Oil Price -- How Crazy Can It Get?

Light Sweet Crude hit $119.50 bl. today. Not a bad move, given
that crude touched $50 in Jan. '07. For my part, this is simply
another market mania evolving into a price bubble. And my
charts say the bubble level is $170 bl., double the breakout from
the long term trend of $85 bl. back in Sep. '07. Whether the price
extends up to $170 or not, I have no idea. Saxo Bank's strategist
has oil hitting $175 by late '08 and sees chaotic economic and
currency conditions as a result. A further sharp run-up in price
from the current level will turn the background noise of consumer
discontent into a roar, with unpredictable consequences, save for
eventual retribution for OPEC. Piggy Asian food exporters are now
also trying to cartelize the export of rice and grains, with this latest
insult serving to create increasingly widespread unrest among the
world's poor, who cannot afford these prices.

There is no shortage of managers of large pools of funds out there
who think they can enjoy the run and manage their risk in rapid
market conditions. Morever, if you are a manager who grows fearful
as the price of oil edges ever higher, you can lose your accounts if
manic attitudes remain after the plug has been pulled.

If you are playing this market, you best make damned sure you
know what you are doing because a concert of unexpected bad news
can easily take $40 - 50 bl. off your position and crush you out.

Stock Market -- Technical (SP 500 @ 1390)

Well, the shorter term trend is up, and the intermediate term
trend has turned up as well. The market has broke above the
downtrend line running back to 12/07 and is very close to
challenging the down line running from the 10/07 high.

The market is now moderately overbought short term. The
current advance has taken out all shorter run resistance save
for a close just under 1400 on the SP 500. That failure to wipe
out the 1395-1400 level set off selling today, and we could see
some more on Monday as some of the ruthless players take profits.

It is a tricky time now, as there is enough of an up-channel off
the 3/08 lows to withstand a sharp 30 - 40 point downdraft in
the SP 500 before you could claim with assurance that the
bears were back.

Chasing on the long side could be risky next week until we see
what the bears have in store.

Stock Market -- Technical

Officially, I guess, the current advance off the March lows counts as
a bear market rally. Shorter term trend indicators are positive. The
SP 500 at 1365 is mildly overbought relative to the short run trend.
The index also faces several discrete resistance levels from 1370
clear up to 1400. The weekly intermediate term indicators are also
rounding positive, suggesting further upside may lie ahead. These
largely momentum indicators have been trending negative since Jan.
of this year, so reversals require mention. I also like the weakening
in the 15 month-long uptrend in the $VIX.

But, look, first things first. Let's see how well the market starts to
challenge resistance, remembering that in a bear market, signs of
weakness in a countertrend rally often summon swift retribution
from the bears.

I am also watching the oil price relative to the stock market. The
stock rally has fared ok recently against a rising oil price, but there
is no shortage of players out there who act to crimp the market's
p/e ratio when inflationary pressures are evident.

For an intermediate term look at the SP 500, click here.

Business Inventories

Through 2/08, total business inventories growth has accelerated
to 8.7% annualized. That is much faster than the growth of final
demand, so we are now seeing some involuntary inventory
accumulation. Ballooning inventories can make a downturn far
worse if they are not brought quickly to heel. So far in this cycle,
inventory management has been keen, and one might expect a
fast adjustment. However, you need to watch inventory data
very carefully once a downturn has started, because it can be a big
risk factor in the outlook. Fortunately, end-stage or retail inventories
do seem to be under good control, at least through February.

BS Warning

2008 is national election year, and with all that is at stake among the
political players and their minions and friends, you will find that even
independent economists and analysts are not immune to "spinning" for
their favorites. Most of the BS is deliberate but some springs forth
from the unconscious, so to speak. When reading the economists and
pundits on the US and its problems, get a second opinion.

GE Sends A Jolt

As a huge and widely diversified cyclical company, GE is widely
regarded for its comparative stability and its ability to manage
earnings to a forecast. So, the eps shortfall, mild as it was, shocked
the large players who have big positions in the stock. It did not help
that CEO Immelt gave a lame explanation for the shortfall and its
failure to warn analysts ahead of time will cost them points.

But, come on, Bernanke and other economists have been warning
for months that growth was at risk. At any rate, I bring this up
because the GE announcement spooked investors who were
supposed to be looking through the first quarter to recovery later in
the year. With the bulk of Q1 earnings reports ahead, folks might start
wondering that if GE can have "unexpected" trouble, then how many
other disappointments lie lurking in the tall weeds. Shows you that
investor nervousness and concern may still be hovering.

Stock Market Fundamentals

The SP500 Market tracker continues to sit around the 1300 level.
So, with the "500" now trading 1350-1360, investors have been
endeavoring to look beyond the current situation to a brighter
future. Short rates are falling, monetary liquidity is expanding
more rapidly, the yield curve is positive, intermediate quality and
junk bond yields have been inching down, and all know the US is
in for a round of tax rebates designed to provide a mild spur to
consumption. Investors also likely expect that there will be some
degree of positive swing to earnings of the financials later in the
year.

But there are significant uncertainties. Earnings estimates are still
being cut, and the present quarterly earnings reporting period is
being carefully watched to gauge the breadth and depth of eps
shortfalls. Moreover, the commodities price boom , although
narrowing, is still intact, leaving the risk of further inflation
pressure going forward. The financial system in the US is widely
perceived as remaining under duress, and key indicators such as
short term yield quality spreads and the very slow improvement
in the growth of credit driven liquidity reflect the pressures within
the system.

For now, I am watching the inflation potential inherent in the
ongoing round of heavy speculation in commodities most closely,
as a continuing surge in fuels and other basics would damage the real
economy further. At this point I doubt I would mind much if the
Fed decided to take a pass on cutting short rates again for a while
to assess its handiwork to date. I think it is fair to wonder if that
might jolt the commodities speculators enough to allow underlying
supply / demand fundamentals to regain more focus and attention.

Stock Market -- Technical

The urgent oversold discussed in the mid-March posts on the market
did yield a strong and tradable rally. My six week selling pressure
gauge, which hit deep oversold levels during the middle of last month,
has since moved into neutral territory. The market is also moderately
overbought against its 25 day m/a at +3.3%. The 25 m/a has also
upticked, a positive indication.

Early in the day, the SP 500, which closed around 1373, did move up to
test resistance above 1380. The test failed. This triggered a mechanical
short term sell signal for some short term traders. As well, the market
has been unable to close decisively above a closing price only downtrend
line (1368 today). All perhaps minutiae in the long run, but not to short
term players.

Now the market is close to an intermediate term positive turn in my book,
so I think the action this week may be important.

From an inter-market perspective, the rapid recovery of the oil price
from its recent $100 bl. low back above $109 is something to keep in
sharp focus. Oil and gasoline prices remain in firm longer term uptrends
and that price action is inflationary, which is, in turn, a threat to the
stock market p/e ratio.

I link to an SP500 chart below and plan to comment on the technical
tea leaves later in the week. Click.

Economic Indicators

Weekly leading indicator sets made new cyclical lows. The peak to current
declines are large enough to signal a substantial downturn could be underway.

The monthly data for March show a continuing downturn. They suggest
ongoing pressure on US profit margins, but are not yet weak enough to signal
that a recession is underway. The employment picture is consistent with
development of a recession, but production and new order activity are not.

The monthly global indicators show the world economy slowing toward
modest expansion, with the US leading the way down. Since private sector
activity levels for production and services are below prior year levels, it
will be interesting to see how much profits earned abroad offset weaker US
profits among US multinationals.

As recently discussed, US longer term indicators have turned positive, but
remain subdued. Underlying purchasing power to support the US economy
continues at -0.5% measured yr/yr. This is comprised of -0.1% for total
employment and -0.4% for the real wage. Growth of current $ wages has started
to slow as is normal in a downturn. Fortunately, inflation pressure has
subsided as we move into April, although the longer run trend is still intact.
Since the end of WW2, steep economic declines have been associated with
yr/yr drops of underlying purchasing power of -3 to-4%.

Inflation Potential

The broad market for commodities has eased off in recent weeks
following a very powerful run. The weakness has taken momentum
out of my inflation thrust indicator. Now, as it turns out, a degree
of weakness in the broader market is not uncommon during the
spring months, and would not normally be worth much comment
except that it has come at a time of growing evidence of a global
economic slowdown, paced by a weakening US economy. Moreover,
an increasing number of market commentators have been pointing
out how frothy these major sub-components have become, not
the least of which is the oil price. I have pointed out several times
how overextended the major components are in recent months,
so I find it may be intriguing to see if there is more downside
follow-through ahead.

The oil price, a major driver of inflation, remains in an ominous
uptrend that threatens economic stability. At close to $101 bl.,
it is off roughly 10% from recent top prints, but really needs
to break and stay below $100 a bl. to provide a stronger case
that the speculative fever may have broken. At present levels
we are still in mania-land.

The wobbly picture for commodities has shaken the gold price
down from the $1000 oz. la-la land and has also helped the
stock market, which has had to contend with weaker earnings
and accelerating inflation.

Corporate Profits

US corporate profits rose by 2.5% yr/yr through Q4 '07 to $1.57
trillion. Domestic profits fell 6.5% to $1.17 tril. and earnings from
abroad surged 42.8% to $397 bil.

The major reason for down US profits was the large $85 bil. hit
to the financial sector reflecting the big loan losses and writeoffs
incurred. That left financial profits down at the$400 bil. level.
But, with a broadening economic slowdown underway, non-
financial profits began to slide over the second half of the year,
declining at a an 8.2% annual rate.

The surge in offshore earnings reflected stronger growth compared
to the US, and the beneficial effects of a significantly weaker US $
via translation gains.

Looking forward, the financial sector will experience additional
writedowns through mid-2008, but could bounce back sharply by
late in the year, since the bulk of the losses were absorbed in the
final months of 2007. With a broadening of the economic downturn,
non-finance profits seem set to weaken further, with a bottom
point not likely until well into the second half of this year.

Moreover, since the global economy is losing growth momentum,
it is difficult to step up and call for another big 40% up year from
foreign operations.

My figuring leaves the outlook for earnings this year more muted
than consensus. By the way, analysts have turned to cutting
estimates again as the year progresses.

Now, if you remember how the game works, if the economy begins
to regain some positive traction by Q3 of this year, The Street will
shift focus to 2009, and will likely put up some dazzling estimates.

For now though, earnings appear on course to lose more momentum.
I'll be particularly interested to see how well offshore profits come
in over the first two Qs of the current year.

Liquidity Factors

Recent data suggest the Fed has changed policy to a more full blooded
easing. It has been reducing the FFR% and now appears to be adding
some monetary liquidity to the system. The Fed has "sterilized" the vast
bulk of its term swap facilities to banks and primary dealers by having
the Open Market Desk sell Treasuries in amounts comparable to what
it has swapped out in exchange for the very much less liquid private
sector finance paper. Still, total Fed Bank Credit has been growing
more rapidly since last autumn. Specifically, total Fed Bank Credit has
grown at a 5.6% annual rate over the past six months. This compares to
a paltry 1.3% annualized rate of growth for the prior six months. This
development, coupled with falling short rates constitutes an important
positive for the economy down the road.

The much broader measure of credit driven liquidity has also begun to
accelerate in growth, rising at a 4.7% annual rate since mid-2006. The
improvement here has come far more slowly, mainly reflecting
continued weakness in the asset-backed commercial paper market.
The Fed has also been concerned about the large rate spreads that have
opened up for A2/P2 and lesser paper against prime paper. Moreover,
private sector paper continues to trade at yield levels well above short
Treasuries as investors continue to fly to quality. In short, there have
been improvements in liquidity, but the system remains far off kilter.

The liquidity improvements to date were far too tepid to stave off an
economic downturn and are still shy of what's needed to help put the
economy on a much stronger footing, but you need to be aware that the
system is repairing despite the gravity of so many comments in the
media. Ditto the banking system where loans are improving modestly
along with a decent recovery of primary capital.

US Economy

It is silly to compete with all the learned economic forecasts
out there. So, I will provide but a brief sketch of what my
indicators suggest:

Cyclical growth potential is now negative at -0.2% reflecting
weakening employment and a modest contraction of the real wage.

Shorter term leading economic indicators are weakening further,
but so far signal only a shallow downturn.

Performance of my longer term indicators over the past eighteen
months are consistent with development of a recession and very
sluggish period through mid-2009.

The longer term indicators are turning decidedly positive now.

My profits indicators require more than normal elucidation.
Financial service revenues and net revenue spreads before
chargeoffs have slowed, but are decent. The chargeoffs as all
know have been huge and will be a factor through mid-2008.
The "average" non-financial is experiencing mild margin pressure
in US ops. but offshore earnings have been strong and may
just be starting to show some wear and tear.

Analysts expect SP 500 net per share to jump to 100 in
sustainable earning power by the end of 2008. That looks too
high from today's perspective ( current 12 mos. eps of 81.25).

Inflation thrust, recently dominated by commodities action,
has hit a brick wall, at least for the short run. That's a positive
for the real wage, confidence and the stock market's p/e multiple.

Based on long term history, the cut in the Fed Funds rate to
2.25% is enough to help underwrite an eventual economic
recovery (Better than 50% off the cyclical peak of 5.25%).

Stock Market Quickie

The market powered ahead again today. I pointed out the
interesting oversold earlier in the week and have also
discussed how damaging the frothy run -up in commodities
was to the market p/e and real incomes. We have witnessed
a sharp break in oil and other key rotgut that sharply
demotes the shorter term inflation outlook and has triggered
a nice relief rally in stocks.

The break in the commodities composites, the mini - blowout in
gold and the bounce in the $USD are short term pluses for the
equities market. How long this sudden ugly turn for commods and
the metals will last is too hard to say right now. However,
with the US in a downturn and energy usage dropping, it should
come as no surprise that we are seeing corrections in hard
assets and commods. I have commented frequently on the froth
in these markets in past weeks.

It would be amusing if the primary dealers were now long the $USD
in the wake of the Fed's decision to fund their liquidity needs.
Almost as if the Fed was going long the US dollar to break the
bubbling in commods and hard assets. But we know nothing like
that ever happens, right?

I am going to swing away from the super shorter term commentary to
focus on the evolving environment in the months ahead. But I do
thank the boyz on the Street for the profitable bounce.

Stock Market

As posted on Sun. 3/16, the rally potential straight ahead
was decent enough. The market again plumbed the SP 500 low
test zone of 1260 - 1270 on Monday before pulling up on
basket trades, but today the action was far stronger and
broader. Yesterday's horrendous breadth put my selling
pressure gauge into very strong oversold territory.

The low test zone has been hit several times since mid -
January and today's action built around another 75 bp cut by
FOMC to cut the Fed Funds Rate (now 2.25%) was impressive
enough, but from a chart perspective it is still anyone's
guess whether the bears come in again and trash the rally.

There is obviously an economic downturn underway in the US,
and the hard asset/commodities crowd may have been looking
for a bigger cut in the FFR% to feed their bubbly markets.
Gold tanked this afternoon from the $1000 oz. level to $976.
I point this out, because disenchantment by the pro-inflation
crowd could help the stock market.

From my perspective,the Fed has done quite enough for awhile
in cutting rates and in liquifying the credit markets. Time
comes around once in a while to stop and survey the handiwork
to date. The Fed also needs to get nastier with Paulson and GWB.
The latter two have been functioning in this crisis like FEMA
did after Katrina. I have mentioned in prior posts that in a
crisis like this, the regulators need to allow lenders not
only to book only cash losses, but to spread them out over time
to maintain liquidity and capital. Paulson has simply not
grasped the bigger picture and has failed to use the regulatory
levers at hand properly. Sermon over.

Stock Market -- Technical Note

The week ahead will be a short one and it is likely to be
dominated by fundamental factors. The US markets are closed
for Good Friday, and Mon. - Thurs. are packed with financial
and economic news. Bear Stearns, Goldman, Lehman and Morgan
Stanley are set to report quarterly results, FOMC meets on
Tues., and there are reports coming on production and housing.

So, a minute out for a technical item. The stock market is
moderately oversold on price oscillators out through three
months, and interestingly, my buy and sell pressure gauges
(based on breadth) are in deep oversold territory. The latter
are six week measures and tend to revert to the mean more
rapidly than not. So, even though bear conditions prevail for
now, the chances for a countertrend rally are decent.

Stock Market / Fed's Expanding Role

As I write this, the market has rallied powerfully out of
the 1/08 low test zone. News this morning that the Fed is
expanding its role in liquifying the credit market triggered
a massive short squeeze and follow through by traders eager
to join the rally.

This bounce interrupts a breakaway downtrend and puts in a
short term double bottom. The rally has brought the SP 500
from a deep short term oversold to a modest one. The double
bottom is an encouraging sign in the short run, but since
powerful, brief rallies are a hallmark of a bear market, it
is too early to tell whether more extended positive action is
in order.

Today, the Fed announced expansion of its special term credit
facilities to $400 billion. It has increased these facilities
by $340 billion in less than a week. Banks and primary dealers
can offer less liquid, lower quality debt to the Fed for Treas-
uries after the private stuff has been given an appropriate
haircut. So far, the Fed has "sterilized" these acquisitions
by selling Treasuries in the open market, with the result that
the liquidity pool has improved in quality, but not in size. It
will proceed with this dual process going forward, but the new
larger scope of transactions will give them some "cover" to add
permanent reserves as needed.

Financial corp. commercial paper has contracted by roughly $550
billion since peaking in early August, 2007. Much of this
contraction is mortgage backed paper. This market has struggled
since the sub-prime crisis broke. With only a slight recovery in
outstandings and a recent new spike in quality spreads, the Fed
felt called upon to act. The $400 million in Treasuries offered
as an effective swap equals 24% of outstanding financial corp.
commercial paper. That does provide a more secure lifeline for
illiquid players in the market.

The broad measure of system liquidity I use is flat with August,
2007 levels. Without rapid improvement, the economy will remain
at considerable risk and this may eventually force the Fed to add
more permanent reserves, inflation risk notwithstanding. The new
line of term financing also allows the Fed more time to see if
the high flying commodities markets break.

Down In Flames...The Street Chuckles

Yes, the market was hammered today, but more about that in
a moment. Today, NY Gov. Eliot Spitzer (D), a stilted,
sanctimonious first termer, said he had been fingered via wire
tap for bringing a hooker down to DC for an evening of
salacious R&R. That's a felony violation of the Mann Act.
You may remember Spitzer's tireless prosecution of Street
baddies during the 2001 - 2003 market bust, when he was NY
state attorney general. Not beloved on The Street, he left
the guys laughing during an otherwise tough day.

Back to the stock market. The SP 500 made a new down cycle
closing low of 1275 today, and is now slightly above the
1260 -1270 low test zone carved out by the e-mini future back
in January. Be watchful here, as the SP500 is in breakaway
down mode again on the basis of closing prices, but is also
oversold enough to attract positive interest. Technicians are
going to watch tomorrow's action with considerable scrutiny and
so should you if you are a trader.

Stock Market Comment

Well, as it turns out, the SP500 could not hold nicely above
my Market Tracker, as discussed yesterday. Today's close of
1304, brings the "500" much closer to the 1280 - 1300 range of
the Tracker.

As discussed this past Friday, the week's end sell off set up
the bears for control this week. They got the upper hand today,
a move signaled by the poor action of the financials throughout.

An oversold condition is developing, and my selling pressure
gauge is rising quickly. Further weakness in the market over
the next 5-7 trading days would produce a deep and tradable
oversold on this important measure.

The new 2008 closing low on the SP500 will have a number of
technicians speculating about a decline to the important low
test zone of 1260 - 1270. I sure cannot discount the
possibility of another breakaway move. It would be scary
but would also spell opportunity.

My proxy for the "average stock" is the unweighted Value Line
Arithmetic index of 1700+ issues ($VLE). This index did not
make a new yearly low today and is trading above long term
support going back to last spring. It may only be that the
index is less heavily freighted by the financials than the
SP500, but it's better realtive performance is worth noting.

Stock Market -- Fundamentals

The SP500 Market Tracker has now dropped into a range of 1280-
1300. Accelerating inflation suppresses the p/e multiple and
analysts have resumed cutting estimates. Today's SP500 close of
1334 might indicate some willingness on the part of investors to
anticipate a better economic environment later in the year. The
market has held well above the intraday spike low in the 1260 -
1270 area since January even as the Market Tracker has continued
to move lower. Hardly conclusive, but worth noting.

The liquidity environment does not support a sustainable bull market.
Both monetary and credit driven liquidity are growing at subpar rates.
Importantly though, sideline and portfolio cash in aggregate are
running at high levels. Looking forward, monetary liquidity will
increase by more than 10% for a spell starting in late spring as $150
billion in IRS rebate checks are mailed out. The sideline cash and
rebates are positives, but are not indicative a stronger underlying
trend of system liquidity needed to sustain economic and profits
growth over time.

Credit quality spreads in the bond market are still widening, with
intermediate quality bond yields topping 8% and still rising. Concern
over the depth and duration of an economic downturn are still
evident. That's not a positive for stocks.

My long term dividend discount model has the SP500 fairly valued at
1410. The 5.4% discount of today's 1334 close to the DDM fair value
is also worthy of note and is a reflection of a modest degree of
investor concern for the long term.

I continue to watch the oil market and the broader commodities
composites. The powerful uptrends in evidence here are suppressing
stock prices. Rising oil / commodities have pushed up inflation,
punished real take home pay, eroded the market multiple and have
restricted the Fed in supplying liquidity to the economy. The
oil / commodities booms are in highly speculative stages, but
blow-offs of this sort can be very confounding when you are
looking for suggestions of tops.

Gold Price -- The Bubble Draweth Nigh

Gold printed slightly above $990 oz. today before an after-
noon close of $982. By my reckoning, if gold closes above
$1000 oz. any time over the next year or so, then it is in
a price bubble that could reach $1500. The $1500 price
would be a triple over the early 2006 price of $500.

If gold does cross the bubble threshold of $1000, there is
no compelling reason that it must advance to $1500 or any
price in between. Bubbles occur rarely in any market and a
double or triple over the breakout price ($500 oz. in this
case) is a reasonable range for an unreasonable price move.

If gold does enter the bubble range, it does, prima facie,
suggest substantial price upside. With the upside potential
comes large downside price risk, which I would now put at
$250 - 400 oz.

You can make good money in a bubble on the long side as long
as the fundamentals are positive. Danger comes especially
when fundamentals diverge from a rising price. But large
downside can also occur in moments of doubt which can trigger
panic even if the fundamentals do not head south. These are
facets of a high return / high risk market.

My gold price macroeconomic indicator remains in a pronounced
uptrend for now.

The near term technical situation is interesting. Gold is
strongly overbought, and is just completing a 13 month long
parabolic upmove. The situation suggests a range of short term
possibilities running from consolidation to sharp correction.

The macroeconomic indicator is available only weekly. If you are
playing the gold market and want some daily reference, I would
watch the oil price and a broad range of industrial commodities
prices.

Scroll down to the end of the 2/25/08 post on gold and you
will find a chart link that may be of interest. Good luck.