Monthly Market Analytics & Technical Analysis

JULY 2013 Edition

INDEXED RESEARCH DATA BASE

Gordon T Long

7/13/2013

1 July 2013 Edition

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Monthly Market Analytics & Technical Analysis

JULY 2013
SUBSCRIPTION SERVICE: PLAN IV
HIGHLIGHTS - WHAT YOU NEED TO KNOW ..........................................................................................................................................10
SUMMARY ANALYSIS......................................................................................................................................................... 10
Valuation Summary.......................................................................................................................................................... 13
Fed Panics> "QE Unlimited" - ECB Panics> "OMT" Unlimited - Japan /UK Panic> ...................................................... 15
Defining Chart #1 - "Delusional Distortion" Expectations .................................................................................................. 15
Defining Chart #2 - Finding the Long Term Pivot .............................................................................................................. 17
Defining Chart #3 - Intermediate Term Consolidation ....................................................................................................... 18
Defining Chart #4 - Short Term Volatility .......................................................................................................................... 20
OUR APPROACH - MACRO ANALYTICS ...............................................................................................................................................23

............................................................................................................................................................... 24
JULY 2013: Global Macro Drivers ...................................................................................................................................... 25
DRIVER: Real Wealth, Commodities & Dr Cooper ........................................................................................................... 26
DRIVER: Carry Trade & the : Cross .......................................................................................................................... 29
DRIVER: Currency & Forex Markets ................................................................................................................................ 37
DRIVER: Yield, Spread & Credit ...................................................................................................................................... 41
DRIVER: Global Equities ................................................................................................................................................. 43
SUMMARY ...................................................................................................................................................................... 44
EMERGING DRIVER$ - Earnings Disconnected From Steepening Treasury Term Structure ........................................... 51
EMERGING DRIVER$ - Emerging Market Bond Outflows Accelerating ........................................................................... 53
RISK: Risk-On versus Risk-Off........................................................................................................................................... 55
RISK - IG and HY Markets Sending Warning Signals of Limits to a QE Policy ................................................................. 55
RISK - In 1999 It was called the New Paradyn - Today it is the New Normal .................................................................... 58
RISK - Complacent Global Sentiment .............................................................................................................................. 59
RISK - Hayman Capital Dramatically Reduces Risk ......................................................................................................... 60
RISK - Hindenburg Omen ................................................................................................................................................ 61
RISK - Risk is in the DRAWDOWN .................................................................................................................................. 63
RISK - Falling Real Disposable Income means Falling Consumption ............................................................................... 65
RISK - A Credit Squeeze Leading to a Deflationary Leg Down......................................................................................... 67
RISK - Private Equity a Major Seller of All Assets ............................................................................................................ 69
RISK - Volatility and Increasing Instability ........................................................................................................................ 70
RISK - Credit Cycle Reversal Ahead ................................................................................................................................ 72
PREVIOUS MONTH - Reference ..................................................................................................................................... 75
RISK - A Major Contrarian Warning Signal....................................................................................................................... 80
RISK - QE Creating a 1142 Point SPX Market Distortion ................................................................................................. 81
RISK - US Equity Markets Disconnecting from Benchmarks ............................................................................................ 84
RISK - Signs of Increasing US Economic Risk ................................................................................................................. 87
RISK - Elevated Leverage & Margin Levels .................................................................................................................... 88
RISK - "Jaws of Despair" and the Regression-to-the-Mean .............................................................................................. 89
RISK - Historic Low High Yield (Record Price Paid) ......................................................................................................... 92
PRIOR MONTH - Reference ............................................................................................................................................ 94
RISK: Rosenberg Sees Signs of Overbought Market ....................................................................................................... 94
RISK: Market Risk ........................................................................................................................................................... 95
RISK: Weakness Below the Headline Numbers ............................................................................................................... 98
RISK: Quickly Escalating Risk.......................................................................................................................................... 99
RISK: Increasing Levels of Market Risk ......................................................................................................................... 101
RISK: Dark Pools Now 40%, Internalization 60% Of Off-Exchange Trading to Avoid HFT............................................. 102
TECHNO-FUNDAMENTALS .............................................................................................................................................. 104
PATTERNS - A Correction is Overdue ........................................................................................................................... 104
PATTERNS - A Good Pivot Indicator ............................................................................................................................. 106
PATTERNS - Classic Trendline Resistance Retest ........................................................................................................ 107
PATTERNS - Bond Scare Nearing Support ................................................................................................................... 108
PATTERNS - Earnings Revisions Disconnected From Steepening Treasury Term Structure ......................................... 110
PATTERNS - An Artificial Market ................................................................................................................................... 112

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PATTERNS - An Oversold Bounce and Weak Summer Ahead ...................................................................................... 113

PATTERNS - PE's In Perspective .................................................................................................................................. 115
PATTERNS - Traders Reacting to the 1994 Pattern....................................................................................................... 117
PATTERNS - QE Is Ineffective In Increasing GDP ........................................................................................................ 119
PATTERNS - Credit Is Leading Equities ........................................................................................................................ 120
PATTERNS - Asset Trends versus Bubbles ................................................................................................................... 122
PATTERNS - Consumer Confidence & the Mortgage Spike "Peak Signal" .................................................................... 124
PATTERNS - Contrarian Breadth Rule .......................................................................................................................... 125
PATTERNS - Financial Stress Index Sends Market Clue ............................................................................................... 127
PATTERNS - Inflation Expectations Contributing to Volatility ......................................................................................... 129
PATTERNS - The Three Legged Stool .......................................................................................................................... 130
PATTERNS - Divergences Can Be Found Almost Everywhere ...................................................................................... 131
PATTERNS - Japan & SPX Testing Critical Intermediate Term Trendline Support ......................................................... 133
PREVIOUS MONTH - Reference ................................................................................................................................... 135
PATTERNS - Bond Market Tremors Only Getting Louder .............................................................................................. 135
PATTERNS - Emerging Markets Feeling the US "Exportation" of Inflation ..................................................................... 136
PATTERNS - Treasury Yields Spike To New 14 Month Highs........................................................................................ 138
PATTERNS - 10Y TIPS Yield Above 0%; Highest In 19 Months .................................................................................... 139
PATTERNS - The Bond "Scare" We Warned of BUT Only a Corrective / Consolidation ................................................. 141
PATTERNS - Emerging Market Interest Rebounding ..................................................................................................... 142
PATTERNS - 10Y UST and HY Credit Sending a Market Message ............................................................................... 143
PRIOR MONTH - Reference .......................................................................................................................................... 146
PATTERNS - Breadth Narrowing ................................................................................................................................... 146
PATTERNS - "Most Shorted" Driving Market Higher As Short Sellers Destroyed ........................................................... 147
PATTERNS - Crowded Trades Normally Tip the Boat .................................................................................................... 149
PATTERNS - Strong US Macro Divergence Correlation................................................................................................. 154
PATTERNS - Ending a Grand Super Cycle Degree Long Wave .................................................................................... 157
PATTERNS - Divergences of Indices from Sectors ........................................................................................................ 160
PATTERNS - Seasonal US Macro Correlation ............................................................................................................... 161
PATTERNS - 10Y Inflation Breakeven Disconnected from Markets ............................................................................... 163
PATTERNS - A Historic Short Squeeze ......................................................................................................................... 164
PATTERNS - Consumer Discretionary Showing Real Strength ...................................................................................... 166
OUTLOOK - ANALYTICAL ANALYSIS ................................................................................................................................................... 167
STUDY: SECTOR CANARIES ........................................................................................................................................... 167
SECTORS - EU > ALCOA > How the "Beat Estimates" Game is Played When Earnings are a Disaster ........................ 167
SECTORS - China > Nike > Impact On Nike .................................................................................................................. 170
SECTORS - Global > Banks & Financial > Net Unrealized Bond Gains / Losses ........................................................... 171
SECTORS - Global > Banks & Financial > Bank Losses ............................................................................................... 173
STUDY: MARGIN & CREDIT.............................................................................................................................................. 177
MARGIN DEBT - Rolling Over & Suggesting a Significant Correction Ahead ................................................................. 177
STUDY: ROTATION-CREDIT CONTRACTION II ............................................................................................................... 180
CREDIT CONTRACTION - Bank Reserves A Ticking Bomb, But Who Will Be Caught in the Blast? .............................. 180
CREDIT CONTRACTION - Traders Reacting to the 1994 Pattern.................................................................................. 183
CREDIT CONTRACTION - Global Growth Clearly Slowing and near Contraction Without BRICS ................................. 185
CREDIT CONTRACTION - Fundamentals Emerging as ERP is Changing ..................................................................... 186
CREDIT CONTRACTION - Falling Real Disposable Income means Falling Consumption ............................................. 188
CREDIT CONTRACTION - A Credit Squeeze Leads to a Deflationary Leg Down ......................................................... 190
CREDIT CONTRACTION - Stunning Withdrawals from Emerging Markets .................................................................... 191
CREDIT CONTRACTION - Private Equity are Major Sellers of All Assets ...................................................................... 193
CREDIT CONTRACTION - Asset Trends versus Bubbles.............................................................................................. 195
STUDY: BOND SCARE ...................................................................................................................................................... 197
07-11-13-BOND SCARE - An Avalanche of Outflows .................................................................................................... 197
BOND SCARE - Only An Intermediate Price Bottom. Recession Suggests 0.75% 10UST ............................................. 199
BOND SCARE - Nearing Support .................................................................................................................................. 202
BOND SCARE - "TAPER" Clearly A Bluff or Muddled Policy.......................................................................................... 204
BOND SCARE - Volatility and Increasing Instability ....................................................................................................... 206
BOND SCARE - A LONG Supply and Demand Problem BUT Heavy SHORT Demand ................................................. 207
BOND SCARE - Long Term Support Trendline Achieved............................................................................................... 209
BOND SCARE - Retail Investors Running for the Exit .................................................................................................... 210
BOND SCARE - Credit Cycle: HY Leading the Way....................................................................................................... 211
BOND SCARE - CREDIT CYCLE: Reversal Ahead ....................................................................................................... 214
BOND SCARE - Reactive Panic Mode to TAPER .......................................................................................................... 217
BOND SCARE - The Impact of "TAPER" on Emerging Markets ..................................................................................... 220

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BOND SCARE - Buy in June After the Swoon................................................................................................................ 223

BOND SCARE - A Flight to Safety from An EM Liquidity Crisis? .................................................................................... 225
STUDY: Q2 EARNINGS ..................................................................................................................................................... 228
Q2 EARNINGS - Revenues Flat with Rising Earnings?? ................................................................................................ 228
Q2 EARNINGS - Q2 EPS Estimates .............................................................................................................................. 229
Q2 EARNINGS - Negative Guidance Worst Since Early 2012........................................................................................ 231
Q2 EARNINGS - Signs of Serious Troubles in Consumption.......................................................................................... 231
Q2 EARNINGS - Concerns Abound With Non-US Earnings ........................................................................................... 233
Q2 EARNINGS - Negative Pre-Announcements Currently At Record Levels ................................................................. 235
Q2 EARNINGS - Tax Incentives Inflating Earnings ........................................................................................................ 237
STUDY: VALUATIONS....................................................................................................................................................... 240
07-12-13-VALUATIONS - CAPE currently stands at 23.6, higher than 90% of comparable readings since the 1870s. ... 240
STUDY: GOLD MARKET ................................................................................................................................................... 241
07-11-13-GOLD - Something is Just Not Right?............................................................................................................. 241
GOLD - Prices Nearing a Practical Bottom of Production Costs of $1300/OZ and Cash Cost $1104 .............................. 242
GOLD - Bottom Still Not In ............................................................................................................................................. 243
GOLD - Margins Significantly Increased - Coincidence?? .............................................................................................. 245
STUDY: EQUITY RISK PREMIUM ..................................................................................................................................... 247
EQUITY RISK PREMIUM - Yields Improved, Especially Against Stock Yields ............................................................... 247
EQUITY RISK PREMIUM - The Incentive for the Anticipated "Great Rotation" ............................................................... 248

PREVIOUS MONTH - Reference ....................................................................................................................................... 251

STUDY: BUYBACKS ......................................................................................................................................................... 251
BUYBACKS - Going nowhere if it wasnt For BUYBACKS from Cheap Debt .................................................................. 251
BUYBACKS - Buyback Achievers Index at 2007 Top ..................................................................................................... 253
STUDY: INSUFFICENT WEALTH CREATION MEANS SHRINKING EQUITY GROWTH.................................................. 254
WEALTH - Debt Saturation Means there is Simply Insufficient Wealth Creation within Developed Nations .................... 254
WEALTH - The "TAPER" Scare before the 'OPMF' Storm............................................................................................. 258
WEALTH - Cash Flow and CAPEX ................................................................................................................................ 261
WEALTH - Removing the Manipulation to See Real Enterprise Value Metrics ............................................................... 262
STUDY: VALUATIONS....................................................................................................................................................... 264
VALUATIONS - Market Expensive According to 5 Year Rolling Forward PE .................................................................. 264
VALUATIONS - Expanding PEs as there is a Perception of 'Few Options' Available to Investors ................................... 265
STUDY: Q2 EARNINGS ..................................................................................................................................................... 268
EARNINGS - Estimates Becoming Very Suspect ........................................................................................................... 268
EARNINGS - Fund Managers forced to Chase Yield...................................................................................................... 270
EARNINGS - Estimates Simply Not Believable .............................................................................................................. 272
EARNINGS - Financialization & Financial Profit Levels .................................................................................................. 273
EARNINGS - PE Expansion Hides Risk and is itself Unjustified ..................................................................................... 274
EARNINGS - Goldman Goes Uber-hyper-Bullish ........................................................................................................... 275
STUDY: GOLD MARKET ................................................................................................................................................... 277
GOLD - JPM's Gold Vault Needs Watching.................................................................................................................... 277
GOLD - Confiscation as Part of Financial Repression is Still A Possibility ...................................................................... 279
GOLD - Tentacles of Financial Repression .................................................................................................................... 282
GOLD - Government Intervention Begins In India .......................................................................................................... 283
GOLD - Demand Has Outstripped Gold Supply ............................................................................................................. 284
GOLD - China on Track to Import 150% of Entire Gold Holdings in a Single Year. ......................................................... 288
GOLD - Something SERIOUSLY Wrong at JP Morgan .................................................................................................. 289
GOLD - Stairway to HELL suggests $3500/Oz by 2016 ................................................................................................. 291
GOLD - BEWARE: Short Positions Being Re-Established! ............................................................................................. 292
GOLD - Gold/Silver Ratio ............................................................................................................................................... 293

PRIOR MONTH - Reference .............................................................................................................................................. 295

STUDY: GOLD SMACKDOWN .......................................................................................................................................... 295
GOLD - Chinese Bullion Imports .................................................................................................................................... 295
GOLD - JP Morgan's "Run on the "Vault" ....................................................................................................................... 298
GOLD - Settling Physical in Paper (Dollars) ................................................................................................................... 301
GOLD - Shaking the 400 oz Bars Out of GLD ................................................................................................................ 304
GOLD - Drivers To Watch .............................................................................................................................................. 306

4 July 2013 Edition

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GOLD - Supply / Demand .............................................................................................................................................. 307

GOLD - The Likely Story of the Gold Smash Minus the Conspiracy Angel ..................................................................... 308
GOLD - JPM's Dramatic Reduction in 'Eligible' Physical Gold ........................................................................................ 322
GOLD - April 2013 Sell-Off Retracement in Context ....................................................................................................... 325
GOLD - 2 Year Consolidation Pattern Ending ................................................................................................................ 328
GOLD - Japanese Interest Rate Volatility Correlation..................................................................................................... 332
GOLD - The Attack of the Fiat Currency Cartel .............................................................................................................. 333
GOLD - Gold-Dow Ratio - A Secular Trend .................................................................................................................... 334
STUDY: BETTER THAN CASINO HOUSE ODDS ............................................................................................................. 336
CASINO - Bank of America Traded Profitably on 60 out of 60 Days ............................................................................... 336
CASINO - JP Morgan Traded Profitably on 63 out of 63 Days........................................................................................ 337
STUDY: COMPLACENCY .................................................................................................................................................. 339
COMPLACENCY - Extreme Levels of Complacency...................................................................................................... 339
COMPLACENCY - False Belief In Central Bakers.......................................................................................................... 341
COMPLACENCY - Much too High! Setting Ourselves up for A Shock ............................................................................ 343
COMPLACENCY - Leverage Being Increased ............................................................................................................... 344
STUDY: SECURITIES SUPPLY ......................................................................................................................................... 347
SUPPLY - Shortage of Investable Assets....................................................................................................................... 347
STUDY: Q1 EARNINGS .................................................................................................................................................... 349
EARNINGS - Lack of Investment Resulting in Revenues Being a Problem .................................................................... 349
EARNINGS - Still Squeezing Costs but Revenue Growth a Problem ............................................................................. 351
EARNINGS - Technology Profit Margins A Big Contributor ............................................................................................ 352
EARNINGS - What Analysts Are Watching Revenues and Margins Going Forward ....................................................... 353
EARNINGS - Hockey-stick Beginning to Fail .................................................................................................................. 354
STUDY: VALUATIONS...................................................................................................................................................... 356
VALUATIONS - A Flow Driven Manufactured Market Versus Real Economy ................................................................. 356
VALUATIONS - The NY Feds Equity Risk Premium ....................................................................................................... 357
VALUATIONS - Kotok's Decade Ending 2200-2500 SPX ............................................................................................... 361
VALUATIONS - A Long Term PE Adjustment Process ................................................................................................... 363
VALUATIONS - Hussman Earnings Excessive by Historical Norms ............................................................................... 363
VALUATIONS - When Rich Valuations Meet Poor Economic Data ................................................................................ 365
SHORT TERM TECHNICAL ANALYSIS .............................................................................................................................................. 371
SUPPORT & RESISTANCE ............................................................................................................................................... 371
Gann Analysis................................................................................................................................................................ 371
Boundary Conditions...................................................................................................................................................... 372
Channels & Regressions................................................................................................................................................ 374
Fibonacci - Controlling Time Extensions ........................................................................................................................ 375
Elliott Wave.................................................................................................................................................................... 377
SENTIMENT - Consumer, Investor & Trader .................................................................................................................... 380
Consumer Confidence - Conference Board .................................................................................................................... 380
Consumer Confidence - Up but Sending Concern Signals ............................................................................................. 383
Consumer Sentiment - Michigan .................................................................................................................................... 385
Consumer Comfort......................................................................................................................................................... 386
Investors Intelligence ..................................................................................................................................................... 387
American Association of Independent Investors ............................................................................................................. 387
National Association of Active Investment Managers (NAAIM) ....................................................................................... 388
Small Business Optimism .............................................................................................................................................. 389
Smart Money / Dumb Money Confidence ....................................................................................................................... 390
Percentage Stocks Above 50 & 200 DMA ...................................................................................................................... 391
Margin Levels ................................................................................................................................................................ 392
Mutual Fund Cash Levels v S&P 500 ............................................................................................................................. 395
OSCILLATORS & BREADTH: Indicators of Importance................................................................................................. 397
NYSE Overbought / Oversold ........................................................................................................................................ 397
OEX Open Interest (Puts/Calls) ..................................................................................................................................... 399
TRIN .............................................................................................................................................................................. 400
McClellan Oscillator ....................................................................................................................................................... 401
STUDY: UNCERTAINTY & COMPLACENCY .................................................................................................................... 402
SENTIMENT: EU Consumer Sentiment Telltales ........................................................................................................... 402
SENTIMENT: Mispricing Uncertainty ............................................................................................................................. 404
SENTIMENT: High Level of Complacency ..................................................................................................................... 405

5 July 2013 Edition

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SENTIMENT: Uncertainty Always Stops Business Investment ....................................................................................... 406

SENTIMENT: Consumer Confidence Plunges After Election as Fiscal Cliff Realization Faced. ...................................... 408
SENTIMENT: Abruptly Plummets: Post Election, Sandy and pending Fiscal Cliff ........................................................... 409
SENTIMENT: Uncertainty .............................................................................................................................................. 410
SENTIMENT: Market Not Prepared for Fiscal Cliff Disappointment! ............................................................................... 411
SENTIMENT: Fiscal Cliff Uncertainty Parallels With Debt Ceiling Negotiations (The "Holy Shit" Moment)...................... 413
INTERMEDIATE TERM RISK ANALYSIS.......................................................................................................................................... 417
RISK SUMMARY- Aggregated Global Financial Risk Index ............................................................................................ 417
AGGREGATED GLOBAL FINANCIAL RISK INDEX.......................................................................................................... 417
BANKING RISK - LIBOR-OIS SPREAD (Updated) ........................................................................................................ 418
BANKING RISK - TED SPREAD (Updated) ................................................................................................................... 418
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated)................................................................................. 419
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ........................................................................................... 419
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ............................................................................... 420
ECONOMIC RISK - ECRI LEADING INDEX (Updated).................................................................................................. 421
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) .................................................................................. 422
INFLATION RISK - MONEY VELOCITY (Updated) ........................................................................................................ 423
MONETARY RISK - BANK LIABILITIES (Updated)........................................................................................................ 423
COST OF MONEY RISK - INTEREST RATES (Updated) ............................................................................................. 424
AGGREGATED RISK LEVEL............................................................................................................................................. 424
Risk .................................................................................................................................................................................... 426
RISK: 1970 Pattern Comparisons See 20-27% Correction in H2.................................................................................... 426
RISK: The Bond Bubble the Next to Burst, A Panic into Stocks...................................................................................... 428
RISK: Collateral considerations are a joke and Loans are Disguised ............................................................................. 429
RISK: Citigroup Economic Surprise Index has moved below Zero.................................................................................. 431
RISK: Key Market Warning Signals Triggered ................................................................................................................ 432
RISK: Nearing End of Short Squeeze ............................................................................................................................ 433
RISK: Shift in Perceptions & Market Optimism Reflected at Davos ................................................................................ 435
RISK: Bonds Most Overbought in 55 Years ................................................................................................................... 436
RISK: A Final Parabolic Lift to 1550 to 1570 in the SPX before Major Capitulation ......................................................... 437
RISK: Brace For A Stock Market Accident ..................................................................................................................... 439
RISK: Excess Euphoria .................................................................................................................................................. 441
RISK: Money is ALL IN .................................................................................................................................................. 443
RISK: VIX - Cost of Risk Plummets ................................................................................................................................ 446
Cassandra's - New Additions to the List ......................................................................................................................... 448
Cassandra: Byron Wien Warns "Oblivious Markets" Of 20% Correction ......................................................................... 448
Cassandra: Harry Dent Warns Stocks to Sink More than 60% by End of 2014............................................................... 448
Cassandra: Stanley Druckenmiller: "When You Get This Kind Of Rigging, It Will End Badly" ......................................... 449
Cassandra: Mohamed El-Erian: "Prices Are Artificially High - Its Time to Take Profits".................................................. 450
Cassandra: Felix Zulauf: World Headed Toward 1987 Style Market Collapse ................................................................ 451
Cassandra: Doug Kass: 'I'm Getting The Summer Of 1987 Feeling' In The Market Right Now ....................................... 451
Q2: Canaries ...................................................................................................................................................................... 453
Q2 CANARIES The Downside Risk of Fed Losing Control is Terrifying .................................................................... 453
Q2 CANARIES Wal-Mart Same Store Sales Fall 1.4%................................................................................................ 459
Q1: Canaries ...................................................................................................................................................................... 461
Q1 Canaries - The Equity 'Air-Pocket' And 5 Reasons To Worry .................................................................................... 461
Q1 Canaries - 12 Things That Just Happened That Show The Next Wave Of The Economic Collapse Is Almost Here .. 471
Q1 Canaries - A Mad Rush Could Be Coming In The Corporate Credit Markets ............................................................ 473
LONGER TERM - FUNDAMENTAL ANALYSIS....................................................................................................................................... 478
HIGHLIGHTS ...................................................................................................................................................................... 478
Valuation Summary........................................................................................................................................................ 478
Earnings > Margins > PE > Valuation............................................................................................................................ 480
Three Major Disappointments ........................................................................................................................................ 481
Three Evident Themes ................................................................................................................................................... 482
Peek Earnings & Peek PE ............................................................................................................................................. 484
Equity Valuation: The Surprising PE Ratio Regime You MUST Now Watch .................................................................. 485
What to Watch in Q1 ...................................................................................................................................................... 488
VALUATION: Alternative Methodologies ......................................................................................................................... 489
Four Set Consolidated Market Valuation Indicators: Overvaluation Relatively Unchanged ............................................. 489
Crestmont from the Arithmetic........................................................................................................................................ 491

6 July 2013 Edition

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Cyclical PE 10 Ratio ...................................................................................................................................................... 493

Q Ratio .......................................................................................................................................................................... 497
S&P Composite Regression-to-the-Trend ...................................................................................................................... 502
REFERENCE METHODOLOGIES ANALYSIS .............................................................................................................. 503
S&P Fair Value .............................................................................................................................................................. 512
Rule of 20 ...................................................................................................................................................................... 518
Cyclically Adjusted PE's (CAPE) are Richly Valued........................................................................................................ 519
Value Line Arithmetic ..................................................................................................................................................... 520
Shiller PE Ratio.............................................................................................................................................................. 520
Comments on Estimated Forward Operating Earnings ................................................................................................... 521
S&P Earnings Yield versus Bond Yields................................................................................................................... 522
VALUATION: Situational Assessment ............................................................................................................................. 523
VALUATION: Macro Trends in Wages and Profits ......................................................................................................... 523
Valuation: Earnings, Valuations, Dividends and Buybacks a Problem ............................................................................ 527
Valuation: Unencumbered DCF -- Free Cash Flow is KING! .......................................................................................... 530
Valuation: S&P 500 Between 40-70% above Pre-Bubble Valuation Norms .................................................................... 531
Valuation: Hope Priced In .............................................................................................................................................. 535
Valuation: Median NTM PE ............................................................................................................................................ 536
Valuation: Inflation Adjusted Earnings ............................................................................................................................ 537
Valuation: PE Expansion Possible, though Likely Temporary ......................................................................................... 538
Valuation: PE Compression In Process .......................................................................................................................... 540
Valuation: PE Ratio Election Year Trends ...................................................................................................................... 541
Valuation: The Shiller P/E .............................................................................................................................................. 542
Valuation: Foreign Profits Kept Untaxed Offshore .......................................................................................................... 545
Valuation: Downward Revisions Accelerating................................................................................................................. 546
Valuation: Forward Guidance Significantly Lower than Reported Strength ..................................................................... 549
Valuation: Equity Valuations: It's All Downhill From Here ............................................................................................... 551
Valuation: Earnings Continuing to Weaken without much Media Fanfare ....................................................................... 553
Valuation: A Different Earnings Season. ........................................................................................................................ 554
Valuation: Government Spending Driving Profits: Artificially High Margins .................................................................... 556
Valuation: Inflation Expectations - Markets Mistakenly Expecting Growth & Profit To Accompany It .............................. 557
Valuation: Major Warning Needs Heeding: FedEx......................................................................................................... 558
Valuation: What We Called for Is Beginning To Show .................................................................................................... 560
Valuation: Equities as a Matter of Belief ......................................................................................................................... 565
Valuation: The Charts Wall Street Doesn't Want You To See On Annual Returns .......................................................... 568
Valuation: Some Sobering Japanese Comparison Charts from Michael Darda at MKM Partners ................................... 573
Valuation: Are Corporate Profit Margins About To Grind Lower For Another 10 Years? ................................................. 576
Valuation: Corporations Have Captured 88% Of All Post-Recession Income Growth ..................................................... 577
Valuation: Think Stocks Are Cheap? Here's 7 Reasons Why That's A Myth ................................................................... 578
PE CONTRACTION - Situational Assessment ................................................................................................................. 579
We Have Been Warning, Now Here it is ................................................................................................................. 579
PE Ratio: Expansion, Then Contraction ......................................................................................................................... 582
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 583
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 586
PE Ratio: PE's Are At Historically Elevated Levels ......................................................................................................... 588
PE Ratio: Signs of Peek PE ........................................................................................................................................... 589
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 590
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 593
PE Ratio: Have Significant More Room To Compress .................................................................................................... 594
PE Ratio: Over Next Year Trailing PE to be Below Generational Norm. ......................................................................... 596
MARGIN COMPRESSION - Situational Assessment ....................................................................................................... 599
Compression: Cost Push now Creating Margin Compression! ....................................................................................... 599
Compression: Corporate Earnings - Signals of Margin Compression ............................................................................. 603
Compression: Expect Further PE Compression: Margin Squeeze ................................................................................. 608
Compression: Shifting Secular Sands - Emerging Impediments to Global Earnings Growth Rates................................. 610
Compression: Corporate Margins - 2013 Margin Expectations Not Credible .................................................................. 611
Compression: Profits Have Stalled. Has the Market? ..................................................................................................... 612
EARNINGS - Situational Assessment .............................................................................................................................. 614
Q2 Earnings - Estimate Reductions Accelerating ........................................................................................................... 614
Q2 EARNINGS - Estimates Becoming Very Suspect ..................................................................................................... 614
Q2 EARNINGS - Fund Managers forced to Chase Yield ................................................................................................ 616
Q2 EARNINGS - Estimates Simply Not Believable......................................................................................................... 618
Q2 EARNINGS - Financialization & Financial Profit Levels ............................................................................................ 619
Q2 EARNINGS - PE Expansion Hides Risk and is itself Unjustified ............................................................................... 620
Q2 EARNINGS - Goldman Goes Uber-hyper-Bullish ..................................................................................................... 621

7 July 2013 Edition

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Q1 Earnings - Outlooks Being Brought Down................................................................................................................. 623

Q1 Earnings: 2013 Top-Down & Bottom-Up................................................................................................................... 623
Q1 Earnings: 2013 Earnings To Be Less Than 2009 Earnings Projected To Be In 2007 ................................................ 626
Q1 Earnings: Classic Hockey stick of False Expectations .............................................................................................. 628
Q1 Earnings: Bearish Corporate Guidance Threatens Q1 Profit Growth Estimates ........................................................ 631
Q1 Earnings: Retailers Report Solid Q4 Profits, But Q1 Outlook Dims Still Further ........................................................ 633
Q1 Earnings: Analysts Apparently Surprised? ................................................................................................................ 635
Q1 Earnings: Wage & Profit Disparity - Peak Profits, Trough Wages ............................................................................. 637
Q1 Earnings: Resting In a Few Tired Hands .................................................................................................................. 638
Q1 Earnings: Overstated Due to the Magnitude of One Time Write-Offs ........................................................................ 642
Q1 Earnings: 10 Tired Generals Carrying the Market ..................................................................................................... 644
Q1 Earnings: Interest Rates Determined by Future Inflation & Growth ........................................................................... 645
Q1 Earnings: Only 30% of firms Beat Revenue Estimates. 65% Beat Earnings ............................................................. 647
Q1 Earnings: Global Market Comparisons ..................................................................................................................... 648

S&P 500 TARGETS ..................................................................................... 649

CONCLUSIONS ........................................................................................... 650

8 July 2013 Edition

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