War Room 27 Mar 2013 The Great Rally – Is the Ride Over?

War Room Monthly macro discussion Using tools in context Update on HiddenLevers Features Your feedback welcome

The Great Rally I.Historical Comparisons II Rally in Context III.Sector Analysis III.Scenarios + Macro Themes

HiddenLevers HISTORICAL COMPARISONS

Market Rallies: Bull Markets Compared I’m still going strong source: financialgraphart.com Typical bull market lasts 3-4 years Truly great rallies last a decade Current rally right in the middle of the pack

Markets: Secular Bulls + Bears since 1871 source: Doug Short, dshort.com Secular trends can span many market cycles Four bull and four bear markets since 1871 Current (4 th ) bear not yet clearly over

Markets: Defining the paradigm shift S&P Real Total Return all-time high: date: When will Bear Market end? Only when the year 2000 highs are forever left in the rearview mirror /Mar 2000

Market Metrics at Recent Peaks Metric3/200010/2007 3/2013 P/E Ratio Dividend Yield1.16%1.77%2.12% Q-Ratio S&P / GDP Ratio S&P 500 not as overvalued as it was in (YET) source: HiddenLevers analysis, Multpl.com, dshot.com

Bullish Historians – Market/GDP Ratio source: Bloomberg Market not overvalued relative to other recent peaks Economy has grown so S&P is just catching up Buffets favorite indicator Peaking?

Bearish Historians – Q Ratio Q Ratio total market value / total replacement value of all companies Market peaks around 1 on Q scale 2000 a clear outlier source: Doug Short, dshort.com Peaking?

HiddenLevers RALLY IN CONTEXT

Rally in Context: Inflation + USD source: HiddenLevers Analysis QE made inflation jump, but inflation has trended downward since mid Usually USD trades inverse to markets, but US dollar has rallied in 2013, even with QE increasing. This shows an intact decoupling story. CPI touched 4% USD S&P

Rally in Context: Unemployment + GDP source: HiddenLevers Analysis We are still near 8% unemployment, a far cry from under 5% when the 2007 S&P peak. This exposes QE shortcomings US GDP has not kept up with the market rally. Again, QE can lift asset prices, but real growth is more difficult to achieve BIG GAP Shabby growth

Rally in Context: Housing + Confidence source: HiddenLevers Analysis Home sales + consumer confidence slowly rising since bouncing upward in 2011 Home prices initially lagged, now marching up with S&P 500 Housing rebound Housing = confidence = rally

Rally in Context: QE + Markets QE 1 Mortgages Asset Backed Securities Any toxic Asset QE2 US Treasuries QE3 Agency backed mortgages Continued buying (equities) Yeah baby!

QE Scenarios: How did we do? slide from Sept 2012 War Room – QE3 # success # fail 10y S&P unemployment USD index US GDP # TBD Still the case

SECTOR ANALYSIS HiddenLevers

Sector Analysis: Strongest Telecom = 21% Healthcare = 20% Discretionary = 17% 52 week change on S&P Defensive sectors doing best Usually, defensive sectors don’t lead rallies. Residential construction has outperformed with the turn in housing Consumer Discretionary contains all of residential construction and related industries 11%

Sector Analysis: Weakest 52 week change on S&P Tech… Apple effect? Google at 52 week highs Apple at 52 weeks lows Inflation has been in check GDP growth sluggish Materials + Energy have no reason to lift off 11% Tech = -2.6% Materials = 5% Energy = 8%

SCENARIOS + MACRO THEMES HiddenLevers

Scenarios: Rally Killers How will QE end? Europe’s crash test dummy

Good Economy back on track Bad Stagflation Ugly Deflation strikes back Scenarios: End of Quantitative Easing US Dollar gains in all outcomes

Good Debt Crisis Averted Bad Cyprus Contained Meltdown Ugly Collapse + Currency Run Scenarios: Euro Zone Debt Crisis EU leadership biggest mistake Pulling Euros out of depositor accounts

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