Ianco Esearch L.L.C. A R T A: What Is The Fed's Plan and Will It Work?

Bianco Research L.L.C.
An Arbor Research & Trading Affiliated Company

Independent Objective Original
What Is The Feds Plan And Will It Work?

The Big Picture Conference, New York City
October 10, 2012
Long-Term Interest Rates - 1900 to 2011
CFNAI vs ECRI
Comparing The Chicago Fed National Activity Index (CFNAI)
To The Economic Cycle Research Institute (ECRI) Growth Rate
30
3.00
Oct-09, 26.70
2.00
ECRI Growth Rate (Red Line)
10
Apr-11
7.38
May-10
0.31
1.00
Sept-12
2.70
0.00
Aug-12
-0.47
-10
Oct-11
-9.40
Jul-10
-10.50
-20
-1.00
-2.00
-30
-3.00
Nov-08
-29.00
October 10, 2012
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
-4.00
Jan-10
Jan-09
-3.66
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
-40
Bianco Research, L.L.C
CFNAI 3-Month Average (Blue Line)
20
Bloomberg Median Q3 2012 U.S. Real GDP Forecast

3.40%
3.40%
3.20%
3.20%
3.00%
3.00%
8/11/2011, 3.0%
2.80%
2.80%
5/9/2012
2.5%
2.60%
2.60%
2.40%
2.40%
11/18/2011, 2.3%
2.20%
2.20%
7/13/2012, 2.2%
2.00%
U.S. Real GDP Forecast
1/12/2011, 2.9%
2.00%
1.80%
1.80%
8/10/2012, 1.8%
October 10, 2012
10/30/2012
9/20/2012
8/11/2012
7/2/2012
5/23/2012
4/13/2012
3/4/2012
1/24/2012
12/15/2011
11/5/2011
9/26/2011
8/17/2011
7/8/2011
5/29/2011
4/19/2011
3/10/2011
1/29/2011
12/20/2010
1.60%
11/10/2010
1.60%

3.40%
3.40%
3.20%
3.20%
3.00%
3.00%
2.80%
2.80%
2.60%
2.60%
9/22/2011, 2.5%
2.40%
2.40%
2.20%
2.20%
7/20/2012, 2.2%
8/10/2012, 2.0%
2.00%
2.00%
October 10, 2012
10/30/2012
9/20/2012
8/11/2012
7/2/2012
5/23/2012
4/13/2012
3/4/2012
1/24/2012
12/15/2011
11/5/2011
9/26/2011
8/17/2011
7/8/2011
5/29/2011
4/19/2011
3/10/2011
1/29/2011
1.80%
12/20/2010
1.80%
Citigroup Surprise Index

Citigroup Economic Surprise Index
United States
100
100
1/9/2012
3/4/2011
8/15/2007
1/31/2007
75
9/4/2008
5/28/2009
12/2/2011
2/3/2012
75
9/3/2009
5/12/2006
10/8/2012
43.40
50
50
11/14/2011
25
25
-25
-25
9/28/2011
-50
-50
2/28/2006
7/20/2012
8/25/2010
10/13/2006
-75
-75
8/19/2011
-100
-100
3/28/2008
6/3/2011
-125
-125
12/5/2008
October 10, 2012
1/11/2013
9/21/2012
6/1/2012
2/10/2012
10/21/2011
7/1/2011
3/11/2011
11/19/2010
7/30/2010
4/9/2010
12/18/2009
8/28/2009
5/8/2009
1/16/2009
9/26/2008
6/6/2008
2/15/2008
10/26/2007
7/6/2007
3/16/2007
11/24/2006
8/4/2006
4/14/2006
-150
12/23/2005
-150
The Trend In Earnings
October 10, 2012
Guidance Trends
Company Guidance Trends
14
14
12
12
10
10
The Daily Number of Companies Offering Guidance (3-Month Average):

Red = UP Guidance (Guidance Greater Than Current Earnings Estimates)
Blue = DOWN Guidance (Guidance Less Than Current Earnings Estimates)
Black = NEUTRAL Guidance (Guidance Same As Current Earnings Estimates)
October 10, 2012
10/3/2012
7/11/2012
4/18/2012
1/25/2012
11/2/2011
8/10/2011
5/18/2011
2/23/2011
12/1/2010
9/8/2010
6/15/2010
3/19/2010
12/21/2009
9/24/2009
6/30/2009
Guidance Index
3-Month Company Guidance Index
0.35
0.35
11/8/2010
6/14/2011
0.25
6/5/2002
0.25
6/7/2004
1/4/2012
7/22/2008
0.15
6/14/2006
6/6/2012
0.05
0.15
0.05
3/16/2012
-0.05
-0.05
Biggest Negative Since July 2009
2/13/2007
-0.15
-0.15
Company Guidance vs. Consensus Estimates

-0.25
-0.25
3-month average of:

(UP minus DOWN) + 1/2 NEUTRAL
Total Offering Guidance
-0.35
-0.35
10/9/2000
2/12/2009
October 10, 2012
10/25/2012
5/10/2012
11/24/2011
6/9/2011
12/23/2010
7/7/2010
1/14/2010
7/23/2009
1/30/2009
8/8/2008
2/19/2008
8/24/2007
3/6/2007
9/8/2006
3/16/2006
9/21/2005
3/31/2005
10/7/2004
4/19/2004
10/22/2003
5/2/2003
11/7/2002
5/20/2002
11/23/2001
6/5/2001
12/11/2000
-0.45
6/21/2000
-0.45
Q3 2012 S&P 500 Earnings Expectations

Operating Earnings Estimates Year-Over-Year Change
10%
10%
8%
8%
All S&P 500
Companies
6%
6%
4%
4%
S&P 500 Less Financials
2%
2%
0%
0%
10/5/2012
-1.70%
-2%
-2%
-4%
-4%
10/5/2012
-5.30%
October 10, 2012
10/19/2012
9/28/2012
9/7/2012
8/17/2012
7/27/2012
7/6/2012
6/15/2012
5/25/2012
5/4/2012
4/13/2012
3/23/2012
3/2/2012
2/10/2012
1/20/2012
1/3/2012
-6%
12/21/2011
-6%

Operating Earnings Estimates Year-Over-Year Change
20%
20%
18%
18%
16%
16%
All S&P 500
Companies
14%
14%
S&P 500 Less Financials
12%
12%
10/5/2012
10.20%
10%
10%
8%
8%
10/5/2012
6.70%
October 10, 2012
10/19/2012
9/28/2012
9/7/2012
8/17/2012
7/27/2012
7/6/2012
6/15/2012
5/25/2012
5/4/2012
4/13/2012
3/23/2012
3/2/2012
2/10/2012
1/20/2012
1/3/2012
6%
12/21/2011
6%
10

October 10, 2012
1/10/2014
1/25/2013
2/10/2012
2/25/2011
3/12/2010
4/17/2009
5/2/2008
5/18/2007
6/2/2006
120
1/30/2009, 112.79
100
100
90
90
80
80
Estimates For The Next Year

One Year Ago
70
60
60
50
50
Trailing 12-Month Operating Earnings
30
30
20
20
Earnings Per Share
110
6/17/2005
7/2/2004
7/18/2003
8/2/2002
8/17/2001
40
9/1/2000
9/17/1999
10/2/1998
10/17/1997
70
11/1/1996
11/17/1995
12/2/1994
12/17/1993
12/31/1992
1/17/1992
2/1/1991
Earnings Per Share
Actual versus Forecasted Earnings

S&P 500 Operating Earnings
5/3/2013
118.91
120
110
40
11
Earnings Forecast Error Rate

Error Rates
Current 12-Month Trailing Operating Earning versus Forward 12-month Forecast 12 Months Ago
20%
20%
12/17/2004
8.39%
10%
5/19/1995
2.49%
12/31/2010
6.36%
10%
5/19/2000
-0.90%
0%
0%
1/10/1997
-6.32%
-10%
-10%
10/5/2012
-11.71%
1/8/1999
-13.35%
-20%
-20%
4/10/1992
-19.91%
12/21/2001
-25.18%
-30%
-40%
-30%
-40%
Estimates For The Next Year

One Year Ago
-50%
-50%
10/30/2009, -51.12%
October 10, 2012
1/10/2014
1/25/2013
2/10/2012
2/25/2011
3/12/2010
4/17/2009
5/2/2008
5/18/2007
6/2/2006
6/17/2005
7/2/2004
7/18/2003
8/2/2002
8/17/2001
9/1/2000
9/17/1999
10/2/1998
10/17/1997
11/1/1996
11/17/1995
12/2/1994
12/17/1993
12/31/1992
1/17/1992
-60%
2/1/1991
-60%
12
Q3 2012 S&P 500 Revenue Expectations

Sales Estimates Year-Over-Year Change
5.00%
6.00%
S&P 500 Less
Financials
5.00%
4.00%
Year-Over-Year Change
All S&P 500

Companies
3.00%
2.00%
2.00%
1.00%
1.00%
4.00%
3.00%
0.00%
0.00%
10/5/2012, -0.6
-1.00%
-1.00%
October 10, 2012
10/19/2012
9/28/2012
9/7/2012
8/17/2012
7/27/2012
7/6/2012
6/15/2012
6/1/2012
5/11/2012
4/20/2012
3/30/2012
3/8/2012
2/24/2012
2/3/2012
1/6/2012
-2.00%
12/23/2011
-2.00%
13

Sales Estimates Year-Over-Year Change
7.00%
7.00%
6.00%
6.00%
S&P 500 Less
Financials
5.00%
All S&P 500
Companies
4.00%
4.00%
3.00%
3.00%
2.00%
2.00%
5.00%
10/5/2012, 1.4%
October 10, 2012
10/19/2012
9/28/2012
9/7/2012
8/17/2012
7/27/2012
7/6/2012
6/15/2012
6/1/2012
5/11/2012
0.00%
4/20/2012
0.00%
3/30/2012
1.00%
3/8/2012
1.00%
14
Bernanke Explains The Wealth Effect

Bernanke told us in his speech August 31 in Jackson Hole:
After nearly four years of experience with large-scale asset purchases, a substantial body of empirical
work on their effects has emerged. Generally, this research finds that the Federal Reserves largescale purchases have significantly lowered long-term Treasury yields. For example, studies have
found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP
program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The
$600 billion in Treasury purchases under the second LSAP program has been credited with lowering
10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative
influence of all the Federal Reserves asset purchases, including those made under the MEP, found
total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are
economically meaningful.
LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by
improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S.
equity prices began in March 2009, shortly after the FOMCs decision to greatly expand securities
purchases. This effect is potentially important because stock values affect both consumption and
investment decisions.
While there is substantial evidence that the Federal Reserves asset purchases have lowered longerterm yields and eased broader financial conditions, obtaining precise estimates of the effects of these
operations on the broader economy is inherently difficult, as the counterfactualhow the economy
would have performed in the absence of the Federal Reserves actionscannot be directly observed. If
we are willing to take as a working assumption that the effects of easier financial conditions on the
economy are similar to those observed historically, then econometric models can be used to estimate
the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally
find that the securities purchase programs have provided significant help for the economy. For
example, a study using the Boards FRB/US model of the economy found that, as of 2012, the first two
rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll
employment by more than 2 million jobs, relative to what otherwise would have occurred.15
October 10, 2012
15
Bernanke Explains The Wealth Effect - 2

This is not the first time the Federal Reserve has laid out this argument. In a
November 4, 2010 Washington Post op-ed, the day after QE2 was approved, Ben
Bernanke defended their actions with the following passage:
Easier financial conditions will promote economic growth. For example,
lower mortgage rates will make housing more affordable and allow more
homeowners to refinance. Lower corporate bond rates will encourage
investment. And higher stock prices will boost consumer wealth and help
increase confidence, which can also spur spending. Increased spending will
lead to higher incomes and profits that, in a virtuous circle, will further
support economic expansion.
And in January 2011 Bernanke said:
Federal Reserve Board Chairman Ben Bernanke said Thursday that a
controversial $600 billion bond buying plan has contributed to a stronger
stock market. Our policies have contributed to a stronger stock market just
as they did in March 2009 when we did the first iteration of this program,
Bernanke said at a Federal Deposit Insurance Corp. forum on small
businesses. A stronger economy helps small businesses more than larger
businesses. Interest rates are higher but thats mostly because the news is
better. It has responded to a stronger economy and better expectations.
October 10, 2012
16
Our View Of The Wealth Effect

QE does produce lower interest rates, or at least the belief that rates are too low.
This then pushes investors out the risk curve which is why stocks have such an
immediate and positive reaction whenever QE is speculated.
The Federal Reserve is playing politics in regards to the effect of QE on

commodity prices.
There is no reason to believe the risk curve ends at low-rated stocks. How much
QE affects food and gasoline prices can be debated, but to argue there is no effect
at all, and will never be an effect under any scenario, merely because the Federal
Reserve does not want to answer for these higher prices, is just wrong.
The argument that higher asset prices produce a wealth effect is only partially
correct. Two conditions must be met for a wealth effect to ensue. Net worth must
reach a new high and it must be perceived to be permanent. This is why housing
produced such a powerful wealth effect before 2006. Home prices always went up
and their gains were perceived to be permanent. Currently we have a retracement
of losses and a widespread distrust of financial markets. These conditions will not
produce any wealth effect and we believe they have not.
October 10, 2012
17
Flows Into Domestic Mutual Funds And ETFs
250
200
200
150
150
100
100
50
50
October 10, 2012
8/31/2012
8/31/2011
8/31/2010
8/31/2009
8/31/2008
8/31/2007
-150
8/31/2006
-150
8/31/2005
-100
8/31/2004
-100
8/31/2003
-50
8/31/2002
-50
8/31/2001
Billions of Dollars
250
Billions of Dollars
12-Month Net New Assets In Foreign Equity Mutual Funds and ETFs
& 12-Month Net New Assets In Domestic Equity Mutual Funds and ETFs
18
Weekly Equity Mutual Fund Flows

25
-25
-25
5/26/2010
-29.95
1/30/2008
-42.50
-50
8/10/2011
-58.66
3/11/2009, -56.41
-75
-100
-50
-75
-100
10/15/2008, -107.51
-125
-125
20
20
Rolling 4 Week Sum Of The Net New Cash Flow into Domestic Equity Mutual Funds
5/13/2009, 11.10
10
4/20/2011
2.12
2/22/2012
0.3
10
0
-10
-20
10/14/2009
-15.79
7/23/2008
-21.06
1/30/2008
-33.30
-30
-40
-20
9/15/2010
5/26/2010 -17.93
-23.62
-30
-40
3/11/2009, -39.23
8/10/2011
-47.68
-50
billions of dollars
billions of dollars
-10
-50
-60
-60
10/15/2008, -70.04
-70
-70
-80
-80
30
billions of dollars
billions of dollars
50
25
30
Rolling 4 Week Sum Of The Net New Cash Flow into World Equity Mutual Funds
20
20
10
10
-10
6/2/2010
-6.87
2/6/2008
-9.46
-20
-10
8/10/2011
-10.98
3/11/2009, -17.19
billions of dollars
billions of dollars
Rolling 4 Week Sum Of The Net New Cash Flow into Total Equity Mutual Funds
50
-20
-30
-30
10/15/2008, -37.47
-40
-40
9/23/2009, 11.27
10
billions of dollars
15
Rolling 4 Week Sum Of The Net New Cash Flow into Hyrbid Mutual Funds
10
-5
-5
-10
8/10/2011
-8.59
3/11/2009, -9.26
-15
-10
-15
10/15/2008, -16.35
October 10, 2012
10/31/2012
7/11/2012
3/21/2012
11/30/2011
8/10/2011
4/20/2011
9/8/2010
12/29/2010
5/19/2010
1/27/2010
10/7/2009
6/17/2009
2/25/2009
11/5/2008
7/16/2008
3/26/2008
12/5/2007
8/15/2007
4/25/2007
-20
1/3/2007
-20
billions of dollars
15
19
Who Believes In QE3?

Richmond Federal Reserve (September 15) Richmond Fed President Lacker Comments on FOMC Dissent
Further monetary stimulus now is unlikely to result in a discernible improvement in growth, but if it does, its also likely to
cause an unwanted increase in inflation.
The Wall Street Journal (September 17) George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and
John B. Taylor: The Magnitude of the Mess Were In
The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage. Traders
speculate whether and when the Fed will intervene next. The Fed can intervene without limit in any credit marketnot only
mortgage-backed securities but also securities backed by automobile loans or student loans. This raises questions about why
an independent agency of government should have this power.
Dallas Federal Reserve (September 19) Richard W. Fisher: Comments to the Harvard Club of New York City on
Monetary Policy (With Reference to Tommy Tune, Nicole Parent, the FOMC, Velcro, Drunken Sailors and Congress)
The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really
knows what is holding back the economy.
MarketBeat (WSJ Blog) (September 27) Feds Plosser: Monetary Policy Shouldnt Be a Day Trader
The hawk in the house isnt pleased. Philly Fed President Charles Plosser, a veteran central-bank official who has publicly
opposed the Feds latest accommodative efforts, says many of his colleagues are too focused on how markets react in the
short-term to Fed stimulus, as opposed to taking longer, more pragmatic views.
Bloomberg.com (October 1) Volcker Says Fed Bond-Buying Has No Effect on Inflation
Paul Volcker, former chairman of the Federal Reserve, said the U.S. central banks latest bond-buying program isnt creating
inflationary pressure. Its not going to have a profound effect on the economy and its not going to have any effect on inflation
in the short run, Volcker said today at a forum sponsored by Bloomberg Link at the New York Athletic Club. The basic
situation is not an inflationary situation.
CNBC (October 5) Effect of Jobs Report on 2012 Election
At the very end of this interview Austan Goolsbee and Ed Lazear were both asked about the effectiveness of QE3. Both
agreed it would not be very effective although Goolsbee did concede that the Fed was doing what it had to do.
October 10, 2012
20
The Fed Now Has A Formal Inflation Target

The Fed Now Has A Formal Inflation Target
4.5%
4.5%
4.0%
4.0%
3.5%
3.5%
3.0%
2.5%
2.5%
2.0%
2.0%
7/31/2012
1.65%
1.5%
7/31/2012
1.30%
1.0%
1.5%
1.0%
Annual rate of change
Annual rate of change
9/30/2011
2.87%
Fed's Target
3.0%
Core PCE
0.5%
0.5%
Headline PCE
October 10, 2012
1/31/2013
5/31/2012
9/30/2011
1/31/2011
5/31/2010
-1.0%
9/30/2009
-1.0%
1/31/2009
-0.5%
5/31/2008
-0.5%
9/30/2007
0.0%
1/31/2007
0.0%
21
The Fed Adopts An Inflation Target
The Federal Reserve Janaury 25, 2012 Press Release

The inflation rate over the longer run is primarily determined by
monetary policy, and hence the Committee has the ability to
specify a longer-run goal for inflation. The Committee judges that
inflation at the rate of 2 percent, as measured by the annual
change in the price index for personal consumption expenditures,
is most consistent over the longer run with the Federal Reserves
statutory mandate. Communicating this inflation goal clearly to the
public helps keep longer-term inflation expectations firmly
anchored, thereby fostering price stability and moderate long-term
interest rates and enhancing the Committees ability to promote
maximum employment in the face of significant economic
disturbances.
October 10, 2012
22
Why 2%, Why Not?

During the Q&A portion of Bernankes March 29 speech at George Washington University, a
student asked the following:
Q: You mentioned in your lecture the dangers of deflation from the Great Depression and more
recently in Japan. And one of the arguments for maintaining a target inflation rate above zero is to
provide a cushion against possibility of deflation. Yet in the last two recessions in the United States,
theres been a pretty significant fear of deflation causing the Fed to keep monetary policy pretty
very accommodative in the beginning of the last decade and even more so at this point. Do you
think that 2 percent is enough of a cushion to prevent deflation, and have you considered higher
inflation target rates? Thank you.
MR. BERNANKE: Well, thats a thats a great question. And theres been a lot of research on
it. It seems like the international consensus is pretty much around 2 percent. I mean, almost all
central banks that have a target either have a 2 percent target or a 1 (percent) to 3 percent target or
something like that. And theres a trade-off here because on the one hand, you want to have it
above zero, as you say, in order to avoid or reduce deflation risk, but on the other hand, if inflation
is too high, its going to create problems for markets; its going to make the economy less
efficient. And so theres a trade-off, you know, which what level of inflation gives you at least
some reasonable buffer against deflation but is not so high that it makes markets work less well.
And so again, the international consensus has been around 2 percent. And thats sort of where the
Fed has been informally for quite a while. So thats what we announce, and thats, you know you
know, for foreseeable future, thats where we plan to stay. But its obviously an issue that
researchers will continue to look at, trying to address exactly that trade-off that youre referring to.
October 10, 2012
23
The Fed Cannot Waver From 2%

In an April 25 press conference following the FOMC meeting, Bernanke
was again questioned on the topic and answered with the following:
MR. BERNANKE: I guess the question is, does it make sense to actively seek a
higher inflation rate in order to achieve a slightly increased reduction a
slightly increased pace of reduction in the unemployment rate? The view of the
committee is that that would be very reckless. We have we, the Federal
Reserve, have spent 30 years building up credibility for low and stable inflation,
which has proved extremely valuable in that weve been able to take strong
accommodative actions in the last four or five years to support the economy
without leading to a(n) unanchoring of inflation expectations or a destabilization
of inflation. To risk that asset for what I think would be quite tentative and
perhaps doubtful gains on the real side would be a, I think, unwise thing to do.
Rather than use these questions as an opportunity for greater transparency and
understanding, Bernanke offers canned responses such as, theres been a lot
of research on it or, the international consensus is pretty much around 2
percent. Had he more time to explain the Federal Reserves rationale,
Bernanke may have pointed to a mid-2008 research paper written by Roberto
Billi and George Kahn of the Kansas City Federal Reserve.
October 10, 2012
24
Now Its Ok If Inflation Expectations Go Above 2%

In a September 13, 2012 press conference following the
FOMC meeting, Bernanke said:
Q: I'm sorry. I just need to follow up. Does this -- so you're

saying it does not include greater tolerance for inflation; that
you will -- you would reverse course if inflation were to be
above your target level, even given that statement?
MR. BERNANKE: Well, if inflation goes above target level, as
we talked about in our statement in January, we take a
balanced approach. We bring inflation back to the target over
time, but we do it in a way that takes into account the
deviations of both of our objectives, you know, from their
targets.
October 10, 2012
25
10-Year TIPS Breakeven Inflation Rate

10-Year TIPS Breakeven Inflation Rate
2.75
7/4/2008
2.598
2.50
1/11/2010, 2.465
2.25
4/29/2010
2.431
9/14/2012
2.639
2.75
2.50
10/9/2012
2.563
2.25
6/10/2009
2.070
9/10/2007
2.189
2.00
4/11/2011, 2.66
3/20/2012
2.434
2.00
1.75
1.75
9/22/2011, 1.713
1.50
Operation
Twist
8/24/2010
1.512
1.50
QE 2
1.25
1.25
1.00
1.00
3/6/2009
0.846
0.75
0.75
TIPS Breakeven (Thick Line/Left Scale)
Yield of the 10-Year Treasury Note minus the
Yield of 10-Year TIPS Note
0.50
0.50
QE 1
0.25
0.25
12/31/2008, 0.120
11/20/2008, 0.041
October 10, 2012
1/15/2013
10/7/2012
6/29/2012
3/21/2012
12/12/2011
9/3/2011
5/26/2011
2/15/2011
11/7/2010
7/30/2010
4/21/2010
1/11/2010
10/3/2009
6/25/2009
3/17/2009
12/7/2008
8/29/2008
5/21/2008
2/11/2008
11/3/2007
7/26/2007
4/17/2007
1/7/2007
0.00
9/29/2006
0.00
26
5-Year Forward/5-Year Inflation Breakeven Rates

5-Year Forward/5-Year Inflation Breakeven Rates
3.50
3.50
5/20/2004, 3.34
5/3/2010, 3.08
5/1/2006
2.83
3.00
11/1/2010
3.08
10/8/2012
3.03
3.00
11/9/2009, 2.89
1/23/2008
2.77
2.50
2.50
6/30/2005
2.34
2.00
2.00
9/22/2011
1.99
8/24/2010, 1.92
10/8/2008, 1.68
1.50
1.50
1.00
1.00
11/20/2008, 0.71
0.50
0.50
12/31/2008, 0.41
October 10, 2012
11/26/2012
7/9/2012
2/20/2012
10/3/2011
5/13/2011
12/24/2010
8/6/2010
3/18/2010
10/26/2009
6/8/2009
1/19/2009
9/1/2008
4/14/2008
11/26/2007
7/9/2007
2/19/2007
9/29/2006
5/12/2006
12/23/2005
8/5/2005
3/17/2005
10/28/2004
6/10/2004
0.00
1/20/2004
0.00
27
Central Bank Balance Sheets

Central Bank Balance Sheets
(China, ECB, U.S. and Japan)
5
5
6/30/2012
4.50
4
8/31/2012, 3.88
3
8/31/2012
2.81
The Federal Reserve

Balance Sheet
The ECB Balance Sheet

(Converted to Dollars)
Trillions of Dollars
PBoC - Chinese Central Bank Balance

Sheet (Converted To Dollars)
8/31/2012, 1.91
BoJ Balance Sheet

(Converted To Dollars)
October 10, 2012
1/31/2013
1/31/2012
1/31/2011
1/31/2010
1/31/2009
1/31/2008
1/31/2007
1/31/2006
1/31/2005
1/31/2004
1/31/2003
1/31/2002
28
The Biggest Six Central Bank Balance Sheets

The Biggest Six Central Bank Balance Sheets
(U.S., U.K, ECB, Japan, China, and Switzerland)
15
15
14
14
7/31/2012
13.54
13
12
12
11
11/30/2010, 10.87
12/31/2008, 10.12
10
9
10
9
2/28/2009, 8.95
11
13
8
8/31/2008, 7.23
6
5/31/2006
4.99
October 10, 2012
11/30/2012
5/31/2012
11/30/2011
5/31/2011
11/30/2010
5/31/2010
11/30/2009
5/31/2009
11/30/2008
5/31/2008
11/30/2007
5/31/2007
11/30/2006
5/31/2006
29
6 Central Bank Balance Sheets As A % Of World Market Cap

The Size Of The Six Central Bank Balance Sheets
As A Percent Of World Market Capitalization
35%
35%
1/31/2009, 33.28%
11/30/2011, 29.91%
7/31/2012
28.17%
6/30/2010
24.80%
25%
25%
7/31/2011
23.45%
4/30/2010
22.01%
20%
4/30/2011
21.55%
20%
8/31/2008, 15.14%
15%
5/31/2006
11.39%
15%
6/30/2007
9.53%
October 10, 2012
11/30/2012
5/31/2012
11/30/2011
5/31/2011
11/30/2010
5/31/2010
11/30/2009
5/31/2009
11/30/2008
5%
5/31/2008
5%
11/30/2007
10%
5/31/2007
10%
11/30/2006
Balance Sheets / World Market Cap
30%
9/30/2011, 29.23%
5/31/2006
Balance Sheets / World Market Cap
30%
30
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An Offer For Conference Attendees

Between Now and October 31 you can view our research at
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Go To Log-In Using Invitation Code on our Home Page
Invitation Code = TBP2012 (case sensitive)
Enjoy
October 10, 2012
31
Europe: The Cycle Continues

Bloomberg.com (September 12, 2012) pain Says No Urgency to Seek Bailout as ECB
Eases Yields
Prime Minister Mariano Rajoy told Parliament its not clear if Spain needs help as the European
Central Banks crisis plan has cut borrowing costs. Theres no urgency because the ECBs move
put the Treasury in a more comfortable position, Deputy Economy Minister Fernando Jimenez
Latorre said. The important thing is that when whatever assistance that is needed is requested,
that it should be well received in the markets, Jimenez Latorre told reporters in Madrid
today.Spanish 10-year bond yields have fallen about 80 basis points since ECB President Mario
Draghi said on Sept. 6 the bank could buy cash-strapped nations debt if they seek help from the
regions government-run rescue mechanism first..
Comment
This story, particularly the highlighted passage above, is a perfect example of what we wrote
about last month:
This highlights the all too familiar pattern of the European crisis. When markets slump and
things look bad, European leaders will promise anything/everything to stop the decline, no
matter how politically distasteful it might be. Markets then rally on the hope that Europe has
turned the corner. However, these rallies embolden European leaders to not follow through
on the politically difficult promises made at the depth of the crisis. The markets then fall
again on this disappointment until another crisis emerges forcing European leaders to
promise something else that will last only until the markets rally once again.
October 10, 2012
32
Spain 10-Year Yields

Spain 10-Year Yields
8.00%
8.00%
7/25/2012, 7.75%
7.50%
7.50%
8/3/2012
7.44%
6/18/2012, 7.29%
7.00%
7.00%
OMT
LTRO
11/17/2011, 6.78%
6.50%
6.50%
8/2/2011, 6.46%
6.00%
6.00%
11/30/2010, 5.67%
5.50%
6/17/2010
4.99%
5.00%
5.50%
9/10/2012
5.55%
SMP
5.00%
8/18/2011, 4.90%
3/2/2012
4.85%
4.50%
4.50%
4.00%
4.00%
10/12/2010, 3.95%
4/5/2010, 3.81%
October 10, 2012
11/15/12
10/04/12
08/23/12
07/12/12
05/31/12
04/19/12
03/08/12
01/26/12
12/15/11
11/03/11
09/22/11
08/11/11
06/30/11
05/19/11
04/07/11
02/24/11
01/13/11
12/02/10
10/21/10
09/09/10
07/29/10
06/17/10
05/06/10
03/25/10
02/11/10
3.50%
12/31/09
3.50%
33
Italy 10-Year Yields

Italy 10-Year Yields
8.00%
8.00%
7.50%
7.50%
11/9/2011, 7.48%
1/9/2012
7.16%
7/25/2012
6.71%
7.00%
7.00%
8/5/2011
6.40%
6.50%
6.50%
7/12/2011
6.02%
6.00%
6.00%
12/7/2011
5.76%
5.50%
11/30/2010
4.80%
5.00%
4.50%
5.00%
8/18/2011
4.87%
5/7/2010
4.36%
5.50%
3/10/2011
5.02%
9/20/2012
4.99%
3/9/2012
4.68%
2/2/2011 5/16/2011
4.59%
4.54%
4.50%
4.00%
4.00%
October 10, 2012
11/15/12
10/04/12
08/23/12
07/12/12
05/31/12
04/19/12
03/08/12
01/26/12
12/15/11
11/03/11
09/22/11
08/11/11
06/30/11
05/19/11
04/07/11
3.50%
02/24/11
01/13/11
12/02/10
09/09/10
07/29/10
06/17/10
05/06/10
03/25/10
02/11/10
12/31/09
3.50%
10/21/10
10/12/2010
3.71%
34
Ireland 9-Year Yields

Ireland 9-Year Yields
15.00%
15.00%
7/18/2011, 14.12%
14.00%
14.00%
13.00%
13.00%
12.00%
12.00%
11.00%
11.00%
11/28/2011
9.74%
10.00%
10.00%
9.00%
9.00%
5/16/2012
7.72%
8.00%
9/29/2011
7.58%
7.00%
8.00%
7.00%
6.00%
6.00%
5.00%
9/20/2012, 4.97%
8/6/2010, 4.89%
4.00%
12/31/09
01/28/10
02/25/10
03/25/10
04/22/10
05/20/10
06/17/10
07/15/10
08/12/10
09/09/10
10/07/10
11/04/10
12/02/10
12/30/10
01/27/11
02/24/11
03/24/11
04/21/11
05/19/11
06/16/11
07/14/11
08/11/11
09/08/11
10/06/11
11/03/11
12/01/11
12/29/11
01/26/12
02/23/12
03/22/12
04/19/12
05/17/12
06/14/12
07/12/12
08/09/12
09/06/12
10/04/12
4.00%
5.00%
October 10, 2012
35
Tax Cuts
October 10, 2012
36
The Debt Ceiling

The Debt Ceiling
$16.50
$16.50
10/9/2012
16.1230
$16.00
$15.50
Administration intentionally slowing

debt sales to avoid hitting the limit as
long as possible
$15.00
$15.00
$14.50
$14.50
y = 0.0051x + 13.707
R2 = 0.9836
October 10, 2012
1/4/2013
10/12/2012
7/20/2012
4/27/2012
2/3/2012
8/19/2011
$13.50
5/27/2011
$13.50
3/4/2011
$14.00
12/10/2010
$14.00
11/11/2011
$15.50
$16.00
Blue = Debt Subject To Debt Ceiling Limit

Red = Debt Ceiling Limit
16.3940
37
Obama To Be Re-Elected President In 2012

Barack Obama To Be Re-Elected President In 2012
Intrade.com Betting
80
80
30-Sep-12, 78.7
76
76
Osama Bin Laden is
pronounced dead
72
3-Oct-12, 74
72
68
68
64
12-Mar-12, 61.4
16-Apr-12
61.40
22-Jul-12
59.5
9-Feb-12, 60.7
60
56
64
9-Oct-12
63.8
60
9-Sep-12
57.6
56
23-Jan-12, 55.9
12-Nov-11
52.3
30-Aug-12
55.7
6-Jun-12, 52.3
52
52
19-Jun-12
52.4
8-Jan-12, 50.2
Chance of Being Re-Elected
2-May-11
69.9
48
48
October 10, 2012
10/3/2012
8/24/2012
7/15/2012
6/5/2012
4/26/2012
3/17/2012
2/6/2012
44
12/28/2011
10/9/2011
8/30/2011
7/20/2011
6/10/2011
4/30/2011
3/21/2011
2/9/2011
12/31/2010
44
11/18/2011
16-Oct-11
46.5
38
Election 2012 Trial Heat: Obama vs Romney

Election 2012 Trial Heat: Obama vs. Romney
Gallup Organization
52.0%
50.0%
52.0%
These are the results when registered voters are asked: "Suppose the presidential election were held
today. If Barack Obama were the Democratic Party's candidate and Mitt Romney were the Republican
Party's candidate, who would you vote for Barack Obama, the Democrat or Mitt Romney, the
Republican?" Those who are undecided are further asked if they lean more toward Obama or Romney
and their leanings are incorporated into the results. Each five-day rolling average is based on
telephone interviews with approximately 2,200 registered voters; Margin of error is 3 percentage
points.
50.0%
Obama
48.0%
48.0%
46.0%
46.0%
44.0%
44.0%
Romney
42.0%
40.0%
40.0%
4/15/2012
4/20/2012
4/26/2012
5/1/2012
5/7/2012
5/12/2012
5/17/2012
5/22/2012
5/27/2012
6/2/2012
6/7/2012
6/12/2012
6/17/2012
6/22/2012
6/27/2012
7/2/2012
7/8/2012
7/13/2012
7/18/2012
7/23/2012
7/29/2012
8/3/2012
8/8/2012
8/13/2012
8/18/2012
8/23/2012
8/28/2012
9/2/2012
9/7/2012
9/12/2012
9/17/2012
9/22/2012
9/27/2012
10/2/2012
10/7/2012
42.0%
October 10, 2012
39
Obamas Approval Ratings

Obama's Approval Ratings
Gallup Poll
70%
70%
1/24/2009, 69%
5/2/2009, 68%
Last (Oct 5 to Oct 7)

Approval = 51%
Disapproval = 44%
66%
66%
62%
62%
Bin Laden
Bounce
58%
5/13/2010
52%
54%
58%
Convention
Bounce
54%
6/21/2012
51%
1/21/11
51%
5/1/2012, 51%
50%
50%
46%
46%
6/9/2010, 44%
42%
42%
8/17/2010, 41%
10/23/10
41%
38%
38%
10/20/2011
38%
October 10, 2012
10/24/2012
8/25/2012
6/24/2012
4/25/2012
2/25/2012
12/20/2011
10/20/2011
8/19/2011
6/19/2011
4/18/2011
2/16/2011
12/9/2010
10/5/2010
8/6/2010
6/5/2010
4/3/2010
2/2/2010
11/26/2009
9/27/2009
7/27/2009
5/25/2009
3/25/2009
34%
1/23/2009
34%
40
The Pattern Of Winners

Comparing Obama's Odds of Re-Election To Previous Winners' Odds
Intrade.com Betting
90
90
Odds of the Democratic nominee

winning the election in 2008
85
85
80
Odds of George Bush being
re-elected in 2004
75
75
70
70
65
65
60
60
55
80
55
Odds of Barack Obama

being re-elected in 2012
50
50
30-Jul-11
50.0
16-Sep, 48.7
October 10, 2012
9-Nov
28-Oct
16-Oct
4-Oct
22-Sep
10-Sep
29-Aug
17-Aug
4-Aug
23-Jul
11-Jul
29-Jun
17-Jun
5-Jun
24-May
11-May
29-Apr
17-Apr
5-Apr
24-Mar
12-Mar
28-Feb
16-Feb
4-Feb
23-Jan
11-Jan
30-Dec
18-Dec
45
6-Dec
45
41

October 10, 2012
8/29/2012, 92.1
10/3/2012
90
9/13/2012
8/24/2012
70
8/4/2012
7/15/2012
6/25/2012
6/5/2012
5/16/2012
4/26/2012
4/6/2012
3/17/2012
2/26/2012
2/6/2012
1/17/2012
12/28/2011
12/8/2011
11/18/2011
10/29/2011
10/9/2011
9/19/2011
8/30/2011
8/10/2011
7/20/2011
6/30/2011
6/10/2011
5/21/2011
4/30/2011
4/10/2011
3/21/2011
3/1/2011
2/9/2011
1/20/2011
12/31/2010
The Republicans Control The House After 2012 Elections

The Republicans Control The House After 2012 Elections
Intrade.com Betting
95
90
10/7/2012
89
95
85
85
80
80
75
75
9/29/2012, 71.2
70
65
65
60
60
55
55
50
50
45
45
42

October 10, 2012
10/3/2012
70
9/13/2012
75
8/24/2012
8/4/2012
7/15/2012
6/25/2012
6/5/2012
5/16/2012
4/26/2012
4/6/2012
3/17/2012
2/26/2012
2/6/2012
1/17/2012
12/28/2011
12/8/2011
11/18/2011
10/29/2011
10/9/2011
9/19/2011
8/30/2011
8/10/2011
7/20/2011
6/30/2011
6/10/2011
5/21/2011
4/30/2011
4/10/2011
3/21/2011
10
3/1/2011
35
2/9/2011
80
1/20/2011
12/31/2010
Who Will Control The Senate?

Who Will Control The Senate?
Intrade.com Betting
90
90
85
85
Republicans
80
10/1/2012
66.9
40
Democrats
15
Neither Party will contol The Senate
75
70
65
65
60
60
55
55
50
50
45
45
40
35
30
30
25
25
20
20
15
10
5
5
0
0
43
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An Arbor Research & Trading Affiliated Company

What Is The Feds Plan And Will It Work?

Long-Term Interest Rates - 1900 to 2011

ECRI Growth Rate (Red Line)

October 10, 2012

Bianco Research, L.L.C

CFNAI 3-Month Average (Blue Line)

Bloomberg Median Q3 2012 U.S. Real GDP Forecast

U.S. Real GDP Forecast

U.S. Real GDP Forecast

Bianco Research, L.L.C

October 10, 2012

Bloomberg Median Q4 2012 U.S. Real GDP Forecast

U.S. Real GDP Forecast

U.S. Real GDP Forecast

Bloomberg Median Q4 2012 U.S. Real GDP Forecast

Bianco Research, L.L.C

October 10, 2012

Citigroup Surprise Index

Bianco Research, L.L.C

October 10, 2012

The Trend In Earnings

Bianco Research, L.L.C

October 10, 2012

The Daily Number of Companies Offering Guidance (3-Month Average):

Bianco Research, L.L.C

October 10, 2012

Company Guidance vs. Consensus Estimates

3-month average of:

Bianco Research, L.L.C

October 10, 2012

Q3 2012 S&P 500 Earnings Expectations

Bianco Research, L.L.C

October 10, 2012

Q4 2012 S&P 500 Earnings Expectations

Bianco Research, L.L.C

October 10, 2012

Bianco Research, L.L.C

Estimates For The Next Year

Trailing 12-Month Operating Earnings

Earnings Per Share

Earnings Per Share

Actual versus Forecasted Earnings

Earnings Forecast Error Rate

Estimates For The Next Year

Bianco Research, L.L.C

October 10, 2012

Q3 2012 S&P 500 Revenue Expectations

All S&P 500

Bianco Research, L.L.C

October 10, 2012

Q4 2012 S&P 500 Revenue Expectations

Bianco Research, L.L.C

October 10, 2012

Bernanke Explains The Wealth Effect

October 10, 2012

Bernanke Explains The Wealth Effect - 2

October 10, 2012

Our View Of The Wealth Effect

The Federal Reserve is playing politics in regards to the effect of QE on

Bianco Research, L.L.C

October 10, 2012