longwave - mata 09-12-12 - sub - stall speed

Listen to the original podcast for this slide at www.GordonTLong.com/LONGWave

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This chart is from the September 2012 Market Analytics & Technical Analysis Report

September 12th, 2012

STALL SPEED

“Any Geo-Political, Economic or Financial Event Will Trigger a Market Clearing Stall!”

http://www.gordontlong.com/LONGWave.asp

STALL SPEED

AGENDA

RISK

• CANARIES IN THE COAL MINE

FUNDAMENTALS

• Q2 EARNINGS RECAP • Q3 Estimate Revisions, Q4 “Hockey Stick”• CORPORATE EARNINGS IMPEDIMENTS

CONFIDENCE, SENTIMENT, OPTIMISM & COMFORT

• GLOBAL CONSUMER CONFIDENCE• US CONSUMER CONFIDENCE & COMFORT• INVESTOR SENTIMENT








LONGER TERM - Fundamentals






INTERMEDIATE TERM - Risk

FedEx Stock Chart

Intel Warns of Revenue Drop Amid Weak PC Sales

Blaming lackluster demand for new PCs among businesses, Intel cut its revenue forecast for the third quarter. Similar ailments are plaguing other companies whose fortunes are tied to PC manufacturing and sales. Weakening corporate PC are the latest sign of a tech shift




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SHORTER TERM - Technical Indicators










http://blogs.decisionpoint.com/.a/6a0120a65d6eb8970b0177442c44c4970d-pi







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FUNDAMENTALS - EARNINGS







Q2 RECAP:

1. Global EPS forecasts are too high.

• Top-down, full-year earnings forecasts imply further downside to consensus estimates in the US, Europe and Japan. • In each region, the difference between our top-down 2012 EPS growth forecast and bottom-up consensus growth is

about 3pp. • MSCI Asia Pacific ex-Japan earnings growth estimate is in line with consensus.

2. In the US and Europe, P/E multiples have expanded more than fund managers realize.

• The strong rally in global equity markets during the past five weeks means portfolio managers have re-rated stocks based on policymaker promises rather than fundamentals.

• On consensus NTM EPS, the S&P 500 P/E multiple expanded from 12.6X to 12.9X. • The Stoxx multiple rose from 10.0X to 10.7X over that same period of time.

3. Consensus earnings estimates declined in all regions over the last month.

• Full-year 2012 estimates fell 4% for the Stoxx 600 while Topix (FY) and MSCI AP ex Japan forecasts each fell 3%. • S&P 500 estimates fell 1%.

4. Meanwhile, despite weak earnings season, the S&P 500 is up 3.6% since July 6.

• Other global indices have also rallied sharply with Stoxx up 6.2% and MSCI Asia Pacific ex Japan up 4.0%. TOPIX is down 2.6%.

In the US and Europe, P/E multiples have expanded more than fund managers might realize because earnings estimates are too high.







Q2 TAKEAWAYS:

1. Sales disappointed. Realized sales are 2% lower than consensus estimates at the start of the season. 2Q 2012 sales for S&P 500 (excluding Financials and Utilities) grew by 3% year over year.

2. Earnings in line with expectations. S&P 500 realized 2Q EPS is tracking at $25.49, a 2% positive surprise versus the consensus estimate at the start of reporting season. On a quarterly basis, 2Q2012 EPS will post year over year growth of 3% vs. 2Q2011. Telecommunication Services and Financials EPS grew by 26% and 14%, respectively. On a trailing four-quarter basis, 2Q2012 will establish a new EPS peak of $99.

3. Margins beat, but LTM margins are declining. With earnings beats and sales misses, 2Q quarterly margins are 20bp higher than expected (9.1% vs. 8.9%). Year over year, quarterly margins are flat to negative in most sectors. The trailing-four-quarter net margin for the S&P 500 is tracking at 8.8%.

4. Earnings expectations are falling and 3Q estimates imply no growth. The S&P 500 bottom-up consensus EPS estimate for 3Q fell 4% during the past five weeks and management guidance has been more negative than usual. Consensus expectations imply no earnings growth for the S&P 500 versus 3Q2011. Energy and Materials are the most significantly negative.

5. Over half of consensus 2012 EPS growth is from strong 4Q forecasts. 4Q earnings are expected to grow 15% versus 4Q2011, more than twice as fast as any other quarter. 4Q2011 growth was about half that of the other 2011 quarters, which explains some of the growth discrepancy between quarters in 2012. Analysts forecast a sudden jump in LTM margins to a new peak of 9.0% in 4Q2012 while we forecast further slippage to 8.7%.









USA

For the US, sales disappointed more than earnings, Lowest Percentage (42%) of Companies to Beat Sales Estimates since

Q1 2009, 18% of ex-Financials and Utilities companies have posted positive

revenue surprises by beating consensus sales expectations by at least one standard deviation, half the historical average.

The number of firms that missed sales estimates was twice the historical average.

Sales surprises were the worst since 1Q2009. Highest Earnings Growth: Financials and Industrials, Excluding Bank of America, S&P 500 Earnings Growth Falls to 1.5%, Lowest Earnings Growth for Commodity-Based Sectors: Energy &

Materials, Revenue Growth: Below 1%, The frequency of earnings beats and misses are largely in line with

history. The blended earnings growth rate for Q2 2012 is 6.5%. The Financials

(62.2%)sector reported the highest earnings growth rate for the quarter, while the Energy (-19.1%) and Materials (-15.4%) sectors reported the lowest earnings growth rates.







EUROPE• In Europe, earnings season misses were driven by margins not sales. • The frequency of earnings beats, a surprise of 5% or more, is below the three-year average (33% vs. 43%), and misses are slightly higher (40% vs. 37%). • Sales results have been modestly positive. • Analysts significantly revised down Banks earnings. • FY2012 estimates are down 9% over the past month.

JAPAN• In Japan, companies reported further earnings declines. • Results have been disappointing especially in context of the April-June 2011 quarter. • Last year, supply chain problems following the March 2011 earthquake resulted in a weak earnings season. Yet operating earnings for the April-June 2012 quarter are down 7.4% year over year. • Revisions and guidance have remained muted, which are a sign of caution in the face of macro uncertainty going into 2H.

ASIA• Across Asia, Consumer Discretionary companies posted stronger results relative to consensus estimates. • Similar to results in the United States, Energy and Materials posted the weakest results relative to consensus estimates. • Singapore posted the strongest results relative to consensus while Taiwan was weaker.







Over half of consensus 2012 EPS growth is from strong 4Q forecasts.

4Q earnings are expected to grow 15% versus 4Q2011, more than twice as fast as any other quarter.

4Q2011 growth was about half that of the other 2011 quarters, which explains some of the growth discrepancy between quarters in 2012.

Analysts forecast a sudden jump in LTM margins to a new peak of 9.0% in 4Q2012

Early in expansions, earnings tend to strengthen as cost-cutting efforts boost profits - but revenues tend to catch up as demand increases later in the cycle. That hasn't happened in an expansion nearing its third anniversary.

"What this is telling us is that the economy is slowing down, and that doesn't bode well for the bullish earnings expectations. Generally there's always a gap, but this gap

is much wider."








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CONFIDENCE, SENTIMENT & COMFORT









US








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SMALL BUSINESS OPTIMISM




CONCLUSIONS

“A 71% Consumption Economy Cannot Have

Plummeting Confidence, Unemployment, Disposable Income Compression and Job Insecurity

…. and not have Corporate Earnings Eventually Fall.”






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STALL SPEED




longwave - mata 09-12-12 - sub - stall speed

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market clearing stall

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