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
answers.

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
front.

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