Even after 7 weeks of continuous rallying US investor sentiment remains
weak with the balance betwen AAII Bulls and Bears coming in at -7.52 this
week, a slight deterioration from last week's -6.82 reading. Interestingly
the number of both Bulls and Bears increased considerably, Bulls form
31.82% to 36.09%, Bears from 38.64% to 43.61%, while Neutral voters dropped
sharply from 29.55% to 20.30%. It therefore appears that as the powerful
rally continues (April 2009 is on course to be the strongest month since
March 2000 and has a decent shot of being the strongest since December
1991) it is driving investment opinion into 2 increasing "hard" camps. This
has clear bullish implications for the market over the near term. There is
no technical sign of the rally losing strength (quite the opposite in fact)
and a large body of negative opinion has been formed that will probably
have to reverse itself before the current rally has run its course.


(See attached file: D-.AAII_Index.gif) - D-.AAII_Index.gif

As we had expected today's FRB statement made no adjustment to the
previously stated purchase targets of the FRB either in MBS or Treasury
securities. This has clearly come as a disappointment to Treasury bulls and
the 10 year note yield has now followed the 30 year bond by breaking out
above its key resistance at the 3.00% level. Looking ahead we would expect
to see both yields continue to move higher in the coming sessions, with our
target ranges being centered around the 4.20% level for 30 year (pink
shading on chart) and 3.40% (green shading on chart) for 10 year yield. The
30 year - 10 year spread (lower chart in green) remains elevated at 92 bp
making the 10 year note yield unusually sensitive to further moves higher
by the 30 year bond yield.

Unlike many commentators we do not view higher yields as an impediment to
the current equity rally provided they remain within our anticipate ranges.
Even at our targets these yields would still be a the extreme lows
registered during the 2000-2002 recession. We would also expect to see a
good portion of the Treasury yield rise absorbed in other credit pricing,
which would imply spreads tightening n both he corporate and MBS spread.
The one class of investor that would be at risk of substantial loss is the
Treasury holder, since the principal value of long term Treasuries is
extremely sensitive to even small moves at current yields. With a
substantial amount of "natural equity" funds being redirected to the
Treasury sector at the end of 2008 it may be that a degree of re-allocation
now takes place, which would be quite bullish for the equity market.


(See attached file: D-USGG30_Index.gif) - D-USGG30_Index.gif

Looking ahead to this afternoon's FRB statement the first point we would
make is that we would not expect to see a surprise on the scale of the
March 18th event and it may be that no new initiative of any importance is
announced. Nevertheless, as the attached chart demonstrates the last month has
generated some powerful data that indicates both the power and impotence of
the FRB at the current time.

To the extent that the FRB has chosen to intervene directly in a credit
marketplace it has generally been very effective. It has been able to
deploy its capital rapidly and, in the case of both MBS and Commercial
Paper, radically reduce the market yield of the underlying instruments.
This is the stated aim of Bernanke's "Credit Easing" policy and it can be
seen to be effective, albeit at the "cost" of requiring a substantial
expansion of the FRB balance sheet (it is of course substantially
profitable for the FRB to own these securities given that its cost of
capital is basically zero). In the case of Treasury purchases the FRB has
been able to purchase a substantial amount (roughly 25% of the stated
target of $300 bln. were added in approximately 4 weeks) but longer term
yields have continued to rise. While there have been calls for the FRB to
respond to this pressure on the Treasury market by increasing this facility
we do not believe that this is likely to occur unless there was clear signs
of distress (such as a failure of auctions to clear). Long term yields
remain extremely low on a historical basis and would remain so even if 10
and 30 year yields backed up another 50 bp. It should also be noted that
credit spreads have generally moderated in the face of rising Treasury
yields, which is ultimately a more important metric from the FRB's
perspective.

The great failure of recent policy has been the TALF where uncertainty of
Congress' potential intervention in participants' businesses has meant that
almost no traction has been made in a facility that is intended to reach
around $1 Trln. $6 bln. is a pathetic start and it would take about 12
years at the current rate of accumulation to reach the stated target.

The obvious lesson from our perspective is that to the extent the FRB
wishes to influence the cost of credit going forward it is far more
efficient to directly intervene in that particular market than either to
purchase Treasury notes or set up TALF type funding vehicles for private
capital. We will be reading today's statement with interest to see if any
light can be shed on the FRB's intentions in this regard.



(See attached file: D-FARBCPFF_Index.gif) - D-FARBCPFF_Index.gif

April's reading came in at -9, significantly stronger than consensus -17 or
last month's -20. notably this is the first of the regional PMI indexes to
improve above the level recorded in September 2008 (marked by red line on
chart), although since we remain in negative territory this means that
conditions are still deteriorating but at a more moderate pace. -
sg2009042842258.gif

The April reading for the Conference Board Consumer Confidence Data came in at
39.2, significantly higher than the 29.7 consensus and a sizeable improvement
on the March reading of 26.9 (revised up from 26). Since the March 2009 reading
was by some distance a record low for this measure (see white line on attached
chart) this was in some senses an easy hurdle to clear but looking at this data
in detail it does appear to contain the sort of data that has historically been
present at major cyclical turning
points.
While the overall confidence
reading is a very "noisy" signal the "Present Situation" (dashed red line on
attached chart) has typically been a far more reliable indicator. It is
therefore important that this also registered a small improvement from 21.90 in
March to 23.70 in April. From our perspective the size of this turn is much
less important than the fact that it has occurred. similar confirmation can be
found in a number of the other sub-indexes. We have included the "Business
Good" Index (green line using LEFT scale) which again has typically delivered a
reliable signal at cyclical turning points. This rose from 6.9 to 7.6 in April,
again the turn itself being more important than its intial magnitude. -
sg2009042838141.gif

We have been tracking the US New Home sale and Inventory data for
several months and, as we had predicted would occur, we are now reaching the
point whereby even if the pace of new home sales remains at its current 50 year
low (an unlikely occurrence from our perspective) we are likely to find
that there is a shortage of new home inventory by the end of
2009.
As the attached chart shows March sales (blue line, top
chart) came in essentially flat compared to February at 357K but the inventory
of new homes (black line, top chart) fell sharply from 328K to 311K (a 5.18%
drop). This takes inventory some distance below the 50 year average (pink band)
and the 12
month ROC of inventory down to a new all time low of -33.69%. Our suspicion
is that the Homebuilding industry as going to be very wary of ramping up
production until there are clear signs of increased sales activity, meaning
that the pace of inventory decline is likely to remain rapid throughout the
spring selling season. We would imagine that inventory below the 250-275K
range would be sufficient to lead to significant supply/demand imbalances
in certain geographical markets and it looks likely that this point will be
reached by the start of the 3rd quarter.


(See attached file: D-NHSLNFS.gif) - D-NHSLNFS.gif

We appear to have reached a critical juncture for the Treasury market as 30
year yields (red line, top chart) have finally succeeded in breaking above
both the 3.80% level which has acted as strong resistance since the
collapse in yields last November. The importance of this level is enhanced
since it now coincides with the 200 day ma (not shown) that comes in at
3.79%. Should this morning's breakout up to 3.86% be sustained through
today's close we would expect to see the long bond yield reach 4.00% fairly
quickly.

In more normal times we would expect the 10 year note yield (black line,
top chart) to follow suit and break above its own key resistance at 3.00%.
Complicating matters this time is the fact that the FRB is still in the
middle of its stated program to purchase $300mm of medium term Treasury
notes. It remains to be seen whether this will prove sufficient to cap the
move in the 10 year yield, particularly since the spread between the 30 and
10 year yield (shown in green on lower chart) is already very elevated at
89 bp. A breakout by 10 year yields in these circumstances would certainly
suggest that an element of capital allocation out of the Treasury space and
into other assets (both corporate debt and equities being obvious
destinations) is underway.



(See attached file: D-USGG10_Index.gif) - D-USGG10_Index.gif

Today's positive FHFA House Price Index data has been warmly greeted by the
US Homebuilders and while we do not ascribe too much importance to this
particular survey it could be the catalyst for an advance that would have
important technical ramifications. As the attached chart of the S15HOME
Index demonstrates we are currently testing key price resistance at 250
together with key resistance relative to the SPX Index (green line on
bottom chart). A double breakout would be an important confirmation that
the 40 month decline for Homebuilder stocks culminated in their November
collapse. Clearly any breakout will have to hold through the release of the
far more significant Existing and New Home Sales data later this week. We
will be particularly interested in tracking New Home inventory in Friday's
release.



(See attached file: D-S15HOME_Index.gif) - D-S15HOME_Index.gif

As the April option cycle enters its final hours the VXO index has
decisively broken below its 40-55 range that has contained it for virtually
the whole of the last 4 months. Indeed the 40 level has not been decisively
crossed since the VXO exploded higher in the aftermath of LEH's demise. We
have written several times in recent weeks that any viable rally in the
broad market would require the VXO to fall substantially during its
progress and this is seemingly now starting to unfold. Clearly we will need
to wait for Monday's price action to confirm today but it is our belief
that with the support at 40 comprehensively taken out the VXO could easily
fall to the levels seen last spring and summer. This obviously implies some
further strong gains in the overall market over the coming sessions prior
to a potential "mis-pricing" of implied volatility (this time too low) and
subsequent correction.

One clear casualty of such a move would be the tactic of "overwriting"
which has become so popular in recent months. It is interesting to note
that while the CBOE Buy-Write Index (BXM) has rallied strongly since
mid-March it has underperformed the SPX index quite markedly over this
period of time (see BXM chart green line, lower chart). We have not yet
reached the point at which overwriting is shunned by participants but the
opportunity cost of following this strategy may be quite punitive over the
course of this rally (or though less punitive than not participating at
all).



(See attached file: D-VXO_Index.gif)
(See attached file: D-BXM_Index.gif) - D-VXO_Index.gif - D-BXM_Index.gif

Chart now shows Treasury Holdings (light blue lower chart)



(See attached file: W-FARBCRED_Index.gif) - W-FARBCRED_Index.gif

As we continue to monitor the FRB balance sheet changes we note that the
overall balance sheet grew moderately by 1.41% last week to $2.099
Trillion. Looking at the major subcategories we can see that the source of
growth was almost entirely supplied by an increase in Treasury holdings
(new light blue line on lower chart) and MBS securities (pink line lower
chart). By contrast the TALF facility (new orange line on lower chart) is
off to a much more disappointing start and had grown to a measly $5bln by
April 15th. One conclusion that could be drawn is that the FRB is far more
effective at deploying its own capital into secondary markets than funding
"public private" initiatives such as TALF. Whether this will lead to a
tweaking of the "credit easing" doctrine remains to be seen - but it is
certainly possible that should TALF fail in its current incarnation that a
more direct intervention in the ABS arena will be attempted in the coming
months.



(See attached file: W-FARBCRED_Index.gif) - W-FARBCRED_Index.gif

Some 4 months after the peak dislocation of corporate credit markets we are
finally seeing some clear signs of healing in the HY arena. The attached
chart shows the CS HY Index II (black line upper chart) together with the
Moody's BAA Index (red line upper chart) and the spread between these 2
indexes (green line, lower chart). As the chart demonstrates the HY index
is now approaching the 15% level where yields peaked in the 2000-2002
recession As such yields are still high but are no longer unprecedentedly
so and it is interesting to note that the rate of new issues has recently
increased appreciably. While we would normally look at HY spreads to
Treasury yields since the Treasury market is no longer a truly "public"
domain (with the FRB purchasing $300 bln of paper) it is perhaps more
interesting this cycle to look at the spread between HY and the lower end
of Investment grade.

Doing this we see that the risk premium has shrunk considerably from a peak
just under 12.5% last December to 7.26% this week. As with nominal yields
we are now approaching the peak registered in the 2000-2002 cycle. It will
be interesting to monitor whether the prior cycle peaks act as a "support
zone" for nominal yields and spreads. If they fail to do so we will be able
to talk about normalized (albeit still stressed) credit markets for the
first time in several months.


(See attached file: W-DLJHYTW_Index.gif) - W-DLJHYTW_Index.gif

This sort of extreme in allocations has bullish medium term implications for
the equity market.

+------------------------------------------------------------------------------+

Cash Beats Stocks for First Time in U.S. Survey: Chart of Day
2009-04-13 15:23:14.573 GMT


By David Wilson
April 13 (Bloomberg) -- U.S. individual investors held more
assets in cash than in stocks last month for the first time in
more than two decades, meaning they have plenty of money to fuel
the current surge in share prices.
The CHART OF THE DAY shows the results of an asset-
allocation survey that the American Association of Individual
Investors has conducted monthly since November 1987, a month
after the so-called Black Monday crash.
Investors had a record 45 percent of assets in cash,
including money-market investments, and a record-low equity
allocation of 41 percent in March, according to the survey data.
Historical averages are 25 percent and 60 percent, respectively.
“This is bullish from a liquidity standpoint,” according
to a posting four days ago on the Big Picture financial blog
about the results. “Money can flow back into the market when
it’s on the sidelines.”
The chart displays the average percentage of assets in cash
and stocks in the top panel. The average bond allocation, which
tumbled last month as cash increased in popularity, is in the
bottom panel. The stock and bond figures combine holdings of
securities and mutual funds.
The Standard & Poor’s 500 Index’s five-week advance, the
longest since share prices peaked in October 2007, started in the
second week of March. The index’s gain during the advance totaled
25 percent through last week.
Cash levels show investors have enough buying power “to
keep moving stocks higher in this snapback/bounce,” Fusion IQ,
an investment-research firm owned by the Big Picture’s founder,
Barry Ritholtz, wrote in the posting.

(To save a copy of the chart, click here.)

For Related News and Information:
U.S. strategists’ allocation calls: TNI ADVISE TABLE <GO>
AAII investor-sentiment data: ALLX AAII <GO>
Top stock-market stories: TOP STK <GO>
Bloomberg columns: NI COLUMNS BN <GO>
Current opinion: OPED <GO>

--Editors: James Greiff, Laurence Arnold

To contact the reporter on this story:
David Wilson in New York at +1-212-617-2248 or
[email protected]

To contact the editor responsible for this story:
James Greiff at +1-212-617-5801 or [email protected]

- aaiiallocationsmarch2009.gif

China's February New loan and M2 data was released last Friday and showed
an acceleration in the rate of credit expansion off January's already
remarkable pace. New loans for the month of February alone were reported at
1.89 Trillion RNB, which is just under 5.7% of total loans outstanding and
is approximately 6 times the pace of credit expansion prior to the current
stimulus. M2 shows the dramatic effect of this on general money supply and
is now growing at 25% per annum. The public statements of Chinese officials
made after this data was released make it clear that the current policy is
expected to remain in place for the foreseeable future and this highly
expansionary policy can be expected to continue to lend support to a broad
array of industrial commodities and related equities.

(See attached file: D-CNMSM2_Index.gif) - D-CNMSM2_Index.gif

The number of high profile mandates being terminated is starting to add up. We
see this as typical of the bottoming process in a cycle.

The February report for US Wholesale Inventories showed a significantly
larger drawdown of -1.5% than had been expected (survey median was -0.7%).
In addition the January data was revised downwards to -0.9% (from -0.7%).
Wholesale inventories are falling faster than at any point since this
survey was re-calibrated in 1992 and today's reading suggests that
production rates in many industries have more than compensated for the
plunge in sales. This release continues the trend of a number of other data
points which have suggested that the US economy may be somewhat further
along the cyclical process than current consensus estimates.





(See attached file: D-MWINCHNG_Index.gif) - D-MWINCHNG_Index.gif

Pulte Homes to Buy Centex for $1.3 Billion in Survival Bid April 8 ...

Consolidation is a key part of the repair process for the Homebuilding
industry. Mergers between key parties are often made at or near the lows in a
cycle.
<>

Fed Said to Weigh Charging Higher Rates for Longer TALF Loans ...

We are still a long way from getting the first stage of TALF to work at an
acceptable pace. Extending the program to CMBS will be somewhat more
complicated in our opinion. The issue with the term of the facility is only one
of the complications that needs to be considered.
<>

While we would not normally be tracking the trade data for one of the
smaller emerging market countries Chile's concentration in industrial
metals (particularly copper) makes it an excellent barometer of global
industrial trade activity. Interestingly today's data release came in at
$950mm a far stronger level than had been expected (median estimate was
$478). Furthermore since this data is for February when copper prices
averaged only $3363 this improvement is far more about the volume of
exports than an increase in the unit price.


(See attached file: D-CHTBBALM_Index.gif) - D-CHTBBALM_Index.gif

The weekly H.8 report on the size and composition of US commercial bank
balance sheets shows both the success and limitation of the FRB's policy of
"credit easing". On the one hand the liquidity of the banks balance sheet
has been radically improved with the percentage of cash and treasury
securities on bank balance sheets rising to 23.72%, the highest reading
since September 1999. This metric is very closely linked to the increase in
size of the FRB balance sheet (since a great deal of the funds end up in
the banks reserve accounts) and given the fact that the FRB has committed
to expand its balance sheet by at least a further $1 Trln it seems likely
that the final percentage of cash and treasury securities may be as high as
32% by the time this process is complete, which was the level reached in
the 1974/5, 1980/1 and 1990 recessions.

Of less comfort to the FRB will be the fact that bank lending activity has
remained very muted in recent months. As the attached chart of total loan
balances shows these are currently only just positive on a 52W ROC basis
(green line on lower panel) and have actually shrunk quite markedly on a
quarterly basis (red line middle chart). Prior recessions have included
periods of zero and moderately negative loan growth (although it should be
remembered that inflation rates were far higher in the mid-70's and early
80's, making zero bank lending growth very restrictive in real terms).
While the populist viewpoint may blame the commercial banks for hoarding
cash, the combination of a lack of credit worthy ventures, the wish of
borrowers to retrench and (more positively) a vibrant market for corporate
debt issuance seem far more relevant factors to consider at the current
time.

In summary while credit easing has been successful in reducing the price of
credit markedly in a number of key areas and most notably stimulating
demand in home refinancings and for commercial paper the beneficial effects
of this policy are still very uneven. We have made much progress from the
chaos of late 2008 but these remain far from normal times.





(See attached file: D-.BANKCASH_Index.gif)
(See attached file: W-ALCBLOAN_Index.gif) - D-.BANKCASH_Index.gif -
W-ALCBLOAN_Index.gif

One interesting thing to note in Chairman Bernanke's long explanation of
his Credit Easing policy today was how little attention was paid to the
purchase of Treasury securities by the FRB. While the $300mm facility was
briefly mentioned nobody listening to the speech could have come away with
the idea that Treasury purchases are in any way central to this unfolding
policy. It has been our belief that the decision to authorize the initial
purchase was made for the sake of promoting unity on the FRB Board of
Governors and today's speech only hardens our belief. Interestingly we do
not seem to be alone since the 10 year note yield has risen to their
highest level since the March 18th surprise. Another test of key resistance
at 3.00% certainly seems possible in the days ahead.



(See attached file: D-USGG10.gif) - D-USGG10.gif

This speech seems likely to be a key reference guide for the still emerging FRB
policy of "Credit Easing". We will have further comments to make once we have
read the speech in its
entirety.

http://www.federalreserve.gov/newsevents/speech/bernanke20090403a.htm

Shanghai Prime Office Building Vacancy Rate Rose to 4 Year High ...

Somewhat less bullish news out of Shanghai. Despite the clear response of the
local economy to monetary and fiscal stimulus there are still clear questions
of over-supply and capital allocation in China.
<>

One of the things we have been looking for in the first few days of the 2nd
quarter is some evidence of new allocations to sectors that have recently
shown leadership. The retail sector is particularly interesting since
despite the nearly unanimous negativity surrounding consumer spending in
the US, the RELX index managed to rise over 5% in the first quarter. As the
attached chart shows this strength has followed through with the index
breaking above its 200 day ma for the first time since last September and
the index is almost exactly where it was last November at a time when the
SPX was as high as 1007. This degree of outperformance is shown by the
lower line which maps the RELX vs. the SPX Index.



(See attached file: D-RELX_Index.gif) - D-RELX_Index.gif

Another interesting data point from China. We are firm believers that rising
volume is the key metric to follow when looking for a recovery in real estate
markets (just as rising inventory is the key metric that precedes a collapse).
It is only one month and it is only one city but it is still potentially
significant.

The March China PMI data continues to show a rapid improvement in Chinese
industrial activity with the headline number (black line) coming out at
52.4 (up from 49 last month) which is indicative of a moderate expansion.
The New Order component (red line) came out at a robust 54.6 (up from 50.4
last month) and none of the 11 sub categories came in lower than 46.7. This
data should be well received by the commodity complex and material sectors
in particular.



(See attached file: D-CPMINDX_Index.gif) - D-CPMINDX_Index.gif

An interesting price of data. Brazil becomes one of the few global markets to
report a YOY increase in car sales. This supports our notion that several EM
economies are going to prove to be significantly more sensitive to conventional
monetary and fiscal stimulus than most developed economies.

While the overall March ISM Manufacturing report (black line on attached
chart) came in at 36.3 (essentially in line with estimates) a far stronger
showing was recorded by the New Order report (red line on chart) which came
in at 41.2. While this is still below the neutral reading of 50 it is a very
significant improvement on the record low reading of 23.1 recorded in
December or February's reading of 33.1. As the attached chart shows sharp
rebounds in New Orders typically precede a recovery in the overall ISM
index (for fairly obvious reasons) with the spread between these 2 indexes
never exceeding 10 in either direction (see lower chart). Today's data is
certainly supportive of the recent data trend that has suggested that the rate
of economic decline has substantially slowed during the 1Q 2008, but it still
comes short of indicating that a recovery has actually commenced. However,
given the extremely negative sentiment prevalent amongst investors,
industrialists and consumers this is still a significant report.


(See attached file: D-NAPMPMI_Index.gif) - D-NAPMPMI_Index.gif