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 !!!

Friday, January 12, 2018

Stock Market -- First Greater Fools Arrive

The bull party has become a little more crowded with the arrival of the first greater fools. Among
the pundits in this crowd are those who proclaim that there is large sideline money that has yet
to jump in but is now doing so. The story goes that even after eight years of a rising market there is
a big crowd who are suddenly afraid they going to miss a huge run-up. When this kind of thinking
becomes mainstream as it last did over 1997 - 2000, you might as well put the fundamentals down
into your desk drawer. In fairness though, the market is hardly beyond rational argument yet, and
the recent trajectory of the SPX is still too mild to suggest a genuine bubble may be forming. It is
still just a burst of enthusiasm that has brought the market to an overbought that has not been seen
in over a generation. But, with money starting to flow into weaker, less experienced hands, volatility
could start to increase.

SPX Weekly

Monday, January 01, 2018

Stock Market

As we wheel into the new year, we start off with a fabulously overbought market and one which
is also mildly overextended on a very long term basis. My most liberal valuation measure has fair
value for 2018 at SPX 2610 based on a p/e ratio of 18x and eps of $145. On this measure, the
SPX is already discounting an extension of the rising earnings trend well into 2019. I fully expect
a nasty and deep correction at some point over the next two years, although I cannot make a
credible case for such as of now, as I have many more questions about the environment ahead than

My weekly cyclical fundamental market indicator is partly forward looking and partly coincident.
It rose very sharply over most of 2016 but advanced only mildly last year. I watch it in conjunction
with the PMI diffusion index for manufacturing. The PMI rose sharply from the 50 level in mid-
2016 to the very strong 60 area by late last year. I would point out that a 60 mfg. reading has only
been reached eight times since 1985 and rarely stays there for long. So there could be a loss of
economic growth momentum over the first half of 2018. If so, it could have a negative impact
on stock market momentum. On the positive side, my inflation thrust measures have turned higher,
but are up only rather modestly. Thus, the 18x p/e is not immediately imperiled on the inflation

Faster economic growth last year has reduced excess monetary liquidity in the system down to
zero. Normally, that is a warning sign, but so far, foreign inflows to US stocks have been a nicely
positive offset (It should be noted that US market cyclical tops often coincide with surges of
stock buying from abroad).

Short term interest rates are widely expected to increase by 100 basis points over the next 12 - 15
months, but that need not be a problem unless the Fed signals an extended continuation of
monetary tightening.

Interestingly, the Fed has been dragging its feet on the much heralded quantitative tightening
program and this has helped both stocks and bonds. We await whether They will turn more
aggressive this year and how the markets will react. Ms. Yellen is leaving the heavy lifting
to the new guy.

Finally, we have The Donald himself. He could behave very badly if special counsel Mueller
closes in on him of if the stock market and the economy do not treat him well.

Have a good new year and Godspeed.

SPX Weekly

Saturday, December 23, 2017

Stock Market Sentiment -- Quickie

When the equities only put / call ratio reaches a low level, it reveals strong bullish sentiment among
traders, and, as such may serve as a contrarian warning. The chart link below shows how the shorter
term p / c ratio since early 2016 has been in a persistent downtrend as the market has trended
sharply higher. Traders were way too bearish late in 2015 and early in 2016, and now have become
very nearly too bullish. This, as traders have positioned for a hoped for year end 'Santa' rally.

$CPCE Weekly

Thursday, December 21, 2017

Long Treasury Bond

The long T-bond will be very interesting to watch as 2018 unfolds. With inflation running down
around 2%, the bond has given up almost all of its long run 300 basis point premium to average
of the inflation rate. Bond investors have also remained skeptical that US real economic growth
will accelerate markedly enough to create sufficient pressure on extant economic slack to push
the inflation rate above the 2% average for any appreciable period of time.

The long guy has moved up from its all time low yield of 2.1% to as high as 3.2% since 2016,
before settling down to the 2.8+% level recently. Doubtless, rising short rates over the past 12-15
months have exerted upward pressure on yields, but the rise in the long bond yield % has been
very stubborn. My bond yield directional indicator has pointed to higher yield levels but it too
has cooled off recently as US production growth has remained modest and sensitive materials
prices have flattened out after rising appreciably from early 2016 through early 2017.

So far, the bond players have not grown apprehensive that the Trump / GOP tax cut plan is going
to do much to push up either growth or inflation. Moreover, there is as yet little worry that the
combination of Fed quantitative tightening (selling Treasuries and agencies) and a larger budget
deficit resulting from the tax cut plan will create sufficient supply to put extra premium in the
bond yield. Plainly the bond market is playing like they are from Missouri: Show Us!

Long Treasury Yield %

Saturday, December 16, 2017

Short Term Interest Rates

Well, I have dusted off the short rates file now that the Fed has started moving off the ZIRP
policy. Since the economic recovery began in 2009, the inflation rate has averaged about 2%
per year. My super long term short rate model suggests that the 91day T-bill should have
averaged about 2 - 2.5% over this interval. Obviously the Fed, deeply concerned about nursing
the Us economy back to life and on to a more stable footing, allowed the 'Bill' yield, or risk-
free rate, to hover near zero over most of this period. The T-bill has risen up to around 1.3%
recently, so we remain in an easy money mode when compared to inflation. You can see the
same thing by comparing the low bill yield to total business sales of around 6% measured y/y.
It is interesting to note that my cyclical rate direction model only signaled that short rates should
be rising only twice over the entire 2009 - 17 period. the first time was as 2014 progressed and second time was as 2017 unfolded. It has even been a stretch this year as business shorter term
credit demand has been increasing only modestly. The long term approaches I use show that
the Fed has indeed been very easy with money but not recklessly so.

Investor expectations for the direction of short rates next year and in 2019 reveal modest projections
of higher short rates and are based on the assumption the Fed will continue to move to restore
normality to the interest rate structure on a gradual basis. It is wise to expect short rates to keep
on an upward track through 2019 provided the economy continues to expand and the inflation rates
strengthens further .

Since there is light pressure when one compares short term credit demand against the supply of
loanable funds, economic momentum and the inflation trend will be the key fundamentals going
forward. Naturally, as Mr. Powell eases into his role as the new Fed chair, markets players will
take careful note of whether changes in the Fed's approach evolve.

3M T-bill Yield

Saturday, December 09, 2017

Bitcoin Goes Parabolic

Bitcoin is the most prominent of the growing list of crypto-currencies. When I first encountered
it in 2008, its foundations were shrouded in mystery, but I think it was intended as an alternative
to fiat currency which had features that suggested that, unlike fiat currency, it was designed as
an inflation hedge which could maintain its value. As such, it should hold its value over
time when adjusted for the inflation rate. With inflation low and relatively stable in recent years,
the original concept suggested that Bitcoin's price should appreciate rather modestly. However,
it has become a plaything for wealthy individual traders and investors. Now that it has become
a high flyer, Wall Street has taken an interest and and a futures market is about to be rolled out.

It may well be, that over the long term, crypto-currency may occupy a spot along with PMs
such as gold in the inflation hedge play category. At the moment, however, it is in a parabolic
price formation and that kind of price curve rarely works out for those who come in long as
the move completes. It is tough to measure parabolic price action with accuracy, but the
Bitcoin curve looks like it may be in a terminal phase, at least for the short run.  CBTC Weekly

Friday, December 01, 2017

SPX In Longer Term Perspective

Looking back nearly 25 years, it has been an impressive period for the SPX. Net per share has
compounded at 6.6% annually which is a bit above the very long term average. However, the
SPX itself has grown at 7.8% as the p/e ratio has tilted higher in recent years, reflecting not
only low interest rates and inflation, but high confidence the longer run future will bring more
attractive performance.

The market is trading above the upper band of longer term ranges starting in the early 1930s,
again reflecting rising earnings and elevated p/e ratios. Noteworthy also is that earnings are
not yet enough extended to signify a top in cyclical economic performance.

The accompanying SPX chart makes clear the dramatic recent power of the market. SPX Monthly
Measures of longer term price momentum are running as strong as they have in over a quarter of
a century and the near term reveals no indications of decay as of yet.

When the market topped the previous historic highs during 2013, it signaled the onset of a new
bull market and not just a quantum cyclical bounce off the 2009 cyclical low. However, from
a practical technical point of view, the evidence would suggest the SPX should not do much
better than at present in the near term without some degree of negative price adjustment. The
'now' should be interesting because the boyz are hoping for a nice Santa Claus rally to wrap up
the year.