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Investing in Macro Tipping Points
QUARTERLY SMII "CALLS" |
EXPECTED MACRO DEVELOPMENT |
INVESTMENT STRATEGY |
INSIGHT |
COMPLETED |
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Q1 2014 |
UKRAINE & the PETRO$$ |
Global Shift in LNG Balance |
Vehicle: Gazprom (OGZPY)
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Q2 2014 |
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Collapse in Select REITs |
Vehicle: S&P Discretionary Spending SPDR (XLY)

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COMPLETED |
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Q3 2014 |
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Slowing Central Bank Liquidity |
Short Equities (Nasdaq / Russell 2000) ONLY with Death Cross Confirmations

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COMPLETED |
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Q3 2014 |
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ECB T-LTRO Impact |
Short EURUSD Cross

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2H 2014 |
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"ABENOMICS" - A FLAWED POLICY |
YEN WEAKNESS
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2H 2014 |
GLOBAL EVENT RISKS
US$ 'CARRY' COVERING (Short Squeeze)
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FLIGHT TO 'PERCEIVED' SAFETY |
US$ STRENGTH

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MOST CRITICAL TIPPING POINT ARTICLES TODAY |
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AN UNUSAL WARNING
None of the International stock markets that we cover have followed the U.S. stock market to new highs for 2014 over the past several weeks, with the exception of Japan's Tokyo Nikkei Index NIKK , which has rallied recently in response to its massive yen monetary devaluation plan. Japan's gains are purely monetary debasement driven. Every other international stock market we cover remains in a downtrend in 2014. This is a fascinating Bearish divergence for the United States stock market. The following international stock markets are below their 2014 highs this weekend, some very far below:
- Canada's TSX,
- London's FTSE,
- Germany's DAX,
- Israel's TA100,
- the Dow Jones Euro Stoxx 50,
- Emerging Markets MSEMF Index,
- the Hong Kong Hang Seng HSI Index,
- France's CAC 40 Index,
- China's Shanghai SSEC Index, and
- Australia's S&P ASX 200 Index.
As of this weekend, the Daily Full stochastics for every one of these International stock markets are either
- Overbought or
- On a sell signal,
... with the exception of the MSEMF, supportive of the next leg of their large degree declining trends.
Every single international stock market we cover has Elliot wave labelings and price patterns that tell us they have all completed major tops and are now in the infancy of disastrous declining major waves that could last years. You can see those charts in this weekend's international report at www.technicalindicatorindex.com
What this means is world stock markets are falling, and the next leg of their declines is either underway or close to starting. Think about this. Global markets are in trouble.
Do we honestly think the U.S. stock market and economy can hold up with international stock markets declining in concert? This is a grave situation.
The consensus of all knowledge internationally of all market participants about the expected future state of world economic prospects is that economic devastation is coming. The specific causal factors of that economic devastation is hard to identify. Technical Analysis does not identify causal factors. But TA does measure the collective wisdom of every investor worldwide and what they see coming for the future of stocks, and at this time we are being told by the markets that the collective wisdom of every investor worldwide sees from their own vantage point a series and collection of negative events that suggests to them individually that stocks will fall in the future and will fall quite a bit.
Perhaps their collective wisdom sees barriers to economic growth from
- war,
- pestilence,
- terrorism,
- political strife,
- environmental crises,
- a derivatives implosion,
- banking crises,
- power grid blackouts,
- natural disasters,
- the demise of capitalism,
- other issues unsupportive of future higher stock prices.
Global markets in combination reflect the opinions of every investor, the sum of their bets that the future will be brighter or worse. The verdict: Global Market participants do not believe governments will be able to stop whatever is coming. They believe stocks are headed much lower. A major Bear Market is starting.
This is the technical analysis picture for international stock markets this weekend. I wish it was a brighter picture, but the markets are speaking loud and clear, "Prepare."
Best regards,
Bob McHugh, Ph.D.
www.technicalindicatorindex.com
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11-15-14 |
YEN WEAKNESS |
19 - US Stock Market Valuation |
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Nov. 9nd - Nov 15th, 2014 |
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Market Analytics |
TECHNICALS & MARKET ANALYTICS |
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PATTERNS - The Long Term Elliot Wave Count
The Fibonacci Ratio Progression from 1932 to 2014 Our highest Fibonacci-derived target for a daily closing high for wave V in the Dow, as presented on pages 18-20 and Figure 9 of the July issue of The Elliott Wave Theorist , is “17,282 + or – 2%.” Let’s refine this projection.
- The rise of wave I from 41.22 in 1932 to 194.40 in 1937 is 4.71616x, or (5/3) 3 (which is 4.6296) + 1.870%.
- The rise of wave III from 92.92 in 1942 to 995.15 in 1966 is 10.70975x, or (8/5) 5 (which is 10.48576) + 2.136%.
We did not need “ or minus ” within our original expression, as in both cases the Dow went beyond the Fibonacci ratio multiple. It should have read only “+2%.” The average overshoot is 2.003%.
A compatible goal for the end of wave V from 577.60 in 1974 would be a multiple of (13/8) 7 , which is 29.9208, yielding a target of 17,282.25, plus 1.870%-2.136%, which is 2.003% + or – 0.133%, indicating a high at 17,605.43- 17,651.40 , or 17,628.41 + or – 23 points

We should consider the possibility that the difference in overshoot for each wave is also undergoing a progression, in which case the target is slightly higher. In arithmetic terms, the overshoot of wave III is 0.266% additional to that of wave I, and if wave V’s overshoot is 0.266% additional to wave III’s, it would be 2.402%, projecting 17,697.37 . In percentage terms, the overshoot of wave III is 14.2246% more than that of wave I, and if wave V’s overshoot is 14.2246% more than wave III’s, it would be 2.4398%, projecting 17,703.90 . If the Dow’s closing high is within four points of 17,701 , then, the progression will be precise.
The calculated ideal target range of 17,605-17,704 covers less than 100 Dow points. It can also be expressed as 17,655 + or – 50 points . Figure 6 displays these observations. The Dow entered this range at today’s close.
Like the other targets provided in the July-August issue, this is a single projection. There is just some leeway as to where it might be met.
Supercycle Peaks are Occurring at Fibonacci Numbers
The calculation yielding 17,704 is especially interesting given that 17,711 is a Fibonacci number. The three previous Supercycle-degree tops of the past 250 years also occurred near Fibonacci numbers. The Fibonacci sequence goes like this, with the Supercycle-degree peaks noted in bold :
1, 1, 2, 3, 5, 8, 13, 21 , 34, 55, 89, 144, 233, 377 , 610, 987 , 1597, 2584, 4181, [ 6765 ], 10946, 17711 .
The wave peaks are as follows:
- 21 : Supercycle (I) at 24.44 in 1835
- 377 : Supercycle (III) at 381.17 in 1929
- 987 : Supercycle peak in inflation-adjusted Dow (DJIA/PPI) in
- 1966; Dow at 995.15
- 17711 : Supercycle (V) in 2014?
The peaks of 1929 and 1966 average less than 1% from their associated Fibonacci numbers. The differences are 1.1% and 0.8%, respectively. A 1.1% leeway from 17,711 is 195 Dow points, bracketing 17,516-17,906 . The Dow entered this range on November 6.
At 16% away, the peak of Supercycle (I) is the furthest from its associated number. It nevertheless seems qualified for part of the progression because the Foundation for the Study of Cycles derived its Dow-equivalent numbers from skimpy data for the first hundred years on this chart. Any actual DJIA could have been 16% different from the interpolated number. The success of the two peaks for which data are precise suggests that the earlier peak may have been so as well. If the upcoming turn does not coincide with a Fibonacci number, the proposed progression will prove spurious. If it does coincide with a Fibonacci number, then we may feel even safer in assuming that the 1835 high did so as well.
The low in 2009 at 6547, denoted in brackets, occurred 3% away from a Fibonacci number, 6765 . That low is either Primary 4 or Supercycle a . The reason this is worth noting is that it fits the spacing of the other turning-point numbers: 21 is 6 steps past the sequence’s starting number, 1; 377 is 6 steps past 21 ; and 17111 is 6 steps past 987 . Likewise, 6765 is 6 steps past 377 . Moreover, there are 2 steps between 377 and 987 , and 2 steps between 6765 and 17711 .
All these observations are illustrated in Figure 7.
The Supercycle lows have not adhered to Fibonacci numbers. Although the low of wave (II) in 1842 is 5.43, which is 9% away from the Fibonacci number 5 , the low of wave (IV) in 1932 is 41.22, nowhere near a Fibonacci number
The Inflation-Adjusted Dow Clears the Way for a Wave 5 Label in 2014
The Dow/PPI ratio adjusts the Dow for inflation. It measures not how many dollars the Dow will buy but how many goods . We use the Producer Price Index (PPI) as the divisor because it is not nearly as easily manipulated as the Consumer Price Index (CPI).
In the past, corrective-wave rallies that made new nominal highs (for example the Dow in 1973) did not make new highs in inflation-adjusted terms. This divergence seems to be a trait of intra-correction waves, i.e. “B” and “D” waves, as opposed to fifth waves.
One of my long-time arguments in favor of labeling the orthodox end of wave (V) in 2000 has been that the inflation-adjusted DJIA, as represented by the Dow/PPI ratio, peaked on 1/14/2000 at 86.91, and despite new nominal highs in 2007 and 2013 the market fell short of new inflation-adjusted highs. But a new high in the Dow/PPI this month has eliminated this objection to labeling the current rally as wave 5.
The new high in the inflation-adjusted Dow is not proof that wave 5 is the correct count. The Dow/ gold ratio (pricing the Dow in real money) is nowhere near a new high. Still, sentiment toward stocks is ebullient enough that investors have driven the Dow’s purchasing power to a higher level today than they did in 2000. That’s quite a feat, one more likely in a fifth wave than in a B wave.
Figure 8 shows that wave 5 in the Dow/ PPI can be counted as five nearly completed waves. The impulse form does not have to be terminating, but for the first time since the 2009 low it can be. This acceptably terminating form is compatible with the fact that the nominal Dow is in the range of our last price target.

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11-13-14 |
PATTERNS |
ANALYTICS |
STUDIES - Revisiting the Macro Bias
2014 MACRO CALL

2007 COMPARISON

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11-12-14 |
STUDIES |
ANALYTICS |
STUDIES - Fed Balance Sheet Correlation Returns

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11-12-14 |
STUDIES |
ANALYTICS |
STUDIES - USD Breaks 30, 12 and 8 Year Trend Resistance


ACTUALLY OVER 12 YEARS
MORE IMPORTANTLY OVER 30 YEARS
US CARRY TRADE SHOCK: Globally the US Dollar carry trade is believed to be north of $3 trillion (the emerging market component alone is $2.7 trillion). Now, a carry trade only works when the currency you are borrowing in remains weak. As soon as it begins to strengthen, your profits not only evaporate but you can end up deep in the red (remember you’ve borrowed $100 for every $1 you have in capital). And the US Dollar rally has become a BIG problem for a financial system awash in borrowed Dollars. If the $3 trillion carry trade begins to unwind we could very well see a spike similar to that which occurred leading up to 2008 |
11-12-14 |
STUDIES |
ANALYTICS |
DRIVER$ - US$ Carry Trade In Troubles
The following analysis is marked up / annodated from: Is the US Dollar About to Trigger a 2008 Collapse? 11-10-14 Phoenix Capital Research via ZH
The financial world focuses far too much on stocks. The stock market, despite being at record highs (meaning record market capitalizations) remains one of the smallest, and least sophisticated markets on the planet.
Consider that stocks, even at current lofty levels, have a global market capitalization of slightly over $60 trillion. In contrast, the global bond market is well over $100 trillion. And the global currency market trades OVER $5.3 trillion per day.
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- It is currencies, not stocks, where the most significant moves occur.
- The currency markets are the largest, most liquid markets in the world.
- They are always first to move when things change.
- Stocks are the DUMB money compared to currencies.
With that in mind. I want to draw your attention to something that is happening in the US Dollar. We’ve been following the greenback closely since it began a sharp rally last summer. But now things havereally begun to heat up. As you can see, the US Dollar has broken out of a massive wedge pattern that has been forming over the last eight years.

ACTUALLY OVER 12 YEARS
MORE IMPORTANTLY OVER 30 YEARS
Why does this matter?
US$ CARRY TRADE UNWINDING
Because, globally, the world is awash in borrowed money… most of it in US Dollars.
When the Fed cut interest rates to zero in 2008 and flooded the financial system with liquidity, it funded an unprecedented amount of debt borrowed in US Dollars.
Everyone around the world, from traders to hedge funds to financial institutions and even global banks could borrow US Dollars at 0.25%... and invest in emerging markets, emerging market currencies with higher yields, infrastructure projects, corporate takeovers, etc.
In simple terms, the US Dollar became one of, if not the largest carry trade in the world. Globally the US Dollar carry trade is believed to be north of $3 trillion (the emerging market component alone is $2.7 trillion).
Now, a carry trade only works when the currency you are borrowing in remains weak. As soon as it begins to strengthen, your profits not only evaporate but you can end up deep in the red (remember you’ve borrowed $100 for every $1 you have in capital).
And the US Dollar rally has become a BIG problem for a financial system awash in borrowed Dollars. If the $3 trillion carry trade begins to unwind we could very well see a spike similar to that which occurred leading up to 2008:
Here’s the recent action:

Is the US Dollar about to send us into another 2008 collapse?
Don’t let the second round of the financial crisis crush your portfolio… we offer a FREE investment reportFinancial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits. |
11-11-14 |
DRIVER$ |
ANALYTICS |
BUYBACKS - The largest source of overall US equity demand in recent years
The Biggest "Source Of Equity Demand In Recent Years", According To Goldman Sachs
Spoiler alert: it's not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed's own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both).
The answer, according to Goldman's David Kostin is the following: "From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years."
In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing "advisors" managing other people's money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the "Pull the S&P up by the Bootstaps" market, in which the only relevant question is which company can buyback the most of its own stock.
Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:
Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.
And sure enough, with the market once again rewarding stock buybacks...

... companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012):
We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.
Putting this number in the context of the recent "fire and brimstone" announcement by the BOJ:
We estimate the incremental demand for US equities from the combined re-allocation of Japan pension assets will total $70 billion. For context, we forecast share buybacks by S&P 500 firms will total $707 billion in 2015, or 10x as much as the overall Japan pension fund re-balancing.
In other words, what the BOJ does to the market will be a tiny fraction of the impact the latest and greatest cost-indescriminate buyer - corporations buying back their own stock - will impart on equities.
And here is what happens to CapEx as a result:
... capex growth will decelerate by 200 bp to 6% as global growth concerns and a 25% plunge in crude oil prices since June have brought investment plans under review. The Energy sector accounts for roughly onethird of aggregate S&P 500 capex.
We have said it for years, and finally even Goldman admits it: the days of Capex growth are over:

There is more bad news: because while stock buybacks mean even more artificial growth for risk assets, the collapse in CapEx, especially among energy companies, means that GDP in 2015 is about to drop off a ledge, polar vortex 2.0 notwithstanding.
Behold: 0% (or negative) growth in Real Private Fixed Investment Oil & Gas Structures & Machinery, a direct - and quite substantial - input factor into the GDP calculation.

But who needs growth when the Chief Executives of America's largest corporations are about to trickle down their record, stock-buybacks driven bonuses for yet another year.
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11-11-14 |
STUDIY
BUYBACKS |
ANALYTICS |
EARNINGS - Revenue Softness Worries Stock Investors
ISSUES:
- Slowing Global Demand - Especially Europe and China
- Strong US$ which will impact Earnings,
- Stock Prices have been distorted by Buybacks
- Further Cost Cutting is running out of "runway'
- Sales Growth not matching Earnings Growth nor Price Sales Rates
Revenue Softness Worries Stock Investors 11-09-14 WSJ
Third-Quarter Earnings Reports Show Solid Profits but Also Possible Warning Signs

As investors pore over third-quarter earnings reports, they are finding signs of corporate malaise that are raising concerns about the outlook for U.S. stocks.
While profit gains have generally been solid, many blue-chip companies are posting weak sales growth or outright year-over-year revenue declines, causing worries about their long-term growth prospects. Others are reporting earnings increases driven by factors that don’t reflect sustainable improvements in their business, such as share buybacks and cost-cutting efforts.
Amplifying those concerns is a softening global economic outlook. U.S. multinational firms are now contending with slowing economic growth in key markets like Europe and China, and a strengthening dollar that threatens to further damp revenue by reducing the value of payments collected in foreign currencies when converted into dollars.
Few investors expect a sustained stock decline. But many traders and analysts say they fear future growth at U.S. companies won’t be robust enough to meet the high expectations currently implied by the above-average valuations on blue-chip shares. Friday’s employment report for October, which showed another month of modest job gains tempered by only slight increases in wages, underscored those concerns.
Investors are responding by punishing shares of some companies that report disappointing sales, even if profits top expectations. Shares of General Motors Co. shed 1.2% on Oct. 23 after third-quarter profit beat Wall Street estimates but revenue rose only slightly. Avon Products Inc. stock tumbled 9% on Oct. 30 after the company reported a slump in sales, even though profit beat expectations.
“Still the theme is anemic revenue growth,” said Laton Spahr, a portfolio manager at OppenheimerFunds Inc.
Earnings for companies in the S&P 500 are on track to climb 7.7% in the third quarter from a year earlier, the sharpest year-over-year rise in any quarter so far this year, according to FactSet. The index is up 9.1% from its Oct. 15 low, finishing Friday at 2031.92, up 9.9% for the year.
Investors note that much of the growth in earnings since the financial crisis has come from deep expense cuts, leaving companies with stronger balance sheets and hoards of cash.
Profit margins for the S&P 500 have grown to record levels, coming in at 10.1% of sales in the third quarter, according to FactSet. But many investors worry because sales, which they view as a clearer indicator of a company’s long-term prospects, haven’t kept up.
Revenue at S&P 500 companies is on track to grow 3.8% from a year earlier in the third quarter, down from 4.4% in the second and below the 4.8% average of the last five years, according to FactSet. Investors are left wondering how much deeper companies can cut and still wring out further expansion in earnings.
REVENUE GROWTH
- Q3 3.8%
- Q2 4.4%
- 5 YEAR AVERAGE 4.8%
- The last time stocks were pricier than today, revenue growth was 7%, according to Jonathan Glionna, head of U.S. equity strategy at Barclays PLC, suggesting a period of more muted returns are likely on the horizon.
“The easy cost cutting that has been done over the last five plus years is done,” said David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management, which oversees about $25 billion. Mr. Donabedian said he is aiming to buy shares of companies with steady revenue streams, growing dividends and plenty of cash.
Though stocks remain far from bubble territory, they are expensive relative to historical levels. The S&P 500 is trading at 15.8 times analysts’ expected earnings for the next 12 months, versus the average of 14.1 over the last 10 years and the 13.5 of the last five.
The last time stocks were pricier than today, revenue growth was 7%, according to Jonathan Glionna, head of U.S. equity strategy at Barclays PLC, suggesting a period of more muted returns are likely on the horizon.
Meanwhile, companies are contending with a stronger dollar and the slowdown in Europe and in once-booming economies like China and Brazil.
Companies in the S&P 500 derive almost one-third of their revenue from overseas, a figure that has grown steadily for the past 10 years, according to Mr. Glionna.
Troubles for some blue chips are already emerging. Coca-Cola Co. , which derived 58% of its net operating revenue from outside the U.S. in 2013, said third-quarter profit fell 14% and warned it will miss its profit target this year and in 2015. The company said economic weakness in Japan, Europe and emerging markets weighed on its results. Shares fell 6% on Oct. 21, the day Coke reported earnings. Since then, the stock has gained ground, but remains below its Oct. 20 close of $43.29.
Procter & Gamble Co. said Oct. 24 that its fiscal first-quarter profit fell 34% to $2 billion on flat sales of $20.8 billion. The company, which derived about 65% of sales from outside the U.S. in its last fiscal year, also cut its sales forecast and said it expected problems from the strengthening dollar. Still, shares ended the day 2.3% higher after the company reported results. As of Friday’s close, shares were up 7.1% since Oct. 23, the day before the earnings release.
Another cause for worry has been the explosion in share buybacks. These purchases goose earnings per share by reducing the total amount of shares on the market. Critics say buybacks consume cash that could be invested in future growth opportunities.
In the third quarter, buybacks have boosted earnings per share at S&P 500 companies by 2.35%, the highest level in more than two years, according to Barclays.
“Companies to some extent are running out of tricks,” said Jack Rivkin, chief investment officer at Altegris Advisors LLC, which manages $2.39 billion.
To be sure, stocks have a cushion because other assets also appear fully priced. Razor-thin yields in fixed-income securities, slumping commodities prices and signs of weakness in overseas markets mean many portfolio managers are happy to accept modest gains for U.S. stocks into next year.
“Put it all together, it’s still probably the best rate of return compared to other investments,” said Margie Patel, a portfolio manager who oversees $1.4 billion in stock and bond investments at Wells Fargo Asset Management, of the outlook for stocks.
Ms. Patel holds large positions in shares of health-care companies, which have been among the market’s biggest gainers this year. She also owns shares of energy infrastructure companies, which should gain as the domestic energy boom continues, she said.
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11-10-14 |
EARNINGS |
ANALYTICS |
EARNINGS - Analytsts Taking Down Earnings Estimates for Q4 2014
Does this look like the earnings picture painted by a thousand talking heads on financial news networks?
As Goldman reports,
The positive 3Q earnings surprise is in stark contrast to negative revisions to consensus 4Q 2014 and 2015 earnings forecasts.

Consensus 2015 EPS estimates for the Energy sector fell 3% in the last week alone.

Forecasts for most other sectors are also falling but the magnitude of revision is smaller.

So apart from that - yeah, earnings look great!! |
11-10-14 |
EARNINGS |
ANALYTICS |
COMMODITY CORNER - HARD ASSETS |
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PORTFOLIO |
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COMMODITY CORNER - AGRI-COMPLEX |
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PORTFOLIO |
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SECURITY-SURVEILANCE COMPLEX |
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PORTFOLIO |
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THESIS |
2014 - GLOBALIZATION TRAP |
2014 |
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2013 - STATISM |
2013-1H
2013-2H |
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2012 - FINANCIAL REPRESSION |
2012
2013
2014 |
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2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS |
2011
2012
2013
2014 |
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2010 - EXTEND & PRETEND |
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THEMES |
FLOWS -FRIDAY FLOWS |
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THEME |
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FLOWS - Liquidity, Credit and Debt
From Despair to Euphoria (and Back?) 11-01-14 Richard Duncan
When I wrote my last blog, “Very Scary”, on October 14th, the stock market was very shaky. Bloomberg reported that $744 billion had been wiped off equity values just since October 8th. Things became very much scarier the next day. When the markets opened on October 15th, panic set in. The Dow fell as much as 470 points, and bond yields collapsed. The yield on the 10-year US government bond fell from above 2.2% to 1.86% nearly as soon as the market opened. CNBC’s savvy bond market watcher, Rick Santelli, said he had never seen anything like it. The Fed had long signaled that it would end the third round of Quantitative Easing in October and the markets were terrified by the thought of what would happen to stocks when the Fed stopped pumping money into the financial markets.
The following morning (October 16th) stocks were moving down sharply again. The NASDAQ was down more than 10% from its September high, while the S&P was off 9.8% from its peak. Then, in the blink of an eye, everything changed. In a live TV interview, St Louis Fed President James Bullard recommended extending QE. The Dow jumped 120 points so quickly that it looked like a computer error must have occurred. The following day, the chief economist of the Bank of England revealed that the first interest rate hike in the UK was likely to be delayed relative to earlier expectations. On October 20th, the European Central Bank announced it had begun buying covered bonds to boost the Eurozone’s economy. And on October 28th, Sweden’s central bank cut its policy interest rate to zero percent for the first time in history.
By this point, stocks had recovered most of their losses from earlier in the month. On October 29th, the Fed put on a brave face and announced that it had decided to end QE 3, as scheduled. But, then, two days later, the Bank of Japan stunned the financial world by announcing that it would increase its Quantitative Easing program from Yen 60 - 70 trillion a year to Yen 80 trillion a year, an amount equivalent to US$727 billion.
Within the space of two weeks, market sentiment flipped from despair to euphoria. By the end of trading on October 31st, both the Dow and the S&P had hit new record highs. The Yen fell to its lowest level against the dollar in nearly seven years, while the Nikkei index jumped to its highest level since November 2007. The strong dollar pushed oil down 9% during October and gold fell to its lowest level since 2010. What a couple of weeks!
So, what next? As you know, I believe central banks (primarily the Fed) have been driving economic growth by printing money and pushing up asset prices, thereby creating a wealth effect. Stocks came very close to crashing mid-month on the thought that QE was about to end. But, James Bullard restored calm by strongly implying that the Fed was prepared to step back in with more QE if necessary. Then all the other central banks chipped in, one way or the other (the BOJ most dramatically), to send a strong signal that they would not allow the global bubble to deflate.
But, here’s the thing. Without more – in fact, without much more – fiat money creation by the Fed (a.k.a. QE 4), the global bubble is going to deflate, or, at least, that’s how it looks to me.
The following chart was taken from my latest Macro Watch video, which was called “Analyzing The Five Largest Central Banks”. It shows the annual percent increase in Global Liquidity projected out to the end of 2016.

It shows that, without more Quantitative Easing from the Fed, global liquidity will expand by only
- 6% during 2016, compared with
- 20% in 2012,
- 30% in 2009 (at the peak of the policy response to the crisis), and
- 15% in 2004 and 2005 (the years leading up to the crisis).
This chart was made before the BOJ announced the expansion of its QE program, but even incorporating that, the growth in global liquidity will still be less than 7% in 2016. That will not be enough to keep the global economic bubble inflated. Only another very large round of Quantitative Easing by the Fed will achieve that. It will be fascinating to watch how much longer stock prices will continue to levitate without additional policy intervention to keep them afloat.
Not for long is my guess.

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11-14-14 |
FLOWS |
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Tipping Points Life Cycle - Explained
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