Monthly Market Analytics & Technical Analysis

November 2012 Edition

Gordon T Long
11/12/2012

1 November 2012 Edition

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Monthly Market Analytics & Technical Analysis

NOVEMBER 2012
SUBSCRIPTION SERVICE: PLAN IV
BIG PICTURE - KEEPING YOUR PERSPECTIVES ..................................................................................................................................... 7
HIGHLIGHTS - WHAT YOU NEED TO KNOW ..........................................................................................................................................10
SUMMARY ANALYSIS......................................................................................................................................................... 10
"QE Unlimited": Fed Panics - "OMT" Unlimited: ECB Panics ......................................................................................... 15
Defining Chart #1 - "Delusional Distortion" Expectations .................................................................................................. 15
Defining Chart #2 - Long Term ......................................................................................................................................... 16
Defining Chart #3 - Short Term ........................................................................................................................................ 17
Defining Chart #4 - Short Term ........................................................................................................................................ 19
OUR APPROACH - MACRO ANALYTICS ...............................................................................................................................................22

............................................................................................................................................................... 23
NOVEMBER 2012: Global Macro Drivers ........................................................................................................................... 24
DRIVER: Real Wealth, Commodities & Dr Cooper ........................................................................................................... 25
DRIVER: Carry Trade & the : Cross .......................................................................................................................... 28
DRIVER: Currency & Forex Markets ................................................................................................................................ 30
DRIVER: Yield, Spread & Credit ...................................................................................................................................... 34
RECIPIENT: Global Equities ............................................................................................................................................ 36
RISK: Risk-On versus Risk-Off........................................................................................................................................... 37
RISK: Global Equities - US .............................................................................................................................................. 38
RISK: Global Equities - Europe ........................................................................................................................................ 39
RISK: Global Equities - Japan .......................................................................................................................................... 40
RISK: Global Equities - Asia ............................................................................................................................................ 41
RISK: Credit Suisse - "Extremely Elevated" .................................................................................................................... 42
RISK: Barclays - "Close to Extreme Levels" ..................................................................................................................... 43
RISK: More Evidence of Elevated Levels ......................................................................................................................... 44
RISK: Signs of Market Fragility Indicate Potential Flash Crash......................................................................................... 46
RISK: 1987 Dj vue - QEfinity Working Psychologically the same as Portfolio Insurance ............................................... 48
RISK: Volatility Has Become a Shadow Currency ............................................................................................................ 50
November Index - Reference Only ................................................................................................................................... 52
RISK: Major Contrarian Warning Signal ........................................................................................................................... 54
RISK: Bearish Signals Indicating a Short to Intermediate Correction-Consolidation ......................................................... 55
RISK: Earnings Gamesmanship & Folly - Cheating ......................................................................................................... 57
RISK: Earnings Gamesmanship & Folly - Who Is Manipulating? ...................................................................................... 58
RISK: Earnings Gamesmanship & Folly - Equity Investors Fleeing Equity Markets .......................................................... 59
RISK: Earnings Gamesmanship & Folly - Historical Perspective ...................................................................................... 60
RISK: Earnings Gamesmanship & Folly - The Folly ......................................................................................................... 61
RISK: Avoiding Risk May Have Caused a Bond Bubble ................................................................................................... 63
TECHNO-FUNDAMENTALS ................................................................................................................................................ 64
PATTERNS: Analogies Worth Considering & WATCHING Carefully! ............................................................................... 67
PATTERNS: No Credit Balances On Hand to Stop Potential Margin Calls ....................................................................... 72
PATTERNS: Bernanke's "Electile Dysfunctional" QE3 ..................................................................................................... 73
PATTERNS: Credit Anticipates and Equity Confirms ....................................................................................................... 75
PATTERNS: GSAI's Bottom-Up was Bad (44.1) and Now Getting Worse (32.9) in a Hurry .............................................. 76
PATTERNS: October Asset Performance ........................................................................................................................ 79
PATTERNS: Cyclical Recovery Prematurely Priced In ..................................................................................................... 81
PATTERNS: Six-Month Seasonality Turns Favorable ...................................................................................................... 82
PATTERNS: Increasing Global Economic Synchronization .............................................................................................. 83
PATTERNS: Stock Correlation Suggests A Major Positive Market Turning Point ............................................................. 84
PATTERNS: Short Interest a Problem for the Fed ........................................................................................................... 85
PATTERNS: Dangerous Divergences now Delusional ..................................................................................................... 87
PATTERNS: Over-Exuberance at 'Reflation" ................................................................................................................... 89
PATTERNS: Great Moderation Correlation ...................................................................................................................... 90

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November Index - Reference Only ................................................................................................................................... 91

PATTERN: QE III Doesn't Bode Well For Traders ............................................................................................................ 92
PATTERN: Short Shelf Life for QE3 & OMT ..................................................................................................................... 94
PATTERN: Markets Show Strong Correlation With QE Policy .......................................................................................... 97
PATTERN: Transports Flagging Non-Confirmation & Weakening Strength .................................................................... 101
PATTERN: Consolidation or Topping Pattern?............................................................................................................... 104
PATTERN: Topping Signals Starting to Show ................................................................................................................ 105
OUTLOOK - ANALYTICAL ANALYSIS ................................................................................................................................................... 107
STUDY: Election Risk ....................................................................................................................................................... 111
Post Election: Now for the Main Event - The FISCAL CLIFF .......................................................................................... 111
Post Election: Expect "Electile Dysfunction" ................................................................................................................... 113
Post Election: Following Historic Election Year Trends .................................................................................................. 115
Post Election: BUY Presidential Election; SELL Dividend Tax Credit ............................................................................. 116
Post Election: "Real" Realities - Equity Markets 83% Lower Since 2000 in Real Terms ................................................. 118
STUDY: Spending Deficit Correlation & the Fiscal Cliff.................................................................................................. 119
Deficit Spending: Small Business Concern: "Government Requirements" ...................................................................... 119
Deficit Spending: Government Driver$ of Corporate Margin Levels - GMO's James Montier ......................................... 120
Deficit Spending: Every Investor And CEO Needs To See This Chart Before The Fiscal Cliff Is Hit ............................... 123
STUDY: PE Expansion / Contraction DRIVER$ ............................................................................................................... 125
PE Ratio: Expansion, Then Contraction ......................................................................................................................... 125
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 126
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 129
STUDY: Economic Cycles ................................................................................................................................................ 130
Pay Close Attention to the 8 Economic Cycle Theories .................................................................................................. 130
November Summary - Reference Only .......................................................................................................................... 136
SHORT TERM TECHNICAL ANALYSIS .............................................................................................................................................. 140
SUPPORT & RESISTANCE ............................................................................................................................................... 140
Gann Analysis................................................................................................................................................................ 140
Boundary Conditions...................................................................................................................................................... 141
Channels & Regressions................................................................................................................................................ 143
Fibonacci - Controlling Time Extensions ........................................................................................................................ 145
Elliott Wave.................................................................................................................................................................... 150
SENTIMENT - Consumer, Investor & Trader .................................................................................................................... 156
CONSUMERS
Consumer Confidence - Conference Board .................................................................................................................... 156
Consumer Sentiment - Michigan .................................................................................................................................... 160
Consumer Comfort......................................................................................................................................................... 161
TRADERS
Investors Intelligence ..................................................................................................................................................... 162
American Association of Independent Investors ............................................................................................................. 162
National Association of Active Investment Managers (NAAIM) ....................................................................................... 163
Small Business Optimism .............................................................................................................................................. 164
INVESTORS
Smart Money / Dumb Money Confidence ....................................................................................................................... 165
Percentage Stocks Above 50 & 200 DMA ...................................................................................................................... 166
Margin Levels ................................................................................................................................................................ 167
Mutual Fund Cash Levels v S&P 500 ............................................................................................................................. 170
OSCILLATORS & BREADTH: Indicators of Importance................................................................................................. 172
NYSE Overbought / Oversold ........................................................................................................................................ 172
OEX Open Interest (Puts/Calls) ..................................................................................................................................... 174
TRIN .............................................................................................................................................................................. 175
McClellan Oscillator ....................................................................................................................................................... 176
INTERMEDIATE TERM RISK ANALYSIS.......................................................................................................................................... 177
RISK SUMMARY- Aggregated Global Financial Risk Index ............................................................................................ 177
BANKING RISK - LIBOR-OIS SPREAD (Updated) ........................................................................................................ 178
BANKING RISK - TED SPREAD (Updated) ................................................................................................................... 178

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CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated)................................................................................. 179

CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ........................................................................................... 180
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ............................................................................... 181
ECONOMIC RISK - ECRI LEADING INDEX (Updated).................................................................................................. 182
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) .................................................................................. 183
INFLATION RISK - MONEY VELOCITY (Updated) ........................................................................................................ 184
MONETARY RISK - BANK LIABILITIES (Updated)........................................................................................................ 184
COST OF MONEY RISK - INTEREST RATES (Updated) ............................................................................................. 186
AGGREGATED RISK LEVEL............................................................................................................................................. 187
Q4 - Canaries ..................................................................................................................................................................... 188
CANARIES: A Snap Shot of Reporting - It's Worse than Ugly! ....................................................................................... 188
Caterpillar ................................................................................................................................................................... 188
DOW ........................................................................................................................................................................... 189
DuPont........................................................................................................................................................................ 189
JAPAN: Consumer Electronics & Auto ........................................................................................................................... 190
CHINA: All Sectors......................................................................................................................................................... 191
US: Consumer Retail ..................................................................................................................................................... 192
US: Technology ............................................................................................................................................................. 193
Intel Earnings .............................................................................................................................................................. 195
Q3 - Signs Everywhere ..................................................................................................................................................... 196
Blatant Distortions: Corporations Reducing EU Risk Exposure (aka: Bank Runs) ......................................................... 196
Blatant Distortions: Hong Kong's Hang Seng Warning (August) ..................................................................................... 197
Blatant Distortions: Deutsche Bank Warns of 5 -10% Market Correction (August) ......................................................... 198
Blatant Distortions: Canaries Singing but Few are Listening - TSE Halted (August) ...................................................... 198
Q2 - Everyone Is Suddenly Nervous ................................................................................................................................ 199
Nervousness: GREECE: Investors Flock to Safety as Euro-Exit Fears Rise.................................................................. 199
Nervousness: FRANCE: Showdown in Europe: Hollande Takes on Merkel and Draghi, Insists on Renegotiation of
Merkozy Treaty .............................................................................................................................................................. 200
LONGER TERM - FUNDAMENTAL ANALYSIS....................................................................................................................................... 201
HIGHLIGHTS ...................................................................................................................................................................... 201
Three Major Disappointments ........................................................................................................................................ 203
Three Evident Themes ................................................................................................................................................... 204
Peek Earnings & Peek PE ............................................................................................................................................. 206
Equity Valuation: The Surprising PE Ratio Regime You MUST Now Watch .................................................................. 207
What to Watch in Q4 ...................................................................................................................................................... 210
VALUATION: Alternative Methodologies ......................................................................................................................... 211
Four Set Consolidated Market Valuation Indicators: Overvaluation Relatively Unchanged ............................................. 211
Crestmont from the Arithmetic ..................................................................................................................................... 213
Cyclical PE 10 Ratio ................................................................................................................................................... 215
Q Ratio ....................................................................................................................................................................... 219
S&P Composite Regression-to-the-Trend ................................................................................................................... 224
Estimating Future Returns ............................................................................................................................................. 225
S&P Fair Value .............................................................................................................................................................. 233
REFERENCE METHODOLOGIES ANALYSIS .............................................................................................................. 239
Rule of 20 ...................................................................................................................................................................... 239
Cyclically Adjusted PE's (CAPE) are Richly Valued........................................................................................................ 240
Value Line Arithmetic ..................................................................................................................................................... 241
Shiller PE Ratio.............................................................................................................................................................. 241
Comments on Estimated Forward Operating Earnings ................................................................................................... 242
S&P Earnings Yield versus Bond Yields................................................................................................................... 243
VALUATION: Situational Assessment ............................................................................................................................. 244
Valuation: Foreign Profits Kept Untaxed Offshore .......................................................................................................... 244
Valuation: Downward Revisions Accelerating................................................................................................................. 245
Valuation: Forward Guidance Significantly Lower than Reported Strength ..................................................................... 248
Valuation: Equity Valuations: It's All Downhill From Here ............................................................................................... 250
Valuation: Earnings Continuing to Weaken without much Media Fanfare ....................................................................... 252
Valuation: A Different Earnings Season. ........................................................................................................................ 253
Valuation: Government Spending Driving Profits: Artificially High Margins .................................................................... 255
Valuation: Inflation Expectations - Markets Mistakenly Expecting Growth & Profit To Accompany It .............................. 256
Valuation: Major Warning Needs Heeding: FedEx......................................................................................................... 257
Valuation: What We Called for Is Beginning To Show .................................................................................................... 259

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Valuation: Equities as a Matter of Belief ......................................................................................................................... 264

Valuation: The Charts Wall Street Doesn't Want You To See On Annual Returns .......................................................... 267
Valuation: Some Sobering Japanese Comparison Charts from Michael Darda at MKM Partners ................................... 272
Valuation: Are Corporate Profit Margins About To Grind Lower For Another 10 Years? ................................................. 275
Valuation: Corporations Have Captured 88% Of All Post-Recession Income Growth ..................................................... 276
Valuation: Think Stocks Are Cheap? Here's 7 Reasons Why That's A Myth ................................................................... 277
PE CONTRACTION ............................................................................................................................................................ 278
We Have Been Warning, Now Here it is ................................................................................................................. 278
PE Ratio: PE's Are At Historically Elevated Levels ......................................................................................................... 281
PE Ratio: Signs of Peek PE ........................................................................................................................................... 282
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 283
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 286
PE Ratio: Have Significant More Room To Compress .................................................................................................... 287
PE Ratio: Over Next Year Trailing PE to be Below Generational Norm. ......................................................................... 289
MARGIN COMPRESSION .................................................................................................................................................. 292
Compression: Cost Push now Creating Margin Compression! ....................................................................................... 292
Compression: Corporate Earnings - Signals of Margin Compression ............................................................................. 296
Compression: Expect Further PE Compression: Margin Squeeze ................................................................................. 301
Compression: Shifting Secular Sands - Emerging Impediments to Global Earnings Growth Rates................................. 303
Compression: Corporate Margins - 2013 Margin Expectations Not Credible .................................................................. 304
Compression: Profits Have Stalled. Has the Market? ..................................................................................................... 305
FUNDAMENTALS - Q3 EARNINGS ................................................................................................................................... 307
Q3 Earnings - ITS A 'TOP LINE' PROBLEM ..................................................................................................................... 307
Q3 Earnings Season: Q4 Earnings Hockey Stick now Officially in Jeopardy .................................................................. 307
Q3 Earnings Season: Revenue Mises Rise.................................................................................................................... 308
Q3 Earnings Season: UGLY! ......................................................................................................................................... 310
Q3 Earnings Season: A Bigger Disappointment than Initially Expected ......................................................................... 314
Q3 Earnings Season: Worst Earning Guidance in Over 5 Years .................................................................................... 316
Q3 Earnings - A DEMAND Problem in the Top Line ........................................................................................................ 319
Demand: Europe Impacting Demand ............................................................................................................................. 319
Demand: European Corporations Report Negative Production Surprises ....................................................................... 322
Demand: Headlines & Highlights Suggest a MAJOR DEMAND Problem ....................................................................... 324
Q3 Earnings: A REVENUE Problem in the Top Line ....................................................................................................... 327
Revenue: Continue to Be the Problem & Accelerating ................................................................................................... 327
Q3 Earnings: Estimates & Forecasts ............................................................................................................................... 330
Estimates: 4.3 Up versus Down Revisions Highest Since 2001 ...................................................................................... 330
Estimates: First Earnings Decline in 11 Months of - 1.34% ............................................................................................ 331
Estimates: Stealth Warnings Season Not Going Well ..................................................................................................... 332
Estimates: Goldman's Down then Up Call ...................................................................................................................... 333
Q3 Earnings: Warnings..................................................................................................................................................... 337
Warnings: Earnings Estimates Simply Don't Match Reality ............................................................................................ 337
Q3 Earnings: Preliminary Earnings Results .................................................................................................................... 339
Preliminary: Alcoa & Cummins ...................................................................................................................................... 339

S&P 500 TARGETS ..................................................................................... 342

CONCLUSION .............................................................................................. 345

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