NOVEMBER 2012: GLOBAL MACRO TIPPING POINT - (Subscription Plan III)

RACE TO DEBASE : The "Race to Debase" Accelerates in a "Race to the Bottom"

The November GMTP issue discusses the Regional Macro Economic Issues in Europe, Japan, China and the Emerging Economcis and BRICS countries. The IMF, World Bank and BIS have all warned of heightened economic and financial risk. The IMF cut the grwoth rate of the advanced economies by 25% taken it down to levels not seen since 2009. The World Bank released a study indicating theat 600 million new jobs must be created over the next 15 years to meet economic and social demands. Meanwhile global growth is falling at rates not seen since the early stages of the 2008 financial crisis.

Currency Wars have entered a new stage has global economies fight for a shrinking piece of export/import demand. Any Geo-Politicl event, an unresolved US Fiscal cliff or unexpected corporate financial failure could be the catalyst to push the world into its first global recession.

MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY

OCTOBER 2012: MONTHLY MARKET COMMENTARY (Subscription Plan II)

RACE TO DEBASE : The Fighting Resumes - The "Race to the Bottom" Monetary Policy Programs Accelerates

THE "UNLIMITED" & "UNCAPPED" SALVO - The macroprudential policy strategy of Financial Repression reached a seminal point last month with the announcement of the Federal Reserve's "Unlimited" QEIII/Operation Twist and the ECB's "Uncapped" OMT. We have moved into the outer limits of Monetary Policy which now forces the accelerated currency debasement of the developed economies against its Asian & BRIC competitors. The 'race to the bottom' has entered another phase which now sets the battle lines for the next set of conflicts.

In case you haven't been keeping score, here is how the "Race to Debase" currently stands. (see right) MORE>>

MARKET ANALYTICS & TECHNO-FUNDAMENTAL ANALYSIS

OCTOBER 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 Technical Analysis coverage available this month.

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OCTOBER 2012: TRIGGER$ (Subscription - Plan V)

TRIGGER$ publications combine both Technical Analysis and Fundamental Analysis together offering unique perspectives on the Global Markets. Every month “Gordon T Long Market Research & Analytics” publishes three reports totalling more then 380 pages of detailed Technical Analysis and in depth Fundamentals. If you find our publications TOO detailed, we recommend you consider TRIGGER$ which edited by GoldenPhi offers a ‘distilled’ version in a readable format for use in your daily due diligence. Read and understand what the professionals are reading without having to be a Professional Analyst or Technician.

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• Technical Analysis Alerts would include hitting potential Trigger Points, Pivots orsome progression that requires you immediate attention.
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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

PATTERNS - 2012 v 1987

S&P 500: 2012 vs 1987 10-23-12 Bespoke

There's nothing like a sharp sell off in the equity market during the month of October to bring out the worst of investor fears.  With last Friday marking the 25th anniversary of the 1987 Crash, those fears are even more apparent.  Making matters worse is the fact that the pattern of 2012 bears more than a passing similarity to 1987.

As shown in the charts below, in both years, the S&P 500 started off strong, saw a first half peak in the Spring, and then sold off.  In both years, the market regainged its footing around Memorial Day weekend, kicking off a Summer rally.  In 1987, the S&P 500 peaked in late August and had two successive failed rallies where each subsequent sell off made a lower low.  Likewise, this year the S&P 500 peaked in mid September and has since had two successive failed rallies where the index has made lower lows.

While the patterns between 1987 and 2012 are similar, there are two key differences.  First, the S&P 500 was up considerably more at its peak in 1987 (+39%) than it was at the 9/14 peak this year (+16.6%).  Secondly, in terms of valuation, the S&P 500's P/E ratio is considerably lower now than it was in 1987.  In 1987, the S&P 500's P/E ratio at the low after the crash (14.37) was still higher than it is now (14.28).

PE COMPRESSION - In Process

P/E Ratios Contract 11-08-12 Bespoke

The market pullback during a relatively strong earnings season for bottom line numbers has caused P/E ratios to contract recently.  Below we highlight one-year P/E ratio charts (trailing 12-month) for the S&P 500 and its ten sectors.  As shown, the S&P 500's current P/E stands at 13.92.

We've really seen a pullback in P/Es for three defensive sectors lately -- Consumer Staples, Telecom and Utilities.  This summer we noted the big increase in valuations for the Utilities sector as investors plowed into dividend paying stocks.  But with an increase in dividend taxes on the horizon, we're starting to see an exodus out of the inflated higher yielding names, and it's bringing P/E ratios down with it.  Even with the drop, however, the Utilities sector still has a higher P/E than the Technology sector, which is having its own problems lately.

MARGINS - No Cash Available for Margin Calls

And Now Come The Margin Calls: NYSE Margin Debt At 16 Month High 11-07-12 Zero Hedge

A stock sell off is usually a healthy, cathartic thing: one sells, pockets the proceeds, books a loss, and comes back to fight another day. The big problem, however, is when speculators and traders are already massively overleveraged, and not only don't have a positive Net Worth (defined as Free Credit Cash Account and Credit Balances in Margin Accounts less Margin Debt) but their Margin Debt is so high it commences a toxic loop of selling merely to fund margin calls which usually start popping up in the last hour of trading (and when trading desks put their phones straight to VM), leading to more forced selling, more margin calls, and so on. And therein lies the rub: according to the most recent NYSE margin debt data, the market complacency recently hit such high levels, that speculators virtually went all in, but solely in their margin accounts without holding any cash buffer to pay for potential margin calls. As can be seen on the table below, Margin Debt as of 9/30 hit $315 billion: a jump of $30 billion from the prior month, and the highest since March 2011, just before the market tanked. And confirming that there is simply no cash on hand to pay for margin calls when they start pouring in after today's massive sell off, is the total Net Worth, which in September was the lowest since April. Because with record complacency, and the Fed guaranteeing no further shocks are possible, who needs to hold cash? Today, we will find out: just as soon as the margin calls start coming around around 3PM Eastern...

CANARIES - Micro Weakness Indicating Major Macro Problems

Is Micro Weakness Smelling A Macro Collapse? 11-09-12 Goldman Sachs via ZH

Last week we suggested a reason why the market was unable to hold on to the Bernanke bid. The relative plunge in Goldman Sachs 'bottom-up' Analysts Index (GSAI) suggested that the macro 'strength' that market-savants were so focused on, could perhaps be election-biased (blasphemy). It seems this macro 'strength' divergence (highest since 1996!) from micro 'weakness' reality was enough to get the Goldmanites thinking - and unfortunately for all the cautiously optimistic managers out there, they are not hopeful. As Jan Hatzius explains,  "the GSAI remains closely correlated with other bottom-up measures, including the S&P 500 sales guidance diffusion index; and while one possible explanation is that S&P 500 companies are more exposed to non-US demand than the US economy at large, and the US has been a relative outperformer. But it is unclear whether this accounts for all of the weakness, or whether the bottom-up weakness also holds some additional leading information for the macroeconomic data."

Via Goldmans Sachs' Jan Hatzius:

• Our Goldman Sachs Analyst Index (GSAI)—which is based on our equity analysts' assessment of conditions in the industries they cover—has sharply underperformed the macroeconomic data, to a degree not seen since its inception in 1996.
• Has the GSAI gone off track? We don't think so, as it remains closely correlated with other bottom-up measures, including the S&P 500 sales guidance diffusion index compiled by our Portfolio Strategy group. It seems that the bottom-up message is simply gloomier.
• One possible explanation is that S&P 500 companies are more exposed to non-US demand than the US economy at large, and the US has been a relative outperformer. But it is unclear whether this accounts for all of the weakness, or whether the bottom-up weakness also holds some additional leading information for the macroeconomic data.

Since 1996, we have conducted a monthly poll of the Goldman Sachs equity analysts about business conditions in the industries under their coverage. In general, the resulting Goldman Sachs Analyst Index (GSAI)—a weighted average of analyst diffusion indexes for orders, shipments, and other activity measures—has matched macroeconomic indicators such as the ISM manufacturing and non-manufacturing index quite closely, and has at times even provided leading information. Partly for that reason, we typically release the GSAI two days before the ISM manufacturing index.

Over the past year, however, the historical relationship between the GSAI and the ISM has weakened, and anyone who has tried to use the GSAI to get an early read on the ISM has been disappointed (see Exhibit 1). The October 2012 release was the most striking example. The GSAI fell to 32.9, a reading that historically would have been consistent with an all-industry ISM in the mid- to high 40s. However, the all-industry ISM was broadly flat at 53.9.

Exhibit 1: Relationship between GSAI and ISM Has Weakened

What lies behind this divergence? One possible explanation is that the GSAI has simply become a less useful indicator over time, perhaps because of fluctuations in the sample size or divergence between our analyst coverage and the broader equity market. But on closer inspection, it seems that the weakness in the GSAI can be explained by more fundamental factors. While it has departed from the ISM, its weakness matches other "bottom-up" measures of economic activity quite closely, as also noted by our European Portfolio Strategy team. A good example is the revenue guidance index compiled by our US Portfolio Strategy group. It is defined as the percentage share of S&P 500 companies that guide consensus revenue estimates higher minus the percentage share that guide consensus estimates lower. Exhibit 2 shows that the GSAI has tracked the revenue guidance index closely since the latter was introduced in 2006, and both have weakened in lockstep in the past year. It seems that the bottom-up message from S&P 500 companies and the analysts that cover them is simply more negative than the macro data would suggest.

Exhibit 2: GSAI Still Tracks Revenue Guidance Closely

It is less clear why the bottom-up message is so weak. One reason is probably that S&P 500 companies are more exposed to international factors than the US economy as a whole, and non-US economies have slowed more sharply than the US. Regarding the first point, non-US sales account for 33% of the total sales of S&P 500 companies, but exports account for only 14% of US GDP. Regarding the second point, Exhibit 3 shows that the all-industry non-US purchasing managers index (based on data from our Global Economics group) has underperformed the all-industry ISM index for the US over the past year. Moreover, Exhibit 4 shows that while the GSAI has underperformed the composite ISM sharply, it has actually tracked the new export orders sub-index of the ISM (which is not included in the composite) reasonably well.

Exhibit 3: Weaker Conditions Outside the US

Exhibit 4: GSAI Still Tracking ISM Exports Closely

At the same time, the domestic/foreign split is probably not sufficient to explain the entire micro/macro divergence. Although there is little evidence for a systematic lead/lag relationship between the micro and macro data, and although other measures of overall activity such as the labor market and various GDP-type spending measures also point to decent growth, the micro data do provide an independent read on activity and may be pointing to slower growth ahead. Our forecast remains for a deceleration in real GDP growth to a 1.5% pace in early 2013, despite positive bounce-back effects from both Hurricane Sandy and the 2012 droughts. The main reason lies in the step-up in the pace of fiscal restraint and the uncertainty effects that may already have started to hit capital spending.

It is possible that indicators such as the GSAI and S&P 500 revenue guidance have picked up signs of such a slowdown at an earlier stage than the macroeconomic indicators.

SECTOR RETURNS - Total Return Performance of Obama's First Term

The Returns Of Every Major Financial Asset In The World During Obama's Presidency 11-06-12 Deutsche Bank via ZH

PATTERNS - Global Market Comparisons

Why Global Investors Love The US Stock Market 11-07-12 Mrgan Stanley via ZH

Gerard Minack, Morgan Stanley's head of developed market strategy, created this chart to show how 2013 earnings expectations for Australia's stock market — the S&P/ASX 200 — have deteriorated through out the year.  Australia's economy is largely driven by a mining industry, which has been supplying the emerging markets.  Those emerging markets have slowed significantly.

It's worth noting, however, that the Nasdaq has had net upward EPS revisions.  And S&P 500 EPS revisions have been revised down only modestly.

The lack of earnings expectations volatility is certainly welcome by investors.

Below is the chart from Minack.

• DM EX-US: Developed Markets excluding the US
• MSCI EM: Emerging Markets
• EURO STOXX: Europe