About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, January 17, 2017

SPX -- Daily

Short run business / economic data have continued to move positively, but the SPX has been
trading basically flat for the past month. The simplest explanation of course is that the strong
post election rally brought the market up to near term overbought levels and that it has been
in consolidation mode since.  SPX Daily

Price momentum has gone from strong up down to neutral levels as the market settles in near
its 25 day m/a. The indicators have turned down, but no break has yet occurred. As discussed back
on Jan. 2 (scroll down), the pattern of the market advance since early 2016, if it follows through,
suggests continued chop to be followed by a sell down to test to the 200 day m/a. This pattern could
take a couple of months to complete and is based partly on my assumption that players are
exercising bullish zeal in relatively short doses and have not been ready to throw caution to the
wind. The SPX is trading now about 5.6% above the 200 day m/a. In zippier times, when the guys
have been very enthused, the market has ridden up to in excess of 10% of the "200".

The large shifts in political power in the US in the wake of the election point initially toward a
more business friendly environment. I think the new crew is a good thirty years late in terms
of relevance, but most others see it differently. But more importantly for the year upon us, the
market has already blessed us with a good eight year run, economic slack has been cut during
the expansion, and the Fed is now tightening, albeit gradually. It may be tougher to do well
chasing stocks up now then it was when the Fed had our back as They did most of the time since

Sunday, January 15, 2017

Market Psychology & SPX Weekly

Market Psychology
Following the strong post-election rally, the market has lapsed into a 2260 - 2280 range on the SPX
since mid-Dec. Toward the end of last week, Bloomberg featured quips from US dollar traders that
suggested: "Where is my stimulus?" or emerging impatience as the lead-in to inauguration day
wears on. So far, The Donald has offered growth negatives such as the idea that drug prices be
subject to haggling and the hit on Lockheed for padded costs. Meanwhile, the Congress is fast
tracking repeal of the ACA -- a negative for health care business volumes. There is a contretemps
with China over the status of Taiwan and a crackling good dumpster fire involving Russia's hack
of the DNC and subsequent developments. Get used to it. The stimulus programs will be announced
in due time, but we're talking Trump here and you have to take the goodies along with all the other
horseshit and troubles that will inevitably come. So, markets players patience is being tested and
all will have to wade through the Trump crap. And then there is the Fed who may have to face
programs that ultimately raise inflation potential.

SPX Weekly
The SPX continues its bull run from 3/2009. It is now nearing a moderate overbought against its
13 and 40 wk. moving averages, and is moving into overbought territory on RSI and MACD. There
is room to run on the upside, but such will involve investors relaxing more of the caution they have
displayed since the end of 2014 when the Fed ended the QE programs. Near term business
fundamentals will continue to weigh heavily on the action and players who are counting styrongly on
a new pro-business environment to produce more positive market action will have to keep spirits
up.   SPX Weekly

Tuesday, January 10, 2017

Gold Price

The argument here back on 12/7 was that the economic fundamentals continued positive and
that the blow out in the  market over Half 2 '16 left the metal sharply oversold. I also did some
complaining about how difficult it has become to trade gold because the futures market has been
grandly inflated by large pools of hot money over the past 15 years. Well, the market has rallied
here in the early going this year and the deep oversold is being remedied reflecting a weaker
dollar and a flat stock market since mid-Dec. Inflation fundamentals have also picked up on the
basis of stronger US and China economic activity. The US dollar weakness has probably done
the most to carry the day.

The gold price is approaching its 50 day m/a and is also approaching the $1200 level. That $1200
price has served as a resistance point in recent years and when it is pierced with conviction, can
extend a rally.  Gold Price

I have a macro argument that the fundamentals for the USD will strengthen further over the long
term. It is a view I have held since the early aftermath of the deep recession of 2008-09, but it
calls for very gradual improvement in the dollar's standing. At this point, I regard fair value for the
dollar to be around 90 - 92, but it has been running ahead of schedule since the Fed first tightened
policy in 2014 by ending QE programs. Perhaps USD vulnerability will increase out ahead if
inflation continues to firm and the US trade position weakens further.

Saturday, January 07, 2017

SPX -- Weekly

The argument here over the past three years is that the market can rise in sustainable fashion even
without  the strong tailwind of primary liquidity growth from the Fed. In positive cases like this,
the private sector assumes the role of funding economic growth and a rising stock market through
internally generated funds and through the credit window via banks and other credit intermediaries.
Both the economy and the stock market struggled for the past nearly two years after the Fed shut
off the spigots. But, as this past year wore on, the economy has slowly recovered its footing
and the market has moved along with it. So, a positive economic environment has been regained
and can be sustained so long as major imbalances do not develop. The labor market is obviously
tightening, but there is slack in production and some in the services component as well. By today's
computer analytic capabilities, business inventories remain elevated, but have fallen to manageable
levels. Bank balance sheets remain liquid, so there is ample lending capacity available. Inflation
has been accelerating but remains modest. The Fed is now more active, but short rates are
accommodative as rates remain negative in real terms. So long as the economy can grow moderately
without triggering off both stronger inflation and rounds of tightening by the Fed, the stock market
p/e ratio, although very generous, is primarily vulnerable only to troubling external events.

I still want to see business sales fulfill the promise of the forward indicators and continue to
improve in performance. As well, I have my biases, and with a global economy not yet that far
out the tank, I have serious concerns about a Trump administration and how well they can
manage the path to genuine stability. Pundits and strategists continue to regard the incoming
crew positively, but, if I may speak colloquially, I fear this group can fuck things up to a

The weekly chart remains positive, but an intermediate term overbought condition is developing.
SPX Weekly

Thursday, January 05, 2017

Global Economic Supply & Demand

Despite moderate global economic recovery over 2009 - mid-2014, excess production capacity
remains a worldwide problem. Following a period of intermittent inventory restocking during the
during this period, the capacity excesses resurfaced with a vengeance as global production and
trade slowed over the past nearly two years. Emerging market production began to improve
in early 2016, and the rest of the world has gradually followed suit, signaling a return from very
slow growth and deflationary pressure to prospective moderate growth.

Historically, bouts of inflation start in the commodities sector. Over the past year, a broad measure
of industrial commodities has jumped by over 27%, paced by a partial recovery in fuels prices. The
even broader CRB commodities market has recovered by nearly 15% over the past 12 months.
$CRB Weekly

The commodities markets have seen capacity reductions in various sectors since 2014, but excess
remains. My long term macro model for the CRB composite has breakeven in a range of 300-
335, with the low end of the range reflecting the positive impact of lower oil and fuel prices on
the cost structures of non-fuels commodities production.

Even so, with stronger global industrial output growth underway, commodities prices can
recover further, and should global production rise from the low of 1% seen in early 2016,
back toward more nearly respectable 2.5% during this year, the CRB can rise substantially more
and put added pressure on a rising inflation rate. That would strongly suggest more upward
pressure on interest rates and downward pressure on the p/e ratio of the stock market.

Monday, January 02, 2017

SPX -- Daily

The Trump rally reached a short term overbought around mid-month. Since then, the SPX has
been correcting and has moved down to a neutral on a momentum basis although RSI and MACD
are declining. The pattern of the market's rally since early 2016 has been one of a sharp up move
followed by an extended topping process and completed by corrective action down to test the
200 day m/a.  SPX Daily

If the pattern holds suit, it may be early in the "topping" process, but the corrective phase likely
would not run its course until the first couple months of the new year are completed. In this scenario,
the Trump plans for the economy would hit a bump as market players assess how truly likely it
is to pass muster with the Congress and, encompass another Fed policy meeting as well.

But, just as history shows stock market patterns change, so might this one as well, with the
opening weeks of 2017 to tell the tale. Given the period of political testing that surely lies ahead,
I merely suggest that you keep continuation of the 2016 rally pattern in mind.

And speaking of politics, the Trump crew will be facing another issue. Pushing the economy to
grow faster in the shorter term when it is already well along in employment and when signs of
faster inflation are evident invite an eventual economic overheating and possible subsequent
recession that, depending on timing, could be politically damaging to The Donald's re-election
chances. If instead, the new administration acts in a leisurely fashion and allows for a degree
of disappointed expectations to take hold in the economy and the stock market in 2017, he
might wind up in better shape in 2020, should he choose to run again. Believe me, this
discussion will take place if it has not already concluded.

Sunday, January 01, 2017

SPX -- Monthly

The market closed out the year nicely positive. My projection for the SPX, made 15 months ago, was
that the market would close out at 2160. Instead, it finished the year at 2238 or 20.7 estimated 2016
net per share. I foresaw rising earnings, but not the premium multiple. I expect net per share for the
SPX to rise to $120 - 130 for 2017, but accord only a p/e ratio of 17.6x based on a rise in the
inflation rate to 2.4% and a few more hikes in short rates. So, this puts fair value at about 2200 for
the SPX, or nearly 6% below the 2016 close. This value is well below the consensus range of
SPX 2300-2500, and reflects an adjustment to the p/e ratio for a pick up of the inflation rate,
something most other forecasters give short shrift to. I also assume that earnings benefits that
might flow from a Trump policy of fiscal stimulus will more likely arrive in 2018, and allow
risks to earnings from possible Trump restrictive trade and immigration policies not included in the
consensus calculations.

Now, one has to recognize that the SPX itself is on trend, when extended, to rise to 2500 by the
end 2017. Playing 'extend a trend', however implicitly, is no small pastime of Wall Street, so there
is a neat fit with the strong idea that the new administration is going to be very business friendly.

With the old adage that 'the trend is your friend' in mind, and with no red flags yet on probable
SPX net per share and the vigor of inflation, many investors and traders will probably go along
with this high powered projection. You might keep in mind that the SPX could decline this
month to 2100 and not upset the apple cart.

Monthly Chart
The chart shows a continuing cyclical bull but one with very subdued momentum since the end
of 2014. That's when the Fed tightened policy substantially by freezing the monetary base and
its own balance sheet. it also reflects a down wave in economic activity and in profits which has
started to reverse recently. Importantly, the monthly MACD has experienced a positive cross-
over and is trying to lift. The bottom panel shows a broad range oscillator and reveals the
best entry points for this market (when the oscillator falls below 50%). At present, the
oscillator is moving up toward an overbought.  SPX Monthly

Oh yeah. Happy New Year.