An interesting and (to us) unsurprising piece of data. One of the first clear
signs that the pace of hiring may actually be increasing, as well as the pace
of firing decreasing.

It is no secret that the current recovery rally has taken place against a
backdrop of disbelief and distrust, despite the fact that it has delivered
returns of over 50% to those that exposed themselves to its beneficial
impact. What is perhaps surprising is that some participants have, if
anything, hardened their antipathy in recent weeks. We base this assertion
upon a consideration of recent activity in the VXO Index.

On the surface nothing has actually been happening in the world of OEX
index options since the VXO remained trapped in an extremely tight range in
the mid-20's. But it should be remembered that the VXO measures the level
of Implied Volatility of index options and in setting the price of these
options participants will typically reflect upon the recent
Historical Volatility of the underlying Index (we would use 30 day
Historical Volatility as a fair comparison). This is where things get more
interesting since in the face of this resilient rally 30 day Historical
Volatility (HVG) has fallen sharply in the last few weeks, leading to a
significant gap developing between the VXO and the 30 day HVG. This is
shown on the top chart where the VXO is in red and 30 day HVG in black.

Indeed one way to measure the "Under" or "Over" pricing of the VXO is to
simply look at the spread between the VXO and 30 day HVG as a Percentage of
the price of the VXO Index. We show this relationship in blue on the lower
chart and as can be seen at Friday's close the VXO was 39.98% "Overpriced".
Of course this disparity can be resolved in two distinct ways, either HVG
can move higher (which normally happens in a market correction) in which case
participants would be vindicated for "overpaying" for their options.
Certainly those who believe that September is traditionally a difficult
month will hope that this proves to be the case. On the other hand a
further rally could lead to a liquidation of protective option positions,
which would generate a downward shift in the VXO.

On the basis that the market tends to move in the direction that causes
most consternation our money would be on the latter scenario unfolding.
Outside of some concerns regarding the Chinese equity market it is hard to
see where the bad news is going to some from in the next few weeks. Recent
economic data has tended to run ahead of consensus and the only earnings
surprises have been positive, with even some top line growth reported by
certain retailers last week. Any bad news will therefore have to come "out
of left field", and while this is possible it is (by definition) less likely.
From our perspective protection is therefore probably overvalued in the
marketplace.


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

The ECRI Weekly Leading Indicator Index continues to force its way higher,
reaching 19.6 this week and therefore surpassing the levels reached in the
1982/3 recovery. The only period to see higher readings over the last 40
years was the 1970/71 recovery. It no longer matters exactly where this
indicator peaks since it has already given an unambiguous signal that
something fairly exciting is going to occur in the US economy. Given the
past relationship of the ECRI Index with returns in the SPX Index we would
expect to see a positive 52 Week ROC of somewhere at least 40-50%
registered by the SPX in the coming months. To put this in perspective the
SPX would register a 50% annual return if it hit 1125 in late November 2009
or 1,200 in January 2010 or (more negatively) 1,000 in March 2010. The
first 2 scenarios no longer look remotely fanciful and of course none of
them are mutually exclusive.



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

In recent weeks we have not bothered to comment on the FRB balance sheet
since its size has only fluctuated moderately around the $2 Trln. level and
the changes to its constituent parts have become well understood and
predictable. This does not of course mean that nothing has been happening.
Since the start of the year a number of the "Emergency" CRedit Easing (CE)
facilities have been allowed to run off considerably, most notably the Foreign
Central Bank Facility (blue line) which has fallen by more than $500 bln to a
mere $60 bln, the Commercial Paper Facility (maroon line) which has fallen by
over $725 Bln to $52 Bln and the TAF which has fallen by over $275 bln. to $221
bln.

These reductions have been almost exactly matched by the creation of the
"Permanent" portions of the CE policy, the expanded holdings of
Treasuries (light blue line), which have risen by approximately $270 bln.
and the creation of the MBS Facility (pink line) which is currently $624
Bln, almost exactly half its intended target of $1.25 Trln. TALF is so far a
minor issue at $35 Bln and seems unlikely to ever get close to its target of $1
Trln.

The first point we would make is that far from being neutral for the US
economy these changes represent an injection of approximately $500 Bln,
since the funds sent to Foreign Central Banks at the end of 2008 did not
add to US liquidity but their replacement by the MBS Facility has clearly
done so. In other words as far as the US monetary system is concerned we
would argue that as much liquidity has been added since January as was
added in the dark days of October - December 2008 (both periods saw
injections of approximately $500 bln).

The second point that we would make is that if the FRB does indeed
implement the full extent of its MBS and Treasury Purchases then fairly
soon the FRB balance sheet will once more start to grow quite rapidly. This
is because the major sources of offsetting reductions have become seriously
depleted. A further related effect would presumably be another spike in
Excess Commercial Bank Reserves (green line on chart). These are already
uncomfortably high at $833 Bln. and have resulted in the percentage of cash
and Treasuries on Commercial Bank Balance sheets reaching over 25% (see
chart). With clear signs of an economic recovery developing this additional
monetary stimulus may prove unwelcomely "effective" and the ability of the
commercial banking sector to supply credit once the willingness to do so
and demand for credit becomes more tangible could well result in very
significant private sector credit growth later on in this cycle. Before
this process becomes troublesome in terms of inflationary pressures (our
guess is that these are still probably 18 months away) it is likely to
allow valuations in assets that are traditionally users of leverage to
appreciate quite rapidly.


(See attached file: W-FARBCRED_Index.gif)

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

The Nationwide UK House Price Index rose 1.6% last month compared to 0.5%
survey. Annual change now -2.7% (-3.9% survey). The UK home market seems to be
recovering far faster than was expected at the height of the crisis. -
sg2009082736285.gif

Regular readers will know that we have a high regard for the Continuing
Unemployment Claims data since we believe it is the best single statistic
to follow in order to understand where we are in the employment cycle. This
is not to say that it is flawless since it does not capture the long term
unemployed. It is also subject to massive seasonal adjustment (reasonably
since much employment is seasonal in the US) which can make it hard to read
a signal over the short term.

Having said that, the message coming out of Continuing claims appears to be
straightforwardly bullish, at least going forwards. Our thesis is that the
recovery in employment will be much more coincident with the recovery in
the economy and also far more powerful in scope that we saw in the last two
"jobless" recoveries and we are using the 1974/75 cycle as a rough
template. This suggests that Continuing claims could fall to something like
3.5 to 4.0 Million by the end of 2010. We know this may seem fanciful but
it is historically consistent with a recovery off the sort of crisis we
experienced last year. Looking at the chart we can certainly see that a
decisive turn has been made. The overall number (seasonally adjusted) has
fallen to 6133K, a drop of over 9% over the last 13 weeks (see red line) and
the 52 week ROC (green line) has also signalled a decisive change. Furthermore,
we have noted that the Weekly Continuing Claims data has consistently beaten
consensus estimates over the last 3 months, even as these have been adjusted
downwards.

In a cycle of this magnitude it also makes sense to look at the Non Seasonally
adjusted data. Again a decisive turn appears to have been made that goes beyond
the scope of the typical summer hiring season, with the 12 month ROC (green
line) registering a sizeable drop similar in scope to that at the start of the
1974/5 employment recovery. We would advise readers to keep a close eye on
this data in the weeks ahead.



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

The July New Home Sale data was wholly positive with overall sales rising
by 9.6% to 433K (highest reading since September 2008), the second
consecutive month of rapidly increasing sales. Note that the Average rate
of sales since this data starts in 1963 is 688K and so having finally
established a "V" shaped bottom in activity we would expect to see a very
rapid rate of expansion in the month's ahead. Unsurprisingly Inventory
continues to shrink, falling to 272K units, the lowest reading since April
1993. Note that only 120K of this represents completed homes and this
number has fallen at an annualized rate of over 50% over the last 6 months.

With sales rising and inventory falling the Inventory/Monthly Sales ratio
(red line on chart) is also finally collapsing. As we pointed out several
months ago this is always a lagging indicator of the housing market and
should sales continue to rise in the manner we anticipate we would expect
to see this ratio fall below 5 months (a good definition of "tight" supply)
within a few months unless home-builders substantially increase the pace of
home construction.


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

Due to their inherent volatility Durable Goods are one of the hardest data
series to make use of. Nevertheless by using a longer term moving average
it is possible to discern the cyclical pointers beneath the monthly noise.
Attached is a chart of the 12 month moving average the Monthly Change in
Durable Goods (Including Transportation) which shows both the extent of
collapse and an unmistakable beginnings of a "V" shaped bottom. The extent
of decline this cycle exceeded even the collapses of 1974/5 and 1981/2
(although much higher inflation during those periods does reduce the extent
of nominal decline when compared to the current time period). Both those
periods were followed by very strong periods in which the 12 month ma moved
above 2%, signalling an annual increase of over 25% in Durable Goods
orders.

Note that even after this month's very powerful 4.9% rise Durable goods
orders are still down over 22% over the last 12 months with the 12 month ma
at -1.97%. We would expect this number to move back into positive territory
in the months ahead, partly due to the "dropping out" of the very weak
data that was released during last Fall and Winter but also, more
positively, because we expect Industrial activity to continue to accelerate
from this point on.



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

The August Conference Board Consumer Confidence Index came in at 54.1 somewhat
better than the expected 47.9 and repairing the damage of the prior 2 months.
Regular readers will know that we try not to make too much of readings on a
monthly basis and it is suffice to point out that today's reading keeps the
strong "V" off the February 2009 low (25.31) intact. Interestingly there is a
wide disparity between the "Current Confidence" at 24.90 and the "Future
Confidence" at 73.50 but this has happened before during prior recoveries and
in fact the spread has at times been even
wider.
What is always more interesting to us is
readings that can be classified as "extreme" either at high or low levels,
since at extremes Consumer Confidence tends to be an excellent leading CONTRARY
indicator. In this regard the "Jobs Plentiful" reading still stands out at a
pathetic 4.20, which is at least an improvement on last month's 3.70. As one
would expect extremely low "Jobs Plentiful" readings have tended to correlate
with the low points in employment cycles. Attached is a chart with the index
(top line, Blue) and the Continuing Unemployment Claims (bottom line, green).
Obviously the Confidence line would have to rise sharply in the coming month's
to establish that a turning point has been reached but during prior cycles this
index has not spent much time in the low single digits. - sg2009082548369.gif

The FHFA price index shows a slightly different picture to the Case Shiller
data. The FHFA index bottomed earlier and suffered a far shallower drop in
price from which it is recovering slowly. This is because this index
largely tracks non-distressed sales and refinancings (foreclosures are not
excluded but are overwhelmed by the large number of refinanced properties
in the data set).

The 12 month drop in prices (green line) is now less than 5% in this index
and the quarterly data (red line) is back in positive territory. Regionally
there is more dispersion of results with 4 of the 9 regions registering
moderate drops in price (Mid Atlantic was worst with -0.95% drop) and 5
regions registering rises (SE Central best with a 3.44% rise). Overall we
would describe this data as being consistent of national housing market in
the early stages of repair.


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

The June data for the Case Shiller Price Index continues to show the effect
of "clearing prices" being established in a number of important
Metropolitan areas. The 20 Metro Index index rose 1.39% from March and is
now up on a Quarterly basis (red line on chart) for the first time since
the middle of 2006. Prices rose in 18 out of 20 districts (Las Vegas and
Detroit being the only areas to record a drop in prices). As we have
commented before the Case Shiller Index is a far better guide of the
foreclosed house market than the "non-distressed" housing market (we would
use the FHFA Price index for the latter and this is due to be released
later this morning).

Today's data is probably most relevant for the smaller commercial banks
that still are at the center of the residential housing crisis clean up. It
is our belief that current peak delinquency rate and recovery rate
assumptions overestimate the actual numbers that will be recorded in the
months ahead. The news out of the distressed housing market will continue
to get worse (as Fitch reported yesterday) but it will crest earlier and
lower than most people imagine at the current time and this suggests that
the smaller regional banks should ultimately suffer less losses than are
currently being estimated.



(See attached file: M-SPCS20_Index.gif) - M-SPCS20_Index.gif

It is several weeks since we sent out a chart of the ECRI Weekly Leading
Indicator Index (red line, bottom chart) together with the 52 Week Rate of
Change (black line, top chart) and it is worth updating this relationship.
The ECRI Index has subsequently soared to 17.5%, the highest level since
1983 and there is a chance that this index will challenge the 21.60 level
reached in May 1971. As the attached chart shows strongly positive readings
in the ECRI are highly correlated with a strongly rising SPX Index (for
fairly obvious reasons). Of course the 52 Week ROC in the SPX will start to
rise strongly from mid-September on (due to the Lehman crisis price points
falling out of the data) even if the market stays where it is, but there is
increasingly strong evidence to suggest that current equity prices do not
fully reflect the potential strength of the recovery.



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

Today's Existing Home sale data is a further pointer that the "New Normal"
(which imagines that the US consumer has permanently down shifted its
consumption pattern) may in the end be about as fondly remembered as the
"New Economy". Certainly looking at Single Family sales we can see that a
clear "V" shaped bottom has been established with sales rising 6.47% to
4.61 Million based on July's data. This is the strongest reading since
August 2007 and takes sales comfortably above the 12 month ma. It also
takes the 12 month ROC (green line, bottom chart). As we have written
before rising sales is the best indication of an improving RE market and we
appear to have reached the point at which this is apparent several key
markets.

The data on condos and co-ops makes even more fascinating reading. This
sub-market is dominated by foreclosure sales to an even greater degree than
the single family home market. In a number of key markets we have
established "clearing prices" for foreclosed units at which buyers and
sellers are willing to transact in significant volume. As a result Sales
have rebounded over 30% from their January 2009 low point and rose 12.50%
in July from June to 630K. At the same time the Inventory of condos and
co-ops has spiked to a new all time high of 791K units. While on the
surface this looks like bad news what it represents is the foreclosure
process kicking up a gear and banks actually being willing to list
properties held in REO for sale. This is of course extremely positive since
it implies that banks will be able to cut the amount of time that "dead
capital" is tied up holding foreclosed property and we think this is
particularly important for the smaller regional banks. The rise in Average
Price is probably reflecting a shift in the type of unit being sold but it
does also indicate that the "clearing price" in many markets has stabilized.


(See attached file: D-EHSLSL_Index.gif)
(See attached file: D-ECSLSL_Index.gif) - D-EHSLSL_Index.gif -
D-ECSLSL_Index.gif

The August Philadelphia Fed survey contained surprises both at and below the
surface. The overall index came in at 4.2%, the strongest reading since
November 2007 and this suggests that July's weak -7.5% reading may have been
something of an aberation (even "V" shaped recoveries have air-pockets).
Perhaps more suprisingly the Inventory sub-index also recovered very strongly.
It has been anotable feature accross PMI surveys in recent months that
inventory data has been far weaker than other categories. We would be careful
of putting too much trust into any one data-point but the movement of the
Inventory sub index into positive territory (0.30, up from -15.40 last month)
for the first time since July 2007 counts as a major surprise. -
phillyfedinventoryaug09.gif - phillyfedoverallaug09.gif

We view the UK as a more extreme version of the US in the current cycle and
therefore the resilience of UK retail sales in the face of a traumatic
couple of years is an important piece of data to consider. July's data
showed a small increase of 0.4% from June (unusual given the seasonally of
retail sales) and this allowed the annual ROC to rise to 3.3%. It is
interesting to note that although this has undoubtedly been a much more
severe recession in the UK for the overall economy than that experienced in
1990/91 retail sales have actually held up far better this time around. One
clear explanation is that the UK has an extremely high home ownership rate
and the vast majority of mortgages are variable rate loans. With UK
interest rates at historic lows this has the effect of considerably
increasing disposable income available for non-housing related expenditure.
Of perhaps more importance is the fact that UK consumers are willing to
consume. There is little evidence of any "new normal" constraining
consumption patterns in the UK and we expect the same to be true of the US
counterpart by the end of 2009.


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

Manhattan Office Sales Ground to Halt in First Half, CBRE Says Aug ...

As we have pointed out on numerous occasions it is volume that measures the
health of a RE market. The Manhattan office market is clearly as sick as they
come on this basis and we would expect a wave of distressed activity over the
coming months. At the same time this is now quite well understood by the
capital markets.
<>

Today's Housing Start and Building Permit data was in line with yesterday's
NAHB Confidence index. In other words it indicates that an important turn
in the housing cycle has been established but this turn is yet to develop
into a substantial uptick in activity. The attached chart shows Single
Family Building Permits since this really is the most interesting part of
the industry (we would expect Multi-Family starts and permits to lag any
recovery by several quarters) and July's data showed a continued steady
improvement with Permits issued rising from 482K to 490K. As the chart
shows this is still a remarkably low level of activity and even though
Permits issued are some 35% higher than the record low recorded in February
they remain below the prior historical trough recorded in the 1980/82
housing collapse. More positively, monthly activity has managed to pass
above its (still falling) 12 month ma (red line) and the 12 month ROC
(bottom chart in green) is also starting to recover strongly.

Our view has long been that builders will wait until clear signs of
improved sales activity have been established prior to ramping up building
activity, and that by the time this occurs Housing Inventory is likely to
fall to a very low level. In the end this will provide scope for
significantly increased activity (for instance Single Family permits are
running at less than 50% of their historical average) and perhaps even
some gross margin expansion but it will require some more patience before
this becomes apparent in the data.


(See attached file: D-NHSPS1_Index.gif) - D-NHSPS1_Index.gif

The overall NAHB Sentiment Index reading for August came in as expected at 18,
which represents a modest improvement over last month's reading of 17 and a
decent run up from the record low reading of 8 that was reported in January.
Clearly we are still in deeply distressed territory and we would need to see
readings above 20 before we could even start to talk about something truly
encouraging at the overall index level.

However, when one looks at the Future Sales sub index (attached) there are some
greater signs of improvement. The Future Sales index has reached 30, exactly
double its record low reading in February, the highest reading since April 2008
and the 2nd highest since October 2007 when the credit crisis really started to
get into gear. We would still require to see this index break convincingly
through the 30 level in the next couple of reports but the recent improvement
has already changed the direction of the 12 month ma (red line) and this has
proved to be a reliable signal in prior homebuilding cycles. -
sg2009081750109.gif

Last week's note warning of signs of weakness in the Chinese equity market
proved to be accurate. The SHASHR index took out its 50 day ma at the end of
last week and suffered a further sharp fall of -184.96 (-5.78%) last night, its
worst single session since November 2008. This fall has taken the index right
down to its "last ditch support" at the 3,000 level, but given the speed of the
decline it is understandable why other markets are not waiting to see if this
support will hold.

Looking ahead to the next couple of sessions we would expect the majority of
the pressure to fall on the emerging market and commodity complexes. We will be
watching for signs of relative strength in countries and sectors which should
give some important clues as to leadership in the next stage of the rally. Our
hunch is that these will be concentrated in developed markets but we will have
to wait and see. - sg2009081726505.gif

One of the most striking aspects of the current cycle is the extent to
which business inventories have been drawn down. Today's data shows that
June 2009 was the 10th consecutive month that inventories have fallen
although the 1 month drop of -1.12% was the smallest since November 2008.
As the attached chart demonstrates the 12 month ROC (green line) is now a
record -9.8% (far worse than was experienced during the 15 month drawdown
betwen February 2001 and April 2002) and is likely to continue falling for
the next couple of months. The 3 month ROC is still strongly negative at
-3.59% (an annualized rate of -14.4%) but this shorter term indicator is at
least hinting at a change in direction. From our perspective the negative
aspect of the inventory drawdown is already fully reflected in the 2nd
quarter corporate earnings and macroeconomic data. What is more interesting
is the potential boost that slender inventories offer for a powerful
rebound should any uptick in corporate and retail sales be registered. We
suspect that the latter part of 2009 may be punctuated by bottlenecks and
subsequent hurried re-allocation of human (ie re-hiring) and physical
resources should things play out in the manner we anticipate.



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

Despite our current preference for Developed market equities strong inflows
into Emerging markets clearly make further gains possible. Interestingly Brazil
is the only one of the 4 BRIC markets to be making a new high, the other 3 have
suffered either moderate (SENSEX) or relatively significant (SHASHR and RTSI$)
corrections. Narrowing breadth is normally a reliable indicator that a trend is
starting to lose its power and so it will be interesting to note whether the
other 3 markets (and other major markets such as KOSPI, JALSH and MEXBOL) can
follow Brazil to new recovery highs. - sg2009081332984.gif

An excellent indication of how far risk appetite has swung back towards seeking
opportunity in recent weeks.

In recent weeks we have noted far more commentary being directed towards
China with a fairly straightforward battle of committed capital between a
"mainstream consensus" which believes that the current stimulus represents
an excellent investment opportunity and "alternative consensus", which
believes that the authorities will attempt to cool the recent strong
rebound in asset markets. Our own feelings are that the "alternative
consensus" may prove right in the end but is several quarters ahead of
itself (our favorite definition of a "bubble" is a speculative appreciation
that wipes out an awful lot of smart people along the way). Nevertheless it
is clearly possible that the local equity market could suffer a significant
short term pullback, and that this could easily spill over into the wider
emerging market and commodity complexes.

In this regard it is worth noting that the SHASHR Index fell 4.66% last
night and is now within touching distance of its 50 day ma. This indicator
has offered important trend support throughout the strong recovery rally
and a violation would therefore be a significant negative technical
development. We would use the 3000 level as a "safety net", below which we
would be targeting 2785 or 2571 which represent 38.2% and 50% retracements
of the recovery rally.



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

Today's release of US Wholesale Inventory data continued to show the highly
unusual nature of the current cycle. There simply is no modern day
precedence for a 10.3% drop in inventories over a 12 month period and yet
this is what has occurred over the last year (see green line on middle
chart). Meanwhile although the shorter term 3 month ROC (red line, bottom
chart) has started to turn from April's low point of -4.77%, recovering to
-4.17%, it remains strongly negative. It therefore appears that with clear
signs of improving demand in a number of industries production is
insufficient to keep inventory levels from falling further.

Although we understand the reticence of manufacturers to trust the
improving data that has recently appeared we think it unlikely that this
de-stocking process can continue for much longer without triggering a
fairly substantial upward adjustment to production.


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

Last night's release of Chinese July Monetary data made for interesting
reading (as did the trade and retail data which we will address in a later
comment). Chinese M2 rose a relatively modest 410 bln RMB (0.72%) but this
still kept the YoY rate of change up at 28.4%. This increase was also
enough to push Chinese M2 past US M2 for the first time in history, an
event that deserves somewhat more fanfare than it has recently been
receiving.

Of course most of today's headlines have been concerned with the large drop
in New Loan Issuance which dropped from 1530.4 Bln RMB to 355.9 bln RMB,
somewhat below the 500 bln that had been anticipated. This is of course a
very volatile data series and for this reason we have been using a 12 month
ma to smooth the data. The 12 month ma remains at 816 Bln RMB , a sizeable
increase over the pre-crisis level of credit creation. and it would take
several months of lower loan growth to take the average lower. In short it
is too soon to conclude anything about the future direction of this measure
and in any case it would be unrealistic to expect loan growth to have
remain anywhere close to the remarkable levels seen earlier this year.

We also note that a great deal of attention has been drawn to the
coincident rally in Chinese equities and we are starting to see the "B"
word re-attached to China we have attached an additional chart that looks at
Chinese New Loan creation as a percentage of the combined market cap of the
Shanghai (SHASHR) and Shenzen (SZASHR) Indexes. This makes interesting
viewing since it shows that the direct impact of new loan creation on the
domestic Chinese equity market may actually have been somewhat less than
many people estimate since the size of the domestic equity market, even
after the savage correction of 2007/8, remains significantly larger than it
was in the middle of this decade.

Our view remains that the short term dangers associated with China are
somewhat overstated at present. Although the level of domestic activity is
improving it remains sufficiently damaged to encourage the authorities to
continue to stimulate. We do have very significant longer term concerns
about Chinese monetary policy but if this is indeed the start of a "manic"
excess then it will take several months, even quarters to reach its true
destructive potential.




(See attached file: D-CNMSM2_Index.gif)

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

The effect of the seasonal adjustments connected to the auto industry dropped
out of the continuing claims statistics today and only had a moderate effect on
the resulting total of 6310K. This is important since it leaves our thesis of a
more rapid, coincident and substantial improvement in employment intact.
Clearly tomorrow's Non-farm payroll report will be viewed as the "senior"
employment statistic but we would caution that continuing claims actually have
a far better historical record in terms of predicting turns in the employment
cycle - no doubt because they are subject to significantly less statistical
adjustment. - sg2009080630847.gif

All the excitement surrounding the speculative excess that has been encouraged
by the powerful Chinese monetary stimulus arguably misses the point that if
this is indeed the beginings of a new "manic" phase (we suspect it is but are
staying open monded) then such episodes are typically far longer lasting than
most "smart money" anticipates and also in the end overwhelmed by supply as
much as tighter monetary conditions. A significant increase in the supply of
new land would therefore be an interesting development - but this land would
still take at least another 18 months or so to be turned into new property once
it was in the hands of speculative developers.