war room 27 mar 2013 the great rally – is the ride over?
TRANSCRIPT
War Room 27 Mar 2013
The Great Rally – Is the Ride Over?
War Room•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
The Great Rally
I. Historical Comparisons
II. 2009-2013 Rally in Context
III. Sector Analysis
III. Scenarios + Macro Themes
HiddenLevers
HISTORICAL COMPARISONS
1929-1949 1968-1980
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
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
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
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
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?
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?
HiddenLevers
2009-2013 RALLY IN CONTEXT
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
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
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
Rally in Context: QE + MarketsQE 1MortgagesAsset Backed SecuritiesAny toxic Asset
QE2US Treasuries
QE3Agency backed mortgagesContinued buying(equities)
Yeah baby!
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
SECTOR ANALYSISHiddenLevers
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%
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%
SCENARIOS + MACRO THEMESHiddenLevers
Scenarios: Rally Killers
How will QE end?
1 2
Europe’s crash test dummy
GoodEconomy
back on track
BadStagflation
UglyDeflation
strikes back
Scenarios: End of Quantitative Easing
US Dollar gains in
all outcomes
GoodDebt Crisis
Averted
BadCyprus
Contained Meltdown
UglyCollapse +
Currency Run
Scenarios: Euro Zone Debt Crisis
EU leadershipbiggest mistake
Pulling Euros out of depositor accounts
HiddenLevers – Product Update
• Risk Profile – improved user interface
• Risk Profile – custom benchmarks
• Recent Activity Stream
• Integrations – MoneyGuidePro, Morningstar
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1. Upmarket + Downmarket Analysis
2. More polish on site – Icons + Images