Monthly Market Analytics & Technical Analysis

NOVEMBER 2013 Edition

INDEXED RESEARCH DB

Gordon T Long

11/12/2013

1 November 2013 Edition

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Monthly Market Analytics & Technical Analysis

NOVEMBER 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 .............................................................................................................. 18
Defining Chart #3 - Intermediate Term Top ...................................................................................................................... 21
Defining Chart #4 - Short Term Volatility .......................................................................................................................... 23
OUR APPROACH - MACRO ANALYTICS ...............................................................................................................................................26

............................................................................................................................................................... 27
NOVEMBER 2013: Global Macro Drivers ........................................................................................................................... 28
DRIVER: Real Wealth, Commodities & Dr Cooper ........................................................................................................... 31
DRIVER: Carry Trade & the : Cross ........................................................................................................................... 35
DRIVER: Currency & Forex Markets ................................................................................................................................ 44
DRIVER: Yield, Spread & Credit ...................................................................................................................................... 48
DRIVER: Global Equities ................................................................................................................................................. 49
DRIVER-TRIGGER TABLE.............................................................................................................................................. 50
DRIVER$ - The Carry Trade Driver$ ................................................................................................................................ 68
RESEARCH OF INTEREST ............................................................................................................................................ 70
DRIVER$ - 10 Year US Treasury Note ............................................................................................................................ 70
DRIVER$ - "Hard" March Debt Ceiling (April is the X-Date) ............................................................................................. 71
RISK: Risk-On versus Risk-Off........................................................................................................................................... 74
RESEARCH..................................................................................................................................................................... 74
RESEARCH OF NOTE .................................................................................................................................................... 75
RISK - As We Warned - Equity Follows Credit ................................................................................................................. 75
RISK - As Credit Is Warning ............................................................................................................................................. 76
RISK Event Risk Volatility Ahead .................................................................................................................................. 77
RISK - As Blue Sky indices (Index Levels divided by volatility measures, such as OEX/VXO) are off the charts ............. 80
RISK - As Pay Attention to the SKEW in Volatility ............................................................................................................ 81
RISK - As Approaching Tech Bubble Levels. Already Exceeded 2007 Levels .................................................................. 84
PREVIOUS MONTH - Reference ..................................................................................................................................... 86
RISK Shutdown Stirs Investor Anxiety........................................................................................................................... 86
RISK Confusion Reigns ................................................................................................................................................ 87
RISK Consider the VIX Inversion .................................................................................................................................. 88
RISK US Treasury Default Risk Hits 2011 Highs ........................................................................................................... 89
RISK A Collateral Crunch in the Repo Market the Short Term Exposure ....................................................................... 90
RISK Economic Confidence Collapses At Fastest Pace since Lehman ......................................................................... 92
RISK This Secular Bear Has Only Just Begun .............................................................................................................. 94
RISK Three Rising Risks To The Markets ..................................................................................................................... 98
RISK Treasury Warns Current "Herding" Threatens US Financial System .................................................................. 102
RISK Markets Sending Strong Signals ........................................................................................................................ 102
PRIOR MONTH - Reference .......................................................................................................................................... 107
RISK: Margin ................................................................................................................................................................. 107
RISK: Volatility Patterns in the VIX ................................................................................................................................ 108
RISK: Credit & Volatility ................................................................................................................................................. 112
RISK: Potential Head & Shoulders Pattern Appearing.................................................................................................... 115
RISK: The Unwelcome Return of Risk-on, Risk-off......................................................................................................... 116
RISK: The Taper Risk Is In Stocks Not Bonds................................................................................................................ 117
RISK: Stock Bear Looms ............................................................................................................................................... 119
RISK: U.S. Stock ETFs Record Biggest Withdrawals Since 2010 .................................................................................. 124
RISK: Gauging the Weakness........................................................................................................................................ 125

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RISK - Biggest Hindenburg Omen Cluster On Record ................................................................................................... 128

RISK - Positive Global Surprise Indices Topping In Developed Economies .................................................................... 130
RISK - September Events Cluster .................................................................................................................................. 133
RISK - A Confluence Of Risky Economic Events ........................................................................................................... 134
RISK - A New Form of 1987 Portfolio Insurance and Dynamic Hedging ......................................................................... 135
RISK - Investors Never Listen NOR Learn ..................................................................................................................... 138
RISK - Money Going to Cash But Equity Inflows Still Suggest Corrective Correlation .................................................... 139
RISK - "Blue-Sky" Index Is Flashing Red ....................................................................................................................... 143
RISK - US Recession an Increasing Possibility .............................................................................................................. 144
RISK - Confidence in Monetary Policy Direction is Exposed .......................................................................................... 145
TECHNO-FUNDAMENTALS .............................................................................................................................................. 147
RESEARCH................................................................................................................................................................... 147
RESEARCH OF NOTE .................................................................................................................................................. 148
PATTERNS - Finding Treasury Price Support, Yield Resistance .................................................................................... 148
PATTERNS - Draghi Unintentionally Destabilizes Currency Markets ............................................................................. 149
PATTERNS - Market Reversal Nears (if only Temporary before the Santa Claus Rally) ................................................ 154
PATTERNS - US Treasuries Due for a Bounce.............................................................................................................. 159
PATTERNS - Accelerating Sentiment Divergences ........................................................................................................ 160
PATTERNS - QE Programs versus S&P 500 Movements .............................................................................................. 162
PATTERNS - Our Proof the Crackup Boom is Underway ............................................................................................... 164
PATTERNS - While Everyone Was Worrying About the US and Washington.... ............................................................. 165
PATTERNS - Perception (prices) and Reality (value) has grown too wide ..................................................................... 167
PATTERNS - 90% Up Days Are Bullish ......................................................................................................................... 169
PREVIOUS MONTH - Reference ................................................................................................................................... 170
PATTERNS - A Mad Rush into European Stocks ........................................................................................................... 170
PATTERNS - The Carry Trade Driver$ .......................................................................................................................... 172
PATTERNS - Post Government Shutdown Resolutions ................................................................................................. 174
PATTERNS - Bearish Divergences ................................................................................................................................ 175
PATTERNS - US$, EURJPY, Currency Debasement .................................................................................................... 179
PATTERNS - How Long Can this Divergence Be Maintained?....................................................................................... 182
PATTERNS - Watching the AUDJPY as a Market Driver$ ............................................................................................. 182
PATTERNS - October 8th Bradley Turn Date & Phi Cluster ........................................................................................... 185
PATTERNS - VIX surged by its most in over 3 months above 19%. ............................................................................... 188
PATTERNS - Debt Divergence Has Preceded Equity Market Peaks .............................................................................. 191
PATTERNS - Speculation: The Bloomberg IPO Index Indicator ..................................................................................... 193
PATTERNS - Margin debt is up 100 times in the last 39 years ....................................................................................... 195
PATTERNS - Spotting Potential TRIGGER$ .................................................................................................................. 196
PATTERNS - Cognitive Dissonance .............................................................................................................................. 197
PATTERNS - Derivatives & Hedging: Markets being Manipulated through the VIX ........................................................ 198
PRIOR MONTH - Reference .......................................................................................................................................... 201
PATTERNS - Major Long Term Overhead Resistance ................................................................................................... 201
PATTERNS - SPX Being Driven By 3 Trading Factors ................................................................................................... 202
PATTERNS - US Equity Funds Post Largest Weekly Outflow Since November 2011 .................................................... 208
PATTERNS - 1987 Yields .............................................................................................................................................. 209
PATTERNS - Surprise Index Says Its Normally Time For Central Bank Intervention ...................................................... 210
PATTERNS - A Gap That Must Be Soon Filled .............................................................................................................. 211
PATTERNS - US Treasury Finally Admits The Truth: It's All POMO ............................................................................... 212
PATTERNS - Even Retail Investors Don't Believe this Rally .......................................................................................... 215
PATTERNS - 7 Charts Of The Market's Complete Divorce From Reality ....................................................................... 216
PATTERNS - EU Worries Will Soon Emerge After the Election in Germany is Finalized ................................................ 222
PATTERNS - Equity Fund Flows ................................................................................................................................... 224
OUTLOOK - ANALYTICAL ANALYSIS ................................................................................................................................................... 225
STUDY: A DOT.COM ERA EUPHORIA IS NOW EVIDENT................................................................................................ 225
THE TWITTER IPO........................................................................................................................................................ 226
TWITTER - Pre-IPO Euphoria: So Dj Book ................................................................................................................ 226
TWITTER - The Greater Fool: "I'm Just Buying Because Everybody's Talking About Twitter" ........................................ 227
TWITTER - What Is Twitter's Real Value: You Decide With This Interactive Calculator .................................................. 229
EUPHORIA IPO Surge and The Fed Balance Sheet Correlation ................................................................................. 230
EUPHORIA A Bubble that Everyone Admits is a Bubble ............................................................................................. 232
EUPHORIA EU Hits a Five Year High; After Six Quarters of Recession? .................................................................... 233
EUPHORIA - Panic-Euphoria Model Shows substantial complacency & Most Euphoric Since 2008 .............................. 234
STUDY: CAPITAL VERSUS MONEY - LIQUIDITY VERSUS CREDIT ............................................................................... 236
LIQUIDITY - Capital is Not Money!................................................................................................................................. 236
LIQUIDITY - We Are out of new outlets for Credit Unsustainable Global Price Levels ................................................. 238

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LIQUIDITY - Barry Sternlicht Warns "Everyone Is Holding Cash .................................................................................... 249

LIQUIDITY - Citi Survey Finds Rich Families Are Hoarding Cash................................................................................... 250
LIQUIDITY - Corporate Cash Piles are Growing ............................................................................................................ 251
LIQUIDITY - $3 Trillion "Created" In First 9 Months of 2013 ........................................................................................... 252
STUDY: SIGNS OF A CRACKUP BOOM ........................................................................................................................... 255
RECENT PAPER SIGNS OF A "CRACKUP BOOM"................................................................................................... 255
CRACK-UP BOOM VENEZUELA: After 475% 13 Stock Rally, Venezuela Begins "Operation Speculation" ............... 263
CRACK-UP BOOM VENEZUELA: Tries To Curb Inflationary Unrest with Ministry of Supreme Happiness ............... 264
CRACK-UP BOOM VENEZUELA: Government "Occupies" Electronics Retail Chain to Enforce "Fair" Prices ............. 266
CRACK-UP BOOM 'The Final Melt-Up for the One Percenters'................................................................................... 269
CRACK-UP BOOM Slowly At First, Then All At Once.................................................................................................. 271
CRACK-UP BOOM More Countries Forced to Resort to Printing Money ..................................................................... 272
CRACK-UP BOOM Pre-Crash Conditions Are Building Similar to the 2000 Dotcom Bubble ........................................ 274
CRACK-UP BOOM CZECH: More Countries Being Forced to Resort to Printing Money ............................................. 277
CRACK-UP BOOM CZECH: Republic Enters Currency Debasement Club ................................................................ 279
STUDY: TRADING THE DONT FIGHT THE FEDERAL RESERVE MANTRA ............................................................... 281
DONT FIGHT THE FED - Between Now and the All In QE Policy Move in the last 3 Quarters of 2014 ....................... 281
DONT FIGHT THE FED - The Policy Options Available to the Fed ............................................................................... 283
STUDY: LONG TERM CYCLES MAY BE AT PLAY ........................................................................................................... 285
CYCLES - The 17.6 Year Stock Market Cycle............................................................................................................... 285
STUDY: LEVERAGE & MARGIN SPECULATION ............................................................................................................. 288
MARGIN & LEVERAGE - Prime Brokers Funding Five Times Leverage to Hedge Funds .............................................. 288
MARGIN & LEVERAGE - Approaching Tech Bubble Levels. Already Exceeded 2007 Levels ........................................ 289
LEVERAGE Near Perfect Correlation of NYSE Margin Debt to the S&P 500 .............................................................. 290
LEVERAGE Market Mirrors Changes in Margin Requirements ................................................................................... 292
LEVERAGE Margin Debt Divergence Precedes Equity Market Peaks......................................................................... 294
LEVERAGE The Bloomberg IPO Index Indicator (Degree of Speculation) .................................................................. 297
STUDY: SECULAR BEAR MARKET.................................................................................................................................. 299
BEAR MARKET This Secular Bear Has Only Just Begun ........................................................................................... 299
BEAR MARKET When Easy Money Ends ................................................................................................................... 303
STUDY: BOND ROTATION ................................................................................................................................................ 305
10-28-13-DRIVER$ - 10 Year US Treasury Note ........................................................................................................... 305
BOND ROTATION Bond Momentum Chart Reverses ................................................................................................. 306
BOND ROTATION The Global Economy may have to get used to Financially Repression.......................................... 308
STUDY: Q3 EARNINGS ..................................................................................................................................................... 313
10-17-13-EARNINGS - Asia, BRIC, Emerging Markets Crater IBM Earnings ................................................................. 315
EARNINGS - Consensus Continues Down Trend .......................................................................................................... 317
EARNINGS - Still Believe in the Q4 Earnings Hockey Stick Forecast? ........................................................................... 317
EARNINGS - Q3 Earnings Warnings Second-Worst Since 2001 .................................................................................... 320
STUDY: Q3 VALUATIONS ................................................................................................................................................. 323
11-08-13-VALUATIONS - CAPE at PE of 24 .................................................................................................................. 323
11-08-13-VALUATIONS - CAPE Is Not A Timing Tool ................................................................................................... 324
11-05-13-CASHFLOW - Leads Earnings Reductions ..................................................................................................... 326
10-31-13-EARNINGS - Primarily About Smart Tax and Balance Sheet Planning ........................................................... 328
VALUATIONS - Fewer Listings Relative to the Increase In Liquidity & Margin Growth ................................................... 329
VALUATIONS - Is the Multiple-Expansion "Dream" Over? ............................................................................................. 330
VALUATIONS - Sentiment to Reverse PE Expansion .................................................................................................... 336
VALUATIONS - US Equity Market Are the Most Expensive In The World ...................................................................... 340
VALUATIONS - Margin debt is up 100 times in the last 39 years ................................................................................... 342
VALUATIONS - Largest 2 Year Multiple Expansion since Late 90's ............................................................................... 343
STUDY: DIVIDENDS & BUYBACKS .................................................................................................................................. 345
DIVIDENDS - Continuing Shift from Capex To Dividends ............................................................................................... 345
BUYBACKS - Going nowhere if it wasnt For BUYBACKS from Cheap Debt .................................................................. 349
BUYBACKS - Buyback Achievers Index at 2007 Top ..................................................................................................... 352
STUDY: Q3 GOLD.............................................................................................................................................................. 353
GOLD - Bottom Still Likely Not In - A Little More in Price and Time ................................................................................ 353
GOLD - Level Of Currency Debasement ........................................................................................................................ 354
GOLD - Winners in Q3 ................................................................................................................................................... 357
PREVIOUS MONTH - Reference ....................................................................................................................................... 358
STUDY: GOLD & SYRIAN CONFLICT ............................................................................................................................... 358
PRECIOUS METALS - Syrian War Factor on GOLD ...................................................................................................... 358

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STUDY: Q3 EARNINGS ..................................................................................................................................................... 359

Q3 Earnings: Earnings: the Stock Market's Achilles Heel ............................................................................................... 359
Q3 Earnings: Buybacks Disguising Overvaluation .......................................................................................................... 362
STUDY: ASIAN CRISIS & BOND IMPACT ......................................................................................................................... 367
ASIAN CRISIS - EU Major Contributor to EM Current Account Deficit Growth ............................................................... 367
ASIAN CRISIS - BRICS Reserves of Insufficient Levels, Prompt Russian-Chinese Support .......................................... 368
ASIAN CRISIS - Global Bond Yields React Together to "Taper" .................................................................................... 370
STUDY: A MOTHER OF A MONTH.................................................................................................................................... 371
SEPTEMBER 2013 - A Mother of a Macro Month .......................................................................................................... 371
SEPTEMBER 2013 - A Mother Month ............................................................................................................................ 376
STUDY: BOND SCARE ...................................................................................................................................................... 380
BOND SCARE - Near Term Overhead Resistance Near ................................................................................................ 380
BOND SCARE - "Taper Talk" Gives Way to a "Taper Tantrum" .................................................................................... 381
BOND SCARE - The Bearish Bond Trend Has Resumed .............................................................................................. 384
BOND SCARE - Bonds (TLT) Break Important Support ................................................................................................. 386
BOND SCARE - Bond Vigilantes, Dead or Alive?........................................................................................................... 387
BOND SCARE - An Avalanche of Outflows .................................................................................................................... 388
BOND SCARE - Only An Intermediate Price Bottom. Recession Suggests 0.75% 10UST ............................................. 390
BOND SCARE - Nearing Support .................................................................................................................................. 393
BOND SCARE - "TAPER" Clearly A Bluff or Muddled Policy.......................................................................................... 395
BOND SCARE - Volatility and Increasing Instability ....................................................................................................... 397
BOND SCARE - A LONG Supply and Demand Problem BUT Heavy SHORT Demand ................................................. 398
BOND SCARE - Long Term Support Trendline Achieved............................................................................................... 400
BOND SCARE - Retail Investors Running for the Exit .................................................................................................... 401
BOND SCARE - Credit Cycle: HY Leading the Way....................................................................................................... 402
BOND SCARE - CREDIT CYCLE: Reversal Ahead ....................................................................................................... 405
BOND SCARE - Reactive Panic Mode to TAPER .......................................................................................................... 408
BOND SCARE - The Impact of "TAPER" on Emerging Markets ..................................................................................... 411
BOND SCARE - Buy in June After the Swoon................................................................................................................ 414
BOND SCARE - A Flight to Safety from An EM Liquidity Crisis? .................................................................................... 416
PRIOR MONTH - Reference .............................................................................................................................................. 419
STUDY: MARGIN CALL EXPOSURE ................................................................................................................................ 419
MARGIN - Deutsche Bank Hopes "Not All Margin Calls Come At Once In Case Of A Sell-Off" ...................................... 419
STUDY: SHIFTING SURPRISE INDICES ........................................................................................................................... 428
SURPRISE - Global Surprise Indices Sending Signals of Pending Shift ......................................................................... 428
STUDY: GLOBAL CORPORATE PROFIT EXPOSURES................................................................................................... 431
GLOBAL GROWTH - Fighting Triffin's Paradox ............................................................................................................. 431
STUDY: RETAIL INVESTORS ALL-IN............................................................................................................................ 433
ALL-IN - US Retail Investors 'Rotate' All-In .................................................................................................................... 433
STUDY: CREDIT EUPHORIA ............................................................................................................................................. 438
EUPHORIA - Warning lights are flashing in Americas Credit Markets ........................................................................... 438
STUDY: COLLATERAL TRANSFORMATION ................................................................................................................... 442
COLLATERAL TRANSFORMATION - Quality Collateral Supply Is Determining "TAPER" Schedule.............................. 442
STUDY: MARKET TOPPING SIGNS .................................................................................................................................. 445
TOPPING - Are We Re-Tracing A Market Peak? .......................................................................................................... 445
SHORT TERM TECHNICAL ANALYSIS .............................................................................................................................................. 449
SUPPORT & RESISTANCE ............................................................................................................................................... 449
Gann Analysis................................................................................................................................................................ 449
Boundary Conditions...................................................................................................................................................... 450
Channels & Regressions................................................................................................................................................ 452
Fibonacci - Controlling Time Extensions ........................................................................................................................ 453
Elliott Wave.................................................................................................................................................................... 455
SENTIMENT - Consumer, Investor & Trader .................................................................................................................... 458
Consumer Confidence - Conference Board .................................................................................................................... 458
Consumer Sentiment - Michigan .................................................................................................................................... 461
Consumer Comfort......................................................................................................................................................... 462
Investors Intelligence ..................................................................................................................................................... 463
American Association of Independent Investors ............................................................................................................. 463
National Association of Active Investment Managers (NAAIM) ....................................................................................... 464
Small Business Optimism .............................................................................................................................................. 465

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Smart Money / Dumb Money Confidence ....................................................................................................................... 466

Percentage Stocks Above 50 & 200 DMA ...................................................................................................................... 467
Margin Levels ................................................................................................................................................................ 468
Mutual Fund Cash Levels v S&P 500 ............................................................................................................................. 471
OSCILLATORS & BREADTH: Indicators of Importance ................................................................................................. 473
NYSE Overbought / Oversold ........................................................................................................................................ 473
OEX Open Interest (Puts/Calls) ..................................................................................................................................... 474
TRIN .............................................................................................................................................................................. 475
McClellan Oscillator ....................................................................................................................................................... 476
STUDY: Over-Bought, Over-Bullish, Over-Weight .......................................................................................................... 477
SENTIMENT: Small Business Is Going Nowhere ........................................................................................................... 477
SENTIMENT: Fed Financial Stress Index Indicates Complacency ................................................................................. 481
SENTIMENT: Consumer Confidence Misses Expectations By Most On Record............................................................. 482
SENTIMENT: Consumer Confidence Up but Sending Concern Signals ......................................................................... 483
SENTIMENT: Extreme Levels of Complacency.............................................................................................................. 485
SENTIMENT: False Belief In Central Bakers.................................................................................................................. 487
SENTIMENT: Much too High! Setting Ourselves up for A Shock .................................................................................... 489
SENTIMENT: Leverage Being Increased ....................................................................................................................... 490
SENTIMENT: EU Consumer Sentiment Telltales ........................................................................................................... 493
SENTIMENT: Mispricing Uncertainty ............................................................................................................................. 495
SENTIMENT: High Level of Complacency ..................................................................................................................... 496
SENTIMENT: Uncertainty Always Stops Business Investment ....................................................................................... 497
SENTIMENT: Consumer Confidence Plunges After Election as Fiscal Cliff Realization Faced. ...................................... 499
SENTIMENT: Abruptly Plummets: Post Election, Sandy and pending Fiscal Cliff ........................................................... 500
SENTIMENT: Uncertainty .............................................................................................................................................. 501
SENTIMENT: Market Not Prepared for Fiscal Cliff Disappointment! ............................................................................... 502
SENTIMENT: Fiscal Cliff Uncertainty Parallels With Debt Ceiling Negotiations (The "Holy Shit" Moment) ...................... 504
INTERMEDIATE TERM RISK ANALYSIS.......................................................................................................................................... 508
RISK SUMMARY- Aggregated Global Financial Risk Index ............................................................................................ 508
AGGREGATED GLOBAL FINANCIAL RISK INDEX .......................................................................................................... 508
BANKING RISK - LIBOR-OIS SPREAD (Updated) ........................................................................................................ 509
BANKING RISK - TED SPREAD (Updated) ................................................................................................................... 509
CREDIT RISK - GLOBAL CREDIT DEFAULT SWAPS (Updated)................................................................................. 510
CREDIT RISK - EU CREDIT DEFAULT SWAPS (Updated) ........................................................................................... 510
CONSUMER RISK - HOUSING - RATE OF CHANGE (Reference) ............................................................................... 511
ECONOMIC RISK - ECRI LEADING INDEX (Updated).................................................................................................. 512
INFLATION RISK - MONEY SUPPLY GROWTH - M3 (Updated) .................................................................................. 513
INFLATION RISK - MONEY VELOCITY (Updated) ........................................................................................................ 514
MONETARY RISK - BANK LIABILITIES (Updated)........................................................................................................ 514
COST OF MONEY RISK - INTEREST RATES (Updated) ............................................................................................. 515
AGGREGATED RISK LEVEL ............................................................................................................................................. 515
Risk .................................................................................................................................................................................... 517
RISK: Signs of a 1987 Correction Abound ..................................................................................................................... 517
RISK: How the Fed could cause another 1987 crash ..................................................................................................... 519
RISK: Schwab Says Buckle Up ...................................................................................................................................... 521
RISK: The Market Outlook Has Taken A Turn For The Worse ....................................................................................... 526
RISK: Dodd Frank's TBTF Strategy A Failure ................................................................................................................ 527
RISK: 1970 Pattern Comparisons See 20-27% Correction in H2 .................................................................................... 529
RISK: The Bond Bubble the Next to Burst, A Panic into Stocks...................................................................................... 531
RISK: Collateral considerations are a joke and Loans are Disguised ............................................................................. 532
RISK: Citigroup Economic Surprise Index has moved below Zero.................................................................................. 534
RISK: Key Market Warning Signals Triggered ................................................................................................................ 535
RISK: Nearing End of Short Squeeze ............................................................................................................................ 536
RISK: Shift in Perceptions & Market Optimism Reflected at Davos ................................................................................ 538
RISK: Bonds Most Overbought in 55 Years ................................................................................................................... 539
RISK: A Final Parabolic Lift to 1550 to 1570 in the SPX before Major Capitulation ......................................................... 540
RISK: Brace For A Stock Market Accident ..................................................................................................................... 542
RISK: Excess Euphoria .................................................................................................................................................. 544
RISK: Money is ALL IN .................................................................................................................................................. 546
RISK: VIX - Cost of Risk Plummets ................................................................................................................................ 549
Cassandra's - New Additions to the List.......................................................................................................................... 551
Cassandra: Ron Paul Portfolio, 'Craziest' we've ever seen? ........................................................................................... 551
Cassandra: John Mauldin Goes Negative ...................................................................................................................... 552
Cassandra: Hayman Capital Dramatically Reduces Risk ............................................................................................... 559

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Cassandra: Byron Wien Warns "Oblivious Markets" Of 20% Correction ......................................................................... 560
Cassandra: Harry Dent Warns Stocks to Sink More than 60% by End of 2014............................................................... 560
Cassandra: Stanley Druckenmiller: "When You Get This Kind Of Rigging, It Will End Badly" ......................................... 561
Cassandra: Mohamed El-Erian: "Prices Are Artificially High - Its Time to Take Profits".................................................. 562
Cassandra: Felix Zulauf: World Headed Toward 1987 Style Market Collapse ................................................................ 563
Cassandra: Doug Kass: 'I'm Getting The Summer Of 1987 Feeling' In The Market Right Now ....................................... 563
SECTOR: Canaries ............................................................................................................................................................ 565
SECTORS - EU > ALCOA > How the "Beat Estimates" Game is Played When Earnings are a Disaster ........................ 565
SECTORS - China > Nike > Impact On Nike .................................................................................................................. 568
SECTORS - Global > Banks & Financial > Net Unrealized Bond Gains / Losses ........................................................... 569
SECTORS - Global > Banks & Financial > Bank Losses ............................................................................................... 571
Q3: Canaries ...................................................................................................................................................................... 575
Q3 Canaries - 7 reasons for a September Crash ........................................................................................................... 575
Q2: Canaries ...................................................................................................................................................................... 579
Q2 Canaries - Liquidity and Devious Public Policy Can Overcome Common Sense for only so long! ............................. 579
Q2 Canaries The Downside Risk of Fed Losing Control is Terrifying ........................................................................ 581
Q2 Canaries Wal-Mart Same Store Sales Fall 1.4% ................................................................................................... 587
Q1: Canaries ...................................................................................................................................................................... 589
Q1 Canaries - The Equity 'Air-Pocket' And 5 Reasons To Worry .................................................................................... 589
Q1 Canaries - 12 Things That Just Happened That Show The Next Wave Of The Economic Collapse Is Almost Here .. 599
Q1 Canaries - A Mad Rush Could Be Coming In The Corporate Credit Markets ............................................................ 601
LONGER TERM - FUNDAMENTAL ANALYSIS....................................................................................................................................... 606
HIGHLIGHTS ...................................................................................................................................................................... 606
Valuation Summary........................................................................................................................................................ 606
Earnings > Margins > PE > Valuation............................................................................................................................ 609
Three Major Disappointments ........................................................................................................................................ 610
Three Evident Themes ................................................................................................................................................... 611
Peek Earnings & Peek PE ............................................................................................................................................. 613
Equity Valuation: The Surprising PE Ratio Regime You MUST Now Watch .................................................................. 614
What to Watch in Q1 ...................................................................................................................................................... 617
VALUATION: Alternative Methodologies ......................................................................................................................... 618
Four Set Consolidated Market Valuation Indicators: Overvaluation Relatively Unchanged ............................................. 618
Crestmont from the Arithmetic ..................................................................................................................................... 620
Cyclical PE 10 Ratio ................................................................................................................................................... 622
Q Ratio ....................................................................................................................................................................... 626
S&P Composite Regression-to-the-Trend ................................................................................................................... 631
REFERENCE METHODOLOGIES ANALYSIS .............................................................................................................. 633
S&P Fair Value .............................................................................................................................................................. 642
Rule of 20 ...................................................................................................................................................................... 648
Cyclically Adjusted PE's (CAPE) are Richly Valued........................................................................................................ 649
Value Line Arithmetic ..................................................................................................................................................... 650
Shiller PE Ratio.............................................................................................................................................................. 650
Comments on Estimated Forward Operating Earnings ................................................................................................... 651
S&P Earnings Yield versus Bond Yields................................................................................................................... 652
VALUATION: Situational Assessment ............................................................................................................................. 653
Valuation: The Shiller CAPE Isnt the Only Metric Showing a Severely Overvalued Market. ....................................... 653
Valuation: Earnings & Profits Per Share Suggest Overvaluation .................................................................................... 655
Valuation: When Corporate Cash flow Slows& Goes Negative Bad Things Happen....................................................... 657
Valuation: Risk is in the Drawdown ................................................................................................................................ 658
Valuation: Fundamentals Emerging as ERP is Changing ............................................................................................... 660
Valuation: Macro Trends in Wages and Profits............................................................................................................... 662
Valuation: PE Multiple Expansion Is Not Sustainable ..................................................................................................... 666
Valuation: Shiller PE of 24X Historically Signals An Approaching Top ............................................................................ 667
Valuation: Revenue Recession and Eroding Operating Profits ....................................................................................... 670
Valuation: CAPE currently stands at 23.6, higher than 90% of comparable readings since the 1870s. ........................... 672
Valuation: Market Expensive According to 5 Year Rolling Forward PE ........................................................................... 673
Valuation: Expanding PEs as there is a Perception of 'Few Options' Available to Investors ........................................... 674
Valuation: A Flow Driven Manufactured Market Versus Real Economy .......................................................................... 677
Valuation: The NY Feds Equity Risk Premium ............................................................................................................... 678
Valuation: Kotok's Decade Ending 2200-2500 SPX ....................................................................................................... 682
Valuation: A Long Term PE Adjustment Process ........................................................................................................... 684
Valuation: Hussman Earnings Excessive by Historical Norms ........................................................................................ 684
Valuation: When Rich Valuations Meet Poor Economic Data ......................................................................................... 686
Valuation: Earnings, Valuations, Dividends and Buybacks a Problem ............................................................................ 692

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Valuation: Unencumbered DCF -- Free Cash Flow is KING! .......................................................................................... 695

Valuation: S&P 500 Between 40-70% above Pre-Bubble Valuation Norms .................................................................... 696
Valuation: Hope Priced In .............................................................................................................................................. 700
Valuation: Median NTM PE ............................................................................................................................................ 701
Valuation: Inflation Adjusted Earnings ............................................................................................................................ 702
Valuation: PE Expansion Possible, though Likely Temporary ......................................................................................... 703
Valuation: PE Compression In Process .......................................................................................................................... 705
Valuation: PE Ratio Election Year Trends ...................................................................................................................... 706
Valuation: The Shiller P/E .............................................................................................................................................. 707
Valuation: Foreign Profits Kept Untaxed Offshore .......................................................................................................... 710
Valuation: Downward Revisions Accelerating................................................................................................................. 711
Valuation: Forward Guidance Significantly Lower than Reported Strength ..................................................................... 714
Valuation: Equity Valuations: It's All Downhill From Here ............................................................................................... 716
Valuation: Earnings Continuing to Weaken without much Media Fanfare ....................................................................... 718
Valuation: A Different Earnings Season. ........................................................................................................................ 719
Valuation: Government Spending Driving Profits: Artificially High Margins .................................................................... 721
Valuation: Inflation Expectations - Markets Mistakenly Expecting Growth & Profit To Accompany It .............................. 722
Valuation: Major Warning Needs Heeding: FedEx......................................................................................................... 723
Valuation: What We Called for Is Beginning To Show .................................................................................................... 725
Valuation: Equities as a Matter of Belief ......................................................................................................................... 730
Valuation: The Charts Wall Street Doesn't Want You To See On Annual Returns .......................................................... 733
Valuation: Some Sobering Japanese Comparison Charts from Michael Darda at MKM Partners ................................... 738
Valuation: Are Corporate Profit Margins About To Grind Lower For Another 10 Years? ................................................. 741
Valuation: Corporations Have Captured 88% Of All Post-Recession Income Growth ..................................................... 742
Valuation: Think Stocks Are Cheap? Here's 7 Reasons Why That's A Myth ................................................................... 743
PE CONTRACTION - Situational Assessment ................................................................................................................. 744
We Have Been Warning, Now Here it is ................................................................................................................. 744
PE Ratio: Rising PE Multiples, Not Better Earnings, Are What's Driving The Stock Market ............................................ 747
PE Ratio: Expansion, Then Contraction ......................................................................................................................... 748
PE Ratio: Multiples Grow at Fastest Pace Since Dot-Com Bubble ................................................................................. 749
PE Ratio: CAPE currently stands at 23.6, higher than 90% of comparable readings since the 1870s. ............................ 751
PE Ratio: PE's In Perspective ........................................................................................................................................ 753
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 754
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 757
PE Ratio: PE's Are At Historically Elevated Levels ......................................................................................................... 759
PE Ratio: Signs of Peek PE ........................................................................................................................................... 760
PE Ratio: The Four Regimes of Equity Valuation ........................................................................................................... 761
PE Ratio: Since 2010, valuations have moved with Non-Investment grade (B) yields .................................................... 764
PE Ratio: Have Significant More Room To Compress .................................................................................................... 765
PE Ratio: Over Next Year Trailing PE to be Below Generational Norm. ......................................................................... 767
MARGIN COMPRESSION - Situational Assessment ....................................................................................................... 770
Compression: Cost Push now Creating Margin Compression! ....................................................................................... 770
Compression: Corporate Earnings - Signals of Margin Compression ............................................................................. 774
Compression: Expect Further PE Compression: Margin Squeeze ................................................................................. 779
Compression: Shifting Secular Sands - Emerging Impediments to Global Earnings Growth Rates................................. 781
Compression: Corporate Margins - 2013 Margin Expectations Not Credible .................................................................. 782
Compression: Profits Have Stalled. Has the Market? ..................................................................................................... 783
MARGIN & CREDIT ............................................................................................................................................................ 785
MARGIN DEBT - Rolling Over & Suggesting a Significant Correction Ahead ................................................................. 785
ROTATION-CREDIT CONTRACTION II ............................................................................................................................. 788
Credit Contraction - Bank Reserves A Ticking Bomb, But Who Will Be Caught in the Blast?.......................................... 788
Credit Contraction - Traders Reacting to the 1994 Pattern ............................................................................................. 791
Credit Contraction - Global Growth Clearly Slowing and near Contraction Without BRICS ............................................. 793
Credit Contraction - Fundamentals Emerging as ERP is Changing ................................................................................ 794
Credit Contraction - Falling Real Disposable Income means Falling Consumption ......................................................... 796
Credit Contraction - A Credit Squeeze Leads to a Deflationary Leg Down .................................................................... 798
Credit Contraction - Stunning Withdrawals from Emerging Markets ............................................................................... 799
Credit Contraction - Private Equity are Major Sellers of All Assets ................................................................................. 801
Credit Contraction - Asset Trends versus Bubbles ......................................................................................................... 803
EQUITY RISK PREMIUM.................................................................................................................................................... 805
Equity Risk Premium: Yields Improved, Especially Against Stock Yields ........................................................................ 805
Equity Risk Premium: The Incentive for the Anticipated "Great Rotation" ....................................................................... 806
BUYBACKS ........................................................................................................................................................................ 809
Buybacks: Going nowhere if it wasnt For BUYBACKS from Cheap Debt ....................................................................... 809
Buybacks: Buyback Achievers Index at 2007 Top .......................................................................................................... 811

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INSUFFICENT WEALTH CREATION MEANS SHRINKING EQUITY GROWTH ................................................................ 812

Wealth - Debt Saturation Means there is Simply Insufficient Wealth Creation within Developed Nations ........................ 812
Wealth - The "TAPER" Scare before the 'OPMF' Storm ................................................................................................ 816
Wealth - Cash Flow and CAPEX .................................................................................................................................... 819
Wealth - Removing the Manipulation to See Real Enterprise Value Metrics ................................................................... 820
EARNINGS - Situational Assessment .............................................................................................................................. 822
Q3 Earnings - Conference Calls to Bring Down Q4 "Hockey stick" Significantly ......................................................... 822
Q3 Earnings: Earnings: the Stock Market's Achilles Heel ............................................................................................... 822
Q3 Earnings: Buybacks Disguising Overvaluation .......................................................................................................... 825
Q2 Earnings - Estimate Reductions Accelerating ........................................................................................................... 830
Q2 Earnings: As Goes Wal-Mart; So Goes America...? .................................................................................................. 830
Q2 Earnings: Investors Still Distracted ........................................................................................................................... 831
Q2 Earnings: Financial Loan Loss Reserve Reversals Hiding a Disaster ....................................................................... 832
Q2 Earnings: EU Earnings Disappointments Match US.................................................................................................. 834
Q2 Earnings: Revenues Flat with Rising Earnings?? ..................................................................................................... 835
Q2 Earnings: Q2 EPS Estimates .................................................................................................................................... 836
Q2 Earnings: Negative Guidance Worst Since Early 2012 ............................................................................................. 838
Q2 Earnings: Signs of Serious Troubles in Consumption ............................................................................................... 838
Q2 Earnings: Concerns Abound With Non-US Earnings ................................................................................................ 840
Q2 Earnings: Negative Pre-Announcements Currently At Record Levels ....................................................................... 842
Q2 Earnings: Tax Incentives Inflating Earnings .............................................................................................................. 844
Q2 Earnings: Estimates Becoming Very Suspect ........................................................................................................... 847
Q2 Earnings: Fund Managers forced to Chase Yield...................................................................................................... 849
Q2 Earnings: Estimates Simply Not Believable .............................................................................................................. 851
Q2 Earnings: Financialization & Financial Profit Levels .................................................................................................. 852
Q2 Earnings: PE Expansion Hides Risk and is itself Unjustified ..................................................................................... 853
Q2 Earnings: Goldman Goes Uber-hyper-Bullish ........................................................................................................... 854
Q1 Earnings - Outlooks Being Brought Down ................................................................................................................. 856
Q1 Earnings: 2013 Top-Down & Bottom-Up................................................................................................................... 856
Q1 Earnings: 2013 Earnings To Be Less Than 2009 Earnings Projected To Be In 2007 ................................................ 859
Q1 Earnings: Classic Hockey stick of False Expectations .............................................................................................. 861
Q1 Earnings: Bearish Corporate Guidance Threatens Q1 Profit Growth Estimates ........................................................ 864
Q1 Earnings: Retailers Report Solid Q4 Profits, But Q1 Outlook Dims Still Further ........................................................ 866
Q1 Earnings: Analysts Apparently Surprised? ................................................................................................................ 868
Q1 Earnings: Wage & Profit Disparity - Peak Profits, Trough Wages ............................................................................. 870
Q1 Earnings: Resting In a Few Tired Hands .................................................................................................................. 871
Q1 Earnings: Overstated Due to the Magnitude of One Time Write-Offs ........................................................................ 875
Q1 Earnings: 10 Tired Generals Carrying the Market ..................................................................................................... 877
Q1 Earnings: Interest Rates Determined by Future Inflation & Growth ........................................................................... 878
Q1 Earnings: Only 30% of firms Beat Revenue Estimates. 65% Beat Earnings ............................................................. 880
Q1 Earnings: Global Market Comparisons ..................................................................................................................... 881

TARGETS ..................................................................................................... 881

CONCLUSIONS ........................................................................................... 883
I- GORD'S VIEWS & OPINIONS ......................................................................................................................................... 883
Credit Leads Equities and It is Sending a Clear Message .............................................................................................. 883
We Are Seeing Signs of a Potential Crack-Up Boom in Equities .................................................................................... 884
When Valuations no Longer Matter A Correction Usually Follows ............................................................................... 884
Euphoria and Complacency Need Serious Consideration .............................................................................................. 885
We are within 5-6 months of a Multi Decade Top and Market Reversal .......................................................................... 885
We have another Scare before the Year End Rally & the Multi Decade Top Still Ahead ................................................. 886
Some Things in the Near Term Are Eerily Familiar......................................................................................................... 886
A Reminder: We Still Are Operating Within a 6 Hindenburg Omen Historic Cluster It Expires November 15th ............ 887
Markets Have Disconnected from All Basic Fundamental Valuation Measures .............................................................. 887
Margin Debt is at a Peak (Again) ................................................................................................................................... 888
Earnings are falling With a Q4 "Hockey Stick" To Come ................................................................................................ 888
Most Sentiment Indicators Are Rolling Over Again (History Tells Us to be aware of this) ............................................... 889
CRACK-UP BOOM after the near Term Consolidation We Still Expect new Highs ......................................................... 890
I- TARGETS........................................................................................................................................................................ 891
II- MONTHLY METRICS & ASSESSMENT......................................................................................................................... 892
A - LONG TERM: Fundamentals .................................................................................................................................... 892
B - INTERMEDIATE TERM: Risk ................................................................................................................................... 894
C - SHORT TERM: Sentiment........................................................................................................................................ 894

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III - BIG PICTURE ............................................................................................................................................................... 896

IV - DEFINING CHARTS ..................................................................................................................................................... 897
Defining Chart #1 - "Delusional Distortion" Expectations ................................................................................................ 897
Defining Chart #2 - Finding the Long Term Pivot ............................................................................................................ 898
Defining Chart #3 - Intermediate Term Top .................................................................................................................... 901
Defining Chart #4 - Short Term Volatility ........................................................................................................................ 903
V- KEY ANALYTICS ........................................................................................................................................................... 906
RISK .............................................................................................................................................................................. 906
PATTERNS ................................................................................................................................................................... 908
VI - STUDIES ...................................................................................................................................................................... 909
STUDY: Dotcom Level Euphoria .................................................................................................................................... 909
STUDY: Capital v Money: Liquidity v Credit ................................................................................................................... 909
STUDY: Margin & Leverage ........................................................................................................................................... 910
STUDY: DIVIDENDS & BUYBACKS .............................................................................................................................. 912
TRIGGER$ ZONES ....................................................................................................................................................... 913
DRIVER$ & BIA$ ........................................................................................................................................................... 914

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