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, 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.

Monday, March 26, 2018

SPX -- Quickie

News that the US and China were exploring a trade agreement behind the scene triggered off a
relief rally today, with the SPX rallying off the 200 day m/a trend support. Traders also liked the
double bottom on closing lows.   SPX Daily

We will just have to see whether the two parties can up with a suitable compromise. In the mean-
time you can watch to see if the SPX can rally enough to reverse downtrends in the 25 day ma, and
the RSI, MACD and trend indicators. You need to take care here because the first attempt to 'buy
the dip' in early Feb. did not work, with this indicating a loss of the level of high confidence we
saw throughout last year and into Jan. of '18.

Saturday, March 24, 2018

SPX -- Weekly

Back in late Jan. '18, I argued that the SPX had carried up to such a large premium to its 40 wk. m/a
that history showed there was but in a 1 in 4 chance it would trend significantly higher over the
next six odd months or so. Since then, it has gone into corrective mode and, based on the RSI and
stochastic measures, it has fallen from heavy overbought down to neutral. The market is again
testing its 40 wk. m/a, and all of the premium has gone out of it. Momentum, based on the MACD
reading, is still elevated but is now negative as it trends down. The SPX is now sitting right at
longer term trend support and a further sharp downward break would signal a termination of the
advance at least until a new base at lower levels could be established.  SPX Weekly

That the market did not break down last week but exited as a cliffhanger instead suggests the bulls
are trying to buy time to see if investors now think rising short rates and a protectionist trade action
between the major economic powers -- the US and China -- cloud the outlook sufficiently to
warrant further price erosion. Restrictive trade action so far is mild enough that the market should
not worry, but we do not know if further actions could come along to create more substantial and
palpable risk. I know what should happen between the US and China on this subject, but what is
likely to happen is the obvious critical thing. It will be very interesting to see if traders are
confident next week to rally the market based on the current prospect of only modest economic


Sunday, March 18, 2018

March Overview

The best guess here is that the US economy is experiencing an interim momentum peak with a
mild and short lived slowdown to follow. This peaking process will be the third one since the
economy began to recover from its deeply recessed base back in 2009. My indicators and
observations of inventory levels now suggest the slowdown will not be as long or as steep as they
were following interim peaks in 2011 and 2014. Business profits and real disposable incomes are
benefiting from the large tax cuts recently enacted and slowdowns here will likely be far less
pronounced. With the quantitative tightening of monetary liquidity (QT) having displaced QE,
the stock market will likely remain focused on economic momentum going forward so any
negative reaction in the stock market to a slowdown should be mild.

Trump's first round of protectionism  -- duties on imported steel and aluminum -- looks like it
may resolve into an old fashioned extortion program. the second wave may target China's large
export balance in the US and could be tougher and involve some nasty blow back from China.
This potential trade spat could shake stock market confidence more significantly.

The indicators still show no very substantial inflation potential ahead for the US. My longer
range indicators suggest a much stronger ramp up of inflation pressure, but this is yet to show

I am expecting the Fed to continue to raise short rates in a temperate manner, but I think the
Fed could turn more aggressive later in the year if economic growth picks up again as I expect.

It will be instructive to see if the economic slowdown out ahead in the short run triggers a further
downswing in longer term Treasury yields.

As of now there seems to be little potential for the development of the kind of cyclical credit
squeeze  that normally pre-dates a recession. Liquidity growth is slowing, but short term credit
demand remains exceedingly mild still with worthy borrowers preferring the long end of the

Bobby Three Sticks (Robert Mueller 111) continues to close in on Trump and as he does, there
may be further push back from The Donald. This could prove disconcerting to the markets if
some sort of judicial crisis emerges.

Monday, March 05, 2018

SPX -- Update

The up leg underway since early 2016 remains intact and provides trend support around 2600. The
upward acceleration in the SPX since the 2016 election has not broken in any decisive way, leaving
the SPX with a shot at regaining the highs set in Jan. The market is not at all stable, and if it is to
move higher, it needs to come up through the 25 day m/a with an up turn in the "25" to follow.
 SPX Daily

So far, the SPX is up around 1.7% on the year. It seems as if we have had year's worth of action
all rolled into a little more than two months' time. Most market strategists, although bullish on
the outlook for this year, also foresaw increased volatility as market players contend with the
expected combination of rising interest rates and profits coming along together. For most folks,
that scenario has not changed, nor has the consideration of an acceleration of inflation as the
economic expansion matures. In short, the thinking out there remains that events could lead to
occasional wobbles of the SPX p/e ratio. My fair value model suggests a single figure of SPX
2720 through mid-2019, which is where the market stands now.

There is concern that should Trump apply tariffs to both aluminum and steel imports, a larger
trade war could ensue. However, lets see if he is running a bluff first.

The lack of stability in the market at present calls for you to double check your convictions.

Monday, February 26, 2018

Big Trouble In Big China?

China plans to amend its constitution to  eliminate term limits for the president.  If so, maybe
Mr. Xi can serve more than two consecutive terms. Given China's imperial legacy and the long
run for Mao and Chou, the knee jerk response from outsiders is that Mr. Xi wants those
imperial trappings and may signal a new cult. Could be. And, since this is a bull market, look
for China apologists to put a positive spin on this transition if that is all it is.

To be a contrarian, I offer a different and more dangerous assessment. Suppose the younger Party
climbers and technocrats have indicated to Xi that his generation has created an obvious financial
mess in China and that it is Xi's job to clean it up. There is no new "Great Leap Forward" for
China unless The Party straightens out the country's finances first. A genuine reform transition
would involve efforts to gain control over China's finances, specifically debt creation.
That cannot be done without creating pain and economic and financial fallout that will extend
beyond China's borders. It cannot be accomplished without a president that is in a very strong
position and who can command the Party rank and file to do the bidding necessary to turn
this enormous debt laden boat around. Mr. Xi already tried and failed to generate a super bull
market in equities to balance the debt. Recall that China had to make open market purchases to
keep its equity market afloat. And, if China continues to leverage up and create new entities to
take on its bad debt, the result will be accelerated capital flight, the destruction of its currency
and bitter recrimination from the international markets.

Now, if all Xi wants to do is to become the imperial Xi, that could have dangerous unintended
consequences as well, including an eventual and destabilizing mutiny.

Do not ignore this decision. Comments are invited and welcome.

Saturday, February 24, 2018

Commodity Price Index

The last bull market in commodities ran from the end of 2001 through early 2008. Paced by very
rapid production growth in China, inventory hoarding and intense financial speculation, the CRB
rose from a low of 170 to the 470 level before collapsing over the balance of 2008. The market
staged a strong partial recovery over the 2009 - 11 period, reflecting a global economic advance
from deep recession, a massive fiscal stimulus program by China, and speculative inventory
pipeline rebuilding and the return of intense financial speculation. But, the bear market endured
until early 2016. Over 2011 - 2016, global economic growth was modest, inventories were
slowly unwound, and speculators turned strongly to financial assets.

Materials production capacity expanded rapidly over the decade through 2010, and more recent demand has not been strong enough to take up the slack. Commodities pricing has also been adversely affected by the growth of synthetics, recyclables and new production and and
consumption technologies.

For many years, there was price support for the CRB around the 170 -200 area, but a reading of
200 on the index has now become resistance!  Weekly CRB

As seen, the market has been recovering from its multi-year low of around 160 set in early 2016.
Faster global economic growth over the past couple years has not been sufficient to set off a strong
sustainable rally in the CRB. From a longer term perspective, the CRB is still in a bear market.
The current extended base looks promising, but the index has not strengthened sufficiently to
challenge longer run trend resistance. To attract stronger trader and investor interest, the CRB
needs to break above the 200 level and challenge that first significant hurdle at 230. The CRB
is at huge discounts to the stock and bond market price indices and would attract strong interest
if there is finally a stronger positive response to a swifter global economy.

Tuesday, February 20, 2018

Gold Price

My long term view on the gold price remains that gold will  primarily stay a range bound
trading vehicle until investors become more confident that the global economy is transitioning
from a deflation prone period into an inflationary era when global plant and service operating
rates are more easily challenged by rising world economic demand. A tighter operating
environment tends to foster stronger wage growth and stronger competition for materials and
commercial resources. The very deep global recession and modest economic recovery that
has come along in its wake has left a legacy of excess production capacity and a trend of volatile
but decelerating inflation.

Although the cyclical fundamentals for the gold price have been positive since early 2016, and
there has been a rather mild cyclical acceleration of inflation pressure, it has not apparently
been strong enough to support a sustained rise in the price of gold. Since gold began to recover
in early 2016, the interim price lows have trended higher, but clear longer term price resistance
has formed in the 1375 - 1400 area.  Weekly Gold Price

The gold price is inherently volatile and price action can far outstrip a fundamental approach
to trying to determine a reasonable price for the metal. In recent years speculative surges have
been contained even though gold has fared decently off its 2016 low. The bottom panel of the
chart shows that gold's price has been deteriorating relative to the stock market for a quite a
while. That could change if further economic growth brings increased inflation pressure going

Sunday, February 18, 2018

Stock Market -- This Is A Little Odd

While folks debate the near term future of the market, I content myself with an oddity in the
market internals. The TRIN measures the amount of selling pressure in the market. A high TRIN
signals heavy selling pressure and a low TRIN signals light selling pressure (low volume per issue
sold). During the extended period of market weakness over the latter part of 2015, the 13 week
TRIN reached a high of 1.6, indicating the accumulation of heavy selling pressure.  Weekly TRIN

Notice that despite the dramatic sell-off over the earlier part of February, the 13 week TRIN has
continued to trend down to low levels, and since it's now below 1.00, suggests the continuation of
accumulated net buying pressure through 2018.

Saturday, February 10, 2018

SPX -- Update

According to my cyclical valuation work, I have the SPX as fairly valued at 2610 for 2018 at 2720
through mid-2019. The modest increase in valuation product into next year reflects another year
of positive earnings direction offset by a reduction in the market's p/e ratio to reflect a higher
inflation rate of 3% by mid-2019. Although the inflation pressure gauges currently remain in
rather humble uptrends, that should change as the large fiscal stimulus programs kick in to boost
an already maturing economic expansion. there could very well be an interim period starting in
a month or two when the economy temporarily slows, and market players  run-up stock prices in
the erroneous assumption that "Goldilocks" has returned to preside over a period of more modest
growth and continuing low inflation. If such a strong rally occurs, there might be a classic
"get out " rally to reduce equity exposure.

Despite the current correction, the stock market remains strongly overbought on a long term
basis and mildly overdone in the intermediate term. The main trend of the market remains in
bullish mode with intermediate trend supports around 2600 on the SPX. Longer term trend
support stand around 2500.  SPX Weekly

Do not ask me where the market is going over the couple of weeks. However, by my conservative
trading discipline, I would give the market a hard look for a long side fling if the stochastic
measure (bottom panel of the chart) drops inside the 20 level.

Monday, February 05, 2018

Stock Market -- Historic Overbought Deflates

Yeah, well it was a market that became one of the most overbought in history. The best the bulls
could do was express some edginess the weekend before Groundhog Day (Feb.2). Little did folks
know that Punxatawny Phil  down in Pa. was not only forecasting six more weeks of winter, but
an Eagles win in the super bowl as well as a blowout of the parabolic move in the SPX that we
all witnessed in. Jan.'18. Easy come, easy go.

Now the market is assuredly on the oversold side and we'll just have to see whether the boyz can
rally around the fact that the SPX closed well off its low today or whether exhaustion has not fully
set in and there is more to go on the downside in the days ahead.

Several weeks back, I opined that if I stretched it, there was a case for the SPX to trade around
the 2610 level in 2018. That speculation immediately looked foolish as the market rocketed
above 2870 by the end of Jan. The rapid decline in the SPX to just below 2650 makes the 2610
estimate of fair value look less foolish.  SPX Daily

Market players are going to have to decide whether the prospect of higher business profits this
year will also include faster inflation and higher interest rates and what consideration of the
latter factors might do to their expectation for the SPX p/e ratio. I think it is fair to say that
most investors did not envisage crossing the p/e challenge bridge until well later in the year.
These issues may fully occupy investors if they keep their blinders on.

I happen to be entertaining a darker vision for the near term future. Not only is the US Gov't.
barely functioning, but I suspect Trump may consider some politically dangerous maneuvers
if the Mueller investigation closes in on him and his family especially. I have some fears here
involving challenges to our constitution in this era of sharp political division and given how
I view The Donald's history, I do not regard them as baseless. I also do not know whether
the serious misbehavior we see underway in Washington is bothering the market already and,
I do not know if the market will grow more troubled as matters get more heated as the Mueller
investigation proceeds. Let each of you decide how much we should pay attention to this
sad spectacle of America in worsening political conflict.

Friday, January 26, 2018

Stock Market -- More Amber Lights

As the SPX continues to surpass generational overbought records, I have a couple of more
signals to keep in mind. The SPX is now trading at a 13.4% premium to its 40 wk. moving
average. This is not a record, but history shows that when the market exceeds its 40 wk. m/a
by more than 10%, the odds are only about 1in 4 that the market will make good further progress
over the next six months or so. This signal does not imply a bear market will be coming along,
but a correction of substance is certainly not out of the question. Also, with a powerful run-up
in place, the intermediate and longer term price momentum indicators (ROC% below) are
getting extended. They also portend but do not fore-ordain a discontinuation of momentum
uptrends ahead.  SPX Weekly

The SPX has also turned parabolic in this powerful rally. It has not and need not complete
its move, but for a long term veteran of the markets, such levitation is absolutely fascinating.
I have done markets bubble measurement over the years, and it is very hard to spot one in the
early stages. The trajectory up for the SPX is a bubble trajectory, but the SPX would have to
reach 3300 this year and, perhaps, 4100 in 2019 to qualify as a fully blown market bubble.
Bubble talk does not scare many players anymore because of the idea of how much money can
be made during the flight higher. Moreover, money managers can lose accounts quickly if
they do not play the bubble. That's called career risk, and it surfaced broadly in 2000. It would
be odd indeed to have a market bubble so soon after the 1996 - 2000 event, but these are
loopy times for the US.

If the market takes a holiday for a couple of weeks just ahead, but then resumes a its strong
trend higher, central bankers should start to feel the heat to tamp down the advance. Greenspan
warned about the last bubble in late 1996, then quieted down and wound up as a drum major
leading it higher.

Finally, do not forget The Donald. He has fucked up more than party with his peculiar


Wednesday, January 24, 2018

US Dollar

I have been bullish on the dollar since the end of the deep recession of 2008-9. The long term view
was that the dollar could rise from the deeply depressed low 70s level back then to the 100 level
by 2020. I did not posit faster economic growth than the world could muster, but that the US
balance of trade would gradually improve reflecting increasing fuel efficiency, rising domestic
hydrocarbon production and a continued slowing of real consumer spending growth on the basis
of less favorable demographics. The rise in the dollar up to the 105 level by the end of 2016
represented a considerable overshoot of my projection. $USD Daily

Slow global economic growth in the intervening years led to a contraction of global trade and
favored the dollar by too large a margin. The sharp decline in the value of the dollar since the end
of 2016 reflects stronger global economic performance, stronger trade, and some deterioration of
the US trade balance. In addition, the dollar was heavily overbought by the end of 2016.

The chart reveals that the dollar sits well above longer term technical support, and it is tempting
to extend the dollar's downtrend line significantly further in the months ahead. Since the end of
fixed exchange rates way back when in the 1970s, I have often been been surprised by the strong
volatility of the dollar and the other major currencies, so far be it from me to argue that the
dollar is about to bottom out.

In my view, the dollar has dropped into a  reasonable area just below the 90 level, and with export
sales rising at a reasonable rate, I am reluctant to become too bearish now.



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