Monthly Market Analytics & Technical Analysis

SEPTEMBER 2013 Edition

INDEXED RESEARCH DB

Gordon T Long

9/14/2013

1 September 2013 Edition

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Monthly Market Analytics & Technical Analysis

SEPTEMBER 2013
SUBSCRIPTION SERVICE: PLAN IV
HIGHLIGHTS - WHAT YOU NEED TO KNOW ..........................................................................................................................................12
SUMMARY ANALYSIS ......................................................................................................................................................... 12
Valuation Summary.......................................................................................................................................................... 15
Fed Panics> "QE Unlimited" - ECB Panics> "OMT" Unlimited - Japan /UK Panic> ...................................................... 17
Defining Chart #1 - "Delusional Distortion" Expectations .................................................................................................. 17
Defining Chart #2 - Finding the Long Term Pivot .............................................................................................................. 19
Defining Chart #3 - Intermediate Term Top ...................................................................................................................... 22
Defining Chart #4 - Short Term Volatility .......................................................................................................................... 24
OUR APPROACH - MACRO ANALYTICS ...............................................................................................................................................26

............................................................................................................................................................... 27
SEPTEMBER 2013: Global Macro Drivers ......................................................................................................................... 28
DRIVER: Real Wealth, Commodities & Dr Cooper ........................................................................................................... 29
DRIVER: Carry Trade & the : Cross .......................................................................................................................... 32
DRIVER: Currency & Forex Markets ................................................................................................................................ 40
DRIVER: Yield, Spread & Credit ...................................................................................................................................... 44
DRIVER: Global Equities ................................................................................................................................................. 45
DOLLAR-YEN CROSS - Consolidation May Be Completing ............................................................................................ 58
EMERGING DRIVER$ - US$ Short Term Shortages ....................................................................................................... 59
EMERGING DRIVER$ - Earnings Disconnected From Steepening Treasury Term Structure ........................................... 60
EMERGING DRIVER$ - Emerging Market Bond Outflows Accelerating ........................................................................... 62
RISK: Risk-On versus Risk-Off........................................................................................................................................... 64
RISK: Margin ................................................................................................................................................................... 64
RISK: Volatility Patterns in the VIX .................................................................................................................................. 65
RISK: Credit & Volatility ................................................................................................................................................... 69
RISK: Potential Head & Shoulders Pattern Appearing ...................................................................................................... 72
RISK: The Unwelcome Return of Risk-on, Risk-off........................................................................................................... 73
RISK: The Taper Risk Is In Stocks Not Bonds.................................................................................................................. 74
RISK: Stock Bear Looms ................................................................................................................................................. 76
RISK: U.S. Stock ETFs Record Biggest Withdrawals Since 2010 .................................................................................... 81
RISK: Gauging the Weakness.......................................................................................................................................... 82
PREVIOUS MONTH - Reference ..................................................................................................................................... 85
RISK - Biggest Hindenburg Omen Cluster On Record ..................................................................................................... 85
RISK - Positive Global Surprise Indices Topping In Developed Economies ...................................................................... 87
RISK - September Events Cluster .................................................................................................................................... 90
RISK - A Confluence Of Risky Economic Events ............................................................................................................. 91
RISK - A New Form of 1987 Portfolio Insurance and Dynamic Hedging ........................................................................... 92
RISK - Investors Never Listen NOR Learn ....................................................................................................................... 95
RISK - Money Going to Cash But Equity Inflows Still Suggest Corrective Correlation ...................................................... 96
RISK - "Blue-Sky" Index Is Flashing Red ....................................................................................................................... 100
RISK - US Recession an Increasing Possibility .............................................................................................................. 101
RISK - Confidence in Monetary Policy Direction is Exposed .......................................................................................... 102
PRIOR MONTH - Reference .......................................................................................................................................... 104
RISK - IG and HY Markets Sending Warning Signals of Limits to a QE Policy ............................................................... 104
RISK - In 1999 It was called the New Paradyn - Today it is the New Normal .................................................................. 107
RISK - Complacent Global Sentiment ............................................................................................................................ 108
RISK - Hayman Capital Dramatically Reduces Risk ....................................................................................................... 109
RISK - Hindenburg Omen .............................................................................................................................................. 110
RISK - Risk is in the DRAWDOWN ................................................................................................................................ 112
RISK - Falling Real Disposable Income means Falling Consumption ............................................................................. 114
RISK - A Credit Squeeze Leading to a Deflationary Leg Down....................................................................................... 116
RISK - Private Equity a Major Seller of All Assets .......................................................................................................... 118
RISK - Volatility and Increasing Instability ...................................................................................................................... 119
RISK - Credit Cycle Reversal Ahead .............................................................................................................................. 121

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RISK - IG and HY Markets Sending Warning Signals of Limits to a QE Policy ............................................................... 124
RISK - In 1999 It was called the New Paradyn - Today it is the New Normal .................................................................. 127
RISK Complacent Global Sentiment ........................................................................................................................... 127
RISK - A Major Contrarian Warning Signal..................................................................................................................... 129
RISK - QE Creating a 1142 Point SPX Market Distortion ............................................................................................... 130
RISK - US Equity Markets Disconnecting from Benchmarks .......................................................................................... 133
RISK - Signs of Increasing US Economic Risk ............................................................................................................... 135
RISK - Elevated Leverage & Margin Levels .................................................................................................................. 136
RISK - "Jaws of Despair" and the Regression-to-the-Mean ............................................................................................ 137
RISK - Historic Low High Yield (Record Price Paid) ....................................................................................................... 140
RISK: Rosenberg Sees Signs of Overbought Market ..................................................................................................... 142
RISK: Market Risk ......................................................................................................................................................... 143
RISK: Weakness Below the Headline Numbers ............................................................................................................. 146
RISK: Quickly Escalating Risk........................................................................................................................................ 147
RISK: Increasing Levels of Market Risk ......................................................................................................................... 149
RISK: Dark Pools Now 40%, Internalization 60% Of Off-Exchange Trading to Avoid HFT............................................. 150
TECHNO-FUNDAMENTALS .............................................................................................................................................. 152
PATTERNS - Major Long Term Overhead Resistance ................................................................................................... 152
PATTERNS - SPX Being Driven By 3 Trading Factors ................................................................................................... 153
PATTERNS - US Equity Funds Post Largest Weekly Outflow Since November 2011 .................................................... 159
PATTERNS - 1987 Yields .............................................................................................................................................. 160
PATTERNS - Surprise Index Says Its Normally Time For Central Bank Intervention ...................................................... 161
PATTERNS - A Gap That Must Be Soon Filled .............................................................................................................. 162
PREVIOUS MONTH - Reference ................................................................................................................................... 163
PATTERNS - US Treasury Finally Admits The Truth: It's All POMO ............................................................................... 163
PATTERNS - Even Retail Investors Don't Believe this Rally .......................................................................................... 166
PATTERNS - 7 Charts Of The Market's Complete Divorce From Reality ....................................................................... 167
PATTERNS - EU Worries Will Soon Emerge After the Election in Germany is Finalized ................................................ 173
PATTERNS - Equity Fund Flows ................................................................................................................................... 175
PRIOR MONTH - Reference .......................................................................................................................................... 176
PATTERNS - A Correction is Overdue ........................................................................................................................... 176
PATTERNS - A Good Pivot Indicator ............................................................................................................................. 178
PATTERNS - Classic Trendline Resistance Retest ........................................................................................................ 179
PATTERNS - Bond Scare Nearing Support ................................................................................................................... 180
PATTERNS - Earnings Revisions Disconnected From Steepening Treasury Term Structure ......................................... 182
PATTERNS - An Artificial Market ................................................................................................................................... 184
PATTERNS - An Oversold Bounce and Weak Summer Ahead ...................................................................................... 185
PATTERNS - PE's In Perspective .................................................................................................................................. 187
PATTERNS - Traders Reacting to the 1994 Pattern....................................................................................................... 189
PATTERNS - QE Is Ineffective In Increasing GDP ........................................................................................................ 191
PATTERNS - Credit Is Leading Equities ........................................................................................................................ 192
PATTERNS - Asset Trends versus Bubbles ................................................................................................................... 194
PATTERNS - Consumer Confidence & the Mortgage Spike "Peak Signal" .................................................................... 196
PATTERNS - Contrarian Breadth Rule .......................................................................................................................... 197
PATTERNS - Financial Stress Index Sends Market Clue ............................................................................................... 199
PATTERNS - Inflation Expectations Contributing to Volatility ......................................................................................... 201
PATTERNS - The Three Legged Stool .......................................................................................................................... 202
PATTERNS - Divergences Can Be Found Almost Everywhere ...................................................................................... 203
PATTERNS - Japan & SPX Testing Critical Intermediate Term Trendline Support ......................................................... 205
PATTERNS - Bond Market Tremors Only Getting Louder .............................................................................................. 207
PATTERNS - Emerging Markets Feeling the US "Exportation" of Inflation ..................................................................... 208
PATTERNS - Treasury Yields Spike To New 14 Month Highs........................................................................................ 210
PATTERNS - 10Y TIPS Yield Above 0%; Highest In 19 Months .................................................................................... 211
PATTERNS - The Bond "Scare" We Warned of BUT Only a Corrective / Consolidation ................................................. 213
PATTERNS - Emerging Market Interest Rebounding ..................................................................................................... 214
PATTERNS - 10Y UST and HY Credit Sending a Market Message ............................................................................... 215
PATTERNS - Breadth Narrowing ................................................................................................................................... 218
PATTERNS - "Most Shorted" Driving Market Higher As Short Sellers Destroyed ........................................................... 219
PATTERNS - Crowded Trades Normally Tip the Boat .................................................................................................... 221
PATTERNS - Strong US Macro Divergence Correlation................................................................................................. 226
PATTERNS - Ending a Grand Super Cycle Degree Long Wave .................................................................................... 229
PATTERNS - Divergences of Indices from Sectors ........................................................................................................ 232
PATTERNS - Seasonal US Macro Correlation ............................................................................................................... 233
PATTERNS - 10Y Inflation Breakeven Disconnected from Markets ............................................................................... 235
PATTERNS - A Historic Short Squeeze ......................................................................................................................... 236
PATTERNS - Consumer Discretionary Showing Real Strength ...................................................................................... 238

3 September 2013 Edition

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OUTLOOK - ANALYTICAL ANALYSIS ................................................................................................................................................... 239

STUDY: GOLD & SYRIAN CONFLICT ............................................................................................................................... 239
PRECIOUS METALS - Syrian War Factor on GOLD ...................................................................................................... 239
STUDY: Q3 EARNINGS ..................................................................................................................................................... 240
Q3 Earnings: Earnings: the Stock Market's Achilles Heel ............................................................................................... 240
Q3 Earnings: Buybacks Disguising Overvaluation .......................................................................................................... 243
STUDY: ASIAN CRISIS & BOND IMPACT ......................................................................................................................... 248
ASIAN CRISIS - EU Major Contributor to EM Current Account Deficit Growth ............................................................... 248
ASIAN CRISIS - BRICS Reserves of Insufficient Levels, Prompt Russian-Chinese Support .......................................... 249
ASIAN CRISIS - Global Bond Yields React Together to "Taper" .................................................................................... 251
STUDY: A MOTHER OF A MONTH.................................................................................................................................... 252
SEPTEMBER 2013 - A Mother of a Macro Month .......................................................................................................... 252
SEPTEMBER 2013 - A Mother Month ............................................................................................................................ 257
STUDY: BOND SCARE ...................................................................................................................................................... 261
BOND SCARE - Near Term Overhead Resistance Near ................................................................................................ 261
BOND SCARE - "Taper Talk" Gives Way to a "Taper Tantrum" .................................................................................... 262
BOND SCARE - The Bearish Bond Trend Has Resumed .............................................................................................. 265
BOND SCARE - Bonds (TLT) Break Important Support ................................................................................................. 267
BOND SCARE - Bond Vigilantes, Dead or Alive?........................................................................................................... 268
BOND SCARE - An Avalanche of Outflows .................................................................................................................... 269
BOND SCARE - Only An Intermediate Price Bottom. Recession Suggests 0.75% 10UST ............................................. 271
BOND SCARE - Nearing Support .................................................................................................................................. 274
BOND SCARE - "TAPER" Clearly A Bluff or Muddled Policy.......................................................................................... 276
BOND SCARE - Volatility and Increasing Instability ....................................................................................................... 278
BOND SCARE - A LONG Supply and Demand Problem BUT Heavy SHORT Demand ................................................. 279
BOND SCARE - Long Term Support Trendline Achieved............................................................................................... 281
BOND SCARE - Retail Investors Running for the Exit .................................................................................................... 282
BOND SCARE - Credit Cycle: HY Leading the Way....................................................................................................... 283
BOND SCARE - CREDIT CYCLE: Reversal Ahead ....................................................................................................... 286
BOND SCARE - Reactive Panic Mode to TAPER .......................................................................................................... 289
BOND SCARE - The Impact of "TAPER" on Emerging Markets ..................................................................................... 292
BOND SCARE - Buy in June After the Swoon................................................................................................................ 295
BOND SCARE - A Flight to Safety from An EM Liquidity Crisis? .................................................................................... 297
PREVIOUS MONTH - Reference ....................................................................................................................................... 300
STUDY: MARGIN CALL EXPOSURE ................................................................................................................................ 300
MARGIN - Deutsche Bank Hopes "Not All Margin Calls Come At Once In Case Of A Sell-Off" ...................................... 300
STUDY: SHIFTING SURPRISE INDICES ........................................................................................................................... 309
SURPRISE - Global Surprise Indices Sending Signals of Pending Shift ......................................................................... 309
STUDY: GLOBAL CORPORATE PROFIT EXPOSURES................................................................................................... 312
GLOBAL GROWTH - Fighting Triffin's Paradox ............................................................................................................. 312
STUDY: RETAIL INVESTORS ALL-IN............................................................................................................................ 314
ALL-IN - US Retail Investors 'Rotate' All-In .................................................................................................................... 314
STUDY: CREDIT EUPHORIA ............................................................................................................................................. 319
EUPHORIA - Warning lights are flashing in Americas Credit Markets ........................................................................... 319
STUDY: COLLATERAL TRANSFORMATION ................................................................................................................... 323
COLLATERAL TRANSFORMATION - Quality Collateral Supply Is Determining "TAPER" Schedule.............................. 323
STUDY: MARKET TOPPING SIGNS .................................................................................................................................. 326
TOPPING - Are We Re-Tracing A Market Peak? .......................................................................................................... 326
PRIOR MONTH - Reference .............................................................................................................................................. 330
STUDY: GOLD MARKET ................................................................................................................................................... 330
GOLD - JPM Vaults Now Empty .................................................................................................................................... 330
GOLD - German Repatriation A Destabilizing Trigger .................................................................................................... 332
GOLD - Something is Just Not Right? ............................................................................................................................ 336
GOLD - Prices Nearing a Practical Bottom of Production Costs of $1300/OZ and Cash Cost $1104 .............................. 337
GOLD - Bottom Still Not In ............................................................................................................................................. 338
GOLD - Margins Significantly Increased - Coincidence?? .............................................................................................. 340
GOLD - JPM's Gold Vault Needs Watching.................................................................................................................... 342
GOLD - Confiscation as Part of Financial Repression is Still A Possibility ...................................................................... 344
GOLD - Tentacles of Financial Repression .................................................................................................................... 347

4 September 2013 Edition

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GOLD - Government Intervention Begins In India .......................................................................................................... 348

GOLD - Demand Has Outstripped Gold Supply ............................................................................................................. 349
GOLD - China on Track to Import 150% of Entire Gold Holdings in a Single Year. ......................................................... 353
GOLD - Something SERIOUSLY Wrong at JP Morgan .................................................................................................. 354
GOLD - Stairway to HELL suggests $3500/Oz by 2016 ................................................................................................. 356
GOLD - BEWARE: Short Positions Being Re-Established! ............................................................................................. 357
GOLD - Gold/Silver Ratio ............................................................................................................................................... 358
GOLD - Chinese Bullion Imports .................................................................................................................................... 360
GOLD - JP Morgan's "Run on the "Vault" ....................................................................................................................... 363
GOLD - Settling Physical in Paper (Dollars) ................................................................................................................... 366
GOLD - Shaking the 400 oz Bars Out of GLD ................................................................................................................ 369
GOLD - Drivers To Watch .............................................................................................................................................. 371
GOLD - Supply / Demand .............................................................................................................................................. 372
GOLD - The Likely Story of the Gold Smash Minus the Conspiracy Angel ..................................................................... 373
GOLD - JPM's Dramatic Reduction in 'Eligible' Physical Gold ........................................................................................ 387
GOLD - April 2013 Sell-Off Retracement in Context ....................................................................................................... 390
GOLD - 2 Year Consolidation Pattern Ending ................................................................................................................ 393
GOLD - Japanese Interest Rate Volatility Correlation..................................................................................................... 397
GOLD - The Attack of the Fiat Currency Cartel .............................................................................................................. 398
GOLD - Gold-Dow Ratio - A Secular Trend .................................................................................................................... 399
STUDY: BETTER THAN CASINO HOUSE ODDS.............................................................................................................. 401
CASINO - Bank of America Traded Profitably on 60 out of 60 Days ............................................................................... 401
CASINO - JP Morgan Traded Profitably on 63 out of 63 Days........................................................................................ 402
STUDY: SECURITIES SUPPLY ......................................................................................................................................... 404
SUPPLY - Shortage of Investable Assets....................................................................................................................... 404
SHORT TERM TECHNICAL ANALYSIS .............................................................................................................................................. 406
SUPPORT & RESISTANCE ............................................................................................................................................... 406
Gann Analysis................................................................................................................................................................ 406
Boundary Conditions...................................................................................................................................................... 407
Channels & Regressions................................................................................................................................................ 409
Fibonacci - Controlling Time Extensions ........................................................................................................................ 411
Elliott Wave.................................................................................................................................................................... 413
SENTIMENT - Consumer, Investor & Trader .................................................................................................................... 415
Consumer Confidence - Conference Board .................................................................................................................... 415
Consumer Sentiment - Michigan .................................................................................................................................... 418
Consumer Comfort......................................................................................................................................................... 419
Investors Intelligence ..................................................................................................................................................... 420
American Association of Independent Investors ............................................................................................................. 420
National Association of Active Investment Managers (NAAIM) ....................................................................................... 421
Small Business Optimism .............................................................................................................................................. 422
Smart Money / Dumb Money Confidence ....................................................................................................................... 423
Percentage Stocks Above 50 & 200 DMA ...................................................................................................................... 424
Margin Levels ................................................................................................................................................................ 425
Mutual Fund Cash Levels v S&P 500 ............................................................................................................................. 428
OSCILLATORS & BREADTH: Indicators of Importance ................................................................................................. 430
NYSE Overbought / Oversold ........................................................................................................................................ 430
OEX Open Interest (Puts/Calls) ..................................................................................................................................... 431
TRIN .............................................................................................................................................................................. 432
McClellan Oscillator ....................................................................................................................................................... 433
STUDY: UNCERTAINTY & COMPLACENCY .................................................................................................................... 434
SENTIMENT: Small Business Is Going Nowhere ........................................................................................................... 434
SENTIMENT: Fed Financial Stress Index Indicates Complacency ................................................................................. 438
SENTIMENT: Consumer Confidence Misses Expectations By Most On Record............................................................. 439
SENTIMENT: Consumer Confidence Up but Sending Concern Signals ......................................................................... 440
SENTIMENT: Extreme Levels of Complacency.............................................................................................................. 442
SENTIMENT: False Belief In Central Bakers.................................................................................................................. 444
SENTIMENT: Much too High! Setting Ourselves up for A Shock .................................................................................... 446
SENTIMENT: Leverage Being Increased ....................................................................................................................... 447
SENTIMENT: EU Consumer Sentiment Telltales ........................................................................................................... 450
SENTIMENT: Mispricing Uncertainty ............................................................................................................................. 452
SENTIMENT: High Level of Complacency ..................................................................................................................... 453
SENTIMENT: Uncertainty Always Stops Business Investment ....................................................................................... 454
SENTIMENT: Consumer Confidence Plunges After Election as Fiscal Cliff Realization Faced. ...................................... 456
SENTIMENT: Abruptly Plummets: Post Election, Sandy and pending Fiscal Cliff ........................................................... 457
SENTIMENT: Uncertainty .............................................................................................................................................. 458

5 September 2013 Edition

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SENTIMENT: Market Not Prepared for Fiscal Cliff Disappointment! ............................................................................... 459
SENTIMENT: Fiscal Cliff Uncertainty Parallels With Debt Ceiling Negotiations (The "Holy Shit" Moment) ...................... 461
INTERMEDIATE TERM RISK ANALYSIS.......................................................................................................................................... 465
RISK SUMMARY- Aggregated Global Financial Risk Index ............................................................................................ 465
AGGREGATED GLOBAL FINANCIAL RISK INDEX .......................................................................................................... 465
BANKING RISK - LIBOR-OIS SPREAD (Updated) ........................................................................................................ 466
BANKING RISK - TED SPREAD (Updated) ................................................................................................................... 466
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated)................................................................................. 467
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ........................................................................................... 467
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ............................................................................... 468
ECONOMIC RISK - ECRI LEADING INDEX (Updated).................................................................................................. 469
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) .................................................................................. 470
INFLATION RISK - MONEY VELOCITY (Updated) ........................................................................................................ 471
MONETARY RISK - BANK LIABILITIES (Updated)........................................................................................................ 471
COST OF MONEY RISK - INTEREST RATES (Updated) ............................................................................................. 472
AGGREGATED RISK LEVEL ............................................................................................................................................. 472
Risk .................................................................................................................................................................................... 474
RISK: Signs of a 1987 Correction Abound ..................................................................................................................... 474
RISK: How the Fed could cause another 1987 crash ..................................................................................................... 476
RISK: Schwab Says Buckle Up ...................................................................................................................................... 478
RISK: The Market Outlook Has Taken A Turn For The Worse ....................................................................................... 483
RISK: Dodd Frank's TBTF Strategy A Failure ................................................................................................................ 484
RISK: 1970 Pattern Comparisons See 20-27% Correction in H2 .................................................................................... 486
RISK: The Bond Bubble the Next to Burst, A Panic into Stocks...................................................................................... 488
RISK: Collateral considerations are a joke and Loans are Disguised ............................................................................. 489
RISK: Citigroup Economic Surprise Index has moved below Zero.................................................................................. 491
RISK: Key Market Warning Signals Triggered ................................................................................................................ 492
RISK: Nearing End of Short Squeeze ............................................................................................................................ 493
RISK: Shift in Perceptions & Market Optimism Reflected at Davos ................................................................................ 495
RISK: Bonds Most Overbought in 55 Years ................................................................................................................... 496
RISK: A Final Parabolic Lift to 1550 to 1570 in the SPX before Major Capitulation ......................................................... 497
RISK: Brace For A Stock Market Accident ..................................................................................................................... 499
RISK: Excess Euphoria .................................................................................................................................................. 501
RISK: Money is ALL IN .................................................................................................................................................. 503
RISK: VIX - Cost of Risk Plummets ................................................................................................................................ 506
Cassandra's - New Additions to the List.......................................................................................................................... 508
Cassandra: Ron Paul Portfolio, 'Craziest' we've ever seen? ........................................................................................... 508
Cassandra: John Mauldin Goes Negative ...................................................................................................................... 509
Cassandra: Hayman Capital Dramatically Reduces Risk ............................................................................................... 516
Cassandra: Byron Wien Warns "Oblivious Markets" Of 20% Correction ......................................................................... 517
Cassandra: Harry Dent Warns Stocks to Sink More than 60% by End of 2014............................................................... 517
Cassandra: Stanley Druckenmiller: "When You Get This Kind Of Rigging, It Will End Badly" ......................................... 518
Cassandra: Mohamed El-Erian: "Prices Are Artificially High - Its Time to Take Profits".................................................. 519
Cassandra: Felix Zulauf: World Headed Toward 1987 Style Market Collapse ................................................................ 520
Cassandra: Doug Kass: 'I'm Getting The Summer Of 1987 Feeling' In The Market Right Now ....................................... 520
SECTOR: Canaries ............................................................................................................................................................ 522
SECTORS - EU > ALCOA > How the "Beat Estimates" Game is Played When Earnings are a Disaster ........................ 522
SECTORS - China > Nike > Impact On Nike .................................................................................................................. 525
SECTORS - Global > Banks & Financial > Net Unrealized Bond Gains / Losses ........................................................... 526
SECTORS - Global > Banks & Financial > Bank Losses ............................................................................................... 528
Q3: Canaries ...................................................................................................................................................................... 532
Q3 Canaries - 7 reasons for a September Crash ........................................................................................................... 532
Q2: Canaries ...................................................................................................................................................................... 536
Q2 Canaries - Liquidity and Devious Public Policy Can Overcome Common Sense for only so long! ............................. 536
Q2 Canaries The Downside Risk of Fed Losing Control is Terrifying ........................................................................ 538
Q2 Canaries Wal-Mart Same Store Sales Fall 1.4% ................................................................................................... 544
Q1: Canaries ...................................................................................................................................................................... 546
Q1 Canaries - The Equity 'Air-Pocket' And 5 Reasons To Worry .................................................................................... 546
Q1 Canaries - 12 Things That Just Happened That Show The Next Wave Of The Economic Collapse Is Almost Here .. 556
Q1 Canaries - A Mad Rush Could Be Coming In The Corporate Credit Markets ............................................................ 558
LONGER TERM - FUNDAMENTAL ANALYSIS....................................................................................................................................... 563

6 September 2013 Edition

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HIGHLIGHTS ...................................................................................................................................................................... 563

Valuation Summary........................................................................................................................................................ 563
Earnings > Margins > PE > Valuation............................................................................................................................ 566
Three Major Disappointments ........................................................................................................................................ 567
Three Evident Themes ................................................................................................................................................... 568
Peek Earnings & Peek PE ............................................................................................................................................. 570
Equity Valuation: The Surprising PE Ratio Regime You MUST Now Watch .................................................................. 571
What to Watch in Q1 ...................................................................................................................................................... 574
VALUATION: Alternative Methodologies ......................................................................................................................... 575
Four Set Consolidated Market Valuation Indicators: Overvaluation Relatively Unchanged ............................................. 575
Crestmont from the Arithmetic .................................................................................................................................... 577
Cyclical PE 10 Ratio .................................................................................................................................................. 579
Q Ratio ...................................................................................................................................................................... 583
S&P Composite Regression-to-the-Trend .................................................................................................................. 588
REFERENCE METHODOLOGIES ANALYSIS .............................................................................................................. 590
S&P Fair Value .............................................................................................................................................................. 599
Rule of 20 ...................................................................................................................................................................... 605
Cyclically Adjusted PE's (CAPE) are Richly Valued........................................................................................................ 606
Value Line Arithmetic ..................................................................................................................................................... 607
Shiller PE Ratio.............................................................................................................................................................. 607
Comments on Estimated Forward Operating Earnings ................................................................................................... 608
S&P Earnings Yield versus Bond Yields................................................................................................................... 609
VALUATION: Situational Assessment ............................................................................................................................. 610
Valuation: The Shiller CAPE Isnt the Only Metric Showing a Severely Overvalued Market. ....................................... 610
Valuation: Earnings & Profits Per Share Suggest Overvaluation .................................................................................... 612
Valuation: When Corporate Cash flow Slows& Goes Negative Bad Things Happen ....................................................... 614
Valuation: Risk is in the Drawdown ................................................................................................................................ 615
Valuation: Fundamentals Emerging as ERP is Changing ............................................................................................... 617
Valuation: Macro Trends in Wages and Profits............................................................................................................... 619
Valuation: PE Multiple Expansion Is Not Sustainable ..................................................................................................... 623
Valuation: Shiller PE of 24X Historically Signals An Approaching Top ............................................................................ 624
Valuation: Revenue Recession and Eroding Operating Profits ....................................................................................... 627
Valuation: CAPE currently stands at 23.6, higher than 90% of comparable readings since the 1870s. ........................... 629
Valuation: Market Expensive According to 5 Year Rolling Forward PE ........................................................................... 630
Valuation: Expanding PEs as there is a Perception of 'Few Options' Available to Investors ........................................... 631
Valuation: A Flow Driven Manufactured Market Versus Real Economy .......................................................................... 634
Valuation: The NY Feds Equity Risk Premium ............................................................................................................... 635
Valuation: Kotok's Decade Ending 2200-2500 SPX ....................................................................................................... 639
Valuation: A Long Term PE Adjustment Process ........................................................................................................... 641
Valuation: Hussman Earnings Excessive by Historical Norms ........................................................................................ 641
Valuation: When Rich Valuations Meet Poor Economic Data ......................................................................................... 643
Valuation: Earnings, Valuations, Dividends and Buybacks a Problem ............................................................................ 649
Valuation: Unencumbered DCF -- Free Cash Flow is KING! .......................................................................................... 652
Valuation: S&P 500 Between 40-70% above Pre-Bubble Valuation Norms .................................................................... 653
Valuation: Hope Priced In .............................................................................................................................................. 657
Valuation: Median NTM PE ............................................................................................................................................ 658
Valuation: Inflation Adjusted Earnings ............................................................................................................................ 659
Valuation: PE Expansion Possible, though Likely Temporary ......................................................................................... 660
Valuation: PE Compression In Process .......................................................................................................................... 662
Valuation: PE Ratio Election Year Trends ...................................................................................................................... 663
Valuation: The Shiller P/E .............................................................................................................................................. 664
Valuation: Foreign Profits Kept Untaxed Offshore .......................................................................................................... 667
Valuation: Downward Revisions Accelerating................................................................................................................. 668
Valuation: Forward Guidance Significantly Lower than Reported Strength ..................................................................... 671
Valuation: Equity Valuations: It's All Downhill From Here ............................................................................................... 673
Valuation: Earnings Continuing to Weaken without much Media Fanfare ....................................................................... 675
Valuation: A Different Earnings Season. ........................................................................................................................ 676
Valuation: Government Spending Driving Profits: Artificially High Margins .................................................................... 678
Valuation: Inflation Expectations - Markets Mistakenly Expecting Growth & Profit To Accompany It .............................. 679
Valuation: Major Warning Needs Heeding: FedEx......................................................................................................... 680
Valuation: What We Called for Is Beginning To Show .................................................................................................... 682
Valuation: Equities as a Matter of Belief ......................................................................................................................... 687
Valuation: The Charts Wall Street Doesn't Want You To See On Annual Returns .......................................................... 690
Valuation: Some Sobering Japanese Comparison Charts from Michael Darda at MKM Partners ................................... 695
Valuation: Are Corporate Profit Margins About To Grind Lower For Another 10 Years? ................................................. 698
Valuation: Corporations Have Captured 88% Of All Post-Recession Income Growth ..................................................... 699
Valuation: Think Stocks Are Cheap? Here's 7 Reasons Why That's A Myth ................................................................... 700

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PE CONTRACTION - Situational Assessment ................................................................................................................. 701

We Have Been Warning, Now Here it is ................................................................................................................. 701
PE Ratio: Rising PE Multiples, Not Better Earnings, Are What's Driving The Stock Market ............................................ 704
PE Ratio: Expansion, Then Contraction ......................................................................................................................... 705
PE Ratio: Multiples Grow at Fastest Pace Since Dot-Com Bubble ................................................................................. 706
PE Ratio: CAPE currently stands at 23.6, higher than 90% of comparable readings since the 1870s. ............................ 708
PE Ratio: PE's In Perspective ........................................................................................................................................ 710
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 711
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 714
PE Ratio: PE's Are At Historically Elevated Levels ......................................................................................................... 716
PE Ratio: Signs of Peek PE ........................................................................................................................................... 717
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 718
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 721
PE Ratio: Have Significant More Room To Compress .................................................................................................... 722
PE Ratio: Over Next Year Trailing PE to be Below Generational Norm. ......................................................................... 724
MARGIN COMPRESSION - Situational Assessment ....................................................................................................... 727
Compression: Cost Push now Creating Margin Compression! ....................................................................................... 727
Compression: Corporate Earnings - Signals of Margin Compression ............................................................................. 731
Compression: Expect Further PE Compression: Margin Squeeze ................................................................................. 736
Compression: Shifting Secular Sands - Emerging Impediments to Global Earnings Growth Rates................................. 738
Compression: Corporate Margins - 2013 Margin Expectations Not Credible .................................................................. 739
Compression: Profits Have Stalled. Has the Market? ..................................................................................................... 740
MARGIN & CREDIT ............................................................................................................................................................ 742
MARGIN DEBT - Rolling Over & Suggesting a Significant Correction Ahead ................................................................. 742
ROTATION-CREDIT CONTRACTION II ............................................................................................................................. 745
Credit Contraction - Bank Reserves A Ticking Bomb, But Who Will Be Caught in the Blast?.......................................... 745
Credit Contraction - Traders Reacting to the 1994 Pattern ............................................................................................. 748
Credit Contraction - Global Growth Clearly Slowing and near Contraction Without BRICS ............................................. 750
Credit Contraction - Fundamentals Emerging as ERP is Changing ................................................................................ 751
Credit Contraction - Falling Real Disposable Income means Falling Consumption ......................................................... 753
Credit Contraction - A Credit Squeeze Leads to a Deflationary Leg Down .................................................................... 755
Credit Contraction - Stunning Withdrawals from Emerging Markets ............................................................................... 756
Credit Contraction - Private Equity are Major Sellers of All Assets ................................................................................. 758
Credit Contraction - Asset Trends versus Bubbles ......................................................................................................... 760
EQUITY RISK PREMIUM.................................................................................................................................................... 762
Equity Risk Premium: Yields Improved, Especially Against Stock Yields ........................................................................ 762
Equity Risk Premium: The Incentive for the Anticipated "Great Rotation" ....................................................................... 763
BUYBACKS ........................................................................................................................................................................ 766
Buybacks: Going nowhere if it wasnt For BUYBACKS from Cheap Debt ....................................................................... 766
Buybacks: Buyback Achievers Index at 2007 Top .......................................................................................................... 768
INSUFFICENT WEALTH CREATION MEANS SHRINKING EQUITY GROWTH ................................................................ 769
Wealth - Debt Saturation Means there is Simply Insufficient Wealth Creation within Developed Nations ........................ 769
Wealth - The "TAPER" Scare before the 'OPMF' Storm ................................................................................................ 773
Wealth - Cash Flow and CAPEX .................................................................................................................................... 776
Wealth - Removing the Manipulation to See Real Enterprise Value Metrics ................................................................... 777
EARNINGS - Situational Assessment .............................................................................................................................. 779
Q3 Earnings - Conference Calls to Bring Down Q4 "Hockey stick" Significantly ......................................................... 779
Q3 Earnings: Earnings: the Stock Market's Achilles Heel ............................................................................................... 779
Q3 Earnings: Buybacks Disguising Overvaluation .......................................................................................................... 782
Q2 Earnings - Estimate Reductions Accelerating ........................................................................................................... 787
Q2 Earnings: As Goes Wal-Mart; So Goes America...? .................................................................................................. 787
Q2 Earnings: Investors Still Distracted ........................................................................................................................... 788
Q2 Earnings: Financial Loan Loss Reserve Reversals Hiding a Disaster ....................................................................... 789
Q2 Earnings: EU Earnings Disappointments Match US.................................................................................................. 791
Q2 Earnings: Revenues Flat with Rising Earnings?? ..................................................................................................... 792
Q2 Earnings: Q2 EPS Estimates .................................................................................................................................... 793
Q2 Earnings: Negative Guidance Worst Since Early 2012 ............................................................................................. 795
Q2 Earnings: Signs of Serious Troubles in Consumption ............................................................................................... 795
Q2 Earnings: Concerns Abound With Non-US Earnings ................................................................................................ 797
Q2 Earnings: Negative Pre-Announcements Currently At Record Levels ....................................................................... 799
Q2 Earnings: Tax Incentives Inflating Earnings .............................................................................................................. 801
Q2 Earnings: Estimates Becoming Very Suspect ........................................................................................................... 804
Q2 Earnings: Fund Managers forced to Chase Yield...................................................................................................... 806

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Q2 Earnings: Estimates Simply Not Believable .............................................................................................................. 808

Q2 Earnings: Financialization & Financial Profit Levels .................................................................................................. 809
Q2 Earnings: PE Expansion Hides Risk and is itself Unjustified ..................................................................................... 810
Q2 Earnings: Goldman Goes Uber-hyper-Bullish ........................................................................................................... 811
Q1 Earnings - Outlooks Being Brought Down ................................................................................................................. 813
Q1 Earnings: 2013 Top-Down & Bottom-Up................................................................................................................... 813
Q1 Earnings: 2013 Earnings To Be Less Than 2009 Earnings Projected To Be In 2007 ................................................ 816
Q1 Earnings: Classic Hockey stick of False Expectations .............................................................................................. 818
Q1 Earnings: Bearish Corporate Guidance Threatens Q1 Profit Growth Estimates ........................................................ 821
Q1 Earnings: Retailers Report Solid Q4 Profits, But Q1 Outlook Dims Still Further ........................................................ 823
Q1 Earnings: Analysts Apparently Surprised? ................................................................................................................ 825
Q1 Earnings: Wage & Profit Disparity - Peak Profits, Trough Wages ............................................................................. 827
Q1 Earnings: Resting In a Few Tired Hands .................................................................................................................. 828
Q1 Earnings: Overstated Due to the Magnitude of One Time Write-Offs ........................................................................ 832
Q1 Earnings: 10 Tired Generals Carrying the Market ..................................................................................................... 834
Q1 Earnings: Interest Rates Determined by Future Inflation & Growth ........................................................................... 835
Q1 Earnings: Only 30% of firms Beat Revenue Estimates. 65% Beat Earnings ............................................................. 837
Q1 Earnings: Global Market Comparisons ..................................................................................................................... 838

S&P 500 TARGETS ..................................................................................... 839

CONCLUSIONS ........................................................................................... 840
I- GORD'S VIEWS & OPINIONS ......................................................................................................................................... 840
We are Within 10 months of a Multi Decade Top and Market Reversal .......................................................................... 840
Some Things In the Near Term Are Eerily Familiar ........................................................................................................ 840
Some Things Are Also Just Unsustainable..................................................................................................................... 841
A Reminder: We Still Are Operating Within a 6 Hindenburg Omen Historic Cluster ........................................................ 841
Markets Have Disconnected from All Basic Fundamental Measures .............................................................................. 842
Margin Debt is at a Peak (Again) ................................................................................................................................... 843
Earnings are Falling With a Q4 "Hockey Stick" To Come ............................................................................................... 843
Most Sentiment Indicators Are Rolling Over Again (History Tells Us to be aware of this) ............................................... 843
CRACK-UP BOOM After the Near Term Consolidation We Still Expect new Highs ....................................................... 844
I- TARGETS........................................................................................................................................................................ 845
II- MONTHLY ASSESSMENT ............................................................................................................................................. 846
A - LONG TERM: Fundamentals .................................................................................................................................... 846
B - INTERMEDIATE TERM: Risk ................................................................................................................................... 848
C - SHORT TERM: Sentiment........................................................................................................................................ 848
III - BIG PICTURE ............................................................................................................................................................... 850
IV - DEFINING CHARTS ..................................................................................................................................................... 851
Defining Chart #1 - "Delusional Distortion" Expectations ................................................................................................ 851
Defining Chart #2 - Finding the Long Term Pivot ............................................................................................................ 853
Defining Chart #3 - Intermediate Term Top .................................................................................................................... 856
Defining Chart #4 - Short Term Volatility ........................................................................................................................ 858
V- KEY ANALYTICS ........................................................................................................................................................... 860
DRIVERS....................................................................................................................................................................... 860
RISK .............................................................................................................................................................................. 860
PATTERNS ................................................................................................................................................................... 862
VI - STUDIES ...................................................................................................................................................................... 862
STUDY: Global Profit Growth Squeeze and Triffin's Paradox ......................................................................................... 862
STUDY: Shifting Global Surprise Indices ....................................................................................................................... 863
STUDY: Margin Credit ................................................................................................................................................... 863
STUDY: Bond Scare ...................................................................................................................................................... 864
STUDY: Buybacks ......................................................................................................................................................... 864
STUDY: Equity Premiums .............................................................................................................................................. 865

9 September 2013 Edition

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10 September 2013 Edition

Copyright 2013 Gordon T. Long All Rights Reserved

Restricted & Confidential

general@GordonTLong.com