About Me

Retired chief investment officer and former NYSE firm partner with 50 plus 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 !!!

Wednesday, November 15, 2017

The Stock Market -- Long Term

I am projecting the SPX to reach the 3550 level by 2025. This projection is for doggy growth of
about 4.2% per annum and includes a substantial price retreat and subsequent recovery around
2019 - 2020. What's worse is that I have ginned up the SPX ' earnings growth rate slightly to
account for faster foreign sales and profits growth and also for improved inventory management
by US companies.Despite the availability of highly sophisticated supply management  tools, the management of inventories by business has been too speculative over the last seven odd years.
I am also looking for modest appreciation of business pricing power as the world slowly works
off still sizable production capacity. The growth of monetary liquidity will continue to taper
down as central banks work to regain reasonable balance between the still excessive supply  of
liquidity and genuine economic demand. This will mean somewhat higher interest rates over the long run and considerably more market volatility as the days of spoon feeding the global economy with
dollops of liquidity wane. In sum, I envision a more subdued continuation of the bull market but
one with an expanded 'normal' price range.

If I was a younger guy with a couple of extra bucks, I would be looking at investment in reasonably
valued smaller capitalization companies in both the US and foreign markets. I would only trade
the US market overall after periods of substantial price weakness and, most of all, I would be
looking to invest money privately here at home.

The following chart shows the current very elevated SPX with a horizontal line at 2200 which
is the level that would provide closer to a 10% annual total return out to the projected level of
3550 in 2025. SPX Weekly

Tuesday, October 31, 2017

Longer Term -- Monetary Policy

It is gospel among central bankers that provision of excessive money growth over time will
eventually lead to price inflation which will tend to accelerate to levels that are unacceptable to
the execution of sound monetary policy. The period of major quantitative easing of policy in the
wake of the Great Depression and lasting until the end of WW2 swelled the monetary base hugely
and was never corrected. There were a number of factors that contributed the dramatic inflation
of the 1968 - 82 period and it can be argued that the swelling of the monetary base in years prior
probably contributed to it. Looking out longer term, today's central bankers are concerned that the
major QE programs of recent years, if not corrected in some form could provide the raw material
for a new round of major inflation at some point down the road. The thinking here is that even if
there is no immediate risk, inflation could well up again even if it is ten years out or longer.

The mammoth excess reserves that now  sit in the world's major banking systems are of major
long term concern to the central banks. Programs to reduce the size of central bank balance sheets
directly or hold them in check by paying competitive interest rates on these reserves are two
methods under review. Suffice it to say that plans can be expected to be developed which will
provide far less proportionate liquidity than investors and traders have become accustomed to
over most of the last decade. Since such tightening of policies have not been tried before on a
major scale, there are elements of sizable risk that may only become apparent as these programs

The Fed currently plans to experiment with reducing the size of its balance sheet in the months
ahead in combination with a program of continuing to gradually increase the level of short term
interest rates as the cycle of the economic expansion cycle plays out.

With the economic depression of 2008, the world entered a pro-deflationary environment because
the preceding global economic expansion and the initial bounce of economies after the 2008-2009
downturn resulted in the development of large excess global productive capacity. The issue
of low operating rates is next on this exploration of the long term.

Sunday, October 22, 2017

The Long Term -- Overview

This post begins a series of notes on the long term outlook for the capital markets and the
economy. It is based on a half century of analytic work, hopefully informed conjecture, and
of course, sprinkles of pure imagination.

I think that by 2025 - 2027, the stock market and the global economy will fall into serious
trouble. I foresee a credit crunch that bring the stock market and an overheated economy into
steep downturns. I am looking toward China to have large scale economic and financial blow-
outs that take the US and the rest of the world down with it. I also am projecting an end to a
longer term bull market in US stocks to come to a an end which will see highs that are not
surpassed for a good several years. As well I am, projecting the broad financial environment
to become increasingly volatile by 2020 if not a little sooner.

This view presumes that inflationary pressures will gradually increase going forward and bring
about a long, long overdue capital expansion cycle which will add to the world's production
capacity and thus set off central bank tightening of the credit reins.

Through this all, my deepest concern would be for China where the odds favor up and coming
technocrats who will decide to bring President Xi's expanding political power and reach to an
end. This is projected to be an introspective and deeply unsettling period.

Although I do foresee the US bull market in stocks coming to an end until 2025, I suspect an
overvalued market to have a serious decline over 2019 - 2020 as the economy shifts away from
nominal inflation and super low interest rates up toward more "normal" levels.
Note On The Near Term
The SPX is getting a touch pricey...Note as well that the intermediate term stochastic (bottom
panel) rarely goes through a calendar year without heading down toward the 20 level.
SPX Weekly

Friday, September 29, 2017

Broad Stock Market (Value Line Arithmetic)

Cyclical Bull market continues and rose to new high this week.

Spurs for new up leg since early 2016: Potential for faster economic growth as major business
inventory cycle unwound....Increase in business pricing power and higher profit margin...Promise
of large tax cut program encompassing both individuals and business via Trump...Continuation
of very low and negative short term interest rates.

Looking Ahead
Momentum of real economic growth is at or near peak with slower growth ahead...Pricing power
has been disappointing this year but may improve slightly....Tax cut program could boost corporate
profits by an extra 10% over 2018 / 2019....Passing of tax cut program in full hardly assured....Fed
plans another hike to short rates and to begin shrinking excess liquidity....Private sector funding of
economy is now merely adequate with no excess of liquidity in evidence.

Valuation shows a fully valued market with little scope to tolerate an unexpected surge of inflation
pressure or more sustained rise of short term interest rates.

Fundamental conclusion : bull market with moderate return / high risk profile because of
developing tightening of liquidity.

VLE Weekly Chart

Chart shows overbought market for intermediate term...Bottom panel shows that mid and smaller
cap. stocks are starting to outperform on expectation  that tax cut program will pass muster.

Thursday, September 28, 2017

Trump Plan To Loot The Treasury

The Donald's tax cut plan offers a bonanza in cash for the wealthy and for business. And the
Congress has put itself up for sale as well. Ostensibly, to help defray the costs of the large tax
breaks ahead, tax loopholes will have to be closed. The lobbyists will be there with campaign
cash, sports tickets, girls and even job offers for the future with the private sector. As of this
moment, all the deficit hawks around when Obama was president appear to be on holiday.
There will be many debates and fights over these issues. All of them will be stale. After all,
the issue  of laissez-faire vs. the welfare state has been around for nearly 150 years here in the
US. There brawls will be especially nasty if the Ryan wing of the House starts talking up
entitlement spending cuts to help contain the budget deficit.

When it comes to the markets, there will be extra spin and bullshit thrown in with the strategy
pieces yet to come on stocks, bonds and gold. I leave it all to the rest my brethren to regale
you with their stories. 

Tuesday, September 26, 2017

Stock Market

I have followed the stock market since the late 1960s. I have always been a monetary liquidity guy
who like to buy when the Fed fosters a tail wind for the economy and the stock market through
providing liquidity to the system and reducing interest rates.

Finding market low points when the Fed has your back with 'easy money' has been a top priority
for me because these periods are always low risk / high return intervals. I have always been much
less concerned with trying to call market tops when the Fed has turned restrictive and liquidity
is being squeezed because I usually opt to scale back positions as the head winds intensify.

The Fed is embarking on a historic mission now. It plans not only to raise interest rates gradually,
but to shrink its balance sheet and excess reserves in the banking system. The bulls will argue
monetary policy is still accomodative, but as time rolls along, the Fed will continue to reduce
its balance sheet substantially, and the head winds will only intensify.

I am content with SPX 2500, and at the tender age of 78, I am not well motivated to do the
careful and intense research to figure out when the market will get into trouble. There are lots
of interesting things to do that do not  require such strenuous work.

Here is a link to the monthly SPX. It is overbought longer term, but the important MACD
momentum indicator remains positive.  SPX

Sunday, September 24, 2017

Long Treasury Bond Yield

The 35 year long bull market in quality bonds has been one of the greatest gifts to investors in all
history. For savvy market players, it has been like shooting fish in a barrel. Moreover, it may not
be dead yet. This is because the long term down trends in real economic growth, inflation, and the
full spectrum of investment grade interest rates have not reached decisive conclusions.The US will
likely need to experience another economic recession at some point in the years ahead before we
could be sure that deflation and zero short rates may have been banished. This is why many bond
players have not thrown in the towel despite historic lows in Treasury yields in 2016.

Since this is one of my final blog entries, it would be polite of me to offer long term guidance on
the potential for the economy in the future. But, to be truthful, I have thought for years that the
US economy had the potential to grow by 2.7% per annum based on work force growth and
productivity assumptions and, as it turns out, this view has been too optimistic. Businesses have
just been too cautious to make the long term capital commitments to assure a more productive labor
force in the wake of the huge expansion of productive capacity in the 1990s and more cautious
growth in final demand so far in this century. Even today, capacity utilization in the US is a sub-
par 77%. It could turn out that much of the excess capacity is by now uneconomic and that even
continued modest real growth will eventually trigger an unavoidable need for productivity
enhancing investment. Having been too optimistic about the economy, I leave it for actual events
to tell the story.

I have a link to the long Treasury yield for the past 5 years. In the chart you will spot a horizontal
line at 33 (3.3%). If the long bond yield  rises above that level over the next year and remains
"sticky" above 3%, that would constitute a break of the very long term down trend in yield for the
bond and would be a prima facie indication that the bull was finally winding up, but hardly a
conclusive one.   TYX Weekly