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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

EARNINGS: Warning Season Worst Since Q4 2008 Financial Crisis

New Jolt Looms for Investors: Earnings 07-08-12 WSJ

SITUATIONAL ANALYSIS

• Company announcements have been the worst since the fourth quarter of 2008,
• 42 companies —including Ford Motor Co. and Texas Instruments Inc. have warned investors that profits will be lower than initially expected, in large part because of slowing demand from customers around the world, particularly in Europe.
• Adam Parker, Morgan Stanley's chief stock strategist, predicts Standard & Poor's 500-stock index will finish the year at 1167, about 14% below where it is now. "The pillar of strength is U.S. corporate earnings, and now we're seeing signs that that is cracking," he says
• Most analysts now expect the S&P 500 companies to generate a total of $25.21 in earnings per share this quarter, down from expectations of $25.89 at the beginning of the quarter, according to S&P Capital IQ.
• Wall Street analysts have done little in response to companies' efforts to dampen expectations, says Maulin Thaker, who tracks earnings at Brown Brothers Harriman. Analysts have reduced their earnings estimates from companies in the Standard & Poor's 500-stock index by just 2.8% since April 1. By contrast, the last time company guidance was this bleak, in the fourth quarter of 2011, analysts slashed earnings expectations by 6% in the three-month run-up to earnings season.

EXAMPLES

PROCTOR & GAMBLE

• In June cut its earnings outlook for the second time in three months, as the maker of Tide, Pampers and Crest failed to make some price increases stick, lost market share and struggled to manage rising commodity costs.
• Sales likely fell 1% to 2% in the quarter, the company said.
• P&G Chief Executive Bob McDonald acknowledged at the time that the results reflected in part the company's own management failures. But they also underscore how budget-conscious consumers are putting pressure on P&G's strategy of pricing its products at a premium.

MACY'S

• Mainstream retailers like Macy's Inc. meanwhile, turned in a weaker-than-expected performance in June.
• Macy's sales at stores open at least a year, a key measure of demand for retailers' wares, rose just 1.2% in June.
• "In part, this was a function of a macroeconomic environment that is stagnant at best," Chief Executive Terry Lundgren said at the time.
• The department store chain didn't lower its outlook for this year's results, saying same-store sales are still expected to rise by around 3.7%.

UNITED TECHNOLOGIES

• Chief Financial Officer Greg Hayes told a conference in June that he estimated the worsening situation in Europe and China could cost the company between $50 million and $100 million in operating profit this year.
• "Clearly, the situation in Europe has gotten a lot worse than what we had expected," Mr. Hayes said. "We thought that perhaps we had a year or two of kind of reasonably solid if not growth, at least stability in Europe. That view has changed completely."
• About 17% of the company's revenues come from Europe and about $1 billion of revenue from Spain. "The Spanish market as you can imagine has been rough.
• We've seen pricing pressures primarily in our Otis elevator business as the Spanish market continues to convulse—25% unemployment, 50% youth unemployment, and no clear path to a solution," Mr. Hayes said.

FORD

• Ford last month cited heavier-than-expected losses outside North America when it said it would report "substantially lower" pretax profit for the second quarter.

EARNINGS: Pre-Announcements A Major Concern

Ominous Charts For Q2 Earnings 07-10-12 Zero Hedge

With near record levels of negative pre-announcements post the financial crisis (most recently AMD and Cummins), we are shocked (shocked we tell you) that analysts could have got it so wrong. Expectations for Q2 2012 EPS Growth have dropped from a Viagra-based 'its-always-better-two-quarters-out' view in August 2011 of +11% to -1.8% today. What is not surprising is the hope-filled 14% S&P 500 EPS growth rate expected for Q4 2012! With EURUSD down almost 11% from Q2 2011, we can only imagine the FX translation impacts that analysts are desperately trying to goal-seek into their forecasts - which we presume accounts for the surge in Q4 when Europe will be 'fixed'. With negative macro surprises so disconnected from equity market performance (and implicitly hope for earnings), it seems there is notable room for disappointment.

1) Q2 2012 EPS Growth expectations have fallen from over +11% to -1.8% since August 2011 (priced in? - seems not, given...)

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2) Near record levels of negative pre-announcements (which are accompanied by notable weak equity performance upon announcement) and moreover - positive pre-announcements are trending notably lower also...

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EARNINGS: European Revenue Dependence

Earnings in Europe and the U.S. 07-11-12-WSJ

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EARNINGS: Asian Concerns

Companies Exposed To Asia Are Doing Even Worse Than Companies Exposed To Europe This Year 07-10-12 BI

• Investors have sold off shares of U.S. based companies that derive large parts of their revenue from foreign soil.
• Since mid-May, companies that count all of their sales within the U.S. have seen shares increase more than 6.13 percent, on average.
• However, firms that enjoyed strong foreign sales suffered, with those invested in Asia off 6.74 percent and those in the eurozone down 4.09 percent.
• Business Insider constructed three custom indices based on a company's revenue exposure to three geographic regions: Europe, the Asia-Pacific, and U.S.
• The European and Asian Indices use the top 20 companies within the S&P 500 that generate the highest percentage of their sales from those areas.
• The U.S. index is based on 97 companies, which all generate 100 percent of their revenues within U.S. borders.

Below, year-to-date performance for the three regions. You can see how much better the green line (U.S.-only) is doing compared to the others.

EARNINGS: Q4 Optimism Unfounded & Due for a Fall

Ominous Charts For Q2 Earnings 07-10-12 Zero Hedge

1) US Macro Data reports were dramatically worse throughout Q2 2012 (and yet equities remain up on NEW QE hope - not earnings)...

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2) As everyone assumes that Europe will be fixed by then and the near 11% drop in EURUSD YoY for Q2 will be washed away...

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3) But have no fear because it will all be fixed again by Q4 2012 (when revenues and earnings will hockey-stick back - why? well, because they have to right?)...

LABOR REPORT: Employment Continuing to Fall Further Behind Labor Force Growth Requirement Trend

"The Chart That Tears Apart The Stimulus Package" 07/06/12 Zero Hedge

AEI: This continues to be the longest streak — 41 months — of unemployment of 8% or higher since the Great Depression. And recall that back in 2009, Team Obama predicted that if Congress passed its $800 billion stimulus plan, the unemployment rate would be around 5.6% today. – If the size of the U.S. labor force as a share of the total population was the same as it was when Barack Obama took office—65.7% then vs. 63.8% today—the U-3 unemployment rate would be 10.9%. Even if you take into account that the LFP should be declining as America ages,theunemployment rate would be 10.5%. – The broader U-6 unemployment rate, which includes “all persons marginally attached to the labor force, plus total employed part time for economic reasons,” is 14.9%, up a bit from May. – The average duration of unemployment ticked up to 39.9 weeks.

Trends in Civilian Population, Labor Force, Employed 07-06-12 Mish

Here is an interesting chart from Tim Wallace on Civilian Population, Labor Force, Employed. The chart compares June of 2012, to June in previous years.

Population keeps growing but labor force does not. This is mostly due to the weak economy not boomer demographics (although demographics does come into play). Demographics suggests the labor force would be growing at a smaller rate, but still growing. Instead, the labor force has stalled for four years. For example: in 2000 it took about 150,000 jobs per month to keep up with birthrate and immigration. In 2007 it took about 125,000 jobs per month (a number I believe Bernanke still uses). I think it now takes about 75,000. However, so many boomers are desperate for jobs and the participation rate has dropped so low, that should the economy improve and people start looking for work, the number could easily rise back up to 125,000 per month. For a detailed discussion, please see Question on Jobs: How Many Does It Take to Keep Up With Demographics?

Percent Job Losses In World War II Recessions 07-06-12 BI

The latest jobs report was a major disappointment, as the 80K number of net new jobs created was below the 100K that was expected, and well below any pace that will quickly reduce the unemployment number, which remains elevated at 8.2%. And so we bring you the latest, updated version of this famous chart from Bill McBride at Calculated Risk, which shows the trajectory of the jobs decline (starting at the beginning of the recession) and the recovery, compared to all of the other post-WWII recessions. Once again, the decline is far deeper than anything previous that we've seen, and the comeback remains bad.

QE III: August FOMC

Fed QE3 is Moving Closer 07-05-12 Danske Research

There is a good chance of more easing at August meeting To sum up, we expect the Fed to deliver another round of easing if economic data continue on an equally weak trajectory. It is a close call whether data received ahead of the 1 August FOMC meeting will be enough to convince the Fed that more stimulus is needed.. In the table below, we list the key data to watch over the coming weeks. We also include the threshold that indicates the status quo in economic conditions. If data comes out weaker or in line with this threshold, the likelihood of QE3 in August should be more than 50%.

Should the Fed decide to provide additional stimulus a good candidate is

1. unsterilised purchases of both treasury and mortgage-backed securities (full-scale QE3).
2. A softer measure would be to buy mortgage-backed or treasury securities but sterilise the purchases via reverse repos or term deposits.
3. Both of these measures could be combined with a softening in the communication on the fed funds rate, extending the guidance for exceptionally low rates to 2015.

BUSINESS CYCLE: Sector Performance & Rotation

Q2 Winners And Losers: Who Were The Top And Bottom Contributors To The S&P 07-07-12 Zero Hedge

In the second quarter, despite the ludicrous ramp in the S&P on the last day of the month on what has now been proven to be yet another fizzled European summit, the S&P dropped by 275 bps. Below is the full breakdown of which sectors contributed or detracted from the S&P's performance, as well as which companies were the biggest winners and losers in the quarter. In short: boring old Telecom (AT&T and Verizon at the top), Consumer Staples and Utilities did great, while IT, Financial and Energy got crushed.

Q2 S&P Composition:

Top 10 Contributors to the S&P:

Bottom 10 Contributors to the S&P:

Q2 EARNINGS: At+9.7% they are Still Too High

Earnings Season Preview: +9.7% 2012 EPS Growth Still Too High 07-09-12 Zero Hedge

• There was more negative guidance during the second quarter than any time in this cycle and Morgan Stanley, like us, believes these soft results and weaker guidance are not fully discounted into a QE-hungry market.
1. Lower oil,
2. a stronger dollar (e.g. a one-standard deviation appreciation in the US Dollar against a basket of currencies decreases expected S&P 500 earnings by 2.6%),
3. lower 10-year yields and
4. a preponderance of evidence of lighter growth from economically sensitive companies
• Are reasons for a lower view of Q2 EPS than we previously expected as UBS notes the 'official' US Q2 reporting season kicks off in earnest today with Alcoa followed by over 3,000 global companies reporting in the next two months.
• At the sector and stock level UBS sees particular risk around some of the higher rated areas such as consumer staples and consumer discretionary, where relative multiples are high and expectations are demanding
• Consensus estimates for 2012 global EPS growth have been falling - at 9.7%, they remain too high given
1. the Eurozone crisis / policy response;
2. deteriorating global macro data; and
3. the corporate profit cycle - and in that order of importance.

Most profit warnings have been concentrated in consumer discretionary, industrials and materials. In the defensives, the bulk of the warnings have come from the consumer staples.

Peak weeks for Global companies reporting will be the second-half of July with over 1,200 companies reporting

PRESIDENTIAL YEARS: The Unemployment Rate is Everything

This Is What The Economy Did The Last Time A President Didn't Win Re-Election 07-08-12 BI

It's beyond conventional wisdom that the economy is far-and-away the most important issue in this year's election. The economy is not nearly as strong as Obama would like, and he's praying that there's no more to the summer swoon, and that the jobs report that comes out on Friday, November 2 (four days before the election) isn't a total dud. There are all kinds of models that purport to predict what varying economic indicators mean for a Presidential election, though they all suffer from very small sample sizes. So we're going to take a look at what the economy was like the last time an incumbent President didn't win re-election, which happened to be George H.W. Bush in 1992. The chart below shows the Bush economy in a nutshell. We're only looking at 3 indicators here: Gas prices (green line), the unemployment rate (red line), and the S&P 500 (blue line), since really, those are the kinds of numbers that really relate to how people feel day in and day out. For simplicity, we're starting the charts right at the beginning of 1989.

As you can see, the stock market (blue) did fantastically under Bush, gaining nearly 60% in 4 years. Gas prices in green spiked during the Gulf war/recession (particularly brutal), but by the end of the administration were back on the decline. What really stands out as having gone the wrong way for Bush was the unemployment rate, which was climbing well into 1992. The recession was technically short, and markets boomed, but the unemployment rate was a killer in November. Here's the same chart, but with University of Michigan Consumer Confidence added in Orange. As you can see, it never got back to the level it was at the start of his administration.

So with that frame of reference, let's look at what the situation is like for Obama.

As with H.W. Bush, the stock market has done fantastically under Obama. Gas prices are much higher than at the state of the administration. And unemployment while way too high, has generally been trending down for most of the time Obama has been in office.

This is why the next few jobs reports are simply going to be enormous. If the downtrend in the unemployment rate is re-established, that will be huge. If it's clear that things are stalling out/getting worse again, it seems likely that the same datapoint which knifed the first Bush president, will also get Obama.

SPX and 2012 Elections 2 07-09-12 Zeal

In 15 out of 16 times the incumbent party was re-elected to the presidency when the stock markets rallied in those final two months before voting.  And in 10 out of 12 times when the stock markets fell in September and October, the incumbent party lost.  These are super-high correlations over more than a century’s worth of data, so this stock-market indicator has to be taken very seriously.

In general when the stock markets are up, Obama’s approval rating is high and his disapproval rating is low. And the opposite is true when the stock markets are down. Voters are heavily influenced by the SPX!

The Best Economic Indicator In The World Continues To Be Dead On 07-08-12 BI

The reason we like this chart is that for one thing, it's a pretty correlation. But beyond that, it's a reminder of what's driving this market. Fundamentals. There haven't been many periods where the two lines separated much, and where they did, it was always the market (blue line) that caught back up with the fundamentals. When a real downdraft in initial claims happens, then it's time to be worried.

TRADER SENTIMENT: Intermediate Term Buying Climax Forming

Sentiment Climax 07-06-12 Decision Point

The Wall Street Sentiment Survey* is unique in that the poll is taken on Friday after the market closes, and it asks participants for their forecast for the following week. This differs from other polls that take opinions through the week during periods when the market is active and changing. Last week's survey results (June 29 cutoff) were surprisingly one sided with 80% bulls versus 20% bears.

Sentiment indicators are contrarian, so with that many bulls, there was a pretty good chance that prices would close down this week, which they did, thanks to Friday's selloff.

Another point worth noting is typical price behavior after a climax. Eighty percent bulls is a climactic reading, so we normally expect a short-term top to form within a few days. After a few days of consolidation, it is possible for the rally to continue, but this week's price top has set up an ascending wedge pattern, which has bearish implications -- the rising trend line will probably be violated.

Conclusion: Climaxes can initiate a move to higher prices or signal that a move has been exhausted. In this instance it appears that the latter is the case.