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 !!!

Monday, May 21, 2018

SPX -- Looking Ahead

Fundamentals
Total business sales have been ticking along at nearly 6.5% yr/yr. With reasonably strong
volumes and a price/ cost ratio fairly even, pretax margins have been advancing, and bottom lines
are enjoying the large extra kicker from the tax cuts. As well, inventories are being managed well
compared to other growth spurts during this long expansion period. Stock buybacks are surging,
providing extra fillips to net per share. But businesses are committing to higher levels of capital
spending as well, which will add to productive capacity in 2019 - 20.

Interest rates are in clear up trends across the board and do seem poised to go higher well into
next year as the Fed continues to tighten monetary policy. Inflation pressure is inching ahead and
there is no indication of a sharp acceleration of pricing as yet.

There may well be some slowdown in economic growth momentum as this year progresses, but
it may well be more modest than I originally expected if business inventories continue to grow
at a  moderate pace.

The earnings / price yield for SPX based on estimated net per share sits at 5.8% and is well above
the 91 day T-bill yield. This indicates that monetary policy is tightening only gradually and it may
not threaten the market near term.

Valuation
Despite reasonably attractive fundamentals, I have the SPX as no better than fairly valued looking
right into 2019. So, strong upside from current levels rests on the development of some sort of
speculative zeal for stocks as the economic / profits expansion matures and the Fed presses
onward in its bid to "normalize" rates.

Technicals
The SPX is struggling to regain sustainable positive momentum after coming off a generationally
strong overbought condition brought on by the big wave up over the latter part of last year. I
would like to think the SPX is set for a shot at the former highs over the next couple of months,
but I do not think it unreasonable to look for the market to complete a deeper correction that
would bring it to a more solid intermediate term bottom.

SPX Daily

Sunday, May 06, 2018

SPX -- Weekly

The historic and obvious overbought we saw at the end of Jan. '18 has corrected down to neutral.
The prospect of a significant increase in earning power is being realized via the large fiscal stimulus
programs enacted by the force of Trump / GOP. However, there is no evidence yet that it will add
to business sales or top line growth going forward. The Fed appears on track to tighten money
further as it shrinks its balance sheet and the monetary base and  promises to keep on raising short
term rates in a gradual fashion. Some Trump influence downside is being felt. The US is taking a
hard line with China on trade and is now threatening Iran that it may walk away from the nuclear
deal and perhaps re-impose sanctions that could boost the oil price further. And, even though the
Trump / Kim prospective summit is intriguing and may be positive, wrong turns could leave us
staring at additional saber rattling. As well, Trump and the far right of the GOP may be readying
to provoke a judicial if not a constitutional crisis over the Mueller investigation. Why, it has
almost become what we used to call a Thinking Man's market.

The bulls are left to put their heads down and plow forward. Longer term momentum measures
are rolling over, but the market has drifted from big time overbought down to neutral, is holding
support at SPX 2600, and is maintaining its uptrend off the 2016 low. There are no clear signs that
a recession lies nearby and the inflation rate is not threatening yet to take off higher. Moreover,
if you accept liberal valuation standards, the SPX is fairly valued.

SPX Weekly

Monday, April 30, 2018

SPX -- Monthly

As indicated in the Jan. '18 posts, the SPX in the 2800s hit a generational overbought reading which
suggested little intermediate term or 3 - 6 month upside. At 2648 today, the market remains in
correction mode with significant support at SPX 2600. In the briefest of summaries, all the
fundamental indicators I study suggest only very mild, perhaps sluggish, progress from here this
year. Looking out through mid - 2019, I have the SPX fairly valued at 2720, or 2.7% above the
current level. Taking a longer view of the chart, the recent downturn in momentum is the first since
the end of 2015, and offers little comfort.  SPX Monthly

The US has to continue to work through a very troubling Trump presidency during a period of
a maturing economic expansion. Going back to 2016, I have argued that this guy is a basic,
textbook case of egomania who, through his impulsiveness and overwhelming sense of self
aggrandizement, can wind up doing some good things and some very bad things. Given how
far the market has come since the very dark days of 2008 - 2009, I would be delighted if the
SPX could hold the mid - 2500s through his term. 


Thursday, April 26, 2018

Oil Price And The Real Economy

I accepted the end of the end of the decline in the oil price in early 2016. The steady bull run in oil
has been obvious for all to see since then. However, I did not think that oil would approach $70 bl.
until some time over the second half of 2019. So, by my lights, the price is well ahead of schedule.
Sharp, extended run ups in the price of oil are rarely good for the real economy or the stock market.
Net oil consuming countries such as the US experience net income and wealth transfers to net
producers during such periods with a sharply rising oil price acting as an inflationary tax on
consumption. Too, fast oil price appreciation can lead the Fed to punish the economy with
tighter liquidity and higher short term interest rates.

These developments can punish both business earnings and p/e ratios and flatten the yield curve.

I would not hazard a guess as what the negative tipping point for the US will be if the oil price
continues to march substantially higher. Moreover, the US is now in a position to export higher
levels of hydrocarbons which will be a positive offset to its continuing dependency on imported
crude. Suffice it to say, that at some point before too long, the rising price of crude will begin
to cast a shadow on the economy and Fed monetary policy as well.

WTIC Weekly

Monday, April 23, 2018

Oil Price

The oil price is entering its third year of recovery following the big bust. The bull case has argued
that a faster growing global economy coupled with production cuts from OPEC / Russia would
allow a massive build up of crude inventories to work off steadily, thus allowing the industry to
eventually return to a reasonable balance between supply and demand. the hope has turned into
reality as stocks have dwindled from huge down much close to normal based on a five year average.
For the most part, the price has advanced in an orderly fashion. In late 2016, most industry buffs
were projecting the price of crude to stay in a range of $40 - 60 bl. well past 2017. Amazingly,
given how hard it is to forecast the price of oil, crude has remained in that range until recently.
With promises of further production-side discipline and the reduction of stocks still underway, a
new consensus has emerged in the industry with oil now seen as rising to $80 bl. in the months
ahead.  WTIC Daily

With the WTIC having just topped $68, the market is a hefty 22% above the 200 day m/a. It is
not overbought on many other technical measures, but you need to know that this is a very crowded
trade, with speculative long futures continuing at record levels. Moreover, with the big petrol build
now nearly completed for the year, the market is about to enter a very choppy period on a seasonal
basis and it may be tricky if you want to chase the recent burst.

Production reductions over the next six months or so could have a disproportionatley large
positive impact on prices. But note as well that since the industry is now firmly in the black on
the production side, there is a little extra incentive to cheat.

More on oil later in the week.



Wednesday, April 11, 2018

Stock Market Update

The bull case is as follows: Top line business sales growth momentum may slow some this year,
but the outlook for earnings continues excellent reflecting large corporate tax cuts now on the
book. Interest rates may rise further, but since inflation pressure remains quiescent, the Fed will
remain on a gradual course of tightening monetary policy. There is no excess liquidity in the US
system, but there may be some further rotation out of a weaker bond market into stocks. Moreover,
share buybacks could surge over the next fifteen months as companies tap larger cash flows. And,
there may be additional foreign interest in US stocks. There are exogenous factors to keep a close
eye upon, including a possible heavy duty bi-lateral trade war with China, fallout if the talks with
North Korea fail, a Syrian conflict that could go beyond its borders and a crisis if Trump blows
up the DOJ and the Mueller inquiry.These clouds could clear up rather quickly, giving investors
a clean shot at the prior top over 2800 SPX, or they could linger and force market players to make
further adjustments.

The SPX chart reflects a cloudy crystal ball. There is a bearish falling wedge pattern forming, and
the SPX is struggling to hold the uptrend in place since early 2016. But the market is holding
above its 200 day m/a and a 2600 support level.  SPX Daily

Thursday, March 29, 2018

SPX -- Monthly

The bull market continues, but with a tough first quarter of 2018, the market is barely holding its
uptrend. Moreover, for the first time since late 2014, the longer term momentum indicator (MACD)
has turned down. This indicator can whipsaw in the months ahead, but the downturn is bearish
for now. Note as well that there has been no negative cross in the MACD yet, so that there is no
confirmation of a downtrend ahead.  SPX Monthly

My weekly cyclical fundamental indicator has been in an uptrend since early 2016. It has turned
sloppy during Q1, but is not headed down fast enough to cause much concern. The US economy
may be peaking in terms of growth momentum and this suggests we may see some slowing of
top line sales growth ahead as well as some pressure on pretax profit margins. On the plus
side, the business sector will benefit from a lower tax rate and earnings should continue growing.
The Fed has turned more restrictive in policy. It is shrinking its balance sheet and the monetary
base has flattened out as well. Bank asset growth is modest relative to economic momentum so
that, in all, there is insufficient liquidity growth in the system to support rising stock prices. This
leaves the market dependent on share buybacks by companies and foreign inflows from offshore
investors. With short rates rising, there is a challenge ahead for the SPX p/e multiple. On the
plus side a cyclical advance underway in  inflation has been strikingly humble. You can also
watch to see if equities might benefit from rotation out of bonds if inflation perks up a little more.
In all, thin porridge for the bulls.