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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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 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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RISK: Option Pricing Sentiment
Bearish Enough To Buy? The Real Fear Index Says Not So Fast 07-10-12 Zero Hedge
All day long we are bombarded with surveys of sentiment. When positive; all is well. When negative they are used by any and every long-only manager as yet another money-on-the-sideline-like as justification to be the contrarian and buy-the-dip. There are however many times when the survey of people's 'views' is quite different from their positioning (cognitive dissonance aside) and we prefer to look at real market sentiment indications for our signals. Case in point is CSFB's Fear Index - which, unlike VIX, measures the sentiment skew in options prices (how much more bearish or bullish put options are relative to call options).
Click To Enlarge
In general, it shows a slight leading indication for larger-trend equity movements but most critically - it can signal when real market positions have become too bullish (or overly confident) or too bearish (overly conservative).
The fact is that the options markets are NOT currently overly bearish here - as they were in Q4 (green oval) - providing the short-squeeze-levered ammo for a rally here; just as options markets were overly bullish (red oval) as the end of LTRO2 began - which provided the initial levered-long-squeeze ammo for the current sell-off.
So the next time you hear someone saying how negative sentiment is - and that's a reason to buy - show them this chart (of real positions - not a survey!) and tell them to move along.
The bottom line is that options prices (or real market sentiment) are in sync with equity prices here and show neither extreme bullish or bearishness.
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07-12-12 |
RISK-OnOff |
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3 - Risk Reversal
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JOB GROWTH: Presidential Year Politics
Chart of the Day 07-06-12
- The Labor Department reported that nonfarm payrolls (jobs) increased by 80,000 in June.
- The chart above provides some perspective in regards to the US job market.
- Note how the number of jobs steadily increased from 1961 to 2001 (top chart).
- During the last economic recovery (i.e. the end of 2001 to the end of 2007), job growth was unable to get back up to its long-term trend (first time since 1961).
- More recently, the number of nonfarm payrolls has been working its way higher but at a pace that is not fast enough to close the gap on its 1961 to 2001 trend.
- It is interesting to note that the current number of US jobs recently surpassed its 2001 peak.
- However, if this month's pace of 80,000 new jobs were to continue for each and every month going forward, the 2008 peak would not be reached until the third quarter of 2017.
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07-12-12 |
US CYCLES |
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7 - Chronic Unemployment |
EARNINGS: H2 Earnings Slump
From Q2 Macro Weakness To H2 Earnings Slump 07-10-12 Zero Hedge
- 14 of the last 20 June indicators has come in below expectations
- Retail sales look likely to disappoint as weak chain store sales offset the modest tick higher in auto sales.
- Given the collapse in the ISM, we expect manufacturing production and durable goods orders to be soft.
- This data will determine if the FOMC has enough ammo to ease aggressively on August 1st (or wait til September 13th) which we expect to only be an extension of forward rate guidance to mid-2015 from late-2014 (and not the panacea of NEW QE).
Q2 EARNINGS EXPECTATIONS
According to our US equity and quant strategy team, analysts started to meaningfully take down estimates in April, when US economic data began surprising to the downside (Chart 1) and as concerns around Europe and slowing growth in China reemerged. Coupled with a drop in oil prices and a stronger dollar, expectations have been driven down by macro headwinds, and guidance has started to falter. At this point, bottom-up consensus is expecting S&P 500 EPS of $25.23, representing earnings growth of 5% YoY (flat ex. Financials), which is slightly below our estimate of $25.50.
Click to Enlarge
H2 EARNINGS EXPECTATIONS
The US equity and quant strategy team remains more concerned with the consensus outlook for the second half of the year, particularly expectations for 4Q. Analysts expect 14% YoY earnings growth in the fourth quarter, despite the fact that our economists expect just 1% GDP growth. Estimate revisions have begun to roll over, with analysts now making more cuts than increases to EPS on a three-month basis, but we think this trend may have further to go. The US equity and quant strategy team has taken a more cautious stance on their earnings estimates for companies with high foreign or US government exposure, given the recession in Europe and high level of uncertainty ahead of the US fiscal cliff that will likely lead to slowing growth in the second half of this year.

Click to Enlarge
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07-12-12 |
STUDY FUNDAMENTALS |
ANALYTICS |
FEDERAL RESERVE: Has "Effectively"Doubled the S&P 500
The Puzzling Pre-FOMC Announcement “Drift” 07-11-12 Federal Reserve Bank of New York
"Absent what the Fed calls "Pre-FOMC Announcement Drift", or the move in the S&P in the 24 hours preceding FOMC announcements, the S&P 500 would be at or below 600 points, compared to its current level over 1300."
The reason for the divergence: the combined impact of cumulative returns of in the S&P on days before, of, and after FOMC announcements and expectations of Easy Money.
We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.” Our findings suggest that the pre-FOMC announcement drift may be key to understanding the equity premium puzzle since 1994. However, at this point, the drift remains a puzzle.
For many years, economists have struggled to explain the “equity premium puzzle”—the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”
The equity premium is usually measured as the difference between the average return on the stock market and the yield on short-term government bonds. Previous research on the size of the premium finds that it is too large for plausible levels of risk aversion (see Mehra [2008] for a review).
The Drift: A First Take
The pre-FOMC announcement drift is best summarized in the chart below, which provides two main takeaways:
- Since 1994, there has been a large and statistically significant excess return on equities on days of scheduled FOMC announcements.
- This return is earned ahead of the announcement, so it is not related to the immediate realization of monetary policy actions.

The chart shows average cumulative returns on the S&P 500 stock market index over different three-day windows. The solid black line displays the average cumulative return starting at the market’s opening on the day before each scheduled FOMC announcement to the market’s close on the day after each announcement. Our sample period starts in 1994, when the Federal Reserve began announcing its target for the federal funds rate regularly at around 2:15 p.m., and ends in 2011. (For a list of announcement dates, see the FOMC calendars.) The shaded blue area displays the 95 percent confidence intervals around the average cumulative returns—a measure of statistical uncertainty around the average return. We see from the chart that equity valuations tend to rise in the afternoon of the day before FOMC announcements and rise even more sharply on the morning of FOMC announcement days. The vertical red line indicates 2:15 p.m. Eastern time (ET), which is when the FOMC statement is typically released. Following the announcement, equity prices may fluctuate widely, but on balance, they end the day at about their 2 p.m. level, 50 basis points higher than when the market opened on the day before the FOMC announcement.
How do these returns compare with returns on all other days over the sample period? The dashed black line, which represents the average cumulative return over all other three-day windows, shows that returns hover around zero. This implies that since 1994, returns are essentially flat if the three-day windows around scheduled FOMC announcement days are excluded.
A Deeper Look through Regression Analysis
The previous chart showed stock returns without accounting for dividends or the return on riskless alternative investments. In the table below, we account for these factors in a regression analysis by considering the return, including dividends (in percent), on the S&P 500 index in excess of the daily yield on a one-month Treasury bill rate, which is a measure of a risk-free rate. We regress this “excess return” on a constant and on a “dummy” variable, equal to 1 on days of FOMC announcements.
The coefficient on the constant (second row) measures the average return on non-FOMC days, while the coefficient on the FOMC dummy (top row) is the differential mean return on FOMC days. In the first column, we regress close-to-close stock returns and see that excess returns on FOMC days average about 33 basis points, compared with an average excess return of about 1 basis point on all other days. As seen in the previous chart, this return is essentially earned ahead of the announcement—hence our label of a pre-FOMC announcement drift. Indeed, in the third column we see a return of about 49 basis points during a 2 p.m.-to-2 p.m. window, while the FOMC releases its statement at 2:15 p.m. ET. In the second column, we repeat the regression using the close-to-close returns from 1970 to 1993, which is prior to when the Fed released its policy decisions right after each meeting, and see that essentially no such premium exists. The bottom rows of the table decompose the annual excess return of the S&P 500 index over Treasury bills on the return earned on FOMC days and the return earned on all other days. As shown in the third column, the return on the twenty-four-hour period ahead of the FOMC announcement cumulated to about 3.9 percent per year, compared with only about 90 basis points on all other days. In other words, more than 80 percent of the annual equity premium has been earned over the twenty-four hours preceding scheduled FOMC announcements, which occur only eight times per year.
The chart below visualizes this return decomposition. It shows the S&P 500 index level along with an S&P 500 index that one would have obtained when excluding from the sample returns on all 2 p.m.-to-2 p.m. windows ahead of scheduled FOMC announcements. In a nutshell, the figure shows that in the sample period the bulk of the rise in U.S. stock prices has been earned in the twenty-four hours preceding scheduled U.S. monetary policy announcements.

An International Perspective
Does this striking result apply only to U.S. stocks? While we do not find similar responses of major international stock indexes ahead of their respective central bank monetary policy announcements, we observe that several indexes do display a pre-FOMC announcement drift, as the chart below shows. Cumulative returns rise for the British FTSE 100, German DAX, French CAC 40, Swiss SMI, Spanish IBEX, and Canadian TSE index when each exchange is open for trading over windows of time around each FOMC announcement in our sample.
Potential Explanations
One might expect similar patterns to be evident also in other major asset classes, such as short-and long-term fixed-income instruments and exchange rates. Surprisingly, though, we don’t find any differential returns for these assets on FOMC days compared with other days. In other words, the pre-FOMC drift is restricted to equities. Further, we don’t find analogous drifts ahead of other macroeconomic news releases, such as the employment report, GDP and initial claims, among many others. The effect is therefore restricted to FOMC, rather than other macroeconomic, announcements. In the Staff Report, we attempt to account for standard measures considered in the economic literature that proxy for different sources of risk, such as volatility and liquidity, but they also fail to explain the return. Finally, we consider alternative theories that feature political risk, investors with capacity constraints in processing information, as well as models where stock market participation varies over time. Although these theories can help qualitatively explain the existence of a price drift ahead of FOMC announcements, they are counterfactual in some dimension of the empirical evidence.
Our findings suggest that the pre-FOMC announcement drift may be key to understanding the equity premium puzzle since 1994. However, at this point, the drift remains a puzzle.
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07-12-12 |
PATTERNS |
CENTRAL BANKS |
MONEY SUPPLY: Has M2 Peaked & Will It Take the Market With it?
As M2 Money Supply Rolls Over, The Stock Market Will Follow 07-11-12 Charles Hugh Smith
As M2 Money Supply Rolls Over, the Stock Market Will Follow
M2 money supply rose sharply, driving the stock market higher. Now it has peaked and rolled over. That does not bode well for the Bull market. The primary point is that “real growth,” i.e. rising wages and profits powered by increases in productivity, does not require massive growth of M2.
Here is Chartist Friend from Pittsburgh's explanatory commentary:
"He who controls the money supply of a nation controls the nation." President James A. Garfield
Except during periods of exceptional earnings growth like we had during the pre-internet computer boom when companies like Microsoft, Oracle and Intel were improving business productivity by leaps and bounds, the trend of the stock market (and economic growth in general) tends to closely follow changes in Fed controlled money supply growth.
The outlier earnings growth of the 1980's and early 90's PC and database revolution was so strong that the Fed was able to take its foot off the monetary accelerator without causing a corresponding drop in stock prices. Once every business was fully computerized in the mid 90's the Fed floored it again to support stocks and create the Internet Bubble. Since then every time the Fed has taken its foot off the M2 accelerator the market trend has turned negative and the economy has gone into recession.
That appears to be what is happening right now.
Note the clear correlation of the 1987 crash and the breakdown from a 20-year dome-top of M2 growth that occurred during the late 80's. The two downtrend lines are parallel on the chart.
As many observers have noted, you can expand the money supply but if that money ends up stashed as bank reserves, it never enters the real economy, nor does it flow into household earnings. The velocity of that "dead money" is near-zero.
M2 declined in the housing bubble as the velocity of money skyrocketed: everyone was pulling money out of housing equity via HELOCs (home equity lines of credit) and spending the "free money" on cruises, furniture, big-screen TVs, boats, fine dining, etc. The recipients of that spending also borrowed and spent as if the "free money" would never end.
If M2 expansion is the only thing propping up an artificial market, what happens to the stock market rally as M2 rolls over? |
07-12-12 |
PATTERNS |
CENTRAL BANKS |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - July 8th - July 14th, 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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CHRONIC UNEMPLOYMENT |
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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.

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07-09-12 |
STUDY |
7
7 - Chronic Unemployment
13
13 - Global Governance Failure |
GEO-POLITICAL EVENT |
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8 |
TO TOP |
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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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
- unsterilised purchases of both treasury and mortgage-backed securities (full-scale QE3).
- A softer measure would be to buy mortgage-backed or treasury securities but sterilise the purchases via reverse repos or term deposits.
- 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.
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07-10-12 |
RISK OnOff |
CENTRAL BANKS |
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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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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.
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07-11-12 |
STUDY
FUNDAMENTALS |
ANALYTICS |
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...)

Click to Enlarge
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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07-11-12 |
STUDY
FUNDAMENTALS |
ANALYTICS |
EARNINGS: European Revenue Dependence
Earnings in Europe and the U.S. 07-11-12-WSJ
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07-11-12 |
STUDY
FUNDAMENTALS |
ANALYTICS |
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.

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07-11-12 |
STUDY
FUNDAMENTALS |
ANALYTICS |
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?)...
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07-11-12 |
STUDY
FUNDAMENTALS |
ANALYTICS |
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:

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07-10-12 |
CYCLE
SECTOR ROTATION |
ANALYTICS |
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.
- Lower oil,
- 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%),
- lower 10-year yields and
- 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
- the Eurozone crisis / policy response;
- deteriorating global macro data; and
- 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
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07-10-12 |
FUNDMENTALS STUDY |
ANALYTICS |
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.

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07-09-12 |
STUDY |
ANALYTICS |
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. |
07-09-12 |
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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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SOCIAL UNREST: Class War in Chicago
THIRD WORLD AMERICA: Class War Gets Violent In Chicago 07-08-12 Janet Tavakoli
- It's not a race war, it's a class war.
- More Shooting Deaths in Chicago than in Afghanistan So Far This Year
- schools report that teachers can't discipline children, and when they speak to a parent, they are often met with denial and verbal abuse instead of cooperation and backup.
- Police have difficulty getting cooperation from witnesses.
- Budget cuts have resulted in an undermanned and demoralized police force
- The problem isn't the race of the perpetrators; it's that the criminals lack respect for themselves, lack respect for others, and lack respect for authority.
- My last post about Arianna Huffington's new book, Third World America: How Our Politicians are Abandoning the Middle Class and Betraying the American Dream talked about the Great Recession, the Great Bailout, and the Great Cover-Up of financial crimes.
- Among the future consequences of not fixing our national problems will likely be an increase in social unrest and an increase in crime. A look at Chicago's problems may serve as a call to action for America's middle class. Chicago's city budget is in dire straits. That's also true of the state of Illinois, California, New York and other areas. In Chicago, the same mismanagement that deepened our fiscal crisis has caused a crisis in essential city services.
- When asked, most will freely tell you that they do not want to place themselves, their families and livelihoods at risk from a perceived Machiavellian police superintendent or other incompetent "bosses" that could lead them into legal trouble that would risk their liberty and freedom (jail).
- "That is why the first step toward stopping our relentless transformation into Third World America has to be breaking the choke hold that special interest money has on our politicians." (Third World America, 172)
- On a local level, Chicago will have to fix its own problems by breaking the choke hold of special interest groups.
- On a national level, it will take a Constitutional amendment requiring full public financing for political campaigns (for starters). Our politicians have shown us how willing they are to be owned by special interest groups that will buy votes, buy a campaign, or just buy them off. As Arianna explains:
"If someone's going to own the politicians, it might as well be the American people."
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07-10-12 |
Macro Analytcs CHS Audio |
SOCIAL UNREST |
STATISM |
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CURRENCY WARS |
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STANDARD OF LIVING |
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GENERAL INTEREST |
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