war room 27 mar 2013 the great rally – is the ride over?
TRANSCRIPT
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War Room 27 Mar 2013
The Great Rally – Is the Ride Over?
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War Room•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
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The Great Rally
I. Historical Comparisons
II. 2009-2013 Rally in Context
III. Sector Analysis
III. Scenarios + Macro Themes
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HiddenLevers
HISTORICAL COMPARISONS
1929-1949 1968-1980
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Market Rallies: Bull Markets Compared
I’m still goingstrong
source: financialgraphart.com
• Typical bull market lasts 3-4 years
• Truly great rallies last a decade
• Current rally right in the middle of the pack
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Markets: Secular Bulls + Bears since 1871
source: Doug Short, dshort.com
• Secular trends can span many market cycles
• Four bull and four bear markets since 1871
• Current (4th) bear not yet clearly over
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Markets: Defining the paradigm shift
S&P Real Total Return
all-time high:
date:
When will Bear Market end?
Only when the year 2000 highs are forever left in the
rearview mirror.
163724/Mar 2000
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Market Metrics at Recent Peaks
Metric 3/2000 10/2007 3/2013
P/E Ratio 28.5 20.7 18.01
Dividend Yield 1.16% 1.77% 2.12%
Q-Ratio 1.78 0.95 0.98
S&P / GDP Ratio 154.5 111.8 98.3
S&P 500 not as overvalued as it was in 2000 + 2007 (YET)
source: HiddenLevers analysis, Multpl.com, dshot.com
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Bullish Historians – Market/GDP Ratio
source: Bloomberg
• Market not overvalued relative to other recent peaks
• Economy has grown so S&P is just catching up
• Buffets favorite indicator
Peaking?
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Bearish Historians – Q Ratio
Q Ratio • total market
value / total replacement value of all companies
• Market peaks around 1 on Q scale
• 2000 a clear outlier
source: Doug Short, dshort.com
Peaking?
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HiddenLevers
2009-2013 RALLY IN CONTEXT
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Rally in Context: Inflation + USD
source: HiddenLevers
Analysis
• QE made inflation jump, but inflation has trended downward since mid-2011.
• Usually USD trades inverse to markets, but US dollar has rallied in 2013, even with QE increasing. This shows an intact decoupling story.
CPI touched 4%
USD
S&P
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Rally in Context: Unemployment + GDP
source: HiddenLevers
Analysis
• We are still near 8% unemployment, a far cry from under 5% when the 2007 S&P peak. This exposes QE shortcomings
• US GDP has not kept up with the market rally. Again, QE can lift asset prices, but real growth is more difficult to achieve.
2007
BIG GAP
Shabby growth
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Rally in Context: Housing + Confidence
source: HiddenLevers
Analysis
• Home sales + consumer confidence slowly rising since bouncing upward in 2011
• Home prices initially lagged, now marching up with S&P 500Housing rebound
Housing = confidence = rally
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Rally in Context: QE + MarketsQE 1MortgagesAsset Backed SecuritiesAny toxic Asset
QE2US Treasuries
QE3Agency backed mortgagesContinued buying(equities)
Yeah baby!
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QE Scenarios: How did we do?
slide from Sept 2012 War Room – QE3# success
# fail
10y S&P unemployment
USD index US GDP
# TBD
Still the case
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SECTOR ANALYSISHiddenLevers
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Sector Analysis: Strongest
Telecom = 21%
Healthcare = 20%
Discretionary = 17%
52 week change on S&P
Defensive sectors doing best
Usually, defensive sectors don’t lead rallies.
Residential construction has outperformed with the turn in housing
Consumer Discretionary contains all of residential construction and related industries
11%
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Sector Analysis: Weakest52 week change on S&P
Tech… Apple effect?
Google at 52 week highsApple at 52 weeks lows
Inflation has been in check
GDP growth sluggish
Materials + Energy have no reason to lift off
11%Tech = -2.6%
Materials = 5%
Energy = 8%
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SCENARIOS + MACRO THEMESHiddenLevers
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Scenarios: Rally Killers
How will QE end?
1 2
Europe’s crash test dummy
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GoodEconomy
back on track
BadStagflation
UglyDeflation
strikes back
Scenarios: End of Quantitative Easing
US Dollar gains in
all outcomes
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GoodDebt Crisis
Averted
BadCyprus
Contained Meltdown
UglyCollapse +
Currency Run
Scenarios: Euro Zone Debt Crisis
EU leadershipbiggest mistake
Pulling Euros out of depositor accounts
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