Stock Market -- Weekly

Fundamentals
The Fed continues to expand its balance sheet rapidly and despite the rapid upward
trajectory of credit extended, it looks like it will still be another 3-4 months before Mr.
Bernanke starts to get more avid pushback from the hawks on the board and some of the
economics staffers as well. The near-death experience of the economic recovery last
year has the inflation hawks off-balance and quiet for now. Aggressive QE creates a
strong tail wind for the market.

My weekly cyclical fundamental indicator has experienced a moderation of its uptrend
in recent weeks but is still heading higher primmarily reflecting stronger employment
indicators.

About Cyprus
Cyprus is a tax haven with banks that form a payments / deposits flow hub. Banks that
specialize in payments / deposit flows must be exceptionally discrete, maintain excess
equity capital and keep low risk loan portfolios. The money is made via hefty fees that
are charged for maintaining high discretion and for allowing funds transfers that require
bankers naturally disinclined to ask probing questions. Risky lending is to be avoided
because funds transfers can and do involve occasional, troubling overdrafts for which
a large capital base is needed to smooth out those little bumps in the road. Leverage up
and make risky loans and you can be dead in a hurry, figuratively if not literally. Little
Cyprus has a bit of leverage here -- to leave what lies beneath staying beneath, so to
speak. Outsiders will need to be discrete in settling the Cyprus fracas.

Technical
Back on Mar. 10, I opined that the stock market would be moving into an intermediate top
over the subsequent two weeks ended Mar. 22. The market has turned flat in the short run,
but remains in a clear uptrend nonetheless. The SPX is overbought on price momentum as
well as on the weekly MACD and RSI indicators. SPX Weekly

Overbought markets reserve the right to get even more overbought, but this baby seems
well along.

It is interesting that as the SPX has approached its historic highs we have seen an outbreak
of coughing and foot shuffling before the bulls finally square up and take out  the old highs.
Since the market can inflict pain for all at critical junctures, a fitting alternative scenario
would be for players to squeeze the shorts into the land of the new high, shout "hooray",
high five each other in the halls, enjoy a few joyous days and then get clobbered by a sell off....

New Home Construction Permits

My long term track record with US housing has been a very good one. Back in late 2001,
when I was still doing investment advisory / consulting on a part time basis, I projected a
long term top in home prices for 2007 based on deteriorating demograhics. The industry
turned mad as the decade progressed and I lost interest. When I saw the totals for new home
construction at the peak over 2006 - 08, I figured there was so much over-capacity in
housing, there would be no recovery until 2011 earliest.

Right now, I think the beginnings of a new boom in housing are still about 7-8 years away
and will largely be reflecting the emergence of Gen. Y (born 1985 -2005 and nearly 80 mil.
strong) as first time buyers. Even then, the money to be made will be more from building
and modernizing homes than from home price appreciation.

Unless there is a powerful surge in immigration, I do not think underlying demand for housing
will exceed 1.7 mil. units a year. (I would welcome an aggressive and sensible program of
accelerated immigration but that is a subject for another time as it is politically fraught).

Prospective homebuyers have cut their leverage and are in better shape on a cash flow basis,
but too many younger people, many saddled with college loan debt, are low on down
payment capability.

Now, building permits have been an excellent leading economic indicator over the years, but
failed to signal properly in the present recovery because the recession hit the entire housing
business so hard. But, a recovery is emerging in the US. Housing Permits I would be
delighted to see permits rise back up to 1.5 mil. annual over the next few years. I think that is
do-able, but I would be careful to contain optimism. After all, the middle class has been
pummeled economically in recent years, and, when you think about it, mortgage finance
capability needs to be re-built.

Inflation Potential -- Shorter Term

As will be shown, the full CPI over the past decade has been heavily influenced by changes
in the price levels of foods and fuels. The boad CPI less food and fuels has been mild
over the past decade and has been in deceleration mode. Shorter run surges and retreats of
the full CPI have largely been determined by the food and fuels components, particularly
petroleum products. CPI Chart

As the chart above shows, a vigorous "V" recovery in production and operating rates starting
in 2009 turned a deflation environment into a sharp cyclical acceleration of inflation pressure
which culminated in a surge in the CPI measured yr/yr up to 3.9% in Sep. 2011. Note the
strong role played by the price of gasoline and the far broader CRB commodities composite
in driving the CPI up well into 2011. Motorfuel / CRB (bottom panel)

The CPI has been in deceleration mode since the autumn of 2011 on slow production growth,
a flattening out of capacity utilization % and a decline of commodites prices including even
petrol fuels. Note however how the seasonally strong surge of gasoline prices has turned the
full CPI back up this year.

I think the chances favor further and cyclical inflation pressure in 2013 on faster production
growth and higher operating rates coupled with a stronger services sector. This projection
is based very heavily on a positive response from the economy to the current major QE
program by the Fed and comes with an additional stipulation that QE if sustained will also
put some stronger financial player interest back into the commodities market.

Now if there is the usual positive economic response to QE 4, an acceleration of inflation
pressure will re-introduce two issues to think about: (1) If inflation does build too quickly,
it will put even more stress on household income, further undercut confidence, and increase
risk for the economy, especially given the low wage growth in evidence and, (2) Pressures
will rise on the Fed to curtail its QE commitment, provided particularly that the CPI,
excluding foods and fuels, moves up toward 2.5% yr/yr which could be a trigger point to
slice the QE program by the Fed's own admission. A couple of things to think about.    

     

Long Term: Inflation vs. Deflation Potential

The best and fastest way to get a handle on longer term inflation potential is to look at
a rolling 10 year record of growth for a broad measure of money and credit funding
instruments and then subtract annual productivity growth potential from it. In the wake
of the great recession, which saw well over $2 tril. of short term debt default or not get
rolled into new debt, the broad measure of financial liquidity growth for the past decade
has dropped to 4.1% annual. Pull out the reasonable assumption of 1.5% annual product-
ivity growth and you get inflation potential of 2.6%. It is no coincidence that inflation has
averaged just 2.2% per annum on a rolling 5 year basis through Feb. '13.

To get annual inflation potential up to 5%, the broad measure of financial liquidity in the
system would have to be about $4 tril. or nearly 26% higher than it is today. Given how
conservative banks remain, such rapid growth in credit demand soon seems rather unlikely.

To get inflation going strongly for a goodly spell requires not just fast money and credit
growth but high rates of resource utilization and a sharply elevated level of wage growth
to sustain it, all of which we saw over the great inflation period of 1965 - 80, which
incidentally was a an era of low productivity growth. Tossing in a major war might also
help get inflation going.

I would argue instead that the US economy has become deflation prone and has been so
for the past 7 - 8 years, commodity driven mini inflation surges notwithstanding. US
real growth has been very scant in real terms, resource utilization has been declining and
business has succeeded in wringing productivity from an employment base that is nearly
flat. On top, the wage in current $ has been coming down (from 3.5% to 2.1% currently).

The Fed has added nearly $2 tril. in credit to the system to re-inflate it since 2008. The
economy is, in turn, still recovering slowly with the $ value of industrial output running
nearly 24% below the long term trend. To add a little excitement to the mix, The US
Gov't is looking to join the states in cutting spending and jobs. Small wonder then that
top notch economists like Paul Krugman and Joe Stiglitz are not just dismayed but are
appalled instead. Can deflation be virtuous in a well leveraged economy such as ours?
Dream on.

The Fed needs to keep plugging away until the economy takes up more of the capital
slack in the system and shows itself as able to sustain growth on dramatically more
limited help from the Fed.

Up next: shorter term inflation potential... 

Economic & Profits Indicators

Weekly Leading Economic Indicators
The weeklies I follow moved up substantially over the Jun. '12 / Jan. '13 period, although
there was unusual volatility involving jobless claims in the wake of Hurricane Sandy. The
weeklies have flattened out since Feb., but there has been no break down of trend yet. The
pattern still suggests better economic growth through April.

Monthly Coincident Indicators
I use a combine of retail sales, production, the real after tax wage and jobs growth all
measured yr/yr to derive my coincident indicator. On this measure, 3.0% is a good
number and would indicate the economy is or can hum along nicely. Not so, recently.
For Feb., the reading was a low +1.1% and reveals a growing imbalance between sales
and production on the one hand and the income components on the other. The data is lousy
and suggests that consumers must continue to dip into savings and tap borrowing to sustain
spending. With gasoline prices dipping some here in Mar., the heavy pressure on the real
after tax wage may ease up some. It is fair to say that my view may be conservative since
consumers do have stronger borrowing power now but it is also fair to say that pressure on
real personal income will, if sustained for a while, eventually pull down consumer spending.

Profits Indicators
Stronger sales and industrial output in Feb. brought my yr/yr measure of business sales up
to nearly 4%. The price / cost ratio was slightly in favor of cost, so there could still be
companies experiencing profit margin pressures. Feb. also saw some currency translation
penalties on a stronger US$. On balance, profits were a bit lower going into Mar., but it
must be said  recent higher sales and production numbers still hold out promise for
improved quarterly earnings yr/yr.

Commodites

Back in late Jan. '13, I mentioned that a downtrending CRB commodites composite was
rallying up to trend resistance. I did not forecast it would swing through to the upside and
it did not. To my surprise, that failure did not trigger a strong negative response, either.
Players seem interested in seeing how much widespread central bank QE programs might
spur faster global growth.

As discussed just below in the post on global economic supply and demand, the global
economy, following a steep "V" shaped economic recovery over 2009-10, has settled into
a slow growth mode, with production growth only a little better than half as fast as that
seen from 2003 through spring 2008, when the CRB more than doubled from 230 to a lofty,
bubbly 480. This period featured strong economic growth by China, the major global
buyer of commodities, and aggressive inventory carry policy, as China business binged on
FIFO accounting and large cash inventory profits. China joined the other major economic
powers during the 2010 - 2012 recovery period as it too experienced decelerating growth
and had to struggle against over-inventorying in a sluggish global trade environment.
Commodities prices, after a strong rebound from late 2008 toward mid-2011, have fallen
about 20%.

The CRB chart does show an index value support level of 290 which was violated only
briefly in mid-2012. $CRB Weekly  It could be important to note that my long term chart
dating back to 1932 has trend support right around the 290 level for much of this year.

I did happen to catch the 6/12-9/12 lift in the CRB nicely, and with broadscale QE in
place, I am expecting there could be a trade worthy +20% pop in the index during the year.

Just In The Nick Of Time

The very broad measure of US business sales turned down for the month of Jan. and the
level of total business inventories shot up. That is classic early bad news. Viewed yr/yr,
business sales were up 2.9% in current $ and about 1.3% real. The Fed damn near lost
its gamble by holding off on further QE for a good 15 months. Fortunately, retail sales
did pick up strongly in Feb. and accelerated back up to 4.7% yr/yr, partly reflecting
strong, but temporary income growth near the end of 2012. My forward looking economic
indicators do suggest a couple of months of stronger business ahead, particularly in view
of the sharp recent improvement in goods and services new order rates from the purchasing
managers' reports. However, my weekly indicators have been on the flat side since late
Jan., so we need to see more positive follow through here.

Now, the broad business sales report for Jan. was a negative indicator for earnings
momentum. We'll get a more current reading on this score from Feb. production and inflation
data out soon. Through Jan. there was low production growth yr/yr and a continuing
deceleration of pricing power.

It is perhaps noteworthy that the large pick-up in retail sales reported today was a "yawner"
for the stock market. Experienced traders know that retail sales is a volatile series, but it
also shows that a good number may have been needed to hold the market after the recent
strong run-up.

Stock Market -- Daily & Weekly

Daily
Back on Feb. 25 and Mar.5 I discussed the decay of key indicators and how evidence was
accumulating that the market was approaching roll-over. I also stressed there could be a
positive whipsaw which would cream the shorts such as happened near the very end of 2012.
Well, we got the whipsaw up on light volume, which equals a clear short squeeze of traders
who, seeing the SPX was approaching prior record levels, figured they could catch a pull back
as the SPX encountered major long term resistance. A breakout last week above the prior
cyclical high of SPX 1531 on expanded volume would have been more comforting for the
bulls, but may still have left the issue of taking out the historic highs unresolved. So we are
left with an overbought market pushing to take out the old highs. SPX Daily

Weekly
The weekly SPX shows the market in a strong but maturing uptrend from the darker days of
autumn, 2011. Once again, the SPX has opened a large premium of 8.6% over its 40 wk m/a
and is overbought on weekly RSI and MACD. SPX Weekly

Note that the 30 yr. T-bond yield is in the top panel of the chart. It has worked well as an
indicator of economic momentum both present and short term future. The labored but still
substantial 75 basis point move up in yield since last summer when the Fed suggested new QE
would be on the way continues to suggest a modest eventual re-acceleration in the pace of
economic recovery, an eventuality to be welcomed, but one which the stock market has already
mostly discounted for now.

The technicals tell me an intermediate term top is out ahead over the next week or two, but one
has to realize that with this large, still open ended QE program in place, players may elect to
chase the market up until the Fed gets concerned that rational exuberance is beginning to turn
giddy. Make no mistake here. There are guys in this market who plan to run with the Fed even if
they get edgy about the place of the market against the economy.

Global Economic Supply & Demand

The global economy remains in expansion mode. That's the good news. The bad news is that
the deceleration in the rate of growth in evidence since mid-2010 remains intact on a trend
basis. Wait, it gets worse. The global economy has downshifted to a sub-normal and modest
rate of growth. Instead of 4-5% yr/yr production growth which characterized previous ongoing
expansions, we have production growth that has slipped to 2.5 - 3.0%. The global operating
rate has eased and commodities pricing has followed suit as resources are hardly strained
at the low rate of growth. There was some pick-up in the pace of production growth near
the end of 2012, but it has not been enough to reverse the continuing downtrend in momentum.
Major sectors -- the US, Eurozone, China and Japan have all contributed to the slowdown
from the heady early recovery phase of 2010. Moreover, there has been additional pressure
on the commodities markets from financial players discouraged by the slow pace of growth.

The US has finally turned stronger recently, but Euroland continues to struggle while China
is getting a subpar bang for its buck as property price speculation has revived. Japan continues
to clear the decks for an attempt to end its lengthy and debilitating deflation.

After a powerful 23% surge in the first 18 odd months, world trade measured yr/yr has settled
down into a desultory 2-3% range. This has naturally set off fears of  "currency wars" as
countries adopt accomodative monetary policies to make exports more attractive. Such could
eventually happen if these policies of greater ease fail to stimulate local economies and, in
turn, trade demand. Right now, the data show that slow growth is holding on a global basis.

As I read it, the globe is far from overheating and running the risk of ushering in a cyclical
acceleration of inflation. But, matters can change here if we begin to see some pick-up in
the growth of major economies.

For more info, check out CPB Netherlands global trade and production monitor and the global
PMI summary from JP Morgan  / Markit.

Gold -- Slip Out The Back, Jack

Upset in offshore economies, a more financially settled US and the continuing and major
rise in US oil output has stabilized the US dollar and even allowed for a slight rise from
historically low levels. Equities players who have been hiding in gold have been gradually
migrating back to stocks. The rotation has accelerated in popularity recently and is getting
extended. Stocks vs Gold

Stock Market / Economy #3

My argument is recent weeks is that The economy is well due to show stronger economic
data lest the rally in the market turns into just an eventually hollow play on the Fed's QE 4
program. Well economic activity data from US purchasing managers in recent days shows
a firming up in both manufacturing and services including especially new orders. On a
combined, unweighted basis, my US new orders index jumped to 57.0 in Feb. This is a
healthy reading and the strongest since Feb. 2012. Now, reflecting the timing of QE
movements by the Fed, the economy has tended to be strongest in the 4th Q / 1st Q
sequence periods of this recovery. Q4 '12 was a dud in view of the extended tardiness of
Fed liquidity policy implementation, so it was important to see some positive flow through
here in early 2013 in response to QE 4. I also liked the snapback in new orders for
non-defense capital goods which was recently reported.

Now, it may well be the economy will lose some positive momentum as it moves into Q 2
'13, but it was important to see the reaction to QE 4 and to realize that Bernanke intends to
stay with it in the months just ahead.

Based on today's strong positive action, the SPX has started to edge away from seeing the
indicators roll over to signal a correction. But, it is an overbought and extended market
and must build energetically off today's lift to develop a clear positive whipsaw that will
shamelessly rout the shorts. SPX

China Note

As discussed back in Dec. '12 and in early Jan. I argued that a recovery in the Shanghai
stock market was well overdue based on an easy money policy and the fact that the
economy had started to expand again. Following a super fast run-up that kicked off in
early Dec. '12, the market went nearly vertical until mid-Feb when word started to get
around that the economy was slowing. Then, another body blow came today when the
cabinet leaders imposed new restrictions on real estate investments including higher
down payments and capital gains taxes on sales of a variety of properties. Real estate
equities tumbled and pulled the market down. Moreover, since the Chinese use the
equities market as a way to try and build capital to play in real estate, speculators were
forced to take some money off the table.

Measured yr/yr, China's money M-2 has increased by more than 20%. No "pushing on a
string" here. The economy has responded positively and the large block of excess liquidity
has been finding its way right into the property markets. The official data on the economy,
as suspect as it may be, show that the Peoples Bank has been providing liquidity well in
excess of the needs of the real economy for at least a decade. The authorities have been
playing "catch up" with year after year of new regs to contain wild cat real esate markets.
Since the PBOC has been a steady fount of excess liquidity, the authorities, who are pressed
to provide housing for a fast growing work force, have obviously allowed the central bank
vast leeway to fund real estate development whether silly (the "ghost cities") or sensible.

The Shanghai market was overbought and due for a correction which it is getting now.
The risks to the market concern whether the authorities are dead serious this time about
curtailing real estate speculation, and more conventionally, whether China's recent ramp
up in output was a little strong relative to sustainable export demand.

The real estate game as funded by excess liquidity allows the authorities to create a small
army of mandarin buddy tycoons as well as fund needed development. So, it may be that the
new chiefs and the PBOC may stay with aggressive monetary policy until it finally shows
up in the inflation rate.

In the meantime, it is early to tell whether China over-ramped production for the short run.

My view of the Shanghai remains that it can trade up to 2700 if the economy can maintain
real economic growth in the 7% per year range. Obviously, getting there may not be a smooth
ride. Shanghai Composite

Stock Market -- Monthly

The cyclical bull market running from 3/09 continues to roll on. The SPX monthly chart
(linked to below) also shows the SPX is getting overbought against its 9 mo. m/a as well
as on a monthly stochastic measure. Market momentum has been decelerating as the advance
has moved along, with this development being typical of a cyclical upmove that is no longer
fresh. The market is extended on the price band up from mid-2011, but the momentum
measure is well under levels that would signify a blow-off top. SPX Monthly

I do not ascribe great significance to the fact that the SPX has been closing in on its previous
all-time peak. My argument for several years has been that the US economy has the capital
resources in place to see the economy advance for another few years. It has been slow
going, and particularly frustrating since business has opted to continue to mal-distribute
income generated. The Fed's periodic experiments to curtail QE have slowed progress and
now fiscal policy seems to be set on putting further hurdles in place with new austerity
measures. Economic risk is higher than normal now, but no recession is currently indicated.

the Fed has a strong QE program underway since this autumn and US economic history clearly
suggests that economic expansion, now very tepid, should re-accelerate soon, thus paving the
way for further advances in the SPX as the year wears on. I am presently not comfortable that
current QE has not already spirited the broad economy and would like to see more positive data
soon. I have argued my case for an uninteresting market based solely on QE without positive
economic follow-through.

Investor confidence, as measured by a recently expanding p/e ratio, has been on the rise based
on QE, but remains significantly below a level that would reflect solid but hardly exuberant
confidence. With QE and room for the economy to grow without serious inflation pressure,
the SPX should be trading in a range 1650 - 1700 with $100 per share earning power in the
can.

Oil Price

Longer Term
The oil price has not been able to hold above the downtrend line set by connecting the 2008
bubble top and the 2011 Libya coup top. The cyclical uptrend from the late 2008 bottom was
broken in 2011 effectively ending the cyclical price recovery story, at least for the time being.
WTIC 5 Year Chart Over the past nearly two years, there has been a narrowing trading range
market which has presented  both long and short trading opportunites but in an environment
that has grown more tame with time. This is not atypical post price bubble behavior, especially
for the oil market.

Shorter Term
I have done alright trading the oil price over past couple of years, and even though the market's
movements have grown less dramatic, I do have a keen interest in oil this year, as I have been
thinking there would be more pressure from NATO and Israel to deal with the Iranian nuclear
program in 2013. We are, however, off to an inauspicious start so far. Israeli voters have
slapped Bibi around pretty well and Obama has put up Chuck Hagel as Defense Sec. Chuck has
little patience with the Israeli political lobby in the US, is critical of US military adventures in
the Mid-east and is aware of the risks in a military confrontation with Iran. Nevertheless, reports
do indicate Iran is getting ever closer to turning out bomb grade nuclear material, and, even if
neither the US or Israel opt to try and take out much of Iran's program, there will be tough talk
after the UN offers a compromise, talk that is tough enough to get the oil traders interested in
pushing up the oil price. Moreover, the war in Syria continues to turn more violent with
widening but still moderate spillover.

The oil price is at a periodic seasonal low point with refinery changeover to warmer weather
gasoline blends winding up. Predicting bombing runs on Iran has been a staple of trader tactics
for nearly a decade, and the boyz like to gear up the buzz at the end of each Feb. With the oil
market set to move into a seasonally strong period, it might be worthwhile to see how all the
market players and pundits may try and "amp" it. WTIC The chart indicators say it is still a
bit early, so keep an eye out if this is a market that interests you.

Stock Market -- Warning Flags Short Term

The stock market can still whipsaw to the upside as it did in late 2012, but evidence that
it could well be rolling over is accumulating. SPX I prefer the weekly chart, but since it
was a bit tardy with signals over the last half of 2012, I am watching the daily chart now
and will post  the weekly and monthly views at week's end. I should mention that my
weekly cyclical fundamental indicator has been edging lower as February has proceeded.

Stock Market / Economy -- #2

This post can be tacked on to the 2/15 entry (scroll down) which was a comment that
indicated the US economy should re-accelerate quickly in view of the strong, positve action
of the stock market over the past 8 months or else a fundamental disconnect between the
market and the economy will develope.

My coincident economic indicator, which pools sales, production, jobs and income
growth measured yr/yr, was a lowly +1.2% for Jan. The indicator does include an
adjustment for the restoration of the payroll tax which does not affect the wage rate but
does reduce take-home pay. My business sales growth measure for Jan. was +3.7% yr/yr
and reflected both low volume and pricing growth. Since it is tough for companies to
maintain profit margins in this sort of slow growth environment without additional cost
cutting that could hit jobs, fundamental business risk is being elevated.

In the US rare are the times when low short rates and a large, fresh injection of liquidity
fails to stimulate a stronger economy. I think a re - acceleration of growth needs to occur
right quick or we can open a debate about whether fiscal policy is now too restrictive in
an era of above normal unemployment coupled with income inequality / mal-distribution.

In my reading of recent weeks, I note a number people are bullish on stocks because of QE
4 and also do not seem to mind that much that the economy has been so sluggish. The theme
seems to be that since the Fed is so easy and desires higher asset values that players simply
have no recourse but to be in the equities game on the long side. It's easy to talk that way
when the market is on the rise and other portfolio managers are buying and threatening to
leave one behind at the station and, since faster business growth is not yet clearly overdue,
the "simply go with the Fed" pundits seem to be the wise ones. And then, there are the
brazen guys who may be going along just because a run up is a run up, smart or not.

My point is that if QE 4 is a fail as far as faster growth is concerned, we have a disconfirm
of the normal and perhaps a very different ball game then we have seen for quite some time.
I am hoping we do not get the fail.

Stock Market -- Short Term

With yesterday's release of the 1/13 FOMC policy meeting notes, the Fed poured a full
cup of uncertainty into the punchbowl (See the 2/20 post just below). It came as news to
an overbought, extended stock market which was experiencing momentum loss anyway. So,
traders have lined up to book profits after an extended positive run since early, Jun. '12.
The SPX has broken below its 10 and 25 day moving averages although the latter two have
yet to roll over. My extended time MACD which had clear sailing since the end of Nov. '12
is still positive, but it is operating on a wing and a prayer now. In the upcoming SPX chart link
I also show the money flow index (MFI), a price and volume based relative strength index.
One use for the MFI is when it begins to trend down ahead of the market, especially if it
is from an uptrend that made an overbought reading. SPX With MACD & MFI

I also have linked to a five panel chart that shows the SPX with some risk measures.
SPX & Indicators The SPX portion of the chart shows the market against its 200 day m/a.
It reached a nearly 9% premium just the other day at 1530. That sort of premium represents
a significant overbought. The top panel of the chart shows the VIX or volatility index.
Readings down around 10 signify a confident, complacent market. You'll need to see whether
the VIX moves up further to clear 20, as that would warn of a correction. I would also call
your attention that price corrections which begin off a low VIX / high confidence reading
can get nasty. The fourth panel down measures the relative strength of the SP 500 ETF vs.
the long Treasury price. It is toppy at resistance in the 1.05 area and reveals a possible
transition to "risk off" mode by equities players. The bottom panel of the chart shows the
relative strength of cyclicals against the SPX. The clear uptrend here which signals growing
confidence in the earnings outlook is now being challenged via the Fed's new caution about
the future of QE 4.

The Fed: Let's Try For The Best Of Both Worlds

Minutes of the late Jan. FOMC meeting show a Fed planning to keep the large QE program
going, but in deference to the inflation hawks, plans are afoot to look over alternatives
which feature possible modifications that could wind up reducing the $ volume of QE.
Has the Board lost its collective nerve? Well, not quite yet as I will endeavor to point out.
First, let me say uneqivocally that I regard this kind of ambivalence as bullshit. The
instruments the Fed has at its disposals are large hammers and not the tools one could use to
fine tune anything. You either need the bigger hammer or you do not.

The game here as I see it is that the Fed desires to push QE 4 along but is afraid that strong
liquidity flow into the financial system could weaken the dollar and set off hefty speculation
by financial types in the oil and commodities markets. I doubt the Fed stays up late nights
worrying about what the prices of gold and silver might do except in so far as rallies in
PMs  might re-inforce the speculation in oil and commodities. The Fed's concern here is that
a run-up in commodites will accelerate inflation and pinch real incomes which are already
under pressure from the recent increase in the payroll tax. By crying wolf as they allow the
beast to roam, the FOMC hopes to keep folks from running up the prices in the oil / fuels
complex via concern that the Fed may curtail QE and leave the guyz with unsustainably long
speculative positions. The Fed has spooked the PM market by adding strings to the QE $
program, but oil and gasoline players were more nervy and so the FOMC has now trotted out
its QE curtailment in "potentcy" as Aquinas might have said. This could be clever stuff as
long as the Fed does not have to cry wolf but rarely.

I see the progress the economy has made off its lows in 2009, but I am not yet convinced
economic expansion has reached self sustain mode. therefore, I am still happy to see the Fed
with a robust QE program.

The Fed has punished the gold players since latter 2012: GLD Gold Trust ( Yes, a big
test of support could lie ahead).
 

Stock Market -- Weekly

Technical
This week I return to the broad, unweighted Vale Line -A index and the NYSE advance -
decline line. I use these two measures in tandem as a sort of informal model of the stock
market.

First up is the Value Line 1700 + issues chart. $VLE  By this measure, the market is trading
at an all-time high. Using the Sep. 2011 low, my trend work suggests this market is over-
extended on the upside for the first time since the spring of last year. No red light here, but an
amber warning signal. The VLE is also overbought on RSI and MACD, and the weekly
price momentum indicator is just coming off an overbought +20%. The market is on a rising
trend, but this is a very mature rally.

Next we turn to the NYSE weekly A/D line. $NYAD The chart includes the VLE in the top
panel. Here again, we have an uptrend in breadth which is also making new highs. We also
have an overextended market reading and overbought indications for stochastic RSI (momentum)
and plain RSI. The stock market when rising tends to start to have difficulties when the
weekly A/D line begins to get tangled with its own 6 week moving average. It is running free and
clear above the 6 m/a now, and a toppy suggestion is not likely to come unless the A/D line
starts to break down against  its 6 wk. m/a. Keep this in mind.

Fundamentals
The Fed remains on a relatively vigorous QE program, with the QE trend remaining strongly
positive after a slow start last autumn. The weekly cyclical fundamental indicator has eased off
modestly in the past couple of weeks as sharp progress in the reduction of new unemployment
claims and in sensitive materials prices has ebbed. Continuing progress in stocks in the past
few weeks represents a divergence to the WCFI, but note as well that stock price momentum
has started to slow.

Stock Market / Economy

The rally in the market to a new cyclical high over the past seven months primarily reflects
the expectation that substantial new QE by the Fed would eventually translate into faster
business sales and earnings growth. Now the QE4 program of liquidity infusion did not
get going until early Nov. 2012. In turn, my weekly cyclical fundamental index (WCFI)
 -- a forward looking measure as far as the economy is concerned -- began to recover in
June. On balance, the advance in the stock market has mirrored the WCFI, but the economy
has yet to confirm the WCFI with an acceleration in growth. I have not been so concerned
with this issue because I figured that since QE 4 did not start in earnest until early Nov., it
would be best to tack on a 3-4  month lead time to the unofficial onset of QE before looking
for faster economic progress. Well, we are there now, and it is fair to look for the economy to
start performing better PDQ (quickly).

Sales and production data for Jan. '13 were not good, and it appears that the business
inventory sales / ratio is running a little higher than earlier in the recovery. Moreover,
US trade data for Dec. '12 showed both imports and exports to be flat on an extended basis.
And, to cap off matters, the WCFI has started to flatten out as well in recent weeks following
a strong initial start (Confirms the recent loss of momentum in stocks).

I do not find the stock market at all interesting as a long unless we not only see business sales
pick up soon, but get on a track that would begin to lift US sales out of the 3 - 4% pattern we
have seen for months. For me, it is unwise to bother putting capital at risk for more than a
short term trade unless I think I can earn a 10% return per annum at the minimum. The
prospect of 3 - 4% top line growth for US business is not likely to support the return hurdle
I use. The SP 500 is trading around 15X 12 month earnings and a slow struggle, modest growth
muddle - through is not going to be good enough.

The US economy needs to start performing pronto.

Weekly SPX Chart

Strategists Warn On Bonds

Way back in 1981, I was SVP and chief investment officer for NYC based and since long
gone Irving Trust (1 Wall St.). Relative to our size, the trust unit was among the biggest
bond buyers in the US. Sentiment was so bearish, I used to get the occasional phone
call from an economist on Fed Chairman Volcker's personal staff inquiring about my
job standing and whether I still liked the bond market. My stock answer was that I was on
tenuous ground but still a buyer as bonds were 1) yielding more than most companies
earned on their equity and 2) with a blended bond portfolio, we could earn out our clients'
capital inside of five years (There were call protected corporates available for 18%). It
was not the last time I faced career risk in buying bonds, but it was the most memorable.

The bull market in bonds was one of the greatest and most durable in history and also one
of the easiest to trade ever known -- far easier to trade than stocks or currencies or just
about anytrhing else. It was simply like shooting fish in a barrel.

looking at the very, very long term for bonds, it is easy to note that yields are at or near
historically low levels, and it is hardly difficult to wisely surmise that yields will not
stay so low forever. So,what to watch for.

From a finance perspective, bond yields have had two anchors: 1) a long term decline in
short term Treasury yields, and 2), a long term deceleration of inflation. A lengthy bull
market in bonds has  instilled such investor confidence that the "spread" between the 30 yr.
Treasury yield and the consumer price index measured yr/yr has shrunk dramatically.

The US 91 day T-bill now yields 0.07%. Even with economic recovery, the 36 month
centered CPI is but 2.3%. With low inflation and the Fed's ZIRP policy on the Fed Funds
Rate (FFR%), it makes perfect sense for bond yields to be low.

Now, despite an achingly slow path, the US economy is moving toward more normal
bounds and is very gradually recovering the ability to self sustain. It can still certainly
backslide, but within the next year or two, economic expansion may be stable enough
for the Fed to not only have curtailed liquidity infusions but to raise short term interest
rates. Ending ZIRP will send a shudder to the bond market, and yields might be
expected to rise dispropotionately to the initial moves up in the FFR%. as bond players
assume there will be more upside to the FFR% over time. This series of events will be
a strong bear signal for bonds at least on a cyclical basis.

But, rest assured, the near collapse of the financial system and the damage to the economy
that came with the near economic depression of 2008 - 2009 created great caution that is
only slowly dissipating and which can be set back by premature Fed tightening, stepped up
fiscal austerity or the continued punishment of the wage earner.

In the meantime, I will be watching my favorite standbys -- the direction of industrial
commodities prices and the 6 mo. % momentum of industrial production.

Financial System Liquidity

1) My broad measure of credit driven liquidity or bank funding capacity is continuing to
show accelerated growth and is now up 6.8% yr/yr. This is good news for the economy
and it is also nice to see that all major funding categories are finally on the rise. The basic
M-1 money supply is still contributing to broader liquidity growth, but it is counting for
proportionally less as time moves on.

2) Banking system total interest earning assets are up about 6% yr/yr, the minimum rate
I would like to see to sustain economic expansion. The banking system's loan book is up
about 5%, held back by continued ever so modest expansion of the real estate book as
housing activity and real estate development remain well below pre - recession levels
and as banks concentrate on booking fees for mortgage refinancing and portfolio quality
upgrading.

3) Fed Bank Credit has been expanding rapidly in recent months via the new QE program,
but assets on the Fed's book are up but 2.9% yr/yr. Since broad business sales growth rose
only 3 - 4% over the past year, the slow pace of QE measured on a 12 month basis did the
economy no favors. The practically wise course for the Fed would be to stick with the
now more rapid QE program until business and private sector credit demand strengthen
and confidence increases to levels which can allow self - sustaining economic growth.

4) Recently, the annual growth of broad credit driven liquidity did exceed the advance in
business sales measured yr/yr, thus allowing liquidity to flow beyond the needs of the
real economy and primarily into equities. This flow of liquidity was last seen in late 2009
and is a measure of how tight the banking system has been in extending credit to the private
sector. Excess liquidity relative to real economic demand only helps stocks when investor
confidence is reasonably strong which it has been since mid - 2012 when the Fed first
signaled new QE. Folks have been happy to buy stocks on the premise that major new QE
from the Fed will lead to faster business growth. But, such must begin to unfold soon to
keep confidence levels up.

5) Money market fund (MMF) balances were drawn down heavily from mid - 2009 through
2011 as money flowed into the capital markets with some also finding its way into the
purchase of goods and services. Since the end of 2011, fund balances have remained
fairly steady even with scant returns on MMFs. If fund participants have invested or spent
their discretionary cash, future moves in the capital markets are more likely to remain
strongly rotational.

Stock Market Factors

The SPX closed out today at a new cyclical high to confirm the uptrend. The market is
moderately overbought against the 25 day m/a as well as against the 200 day m/a. The
SPX stands 8.2% above the 200 day m/a. Your careful attention is required when the SPX
goes to a 10% premium to its 200 m/a. The market remains extended in price compared
to its price channel up from Nov. '12. SPX And Indicators

The top panel shows the VIX or volatility index. Traders often use the VIX to measure fear
and complacency in the market. You can peg an uptrend in the market off the late Sep. 2011
interim low through the present and note that the VIX has been trending down over this period
suggesting rising confidence. When the VIX falls to a reading of 10.0, investors are seen as
smugly complacent. The current reading is now a low 13.2. When the VIX rises, players are
thought to be growing fearful. When the VIX crosses 20.0 on the way up, you should take note
as well.

My advisory / polling sentiment indicator is excessively bullish at a reading of 65.0. Over
the last couple of weeks. the index has moved up from the mid - 50s to a range of 61.0 - 63.5.
Opinion is indeed starting to warn of optimism that is cruising toward the fringe of exuberance.

The first of the bottom panels in the chart compares the relative strength of the SPX etf to the
long Treasury. Rising strength indicates players are in "risk on mode". This ratio is again up
to the substantial resistance levels seen back in 2011. No reason the ratio cannot motor up
through resistance, but good reason to know we are there now.

The final lower panel looks at the relative strength of cyclicals against the broad market and
is a good gauge of investor opinion regarding SPX earnings potential. This is an important
measure because: 1) earnings leverage resides with the cyclicals; and 2) Players like relative
strength in earnings when structuring portfolios. The uneven uptrend in the ratio shows how
carefully investors are weighing earnings potential this year.
.....................................................................................................................................................
We in the New York area are experiencing our fourth annual "Storm Of The Century", this
time in the form of a blizzard tabbed as "Nemo"... Hope the power stays on, but if not, the
next post will be a few days out.

Stock Market -- Daily Chart

The market rally, which has been humming along since mid - Nov. has hit overhead
resistance on the SPX just under the 1515 level. The market is working off a short term
overbought condition and has yet to move into a situation which would generate strong
warning signals that a significant correction may be at hand. The SPX is mildly extended
on a three month price channel basis now bounded by 1450 - 1490 and could fall to test
the 1450 - 1460 area in the short run without violating the base uptrend line in place since
mid - Nov. Since the short term seasonals call for weakness in Feb., and since a nine
month cycle price low is due this month, you may want to switch off from cruise control to
manual for a spell if you have been coasting mentally through the recent advance. SPX Daily

Global Economic Growth Momentum

Global real growth momentum tends to decelerate as an economic recovery gains in maturity.
Boom / bust indicators show powerful recovery momentum surges in both 2009 and 2010,
but growth did decelerate persistently and substantially from there when measured yr/yr and
seemed destined to start courting contraction as late as Jul. 2012. Global PMI

The global leading indicator, based on new business order flows and sensitive materials
prices, turned more positive in Aug. of last year. Its momentum suggests an end to the
deceleration of real growth, but the pick up in momentum so far has been modest and needs
to firm up further to support the profits growth acceleration which is currently being
discounted by the world's major stock markets. Moreover, with a number of countries now
employing QE programs by their central banks, global demand should strengthen enough to
support a  revival of trade to avoid the development of conflicts centered around
accusations of deliberate currency devaluation which can ultimately undermine economic
stability. A substantial re-acceleration of global trade is needed as an important safety
valve in the economic growth equation for 2013.

Commodities -- Important Resistance level Ahead

It has been my view that with broadscale central bank QE in place, the global economy
should soon experience a reversal in growth momentum from negative to positive. In
2008, the CRB Commodities Index experienced a price bubble top of near 475 before
crashing to long term support around the 200 level in early 2009. There was a strong
recovery out into 2011, but the CRB has languished since then as China, the major
commodities consumer, experienced a sharp deceleration of growth. With Beijing now
showing better production numbers, the CRB has been drifting higher again recently,
and at 305, is set to challenge the five year downtrend line in place since the 2008 top.

Index indicators for the CRB show the index is slowly turning positive, so speculation
about whether it can take out the longer run downtrend is not idle. CRB Index Chart

A break above the downtrend does not by itself imply a new longer term advance may be
in store. Commodities are too volatile for that. Moreover, the CRB would have to take out
the 370 level interim high set in Apr. 2011 to solidify the bull case.

The 320 line on the chart does reflect my judgment that 320 represents minimal long term
fair value for the index based on a macro view of the curve of production costs. It would
be disappointing not to see the CRB hit the 320 level this year especially since continued
global economic growth should be sufficient to wipe out the small amount of excess
commodities production capacity which is still apparent.

US Monetary Policy -- Looking Ahead

I keep a carefully drawn chart of Fed Bank Credit. Since the Fed first moderated QE in late
2008, they have worked hard to keep the flow of credit within a $250 bil. band. At the
present rate of expansion, Fed Credit will exceed the top of the growth band near mid -
2013. They may just allow the flow of liquidity to go  right on and exceed the top of
the band by a handsome margin, but chances are that if the economy is expanding and the
unemployment rate is coming down, more of the voting governors are going to take issue
with the current powerful trend up in credit flow and there will be a stronger voice behind
the idea of scaling down but not eliminating the QE program. FBC Chart (PDF p.7) 

This very possible surge of concern about Fed expansiveness is not a done deal, but it is
a contingency for equities and bond investors as well as currency traders that needs to be
kept in mind.

Oil Price

1) My base case for the oil price in 2013 is a range of $85 - 105 bl. WTIC to be paced
primarily by stronger demand in China and the various QE programs by major central banks
which can positively influence physical demand and price speculation from financial players.

2) Political stability issues in both the Middle East and North Africa to include a re-focus on
Iran's nuclear development program could easily pop up and drive the oil price sharply and
temporarily higher.

3) The oil price at around $97.50 bl. is now at the top of a huge pennant formation dating
back to  mid - 2008 (top of downtrend line) and early 2009 (bottom of uptrend line).
Oil Price 10 Year Chart It is interesting but not at all atypical that the oil price has not been
able to take out the price bubble highs of mid - 2008 and it is at least as interesting that the
price has settled into a very leisurely trend up from the early 2009 low. This triangle or
pennant formation looks to close out late this spring in the low $90's per.

4) Near term, oil did follow its normal late year seasonal pattern and allowed those interested
in the long side to accumulate positions. This seasonal window closed in Jan. of 2013, as oil
maintained its Dec. uptrend through a normally weak seasonal period. Feb. is also a seasonally
weak month and the market could still bow to seasonal forces (Late Feb. is usually when pit
traders and pundits put the bombers out on the tarmac to attack Iran and try to jump start a
rise off a seasonal price low).

5) The oil market is presently overbought short term and this is especially noteworthy now as
there is another month of possible pronounced seasonal weakness to work through before the
ramp up for the Northern Hemisphere driving season. WTIC Technical Chart The USO
exchange traded facility is featured in the bottom panel of the chart.

GDP -- 2012 Was A Slow Go

The fed. gov. has many ways to play with the GDP data. That is why I stopped forecasting
it over 35 years ago. I thought Q3 '12 was a politically inspired +3.1% and with the election
over, I am not surprised that the initial report for real GDP showed a -0.6%. Enough said on this.

It can be instructive to look at the data by sector, however. Consumption in real terms was a
punk +1.9% yr/yr reflecting continued heavy maldistribution of income away from the average
wage earner. Housing investment was strong as was to be expected, but business fixed
investment was up a scant 4.3% as slow broad economic growth kept capacity utilization at
low levels. Export sales ended up the year about where they were in late 2011, as global trade
slowed sharply. Total government spending -- federal, state and local -- declined in real terms
and damaged economic performance. Calls for sharper cuts in federal spending ahead look
even more stupid.

The Fed, which largely quit QE support for the better part of 18 months, must shoulder a goodly
amount of the blame for a very sluggish economy. I warned for months that the Fed was
gambling with the recovery with an extended liquidity squeeze after mid-2011, and the punk
result for 2012 bears out the concern.

The takeaway here for policy is pretty obvious and that is: do no more harm. That means
abandon raising taxes further, make no more than slight token adjustments to federal spending,
and keep QE in place at a strong level. It also again makes it clear that the administration and
the congress need to end the bozo circus sideshows and focus instead on how the gov. might
help a struggling economy move forward at a faster rate.
--------------------------------------------------------------------------------------------------------------------

Russia Stocks

Back on 12/5/12, I posted that the Russian market had some fundamental pluses in store for
2013, and that stocks had some potential. Well comrades, the market has made a fairly strong
move. Back then I pointed to the way the Russian market was shadowing the Euro stocks,
the EU being an important trade partner, and in today's update of the RTSI chart, I compare
it with the oil price. RTSI Chart  You will note that the market has no serious resistance
until the 1750 level but also note this baby is getting overbought in the short run.

Gold Price

Gold price direction fundamental indicators have turned positive over the past couple of
months following a nearly 18 month bout of weakness. With gold, I follow Fed Bank Credit,
the oil price, industrial commodities prices and global industrial production. The trends in
these indicators provide a decent enough picture of whether the gold price should be moving
up or down but viewed historically, only the oil price has provided helpful guidance on the
magnitude of swings in the gold price.

Right now the fundamentals plus my micro analysis of what the gold price should be based on
costs and a profit margin sufficient to encourage direct reinvestment suggest a gold price in a
range of $1050 - 1100 oz.

However, the gold price can also carry an enormous premium if enough investors and traders
become concerned about the potential for acute, systemic economic and financial crisis. On
the flipside, the gold price can languish when large crises are not perceived to be on the radar
as transpired over the 1983 - 2000 period.

When gold briefly topped $1900 in 2011 when fears of a Euro and EZ collapse were acute, the
crisis premium was 100% above what the ordinary fundamentals suggested. Now the crisis
premium is down to 54% as market players have become less worried about a serious blow up
in a prime economic region such as the US or the EZ.

If there is greater cyclical strength in the global economy this year, but players take this trend
as a signal that further, dramatic economic and financial upheaval may be averted or greatly
delayed, traders may opt to look for greener pastures for their money than gold even if the
ordinary fundamentals remain positive.

The daily gold chart does show the tensions in the market. Crisis fears have abated significantly
since the 2011 all-time high, but gold is nevertheless trading above the $1550 oz. support level
seen in 2012 and just as central bank chairs Bernanke and Draghi declared for fresh QE.
Daily Gold Chart

One move for traders as discussed last week (below), has been to rotate money into equities.

Stock Market -- Short Term

Weekly fundamentals continue to improve. The trend of the market remains up. The
SPX is now moderately overbought on a short term basis due to 14 day RSI and a
3% premium to the day 25 day m/a. The same holds for the intermediate term trend
based on a significant SPX premium to the 200 day m/a and the very high % of stocks
trading above their respective 200 day m/a's. SPX Chart

February could be tricky. Historically, it is a seasonally weak month and the next 9
month cycle low is due as well. Nothing biblical here, just reminders.

Rotation From Gold To Stocks

The gold price and the stock market reflect some key variables:
.... Fed policy in terms of both Fed Funds rate and monetary liquidity;
.... Leading economic indicators;
.... Trends of industrial production, sensitive materials prices and the oil price;
....  Broad measures of inflation.

Gold and stocks will often part company when investors fear severe systemic financial
problems ahead and / or when inflation is accelerating rapidly. Inflation has been a minor issue
in recent years, but fears of financial / economic armageddon have been hot button issues.

For years, smart equities players have gone long the gold market when systemic stress
anxieties have run up, and have moved back into stocks when such anxieties abate. That has
clearly been the case since the late summer of 2011 when worries about a possible collapse
of the Euro and disintegration of the EZ peaked. Since then, faster money equities players have
been rotating from gold back into stocks SPY Strength Relative To GLD

From a purely technical point of view, stocks are getting pricey relative to gold while the
SPY / GLD relative strength measure is coming up to resistance. So we are moving into an
interesting period when confidence in the potential for faster global growth in a mild and
systemically stable environment might be tested. If the idea of quiet economic progress holds
up, then the SPY / GLD ratio should easily surpass the 1.00 level this year. Keep an eye on it.

Stock Market -- Weekly

Fundamentals
The weekly cyclical fundamental indicator has turned up sharply reflecting rising sensitive
materials prices, reduced unemployment insurance claims and a stronger coincident indicator,
which measured weekly, has increased to 2.5% yr/yr. The coincident measure is not seasonally
adjusted, but it does suggest a good start for business in the new year.

The Fed continues to add more generously to its balance sheet -- a continuing positive.

Technical
The SPX remains in a confirmed uptrend. SPX Chart. Note that 12 week price momentum has
finally started to blossom after a lengthy muted period. The 40 wk or 200 day price oscillator is
positive and on a buy signal. The 6% premium of the SPX to the moving average signifies a
mild overbought condition for the intermediate term. SPX vs. 200 Day M/A

Cycle And Seasonal
The venerable 9 month cycle low is due to arrive near mid - Feb. The seasonal pattern,
distilled from long term studies, also suggests price weakness or profit taking going into and
during Feb. (Respect, but never bet the farm on theses measures.)

Sentiment
One hot topic currently is that "everybody is bullish" which is taken to imply that a downsweep
could be at hand. I use a compilation method to measure bullish sentiment from several opinion
and advisory services. An index reading of 65.0 suggests opinion is too bullish and does
carry a warning of a probable price correction not far ahead. The current reading is 55.3 and is trending higher (For comparison, the index at the market low in 3/09 was 21.7).

Stock Market -- Long Term

1) The stock market has experienced an extraordinary period over the past 16 years. There was
the classic price bubble of 1996 - 2002 and then another or "echo bubble" from 2003 - 2009.
Both markets saw very powerful cyclical earnings performance and elevated price / earnings
ratios and both ended with very large earnings declines, especially when one looks at net
per share as originally reported and to include all the writeoffs and one time charges.

2) In my view, the SP 500 remains in a long term bull market dating back to the end of WW2,
when the focus of buying stocks largely to reflect earnings and dividend growth first took hold.
We have not reached the end of this epoch yet.

3) I have attached the Yahoo! long term SP 500 with log scale. SP 500 Chart To form a band,
I would anchor the low part of the channel with 1950 and 1980 as thr bases, and for the top of
channel, I suggest drawing a trend line up from highs recorded over the late 1950s and 1960s.
The bubbles of the past 15 years exceeded the top of the upper band of the channel and the
bottom in 2009 came in about 10% over the bottom of the channel. Time will tell of course,
but the Mar. 2009 low could be a very substantial one.

4) What is interesting to me about the chart now is that the SP 500 is starting to inch up to the
top end of the channel which stands at around 1700 for 2013. The index stands at 12.6% below
the top of the channel, and wouldn't you know it, SP 500 net per share stands very close to the
top of the 1950 - 2013 channel for earnings. Viewed over the very long term, price and net
per share performance now stand in decent balance. There seems to me there is no good
reason not to look for the SP 500 to go on to new all time highs as long as the current economic
expansion stays intact.

5) The price chart also suggests to me that if it is true that grand bull markets have three clear
uplegs, then the final leg up for the "invest for growth" era could be underway. But, do not jump
too far ahead of the story. Even though the 400 industrial companies composite within the SP
500 is on to new high ground as is the NYSE A/D line, we ain't there yet for the lagging 500.

Business Profits & The Stock Market

1) SP 500 net per share measured quarterly have been flat now for 18 months on both
decelerating sales growth and modest profit margin pressure. Leading economic
indicators, both weekly and monthly, are signaling an upturn in the US economy. My
coincident indicators (measured yr/yr) have moved up from a very sluggish 1.2% for Oct.
to 1.6% through year's end. Most important for the market, the Fed has embarked on a
strong new program of QE. Although economic data do not yet reflect the rise in the payroll
tax and how it might impact consumer spending, the indicators on balance point to faster
business sales and earnings growth. Good thing, too as it is doubtful investors are going to
stay interested in the market without confirmation from improving earnings. The market has
been discounting a bounce in sales and profits for over 6 months and it will become
increasingly vulnerable without stronger, positive news on the economy early this year.

2) SP 500 eps is now running about 22% above the very long trend line for earnings. This is
not at all unusual during an economic growth period. You should also note that during extended
periods of sales and earnings growth, net per share can stay well above the long term trend for
a lengthy period of time. Also note, that to have a long economic cycle, a range of balances
need to be struck between various measures of economic supply and demand. My view since
early 2009 is that the US, coming out of such a deep recession, has a good chance for a lengthy
expansion period, but note the prior post for drag factors that could upset the apple cart.

3) Earnings rarely rise or fall more than one very broad standard deviation from trend. When
net per share has risen well above one standard deviation over trend, the recession which
follows brings a larger than normal decline in earnings. SP 500 net earns. is now running about
$10 or 10% below the upper band of the long term channel. So, a strong year in 2013 would
set up a rather early warning signal about the cyclical durability of eps.

4) Return on equity at book value is now running about 15.5% for the SP 500. The earnings
plowback ratio is now running 67%. ROE% x Plowback = implied growth. 15.5% x 67%
gives you implicit growth of 10.4%. History does not suggest a bright new era. History does
suggest companies are retaining too much of earnings to make share buybacks and to do deals.
the huge writeoffs we have seen at the end of the past two expansion periods in this first
decade of the new century attest to that (Let's hope the Rio Tinto and Hewlett Packard fiascos
are not the opening wedge of a wave of new writeoffs resulting from dopey CEO empire
building). Shareholders would be better served by higher dividend payout ratios.

Stock Market -- 2013

The US starts the year with ample resources of physical capacity, labor and financial
capital. The country is in the midst of the most powerful liquidity cycle since the 1930s
which would normally assure both an advancing economy and stock market. Since the
inflation rate has been tame in the recovery environment, the stock market should be
trading at an elevated p/e ratio, and with $100 per share earning power, the SP 500
should be trading in a range of 1650 - 1700 and not the low 1480s.

But there are significant drag factors. The Great Recession, now more than 3 years past,
has left the private sector with a shared case of post traumatic stress syndrome. Consumers
have been spending, but have also worked to reduce debt exposure. Bankers, who threw
money at people over the 2004 - 2007 period, have just begun to slide out from hiding
under their desks and do some lending. Business as a group has been accumulating cash at
almost no return, and has been maintaining a salary policy which enriches the top guys at
firms and impoverishes the rank and file through reduced real wages for over a decade.
Even the Fed, which has greatly expanded its balance sheet as it should have during the
recovery, has instituted temporary bouts of liquidity shrinkage which have introduced
volatility into the economy and the markets and which have undermined one of the most
precious commodities in hard times -- confidence. Official Washington is meanwhile
engaged in a center vs right battle over raising taxes and cutting spending when it should
be looking at how to grow the US economy and to define its role in positioning the US
to perform well in a changing global economy. Austerity measures are for boom times,
not for times when folks are down on their luck, which they still surely are.

So, when I look at the stock market's potential for this year and next, I see strong positive
forces arrayed against large batteries of scaredy cats, corporate piggy dudes and a nation's
capital that is mired in doubts (the Fed) and political squabbles based on incorrect
perspective and destructive impulses.

Keep up your courage chairman Bernanke and maybe we can snatch victory from the jaws
of defeat.

Profits & Economic Indicators

Corporate Profits
Since the spring of 2010, business sales momentum measured yr/yr has declined from
+10 - 12% down to +3 - 4 as 2012 ended. Historically, when sales growth has dropped
below 5% yr/yr, it has been difficult to maintain profit margin and this time is no different
although my indicators suggest only minor pressure. Top line data is consistent with modest
progress in profits. I would also note that when my top line sales indicator drops below 5%
it signals vulnerability to further sales weakness ahead although not necessarily a recession.
Decelerating Production Growth

Forward Looking Economic Indicators
The leading indicators I follow remain in an uptrend but have been unusually volatile during
this economic recovery. No recession has been indicated, but there have been low points
in each of the past three years which have triggered QE responses from the Fed. The last
of these low points occurred in mid - 2012, and since then, the forward looking measures,
both weekly and monthly, have turned up mildly, with new orders measures for the industrial
sector improving but nominally. On balance though the forwards suggest a mild degree of
acceleration of business sales (and profits) in early 2013 (But, see final paragraph below).

Coincident Economic Indicators
Mine reflect momentum of real retail sales, production, employment growth and real wages
put on a combined basis and measured yr/yr. On my scale, +3% yr/yr for the group
represents solid growth, with +1.5% indicative of anemic growth. The US closed out 2012
with a reading of 1.6% yr/yr. That's a little better than The Oct. '12 reading of 1.2%, but is
still on the slow side.

Inflation gauges are still rather mild, but real take home pay could still take a hit of up to 2%
this year with the payroll tax returning back up to 6%. To keep retail sales growing, consumers
can hope for better wage gains this year, but may have to dip more into savings and increase the
use of credit to keep retail afloat. This change in fiscal poilicy can clearly work against Fed
QE, although we'll have to wait and see by how much.

Financial System Liquidity Factors

Cash & Checkables
The basic money supply M-1 has increased by 13.5% over the past year. When credit
demand growth is low, it is vital for the Fed to supply the system with monetary liquidity
to keep the economic recovery on track. More vigorous private sector credit demand in
2013 might well pressure the Fed to cut back on the now generous QE program.

Credit Funding & Demand
My broad measure of financial system liquidity increased by 6.4% over the past year. This is
the strongest reading since Nov. 2007 and indicates that system liquidity is finally approaching
levels needed to support economic recovery for the private sector. Note though that the strong
growth of the basic money supply has played a major role in allowing liquidity to expand
since mid - 2008 but that non - money sources of funding are now rising as well.

The banking system loan book (excluding the Fed) has been recovering modestly since early
2011, but, reflecting the depth of the past recession and tighter loan policies, is just now
at prior record levels seen in the autumn of 2008. Interestingly, by mid - 2008, the banking
system's loan book was running about $1.5 tril. or a whopping 31% over the long term growth
rate of 6%. The loan book is just about at the long term trend line now, and this signals still
tight demand as the loan book tends to jump moderately over the 6% trend during economic
expansion periods.

The Fed did push forth QE 4 partly because private sector loan growth had decelerated as
2012 wound down. The Fed is doing its bit to foster faster credit growth in 2013. I have
included an interactive chart from the Fed which you can use to measure the growth of all the
major interest earning asset categories since the mid - 1980s. Good stuff for chart buffs.
Banking System Credit Chart

Cash Reserves
The market meltdowns of 2008 - early 2009, led to a jump in the total of money market fund
(MMF) balance of roughly $700 bil. to $3.6 tril. by the spring of 2009. Over the following
two years, the MMF balance declined from the $3.6 tril level to $2.4 tril. as investors moved
back into stocks as well as buying a boat load of Treasuries and private sector bonds. MMF
balances have been relatively stable over the past 18 months, with new flows and reinvestment
proceeds going into the markets and elsewhere, but with ending balances held firm.

The total MMF balance can be drawn down further, but the recent extended stability of ending
balances does suggest that preference for capital assets may now involve rotational moves
between categories such as stocks, bonds, PMs and real estate. So, for example, a strong
stock market for this year could again come at the expense of the bond market while an expanding
economy could also draw far more resources to real estate development and investment.

Stock Market -- Weekly

Fundamentals
The weekly cyclical fundamental indicator continues in a mild but volatile uptrend. The
volatility is traceable to initial unemployment claims date which, in turn, reflects the
interruption of business as usual by Hurricane Sandy. Effects of this shake up should be
about complete.

The Fed has accelerated the current round of QE. This remains a positive, but it should be
noted that the FOMC is running a bit low in implementation and also that Its balance sheet
has yet to exceed the all - times highs set in late 2011 / early 2012.

Technical
I am back to the weekly for the SPX. SPX Chart I did finally get a buy signal on the this
chart this week, a signal which has come late owing to the tame momentum of the advance
over the past three months (See ROC% in chart).

I did not play this rally because I have been trading only deep oversolds on the long side.
Based on the 40 wk price oscillator, rallies from very shallow oversolds have very seldom
been powerful through history, so I am reluctant to say this current but belated buy signal
will have that much "juice" on the upside. Rallies of the sort we have seen over the past
six months are typical of an advanced cyclical bull market.

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I am updating my SP 500 earnings models and will post on such one day next week along
with a longer term SPX chart.

China Stock Market Divergence Resolved

Last month I discussed how the Shanghai Composite remained in a pronounced bear market
even in view of rising China based indices which focused on the larger companies the
China authorities leave open to foreign investment. Using traditional western standards, the
case for anticipating a cyclical bull market fell into place in early 2012 as monetary policy
eased and economic momentum began to stabilize. Perhaps there was an awaiting of the
announcement of the new leadership and their respective portfolios before the boys hit
the green light. The Gov. appears to want to give the Shanghai index a better standing. The
exchange is pressuring listed companies to institute and pay out higher dividend rates and
authorities appear to strongly desire to limit real estate speculation all of which could provide
more stability for the highly volatile Shanghai which players have used to try and build "kittys"
to play the more highly esteemed real estate markets.

There has finally been a sharp positive turn for the index which started as 2012 drew to a close.
The impulse has been strong enough to reverse a downtrend in place for several years duration
and the market has crossed above its 200 day EMA to stand around 2275. Projections for
China's  growth vary greatly, but if you take formal assumption from the authorities of 7% real
GDP  growth, the SSEC should trade eventually up around 2700. Shanghai Composite

Commodities Market

The global economy did grow over the past 18 months, but production growth has
continued to decelerate over this period, and significant spare capcity is evident. In
China, the major buyer of a broad range of commodities, mean annual production growth
over the past decade has averaged 15% per annum. however, even with the recent pick
up in production growth to 10% yr/yr, China likely is growing along with depressed
operating rates. Slower global growth and significant excess capacity in China has
continued to pressure commodities prices. CRB Commodities Composite

There was a burst of improvement in the CRB in the early summer of 2012 as the Fed
began to talk up further QE. At about the same time, China's production growth trend
bottomed and began to improve at a modest pace. The decline in the CRB Index to the
270 level did provide a nice long side trade starting in June, but the market has given
up a fair amount of ground since in the absence of a re-acceleration of global growth.

By my stripped down econometric model, there is presently economic slack with the CRB
trading below the 320 area. With considerably stronger global production growth, the model
suggests the CRB should trade between 320 - 380 during 2013. With the index now at
295, it is evident that more slack needs to come out of the system and that speculative
financial interest in this market remains well muted now despite various QE programs.
The indicators for the CRB have a slight positive bias and interestingly, the index is putting
in a short term base right under the 50 and 200 day m/a's. It is distressing that with the
recent popularity of the "risk on" trade, the CRB has yet to again reverse to the upside.
There are many financial market types who have speculated in this market over the past 5-7
years, and, given its volatility, there are probably many cases of "burned fingers". Keep an
eye on it.

Stock Market -- Weekly

Fundamentals
My weekly cyclical fundamental indicator (WCFI) finished up 2012 on a strong note.
Through the first trading week in in Jan. 2013, the WCFI rose 10.8% from year end 2012.
This compares to a + 16.5% up move for the SPX. Part of the difference reflects only a
6.2% rise for the sensitive materials price component, but the bulk of the differential
stems from the QE programs from the Fed (which are not in the WCFI). The stock market
has responded very positively to the major QE effort, despite the volatility that surrounded
the fiscal cliff saga around year's end. The Fed is ambivalent about how long to push on
with the large QE now in place and has attached an inflation "string" to it, but through
history, the market has rarely failed to respond positively to sizable quantitative easing
and very low short term interest rates. The stock market is discounting an eventual
significant move up in profits for 2013 and is running well ahead of developments for
sales and earnings at this point.

Technicals
This week I take a different cut. I like to watch the movement of a broad, unweighted stock
index and I prefer the Value Line Arithmetic Index ($VLE), which features over 1700 stocks. In
tandem, I keep an eye on the cumulative NYSE advance / decline line. The NYSE  A/D is
basically a very broad mid - and smaller sized capitalization measure.

The $VLE has just surged to a new all time high. It is in a strong uptrend off the 2011 interim
low, but is now moderately overbought against its 40 wk. m/a and is approaching overbought
on shorter term measures as well. $VLE Chart:  http://stockcharts.com/h-sc/ui?s=$VLE&p=W&yr=3&mn=0&dy=0&id=p55102470047 It could be niggling on my part, but
the MACD in the lower panel needs to establish a much smoother trend up in the weeks ahead
or else it would be fair to suspect the market's trend.

The bottom panel of the chart shows the strength of $VLE relative to the SP 500. Notice the
positive reversal in relative strength for the $VLE as 2012 worked to an end. This shows
action by investors to position themselves more aggressively to capitalize on the assumed
benefits to the economy and profits from QE and also is an expression of conviction that
the dollar will not rise sharply to allow foreign firms to penetrate smaller US growth sectors.

The next chart shows the cumulative weekly NYSE A/D line. It reveals that the NYSE A/D
has also reached a new all time high as well and that it is getting overbought against its
6 wk. m/a. Note too, that it is getting elevated on RSI and is also a little shaky on its MACD.
NYSE A/D Chart

The market is clearly up on price and breadth trends. The shaky MACDs may merely reflect
interference from the volatility caused by the fiscal cliff brouhaha. But as most of you know,
there is more to come on the fiscal front as there will be a request to raise the debt ceiling
(Feb.) and Obama and the Congress will have to address the mandated spending cuts in
Mar. The talk in the capitol is already getting nasty and threatening. More markets volatility
may lie ahead. As well, most US workers are going to see take home pay recede by up to
2% as the increase in the payroll tax takes hold. There could be a jolt here, too.

US Long Treasury Bond

The yield on the long guy has been trending up since 7/12. The market took its cue from
the Bernanke promise to re-engage QE programs and just as industrial commodities price
indices began to turn up. The T-bond market remains as highly sensitive to the direction
of industrial raw prices as ever. Now I use a 6 mo. momentum indicator which combines
production with sensitive materials prices to give me a a little bit of a longer term
perspective on the direction of yields. This indicator has also recently turned up but is
still comparatively quiet. Nevertheless, the fundamentals have turned in favor of higher
yields. I would note that although my production / industrial pricing indicator has turned
up, there has yet to be a decisive positive reversal of momentum on a trend basis. The
implication here is that if US and global business pick up strength in the months ahead,
the long Treasury yield could climb sharply while the bond's price falls.

I have included a long T-bond yield chart with the bond's price in the bottom panel.
30 Yr. T-Bond Yield  Note the line at the 3.50% level. Should the yield rise to 3.50%,
I'll add the bond back to my list of tradeables. Note as well the reversal of trend that has
occurred following a nearly 18 month downswing in yield. Experience says "Respect
that".

I have also included a 5 year chart of industrial commodities input costs. The chart runs
through 11/12 and does not reflect another significant 3% jump in the index for Dec. '12.
Index Mundi IC

Both the T-bond yield and sensitive materials prices do ok as leading economic indicators
in my book.

US Economy -- Outlook Sketchy

In terms of physical capital, the US now stands at levels seen after a garden variety
recession. Both capacity utilization and the unemployment rate have recovered significantly
from very depressed levels. So has banking balance sheet liquidity and capital bounced
back from deep lows. As all know, housing and construction activity remain depressed.
The Fed is providing ample monetary liquidity and interest rates remain low.

Viewed long term against its potential, business sales, although at an all time high, remain
about 20% below trend reflecting not only slow domestic demand growth since 2001, but
a significant loss of market share to imports. Profits, however, are around record levels
reflecting both stronger offshore growth as well as a surge in the price / cost ratio as wages
have remained painfully tame and productivity growth has been strong. So, profit margins
have been exceptional.

The economy has been recovering for about 3 1/2 years, and since the US has moved up from
a very deep bottom to levels that are normal for recession lows based on physical capital, the
economy has the potential to grow for about another 4 years if it can maintain decent balance.

Per worker real income has remained weak during the recovery from 2009, and to develop
a moderate growth scenario, demand for goods and services must accelerate to foster sales
and production rapid enough to generate at least 2% annual employment growth going
forward. The stronger level of jobs growth is needed to provide aggregate income growth
to support demand. With individual wages growing slowly, the void between income and
demand must be filled by credit growth and, perhaps, the further drawdown of household
savings.This is not an unusual challenge. After all, home and auto purchases as well as
sending kids to college are all funded with liberal amounts of borrowing. But do not forget
that confidence has recovered very slowly.

The sketchiness in the outlook reflects several factors. Wage increases of 1 - 2% are very
low and are not conducive to confidence. Individuals have also been delevering and
using debt more sparingly. Because strongly accomodative monetary policy can drive
commodities speculation, modest incomes can be punished further by even mild bouts
of accelerated inflation. And, let's not forget the banks. Lenders remain very conservative
and are clipping consumers especially with loan rates that are high relative to the cost of
funds.

Let consumers get concerned about rising gasoline prices or a stall out in the recovery of
housing prices and still low confidence levels could erode further, damaging the economy.

And let me say that collectively, business continues to act stupidly. With much better
earnings and low dividend payout ratios, CEOs are buying in stock at elevated prices but
are still accumulating far more cash than they need, which suppresses the returns earned
on assets and leads to a mal - distribution of money within the economy as shareholders and
employees do not share in the rakeoff of profits as top management does. Fat cats get but
fatter.

It remains a hard grind to keep balance between income and demand reasonable enough
to generate the demand that will fill more purses and spread the return to prosperity. And,
wouldn't much stronger income growth boost tax revenues to better cope with US budget
issues.

Stock Market -- Technical

My favorite daily, weekly and monthly price charts closed out 2012 flat neutral, leaving
the early weeks of 2013 to signal direction. The charts basically the future a well guarded
secret. I mentioned recently that the technical side of the market might be of limited utility
in view of investor and trader pre-occupation with the fiscal cliff show and other very
short term fundamentals. With today's boffo strong opening for the year, it may be the case
that very short term senitment or emotion may dominate for a bit, as resolution of the
cliff issues have twists and turns ahead. Moreover, the initial move on taxes is a net negative
for the economy as it will reduce take home pay for most US workers owing to the shifting
of the payroll tax from 4.2% to 6.2% -- a 2% hit to income for the many around $50K.
Today's glee could see a more sober view out ahead.

The selloff in the SPX going into the end of the year reduced the angle of ascent for the rally
in place since mid - Nov. Today's spike took the SPX to a short term over - extended  point
and to enough of a premium to the 25 day m/a to invite fast money profit taking. SPX Daily
The trend band off the Nov. interim low is wide enough to allow elevated volatility.

The red horizontal line on the chart shows the cyclical high to date for the SPX, and the green
HZL line shows 5 year resistance at 1400. It is good that the SPX is spending more time above
long term resistance and it would also be nice if the SPX can take out the prior cyclical highs
in that 1460 - 1465 bracket.