From our perspective RE markets are all about transactional volume. This is
therefore a significant price of data that suggests that Manhattan remains some
distance off its low point for this cycle.

May's US New Home data had something for both the bulls and the bears to
chew on. The overall headline sales number came in flat at 342K, somewhat
below the consensus reading of 360K. However, when one considers that this
is annualized data off a 1 month reading this shortfall is perhaps less
troublesome than it appears. In any case it keeps sales activity moribund
at a 40 year low (see blue line on first chart) while also suggesting that
some stability is being found at this level of activity. Inventory (black
line on first chart) continues to shrink rapidly falling to 292K and
approaching a level that would start to signal a shortage of houses if any
up-tick in sales was to occur.

Perhaps the most interesting data in this month's report concerned average
prices paid for homes which actually recorded a substantial increase (see
black line on second chart). The 12 month ROC for Average New Home Prices
(green line on second chart) is now registering a drop of just -8.01%, a
far stronger showing than indexes such as Case-Schiller are indicating in
the existing home market. This echoes the point we made yesterday in
considering the FHFA Home Price data. There is an increasing disparity
between the "elective" non-distressed housing market and the
foreclosure/investor dominated transactional market. There is nothing
surprising about this and it can be expected to remain in place (and even
widen) for several months but it does mean that answering a question about
the "health of the US housing market" is getting increasingly complicated.


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

We do not normally pay a great deal of attention to the monthly Durable
Goods Orders since this data series tends to be extremely volatile and hard
to predict leading to a large number of "false signals" throughout the
course of a normal cycle. However, there is nothing "normal" about recent
months and if one smooths out the monthly readings into a quarterly signal
then a fairly straightforward picture of a rapid cyclical collapse and
recovery seems to be emerging. The attached chart shows a 3 month moving
average of the overall index (including transportation). As this chart
demonstrates the average quarterly activity fell to -6 during the first
quarter almost matching the low-point reached in the 1980 recession and
exceeding that of 1974/5 (red arrows on chart). The rebound from this
low-point has been equally impressive taking the 3 month average back into
positive territory at 0.47. Using 1974/5 and 1980 as guides this recovery
should now be expected to extend into strongly positive territory. In 1975
the 3 month average peaked at over 3% and in 1990 at over 5%. A rebound to
anywhere near either of these levels would represent a significantly
stronger economic performance than is currently anticipated by most
participants.



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

Sinopec Group Agrees to Buy Addax for $7.3 Billion (Update1) June ...

One of our main thematics over the medium term is the rampant monetary growth
in China leading to increasing attempts by Chinese corporations to gain control
of commodities "below the ground". This transaction is therefore an interesting
marker in this process.
<>

Today's release of the FHFA housing data continues to show a marked diversion
from other "free market" house price data such as the Case-Schiller index (see
attached release). The FHFA index fell by a mere 0.1% in April 2009 taking the
YOY decline down by 6.8%. By comparison the most recent YOY decline for the
Case-Schiller index (which is through March 31st 2009) shows a decline of
18.70%.

Conspiracy theories aside the most obvious reason for the discrepancy is the
relative lack of foreclosure sales in the FHFA data set, since the houses
included in this data are all subject to FNM or FRE purchases or refinancings.
In effect the US currently has 2 interrelated existing home markets, the
distressed arena where an increasing volume of foreclosed homes are sold at
heavily discounted prices to a mix of "users" and investors (the latter being
increasingly active) and the "traditional" market whereby an existing home is
sold by one occupant to another. Not surprisingly in the absence of distress
forcing a sale home prices fall rather less. We would suggest that both markets
need to be followed carefully in order to obtain a full picture of an
increasingly complex story.

The publication of the May CPI reading at -1.3% allows us to recalibrate the
"real" (ie CPI adjusted) 10 year note yield with the current data.
Interestingly this takes the current real yield up to 4.93%, the highest
reading since late 1994 (when it briefly reached 5.41%). The only prolonged
period of higher real yields was the mid 1980's when participants wrongly
anticipating a return to the very high CPI readings of the late 1970's and
early 1980's bid the 10 year note yield up to over 13%. At the current time it
seems that while participants have the right idea about the LONG TERM
inflationary impact of current monetary policy they have their timing off by
several quarters. We continue to believe that long term Treasury yields have
marked their high point for the current phase of this economic cycle. -
sg2009061749429.gif

We finally appear to have touched bottom in the important Building Permit data
series (which we far prefer to the more volatile housing starts alternative).
May's number came in at 518K, just beating the consensus data of 505K and
rising from April's (revised) 498K level. While the incremental change is
fairly insignificant as the attached chart shows this data series is highly
cyclical and typically marks violent "V shaped" bottoms and tops. Any turn at
the current level, no matter how minor is potentially significant particularly
against the backdrop of sharply dropping inventories. - sg2009061653496.gif

After dropping back very sharply in April to 591.8 Bln RMB (still a very high
figure pre-2009) Chinese new loan extension increased in May to 664.4 RMB, as
did the 12 month ma (purple line on chart) to 718.92 RMB (approximately $105
Bln). It is increasingly clear that much of this loan extension is being
directed towards tradable assets with the odds of a severe inflationary
hangover sometime down the road increasing significantly. Meanwhile enjoy the
party... - sg2009061215627.gif

No prizes for guessing the winner on today's Z1 report. Federal Debt
outstanding grew by $360.1 bln (5.6%) to $6,721. The annual ROC is now 28.63%
(the highest ROC since the data starts in 1952) and the only time that Federal
debt growth approached this level was in the mid 1970's and mid 1980's when
inflation rates were significantly higher. No doubt this dubious record will be
surpassed in coming quarters. - sg2009061145283.gif

The quarterly Z1 report was issued by the FRB today and so we have had a chance
to update our chart of Mortgage Credit vs. M2 Money Supply. To remind readers
Mortgage Credit had always been smaller than M2 up until the start of the
recent housing boom, and by the end of this period exceeded M2 by just over $3
Trillion. From our perspective this represents the (rough) sum of excess that
needs to be addressed - either by lowering the amount of mortgage credit or by
increasing M2.

Looking at the Q1 2009 data Mortgage Credit was virtually unchanged at $10,461
a drop of $2 bln from the last quarter (it should be noted that this vital
piece of data is a "residual" - ie is its value is implied by the rest of the
data that is actually collected) while M2 rose strongly by $193 bln to $8,316.
As a result approximately one third of the multi-year repair process has been
completed, although we strongly suspect that the residual mortgage data dows
not adequately account for the right offs and market-price drops of a
significant proportion of mortgage credit outstanding. If this is true then we
may have made significantly more progress than this imperfect "residual" data
suggests. - sg2009061144266.gif

Chinese Investment Surges, Countering Record Export Slump June 11 ...

We continue to see the powerful effects of Chinese stimulus rip through their
domestic economy. With local M2 growing at 26% YOY (and now totalling 95% of
total US M2 despite nominal GDP being only 25% as large) we should not be
surprised at such effects. Clearly at present the very strong boost to local
activity is being counteracted by a slump in export activity but given the
signs of global economic improvement that are increasingly present we doubt
this will continue to be the case.
<>

Some interesting sentiment data from the relatively new Bloomberg confidence
survey. Unsurprisingly it indicates that most survey participants are now
negative on the USD and Treasuries. We do not yet have enough historical data
to be sure that a "crowded" consensus has formed but in any case our opinion
was already that both the USD and long term Treasury markets are close to or at
their lows for this particular period.

As we expected China's massive (even reckless) expansion of M2 is having clear
stimulatory effects on market behavior.

One of the more notable aspects of the recent back up in Treasury yields has
been the fact that the super-long term 30 year bond led the 10 year note
higher. This can best be seen looking at the spread between 30 and 10 year
yields (yellow line on lower chart) that breached the key 100 level on a number
of occasions during the last few weeks. What is notable at present, is that at
precisely the time that participants have started to obsess about the spike in
treasury yields higher this spread has started to narrow significantly, falling
to 75 bp at the current time. This certainly suggests that the 30 year bond has
started to find price support (or yield resistance) at the 4.60% level and that
while the 10 year note may move somewhat higher in the coming sessions we are
far nearer the end of the rise in long term treasury yields than the begining.
- sg2009060846098.gif

With all eyes now directed to the Treasury market where yields are threatening
to break out across the curve it is important to keep some focus on some the
the perhaps more important credit markets that are typically priced off the
Treasury curve. In the current environment none is more important that the GSE
debt arena and the attached chart shows the spread to Treasury of FNM 4,7,10
and 30 year paper.

As can be seen the recent spike in yields has had a quite dramatic effect on
spreads. The crucial 30 year spread is now down to a mere 54 bp (approximately
100bp less than last December), the 10 year spread is 26 bp while both the 7
and 4 year spreads have INVERTED to -17 and -40 bp respectively. This latter
"impossibility" was something we had speculated could occur a couple of weeks
ago. We would note that we using generic bloomberg indexes and have now idea
how liquid the markets they are being priced off really are - but even if the
degree of inversion is overstated it shows that something quite unusual is
occurring in the GSE market, and that the knee-jerk assumption that higher
Treasury yields means higher mortgage rates needs to be modified accordingly. -
sg200906089130.gif

It is interesting to note that the RTY index broke out to new recovery high
today - before either the NDX or SPX have managed to do so. This may be a hint
that leadership has shifted down the capitalization scale as this recovery
rally continues to mature. - sg2009060455914.gif

This strikes me as the crucial paragraph. As one would expect Bernanke is
reasonably satisfied with the effects of his "Credit Easing" policy. There is
little indication in this speech that the back-up in Treasury yields concerns
him greatly at the current time and we would not expect to see any expansion to
the current facility for purchasing Treasury
Notes.
"In markets for longer-term credit, bond
issuance by nonfinancial firms has been relatively strong recently, and spreads
between Treasury yields and rates paid by corporate borrowers have narrowed
some, though they remain wide. Mortgage rates and spreads have also been
reduced by the Federal Reserve's program of purchasing agency debt and agency
mortgage-backed securities. However, in recent weeks, yields on longer-term
Treasury securities and fixed-rate mortgages have risen. These increases appear
to reflect concerns about large federal deficits but also other causes,
including greater optimism about
the economic outlook, a reversal of flight-to quality flows, and technical
factors related to the hedging of mortgage holdings."

April Pending Home Sales came in at 6.7%, far stronger than the 0.5% number
that had been estimated or last month's 3.2%. If we look at a 3 month ma
(red line on chart) to smooth out this volatile data series we can see that
this measure is registering its strongest average quarterly activity since
mid-2004. Of course overall activity in 2004-7 was substantially higher
making this month's rebound less meaningful in terms of aggregate units
rather than percentages.

Nevertheless the trend indicates a rebound in activity is underway and as
we have stated many times before a rebound in activity is a key metric of
repair in a real estate market (just as a collapse of activity is the
harbinger of sharply lower prices). No doubt many of the current pending
transactions are distressed and foreclosure sales and are being struck at
prices far below their highs but the only way markets clear is buyers and
sellers meeting in the middle/



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

Attached is a 12 year weekly chart of the MOVE Index which measures the
implied volatility of the 1 month Treasury option across the duration of
the yield curve (it is the equivalent of the VIX and VXO indexes for the
Treasury market). As can be seen the recent back up in long term Treasury
yields has been accompanies by a very rapid expansion in implied
volatility and at last night's close of 190.3 we had reached a level that
has only ever been exceeded during the height of the LEH crisis.

There are several points to take from this. Firstly there is clearly a
significant element of distress within the crowded Treasury market; spikes
in volatility such as this typically accompany forced unwinds of positions
as this supports our argument that the current yields are close to reaching
their climactic high at least for this particular phase of the cycle. It
also signals a continued willingness of participants to "pay up" for
implied volatility and (as with the VXO) readings tend to overstate the
amount of stress present within a market, at least if one is comparing them
to historical equivalents. Nevertheless we would remain alert for news of
any significant concentration of losses within any single institution, the
Treasury market is large and the spike in yields has been very expensive
for those caught on the wrong side of the trade.



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

There is no doubt that EM flows are getting frothy. Nevertheless this does not
indicate an IMMEDIATE correction. In this story they talk about flows being
strongest since February 2006 and how after that the MXEF collapsed. This is
basically true - but the index did not actually top out until early May some 3
months after flows peaked. Those who turned negative too early (and we were
included in this group at the time) had a very long and painful wait until
proved correct. As we have written before we're inclined to give these markets
until the end of June unless given a good reason to change our minds.

Today's release of the May ISM PMI Survey saw the Overall index (black line
on chart) came in at 42.8 (just above consensus 42.3) and so this key
indicator continues to demonstrate an improving tone to manufacturing
activity from the depths of the winter months. Of course 42.8 is still
firmly in negative territory but looking at the sub-indexes it is notable
that the "leading" groups such as New Orders (shown in red dotted line on
chart) (51.1), Backlog (48.0) and Exports (48.0) are showing the best
readings while "lagging" indicators such as Employment (34.3) have the
worst readings. All in all this can be taken to be an encouraging report
that supports the recent improvement in asset valuations.



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