As 2007 closes out, my SP500 Market Tracker has continued
to weaken, putting current fair value around 1400. That
reading is down from the all-time high of around 1600 set
in July, 2007, with the decline reflecting a 7% cut to
the consensus 2007 earnings estimate, and a sharp contraction
of the multiple to adjust for a ramp up of inflation
pressure. My profits indicators outside of the financial
sector actually strengthened a bit in Q4 '07, but financial
sector earnings have been slashed for CDO related loan losses.
Moreover, banks may warn of more losses for late 2007 after
the books have been closed and the auditors speak up.
The weekly leading economic indicators continue to decline and
are warning of a possible downturn. I am looking forward to
the ISM data on new orders for both manufacturing and services
due out next week to see how the monthly leading numbers shape
up. December may have been quieter for inflation, but the
inflation thrust gauge remains in a strong uptrend as we pass
into 2008.
The SP500 is trading at 1478, or a 5.6% premium to fair value.
A stronger liquidity injection by the Fed and declining short
rates have a number of investors and traders trying to discount
an eventual improvement in the fundamentals later in the year
just ahead, but the choppy price action off the 11/26/07 low
makes clear that there are plenty of players not yet on board.
The SP500 carries an earnings yield of roughly 6% presently.
That translates to a nice premium over the 91-day T-bill yield,
but there is still decent quality 5% short money out there, so
the market's e/p yield, although positive, is still modest.
Dividend growth continues strong -- up 10.9% yr/yr -- and the
dividend discount model I use has the SP500 fairly valued for
the long term at 1405.
There is no excess liquidity in the US financial system above
the needs of the real economy, so the stock market will remain
heavily dependent on managers' portfolio cash for support.
The continuing economic uncertainty surrounding near term
output growth and inflation potentials could well extend through
the first quarter of 2008, and it would not be a surprise
for the stock market to remain on edge and listless as a result.
I am not uncomfortable thinking in a range of 1400 - 1550 for
the SP500, nor am I uncomfortable with the idea of elevated
volatility.
I do think that springtime 2008 will bring an improvement in
confidence, a topic I'll discuss soon.
Sunday, December 30, 2007
Wednesday, December 26, 2007
Liquidity Factors
Finance sector commercial paper issuance in the US has
fallen from a historic peak of $2.2 tril. set in early Aug.
2007 to about $1.6 tril. currently, primarily reflecting the
collapse in the asset backed segment of the market. This
has shut off the yield spread funding of longer dated CDO
and other types of high risk long paper. For the past
six months, the broad measure of credit driven funding or
liquidity has grown at a 2.0% annual rate, compared to an
8.6% AR over Half 1'07. Since the commercial paper market has not
bottomed yet, we can look forward a little and say that the broad
measure of liquidity ($11 tril.+) is not growing fast enough to
sustain economic expansion and heavier trouble will result if
liquidity growth does not improve. the matter has been made more
pernicious by the fact that accelerated inflation has been
gobbling up what liquidity has appeared.
Viewed yr/yr, the matter is less dire, as liquidity has risen
about 6.5%. So there has been enough of a longer term tailwind
to sustain the economy, but that will run down with time.
With the new TAFs added in, Fed Bank lending to the banking
system is around $900 bil., up roughly 6.0% yr/yr, with the vast
bulk of this increase coming in recent weeks. This high powered
monetary liquidity plus the cuts to the FFR% form the base of the
Fed's plan to keep the economy growing and to encourage a step-up
in funding and lending by the banks. Under the best of cirumstances,
this will not work overnight and it's no small wonder the Fed has
pushed the prospect of faster economic growth out until the second
half of 2008.
Dry, arcane stuff you say? A clear 3-6 month window of uncertainty
you say? Right on both counts. Will the Fed have to do more?
Could well be they will. Were They too slow to act? Probably. Was
Their concern about inflation misplaced? Doesn't look so yet.
Measured yr/yr, the $ cost of production is up just about as much
as the broad measure of liquidity. This means no liquidity
tailwind for the capital markets and increased reliance on portfolio
cash and perhaps a new source -- the sovereign wealth fund.
On an annual basis, the US is now exporting about $120 bil. less in
$ through the trade window. This means you have to keep an extra
careful watch on the smaller less well developed countries that
have increased reliance on exporting to the US. Eastern Europe
comes to mind.
fallen from a historic peak of $2.2 tril. set in early Aug.
2007 to about $1.6 tril. currently, primarily reflecting the
collapse in the asset backed segment of the market. This
has shut off the yield spread funding of longer dated CDO
and other types of high risk long paper. For the past
six months, the broad measure of credit driven funding or
liquidity has grown at a 2.0% annual rate, compared to an
8.6% AR over Half 1'07. Since the commercial paper market has not
bottomed yet, we can look forward a little and say that the broad
measure of liquidity ($11 tril.+) is not growing fast enough to
sustain economic expansion and heavier trouble will result if
liquidity growth does not improve. the matter has been made more
pernicious by the fact that accelerated inflation has been
gobbling up what liquidity has appeared.
Viewed yr/yr, the matter is less dire, as liquidity has risen
about 6.5%. So there has been enough of a longer term tailwind
to sustain the economy, but that will run down with time.
With the new TAFs added in, Fed Bank lending to the banking
system is around $900 bil., up roughly 6.0% yr/yr, with the vast
bulk of this increase coming in recent weeks. This high powered
monetary liquidity plus the cuts to the FFR% form the base of the
Fed's plan to keep the economy growing and to encourage a step-up
in funding and lending by the banks. Under the best of cirumstances,
this will not work overnight and it's no small wonder the Fed has
pushed the prospect of faster economic growth out until the second
half of 2008.
Dry, arcane stuff you say? A clear 3-6 month window of uncertainty
you say? Right on both counts. Will the Fed have to do more?
Could well be they will. Were They too slow to act? Probably. Was
Their concern about inflation misplaced? Doesn't look so yet.
Measured yr/yr, the $ cost of production is up just about as much
as the broad measure of liquidity. This means no liquidity
tailwind for the capital markets and increased reliance on portfolio
cash and perhaps a new source -- the sovereign wealth fund.
On an annual basis, the US is now exporting about $120 bil. less in
$ through the trade window. This means you have to keep an extra
careful watch on the smaller less well developed countries that
have increased reliance on exporting to the US. Eastern Europe
comes to mind.
Monday, December 24, 2007
Economic Indicators
The weekly leading economic indicators have been trending
down since July, and have fallen enough below those peaks
to move the economic expansion light from green to amber.
This is a tricky situation, since we had similar moves in
1987 and 1998 without a resulting downturn. Those two periods
were ones of financial crisis, but matters did settle out
favorably for the US economy. Such could well happen this time
too, but there has been enough damage to the readings to
warrant more concern.
The inflation thrust indicator has been flat over the past
month, but it remains in a strong uptrend, paced by oil and
basic agriculturals. The CPI inflation of 4.3% yr/yr through
November wiped out the growth in the average wage, and
the increase of inflation pressure has damaged the economy
as a result. Rising deliquencies on consumer credit cards is
likely also a result of faster inflation. Consumers have
probably been a little slow to re-work budget priorities with
the rises in energy and grocery bills.
The longer term economic indicators have turned from negative
to mixed. Real M-1 growth is still negative, the real wage is
under pressure and the real price of oil remains in an uptrend.
Positively, the Fed is stepping up liquidity infusion, at least
for the short run, and short rates are trending down. I might
add that despite the bevy of negative headlines, the banking
system is functioning and growing.
Since I am a growth freak, I have my fingers crossed.
down since July, and have fallen enough below those peaks
to move the economic expansion light from green to amber.
This is a tricky situation, since we had similar moves in
1987 and 1998 without a resulting downturn. Those two periods
were ones of financial crisis, but matters did settle out
favorably for the US economy. Such could well happen this time
too, but there has been enough damage to the readings to
warrant more concern.
The inflation thrust indicator has been flat over the past
month, but it remains in a strong uptrend, paced by oil and
basic agriculturals. The CPI inflation of 4.3% yr/yr through
November wiped out the growth in the average wage, and
the increase of inflation pressure has damaged the economy
as a result. Rising deliquencies on consumer credit cards is
likely also a result of faster inflation. Consumers have
probably been a little slow to re-work budget priorities with
the rises in energy and grocery bills.
The longer term economic indicators have turned from negative
to mixed. Real M-1 growth is still negative, the real wage is
under pressure and the real price of oil remains in an uptrend.
Positively, the Fed is stepping up liquidity infusion, at least
for the short run, and short rates are trending down. I might
add that despite the bevy of negative headlines, the banking
system is functioning and growing.
Since I am a growth freak, I have my fingers crossed.
Friday, December 21, 2007
Stock Market -- Technical
As was indicated in the 12/17 post on the market, it needed
to catch bids this week to put it on a recovery trajectory
that was sensible. The initial responses were very tentative
earlier in the week, but today's action was more robust and
broad. From a short run perspective, there's nothing to do
but let it go through the holidays and see if it can muster
further upside consistency. That first run up from the 11/26
low was a joke, being nearly vertical (See prior recent comments).
I plan to put some posts together in the days ahead regarding
2008, toward which we are slouching along.
to catch bids this week to put it on a recovery trajectory
that was sensible. The initial responses were very tentative
earlier in the week, but today's action was more robust and
broad. From a short run perspective, there's nothing to do
but let it go through the holidays and see if it can muster
further upside consistency. That first run up from the 11/26
low was a joke, being nearly vertical (See prior recent comments).
I plan to put some posts together in the days ahead regarding
2008, toward which we are slouching along.
Monday, December 17, 2007
Stock Market -- Technical
In the 12/6 post on the stock market, it was mentioned that
the anticipated rally had materialized, but that the rocket
like trajectory was simply too strong. It was mentioned that
a sharp sell off was in the offing, as seasoned traders were
not likely to ride the rocket much longer. And so, the
market behaved and delivered a heavy sell off. The market is
mildly oversold in the very short run, and I am intrigued that
my six week selling pressure gauge is once again in significant
oversold territory. That suggests to me that there will be
another try at a rally before the year is out.
At 1445, the SP500 needs to hold around this level in the days
right ahead to put it on a suitable trajectory up from the
Nov. 26 low. Further sharp weakness from here would suggest
another retest of lows down around 1400 -1410. That's the easy
call, but we've had enough of a sell off already to bring in
some buying interest now. So, I'd watch the action carefully
over the next day or two to see whether the bulls are ready or
not.
the anticipated rally had materialized, but that the rocket
like trajectory was simply too strong. It was mentioned that
a sharp sell off was in the offing, as seasoned traders were
not likely to ride the rocket much longer. And so, the
market behaved and delivered a heavy sell off. The market is
mildly oversold in the very short run, and I am intrigued that
my six week selling pressure gauge is once again in significant
oversold territory. That suggests to me that there will be
another try at a rally before the year is out.
At 1445, the SP500 needs to hold around this level in the days
right ahead to put it on a suitable trajectory up from the
Nov. 26 low. Further sharp weakness from here would suggest
another retest of lows down around 1400 -1410. That's the easy
call, but we've had enough of a sell off already to bring in
some buying interest now. So, I'd watch the action carefully
over the next day or two to see whether the bulls are ready or
not.
Wednesday, December 12, 2007
Monetary Policy -- Plan B (Bailout)
Today the Fed and a quartet of other central banks announced
a coordinated effort to accelerate the process of rebuilding
credit driven liquidity. The details have been widely reported,
so no need to repeat them here. But, observations are in
order.
The $40 billion term auction facility plus the $24 billion
currency swap arrangements adds substantially to monetary
liquidity. This is a plus for the economy down the road. It is
also mildly inflationary and brings the Fed to the brink of
abandoning a policy of bringing down the long term growth of
monetary liquidity from the high levels of the bubble years
(1992 - 2003). It is a setback for the Fed.
Creation of this facility partially separates the liqudity
aspect of monetary policy from the rate setting aspect. This
will complicate the process of analyzing policy.
The TAF gives the Fed substantial flexibility to manage liquidity
in the system independent of month to month FOMC activity geared
to managing the FFR%.
Because the Fed can increase the $ amount of these facilities if
needed, it is a strong prompt to the banks to resume a more
normal level of lending and to service qualified credits. The
Fed is obviously unhappy with the slow pace of private sector
credit / funding growth and wants to protect against defaltion
of asset values secured by credit. Time will tell how well it
works.
A strong positive response from the banking system would allow
the Fed to roll up these faciliities easily and return to normal
operations. But, why jump ahead of the story?
The de-linking of this announcement today from the FOMC meeting
relects longstanding protocol, creates a new protocol and was
also an expression of Fed disdain for The Street and the banks
who abandoned any semblance of credit underwriting integrity
in the the CDO market. I would have enjoyed "perp walks" for
banks to the discount window instead of this more anonymous
arrangement.
a coordinated effort to accelerate the process of rebuilding
credit driven liquidity. The details have been widely reported,
so no need to repeat them here. But, observations are in
order.
The $40 billion term auction facility plus the $24 billion
currency swap arrangements adds substantially to monetary
liquidity. This is a plus for the economy down the road. It is
also mildly inflationary and brings the Fed to the brink of
abandoning a policy of bringing down the long term growth of
monetary liquidity from the high levels of the bubble years
(1992 - 2003). It is a setback for the Fed.
Creation of this facility partially separates the liqudity
aspect of monetary policy from the rate setting aspect. This
will complicate the process of analyzing policy.
The TAF gives the Fed substantial flexibility to manage liquidity
in the system independent of month to month FOMC activity geared
to managing the FFR%.
Because the Fed can increase the $ amount of these facilities if
needed, it is a strong prompt to the banks to resume a more
normal level of lending and to service qualified credits. The
Fed is obviously unhappy with the slow pace of private sector
credit / funding growth and wants to protect against defaltion
of asset values secured by credit. Time will tell how well it
works.
A strong positive response from the banking system would allow
the Fed to roll up these faciliities easily and return to normal
operations. But, why jump ahead of the story?
The de-linking of this announcement today from the FOMC meeting
relects longstanding protocol, creates a new protocol and was
also an expression of Fed disdain for The Street and the banks
who abandoned any semblance of credit underwriting integrity
in the the CDO market. I would have enjoyed "perp walks" for
banks to the discount window instead of this more anonymous
arrangement.
Tuesday, December 11, 2007
Monetary Policy
The FOMC moved to cut the FFR% and DR% by 25 bp each today.
The FFR% now stands at 4.25%. That was the consensus view
among pundits going into the meeting. The stock market threw
a tantrum. Players were expecting 50 bp cuts. They had noticed
the large 150 bp spread between the 91 day Bill rate and were
encouraged by "dovish" Fedspeak from Board members in recent
weeks.
I am not much of a psychoanalyzer of the Fed, so I will not try
to divine why They did exactly what They did. But, I do think it
is fair to say that it is understandable that a number of players
felt snookered.
The longstanding policy variables did suggest a cut, especially
the weakening of the ISM manufacturing survey and a modest downturn
in the capacity utilization rate. The situation was not without
some ambiguity, as short term business credit demand remains
robust. Here though, the recent surge in C&I loans is likely more
a reflection of interim financing for deals still stuck in the
pipeline.
Besides a strong C&I book, home equity and mortgage loans are ticking
up at banks, although both are well off the trends seen in recent
years. The decline in the commercial paper market has slowed sharply
as well. So the system is functioning. Higher risk credits are priced
at much larger spreads over solid, investment grade credits -- as they
should be in a sluggish economy.
The Fed has been adding monetary liquidity more generously to the
system in recent weeks, but this may be only a seasonal development
which could continue into early January, 2008.
The FFR% now stands at 4.25%. That was the consensus view
among pundits going into the meeting. The stock market threw
a tantrum. Players were expecting 50 bp cuts. They had noticed
the large 150 bp spread between the 91 day Bill rate and were
encouraged by "dovish" Fedspeak from Board members in recent
weeks.
I am not much of a psychoanalyzer of the Fed, so I will not try
to divine why They did exactly what They did. But, I do think it
is fair to say that it is understandable that a number of players
felt snookered.
The longstanding policy variables did suggest a cut, especially
the weakening of the ISM manufacturing survey and a modest downturn
in the capacity utilization rate. The situation was not without
some ambiguity, as short term business credit demand remains
robust. Here though, the recent surge in C&I loans is likely more
a reflection of interim financing for deals still stuck in the
pipeline.
Besides a strong C&I book, home equity and mortgage loans are ticking
up at banks, although both are well off the trends seen in recent
years. The decline in the commercial paper market has slowed sharply
as well. So the system is functioning. Higher risk credits are priced
at much larger spreads over solid, investment grade credits -- as they
should be in a sluggish economy.
The Fed has been adding monetary liquidity more generously to the
system in recent weeks, but this may be only a seasonal development
which could continue into early January, 2008.
Friday, December 07, 2007
Economic Indicators & S&P 500 Market Tracker
My leading economic indicator composite continues in a
downtrend. It has not fallen far enough to signal the
advent of an economic downturn, but unless the composite
stabilizes soon, we'll have to entertain that idea in Q1
'08. Significant declines in this indicator gave false
downturn signals twice over the past 50 years -- 1987 and
1998 -- which, interestingly, were both periods of turmoil
in the financial and capital markets. So, one can still
get a recession signal and have it backfire if unsettled
financial conditions return to stability in a timely
enough fashion. Frustrating? Well, remember Aristotle's
reminder not to demand more perfection from a subject than
it admits of.
Yr/Yr employment growth continues at a paltry 0.5% and the
real wage continues to grow below 1.0%. These conditions
reinforce a very sluggish economy.
My long lead economic indicators do not present a pretty
picture either. Continued low real growth of Federal Reserve
Bank Credit and weak real M-1 have implied economic
vulnerability the moment credit driven liquidity slackened,
which it has in dramatic fashion since July. The real oil
price continues to rise, punishing broader consumption, and
capacity utilization has lost its uptrend. The bright spot
is that short rates are trending lower. Moreover, the Fed
has stepped up the buying of securities, but we'll have to
wait a month or two to see if this is other than a temporary
seasonal push.
The SP500 market Tracker continues to slip, and is now assigning
fair value for the "500" in a range of 1460 - 1500. Analysts
continue to chip away at earnings estimates, and the pace of
inflation measured yr/yr has accelerated. Thus, both earnings
and the p/e are under pressure.
downtrend. It has not fallen far enough to signal the
advent of an economic downturn, but unless the composite
stabilizes soon, we'll have to entertain that idea in Q1
'08. Significant declines in this indicator gave false
downturn signals twice over the past 50 years -- 1987 and
1998 -- which, interestingly, were both periods of turmoil
in the financial and capital markets. So, one can still
get a recession signal and have it backfire if unsettled
financial conditions return to stability in a timely
enough fashion. Frustrating? Well, remember Aristotle's
reminder not to demand more perfection from a subject than
it admits of.
Yr/Yr employment growth continues at a paltry 0.5% and the
real wage continues to grow below 1.0%. These conditions
reinforce a very sluggish economy.
My long lead economic indicators do not present a pretty
picture either. Continued low real growth of Federal Reserve
Bank Credit and weak real M-1 have implied economic
vulnerability the moment credit driven liquidity slackened,
which it has in dramatic fashion since July. The real oil
price continues to rise, punishing broader consumption, and
capacity utilization has lost its uptrend. The bright spot
is that short rates are trending lower. Moreover, the Fed
has stepped up the buying of securities, but we'll have to
wait a month or two to see if this is other than a temporary
seasonal push.
The SP500 market Tracker continues to slip, and is now assigning
fair value for the "500" in a range of 1460 - 1500. Analysts
continue to chip away at earnings estimates, and the pace of
inflation measured yr/yr has accelerated. Thus, both earnings
and the p/e are under pressure.
Thursday, December 06, 2007
Stock Market
The oncoming rally discussed in recent Stock market posts
has turned into a rocket off the deep oversold mentioned in
the 11/18 post. At 1507, the SP500 faces trend resistance up
around 1520. The market is mildly overbought, but the
trajectory is too strong, indicating a chase to get in.
Players are betting heavily on a minimum 25 bp cut to the FFR%
at the 12/11 FOMC meeting and like the "freeze" on many sub-
prime ARMs announced by GWB / Paulson, because it will likely
stretch out the drain on lender capital over several years.
Some time over the next week or two there should be a sharp
downdraft as short term players take some chips off the table
and leave investor resolve to be tested.
has turned into a rocket off the deep oversold mentioned in
the 11/18 post. At 1507, the SP500 faces trend resistance up
around 1520. The market is mildly overbought, but the
trajectory is too strong, indicating a chase to get in.
Players are betting heavily on a minimum 25 bp cut to the FFR%
at the 12/11 FOMC meeting and like the "freeze" on many sub-
prime ARMs announced by GWB / Paulson, because it will likely
stretch out the drain on lender capital over several years.
Some time over the next week or two there should be a sharp
downdraft as short term players take some chips off the table
and leave investor resolve to be tested.
Tuesday, December 04, 2007
Braille Economics
Braille economic analysis is what I resort to when the crystal
ball gets too murky. It consists of moving your way into the
future by grappling with the economic data and inching your
way along. Besides, no one is paying me to make forecasts now.
Forty plus years of investing and trading has taught me that
you do not have to be the first kid on the block to know what's
going to happen to make good money and / or dodge bullets. (One
important key to success in the businesses of investing and
trading is to learn how to dodge bullets.)
I have not bought into the recession camp. It is slow out there
now in the US and maybe getting slower. But I have yet to see the
sort of broad imbalances between production and consumption that
signal an involuntary build of inventories that leads to plant
down time and furloughs. Customarily, excess inventory is a
linchpin for a down cycle. The bad news here is that inventory
data on the broad economy comes late in the reporting of
monthly data. Two further points: Many businesses have the
supply chain management capability to control inventories rather
well. But, employment gains and real earnings progress has been
scant this year, so it may not take gaudy inventory excess to
usher in a downturn. So I inch along....
Unlike many economists, I remain concerned about inflation. As
I discussed a short time back, we did have a blowoff in the oil
price. The recent $10 bl. correction is a help, but oil remains
in an ominous uptrend that will sap most households of
purchasing power if it persists.
THE ODD ITEM: The new US NIE asserts that Iran is aggressively
developing fissionables but does not appear to have an active nuclear
weapons development program underway. WHATEVER, this document does
undercut the ability of GWB and the Shooter to kite the oil price
for the boyz in the great Southwest. Maybe less swagger from these
two will help settle down the oil market.
ball gets too murky. It consists of moving your way into the
future by grappling with the economic data and inching your
way along. Besides, no one is paying me to make forecasts now.
Forty plus years of investing and trading has taught me that
you do not have to be the first kid on the block to know what's
going to happen to make good money and / or dodge bullets. (One
important key to success in the businesses of investing and
trading is to learn how to dodge bullets.)
I have not bought into the recession camp. It is slow out there
now in the US and maybe getting slower. But I have yet to see the
sort of broad imbalances between production and consumption that
signal an involuntary build of inventories that leads to plant
down time and furloughs. Customarily, excess inventory is a
linchpin for a down cycle. The bad news here is that inventory
data on the broad economy comes late in the reporting of
monthly data. Two further points: Many businesses have the
supply chain management capability to control inventories rather
well. But, employment gains and real earnings progress has been
scant this year, so it may not take gaudy inventory excess to
usher in a downturn. So I inch along....
Unlike many economists, I remain concerned about inflation. As
I discussed a short time back, we did have a blowoff in the oil
price. The recent $10 bl. correction is a help, but oil remains
in an ominous uptrend that will sap most households of
purchasing power if it persists.
THE ODD ITEM: The new US NIE asserts that Iran is aggressively
developing fissionables but does not appear to have an active nuclear
weapons development program underway. WHATEVER, this document does
undercut the ability of GWB and the Shooter to kite the oil price
for the boyz in the great Southwest. Maybe less swagger from these
two will help settle down the oil market.
Wednesday, November 28, 2007
Stock Market
Back on 11/18, I posted that the stock market was deeply
oversold and that a rally might not be far off in time. Well,
in the interim, the market got even more oversold, and with
better news over the past 2 days, it rallied powerfully, to
the point of leaving only a slight short term oversold in its
wake. Hard to say how it will do in the days straight ahead
after a 4% 2 day pop, but there has been a positive break in
my shorter term momentum trend, and that's an attention getter.
So is the prospect for a positive turn in MACD (12/26/9 day).
At this point, I continue to see enough economic uncertainty
out there to feel a degree of comfort in plunking the SP500 into
a rough 1400 - 1550 trading range until matters sort out
further.
For the daily SP500, click.
oversold and that a rally might not be far off in time. Well,
in the interim, the market got even more oversold, and with
better news over the past 2 days, it rallied powerfully, to
the point of leaving only a slight short term oversold in its
wake. Hard to say how it will do in the days straight ahead
after a 4% 2 day pop, but there has been a positive break in
my shorter term momentum trend, and that's an attention getter.
So is the prospect for a positive turn in MACD (12/26/9 day).
At this point, I continue to see enough economic uncertainty
out there to feel a degree of comfort in plunking the SP500 into
a rough 1400 - 1550 trading range until matters sort out
further.
For the daily SP500, click.
Monday, November 26, 2007
Bond Markets
The long Treasury closed under 4.3% today. This market is
now getting seriously overbought. The Marketvane index of
bullish advisories on Treasuries has reached 77% and is
trending up. As a contrarian reading, 77% bulls is signaling
an eventual rebound in yields (and lower prices).
The strong rally in Treasuries since this summer reflects
prospects for a slowing economy and a strong flight to quality
from riskier assets, especially CDOs of varied stripes. But
yield spreads between top quality and medium quality corporates
are widening, and the high yield market is now once again the
junk market, with yields here jumping from under 8.0% a few
months back to 10.8% presently.
One indicator I watch closely is the industrial commodities price
composite. Broad measures of industrial commodities prices have
leveled off in recent months, a normally bullish development for
bond prices.
I had a nice trade earlier in the year when long Treasuries were
oversold, and now I am looking carefully at a short on the Treasury
price. I am also getting intrigued by the junk universe, which
is deeply oversold. Yields above 10% are attractive for risk capital
since you have a shot at a 10%+ annual return for the risk taken.
So maybe there is nice long / short trade coming up. (I rarely hold
positions in bond trades past 2-3 months.)
I regard Treasuries as fundamentally unattractive for investment.
Investors are not being adequately compensated for inflation and
interest rate risk, nor are they being compensated for the vagaries
of the offering calendar in the years ahead. Flip the coin and you
could make a good argument for offering long Treasuries to the
market to lock in these yields.
For the long Treasury price ($USB), click.
now getting seriously overbought. The Marketvane index of
bullish advisories on Treasuries has reached 77% and is
trending up. As a contrarian reading, 77% bulls is signaling
an eventual rebound in yields (and lower prices).
The strong rally in Treasuries since this summer reflects
prospects for a slowing economy and a strong flight to quality
from riskier assets, especially CDOs of varied stripes. But
yield spreads between top quality and medium quality corporates
are widening, and the high yield market is now once again the
junk market, with yields here jumping from under 8.0% a few
months back to 10.8% presently.
One indicator I watch closely is the industrial commodities price
composite. Broad measures of industrial commodities prices have
leveled off in recent months, a normally bullish development for
bond prices.
I had a nice trade earlier in the year when long Treasuries were
oversold, and now I am looking carefully at a short on the Treasury
price. I am also getting intrigued by the junk universe, which
is deeply oversold. Yields above 10% are attractive for risk capital
since you have a shot at a 10%+ annual return for the risk taken.
So maybe there is nice long / short trade coming up. (I rarely hold
positions in bond trades past 2-3 months.)
I regard Treasuries as fundamentally unattractive for investment.
Investors are not being adequately compensated for inflation and
interest rate risk, nor are they being compensated for the vagaries
of the offering calendar in the years ahead. Flip the coin and you
could make a good argument for offering long Treasuries to the
market to lock in these yields.
For the long Treasury price ($USB), click.
Friday, November 23, 2007
Holiday Season Sales
As all know, sales for the holiday season are avidly watched
by many. Business and investment people enjoy debating the
prospects for the season when it comes to hand, and this time
will be no different, especially since the Fed's FOMC is to
meet on monetary policy on 12/11.
The fundamentals are far more somber this year than last.
Yr/yr, employment is up only 0.5% and the real wage is up by
only 0.5% as well. That yields a base case for a 1.0% gain
in sales before inflation and maybe 4.0% in current $ terms.
But beyond that, it is hard to say how consumers will do at
the register. From my perspective, much depends upon whether
there's an interesting cross-section of newer stuff to buy and
also the weather will play an important role. A good cold snap
with some snow around the US can do wonders at the malls as
folks stock up on easy stuff -- hats, gloves, boots, coats etc.
Another interesting issue is how tough it is to stick to
a modest budget. That requires shoppers have a plan and that
they carry it through with ruthless precision. If you head out
to shop with a vague idea of cutting back, you may find yourself
in trouble when Christmas Eve comes, and the same old large
pile of goodies is under the tree. Debate the outlook if you
wish, but do not fail to miss the magic of the season, for
magic it is.
by many. Business and investment people enjoy debating the
prospects for the season when it comes to hand, and this time
will be no different, especially since the Fed's FOMC is to
meet on monetary policy on 12/11.
The fundamentals are far more somber this year than last.
Yr/yr, employment is up only 0.5% and the real wage is up by
only 0.5% as well. That yields a base case for a 1.0% gain
in sales before inflation and maybe 4.0% in current $ terms.
But beyond that, it is hard to say how consumers will do at
the register. From my perspective, much depends upon whether
there's an interesting cross-section of newer stuff to buy and
also the weather will play an important role. A good cold snap
with some snow around the US can do wonders at the malls as
folks stock up on easy stuff -- hats, gloves, boots, coats etc.
Another interesting issue is how tough it is to stick to
a modest budget. That requires shoppers have a plan and that
they carry it through with ruthless precision. If you head out
to shop with a vague idea of cutting back, you may find yourself
in trouble when Christmas Eve comes, and the same old large
pile of goodies is under the tree. Debate the outlook if you
wish, but do not fail to miss the magic of the season, for
magic it is.
Tuesday, November 20, 2007
Short Term Rates & US Dollar
Short Rates
My 3 mo. T-bill yield indicator spans more than 90 years
of data. It is a diagnostic tool and not a forecasting
model. Based on recent inflation readings, the T-bill
should be trading in a range of 5.10 - 5.50%. The bill
is now around 3.50%. Part of the discount to the model's
value reflects the recent 75 bp. of cuts to the FFR%, but
most of it reflects investor flight to quality. Some
players are anticipating further FFR% rate cuts as the
economy slows, and some have moved into bills and notes
hurriedly as they dump or reduce positions in higher
risk assets.
A 3.50% T-bill yield is not attractive at all to the
average investor and saver. With inflation at 3.5% on a
yr/yr basis, the after tax return is negative and savings
are being confiscated. For higher net worth savers, 6
month CDs at 5.10% are even a bit below breakeven.
Holding taxes aside, the real or inflation adjusted rate
on the bill has fallen from a cyclical high of 3.8% down
to zero since late 2005. Retirement funds have been put
under increasing pressure to increase risk levels to
maintain beneficiary purchasing power.
My longer run measure of inflation has been running about
3.1% this year. On this measure, short rates and shorter
duration T-notes are just too low and unless inflation
pressures ease, savers are going to continue to take it
on the chin. With the economy slowing, consumers may
be pushed to increase savings anyway, especially with a
soft housing market.
US Dollar
The rapid decline in the real rate of interest since late
2005 has greatly reduced the appeal of holding dollars for
US householders and businesses. That alone is a good
reason for foreigners to avoid dollars in preference for
stronger currencies. The cost of doing business in and
with the US for Asian mercantilists like China is rising
sharply as US rates and the dollar decline. The weak dollar
is sharply increasing US competitiveness abroad and is
producing large currency translation gains for US multi-
nationals. Even smaller US companies are getting into the
act.
I genuinely like the fact that US exporters are doing very
well, and if it takes a low dollar for a goodly time to
put our exports out there successfully, fine. However,
The Fed owes savers as well and must move as quickly as is
prudent to restore short rate equilibrium for savers.
My 3 mo. T-bill yield indicator spans more than 90 years
of data. It is a diagnostic tool and not a forecasting
model. Based on recent inflation readings, the T-bill
should be trading in a range of 5.10 - 5.50%. The bill
is now around 3.50%. Part of the discount to the model's
value reflects the recent 75 bp. of cuts to the FFR%, but
most of it reflects investor flight to quality. Some
players are anticipating further FFR% rate cuts as the
economy slows, and some have moved into bills and notes
hurriedly as they dump or reduce positions in higher
risk assets.
A 3.50% T-bill yield is not attractive at all to the
average investor and saver. With inflation at 3.5% on a
yr/yr basis, the after tax return is negative and savings
are being confiscated. For higher net worth savers, 6
month CDs at 5.10% are even a bit below breakeven.
Holding taxes aside, the real or inflation adjusted rate
on the bill has fallen from a cyclical high of 3.8% down
to zero since late 2005. Retirement funds have been put
under increasing pressure to increase risk levels to
maintain beneficiary purchasing power.
My longer run measure of inflation has been running about
3.1% this year. On this measure, short rates and shorter
duration T-notes are just too low and unless inflation
pressures ease, savers are going to continue to take it
on the chin. With the economy slowing, consumers may
be pushed to increase savings anyway, especially with a
soft housing market.
US Dollar
The rapid decline in the real rate of interest since late
2005 has greatly reduced the appeal of holding dollars for
US householders and businesses. That alone is a good
reason for foreigners to avoid dollars in preference for
stronger currencies. The cost of doing business in and
with the US for Asian mercantilists like China is rising
sharply as US rates and the dollar decline. The weak dollar
is sharply increasing US competitiveness abroad and is
producing large currency translation gains for US multi-
nationals. Even smaller US companies are getting into the
act.
I genuinely like the fact that US exporters are doing very
well, and if it takes a low dollar for a goodly time to
put our exports out there successfully, fine. However,
The Fed owes savers as well and must move as quickly as is
prudent to restore short rate equilibrium for savers.
Sunday, November 18, 2007
Stock Market
The market oversold has deepened. The SP500 remains at a
nice discount to its 25 day m/a, and my six week selling
pressure and buying pressure gauges are in deep oversold
territory. So, a tradable rally may not be far off. I would
also note that there are two distinct 20 week cycles and
one nine monther that point to lows within the next 30 days.
That's the good news. The bad news is that the SP500 Market
Tracker is coming down fast reflecting both earnings estimate
cuts and pressure on the p/e multiple from accelerating
inflation. The Tracker is undergoing its sharpest decline
since early 2001, falling from a July 'fair value" estimate
high of 1610 to just slightly below 1500. Analysts are cutting
Q4 '07 estimates and are just starting to trim Q1 '08 numbers
as well. The weekly leading economic indicators have stopped
falling however, but are flattish and suggest slow or "drag
ass" growth. The inflation thrust indicator remains in a
substantial uptrend, pushed hard by the oil price and, more
lately, a recovery in the retail gasoline price. The momentum
of inflation thrust has slowed a little bit over the past ten
days. You have to respect all of this, but not get carried
away with it as there are at least short term indications the
economy is stabilizing. There is no end of print about the
problems of the financials, but the banking sector is
functioning -- loans are ticking up and funding is not unduly
constrained. Loan losses are rising, but cash flow for this
sector has mushroomed to $150 billion annually in recent years.
Visibility to sustain the cyclical bull market is low now, but
my indicators do not yet suggest throwing in the towel.
I plan to give discussion of the stock market a rest for a couple
of weeks and look at some other topics. I include a link to the
weekly SP500 chart.
nice discount to its 25 day m/a, and my six week selling
pressure and buying pressure gauges are in deep oversold
territory. So, a tradable rally may not be far off. I would
also note that there are two distinct 20 week cycles and
one nine monther that point to lows within the next 30 days.
That's the good news. The bad news is that the SP500 Market
Tracker is coming down fast reflecting both earnings estimate
cuts and pressure on the p/e multiple from accelerating
inflation. The Tracker is undergoing its sharpest decline
since early 2001, falling from a July 'fair value" estimate
high of 1610 to just slightly below 1500. Analysts are cutting
Q4 '07 estimates and are just starting to trim Q1 '08 numbers
as well. The weekly leading economic indicators have stopped
falling however, but are flattish and suggest slow or "drag
ass" growth. The inflation thrust indicator remains in a
substantial uptrend, pushed hard by the oil price and, more
lately, a recovery in the retail gasoline price. The momentum
of inflation thrust has slowed a little bit over the past ten
days. You have to respect all of this, but not get carried
away with it as there are at least short term indications the
economy is stabilizing. There is no end of print about the
problems of the financials, but the banking sector is
functioning -- loans are ticking up and funding is not unduly
constrained. Loan losses are rising, but cash flow for this
sector has mushroomed to $150 billion annually in recent years.
Visibility to sustain the cyclical bull market is low now, but
my indicators do not yet suggest throwing in the towel.
I plan to give discussion of the stock market a rest for a couple
of weeks and look at some other topics. I include a link to the
weekly SP500 chart.
Wednesday, November 14, 2007
Quick Note On The Short, Short Term
As discussed on Sunday, we entered the week with a deep
short term oversold. As expected, traders jumped on it and
rallied the market strongly yesterday, right up to short
term downtrend lines. The market failed to break through
today and ended on a weak note. There is still a moderate
oversold in place, and players may have to watch the oil
price carefully because the strong bounce in oil today
following a steep, fast sell off, did not sit well with
the stock market in my view.
short term oversold. As expected, traders jumped on it and
rallied the market strongly yesterday, right up to short
term downtrend lines. The market failed to break through
today and ended on a weak note. There is still a moderate
oversold in place, and players may have to watch the oil
price carefully because the strong bounce in oil today
following a steep, fast sell off, did not sit well with
the stock market in my view.
Sunday, November 11, 2007
Stock Market Comments
The recent weakness in the market has brought it into a
deep short term oversold condition at about 4.5% below
the 25 day m/a. Oversolds at this level have proven very
attractive to aggressive traders in recent years. In turn,
my six week selling pressure gauge is heading into oversold
territory which is another positive.
Intermediate and longer run measures have turned negative.
Breaks of trend on market and breadth measures, weakening
momentum against the 40 wk m/a and a downturn in the 14 wk.
stochastic all signal caution. There have been no breaks
in any of these measures so decisive that a whipsaw move
in the market to the upside can be readily precluded.
Speaking more broadly, the volatility in the market since
mid-July suggests that players are re-appraising fundamentals
that guided the market sharply higher from mid-2006. Signs
of a slower economy, earnings estimate cuts and re-ignition
of inflation pressure have forced the re-appraisal.
The suggestion to me is that any forthcoming rally may be
more subdued and of shorter duration than we have seen in
recent months.
deep short term oversold condition at about 4.5% below
the 25 day m/a. Oversolds at this level have proven very
attractive to aggressive traders in recent years. In turn,
my six week selling pressure gauge is heading into oversold
territory which is another positive.
Intermediate and longer run measures have turned negative.
Breaks of trend on market and breadth measures, weakening
momentum against the 40 wk m/a and a downturn in the 14 wk.
stochastic all signal caution. There have been no breaks
in any of these measures so decisive that a whipsaw move
in the market to the upside can be readily precluded.
Speaking more broadly, the volatility in the market since
mid-July suggests that players are re-appraising fundamentals
that guided the market sharply higher from mid-2006. Signs
of a slower economy, earnings estimate cuts and re-ignition
of inflation pressure have forced the re-appraisal.
The suggestion to me is that any forthcoming rally may be
more subdued and of shorter duration than we have seen in
recent months.
Wednesday, November 07, 2007
Stock Market Comments
My SP500 Market Tracker is weakening. It is now signaling
fair value at 1570, down from a range of 1600 - 1625 several
weeks back. Analysts are cutting earnings through 2008, and
with a fast rising retail gasoline price, headline inflation
is likely accelerating. The result is a lower market P/E on
lower earnings.
The subprime mortgage reset volume is peaking now, and that
assures more defaults and foreclosures going forward. One
difficulty here in trying to restructure these loans is that
law rquires you deal directly with the lender -- tough to do
with sliced and diced collateralized obligations. the larger
problem is that most of the delinquencies involve inadequate
collateral and fraud as to opposed macro-conditions. Not much to
work with even for sympathetic lenders. Net of foreclosure $
and tax writeoffs, I am thinking the total tab will be $145
billion. That figure could equal 10% of total underwriter
capital. The regulators will need to allow recognition of
these losses to be gradual or even amortizable so as not to
impair primary capital. A tough but not unmanagable situation.
The banking industry throws off about $150 billion a year in
gross cash flow.
So, there are more financial sector losses to come. On top,
leading economic indicators do not yet signal a recession but
are in a downtrend. Global indicators are still solid, but are
trending down as well. My inflation thrust indicator is moving
up sharply from a steep low set early in the year and is being
paced by the oil price, up 92% from the Jan. '07 low.
The Fed has so far taken 75 bps off the FFR%, and there are clear
signs that system liquidity is repairing. I'd advise the Fed to
maintain a stable policy course for the next few months to better
sort out economic and inflation potential and to glean how the
financial sector is coping with the mess it created.
The financial system is repairing and the problems, although
very large, are managable with deft regulatory handling. Also,
a little time is needed to take the measure of the oil price.
Yep, supplies are tight, but the action suggests a full scale
blow-off may be well underway.
Bottom line? Patience is needed here. I am not uncomfortable
with the idea that fundamental direction may remain elusive for
another four weeks or even longer.
fair value at 1570, down from a range of 1600 - 1625 several
weeks back. Analysts are cutting earnings through 2008, and
with a fast rising retail gasoline price, headline inflation
is likely accelerating. The result is a lower market P/E on
lower earnings.
The subprime mortgage reset volume is peaking now, and that
assures more defaults and foreclosures going forward. One
difficulty here in trying to restructure these loans is that
law rquires you deal directly with the lender -- tough to do
with sliced and diced collateralized obligations. the larger
problem is that most of the delinquencies involve inadequate
collateral and fraud as to opposed macro-conditions. Not much to
work with even for sympathetic lenders. Net of foreclosure $
and tax writeoffs, I am thinking the total tab will be $145
billion. That figure could equal 10% of total underwriter
capital. The regulators will need to allow recognition of
these losses to be gradual or even amortizable so as not to
impair primary capital. A tough but not unmanagable situation.
The banking industry throws off about $150 billion a year in
gross cash flow.
So, there are more financial sector losses to come. On top,
leading economic indicators do not yet signal a recession but
are in a downtrend. Global indicators are still solid, but are
trending down as well. My inflation thrust indicator is moving
up sharply from a steep low set early in the year and is being
paced by the oil price, up 92% from the Jan. '07 low.
The Fed has so far taken 75 bps off the FFR%, and there are clear
signs that system liquidity is repairing. I'd advise the Fed to
maintain a stable policy course for the next few months to better
sort out economic and inflation potential and to glean how the
financial sector is coping with the mess it created.
The financial system is repairing and the problems, although
very large, are managable with deft regulatory handling. Also,
a little time is needed to take the measure of the oil price.
Yep, supplies are tight, but the action suggests a full scale
blow-off may be well underway.
Bottom line? Patience is needed here. I am not uncomfortable
with the idea that fundamental direction may remain elusive for
another four weeks or even longer.
Monday, November 05, 2007
Treasury Bonds -- Heads Up
I am strictly a contrarian when it comes to trading bonds.
I get very interested in bonds when the long Treasury yield
has drifted far from its 40 wk M/A and / or when trader
advisory sentiment moves to extremes. The Long T is a little
overbought relative to its M/A, but advisory sentiment,
specifically Marketvane, is moving into territory that is
starting to signal excess bullishness. In recent weeks, the
Marketvane compilation of sentiment has kissed 70% bullish
once or twice and most recently stood at 69%. These are the
highest bull readings since mid-2005. Bullish sentiment is
not yet flat out extreme, but the 70% area signals to me
I should starting to think about shorting the bond.
I get very interested in bonds when the long Treasury yield
has drifted far from its 40 wk M/A and / or when trader
advisory sentiment moves to extremes. The Long T is a little
overbought relative to its M/A, but advisory sentiment,
specifically Marketvane, is moving into territory that is
starting to signal excess bullishness. In recent weeks, the
Marketvane compilation of sentiment has kissed 70% bullish
once or twice and most recently stood at 69%. These are the
highest bull readings since mid-2005. Bullish sentiment is
not yet flat out extreme, but the 70% area signals to me
I should starting to think about shorting the bond.
Friday, November 02, 2007
Quick Notes
1. Leading economic indicator set weakened slightly more
in Oct., but growth indication still posiitive, albeit
slow.
2. Yr/yr growth of employment through Oct. was a slim 0.5%.
Wage growth was 3.8%. Underlying consumer purchasing power
continues to erode.
3. Heating oil has broken out to the upside and on deck is the
wholesale price of gasoline, set to break out
above the 2.35 - 2.40 per gal. area. Retail gasoline price
continues to inch up, but now has potential to run up to the
$3.25 area again.
4. Support for SP500 has firmed at 1500. Let's see how they take it
out today.
in Oct., but growth indication still posiitive, albeit
slow.
2. Yr/yr growth of employment through Oct. was a slim 0.5%.
Wage growth was 3.8%. Underlying consumer purchasing power
continues to erode.
3. Heating oil has broken out to the upside and on deck is the
wholesale price of gasoline, set to break out
above the 2.35 - 2.40 per gal. area. Retail gasoline price
continues to inch up, but now has potential to run up to the
$3.25 area again.
4. Support for SP500 has firmed at 1500. Let's see how they take it
out today.
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