There was some very encouraging data out of South Korea last night where
June's Industrial Production (top chart, black) was reported to have grown
5.7% since May (Not Seasonally Adjusted) compared to a consensus of 2.0%.
This means that the YOY decline (bottom chart, green) is now down to -1.2%
and should be able to force its way into positive territory later on this
summer. Once more we have a piece of data that suggests that the global
recovery is running appreciably ahead of consensus estimates.



(See attached file: M-KOIPI_Index.gif) - M-KOIPI_Index.gif

We have argued for several months that the idea that the US consumer had
permanently shifted its consumption pattern downwards was a complete fallacy.
The fact that a simple policy such as "cash for clunkers" should be able to
attract over 250K applicants in one single week is very powerful evidence that
our thinking is along the right track. Indeed we consider this news to be a
landmark event which surely will help shift consensus further towards our own
position.

Some interesting data out of the UK this morning where the Nationwide House
Price Index showed a monthly increase of 1.5% (1.3% on a seasonally adjusted
basis). This is the 3rd consecutive positive reading and as a result the annual
drop in prices (bottom chart) has now greatly moderated and is now only -6.2%.
This data certainly helps support our current pro-UK bias and we would note
that their retail stocks in particular have performed very well in 2009. -
sg2009073033754.gif

An interesting article on CRE risks that probably substantially overstates the
ultimate size of the problem. In the end it is going to be the ability of
commercial property to cover the cost of debt service that determines the
ultimate delinquency rate and not the price of the underlying real estate at
the low point of the cycle. Clearly any property that has insufficient income
to cover debt service will be foreclosed and in those cases we would expect
very considerable losses to be realized but we do not expect the ultimate
number to encompass anything like $2.2
Trillion.
Nevertheless a very large proportion
of CRE that was sold after (say) 2005 is or will be worth much less than its
purchase price, and in many case less than the debt. If everything had to be
re-financed today it would be a disaster but fortunately this problem will be
dealt with over the next 8 years, during which time both property prices and
liquidity in the mortgage market can be expected to recover (with today's news
on new TALF transactions bing an important marker in this process). Finally our
definition of a "relatively conservative buyer" (see text) is not someone who
bought a skyscraper with a concentrated tenancy at the top of the market in
2007. It is no surprise to us that transactions like this are proving to be
extremely problematic.

Today's Conference Board data gives us an excellent opportunity to
demonstrate what we mean by extreme sentiment being a leading but CONTRARY
indicator. As well as the headline index (which we have already discussed)
there are 19 sub-indexes that go into detail in various sub-categories. For
instance apparently 0% of consumers expect to take a vacation in the coming
months (tough news for travel agents - but this is somewhat of a joke
sub-category that fluctuates enormously).

More seriously the "Jobs Plentiful" Index (CONCJBP Index) came in at a
truly pathetic 3.6, just above the all time low of 2.8 registered in
November 2002. We do no doubt the honesty of those answering the poll, or
indeed its accuracy when viewed against a background of what has occurred
in the last 12 months, but this does not make it an accurate indication of
what may unfold going forward. In fact, if you plot the "Jobs Plentiful" index
against Continuing Claims for Unemployment over the last 40 years you find a
near perfect inverse-correlation between these 2 data series. This is shown on
the attached chart with "Jobs Plentiful" in black (RHS) and Continuing Claims
in red (LHS). As the chart demonstrates we still need to make a definitive low
in the "Jobs Plentiful" index but we have certainly fulfilled the need for an
extreme reading while Continuing Claims may already have peaked.

Regular readers will know that one of favorite our potential "macro shocks"
is the notion that the current employment cycle may prove to be much more
coincident and cyclical than the last 2 "jobless recoveries" and some
support for this notion can certainly be found in today's sentiment data.


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

July's Conference Board Consumer Confidence Index registered a small
deterioration to 46.6 (consensus 49.0). We find this neither surprising (other
measures of sentiment have also been weak for this period) or distressing. To
repeat our earlier advice: Sentiment readings are backward looking indicators
once they have either peaked or troughed. The only time they are useful forward
indicators is when they are at record or prior extreme readings - in which case
they are CONTRARY indicators. In a period in which economic and corporate data
is improving and equity markets breaking out we would simply ignore a small
deterioration which still keeps the index 20 points above its February 2009 low
- and that includes for consumer related sectors. - sg2009072836312.gif

May's Case Shiller house price index makes for interesting viewing since it
marks the first time since June 2006 that the Monthly index (black line,
top chart) rose from its prior level. Clearly we would want to see this
trend confirmed in future releases and at a bare minimum want to see the 3
month ma (blue line) force its way into positive territory prior to being
able to be sure that this index has bottomed, but it does seem that an
important turning point has been reached for this index. The annual reading
is still strongly negative but this is a reflection of the steep decline in
prices that took place in the September 2008 - March 2009 period and is not
necessarily a useful guide going forward.

Since this index includes foreclosure sales (and is in fact dominated by
them in cities such as Las Vegas and Miami) we have suggested that
improvements within it would lag other indexes (such as the FHFA) by
several months. What a stabilizing in Case Shiller would indicate is that
an acceptable "clearing price" for foreclosed units has been established in
many markets (something our recent field trip to Miami certainly
established was true in that market). As such stability may be followed by
a significant period of time during which volume of sales rise markedly but
prices only moderately, at least until the very heavy overhang of
foreclosed and currently merely delinquent real estate is absorbed. Even so
this would mark a very significant turning point in the cycle, and as such
today's data is in line with the other information that has been released
in recent days.


(See attached file: M-SPCS20M%_Index.gif) - M-SPCS20M_Index.gif

We continue our monthly tracking of home sales and inventory levels with a
discussion of the June sales data. Sales (blue line, LHS) came in at 384K,
an 11% increase on the feeble 346K recorded in May. This month's
improvement means that YOY sales are down 21.3% or 104K units. Sales are
also still 300K below the 45 year average for this data series.
Nevertheless this month's data creates an unmistakable "v" shape on the
monthly chart, although we would really want to see subsequent data get
above the 450K level in order to confirm that a definitive turn has been
established. This is of course a highly cyclical data series, with all
prior bottoms being followed by very vigorous recoveries.

This is of course highly relevant for inventory (black line RHS) which has now
fallen to 281K, just under 50% of peak inventory of 572K recorded in July 2006.
Even at the current pace of sales we are closing in rapidly on the November 1992
low of 262K, with the October 1982 low point of 246K clearly in sight. We
have made this point before but it is worth repeating - we are clearly
heading for a regional shortage of new single family homes by the end of
2009 and we would expect this to start to show up in the form of improving
margins for homebuilders in the Q3 and Q4 earnings statements.


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

The recent powerful move higher in the SPX has allowed the index to pass a
number of significant technical milestones. This is important because by and
large the technical and macro-strategic advice has remained strongly negative up
until this point of the recovery. With the current earnings season giving
the "bottom up" brigade some pause for (positive) thought the addition of more
constructive technical advice could help provide significant fuel to the next
stage of the
rally.
Attached are 2
charts of the SPX. The first shows the 2002-2009 time period thus allowing us
to look at the last 2 significant equity market recoveries. The 2nd chart looks
at the 1974/5 collapse and subsequent rebound (this has long been our favored
comparison period - readers who prefer the 1937/8 period can rest assured that
the analysis holds for that period as well).

Looking at the current recovery we can see that the SPX has finally managed
to cross its strongly declining 50 week ma and that weekly MACD has moved
comfortably into positive territory. The former is a measure of "location"
- how far the market has recovered from its March low and how far down that
low was compared to last year's index level. The latter is a measure of
Momentum - how quickly the index is moving higher or lower. The current
positive reading suggests that on a weekly basis the pace of the market's
recovery is actually accelerating at precisely the point that resistance
has been overcome. This is obviously a very significant development. It
takes a great deal of work to turn around the sort of negative plunge that
we experienced last year (note how much lower MACD got in 2008 compared to
2002) and once weekly momentum turns positive it tends to force its way
higher for a number of months. This was certainly the experience back in
2003 (the crossover in MACD and the 50 week took place in May) and back in
February 1975 (see 2nd chart) . As the latter period demonstrates the
subsequent recovery may be somewhat "nervy" but the 1976 peak was over 38%
higher than the 1975 crossover point. To put this into perspective a 30%
rally off the (roughly) 950 crossover point would take the SPX to 1235. We
would not try and force the issue in terms of actual projections but the
developments of the last couple of weeks do suggest that the upside for the
SPX over the next few months may be somewhat higher than the consensus
imagines.




(See attached file: W-SPX_Index.gif)
(See attached file: W-SPX_Index1.gif) - W-SPX_Index.gif - W-SPX_Index1.gif

With the NDX index and technology in general performing so much better than
the overall market it is interesting to see some "big picture" support for
this optimism delivered by Taiwan's June Export and Industrial production
data. Exports (black line on chart) which had been expected to record an
-18.70% YOY decline actually came in at -10.91% and rose 11.02% from their
May level. Exports to the US rose 9.6% and to China 10.05%. The very
closely related Industrial production data showed a similar degree of
improvement rising 5.84% on a monthly basis for a YOY decline (red line on
chart) of -11.35% (consensus was -16.01%). Interestingly production of
consumer goods showed a particularly strong 8.4% monthly increase and are
now UP on a YOY basis by 6.88%. This data suggests that the speed of repair
in consumer good production may be running ahead of some estimates.


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

It is well recognized that the SPX index has been stuck in a roughly 75
point range since early May. Opinion is divided, however, as to whether
this represents a healthy "pause for breadth" or the completion of a
temporary "bear market rally". Although the SPX is yet to conclusively
break out of the upper portion of its range the significant improvement in
breadth that has occurred in recent sessions suggests that the former more
optimistic scenario will prove to be the case.

As the attached chart shows the Bloomberg Cumulative Advance-Decline line
(TRADCANY Index) has decisively broken out of its own range which had
capped this index at the 36,000 level. Last night's reading at 40,182 was
over 10% above the range, enough of a margin to be able to talk confidently
of a breakout. From our perspective this represents a recovery of
fundamentally driven "bottom up" investment flows that have been encouraged
by the largely positive earnings season. Technically driven "top down"
flows however continue to place a cap on the advance of the SPX, with a
substantial amount of capital willing to sell the index each time it probes
the upper limits of its range. If the current earnings season continues to
progress in the way we expect (ie positively) we do believe that this
tussle will be won by the fundamental flows, with the likelihood of the type of
extended follow-through that typically comes after a protracted period of
consolidation.



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

We have written before about the disparity between the FHFA Home Price
index, which largely ignores foreclosure sales and that of the NAR and
Case-Shiller Index that are now somewhat dominated by foreclosure pricing.
Our argument is that we now have a largely bifurcated residential RE market
(trifurcated if you include the New Home market) and that this therefore
requires some imagination and diligence when following this unfolding
story.

Today's FHFA release shows purchase prices rising by 0.9%. This brings the
12 month ma (red line on chart) back up to -0.48% meaning that prices have
fallen by just under 6% over the last year. This metric should
continue to improve in the coming months. By comparison the April
Case-Shiller index showed a drop in prices of -18.12%. The truth is
probably somewhere in the middle but the FHFA data is ultimately a better
guide of where the true "clearing price" for residential real estate is
heading in non-distressed sales. Moreover, however high the eventual foreclosure
rate becomes (it is curetly just over 3% for all loans and just over 10%
for non-agency loans) it seems clear that the vast majority of homes will
not enter the foreclosure process. Today's data is therefore an important
marker since it does suggest an element of stability is forming in the pricing
of non-distressed residential RE.

(See attached file: D-HPIMMOM%_Index.gif) - D-HPIMMOM_Index.gif

Keynes Arouses Fed as ECB Looks for Monetary Exit: Mark Gilbert ...

Very good commentary that correctly focusses on the difference between the FRB
and ECB. No conclusions (reasonably enough) but it asks the right questions.
<>

Following the results of yesterday's Homebuilder Confidence index today's
June Building Permit Data saw a better than expected recovery off its truly
dismal May level. Nevertheless as we have argued many times recently, when
looking for cyclical turning points it is the shape of the chart that
matters not the actual nominal level that the turn is made from. In the
case of Building permits (and by extension housing starts) it does appear
that an important inflection point has been reached and this would make
sense since permit application has been running at a record low level in
absolute terms and also relative to actual houses being sold.

The attached chart shows Building Permits (black line, top chart) together
with the excess of Building Permits over Houses Sold (green line, bottom
chart). We have included long term averages for both data series (pink
band). According to this analysis even if the number of houses sold did not
increase Building Permits would still have to increase by over 450K in
order to normalize this relationship. This echoes our analysis of Housing
Inventory which suggests that unless building activity accelerates markedly
we are heading for a shortage of New Homes, at least on a regional basis,
by the end of 2009. We do believe that we are close to the point at which
this acceleration in building will start to occur, and as this charts
demonstrates this has always been one of the most cyclical of industries. A
return to the 50 year average would require almost 800K more Building
Permits, an increase of approximately 250% from the current level of
activity. Prior cycles have taken 15-18 months to improve from their low
point to the historic average and we do not expect this one to be any
different.


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

July's US Homebuilder confidence index (USHBMIDX) was reported as 17 (50 being
"normal") compared to an expected 16 and last month's 15. Clearly we would not
make too much of this mild overshoot it is worth considering the implications
of the attached chart.

The USHBMIDX has completed a mini "V" shaped bottom from its post LEH collapse
at 17 lst September, down to a low of 8 in January and back to 17 this month.
As with all such cyclical turns the key to focus on is the shape of the turn
rather than level that has been reached. We would feel more confident if the
index could push on through the 20 level in the coming report since this marks
both the low point registered in the 1990/91 housing slowdown and an area of
stability earlier in this cycle between the summer of 2007 and Spring of 2008.
Given the throroughly beaten up nature of this industry we would not expect
confidence in Future Sales (one of 3 sub-categories) to show an uptick but we
would expect to see both Traffic and Current Sales to show continued
improvement. It remains our belief that the homebuilding sector should be
exhibiting clear signs of improvment my the end of the 3rd quarter and today's
data is consistent with that belief. -
homebuilderconfidencejuly2009.gif

This morning's Continuing Claims data made for very interesting viewing
since it showed a dramatic and unexpected drop in the unemployment roll of
642K from 6915K to 6273K. Clearly a drop of this magnitude in one week
needs to be treated with suspicion and we see that some commentators have
pointed the finger at unusual large seasonal influence of car manufacturing
plant closures. From our perspective while we will have to wait will have
several weeks for confirmation of the actual magnitude of the drop the very
fact that this data series seems to have turned in direction is really the
key concept to grasp.

Attached is a 40 year chart of Continuing Claims (black line, top chart)
together with a 52 week (green line, middle chart) and 13 week (red line,
bottom chart) ROC. As can be seen the destruction of employment this cycle
has been far worse than either of the 2 prior recessions and is instead
similar (on a percentage basis) to the destruction experienced in 1974/5
and somewhat worse than 1980/2. This is important since while the last 2
economic recoveries were relatively "jobless" (although less so than was
complained about at the time) the recovery from 1974/5 was a violent
inverted "V", as was the recovery in 1982. This makes sense since very
hurried decision to shed labor made at the height of a crisis are clearly
more likely to be reversed once the crisis dissipates than a more
considered and shallower corporate restructuring.

Therefore while most commentators argue that it is hard to envisage a
strong recovery in the face of the awful employment data it is possible
that such a view ignores the reversible nature of at least a portion of the
massive job losses suffered in 2008/9. If we are correct then once
Continuing Claims decisively turn (which they appear to have done) a sharp
recovery down to their prior "peak" level (somewhere between 3.75-4.00
mln.) could be expected to unfold. One thing is for sure this data series
will bear close scrutiny for the rest of the summer month's.



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

Chinese Money Supply data for June 2009 was released last night and once
more confirmed the scope of the Chinese monetary stimulus that has been
unleased in recent months. M2 (top line, black) increased by 3.77% over the
course of June boosting the 12 month ROC to a record 28.39%. It would
appear that far from holding back in the face of some clear evidence that
speculative have re-emerged in local capital and property markets the Chinese
authorities are responding to a collapse in their export economy by actually
accelerating monetary growth.

The scale of these efforts can perhaps be best understood by comparing the
size of Chinese M2 to that of the US. China has a nominal GDP that is
approximately 25% that of the US and yet by the end of June Chinese M2 was
only $20 Bln less than that of the US, essentially a rounding error. With
no end to the current stimulus in sight it seems likely that by the end of
summer Chinese M2 will be substantially larger than that of the US. Even
allowing for the fact that the US contains far more "M3" type money than
China (institutional money market funds, large time deposits and repos
being the primary examples) there would seem to be a considerable excess of
broad money building in China that will have considerable inflationary
consequences several quarters down the road. The largely closed nature of
the Chinese financial system makes judging its effects on global financial
flows more tricky, but with this much money being created in so short a
period of time we suspect that this is a topic that requires rather more
attention than it is receiving at the current time.


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

Given that our own industry sources tell us that grade A office space is
available in the mid $40's and grade B in the mid $30's in the sublease market
it seems that Landlord's are going to have a very hard time keeping
direct-lease rents anywhere close to the $60 mentioned in this story.

The ECRI Weekly Economic Indicator is starting to suggest that a robust
recovery for the US economy is taking hold. This data series uses a variety
of components including:

Money Supply (M2 plus)
The J.O.C. industrial materials price index
Mortgage loan applications
10 year treasury bond yield/BAA corporate bond yield
Stock price index
BAA corporate bond yield
Initial claims for unemployment insurance

in order to gauge the future direction of the economy. The data shown in
red on the attached chart is the smoother annualized growth rate which this
week reached 5.8%, the best reading since July 2007 (at precisely the time that
the BSC mortgage funds suddenly imploded right). This data is very cyclical and
has an excellent correlation with actual business cycles. Perhaps more
importantly this data can be seen to be very well correlated with actual equity
investment cycles. The attached chart shows the 52 week rate of change for the
SPX index (black) together with the ECRI index (red). This certainly suggests
that the SPX is capable of moving back into positive YOY returns later this
summer. Of course this will become a substantially easier task as the
pre-LEH debacle price levels start to fall off the annual comparisons but
we do feel that the odds of a fairly straightforward "V" shaped recovery for
the US economy and the potential for further equity appreciation are
underestimated at the current time.


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

The July Michigan Consumer Sentiment Index came in at 64.6 versus an expected
70.0 and June figure of 70.8. While on the surface this data is dissapointing
is is not necessarily significant. Looking at the attached chart of the entire
30 year history of this survey we can see that the 2 prior times consumer
sentiment collapsed (1980/81 and 1990/91) were followed by somewhat "noisy"
recoveries.

Since the turmoil of 2009/9 clearly exceeds either of these periods (we would
need to see 1974/5 or 1937/8 data to have a more relevant comparison) we should
not be surprised to see consumer sentiment bounce around any more than we are
suprised that investor sentiment or VXO index show the same trepidation. To
remind our readers sentiment responds to clear data (ie it lags key
developments) and is a CONTRARY indicator once it reaches extremes. This data
series "did its job" back in November and February when its lows marked the
peak crisis for the credit and equity markets respectively. We would only be
concerned if it retested these levels - although for this to happen we would
already have been overwhelmed by a slew of negative corprorate and economic
data and presumably undergone a substantial correction. - sg2009071036667.gif

The rolling crisis in CRE continues to grind onwards and we still believe that
the ultimate foreclosure rates will be substantially higher than the consensus
view.

It does not take much of a market move to impact sentiment at the moment
with a relatively shallow correction in the SPX taking the net AAII poll
reading all the way down to -26.74, the lowest reading since March 12th.
Interestingly all 3 categories are almost identical with their March 12th
levels (Bulls 27.91 vs. 27.64 Bears 54.65 vs. 54.47 Neutral 17.44 vs.
17.89) and it therefore seems that sentiment has run ahead of market
conditions at the current time and those participants polled are anticipating a
fairly deep correction in advance of actually seeing one. This chimes with
other such measures as option skew which show a significantly higher price
being paid for out of the money put options than calls at the current time.

There are of course 2 ways to interpret such data. On the one hand it could
be argued that participants are rationally pricing in the greater than
normal risks that exist in the current environment. An alternative (which
we ourselves favor) suggests that risks which are widely discussed and to
an extent incorporated into portfolio construction and hedging tend to lose
a good portion of their effect even if they come to pass, and leave room
for upside in the event that they fail to occur. We therefore see today's
reading as supportive of our belief that even if the SPX broke down out of
its 875-950 range the ultimate correction would be fairly shallow compared
to collapses of late 2008 and early 2009.



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

With earnings season about to commence the SPX is uncomfortably close to
important support at the bottom end of its recent 2 month range. We note
that MACD has just slipped into negative territory and while the current
level is still indicating consolidation rather than correction this is a
significantly worse reading than was in place when this support was
established in early May. The index still gets the benefit of the doubt
while support remains intact but should support fail to hold then it
becomes much more likely that a corrective move that retraced a reasonable
portion of the March to June gains has commenced.

Using Fibonacci levels as a guide a moderate 38.2% correction would take
the index down to 845, a 50% correction to 811 and a more severe 61.8%
correction to 777. We are not expecting the latter to occur but it remains
a technically feasible target.



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

We are finally seeing some better data out of the lagging Eurozone. today's
release of French trade data showed that Exports (red line) rose by 4.5%
from April while Imports by a smaller 0.3%. Both measures remain sharply
down on their pre-crisis levels (-18.7% and -22.3% YOY respectively) but
this is of course priced into the current marketplace. From this point on
it is all about the pace and scope of recovery and while we do believe that
the Eurozone is still somewhat handicapped by the relatively restrictive
ECB we would expect to see signs of improvement in the months ahead.


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