LONGWave 10-10-12 - DELUSIONAL DIVERGENCES
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LONGWave 10-10-12 - DELUSIONAL DIVERGENCES
- 1. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Delusional Distortions + Dangerous Divergences = DELUSIONAL DIVERGENCES Disconnecting from Reality Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 2. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE LONG TERM - FUNDAMENTALS – EARNINGS • DIVERGENCE - Stealth Warnings Season Not Going Well - Divergence Between Stocks And Earnings • ESTIMATES - Up / Down Revisions - Estimates Simply Don't Match Reality • VALUATION - Markets Seriously Overvalued by Most Metrics • INVESTOR SHIFTS - Steady Equity Exit - A “Front Running the Fed” Bond Bubble INTERMEDIATE TERM – RISK • ANALYTICS - 11 Months of QE Priced in • QE III - Doesn't Bode Well For Traders • GLOBAL GROWTH SLOWING - Dangerous Divergences • DRIVERS - Fiscal Cliff, a Eurozone Led Slowdown & Gross Margins Lance Roberts – 10-05-12 • WARNING - Caterpillar - China – Shanghai – Hong Kong Warnings Signs 10/01/12 • EARNINGS – Early Indicators • SPEAKING OUT - MISPRICING: Sam Zell - LET MARKETS CLEAR: Jim Grant SHORT TERM - SENTIMENT • PEAK COMPLACENCY • CANARIES - Equity Investors Now Fleeing Equity Markets • ALL IN - Everyone on the same side of the boat • UP THEN DOWN – Goldman’s Outlook Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 3. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE LONG TERM - FUNDAMENTALS – EARNINGS DIVERGENCE - Stealth Warnings Season Not Going Well - Divergence Between Stocks And Earnings ESTIMATES - Up / Down Revisions - Estimates Simply Don't Match Reality VALUATION - Markets Seriously Overvalued by Most Metrics INVESTOR SHIFTS - Steady Equity Exit - A “Front Running the Fed” Bond Bubble Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 4. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 5. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 6. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 7. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 8. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 9. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 10. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 11. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 12. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE INTERMEDIATE TERM – RISK ANALYTICS - 11 Months of QE Priced in QE III - Doesn't Bode Well For Traders GLOBAL GROWTH SLOWING - Dangerous Divergences DRIVERS - Fiscal Cliff, a Eurozone Led Slowdown & Gross Margins WARNING - Caterpillar - China – Shanghai – Hong Kong Warnings Signs EARNINGS – Early Indicators SPEAKING OUT - MISPRICING: Sam Zell - LET MARKETS CLEAR: Jim Grant Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 13. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 QE PRICED IN Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 14. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 15. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DANGEROUS DIVERGENCES Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 16. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 17. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 18. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 19. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 20. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 21. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 22. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 CATERPILLAR WARNS Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 23. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 24. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 25. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 26. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Cummins Lowers 2012 Revenue and EBIT Guidance. Company Also Announces Necessary Actions to Respond to Global Economic Slowdown. “We continued to see weak economic data in a number of regions during the third quarter increasing the level of uncertainty regarding the direction of the global economy. Demand in China has weakened in most end markets and we have also lowered our forecast for global mining revenues. EBIT margins will also be below our previous guidance primarily due to the sharp reduction in revenues.” CMI is down over 7% after-hours (to three-month lows) as it seems the 16% cut expectations in Aluminum demand that Alcoa just announced can no longer be ignored. Reality is that Cummins is slashing guidance and cutting jobs in "response to the weakening global economy.“ *CUMMINS TO CUT UP TO 1500 JOBS, LOWERS YEAR REV, EBIT FORECASTS *CUMMINS SEES YEAR EBIT ABOUT 13.5%, SAW 14.25%-14.75% :CMI US *CUMMINS PRELIM 3Q REV. ABOUT $4.1B, EST. $4.425B :CMI US *CUMMINS SEES 2012 REV. $17B, SAW $18B, EST. $18.11B :CMI US Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 27. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE MISPRICING -- Sam Zell "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!" Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 28. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE LET MARETS CLEAR – Jim Grant where we "return to capitalism", and markets are finally "allowed to clear." As ever, Grant is worth the price of admission as he explains how the 'monetary mandarins' have interjected themselves between us and the public price mechanism as the Fed's 'influence' has grown exponentially since its inception. Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 29. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE SHORT TERM – SENTIMENT PEAK COMPLACENCY CANARIES - Equity Investors Now Fleeing Equity Markets ALL IN - Everyone on the same side of the boat UP THEN DOWN – Goldman’s Outlook Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 30. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 31. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 32. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 33. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 34. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 35. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE Delusional Distortions + Dangerous Divergences = DELUSIONAL DIVERGENCES Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 36. This chart is from the October 2012 Market Analytics & Technical Analysis Report October 10th, 2012 DELUSIONAL DIVERGENCE DISCLOSURE STATEMENT AND TERMS OF USE THE CONTENT OF THIS SLIDE PRESENTATION AND ITS ACCOMPANYING RECORDED AUDIO DISCUSSION ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY. This slide presentation and its accompanying recorded audio discussion are not a solicitation to trade or invest, and any analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading and investing can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentary is only the opinions of the authors and should not to be used for investment decisions. You must carefully examine the risks associated with investing of any sort and whether investment programs are suitable for you. You should never invest or consider investments without a complete set of disclosure documents, and should consider the risks prior to investing. This slide presentation and its accompanying recorded audio discussion are not in any way a substitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement of this Disclosure and Term of Use Statement is a condition of access to it. Furthermore, any investments you may make are your sole responsibility. THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
Notas del editor
- Good Morning, it is Wednesday October 10th, 2012I'm Gord Long at Gordon T Long.comAs usual I have a lot of charts for us to go through this morning, so therefore I will pass over some of them quickly and leave you to examine them further at your leisure. You will need to open your slide viewer to full screen viewing - or you will not be able to see some of the detail I will be discussing.A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
- 2ND SLIDE - WHAT WE WILL TALK ABOUT The purpose of the audio slides is talk about the areas that are not updated in your Monthly Analytics and Technical Analysis report. This is based on our QUARTERLY cycle as outlined on the Subscriptions page on our site, In this regard, I want to talk today about:FIRST: the Fundamentals as regards EARNINGS estimates SECONDLY: Risk and the CANARIES we are seeingandTHIRDLY: The Technical Indicators as they apply to shifting SENTIMENT
- Regarding the LONG TERM and Fundamentals, I want to specifically talk aboutDivergencesEarnings EstimatesValuationsAnd Shifting Investor Attitudes
- EARNINGS ESTIMATES - Stealth Warnings Season Not Going Well The Divergence Between Stocks And Earnings Guidance Is Driving The Bears Absolutely Crazy 10-01-12 FactSet via BILately the slowing global economy is increasingly catching up with those S&P 500 companies who have been forced to issue disappointing 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% (based on an S&P 500 of 1447.15 from 1362.16) during this same time.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."At the time of this chart, 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 Q1 2006.
- EARNINGS ESTIMATES - 4.3 Up versus Down Revisions Highest Since 2001 Five Fun 'Pre-Earnings' Facts For The "Buy-The-F$$$ing-Dream"ers 10-07-12 Zero HedgeWith the S&P 500 once again testing multi-year highs, and forward P/Es over 14 (in a real-rate environment which would suggest single-digit P/Es) the earnings season reality is that multiple-expansion hopes is about to come crashing down . Downward EPS revisions have outnumbered upward revisions for 22 weeks The 4.3x negative-to-positive pre-announcement ratio is the highest since 2001Of the S&P 500 companies that have reported thus far (25 total), only 52% have exceeded expectations (long-term average is 63% and last four quarters average 67%).Overall Q3 earnings are expected to fall 2.5%
- EARNINGS ESTIMATES - Simply Don't Match Reality The Three Funniest Charts You'll See This Earnings Season 10-08-12 Morgan Stanley via ZHS&P 500 EPS is forecast by consensus to decline 2% both sequentially and Y-o-Y in 3Q12 driven by net margin compression. It appears (for now at least) that we can have an earnings recession without an economic recession; but the disconnect may be a lag as opposed to a decouple. Roughly 50% of companies are expected to experience Y-o-Y contraction in net margins but consensus expects an 18.2% incremental margin expansion in 2013 (from a 7.2% rise in 2012 which is down from 13.1% rise in 2011); and while 3Q EPS is expected to be negative, the following three quarters EPS growth are expected to rise dramatically (double that of 2012 on average). It seems investors (and analysts) are still willing to believe in miracles.Currently, the consensus embeds very optimistic 2013 incremental margin expectations, accelerating at a time when a potential fiscal cliff is imminent and profit margins are already at record levels. Reality suggest that companies simply can’t drop through 18 cents for every dollar they grow revenue in 2013.
- Remember, earnings are declining for the entire S&P500 right now, but are expected rise dramatically in the quarters to come - again by some miracle - even after 3Q2012 EPS has been reduced notably already - with 4Q12 EPS dropping to where 3Q12 was 7 months ago...Priced In? Only if you think Fed-driven multiple-expansion can distort reality and overpower the delusional divergences we are seeing everywhere. Charts: Morgan Stanley
- VALUATION - Markets Seriously Overvalued by Most Metrics The Market Is Now Between 33% And 51% Overvalued 10-02-12 Doug Short, Advisor PerspectivesHere is a summary of the four market valuation indicators that Doug Short updates at the beginning of the month. 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.The charts shown differ 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. The first chart does a satisfactory job of illustrating these four approaches to market valuation, but the geometric variant is 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.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 not surprising.
- BOND BUBBLE - Avoiding Risk Make Have Caused a Bond Bubble Fidelity Now Manages More In Bonds And Money Markets Than Stocks 09-27-12 Zero Hedge The equity markets are being driven by Central Bank Monetary Actions – in Price but not volume! Here is what happened in the week QE3 was announced - from ICI: There was a $4.8 billion outflow in the week Bernanke promised to never let stocks drop. It was the largest outflow since May. There has not been a single inflow into equities since QE3 was either hinted or formally announced.
- VOLUMESince the markets bottom in March 2009, volume in the equity markets as measured by the highly traded S&P 500 Spider has steadily fallen to seriously low levels.This is a clear an example of the degree of Delusional Divergence as you need to understand the magnitude of the distortions occurring.
- BOND BUBBLE - Avoiding Risk Make Have Caused a Bond Bubble Fidelity Now Manages More In Bonds And Money Markets Than Stocks 09-27-12 Zero Hedge The domestic equity mutual funds have seen outflow after outflow which now amounts to a third of a trillion since 2010.FOR EXAMPLE: Fidelity bond and money market assets now total $848.9 billion, more than half of the company's $1.6 trillion in managed assets. The company built an empire in the 1980s and 1990s on stock funds and star stock pickers like Peter Lynch. Fidelity's stock mutual funds held $761 billion at the end of June... The rise of bond and money market funds, including institutional assets, is a remarkable turn of events for Fidelity.
- In the INTERMEDAITE TERM I WANT TO TALK ABOUT RISK ….…. in a host of areas.
- ANALYTICS - 11 Months of QE Priced in Here Is How Much QEternity Has Already Been Priced In 09-24-12 David Rosenberg via Zero Hedge With global growth slowing, global trade tumbling, and earnings revisions falling rapidly, equity market outperformance has been based on the Fed & ECB's largesse. The unanswered question is - how much is now priced in? Given recent 'stability' post-FOMC, it seems the follow-through is not there. In the last three months, the S&P 500 has 'outperformed' the Fed balance sheet by around 220 points - which equates to a pricing-in of around 11 months of additional QEternity.There are six different factors that drive the equity markets at any given point in time, and in some periods, one or a few factors dominate, and in other periods, these same drivers can be on the back burner.These six items are 1-liquidity, 2-fund flows3-positioning. 4-Technicals & valuation, 5-sentiment, and the 6-fundamentals. They continue in the aggregate to provide a very murky picture, but the first two factors appear dominant at the present time.The Fed has bolstered investor confidence with its massive monetary easing, even if it doesn't work for the real economy – David Rosenberg’s research at GluskinSheff indicates that every $40 billion of QE boost (QE3 at a pace of this amount per month) to the Fed's balance sheet, as a static stand-alone event, adds about 20 points to the S&P 500. Then there is the fact that the hedge funds, in aggregate, have lagged so far behind this year that they will be forced into the market to avoid embarrassment - and redemptions - at the end of the year. Technicals, are neutral as is valuation though forward WE ratios are at the high end of the range for the past 20 months at 14x (and the Shiller cyclically adjusted multiple is 25% above historical norms).Sentiment and fundamentals remain the two primary sources of downside risks. On the latter, operating profits are now declining in tandem with reported (GAAP) EPS and guidance overall is to the negative side and by a larger than usual margin (four to one). Analyst downgrades are outpacing upgrades. I look at FedEx as a cyclical bellwether and shipments are contracting. As for the former, the bull camp is getting crowded — problematic from a contrary standpoint.At the June lows in the S&P 500, the Investor's Intelligence Survey flashed just 34% bulls — that number as of this latest week is up to 54.2% (from 51.1%). The bear share fell to 24.5% from 25.5% and is actually lower now than it was when the market was carving out an interim bottom in early June. Take note that the bull/bear gap has widened out to 29.7 points from 25.6 points last week and 7.4 points in early June (when sentiment was very low and the VIX was at 26 versus 13-and-change today) — a spread of over 30 in the past typically characterized an over-extended market ripe for a pullback: and bullish readings of 55% or higher in the past was a warning flag for those investors playing from the long side.Charts: Bloomberg
- QE III - Doesn't Bode Well For Traders Traders Have A New Fear About How QE Won't 'Work' 09-28-12 Dan Greenhaus BTIG via BI The chart on the right compares the performance of the markets 70 sessions prior to QE2 and QE3, showing that basically the behavior of the market has been the same. If markets keep going nowhere (and if we keep seeing commodities lag) the sense that this time the Fed's magic isn't working could start to become an issue.
- DANAGEROUS DIVERGENCES - PMI versus SPX The Disconnect Remains; Contracting PMIs Imply Dramatic Q4 Losses For Global Stocks 10-02-12 Deutsche Bank via Zero HedgeWe have dangerous divergences abounding.Economic Surprise Indices as shown in the bottom left corner have begun to drift back lower in recent days after a short-lived scurry into positive territory as anticipation of Fed/ECB action supported equity valuations over the last few months in the face of deteriorating earnings. Critically though, headline PMIs (and the ISM) are still well behind levels that are consistent with current equity markets as the disconnect between rich equity prices and poor fundamentals remains very wide. Back around May/June they were broadly in line and since then liquidity has propelled markets but with the data at similar levels, and clearly the hope is that the current fundamental weakness corrects into year-end but at current levels the S&P faces a 9% correction, Europe 22%, and China 25% - hope is indeed a powerful thing.
- The US is approximately 25% of Global GDP. If you take the EU as a whole it now approximates 25% of Global GDP . The EU is now an important driver besides the US consumer of global growth. The Markitindex showed Euro-area manufacturing shrank for a 14th month in September, Analysts are lowering 2013 estimates for European earnings growth by 52 percent, according to a Bloomberg surveyAdditionally, the euro-area’s unemployment rate reached 11.4 percent in August, the highest on recordwhich doesn’t bode well for consumer demand.
- RISK - Fiscal Cliff, EuroZone/ZGlobalSlowdon & Falling Gross Margins 3 Huge Risks That Could Crack The Markets In Q4 10-02-12 Lance Roberts via BIWhat's to worry about? The world is engulfed in a liquidity tsunami from Japan's QE expansion to the ECB's bond buying program and the Federal Reserve's QE3. Bond yields have fallen for Spain and Italy pulling them out of the danger zone, the flames of the Eurocrisis have died down to smoldering embers and there is a general belief that the world will somehow shortly reignite the engines of economic growth just any day now. With October starting the seasonally strong "best months of the year" there seems to be nothing but clear sailing ahead.Of course, as Bob Farrell's rule #9 so eloquently states "When all the experts and forecasts agree - something else is going to happen." While the media focuses their attention on all the things that could go "right" to keep the rally going - investors should focus on the things that could possibly go "wrong" which could result in significant, unexpected, capital reductions. Therefore, as we look forward into the final quarter of 2012 here are the three big risks that could crack the markets.
- The "Fiscal Cliff"The fiscal cliff is looming larger as we rapidly approach the end of the year. The simultaneous collision of expiring tax cuts, automated budget and job cuts, and the implementation of 22 new, or higher, taxes from Obamacare will weigh not only the economy but the markets as well. If Congress does not address this issue, and very soon, the fear of a jump in tax rates will induce a market liquidation as investors sell positions to realize capital gains at 2012 rates of 15% before they jump to 23.8% in 2013. Furthermore, those investors that have been pouring money into high yielding dividend investments may begin to rethink their strategy as dividends jump from 15% to 43.4% next year.
- However, it is not just the hike in investment related taxes that will cause a burden on the markets. The impact of the entire "fiscal cliff," should it go unchecked, will impose an estimated 4% clip to economic growth, and ultimately corporate earnings, pushing the U.S. into a deep recession next year. The financial markets are currently pricing in strong economic growth in 2013, as high as 4%, versus the current paltry 1.25% as of Q2-2012.Historically, stocks have lost roughly 30% of their value on average during a "normal" economic recession. With such a wide disparity between the current price of the S&P 500 index and the underlying economic and fundamental realities - the potential reversion could be as brutal as seen during the last two recessionary cycles in 2000 and 2008.
- RISK - Fiscal Cliff, EuroZone/ZGlobalSlowdon & Falling Gross Margins 3 Huge Risks That Could Crack The Markets In Q4 10-02-12 Lance Roberts via BIEuro-crisis And Euro-recessionOther than a lot of promises, hope and hand shaking - there has actually been very little progress made in resolving the issues that plague the Eurozone. While bond buying programs, monetary assistance, and continuous "talk" has kept quieted the news flow from the Eurozone in recent weeks - the debt, deficits and economic struggles still weigh on countries unwilling to implement spending controls and debt reduction programs. The bond buying program that has been put forth by the ECB as the solution to saving the Eurozone is really nothing more than a regurgitation of the SMP Program which was tried, and failed, in 2011. The reality is that the program doesn't attack the root problems at the base of the Eurocrisis which is a complete lack of a constitutional union, and central banking system, under which the countries have collectively agreed to operate. The current union is destined to fail simply due to a lack of a unified structure - "all chiefs and no indians.“However, the recession in the Eurozone is just as big of a risk to the 4th quarter as a return of the crisis. The continued recessionary drag across the Eurozone is dampening revenues and slowing demand for exports from the U.S. Recent corporate reports from key transportation related companies have all warned of weaker outlooks due to slowdowns in the Eurozone. Since the end of the last recession exports have made up roughly 40% of corporate profitability. The chart below shows exports as a percentage of GDP. Historically, when exports turn down the economy was slipping into recession. The recent drop in durable goods orders and industrial production are warnings that this could already be occurring. While the media continues to discuss how the U.S. is faring well despite the drag from the Eurozone - the reality is that it just takes time for the slowdown across the ocean to migrate its way west. The chart below shows the Eurozone versus the U.S. economy and the close relationship that exists between the two. It is unlikely that the domestic economy will be able to avoid the drag of a continued recession in Europe for long.
- RISK - Fiscal Cliff, Eurozone/Global Slowdown & Falling Gross Margins 3 Huge Risks That Could Crack The Markets In Q4 10-02-12 Lance Roberts via BIEarnings SlowdownAnother risk to the 4th quarter comes down to the impact of the deteriorating economic environment on corporate earnings. Stock prices have been rising solidly over the past several months to get in front of the anticipated QE3 operation by the Fed. However, that rise in price comes at a time without an increase in the underlying fundamentals. This detachment of price from earnings puts the markets at risk of reversion in the months ahead.The chart below shows Gross, EBIT and Net Profit Margins for the market. What is clearly evident is that each has peaked and began to weaken. Falling margins and year-over-year revenue growth (top line sales) becomes a real concern as analysts continue to estimate a sharp rise in revenue (dashed line for the last half of 2012) in the months ahead. These overly optimistic assumptions will have to be negatively revised in the coming months given the ongoing weakness in Europe and China.Unlike the 2008-2009 recession when revenues fell at the same time as the cost of sales - we are currently witnessing a far more disturbing development of falling gross margins in recent quarters. This suggests, unlike the last recession, that costs are rising relative to top line growth which will rapidly impact profit margins more than currently estimated.Not Just 3These are just three of the risks that we see going into the 4th quarter that could well limit the impact of the recently announced QE3 bond buying program. While the Fed may state that the program is in place to boost employment - the reality is that the program was implemented to stave off the impact of the recession that is slowly sweeping the globe. The coordinated efforts of the ECB, Japan, China and the U.S. make this clear.The biggest threat to the financial system is another sharp recession that could potentially lock up the financial system. The debt burdens that currently clog the system have not been dealt with and the systemic risks are still very present throughout the system. With economic growth faltering any shock to the system, such as the "fiscal cliff", could well be the domino that begins a sharp unwinding of the risks that have once again built up in the system.With the current markets overbought, extended and overvalued combined with overly optimistic future expectations - the components of the next mean reversion are already in place. The only question is what triggers the next decline?
- CATERPILLAR - Cuts 2013 Earnings Huge Bellwether Caterpillar Just Cut Its Forecast For 2013 09-24-12 Caterpillar Management said that it expects to earn $12 to $18 per share in 2013. According to Reuters, this range is actually lower than the $15 to $20 range they issued previously."Our goal hasn't changed but the economy has," wrote management. Additionally, the company is also considering recession scenarios for 2013. However, a recession is not the base case.
- ANALYTICS - Warnings Signs Exposing China's Shadow Banking System 09-30-12 AsiaFinanceNewspdf via ZH
- EARNINGS - AlcoaAlcoa Launches Earnings Season With A Whimper 10-09-12 ZH*ALCOA CUTS 2012 GLOBAL ALUMINUM DEMAND FORECAST TO 6% VS 7%Free Cash Flow: Q3 -$39MMAdjusted EBITDA: Q3 $282mm, down 45% from Q2Adjusted EBITDA: Q3 2011: $821 MM; Q2 2012: $ 517 MM; Q3 2013: $282 MMAdjusted EBITDA Margin Changes: Q3 2011: 12.8%; Q2 2012: 8.7%; Q3 2012 4.8%Total debt: $9,524; Net debt: $8,092; LTM EBITDA $1,875 million; Total Leverage: 5.1x; Net Leverage: 4.3xThe chart shown here shws the correlation
- EARNINGS - AlcoaThe State Of The Slowing Global Economy In 2 Huge Slides 10-09-12 BI Alcoa management cut its forecast for 2012 global demand growth to 6 percent from 7 percent previously. This is way down from the 10 percent growth rate they saw in 2011. And demand for aluminum is extremely sensitive to global real GDP, so this is not good.This slide come from Alcoa's earnings presentationand looks at demand growth based on regional end markets. One stat that stands out is the huge decline in truck and trailer production in China, which confirms the warning that truck engine maker Cummins gave tonight.. As you can see here, demand in much of the world is expected to have decelerated in the second half.
- EARNINGS - Cummins Cummins Lowers 2012 Revenue and EBIT Guidance. Company Also Announces Necessary Actions to Respond to Global Economic Slowdown.“We continued to see weak economic data in a number of regions during the third quarter increasing the level of uncertainty regarding the direction of the global economy.Demand in China has weakened in most end markets and we have also lowered our forecast for global mining revenues. EBIT margins will also be below our previous guidance primarily due to the sharp reduction in revenues.”CMI was down over 7% after-hours (to three-month lows) as it seems the 16% cut expectations in Aluminum demand that Alcoa just announced can no longer be ignored. Reality is that Cummins is slashing guidance and cutting jobs in "response to the weakening global economy.“*CUMMINS TO CUT UP TO 1500 JOBS, LOWERS YEAR REV, EBIT FORECASTS*CUMMINS SEES YEAR EBIT ABOUT 13.5%, SAW 14.25%-14.75% :CMI US*CUMMINS PRELIM 3Q REV. ABOUT $4.1B, EST. $4.425B :CMI US*CUMMINS SEES 2012 REV. $17B, SAW $18B, EST. $18.11B :CMI US
- SAM ZELL - QE3 and Fed Caused Mispricing Sam Zell On "Class Warfare Crap", QE3 Unreality, And Why Everything Is Mispriced Due To The Fed 10-02-12 CNBC via ZHLet me share some quotes and comments from Sam Zell, a major proven real estate magnate:"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. Zellis NOT buying here, is gravely concerned about liquidity needs, and in his assessment "everything is massively too expensive."QUOTE; "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? According to Zell: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 recessionHow 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? QUOTE: Unleash the animal spirits, unleash people like me - the game is being stacked against me.Stop this class warfare crapWe'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... QUOTE:Delays in capex spending is usually a sign we are headed into recessionNot optimistic about consumer spending into the end of the yearI am normally an optimist - buying when everything has dropped - but my assessment is that "Everything is massively too expensive"Stock market should 9000 not 14000QE is creating artificial numbers that I dont think the underlying will support
- MISPRICING - Markets Must Be allowed to Clear Jim Grant Asks The "PhD Standard" To Allow Markets To Finally Clear 10-03-12 Jim Grant CNBC According to Jim Grant on CNBC, we are living in a world where only PhDs know what is best for us all. As the Fed hides behind the political cover of its dual mandate to centrally-plan our lives, the Fed-fighter notes "we are off the common-sense-mandate and in a PhD-Standard."Grant guides the CNBC Fed-cheerleaders to a new reality of inflation not being what they think it is (i.e. not the PCE Deflator but more prosaically too much money chasing too few products exemplified in bloated real estate prices in the past and now equity prices), of a '32-inch' yard, and of a dream-like world where we "return to capitalism", and markets are finally "allowed to clear." Grant spells out how the 'monetary mandarins' have interjected themselves between us and the public price mechanism as the Fed's 'influence' has grown exponentially since its inception. 10-0
- RISK AVERSION - Likely Reversal Ahead Peak Macro Complacency 09-27-12 Zero Hedge Citigroup's macro risk aversion index just tested record lows (i.e. record high complacency levels with regard investors' view of macro uncertainty going forward). Coinciding as it did with Bernanke's all-in moment we wonder if we just saw the 'peak complacency' moment as the wall of worry was officially scaled only to find that the grass is indeed NOT greener on the other side. For sure, it would appear that all the talk of bearish sentiment as the driver of the next 'secular' leg in stocks seems just that - 'talk'.
- CANARIES - Equity Investors Now Fleeing Equity Markets Complete Fed Failure: Retail Investors Pull Out Most From Domestic Equity Funds In Two Months 10-03-12 Zero HedgeJust as we had suspected for months, Bernanke's attempt to herd cats and to drive retail investors into equities is now a complete and unmitigated catastrophe. According to just released ICI data, in the week ended September 26, the second full week after the announcement of QE3, retail investors pulled $5.1 billion from domestic equity funds, following a massive $4.8 billion outflow the week prior, and the most in 2 months. This is also the sixth largest weekly outflow in 2012 to date, a year in which over $100 billion has already been pulled from equity mutual funds. And since we now know that Bernanke's only motive for QE3 is to stimulate a wealth effect and to push everyone into the broken casino, where such trading farces as Kraft's flash smash today, as Knight Capital's implosion a month ago, and FaceBook's IPO, not to mention the virtually daily Flash Crash in at least one name, have killed every last shred of faith in equities, it can be safely said that QE3 has failed three short weeks after being launched. As to where the money did go: why taxable bonds of course - not even the "dumb money" is that dumb to go where the Fed tells it to, and instead merely does what the Fed does: it keeps on frontrunning the Fed's monetization of the US deficit, which is now going on for the 3rd year in a row. Eventually "this time may be different." But not yet.
- ALL IN - Everyone on the same side of the boat About That Money On The Sidelines: It's "All In" 10-03-12 Zero HedgeThe Net Long Interest in S&P 500 Futures (the most liquid equity trading vehicle in the world) is now at its highest since December 2008. The last time investors were this 'net long', the S&P 500 fell over 25% in the next two months.
- EARNINGS - Goldman's Down then Up Call Goldman Sees Stock Plunge Then Surge 10-05-12 Goldman Sachs via ZHGoldman's equity strategist David Kostin has been very quiet for the past year, having not budged on his 2012 year end S&P target of 1250 since late 2011. Today, he recently released a revised forecast, one that curiously still leaves the year end forecast unchanged at a level over 200 points lower in the S&P cash, and thus assuming a ~15% decline. The reason: the same fiscal cliff (which would otherwise deduct 5% in GDP growth) and debt ceiling debate we have warned will get the same market treatment as it did in August of 2011 when the only catalyst was a 15% S&P plunge and a downgrade of the US credit rating. However, one the fiscal situation is fixed, Kostin sees only upside, with a 6 month target of 1450 ("We raise our medium-term fair value estimates for the S&P 500 in response to open ended quantitative easing (QE) announced by the Fed."), and a year end S&P target of 1575, calculated by applying a 13.9 multiple to the firm's EPS forecast of 114. Of course, this being Goldman Sachs it means - expect a continued surge into year end, then prolonged fizzle into the new year. Why? Because there is not a snowball's chance in hell the consolidated S&P earnings can grow at this rate, especially not if the Fiscal Cliff compromise is one that does take away more than 1% of GDP thus offsetting all the "benefit" from QE. Simply said, companies who have already eliminated all the fat, and most of the muscle, and are desperate for revenue growth to generate incremental EPS increase, have not invested in CapEx at nearly the rate needed to maintain revenue growth (see How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement) having dumped all the cash instead in such short-sighted initiatives as dividends and buybacks. Also, recalling that revenues are now outright declining on a year over year basis, and one can see why anyone assuming a 14% increase in earnings in one year, is merely doing all they can to make the work of their flow desk easier.
- From the Kostin report;Equities are attractive for long-term investors but face near-term risks. We forecast S&P 500 will reach 1575 at year-end 2013 based on our new 2014 EPS estimate of $114 and a fair value P/E of 13.9X. The FOMC’s open-ended easing program allows investors to look past current stagnant economic growth and focus on corporate fundamentals. So far QE has reduced the equity risk premium but not yet improved growth expectations. However, in the near-term we apply a valuation discount due to fiscal policy uncertainty. Our year-end 2012 price target remains 1250Downside risk through year-end stems from ‘fiscal cliff’ uncertainty Investors are too complacent that Congress reaches compromise on the divisive issues of taxes and spending during the six weeks between the Nov 6 election and Jan 1 when $576 billion of fiscal contraction starts.New QE policy supports rising EPS in 2014 and the market will follow Although Congress may stumble, we assume it reaches agreement in early 2013 to delay full impact of the ‘fiscal cliff’. Open-ended QE has eased financial conditions and will continue to support GDP growth. We raise our 2013 S&P 500 EPS estimate to $107 and introduce a 2014 estimate of $114. S&P 500 will establish a new high of 1575 at year-end 2013 We forecast S&P 500 will reach 1575 by year-end 2013, 9% above current and 1% above the 2007 peak. Once policy risks are addressed investors can focus on the trajectory of EPS growth, high ROE, and valuation metrics.We apply a valuation discount to S&P 500 through year-end due to fiscal policy risks but see attractive upside over the medium-to long-term. Open-ended QE allows investors to look past current stagnant economic growth and assign valuation consistent with strong fundamentals. We introduce a 2014 EPS estimate of $114 and a year-end 2013 S&P 500 target of 1575 but maintain our 2012 year-end target of 1250. Two of the three pillars of our 2012 framework for analyzing the US equity market have stood firm, but one has not – valuation. US GDP growth has been below trend at 2% and our top-down 2012 S&P 500 EPS estimate has remained unchanged at $100 since the start of the year. Meanwhile, consensus sales and earnings estimates have dropped by 1% and 5%, respectively, since early 2012. Despite that, valuation is notably higher.Our expectation that S&P 500 valuation would remain flat in 2012 in the face of stagnating economic and earnings growth has been incorrect. Investor response to Fed and ECB policy actions since June 2012 was far more dramatic than we anticipated. The forward P/E multiple has expanded by 15% to 13.4x and S&P 500 has advanced by 15% YTD, reversing the pattern of 2011 when EPS rose by 15% but S&P 500 ended flat at 1258. We raise our medium-term fair value estimates for the S&P 500 in response to openended quantitative easing (QE) announced by the Fed. The FOMC’s commitment to pursue a loose monetary policy until unemployment falls should allow investors to look through the current period of stagnation and assign a valuation multiple consistent with corporate fundamentals, once fiscal policy risk abates.Our S&P 500 price targets are 1250 at year-end, 1450 in 6 months and 1575 at yearend 2013. Those estimates suggest returns of -14%, 0%, and +9% over those time periods. Our year-end 2012 forecast is below our estimate of fair value due to high uncertainty from the impending December 31 ‘fiscal cliff’.Our baseline assumption is that fiscal issues will be resolved during 1Q 2013 but they remain the largest medium-term risk to US equity performance and economic growth. Our US Economists expect $193 billion of fiscal consolidation out of the potential $576 billion total, representing a drag of about 120 bp on 2013 GDP. Although we forecast a rising stock market in 2013, numerous headwinds remain for equity performance that policy action must overcome: Consensus 2013 EPS estimates remain too high despite sales and EPS revisions that have been consistently negative in 2012; S&P 500 margins have declined for three quarters; US GDP growth continues to stagnate near 2%; China economic growth has been reduced ahead of an important political transition in November; and political and policy uncertainty remains high in Europe along with risk to Euro area growth. The major near-term policy risk relates to possible 1Q 2013 fiscal consolidation of roughly 4% of GDP under a worst case outcome. Our S&P 500 EPS, revenue and ROE estimates remain largely unchanged as QE was already an element of our US GDP forecasts. We expect S&P 500 will earn $100 per share in 2012, $107 in 2013 and $114 in 2014, with revenue growth of approximately 5% in each year. Our ROE forecasts remain 17.5% for 2012 and 17.3% for 2013 for the S&P 500 due to weak Financials ROE but 19.7% and 20.7% on an ex-Financials basis.Slow growth, low inflation and high unemployment justify additional easing. Goldman Sachs US Economics forecasts real US GDP growth of 2.2% in 2012 and 1.9% in 2013. They forecast benign core PCE inflation below 2% and expect the US unemployment rate will remain above 8%. Our forecasts are modestly more conservative than the FOMC central tendency outlook as well as consensus expectations. We assume GDP growth of 2.5% in 2014 as an input in our top-down sales, margin, and EPS.We revise our 2013 S&P 500 earnings estimate to $107 (from $106) and introduce a 2014 EPS forecast of $114 per share. Our new estimates imply EPS growth of 4% in 2012, 7% in 2013, and 6% in 2014. Our EPS estimates are below current bottom-up consensus EPS estimates in 2012, 2013 and 2014 of $102, $115 and $128, respectively (see Exhibit 1). Our regression-based model of sales and net margins for each sector drives our earnings forecasts for individual sectors and for the overall S&P 500. Variables included in our sales and margin models encompass US GDP growth, world GDP growth, 2-year and 10- year US Treasury rates, Brent crude oil, core inflation, and the tradeweighted US Dollar (see Appendix A for our macroeconomic assumptions).The level of sales is highly correlated with nominal economic growth. We assume the nominal size of the US economy will grow by 3.7% in 2013 and by 4.6% in 2014. Given more than 30% of aggregate revenues of S&P 500 companies take place outside of the US, our model forecasts S&P 500 sales will rise by 4.4% in 2013 and 4.7% in 2014, respectively.Our revenue growth forecast is in-line with consensus expectations. We forecast trailing four quarter net margins will return to the previous peak of 8.9% by 2013 before rising to a new peak of 9.0% in 2014. Higher labor costs and decelerating margin expansion in the Information Technology sector are headwinds to further margin expansion at the index-level (see Exhibit 4). Consensus expects aggressive margin expansion of 60bp in both 2013 and 2014. Bottom-up consensus forecasts S&P 500 margins will reach new peak levels by 1Q 2013.To summarize: Goldman rejoins the sellside groupthink. It will be wrong once again.
- In closing I would like take a moment as a reminderDO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY. Thank you for listening and until next month, May 2012 be an outstanding investment year for you.