Monthly Market Analytics & Technical Analysis: Indexed Research Data Base

Monthly Market Analytics & Technical Analysis
OCTOBER 2013 Edition
INDEXED RESEARCH DATA BASE
Gordon T Long
10/16/2013
1 October 2013 Edition

Copyright 2013 Gordon T. Long All Rights Reserved
Restricted & Confidential

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Monthly Market Analytics & Technical Analysis

OCTOBER 2013
SUBSCRIPTION SERVICE: PLAN IV
HIGHLIGHTS - WHAT YOU NEED TO KNOW ..........................................................................................................................................11
SUMMARY ANALYSIS ......................................................................................................................................................... 11
Valuation Summary.......................................................................................................................................................... 14
Fed Panics> "QE Unlimited" - ECB Panics> "OMT" Unlimited - Japan /UK Panic> ...................................................... 16
Defining Chart #1 - "Delusional Distortion" Expectations .................................................................................................. 16
Defining Chart #2 - Finding the Long Term Pivot .............................................................................................................. 17
Defining Chart #3 - Intermediate Term Top ...................................................................................................................... 20
Defining Chart #4 - Short Term Volatility .......................................................................................................................... 22
OUR APPROACH - MACRO ANALYTICS ...............................................................................................................................................25
............................................................................................................................................................... 26
OCTOBER 2013: Global Macro Drivers .............................................................................................................................. 27
DRIVER: Real Wealth, Commodities & Dr Cooper ........................................................................................................... 29
DRIVER: Carry Trade & the : Cross ........................................................................................................................... 33
DRIVER: Currency & Forex Markets ................................................................................................................................ 42
DRIVER: Yield, Spread & Credit ...................................................................................................................................... 46
DRIVER: Global Equities ................................................................................................................................................. 47
DRIVER-TRIGGER TABLE.............................................................................................................................................. 48
DRIVER$ - The Carry Trade Driver$ ................................................................................................................................ 70
RESEARCH OF INTEREST ............................................................................................................................................ 72
DRIVER$ - Understanding the Current Macro Driver$ - US Debt Default Scare ............................................................... 72
DRIVER$ - Understanding the Current Macro Driver$ - US Debt Default Scare ............................................................... 76
DRIVER$ - Drivers & Triggers.......................................................................................................................................... 78
DOLLAR-YEN CROSS - Consolidation May Be Completing ............................................................................................ 81
EMERGING DRIVER$ - US$ Short Term Shortages ....................................................................................................... 82
EMERGING DRIVER$ - Earnings Disconnected From Steepening Treasury Term Structure........................................... 83
EMERGING DRIVER$ - Emerging Market Bond Outflows Accelerating ........................................................................... 85
RISK: Risk-On versus Risk-Off........................................................................................................................................... 87
RISK Shutdown Stirs Investor Anxiety........................................................................................................................... 87
RISK Confusion Reigns ................................................................................................................................................ 88
RISK Consider the VIX Inversion .................................................................................................................................. 89
RISK US Treasury Default Risk Hits 2011 Highs ........................................................................................................... 90
RISK A Collateral Crunch in the Repo Market the Short Term Exposure ....................................................................... 91
RISK Economic Confidence Collapses At Fastest Pace since Lehman ......................................................................... 93
RISK This Secular Bear Has Only Just Begun .............................................................................................................. 95
RISK Three Rising Risks To The Markets ..................................................................................................................... 99
RISK Treasury Warns Current "Herding" Threatens US Financial System .................................................................. 103
RISK Markets Sending Strong Signals ........................................................................................................................ 103
PREVIOUS MONTH - Reference ................................................................................................................................... 108
RISK: Margin ................................................................................................................................................................. 108
RISK: Volatility Patterns in the VIX ................................................................................................................................ 109
RISK: Credit & Volatility ................................................................................................................................................. 113
RISK: Potential Head & Shoulders Pattern Appearing .................................................................................................... 116
RISK: The Unwelcome Return of Risk-on, Risk-off......................................................................................................... 117
RISK: The Taper Risk Is In Stocks Not Bonds................................................................................................................ 118
RISK: Stock Bear Looms ............................................................................................................................................... 120
RISK: U.S. Stock ETFs Record Biggest Withdrawals Since 2010 .................................................................................. 125
RISK: Gauging the Weakness........................................................................................................................................ 126
PRIOR MONTH - Reference .......................................................................................................................................... 129
RISK - Biggest Hindenburg Omen Cluster On Record ................................................................................................... 129
RISK - Positive Global Surprise Indices Topping In Developed Economies .................................................................... 131
RISK - September Events Cluster .................................................................................................................................. 134
RISK - A Confluence Of Risky Economic Events ........................................................................................................... 135


RISK - A New Form of 1987 Portfolio Insurance and Dynamic Hedging ......................................................................... 136
RISK - Investors Never Listen NOR Learn ..................................................................................................................... 139
RISK - Money Going to Cash But Equity Inflows Still Suggest Corrective Correlation .................................................... 140
RISK - "Blue-Sky" Index Is Flashing Red ....................................................................................................................... 144
RISK - US Recession an Increasing Possibility .............................................................................................................. 145
RISK - Confidence in Monetary Policy Direction is Exposed .......................................................................................... 146
TECHNO-FUNDAMENTALS .............................................................................................................................................. 148
PATTERNS - A Mad Rush into European Stocks ........................................................................................................... 148
PATTERNS - The Carry Trade Driver$ .......................................................................................................................... 150
PATTERNS - Post Government Shutdown Resolutions ................................................................................................. 152
PATTERNS - Bearish Divergences ................................................................................................................................ 153
PATTERNS - US$, EURJPY, Currency Debasement .................................................................................................... 157
PATTERNS - How Long Can this Divergence Be Maintained?....................................................................................... 160
PATTERNS - Watching the AUDJPY as a Market Driver$ ............................................................................................. 160
PATTERNS - October 8th Bradley Turn Date & Phi Cluster ........................................................................................... 163
PATTERNS - VIX surged by its most in over 3 months above 19%. ............................................................................... 166
PATTERNS - Debt Divergence Has Preceded Equity Market Peaks .............................................................................. 169
PATTERNS - Speculation: The Bloomberg IPO Index Indicator ..................................................................................... 171
PATTERNS - Margin debt is up 100 times in the last 39 years ....................................................................................... 173
PATTERNS - Spotting Potential TRIGGER$ .................................................................................................................. 174
PATTERNS - Cognitive Dissonance .............................................................................................................................. 175
PATTERNS - Derivatives & Hedging: Markets being Manipulated through the VIX ........................................................ 176
PREVIOUS MONTH - Reference ................................................................................................................................... 179
PATTERNS - Major Long Term Overhead Resistance ................................................................................................... 179
PATTERNS - SPX Being Driven By 3 Trading Factors ................................................................................................... 180
PATTERNS - US Equity Funds Post Largest Weekly Outflow Since November 2011 .................................................... 186
PATTERNS - 1987 Yields .............................................................................................................................................. 187
PATTERNS - Surprise Index Says Its Normally Time For Central Bank Intervention ...................................................... 188
PATTERNS - A Gap That Must Be Soon Filled .............................................................................................................. 189
PRIOR MONTH - Reference .......................................................................................................................................... 190
PATTERNS - US Treasury Finally Admits The Truth: It's All POMO ............................................................................... 190
PATTERNS - Even Retail Investors Don't Believe this Rally .......................................................................................... 193
PATTERNS - 7 Charts Of The Market's Complete Divorce From Reality ....................................................................... 194
PATTERNS - EU Worries Will Soon Emerge After the Election in Germany is Finalized ................................................ 200
PATTERNS - Equity Fund Flows ................................................................................................................................... 202
OUTLOOK - ANALYTICAL ANALYSIS ................................................................................................................................................... 203
STUDY: LEVERAGE & MARGIN SPECULATION ............................................................................................................. 203
LEVERAGE Near Perfect Correlation of NYSE Margin Debt to the S&P 500 .............................................................. 203
LEVERAGE Market Mirrors Changes in Margin Requirements ................................................................................... 204
LEVERAGE Margin Debt Divergence Precedes Equity Market Peaks......................................................................... 206
LEVERAGE The Bloomberg IPO Index Indicator (Degree of Speculation) .................................................................. 209
STUDY: SECULAR BEAR MARKET.................................................................................................................................. 211
BEAR MARKET This Secular Bear Has Only Just Begun ........................................................................................... 211
BEAR MARKET When Easy Money Ends ................................................................................................................... 215
STUDY: BOND ROTATION ................................................................................................................................................ 217
BOND ROTATION Bond Momentum Chart Reverses ................................................................................................. 217
BOND ROTATION The Global Economy may have to get used to Financially Repression.......................................... 219
STUDY: Q3 EARNINGS ..................................................................................................................................................... 223
EARNINGS - Consensus Continues Down Trend .......................................................................................................... 223
EARNINGS - Still Believe in the Q4 Earnings Hockey Stick Forecast? ........................................................................... 224
EARNINGS - Q3 Earnings Warnings Second-Worst Since 2001.................................................................................... 226
STUDY: Q3 VALUATIONS ................................................................................................................................................. 228
VALUATIONS - Fewer Listings Relative to the Increase In Liquidity & Margin Growth ................................................... 228
VALUATIONS - Is the Multiple-Expansion "Dream" Over? ............................................................................................. 230
VALUATIONS - Sentiment to Reverse PE Expansion .................................................................................................... 236
VALUATIONS - US Equity Market Are the Most Expensive In The World ...................................................................... 240
VALUATIONS - Margin debt is up 100 times in the last 39 years ................................................................................... 242
VALUATIONS - Largest 2 Year Multiple Expansion since Late 90's ............................................................................... 243
STUDY: DIVIDENDS & BUYBACKS .................................................................................................................................. 245
DIVIDENDS - Continuing Shift from Capex To Dividends ............................................................................................... 245
BUYBACKS - Going nowhere if it wasnt For BUYBACKS from Cheap Debt .................................................................. 249
BUYBACKS - Buyback Achievers Index at 2007 Top ..................................................................................................... 252


STUDY: Q3 GOLD.............................................................................................................................................................. 253

GOLD - Bottom Still Likely Not In - A Little More in Price and Time ................................................................................ 253
GOLD - Level Of Currency Debasement ........................................................................................................................ 254
GOLD - Winners in Q3 ................................................................................................................................................... 257
PREVIOUS MONTH - Reference ....................................................................................................................................... 258
STUDY: GOLD & SYRIAN CONFLICT ............................................................................................................................... 258
PRECIOUS METALS - Syrian War Factor on GOLD ...................................................................................................... 258
STUDY: Q3 EARNINGS ..................................................................................................................................................... 259
Q3 Earnings: Earnings: the Stock Market's Achilles Heel ............................................................................................... 259
Q3 Earnings: Buybacks Disguising Overvaluation .......................................................................................................... 262
STUDY: ASIAN CRISIS & BOND IMPACT ......................................................................................................................... 267
ASIAN CRISIS - EU Major Contributor to EM Current Account Deficit Growth ............................................................... 267
ASIAN CRISIS - BRICS Reserves of Insufficient Levels, Prompt Russian-Chinese Support .......................................... 268
ASIAN CRISIS - Global Bond Yields React Together to "Taper" .................................................................................... 270
STUDY: A MOTHER OF A MONTH.................................................................................................................................... 271
SEPTEMBER 2013 - A Mother of a Macro Month .......................................................................................................... 271
SEPTEMBER 2013 - A Mother Month ............................................................................................................................ 276
STUDY: BOND SCARE ...................................................................................................................................................... 280
BOND SCARE - Near Term Overhead Resistance Near ................................................................................................ 280
BOND SCARE - "Taper Talk" Gives Way to a "Taper Tantrum" .................................................................................... 281
BOND SCARE - The Bearish Bond Trend Has Resumed .............................................................................................. 284
BOND SCARE - Bonds (TLT) Break Important Support ................................................................................................. 286
BOND SCARE - Bond Vigilantes, Dead or Alive?........................................................................................................... 287
BOND SCARE - An Avalanche of Outflows .................................................................................................................... 288
BOND SCARE - Only An Intermediate Price Bottom. Recession Suggests 0.75% 10UST ............................................. 290
BOND SCARE - Nearing Support .................................................................................................................................. 293
BOND SCARE - "TAPER" Clearly A Bluff or Muddled Policy.......................................................................................... 295
BOND SCARE - Volatility and Increasing Instability ....................................................................................................... 297
BOND SCARE - A LONG Supply and Demand Problem BUT Heavy SHORT Demand ................................................. 298
BOND SCARE - Long Term Support Trendline Achieved............................................................................................... 300
BOND SCARE - Retail Investors Running for the Exit .................................................................................................... 301
BOND SCARE - Credit Cycle: HY Leading the Way....................................................................................................... 302
BOND SCARE - CREDIT CYCLE: Reversal Ahead ....................................................................................................... 305
BOND SCARE - Reactive Panic Mode to TAPER .......................................................................................................... 308
BOND SCARE - The Impact of "TAPER" on Emerging Markets ..................................................................................... 311
BOND SCARE - Buy in June After the Swoon................................................................................................................ 314
BOND SCARE - A Flight to Safety from An EM Liquidity Crisis? .................................................................................... 316
PRIOR MONTH - Reference .............................................................................................................................................. 319
STUDY: MARGIN CALL EXPOSURE ................................................................................................................................ 319
MARGIN - Deutsche Bank Hopes "Not All Margin Calls Come At Once In Case Of A Sell-Off" ...................................... 319
STUDY: SHIFTING SURPRISE INDICES ........................................................................................................................... 328
SURPRISE - Global Surprise Indices Sending Signals of Pending Shift ......................................................................... 328
STUDY: GLOBAL CORPORATE PROFIT EXPOSURES................................................................................................... 331
GLOBAL GROWTH - Fighting Triffin's Paradox ............................................................................................................. 331
STUDY: RETAIL INVESTORS ALL-IN............................................................................................................................ 333
ALL-IN - US Retail Investors 'Rotate' All-In .................................................................................................................... 333
STUDY: CREDIT EUPHORIA ............................................................................................................................................. 338
EUPHORIA - Warning lights are flashing in Americas Credit Markets ........................................................................... 338
STUDY: COLLATERAL TRANSFORMATION ................................................................................................................... 342
COLLATERAL TRANSFORMATION - Quality Collateral Supply Is Determining "TAPER" Schedule.............................. 342
STUDY: MARKET TOPPING SIGNS .................................................................................................................................. 345
TOPPING - Are We Re-Tracing A Market Peak? .......................................................................................................... 345
SHORT TERM TECHNICAL ANALYSIS .............................................................................................................................................. 349
SUPPORT & RESISTANCE ............................................................................................................................................... 349
Gann Analysis................................................................................................................................................................ 349
Boundary Conditions...................................................................................................................................................... 350
Channels & Regressions................................................................................................................................................ 352
Fibonacci - Controlling Time Extensions ........................................................................................................................ 354
Elliott Wave.................................................................................................................................................................... 356


SENTIMENT - Consumer, Investor & Trader .................................................................................................................... 360

Consumer Confidence - Conference Board .................................................................................................................... 360
Consumer Sentiment - Michigan .................................................................................................................................... 363
Consumer Comfort......................................................................................................................................................... 364
Investors Intelligence ..................................................................................................................................................... 365
American Association of Independent Investors ............................................................................................................. 365
National Association of Active Investment Managers (NAAIM) ....................................................................................... 366
Small Business Optimism .............................................................................................................................................. 367
Smart Money / Dumb Money Confidence ....................................................................................................................... 368
Percentage Stocks Above 50 & 200 DMA ...................................................................................................................... 369
Margin Levels ................................................................................................................................................................ 370
Mutual Fund Cash Levels v S&P 500 ............................................................................................................................. 373
OSCILLATORS & BREADTH: Indicators of Importance ................................................................................................. 375
NYSE Overbought / Oversold ........................................................................................................................................ 375
OEX Open Interest (Puts/Calls) ..................................................................................................................................... 376
TRIN .............................................................................................................................................................................. 377
McClellan Oscillator ....................................................................................................................................................... 378
STUDY: UNCERTAINTY & COMPLACENCY .................................................................................................................... 379
SENTIMENT: Small Business Is Going Nowhere ........................................................................................................... 379
SENTIMENT: Fed Financial Stress Index Indicates Complacency ................................................................................. 383
SENTIMENT: Consumer Confidence Misses Expectations By Most On Record............................................................. 384
SENTIMENT: Consumer Confidence Up but Sending Concern Signals ......................................................................... 385
SENTIMENT: Extreme Levels of Complacency.............................................................................................................. 387
SENTIMENT: False Belief In Central Bakers.................................................................................................................. 389
SENTIMENT: Much too High! Setting Ourselves up for A Shock .................................................................................... 391
SENTIMENT: Leverage Being Increased ....................................................................................................................... 392
SENTIMENT: EU Consumer Sentiment Telltales ........................................................................................................... 395
SENTIMENT: Mispricing Uncertainty ............................................................................................................................. 397
SENTIMENT: High Level of Complacency ..................................................................................................................... 398
SENTIMENT: Uncertainty Always Stops Business Investment ....................................................................................... 399
SENTIMENT: Consumer Confidence Plunges After Election as Fiscal Cliff Realization Faced....................................... 401
SENTIMENT: Abruptly Plummets: Post Election, Sandy and pending Fiscal Cliff ........................................................... 402
SENTIMENT: Uncertainty .............................................................................................................................................. 403
SENTIMENT: Market Not Prepared for Fiscal Cliff Disappointment! ............................................................................... 404
SENTIMENT: Fiscal Cliff Uncertainty Parallels With Debt Ceiling Negotiations (The "Holy Shit" Moment)...................... 406
INTERMEDIATE TERM RISK ANALYSIS.......................................................................................................................................... 410
RISK SUMMARY- Aggregated Global Financial Risk Index ............................................................................................ 410
AGGREGATED GLOBAL FINANCIAL RISK INDEX .......................................................................................................... 410
BANKING RISK - LIBOR-OIS SPREAD (Updated) ........................................................................................................ 411
BANKING RISK - TED SPREAD (Updated) ................................................................................................................... 411
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated)................................................................................. 412
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ........................................................................................... 412
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ............................................................................... 413
ECONOMIC RISK - ECRI LEADING INDEX (Updated).................................................................................................. 414
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) .................................................................................. 415
INFLATION RISK - MONEY VELOCITY (Updated) ........................................................................................................ 416
MONETARY RISK - BANK LIABILITIES (Updated)........................................................................................................ 416
COST OF MONEY RISK - INTEREST RATES (Updated) ............................................................................................. 417
AGGREGATED RISK LEVEL ............................................................................................................................................. 417
Risk .................................................................................................................................................................................... 419
RISK: Signs of a 1987 Correction Abound ..................................................................................................................... 419
RISK: How the Fed could cause another 1987 crash ..................................................................................................... 421
RISK: Schwab Says Buckle Up ...................................................................................................................................... 423
RISK: The Market Outlook Has Taken A Turn For The Worse ....................................................................................... 428
RISK: Dodd Frank's TBTF Strategy A Failure ................................................................................................................ 429
RISK: 1970 Pattern Comparisons See 20-27% Correction in H2 .................................................................................... 431
RISK: The Bond Bubble the Next to Burst, A Panic into Stocks...................................................................................... 433
RISK: Collateral considerations are a joke and Loans are Disguised ............................................................................. 434
RISK: Citigroup Economic Surprise Index has moved below Zero.................................................................................. 436
RISK: Key Market Warning Signals Triggered ................................................................................................................ 437
RISK: Nearing End of Short Squeeze ............................................................................................................................ 438
RISK: Shift in Perceptions & Market Optimism Reflected at Davos ................................................................................ 440
RISK: Bonds Most Overbought in 55 Years ................................................................................................................... 441
RISK: A Final Parabolic Lift to 1550 to 1570 in the SPX before Major Capitulation ......................................................... 442
RISK: Brace For A Stock Market Accident ..................................................................................................................... 444


RISK: Excess Euphoria .................................................................................................................................................. 446

RISK: Money is ALL IN .................................................................................................................................................. 448
RISK: VIX - Cost of Risk Plummets ................................................................................................................................ 451
Cassandra's - New Additions to the List.......................................................................................................................... 453
Cassandra: Ron Paul Portfolio, 'Craziest' we've ever seen? ........................................................................................... 453
Cassandra: John Mauldin Goes Negative ...................................................................................................................... 454
Cassandra: Hayman Capital Dramatically Reduces Risk ............................................................................................... 461
Cassandra: Byron Wien Warns "Oblivious Markets" Of 20% Correction ......................................................................... 462
Cassandra: Harry Dent Warns Stocks to Sink More than 60% by End of 2014............................................................... 462
Cassandra: Stanley Druckenmiller: "When You Get This Kind Of Rigging, It Will End Badly" ......................................... 463
Cassandra: Mohamed El-Erian: "Prices Are Artificially High - Its Time to Take Profits".................................................. 464
Cassandra: Felix Zulauf: World Headed Toward 1987 Style Market Collapse ................................................................ 465
Cassandra: Doug Kass: 'I'm Getting The Summer Of 1987 Feeling' In The Market Right Now ....................................... 465
SECTOR: Canaries ............................................................................................................................................................ 467
SECTORS - EU > ALCOA > How the "Beat Estimates" Game is Played When Earnings are a Disaster ........................ 467
SECTORS - China > Nike > Impact On Nike .................................................................................................................. 470
SECTORS - Global > Banks & Financial > Net Unrealized Bond Gains / Losses ........................................................... 471
SECTORS - Global > Banks & Financial > Bank Losses ............................................................................................... 473
Q3: Canaries ...................................................................................................................................................................... 477
Q3 Canaries - 7 reasons for a September Crash ........................................................................................................... 477
Q2: Canaries ...................................................................................................................................................................... 481
Q2 Canaries - Liquidity and Devious Public Policy Can Overcome Common Sense for only so long! ............................. 481
Q2 Canaries The Downside Risk of Fed Losing Control is Terrifying ........................................................................ 483
Q2 Canaries Wal-Mart Same Store Sales Fall 1.4% ................................................................................................... 489
Q1: Canaries ...................................................................................................................................................................... 491
Q1 Canaries - The Equity 'Air-Pocket' And 5 Reasons To Worry .................................................................................... 491
Q1 Canaries - 12 Things That Just Happened That Show The Next Wave Of The Economic Collapse Is Almost Here .. 501
Q1 Canaries - A Mad Rush Could Be Coming In The Corporate Credit Markets ............................................................ 503
LONGER TERM - FUNDAMENTAL ANALYSIS....................................................................................................................................... 508
HIGHLIGHTS ...................................................................................................................................................................... 508
Valuation Summary........................................................................................................................................................ 508
Earnings > Margins > PE > Valuation............................................................................................................................ 511
Three Major Disappointments ........................................................................................................................................ 512
Three Evident Themes ................................................................................................................................................... 513
Peek Earnings & Peek PE ............................................................................................................................................. 515
Equity Valuation: The Surprising PE Ratio Regime You MUST Now Watch .................................................................. 516
What to Watch in Q1 ...................................................................................................................................................... 519
VALUATION: Alternative Methodologies ......................................................................................................................... 520
Four Set Consolidated Market Valuation Indicators: Overvaluation Relatively Unchanged ............................................. 520
Crestmont from the Arithmetic ..................................................................................................................................... 522
Cyclical PE 10 Ratio ................................................................................................................................................... 524
Q Ratio ....................................................................................................................................................................... 528
S&P Composite Regression-to-the-Trend ................................................................................................................... 533
REFERENCE METHODOLOGIES ANALYSIS .............................................................................................................. 535
S&P Fair Value .............................................................................................................................................................. 544
Rule of 20 ...................................................................................................................................................................... 550
Cyclically Adjusted PE's (CAPE) are Richly Valued........................................................................................................ 551
Value Line Arithmetic ..................................................................................................................................................... 552
Shiller PE Ratio.............................................................................................................................................................. 552
Comments on Estimated Forward Operating Earnings ................................................................................................... 553
S&P Earnings Yield versus Bond Yields................................................................................................................... 554
VALUATION: Situational Assessment ............................................................................................................................. 555
Valuation: The Shiller CAPE Isnt the Only Metric Showing a Severely Overvalued Market. ....................................... 555
Valuation: Earnings & Profits Per Share Suggest Overvaluation .................................................................................... 557
Valuation: When Corporate Cash flow Slows& Goes Negative Bad Things Happen ....................................................... 559
Valuation: Risk is in the Drawdown ................................................................................................................................ 560
Valuation: Fundamentals Emerging as ERP is Changing ............................................................................................... 562
Valuation: Macro Trends in Wages and Profits............................................................................................................... 564
Valuation: PE Multiple Expansion Is Not Sustainable ..................................................................................................... 568
Valuation: Shiller PE of 24X Historically Signals An Approaching Top ............................................................................ 569
Valuation: Revenue Recession and Eroding Operating Profits ....................................................................................... 572
Valuation: CAPE currently stands at 23.6, higher than 90% of comparable readings since the 1870s. ........................... 574
Valuation: Market Expensive According to 5 Year Rolling Forward PE ........................................................................... 575


Valuation: Expanding PEs as there is a Perception of 'Few Options' Available to Investors ........................................... 576
Valuation: A Flow Driven Manufactured Market Versus Real Economy .......................................................................... 579
Valuation: The NY Feds Equity Risk Premium ............................................................................................................... 580
Valuation: Kotok's Decade Ending 2200-2500 SPX ....................................................................................................... 584
Valuation: A Long Term PE Adjustment Process ........................................................................................................... 586
Valuation: Hussman Earnings Excessive by Historical Norms ........................................................................................ 586
Valuation: When Rich Valuations Meet Poor Economic Data ......................................................................................... 588
Valuation: Earnings, Valuations, Dividends and Buybacks a Problem ............................................................................ 594
Valuation: Unencumbered DCF -- Free Cash Flow is KING! .......................................................................................... 597
Valuation: S&P 500 Between 40-70% above Pre-Bubble Valuation Norms .................................................................... 598
Valuation: Hope Priced In .............................................................................................................................................. 602
Valuation: Median NTM PE ............................................................................................................................................ 603
Valuation: Inflation Adjusted Earnings ............................................................................................................................ 604
Valuation: PE Expansion Possible, though Likely Temporary ......................................................................................... 605
Valuation: PE Compression In Process .......................................................................................................................... 607
Valuation: PE Ratio Election Year Trends ...................................................................................................................... 608
Valuation: The Shiller P/E .............................................................................................................................................. 609
Valuation: Foreign Profits Kept Untaxed Offshore .......................................................................................................... 612
Valuation: Downward Revisions Accelerating................................................................................................................. 613
Valuation: Forward Guidance Significantly Lower than Reported Strength ..................................................................... 616
Valuation: Equity Valuations: It's All Downhill From Here ............................................................................................... 618
Valuation: Earnings Continuing to Weaken without much Media Fanfare ....................................................................... 620
Valuation: A Different Earnings Season. ........................................................................................................................ 621
Valuation: Government Spending Driving Profits: Artificially High Margins .................................................................... 623
Valuation: Inflation Expectations - Markets Mistakenly Expecting Growth & Profit To Accompany It .............................. 624
Valuation: Major Warning Needs Heeding: FedEx......................................................................................................... 625
Valuation: What We Called for Is Beginning To Show .................................................................................................... 627
Valuation: Equities as a Matter of Belief ......................................................................................................................... 632
Valuation: The Charts Wall Street Doesn't Want You To See On Annual Returns .......................................................... 635
Valuation: Some Sobering Japanese Comparison Charts from Michael Darda at MKM Partners ................................... 640
Valuation: Are Corporate Profit Margins About To Grind Lower For Another 10 Years? ................................................. 643
Valuation: Corporations Have Captured 88% Of All Post-Recession Income Growth ..................................................... 644
Valuation: Think Stocks Are Cheap? Here's 7 Reasons Why That's A Myth ................................................................... 645
PE CONTRACTION - Situational Assessment ................................................................................................................. 646
We Have Been Warning, Now Here it is ................................................................................................................. 646
PE Ratio: Rising PE Multiples, Not Better Earnings, Are What's Driving The Stock Market ............................................ 649
PE Ratio: Expansion, Then Contraction ......................................................................................................................... 650
PE Ratio: Multiples Grow at Fastest Pace Since Dot-Com Bubble ................................................................................. 651
PE Ratio: CAPE currently stands at 23.6, higher than 90% of comparable readings since the 1870s. ............................ 653
PE Ratio: PE's In Perspective ........................................................................................................................................ 655
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 656
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 659
PE Ratio: PE's Are At Historically Elevated Levels ......................................................................................................... 661
PE Ratio: Signs of Peek PE ........................................................................................................................................... 662
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 663
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 666
PE Ratio: Have Significant More Room To Compress .................................................................................................... 667
PE Ratio: Over Next Year Trailing PE to be Below Generational Norm. ......................................................................... 669
MARGIN COMPRESSION - Situational Assessment ....................................................................................................... 672
Compression: Cost Push now Creating Margin Compression! ....................................................................................... 672
Compression: Corporate Earnings - Signals of Margin Compression ............................................................................. 676
Compression: Expect Further PE Compression: Margin Squeeze ................................................................................. 681
Compression: Shifting Secular Sands - Emerging Impediments to Global Earnings Growth Rates................................. 683
Compression: Corporate Margins - 2013 Margin Expectations Not Credible .................................................................. 684
Compression: Profits Have Stalled. Has the Market? ..................................................................................................... 685
MARGIN & CREDIT ............................................................................................................................................................ 687
MARGIN DEBT - Rolling Over & Suggesting a Significant Correction Ahead ................................................................. 687
ROTATION-CREDIT CONTRACTION II ............................................................................................................................. 690
Credit Contraction - Bank Reserves A Ticking Bomb, But Who Will Be Caught in the Blast?.......................................... 690
Credit Contraction - Traders Reacting to the 1994 Pattern ............................................................................................. 693
Credit Contraction - Global Growth Clearly Slowing and near Contraction Without BRICS ............................................. 695
Credit Contraction - Fundamentals Emerging as ERP is Changing ................................................................................ 696
Credit Contraction - Falling Real Disposable Income means Falling Consumption ......................................................... 698
Credit Contraction - A Credit Squeeze Leads to a Deflationary Leg Down .................................................................... 700
Credit Contraction - Stunning Withdrawals from Emerging Markets ............................................................................... 701
Credit Contraction - Private Equity are Major Sellers of All Assets ................................................................................. 703
Credit Contraction - Asset Trends versus Bubbles ......................................................................................................... 705


EQUITY RISK PREMIUM.................................................................................................................................................... 707

Equity Risk Premium: Yields Improved, Especially Against Stock Yields ........................................................................ 707
Equity Risk Premium: The Incentive for the Anticipated "Great Rotation" ....................................................................... 708
BUYBACKS ........................................................................................................................................................................ 711
Buybacks: Going nowhere if it wasnt For BUYBACKS from Cheap Debt ....................................................................... 711
Buybacks: Buyback Achievers Index at 2007 Top .......................................................................................................... 713
INSUFFICENT WEALTH CREATION MEANS SHRINKING EQUITY GROWTH ................................................................ 714
Wealth - Debt Saturation Means there is Simply Insufficient Wealth Creation within Developed Nations ........................ 714
Wealth - The "TAPER" Scare before the 'OPMF' Storm ................................................................................................ 718
Wealth - Cash Flow and CAPEX .................................................................................................................................... 721
Wealth - Removing the Manipulation to See Real Enterprise Value Metrics ................................................................... 722
EARNINGS - Situational Assessment .............................................................................................................................. 724
Q3 Earnings - Conference Calls to Bring Down Q4 "Hockey stick" Significantly ......................................................... 724
Q3 Earnings: Earnings: the Stock Market's Achilles Heel ............................................................................................... 724
Q3 Earnings: Buybacks Disguising Overvaluation .......................................................................................................... 727
Q2 Earnings - Estimate Reductions Accelerating ........................................................................................................... 732
Q2 Earnings: As Goes Wal-Mart; So Goes America...? .................................................................................................. 732
Q2 Earnings: Investors Still Distracted ........................................................................................................................... 733
Q2 Earnings: Financial Loan Loss Reserve Reversals Hiding a Disaster ....................................................................... 734
Q2 Earnings: EU Earnings Disappointments Match US.................................................................................................. 736
Q2 Earnings: Revenues Flat with Rising Earnings?? ..................................................................................................... 737
Q2 Earnings: Q2 EPS Estimates .................................................................................................................................... 738
Q2 Earnings: Negative Guidance Worst Since Early 2012 ............................................................................................. 740
Q2 Earnings: Signs of Serious Troubles in Consumption ............................................................................................... 740
Q2 Earnings: Concerns Abound With Non-US Earnings ................................................................................................ 742
Q2 Earnings: Negative Pre-Announcements Currently At Record Levels ....................................................................... 744
Q2 Earnings: Tax Incentives Inflating Earnings .............................................................................................................. 746
Q2 Earnings: Estimates Becoming Very Suspect ........................................................................................................... 749
Q2 Earnings: Fund Managers forced to Chase Yield...................................................................................................... 751
Q2 Earnings: Estimates Simply Not Believable .............................................................................................................. 753
Q2 Earnings: Financialization & Financial Profit Levels .................................................................................................. 754
Q2 Earnings: PE Expansion Hides Risk and is itself Unjustified ..................................................................................... 755
Q2 Earnings: Goldman Goes Uber-hyper-Bullish ........................................................................................................... 756
Q1 Earnings - Outlooks Being Brought Down ................................................................................................................. 758
Q1 Earnings: 2013 Top-Down & Bottom-Up................................................................................................................... 758
Q1 Earnings: 2013 Earnings To Be Less Than 2009 Earnings Projected To Be In 2007 ................................................ 761
Q1 Earnings: Classic Hockey stick of False Expectations .............................................................................................. 763
Q1 Earnings: Bearish Corporate Guidance Threatens Q1 Profit Growth Estimates ........................................................ 766
Q1 Earnings: Retailers Report Solid Q4 Profits, But Q1 Outlook Dims Still Further ........................................................ 768
Q1 Earnings: Analysts Apparently Surprised? ................................................................................................................ 770
Q1 Earnings: Wage & Profit Disparity - Peak Profits, Trough Wages ............................................................................. 772
Q1 Earnings: Resting In a Few Tired Hands .................................................................................................................. 773
Q1 Earnings: Overstated Due to the Magnitude of One Time Write-Offs ........................................................................ 777
Q1 Earnings: 10 Tired Generals Carrying the Market ..................................................................................................... 779
Q1 Earnings: Interest Rates Determined by Future Inflation & Growth ........................................................................... 780
Q1 Earnings: Only 30% of firms Beat Revenue Estimates. 65% Beat Earnings ............................................................. 782
Q1 Earnings: Global Market Comparisons ..................................................................................................................... 783
TARGETS ..................................................................................................... 784

CONCLUSIONS ........................................................................................... 785
I- GORD'S VIEWS & OPINIONS ......................................................................................................................................... 785
We are within 5-6 months of a Multi Decade Top and Market Reversal .......................................................................... 785
We have another Scare before the Year End Rally & The Multi Decade Top ................................................................. 785
Some Things in the Near Term Are Eerily Familiar......................................................................................................... 786
Some Things Are Also Just Unsustainable..................................................................................................................... 787
A Reminder: We Still Are Operating Within a 6 Hindenburg Omen Historic Cluster Expires November 15th ............... 787
Markets Have Disconnected from All Basic Fundamental Valuation Measures .............................................................. 788
Margin Debt is at a Peak (Again) ................................................................................................................................... 789
Earnings are Falling With a Q4 "Hockey Stick" To Come ............................................................................................... 789
Most Sentiment Indicators Are Rolling Over Again (History Tells Us to be aware of this) ............................................... 789
CRACK-UP BOOM After the Near Term Consolidation We Still Expect new Highs ........................................................ 790
I- TARGETS........................................................................................................................................................................ 791


II- MONTHLY METRICS & ASSESSMENT......................................................................................................................... 792

A - LONG TERM: Fundamentals .................................................................................................................................... 792
B - INTERMEDIATE TERM: Risk ................................................................................................................................... 794
C - SHORT TERM: Sentiment........................................................................................................................................ 794
III - BIG PICTURE ............................................................................................................................................................... 796
IV - DEFINING CHARTS ..................................................................................................................................................... 797
Fed Panics> "QE Unlimited" - ECB Panics> "OMT" Unlimited - Japan /UK Panic> .................................................... 797
Defining Chart #1 - "Delusional Distortion" Expectations ................................................................................................ 797
Defining Chart #2 - Finding the Long Term Pivot ............................................................................................................ 798
Defining Chart #3 - Intermediate Term Top .................................................................................................................... 801
Defining Chart #4 - Short Term Volatility ........................................................................................................................ 803
V- KEY ANALYTICS ........................................................................................................................................................... 806
RISK .............................................................................................................................................................................. 806
PATTERNS ................................................................................................................................................................... 808
VI - STUDIES ...................................................................................................................................................................... 809
STUDY: Q3 EARNINGS ................................................................................................................................................ 809
STUDY: VALUATIONS .................................................................................................................................................. 809
STUDY: Margin & Leverage ........................................................................................................................................... 810
STUDY: DIVIDENDS & BUYBACKS .............................................................................................................................. 811
TRIGGER$ ZONES ....................................................................................................................................................... 812
DRIVER$ ....................................................................................................................................................................... 812



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Monthly Market Analytics & Technical Analysis

OCTOBER 2013 Edition

INDEXED RESEARCH DATA BASE

1 October 2013 Edition

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