playing the bull market’s final inning(s)...12 june 1, 2012 1.47 1278.04 stock market up: 29.5 %...

Playing The Bull Market’s Final Inning(s)

Douglas Ramsey, CFA, CMTMid-September 2013

FOR PROFESSIONAL USE ONLY. FURTHER DISTRIBUTION OF THE INFORMATION CONTAINED HEREIN IS PROHIBITED WITHOUT PRIOR PERMISSION.

2

This report is not a solicitation or offer to buy or sell securities. The Leuthold Group, LLC provides research to institutional investors. It is also a registered investment advisor that uses its own research, along with other data, in making investment decisions for its managed accounts. As a result, The Leuthold Group, LLC may have executed transactions for its managed accounts in securities mentioned prior to this publication. The information contained in The Leuthold Group, LLC research is not, without additional data and analysis, sufficient to form the basis of an investment decision regarding any one security. The research reflects The Leuthold Group, LLC’s views as of the date of publication, which are subject to change without notice. The Leuthold Group, LLC does not undertake to give notice of any change in its views regarding a particular industry prior to publication of their next research report covering that industry in the normal course of business. The Leuthold Group, LLC may make investment decisions for its managed accounts that are inconsistent with, or contrary to, the views expressed in current Leuthold Group, LLC reports. Weeden Investors, L.P., Weeden & Co., L.P.'s parent company, owns 22% of Leuthold Group’s securities. A Managing Director of Weeden & Co., L.P. is a member of The Leuthold Group, LLC board of directors. Weeden & Co., L.P. member FINRA, NASDAQ, and SIPC.

Disclosures

3

MTI is mildly bullish Net

ReadingIntrinsic Value -215

Economic/Interest Rates/Inflation -7

Attitudinal -146

Supply/Demand 75

Momentum/Breadth/Divergence +435

Ratio of Positive to Negative Points: 1.12

Above 1.05 = BullishBetween 0.95 and 1.05 = NeutralBelow 0.95 = Bearish

Major Trend Index

4

It’s not exactly been a “global”bull market

2010 2011 2012 2013

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13501400145015001550160016501700175018001850

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1700© 2013 The Leuthold Group

United States(S&P 500)

ForeignDeveloped Markets(MSCI World Ex USA)

EmergingMarkets

(MSCI)

5

“The tape” is mostly in gear…

S&P 500 bull market highJuly 22, 2013

2010 2011 2012 2013

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700800900

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Dow JonesTransports

Russell 2000

S&P 500

Dow Jones Utilities

© 2013 The Leuthold Group

S&P 500Financials

Morgan Stanley Cyclical Index

NYSEAdvance/Decline

Line

Dow Jones 65Composite

6

Tape is in gear (cont.)

Market Early Warning Signals: Prior S&P 500 Tops Vs. Today

Subse- Dow 65 Dow Dow Russell S&P 500 MS NYSE TotalDate of quent Composite Transports Utilities 2000 Financials Cyclical A/D Line Number ofBull Market High Decline Warning? Warning? Warning? Warning? Warning? Warning? Warning? Warnings*

July 16, 1990 -19.9 % 1 1 1 1 1 1 1 7July 17, 1998 -19.3 1 1 0 1 0 1 1 5March 24, 2000 -49.1 1 1 1 0 1 1 1 6October 9, 2007 -56.8 1 1 1 1 1 1 1 7

Average: 6.3

Important Highs, March 2009 To DateApril 23, 2010 -16.0 0 0 1 0 0 0 0 1April 29, 2011 -19.4 0 0 0 0 1 0 0 1August 2, 2013 -4.6 0 0 1 0 0 0 0 1

*A warning is issued when an index fails to "confirm" a new S&P 500 bull market price high during the preceding 21 trading days (one month). © 2013 The Leuthold Group

Usually most of these internal market measures will deteriorate beforethe final bull market peak is achieved. But at the August 2nd high,

just one of these seven leading measures (DJ Utilities) had raised a warning flag.

7

Two longer-term warning signs…

2007 2008 2009 2010 2011 2012 2013

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S&P 500

NYSE WeeklyAdvance/Decline Line

The NYSE WeeklyAdvance/Decline Line generally

acts stronger than its daily counterpartthroughout a bull market. But the weekly

version now looks weaker, and hasn'tmade a new high since mid-May.

2007 2008 2009 2010 2011 2012 20130

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S&P 500

NYSE High/LowLogic Index*(10-Wk. Avg.)

NYSE new 52-week highs and lows are both at

elevated levels, a sign that market

strength is notas uniform as

indicated by most other measures.

Below 1% - Tape is "in gear"- BULLISH

Above 5% - Tape is "divergent"- BEARISH

Index calculated as the lesser of NYSE Weekly New Highs and New Lows as a percentage of issues traded.

8

A possible sign of “distribution”?

2007 2008 2009 2010 2011 2012 2013-130

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155160165170175180185190195

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150160170180

SPDR S&P 500ETF Trust

(SPY)

Morning hype haslately been giving way to

afternoon weakness… a sign the smartmoney may be "distributing" stock.

SPDR Cumulative Opening Price Change(The "Emotional Money")


SPDR Cumulative Intraday Price Change(The "Smart Money")

9

Rates and stocks prices can rise together

1950 1960 1970 1980 1990 2000 2010

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300400500

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1200150019002400

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Stocks & Interest Rates Can SometimesGo Up Together

U.S. 10-Yr. Treasury Bond Yield(weekly close)


S&P 500

10

Rising rates/ rising stock prices (cont.)

S&P 50010-Yr. P/E on 5-Yr.Bond Stock Market/ Normalized

Dates Yield S&P 500 Bond Yield Action © 2013 The Leuthold Group EPS1 May 2, 1958 2.89 43.69 Stock Market Up: 38.5 % 15.1

July 31, 1959 4.41 60.51 Bond Yields Up: 152 Basis Points

2 January 11, 1963 3.80 64.85 Stock Market Up: 44.7 % 21.0February 11, 1966 4.86 93.81 Bond Yields Up: 106 Basis Points

3 January 27, 1967 4.47 86.16 Stock Market Up: 25.8 % 21.2November 29, 1968 5.78 108.37 Bond Yields Up: 131 Basis Points

4 November 5, 1971 5.72 94.46 Stock Market Up: 26.8 % 15.2January 5, 1973 6.42 119.73 Bond Yields Up: 70 Basis Points

5 March 3, 1978 8.04 87.04 Stock Market Up: 60.1 % 11.3November 28, 1980 12.72 139.33 Bond Yields Up: 468 Basis Points

6 November 5, 1982 10.48 143.02 Stock Market Up: 19.1 % 8.8July 22, 1983 11.43 170.35 Bond Yields Up: 95 Basis Points

7 April 18, 1986 7.09 242.42 Stock Market Up: 38.9 % 16.5August 21, 1987 8.77 336.77 Bond Yields Up: 168 Basis Points

8 January 19, 1996 5.54 612.79 Stock Market Up: 8.0 % 24.6June 7, 1996 6.93 662.06 Bond Yields Up: 139 Basis Points

9 October 2, 1998 4.31 1002.60 Stock Market Up: 46.1 % 27.8January 14, 2000 6.69 1465.15 Bond Yields Up: 238 Basis Points

10 June 13, 2003 3.13 988.61 Stock Market Up: 34.1 % 23.0May 5, 2006 5.12 1325.76 Bond Yields Up: 199 Basis Points

11 March 20, 2009 2.65 768.54 Stock Market Up: 53.3 % 11.3April 2, 2010 3.96 1178.10 Bond Yields Up: 131 Basis Points

12 June 1, 2012 1.47 1278.04 Stock Market Up: 29.5 % 18.6September 6, 2013 (To 2.94 1655.17 Bond Yields Up: 147 Basis Points

Average Stock Market Gain (Excl. 2012-13): 35.4 % 17.9Median Stock Market Gain (Excl. 2012-13): 36.3 % 17.6

Average Bond Yield Increase (Excl. 2012-13): 170 Basis PointsMedian Bond Yield Increase (Excl. 2012-13): 143 Basis Points

11

Bull markets have frequently topped near current valuations

S&P 500 Normalized

Date Of S&P 500 P/E At BullBull Market Peak Market PeakDecember 31, 1961 22.3 x

February 28, 1966 23.0November 29, 1968 20.6January 31, 1973 20.8September 29, 1976 13.6November 29, 1980 11.3August 31, 1987 22.3 "Normal"July 31, 1990 18.4 S&P 500July 31, 1998 27.7 Bull MarketMarch 31, 2000 32.1 HighOctober 31, 2007 20.9

Median At Modern Era Bull Market Peaks (1957 To Date) 20.9 x 1695


1957 To DateAt Bull Market Peaks,

S&P 500 Normalized P/E

.ec

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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1957-to-DateMedian = 18.6x

1926-to-DateMedian = 16.6x

S&P 500 P/E On 5-Yr. Normalized EPS(1926 To Date - Monthly)

© 2013 The Leuthold GroupGreat Depression earnings wipeout

August 30, 2013 = 20.1x(76th percentile

since 1926)

12

Profit margins have probably peaked for this business cycle…

1947 1951 1954 1957 1961 1964 1967 1970 1974 1977 1980 1983 1987 1990 1993 1996 2000 2003 2006 2009 2013 201

4.04.55.05.56.06.57.07.58.08.59.09.5

10.010.5U.S. Corporate Profits As A Percent Of GDP

[from National Income and Product Accounts (NIPA);Profits are after tax and Include inventory valuation allowanceand capital consumption adjustment]

1950 1960 1970 1980 1990 2000 2010

65-Yr. Median = 6.0%

5.5%

4.7%

10.3%

8.6%


10.1%(2Q)

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Implications of high margins…

. 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2

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1952 1960 1970 1980 1990 2000 2010

Margins Are An Excellent (But Unfortunately Inverse) Predictor Of

Future Profit GrowthConcept courtesy of Hussman Research & Insight.

© 2013 The Leuthold Group5-Yr. Annualized Growth In NIPA Corporate Profits

(scale at left)

NIPACorporate ProfitsAs A Pct.Of GDP - advanced five years

and shown on invertedscale (right)

Today's profit margins are so inflated thatsubstantially slower profit growth over the next three to five years is almost baked in the cake.

14

The bond bull has been a big driver of margin gains..

1950 1960 1970 1980 1990 2000 2010

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Moody's BAA Corporate Bond Yield(quarterly average - left scale) best

case

likelypath

Net Interest Expense As APct Of Earnings Before Interest

And Taxes (EBIT)(right scale)

How The Bond Bull Boosted Earnings...

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“Bookkeepers”have also helped boost margins…

1950 1960 1970 1980 1990 2000 2010

47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 01011 13 14 15

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How Bookkeepers Have Boosted Earnings...

Top Marginal Corporate Tax Rate

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Effective Corporate Tax Rate As APercentage Of Statutory Rate

1950 1960 1970 1980 1990 2000 2010

19.9%(2Q)

57%(2Q)

66-Yr. Median = 80%


Corporate Income Taxes As APercent Of Pretax Corporate Profits

(Effective Tax Rate)

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Virtually all margin improvement has been “below” the line…

NIPA Income Statement 1997:Q3 2013:Q2Earnings Before Interest & Taxes As Pct. Of "Sales" (i.e., GDP) 15.1% 15.3%Net Interest Payments Pct Sales 4.8% 2.7%Corporate Income Taxes Pct Sales 2.9% 2.5%Net Corporate Profit Margin 7.3% 10.1%© 2013 The Leuthold Group

Margin Expansion:From The Late 1990s Profitability Peak To Today

17

On the positive side, EBIT margins have room to move higher…

1947 1951 1954 1957 1961 1964 1967 1970 1974 1977 1980 1983 1987 1990 1993 1996 2000 2003 2006 2009 2013 201

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18Earnings Before Interest And Taxes (EBIT)As A Percent Of GDP

1950 1960 1970 1980 1990 2000 2010

66-Yr. Median = 13.7%11.9%

16.4%


15.3%(2Q)

From National Income and Product Accounts (NIPA);Profits include inventory valuation allowance and capital consumption adjustment.

16.7%

15.1%

12.2%

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Breadth of earnings gains has narrowed dramatically in last year…

1990 2000 2010

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Percent OfCompanies With Rising

Year-Over-YearEarnings*

6 yrs. of strongearnings breadth

4+ yrs. Ofstrong earnings

breadth

2 yrs. ofstrong

earningsbreadth

*Based on tabulation of all earnings reports published inInvestor's Business Daily.


60% =recessionalert

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Earnings breadth & the leadership “inversion”

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February 17, 2011:Peak in earnings breadth

Earnings Breadth & Stock Market Leadership

Percent OfCompanies With Rising

Year-Over-Year Earnings

Ratio,Russell 2000 to

S&P 500

Ratio,S&P 500

High Beta/Low Volatility

Index

Ratio,Morgan StanleyCyclical Index/

ConsumerIndex

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Industry groups are enjoying “positive feedback”

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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Ratio, Strong To Weak Global Industries(Relative price performance of top to bottom quintile of MSCI World Level III industry porfolios formed monthly on trailing 12-mo. price momentum.)

2009 bearmarket low

The stock market is in a "positive feedback" loop in

which winning industry themes tend to keep winning

over the short- to intermediate-term. This is

likely to continue on a relative basis until well into

the next bear market.

2002bear market

low

2011correction

low

21

Momentum strategies work best near the end of a bull market…

Stocks With Stocks WithDate Of Monthly High Price Low PriceBull Market High Momentum MomentumAugust 1929 68.3 20.1February 1937 34.6 18.6October 1938 8.1 10.3May 1946 61.1 31.4July 1956 24.4 11.2December 1961 27.3 19.7January 1966 33.9 4.3November 1968 22.9 23.8December 1972 23.7 6.5September 1976 26.1 26.6November 1980 76.2 15.9August 1987 30.0 39.8June 1990 19.3 1.8June 1998 35.3 19.5March 2000 38.7 3.7October 2007 25.6 8.7Average 34.7 % 16.4 %Number Of TimesWith Highest Return 12 4Monthly total returns for large-cap stocks based on Fama-French Momentum Portfolios, Tuck School of Business.Boxes highlight higher return in last year of bull market.

Last 12 Months Of Bull MarketsPerformance Of Price Momentum In


22

…And momentum even wins during bear markets!

Stocks With Stocks WithBear Market Dates High Price Low Price(Monthly) Momentum MomentumSep 1929 - Jun 1932 -77.3 -94.5Mar 1937 - Mar 1938 -51.2 -56.3Nov 1938 - Apr 1942 -24.2 -28.7Jun 1946 - Jun 1949 -16.0 -26.3Aug 1956 - Oct 1957 -12.6 -19.1Jan 1962 - Jun 1962 -21.5 -30.2Feb 1966 - Sep 1966 -11.4 -16.2Dec 1968 - Jun 1970 -31.3 -35.3Jan 1973 - Sep 1974 -39.8 -64.0Oct 1976 - Feb 1978 4.2 -20.7Dec 1980 - Jul 1982 -21.8 -13.2Sep 1987 - Nov 1987 -30.4 -19.3Jul 1990 - Oct 1990 -12.1 -31.9Jul 1998 - Aug 1998 -14.6 -17.8Apr 2000 - Sep 2002 -38.1 -56.4Nov 2007 - Feb 2002 -48.3 -68.8Average -27.9 % -37.4 %Median -21.8 -28.7Number Of TimesWith Highest Return 14 2Monthly total returns for large-cap stocks based on Fama-French Momentum Portfolios, Tuck School of Business.Boxes highlight better performer during bear market.

During Cyclical Bear MarketsPerformance Of Price Momentum


23

New bull markets see the “Revenge of the Nerds”

Stocks With Stocks WithDate Of High Price Low PriceBear Market Low Momentum MomentumJune 1932 100.4 % 287.7 %March 1938 25.1 62.4April 1942 66.6 61.1June 1949 40.9 38.3October 1957 31.9 31.6June 1962 38.1 26.9October 1966 39.7 34.2May 1970 39.6 64.3October 1974 37.7 52.4March 1978 27.5 18.5August 1982 66.3 64.1December 1987 20.5 32.5October 1990 37.6 74.0August 1998 43.4 49.2October 2002 14.9 51.1February 2009 35.5 116.7Average 41.6 % 66.6 %Number Of TimesWith Highest Return 7 9Monthly total returns for large-cap stocks based on Fama-French Momentum Portfolios, Tuck School of Business.Boxes highlight higher return in first year of bull market.

First Year Of New Bull MarketsPerformance Of Price Momentum In


24

Investors remain in love with yield, at a time it scarcely exists…

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20101.5

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Total Yield On A 60/40 Portfolio(60% S&P 500/40% 10-Yr. Treasurys)


1878-To-DateMedian =

4.15%

August 30, 2013 = 2.43%

25

A sober portfolio forecast…

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21Total Yield On A 60/40 Portfolio Vs. 10-Yr. Total Portfolio Return


Total Yield On 60/40 Portfolio

10-Yr. Trailing

Return On 60/40

Portfolio

Correlation Coefficient(1878 To Date) =

0.66

(advanced 10 yrs. - left scale)

(right scale)

1880 19101890 1900 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

26

The bipolar modern history of bonds…

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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Annualized Real Total Return,Jan26 - Sep81 = +0.01%

Annualized RealTotal Return,

Oct81 - Jan13 =+6.67%

U.S. 10-Yr. Treasury BondReal Total Return Index

(Cumulative Total Return Deflated By CPI)1926 To Date

Annualized RealTotal Return,

Jan26 - Jan13 =+2.38%


September 30, 1981 -the best date in U.S. historyto retire…

27

A simple way to forecast bond returns

1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

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Current Bond Yields Have Historically Been An Excellent EstimateOf Bonds' 10-Yr.

Future Total Return Potential...

U.S. 10-Yr. Treasury Bond Yield,Advanced 10 Years

10-Yr. U.S. Treasury Bonds10-Yr. Annualized

Total Return

Correlation,January 1930 To Date =

0.96


28

Bond market symmetry!

940 1950 1960 1970 1980 1990 2000 2010 20

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September 1981 yield peak =15.32%

The BondBull Market Has Essentially BeenThe Mirror ImageOf The Previous

Bear!

Sep41-Sep81:U.S. 10-Yr. Treasury

Bond Yield(mo. avg.)

Oct81-Sep21:"Mirror Image"of 1941-1981U.S. 10-Yr.

T-Bond Yield(mo. avg.)

To preserve its near-perfect symmetry with the preceding bear market, the secular bond bull begun in

September 1981 would need to last until July 2017.

Oct81-To-DateActual U.S. 10-Yr.

T-Bond Yield(mo. avg.)

Correlation Between Actual Yield and "Mirror Image" Forecast,October 1981 To Date =

0.92


30

A Simple, Single-Asset Annual Allocation Strategy:Invest Using Last Year's Performance Rank, 1973-2012

0

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Best P

erform

ing Ass

et

Second B

est

Third B

est

Fourth B

est

Fifth B

est

Sixth B

est

Worst Perf

orming A

sset

S&P 500

TOTAL

RETURN

(%)


31

BridesmaidAsset ClassOwned During

Year Year1973 -14.7 % Commodities 75.0 % 95.11974 -26.5 Gold 66.3 47.51975 37.2 Commodities -17.2 -33.11976 23.8 Large Caps 23.8 30.31977 -7.2 REITs 19.1 6.01978 6.6 Gold 37.0 21.71979 18.4 EAFE 6.2 25.21980 32.4 Small Caps 38.6 17.91981 -4.9 Large Caps -4.9 8.31982 21.4 Govt. Bonds 39.3 22.01983 22.5 REITs 25.5 29.91984 6.3 REITs 14.8 11.81985 32.2 REITs 5.9 18.11986 18.5 Large Caps 18.5 5.61987 5.2 Govt. Bonds -2.2 -10.81988 16.8 Commodities 27.9 30.01989 31.5 Commodities 38.3 31.61990 -3.2 Large Caps -3.2 4.71991 30.5 Govt. Bonds 18.8 10.81992 7.7 REITs 12.2 0.21993 10.0 REITs 18.5 20.01994 1.3 Small Caps -1.8 -6.41995 37.4 Commodities 20.3 21.71996 23.1 Small Caps 16.5 27.01997 33.4 Commodities -14.1 15.91998 28.6 Small Caps -2.5 24.01999 21.0 EAFE 27.4 19.42000 -9.1 EAFE -14.0 -24.32001 -11.9 REITs 15.5 13.52002 -22.1 Govt. Bonds 15.4 26.12003 28.7 Gold 20.9 12.42004 10.9 EAFE 20.7 22.62005 4.9 EAFE 14.0 5.02006 15.8 Gold 22.5 26.82007 5.5 EAFE 11.6 8.62008 -37.0 Gold 4.3 14.12009 26.5 Gold 26.5 24.02010 15.1 REITs 27.6 11.92011 2.1 REITs 7.3 -15.92012 16.0 Gold 5.9 16.32013 EAFE1973-2012, AnnualizedTotal Return: 9.8 % 15.6 % 14.2 %Std. Deviation: 18.1 % 19.0 % 20.2 %

No. Yrs Matching Or Exceeding S&P 500: 28/40 23/40Correlation With S&P 500 (Annual Returns): -0.11 -0.09© 2013 The Leuthold Group

Bridesmaid

Total ReturnS&P 500

Total ReturnAsset Class)

Year's Runner-Up(Own Previous

Strategy

(Using 12-Mo.Momentum)

BridesmaidStrategy

With MonthlyRebalancingBuy last year’s

“Bridesmaid” asset class!

2012

REITs (NAREIT Index) 20.1 %MSCI EAFE 17.9Russell 2000 16.4S&P 500 16.0Gold 5.910-Yr. U.S. Treasury Bonds 2.8Commodities (GSCI) 0.1

Total Return

32

BridesmaidSector Strategy With

Bridesmaid Monthly S&P 500 Bridesmaid Strategy Rebalancing

Total Sector (Last Year's Total (Using 12-Mo.Return Second Best Sector) Return Momentum)

1991 30.5 % Consumer Staples 41.7 % 45.71992 7.6 Financials 23.3 13.51993 10.1 Consumer Discretionary 14.6 19.21994 1.3 Industrials -2.4 1.41995 37.6 Health Care 58.0 82.81996 23.0 Financials 35.2 22.51997 33.4 Financials 48.2 58.11998 28.6 Health Care 43.9 35.31999 21.0 Telecom Services 19.1 19.12000 -9.1 Materials -15.7 -2.52001 -11.9 Health Care -11.9 -14.02002 -22.1 Consumer Discretionary -23.8 2.32003 28.7 Materials 38.2 20.42004 10.9 Materials 13.2 7.62005 4.9 Utilities 16.8 16.82006 15.8 Utilities 21.0 22.92007 5.5 Energy 34.4 7.22008 -37.0 Materials -45.7 -35.82009 26.5 Health Care 19.7 24.52010 15.1 Materials 22.2 23.82011 2.1 Industrials -0.6 3.02012 16.0 Consumer Staples 10.8 0.92013 Consumer Discretionary

1991-2012 Annaulized:Total Return 9.1 % 13.3 % 14.6 %Std. Deviation 18.7 % 25.3 % 24.5 %

No. Yrs. Outperforming S&P 500: 13/22 15/22Correlation With S&P 500 (Annual Returns): 0.94 0.86

Results assume annual rebalancing of S&P 500 sectors; numbers include dividends, but exclude transactions costs.


2012Total

S&P 500 Sectors ReturnFinancials 28.8 %Consumer Discretionary 24.1Telecom Services 18.3Health Care 17.9Industrials 15.3Materials 15.0Information Technology 14.8Consumer Staples 10.8Energy 4.6Utilities 1.3S&P 500 16.0 %

“Bridesmaid” has been a winning sector strategy, too

playing the bull market’s final inning(s)...12 june 1, 2012 1.47 1278.04 stock market up: 29.5 %...

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