in strong uptrends and are
close to turning up when measured yr/yr. They have lost some
momentum over the past 2 weeks as sensitive materials prices have
leveled off. The action of the indicators point to a "V" shaped bounce
for the economy in the early stages. The monthly indicators are
also strongly up, paced by a rapid surge in the index of new orders
for manufacturing. With 100 = to expansion, the combined index for
commercial / mfg. has moved up from a 12/08 low of 62.6 to 114.8
for August. This represents a substantial positive reversal of trend
from a downmove in order momentum that ran from early 2004
through mid-2008. Again, the pattern for now is a "V".

Also of note here is that the index of mortgage purchases has been
basing after a severe 3 year downtrend. This suggests a lift to
housing sales (already recently seen). The Monster Inc. index of web
job listings peaked over 2007 and heralded the end of expansion. It
is now in basing mode and jumped up sharply in August (Monster).

Economic Power Index
The swift positive turnaround in this index over Half 2 '08 helped
significantly to stabilize consumer spending and the economy. The
turn was fuelled by a fast rise in the real wage as inflation fell away.
The index is now only slightly positive. Measured yr /yr, the real
wage remains a strong 4.2%, but this is nearly offset by a 3.9%
decline of civilian employment. There will be a dicey interval ahead.
Job losses are moderating, but so is the real wage.

Capital Slack Measure
This measure continues to show deeply ample slack: Short rates are
near zero, unemployment is at 9.7% and capacity utilization is very
low. The extent of the slack is sufficient to underwite a prolonged
period of expansion if the recovery takes hold.

Global
Worldwide indicators replicate the recent US performance. With 50
= to expansion, the global output measure has moved up sharply
from a 11/08 low 0f 35.5 to 52.1 through 8/09, and the new
orders component has jumped from a 11/08 low of just 35.2 to 51.1
through 8/09. Both series are giving the "V" sign for now.

Natural Gas -- Time For Me To Study Up

As all seasoned traders know, few commodities can break your
spirit and your pocketbook faster than playing natural gas. Well,
it has been crashing on oversupply concerns, and as anyone who
cares to look can see, the vast bulk of downside price risk in
absolute $ terms is now behind it.

So, I am going to dust off the NG file and have a look see at what
might be done about this free falling substance. I plan to look at
the trade and investment possibilities and come back soon on it.

Weekly NG chart is here.

Long Treasury Bond

Short Term Situation
Back on May 29, I opined that a deeply oversold long bond was
setting up for a countertrend long side trade as rapidly falling
bullish advisory sentiment was nearing an attractive contrarian
signal. Well, the market has been choppy since then, but did
afford two nice long side trades. Now, with advisory sentiment
neutral and with the oversold condition greatly reduced, I have
closed out to the sideline.

My 52 wk. rate of change in yield indicator turned negative at
year's end 2008, and did signal a rising yield straight through the
end of 6/09. It has since turned neutral and may even be set to
signal a lower yield straight ahead, as the weakness of the stock
market, coming off a large overbought condition, may aid the T
bond.(Scroll down at link below for the 52 ROC).

On the fundamental side, my indicator of industrial commodites
prices plus production has steadfastly signaled a rising Treasury
yield since early 2009. However, this indicator has leveled off in
recent weeks as sensitive materials prices have eased off a bit
following a strong run. The run up in the long Treasury yield
this year has far outpaced my very broad measures of the
economy / inflation, so that the run in sensitive materials prices
has been the dominant driver this year. Normal mid -year seasonal
weakness in the industrial commodities market did not occur in
2009, but the recent easing up may be a delayed reaction.

In sum, the Treasury bond market is developing a modest positive
bias on price short term, and still remains interesting, although my
original reasons for buying the bond have been satisfied.

Long Term
I have linked to a long term chart of the 30 yr. T bond. The bull
market remains intact and clearly implies that investors are not
yet ready to give up on a low inflation environment. Should
economic recovery proceed and inflation intensify on a cyclical basis,
folks may change their minds and reverse the downtrend in yield.
The bulls remain in charge for now. Treasury yield chart.

Financial System Liquidity

Basic monetary liquidity, the most critical element to starting an
economic recovery, remains in growth mode. The large increase in
this composite over the past year brings the 5 year growth up to a
level sufficient to give the economy a fighting chance at expansion.
It also serves as a major positive fundamental for stocks, as rising
real M-1 lets you know you are betting with the Fed.

The broader measure of credit driven liquidity has continued to
decline and is now down about 1.6% yr/yr. The market for financial
company commercial paper outstanding has sunk another 38%
yr/yr or nearly $600 bil. as the shadow banking system continues to
be unwound. Large time deposits at banks have fallen nearly $200
bil. as banks let C&I loans run off and remain with a flat real estate
book. Even the massive M-2 money measure would be down were it
for the large growth of M-1 primary liquidity.

Both retail and institutional money market funds have declined in
2009. Some of this decline is attributable to the purchase of goods
and services by individuals and businesses, but with market short
rates near zero, investors have extended maturities to capture more
yield and have no doubt used funds to fuel the rally in stocks on
expectations of economic recovery.

Individuals have increased savings by over $500 bil. and companies
have added to their liquidity by slashing inventories, capital expend.
and payrolls. So, the economy does not need an ample supply of
private credit to fund economic expansion in the early stages.

Monetary velocity, measured in terms of the cyclical side of the
economy has plunged despite a 1.6% decline in the broad, credit
driven measure of financial liquidity. This has created a large pool
of liquidity that runs over and above the needs of the real economy,
and, as mentioned above, has fuelled the stock and corporate bond
markets.

The Fed and other central banks continue to maintain a network of
large currency swaps to provide liquidity to serve those trapped by
the major decline of global trade. Peak -to-trough, US dollar outflows
have fallen nearly 75% on a monthly basis as the trade deficit has
contracted substantially.

Credit quality spreads have narroweded globally and liquidity appears
sufficient to underwite the initial phase of global economic recovery.
Banking system liquidity is improving as loans run off, but capital is
still not adequate to fund an extended economic expansion.
However, in the US, rising business cash flow and the appearance
of stabilization in home prices will serve to ease the way for banks
to access the capital markets going forward.

Beach Days

The weather is simply too nice. As a retired gentleman of leisure,
I am taking full advantage this week and will not be posting on
the usual subjects.

Stock Market -- Quick Note

The steep sell down on Mon. of this week did wipe out the hefty
short term overbought. It is interesting that we have had "dip"
buyers in the aftermath, as there is rarely a shortage of guys who
say they will buy a dip, but do not. Volume has been light. The beach
days have arrived.

The market remains overbought looking out 30 days and longer, so
it is unclear whether the recent dip marked but a way station on the
way higher. Traders will be watching to see whether the current
bounce off the Mon. low carries to a new rally high and beyond with
any conviction.

Stock Market -- Fundamentals Profile

Observations

1. The market remains in earnings recovery anticipation mode. SP
500 eps for the past 12 months (7/31/09) stand at $39.70. Investors
are presently pricing in a return to $60. earning power, which
primarily reflects heavy cost cutting and slight growth just ahead.
(Q 2 '09 eps should come in around $14.)

2. On a very long term trend basis, SP 500 net per share for 2009
works out to $75. Using the same model, top-of-the-channel eps
would equal about $85. With 12 month earns running about 47%
below the "normal" $75., you get a good sense of how deep the
recession has been.

3. Investors have not changed the broader valuation framework for
the market during this steep downturn. Specifically, players are
pricing in a return to moderate inflation of 3.0 - 3.5% with economic
recovery and have ignored the mild 12 month deflation readings
witnessed recently. This is important. Should economic recovery not
occur and should deflation pressures continue, the market would be
vulnerable to a downward adjustment of earnings and fears that a
period of more prolonged deflation could signal a lengthy period of
sub-par economic performance. This kind of serious further downside
would not be a foregone conclusion, but it would be a reasonable one.

4. Looking out over the next year, the speed of global economic
recovery should be the dominant feature for the stock market. With
a lower cost structure evident, and with the SP 500 companies now
holding prodigious cash, there exists sizable positive earnings leverage
from economic recovery, even if it is mild in scope. With recovery,
profit margins will expand and earnings will benefit from cash mergers
and acquisitions.

5. Despite the rapid run-up in stocks since 3/09, the SP 500 price level
does not include a presumption of a sizable positive take-off in earns.
In my framework, players are looking at $60 earning power now, with
the potential to scale that number up if recovery does indeed take hold.
My thinking is that in a moderate economic recovery, expectations
for SP 500 earning power of $75. - 80. will take hold sooner rather
than later, and that the market would chart a course for 1250 - 1325.

6. The problems the banks and investment banks have experienced
coupled with exceptional weakness in sales over the past year or so
have left a residue of investor fear and no willingness yet to take the
concept of a decent global economic recovery for granted. We have
now entered a period where there is substantial downside price
risk to a failed recovery as well as continuing large upside price
potential should recovery proceed smoothly. This means that eyes
will be fixed on progress, and not just benefits from cost cutting, but
from a resumption of top line growth as well. Given this risk / reward
profile, there is good potential for elevated volatility over the next 6
odd months as investors monitor news carefully for indications of
progress.

7. The SP 500 dividend stands at $21.50. With recovery, the dividend
will likely increase to about $30. by Half '1 2011.

For more detail on SP 500 earnings, go here.

Coincident Economic Indicators

The CEI data sets I follow posted a small increase form the preceding
month in July, for the first month on month increase in the past 14.
So, the US economy appears to have expanded modestly in July.
On my indicators, the growth reflects a 0.1% increase in real retail
sales plus a 0.5% positive in industrial production.

This increase in activity came right on time relative to the turn in the
leading indicators. However, I would have to say that the gain in
inflation adjusted retail sales was quite low, and we are going to have
to see the pace of recovery in sales pick up markedly in the months
ahead if the US economy is to have anywhere near a normal first year
of recovery.

In passing, I would note that both US exports and imports did gain
in June (latest month available).

Measured yr/yr, the coincident indicators declined by more than
6%, reflecting deep declines in real retail sales and production. The
one bright spot remains the change in the real wage, which reached a
record high 4.6% for the 12 months through July. In past recoveries
a large positive change in the real wage of this magnitude would likely
have triggered much stronger consumer spending. But with the
depth of the recession coupled with large losses in home values and
equities portfolios, folks have skewed activity toward building savings
and paying down all manner of revolving credit. The balance needs
to tilt away from emphasis on liquidity and more toward spending
if there is to be a recovery worthy of the name.

I would note that the momentum of job losses is declining rapidly,
and more level sales and production could continue this sharp reversal
in job losses, as companies did make dramatic cuts to employment
and will not want to blow orders because they are short on people.

But, bottom line, I would chalk up July as a month favoring those
who are the more conservative regarding the economy, and this on
the basis of scant progress in real retail sales.

Stock Market -- Technical & A Note

The short and intermediate uptrends remain intact, although the
new intermediate uptrend line has not been tested since the SP 500
touched the 879 level on 7/10. (I link to the "500" chart below and
it features an extended MACD you might find interesting.)

The current shorter term upleg started on 7/13. Since then, the
SP 500 has shown hefty price momentum overboughts daily and
is now materially overbought on RSI (% of "up" days) as well. This
kind of strong positive action has trashed the shorts and has forced
many long side traders to chase stocks.

The market is also registering significant overboughts on breadth and
on positive spread over the 13 and 40 wk. moving averages. You have
to go back to the 1995 - 2000 period to recapture the upward drive
we have seen recently.

the SP 500 chart is here.

Note: On the fundamental side, the market has fully discounted the
positive bounce to earnings from sheer cost cutting alone. Extended
strength from here would imply players are moving on to the
assumption of the commencement of rising sales for businesses and
the prospect of improving profit margins.

Monetary Policy & The Banking System

The Fed has convened its normal 2 day FOMC meeting. The basics
for rate setting that I follow continue to point to maintenance of a
low short rate. Business activity in the US has moved sharply from
deep recession to sufficient breadth to be just below the expansion
threshold. Change has been very rapid so far in 2009. However,
expansion must proceed apace for at least several months before it
would signal it was time to raise rates. As well, capacity utilization
remains depressed and would normally be expected to improve
substantially before the Fed reversed course. Finally, the short term
credit demand / supply pressure gauge continues to move in favor
of slack, as C&I loans run-off as expected. So, a change in FOMC
rate posture would be quite a surprise.

Now, since there has been some inflation pressure from the petrol
sector, and, since economic recovery is now expected to begin sooner
rather than later, the markets and the many observers of the Fed are
likely to begin questioning how long the Fed may maintain its several
large liquidity injection programs. This latter issue is distinct from the
rate setting function, and at some point soon, the Fed may well have
to provide more specifics about keys to closing out these programs.

There is a potential kicker here for the markets. Fed diligence in
framing out how it will move to restore long term integrity to its
balance sheet could have significant consequences for the US dollar,
Treasury securities and precious metals and commodities prices.
The impact of Fed commentary on this issue for equities is less
clear, but could be important nonetheless. Bottom line: the Fed
will want to show it is supportive of recovery but is also increasingly
sensitive to restoring monetary integrity. The sooner it does this,
the faster worries of substantial eventual inflation should dissipate.

Banking system lending has been flat now since mid-2008. No
surprise here at all. A deep recession brings lower private sector
credit demand which can persist for a while even as recovery begins.
C&I loans are running off, the real estate book is very sluggish, and
home equity loans, which did spike up over Half 2 '08, have begun
to level off as borrowers grow more confident about the security of
those lines. The real estate book for the industry is now running
about $800 billion below the longer term trend.

Even with the loss of momentum to real estate lending, total bank
lending is running about $1 tril. or 17% above its 10 year trend. This
suggests continued vulnerability of the banks to further significant
loan losses ahead. Bank net interest cash flow has flattened out, but
bank profitability can still improve markedly if loan losses come in
below recent horrific levels. Capital remains level and system
liquidity is improving as borrowers rely more on their internal
cash flows.

Economic Indicators

Leading Indicators
The data, both weekly and monthly, continue to trend strongly
upward from the deeply depressed levels of late 2008 - early
2009. The data suggest the US economy is closing in fast on
expansion, with the global economy moving in a likewise fashion.
The same may be said for profits recovery. The volatility of the
indicators remains remarkable. My new orders diffusion index
suggests an expanding book of mfg / commercial business at 100.
It fell from 103.3 in 5/08 to a startingly low 73.8 in 2/09, but has
since bounced back up to 103.4 for July. The weekly and monthly
leading indicators are just now starting to show positive trend
reversals.

Economic Power Index
This somewhat longer term index foreshadowed significant
recession by falling from 4.0% (yr/yr) to -2.5% by 8/08. The
index then rallied sharply through year end on a powerful rise of
the real wage as hourly rates kept rising while inflation fell quickly
away. This exceptionally positive development did portend
eventual economic recovery in the US, which I hope is at hand.
However, as I have warned, the growth of wages in current $ is
slowing with growing slack in employment, and the power
index will falter more later in this year if the real wage erodes as
expected and if the drag effect of job loss momentum does not
abate. As of now, job loss momentum, measured month-to-month,
is quickly easing so that the yr/yr measure may soon show some
improvement from the current sharply negative -3.8%.

There are current offsets -- higher social security payout, tax cuts,
unemployment insurance and the ramp up of federal spending for
projects. Consumers also have the option to finance more of their
spending. However, over time, low or no real wage growth coupled
with a weak job market will not sustain economic expansion.

Inflation Indicators
The inflation pressure gauges I use have stopped signaling deflation.
These measures have turned up, and now suggest a return to mild
inflation (measured yr/yr) by late 2009. This development
underscores the need to see the monthly rate of job losses continue
to be cut very quickly as the year progresses.

Commodities Market

The CRB composite closed around 267 today, which puts it just
slightly ahead of initial long term resistance of 265 (dates back
to the latter 1970's). Interestingly, even if the CRB is poised to run
much higher, it may well test 265 as support before moving on.

Historically, commodities are most sensitive to liquidity and
monetary policy conditions and are likely to rise as central bankers
ease monetary policy. Commodities are also sensitive to a basic shift
in direction of the leading indicators, and have been particularly so
this year, accelerating when weekly leading indicator data reversed
positively during 3/09. All sensible enough.

The action of the CRB so far in 2009 has been somewhat unusual
in that the dramatic rise in the petrol sector, which has come early
in the new liquidity cycle, has provided it with a strong tailwind. So,
the CRB is perhaps a bit ahead of itself, to the extent that the oil
price has lifted off so early.

The broad commodites market has been deeply oversold over much
of the past 9 months, but with the rally since 3/09, it has tended to
veer toward modest short term overboughts. However, we have yet
to see the sorts of surges that signal too racy a market.

The potential for the CRB is to move higher in the context of an
expected continuation of monetary ease. But I would note that since
the weekly economic lead indicators have jumped so sharply, the CRB
could be vulnerable to moderation in the dramatic progress of these
indicators (there is some overlap between the two series).

I hope this post might prove timely in that the market is just a little
above long term initial resistance, a factor most well seasoned traders
will have in mind.

Recent CRB action here.

Stock Market -- Shorter Term Alert Still In Force

A modest rise in the aggregates over the past week keeps the
market in overbought territory, and it is extending out past
the very short term. In a strongly rising market, there can be
shorter term overboughts that can drag on for several weeks as
more players pile in from the sidelines to get on board. This type
of situation can be very difficult to short for a quick play, and it
can be frustrating for folks who are trying to maintain discipline
and buy dips that seem to be erased quickly. But best you know
that they have started to chase them a little bit.

On the fundamental side, the SP 500 is, I believe, now fully
discounting $60 a share in 12 month earning power, and further
near term upside would imply that players are moving beyond
recognizing earnings benefits of cost cutting to the expectation of
earnings driven more by a recovery of sales volumes. This is also
worth noting, since not everyone may be ready to make that transition
in their thinking, and so you have to realize there may be some profit
takers who may decide to wait for some confirmation of this
important transition in the weeks ahead.

Long Treasury Bond

With the 5/29 and 6/9 posts on the bond, I indicated there could be
a good short term long side countertrend tade in the offing reflecting
a steep yield premium to the 200 day moving average and "too many
bears" among trading advisors. Well, there was a good 6 point (in
price) leveraged trade there, but it turned out to come in well below
expectations. With the recent weakness in the price of the bond, the
yield is again at a substantial premium to the 200 m/a, with this
implying a sharply oversold market. Bearish sentiment has abated,
and this weakens the logic for a long side trade. Even so, there has
just this week been a small shift in trader psychology away from being
long industrial commodities. So, this keeps the bond interesting and
in play as a candidate for re-placing the trade. Since traders are
now a little concerned about whether cyclical risk exposure is ahead
of the fundamentals, the bond could get another play. However, this
would be a trend / momentum call with odds of getting the best
price low.

30 year Treasury yield.

US Economy -- Baseline

As a retired guy who no longer gets paid to do economic forecasting,
I do not do it. As readers know, I rely heavily on time tested
indicators to look ahead. But I do develop a baseline outlook on
an occasional basis, particularly after economic / markets watershed
events. No time like the present, then.

Basically, I think the US economy can experience an economic
recovery / expansion which can run 8 - 10 years from Q3 ' 09. This
expansion should averge 4% growth in the early part followed by a
multi-year run averaging 2.75% annually. I look for growth to be
well balanced between consumption and investment, and for a
solid base of export sales to be a key driver. So, I do look for an
eventual substantial recovery of employment and profits. I expect
the dramatic increase of entrepreneurship we have seen over the
past 15 years to continue and for the economy to grow ever more
diverse. I expect inflation pressure to return and to average
about 3.5% over this lengthy period. I see short term interest
rates recovering to a range of 3.o - 6.0% and anticipate that
bond yields will rise significantly. Following a strong 2 year
recovery period, I have corporate profits growth settling in at a
6.5% growth rate. Investor pressure to increase dividend
payout will eventually grow as retirement funds look for more
stable income.

The expected long duration of the expansion reflects the very large
build up of capital slack in capacity, employment and financial
resources and the length of time it will take to redeploy these
resources profitably.

There should be exceptional political battles to come as the Feds
face more market pressures to regain budget discipline and
re-prioritize spending against a revenue stream which cannot be
easily augmented by tax increases. The country is greying and
through increased geographic dispersion has grown more conserva-
tive politically (This is so even though the GOP has turned truly
and well stupid and is in need of broad new leadership).

I also suspect the Fed finally realizes that asset bubbles can be
every bit as damaging as high inflation and that monetary policy
will turn more balanced in the years ahead.

Finally, I would say that the 2007 - 2009 economic debacle will
serve as a reminder to all to pursue more balance in economic,
business and investment affairs. This fresh probity will of course
wear off with time, but not, I think, for a good while.

Stock Market ALERT & A Note

Market Alert
The market advanced nicely for the week. It will no doubt be seen as
a Godsend for many suffering with depressed 401Ks. The trend is
positive. However, we have a fairly strong overbought condition on
both my 25 day oscillator (SP 500 is a hefty 6.6% above the 25 m/a)
and on RSI (See chart link). Shorter term players should take note.

SP 500 chart.

Earnings Note
Some of the boyz along The Street are starting to play fast and loose
with interpretations of earnings. they want that red ink Q 4 '08
number to go away. So, some have pulled out AIG, GM and other sick
pups that collapsed in value. Others are working to "normalize" the
earnings data so that the 12 month net per share reading will not look
so awfully low against the current level of the market. Now, S&P
observed that companies rushed to write off everthing their auditors
would let them get away with in last year's final quarter. They may
have written off up to $ 10 a share, thus "borrowing" losses from
2009.

SP 500 eps for the 12 months through 7/09 is most probably around
$40. That gives a whopping 24.5 p/e ratio -- a tough sale, no? To make
matters worse, that nettlesome Q 4 will not drop off the 12 month
running total until Oct. '09. In my view, investors have simply put the
12 month number aside and are looking at earning power going forward
in a recovery. I think they are now pricing in $15 quarterly earning
power for the SP 500 and $60 annual. That is not a "stretch" number
at this point. If you are looking at material wherein the analyst is
putting forth a $60 number as the current 12 month number, you are
reading the work of a charlatan.

Now a final point here. Since companies in toto may have shifted $10 a
share in losses from 2009 to late 2008, then it follows that current
comparisons yr/yr are are overstated. It also follows that the $60 in
estimated earning power is also a bit overstated, say by $5. I would
conclude the market is fairly valued for the next several months, but
is far from undervalued.

US Economy Through Year's End 2009

My view for months has been that the economy will be in recovery
mode over most of Half 2 ' 09, with July either the transition or
turnaround month. The leading indicator sets I follow suggest a
strong initial bounce for the economy, with industrial output up by
as much 6.5% from mid -year levels through early 2010. I would
also expect to see profits recover sharply from depressed levels.

Ironically enough, my longer range economic leading indicators rose
to the strongest level in many years last autumn, just as the economy
fell off the cliff. The longer term indicators -- liquidity and interest
rate measures plus the real wage and the oil price -- remain positive,
although the unusually strong rebound of the oil price has brought
the composite below truly exceptional levels. For now, 2010 looks
like a solid recvovery year, although a continued strong uptrend in
oil and other commodities composites would prove problematic.

The main issue of concern near term is liquidity preference and debt
minimization evidenced in reaction to the deep economic decline. We
will indeed need to see consumers loosen up and spend more freely
to regain solid footing and to start refilling depleted inventory
pipelines.

The US economy is in a deep hole presently when measured by such
key cyclical indicators as residential construction, real retail sales,
industrial production and unemployment. Business investment has
tailed off to the point where production capacity is now down 0.5%
yr / yr. On balance, the cyclical side of the US economy is right at
a depression level, and it will take several years of solid growth to
bring it back to prior peaks. In a volatile and uncertain global
climate, such a straight forward run back up and through the old
peaks is far from assured.

Stock Market -- Technical

Back on 7/08, I posted that the market correction had brought
stocks to a significant short term oversold. The action on that
day was suspect enough that I let a few days go by to see if some
sort of rally could develop. Well, contrary to my initial suspicion,
investors and traders did turn the market around off key support
and in the intervening days have brought the rally up to new highs
following the deep early Mar. low.

Now of course, we have a confirmed short turn uptrend which is
getting overbought in the short run. My 6 week buying and selling
pressure gauges do not indicate an overbought yet at all, so from a
technical perspective, I could not argue with the idea that the
market, although subject to short term pullback, could advance for
another several weeks, before a much more substantial overbought
condition could develop.

This recent advance has brought the major composites plus the NYSE
adv/dec line up through major downtrend lines with origins well back
in 2008. From a simple chart perspective, this is very good news.

The up action of the market since the early part of July will embolden
some technicians to argue that we have started a second leg up in the
early phase of a cyclical bull market. Could be, but too early to tell
with any assurance.

SP 500 daily chart.

Shanghai Express -- 2009 Version

Back in early 2007, I highlighted the Shanghai Stock Index because a
mania had formed that could induce a bubble. The index was trading
around 3500, and I argued that to form a true, spectacular bubble,
the index would have to rise to 6700, perhaps in 2008. Well, it
continued on its parabolic way and did top 6000 by 10/07, before
rolling over into a deep bear. That run was bubble enough for most
people.

The Shanghai entered a new cyclical bull market in 10/08 as players
responded to a massive $580 billion stimulus package, and so it
qualifies as a cycle leader presently. Using a long term 10% real
economic growth rate, I value the Shanghai at 3200 - 3500 presently.
The index is now trading a little below the 3200 mark . Two big
caveats are in order on fundamental value. First, this is a volatile
index. Second, it can trade away from fundamental value for
extended periods of time. It was, as examples, deeply undervalued
over the 2001 - 2005 period and seriously overvalued for much of
2007 and a good slug of 2008.

I have included a price chart for the index and it shows that the
market is getting overbought short term. You will note that for
most markets, an RSI of 70 is a good warning of an overbought, but
for the Shanghai, make that a 90 RSI as this baby likes to blow off.

There are some good objective sources on China. One is economist
Mike Pettis, a Beijing based finance prof. (http://mpettis.com) and
the other is Caijing (http://english.caijing.com.cn). Check both as
counterweights to the China mavens.

Shanghai chart.

Liquidity Factors

Federal Reserve Bank Credit
The Fed is keeping its balance sheet greatly enlarged to support the
financial markets and the economy, with credit out more than double
a year ago. The Fed has allowed a couple of the TALF facilities to
lapse, so that credit offered is about $200 bil. below the peak level
seen in 12/08. To return to more normal pre-crisis levels, the Fed
will need to let about $1 tril. of swap facilities expire and will be
under close scrutiny when economic recovery is underway.

Monetary Liquidity
Thanks to massive liquidity infusions in Half 2 '08, the 5 year growth
rate for the basic money supply has risen to 6% and 3% inflation
adjusted. This is adequate for economic pump priming and is vital
now since consumers have been paying down installment debt and
have been purchasing on a cash and carry basis.

Credit Driven Liquidity
My broad measure of credit driven liquidity is down an astounding
0.7% yr/yr, with both commercial paper and jumbo bank deposits
lower. The market for financial service company commercial paper
is about $1.2 tril. or 53% below the 8/07 level, which was the high
water mark for the shadow banking system and the CMO market.

The banking system's loan book is contracting and is at levels last
seen in early 2008, at the outset of the recession. Even so, the loan
book is a full $1 tril. or 14% above a reasonable and conservative
longer term trend. The boyz went on quite a bender from 2003 -
2008. The loan book could remain flattish for another 12 months
even if the economy recovers.

Excess Liquidity Measure
The $ cost of US production is down nearly 15% yr/yr. Thus, even
though the broad measure of credit driven liquidity is down yr/yr,
large production losses and mild deflation have created substantial
excess liquidity in the system. Put another way, the velocity of
money has fallen very rapidly, as the economy has shrunk even
faster than the financial system.

Excess economic liquidity usually, but not always, forms a strong
tailwind for the stock market as investors have funds to anticipate
an economic recovery.

Trade Window Liquidity
A collapse in US trade saw imports fall far more rapidly than did
exports. The outflow of dollars from the US has declined deeply and
rapidly, forcing the major central banks to engage in a variety of
sizable currency swaps to keep the global system halfway liquid. Still,
the inability of smaller, less seasoned economies to earn reserves in
these treacherous times has worked hardships and leaves capital
flows restrained. There will be more financial fall out in the form of
failed loans abroad.
------------------------------------------------------------------------

As tattered as it is, the global liquidity framework should be sufficient
to edge economies forward into recovery if confidence returns as
expected.

Oil Price

The oil price started to anticipate economic recovery and improved
oil supply / demand fundamentals early this year. That in itself is
remarkable, given how oil tends to weaken and dawdle following one
of its periodic price busts. Then matters veered toward ridiculous
as oil surged to over $70 bl., near the top of a longer term range,
bubble price moves excluded. In fact, oil above $55. is trading as if
there are already pressures developing on excess production capacity.
Nothing could be further from the truth. There is significant excess
capacity at the well head, and there is a huge amount of oil in
storage as carry stock. Moreover, demand remains subdued.

Last week the Commodity Futures Trading Commission announced
it would hold hearings this summer on the advisability of limiting
position size in the futures market. It realized that hedgies and long
only oil index funds were holding huge long positions. These are funds
with no intention of ever taking delivery, and guided by computer
models, are essentially momentum followers who have again driven
the price to levels out of line with fundamentals.

With the pro big oil Bush / Cheney team out of the picture, the CFTC
and other power centers in DC have a freer hand to stop or at
least retard this foolishness before it again does substantial damage
to the economy.

Oil at $60. ought to be trading no higher than $55. and, probably even
less on supply / demand fundamentals. If oil, which has corrected
sharply in recent weeks, is set to progress more sensibly, a range of
$48 - 61 bl. would make sense from a purely technical perspective.

It will be interesting to see if the newer big players in this market
are ready to challenge the CFTC with some "in your face" fresh
buying or whether they will be smart enough to lay lower at least
for the summer.

The oil price is getting modestly oversold short term.

Corporate Profits

Earnings performance from mid-2007 through the end of 2008
represented one of the worst in US history, including a never
before seen loss of $.09 per share for the SP 500 in the final
quarter. The dramatic bear market was fully sensible given the
profound collapse of profitability.

Top down earnings indicators have bottomed over the past 6
months and almost all are on the rise. SP net per share was about
$10.00 in Q 1 ' 09 and the indicators presently suggest it will rise
sequentially through Q 4 '09. Viewed sequentially, sales have yet
to rise, but profitability has improved reflecting lower cost structures
for many companies. Some of this improvement has been
"manufactured" via the taking of massive inventory, termination
and closing losses in Q 4 '08. In my book, the market is now pricing
in 12 month earning power of $50 - 55 a share. This a humble
number when you consider that earning power based on the
past 23 years' range is a midpoint of $92 per share. Also of note is
that in the spring of 2008, the consensus for SP 500 eps in 2009
was $112. The recent pause in the stock market's progress is a
direct reflection of caution concerning earnings recovery prospects.

The strength of the leading economic indicator sets I follow suggests
that at some point over the second half of the year, investors may
raise the consensus for 12 month earning power from the current
$50 - 55 to $60 - 65.

Viewed on a yr/yr basis, earnings are not now expected to top the
prior year until late in 2009.

Stock Market -- Technical

As expected based on my 6/2 post, the market has entered a
corrective phase, with the SP 500 down about 7% from the 6/2
close. The down trend was confirmed by rollovers in the 10 and
25 day m/a 's and a break by the market below both. We have
reached a short term oversold level, and it is the steepest since
just after the market's positive turn in Mar.

The SP500 is at an interesting spot now. It is at the bottom of
my short term oscillator channel and smack on support around
880 based on the close. Since today's late rally up to support may
be but a "head fake", I would not get too excited about jumping
right back in. This cute action was too neat by half. A oversold can
be a bad thing to waste, but I plan to sit back for a few days on this
one.

A rally off 880 would suggest to many the development of a range
bound market. We'll see. After such a powerful bull run from
Mar. through early Jun., it is not unreasonable to suggest that a
10% correction off the 6/2 close of 945 down to 850 could well be
in order. If such were to occur, I would have to say that I would
have mixed feelings from a technical perspective about the
future course of the market. But, I plan to worry more about that if
and when we get there.

SP 500 daily chart is HERE.

Long Treasury Bond

Back in late May and again on 6/9, I posted that the long Treasury
was deeply oversold and that advisory sentiment was approaching
being overly bearish. I suggested I would be looking for a counter-
trend long side trade. Well, a rally of sorts has developed, although
it has been a slow one. Sentiment is less bearish now, but the bond
remains substantially oversold against its 200 day m/a. The ongoing
uptrend in the industrial commodities price composite is acting as a
strong headwind as Treasury traders like to stock up on the long side
when industrials weaken. I was hoping for some seasonal slack in
this sector of the commodities market from late June into July,
but that has yet to materialize, either. So, although the price trend
for Treasury is ok, the trade is on shakier ground, pending some
help from the industrials commodites sector. Monitoring very
closely.

Treasury price chart : $USB.

Economic Indicators

The weekly and monthly leading indicators continue to progress,
and signal the US is coming ever closer to closing out this very
deep recession. My business strength index, which made an
astounding cyclical low of just 101.9 for 12/08, has risen to
113.4 through June, with a reading of around 120.0 tantamount
to recovery. So, recession pressure has receded substantially,
and the pieces are all in place for a positive turnaround, including
an exceptionally strong reading for real disposable income of
the consumer sector to reflect a battery of fiscal counter -
recession programs. What's needed now is more confidence to
spend at retail and invest in housing and less emphasis on
building liquidity and savings. The window is there now,
especially after a large round of inventory liquidation, which
has taken production well below consumption.

There is not a ready formula to determine when consumers will
decide to reduce the flow of money into savings and to increase
their spending. At this point, it is much more a matter of psychology
than a macro econonomic fine point. For more on spending vs
savings, go here.

Gold Price "Heads Up"

Gold went out today around $927 0z. It failed to hold the strong
rally uptrend from 11/08 into 02/09, and now it is close to a
further breakdown on a more extended uptrend measured from
11/08 with an intermediate "touch" of the line around mid- April
' 09. This is a charitable read since the lengthier uptrend has yet
to fully confirm by taking out the Feb. high. Failure of gold to
rally over the next 5 trading days could set the metal up for a
deeper correction down to the $800 level. Time to pay a little
more attention.

The gold macro directional indicator has moved steadily higher in
2009 on expanded monetary liquidity, a rising oil price and a strong
rally in industrial commodities. But the indicator has also leveled
off over the past 2 weeks and its trend, like that of gold, is about to
be tested, especially as oil has flattened out and turned a little
wobbly around $70 bl.

Since gold led the rally back into riskier assets off its 11/08 low,
it's worth watching shorter term from a broader perspective.

Daily gold chart here.

The Fed Relies On Its "Gap Chart"

The FOMC finished up today. They left policy unchanged and
commented that the recession and price deflation are easing and
that sustained inflation is not in sight. they are relying on a tool --
the "Gap Chart" -- a tool that has been a cornerstone of monetary
policy for longer than most of you have lived. The chart compares
the trend of production and capacity and measures whether the gap
is growing or retreating. A growing gap means capacity is advancing
faster than production, which means the operating rate for the
economy is receding and that so should inflation pressure. The gap
is huge now, with the operating rate at a low 68% and still falling.
So, for now, the Fed sees no reason to expect a sustainable rise
of inflation pressure.

They have been dead wrong on this since late winter. Inflation
pressure -- measured without seasonal adjustment -- has been on
the rise even as the production / capacity "gap" has opened
wider. The FOMC did not acknowledge this fact today and has
opted to project that continued US and global economic slack will
kill off inflation pressure from rising commodities prices in the
weeks and months ahead.

Commodities players have an accomodative monetary policy at
their backs and are also armed with the knowledge that since the
recession in new order rates has been unwinding rapidly, prices
should improve with needed inventory restocking. When the
economy does come off deep recession, commodities can bounce
sharply on inventory pipeline refilling, only to settle back as
players realize that underlying demand, although set to recover,
must rise from very low levels. That is the Bernanke bet for the
time being. If commodities players, which now include the big
hedgies and long only funds, can keep the markets stoked, the
Fed will fall well behind the curve.

Commodities do exhibit a slight bias toward seasonal weakness
over the second half of the year, but not nearly enough to rescue
the bet. That will require a round or two of profit taking by
the speculators who have had the markets in play.

Inflation (Deflation) Pressure Gauges

12 Month Deflation
The CPI measured yr/yr showed deflation of 1.3% through May, and
the yr/yr CPI for June and July could well give deflation readings of
2.5%. No surprises here, and no surprise that the 2.5% deflation
mark may reflect the bottom on pricing pressure for 2009.

Inflation Potential
The inflation gauges I use appear to have made bottoms here in Half
1 '09. The CPI remains sensitive to the direction of commodities
prices, especially fuels. With a positive monetary liquidity cycle
underway and low short term interest rates, traders have been
running up the petrol sector and commodities broadly as they look
toward economic recovery. Right now we appear on track to see a
reversal of direction in the yr/yr CPI toward inflation on the order of
up to 2.5% by year's end 2009. Commodites are volatile indeed and
the current uptrends are running ahead of the economy. Whether
the action in the trading pits can sustain the direction of commodities
over the course of the year remains an open question. It will be
interesting to see if the Fed's FOMC addresses this issue in its
6/24 statement and at upcoming meetings.

Stock Market -- Long Term Technical

A broad variety of longer term indicators shows that the market has
turned up from one of its weakest periods in history. The one
exception is the Wilder ADX indicator, which has yet to flash a buy
outside of 20 weeks. It has signalled a change in the direction of
the trend to positive, but is moving very slowly toward a full scale
buy. Several indicators, and I have looked at over 10, show that
positive price momentum off the early Mar. '09 low has been very
strong, too strong perhaps for the longer term.

The SP 500 is also nearing a very important downtrend line that
extends from the May, '08 rally and catches the Aug. '08 interim
high. This line down is significant because the market rapidly fell
apart into a crash shortly thereafter. So this will be a big test of
trend out ahead. The market is now well through and past the crash
down lines.

The SP 500 13 wk. m/a is rising and is threatening to pop above
the 40 wk m/a. Some technicians call this eventuality a "golden
cross" which is seen as providing a confirmation of a durable
advance (providing the 40 wk m/a soon turns up, too). CHART.

Measured on a 40 wk. price oscillator, the market is but rather
mildly overbought. But, when I go out one derivative and look at
that oscillator against a 13 wk. average of itself, I see an
extremely overbought market. Here again, the momentum has
been uncharacteristically strong, even for the onset of a cyclical
bull market. To be to the point, the trajectory of this advance
is nearly twice normal, which suggests that at some point out there
in time, there will be a sharp price correction or extended period
of range bound consolidation or both. In short, when viewed long
term, we are contending with a price rocket.

Now, because the SP 500 took out its 2002-03 lows during the
crash late 2008 - early 2009, we not only ended a long term bull
market, but we have entered a bear market of indeterminate
length. We can see powerful cyclical advances during such a period
and we do not have to plunge to even fresher lows at some point.
But we have to recognize the possibility.

From a short term perspective, resolution of the price rocket
issue is not necessarily a worry. We could see a moderate
correction and a tradable rally in the interim. However, looking
out a month or more, resolution of the price rocket saga could
become more pressing.

Coincident Economic Indicators & Liquidity

Measures which coincide with the level of economic activity showed
that the US economy declined for the 12th consecutive month
through May 2009. Measured yr/yr, the two sets of indicators I
use were down about 6.5%. The big declines are in retail sales and
production which were down 11.1% and 13.4% respectively. The
lone positive has been the real wage which is up 4.4% yr/yr.
Inventories were still likeley being run off through May, and
productivity -- by any sensible measure -- is down as output has
been falling more sharply than employment and hours worked.

My profits indicators for nonfinancials show yr/yr weakness. This
reflects both lower sales and profit margins in the US as well as
abroad. Net revenues for financials have been holding up, but
loan and securities losses likely continue large.

A broad array of indicators suggest that the US economy may hit
bottom in July '09. A very rough guess at this point suggests the
economy could be up by 2.5% by year's end or early 2010.

Viewed historically, consumer spending should already be running
much stronger given the very large yr/yr growth of the real wage.
Householders are obviously continuing to build a savings cushion
and trim their debt. This development should keep everyone
hoping for recovery edgy.

With output down sharply yr/yr, the velocity or turn over of money
has fallen, providing excess liquidity relative to the real needs of the
economy. This is quite a development given that my broad measure
of financial liquidity is running flat yr/yr. Traditionally, excess
liquidity of this sort provides a strong tailwind for the stock market,
although this is not always the case.

I am watching the production data carefully. It has been badly
punished not only by the downturns in autos, other durables and
housing, but by a large decline in export sales as well. Should there
be further significant weakness in production, I would be willing
to call this downturn an economic depression given how far the
production composite has fallen below trend and how long it will
take to recover to new high levels.

Financial Regulation

Ultimately, you cannot legislate away the pernicious effects of
stupidity and greed and their profound influence on the stability
of the financial markets and systems. The US and other economies
are littered with past financial crises, most of which could have been
avoided by prudent foresight and courageous action. But, every so
often, emotion like greed and fear combine with ignorance and
outright stupidity to overwhelm the system.

We could all benefit greatly from a more stable monetary policy and
less monetary tinkering. Consumers would all benefit if they had
exposure to finance, banking and economics in their student days,
and regulators could benefit greatly from keen and diligent
gathering of financial and market intelligence so that they at least
know what we could be getting ourselves into during heady
financial times.

However, investors and lenders who do not do their homework
thoroughly and maintain sensible disciplines will avoid getting
burned in the markets only if they are lucky. Caveat Emptor!

Stock Market -- Technical Warning Lights

Back on 6/2, with the SP500 at 945, I mentioned in a post that I
thought the market was due for a correction. After failing to break
out top side last week, the market has headed down so far this
week, and some technical damage is evident. The SP500 has
fallen through its 10 and 25 day m/a's, and both of the m/a's in
question have turned down. Moreover, the ADX tool shows
that +D1 has just fallen below a rising -D1 on declining momentum.
Note though that the 10 day m/a has yet to confirm a downtrend
by falling through the 25 day m/a CHART.

I know full well how short term technicals can whipsaw you, but
I think enough of this type of analysis to say the amber light is on.

IF a correction is finally underway, my best guess now is that if the
SP500, now 911, is contained in a range of 865 - 880, then it would
remain plausible to argue that the powerful bull leg in evidence
since Mar. '09 could well run further before it confronts more
substantive headwinds. IF there is a break below 865, then the
argument for a cyclical bull from a technical perspective becomes
more problematic, although not necessarily fatally flawed.

With the downdraft this week, the market has turned ever so
slightly oversold, and I plan to keep an eagle eye on it, which I
have not done for a few weeks. It might also be wise to look at
some of the longer term issues in an upcoming post to come
shortly.

Financial Liquidity & Monetary Policy

On balance US financial system liquidity has changed little since early
in the year. My broad measure of credit driven liquidity remains
flattish as further contraction of the commercial paper market and
shadow banking system are offset by rising personal and business
savings via money markets and CDs. The Fed has drawn authority
to increase its balance sheet by nearly $1 tril. more, but has not used
it. In fact, Fed bank credit has contracted since the 2008 holiday
season.

Banking system equity capital has increased by 9.5% yr/yr, as
TARP money and new offerings by larger banks have dwarfed
miniscule internal growth for the system. Liquidity is still tight
at the margin as C&I loans remain in the early stage of a cyclical
run-off. Total loan exposure remains flat, which is not atypical in
a major economic downturn.

On a global basis, the breadth of new manufacturing orders has
increased sharply in 2009, with the US and China leading the way.
There have been numerous reports that China is stocking basic
materials, including bunker crude. With some inventory speculation
underway, petro prices have jumped as have commodities, as traders
get on the recovery anticipation bandwagon. The CPI in the US,
excluding seasonal adjustment, has been rising this year so far. The
Fed has maintained a ZIRP policy and has fallen behind the seasonal
increase of inflation. Basic economic benchmarks for Fed policy are
giving readings well below what would normally trigger rate increases
as the economy has yet to move into an expansion phase. The
continuation of a ZIRP with commodities on the upswing has probably
contributed somewhat to a steepening yield curve and a weaker US
dollar.

The Fed would prefer not to jeopardize the now fabled "green shoots"
with tighter monetary policy, and probably does not now mind a
weaker $. However, persistence of fuel and commodities price rises
over the remainder of 2009 would put the Fed well behind the curve,
as inflation pressures would increase.

Ideally the Fed would like to wait for economic recovery to take hold.
With short rates near zero, the central bank would have ample leeway
to move rates toward more normal levels as the economy expands as
well as contract a Its very large balance sheet.

For the moment however, it is in a less comfortable position than it
was just a few months back, and it will be interesting to see how it
balances the prospects for the economy against higher materials
prices at its upcoming FOMC meeting, Jun. 23-24.

Long Treasury Bond

The bond is sharply oversold and advisory sentiment -- usually
wrong at key turning points -- has dropped into the upper
reaches of "too many bears" territory. The bond price is hovering
just above important support. Conditions continue to fall into
place for what could be a sharp counter-trend rally.

The long Treasury remains very sensitive to the trend of industrial
commodities prices, which are in a clear uptrend now. So, what is
needed now is a spot of negative news on economic recovery
prospects to shake the industrials market into a round of profit
taking. That would serve to rally the T-bond.

Long bond chart here.

The Commodities Market

The availability of commodities ETFs and long position mutual funds
coupled with a large bull market in commodities from 2001 - 2008
has lead to a substantial increase of interest in this area and has
re-positioned commodities from consummables to an asset class.

Over the long term, commodities have been a poor investment. The
famed CRB composite has appreciated by just 2.5% per annum since
1970. Commodities prices have tended to move in 6 year cycles, but
there have been 2 longer term bull markets in recent years: 1970 -
1980, and 2001 - 2008. There are pundits out there who maintain
that a long term or secular bull market is in place, but such claims
sorely test credulity. However, a multi year bull run in commodities
as occured over 2001 -2008 can be highly profitable for an investor
with rigorous discipline.

History shows commodities are most sensitive to interest rates and
the liquidity cycle. Now with short rates low around the world and a
new liquidity cycle underway to reflect easier monetary policy,
commodities have been moving up since Feb. '09, with this move
aided by a positive bounce in the leading economic indicators.

Since 1980, most advances in the CRB index, which closed today at
258, have been constrained in a range of 260 - 280. Breaks above that
level in 1979 and again in 2003, heralded sharp advances. So the
market is approaching important resistance, and with this test thought
near even before the global economy breaks into expansion, you can
appreciate the enthusiasm of commodites bulls as they anticipate
economic growth with the added fillip of inventory rebuilding.

I will do more on commodities going forward. Relative to the long
term trend of the CPI, commodities are indeed cheap as a class.
Below, I have linked to the CRB index chart. I would put resistance
in two close together spots -- 260 / 280 and again at 300. I would
also point out that commodities are crash prone when evidence of a
tough credit crunch emerges, as happened in 1980 and again in 2008.

CRB CHART.

Economic Indicators

The weekly and monthly leading indicators continue to move up
sharply, signaling that the US economy is setting up to recover
from deep recession. The indicators have surged from very
depressed levels, so it remains a little foggy to tell just how
imminent expansion may be. The Economic Power Index remains
positive but the index is being carried entirely by lower tax
witholding rates, unemployment insurance and the large increase
in Social Security payout. The real wage remains strong, but the
continued deterioration of employment has flattend the US
payroll pretax. Straight ahead, there will be pressure in DC to
make sure the spending stimulus dollars are being pumped out. The
very large inventory liquidation underway since late 2008 puts
the economy in a position to benefit from pipeline refilling as final
demand continues to stabilize. Continuing constraints to growth in
the short term remain strong private sector liquidity preference and
the large inventory of unsold homes ( A measure of pending home
sales is showing recovery.)

Capital slack continues to increase and is quite large with
employment, capacity utilization and business credit demand at low
levels. The Obama spending program has been designed to take up
some of this slack. If private sector interest in building liquid assets
up does not ease off some with improved confidence, then Team
Obama may look to enlarge the scope of fiscal stimulus.

No shortage of issues and worries here, but the indicators are
pointing northward, which what is needed most.

On a global basis, total output and new orders measures continue to
recover from exceptinally low levels registered around the end of
2008. these measures are a little more than half way to expansion
readings.

Stock Market

Technical
The strong rally underway since early Mar. remains intact. There
is another short term overbought in place now and the market
remains o-bought out through 13 weeks as well. The trajectory of
the rally is now verging on unusually strong. The SP500 closed
today at 945, and I would be happy if it was down somewhere
around 865-885. So, I think it is nearing a point where it is overdue
for a pull back, even though there are no indications yet of
difficulties with trend. I have linked to a chart which features an
intermediate term MACD and a 40 day RSI. Note that the RSI is
moving toward an intermediate term o-bought at 60%. CHART.

Fundamental
As readers know, I am on the hook for a cyclical bull market call.
Now, it is normal for a cyclical advance in stocks to pre-date a
positive turn in earnings (6.5 months on average). Still, the SP500
is now running about 45% above very depressed 12 months net per
share. Granted that the 12 month figure contains one unprecedented
red ink quarter -- Dec. '08 -- when companies wrote off everything
they could get away with, the 45% premium is a whopper -- large
by historic standards. In short, this baby is counting on the green
shoots to turn into stronger fibre soon. A pause in the upward
trajectory of the market for a month or two would not bother me at
all.

Longer Term Economic Indicators -- Some Uncertainty

My long term lead indicators were about as strong as they get over
the closing 5 months of 2008. They did signal strongly that the
economy could transition to recovery during Q3 ' 09. That plus
impulse may still prove correct, but a couple of troubling signs have
cropped up.

One of course is the powerful run up of the oil price so far in 2009.
It has doubled its low from early in the year as traders and some
commercial players anticipate an economic recovery. Now, the oil
price is extended and overbought short term, but one has to keep in
mind the inflationary impact that a sharply rising oil price has on the
cost structures of households and businesses.

The second point that requires attention is the real hourly wage in
the US. It remains strongly above the year ago level, but has been
flat since yearend, 2008 as wage rate moderation and mild inflation
pressure have eliminated progress. This too is a worry worthy issue
for the longer run. Right now, the tax cuts and a strong social
security adjustment are sheltering incomes. However, a rising fuel
and food bill can chew up these benefits over time. Now, in
the past, a flat real wage has often led consumers simply to borrow to
fund higher consumption. But we may not be able to count on that
in the short run this time.

These points add clouds to the outlook, but not storm clouds, at least
not yet. I have linked to a BLS chart on the real wage along with the
data. Chart.

Long Treasury Bond

I last posted on the long Treasury on 5/1/09 when the long guy was
at 4.10%. I opined then that the yield could rise to 4.50 - 4.80% in
the months ahead on economic recovery prospects. The bond yield
was in a steep uptrend then, and I was unsure how fast it could hit
4.50%. Well, the bond topped 4.60% this week before settling back
a little.

The back story is simple. In late 2008, the bond yield fell near the
2.50% level in a panic flight to quality that produced an historic
overbought. This year as fears about the economy have eased, that
extraordinary overbought has been corrected with a vengeance. A
number of directional economic indicators have started to signal an
eventual "V" turn for the economy, and one of the most sensitive
indicators for the T-bond, the industrial commodities price composite
(JOC - ECRI), has turned up.

In my view, the T-bond is getting well oversold, and I am looking for
a long trade. I use the Market Vane trader advisory sentiment
indicator as a contrarian measure. This indicator has fallen sharply
from an astounding 91% bullish in late '08 well down into the 50s
and may be on its way to a comfortable "too few bulls" reading
before long (40% or under).

A long position in the T-bond ahead would be a short term trade.
After all, if the US economy does move into recovery mode this
year, the bond could eventually go to 5.00 - 6.00% as recovery
becomes more evident.

I have included a price chart for the bond on this go around. It
shows the bond nicely oversold against the 40 wk m/a and on
RSI and weekly stochastic. It is also approaching a significant
price support level. $USB Chart.

I plan to watch the T-bond closely over the next week or two.

Stock Market -- Fundamentals

The broad fundamentals to support a cyclical advance in the stock
market remain in place. For me, these include monetary liquidity
measures, short term interest rates, the trend of BBB bond yields
and financial confidence measures (bond quality yield spreads).
Secondary measures such as the Treas. yield curve and broader
measures of financial liquidity are positive as well. The guess has
been that a cyclical low in the market would occur March - May '09.

There are strains in the shorter term, however. Specifically, the
SP500 Market Tracker has dropped to a value of only about 650
reflecting still further weakness of earnings. Net per share for the
"500" through June could come in close to $40. on a 12 month basis.
That is down 43% from the 12 months ended 6/'08, and is 57%
under the record 12 months ended 6/'07. Now, the powerful rally
that began in March of this year has brought the market a full 37%
above the Market Tracker level. So, the recovery anticipation now
built into the market is quite large based on a consideration of
hopefully trough earnings. In my view, with a moderate economic
recovery starting in Half 2 '09 earnings through 2010 can easily
rebound to $70. by the end of 2010, and the market could trade up
to 1150 - 1200.

The economic indicators as I read them continue to point to recovery
sooner rather than later this year, but even if that reading is correct,
the market has made a very large positive adjustment in the interim.
At some point in the weeks and months ahead, it would not be
unreasonable purely from a fundamentals point of view to witness a
period of consolidation / moderate correction as investors pause to
review whether the fundamentals are on the right track. Fundamentals
are not that helpful for shorter term market timing at all, but the
big premium in the "500" over the Market Tracker does invite
reflection at this time.

Oil Price -- Some Longer Term Thoughts

When viewed against the inflation rate for the past 40 years or so,
oil at around $60 bl. is reasonably priced. I think $50 is a better
number, but let's throw $10 bl. in to cover higher finding and
extraction costs for newer fields. When seen in this context, oil
is not a scarce or expensive commodity.

The oil price trend for the past 10 years presents a different
picture. My long term trend price range for 2009 is $38 - 79 bl.,
with $58.50 as a mid point. Of concern here is that the mid point
price represents nearly 15% annual growth from the 1999 base.
Implicit here is that oil at base has moved from a very cheap
energy source to one that is reasonably priced. That's ok, but
projection of a 15% price growth trend channel over the next 5
years would turn oil into an expensive energy source compared
to global GDP, household incomes and profits. As it turns out
oil was very expensive relative to broad economic measures for
most of the 2005 - 2008 era, and I believe, badly undercut global
growth just as it has in the past when the price spiked for more
than a month or two.

I am thinking now that oil above $70 bl would over time again cut
into growth and lead to further curtailment of oil demand down the
road barring large, dramatic improvement in fuel economies.

The history of the oil price since the late 1960s is one of stark
volatility with regular booms and busts, including the dramatic
bubble / bust from mid -2007 through the end of 2008. This sort
of kinetic volatility can be great fun for astute traders and even
nimble long term players, but it is a true destabilizing force on the
broader economic stage and should direct business and national
leaders to seek out a more assured and stable supply of energy.

I have ducked the "peak oil" debate and plan to do so for another
couple of years. It is still early to expend a lot of hot air on this
subject.

Looking forward, I will be happy to play opportunities in the oil
market so long as the price behaves itself and stays at moderate
levels. My philosophy is not to traffic on the long side with severely
overpriced assets or commodities except under rare circumstances
or in cases where volatility is easily managable, such as bonds.

Oil Price

The story with the oil price through most of 2009 to date has been
one of weak fundamentals and strong technicals. The dichotomy is
still with us.

There will be significant spare production capacity over 2009 - 2010.
Crude inventories or carry stocks are running high and demand
remains suppressed. Storage is becoming an issue. Nonetheless, the
oil price has rebounded far in advance of when we would normally see
a cyclical recovery of price.

There is the usual chatter about geopolitical problems, but my guess
is that we are witnessing a fundamentals recovery anticipation rally
predicated on the idea that excess capacity, which is substantial, is still
not that high compared to prior recession periods, and will be quickly
dissipated by a recovery of demand once the global economy begins
expanding. And, as I have discussed in recent weeks, the short term
leading economic signals have bounced sharply since early Mar., which
has added to bullish urgency in the oil trading pits. The second key here
is the idea that once demand rises enough to begin to push up operating
rates at the well head, we will witness an extended bull market in oil
once again as traders welcome a progressive draw down of spare
capacity.

The most common way to blow an oil price forecast based on the
fundamentals is to chalk up a miss on the demand side of the equation.
So, you have to have an undisputedly reasonable bounce in the global
economy before 2009 is out, and I suspect, what else is needed is a
low sensitivity to a rising price by consumers until the price reaches
much higher levels, say $75 - 80 bl. These are rational assumptions
but carry rather significant risk in a still uncertain environment.

On the technical side, the oil price is in an intermediate term uptrend
but is decidedly overbought with mild extension in the price. CHART.

US Economy -- Looking Ahead

The weekly leading indicators sets I track show a bottom in early
Mar. of '09 followed by a quick "V" bounce. So far, this suggests that
economic recovery can begin in Jul. of this year, in line with my
expectations going back to late 2008 (the stock market does not
carry a heavy weight in the combined set).

It is still early to look for an upturn right now. Thus, readings for
Jul. data on sales and production that are released in Aug. would show
the beginnings of an upturn, if my expectations are correct. It could
come sooner, but for now, I plan to monitor the lead indicators. The
track record for weekly data is not that smooth, and a trend, be it up
or down, can show backing and filling. Such may happen this time as
the bounce in the indicators has been strong off the get - go. I would
opine that one has to prepare for a setback or two in the weekly data
over the next couple of months. So long as there is a positive trend,
I am not likely to change my thinking.

However, I think it is fair to say that it is best to be a little anxious
over the next month or two, as there are a couple of important
differences in the current environment compared to previous
periods. One is the issue of how strong consumer preference for
liquidity may remain. Another is the large inventory of unsold new
homes. Finally, the banks and other credit intermediaries will have
to be tested if consumers do wish to spend more and come looking
for mortgages and loans.

It is unusual for leading indicators to jerk about so badly as to give
false signals, but it does happen. Thus as a defensive measure, my
plan is to monitor short term data closely to see if the indicators turn
indecisive or negative. If either happens, the trap you need to avoid
is to start thinking that re-development of a positive bearing is
right around the corner. The rule here? When an expectation is not
met, reassess, do not rationalize.

Stock Market -- Technical

The correction underway since 5/11 has wiped out the large short
term overbought, brought the market off a very substantial up
trajectory, and has knocked it off the positive trend line.

The 10 and 25 day m/a's are stilll rising and the 10 remains above
the 25, thus signaling that internal damage so far is minimal. The
SP500 has broken below the 10 m/a and is now sitting just above
the 25 m/a (Chart link below). An important test of short term
direction lies ahead this week -- Can the market stay north of a
25 day m/a?

The market remains substantially overbought on measures
running out from 6 - 13 weeks, so you have to allow for the
possibility of a further run-off in the wake of a 2 month rally.

The SP500 had a Fri. 5/15 close of 883. To me, the market remains
of interest if the "500" can close above 840 for the upcoming week
and 850 -855 in the following week. Breaks below the appointed
levels in either week would render this advance increasingly
suspect, as trajectory would no longer be consistent with a decent
intermediate term advance to run perhaps through June.

I have been cautious for the past couple of weeks, but the technicals
do not yet give me reason to be downcast about this market. So, I
plan to keep looking for entry points on the long side. SP500 Chart.

More Economic Indicators

Coincident Indicators
Viewed yr/yr, the coincident indicators are down 5.8% through Apr.
That represents a slight improvement from Mar. Only the real
wage remains positive, with employment, retail sales and production
all in deep negative territory. Viewed month-to-month, the coincident
indicators have lost some of the downward thrust, but do not yet
indicate the economy has hit bottom. The big losses to date in 2009
have come in production and employment as inventories are pared.
When measures of new orders are added in, the picture looks more
stable.

The 13.9% yr/yr decline in the dollar cost of production matches the
Mar. number and shows that non-financial profits remain depressed.

Capital Slack
Measures of capital input remain depressed across the board.
Capacity Utilization in the US is down to 69.1%, and the growth of
capacity over the past year is a scant 0.3%. With more mothballing
on tap, the physical component of capital could shrink at some point
ahead. Large production losses are also evident globally as well.
Business credit demand is starting to contract at a faster pace
reflecting reduced working capital needs.

Inflation (Deflation) Thrust
Yr/yr through Apr., the CPI declined by 0.7%. Thus, we are seeing
mild price deflation as expected. The thrust indicator looks now like
it will bottom in Jun. before turning up from deeply depressed levels.
A broader measure of inflation thrust based on monthly data could
be bottoming now.

The CPI without seasonal adjustment has been rising since Dec. '08
on higher fuels prices. However, the Apr. reading remains 3.8%
below the Jun. '08 all time high. Even so, it is wise to keep an eye on
gasoline prices and entire commodities price composites as the year
progresses.

Long Term Economic Indicators
This composite is still positive, but it has shown some deterioration
because of the rapid recovery of the inflation adjusted crude oil price
this year. Crude market players are betting on a significant recovery
of oil demand over the next 12 months even though carry or cover
stocks remain at high levels in a depressed demand environment.
As we have learned in recent years, this type of wagering can have
significant economic effects.

Stock Market -- Sabbatical Over

I took a couple of weeks off from watching the stock market with
care in the hope there would be a moderate pullback that would
put the uptrend on a more reasonable trajectory. I pointed out
back on 4/27 that if the advance powered on, it would soon take
on SP 500 resistance at 930 - 935. It got close before pulling back
modestly (chart link below). However, the market has yet to break
below the powerful trajectory I set for it in the early going of the
rally, so the two week "holiday" I took netted little.

The market remains overbought. Most advisors are looking for a
pullback, and the debate whether the rally is a cruel bear advance
or a new cyclical bull has started to heat up. The sentiment
indicators I follow have moved from "too many bears" up toward
more nearly neutral levels. So, there is still a substantial dose of
skepticism out there. The latest wrinkle in all the talk is that big
rallies yield big corrections.

As of now, my indicators say it remains a heavily overbought
market, but one which remains in an uptrend. Moreover, nothing as
yet signals a top is in. So, I'll follow along. This rally has treated me
and other longs well even though I am on the sidelines for now.

When you have a powerful move like this, you keep your interest
level up even if you are not in it every day. Chart.

Economic Indicators

Weekly Leading
The weekly lead indicators have moved up strongly since early Mar.
The indicators are on the cusp of a top side breakout, but as of now,
we can only say that they signal continued economic stabilization.
The indicators have been range bound now since Nov. ' 08 and have
moved well outside a frightening crash downtrend line that kicked
off at the end of Jun. ' 08. Yr / Yr % momentum remains deeply
negative, but continues in an improving trend.

Monthly Leading
New order breadth indicators have moved up sharply from deep
recession levels of Dec. ' 08. The composite index has jumped from
62.6 to 94.2 over the first 4 months of the year (100 = expansion).
The indicators are tracing a "V" recovery pattern, but long experience
says that backward steps can come at anytime, as new order volumes
are volatile.

Economic Power Index
This indicator remains positive, which is supportive of a recovery in
consumer spending. Measured yr / yr, the change in the current $
wage rate has begun decelerating as expected, but the real wage rate
remains very strong in light of mild deflation. The yr / yr change of
employment continues to trend lower and is weak enough to flatten
out total payroll before taking into account two positives: lower
tax witholding rates and unemployment insurance. The consumer
sector continues to benefit from sizable growth in social security
payout. The EPI has been nicely positive when averaged over the
past six months, but retail sales have only recently stabilized as
consumers build cash liquidity and tamp down debt. So, the
spend situation, while improving, remains fragile.

Profits Indicator
The first indicator for April -- industrial & commercial activity --
shows further improvement but remains below profits turnaround
levels.

Global
The global economy remains in recession territory, but monthly
data, especially for new orders, suggests a significant abatement of
weakness. The US is the leader in the improvement.

Banking System -- More Capital Needed

The stress tests have been completed and the major banks in the
system will need to raise $75 bil. in primary capital by this Fall.
That would augment system capital by 6.3% and strengthen the
capital bases of the majors who are primary dealers, market
makers and major players in the secondary and syndication
markets. Most of the tainted banks have already been named.
What these guys need to do is raise capital with the lowest
dividend cost they can to preserve cash. The thrust will be to
sell as much common as the market will bear and to convert the
higher cost preferreds. There is about $110 bil. of TARP money left.
The capital funding will be dilutive to common shareholders, but
there can be few surprises there. Other banks who are not directed
to raise capital will raise additional funds as well, subject to market
conditions.

The banking system needs the $75 bil. of new money as system
capital has remained flat, with continuing strong net interest
margin having been offset by rising loan loss reserves. The banks
also need cash liquidity, as the run off commercial loans has been
slow so far.

My estimate has been that the banks made about $1.5 tril. of
speculative loans over the past 5 years. The loans range from the
savvy and profitable to garbage. It is unwise to assume that
the industry is now free of further strong direction from Treasury
regarding capital. Another round could come if the economy does
not show signs of recovery over the next 9-12 months.

On balance the Treasury's disclosures were well advertised and
discounted prior to today's release.

Bond Market -- Corporates

Corporates experienced a powerful bull market from 1982 - 2005,
with Moody's Baa bond yields falling from the whopping 17 - 18%
yield range down to 5.5% in early 2005. It was difficult to capture
the full majesty of this run as companies called their higher coupons
as fast as they could, and investors, who prefer funds, were often
stuck with shorter maturity structures than they deserved. Only
the big players with expertise to assess individual issues got the full
measure.

Yield chasing by liquid players was intense over the late - 2000 to
mid-2005 period. Corporates then entered a bear phase as yields
rose to compensate for higher inflation. The bear phase became acute
once the recession took hold in 2008, and corporates were drubbed
in the Sep. - Dec. ' 08 panic period, as players moved into safer haven
Treasuries in droves even as inflation eased. In spectacular fashion,
the Bloomberg junk index shot up from 10.50% to over 24% yields
before recently returning to near 12.50%.

Like Treasuries, high quality corporates have been poor performers
since Mar. of this year, as players opted to take on more risk in
equities and lower quality bonds.

High quality corporates, which traded as low as 5.2% in 2005, are now
a far more reasonable 7.00% and Baa/BBBs are at 8.20 - 8.80%. So
there are solid corporates out there that are now more attractive than
Treasuries and spreads can be expected to narrow further in even a
modest economic expansion. Junk bonds are much trickier because
the economy has weakened enough to increase default risk measurably.
My cut off for junk is 10%. I'll take a look at the market when yields are
above 10%.

I have never been that comfortable trying to do valuation on corporates.
I would say that in a 3.0 - 3.5% inflation environment, that high grade
corporates would be reasonably priced above 7.0% when maturities
exceed 7 years. I strongly prefer individual issues because with careful
shopping and some basic financial analysis, one can better tailor a
portfolio to suit one's needs than can be done using funds.

Long Treasury Bond

We are in an unusual period with regard to figuring out the T-bond.
In a recession / early recovery phase of the business cycle, the yield
on the T-bond can decline as the Fed eases credit and inflation
decelerates cyclically. But here, we saw the Panic of 2008, a move by
the Fed to a ZIRP at the short end and the development of deflation
in both asset values and the CPI. So, in a sense, the fundamentals
that lead to a cyclical downturn of the T-bond yield have already
happened. And, with evidence the economy is stabilizing, the long
end of the market has gone from flight-to-quality to flight-from-
quality, all in a short time frame, as players dump Treasuries to
move into riskier assets. The Fed has a program to buy in $300
billion of Treasuries to hold rates down to support housing in
particular, but the spike in the long bond has been strong enough to
suggest players have begun to price a "supply" premium into
yields as the budget deficit widens.

The T-bond sports a 4.10%. But this can move up to 4.50 - 4.80%
in the months ahead on further signs of a firming of the economy.
Basically, with economic expansion and a return to moderate
inflation pressure, the yield on the T-bond can easily move up to
between 5.00 - 6.00% over the next year or so.

At the moment, the short term leading economic indicators point
only to a stabilizing economy, while the inflation thrust measures
remain consistent with mild delation. So, the long bond has started
to discount an economic upturn, perhaps later in the year. Again,
remember that the goodies that can push the bond yield down early
in a recovery phase have already been expended.

Importantly, industrial commodities prices, paced by copper, have
also been moving up from steep lows. As I have said many times,
the Treasury is very sensitive to the direction and momentum of
the ind. commod. composite.

In my book the 30 yr T-bond -- now at a rising premium to its 40
m/a -- is fast becoming oversold. This is the flip side to an over-
bought stock market at the moment.

Further upward pressure on the T-bond yield should provide a
short term buying opportunity to capitalize on what could become
a deep oversold. Trades such as this have been a staple for me
for many years, but are not everyone's cup of tea.

I have attached a T-bond yield chart. There is resistance up at
4.40 - 4.50%. But, since the market is already oversold, a move up
to resistance straightaway may be a dicey call. CHART ($TYX).