Third Quarter 2010 GTAA Equities

8/9/2019 Third Quarter 2010 GTAA Equities

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o a ac casse oca on

GTAAEquities

June 14th, 2010

Damien Cleusix

Clue6 Third Quarter 2010

am en c ue .com


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1Executive Summary

StocksInvestors surveys have moved from the complacency witnessed in April to more constructive levels. The Merrill Lynch

Fund Manager Survey is indicating a increased reference toward Ja an and the US and declinin interest toward

emerging markets, a trend which already started a couple of months ago. They are increasingly underweight Europe. While

usually wrong at extremes, the fund managers participating in the survey are right during trends. So accordingly one should be

long Japan and the US relative to emerging market and especially Europe.

p on ac v y as mprove an some n cators are n outr g t u s con gurat on. e wou pre er to see sma tra ers

be more fearful and buying more puts to open instead of selling calls to open. The 3 months skews reached panic levels a week

ago.

. .

Singapore in particular, we have seen a notable pick up in net buying. Europe remains the exception. Some net buying in thevery short-term but a lots of net selling in the past 100 days despite the market plunge. Selling while the markets decline is

rarely a positive combination.

Our preferred market timers continue to have different opinions. J.Hussman is bearish while S. Leuthold thinks that the

correction should be bought. The best value managers have continued to reduce their exposure to the market indicating that

the markets will have to fall more before we see fundamentalists buying from the technical traders.

pecu a ors rema ns ong e as aq u ure w e pec a s s ave ncrease e r re a ve s or se ng

activity in the past days.

So sentiment is oversold but it has to be put in the context of the recent decline and market trend (lower highs and lower

-


.

should at least consolidate in the short-term.


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2Executive Summary

Breadth volatility is such that it is currently hard to give much weight to this area. The positives are that the variousadvance decline lines have not diverged negatively in April and that we had a new cycle high in 52 weeks high at the same time.

Markets tends to at least retest the highs when this happen. Furthermore we did not get an Hindenburg Omen and the Fosback

- . -

ratio-adjusted oscillators and from the stocks above their 10 days moving average. The negative are that we have had a lots of

Lowrys 90% down days, that the McClellan oscillators remained very oversold for a very long time (relatively speaking) and

our selling pressure indicator is behaving as it does at the onset of a cyclical bear market. Furthermore the Nasdaq New High-New Lows model is on sell since the be innin of Ma .

On the liquidity side, there were big outflows in equity funds around the world. In the US one has to keep in mind that the YTD

net inflows have not been homogenous between the various categories. While foreign funds, domestic mid cap and small caps

funds have seen big inflows (mid cap inflows are reminiscent of 2000 and 2007), large cap domestic funds have seen huge

outflows. The cash ratio has also declined everywhere and does not leaves much dry powder to managers. Net redemption will

have to be met with selling holdings. Buybacks have picked up slightly but not as much as during the January correction. The

US IPO and secondary offering market is almost closed while activity has declined markedly in emerging markets in general

and China/Hong Kong in particular. Dont be fooled there are quite a few issues in the pipeline. Foreigners appetite for US

Margin debt remains very high in the US when one look at its size relative to overall market capitalization.

On the monetar front real M2 and M1 rowth is still ne ative on a ear on ear basis in the US and deceleratin

markedly elsewhere. Emerging markets central banks reserve growth has been slowing rapidly which is a headwind for

risky assets.

Pension funds funding status has stabilized but imagine the what will happen if equity price falls while high quality


corporate bonds yields (used to discount liabilities to present value) do not rise as they did in 2008-2009.


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3Executive Summary

Seasonals are supportive for the very short-term but August and September are not kind to the markets, on average. Ourmechanical seasonal model is on sell since the end of April. The 20 cycles low is due for now while the next low is expected

sometimes at the end of October (which could also be a four years presidential low).

Intermarket relationships have deteriorated. The equity market risk relationships like the Nasdaq, semiconductor or banks

relative performance are still supportive (at least for the US). The relative defensive sectors performance is a negative. What is

more worrying is the deterioration in the credit markets. Commercial papers yield are rising as is the Libor-OIS and Ted. .

daily news flow but dont be fooled the trend is clear. We have some surprise on the subject. Some forecast will be met with

incredulity.

The trends is down but markets are so oversold that a snap back rally is almost a certainty. The big problem is that it is

only ALMOST a certainty. Waterfall decline do not starts when the markets are overbought but when they are deeply oversold.

We covered our shorts and bought some in the past 10 days. We sold those position at a nice profit and are in sit and wait

position now. We are seller of strength. We expect to start building a new short position on a move above 1100 on the S&P

500 and to be fully short at 1140-1160. If the markets fail to reach those level we will take short position on lower short-

erm ows a ec ne e ow e curren s or - erm up ren .



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4Equities: Sentiment SurveysS&P 500 and AAII Bull RatioChart 2Investor Intelligence Bull/Bear RatioChart 1

Surveys are indicating rising nervousness but no panic yet .

Source: AAII, Clue6Source: Investor Intelligence, Clue6

The Hulbert Nasdaq and Dow newsletter exposure surveys are clearly showing a lot of anxiety in this space with net short position being

recommended on average.

The Investor Intelligence (Chart 1) and American Association of Individual Investors (Chart 2) surveys have improved but are not yet in


, .


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5Equities: Sentiment SurveysTSP Survey and S&P 500Chart 4NAAIM SurveyChart 3

Source: TSP, Clue6Source: NAAIM, Clue6

The TSP Bull/Bear Survey (Chart 4) is neutral but gave a buy signal 2 weeks ago when it fell below 0.5.



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6Equities: Sentiment SurveysShillers Buy-On-Dips Confidence IndexChart 6Shillers Crash Confidence IndexChart 5

The crash confidence index (Chart 5) measures the percent of the population who attach little probability to a stock market crash in the next-six months.

After having reached its lowest level at the end of 2008-beginning of 2009, the index has been steadily rising since. The analysis of this index is tricky

Source: R. Shiller, Clue6Source: R. Shiller, Clue6

Low levels occurring after prolonged decline are bullish, but you want the index to rise strongly along the markets (remember the crowd is wrong at the

end of the trend not during a trend).

The buy-on-dips index (the percent of the population expecting a rebound the next day should the market ever drop 3% in one day) (Chart 6) is indicating

that institutions are very comfortable buying the dips while individuals are nervous


Last quarter we said : So, maybe small declines will be bought, as they have in the past 9 months but if the selling pressure is strong enough to push the market lower, the

move could start to cascade downward Well, here we are judgment day is coming soon.


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7Equities: Sentiment SurveysML Fund Managers Survey Percentage Net

Overweight Emerging marketsChart 8ML Fund Managers Survey Percentage

Net Overweight JapanChart 7

Source: Merrill LynchSource: Merrill Lynch

On a Country/Region basis we identified two stands out for 2010 in the Q1 presentation.

Ever bod hated Ja anese stocks Chart 7 while Emer in Markets were ever ones darlin Chart 8

So far so good Japan has outperformed Emerging Markets. There are now more managers overweight Japan than at anytime in the past two and an

half years but Emerging Markets are still the most loved region but its popularity is rapidly falling.

The fate of emer in market is aramount to the bulls as the think EM will decou le and be the en ine of the world. The are robabl ri ht on


a 25 years basis but for the medium-term they might be disappointed. Especially when a big part of its outside financing needs have been comingfrom European financial companies.


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8Equities: Sentiment SurveysML Fund Managers Survey Percentage Net

Overweight EuropeChart 10ML Fund Managers Survey Percentage

Net Overweight USAChart 9

Source: Merrill LynchSource: Merrill Lynch

Managers are warming up to the US (Chart 9). We think they are right. With all its ills and disequilibrium, the US are the more flexible among

.

big too fail if they are allowed to be reorganized or liquidated on an orderly fashion, the US will move from outperformer to super-outperformer.

In the meantime managers are now underweight Europe (Chart 10). We never understood why they wanted to be overweight in 2009 in the first

palce but



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9Equities: Sentiment Put Call RatiosS&P 500 and Equity PC RatioChart 12S&P 500 and OEX PC RatioChart 11

The OEX put call ratio (Chart 12) is currently very low after the 2 as usual timely above 2 warnings it kindly gave at the end of April.

Source: Clue6Source: Clue6

The equity put call ratio (Chart 13) has corrected from the extreme bullishness of the end of April. The moving average is now declining which is a

positive. We would have preferred this decline to start from a higher level but



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10Equities: Sentiment Put Call RatiosEuroStoxx 50 and 3M 90/110 SkewChart 14S&P 500 3M 90/110 SkewChart 13

The option skew is the shape of an asset option implied volatility along the strike for a given maturity. In the above charts we are looking at theabsolute difference of the implied volatility of 3 months put options with a strike at 90% of the current price and 3 months call options with a strike


. . . .

The S&P 500 skews has surpassed the levels reached during the aftermath of Lehman Brothers bankruptcy (Chart 13). The same is true for

the EuroStoxx skew (Chart 14).


actually be bearish longer-term.


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11Equities: Sentiment Put Call RatiosIshare MSCI Emerging Market ETF and 3M 90/110 SkewChart 16Ishare MSCI Japan ETF and 3M 90/110 SkewChart 15


e apanese an merg ng ar ets s ew prox es, w e mov ng s arp y g er, not n cate t e same eve o pan c as t e an uropean

Markets (Chart 15 and 16).



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12Equities: Sentiment Put Call RatiosS&P 500 and Small Traders Buy to Open Put/Call RatioChart 18S&P 500 and Small Traders Option ActivityChart 17

Small traders (up to 10 contracts traded) puts buy to open activity represents 18% of their total activity which is low given the recent markets

Source: OCC, Clue6Source: OCC, Clue6

volatility while their call buy to open activity now represent less that 30% of total activity. Their favorite strategy is currently to sell calls (Chart 17).

Bullish strategies now represents less than 50% of the total which is much better that the 60% of 6 weeks ago.

The buy to open put call ratio is above 0.5, still shy of the 0.6 levels where markets have usually bottomed (Chart 18).



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13Equities: Sentiment InsidersFootsie and InsidersChart 20S&P 500 and Russell 3000 InsidersChart 19

The Russell 3000 sell/buy ratio has now corrected from the extremely high levels reached in April (Chart 19). We almost even had some net buying

Source: ML, Clue6Source: Bloomberg, Clue6

. - .

In the UK, the buy/sell ratio has improved somewhat too (Chart 20).

Remember, insiders activity is especially useful in 2 configurations: lots of relative buying or increased selling when the markets decline



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14Equities: Sentiment Insiders

Buying and SellingChart 22

EUR mio. (in 000s EURO)Chart 21

Source: DB Source: DB

Europe experienced some short-term net buying at the transactions level (Chart 21) but

has seen increased selling activity at a company level in the past 6 months (Chart 22). This is not good and indicating that the cycle has

probably moved from bull to bear. Once more you do not want insiders selling a falling market.



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15Equities: Sentiment InsidersSingapore Insiders Buy/Sell RatioChart 24Canadian Insiders Buy/Sell RatioChart 23

Source: InsiderAlphaSource: InkResearch

In Canada, insiders buying has peaked up slightly but remains lower than selling (Chart 23). Historically, as in the UK, buying has outpaced selling

in Canada, not like in the US.

In Singapore, the buy/sell ratio has moved sharply higher in the past few weeks (Chart 24). This is a positive.



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16Equities: Sentiment Smart MoneyS&P 500 and Leuthold Core Beta ExposureChart 26S&P 500 and Hussman Strategic Growth Beta ExposureChart 25

J. Hussman strategy has changed since the start of April He is not buying small on weakness and re-hedging completely on strength, at least not to


the extend it did it in the past 12 months. According to our calculation he is currently fully hedged (Chart 25). He remains very concerned that the

market decline could accelerate after a short-term relief rally.

S. Leuthold, who has been bullish and right since early in 2009, is back to the bull camps after having expressed some short-term concerns in

April (Chart 26)



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17Equities: Sentiment Smart MoneyChart 43

Source: Clue6

Looking at the median exposure of a subset of successful value managers, one can see that they have dramatically reduced their exposure

recently.

It usually pays to buy when their daily exposure shoots higher for a couple of days and you should move out if their exposure decline (couple of days


with very low exposure) in a declining markets as the risk of a waterfall decline increase exponentially.


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18Equities: Sentiment Smart/Dumb MoneyS&P 500 and Strategists Stock AllocationChart 28Nasdaq 100 and Non-Commerical Net Long Future PositionChart 27

Non-Commercial are net long Nasdaq future which is worrying (Chart 27).

Source: Bloomberg, Clue6Source: Bloomberg, Clue6

Wall Street Strategists are still recommending investors to allocate approximately 60% of their assets to stocks (Chart 28). While it remains

lower than the average of the past 12 years this would probably not be the case if a longer history was available.



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19Equities: Sentiment Smart/Dumb MoneyS&P 500 and Odd lot Short SellingChart 30S&P 500 and NYSE Specialists Short ActivityChart 29


.

In the meantime, odd lots short selling relative activity has decreased (Chart 30).



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20Equities: Sentiment Dumb MoneyRydex Total Bull vs. Bear AssetsChart 31 ProShare Short ETF Total AssetsChart 32

Source: G.Lerner

Source: Bloomberg, Clue6

.

Proshare short ETF total assets have risen markedly in the past few weeks (Chart 32).



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21Equities: Sentiment Dumb MoneyAnalysts US Stock Recommendations 3 Months ChangeChart 33 Topix and Percentage Analysts Sell Recommendations JapanChart 34

Source: Bloomberg, Clue6 Source: Bloomberg, Clue6

higher than 3 months ago (Chart 33)

In Japan both buy and sell recommendations are only slightly lower than 3 months ago (Chart 34).



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22Equities: Sentiment Dumb MoneyTopix and Shares Sold on Margin Profit/Loss RatioChart 36Topix and Shares Bought on Margin Profit/Loss RatioChart 35

In Japan analysts have access to the performance of the margin buyers and sellers.


n art one can see t at w en nvestors are start ng to ma e money on t e stoc s oug t on marg n or even os ng ess t an , t e ra y s

usually very near a reversal. They are not yet losing enough for the odds of a rebound to be strongly positive.

The same is true on stocks sold short on margin (Chart 436) when they start to make a profit, a reversal to the upside is not very far. Close to

positive territory.


Margin traders are currently losing both way the winner? Brokers we guess.


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23Equities: Sentiment VolatilityS&P 500 and CFTC VIX Large Speculator Net PositionChart 38S&P 500 and Vix Time-SpreadChart 37

The VIX time-s read is at a neutral level after havin tri ered a bu si nals 2 weeks a o Chart 37 .


Non-commercials have a net short position in the VIX future (Chart 38). Remember that they are the smart-money here (but note that they were

dead wrong with their highest net long position in December so)


E i i


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Equities: Sentiment 24

Source: Clue6

The sentiment Composite is oversold. If we are just experiencing a correction in a bull market, you should be buying aggressively if not we

should/could rebound but the rebound should be used to sell.



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E iti


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26Equities: BreadthS&P 500 and Selling PressureChart 40S&P 1500 and its AD LineChart 39

The S&P 1500 Composite Index cumulative advance decline line is still in synch with the markets after having displayed a lot of strength at


.

current correction being something else than a simple correction in a cyclical bull market very low. This is one of the rare element in our

overall analysis that points clearly that way. This is the fly in the ointment.

Our selling Pressure indicator has spiked higher recently (Chart 40). Usually when it is above 0.7 and the market is making new 52 weeks high, a


, ,

E iti


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27Equities: BreadthLowrys 90% DaysChart 42Nasdaq 100 and the New High New Low ModelChart 41

The Nasdaq New High-Low Model is on sell (Chart 41). It is in sell the rallies mode.


We have documented the rapid increase in breadth volatility in the past few years and the same is true for Lowrys 90% days (to have an 90%

up days, >90% of the volume should be in rising stocks, >90% of the issues should be rising and >90% of the points moves should be made by rising

stocks). The past 6 weeks have seen the highest concentration in history (Chart 42)


E iti


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28Equities: Breadth

Source: Clue6

We have had 11 90% Lowrys down days (7 where both the Nasdaq 100 and S&P 1500 had one the same day) and 5 90% up days.

The last one was a 90% up day for the S&P 1500 on the 10 th .


.

here yet (which is understandable, see the equity valuation presentation).

Equities: B d h


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29Equities: BreadthS&P 500 and Bullish/Bearish Chart Pattern BreadthChart 44S&P 500 and Buying/Selling ClimaxesChart 43

Source: N. Bulkowski

A buying climaxes occurs when a stock is closing a week where it reaches a 52 weeks high with a loss. The selling climaxes is the reverse (close

Source: Investor Intelligence

higher a week where it made a 52 weeks low. Back at the end of May we had a record in the number of buying climaxes. We are now having the

highest number of selling climaxes since the March 2009 bottom (Chart 43).

Looking at the percentage of stocks forming bullish/bearish pattern, N.Bulkovski has created an indicator which has been pretty accurate in the

past few months (Chart 44). The model is on sell now.


30Equities: B dth


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30Equities: BreadthNasdaq Composite and its McClellan OscillatorChart 46S&P 500 and NYSE McClellan OscillatorChart 45

We have been waiting for a positive divergence between the NYSE and Nasdaq McClellan Oscillators in the past few weeks (Chart 46 and 47).We got one this week when the markets made new low but the oscillator did not.

Source: Clue6 Source: Clue6

Markets usually only makes the low on a divergence and when the oscillator is very oversold for 5-6 days, the risk of an acceleration to the downside

are high.

The oscillator stayed deeply oversold so long that it increases the risk of the April highs to be the highs of the bull cycle which started in


March 2009.

31Equities: B dth


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31Equities: BreadthS&P Emer in BMI and Com onents above theirS&P 1500 and Com onents above their

10 and 50 Days Moving AverageChart 48

10 and 50 Days Moving AverageChart 47

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.


32Equities: Breadth


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32Equities: BreadthS&P 500 and Hindenburg OmensChart 50S&P500 and Fosback High Low IndexChart 49

In the past we have used the following 2 studies to warn of impeding cyclical trend change.


On chart 49, one can see that the Fosback High Low Index remains low, indicating a lack of distribution. We are now moving away from the 1

year anniversary of the Marc 2009 bottom and the behavior of the indicator will be very informative in the weeks/months to come

As for the Hindenburg Omen none has been triggered since the 2007 peak on the major indices (Chart 50)


33Equities: Liquidity


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33Equities: LiquidityUS Equity mutual fund Cash Ratio ModelChart 52US Equity mutual fund assets and net cashChart 51

There were huge outflows from equity mutual funds in May after the big inflows in April. Note that not all categories are behaving similarly.

Since the start of the year, foreign equity funds have continued to see inflow as have domestic mid cap (inflow similar to the 2000 and 2007 peak)

Source: ICI, Clue6 Source: ICI, Clue6 Idea: J.Goepfert

an sma caps. e g osers ave een omest c arge cap un s. arge cap qua y w ere you s ou nves your money o s ow your rue

contrarian mentality.

Mutual fund cash reserve is historically low and net mutual fund selling will have to be met with manager selling. If we adjust the cash level

taking into account the short-term interest rate level (a higher risk free rate imply a higher cash ratio, ceteris paribus) using Jason Goepfert


u ua un as eserve, e s - ree a e an oc ar e er ormance paper, one can see a we ave ye o reac angerous ow eve s,

but note that with the current short-term rate even 1% cash ratio would not be sufficient to make the model bearish so


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35Equities: LiquidityNumber of Buybacks Announced per Month in JapanChart 56Number of Buybacks Announced per Month in the USChart 55

Buybacks have picked up modestly in the US in the past 6-7 months but remains at relatively low level (Chart 55) It was encouraging to see

the number of buybacks announcement to rise to around 100 a month in January (with a big increase a the end of the month) and February (at the


.

In Japan, the beginning of the year increase as petered out (Chart 56), we hope we will soon be convinced that managements are more interested

in the well-being of their shareholders.

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, ,

management (insiders)is selling their own shares and in Japan we would prefer to see stocks bought back than new unproductive capitalexpenditures.



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36Equities: LiquidityChina + Hong Kong IPOs and Secondaries (US mio.)Chart 58US IPOs and Secondaries (US mio.)Chart 57

Secondaries picked up in the US in April but the market is quasi closed for now (Chart 57).


, .

Remember that management sell stocks mainly for 2 reasons. First when they have to in order for the company to survive (what happened in the US

during the first 4 months of 2009) or when they would be stupid not to (like Blackstone in July 2007, China and Hong Kong at the end of 2007 and

potentially now, KKR,)


As an aside, we were choked by the level of optimism toward China expressed by Hong Kong investors. See it for yourself here:http://insider.thomsonreuters.com/link.html?ctype=groupchannel&chid=3&cid=111042&start=0&end=2382&shareToken=Mzo0MzJmNWY2ZC1kZmU0LTQ0MjgtYjE1Yy1jZWU3ZjFmYjU5MDM%3D



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37Equities: LiquidityHedge Fund Ownership of US SizeChart 60US Hedge Fund Net Long ExposureChart 59

Source: Goldman Sachs Source: Goldman Sachs

.

They have been actively decreasing their exposure to small caps in the past few months (Chart 60) and this does not bode well for them.




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38Equities: LiquidityShort Interest as a Percent of FloatChart 62Foreigners US Equity Net BuyingChart 61

Foreigners like to bash the US but they have an incredible propensity to buy US equities near cyclical tops (Chart 61).

Source: Goldman Sachs Source: Goldman Sachs

With regard to short interest, we have long said that while large cap shorts tend to be dumb money on aggregate, small caps shorts tend to be

better informed The spreads between small and large cap short interest as a percentage of float is rising again (Chart 62)




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qu t es: qu d tyTopix and Relative Short Sale VolumeChart 64S&P 500 and NYSE Margin debtChart 63

The NYSE margin debt has now exceeded the 2000 levels on a % of market cap basis and is not far away from the 2007 highs (Chart 63). It


remains well below the 1929 highs but those levels will probably never be seen again.

Japan short selling activity has picked up markedly recently and is at levels were the market usually find some footings (Chart 64).




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q q yJapanese Middle to Young Cohort and Equity Funds

AssetsChart 66US Middle to Young Cohort and Equity Funds AssetsChart 65

The above 2 graphs are well-known for those who have been reading our research for a long-time.

Source: ICI, Census Bureau, Clue6 Source: BOJ, Japanese National Institute of Population and Social Security Research, Clue6

We believe that the long-term flows into and out of assets (the relative buying/selling urgency to be more precise as they are no money getting in

or out of the market for each buyer there is a seller and vice-versa) have a demographic root It affects the assets relative value and can be best

seen on the secular trends in normalized valuation ratios.

In the US, one should not be surprised by the net outflows from equities into bonds, this is what should happen (Chart 65) while in Japan we should


see the reverse (Chart )



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q q yMiddle Age Population Growth ForecastChart 68Chart 67

the Next 5 Years

On chart 67 you can see the countries which have the most positive demographic dynamic according to the Middle to Young Cohort hypothesis

Source: Census Bureau, Clue6 Source: Census Bureau, Clue6

But should not only the Middle to Young Cohort but the absolute growth of the middle age population (Chart 68).

Combining both, one see that the picture is somewhat less bullish than it seems for Japan, Spain, Poland, Portugal and Greece




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q q yMiddle Age Population Growth ForecastChart 70Chart 69

the Next 5 Years

On chart 69 one can see the countries with the most bearish demographic configuration according to the Middle to Young Cohort hypothesis.

Source: Census Bureau, Clue6 Source: Census Bureau, Clue6

The middle age dynamic of those countries is presented on Chart 70.




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qUS Pension Assets Sensitivity to Markets

Movements (as a % of ttm Earnings)Chart 72Towers Watson US Pension IndexChart 71

hange)

StocksPrice(%

US Pension Liabilities Sensitivity to theChart 73

Bonds Yields (Bps Change)

Source: Towers Watson

Source: Bloomber , Clue6

Discount Rates(Bps Change)

Pension, both private and public, are an accident waiting to happen

In the US, listed corporate programs are underfunded by almost 30% (Chart 71). This represents more than US bn. 300 or almost 60% of ttm

net earnings.

On the chart 72 and 73 you will find rough estimates of the impact on markets movement on the assets and liability side The 2008-2009 carnage


.

downturn.



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Pension Funds Funded RatioChart 76Pension Funds Investment ReturnsChart 74

Pension Funds Liability GrowthChart75

And here is the situation in some other countries

Source: Towers Watson Source: Towers Watson

And lets not forget the poor state of many public pension schemes Future retirees will not get what they were promised when they will

realize, they will see that they have massively under saved (and we would say that the situation is dearest in many European countries). This will

serve as a wake up call for younger generations.




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MSCI World and Big EM Foreign Reserve HoldingsChart 78S&P 500 and M2 MomentumChart 77

Liquidity momentum has a slight tendency to lead markets, and this should be especially true given in the current environment

Source: Clue6 Source: Towers Watson

momentum s support ve w en us ng a wee s rate o c ange ut on a year on year as s t e p cture oes not oo goo art .

EM foreign reserve holding have started to decline and this has historically coincided with volatile equity markets (Chart 78).

Note that emerging markets foreign reserve holding have been increasing much more rapidly than what the US current account deficit would have


mp e . s means a mass ve s or pos on are e ng u roug e specu a ve n ows. eman or w re urn w a

vengeance when it is least expected.

Equities: Seasonality President Cycle and Monthly Seasonality 46


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Return since 1927)

Chart 79 US Monthly Return (S&P 500 Total Return since 1944)Chart 80

The four ear Presidential c cle Chart 79 has been distorted b the hu e fiscal and monetar stimuli of last ear. The rational behind the


presidential cycle theory is that public money is spend to optimize the chance of the incumbent(s) to be reelected and that is followed by some pay

back for the market. Historically the best time to buy would be this October.

The market has a tendency to perform well in July but then youd better be on holiday (Chart 80).


Equities: Seasonality Sell in May and 47


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Average Return MSCI Indices 1970-1998Chart 81 Average Return MSCI EM Indices 1970-1998Chart 82

Source: The Halloween Indicator, S. BoumanSource: The Halloween Indicator, S. Bouman

We are now in the negative half of the year (Chart 81 and 82) and our sell in may seasonal quant models (where the switch is not based solely

on a date but we want a technical confirmation during a given time-window) has been on sell since late April.


Equities: Seasonality End of Month Anomaly 48


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US Day of the Month (S&P 500 Total Return since 1944Chart 83 Japan Day of the Month (Topix Total Return since 1979Chart 84

The day of the month continue to exhibit its historical pattern in


as showed previously).

In the US the first day of the month remains the stand-out winner

while in Japan, the 8 positive days continue to display an outstanding


.

Source: Macquarie

Equities: Seasonality Cycles 49


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NYSE Composite and the 20 and 40 Weeks CyclesChart 85 Super Cycle Economic SeasonsChart 86

The next 20 and weeks cycles low are expected for now with the next 20 weeks cycle low in October (Chart 85).

Source: Clue6 Source: Bronson Capital Market Research

, . , .

analysts have tried to define this cycle by applying a fixed number of years but, as we have long said, we think that this is more of a generational cycle of

leveraging and deleveraging (was visible on price up to the creation of the Fed and on money velocity since then). People who were young in the 30s

were allergic to borrowing during all their life, organizing parties to celebrate their final mortgage payment The same is slowly happening now in the

developed world (it will likely accelerate in the coming years when the weak foundation of the current upswing will become clear to all)


The Autumn Season is the harbor of the biggest bubbles (1929 and 2007), stocks valuation are rising while interest rates falls from a high level. What

could we ask for more It is followed by the Winter where interest rates and stocks valuations become highly correlated, both falling

50Equities: Intermarket


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US and EUR Libor-OIS SpreadsChart 88US and EUR 30 Days Commercial Paper YieldChart 87

Commercial papers yield have been rising recently (Chart 87). Norman Fosback in the 70s and M. Zweig in the 80s showed that it was not a


good omen for the markets. Our own experience and derived models are confirming their findings.

The US and Euro Libor-OIS Spreads have also risen rapidly in the past few weeks (Chart 88).

Note that the US movements have been sharper and are probably a better reflection of the current stress and demand for cash USD.


51Equities: Graphs


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In our macro presentations we have spent a lot of ink explaining why we believe that the stock markets will move along the ebb and flows of leading indicators.

They might even be lagging somewhat. They wont profit from a valuation ratio expansion to save their day in downturn.

The ECRI weekly leading indicator year on year rate of change is now negative and the fact that austerity is in every politicians mouth wont help (R.Koo

and M.Keynes are trembling but this will be a fertile ground for future financial historian).


. ussman recess on pre ct on mo e wou e as ng a warn ng s gna t e manu actur ng ec nes e ow w t t e rema n ng

lower than 6 month ago and credit spreads higher than 6 months ago. The model has a perfect track record and the last 2 live warnings were on themark. So ignore at your own risk.

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S&P 500 and US Defensive Relative PerformanceChart 90S&P 500 and World Defensive Relative PerformanceChart 89


due for a consolidation (Chart 89).

They are trying to breakout in the US (Chart 90).


53Equities: IntermarketS&P 500 and Philadel hia Semiconductor


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S&P 500 and Philadel hia Semiconductor

Index Relative PerformanceChart 92S&P 500 and Nasdaq Composite Relative PerformanceChart 91


The Nasdaq Composite is continuing to outperform the S&P 500 (Chart 91) which is, on average, supportive for the overall market.

The same is true for the Philadelphia Semiconductor index (Chart 92).


54Equities: IntermarketS&P 500 and the KBW Bank Index S&P 500 and iShares iBoxx Hi h Yield


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Chart 93 Relative Performance Corporate Bond Fund Net Asset ValueChart 94

Banks have been performing relatively well in the US (was a bloodbath in Europe as expected) given the circumstances (Chart 93). The sector


relative performance will be a key to understand how the new wave of mortgages reset, the end of central bank accommodation and new accounting

rules will affect the rest of the market but lets not forget that they are in the portfolio of quite a lot of the smart money managers we follow so

High yield bonds are now in sync with the equity markets (Chart 94). Investment grade 5 years CDS indices have failed to confirm the April

highs and are currently weaker than equities. Check those graphs daily they will lead, this time again.


55Equities: IntermarketCh 95 S&P 500 d US 2 Y T B d S&P 500 d E d ll M d lCh 96


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Chart 95 S&P 500 and US 2 Years Treasury Bonds S&P 500 and Eurodollar ModelChart 96

Two years treasuries above 1% have been associated with struggling market in the past 18 months (Chart 95). This wont last but spike-like

movement have always been a warning worth listening to. This worked again in April.


We also like to look at the relative behavior of the equity markets and the Eurodollar future. On chart 96 you can see what happen to the market

when the eurodollar falls (higher rate expected) 2 days in a row and the market falls at the same time We had an episode mid October Another

one could mark an peak of significance

-


commodities is now neutral to constructive for the markets.

Equities: Intermarket US10 Years Govies against Stocks 56S&P 500 and US 10 Years Treasury BondsCh t 98Chart 97 S&P 500 and US 10 Years Treasury Bonds


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S&P 500 and US 10 Years Treasury BondsChart 98Chart 97 S&P 500 and US 10 Years Treasury Bonds

Blue area indicates when the momentum

in 10 years government bond yield is

positive. In this period, stocks performed

when the momentum was negative.

Blue area indicates when the momentum

in 10 years government bond yield is

. ,

when the momentum was positive.

We have long argued that one the characteristics of the current structural bear market (and we are talking US, Europe and Japan here...) was


the positive correlation between stocks and government bond yields.

But one has also to take into account the fact that while they are positively correlated, when yields have risen too much too quickly the stocks will

struggle. The sequence is usually rising rate, acceleration to the upside, yield starting to fall just before stocks do it to


Equities: Intermarket 57Chart 99 MSCI Emerging Markets and Dollar Index S&P 500 and Sovereign CDSChart 100


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Chart 99 MSCI Emerging Markets and Dollar Index S&P 500 and Sovereign CDSChart 100

A rising USD has rarely been a positive for emerging markets (Chart 99). Funding of emerging markets dependant of European financial

institution, US investor obsessed, rightly, by the prospect of EM growth should start to get more interested by the European problems. They wont

Source: Clue6 Source: Bloomberg, Clue6

e conta ne esp te . e t ner prom se .

2010 or 2011 could be years of major sovereign negative surprises on the next page one will find the countries to have especially an eye on

On Chart 100 you will find the usual suspects Spain, we repeat is AN ACCIDENT IN THE MAKING as is HUNGARY. Spain will be the


om no w c w se e res n o mo on an e consequences are suc a ey are seen as mposs e o ay you now one o s ac swan

in the making). We have been warning for some time and as we said in a recent update:You aint seen nothing yet

Equities: Intermarket 58


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Source: RBS

Canaries in the coal mine candidates To observe attentively in the coming months

Candidates have been selected using the methodology ofRules of Thumb' for Sovereign Debt Crises by P. Manasse and N. Roubini, 2005


Equities: Intermarket 59


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Here are some of the countries you should have a particular look at, besides the usual suspect we have identified in the past 9 months, and

where we expect the CDS spreads to be much higher during the next 18 months). Germany spreads widening will be the consequence of the French

spreads widening following Spain debacle. In a not so distant future they will be speculations that France could be the next one. For the UK we

would be surprised if they were not to ask for the IMF help if they do not sharply devalue the Pound to very undervalued levels (below parity

against the USD) but even then they might need an helping hand (if the helping hand still has money). We have made the case against the


ustra an econom c m rac e n a a - oc note n pr so we won t come ac ere.

The above is impossible, right

60Equities: PatternS&P 500 Deviation from 50 S&P 500 Deviation from 50 Da s

Chart 101

Days Moving Average

Moving AverageChart 102


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Days Moving Average Moving Average

We are now in an environment where the S&P 500 will struggle to stay 4-5% above its 50 days moving average (Chart 101 and 102)


A move above this threshold will likely be followed by a close more than 4% below the moving average later

So do not accept any deterioration in other factors when the market is over-extended

When the cycle is up the market usually does not fall so much below the 50 days MA has it has recently. Another sign that the cycle has


turned?

61Equities: GraphsS&P 500


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e ave no ne exposure ohaving sold our net long

exposure on Friday June 11th.

We will start to build a short

Shoulder

Head

Shoulder

position once the S&P 500

reaches 1100-1110.

We will be fully short once the

Shoulder

S&P 500 is at 1150-1160 or if we

move below 1040. Head

The S&P 500 is hovering around the October and February lows and is approaching the lower end of its declining trend channel. We took a

opportunistic position near the 1150 level less than a week ago. The position has now been exited.

The rebound could continue up to the 1150-1160 area but is not expected to move above. The first real test will be the 40 weeks moving average


which is now at 1100, and falling.

62Equities: GraphsEuroStoxx 50


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Megaphone

Top

We have no net exposure to

Europe having sold our net

lon ex osure on the

Swedish OMX index on

Friday June 11th

.

We will short again once we

move above 2700 or if we

make new lows below 2450.

Europe has performed relatively better than the rest in the past 2 weeks as it did not makes new lows last week. A retest of the 2700-2750 area

before a new down wave is a distinct possibility.

If supports do not hold watch out


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We are still observin .

ShoulderHead

Shoulder

Shoulder

Head

Shoulder

We will start to buymethodically on

weakness below 800

ShoulderShoulder

Head

independently on the

directional models.

Japan has always been a nightmare for technician. You have pattern all over the place and price are very noisy.

The Topix is sitting at support and should rebound along with the other markets. We wont short it on rebound because it is cheap (maybe

justifiably) and there are better shorts elsewhere


64Equities: GraphsMSCI Asia ex-Japan


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Megaphone

Top

We will be shorting

again on a move above

400-410 or on a move to

new lows.

The index has continued to move inside the megaphone top pattern identified in March. The 40 weeks moving average is now at 390 and

declining.


65Equities: GraphsMSCI EM Latin America

Megaphone


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Megaphone

Top

We will be shorting

again on a move above

3900-4000 or on a move

to new lows.

In a configuration very similar to Asia ex-Japan. Has been relatively stronger in the during the past two weeks.


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Megaphone

Top

Havent bought

on weakness lastweek and wont

until we move to

less than 0.5-0.6

times book value.

Much weaker than the rest. Still far away from its declining 40 weeks moving average. Would start to short on a move above 190 or on new

lows. We have insisted in the past that Europe would be the epicenter of the second leg of the great unwind.

There is no way Easter Europe would not be the main victim of what is happening now in the Euro zone. If the guy who finance you and who

you sell what you produce too is having a rough time, you will too, especially if you have lived above your means thanks to big loans.


Do not forget to pick some of the dominoes falling by contagion there are plenty of good things in the Czech Republic for example

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We are short.

Will cover on a move

above 235 and increaseon a move below 190.

Eastern Europe still remains one of the least discounted "unavoidable accident" in the market today (it is was mostly discounted in

the Eastern European markets last year but the second round effects toward other part of the world are not The stronger IMF has

voided the "end of their world" scenario, but)


things in the Czech Republic for example


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Third Quarter 2010 GTAA Equities

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Transcript of Third Quarter 2010 GTAA Equities