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long021013.html
Trouble Coming To
Paradise
10 February 2013
Gordon T Long
The Macro Indicators are signaling there is potential trouble coming to
paradise.
Goldman Sachs points out in a recent study that there is a remarkably strong
correlation which has emerged as a result of global central bank policy
initiatives. The steely eyed Tyler Durden at Zero Hedge points out:
We have noted the odd cyclicality in macro data (and its leading
effect on the market) and it seems Goldman Sachs has also noticed that
something is different this time. For 15 years, the seasonal patterns
in Goldman's macro index have been mild to totally negligible; but since
2009, something changed.
As the chart below indicates, it really is different this time as the
macro cycle has become extremely short and consistent (drop in H1, rise in
H2) - and is evident not just top-down but bottom-up in payrolls and ISM
for instance. Goldman expounds pages of statistical jiggery-pokery to show
what we suspected - that this is not weather or seasonality effects,
and is not just US (UK and Europe see same pattern of six month cycles);
but appears driven by central-bank policy actions (which have been
more concentrated in Q4/Q1). 2013 is playing out exactly as the last three
years has - with a downdraft that is set to continue for the next few
months - though they note that stability in oil prices this time (and
recent expansion of easing efforts - Fed and BoJ) may shift the pattern.
For now, it appears the macro cycle is becoming shorter and warrants
concern as they are unable to find anything but 'reality' as a driver of
this odd cyclical pattern as the real economy fades rapidly after each
and every infusion of promises from the Central Banks.
US Macro data is following the same downward path as we have seen for the
last three years...
.. each year Q4/Q1 is dominated by fiscal or monetary policy
actions to recover from the exposed reality of the underlying economy...
Will this time be any different? Well, we noted the lead-lag relationship
here before, and as stocks test new highs with macro data plumbing new
depths, we can only imagine which better reflects reality for now.
As Goldman concludes:
Given that we are now in the part of the year that has
typically presaged macro weakness, we will be paying close
attention to developments in fundamental factors: policy, financial
conditions, oil prices, and shocks from the rest of the world and the
Euro area.
Put simply, each year central banks lift their foot modestly to see just
what is going on in the real world, and each year the reality is not
good - which then pushes them back into action; the question is (with
BOJ not going open-ended until 2014, OMT off the table for Spain for
now, and Fed QE4EVA 90% priced in) when will the central banks come back
and with what...
Charts: Goldman Sachs
Separately, we have noticed that each of the REGIONAL Economic Surprise
Indices are also ALL following the same pattern GLOBALLY.
The above chart also suggests that economic "reality" is once again not
meeting the analysts' growth and market expectations. This has become an
annual event.
DEATH CROSS
The ECO pattern is clear. A 'death cross' of the 100 DMA through the 200 DMA
is a strong confirming signal that a sustained change in perceptions is now
underway.
As JP Morgan's Tom Lee points out, the US Citigroup Economic Surprise
Index (below) has moved below zero. On the past 7 occasions when this
happened the near-term equity upside was capped. The average maximum
upside of 1% and average drawdown of 8% seen over the following 3 months
demonstrate the asymmetric risk-reward in our view.
Chris Puplava at Financial Sense Network has also noted yet another
correlation:
.... as you can see in the close up below, the rise in oil
prices six months ago suggests we see a peak in economic positive
surprises and the stock market in late February to early March. Given we
likely have a peak in economic activity and the stock market in 4-6 weeks
based on prior oil prices, even if interest rates breakout their run is
likely to be short-lived and a plunge in interest rates and rise in real
interest rates (if nominal rates fall faster than inflation) may be the
catalyst that sees gold stabilize and begin to advance.
We have an endless array of charts showing extreme market levels
but three of note are:
1. Citi's Panic/Euphoria gauge for US stocks (right) has
only been more euphoric on two occasions - Q4 2000 & 2008,
2. Goldman's S&P 500 Positioning which has only been
this extremely long-biased on two occasions - Q4 2008 & Q2 2011; and
3. Barclays' Credit-Equity divergence which has only
been this over-bought stocks on two occasions - Q4 2008 & Q2 2012.
EARNINGS DECIDELY NEGATIVE
Switching gears we need to consider that fact that so far Q4 2013 earnings
have been far worse than most (so far) suspect:
There has been some confusion about the quality of the ongoing
Q4 earnings season, which has seen some 47% of the S&P 500 companies
report to date (and with 53% still left things can certainly change). The
confusion apparently is that this has been a "good" earning season
so far. Nothing could be further from the truth, and as Goldman shows in
its midterm Q4 earnings report, the reality, not spin, is that earnings
are tracking at $24.03, or some 6% below the consensus estimate at the
start of earnings season of $25.51. This revised number, which could
well drop even more from here, means that Q4 earnings will post a
minuscule 1% growth in EPS year over year compared to Q4 of 2011 when
Europe was imploding, and when the world's central banks had to arrange a
global bailout to prevent yet another Armageddon.
Here are the facts:
- Using a mix of realized and consensus earnings, 4Q EPS is
tracking 6% below the consensus estimate at the start of reporting
season, $24.03 vs. $25.51
- Positive earnings surprises are tracking below average this
quarter (34% vs. 42%). The percentage of firms missing earnings
estimates by one standard deviation or more is above the 40 quarter
average (18% vs. 14%).
- 36% of firms beat consensus sales expectations by more than one
standard deviation, below the 10-year historical average of 38%.
In addition, 19% of firms have missed sales estimates by that
magnitude (versus 18% historically).
In summary, the S&P 500 is expected to earn some $98 for all
of 2012, which means that as of this moment, the market is trading at a
quite rich 15+ multiple (although what multiples mean under central
planning nobody knows yet). So how does the S&P500 go from 98 in
earnings in 2012, to the consensus 111 in S&P500 EPS in 2013? A magic
escalator apparently.
BOTTOM LINE - S&P 500
We are now in the early stages of shifting from an extreme condition of
complacency. This has been coupled with elevated levels of a potential
economic or geo-political shock to the market and OVER OPTIMISTIC
INVESTOR SENTIMENT.
Conditions are suggesting we have a RISK-OFF environment looming ahead of us
before the Ides of March..
********
 Good luck, and good trading.
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Gordon T Long
Publisher & Editor
general@GordonTLong.com
Gordon T Long is not a registered advisor and does not
give investment advice. His comments are an expression of opinion only
and should not be construed in any manner whatsoever as recommendations
to buy or sell a stock, option, future, bond, commodity or any other
financial instrument at any time. While he believes his statements to be
true, they always depend on the reliability of his own credible sources.
Of course, he recommends that you consult with a qualified investment
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you are encouraged to confirm the facts on your own before making
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© Copyright 2012 Gordon T Long. The information herein was
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