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JULY 2012: GLOBAL MACRO TIPPING POINT - (Subscription Plan III)
COMING UNGLUED: Market Fragility and Credit Market risk indicators are now at post-Lehman levels.
Global Economic Risks have taken a noticeable and abrupt turn downward over the last 30 days. Deterioration in Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggest the global economic condition is at a Tipping Point. Urgent and significant actions must be taken by global leaders and central banks to reduce growing credit stresses. |
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MISGUIDED PUBLIC POLICY: Could Irresponsible Populist Policies be Steadily Destroying the System? - If you employ a decision making process that is based on an absurdly expensive electioneering hurdle, to decide on highly complex matters, debated through the beliefs in false economic theory, with highly polarized views - is it then any wonder we get either gridlock, kick-the-can-down-the road or pork barrel politics? We have a flawed and inoperable system that is doomed to waiting for crisis events to take actions that then have little probability of success. . MORE>>
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MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS |
 JUNE 2012: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)
The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern. - The "Peek Inside" shows the detailed coverage available this month.
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GLOBAL SLOWING: A Quickly Worsening Situation
OECD’s Composite Leading Indicator Suggests Economic Weakness Spreading to China and India 06/11/12 Reuters
OECD, the Paris-based economic think-tank, reported that its Composite Leading Indicator (CLI), which provides a measure of future economic activity, shows the following:
1. China: The CLI slipped to 99.1 from 99.4 in April, falling further below its long-term average of 100.
2. India: The CLI dropped to 98.0 from 98.2, again below the 100 average.
3. OECD: The overall CLI for the OECD area, covering 33 countries, inched up to 100.5 from 100.4 over the month, helped by fresh growth in activity in the United States, Japan and Russia.
4. U.S., Japan and Russia: The pace of improvement in the U.S., Japan and Russia has decelerated in recent months, giving a tentative sign their growth may be about to slow.
5. The euro area: remained stable at 99.6.
6. Italy: Their LCI inched down to 99.1 from 99.2.
7. Germany: Their LCI was unchanged at 99.4.
8. Britain: Their LCI inched up to 99.8 from 99.7.
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07/02/12 |
Reuters |
17
17 - Shrinking Revenue Growth Rate |
CHINA PMI: 48.2. Fourth Stright Month of JOB Contraction
China HSBC PMI Falls To 48.2, Fourth Straight Month Of Job Contraction 07/01/12 Markit

"For the second quarter as a whole, the index averaged its lowest quarterly value since Q1 2009," according to the report.
Key points:
- New orders fall to greatest extent in seven months, as export orders slump
- Factory output declines marginally in comparison; stocks of finished goods rise
- Input costs and output charges down
"It is all about growth and employment," said HSBC economist Hongbin Qu. "As external demand has weakened and domestic demand hasn't shown a meaningful improvement in response to earlier easing measures, growth is likely to be on track for further slowdown, hence weighing on the jobs market. But as inflation eases sharply, Beijing has plenty of room and policy ammunition to avoid a hard landing. We expect more decisive easing efforts to come through in the coming months.”
On jobs: "The size of China’s manufacturing workforce contracted for the fourth month running in June, albeit at only a modest rate that was the weakest in three months. Job shedding in part reflected spare capacity in the sector, which was highlighted by a slight decline in backlogs of work."
NOT GOOD: South Korean PMI Falls To 49.4, Orders Booked Fall For The First Time In 4 Months 07/01/12 Markit
South Korea's HSBC manufacturing PMI number for June fell to 49.4. This is a decline from 51.0 in May.
A reading below 50 signals contraction in the industry.
“Persistent global uncertainties continue to weigh on Korean manufacturing conditions," said HSBC economist Ronald Man. "Should the slowdown in demand for Korean goods be sustained, manufacturing employment may start to contract."
Key Points:
- First sub 50.0 PMI reading for five months
- Falling output prices recorded for eighth successive month
- Order book volumes contract, ending a four-month period of expansion
From Markit:
Weaker domestic and international demand reportedly contributed to a lower output level in the manufacturing sector. Panellists also stated that a fragile economic climate affected South Korean manufacturers. Although the rate of decline was only moderate, the respective index was the lowest since December 2011.
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07/02/12 |
Markit |
4
4 - China Hard Landing |
CORPORATE EARNINGS: Shrinking Foreign Profits
Rest of World Pulls Down U.S. Profits. 06/30/12 WSJ
$48.1 billion: The quarterly drop in U.S. corporate profits from abroad in the first three months of 2012.
It’s becoming increasingly clear that what happens overseas isn’t likely to stay overseas.
The final data for gross domestic product was released on Thursday, showing that the economy grew at an unrevised rate of 1.9% in the first quarter. Markets basically yawned as they went back to focusing on the euro zone summit and the release shortly after of the Supreme Court’s health-law decision.
But beneath the unchanged headline number were some worrying new details. For one, corporate profits were revised lower. The new data showed the first quarterly drop in the measure since the darkest days of the recession in the fourth quarter of 2008.
At first glance, the drop in profits was a bit hard to square with job numbers for the first quarter. Sure, employment has been weak for the past few months, but it was strong in the early part of the year. The answer came in where the profit drop originated. Profits from the U.S. were actually strong in first quarter, jumping 10% from a year earlier. But earnings coming from the rest of the world tumbled 12% from the first quarter of 2011.
Meanwhile, export growth was revised down to just a 4.2% gain from a previously reported 7.2% increase. Weaker corporate profits from abroad and slower export growth are telling a clearer story of a global slowdown. But the worrying part is that the story is already three months old.
The second quarter was even worse for the global economy than the first. That helps explain some of the weaker data in the U.S. in the past few months. For a while, it appeared that the problems overseas weren’t spreading too badly into the U.S., but the revised data make it clear that the spillover was already starting early in the year. The drag was likely exacerbated in the quarter that ends today.
Hopes are high that Europe has gotten its act together following a summit on Friday. But it’s worth noting that we’ve seen plans before that are long on statements of unity and promises for future action but short on specifics.
In the first quarter, the U.S. stayed mostly healthy while the rest of the world came down with the flu. In the second quarter, it looks like America caught the bug. As the third quarter begins, it still isn’t clear whether we spend the summer recuperating on the beach or in bed with pneumonia.
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07/02/12 |
WSJ |
ANALYTICS |
DECISION POINT: BUY Signal Triggered
New BUY Signal for S&P 500 Index 06/29/12 Decision Point
Today our mechanical Thrust/Trend Model (T/TM) for the S&P 500 switched from NEUTRAL to BUY. For our purposes, the S&P 500 represents "the market."
The signal was generated by the Thrust Component of the T/TM, which consists of the PMO (Price Momentum Oscillator) and the PBI (Percent Buy Index). Once both of these indicators have moved above their EMAs, a BUY signal is generated. You can see that the PMO crossover occurred earlier this month. The PBI crossover occurred today, which was more delayed than we normally see.

While the T/TM is intended for intermediate-term timing, the Thrust Component of the model is really more short-term oriented and its intended effect is an earlier entry than we would normally get from the Trend Component alone. This makes it vulnerable to whipsaw.
At this point we will wait for the Trend Component to confirm the signal, which will happen when the 20-EMA crosses up through the 50-EMA. This will take a while because there is still a lot of separation between the two. (See arrows on the thumbnail chart above.)
The timing model is far from perfect, but it has proven to be a fairly reliable tool for identifying changes in trend. At this point we have to assume that a new up leg is in progress. Our intermediate-term market posture is now bullish. |
07/02/12 |
Decision Point |
ANALYTICS |
INITIAL CLAIMS:
One Indicator Continues To Predict The Market PERFECTLY 06/30/12 BI
The latest look at one of our favorite charts: The S&P (red line) vs. initial jobless claims (inversed, blue line).

Talk all you want about Europe, the Fed, etc. US economic fundamentals matter. |
07/02/12 |
BI |
ANALYTICS |
EARNINGS: Currency Hedging Distorting Falling Revenues
A Stronger Dollar Sparks Second Quarter Earnings Worries for Corporate America 06/27/12 AlphaNOW
As the dollar rises against the euro, companies in the S&P 500 are cutting their forecasts for second-quarter earnings:
- The greenback has gained about 15% against the euro over the course of the last year, perhaps because global investors, in light of the problems afflicting the eurozone, view owning dollar-denominated assets as preferable to exposing themselves to the uncertainty and risk that hovers overhead in Europe.

EXAMPLES
- PHILIP MORRIS: Tobacco powerhouse Philip Morris International Inc. (PM.N) powerhouse is just one of a growing number of companies in the Standard & Poor’s 500 index to cut its earnings guidance to reflect the impact of the stronger U.S. dollar; it also warned that it is seeing sales of tobacco and cigarette products to drop in the European Union.“Growth in developed markets has dropped off significantly,” said Bob McDonald, the company’s chairman and CEO, at last week’s Deutsche Bank Global Consumer Conference. “These markets still account for 60% of sales and an even greater percentage of our profit.” (It doesn’t help, the company noted, that its commodity costs also have risen sharply.)
- MERCK: Pharmaceutical heavyweight Merck & Co (MRK.N) sees the same trends buffeting its own earnings. “At today’s exchange rates, for example, sales in the second quarter would be adversely affected by about 3%,“ cautioned Peter Kellogg, chief financial officer of Merck, during the company’s first-quarter conference call with investors and analysts back in April.
- PROCTOR & GAMBLE - PEPSI: In the final days of the second quarter, other big multinational companies like Procter and Gamble Co. (PG.N), and PepsiCo Inc. (PEP.N) also are giving negative guidance for their second-quarter results.
The strong dollar simply exacerbates the impact of economic weakness worldwide, particularly in Europe; the combination isn’t a good sign for the upcoming earnings season. The chart below provides a selection of companies in the S&P 500 (those that break out their sales by geography) that have the greatest exposure to Europe, as calculated as a percentage of their total revenue, with that revenue translated into British pounds.

From among these companies, Coca Cola Enterprises Inc. (CCE.N) generates the highest percentage of its sales (66%) from Europe, meaning that its second-quarter earnings are very likely to take a hit. Not surprisingly, all 11 analysts covering the stock who have changed their estimates have lowered their earnings per share estimates for the quarter. The dollar effect? Well, Bill Douglas, the company’s chief financial officer, told the Deutsche Bank Global Consumer Conference that he expects currency translation “to have a negative high single-digit impact on (earnings)” for 2012 as a whole.
EARLY INDICATIONS:
- AlphaNow data on earnings preannouncements paints a less-than-rosy picture of what lies ahead. Companies In the S&P 500 have issued 26 positive EPS preannouncements, but that has been dwarfed by the 93 preannouncements cautioning that these companies might not live up to analysts’ expectations for second-quarter earnings.
- To compute a ratio between these negative and positive preannouncements (an N/P ratio), you need only divide 93 by 26; the answer, 3.6, is the weakest showing in more than a decade, since the third quarter of 2001.
- The Information Technology, Consumer Discretionary, and Health Care sectors have seen the largest number of negative earnings preannouncements.
- In addition to the unfavorable exchange rates, companies are citing slower economic growth in emerging markets and Europe as one of many problems that corporate America must grapple with.
- Analysts’ downward revisions, coupled with negative guidance from the companies themselves, makes corporate earnings look bearish in the second quarter.
- As a result, the estimated growth rate for earnings by companies in the S&P 500 has fallen from 9.2% to 6.1%, since the second quarter began in April.
- If the expected earnings growth rate comes in at 6.1%, it will be the third quarter in a row in which earnings growth has remained stuck in the single digits, after eight consecutive quarters of double-digit growth.
- Excluding Bank of America (BOA), the estimated growth rate for the S&P 500 drops to a 1.1%. (See Exhibit 3, below.)
- It doesn’t help that those companies that are generating growth in sales are still having difficulty converting that into growth on the bottom line.
- According to Thomson Reuters I/B/E/S data, nine of the ten sectors in the S&P 500 will record higher revenues for the second quarter, but only five sectors will see earnings grow by more than 1%.
- Analysts expect that three of the ten sectors in the S&P 500 will see earnings decline: Utilities (-16.2%), Energy (-13.5%) and Materials (-11.1%).
- This trend highlights the clear discrepancy between earnings and revenue growth that we discussed previously, and most companies are still facing higher commodity costs, which are eating up profits.
- Troy Alstead, chief financial officer of Starbucks (SBUX.O) reminded his listeners at a recent conference that his company, like many of its peers, has suffered from “extreme commodity cost pressures.”
- Today, with the end of the second quarter only days away, the company, along with those same peers, now must also battle the “macro challenges that we face in Europe”.
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07/02/12 |
AlphaNOW |
ANALYTICS |
EARNINGS: Currency Hedging Distorting Falling Revenues
A Stronger Dollar Sparks Second Quarter Earnings Worries for Corporate America 06/27/12 AlphaNOW
DISTORTIONS: HEDGING OPERATIONS
- Hedging their exposure to foreign currencies is a tried and tested way for multinational companies to reduce the likelihood that their earnings will be dealt a blow by a sudden unfavorable move in the dollar exchange rate.
- While most companies don’t disclose these hedging activities on their balance sheets, it is logical to assume that many are embarking on some kind of hedging strategy.
- PRICELINE.COM Inc. (PCLN.OQ) the online travel company is more reliant on international gross bookings than it is on its U.S. revenues, and, like many of its peers, reduced earnings guidance during its most recent conference call with investors and analysts in light of the challenging economic conditions in Europe.
- Dan Finnegan, the chief financial officer of Priceline.com, warned that expected volatility in the euro/dollar exchange rate “can materially impact our results expressed in U.S. dollars.”
- In order to protect its sales, the company explained that is has contracts in place to shield a substantial portion of its second quarter EBITDA and net earnings from any fluctuation in the euro or pound against the dollar during the second quarter, Finnegan explained.
- ADOBE: Recently, Adobe Systems Inc. (ADBE.OQ) posted results that were slightly better than analysts had predicted (it announced earnings of 60 cents a share, compared to the Thomson Reuters consensus forecast of 59 cents a share) for its fiscal second quarter, which ended May 31.
- However, the company saw a $14.5 million decrease in revenue due to unfavorable currency rates over year-earlier levels.
- Mark Garrett, the chief financial officer at Adobe Systems told conference call attendees that the company had a $10.7 million gain from hedging activities in the second quarter, compared to a $200,000 gain form hedging during the second quarter of 2011.
- “Thus the net year-over-year currency decrease to revenue, considering hedging gains, was $4 million,” Garrett said.
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07/02/12 |
AlphaNOW |
ANALYTICS |
BANK PROFITS: As go Bank Stocks, So Goes the Equity Markets
Risk-Taking by Banks Still Not Paying Off in Higher Returns on Equity 06/29/12 AlphaNOW
Bank investors prize ROE as a measure of how well a financial institution uses its capital to generate profits – but industry-wide, ROE now is at levels once thought unimaginable. Is the right approach taking on more risk, or going back to basics?
- Large global financial institutions could routinely earn returns on equity (ROE) for their shareholders north of 10%, and often even above 20%.
- The financial crisis of 2008 brought about a host of new regulations and restrictions on their activities (such as the provisions of the Dodd-Frank Act barring much proprietary trading and many investments in hedge funds and private equity vehicles).
- The more capital they need to keep on their balance sheets and the more higher-risk but potentially profitable businesses they can no longer pursue as actively, the greater the potential for their ROE to dip.
- The common worry became that if their ROE fell below 10%, investors would be less willing to purchase their stock, since at that level the returns were less attractive relative to the risk and the degree of volatility in the share prices.
- An ROE of around 20% enabled a bank’s stock to trade at around three times book value, a smaller ROE would weigh on that book value ratio and thus the share price.


- As ROE levels have declined since the financial crisis, so, too has the book value of banking stocks in both the United States and Europe.
- European banks, in particular, appear to have a lot to worry about, with a price/book ratio, on average, of around 0.5.
- Whenever a company trade at a level below its book value, it signals that it is generating on return on shareholders’ equity that is below its costs of capital – thus, instead of creating value for shareholders, it is destroying it.
- In theory – although it’s rarely practical in the real world – it would be better for the directors of such a company to liquidate it if they aren’t able to turn that ROE around and boost book value above 1.
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07/02/12 |
AlphaNOW |
ANALYTICS |
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MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - July 2nd - July 7th, 2012 |
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EU BANKING CRISIS |
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SOVEREIGN DEBT CRISIS [Euope Crisis Tracker] |
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RISK REVERSAL |
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CHINA BUBBLE |
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JAPAN - DEBT DEFLATION |
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BOND BUBBLE |
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6 |
CHRONIC UNEMPLOYMENT |
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GEO-POLITICAL EVENT |
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MACRO News Items of Importance - This Week |
GLOBAL MACRO REPORTS & ANALYSIS |
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US ECONOMIC REPORTS & ANALYSIS |
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CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES |
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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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COMMODITY CORNER |
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THESIS Themes |
FINANCIAL REPRESSION |
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CORPORATOCRACY -CRONY CAPITALSIM |
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GLOBAL FINANCIAL IMBALANCE |
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SOCIAL UNREST |
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STATISM |
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CURRENCY WARS |
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STANDARD OF LIVING |
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GENERAL INTEREST |
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