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 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
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 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 |
 NOVEMBER 2012: MARKET ANALYTICS & TECHNICAL ANALYSIS - (Subscription Plan IV)
We have witnessed QEfinity "Unlimited", OMT "Uncapped', and the US Election results. Now we begin to watch the Fiscal Cliff political poker game unfold. So far it has been a Buy on the Rumor, Sell on the News scenario with markets down significantly since each event, but appearing to find support at the 200 DMA. With US government facing another downgrades to its "Risk Free" status, earnings plummeting and a clear global slowdown in progress, what should we expect before year end and more importantly in the New Year? The short answer is 'volatility' as we complete the "Right Shoulder" of a classic Head and Shoulders pattern of a major Long Term Technical structure. Once complete we then head lower.
A Santa Claus Rally is highly likely despite a rarely confirmed Hindenberg Omen and technical chart patterns that mirror the pre-1987 market crash - way too closely for this analyst. The markets are at levels of extreme risk which is not priced in. Most investors are best advised to stand aside and error on being too conservative. It is too risky at this moment to be either net long or short. Soon however there will be a lower risk entry to be net short the market for the 2013 market clearing event, which the macro charts are consistently signaling.
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MOST CRITICAL TIPPING POINT ARTICLES TODAY - Nov 11th - Nov 17th, 2012 |
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GLOBAL ERIVATIVES - BIS Report
Q2 Total Gross Notional Derivatives Outstanding: $639 Trillion 11-13-12 BIS -via ZH
Earlier today, the BIS, which has been doing everything in its power today to defend the 1.27 support in the EURUSD since the market open this morning, released its H1 OTC derivatives presentation update. There was little of material note: total OTC derivatives were virtually unchanged at $639 trillion gross, representing $25 trillion in net outstanding (market value), and $3.7 trillion in gross credit exposure. Here the PhD theorists will say gross is irrelevant because Finance 101 said so, while the market practitioners will point to Lehman, counterparty risk, and less than infinite collateral to fund sudden implosions of weakest links in counterparty chains, and say that it is gross (which until a recent revision of BIS data had been documented at over $1 quadrillion) that mattered, gross which matters, and gross which will always matter until finally everything inevitably collapses in a house of missing deliverable cards. Because not even the most generous sovereigns and central banks can halt the Tsunami once there is a failure of a major OTC Interest Rate swap counterparty. And whereas Basel III had some hopes it would be able to bring down the total notional in derivative notionals slowly over the next few years with a gradual deleveraging across all financial firms, the bankers fought, and the bankers won, because the last thing the current batch of TBTFs can afford it admit there is any hope they can ever slim down. The will... but never voluntarily.
Visually:

Click Image to Enlarge
And in tabular form:
Click Image to Enlarge
Some details from the OTC:
Total notional amounts outstanding of OTC derivatives amounted to $639 trillion at end-June 2012, down 1% from end-2011 (Graph 1, left-hand panel, and Table 1). The appreciation of the US dollar against key currencies between end-2011 and end-June 2012 contributed to the decline by reducing the US dollar value of contracts denominated in euros in particular. The overall decline was driven by interest rate contracts (–2%). Credit derivatives notional amounts also continued to decline (–6%). In contrast, foreign exchange contracts outstanding rose by 5% to $67 trillion.
Gross market values, which measure the cost of replacing existing contracts, dropped by 7% to $25 trillion (Graph 1, right-hand panel). This amounts on average to slightly less than 4% of notional amounts outstanding.
Gross credit exposures, which measure reporting dealers’ exposure after taking account of legally enforceable netting agreements, mirrored the decline in total market values, falling to $3.7 trillion, which represents 14% of the total market value of OTC derivatives. Since the end of 2008, gross credit exposures have tended to move in a narrow band of 14–16% of market values. This compares with a range of 19–24% in the mid-2000s. Gyntelberg and Vause (2012) calculate that about half of dealers’ gross credit exposures are covered by collateral.
Since gross notionals in most categories declined (boring) except for FX, here is the breakdown of what drove this rise:
Click Image to Enlarge
Full report link |
11-14-12 |
GLOBAL
MONETARY |
1
1- EU Banking Crisis |
MONETARY MALPRACE - Moral Hazard & Unintended Consequences
Welcome To The Nuthouse: How Private Financial Fiat Creates A Public Farce 11-13-12 Charles Hugh Smith
Farce #1: “Market value” and “free markets” have become a joke.
Farce #2: Private, self-assigned, fake value is being traded for public money at 100 cents on the dollar.
Farce #3: Printed money is backed by nothing.
Farce #4: We have a “free” enterprise system dominated by monopolies that force people to buy inferior goods and services at exorbitant rates.
Farce #5: High-level financial crimes, no matter how egregious or widespread, are not being prosecuted.
Farce #6: Risk is gone. Now there is only liability borne by citizens.
Farce #7: Productivity has been supplanted by parasitism. |
11-14-12 |
THESIS |
CRONY CAPITALISM |
PATTERNS - Arithmetic versus Geometric Progressions
Sometimes a picture paints a thousand words. In the case of this chart, it paints an expectation of around 300 S&P points (to the downside). The strange symmetrical exponentiality of the last four years can only be marveled at in its reflection of greed and fear catalyzed by the machinations of an increasingly impotent central banking cartel. Trade accordingly.
The irony of the coincident timing of the plunge and the pending fiscal cliff decision - which as we noted here, will not be solved until the market pushes the politicians to 'compromise' - should not be lost on those who poo-poo such silly chartist ramifications...
(h/t Ivan The Terrible @SqueezedEquity) |
11-14-12 |
PATTERNS |
ANALYTICS |
US ECONOMY - Fiscal Tailwinds
Sector Surplus' Is The Key Force That Will Keep The Economy Growing For Years 11-13-12 Goldman Sachs via ZH
As people worry about drag from public sector austerity bringing the US down in 2013, Goldman's Jan Hatzius makes an incredibly important point about another counterveiling point, which is that of the historically high Private Sector Surplus.
...underneath the fiscal drag the fundamentals in the private sector of the US economy are improving. The key force behind this improvement is the gradual normalization in the private-sector financial balance, i.e., the gap between the total income and total spending--or alternatively, the total saving and the total investment--of all US households and businesses, from levels that remain very high. When the private sector balance is high, the level of spending is low relative to the level of income. A normalization then means that spending rises relative to income, providing a boost to demand, output, and ultimately employment and income. The induced improvement in income then has positive second-round effects into spending.
Exhibit 1 shows that while the private sector balance has fallen a bit in recent years, it remains at +5.5% of GDP, more than 3 percentage points above the historical average. In particular, the business sector continues to run a large financial surplus, as capital spending has generally not kept pace with profits and cash flow. The surplus in the household sector--calculated as the difference between personal saving and net residential investment--is less exceptional by the standards of longer-term history, but quite high by the yardsticks of the last 25 years.
This recovery is slow, but there are plenty of tailwinds to kick in on the private sector side, as this chart nicely shows.
Another "fiscal" tailwind that doesn't get discussed is state & local spending/hiring, which finally seems set to stop being a drag, for the first time since the recovery.
So although the Federal austerity is worrisome, it's not the only game in town.
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11-14-12 |
CYCLES GROWTH |
US ECONOMY |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Nov 4th, - Nov 10th 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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RISK - Fixed Income Investor Risk Perceptions
One Big Risk People Have Forgotten Thanks To The Fiscal Cliff 11-12-12
The fiscal cliff has completely dominated the headlines since the presidential election was decided last Tuesday. BofA Merrill Lynch's latest client survey of fixed-income investors confirms that the fiscal cliff is the biggest thing on the market's mind right now:

As fiscal cliff concerns have risen between September and November, many others have waned – especially that regarding oil prices. In fact, less than half of those who called an oil price shock emanating from a conflict in the Middle East a big concern in September did so in November.
BofA Merrill Lynch credit strategist Hans Mikkelsen and his team say that's the biggest thing that investors are underappreciating:
The one risk that appears to us under appreciated by investors is the risk of higher oil prices - mentioned by only 6% of investors as a major concern - especially as there are significant risks of an escalation of the geopolitical situation in the Middle East.
On the other hand, BofA equity strategists peg the risk of an oil shock owing to a potential military conflict between Iran and Israel at below 10 percent. Here is what they had to say in a recent report on the subject:
Although tighter sanctions and the blockade of crude exports from Iran have reduced the country’s oil exports, Iran is still OPEC’s fourth largest oil producer, exporting about 1 million barrels a day. According to Commodity Strategist Francisco Blanch, a full blown Iranian oil supply disruption could push Brent oil prices up by $20-40/bbl and have twice the impact of Libya on global supplies and prices.
Indeed, the potential fallout from an Iranian strike could be much, much greater given that the oil market is already tight and that 20% of the world’s oil is transported through the Strait of Hormuz. A sustained rise in oil prices above $150/bbl would likely result in a recession and necessitate a significantly more defensive asset allocation.
That scenario wouldn't be pretty, but given that BofA's equities team labels this a "tail risk" with less than a 10 percent chance of happening, maybe the bank's credit clients aren't so far off the mark. |
11-13-12 |
RISK |
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3 - Risk Reversal |
CHINA BUBBLE |
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JAPAN - DEBT DEFLATION |
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JAPAN - Deep -3.5% Recession and A Negative Current Account Balance
Japan Plunges Into Deep Recession; GDP Shrinks 3.5% Annualized; Japan Current Account Turns Negative First Time in 30 Years; Watch the Yen 11-12-12 Mish
The global economy took another turn for the worse as Japan plunged into recession following two consecutive quarters of growth.
Please consider Japan’s economy shrinks annualized 3.5%.
Japan’s economy shrank an annualised 3.5 per cent between July and September, the steepest decline since the earthquake-hit first quarter of 2011, as exporters suffered big falls in shipments to key markets such as China and Europe.
Prime Minister Yoshihiko Noda described the gross domestic product figures as “severe”, while Seiji Maehara, economy minister, said Japan had possibly entered a “recessionary phase”.
In a speech on Monday, Masaaki Shirakawa, Bank of Japan governor, said there was “no question that the [central bank] should exert every effort to enhance its easing effects as much as possible”. He said domestic demand was “unlikely to increase at a pace that will outperform the weakness in exports”.
The Japanese government’s monthly survey of “economy watchers” – which includes barbers, hoteliers, car dealers and others who deal with consumers – has recorded six falls in a row since April. Last month the index stood at a level little better than that of April 2011, in the immediate aftermath of the quake.
Japanese manufacturers from Nissan to Shiseido have reported steep falls in sales of their products in China, following a wave of demonstrations against Tokyo’s nationalisation of some of the islands in mid-September.
Japan’s top seven automakers have cut their projections for Chinese sales by a fifth, for the fiscal year to March, according to calculations by the Nikkei newspaper.
Japan Trade Deficit Largest in History
As Japan spirals out of control, please recall Japan trade deficit hits record as relations with China poisoned.
Japan registered its biggest-ever trade deficit for a half of a fiscal year, in a sign that the sovereign debt crisis in Europe and the strained relationship with China over a territorial dispute have eroded Japanese exports, government data showed today.
For the first half of fiscal 2012 through September, Japan logged about USD 40.6 billion (3,219 billion yen) in goods trade deficit, up 90.1 percent from a year earlier and the biggest since the Finance Ministry began recording in 1979.
In September alone, the deficit stood at 558.6 billion yen, the third straight month of red ink and the largest for the month of September, the ministry said in a preliminary report, augmenting fears that violent anti-Japan rallies and boycotting of Japanese products in China have weighed on the exports to the biggest trading partner.
Exports to China fell 8.2 percent to 5,921.1 billion yen in the first half and slid 14.1 percent to 953.8 billion yen in September, sharper than the 9.9 percent fall in August. It was the fourth consecutive month of deficit as various products, ranging from auto and auto parts to steel and semiconductors, declined notably.
The balance showed Japan suffered the biggest September deficit with China of 329.5 billion yen, as imports gained 3.8 percent to 1,283.3 billion yen.
Resentment in China has accelerated since the Japanese government decided last month to nationalize part of an island group in the East China Sea, also claimed by Beijing and Taiwan.
Japan Current Account Turns Negative
The trick for Japan is how to finance its national debt, now at a majorly unsustainable 235% of GDP.
Japan was able to do so for years on account of its current account surplus, of which trade is typically the largest component.
You can now kiss that surplus goodbye because Japan Current Account Turns Negative
The world's third-largest economy has run a surplus in its current account, a measure of trade in goods, services and investments, for several decades—meaning it's earning more from exports and investments abroad than it spends at home. In fact, Japan the world's biggest creditor nation.
The surplus has been in the spotlight recently, since Japan also has the developed world's biggest debt load, now nearing a quadrillion yen ($12.5 trillion)—more than double its gross domestic product. As long as the current account surplus remains, economists say, Japan is in little danger of a Greek-style crisis, since its debt is largely being funded by household savings.
While that remains the case, Japan reported Thursday that the seasonally adjusted current-account was in deficit in September—for the first time in more than 30 years. The sudden surprise drop has some economists warning that Japan's ability to generate wealth is eroding faster than expected, and its fiscal situation could be more fragile than many had thought.
The Finance Ministry says Japan won't slip into a structural current-account deficit very easily, since deficits in the trade of goods and services will be offset by huge surpluses in what the country earns on investments in overseas assets such as U.S. Treasury bonds.
But the Japan Center for Economic Research argues a structural deficit in could be as close 2017, noting fuel-import levels are likely to stay high if most nuclear plants stay off.
The Japan Research Institute, another think tank, says a structural deficit could start in 2022 if crude oil prices keep rising. Hideki Matsumura, an economist with the institute, said it could come earlier if the current strong-yen trend, which hurts Japan's ability to sell overseas, continues.
"Many countries are catching up with Japan in the manufacturing field," he said. "If they can produce similar products for a cost 20% to 30% less than Japanese do, Japan will soon find no demand for its products."
Bug in Search of Windshield
As my friend John Mauldin suggests, Japan is a bug in search of a windshield. I highly doubt Japan can make it to 2022 or even 2017 before it runs into serious issues.
Actually, Japan has extremely serious issues already, it's just that the market is ignoring them for now. If interest rates rise by a mere 2% or so, interest on the national debt will consume 100% of Japanese tax revenue.
Global imbalances are mounting. I suspect within the next couple of years (if not 2013) Japan will resort to the printing press to finance interest on its national debt and the Japanese central bank will start a major currency war with all its trading partners to force down the value of the yen |
11-13-12 |
JAPAN |
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5 - Japan Debt Deflation Spiral |
BOND BUBBLE |
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CHRONIC UNEMPLOYMENT |
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GEO-POLITICAL EVENT |
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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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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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PE RATIO - The Shiller P/E
An Old Friend: The Stock Market’s Shiller P/E Clifford S. Asness, Ph.D. AQR Capital MAnagement November 2012
In particular, though we will touch on some of the other possibilities, we will focus primarily on two measures at the forefront of today’s argument: A market P/E calculated using standard one-year trailing total earnings vs. what has come to be called the “Shiller P/E.”3 The idea of the Shiller P/E arose from the observation that one-year earnings are highly volatile and probably mean-reverting. Thus, at times of very high earnings, the one-year P/E might look “too low” (stocks too cheap) and when earnings are very low, the opposite can occur and the one-year P/E might look “too high” (stocks too expensive). At extremes, like very bad recessions, earnings can get so low as to approach or pass zero, making the oneyear P/E obviously silly (this almost happened in 2008/09). What the Shiller P/E does to adjust for this problem is simple and effective, if obviously imperfect. Instead of using oneyear trailing earnings, it uses the average of the prior 10 years of trailing earnings (inflation adjusted).4 Ten years is, of course, arbitrary. You would be hard-pressed to find a theoretical argument favoring it over, say, nine or 12 years. However, it struck its creators and many of us as reasonable and intuitive. It extends over one or two typical business cycles without going too deeply into the very distant past. Put simply, one-year P/E’s represent what an investor pays for the last years’ worth of S&P 500 earnings, again a very volatile number. In contrast, the Shiller P/E represents what an investor pays for the last 10 years’ average real S&P 500 earnings. The hope is that this is a more stable measure that is more relevant to long-term future stock returns and earnings. So, what do Shiller P/E’s look like over history up until today?



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11-13-12 |
FUNDMAENTALS
EARNINGS
VALUATIONS |
ANALYTICS |
PE RATIO - Election Year Trends
Post-Election Performance: Dip-Buyer's Dream Or Valuation Slump 11-12-12 Bloomberg via ZH
With the S&P 500 down a staggering 6.5% from its post-QEtc highs, the world and their wealth adviser is beginning to get that Deja Deja Deja Vu feeling all over again. The commission-takers are being trotted out left, right, and center to spew forth every market myth from "money-on-the-sidelines" to "markets-hate-uncertainty"; from "valuation is cheap" and "whatcha' gonna do - buy bonds at 1.5% yield?"; and from "healthy retracement" to "long-term horizon". In today's episode of epic realizations of the truth, we thought we would look at year-end multiple expansion (contraction) seasonals - since we suspect earnings expectations (which are still running dramatically high; even though recently trending lower) - remain exorbitantly hopeful of a fiscal cliff resolution bringing joy and happiness to the world. Fact: post-election-year multiples have on average contracted around 1x versus a 0.6x expansion in non-election years.
The chart below shows the change in P/E multiple for the S&P 500 on average through the year - in election years, non-election years, and the current year...

Chart: Bloomberg
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11-13-12 |
FUNDMAENTALS
EARNINGS
VALUATIONS |
ANALYTICS |
PATTERNS - Climatic Readings Signaling Exhaustion
Climactic Readings Usually Signal Exhaustion 11-09-12 Decision Point
We often refer to very high indicator readings as being climactic. This is particularly true with ultra-short-term (days) indicators such as the Participation Index, which measures short-term price trends and tracks the percentage of stocks pushing the upper or lower edge of a short-term price trend envelope. High DOWN Participation readings this week probably mean that current selling pressures are exhausted in the very short-term.
On the chart below we can see that readings of +60 and greater (UP or DOWN Participation) are generally speaking extreme or climactic. And in most cases climactic readings coincide with the exhaustion of the price move that generated the climactic reading. Sometimes prices consolidate briefly before continuing in the direction of the climax, or the trend reverses, retracing all or part of the previous price move.

On Thursday we had a DOWN Participation of +69, so we should be expecting that selling pressure in the ultra-short-term time frame is close to exhaustion. Friday's miniscule bounce and the contraction of DOWN Participation implies that we can now expect a short consolidation or slight advance before prices head lower.
Obviously, it is possible that we will see even more extreme DOWN Participation readings next week (driven by much lower prices), but for now let's assume that the market will take a brief "pause to refresh".
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11-13-12 |
PATTERNS |
ANALYTICS |
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).

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11-12-12 |
PATTERNS |
ANALYTICS |
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.


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11-12-12 |
ANALYTICS
FUNDAMENTALS EARNINGS |
ANALYTICS |
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...
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11-12-12 |
ANALYTICS
PATTERNS |
ANALYTICS |
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.
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ANALYTICS
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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
Deutsche Bank macro strategist Jim Reid's daily note looks at the best-performing asset classes since President Obama was elected on November 4, 2008.
Reid writes, "In brief you've wanted to be in Silver and Gold and not in Greece, Italian or European bank equities during Obama part 1."
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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
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THESIS Themes |
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GLOBAL FINANCIAL IMBALANCE |
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