EARNINGS - Elevated Negative Pre-Announcements

You Know The Market's Euphoric When... 04-02-13 Zero Hedge

We noted last night the 'six charts' that represent the sum total of the hopefulness of these markets with relation to fundamental earnings but it is the ratio of negative to positive earnings guidance - which stands at a record high - that should worry investors the most (and doesn't). As the WSJ notes, in the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007 - just as that bull market was ending (and troughed at 0.97 right as the bottom was in in stocks in Q1 2009). The current 3.55 ratio is the highest on record. But what is more representative of the market's absolutely sanguine nature is that just 2 days after guiding earnings down, stock prices are down just 0.3% (and half the stocks actually rose). As the WSJ concludes, and we tend to agree, watch out. There may be a nasty drop on the other side of this wall.

EARNINGS - Investors Ignore Negative Pre-Announcements

Investors Ignore Negativity at Their Peril 04-01-13 WSJ

As the first quarter drew to a close, 86 companies in the S&P 500 issued negative guidance for what they expect to report in earnings for that period. Just 24 issued positive guidance. At 3.58 negative updates for every positive one, that is by far the highest ratio since FactSet began tracking such data in 2006.

A look at consensus earnings-per-share expectations for the companies with the 10 highest weightings in the S&P 500—making up close to a fifth of the total—shows a similar pattern. Relative to where forecasts stood at the start of the year, they have fallen for seven and risen for three.

Ignore corporate worrywarts at your peril. In the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007—just as that bull market was ending. Meanwhile, one of the lowest ratios of negative guidance, 0.97, came during the second quarter of 2009, when many analysts and investors still were very pessimistic and stocks hit a 13-year low.

Investors' reaction to recent guidance shows they may be too sanguine. FactSet notes that the average stock-price change from two days before to two days after the announcement of negative guidance has been a drop of just 0.3% this quarter. About half of the stocks involved actually rose.

Conversely, companies issuing positive guidance had larger-than-typical gains on average, although this figure was pulled higher by Netflix, which rallied by two-thirds

TOTAL RETURNS - US & Japan the Only Positives

Best And Worst Performing Assets In 2013 04-03-13 Deutsche Bank via ZH

A rather skewed distribution in asset returns Year to Date (through March 31), with the winners so far i) the Nikkei, in both JPY and USD terms, on endless jawboning out of the Japanese political apparatus that it may do virtually anything - although in a few hours we will see just what the BOJ actually will do, the S&P on the $85 billion in monthly liquidity injections, and finally the FTSE on expectations the arrival of yet another Goldman central planner will unleash yet another epic episode of monetization in July, just as the Japan effect is fading.

The losers: pretty much everyone else. (BitCoin was not included in the sample).

ANALYTICS - Weakness Below the Headline Numbers

Underneath The Surface, People Are Seeing Signs That The Stock Market Is Breaking Down 04-03-13 BI

ANALYTICS - Weakness Below the Headline Numbers - 2

There's A Rotation Underway Out Of Small-Cap Stocks That Could Be Bad News For Everyone 04-01-13 BI

SENTIMENT - Contrarian Indicator Suggests Upside Potential

Sell Side Consensus Indicator Still Extremely Bearish 04-01-13 Barry Ritholtz

CANARIES - Rosenberg Sees Signs of Overbought Market

ROSENBERG: I See 10 Signs That Show The Stock Market Is Overbought 04-01-13 Gluskin Sheff's David Rosenberg via BI

PATTERNS - Long Cycles

Long Cycles 04-02-13 Ed Carlson via Safehaven

Chances are you have seen a long-term chart of the Dow annotated as the chart below has been. The red hash marks designate secular bull and bear markets. But if you look closely, you may notice one significant difference from similar charts; the first secular market begins in 1921 and not in 1932 as is often shown.

Why the low in 1921? Why is the secondary low of March 2003 used and not the nominal low in October 2002? The dates shown on this chart are the lows of, what George Lindsay called, the Long Cycle and were found using very specific, rules-based methods devised by him. These rules are explained in the book An Aid to Timing. I recently took a moment to count the exact length of these long-cycles. Although Lindsay devised these methods using data he had collected back to 1798, he wrote the original An Aid to Timing in 1950 so he wasn't able to do perform this exercise for our "modern" market. Review the table below and notice how similar the four cycles are in duration.

Regardless of the time period chosen, the long cycle which began in 2003 is not expected to bottom until 2023. This should eliminate any question of whether the Dow began a new secular bull market at the low in March 2009.

EU - Policy Shift Threatens the View of Bank Deposits

Bail-In Blues: Luxembourg Warns of Investor Flight from Europe 03-29-13 der Spiegel

The debate over this week's "bail in" of bank account holders in Cyprus as part of the country's debt crisis bailout is continuing to simmer in Europe. In Luxembourg, Finance Minister Luc Frieden has warned that the example set in Cyprus by taxing people holding €100,000 ($129,000) or more in their accounts could drive investors out of Europe.

dsl/SPIEGEL

THE CYPRUS IMPACT - Crumbling EU Foundation Principles

The Seven Broken Taboos Of The Cyprus Deal 03-31-13 Barclays via ZH

The euro’s core founding principles, based on the Maastricht Treaty’s:

1- “irrevocable” fixing of currency rates, and of

2- the free movement of capital, have been violated.

According to Barclays: From a European perspective, the list of broken taboos and assumptions continues to grow. It includes:

1. EU sovereign debt cannot be restructured: broken by the Greek PSI.

2. Senior bank debt-holders cannot be bailed in: broken several times with respect to banks in Denmark, Ireland and now two Cypriot banks.

3. Depositors are sacrosanct: broken by Cyprus – deposits greater than the formal guarantee (EUR100k) in the two biggest banks, with EUR4.2bn of uninsured deposits in Laiki Bank set for a large haircut of unknown size, and Bank of Cyprus deposits set for a haircut of around 35% according to several news reports (eg, Economist, Reuters).

4. Depositors should not be punitively taxed: broken by the Cypriot government and implicitly endorsed by the EU, but vetoed by the Cypriot parliament.

5. If capital controls are applied in the euro area, it is ‘game over’: broken by Cyprus – banks were shut for nearly two weeks; draconian controls of uncertain duration have been imposed.

6. Discussion of a euro exit is ‘off limits’: already it is apparent that euro exit was discussed with respect to Greece during H1 12; this topic again re-emerged last weekend with respect to Cyprus.

7. The EU can rely on the IMF to be sympathetic in providing financing without haircuts, even for countries with high public debt: from the Greek and now the Cypriot experience, the Fund is evidently evaluating new programmes more critically, particularly when debt/GDP ratios rise above 100%.

The euro will never be the same again; its preservation now depends urgently upon economic recovery. Without the delivery of economic growth, unemployment will rise to yet higher post-war record levels, and the widespread and growing disillusionment felt by EU citizens towards their economic regime will threaten to spill over into more explicit questioning of the euro’s suitability.

GLOBAL GROWTH - Slowdown Starting to Accelerate

Global Economic Slowdown Accelerates Again 04-01-13 Goldman Sachs via ZH

It would appear that between the historical revisions of over-optimistic initial prints in macro data in the last few months and the reality of the weakness in Europe; the global economy is in Slowdown. Goldman's Swirlogram has now seen its Global Leading Indicator in the 'slowdown' phase for two months as momentum fades rapidly and seven of the ten major factors in the index declining with Global (Aggregate) PMI, and Global New Orders-less-Inventories worsening. Quite comically, the three factors providing some positivity are the Baltic Dry Index (which we are told is irrelevant when it drops), Japanese Inventory/Sales (which improved but remains at depression-era levels), and US initial jobless claims (which have become a farce statistically from what we can tell). Of course, none of this macro reality matters for now - until it does that is.

The red arrows show the relative size of adjustments from the initial estimates...

and the last 3 days have seen the biggest drop in US macro data in 9 months...

Charts: Bloomberg and Goldman Sachs

EU - The "CORE" Problem

Europe Back To 19th Century Growth Rates 04-01-13 JP Morgan via ZH

Long-term growth conditions in Spain, Italy and France are as weak as they have been (other than during wartime) in over a century. The chart below tells the story. As JPMorgan's Michael Cembalest notes, while European sovereign debt spreads have rallied across the board, European bank lending to households and businesses is still declining, and the cost of small business loans in Italy and Spain is higher than both real and nominal growth. With ECB policy now clearly useless given Europe's fragmentation, and with Germany's forward expectations rolling over, it is hard to see how, absent wholesale devaluation and/or inflation (or as Cembalest notes destruction & rebuilding), Europe will recover from this.

SENTIMENT - Small Investors Edging Into Market Afraid to Miss Rally

Mom and Pop Run With the Bulls 03-29-13 WSJ

The market's record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.

When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.

This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.

"What really tipped our hand was to see our cash not doing anything while the S&P was going up," says Ms. White, a 39-year-old dermatologist in Houston. "We just didn't want to be left on the sidelines."

• So far this year, U.S. stock-focused mutual funds—the traditional domain of mom-and-pop investors—have taken in a net of $33.6 billion, according to Lipper.

• That is a small reversal compared with the $445 billion that they pulled from domestic stock mutual funds from 2007 through the end of 2012.

• Many on Wall Street think that trend will likely accelerate in coming months, particularly if the stock rally continues.

• So far, most of the gains have been powered by big institutions and professional traders, whose buying helped push the blue-chip Dow to a gain of 11% in the first quarter of the year, which ended last Thursday.

• That rally, which also pushed up the S&P 500 to a record last Thursday, is the best start for the Dow since 1998.

• Providing some comfort to small investors are fading concerns about the health of the U.S. economy. While growth is far from vibrant, unemployment is falling. Crucially for individual investors, the values of homes—the biggest single investment for most Americans—have started to inch higher. Corporate profits are at record levels, and confidence is rising among consumers and businesses.

• But there is nothing like bad returns to scare away investors, and good ones to bring them back.

• After the long bull market of the 1980s and 1990s, the first 10 years of this century have become known on Wall Street as the "lost decade." The S&P 500 finished 2009 down 24% from where it was a decade earlier, thanks to a pair of vicious bear markets.

• First came the collapse of the technology stock bubble starting in March 2000, which saw the S&P 500 tumble 49% to its nadir in October 2002. Then from its peak just before the financial crisis in October 2007, the S&P 500 slid 57% to its March 2009 low.

RISK - Increasing Levels of Market Risk

US Retail Investor - Do You Feel Lucky? 04-01-13 Doug Short dshort.com via ZH

For all those calling for multiple expansion to save us from dismal earnings - take a look at this...

GOLD-DOW RATIO - A Secular Trend

In the chart below, courtesy of Cambridge House, we ask readers: in which period was there a more stable relationship between tangible and intangible values, and a less exuberant irrationality vis-a-vis that which is purely based on confidence, if not so much reality.

A second logical follow up question is: where is this ratio of intangible to tangible value going next? The chart below attempts to provide some log-based perspective on precisely this.

FALLING BEHIND - Here is Why

INSIDEOUS INVOLVEMENT - Stealth Capture of Controlling Financial Repression Information

All U.S. Intelligence Agencies – Including CIA and NSA – to Spy On Americans’ Finances 03-14-13 Washingtonsblog.com

Government to Spy On Everyone Who Banks In the U.S.

Reuters notes:

U.S. to let spy agencies scour Americans’ finances

The Obama administration is drawing up plans to give all U.S. spy agencies full access to a massive database that contains financial data on American citizens and others who bank in the country, according to a Treasury Department document seen by Reuters.

***

Financial institutions that operate in the United States are required by law to file reports of “suspicious customer activity,” such as large money transfers or unusually structured bank accounts, to Treasury’s Financial Crimes Enforcement Network (FinCEN).

The Federal Bureau of Investigation already has full access to the database. However, intelligence agencies, such as the Central Intelligence Agency and the National Security Agency, currently have to make case-by-case requests for information to FinCEN.

The Treasury plan would give spy agencies the ability to analyze more raw financial data than they have ever had before ….

***

The planning document, dated March 4, shows that the proposal is still in its early stages of development, and it is not known when implementation might begin.

***

The plan calls for the Office of the Director of National Intelligence – set up after 9/11 to foster greater collaboration among intelligence agencies – to work with Treasury. The Director of National Intelligence declined to comment.

The excuse given for this intrusion on privacy?

As with the destruction of all of our privacies and other liberties, the excuse given is terrorism.

Indeed, given that the government claims the right to assassinate or indefinitely detain Americans without any due process of law, do you think government employees will hesitate in seizing the assets of Americans labels as “enemies?”

The government has done it before, and President Obama authorized seizure of property again last year.

And the government’s take-down of Megaupload was an exercise of the power to seize all of the legal property held in a storage facility because a handful of crooks have illegal property in theirs.

The Puppet Master: Government 03-31-13 Bill Buckler, author of The Privateer via ZH

The Puppet Master - Government

It has been well and often said that only two types of “paper” money have ever existed in history - those that are already worthless and those that are going to be. Eventually, the physical pieces of paper or plastic which have been given a function as a medium of exchange by government order may remain - but their purchasing power on the market does not. The transition point always comes when the “promises to pay” on which the fiat money depends are exposed beyond the possibility of denial to be the LIES which they always were. History is replete with examples, yet very few ask the obvious question: “Pay? - WITH WHAT??” One of the great wonders of the twentieth century was the lengths to which the economics “profession” proved willing to go to avoid even facing that question let alone trying to answer it.

For hundreds if not thousands of years of human history, the vast majority were all too well aware that the government “lives” on the backs of the people. Today, that long-held knowledge has been astonishingly successfully reversed. Today, the perceived “wisdom” is that the people live on the back of the government. In the realm of the history of ideas, it took many centuries to bring forward the idea that a life might be lived without constant kowtowing to government. It has only taken one century - the time since WW I - to all but totally submerge that legacy in a new wave of government dependency.

The old and tired phrase - “I’m from the government and I’m here to help you” - is met by as much derision as it has ever been when people bemoan the impositions of their rulers. But those same people rely on the government to insulate them from the consequences of any action they may choose to undertake.

There are people who love government, people who hate it, and people who fear it. But when the chips are down, the majority of those same people profess to have “confidence” in the government’s power to protect their “welfare”. Governments count on that confidence” above all other things.

Short On Credit And Long On Faith

The ignorance over the mechanisms and procedures which power the modern global financial and monetary system is fiercely held. When it comes to the general public, we have seen demonstrations of that on numerous occasions over the past few years, the latest being in Cyprus. As was the case in all previous like instances in other nations in Europe and elsewhere, very few of those demonstrating in the street have ever thought about the TRUE nature of the banks, central banks and governments in which they place their “trust”. Many reports on the anger of the Cypriots have talked about the end of the “age of innocence”.

Unfortunately, the term innocence is not defined as the fierce refusal to see what is right in front of one’s face. At the end of his great work, Human Action, Ludwig von Mises dealt with the real problem like this:

“There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a selfappointed elite of supermen. In such vital matters blind reliance upon ‘experts’ and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny are at stake.”

“Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.”

Human Action was published in 1949. The problems which von Mises so brilliantly dissected then are incomparably worse now. But the main failing remains the same. Those who refuse to gain the knowledge necessary to stand for something will fall for anything. The result in Cyprus is the latest in a long line of similar cases. To give one example, how many of the “Occupy Wall Street” crowd could give a cogent explanation of what they were protesting against? The specific instances may differ, but the reaction remains the same: “But ... BUT ... YOU TOLD US IT WAS ‘SAFE’!!”

What makes it worse is that most knew that it was NOT ‘safe’ - but they refused to admit it to themselves.