gtaa equities q1 2012
TRANSCRIPT
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 1/102
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 2/102
Clue6 First Quarter 2012
1Managed Accounts
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 3/102
Clue6 First Quarter 2012
2
Stocks
Markets have probably entered a new cyclical bear market. Our cyclical models are giving sell signals since June/July
while leverage reached at that time levels typical of cyclical market turns. Bear market rally are to be expected from
time to time and we will do our best to participate (mainly by cutting our net short position and using bullish call backspread
further financed by out of the money put sold on our hedges as we have in the past. We will be more aggressive on the put
financing side when the markets fall below their intrinsic value). We have successfully timed a couple of those rallies since
the August top and are expecting one to start soon and last for a couple of weeks (top in early January).
Determining the cycle is not only crucial to avoid betting against the trend but because
indicators, be it sentiment, breadth, liquidity or cycles should be analyzed differently.
Overbought/oversold in a bear markets is not the same as in a bull markets (both the levels and how the markets react),
sentiment indicators boundaries (optimism/pessimism) change as does how cycles translate. In a bull markets you have
trend followers working for you (if you are a bull) while they are working against you in a bear market. Fundamental
value investors are only working for you at the later stage of a bear markets, waiting for valuations to be attractive (or
more).
Investors surveys have corrected from the excessive optimism they were displaying in the May-July period but have
rebounded to levels which are high in the current cyclical context. Hedge Funds have lowered their high leverage (grosspositions) and their net long exposure but both remain high historically.
Option indicators are mixed. The CBOE equity put call ratios printed high readings a couple of days ago but the moving
averages are neutral at best. The OEX PC ratio has experienced new bearish "above 2“ readings recently. Its open interest
put call ratio has fallen but remains much higher than its typical level at the end of cyclical bear markets. At the retail levels,
Executive Summary
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 4/102
Clue6 First Quarter 2012
3
we are seeing 51% of the activity concentrated in bearish strategies. The buy to open put call ratio is relatively high but usually
go much higher in cyclical bear markets.Few puts are bought to open while many are sold to open
.There are no fears of
waterfall declines. Skews have corrected somewhat.
Insiders activity has deteriorated markedly in the past few weeks. We had net buying in the US during the last week of
August but those days are now gone. The Canadian buy to sell ratio has fallen back close to its 2007 lows. We are seeing more
companies buying stocks than selling in Europe with a big spike 2 months ago.
Our preferred “market timers” are now both defensively positionned.. The best value managers have continued to reduce
their net long exposure to the market indicating that the markets will have to fall more before we see fundamentalists buying
from the technical traders.
Speculators have accumulated a large net short Nasdaq 100 future position. European sell side analysts are very bullish
while US strategists have maintained their equity allocation recommendation near its cyclical high.
Leveraged bullish funds as a percentage of total at Rydex is back to “too high” .
The VIX time-spread, while lower than between August 2010 and April 2011 is again very high while non-commercials
are net long the VIX future. We will use the potential short-term rebound to build a call backspread on the VIX as we did inJune-August. The curve should flatten a bit before and we might be able to get >20* payout for January of February expiry.
Breadth volatility continues to be very high. It is currently hard to give as much weight as we usually do to this area. The
positives are that we have seen some clusters of breadth thrusts in the past 2 months. The negatives are that our Nasdaq new
highs-lows model is on sell since June, the McClellan oscillator is diverging negatively and failed to diverge positively at the
Executive Summary
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 5/102
Clue6 First Quarter 2012
4
October bottom. Selling pressure has increased in the past 19 months. And now even Lowry's Research , THE reference with
regard to breadth analysis, agrees. Our short-term top warning models have yet to display worrying divergences between the
% of stocks above short-term moving average and their respective indices just before the recent correction started and are now
slowly reaching levels where a short-term rebound has to be expected. Dispersion has increased and we had an unconfirmed
Hindenburg Omen in the US a week ago.
On the liquidity side, net outflows in US domestic and developed markets equity funds have increased sharply. Net inflows into
emerging markets have moderated even if we saw some big inflows a couple of weeks ago. The cash ratio are low
everywhere and does not leave much dry powder to managers. Net redemption will have to be met by selling current
holdings. Money market funds as a percentage of aggregate market capitalization continues to decrease rapidly. The number of
buybacks has increased in the US and reached historical highs in Europe and Asia Pacific while it remains low in Japan. In
most markets we are seeing less IPOs and secondary offerings but the amount raised between the end of 2010 and May
2011 are typical of bull markets top.
Foreigners are continuing to buy a lots of US equities. The small caps short interest ratio relative to large cap remains
relatively high which is a negative. Short selling in Japan has moved out of deep panic. Margin debt has corrected
somewhat in the US but remains at the 2007 levels relative to overall market capitalization.
Pension funds’ funding status has deteriorated since the start of the year, courtesy of increasing liabilities (discount ratedeclining). This remains one of the big, big problems the markets and retirees will have to face in the coming years.
M2 has exploded in the June-August period but is flat since (money market funds Euro financial exposure selling and fund
repatriation related). Fed Treasury custody holdings growth momentum is now negative.
Executive Summary
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 6/102
Clue6 First Quarter 2012
5
Seasonals are now a tailwind. Our mechanical seasonal model is on buy since early October. The 40 cycle mad a low in early
October and the next 20 weeks cycle low should be expected around the end of February. With regard to the Presidential Cycle,
the election year has been the second best (but also the most volatile) but remember that the typical fiscal and monetary cycle
has been distorted and pushed forward in the past 3 years. Average outcome highly unlikely.
Intermarket relationships are mostly negative but the fact that the correlation at the stocks, styles, index and assets level is
extremely high recently makes intermarket analysis much more tricky. The macro surprise indices is extremely high. The
defensive sectors have performed relatively well despite the recent rebound. The Nasdaq, semiconductor and bank sectors have
underperformed in the past few months and the Nasdaq is too now. Emerging market are underperforming (always worrying to
see the leader in this situation when prices move higher). High yield bonds are not diverging negatively but corporate CDS
have as have ABX, CMBS indices and emerging markets sovereign spreads. Treasury bonds yields have continued todecline.
Our cyclical models are giving sell signals one after the others but we have reached levels (for the third time after the
beginning of October and the end of November) where a partial “recapture” of the recent decline becomes highly likely.
Taking the US markets as a proxy, The S&P 500 has behaved mostly as expected in the past few months. We are almost
certainly in a cyclical bear market and prices are heading much lower before a new sustained up swing. The index was unable to
break its 200 days moving average and, more importantly, a large cluster of pivots resistance between 1270 and 1300. While inthe short-term a retest of the 1270 area is possible, strength should be used as a selling opportunity. We covered our net short
position (but remained market risk hedged) and entered a bullish call backspread near the November lows. It was sold on
strength early December and we bought another one on 15/12.We will use strength (or further technical deterioration) to re-enter
the net short position we held in July-September and re-entered at the end of October and buy a new Vix call backspread.
Executive Summary
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 7/102
Clue6 First Quarter 2012
6
We would continue to underweight emerging markets , Europe and small caps (US, European and emerging markets small
caps could/will underperform large caps by 3-5% yearly in the next 5-7 years) . We would overweight Japan (but hedge the
currency risk) and the US. Buy high quality (domestic-oriented) stocks (and hedge the market risk when we recommend it).
Value and growth are likely to behave badly in a downturn so value managers won't offer the decorrelated returns they offered
during the 2000-2003 decline. Buy value when value dispersion is high not low as it is now.
With regard to the macro picture, we would refer to the multiple updates we have sent in the past few months. There will
be a recession in the US, Europe and many other places. On Europe in particular we feel we are dreaming. When will the
political elite understand that they are not facing a liquidity…
Executive Summary
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 8/102
Clue6 First Quarter 2012
7Equities: Sentiment – Surveys
As said in the executive summary, most indicators have to be analyzed in the context of the cyclical trend.
The Investor Intelligence surveys (Chart 1) Bull Ratio is rebounding from oversold levels and is just shy of the 60% levels where markets tend to
top during cyclical bear markets.
The American Association of Individual Investors (Chart 2) surveys has been very volatile in the past 2 years. The Bull Ratio is now too high for
our comfort.
S&P 500 and AAII Bull RatioChart 2
Source: AAII, Clue6Source: Investor Intelligence, Clue6
Investor Intelligence Bull/Bear RatioChart 1
0
200
400
600
800
1000
1200
1400
1600
1800
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
II Bull Ratio S&P 500
0
200
400
600
800
1000
1200
1400
1600
1800
20%
40%
60%
80%
100%
120%
140%
AAII Bull Ratio S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 9/102
Clue6 First Quarter 2012
8Equities: Sentiment – Surveys
The National Association of Active Investment Managers allocation survey is below 40%(It means that managers are recommending, on average,
an 40% net long exposure) with a relatively low diffusion of answers (Chart 3).
On Chart 4 one can see that the average exposure of the surveyed lowest quintile is 20%.
NAAIM Survey Lowest Quintile AverageChart 4
Source: NAAIM, Clue6Source: NAAIM, Clue6
NAAIM SurveyChart 3
600
800
1000
1200
1400
1600
1800
0
20
40
60
80
100
120
NAAIM Survey Standard Deviation S&P 500
600
1200
-50
-30
-10
10
30
50
70
90
NAAIM Survey S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 10/102
Clue6 First Quarter 2012
9Equities: Sentiment – Surveys
On Chart 5 one can see the average exposure of the surveyed highest quintile is relatively high during cyclical downturn.
The TSP Bull/Bear Survey (Chart 6) has been very volatile. It is now starting to be too high.
TSP Survey and S&P 500Chart 6
Source: TSP, Clue6Source: NAAIM, Clue6
NAAIM Survey Highest Quintile AverageChart 5
600
1200
0
20
40
60
80
100
120
NAAIM Survey S&P 500
600
1200
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Tsp Survey S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 11/102
Clue6 First Quarter 2012
10Equities: Sentiment – Surveys
The crash confidence index (Chart 7) 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 it rebounded and started to fall again. The decline accelerated in
the past few months.The analysis of this index is tricky…
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 8) has
rebounded sharply.
Shiller’s Buy-On-Dips Confidence IndexChart 8
Source: R. Shiller, Clue6Source: R. Shiller, Clue6
Shiller’s Crash Confidence IndexChart 7
40
45
50
55
60
65
70
75
80Buy-On-Dips Confidence Index - Institu tional
Buy-On-Dips Confidence Index - Individual
0
10
20
30
40
50
60
70Crash Index - Institutional
Crash Index -Individual
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 12/102
Clue6 First Quarter 2012
11Equities: Sentiment – Surveys
The ML Fund Managers Survey Risk & Liquidity Composite is the combination of the risk appetite, investor time-horizon and cash weightings
level (Chart 9). It has fallen quickly from its January cyclical high. Cash balance has risen above 5%. There are a net 8% of respondents who are
overweight equity (> net 50% underweight at the 2009 lows).
Hedge Funds have maintained a high leverage ratio with a 141% gross exposure (<100% in 2009). Their net long position has increased in the
past 3 month by more than 10% (Chart 10).
ML Fund Managers Survey Hedge Fund
PositioningChart 10
Source: Merrill LynchSource: Merrill Lynch
ML Fund Managers Survey Risk &
Liquidity CompositeChart 9
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 13/102
Clue6 First Quarter 2012
12Equities: Sentiment – Surveys
Managers are overweighting the US (Chart 11). We think they are correct and are reiterating our last 5 quarters overweight recommendation. Withall its ills and disequilibrium, the US are the more flexible among major regions (a subject we have written a lot about in our past macro quarterlies).
Once they understand that big financial institutions are not too 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. (and their financial institutions are in much better shape than Europeans, UK and
Australian ones to take some example… and remember that there is what has happened and what will happen… and in the “will happen” camp the
majority of the negative impacts will be for non US-Banks (housing deflation outside US, EM and EMU loans,…)
And very underweight Europe (Chart 12).
ML Fund Managers Survey Percentage Net
Overweight EuropeChart 12
Source: Merrill LynchSource: Merrill Lynch
ML Fund Managers Survey Percentage
Net Overweight USAChart 11
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 14/102
Clue6 First Quarter 2012
13Equities: Sentiment – Surveys
Japanese stocks are underweighted again (Chart 13). They have almost been underweight persistently since 2007 and we believe they will be
proved wrong now (but hedge your Yen , please)
Emerging Markets relative exposure is relatively high (Chart 14). Expect investor to be underweight sometimes next year.
ML Fund Managers Survey Percentage Net
Overweight Emerging marketsChart 14
Source: Merrill LynchSource: Merrill Lynch
ML Fund Managers Survey Percentage
Net Overweight JapanChart 13
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 15/102
Clue6 First Quarter 2012
14Equities: Sentiment
On chart 15 you can find an update of a chart we presented 3 years ago. The Roubini index is declining after having experienced a spike in August-
September.
The recession index (Chart 16) is moving up again. “The Economist” published the first article on a similar indicator many, many years ago.
Contrary to what one would think, there is a spike of the use of the term recession in the major US newspapers BEFORE a recession starts.
According to this indicator, we never moved out of recession and the macro environment will get worse.
Recession IndexChart 16
Source: Bloomberg, Clue6Source: Google, Clue6 Idea: insidemonkey.com
Roubini IndexChart 15
600
1200
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Roubini Index S&P 500
600
1200
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
5,000.0
Recession Index S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 16/102
Clue6 First Quarter 2012
15Equities: Sentiment – Put Call Ratios
The OEX put call ratio (Chart 17) has risen to above 2 plenty of times in the past 10 months. This is a warning of a nearing top which has rarely
failed, if ever in the past. The ratio has been low in the past few days which is supportive for a short-term rebound.
The Open Interest OEX put call ratio (Chart 18) remains high.
S&P 500 and OEX Open Interest PC RatioChart 18
Source: Clue6Source: Clue6
S&P 500 and OEX PC RatioChart 17
0
200
400
600
800
1000
1200
1400
1600
1800
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
OEX Put Call Ratio MA S&P 500
600
1200
0
0.5
1
1.5
2
2.5
OEX Open In terest Put Call Ratio MA S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 17/102
Clue6 First Quarter 2012
16Equities: Sentiment – Put Call Ratios
The Eurostoxx 50 put call ratio (Chart 19) has declined sharply in the past 5 months.
The open interest call put ratio (Chart 20) has risen but is still well below 1.
SX5Eand SX5E Open Interest CP RatioChart 20
Source: Clue6Source: Clue6
SX5E and SX5E PC RatioChart 19
1500
3000
0.2
0.7
1.2
1.7
2.2
2.7
SX5E Put Call Ratio SX5E
1500
3000
6000
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
SX5E Op en Int erest C all P ut Rat io SX5E
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 18/102
Clue6 First Quarter 2012
17Equities: Sentiment – Put Call Ratios
NIKKEI and NIKKEI Open Interest CP RatioChart 22
Source: Clue6Source: Clue6
Nikkei and Nikkei PC RatioChart 21
6000
12000
0.3
0.5
0.7
0.9
1.1
1.3
1.5
NIKKEI Open In terest Cal l Put Rat io NIKKEI
6000
12000
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
Nikkei Put Call Ra tio Nikkei
The Nikkei put call ratio (Chart 21) has also declined sharply in the past 5 months but is well above levels where cyclical bottoms have been
made.
The open interest call put ratio (Chart 22) has risen but is still well below cyclical bottoms level too.
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 19/102
Clue6 First Quarter 2012
18Equities: Sentiment – Put Call Ratios
Hang Seng and Hang Seng Open Interest CP RatioChart 24
Source: Clue6Source: Clue6
Hang Seng and Hang Seng PC RatioChart 23
5000
10000
20000
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
Hang Seng Put Call Ratio Hang Seng
4000
8000
16000
32000
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
Hang Seng Open Interest Call Put Ratio Hang Seng
The Hang Seng put call ratio (Chart 23) has also declined in the past 2 months but is above levels where cyclical bottoms have been made.
The open interest call put ratio (Chart 24) has risen but is still well below cyclical bottoms level too.
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 20/102
Clue6 First Quarter 2012
19Equities: Sentiment – Put Call Ratios
Small traders (up to 10 contracts traded) activity is now more concentrated into bearish bets (51%) (Chart 25).
The buy to open put call ratio is above 0.6 (Chart 26).
S&P 500 and Small Traders Buy to Open Put/Call RatioChart 26
Source: OCC, Clue6Source: OCC, Clue6
S&P 500 and Small Traders Option ActivityChart 25
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Small Trader Buy to Open Put -Call
650
850
1,050
1,250
1,450
1,650
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Buy to Open P ut Sell to O pen Call Sell to Open Put
Buy t o Open Call S&P 500 (rhs )
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 21/102
Clue6 First Quarter 2012
20Equities: Sentiment – Put Call Ratios
Buy to open put activity increased above 20% in August and early October but has since declined (Chart 27). Investors are not worried abouta
rapid decline.
Sell to open call activity is high (Chart 28).
S&P 500 and Small Traders Option ActivityChart 28
Source: OCC, Clue6Source: OCC, Clue6
S&P 500 and Small Traders Option ActivityChart 27
650
850
1,050
1,250
1,450
1,650
10%
15%
20%
25%
30%
Buy to Open Put S&P 500 (rhs)
650
850
1,050
1,250
1,450
1,650
15%
20%
25%
30%
35%
40%
45%
Sell to Op en Call S&P 500 (r hs)
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 22/102
Clue6 First Quarter 2012
21Equities: Sentiment – Put Call Ratios
Buy to open call activity is relatively low at less than 30% (Chart 29).
Sell to open put activity is high at 20% (Chart 30) and it would not if people were worried about a potential waterfall decline.
S&P 500 and Small Traders Option ActivityChart 30
Source: OCC, Clue6Source: OCC, Clue6
S&P 500 and Small Traders Option ActivityChart 29
650
850
1,050
1,250
1,450
1,650
10%
12%
14%
16%
18%
20%
22%
24%
Sell t o Op en Put S&P 500 (r hs)
650
850
1,050
1,250
1,450
1,650
20%
25%
30%
35%
40%
45%
50%
Buy to Open Call S&P 500 (rhs)
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 23/102
Clue6 First Quarter 2012
22Equities: Sentiment – Put Call Ratios
Retail Option volume has decreased sharply since January(Chart 31-32). Note that the increase in the buy to open put call ratio has been a
function of a substantial decline in call buying and not an increase in put buying.
S&P 500 and Small Traders Option ActivityChart 32
Source: OCC, Clue6Source: OCC, Clue6
S&P 500 and Small Traders Option ActivityChart 31
650
850
1,050
1,250
1,450
1,650
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Buy to Open Calls (Retail 1-10) S&P 500 (rhs)
650
850
1,050
1,250
1,450
1,650
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Buy to Open Puts (Retail 1-10) S&P 500 (rhs)
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 24/102
Clue6 First Quarter 2012
23Equities: Sentiment – Implied Volatility
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
at 110% of the current price. The higher the level the more expensive puts are relative to calls i.e. the more nervous investors are.
The S&P 500 skews has declined in the past few weeks (Chart 33). It remains highs compared to the Vix which is a negative divergence for the
markets.
It remains elevated in Europe(Chart 34).
EuroStoxx 50 and 3M 90/110 Skew and VDAXChart 34
Source: Clue6Source: Clue6
S&P 500 3M 90/110 Skew and VIXChart 33
100
300
500
700
900
1100
1300
1500
1700
5
7
9
11
13
15
17
19
S&P 500 3M 90/110 Skew VI X-10 S&P 500
100
600
1100
1600
2100
2600
3100
3600
4100
4600
5100
4
6
8
10
12
14
EuroStoxx 50 3M 90/110 Skew VDAX -10 EuroStoxx 50
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 25/102
Clue6 First Quarter 2012
24Equities: Sentiment – Implied Volatility
The Japanese skews is very elevated (Chart 35).
The emerging Market skews is elevated too (Chart 36).
IShare MSCI Emerging Market ETF and 3M 90/110 Skew
and 3 Month Implied VolatilityChart 36
Source: Clue6Source: Clue6
IShare MSCI Japan ETF and 3M 90/110 Skew and 3
Month Implied VolatilityChart 35
6
7
8
9
10
11
12
13
14
15
16
0
2
4
6
8
10
12EWJ 3M 90/110 Skew 3 Month Implied Volatility -15 EWJ
10
15
20
25
30
35
40
45
50
55
60
3
5
7
9
11
13
15
17
EEM 3M 90/110 Skew 3 Month Implied Volati li ty-20 EEM
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 26/102
Clue6 First Quarter 2012
25Equities: Sentiment – Insiders
The Russell 3000 sell/buy ratio is much lower than some months ago but has been rising during the past week despite the market decline which isworrying (Chart 37).
In Canada, the buy/sell ratio has been decreasing rapidly from its October highs (Chart 38).
Remember, insiders activity is especially useful in 2 configurations: lots of relative buying or increased
selling when the markets decline…
Canadian Insiders Buy/Sell RatioChart 38
Source: InkResearchSource: Bloomberg, Clue6
S&P 500 and Russell 3000 InsidersChart 37
0
2
4
6
8
10
12
14
600
800
1,000
1,200
1,400
1,600
1,800
Russell 3000 Sell/Buy Ratio S&P 500
0102030405060
708090100
0
20
40
60
80
100Russell 3000 Insiders Buy (lhs)
Russell 3000 Insiders Sell
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 27/102
Clue6 First Quarter 2012
26Equities: Sentiment – Insiders
Europe buying pressure as abated in the past 8 weeks (Chart 39-40).
Note that insiders were wrong during the whole bear market in 2007-2009.
Local spikes have predictive powers but we haven’t any at this juncture.
Number of Companies with Directors’
Buying and SellingChart 40
Source: DB
Net Directors’ Buying with Transaction Capped at 1
EUR mio. (in ‘000s EURO)Chart 39
Source: DB
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 28/102
Clue6 First Quarter 2012
27Equities: Sentiment – Smart Money
J. Hussman is, according to our calculation, currently fully hedged (Chart 41). He continues to have a substantial exposure to high quality, cash
generating, large caps stocks.
S. Leuthold, who has been lowering its exposure since July (Chart 42).
S&P 500 and Leuthold Core Beta ExposureChart 42
Source: Clue6Source: Clue6
S&P 500 and Hussman Strategic Growth Beta ExposureChart 41
0
200
400
600
800
1000
1200
1400
1600
1800
-0.85
-0.35
0.15
0.65
1.15 S&P 500 50 per. Mov. Avg. (Rolling beta)
0
200
400
600
800
1000
1200
1400
1600
1800
-0.5
0
0.5
1
1.5
2
S&P 5 00 50 per. Mov. Avg. (Rollin g bet a)
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 29/102
Clue6 First Quarter 2012
28Equities: Sentiment – Smart Money
Global macro hedge funds exposure to equity markets (the correlation is such between assets that we should say exposure to the reflation trade)
moved to a new record high in November-December and has been declining since (Chart 43). Once the exposure move to an extreme and form a
divergence with the markets, a counter-trend move or trend change is not far away.
The same is true for emerging markets hedge funds (Chart 44).
MSCI EM and Dow Jones Credit Suisse Blue Chip Emerging
Markets Hedge Fund Index Beta ExposureChart 44
Source: Dow Jones Credit Suisse, Clue6Source: Dow Jones Credit Suisse, Clue6
MSCI World and Dow Jones Credit Suisse Blue Chip
Global Macro Hedge Fund Index Beta ExposureChart 43
0
50
100
150
200
250
300
350
400
450
500
-0.4
-0.2
0
0.2
0.4
0.6
0.8
MSCI EM (usd) 10 per. Mov. Avg. (Rolling beta)
600
800
1000
1200
1400
1600
1800
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
MSCI World (usd) 10 per. Mov. Avg. (Rolling beta)
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 30/102
Clue6 First Quarter 2012
29Equities: Sentiment – Smart/Dumb Money
Non-Commercial have an important net short position in Nasdaq futures (Chart 45).
Non-reportable have a small net long position in US equity futures (Chart 46).
S&P 500 and Non Reportable Net Long Equity
Futures (in usd bio.)Chart 46
Source: Bloomberg, Clue6Source: Bloomberg, Clue6
Nasdaq 100 and Non-Commercial Net Long Future PositionChart 45
700
1400
2800
-60000
-40000
-20000
0
20000
40000
60000
80000
100000
120000
140000Nasdaq Non-Commercials Net Long Nasdaq 100
650
1300
-10
-5
0
5
10
15
20
25
30
35Non Reportable Net Long (in usd bio.) S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 31/102
Clue6 First Quarter 2012
30Equities: Sentiment – Smart/Dumb Money
Sell-side analysts are bullish (Chart 47).
Wall Street Strategists are recommending investors to allocate 60% of their assets to stocks (Chart 48). 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.
S&P 500 and Strategists Stock AllocationChart 48
Source: Bloomberg, Clue6
Source: Bank of America
European Median Sell Side Analysts’ RecommendationsChart 47
600
1200
50
55
60
65
70
75
Strategists Stock Allocation S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 32/102
Clue6 First Quarter 2012
31Equities: Sentiment – Dumb Money
Proshare short ETF total shares outstanding are where they were last June (Chart 49). Note that shares outstanding tends to top out just before
markets top. It indicates bears being squeezed out or throwing the towel precisely at the wrong moment. The reverse is mostly true at bottoms.
Rydex leveraged (and unleveraged) assets are indicating a extremely high level of optimism (Chart 50).
Source: G.Lerner
ProShare Short ETF Total Shares OutstandingsChart 49 Rydex Leveraged Bull to Bear AssetsChart 50
Source: G. Lerner
Source: Bloomberg, Clue6
600
800
1000
1200
1400
1600
1800
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
SQQQ QID PSQ SPXU SDS SH S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 33/102
Clue6 First Quarter 2012
32Equities: Sentiment – Volatility
The VIX time-spread has risen sharply in the past 8 weeks and is now approaching levels where markets top during bear markets (Chart
51).
Non-commercials are net long in the VIX future (Chart 52).
Remember that they are the smart-money in this market.
S&P 500 and CFTC VIX Large Speculator Net PositionChart 52
Source: Bloomberg, Clue6Source: Bloomberg, Clue6
S&P 500 and Vix Time-SpreadChart 51
8.00
16.00
32.00
64.00
128.00
-35,000.0
-30,000.0
-25,000.0
-20,000.0
-15,000.0
-10,000.0
-5,000.0
0.0
5,000.0
10,000.0
15,000.0
VIX Non-Commercial Net Positon VIX
600
1200
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
VIX Time-Spread S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 34/102
Clue6 First Quarter 2012
Equities: Sentiment 33
The sentiment Composite is dead neutral.
600
800
1000
1200
1400
1600
-2.2
-1.2
-0.2
0.8
1.8
Sentiment Composite S&P 500
Source: Clue6
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 35/102
Clue6 First Quarter 2012
34Equities: Breadth
Why breadth and volume can help us gauge the future prospective risk/reward ratio of the market. We have tried for 10 years to explain it… Well
J.Hussman explains it brilliantly… as always
“ A good way to think about prices and trading volume is to abandon the idea that money goes in or out, and to think instead about the market as
a collection of various groups. Imagine there being fundamental investors, who are interested primarily in value (buying on weakness and selling
on strength), and technical investors, who are interested primarily in trends (selling on weakness and buying on strength). These people also trade
on different horizons and base their trading on different extent of movement.
In this sort of equilibrium, trading volume is a measure of strong views and disagreement. As the market turns weaker, trend-following investors
typically abandon stocks, while fundamental investors accumulate. The reverse is true on significant strength. So spikes in trading volume tend to
occur primarily at extremes relative to the target prices of fundamental investors. Volume spikes also tend to be correlated with a series of positive or
negative shocks that then abate. In contrast, dull volume is a measure of low sponsorship, strong agreement, and lack of external shocks.
Equally important is that net incipient buying from both technical and fundamental investors cannot exist, so large price movements are typically
required to relieve the disequilibrium. If you've got an overvalued market which then loses technical support, the outcome can be extremely
negative, because technical investors are prompted to sell, but fundamental investors have weak sponsorship at that point, so large price declines
are required to induce the fundamental investors to absorb the supply.
In contrast, if you've got an undervalued market where fundamental investors raise their outlook, the demand from fundamental investors is not
typically provided by technical investors (who would tend instead to buy on advances in price), so the price must increase enough to induce
fundamental investors with shorter horizons to supply the stock.
All of these dynamics have been active in the market over the past two years, but the most significant outlier has clearly been the past few months,
where volume behavior has demonstrated much weaker sponsorship than we would have expected for an advance of this size. Normally, the volume
characteristics we've seen have been much more typical of short-squeezes and less durable advances.”
J.Hussman
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 36/102
Clue6 First Quarter 2012
35Equities: Breadth
The S&P 1500 Composite Index cumulative advance decline line is in synch with the markets (Chart 53). In the last three quarterly presentation
we said:
Our selling Pressure indicator has remained persistently high in the last few months (Chart 54). Usually when it is above 0.65 and the market is
making new 52 weeks high, a cycle trend is ahead…This was the case in 1962, 1968, 1972, 2007 and… now.0
S&P 500 and Selling PressureChart 54
Source: Clue6Source: Clue6
S&P 1500 and its AD LineChart 53
10
20
40
80
160
320
640
1280
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
Selling Pressure S&P 500
100
150
200
250
300
350
400
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000S&P 1500 AD Line S&P 1500 Composite
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 37/102
Clue6 First Quarter 2012
36Equities: Breadth
The Nasdaq New High-Low Model is on sell since the middle of July (Chart 55).
We have documented the rapid increase in breadth volatility in the past few years and the same is true for Lowry’s 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) (Chart 56).
Lowry’s 90% DaysChart 56
Source: Clue6Source: Clue6
Nasdaq 100 and the New High New Low ModelChart 55
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
-400
-300
-200
-100
0
100
200
300
400
Nas da q n ew High -Lo w Mo del Nas da q 1 00
600
1200
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
Sum Lowry's 90% Days S&P 1500 and Nasdaq 100 S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 38/102
Clue6 First Quarter 2012
37Equities: Breadth
We have had 1390% Lowry’s down days and 10 90% up days in the past 10 weeks.
Note that we had multiple 90% up days in early October.
Source: Clue6
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 39/102
Clue6 First Quarter 2012
Equities: Breadth Thrust Composite 38
This is our breadth thrusts composite. We use it principally on the buy side.
Source: Clue6
600
1200
-4
-2
0
2
4
6
8
10
12
Brea dth Thrust Models S&P 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 40/102
Clue6 First Quarter 2012
39Equities: Breadth
On chart 57 one can see the % of Nasdaq 100 stocks above their 10 and 50 days moving average. Overbought but this can also be a thrust
sometimes (but markets should remains persistently overbought and not experience any overlapping swings).
The same is true for the Bloomberg Europe 500 index (Chart 58).
Bloomberg Europe 500 and %Stocks
Above their 10 and 50 Days Moving
Average
Chart 58
Source: Clue6
Nasdaq 100 and %Stocks Above
their 10 and 50 Days Moving
Average
Chart 57
Source: Clue6
1250
2500
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60Stocks Above 10 days moving average normalized
Stocks Above 50 days moving average normalized
Nasdaq 100
128-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60Stocks Above 10 days moving average normalized
Stocks Above 50 days moving average normalized
Bloomberg Europe 500
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 41/102
Clue6 First Quarter 2012
40Equities: Breadth
We had a positive divergence in Japan (Chart 59).
While the data is inconclusive on emerging markets (Chart 60).
S&P Emerging BMI and %Stocks Above their
10 and 50 Days Moving AverageChart 60
Source: Clue6
Topix and %Stocks Above their 10 and 50 Days
Moving AverageChart 59
Source: Clue6
650-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60Stocks Above 10 days moving average normalized
Stocks Above 50 days moving average normalized
Topix
150
300
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60Stocks Above 10 days moving average normalized
Stocks Above 50 days moving average normalized
S&P Emerging BMI
i i
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 42/102
Clue6 First Quarter 2012
41Equities: Breadth
We had a negative divergence between the NYSE McClellan Oscillators and the S&P 500 (Chart 61). The market moved to new high while the
oscillator moved below 0 in May. One should now look for a move below 75 and then a divergence for a medium-term bottom.
We also have a negative divergence on the Summation Index (Chart 62). It usually is time to exit when the summation index starts to move down
when in a divergence. This is what happened when the Oscillator moved below 0.
Source: Clue6
S&P 500 and NYSE McClellan OscillatorChart 61
Source: Clue6
650
1300
-125
-75
-25
25
75
125
NYSE Rat io Adjusted McClellan Oscillator
S&P 500
1200
2400
-1500
-1000
-500
0
500
1000
1500
2000
NYSE Ratio Adjusted McClellan Summation I ndex
Nasdaq Composite
S&P 500 and NYSE McClellan Summation IndexChart 62
E i i
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 43/102
Clue6 First Quarter 2012
42Equities: Breadth
As said before the recent cyclical highs have not been confirmed by the number of new highs on various equity indices (Chart 61-62).
We have yet to see a high level of confusion (black lines on the graph which is the minimum of the % of stocks at a new 52 weeks high or 52 weeks
low I.e. The Fosback High-Low Index)
TPX High LowChart 62
Source: Clue6Source: Clue6
S&P 500 High LowChart 61
600
800
1000
1200
1400
1600
1%
3%
5%
7%
9%
11%
13%
15%
17%
19%NL% NH% S&P 500
600
800
1000
1200
1400
1600
1800
2000
1%
3%
5%
7%
9%
11%
13%
15%
17%
19%NL% NH% TPX
E i i
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 44/102
Clue6 First Quarter 2012
43Equities: Breadth
The message is similar in Europe and for the emerging markets (Chart 63-64).
Emerging Markets High LowChart 64
Source: Clue6Source: Clue6
Europe High LowChart 63
7501%
3%
5%
7%
9%
11%
13%
15%
17%
19%NL% NH% MSCI Emerging Markets
150
160
170
180
190
200
210
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
NL% NH% Bloomberg Europe 500
E i i
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 45/102
Clue6 First Quarter 2012
44Equities: Breadth
There are a lots of talk on the influence of non-common stocks “polluting” the NYSE breadth data.
On chart 65, one can see that the Overall (Amex, NYSE and Nasdaq) Fosback High Low Index has declined after having reached 1.5% in
June. It remains above 1%. Bear markets bottoms are usually made after a decline below 0.2%.
We experienced an “Hindenburg Omens” last week (Chart 66) after having experienced the first cluster on multiple indices in July since the autumn
of 2007.
S&P 500 and Hindenburg OmensChart 66
Source: Clue6Source: Clue6
S&P500 and Overall Fosback High Low Index
80
160
320
640
1280
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Short Average Long Average S&P 500
Chart 65
620
1240
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
S hort A ver age L ong A ve ra ge
80
160
320
640
1280
0
1
2
3
4Hindenburg Omen (NYSE, NASD AQ and AMEX)
S&P 500
E iti
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 46/102
Clue6 First Quarter 2012
45Equities: Breadth
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
higher a week where it made a 52 weeks low). We are seeing less buying climaxes (which is logical as we have few 52 weeks highs)(Chart 67).
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 68). The model is on sell mode.
S&P 500 and Bullish/Bearish Chart Pattern BreadthChart 68
Source: N. Bulkowski
Source: Clue6
S&P 500 and Buying/Selling ClimaxesChart 67
100.00
300.00
500.00
700.00
900.00
1100.00
1300.00
1500.00
1700.00
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%Buying Climax % S&P 500
E iti
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 47/102
Clue6 First Quarter 2012
Equities: Breadth 46
The net % of S&P sub-industries indices rising on a 52 weeks basis has fallen below 0% after having diverged negatively with price.
We have repeatedly said that the real secular top was made in 2007 and not in 2000. In 2007 everything was expensive while in 2000 markets prices and
valuation ratios were pushed to the stratosphere by the TMT sector. Median valuation back then were reasonable and as you can see less than 50% of
industries were rising. This explains why one could still make attractive returns by buying a long only buy-holder during the 2000-2003 bear market (if
you were a value investor).
This wasn’t the case at the 2000 top and neither it is now.
Source: Clue6
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
S&P Industries Rising on a 52Weeks Basis
S&P 500
E iti
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 48/102
Clue6 First Quarter 2012
47Equities: Liquidity
Outflows from US equity mutual funds have accelerated in the past few months even when the markets were rebounding (Chart 69). Both
equity and bonds EM funds have seen some inflows after the big outflows in August-early October.
Large cap quality where you should invest your money to show your true contrarian mentality (but
hedge your market risk).
Mutual fund cash reserve is historically low and net mutual fund selling will have to be met with manager selling (Chart 70). 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
“Mutual Fund Cash Reserve, the Risk-Free Rate and Stock Market Performance“ paper, one can see that we have yet to reach dangerous low levels,
but note that with the current short-term rate even 1% cash ratio would not be sufficient to make the model bearish so…
Source: ICI, Clue6
US, Developped and Emerging Markets Equity
mutual fund assets FlowsChart 69
50
100
200
400
800
1600
-4.50%
-2.50%
-0.50%
1.50%
3.50%
5.50%Equity Fund Cash Ratio Model
S&P 500
Source: ICI, Clue6 Idea: J.Goepfert
US Equity mutual fund Cash Ratio ModelChart 70
0
1,000,000
2,000,000
3,000,000
4,000,0005,000,000
6,000,000
7,000,000
8,000,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
E iti
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 49/102
Clue6 First Quarter 2012
48Equities: Liquidity
On an equity flow basis the prospect for Emerging Market relative performance are better than what they were a year ago (Chart 71).
This is not sufficient to change the our 14 month old underperformance recommendation.
Emerging Market Equity Funds Flows and
Relative PerformanceChart 71
Source: Nomura
E iti
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 50/102
Clue6 First Quarter 2012
49Equities: Liquidity
Equity allocation remains below the 2000 and 2007 highs but not as much as one would think (Chart 73 and 74).
Bond allocation is rising in the US but isn’t in Europe. A big share of the increase has been toward corporate bonds while foreign bonds have seen
big relative inflows from a low bas (notably in Emerging market bonds). In the next few years, money will pour into treasury bond funds in the US.
The mountain of cash in the sideline has decreased sharply since March 2009. Note you should not really care has this cash on the sideline
argument if a fallacy.
European Mutual Funds Asset AllocationChart 73
Source: MS
US Mutual Funds Asset AllocationChart 72
Source: MS
E iti i idi
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 51/102
Clue6 First Quarter 2012
50Equities: Liquidity
Buybacks have picked up in the US particularly in October which is encouraging but we would like to see more…(Chart 74).
In Europe, we have seen a sharp increase which is encouraging given the tight credit condition (not like 2007 where it was simply the only use
companies had for their cash flow it seemed…) (Chart 75).
Note that we remain wary of too much buybacks which, in aggregate, still remains a sign of management “short-terminism” (especially when
management (insiders)is selling their own shares.
Number of Buybacks Announced per Month in EuropeChart 75
Source: Bloomberg, Clue6
Number of Buybacks Announced per Month in the USChart 74
Source: Bloomberg, Clue6
0
200
400
600
800
1000
1200
1400
1600
1800
0
50
100
150
200
250
300
350
400
450
500Monthly Buybacks
S&P 500
0
50
100
150
200
250
300
350
0
100
200
300
400
500
600
700
800
900
1000
Monthly Buybacks
Bloomberg Europe 500
Eq ities: Li idi
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 52/102
Clue6 First Quarter 2012
51Equities: Liquidity
Lots of buybacks announcement in Asia which is a positive as many companies are family owned and as such buybacks are not only a short-
term management profit maximization trick (Chart 76).
In Japan, they remain very low (Chart 77).
Number of Buybacks Announced per Month in JapanChart 77
Source: Bloomberg, Clue6
Number of Buybacks Announced per
Month in the Asia PacificChart 76
Source: Bloomberg, Clue6
0
200
400
600
800
1000
1200
1400
1600
1800
2000
0
50
100
150
200
250
300
350
400
450
500Monthly Buybacks
Topix
0
20
40
60
80
100
120
140
160
180
0
200
400
600
800
1000
1200Monthly Buybacks
MSCI Asia Pacific
Equities: Li idi
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 53/102
Clue6 First Quarter 2012
52Equities: Liquidity
The number of IPOs in the US is far from its 2005-2007 levels (Chart 78) but we also had some sizable one (Chart 79), most recently with Zinga.
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…
US IPOsChart 79
Source: Clue6, Bloomberg
US IPOsChart 78
Source: Clue6, Bloomberg
6000
10
20
30
40
50
60
70
80
90
100IPOs (number)
S&P 500
6000
5000
10000
15000
20000
25000
30000IPOs (amounts)
S&P 500
5Equities: Li idit
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 54/102
Clue6 First Quarter 2012
53Equities: Liquidity
We are seeing less secondaries after a large pick up earlier this year (Chart 80).
Looking at the amount raised (Chart 81) there is little doubt than managements did not think the market were as cheap many thought.
Note that the big numbers of secondaries in 2009 are largely a function of US banks raising money, this was a case of do it or die.
US SecondariesChart 81
Source: Clue6, Bloomberg
US SecondariesChart 80
Source: Clue6, Bloomberg
6000
50
100
150
200
250Secondaries (number)
S&P 500
6000
10000
20000
30000
40000
50000
60000
70000
80000Secondaries (amounts)
S&P 500
54Equities: Li idit
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 55/102
Clue6 First Quarter 2012
54Equities: Liquidity
Europe IPOsChart 83
Source: Clue6, Bloomberg
Europe IPOsChart 82
Source: Clue6, Bloomberg
1000
20
40
60
80
100
120
140
160
180IPOs (number)
Bloomberg Europe 500
1000
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000IPOs (amounts)
Bloomberg Europe 500
The number of IPOs in Europe is low (Chart 81) but we had some sizable one earlier this year (Chart 82).
55Equities: Li idit
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 56/102
Clue6 First Quarter 2012
55Equities: Liquidity
Europe SecondariesChart 85
Source: Clue6, Bloomberg
Europe SecondariesChart 84
Source: Clue6, Bloomberg
1000
20
40
60
80
100
120
140
160
180Secondaries (number)
Bloomberg Europe 500
1000
10000
20000
30000
40000
50000
60000
70000Secondaries (amounts)
Bloomberg Europe 500
We are seeing less secondaries after a pick up earlier this year (Chart 84).
Looking at the amount raised (Chart 85) they have decreased sharply recently.
56Equities: Li idit
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 57/102
Clue6 First Quarter 2012
56Equities: Liquidity
Asia Pacific IPOsChart 87
Source: Clue6, Bloomberg
Asia Pacific IPOsChart 86
Source: Clue6, Bloomberg
6000
5000
10000
15000
20000
25000
30000IPOs (amounts)
S&P 500
500
50
100
150
200
250
300
350IPOs (number)
MSCI Asia Pacific
The number of IPOs in Asia Pacific is neither high nor low (Chart 86) but we also had some sizable one earlier this year (Chart 87).
57Equities: Liq idit
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 58/102
Clue6 First Quarter 2012
57Equities: Liquidity
Asia Pacific SecondariesChart 89
Source: Clue6, Bloomberg
Asia Pacific SecondariesChart 88
Source: Clue6, Bloomberg
500
50
100
150
200
250Secondaries (number)
MSCI Asia Pacific
500
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000Secondaries (amounts)
MSCI Asia Pacific
We are seeing less secondaries after an historic pick at the end of last year and earlier this year (Chart 88).
Looking at the amount raised (Chart 89) there is also little doubt than managements did not think the market were as cheap many thought.
58Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 59/102
Clue6 First Quarter 2012
58Equities: Liquidity
Foreigners like to bash the US but they have an incredible propensity to buy US equities near cyclical tops (Chart 90).
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 has been high recently (Chart 91).
Short Interest as a Percent of FloatChart 91
Source: Clue6
Foreigners US Equity Net BuyingChart 90
Source: Clue6
-20
30
80
130
180
50
100
200
400
800
1600Foreigners US Equity Net Buying
S&P 500
2.5
3
3.5
4
4.5
5
5.5
3.5
4.5
5.5
6.5
7.5
8.5
9.5
Difference (rhs)
S&P 600 Short Interest as a % of Float
S&P 500 Short Interest as a % of Float
Equities: Liquidity 59
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 60/102
Clue6 First Quarter 2012
Equities: Liquidity 59
Money market funds assets have stabilized but have yet to shoot up like they have at the tail end of previous cyclical bear markets (but this time
with 2 years yields where they are, the increase is likely to be less important).
Source: Clue6
600
1200
10%
15%
20%
25%
30%
35%
40%
45%
50%
Money Market Fund Assets to Market Cap Ratio S&P 500
60Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 61/102
Clue6 First Quarter 2012
60Equities: Liquidity
The NYSE margin debt has decreased somewhat but remains at its 2007 highs as a % of market cap (Chart 92) . It remains well below the
1929 highs but those levels will probably never be seen again.
Japan short selling activity has increased significantly in the past 6 months (Chart 93).
Topix and Relative Short Sale VolumeChart 93S&P 500 and NYSE Margin debtChart 92
Source: Bloomberg, Clue6Source: Bloomberg, Clue6
15
17
19
21
23
25
27
29
31
33
35
650
700
750
800
850
900
950
1000
1050
Japan Short Sales Volume Relative (rhs) Topix
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
400
800
1600
NYSE Margin Debt (rhs) S&P 500
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
600
700
800
900
1000
1100
1200
1300
1400
1500
1600 NYSE Margin Debt (rhs) S&P500
Equities: Liquidity 61
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 62/102
Clue6 First Quarter 2012
Equities: Liquidity 61
Short selling in Hong-Kong is has been persistently high in the past 4 months. This is typical of cyclical bear markets.
One should except a bear market rally (cover short at least) when one see a relative spike. A way to look for this is use a short-term stochastic of
the short selling turnover ratio.
Source: Clue6
5000
10000
20000
-1
1
3
5
7
9
11
13
15
Short Selling Turnover Rat io H ang Seng
62Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 63/102
Clue6 First Quarter 2012
62Equities: Liquidity
The above 2 graphs are well-known for those who have been reading our research for a long-time.
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 94) while in Japan we should
see the reverse (Chart 95)…
Japanese Middle to Young Cohort and Equity Funds
AssetsChart 95
Source: ICI, Census Bureau, Clue6
US Middle to Young Cohort and Equity Funds AssetsChart 94
Source: BOJ, Japanese National Institute of Population and Social Security Research, Clue6
63Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 64/102
Clue6 First Quarter 2012
63Equities: Liquidity
On chart 96 you can see the countries which have the most positive demographic dynamic according to the Middle to Young Cohort hypothesis…
But should not only the “Middle to Young Cohort” but the absolute growth of the middle age population (Chart 97).
Combining both, one see that the picture is somewhat less bullish than it seems for Japan, Spain, Poland, Portugal and Greece
Middle Age Population Growth ForecastChart 97
Source: Census Bureau, Clue6
Chart 96
Source: Census Bureau, Clue6
Most Bullish Middle to Young Cohort for
the Next 5 Years
64Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 65/102
Clue6 First Quarter 2012
64Equities: Liquidity
On chart 98 one can see the countries with the most bearish demographic configuration according to the Middle to Young Cohort hypothesis.
The middle age dynamic of those countries is presented on chart 99.
Middle Age Population Growth ForecastChart 99
Source: Census Bureau, Clue6
Chart 98
Source: Census Bureau, Clue6
Most Bearish Middle to Young Cohort for
the Next 5 Years
65Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 66/102
Clue6 First Quarter 2012
65Equities: Liquidity
We can only repeat again and again and again…Pension, both private and public, are an accident waiting to happen (well happening we would say)…
In the past 12 months the funding status has declined sharply to 75% (60% according to Tower Watson which compile a broader index). The deficit is now at usd
404 bio. To give an idea if assets where to rise 6.1% (200 bps below median asset return expectation), the funding status would decrease by a further usd 7 bio. If discount rate were to decrease 25 bps from the current 4.53% level the funding status will decrease by usd 52 bio. This year the discount rate has fallen by 102
basis points, increasing liabilitiesby almost 17% (220 bio) while assets have increasedby 2.3%
In 2009 the “Pension Protection Act of 2006” was temporary suspended. Companies with a funding status inferior to 80% have to get back to 94% in seven years.
That’s usd 400 bio (70% of ttm earnings or circa 10% a year) for the S&P 500 companies to amortize, ceteris paribus.
As an aside look at the Chart 101 and see the funds allocation (BEA numbers put equity % holding to just below 60%) and the expected return assumption. If
they return less than this their fund becomes more underfunded… 8.1%... Good luck.
Pension Funds Asset AllocationChart 101US Pension Funds Funding StatusChart 100
Source: Milliman, Clue6
60
70
80
90
100
110
120
130
140
400
800
1600
Milliman 100 Pension Fund Index S&P 500
66Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 67/102
Clue6 First Quarter 2012
66Equities: Liquidity
On Chart 102 and 103 one can see the asset allocation and payment type of a selection of OECD countries.
Spot the worst ones
OECD Pension Fund PaymentsChart 103OECD Pension Fund AllocationChart 102
Source: Milliman, Clue60% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
United States
Finland
Australia (2)
Chile
BelgiumPoland
Norway
Canada (3)
Austria
Turkey
Portugal
Netherlands (p)
Iceland
Mexico
Denmark
Hungary
Spain
Italy (4)
Japan (5)
IsraelGermany (6)
Estonia (7)
Greece
Slovenia
Slovak Republic
Czech Republic
Korea (8)
Equities Bills and bonds Cash and deposit Other (1)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 1 00%
Chile
Czech Republic
Greece
Hungary
Poland
Slovak Republic
Denmark
Italy
Australia
Mexico
New Zealand
Turkey
United States
Israel
Korea
IcelandPortugal
Canada
Finland
Norway
Germany (1)
Def in ed con tr ibu tion Define d b en ef it Hyb rid/ Mixed
67Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 68/102
Clue6 First Quarter 2012
67Equities: Liquidity
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.
We have written on this in the past and will in the future…
Pension Funds Funded RatioChart 105
Source: Towers Watson
Pension Funds
Investment ReturnsChart 104
Pension Funds Liability Growth
Source: Towers Watson
68Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 69/102
Clue6 First Quarter 2012
68Equities: Liquidity
Liquidity momentumhas a slight tendency to lead markets, and this should be especially true given in the current environment…
M2 momentum was supportive when using a 8 weeks rate of change (Chart 106).
Fed Treasury Custody Holding growth has turned negative (Chart 107). When the weeks rate of change turns negative, bad news are likely to pop up shortly
after (Lat Am debt crisis in 80’s, US S&L, Mexico, Asia, TMT, Great Recession afterwards…).
Note that emerging markets foreign reserve holding have been increasing much more rapidly than what the US current account deficit would have implied before
the recent decline. This means that massive short USD position are being build through the speculative inflows. Demand for USD will return with a vengeance
when it is least expected.
MSCI World and Fed Treasury Custody Rate of ChangeChart 107
Source: Clue6
S&P 500 and M2 MomentumChart 106
Source: Clue6
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
M2 8 weeks ROC S&P 500
150
300
600
1200
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
Fed Treasury Custody Holding 12 Weeks ROC MSCI World (rhs)
69Equities: Liquidity
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 70/102
Clue6 First Quarter 2012
69Equities: Liquidity
We have written a couple of special updates on Fed’s Permanent Open Markets Operations (POMO) since the Spring of 2008.
Some stats are revealing. Since 2005, when there has been 0 POMO operation in the past 20 business days the S&P 500 has fallen by a total of 19%
(median rise of 0.02% on those days), when there were at least 3 it has risen by 29%, (median rise of 0.08% on those days) when more than 5 by 45%
(median rise of 0.15% on those days)and more than 5 by 39.16% (median rise of 0.17% on those days) (all stats from F. Hogelucht).
On chart 108 one can see the relationship between the Fed Treasuries holding (a proxy for POMO’s) and equities (same configuration for other risky
assets).
S&P 500 and Fed Treasuries Outright HoldingChart 108
Source: Clue6
600
1200
450,000
650,000
850,000
1,050,000
1,250,000
1,450,000
1,650,000
1,850,000
Fed Tr easu ries Held Out righ t S&P 500
Equities: Seasonality – President Cycle and Monthly Seasonality 70
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 71/102
Clue6 First Quarter 2012
Equities: Seasonality President Cycle and Monthly Seasonality 70
The four year Presidential cycle (Chart 109) has been distorted by the huge fiscal and monetary stimuli of 2009-2010. The rational behind thepresidential 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 (see following page). Historically, we are entering the second best year of the cycle, but also the most volatile.
The market has a tended to put a top early in January in the past few years (Chart 110).
Source: Clue6
US Four Year Presidential Cycle (S&P 500 Total
Return since 1927)Chart 109 US Monthly Return (S&P 500 Total Return since 1944)Chart 110
Source: Clue6
Equities: Seasonality – President Cycle 71
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 72/102
Clue6 First Quarter 2012
Equities: Seasonality President Cycle
The following graph, courtesy of the always insightful Ned Davis Research outfit, clearly show the political forces behind the Presidential
cycle.
Source: Ned Davis
Equities: Seasonality – Sell in May and … 72
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 73/102
Clue6 First Quarter 2012
qu t es: Seaso a ty Se ay a d …
We are now in the positive half of the year (Chart 111 and 112) 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) is on buy since the first week of October.
Average Return MSCI Indices 1970-1998Chart 111 Average Return MSCI EM Indices 1970-1998Chart 112
Source: The Halloween Indicator, S. BoumanSource: The Halloween Indicator, S. Bouman
Equities: Seasonality – End of Month Anomaly 73
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 74/102
Clue6 First Quarter 2012
q y y
The day of the month continue to exhibit its historical pattern in the
US and Japan (Chart 113 and 114) (the same is true for most markets as
showed previously).
In the US the first day of the month which was the stand out winner in
the past couple of years has been very performing very badly recently,
this is good news. Remember that for something with a strong rationale
to work in the long-term, it has to fail miserably form time to time to
ensure that not to much money tries to profit from it. The 8 positive days
continue to display an outstanding performance in Japan.
US Day of the Month (S&P 500 Total Return since 1944Chart 113 Japan Day of the Month (Topix Total Return since 1979Chart 114
Source: Macquarie
Source: Clue6
1
2
4
8
16
32
64
128
256
512
1,024
2,048
4,096
-4, +4 -11-5 SPX TR
Source: Clue6
1,000
2,000
-4, +4 -11-5 SPX TR
175
350
700
1,400
2,800
5,600
-4, +4 -11-5 TPX TR
Equities: Seasonality – President Cycle and Monthly Seasonality 74
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 75/102
Clue6 First Quarter 2012
q y y y y
The lat 40 weeks cycle low came during the first week of October, a couple of week early (Chart 115). The next bottom should be at the end of February for the 20 weeks cycle and late June for the next 40 weeks cycle. Remember that we never used the 20 and 40 weeks cycle in a static
ways but we found it an useful way to get a feel of the market rhythm.
Looking at the Japanese market factor biorythm from Daiwa (Chart 116) one can see that the market was expected to form a bottom around
June and embark into a multi year bull market.
Source: Clue6
NYSE Composite and the 20 and 40 Weeks CyclesChart 115 Topix and Factor BiorythmChart 116
Source: Daiwa3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
0
2
4
6
8
10
12
14
16
18
20
20 Weeks Cycle 40 Weeks Cycle
Equities: Seasonality – Cycles 75
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 76/102
Clue6 First Quarter 2012
q y y
Chart 117, courtesy of B. Bronson, has been used in the past to depict the relative assets movement during the Long Cycle (Kondratiev wave).
Many 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 30’s were allergic to borrowing during all their life, organizing parties to celebrate their final mortgage payment… The same might (should) 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…
Super Cycle Economic SeasonsChart 117
Source: Clue6 Source: Bronson Capital Market Research
76Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 77/102
Clue6 First Quarter 2012
q
We have argued since 2000 that the equity markets would increasingly be correlated with the macro cycle. Indeed, while an expansion in the
valuation ratios dampened the corrections when the macro cycle was impacting profit, no such “expansion in a downturn” would occur for many years tocome.
While macro data surprise is now back to levels were the macro data has started to surprise negatively (Chart 118).
The best time (and hardest time) to be invested is when the ISM manufacturing index is below 50 and just starting to rise. The worst time is when it is
above 50 and declining (Chart 119), just as now.
ISM and Assets PerformanceChart 119S&P 500 and Citigroup US Macro Surprise IndexChart 118
Source: ML, Clue6
Source: Citigroup, Clue6
Table 1
-150
-100
-50
0
50
600
800
1000
1200
1400
1600
1800Citigroup US Macro Surprise Index (rhs) S&P 500
77Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 78/102
Clue6 First Quarter 2012
q
The ECRI weekly leading indicator year on year rate of change is strongly negative.
The ECRI chief economist Lakshman Achuthan is now predicting a recession. We encourage all of those exited by the recent better macro data to
have a look at the following interview (http://www.businesscycle.com/news_events/event_details/1492). If we had to find a symbol of today’s
investor way to analyze the markets (short-terminism) and the very low intellect of some TV anchors here YOU HAVE IT ALL.
50
100
200
400
800
1600
50
60
70
80
90
100
110
120
130
140
150
ECRI Weekly Leading Indicator S&P 500
78Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 79/102
Clue6 First Quarter 2012
q
With regard to our late June call of an incoming recession early 2012 in the US, Europe, Japan, Brazil, India, Eastern Europe and a potential fall out
in China (we know it will happen but the timing is extremely hard so we do not try to forecast this one)., we maintain it
Nothing has really changed since and if they have it is for the worse.
We try to forecast a recession, not what is going on now. Why all this obsession with lagging and at best, coincident indicators?
79Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 80/102
Clue6 First Quarter 2012
q
In our macro notes we have insisted a lot on the nature of the current macro environment and the importance of the monetary and fiscal policies. As
one can see from the above graphs, markets are not going to like the inevitable future tightening .
Good macro data might soon start to be a reason for sell-off as they increase the risk/chance of punchbowl withdrawing. Remember that when
this happen you will really have to worry when bad news are also met by sell off. When bad news is taking as such when the business cycle is
long on its tooth is something one see at the onset of a cyclical bear market. It feels we have entered this phase In June.
Source: Morgan Stanely
80Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 81/102
Clue6 First Quarter 2012
q
Commercial papers yield have been flat in the US and been rising in Europe in the past 12 months (but declining in the past 2-3 months)
(Chart 120). Norman Fosback in the 70’s and M. Zweig in the 80’s showed that it was not a good omen for the markets when they were rising. Our
own experience and derived models are confirming their findings.
The US and Euro Libor-OIS Spreads divergence has corrected somewhat, with the spread rising steadily in the US(Chart 121).
US and EUR Libor-OIS SpreadsChart 121US and EUR 30 Days Commercial Paper YieldChart 120
Source: Clue6Source: Clue6
0
1
2
3
4
5
6
0.0
1.0
2.0
3.0
4.0
5.0
6.0US 30 Days Commercial Paper
EURO 30 Days Commercial Paper
0
0.5
1
1.5
2
2.5
3
3.5
4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
US Libor-OIS Spread EUR Libor-OIS Spread (rhs)
81Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 82/102
Clue6 First Quarter 2012
qS&P 500 And ABX AAA 6-2
Ten years breakeven inflation has stabilized at around 2%.
600
1200
0
1
1
2
2
3
3
US 10 Years Breakeven S&P 500
82Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 83/102
Clue6 First Quarter 2012
While main street has been less and less volatile during the past 50 years (well up to 3 years ago) thanks to the decreasing correlation of the
various components of GDP growth, financial markets and their increasing influence of main street are ensuring that this will be a thing of the past.
Cross assets (Chart 122) and indices (123) correlation remains extremely high, in combination with falling implied volatility, this is a receipt
for a disaster as trades are probably more crowded that what is believed by market participants which are looking only at a small numbers
of risk factors. This is an environment which has preceded some of the most notorious “black swans” of the past 50 years.
Diversification won’t work in the next downturn either… Cash will be THE KING.
S&P 500 and Other US Indices Average 52
Weeks CorrelationChart 123
Source: Clue6
S&P 500 and Assets Average 52
Weeks CorrelationChart 122
Source: Clue6
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
65%
70%
75%
80%
85%
90%
95%
100%
83Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 84/102
Clue6 First Quarter 2012
Global defensives have been performing well globally and in the US (Chart 124-125). Note that the outperformance started while the overall
markets were still rising in May-June.
We continue to recommend a style allocation toward high quality only. Quality will outperform the broader markets by 5-8% in the coming 3-5
years. Note that small caps are likely to underperform the large cap indices by a similar margin. So owning large cap quality stocks hedged with a
basket of pricey small cap stocks with low return on invested capital is expected to produce 10-12% annually in the next 4-5 years . If one
only hedge when the cyclical models are negative or like in the current situation where almost all our indicators are pointing toward a
correction/consolidation, one could make >20% a year and sleep very well at night
S&P 500 and US Defensive Relative PerformanceChart 125S&P 500 and World Defensive Relative PerformanceChart 124
Source: Clue6 Source: Clue6
600
1200
0.3
0.3
0.3
0.3
0.3
0.4
0.4
0.4
0.4
0.4
World Defensive Rela tive Performance S&P 500
850
950
1050
1150
1250
1350
1450
0.3
0.3
0.4
0.4
0.4
0.4
0.4
0.4
0.4
600
1200
0.6
0.6
0.7
0.7
0.8
0.8
0.9
0.9
1.0
US Defensive Relat ive Performance S&P 500
850
950
1050
1150
1250
1350
1450
0.6
0.7
0.7
0.7
0.7
0.7
0.8
0.8
0.8
0.8
84Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 85/102
Clue6 First Quarter 2012
The Nasdaq Composite has been underperforming the S&P 500 in the past 2 months (Chart 126) which is, on average, not supportive for theoverall market.
The same is true for the Philadelphia Semiconductor index which has underperformed since early June (Chart 127). Semiconductor stocks
have tended to bottom several months before the market does at cyclical bottoms.
S&P 500 and Philadelphia Semiconductor
Index Relative PerformanceChart 127
Source: Clue6
S&P 500 and Nasdaq Composite Relative PerformanceChart 126
Source: Clue6
600
1200
1.6
1.7
1.8
1.9
2.0
2.1
2.2
N asd aq 100 Relative Perf ormance S&P 500
600
1200
0.2
0.3
0.3
0.4
0.4
0.5
0.5
SOX Relative Performance S&P 500
85Equities: Intermarket
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 86/102
Clue6 First Quarter 2012
Banks have been continuing to underperform in the US (Chart 128). The sector relative performance will be a key to understand how the new
wave of mortgages reset, the potential end of central bank accommodation and new accounting rules could affect the rest of the market.
High yield bonds are not in sync with the equity markets (Chart 129) as are investment grade 5 years CDS indices .
Chart 128S&P 500 and the KBW Bank Index
Relative Performance
S&P 500 and iShares iBoxx $ High Yield
Corporate Bond Fund Net Asset ValueChart 129
Source: Clue6 Source: Clue6
600
1200
60
65
70
75
80
85
90
95
100
105
110
HYG NAV S&P 500
1000
1050
1100
1150
1200
1250
1300
1350
1400
70
80
90
100
110
120
130
140
150
160
Invest ment Grade5YCDS Gener ic S&P500
600
1200
0
0
0
0
0
0
0
0
0
0
BKX Relative Performance S&P 500
Equities: Intermarket – US10 Years Govies against Stocks 86
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 87/102
Clue6 First Quarter 2012
We have long argued that one the characteristics of the current structural bear market (and we are talking US, Europe and Japan here...) wasthe 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…
S&P 500 and US 10 Years Treasury BondsChart 131
Source: Clue6 Source: Clue6
Blue area indicates when the momentumin 10 years government bond yield is
positive. In this period, stocks performed
when the momentum was negative.
Chart 130 S&P 500 and US 10 Years Treasury Bonds
0
200
400
600
800
1000
1200
1400
1600
1800
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
S&P 500
Blue area indicates when the momentum
in 10 years government bond yield is
positive. In this period, stocks performedwhen the momentum was positive.
Equities: Intermarket 87
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 88/102
Clue6 First Quarter 2012
A rising USD has rarely been a positive for emerging markets (Chart 132). 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 won’tbe contained despite T. Geithner promised. As we have said since the Q4 2010 presentation, one should keep an eye on emerging markets (India,
China, Brazil, Indonesia and Eastern Europe) where past tightening will induce a sharper slowdown than currently expected. This will have
important consequence on global growth as they were the motors of DM recent growth, along fiscal stimuli and Central Banks easing..
On Chart 133 one ca see that emerging markets spreads have turned up.
Source: Clue6
Chart 132 MSCI Emerging Markets and Dollar Index S&P 500 and Sovereign CDSChart 133
200
400
800
1600
2
3
4
5
6
7
8
ML USD EM Sovereign Plus Spread MSCI Emerging Market
Source: Bloomberg, Clue6
128
256
512
1024
2048
70
80
90
100
110
120
D ollar I nd ex (lhs) MSCI Emerging M arket
Equities: Intermarket 88
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 89/102
Clue6 First Quarter 2012
If the Hungarian, Mexican, Polish and Turkish CDS spreads started to widen significantly here, this would be really bad (Chart 134) Here is a repeat from September 2010
presentation:
“some of the countries you should have a particular look at, besides the usual suspect we have identified in the past 15 months, and where we expect the CDS spreads to bemuch higher during the next 12-18 months). Germany spreads widening will be the consequence of the French spreads widening following Spain potential 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 Australian economic miracle in a ad-hoc note in April so we won’t come back here. This is impossible, right…”
Another spread we would play is Sweden against Norway. Sweden is an accident waiting to happen (despite M. Borg and the new center-right coalition fantastic reforms of the
past 5 years). The housing markets is one of the most overvalued in the world with banks lending with 100% loan to value (or more), households are highly leveraged, banks
have a lots of non SEK based short term liabilities and the country is very dependent on exports. While the budget is currently well balanced and the debt level (ex households)
is relatively low, this could (will) change very quickly when banks start to be squeezed.
Source: Clue6 Source: Bloomberg, Clue6
Chart 134 S&P 500 and Sovereign CDS Sovereign CDSChart 135
-5
45
95
145
195FRA/NOR Spreads GER/NOR Spreads AUS/NOR Spreads
UK/NOR Spreads SWE/NOR Spreads
600
1200
5
10
20
40
80
160
320
640
1,280
2,560
S&P 500 Greece Turkey Hungary Poland Mexico
89Equities: Pattern
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 90/102
Clue6 First Quarter 2012
We are now in an environment where the S&P 500 will struggle to stay 4-5% above its 50 days moving average (Chart 136 and 137).
Source: Clue6
Chart 136
Source: Clue6
S&P 500 Deviation from 50
Days Moving Average
S&P 500 Deviation from 50 Days
Moving AverageChart 137
50
250
450
650
850
1050
1250
1450
1650
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%Deviation from 50 d ays Moving Average
S&P 500
Equities: Pattern 90
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 91/102
Clue6 First Quarter 2012
The Coppock curve has made a lower high without having fallen below 0 in between.
This pattern was already identified in the 60’s by Don Hahn and was named “killer wave”.
No sustained bottoms should be expected before the curve fall below 0 and turn back up.
5
10
20
40
80
160
320
640
1280
-150
-100
-50
0
50
100
150
Coppock Curve S&P 500
91Equities: Graphs
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 92/102
Clue6 First Quarter 2012
The S&P 500 has behaved mostly as expected in the past few months. We are almost certainly in a cyclical bear market and prices are heading much lower before a new sustained
up swing.
The index was unable to break its 200 days moving average and, more importantly, a large cluster of pivots resistance between 1270 and 1300.
While in the short-term a retest of the 1270 area is possible, strength should be used as a selling opportunity. We covered our net short position (but remained market risk hedged)
and entered a bullish call backspread near the November lows. It was sold on strength early December and we bought another one on 15/12.
We will use strength (or further technical deterioration) to re-enter the net short position we held in July-September and re-entered at the end of October.
Head
ShoulderShoulder
S&P 500
Shoulder
Head
Shoulder
Shoulder
Head
Shoulder
Shoulder
Head
Shoulder
Equities: Graphs 92
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 93/102
Clue6 First Quarter 2012
Europe has continued to underperform as expected.
The configuration is very similar to the US one and the 2009 lows will probably be at least tested in the next 3-12 months
Note that one should be ready to deploy cash quickly on a break up (and invest first in the PIIGS in this eventuality). One should have a list of high
quality stocks ready.
Head
Shoulder Shoulder
EuroStoxx 50
DiamondBull Trap
Shoulder
Head
Shoulder
Equities: Graph 93
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 94/102
Clue6 First Quarter 2012
While it had mixed result on the currency side, MOF intervention in the currency markets has been good to Japanese stock holders. in the last 3
intervention period (95-96, 99-00 and 03-04) the Topix has risen by 17.3%, 54.5% and 28% respectively.
Yen selling = domestic liquidity pumping. Works less well in a liquidity trap situation but still…
We expect full blown monetization by the BOJ coming in a not so distant future (12-24 months). We have explained the rationale in previous update
so…
700
900
1100
1300
1500
1700
1900
2100
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
MOF Interventions Topix
94Equities: Graphs
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 95/102
Clue6 First Quarter 2012
The March low have been broken and the Topix is testing its 2009 lows. The H&S target is 600 (for what it is worth…)
The key here will be the Yen. We think it will weaken on renewed intervention before crashing to >150 and higher when the BOJ start a full non-
sterelized monetization of the domestic debt.
On a relative basis, we advise to be long Japan (Yen hedged) and short the rest of the world. A basket of high quality small and large cap stock in
Japan is likely to reward investor handsomely in the future (even if we believe this basket can probably be bought at an even bigger discount to
intrisic value in the next 3-12 months)
Head
Shoulder Shoulder
Topix
Equities: Graphs 95
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 96/102
Clue6 First Quarter 2012
Continues to move in a well defined down sloping channel.
Very heavy resistance at the 420-440 level which could be retested in the short-term before the down move resume.
Some analyst are talking about a potential inversed H&S in formation since early August. True but we would need a breakout above 440 for the pattern target to
be triggered and even if it does it is likely to be a magnificent bull trap.
Diamond Continuation
MSCI Asia ex-Japan
Shoulder
Head
Shoulder
96Equities: Graphs
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 97/102
Clue6 First Quarter 2012
Same analysis as for Asia ex-Japan.
Hard to spot the slightest difference in the charts in the past 3-4 months
MSCI EM Latin America
Shoulder
Head
Shoulder
Diamond Continuation
97Equities: Graphs
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 98/102
Clue6 First Quarter 2012
A repeat from our quarterlies since the start of this year:
“There is no way Eastern Europe will 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 lived above your means thanks to those big loans. People will also soon realize that the Baltic States, Bulgaria and other
internal devaluation will end up as a failure (they are currently praised as an example of success).
Do not forget to pick some of the dominoes falling by contagion… there are plenty of good things in the Czech Republic for example…”
MSCI Eastern Europe
Diamond Continuation
Head
ShoulderShoulder
98Equities: Conclusion
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 99/102
Clue6 First Quarter 2012
Markets have probably entered a new cyclical bear market. Our cyclical models are giving sell signals since June/July while leverage
reached at that time levels typical of cyclical market turns. Bear market rally are to be expected from time to time and we will do our best to
participate (mainly by cutting our net short position and using bullish call backspread further financed by out of the money put sold on our hedges as
we have in the past. We will be more aggressive on the put financing side when the markets fall below their intrinsic value). We have successfully
timed a couple of those rallies since the August top and are expecting one to start soon and last for a couple of weeks (top in early January).
Determining the cycle is not only crucial to avoid betting against the trend but because indicators, be it
sentiment, breadth, liquidity or cycles should be analyzed differently.
Overbought/oversold in a bear markets is not the same as in a bull markets (both the levels and how the markets react), sentiment
indicators boundaries (optimism/pessimism) change as does how cycles translate. In a bull markets you have trend followers working for
you (if you are a bull) while they are working against you in a bear market. Fundamental value investors are only working for you at the
later stage of a bear markets, waiting for valuations to be attractive (or more).
Investors surveys have corrected from the excessive optimism they were displaying in the May-July period but have rebounded to levels which are
high in the current cyclical context. Hedge Funds have lowered their high leverage (gross positions) and their net long exposure but both remain
high historically.
Option indicators are mixed. The CBOE equity put call ratios printed high readings a couple of days ago but the moving averages are
neutral at best. The OEX PC ratio has experienced new bearish "above 2“ readings recently. Its open interest put call ratio has fallen but remains
much higher than its typical level at the end of cyclical bear markets. At the retail levels, we are seeing 51% of the activity concentrated in bearish
strategies. The buy to open put call ratio is relatively high but usually go much higher in cyclical bear markets. Few puts are bought to open while
many are sold to open. There are no fears of waterfall declines. Skews have corrected somewhat.
Insiders activity has deteriorated markedly in the past few weeks. We had net buying in the US during the last week of August but those days are
now gone. The Canadian buy to sell ratio has fallen back close to its 2007 lows. We are seeing more companies buying stocks than selling in Europe
with a big spike 2 months ago.
Our preferred “market timers” are now both defensively positionned.. The best value managers have continued to reduce their net long
exposure to the market indicating that the markets will have to fall more before we see fundamentalists buying from the technical traders.
99Equities: Conclusion
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 100/102
Clue6 First Quarter 2012
Speculators have accumulated a large net short Nasdaq 100 future position. European sell side analysts are very bullish while US strategists
have maintained their equity allocation recommendation near its cyclical high.
Leveraged bullish funds as a percentage of total at Rydex is back to “too high” .
The VIX time-spread, while lower than between August 2010 and April 2011 is again very high while non-commercials are net long the VIX
future. We will use the potential short-term rebound to build a call backspread on the VIX as we did in June-August. The curve should flatten a bit
before and we might be able to get >20* payout for January of February expiry.
Breadth volatility continues to be very high. It is currently hard to give as much weight as we usually do to this area. The positives are that we
have seen some clusters of breadth thrusts in the past 2 months. The negatives are that our Nasdaq new highs-lows model is on sell since June, the
McClellan oscillator is diverging negatively and failed to diverge positively at the October bottom. Selling pressure has increased in the past 19
months. And now even Lowry's Research , THE reference with regard to breadth analysis, agrees. Our short-term top warning models have yet
to display worrying divergences between the % of stocks above short-term moving average and their respective indices just before the recent
correction started and are now slowly reaching levels where a short-term rebound has to be expected. Dispersion has increased and we had anunconfirmed Hindenburg Omen in the US a week ago.
On the liquidity side, net outflows in US domestic and developed markets equity funds have increased sharply. Net inflows into emerging markets
have moderated even if we saw some big inflows a couple of weeks ago. The cash ratio are low everywhere and does not leave much dry powder
to managers. Net redemption will have to be met by selling current holdings. Money market funds as a percentage of aggregate market capitalization
continues to decrease rapidly. The number of buybacks has increased in the US and reached historical highs in Europe and Asia Pacific while it
remains low in Japan. In most markets we are seeing less IPOs and secondary offerings but the amount raised between the end of 2010 and
May 2011 are typical of bull markets top.
Foreigners are continuing to buy a lots of US equities. The small caps short interest ratio relative to large cap remains relatively high whichis a negative. Short selling in Japan has moved out of deep panic. Margin debt has corrected somewhat in the US but remains at the 2007
levels relative to overall market capitalization.
Pension funds’ funding status has deteriorated since the start of the year, courtesy of increasing liabilities (discount rate declining). This remains
one of the big, big problems the markets and retirees will have to face in the coming years.
100Equities: Conclusion
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 101/102
Clue6 First Quarter 2012
M2 has exploded in the June-August period but is flat since (money market funds Euro financial exposure selling and fund repatriation related). Fed
Treasury custody holdings growth momentum is now negative.
Seasonals are now a tailwind. Our mechanical seasonal model is on buy since early October. The 40 cycle mad a low in early October and the next
20 weeks cycle low should be expected around the end of February. With regard to the Presidential Cycle, the election year has been the second best
(but also the most volatile) but remember that the typical fiscal and monetary cycle has been distorted and pushed forward in the past 3 years.
Average outcome highly unlikely.
Intermarket relationships are mostly negative but the fact that the correlation at the stocks, styles, index and assets level is extremely high recently
makes intermarket analysis much more tricky. The macro surprise indices is extremely high. The defensive sectors have performed relatively well
despite the recent rebound. The Nasdaq, semiconductor and bank sectors have underperformed in the past few months and the Nasdaq is too
now. Emerging market are underperforming (always worrying to see the leader in this situation when prices move higher). High yield bonds are not
diverging negatively but corporate CDS have as have ABX, CMBS indices and emerging markets sovereign spreads . Treasury bonds yields
have continued to decline.
Our cyclical models are giving sell signals one after the others but we have reached levels (for the third time after the beginning of October
and the end of November) where a partial “recapture” of the recent decline becomes highly likely.
Taking the US markets as a proxy, The S&P 500 has behaved mostly as expected in the past few months. We are almost certainly in a cyclical bear
market and prices are heading much lower before a new sustained up swing. The index was unable to break its 200 days moving average and, more
importantly, a large cluster of pivots resistance between 1270 and 1300. While in the short-term a retest of the 1270 area is possible, strength should
be used as a selling opportunity. We covered our net short position (but remained market risk hedged) and entered a bullish call backspread near the
November lows. It was sold on strength early December and we bought another one on 15/12.We will use strength (or further technical deterioration)
to re-enter the net short position we held in July-September and re-entered at the end of October and buy a new Vix call backspread.
We would continue to underweight emerging markets , Europe and small caps (US, European and emerging markets small caps could/will
underperform large caps by 3-5% yearly in the next 5-7 years) . We would overweight Japan (but hedge the currency risk) and the US. Buy high
quality (domestic-oriented) stocks (and hedge the market risk when we recommend it). Value and growth are likely to behave badly in a downturn
so value managers won't offer the decorrelated returns they offered during the 2000-2003 decline. Buy value when value dispersion is high not low
as it is now.
101Equities: Conclusion
8/3/2019 GTAA Equities Q1 2012
http://slidepdf.com/reader/full/gtaa-equities-q1-2012 102/102
With regard to the macro picture, we would refer to the multiple updates we have sent in the past few months. There will be a recession in
the US, Europe and many other places. On Europe in particular we feel we are dreaming. When will the political elite understand that they
are not facing a liquidity…