Stock Market -- Short Term Technical

Today's sell off continued the one started on Friday, only with more
smack. It ended a plainly unsustainable rocket run up that produced
a massive short term overbought on price (the breadth overbought
reading was mundane). The market could lose a little more ground
over the next day or two and still would be well positioned to move
higher if it catches decent bids. Too early to throw up one's hands.

The short term overbought we saw last week doubled anything
I have seen for quite some time.

Corporate Profits

Profits for the nonfinancial sector for Q1 ' 09 should be lower than
for the prior quarter and down substantially from the prior year
reflecting weak output comparisons and a loss of pricing power,
with the latter especially telling for commodities producers. Ditto
foreign earnings, and, for the offshore net of US companies, we have
to tack on an additional penalty for a stronger US$.

The financial sector maintained a high level of net revenues.
Downsizing likely cut noninterest operating costs, but the flow down
to the bottom line will primarily reflect the magnitude of loan loss
reserves and securities losses from the continuing unwind of the
mortgage paper crisis. That's all guesswork at this point. Naturally,
AIG -- the current poster child for the meltdown -- could have
more bad news to report.

With SP 500 profits broadly bad, companies are cutting dividends
to conserve cash. Measured yr /yr, the Sp 500 dividend is down 16%.

12 month earning power for the "500" is now a low $45. per share.
In a moderate global economic expansion with an accompanying
reduction of finance sector loan losses, earning power could be
$75 - 85. per share in the latter part of 2010.

The drop and crash of the stock market from 2007 is every bit
warranted by the drop and crash of big company earnings. US GDP
corporate profits -- a broader measure but one which has peculiar
economic adjustments -- is down about 33% off its peak, which is
still lousy.

The SP 500 Market Tracker, which uses current 12 month eps, is
priced now at 750 and reflects the current awful state of index profits.
The current rally underway in the stock market reflects an effort
to begin discounting a more stable economy with a bit more investor
confidence about the future.

Stock Market -- Short Term Technical

Yesterday's big rally took the market up to an obscenely high
short term overbought. We saw a pullback today, but the market
is still strongly overbought and vulnerable to more selling pressure.
Such would be the case even if bull market conditions ruled.

The market is at the gate of an intermediate term rally -- 6 -13
weeks -- that could carry the SP 500 up into a congestion / resistance
zone of 850 - 900 (as opposed to today's close of 806). However, the
trajectory up from the 3/9 closing low of 677 was such a rocket it
leaves about 5% further downside before it would enter onto a more
"normal" rally trajectory.

More conservative traders looking long may well hold out to gauge
if they can enter orders at meaningfully lower prices.

The market has moved sharply outside of a strong bear market
trajectory for the first time since the fall-into-crash kicked off after
Labor Day, 2008. So, for long side players this is the most interesting
rally in months and this suggests interest may stay high for a while.

The intermediate term breadth indicators I like still have the market
in oversold territory looking out several more weeks.

Financial Liquidity & Monetary Policy

Early in the calendar year, the Fed tends to drain liquidity from
the banking system following the holiday season. This year, for
reasons not disclosed, the Fed shrunk its balance sheet by a
whopping $400 bil. This action led to a contraction of the basic
money supply and a $150 bil. contraction in my broader measure
of credit driven liquidity. For a central bank intent on easing
credit, the tightening caper makes little sense, unless they wanted
to see how the credit markets would react to so big a change.

In any event, the Fed came along this week to announce they would
buy a little over $1 tril. of paper, including $300 bil. of Treasuries.
With this and their other facilities, the potential is there to expand
their balance sheet by $1.4 tril. or 70% to a ginormous $3.4 tril.
God bless us, that's a lot of money. Piker that I am, I would have
been satisfied if they had replaced the funds they drained and added
perhaps $100 bil. more via buying Treasuries.

So as discussed in the prior post, They are creating liquidity to
support credit growth far in excess of what the US is likely to need
over the next couple of years. Perhaps these planned purchases
will help hold Treasury yields down in the short run. We'll see.

Another gambit the Fed could have tried would have been to stop
paying interest on reserves and to start charging interest instead.
That might have served to get banks to reduce their excess reserves.

Well, we have moved much further in to a new ball game in the
annals of US monetary policy. This move has the potential to help
the economy in the short run, but it also could serve as a destabilizing
force in the long run.

The Fed -- Maybe They've Gone Over The Top

Ok, the FOMC has announced it is committing to buy up to $1 tril.
additional securities, including $300 bil. of Treasuries (quantitative
easing). They want to rescue the economy and do Their bit to help
out globally. I get it. But, this latest round of monetary expansion
grievously offends my sense of proportion and balance. To
analogize, the FOMC is building this enormous casino with every
gambler's interest and amenities provided for. But, the US private
sector is looking maybe to enter the casino once in a while, and needs
but a cup to hold quarters for the slots. In short, the Fed is
seeking to replace a credit regimen that may be too large for the
times we have entered.

Inflationary? Could be. But this action will create a liquidity load
in the system that could destabilize the economy and the capital
markets, especially when it comes to shrinking this vast pool.
Monetary tightening down the road that could involve removing
$1 tril. from the system could have unintended but very disturbing
consequences, inflation notwithstanding. Restoring integrity to the
Fed's balance sheet long term could prove a daunting task indeed.

I say all of this because I do not think the economy needs this much
liquidity to recover and prosper. Savings = investment, so even if
the economy saves more at the expense of a measure of short term
growth, liquidity for longer term investment will be provided
internally. I would like to see economic growth proceed from cash and
carry to modest credit expansion, which seems far more appropriate.

I understand the fear of a deflationary spiral into depression. But I
think folks need time to reassess their priorities and to budget
accordingly. That means a blend of incremental spending and
savings should be expected rather than having everyone only
pinch pennies and wait around to be laid off.

So, I am now out of synch with this decision to build so grand a
monetary edifice. It raisies substantially the risk of unintended
economic disequilibrium and dislocation.

Coincident Economic Indicators

Viewed yr / yr, the recession deepend further. The Feb. index of
CEI was down 5.1% vs. 4.5% for Jan. All components softend. My
indicators are overstating the weakness somewhat because they do
not capture the large increase in the social security disbursement
rate. The real hourly wage remains a very strong 3.6%, which when
coupled with per capita real SS disbursement of over 5%, gives the
consumer the stongest per adult cash buying power in many years.
That remains the bright spot in the outlook.

Real per capita income growth is being undercut by the rising tide of
employment losses and a weakening job market will eventually lead to
a softening of wage rates. Short term, real retail sales is showing
stabilization, which is a hopeful sign. Seen yr/yr, real retail sales is
down about 9.9%, which continues to show how strongly consumers
are interested in boosting liquidity or savings. Short term, the
liquidity preference has weakened, and this is precisely what is needed
to restart the economy. Come April, wage earners will get another
boost from lower tax witholding rates.

Production fell a whopping 11.2% yr/yr through Feb. That means that
inventories are being liquidated relative to sales and that the pipeline
is thinning out. Weak production also reflects the dramatic decline of
US exports under way over the past half year or so.

In all, it remains premature to give up on the idea of a stronger Half 2
economy for 2009, although the outlook remains a cliffhanger.

Stock Market -- Technical

Well, the rally has moved up and past the quick sucker format and
is threatening to become more substantial. The SP 500 has risen to
an overbought at 3.1% above its 25 day m/a, so I think we now are
at a level to test bullish intentions as overboughts above 3.0% have
tended to correct within days after the rallies have topped that
modest level (past six months only).

The 25 day oscillator has broken up through a downtrend underway
since early Jan. ' 09. That's a positive as it suggests the downleg
from Jan. may be over. The 10 day m/a is rising. The 25 day m/a is
still falling and the "10" is below the 25. So, it is still only a short term
run. My 25 day indicators are turning up but do not a confirm a
rally of more consequence as yet. Chart here.

The important 40 week oscillator with 13 week smoothing may be
entering a bottoming phase. This indicator indicated a topping phase
which began in the spring of 2007, ran on, and wound up hinting at
the major top that was to come. In a similar vein, the 40 week osc.
could run on in a bottoming phase for some time as well, although
as with all things technical, it need not.

Stock Market -- Technical & Psychology

Technical
Over the past 3 days, the market has rallied from a deep oversold
up to a modest oversold. Last week, I saw it as a coin toss whether
stocks could rally or fall further to match the kind of oversold %
readings we saw last autumn. Unlike the intermittent rallies we
witnessed through much of 2008, the upsurges this year have all
been cruel sucker moves that have trapped all but the most nimble
of day traders. At the moment, the jury is out on whether this is
just another sucker-doo.

This is the 3rd time this year the market has rallied out of a deep
downtrend line. So, it will be interesting now to see whether the SP
500, which closed today at 751, can advance further, and of greater
importance, can hold above the 710 level through next week's close.
Then, we might have something more interesting.

Psychology
Market psych. has improved this week because leading banks have
pointed out that net revenues remain at high levels and that cash flows
net of reserves remain substantial. The promise here is that if
the economy is more stable and loan loss reserves are more contained,
the earnings leverage will be quite positive. As well, both the SEC and
the accounting standards board (FASB) are under tremendous
pressure from Congress to modify the ridiculous market-to-market
rules which are making banks take losses they may well not realize.
Both the FASB and SEC are now under strong pressure to respond,
pronto. Congress gets my vote on this one. Finally, it should be
noted that retail sales, a forward but not a leading indicator, are
showing some stabilization (More on this next week when the
co-incident economic indicators are reviewed).

I enjoy trying to gauge market psycology, but the recent change to
positive is a great reminder of just how fast psychology can change
and why you have to be so careful with it.

Oil Price

The oil price retains good economic value below $50 bl. The price
is giving mixed signals during this normally strong seasonal period
which can run out through March. It is well off the late 2008 crash
low of $33+, but has not been able to take out short term resistance
in the $46-47 area. At present the shorter term uptrend in evidence
since mid- Feb. '09 is the firmest to date since the price moved up off
the crash level.

Still, the price should be doing better. It is behaving atypically for a
new cyclical advance during this normal strong seasonal period, and
the failure to clear resistance puts it closer to bear market behavoir.
Since cyclical bear markets in oil typically last 12 - 18 months, the
late 2008 low looks suspicious given that the all time price high of
$147 came in mid-2008 as well as the severity of the decline in
global petroleum demand. So, although it has a good short term
technical profile and could push higher before the end of the month,
claiming that the price "bottom is in" is an against-the-house bet.

Fundamentally, despite the OPEC production cuts, inventories are
high on a seasonal basis and gasoline demand in particular remains
on the weak side. Capacity at the well head will expand moderately
this year as well. So, it could be late in this year or 2010 before
supply and demand align more favorably for price recovery.

Long positions should be attentive to how oil behaves as it winds up
the seasonal push around month's end. For a technical chart, click
here.

Economic Indicators

Weekly Leading
Weeklies are still trending down, but the momentum to the downside
has eased markedly, signaling a short term moderation in the pace
of the downturn.

Monthly Leading
New order breadth measures for Feb. again came in above the record
lows for 12/08, but downtrends persist. Monthlies also signal a
moderation of the downturn short term.

Comparable global measures are short run stable at low levels.

Economic Power Index
The real wage rate is holding up decently at 3.6% yr/yr, but the
employment rate has fallen sharply to -3.0% yr/yr, undercutting
the wage. A lower consumer tax bill at the outset of the year and
lower witholding ahead are boosting after tax incomes. The
strong real wage continues to give the economy a decent shot at
recovery this year if liquidity preference moderates in favor of
spending.

Business Strength Index
A weak 110 for Feb., with 135 indicating decent expansion. Business
output and operating rates remain at deep recession levels.

Economic Slack
Slack continues to rise as short rates are very low, operating rates
have been falling and unemployment is trending up sharply.

Profits Indicators
Continued weakness for Jan. , Feb. Suggests Q1 '09 profits will be
sharply lower yr/yr.

Inflation (Deflation) Thrust
The indicators remain consistent with the development of mild
deflation this year when measured yr/yr. Focus of market players is
likely now more directed to month-to-month changes to see if
a fresh trend might emerge.

Summary
The indicators point to an ongoing deep global recession with some
moderation in the power of the decline so far this year. Profit
margins remain under pressure from very weak sales. Within a
12 month perspective, the pricing outlook is mildly deflationary. Too
early to tell yet whether leading indicators have paused in their
decline or are signaling eventual, firmer stabilization.

Stock Market

The market has drifted down into deep oversold territory that can
as easily signal further vulnerability as a rally prelude. If investor
despair is creeping in and taking hold, the broad market can easily
drop another 8 - 10% in relatively short order. As I have discussed
in recent weeks, it is hard for fund managers to hold on for recovery
when current profitability is so very low and when a significant
rebound of earnings seems very "iffy" after plenty of disappointment
since late 2007.

At the current level of 682, the SP 500 has moved down from quite
reasonable to cheap. In my view, it is interesting from an investment
perspective for the first time in a long time. In fact, I have only traded
equities for many years and even cut back on that when the market
had its bubble over 1996 - 2002. Now since I am closing in on 70
age wise, I am not really interested in long term positions, but I do
plan to extend my time horizons well past the 2 - 4 month regime I
have followed for so long as we move forward.

For the very short run, we can only see whether there is enough of
an oversold to trigger more than a few days sucker rally or whether
fear is up enough to trigger another round of heavy selling.

Let Us See....Let Us See

I have posted a lot in recent weeks with topics in a longer term
perspective. Now it is time for a few months of careful monitoring
to see how matters shape up.

My views run as follows. The US is on the borderline of far more
serious economic trouble. Analysis of business cycles over history
precludes reaching too negative a conclusion so quickly. The longer
run leading economic indicators have been positive for nearly 6
months and I have been anticipating a recovery to to take hold over
Half 2 ' 09. Many of the objections to this view can be rejected out
of hand, save for the issue of liquidity preference. Consumers have
cut back sharply on spending to rebuild savings at the expense of the
real economy. A troubled housing industry and low affordability
has kept people away from the residential market. The real wage
per capita is strong and this has been a key to recoveries in the past.
Housing affordability has improved sharply. So, we need to see
how folks balance savings, spending and investment in the months
ahead. Continued very strong liquidity preference will only sink
the economy further. To help consumers and the financial sectors,
there is modest tax relief ahead and another Fed / Treasury
program to boost consumer and small business borrowing. This
latter program based on a $200 bil. swap for Treasuries can be
leveraged up to 5 - 1, putting up to $1 tril. in play.

Businesses are fast trimming inventories to rebalance the pipeline
after a rapid fall of sales. This rebalancing has substantially
punished production and employment, but it is well underway.

By historic measures, a Half 2 ' 09 economic and profits recovery
should see a stock market bottom between March - May right
ahead. Now just below 700, the SP 500 is very reasonable on a
decent recovery in profits through 2010. I would also point out
that my fundamental indicators flashed positive at the end of ' 08,
but weak current earnings and diminished confidence have so far
weighed heavily on the market. I am on the hook for that and will
be for some time, as those indicators would not turn negative until
the Fed tightens policy.

In my view, commodities which are now cheap, should move up
sharply over Half 2 '09. Ditto oil, which at $40 bl. is also inexpensive.
My concern would be if economic recovery brings too rapid a rise
in commodities and begins punishing consumer incomes.

Look, from my perspective, the pieces to move the economy up and
out of the ditch are in place. The battle now is with fear and public
anxiety about the future. Since consumer sentiment can turn on a
dime, I plan to move forward in viewing the environment a couple
of steps at a time.

Stock Market -- Earnings & Long Term

It appears that the 12 month operating earnings of the SP 500
could well fall 50% or more peak-to-trough in this cycle.
Specifically, net per share could fall from an all time high of more
than $91- to $45- or less by later this year. The post WW1 era and
Great Depression saw larger declines, but the present downtrend
is as bad as it gets short of economic catastrophe.

As you might imagine, steep declines of corporate profits are followed
by strong advances once the economy turns positive. Even so, with
a decline of 50% in net per share, experience shows it could take
5-6 years to recoup and see earnings move to new highs. This
observation suggests that the recent $91- peak might not be topped
until 2014-15.

I do keep a model of the SP 500 based on very long term net per
share growth of 6.45% and a p/e based on both a long view simple
average of this ratio plus one based off long run inflation. Trend
or "normalized" eps for 2009 is about $75- and the p/e ratio is
set at 16.0 - 16.5x. The model value thus has the "500" at 1200 -
1238. Thus the market, now in the mid-700s, is very reasonable
against the long term framework. But, to be realistic, it could well
take several years to see reported "500" eps back up to $75-. Thus,
you need to take the model's output as a measure of value and not
a shorter term price target. But, you also have to recognize that
development of a cyclical bull market in the wake of a very deep
decline of earnings can easily double the price low within 4-5 years.

Now I can use historical earnings and dividend data to construct
a more muted price recovery as well as one with even more punch
than that outlined just above. Much will depend on the power of
the economic recovery as well as how aggressively companies
manage their plowback of earnings and their balance sheets.

The long term model I discussed above is quite a bit more
conservative than the one that served me well from the 1985 -2007
period. I have taken the long run trend of earnings component
down from 8.5% back to the historic 6.45% in looking toward
the future. I also used a 70% earnings plowback rate with the
1985 - 2007 model and this could be high going forward. But we'll
have to see on that.

I use a long run "normalized" pattern model to try and envision
the future and as a diagnostic. The LT model of the SP 500 is
different from the Market Tracker, which relies on current 12
month earnings rather than points on a trend. If 12 month "500"
net per share drops to $45- this year as expected, the Tracker
would show a value of about 740. Grim indeed.

I plan to set the longer term stuff aside for awhile to focus more
on the shorter term environment. After all, the economy still
sits at the edge of far more serious trouble, and I need to check
in on whether my view that we can avoid catastrophe has some
merit.

Big Bank Nationalization -- No Thanks

First, a contrary view: The conventional wisdom is that the banks
need to be "fixed" to have an economic recovery. I see it the other
way around. We need to see an economic upturn start first to have
a good chance at straightening out the major banks. Recovery
implies an improvement in loan loss experience, an improvement
in bank operations cash flow and stronger investor interest. A
persistent economic decline implies all of the opposite: wider
losses, shrinking cash flows and the coup de grace for bank equities.

Overall, bank loan demand is more of a lagging indicator, since
businesses can cover early recovery working capital needs with
fast rising cash flows. In the meantime, banks can accomodate
early recovery mortgage needs straight out of the pot. Early
economic upturn provides business with a chance to reduce their
loans and for big companies to refinance short term credit with
bonds. Yes, eventually we will need the banks to finance advanced
expansion, but the early upturn comes first.

Banks follow a certain script with troublesome credits. They
increase loan loss reserves, charge off losses against those reserves
and post loan delinquencies to regulators. Banks are now being
stressed tested every day in the weak economy and will now
step up with 2 year estimates of unrecoverable loans and the hits
to capital such might involve. The US Treasury will then have a
projection of external primary capital each of the major banks
might need.

An economic upturn will bring better loan loss experience and lead
to an upward revaluation of toxic, securitized loans. It will also
greatly expand the market for selling these loans as monster bid /
ask spreads narrow.

At this point, banks would be foolish to sell those loans at large
discounts. If it wants, the Treasury can enlist private capital with
guarantees to, in effect, make a market for the junky stuff. But
an economic upturn will underwrite a far better market, as banks
can sell at reduced losses if need be and dilute equity less.

For my part, the most appropriate course for the Gov. is to
recapitalize the big banks as needed in the short run, close out
the smaller stinkers and wait for improving economic conditions.

The guys out there who are calling for an immediate takeover of
Citibank have no idea of what they are asking for. First, the Feds
would be on the hook for hundreds of billions of $ deposits. Then,
figure it will take the new top guys and directors 18 months to
figure well what they have inherited. In the meanwhile, top
divisional people will leave for better money elsewhere, leaving the
bank undermanned at a time when businesses may come a calling
to bank with a "risk free" house. Finally, there's an even darker
side: The guys at the seized bank may simply not prove very
helpful. So, taking on a big guy via a takeover should be an
absolute last resort.

The focus needs to be on re-starting the economy.

Stock Market -- Technical & Psychology

Technical
There are easier days for technical comments, but here goes. The
recent weakness in the market has brought it to a fairly deep short
term oversold, with the SP 500 about 10% below its 25 day m/a.

The "500" did close under the previous bear market low of 752
set in 11/08, but, with today's close of 743, the action was not
decisive enough to claim that a new dramatic breakaway downleg
is in force. Thus, the focus can be on whether the clear oversold is
deep enough to warrant a rebound. My 25 day price oscillator
broke down below an improving trend in force since last autumn.
That tells me not to simply proclaim a rally is imminent. My six
week adv / decline "flame" is deeply oversold and that tells me there
is a good bounce in store over the next 10 trading days.

My intermediate term indicators run out to 13 weeks. I rely heavily
on these to trade, and, they are in whipsaw mode and have been of
little help. So, I am stuck with the short run.

My weekly SP 500 chart has long term support at 800, so weekly
closes below that level would turn that chart bearish on a longer
run basis. I do note that my NYSE a/d line is a country mile above
levels seen when the SP 500 broke 800 back in 2002. Such has
been the interest in smaller cap stocks as well as the disastrous
performance of the major financials.

With so many years of looking at charts, I have developed trend
momentum trendlines that have proven helpful to me. The SP 500
did move out from under the crash line in 11/08, but has not yet
been able to clear a serious momentum downline in force since 9/08.
Recent failures to do so ratify the bear market. Chart here.

Market Psychology
The major issue in recent weeks concerns how well psychology
will hold up with corporate profits so very weak and with the
leading indicators not signaling recovery straight ahead. It is
difficult for many to summon the courage to buy stocks now even
if profits recovery is 6-7 months away because profits are so very
low.

I do not use psychology as a primary indicator because it is not at all
easy to "read" and because it can turn on a dime. I am now looking
to see whether despair may be starting to creep into the environment.
Tough read now because we are so oversold.

Coincident Economic Indicators

My favorites are the changes to the real hourly wage, employment,
real retail sales and production. Measured yr/yr, the composite of the
four stands at -4.5% for Jan. Momentum is still to the downside, but
the window for economic recovery has opened a little further. The
yr/yr change in the wage stands at a strong 3.9%. The decline of
industrial production has tumbled to -10.0% yr/yr.but that brings it
below that of retail sales at -9.7%. This means weak production has
caught up with sales and that excess inventories are therefore being
worked off. Best now would be a period of stabilization of retail
sales, which did rise 1.0% in Jan.

The economic power index -- change in the real wage plus change of
employment -- stands at 1.7% yr/yr. Compare that to the 9.7% drop in
retail sales and you can see clearly how fiercely consumers have been
building savings and going light on the plastic.

The strength of the real wage gives the US a golden opportunity to
stabilize the economy with a better balance between spending and
saving. I hope we take it, because sooner or later, a weak economy
will bring the wage down.

Inflation (Deflation) Indicators

The 12 month CPI came in at 0.0% for Jan. '09. As often discussed,
the rapid deceleration of inflation measured yr/yr primarily reflects
the Half 2 '08 blowout in the commodities markets, especially fuels.
Worth noting is that the 12 month change for the CPI ex. fuels and
foods has dipped to 1.7%.

My inflation thrust gauge is now a deflation thrust measure and
continues to point to mild 12 month CPI deflation in 2009. Another
longer term measure I follow weighs commodities less heavily but
also seems to be pointing to mild deflation (ECRI).

The CPI has fallen about 4.0% from its all time peak set 7/08. Most
economists now know that the 12 month CPI will show deflation
unless the CPI accelerates up over the next 6 months. So, from
here, there will be more focus on the month-to-month change in
the CPI to determine whether the recent sharp decline was but a
shorter term phenomenon.

The hot button component for the increase in the CPI from Dec. ' 08
was the gasoline price, which has moved up from $1.62 a gallon to
$1.92. There will be little concern unless the gasoline measure
surges much further.

Financial System Liquidity

I start this comment looking on a global basis. The very sharp
contraction in the US trade deficit over the past six months means
a large decline in US dollars flowing overseas. Most economies,
now in deep recession, would welcome additional dollars to buttress
reserve holdings in a time of stress when their own currencies
may be under pressure. The contraction of US trade adds to
sovereign risk for economies in distress now, such as eastern
Europe and Taiwan. The Fed has provided about $600 bil. in
currency swap credit lines to foreign central banks as an offset.
The growing US budget deficit and a strengthening US dollar may
also work to syphon liquidity from abroad, as foreign investors
choose US Treasuries for safe haven status. As the yuan has
weakened in China, there is evidence of some capital flow from
there to the US. The US dollar in global context poses hazards
abroad in 2009. The Fed swap lines are not that popular here as
the Fed is taking credit risk abroad. Thus the Fed has to operate
with caution here.

Over the past 6 weeks or so, the Fed has drained nearly $400 bil.
from its balance sheet. January is often a "drain" month following
the holiday season, and given the current gargantuan size of the
Fed's balance sheet, well, we're now talking big numbers on the
add and drain sides. The drain resulted in substantial shrinkage of
the monetary base and the basic money supply. The liquidity here
is still strong and not a major worry at the moment. However, the
shrinkage may have bothered some stock players. By happenstance,
it might also serve as an important message to high inflation buffs
as the Fed showed it can shrink liquidity in size every bit as fast as
it pumped it up.

The broader measure of liquidity (in which I include financial co.
commercial paper) is recovering in growth. Realistically though, we
may be at a point where increased credit demand may be required to
sustain improvement over the next year or so.

There is large excess liquidity on hand relative to the current needs
of the real economy. And that excess reflects rising deposit balances
against a 10% yr /yr decline of US production and SP 500 company
sales. The much lower need for working capital could at some
point lead to a sharp run off of C&I loans and relieve stress on bank
system liquidity and capital. We'll see. The excess liquidity described
here is normally a powerful plus for stocks, although low investor
confidence has been holding players back.

Stock Market Comment

Much of what I read blames this new round of weakness in the
market on the failure of Treas. Sec. Geithner to present a fully
fleshed out plan to corral toxic bank debt and put the system on
a sounder footing. Such may be hogwash. The Street is out after
Geithner because he represents the leading edge of more regulation
of hedge funds and other managed products. They are not going
to love Timmy.

Rather market weakness reflects the ever more obvious: Really
awful sales and earnings. Yr/yr SP 500 sales are down by more than
10%, and operating earnings for the final quarter now look to come
in below $6.00. That has knocked the wind out of the long side of
the market. Most know that Q1 '09 net per share promises to be
quite low as well, so that there can be no BS-ing about the second
half of the year: Net per share needs to bounce big time to provide
12 month eps that can bridge into a much stronger 2010. You have
to go back to 1932 / 33 to find a shortfall of earnings comparable
to what we have now. Unsure of a Half 2 '09 sharp positive turn
of earnings, investors now struggle with how to stay long on such
low current net per share.

Every stock investment manager out there has faced the challenge
of deep down earnings or worse for a particular stock or industry
sector, but none have faced such depressed earnings for the entire
market. It's gazing into the abyss and players may need more time
to adjust.

Stock Market Psychology

Basically, a waiting game continues. The global market crash over
Sept. /Oct. ' 08 was the direct reflection of a plunge in global output
and profits. In the US, the leading economic data sets I follow have
leveled off over the past 2 months, and the SP 500 has notched 70%
of its daily closes between 800 - 900 since mid - Oct. ' 08.

The market has faded since year end primarily because operating
profits have come in well below expectations. In turn, players now
know the Obama stimulus package will phase in rather slowly.
Players have also re-discovered that settling the toxic debt issue
of the banks is going to have require some creative thought not now
in evidence.

We have G-7 this weekend, but beyond that the focus should be on
another round of poor earnings reports coming in April and whether
prospective additional economic rescue steps by the Obama admin.
and others in the interim might be enough to hold the markets up.