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MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

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	PART I - Understanding FINANCIAL REPRESSION
	PART II - FINANCIAL REPRESSION in Europe
	PART III - FINANCIAL REPRESSION in the US & ASIA
	PART IV - Preparations for FINANCIAL REPRESSION

Password: macro

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.

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

NOT GOOD: South Korean PMI Falls To 49.4, Orders Booked Fall For The First Time In 4 Months 07/01/12 Markit

CORPORATE EARNINGS: Shrinking Foreign Profits

Rest of World Pulls Down U.S. Profits. 06/30/12 WSJ

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.

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.

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”.

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.

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.