STALL SPEED : Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall
As we reported last month, Global Economic Risks have taken a noticeable and abrupt turn downward over the last 60 days. Deterioration in Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggested the global economic condition is at a Tipping Point. Though we stated "Urgent and significant actions must be taken by global leaders and central banks to reduce growing credit stresses" nothing has occurred even after the 19th disappointing EU Summit to address the EU Crisis. Some event is soon going to push the global economy over the present Tipping Point unless major globally coordianted policy initiatives are undertaken. The IMF recently warned and reduced Global growth to 3.5%. This is just marginally above the 3% threshold that marks a Global recession. This would be the first global recession ever recorded. The World Bank is "unpolitically'projecting 2.5%. The situation is now deteriorating so rapidly, as to be impossible to hide anylonger.
MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
MONETARY MALPRACTICE : Moral Hazard, Unintended Consequences & Dysfunctional Markets - Monetary Malpractice has had the desired result of driving Investors into becoming Speculators and are now nothing more than low-odds Gamblers. There is a difference between investing, speculating and gambling. At one time these lines were easy to comprehend and these distinctive groups separated into camps with different risk profiles in which to seek their fortunes. Today investing has become at best nothing more than speculating and realistically closer to outright gambling.
The reason is that vital information is either opaque, hidden or manipulated. Blatant examples such as: the world of off balance sheet debt, Contingent Liabilities, Derivative SWAPS, Special Purpose Vehicles (SPV), Special Purpose Entities (SPE), Structured Investment Vehicles (SIV) and obscene levels of hidden leverage make a mockery out of public Financial Statements. Surely if we get our ego out of this for a moment we can see that stockholders are now nothing more than gamblers? What is worse is that the casino is rigged. With Monetary Policy now targeting negative real interest rates, it is forcing the public out of interest bearing savings and investing, and into higher risk vehicles they would have shunned historically. They have no choice as the Monetary Malpractice game is played against them.
There is an old poker player adage: "when you look around the table and can't determine who the patsy with the money is, it is because it is you." MORE>>
The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern. - The "Peek Inside" shows the detailed coverage available this month.
MORE>> EXPANDED COVERAGE INCLUDING AUDIO & EXECUTIVE BRIEF
TRIGGER$ publications combine both Technical Analysis and Fundamental Analysis together offering unique perspectives on the Global Markets. Every month “Gordon T Long Market Research & Analytics” publishes three reports totalling more then 380 pages of detailed Technical Analysis and in depth Fundamentals. If you find our publications TOO detailed, we recommend you consider TRIGGER$ which edited by GoldenPhi offers a ‘distilled’ version in a readable format for use in your daily due diligence. Read and understand what the professionals are reading without having to be a Professional Analyst or Technician.
TRIGGER$ ALERTS (SPECIAL 2 WEEK TRIAL AVAILABLE - TRIAL - 2 UPDATES PER WEEK)
2 WEEK FREE TRIAL Our Inter-Issue Updates and Alerts are Included with a Monthly Subscription to Triggers. Between issue publication receive updates on Technical Analysis, Economic Analysis and anything note worthy for your trading and investing.
Technical Analysis Alerts would include hitting potential Trigger Points, Pivots orsome progression that requires you immediate attention.
Economic Analysis Updates alert of any fundamental economic events that may have impact on the markets and what to expect.
Inter-Issue Updates and Alerts allow us to keep current with the markets and provide a more fluid and stable ongoing market evaluation.
Technical Updates occur twice a week, Alerts as the markets dictate. Sign-up now
Latest Public Research ARTICLES & AUDIO PRESENTATIONS
To determine whether the stock market is expensive or cheap, some experts use aggregate valuation ratios, either trailing or forward-looking, such as price-earnings ratio (P/E) and price-dividend ratio. Operating under a belief that such ratios are mean-reverting, most imminently due to movement of stock prices, these experts expect high (low) future stock market returns when these ratios are low (high). Where are the ratios now? Using the S&P 500 Index level as of the close on 9/28/12 and the most recent actual and forecasted earnings and dividend data from Standard & Poor’s, we find that:
The following chart shows variations in valuation ratios based on 12-month trailing earnings/dividends from the end of 1989 through the the second quarter of 2012. Solid lines show the behavior of the ratios, and dashed lines of the same color show their respective averages over the past 22 years. All data are actuals (earnings 99% reported for the second quarter of 2012). Operating P/E and as-reported (GAAP) P/E are well below “normal” values, while the price-dividend ratio is slightly below “normal.”
Operating P/E derives from corporate earnings sources expected by management to continue contributing to future earnings. As-reported P/E includes contributions to earnings from discontinued operations and anomalous (as judged by management) conditions. Operating earnings are arguably more forward-looking and optimistic. As-reported earnings are arguably more manipulation-free and realistic (sustainable).
Note that stock buybacks began augmenting/displacing dividends in the mid-1980s.
The next chart is a shorter-term view of 12-month trailing operating P/E for June 2008 through June 2012. The chart also shows the trajectory of operating P/E for the current Standard and Poor’s bottom-up operating earnings forecast through September 2013, assuming the S&P 500 Index persists near its level of 1441 as of the close on 9/28/12. If the Standard & Poor’s earnings forecast is accurate and the S&P 500 Index remains near 1441, 12-month trailing operating P/E will remain well below its 22-year mean of 19.2 shown in the chart above.
The final chart presents a shorter-term view of 12-month trailing as-reported P/E for June 2008 through June 2012. The chart also shows the trajectory of as-reported P/E for the current Standard and Poor’s top-down as-reported earnings forecast through September 2013, assuming the S&P 500 Index persists near its level of 141 as of the close on 9/28/12. If the Standard & Poor’s earnings forecast is accurate and the S&P 500 Index remains near 1441, 12-month trailing as-reported P/E will remain well below its 22-year mean of 25.6 shown in the top chart above.
In summary, current S&P earnings data forecast 12-month trailing price-earnings ratios below generational“normal” over the next year.
● The cyclical P/E ratio using the trailing 10-year earnings as the divisor (more)
● The Q Ratio, which is the total price of the market divided by its replacement cost (more)
● The relationship of the S&P Composite price to a regression trendline (more)
To facilitate comparisons, I've adjusted the two P/E ratios and Q Ratio to their arithmetic means and the inflation-adjusted S&P Composite to its exponential regression. Thus the percentages on the vertical axis show the over/undervaluation as a percent above mean value, which I'm using as a surrogate for fair value. Based on the latest S&P 500 monthly data, the market is overvalued somewhere in the range of 33 percent to 51 percent, depending on the indicator. This is an increase over the previous month's 31 percent to 48 percent range.
I've plotted the S&P regression data as an area chart type rather than a line to make the comparisons a bit easier to read. It also reinforces the difference between the line charts — which are simple ratios — and the regression series, which measures the distance from an exponential regression on a log chart.
Click to enlarge
The chart below differs from the one above in that the two valuation ratios (P/E and Q) are adjusted to their geometric mean rather than their arithmetic mean (which is what most people think of as the "average"). The geometric mean weights the central tendency of a series of numbers, thus calling attention to outliers. In my view, the first chart does a satisfactory job of illustrating these four approaches to market valuation, but I've included the geometric variant as an interesting alternative view for the two P/Es and Q. In this chart the range of overvaluation would be in the range of 43 percent to 61 percent, an increase over last month's 41 percent to 57 percent.
As I've frequently pointed out, these indicators aren't useful as short-term signals of market direction. Periods of over- and under-valuation can last for many years. But they can play a role in framing longer-term expectations of investment returns. At present market overvaluation continues to suggest a cautious long-term outlook and guarded expectations. However, at the today's low annualized inflation rate and the extremely weak return on fixed income investments (Treasuries, CDs, etc.) the appeal of equities, despite overvaluation risk, is is not surprising.
"QE-whatever has created artificial numbers that the underlying won't support" is how Sam Zell sums up his view of the Fed's actions, adding that the Dow should be more like 9000, not 14000. The typically optimistic bottom-feeding real-estate magnate says he is not buying here, is gravely concerned about liquidity needs, and in his assessment "everything is massively too expensive." This epic CNBC interview-fest, where the less-than-cheer-leading Zell was allowed to speak, includes his views on a pending recession (as he sees capex planned projects being delayed) and while trying not to play the political card too strongly, he asks that we "stop this class warfare crap" and that the animal spirits are unleashed - as the game is being stacked against him. "We're kicking the can down the road... and with QE, there is now too much capital chasing too few opportunities - even when nobody has confidence in the future!"
How does QE3 help?
We're seeing too much capital chasing too few opportunities and consequently i think number one the effect of qe3 is nothing more than pushing up the stock market and yet the stock market is being pushed up at record levels of limited trading. we have low volumes and the market goes up, which is manipulation but it's a function of the fact, what's anybody going to do with money and nobody has any confidence in the future,
We're on the cusp of going back in a recession
How many years have we been kicking the khan down the road. that's a wake-up call for rip van winkle,
have you ever solved a problem without going to the edge?
Unleash the animal spirits, unleash people like me - the game is being stacked against me.
Stop this class warfare crap
We're watching liquidity like a hawk because there's great sense tomorrow morning it could go the other way, in effect you don't invest as much, you don't take as much risk.
Show me any country in the world that has progressed successfully without engaging the animal spirits of their people, and without creating opportunity for their people to excel and push the envelope
There are always structural issues...
Delays in capex spending is usually a sign we are headed into recession
Not optimistic about consumer spending into the end of the year
I am normally an optimist - buying when everything has dropped - but my assessment is that "Everything is massively too expensive"
Stock market should 9000 not 14000
QE is creating artificial numbers that I dont think the underlying will support
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Sept 30th- Oct 7th, 2012
Following HSBC's PMI data, China's official Manufacturing PMI just printed well below economists' expectations and is now signaling contraction for the second month in a row. Critically the expectation was for a return to expansion at 50.1 but the data came at 49.8 - still marginally higher MoM. Most sub-indices improved modestly from August but of most interest was the fifth month-in-a-row that the employment index dropped. For all the iron-ore-recovery believers, the Inventories of Raw Materials index also jumped by its most in three months as Input Prices also surged for the second month in a row. So contraction confirmed, a CCP in 'leadership' turmoil, and a PBOC stymied by inflationary concerns and the need to push through structural reform.
We have in the past attempted to take on the gargantuan task of exposing the multi-trillion Chinese Shadow Banking system (not to be confused with its deposit-free, rehypothecation-full Western equivalent), most recently here. Alas, it is has consistently proven to be virtually impossible to coherently explain something as decentralized and as pervasive as an entire country's underground economy, especially when the country in question is the riddle, wrapped in a mystery, inside an enigma known as China. Today, however, courtesy of AsiaFinanceNews we get a report as close as possible to the most comprehensive overview of what may soon be (especially if rumors of tumbling Chinese municipal dominoes are correct) the most talked about subject in the financial world: China's Shadow Banking empire.
From Chinese Shadow Banking System
China presently has five state-controlled megabanks operating within the supervision of the central government, of which the government is a majority shareholder, and seventeen additional “shareholder banks.” Because China’s state banking sector operates as a direct subsidyfunding channel for state-owned enterprises (as opposed to acting in the capacity of risk analytics based credit institutions), the largest state-owned banks have required periodic recapitalization every decade over the past sixty years as the constant generation and cumulative exposure to non-performing loans exceeds the banks’ total equity. The circumstances comprising the present situation, however, will include monetary exposure by international asset management firms which have acquired both direct equity-stakes in the banks as well as exposure to Hong Kong-listed shares.
State Control and Politically Mandated Loans
The banking system is generally considered to represent the weakest link in China’s political economy. Loans are typically a form of direct subsidy by the central government to the various state-owned enterprises. According to Victor Shih, a professor at Northwestern University who specializes in China’s political economy and is considered an expert on China’s banking system, prior to 1997 there had been no comprehensive audits, nor general ledgers, nor any capital stock at any of the five largest banks, as such was considered unnecessary. The central government, which controls 98% of China’s financial sector, maintains control over the banks in order to finance various political and socio-economic policy objectives, maintain capital controls and set fixed interest rates, comprising in effect a self-referential sector, resulting in inefficient capital allocation which deprives China’s small and medium-sized enterprises (“SMEs”) of access to credit through the supervised banking system
Rejection of Western Credit Practices: Global Financial Crisis Doomed Reforms
The government halted and subsequently reversed reforms, and began moving away from western banking practices in late 2008 in response to the global credit crisis, ordering banks to originate loans to both local and centrally-planned investment projects in order to prevent a rapid slowdown in growth. The credit expansion undertaken by banks in 2009 at the direction of Chinese president Hu Jintao resulted in approximately $3.1 trillion in new loans created by the end of 2010.5 The National Development and Reform Commission (“NDRC”) fast-tracked and granted approval of virtually 100% of all fixed-asset investment projects submitted for funding by local governments. The NDRC was created to address the response to a survey by the central government asking local government officials to identify those projects for they had been unable to obtain credit financing. The role of the NDRC is to approve the projects rejected by the banks, thus in essence having approved the worst projects for financing in 2009 and continuing to approve such projects through the present
While the 'Misery' Index in Iran reaches exceptional levels, and the US aggregate of inflation and unemployment peaked last October, Europe's misery has continued to rise in the face of an ever-easing ECB and political jawboning. As SocGen notes today, the UK's misery has turned back higher and the Euro-zone's Misery Index has never been higher. These misery indices clearly reflect deteriorating economic performances in the main G10 countries, with some unsurprisingly weaker performances in Spain and Greece, leading the eurozone index higher. Given recessionary situations expected in some eurozone countries next year, the misery index is unfortunately quite unlikely to edge south significantly.
Eurozone: a record misery index. The situation in the eurozone deteriorated further during the summer: the unemployment rate hit a record 11.4% in August, while inflation increased from 2.4% yoy to 2.6% yoy, pushing the eurozone misery index to a record high (14%). With an unfortunately dark employment outlook, the index is unlikely to reverse course sharply anytime soon. This will force the ECB to keep an ultra-accommodative stance for some time to come.
US misery index: keep a close eye. The decrease (from 8.3% to 8.1%) in the unemployment rate in August was not enough to offset the increase (from 1.4% yoy to 1.7% yoy) in the inflation rate. As a result, the US misery index has increased slightly. Is it merely a passing cloud or the first sign of a more worrying storm? The September NFP report, to be released on Friday, will give us more of a clue. Although the US job situation is clearly less worrying than the eurozone’s, it remains a risk factor for the outlook for the US misery index, and could force the Fed to embark on QE 3.5 with Treasury purchases early next year.
UK misery index edging north. Although we only know the July results for now, we also note the first signs of a deterioration in the UK misery index; based on both employment and inflation. This provides a quandary for the BoE; our economists expect it to increase its QE programme in November.
Spain and Greece: converging misery indices. Spain’s misery index overtook even Greece’s in Q2, and is now about twice the eurozone’s (25.93 versus 13.7). With 24% unemployment rates in both countries, it is clear where the underperformance by both Spain and Greece comes from. Inflation is much more satisfactory, with 1.3% yoy in June in Spain and Greece versus 2.4% yoy in the eurozone. Unfortunately, looming austerity budgets in both countries next year will weigh on domestic demand and thus unemployment rates, leading to still elevated misery indices.
33 - Public Sentiment & Confidence
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
US RECESSION - Reliable Indicators Gives early Signal
In his latest Breakfast with Dave note, David Rosenberg points to one sub-component of the durable goods report that sent a particularly scary signal. The three-month moving average of core capex orders (i.e. nondefense capital goods excluding aircraft) was -4.1 percent in August.
"History shows when the trend weakened to the level we see today, the economy was in recession 100% of the time," wrote Rosenberg. "So stick that in you pipe and smoke it!"
This is also bad news for jobs. According to Rosenberg's data, this measure has an 83 percent correlation with private employment.
Rosenberg also notes that durable goods orders has an 86% correlation to the stock market.
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
EARNINGS ESTIMATES - Stealth Warnings Season Not Going Well
You see, lately the slowing global economy is increasingly catching up with those S&P 500 companies who have been forced to issue disapointing earnings guidance. Meanwhile, stocks have been rallying.
"It is interesting to note that while the EPS estimate for the index for Q3 2012 declined 4.5% during the quarter, the price of the index actually increased 6.2% (to 1447.15 from 1362.16) during this same time," writes FactSet's John Butters. "While it is not unusual to see EPS estimate revisions for a quarter and the price of the market move in opposite directions (it has happened in 20 of the past 40 quarters), it is unusual to see this magnitude of change in both the EPS estimate revisions and price."
For Q3 2012, 82 companies have issued negative EPS guidance and 21 companies have issued positive EPS guidance. If the final percentage of companies issuing negative guidance is 80% (82 out of 103), it will be the highest percentage recorded for a quarter since FactSet began tracking guidance in Q1 2006.
Here's a chart from FactSet illustrating that phenomenon.
The graph below shows the default rate over the last 23 years. The sharp decline in rates in the early 90s shows the change that occurred after the Department of Education started sanctioning institutions with default rates higher than 25 percent.
For the first time ever, the U.S. Department of Education has come out with an official three-year federal student loan default rate. Until now, the agency has only looked at two-year default rates at universities, and with a wider net cast, it's clear that students only struggle to pay back loans more with time.
Two years after leaving school, students default on their federal loans at a rate of 9.1 percent, up from 8.8 percent at last count.
That figure jumps to 13.4 percent at the three-year mark, the report shows.
Though they've seen a slight decrease in two-year default rates, for-profit institutions fared the worst by far on the three-year track, with more than one in five students defaulting after three years. Public and private schools clocked in with 11 percent and 7.5 percent default rates, respectively, according to the report.
What's more, nearly 250 schools were found with a 30 percent three-year default rate, 37 of which had a rate higher than 40 percent.
FAIR USE NOTICEThis site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.
If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.
DISCLOSURE Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.