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 !!!

Thursday, October 27, 2016

The Typical Stocks Bear Market

In recent times, the stock market has tended to carve out and extended top before the cyclical
bear arrives. The current cyclical bull has basically gone nowhere for two years. So, it gets
tempting ask whether the market is experiencing one of those periodic, lengthy topping periods
now.  SPX Weekly

It could be so, but the current period does not fit the the typical lead - in. What is missing of
course is the steady rise in short rates along with progressive flattening of the yield curve that
heralds the onset of a pre - recessionary liquidity squeeze / credit crunch. Some elements of a
problem are there. The Fed zeroed out the growth of its balance sheet and the monetary base
quite some time back and even raised the Fed Funds rate a notch last Dec. Moreover, Fedspeak
is leaning in the direction of another increase before long. But the supply of loanable funds now
provided by the private sector has been steadily growing faster than the demands of the real
economy because of low output growth and nominal inflation. Confident investors have drawn
on the excess liquidity to invest in and trade the capital markets. In addition, history shows that
even when the economy perks up, liquidity and the supply of credit can expand along with it
at least up to a point.

So, it would appear premature to write the market's obituary based on the fundamentals since
the traditional cyclical deterioration of the financial system and rate structure is not in evidence.
However, it remains troubling to me that the stock market and the economy have struggled so
obviously since the end of QE 3 as 2014 closed out, and that the economic system has been
saddled with excess business inventory for such a lengthy period.

For now, bond and stock prices are in softening trends as both markets come off the hefty
overbought conditions of the summer. Market players are seeking to find appropriate price
levels to accommodate another short rate increase. There may also be nervousness as the
election fight comes through the home stretch as well as some trepidation about how Trump
will behave in either victory or defeat.

Sunday, October 23, 2016

Stock Market -- Fundamentals

The Fed ended its QE programs in late 2014. From a liquidity perspective, the US has experienced
stern tight money since then. I along with a few others warned that both the economy and the stock
market could be damaged following a large, cumulative QE program as occurred in the few other  instances when major QE was halted. From the latter part of 2014, US business sales fell  from
a 7% yr/yr rate of growth down into negative territory by the end of last year and nearly went
into recession before stabilizing. Business sales and profits were also damaged by the oil price bust
which took place over the same period. Since new business orders spiked high in late 2014 / early
2015 just as sales momentum turned down, the economy has carried excess inventories ever since.
Super low shorter term interest rates make it easier to carry inventories, so the holding of large
stocks has continued to suppress economic demand. Over this period, SPX net per share has fallen
from about $115 to $98 in 2016. Overall, the economy did not fare that badly, as the Fed wisely
kept interest rates at historic lows.

The stock market did better than profits since late 2014. The SPX is currently about 2.4% higher now
thanks to a premium dividend yield compared to short rates and Treasuries and exceptional investor
and trader confidence.

Looking out a year, most players are mildly bullish, expecting the SPX to grind modestly higher on
a positive bounce in earnings sufficient to overcome worries about upticks to inflation and short

This is a risky environment. There is no liquidity tailwind from the Fed. To avoid a sharp economic
contraction and deeper weakness in profits, excess inventories will need to be worked off slowly.
Such measured inventory policies rarely happen. Inflation will need to be modest enough not to
pressure household incomes too much. Finally, the post - election period will have to yield promise
of either fresh fiscal stimulus or the introduction of a new avenue of monetary easing to assure a
degree of economic rebound. 

It is not easy to thread a needle.

SPX Weekly

Tuesday, October 18, 2016

SPX, Long Treasury, Oil Price -- All Quickies

The fairly strong overbought of Jul. - Aug. has been wiped as the market continues to exhibit mild
corrective action. The uptrend line in force since Feb. of this year has been broken and this remains
a source of concern as is the negative controlling force of the 25 day m/a. The SPX has however
notched a double bottom this week and it remains to be seen whether it can rally more forcefully
off that 2125 level or whether further ground may be lost. Quick little swings in sentiment concerning
monetary policy for the remainder of 2016 appear to dominate the action.  SPX Daily

My proxy for US business sales through Sep. rose a paltry 0.5% though pressure on earnings may be
subsiding as weakness in oil / gas comparisons should continue to grow more shallow. Output from
the mining / extraction / minerals sector was down a sizable 9.4% yr/yr despite modest improvement
in recent months, but pricing in this sector is less awful.

Capacity utilization in the US. is only 75.4%, unheard of in the modern era for an economy that has
been expanding for seven years and the data has to be unnerving to the Fed.

Long Treasury Yield ($TYX)
The long T-bond yield has swung up since early July probably mainly on talk of eventual Fed
tightening. Note as well that the yr/yr % change in CPI inflation has continued to inch ahead with
Sep. standing at 1.5%. Under the most charitable conditions, the long term yield premium spread
of the Treas. vs the CPI would dictate a 3.5% T-bond yield presently. Continued very low real
growth of the economy and large capacity slack has been keeping the yield near historically
low levels.  $TYX Weekly

The long Treasury was very overbought in early July and this position has eased very substantially
in recent months. Thus despite the talk of further monetary tightening and the slow push on
inflation, some traders may play on the long side and it will be informative to see if they push the
bond down enough to reverse its uptrend.

The bottom panel of chart shows the relative strength of the stock market vs the long Treasury.
Note that since QE 3 ended as 2104 ran out, The bond has done about as well as the stock market
on a price basis as bond players correctly gauged that elimination of QE programs would suppress
economic growth and that the blowout in the oil price would contain inflation.

Oil Price
With peak seasonal driving for the year having past, oil has entered a period when the price can
be seasonally very weak right into early Feb. of the succeeding year. Net oil producers could
well hit another period when oil revenue inflows tumble unless they can convince the market
that a strong agreement to limit future oil output can be hammered out. Failing that, WTIC
crude could zip down from around the $50 bl. level right along to $35 - 40 by early this coming
Feb.  $WTIC Crude 

Note that oil has held its uptrend since Feb. of this year. So the test of producer credibility lies
dead ahead. A tumble in the price would further devastate the finances of net producers, probably
bother the SPX and could give the market for top quality bonds another reprieve.

Tuesday, October 11, 2016

SPX -- Daily

The stock market ended the latest upward thrust in Aug., when it became overbought on both short
and intermediate term bases. Weakness since the outset of Sep. could be attributable to a work off
of the overbought condition, but extension of a dip here in Oct. sees the market entering more
perilous territory. The indicators have weakened; the SPX has had trouble breaking through a
falling 25 day m/a; the uptrend line in place since Feb. has been violated. Thus, we have red flags.
SPX Daily

Bad enough the Fed has been keeping up the hawkish patter on the outlook for short rates. Now
a broad range of fundamental issues have increased player anxieties including the Deutshebank
meltdown, new worries about how troublesome Brexit may become, concerns over earnings, and
the sudden fractures within the GOP just a few weeks ahead of the elections. The latter represents
a rare disruption for the idea of a stable two party system, and with The Donald talking nasty
in the wake of his recent "grab them by the pussy" video, freakish debate performance, and GOP
desertions, the party, long a bulwark of US political life, appears in crisis. A novel uncertainty has
presented itself. All of this has come to pass during the latter stage of a jittery seasonal period.

The market is slightly oversold. For the SPX, there is important short term support at 2125. Breaks
of trend are not to taken lightly. Consider also the NYSE a/d line which shows vulnerability as well.
NYAD Daily

Saturday, October 08, 2016

Gold Price

Back on Jul. 10, the argument here was that the price of gold had hit an intermediate term overbought
on record speculative interest in the futures market. Despite the glaring technicals, the price held up
reasonably well until the last several weeks when market sentiment, observing a firming of the USD,
began to deteriorate as players encountered a fresh round of Fedspeak concerning the readiness of
the FOMC to raise short term rates before long (Dec. probably). The fundamentals remain ever so
mildly positive, but the gold price had so wildly over discounted them that a fast negative reversal
in gold's fortunes has rapidly ensued. Gold Price -- Weekly.

The sharp sell down in gold has eliminated the overbought position and the heavy premium to its 40
wk. m/a. Speculative long positions in the futures market are rapidly evaporating but still remain
elevated. The fundamentals ex. the USD have firmed up a bit more with a recovering oil price
leading the way. The dollar still has some short term upside before it hits an intermediate term resistance level. With plenty of chatter out there about the world's major central banks experiencing easing fatigue and a very unsettled UK pound market, it may be necessary to give the gold price a degree of downside leeway to important support at $1200 oz. In addition, since the recent price weakness in gold broke a nice uptrend line running back to late last year, there may be further, belated downside action in gold.

Going forward, it still pays to watch the US economy and whether further expansion is strong
enough to support a mild acceleration of inflation. True, short rates may rise gently further in
such a situation, but there is no guarantee whatsoever that the USD will follow rates higher.
If so, that may give gold another shot at redemption. And, who knows, if Der Trumpy wins
the election the gold guys might like that.

Sunday, October 02, 2016

SPX Monthly -- Brave New World

I have long had substantial respect for the monthly SPX chart, especially the MACD indicator.
Crosses in this measure have proven to be useful guides to future results for the market because
whipsaws have been few and far between. Monthly MACD is in the second panel of the chart:
SPX Monthly

The negative cross in early 2015 tipped off well the 15%+ decline that followed late last year and
carried into early 2016. Now there is a positive cross which confirmed the rally to new highs just
a short while back. The SPX reached an intermediate term overbought this summer, but if the
monthly MACD is taken at face value given its history, the market should trend higher for a period
of months going forward.

Looking from a reasonable perspective, how could this happen? Well, there could be a trend
extension continuation pattern based on the assumption the economy evades recession but does
not grow rapidly enough to foster a significant rise of inflation and a sustainable upturn in short
rates. Or it could be the result of a stronger economy and rebounding profits sufficient enough to
offset the hit to the p/e ratio from a program of gradually rising short rates and somewhat higher
inflation coupled with a degree of rotation out of bonds into stocks. The latter case would signal
the economic expansion was moving into a more mature phase when stocks can certainly rise.

The secondary fundamental indicators I use for the market have cleanly supported the rise of
the SPX since early this year, but implicit economic performance has fallen enough below par to
warrant caution in making either market or economic predictions for the year ahead.

There is growing chatter in the financial press that a Trump election victory could lead to a price
correction in stocks of 10% because it would represent, speaking euphemistically, a wild card.
But if the consensus of market players continues to support a Clinton victory, we could almost
as easily see a pull back on the premise of 'buy the rumor, sell the fact' as players focus in more
carefully on what a Clinton victory might really mean for the economy.

There is an old New Yorker admonition for times like these: Don't be no hero.

Friday, September 30, 2016

Stock Market

The cyclical bull market that started in early 2009 remains in place. But, it is an uncomfortable time.
My forward looking weekly cyclical indicator has been nicely on the rise since Feb. '16, in line with
the current up leg of the market, but the customary positive follow through for the economy and
for profits suggested by the indicator has fallen far short, leaving the market to advance primarily
on a nominally rising dividend, yield premium to cash equivalent and Treasuries, and a very low
inflation rate. Players call this "TINA", short for "there is no alternative". The idea is that with the
Fed holding interest rates so low, there is not enough competition for stocks. So far since the
latest leg up started in Feb., the premium p/e ratio, hyper extended position of the current price
level, and stagnant earnings have increased anxiety but have not knocked the SPX off of its uptrend.

With Fed members talking about raising short rates before long, the rally has lost positive
momentum and players are also wondering about the outcome of the upcoming election as well.
Since my forward looking economic indicators are not working very well at this point, I am not
about to step out of character and start making market predictions. When some useful clues come
around, I'll reassess. The stock market does not owe us a thing at this point, but I hope the economy
owes us some stronger performance.

The SPX continues to work off the overbought levels hit this summer and the indicators show mild
deterioration.  SPX Weekly