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