Second Quarter 2010 GTAA Equities

Global
Gl b l Tactical
T ti l
A t Allocation
Asset All ti
GTAA
Equities
Second Quarter
March 26th , 2010
Damien Cleusix
d i @ l 6
damien@clue6.com
Clue6 Second Quarter 2010

Executive Summary 1
Stocks
Valuations are above the levels where future will not please the buy & hold crowd (in the developed ex Japan world),
even if we go back to the good old days, days the credit bubble stops deflating,
deflating growth reaches pre-2007 level in a sustainable
manner ,…At 1200 on the S&P 500 will be priced more expensively than during all of the structural tops pre-2000 (well 1997-
2000) except the final tail of the 1929 move... And you have to remember that assets quality is not what it was in the past and
that there are signs that accountants are working overtime. This does not imply that the markets will fall in the short or even
the medium term but that a further rise will only y have speculative
p and no investment merit if bought
g and that if one buy y
today to hold for the long-term, negative capital gains should be expected in the next 7-10 years.
Our base assumption remains that we will fall to significantly undervalued levels before a new secular bull market can start (in
the developed world as, as you know, you know we believe that we are in a secular bull market in emerging markets). This
currently
l imply
i l a sub-530
b 530 level
l l on theh S&P 500 going i up by b 5-6%
5 6% a year. Emerging
E i markets
k are getting
i too expensivei even if
one consider that they are in a structural bull market (structural as we think that the 2003 and 2009 low should hold).
Option activity, insiders and most of the smart-money indicators we follow have deteriorated substantially from the
February low and are now at or above January highs.
highs But even if sentiment is once again too greedy,
greedy it has to be put in the
context of the recent advance and market trend (higher highs and higher lows). So sentiment in itself does not imply that the
markets can not continue their ascent in the medium-term but more that it should at least consolidate in the short-term.
Breadth is ggivingg diverging

g g signals.
g The advance-decline and up
p down-volume line are making g new highs,
g of the ahead of
the markets but their momentum is too high for the market to continue straight up. We experienced new breadth thrust, we
had two Lowry’s 90% days after the February low and the McClellan summation index has moved above its January high.
No “Hindenburg Omen” has been triggered and the Fosback High-Low index remains low. This is hard to call for a
cyclical top in this environment. But we are seeing divergences between various indicators measuring the % of stocks
above
b certain
t i movingi averages, divergences
di which
hi h have
h appearedd shortly
h tl before
b f a correction
ti unfold.
f ld

Executive Summary 2
On the liquidity side, inflows into US equity domestic funds remain low while money is pouring into emerging market
equity funds. This has historically been followed by underperforming EM markets. Fund managers have been heavy buyers
and have spend all the money they got in January and then some more, pushing the cash/asset ratio to new historical low.
Foreigners
g appetite
pp for US equities
q has increased dramatically
y which is typical
yp of ending
g cyclical
y bull markets.
There has been a slight pick up in buybacks but they remain very low while IPO’s and secondaries ex US have been plentiful,
with bubble reminiscent level in Hong Kong and China. On the monetary front, real M2 and M1 growth is turning
negative in the US and decelerating markedly elsewhere. Emerging markets central banks reserve growth has been slowing
rapidly
idl which
hi h is
i a headwind
h d i d for
f risky
i k assets.
Pension funds’ funding status has stabilized but imagine the what will happen if equity price falls while high quality
corporate bonds yields (used to discount liabilities to present value) do not rise as they did in 2008-2009.
Seasonals are still supportive but we are slowly entering into the time window where our seasonal model can trigger a sell
signal if markets trend deteriorates. The next cycle low are expected in June and October. We will have to see if the markets
top before or after the middle of the cycle (right or lest translation). If it tops early in the cycle this would be a clear sign of
cyclical
y topping
pp g pprocess.
Intermarket relationships have deteriorated. While the Nasdaq is continuing to make relative highs along the Russell 2000
and equal-weighted indices, semiconductors stocks are underperforming as are many emerging markets and Europe. On
the credit side, neither high yield nor high quality corporate bonds have confirmed the recent markets highs. Finally, the
combined
bi d momentum off crude d oil,
il copper, gold
ld and
d the
h 10 years treasury yield
i ld is
i at levels
l l where
h the
h equity
i markets
k haveh
struggled in the past.
The trends have deteriorated since the January top. The US markets are one of the few making new highs but are now
sitting at the top of their respective rising channels.
channels We are seeing a multitude of potential megaphone tops being formed,
formed but
the short-term trend remains up as long as markets remain in the up channels they have formed since the February low.

Equities: Valuations 3
Chart 1 US Earnings Volatility
Valuations are not useful for short-term market projections but are essential in forecasting
long-term returns. They become informative in the shorter term when they reach extremes.
When they are very high one should not allow the other indicators in one’s arsenal to deteriorate
too much before pushing the exit button, the reverse is true when they reach very low levels.
The perpetual question is what constitutes high and low and which valuation ratios to look at. We
look at normalized price to earning ratios (normalized using a trailing reported earnings moving
average (R. Shiller method), average margins or peak earnings (J. Hussman method)) and price to
book value. We like to look at a historical dataset as long as possible. It is also important to
consider the quality of the data. One often hears that valuations should be higher because the
markets are less risky.
We disagree.
di S
Source: R. Shill
Shiller, Clue6
Cl 6
Chart 2 US Earnings Quality

Main Street has clearly been less volatile in the past 30 years (well up to now), as has
inflation. The consequence is that companies have increased their leverage dramatically (cf.
A. Greenspan’s “Paradox of Credibility” or H. Minsky’s “Unstable Stability”) . In the
process earnings
i volatility
l tilit has
h increased
i d rapidly
idl in
i the
th pastt 10 years (Chart
(Ch 1).1) From
F the
h mid
id
50’s to the mid 80’s, real annual earnings were rising or falling by 3.8% for every percent change
in annual real GDP growth. In the past 10 years if was 22%...
Furthermore the quality of those earnings has decreased dramatically (Chart 2). Don’t be
f l d
fooled…
Source: J. Hussman

US Tangible Assets to Europe Tangible Assets

Chart 3 Total Assets Chart 4 to Total Assets
This has been aggravated by a substantial
deterioration of assets where:
1. intangibles have dramatically gained in

importance in some regions (Charts 3-6) (ask a
bondholder of a bankrupt high intangibles
company what intangibles are worth...),.
G ld
Goldman S h has
Sachs h calculated
l l t d that
th t the
th S&P
500 constituents asset/equity ex-goodwill has
risen from 2.5 in the 80s to 4.4 today.
2. Financial asset have proportionally increased.
3. Assets' mark to market which increase their
pro cyclicality
pro-cyclicality. S
Source: Bloomberg,
l b Clue6
Cl 6 S
Source: Bloomberg,
l b Clue6
Cl 6
Japan Tangible Assets to Emerging Markets Tangible
In brief, as often repeated in the past, we think Chart 5 Total Assets Chart 6 Assets to Total Assets
market should be valued at lower levels, not
higher levels than historically.
This is thus not surprising that AAA and AA

bonds represented almost 60% of the Barclays
Capital Investment Grade Index at the end of
the 70s while they only represent 25% today.
Source: Bloomberg,
Bloomberg Clue6 Source: Bloomberg,
Bloomberg Clue6

Equities: Valuations – A Repeat 5
S&P 500 and Middle to Young

Chart 7 Cohort
Investors attach a lots of importance to what happen to earnings on the very short term
while theyy have a veryy negligible
g g influence on the intrinsic value of the markets. Indeed even
if earnings were to be 0 in the next 2 years, this would not affect by more than a few percentage
points the intrinsic market value derived by a dividends or cash flows discount model.
Remember that markets are a claim on a very long-term stream of cash flows.
What moves market valuation around fair value in the short-term is investors’ risk appetite.
pp
This is what we analyze extensively in the sentiment, breadth, liquidity, seasonality and cycle
section of our presentations.
In the long-term, we believe that the main driver of long-term generational fluctuation in
valuation ratios from very undervalued to very overvalued, is the reallocation of the stock of
wealth (as demonstrated by J. Tobin more than 40 years ago). One can see this phenomenon in Source: Census Bureau, Clue6
action looking at the Saver/Spender ratio or Middle to Young cohort (Chart 7).
This is the ratio of the population aged 40-49 years to 20-29 years (we will show graphs for other
markets later). For the US we think the time for the next structural bull market to start will be the
low made between 2014-2016 (with a preference for 2014).
As we have been saying in the past 10 years, this does not mean that there won’t be cyclical bull
markets to take advantage from in between.
In the past we have showed that during structural bull markets the market rises around 85%
of the time while in structural bear market it rises approximately 65% of the time…

GMO 7 Years
For longer-term return projections (7 years), we use a methodology similar to Grantham, Mayo, Chart 8 Return Forecast
Van Otterlo & Co so let’s use their graphs (Chart 8 and 9) showing their estimated 7 years
forward performance for the various categories if they trade at the average valuation normalized November 2009
to average margin in 7 years .
Another indicator we look at is the Value Line Median Appreciation Potential (VLMAP) which P.
Bernstein used in his valuation estimation of the market. It is the median price appreciation
potential estimated by Value Line of the all of the 1700 stocks they cover for the following 3 to 5
years. It fell below 50% which is at the bottom end of its history… One should start
accumulating stocks when it rises above 100%...
High quality stocks expected return has declined by 2/3% to 8.9%. This is where we still
would be greatly overweight (and as an aside valuation our macro scenario favor "bunker- Source: Grantham, Mayo, Van Otterlo & Co
like" balance sheets).
As we will show in the next few pages, we think there is a non-negligible risk (it is a risk
identified and not a prediction…) that the markets will make “THE” bottom at levels up to
50% below where the markets are now. Chart 9 February 2010
In 2000 we said that the S&P 500 would fall below 500 before the next structural bull market
could start, we still believe that this is a potential outcome (but we would add 5-6% a year to this
objective going forward (would be a combination of extension and time to determine the final low
target I.e. the longer it takes the lower the required decline…)
But we also know that timing the exact bottom is impossible so we will automatically increase
our recommended allocation on declines once we fall below 700-750 on the S&P 500 and we
see breadth extremes without regard to the trend. The allocation will be increase along
price declines exactly as we did in March 2009.
One need a plan to stick to in such environment and this is ours. We will also limit the extent
to which
hi h we take
k net short
h positions
ii the
h closer
l we are to what
h we considerid rockk bottom
b
valuations.

We understand that in a service economy tangible

Chart 10 US PB Chart 11 US Median Vs Mean PE
assets are not as important as when manufacturing
dominated (see the proportion of tangible assets in
emerging
g g economies on Chart 6), ), but once more,,
ask yourself what intangibles are worth in a
bankruptcy…
On the various charts the semi-transparent

area represent time when the market was
cheaper than today on a book value basis.
The US are slightly expensive (remember that the

period 1996-2008 was a bubble so you won’t see
the US at 3 times book value in your lifetime). On
S
Source: Bloomberg,
l b Clue6
Cl 6 S
Source: Bloomberg,
l b Clue6
Cl 6
a normalized PE basis the US are as expensive as
during all previous secular tops (once more except Chart 12 Europe PB Chart 13 Global Tobin Q (Median
the 1996-2008 episode) EV/Total Assets)
On chart 11 one can see that both mean and

median PE are high. If the trend continue, do not
expect value factor to offer safety in the next
downturn (in 2000 we were bearish on the market
but bullish on value stocks as the median PE was
relatively low after having hit an overvalued level
in 1998…, in 2007 we repeatedly said that all the
market was overvalued… history is starting to
repeat here…)
Source: ML
Europe is slightly cheaper than the US but this is
Source: Bloomberg,
Bloomberg Clue6
j ifi d
justified.

All in all we would estimate the US and European

Chart 14 Japanese Small Caps PB Chart 15 Asia ex Japan PB
markets to be overvalued by 30-40% with a fair
value between 750-800 (and do not forget that we
will undershoot).
) Seems outrageous
g to many
y but
we feel comfortable (and in good company…J.
Grantham, A. Smithers, J. Hussman,…)
Japan is cheap…
Japanese small caps are extremely cheap…
Japan remains undervalued and as said, the low

historical ROE should be seen as a potential to
mean revert to other countries standard now that
S
Source: Bloomberg,
l b Clue6
Cl 6 S
Source: Bloomberg,
l b Clue6
Cl 6
Japan is slowly, but surely, becoming more
shareholder friendly. Chart 16 Latin America PB Chart 17 Eastern Europe PB
Emerging markets are getting increasingly

expensive here They are profiting most from the
excess liquidity
li idi pumpedd by b centrall banks
b k aroundd
the world and from the cheap USD but... The USD
won't fall forever and once you reach a certain
level of valuation you are only counting on finding
a bigger fool. Trend change should definitely be
actedd upon from
f h on...
here
Eastern Europe is slowly getting more expensive

and we would now be careful given the macro
background... Buy aggressively on a return to 0.5-
0 6 PB.
0.6 PB Source: Bloomberg,
Bloomberg Clue6 Source: Bloomberg,
Bloomberg Clue6

Equities: Valuation 9
Chart 18 Global Developed MSCI Trailing and Forecasted EPS Chart 19 US Profit/GDP
Source: MS
Source: BEA, Clue6
Global EPS forecast are extremely optimistic (Chart 18), expecting earnings to be more than 50% above their long-term trend by the end of
2012… With margin
g rapidly
p y reachingg ppre-2007 high
g in the US and elsewhere ((Chart 19),.This
) is not ggoing
g to happen…
pp
Looking on a regional basis, we still feel the US will outperform having profited from the downturn to rationalize… The % workforce decline
has been much higher than the decline in GDP while this wasn't the case elsewhere (only 1% decline in workforce in Europe).
As an aside we will investigate in a future note how increased outsourcing could be impacting the GDP statistics, artificially increasing it for the
outsourcer… so maybe the workforce did not decline more than GDP in the US, ceteris paribus… but still better than others…)

Equities: Valuation 10
Chart 20 US Private Compensation/GDP Chart 21 Hours of Work to Buy the S&P 500
Source: Bloomberg, Clue6 Source: Thechartstore.com
Longer-term we are expecting to see a mean-reversion in the Private compensation to GDP (Chart 21) which will weight on margins which
might
g stayy lower for longer
g and not reach the 2007 and even 2000 high
g for qquite some time if ever. Workers will ask for their fair share of
profits.
This should be associated with a reduction in inequalities,... And lower economic growth…
On Chart 21, one can see another reason of the increase in wealth inequality…Financial assets price have risen much more than average income…
This will also mean revert (and not as a consequence of rapidly rising average income…)

Equities: Valuation – US Earnings 11
Chart 22 US NIPA and S&P 500 Operating Profits Chart 23 S&P 500 as Reported Earnings and Margin Direction Model
Source: BEA, Clue6 Source: Shiller, Clue6
We have used the Chart 22 a couple of times in the past (2000, 2002 and 2007) to forecast a turn in the S&P 500 operating earning cycle. NIPA
profits lead by 2 to more quarters. This bodes well for at least the coming 2 quarters (at the top of the cycle accountants tries to mask the earnings
deterioration while at bottoms they do the reverse…)
reverse )
A few remarks… First the big increase in the last quarters NIPA profit was mainly due to financials. Profits in the sector rebounded strongly
because of a decline in both charge offs… One has also to see that the current ratio of as reported (according to GAAP) to operating earning at 14%
is the lowest in history (last low was 60% during the 2000-2002 bear market). Accountant are working overtime.
Finally our basic margin model is has recently turned negative (Chart 23)… If earnings grow beyond Q2 2010 they will have to be supported by
top line growth.

Equities: Valuation – The Price has to be Right 12
Chart 24 Real GDP Growth Vs Real Stock Chart 25 Emerging Markets Real GDP Vs Real
Return 1899-2008) Stock Return (1988-2007)
Source: Smithers & Co Source: Societe Generale
Do not confound good potential secular macro growth with good investment . As W. Buffet said “Price is what you pay, value is what you get”.
As you can see on Chart 24, even if you knew in hindsight which countries would grow the fastest, you would not have outperformed. One has to
take into account that the 2 World War have had a significant impact (some of the less directly impacted lands have had the best performance) but
the same is true for the past 25 years in emerging markets (Chart 25)…
The price you pay (in term of valuation) is determinant… Countries with high expected growth are expensive to buy… Only buy them on
panic…

Equities: Valuation – Style 13
Chart 26 Valuation Factor Dispersion Chart 27 Style Performance
CAGR Year to Date CAGR March 2009-Today
Note: Buy to Quintile / Sell Bottom Quintile
Source: CSFB
Source: Morgan Stanley
There are many strategies one can use to time styles. One we use and have advised to use for many years, is factors dispersion. There are many
ways to calculate it… On Chart 26 you can see the calculation for both Europe and the US of the value factor dispersion… When dispersion is
spiking
iki higher,
hi h buy
b junk
j k stocks
t k (we
( h
have d
demonstrated
t t d in
i the
th pastt that
th t the
th best
b t stocks
t k tot buy
b after
ft a bottom
b tt ( d it can also
(and l beb an intermediate
i t di t
bottom in an on-going bull markets) arethe stocks appearing in short screens) when dispersion is low, buy quality…
The messages are:… the outperformance of simply buying low PB stocks vs. high PB stocks is likely to be much below average going forward
(until dispersion increase again but dispersion could decrease further before we would short them), speculative factors are likely to underperform
until we get the next bout of increasing dispersion,
dispersion we can only repeat what we have been recommending since last fall…BUY
fall BUY QUALITY
STOCKS with stable growth, rock solid balance sheet, steadily increasing dividends and book value per share and a moat…

Equities: Valuation – US Future GDP Growth 14
Source: CBO,Clue6 Idea: J.Hussman
As said in the past, in the long run, earnings tend to grow slightly less than GDP. The above concept to estimate forward growth was first
proposed by J.Hussman. For the US real GDP to reach the CBO potential real GDP forecast in 10 years, the growth should be 2.7% which is one of
the lowest in history.
If one add that there is a non-negligible

g g risk of deleveraging
g g and overcapacity
p y related deflation ((if Central Banks and Government do not ggo all-in
where inflation might become a problem) this does not bode well for nominal growth which is what people and companies use for they
investment and consumption decisions…

Equities: Sentiment – Surveys 15
Chart 28 Investor Intelligence Bull/Bear Ratio Chart 29 NAAIM Survey and S&P 500
Source: Investor Intelligence, Clue6 Source: NAAIM, Clue6
Surveys are slowly but surely getting back to levels where markets have struggled in the past.
The Investor Intelligence bull ratio is still 10% below the January highs (Chart 28).
The NAAIM survey bullish% has risen to the mid-70’s (Chart 29).
y, bears have declined to 20% and bulls risen to 45% with a veryy high
In the last AAII survey, g 35% in correction mode… The Hulbert Nasdaqq and S&P
500 newsletter writers sentiment survey are at levels where the market has had a negative performance going forward on average since 1998…

Chart 30 Greenwich Macro Managers Bearish% Chart 31 TSP Survey and S&P 500
Source: Greenwich Alternative Investments, Clue6 Source: TSP, Clue6
On Chart 30 one can see that the Macro Managers bearishness has increased recently.
The TSP Bull/Bear Survey (Chart 31) is very close to the level where it will give a sell signal (2 I.e. bulls outnumbering bears by 2 times) at above
1.9…

Chart 32 Shiller’s Crash Confidence Index Chart 33 Shiller’s Buy-On-Dips Confidence Index
Source: R. Shiller, Clue6 Source: R. Shiller, Clue6
The crash confidence index (Chart 32) measures the percent of the population who attach little probability to a stock market crash in the next-six months.
After having reached its lowest level at the end of 2008-beginning of 2009, the index has been steadily rising since. The analysis of this index is tricky…
Clearly,
y, low levels occurringg after pprolonged
g decline are bullish,, but yyou want the index to rise strongly
g y alongg the markets ((remember the crowd is wrongg
at the end of the trend not during a trend). So the fact that it has failed to raise as much as what the recent markets performance would suggest indicates
that investors might be quick to push the sell button on a decline…
But this is not confirmed, on the institutional side, by 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 33)…
So, maybe small declines will be bought, as they have in the past 9 months but if the selling pressure is strong enough to push the market lower, the move
could start to cascade downward.
Chart 34 ML Fund Managers Survey Percentage Chart 35 ML Fund Managers Survey Percentage Net
Net Overweight Japan Overweight Emerging markets
Source: Merrill Lynch Source: Merrill Lynch
On a Country/Region basis we identified two stands out for 2010 in the Q1 presentation.
Everybody “hated” Japanese stocks (Chart 34) while Emerging Markets were everyone’s darling (Chart 35)
So far so good… Japan has outperformed Emerging Markets… There are now more managers overweight Japan than at anytime in the past two and
an half years but Emerging Markets are still the most loved region…

Equities: Sentiment – Put Call Ratios 19
Chart 36 S&P 500 and OEX PC Ratio Chart 37 S&P 500 and Equity PC Ratio
Source: Clue6 Source: Clue6
The OEX put call ratio (Chart 36) is currently low but we have started to get some daily higher reading. Remember that one ought to get defensive
when the ratio close above 2 on a repeated basis.
basis
The equity put call ratio (Chart 37) with some daily reading which have historically been followed by nasty down days…is now displaying a high
level of optimism
We would prefer to see both indicators in synch but the very low level of the equity ratio is sufficient to be defensive…
defensive

Equities: Sentiment – Put Call Ratios 20
Chart 38 S&P 500 and Small Traders Option Activity Chart 39 S&P 500 and Small Traders Buy to Open Put/Call Ratio
Source: OCC, Clue6 Source: OCC, Clue6
Small traders (up to 10 contracts traded) puts buy to open activity represents 16% of their total activity which is near an historic low while their call
buy to open activity represents 39% of their transaction… not far from the 40-42% extremes reached in the past…
If one add option sell to open activity (Chart 38), one can see that almost 60% of the volume is concentrated in bullish strategies (buy to open
calls and sell to open puts) which is near le historical highs (data from 2000)…
The buy to open put call ratio is at 0.42 (Chart 39)…
This is confirming the equity put call ratio status discussed in the previous page…

Equities: Sentiment – Insiders 21
Chart 40 S&P 500 and Russell 3000 Insiders Chart 41 Footsie and Insiders
Source: Bloomberg, Clue6 Source: ML, Clue6
Both the number of insiders sell transactions and the sell to buy ratio are reaching historically high levels in the US (Chart 40). Be
cautious…
i
In the UK, the buy to sell ratio is hovering at a low level but we would like to see more sell transactions… This seems to be happening in the past
two weeks…
B t remember,
But b insiders
i id activity
ti it is
i especially
i ll useful
f l in
i 2 configurations:
fi ti l t off relative
lots l ti buying
b i or increased
i d selling
lli when
h the
th markets
k t decline…
d li

Equities: Sentiment – Smart Money 22
Chart 42 S&P 500 and Hussman Strategic Growth Beta Exposure Chart 43 S&P 500 and Leuthold Core Beta Exposure
J. Hussman strategy here

h i clear.
is l He buys
b small
ll on weakness
k andd re-hedge
h d completely
l l on strength. h According
A di to our calculation
l l i he h is
i currently
fully hedged (Chart 42) and he has been out recently saying that a >20% correction is likely (but not certain…) to start in the next 8-12 weeks…
S. Leuthold, who has been bullish and right since early in 2009, has started to sound more cautious, at least for the short-term… (Chart 43)…

Equities: Sentiment – Smart/Dumb Money 23
Chart 44 Nasdaq 100 and Non-Commerical Net Long Future Position Chart 45 S&P 500 and Strategists Stock Allocation
Source: Bloomberg, Clue6 Source: Bloomberg, Clue6
Non-Commercial are still net short Nasdaq Future but they have dramatically reduced their position (Chart 44) but so far so good.
Wall Street Strategists are still recommending investors to allocate approximately 60% of their assets to stocks (Chart 45). 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.

Equities: Sentiment – Dumb Money 24
Chart 46 Analysts US Stock Recommendations 3 Months Change Chart 47 Topix and Percentage Analysts Sell Recommendations Japan
Analysts recommendations momentum is not very informative at the moment with both buy and sell recommendations being lower than 3 months
ago (Chart
(Ch 46)
In Japan after a pick up in sell recommendations at the end of 2008 we are seeing continuing decrease in the momentum of buy recommendations
(Chart 47).

Equities: Sentiment – Dumb Money 25
Chart 48 Topix and Shares Bought on Margin Profit/Loss Ratio Chart 49 Topix and Shares Sold on Margin Profit/Loss Ratio
In Japan analysts have access to the performance of the margin buyers and sellers.
On Chart
O Ch t 48 one can see that
th t when
h investors
i t are starting
t ti tot make
k money on the
th stocks
t k bought
b ht on margin
i (or
( even losing
l i less
l th 5%),
than 5%) the
th rally
ll is
i
usually very near a reversal… slowly reaching this point.
The same is true on stocks sold short on margin (Chart 49) when they start to make a profit, a reversal to the upside is not very far… we had a good
example in December. Losing approximately 10% now.
Margin traders are currently losing both way… the winner? Brokers we guess.

Equities: Sentiment – Volatility 26
Chart 50 S&P 500 and Vix Time-Spread Chart 51 S&P 500 and CFTC VIX Large Speculator Net Position
Our VIX Indicators are giving warning signals.
The time-spread is at levels where volatility has increased and markets have struggled to make sustained advances (Chart 50).
Non-commercials have now a small net long position indicating that they believe the VIX will rise in the near-term (Chart 51). Remember that they
are the smart-money here (but note that they were dead wrong with their highest net long position in December so…)

Equities: Sentiment 27
S
Source: Cl
Clue66
Our composite sentiment indicator is currently spiking higher at levels where market shave struggled even in cyclical bull markets.
It is time for at least a pause… even bulls need to breathe…

Equities: Breadth – A Repeat 28
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 goodd way to
t think
thi k about
b t prices
i andd trading
t di volumel i to
is t abandon
b d theth idea
id that
th t money goes in
i or out,
t andd to
t think
thi k instead
i t d about
b t the
th market
k t 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,

equilibrium trading volume is a measure of strong views and disagreement.
disagreement As the market turns weaker,
weaker trend-following
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,
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,
contrast if you
you've
ve got an undervalued market where fundamental investors raise their outlook,
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. size Normally,
Normally the volume
characteristics we've seen have been much more typical of short-squeezes and less durable advances.”
J.Hussman

Equities: Breadth 29
Chart 52 S&P 1500 and its AD Line Chart 53 S&P 500 and Selling Pressure
The breadth indicators are mixed even if the majority of indicators remains supportive for a continuation of the current cyclical bull market and thus
a buy the dips strategy…
The S&P 1500 Composite Index cumulative advance decline line is displaying a lot of strength, having made new cyclical highs ahead of the
markets (Chart 52). The AD line momentum is also very high… and it indicates either the beginning of a new dynamic move to the upside or a
potential medium-term top. The cyclical up move being more than a year old we would vote for the later…
Our selling Pressure indicator has spiked higher recently (Chart 53).
53) Usually when it is above 0.7
0 7 and the market is making new 52 weeks high,
high a
cycle trend is ahead…This was the case in 1962, 1968, 1972 and 2007…

Chart 54 Nasdaq 100 and the New High New Low Model Chart 55 Lowry’s 90% Days
The Nasdaq New High-Low Model is on buy (Chart 54). Note that we are not seeing the same strength as the one we say after the 2003 bottom.
The recent spike is due to the timing of the bottom in 2009… approximately 52 weeks ago.
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). While the recent bottom was followed by two 90% up days, we are not seeing the same strength as in March and July 2009 (Chart 55)… but
i is
it i better
b than
h none.

Chart 56 Topix and Normalized Advance-Decline Ratio Chart 57 MSCI Asia Ex Japan and Normalized Advance-Decline Ratio
Our Japanese
p normalized advance-decline ratio moved to an extreme oversold level ((<-40)) in earlyy December and has since moved back to ppositive
(Chart 56). You usually needs a move above 20 for the market to stale after such oversold readings.
In Asia, we reached extreme oversold territory back in February and have no moved above 5 very quickly (Chart 57). This is a thrust which has been
historically bullish for the markets but with a couple of notable failures.

S&P 1500 and Components above their S&P Emerging BMI and Components above their
Chart 58 10 and 50 Days Moving Average Chart 59 10 and 50 Days Moving Average
Short-term
Short term breadth is diverging with price around the world (Chart 58 and 59)
This indicates that at least a short-term correction/consolidation is in the offspring…

Chart 60 S&P500 and Fosback High Low Index Chart 61 S&P 500 and Hindenburg Omens
In the past we have used the following 2 studies to warn of impeding cyclical trend change.
On chart 60, one can see that the Fosback High Low Index remains very low, indicating a lack of distribution. We are now moving away from the
1 year anniversary of the Marc 2009 bottom and the behavior of the indicator will be very informative in the weeks/months to come…
As for the “Hindenburg Omen” none has been triggered since the 2007 peak on the major indices (Chart 61)…

Equities: Liquidity 34
Chart 62 Equity mutual fund assets and net cash Chart 63 Flows to Emerging Markets Mutual Funds and Future
Relative performance
Source: Nomura
Source: ICI, Clue6
Net inflows into equity mutual flows have been positive in January (January is usually strong…) and so far in March (Chart 62). Inflows are
needed to give some buying power to manager given the cash/asset level (see next page)
Inflows into emerging market funds have been extremely high and have historically been followed by a substantial underperformance of
Emerging markets (Chart 63)…

Chart 64 US Mutual Funds Asset Allocation Chart 65 European Mutual Funds Asset Allocation
S
Source: MS S
Source: MS
Cash ratio around the world are falling reaching a new historic lows (3.4%)
(3 4%) in the US.
US managers have spend all the money they got from customers
in January and then some more… They are now fully invested and are dependent on public inflows to buy more stocks…
On an overall allocation basis (Chart 64-65) money markets are seeing large outflows.

Chart 66 Number of Buybacks Announced per Month in the US Chart 67 Number of Buybacks Announced per Month in Japan
Buybacks have picked up modestly in the US in the past 4-5 months but remains at depressed level (Chart 66)… It was encouraging to see the
number of buybacks announcement to rise to around 100 a month in January (with a big increase a the end of the month) and February (at the
beginning of the month).
month)
In Japan, we have seen a slightly more robust pick up (Chart 67), especially during the most recent correction but we would like to see more to be
convinced that management is more confident on their company prospect and more interested in the well-being of their shareholders…
Note that we remain wary of too much buybacks which,

which in aggregate,
aggregate still remains a sign of management “short-terminism”
short-terminism (especially when
management (insiders)is selling their own shares… and in Japan we would prefer to see stocks bought back than new unproductive capital
expenditures.
Chart 68 US IPOs and Secondaries (US mio.) Chart 69 China + Hong Kong IPOs and Secondaries (US mio.)
We are seeing a pick up in IPOs in the US after many month of drought (Chart 68). No excess here…
In China and Hong Kong, management are taking advantage of the current rebound to flood the markets with new shares (Chart 69)…
Remember that management sell stocks mainly for 2 reasons. First when they have to in order for the company to survive (what happened in the US
during the first 4 months of 2009) or when they would be stupid not to (like Blackstone in July 2007, China and Hong Kong at the end of 2007 and
potentially now,
now KKR,…)
KKR )

Chart 70 US Hedge Fund Net Long Exposure Chart 71 Hedge Fund Ownership of US Equities
Source: Goldman Sachs Source: Goldman Sachs
Hedge funds net long exposure has increased a lot since its September 2008 lows (Chart 70) while they own 3.8%
3 8% of the market (Chart 71).
71)
Another reason why it will be very difficult for long-only manager, even skilled one, to avoid a lots of pain when the cycle finally turns…

Chart 72 Foreigners US Equity Net Buying Chart 73 Short Interest as a Percent of Float
Source: Goldman Sachs Source: Goldman Sachs
Foreigners like to bash the US but they have an incredible propensity to buy US equities near cyclical tops (Chart 72).
With regard to short interest, we have long said that while large cap shorts tend to be “dumb money” on aggregate, small caps short tends to be
better informed… The spreads between small and large cap short interest as a percentage of float is rising again (Chart 73)
The NYSE margin debt has now exceeded the 2000 levels on a % of market cap basis.

Chart 74 US Middle to Young Cohort and Equity Funds Assets Chart 75 Japanese Middle to Young Cohort and Equity Funds
Assets
Source: ICI, Census Bureau, Clue6 Source: BOJ, Japanese National Institute of Population and Social Security Research, Clue6
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 cause… 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 74) while in Japan we should
see the
h reverse (Chart
(Ch 75)…
75)

Most Bullish Middle to Young Cohort for
Chart 76 Chart 77 Middle Age Population Growth Forecast
the Next 5 Years
Source: Census Bureau, Clue6 Source: Census Bureau, Clue6
On chart 76 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 77).
Combining both, one see that the picture is somewhat less bullish than it seems for Japan, Spain, Poland, Portugal and Greece

Most Bearish Middle to Young Cohort for
Chart 78 Chart 79 Middle Age Population Growth Forecast
the Next 5 Years
Source: Census Bureau, Clue6 Source: Census Bureau, Clue6
On chart 78 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 79…

Chart 80 Labor Force Growth (15-64 years)
Source: NewGeography.com, Joel Kotkin
One has to keep in mind that, ceteris paribus, US growth is likely to surprise to the upside relative to its main competitors (Chart 80)… Emerging
market capital increase will probably more than compensate the labor factor decline but not in Europe, Japan or even South Korea…

Chart 81 Towers Watson US Pension Index Chart 82 US Pension Assets Sensitivity to Markets
Movements (as a % of ttm Earnings)
Change)
Stocks Price (% C
Bonds Yields (Bps Change)
Chart 83 US Pension Liabilities Sensitivity to the

Discount Rate (as a % of ttm Earnings)
Discount Rates(Bps Change)
Source: Bloomberg,
g, Clue6
S
Source: T
Towers Watson
W t
Pension, both private and public, are an accident waiting to happen…
In the US, listed corporate programs are underfunded by almost 30% (Chart 81). This represents more than US bn. 300 or almost 60% of ttm net
earnings.
On the chart 82 and 83 you will find rough estimates of the impact on markets movement on the assets and liability side… The 2008-2009 carnage
was avoided by the big increase in the liability discount rate (highly rated corporate bonds).
bonds) This might not be the case during the next downturn.
downturn

Chart 84 Pension Funds Investment Returns Chart 86 Pension Funds Funded Ratio
Chart 85 Pension Funds Liability Growth
Source: Towers Watson Source: Towers Watson
And here is the situation in some other countries…
And let’s not forget the poor state of many public pension schemes… Future retirees will not get what they were promised… when they will
realize, they will see that they have massively under saved (and we would say that the situation is dearest in many European countries…). This will
serve as a wake up call for younger generations.
We have written on this in the past and will in the future…

future

Liquidity momentum has a slight tendency to lead markets, and this should be especially true given in the current environment…
M2 momentum is supportive when using a 8 weeks rate of change but on a year on year basis the picture does not look good…

Emerging markets foreign reserve holding have been increasing much more rapidly than what the US current account deficit would have implied…
This means that massive short USD position are being build through the speculative inflows…
This is OK as long as the momentum remains but when it turns…
Momentum seems to be abating now… watch out…

Equities: Seasonality – President Cycle and Monthly Seasonality 48
US Four Year Presidential Cycle (S&P 500 Total
Chart 87 Chart 88 US Monthly Return (S&P 500 Total Return since 1944)
Return since 1927)
The four yyear Presidential cycle

y ((Chart 87)) has been distorted byy the huge
g fiscal and monetaryy stimuli of last yyear. The rational behind the
presidential cycle theory is that public money is spend to optimize the chance of the incumbent (s) to be reelected and that is followed by some pay
back for the market.
The market has a tendency to perform well in April (Chart 88).

Equities: Seasonality – Sell in May and … 49
Chart 89 Average Return MSCI Indices 1970-1998 Chart 90 Average Return MSCI EM Indices 1970-1998
Source: The Halloween Indicator, S. Bouman Source: The Halloween Indicator, S. Bouman
We are now in the positive half of the year (Chart 89 and 90) 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) are also on buy.

Equities: Seasonality – End of Month Anomaly 50
Chart 91 US Day of the Month (S&P 500 Total Return since 1944 Chart 92 Japan Day of the Month (Topix Total Return since 1979
The day of the month continue to exhibit its historical pattern in the
US and Japan (Chart 91-92)
91 92) (the same is true for most markets as
showed previously).
In the US the first day of the month remains the stand-out winner
while in Japan, the 8 positive days continue to display an outstanding
performance
performance.
Source: Macquarie

Equities: Seasonality – Cycles 51
Chart 93 NYSE Composite and the 20 and 40 Weeks Cycles Chart 94 Super Cycle Economic Seasons
Source: Clue6 Source: Bronson Capital Market Research
The next 20 and weeks cycles low are expected for the middle of June with the next 20 weeks cycle low in October (Chart 93).
Chart 94,
94 courtesy of B. B Bronson,
Bronson has been used in the past to depict the relative assets movement during the Long Cycle (Kondratiev wave). 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 is slowly happening now in the
developed world (it will likely accelerate in the coming years when the weak foundation of the current upswing will become clear to all…)
The Autumn Season is the harbor of the biggest bubbles (1929 and 2007), stocks valuation are rising while interest rates falls from a high level. What
could we ask for more… It is followed by the Winter where interest rates and stocks valuations become highly correlated, both falling…

Equities: Intermarket 52
Chart 95 S&P 500 and World Defensive Relative Performance Chart 96 S&P 500 and US Defensive Relative Performance
Defensives have been performing relatively well in the past 6 months globally (Chart 95) while they have failed to break to the upside in the
US yet (Chart 96)…
We are in a situation where we would overweight defensive when they get in the lower part of their relative performance channel… so now is the
time in the US…

S&P 500 and Philadelphia Semiconductor
Chart 97 S&P 500 and Nasdaq Composite Relative Performance Chart 98 Index Relative Performance
The Nasdaq Composite

C i isi continuing
i i to outperform
f the S&P
S& 500
00 (Chart
(Ch 97)9 ) which
hi h is
i supportive
i for
f the
h overall
ll market…
k
… but the Philadelphia Semiconductor index is not (Chart 98) which is a negative for the overall market in general and the Nasdaq Composite in
particular…

S&P 500 and the KBW Bank Index S&P 500 and iShares iBoxx $ High Yield
Chart 99 Relative Performance Chart 100 Corporate Bond Fund Net Asset Value
Banks have been performing well recently (Chart 99) but are still below their August 2009 relative peak. The sector relative performance will be a
key to understand how the new wave of mortgages reset, the end of central bank accommodation and new accounting rules will affect the rest of the
market… but let’s not forget that they are in the portfolio of quite a lot of the smart money managers we follow so.
High yield bonds are diverging with the equity market as they are not making new highs (Chart 100). Investment grade 5 years CDS indices
have also failed to confirm the past 10 days strength. Check those graphs daily they will lead, this time again.

Chart 101 S&P 500 and US 2 Years Treasury Bonds Chart 102 S&P 500 and Eurodollar Model
Two years treasuries above 1% have been associated with struggling market in the past 18 months (Chart 101). This won’t last but spike-like
movement have always been a warning worth listening to…
We also like to look at the relative behavior of the equity markets and the Eurodollar future. On chart 102 you can see what happen to the market
when the eurodollar falls (higher rate expected) 2 days in a row and the market falls at the same time… We had an episode mid October… Another
one could mark an peak of significance…
One of our most effective intermarket “consolidation forecaster” which simply

p y looks at the combined medium-term momentum of bonds and
commodities is also flashing a warning signal…

Equities: Intermarket – US10 Years Govies against Stocks 56
Chart 103 S&P 500 and US 10 Years Treasury Bonds Chart 104 S&P 500 and US 10 Years Treasury Bonds
Blue area indicates when the momentum

in 10 years government bond yield is
positive. In this period, stocks performed
when the momentum was negative.
Blue area indicates when the momentum

in 10 years government bond yield is
positive In this period,
positive. period stocks performed
when the momentum was positive.
We have long argued that one the characteristics of the current structural bear market (and we are talking US, Europe and Japan here...) was
the positive correlation between stocks and government bond yields.
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…

Chart 105 MSCI Emerging Markets and Dollar Index Chart 106 S&P 500 and Sovereign CDS
Source: Clue6 Source: Bloomberg, Clue6
We already identified potential headwinds for emerging markets (valuation, investors’ bullishness,…)
Don’t forget to look at the USD… A rising USD has rarely been a positive for emerging markets (Chart 105).
2010 or 2011 could be years of major sovereign negative surprises… on the next page one will find the countries to have especially an eye on…
On Chart 106 you will find the usual suspects… We could have put the UK , Poland, Austria in the mix… and we feel Australia will join this
group in the next 12-24 months.

Source: RBS
Canaries in the coal mine candidates… To observe attentively in the coming months…
Candidates have been selected using the methodology of “Rules of Thumb' for Sovereign Debt Crises” by P. Manasse and N. Roubini, 2005

Equities: Pattern 59
S&P 500 Deviation from 50 S&P 500 Deviation from 50 Days
Chart 107 Days Moving Average Chart 108 Moving Average
We are now in an environment where the S&P 500 will struggle to stay 4-5% above its 50 days moving average (Chart 107 and 108)…
A move above this threshold will likely be followed by a close more than 4% below the moving average later…
So do not accept any deterioration in other factors when the market is over-extended…

Equities: Graphs 60
S&P 500
Shoulder Shoulder
Head
We are short US stocks

(using the Russell 2000).
We will start to cover below

Shoulder
1100.
A short position would be

probably
b bl reentered
t d on a close
l Shoulder
below 1040. Head
The S&P 500 is slowly but surely approaching to the top of its rising channel after having broken out of the down channel formed
during 2008. The trend is up.
The inversed head & shoulders and June-July flag targets are still above us at 1200-1250.
A series of narrow range day has usually been a warning of an impending correction in the past 12 month. So be on the look out.

Equities: Graphs 61
DJ Euro
E Stoxx
S 50
Megaphone
Top
Shoulder
Shoulder
Head
We are short.
short
We will increase our Shoulder

position on a move to Shoulder
3000.
Head
Europe has continued to underperform as expected and has yet to make new cyclical highs. The head & shoulders target is at around 3300.
We would continue our strategy of selling strength (top of channel) and buying weakness (bottom of channel) until our tactical model becomes a
seller…
We would now move from selling upside volatilities to outright reduction of the equity exposure and even a small net short positions when
reaching the top of the channel…

Equities: Graphs 62
T i
Topix
We are observing.
Head Shoulder
We will buy on weakness as Shoulder
long as the US stocks
directional models is on buy.
Shoulder Shoulder
We will start to buy Head

methodically on weakness
below 800 independently on
the directional models.
The Topix has broken out of its down trend with determination. But has yet to make a higher high to confirm an eventual up trend.
The 975-1000 area is likely to offer strong resistance.

Equities: Graphs 63
MSCI A
Asia
i ex-Japan
J
Megaphone
Top
We are short and would

increase our position on a
move toward 450.
Likely to cover some short

below 390.
A move below 330 would

signify the beginning of a
cyclical bear market.
Could be forming a megaphone top or an head & shoulder.
Short aggressively if the index move toward 450.

Equities: Graphs 64
MSCI EM L
Latin
i AAmerica
i
Megaphone
Top
We are short and would

increase our position on a
move toward 4500.
Likely to cover some short

below 3600.
A move below 3500 would

signify the beginning of a
cyclical bear market.
Has been underperforming markedly in the past few days.

Equities: Graphs 65
MSCI E
Eastern E
Europe
We are short.
Will cover on a move

above 235 and increase
on a move below 190.
Eastern Europe still remains one of the least discounted "unavoidable accident" in the market today (it is was mostly discounted in
the Eastern European markets last year but the second round effects toward other part of the world are not…… The stronger IMF has
voided the "end of their world" scenario, but…)
We repeat what we said last time…

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

Equities: Conclusion 66
Valuations are above the levels where future will not please the buy & hold crowd (in the developed ex Japan world), even if we go back to
the good old days, the credit bubble stops deflating, growth reaches pre-2007 level in a sustainable manner ,…At 1200 on the S&P 500 will be priced
more expensively than during all of the structural tops pre-2000 (well 1997-2000) except the final tail of the 1929 move... And you have to
remember that assets quality is not what it was in the past and that there are signs that accountants are working overtime. This does not imply that
the
h markets
k will
ill fall
f ll in
i the
h short
h or even theh medium
di term but
b thath a further
f h rise i willill only
l have
h speculative
l i and d no investment
i merit
i if
bought and that if one buy today to hold for the long-term, negative capital gains should be expected in the next 7-10 years.
Our base assumption remains that we will fall to significantly undervalued levels before a new secular bull market can start (in the developed world
as, as you know, you know we believe that we are in a secular bull market in emerging markets). This currently imply a sub-530 level on the S&P
500 going
i up by
b 5-6%
5 6% a year. Emerging
E i markets
k t are getting
tti too
t expensive
i even if one consider
id that
th t they
th are ini a structural
t t l bullb ll market
k t (structural
( t t l as
we think that the 2003 and 2009 low should hold).
Option activity, insiders and most of the smart-money indicators we follow have deteriorated substantially from the February low and are
now at or above January highs. But even if sentiment is once again too greedy, it has to be put in the context of the recent advance and market
t d (higher
trend (hi h highs
hi h andd higher
hi h lows).
l ) So
S sentiment
ti t in
i itself
it lf does
d nott imply
i l that
th t the
th markets
k t can nott continue
ti th i ascentt in
their i the
th medium-term
di t b t
but
more that it should at least consolidate in the short-term.
Breadth is giving diverging signals. The advance-decline and up down-volume line are making new highs, of the ahead of the markets but their
momentum is too high for the market to continue straight up. We experienced new breadth thrust, we had two Lowry’s 90% days after the
February low and the McClellan summation index has moved above its January high. high No “Hindenburg Omen” has been triggered and the
Fosback High-Low index remains low. This is hard to call for a cyclical top in this environment. But we are seeing divergences between
various indicators measuring the % of stocks above certain moving averages, divergences which have appeared shortly before a correction
unfold.
On the liquidity side,

side inflows into US equity domestic funds remain low while money is pouring into emerging market equity funds.
funds This has
historically been followed by underperforming EM markets. Fund managers have been heavy buyers and have spend all the money they got in
January and then some more, pushing the cash/asset ratio to new historical low. Foreigners appetite for US equities has increased dramatically
which is typical of ending cyclical bull markets.
There has been a slight pick up in buybacks but they remain very low while IPO
IPO’ss and secondaries ex US have been plentiful,
plentiful with bubble

Equities: Conclusion 67
reminiscent level in Hong Kong and China. On the monetary front, real M2 and M1 growth is turning negative in the US and decelerating
markedly elsewhere. Emerging markets central banks reserve growth has been slowing rapidly which is a headwind for risky assets.
Pension funds’ funding status has stabilized but imagine the what will happen if equity price falls while high quality corporate bonds yields
(used to discount liabilities to present value) do not rise as they did in 2008-2009.
Seasonals are still supportive but we are slowly entering into the time window where our seasonal model can trigger a sell signal if markets trend
deteriorates. The next cycle low are expected in June and October. We will have to see if the markets top before or after the middle of the cycle
(right or lest translation). If it tops early in the cycle this would be a clear sign of cyclical topping process.
Intermarket relationships have deteriorated. While the Nasdaq is continuing to make relative highs along the Russell 2000 and equal-weighted
indices, semiconductors stocks are underperforming as are many emerging markets and Europe. On the credit side, neither high yield nor
high quality corporate bonds have confirmed the recent markets highs. Finally, the combined momentum of crude oil, copper, gold and the 10
years treasury yield is at levels where the equity markets have struggled in the past.
The trends have deteriorated since the January top. The US markets are one of the few making new highs but are now sitting at the top of their
respective rising channels. We are seeing a multitude of potential megaphone tops being formed, but the short-term trend remains up as long as
markets remain in the up channels they have formed since the February low.

Second Quarter 2010 GTAA Equities

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Global

Clue6 Second Quarter 2010

Breadth is ggivingg diverging

Clue6 Second Quarter 2010

Clue6 Second Quarter 2010

Chart 1 US Earnings Volatility

Chart 2 US Earnings Quality

Clue6 Second Quarter 2010

US Tangible Assets to Europe Tangible Assets

1. intangibles have dramatically gained in

This is thus not surprising that AAA and AA

Clue6 Second Quarter 2010

S&P 500 and Middle to Young

Clue6 Second Quarter 2010

Clue6 Second Quarter 2010

We understand that in a service economy tangible

On the various charts the semi-transparent

The US are slightly expensive (remember that the

On chart 11 one can see that both mean and

Clue6 Second Quarter 2010

All in all we would estimate the US and European

Japanese small caps are extremely cheap…

Japan remains undervalued and as said, the low

Emerging markets are getting increasingly

Eastern Europe is slowly getting more expensive

Clue6 Second Quarter 2010

Source: BEA, Clue6

Clue6 Second Quarter 2010

Source: Bloomberg, Clue6 Source: Thechartstore.com

Clue6 Second Quarter 2010

Source: BEA, Clue6 Source: Shiller, Clue6

Clue6 Second Quarter 2010

Source: Smithers & Co Source: Societe Generale

Clue6 Second Quarter 2010

CAGR Year to Date CAGR March 2009-Today

Note: Buy to Quintile / Sell Bottom Quintile

Source: Morgan Stanley

Clue6 Second Quarter 2010

Source: CBO,Clue6 Idea: J.Hussman

If one add that there is a non-negligible

Clue6 Second Quarter 2010

Source: Investor Intelligence, Clue6 Source: NAAIM, Clue6

Clue6 Second Quarter 2010

Source: Greenwich Alternative Investments, Clue6 Source: TSP, Clue6

Clue6 Second Quarter 2010

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

Source: Merrill Lynch Source: Merrill Lynch

Clue6 Second Quarter 2010

Source: Clue6 Source: Clue6

Clue6 Second Quarter 2010

Source: OCC, Clue6 Source: OCC, Clue6

The buy to open put call ratio is at 0.42 (Chart 39)…

Clue6 Second Quarter 2010

Source: Bloomberg, Clue6 Source: ML, Clue6

Clue6 Second Quarter 2010

Source: Clue6 Source: Clue6

J. Hussman strategy here

Clue6 Second Quarter 2010

Source: Bloomberg, Clue6 Source: Bloomberg, Clue6

Clue6 Second Quarter 2010

Source: Bloomberg, Clue6 Source: Bloomberg, Clue6

Clue6 Second Quarter 2010

Source: Bloomberg, Clue6 Source: Bloomberg, Clue6