The Initial and Continuing Claims data continues to support the notion that
US employment has stopped deteriorating in the 4th quarter. Initial Claims
were reported at 432K, the lowest reading since July 18th 2008 and well
below the consensus estimate of 460K. The current level of claims is
roughly equivalent to that recorded during Q1 and Q2 2003. This is still
some distance above the level of Initial Claims that typically coincides
with actual employment growth but as we have commented before, the scale of
employment, production and inventory cutbacks this cycle suggest that
substantial rehiring will be required far earlier in the production cycle
and as a result employment growth may take place at a higher level of
Initial Claims than has historically been the case. It therefore remains
our belief that by the end of Q1 2010 employment growth will have been
established in the US.


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

This week's AAII Investor Poll finally shows an overdue capitulation of
Bearish Sentiment in the face of a 9 month recovery rally and sharply
improving economic metrics. At 22.95% the percentage of Bears is the lowest
since February 22nd 2007, a reading that occurred right on the eve of the
collapse of the first sub-prime lenders. While this may appear to be alarming
(sentiment being a contrary indicator) the attached chart shows a different
story. What is remarkable about 2009 is how long it has taken for bearish
sentiment to collapse. If one looks back to the 2003/4 recovery by December
2003 (also 9 months from the equity market's final low) the 10 week ma of
Bearish sentiment had fallen below 20 and continued to fall for another 3 months
until the mini-correction of spring 2004 led to a reversal in sentiment.
From our perspective the current collapse in Bearish sentiment represents a
belated willingness of individual investors to allocate funds to the
domestic equity market, which implies further gains will be seen in the
early part of 2010. Later on things may get more problematic but it would
take several weeks of sharply lower Bearish sentiment (and also higher
Bullish sentiment) for us to be concerned about this particular metric.


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

December's Chicago PMI data suggests that the recovery in US manufacturing
accelerated considerably during the 4th quarter. The overall PMI index (black
line) rose to 60, the highest level seen since January 2006, and broadly
equivalent to the level recorded in November and December 2003 (61.1 and 61.7
respectively). What is particularly encouraging is that the improvement in the
metrics were visible throughout the supply chain.
.
New Order growth (which remains the key to the recovery in our opinion) rose
slightly to 63.5, a strong level to maintain over consecutive months (red
line). This stimulated a surge in Production (blue line) which rose to 65.8,
the strongest reading since October 2005. Even so Inventory drawdown continued
to be significant (green line) at 39.4, although this was a shallower rate of
decline than November's 34.9. This suggests that even after November's surge
Production remains insufficient to meet current New Order levels. Finally
Employment (pink line) rose to 51.2 from 41.9, the first positive reading since
November 2007. Again this is equivalent to the level recorded in December 2003
(51.3). Taken together this is a very positive report that supports our notion
that perhaps by the end of Q1 2010 (at the latest the end of Q2) considerable
pressure may be building on the FRB to reconsider its current stance on
interest rates. - chicagopmidec09.gif

This is an interesting story because it specifically talks about different
inventory management strategies in the retailers - contrasting the success of
Nordstrom (which only drew down on inventories moderately) with Saks (who
slashed inventory). As we have pointed out before the Apparel Industry has
undergone a dramatic inventory drawdown (second only to Computers in the
Merchant Wholesaler data-series) and given the relative success of carrying
larger stocks we'd expect to see other retailers follow Nordtstrom's lead in
2010.

As we discussed yesterday, December has been a cruel month for crowded
"macro" trades that sought to benefit from a prolonged period of US
economic weakness. The short end of the yield curve is a clear example of
this phenomenon and the 2 year note yield has risen from its 2009 low yield
of 0.60% (recorded on November 30th) to the current level of 1.08%. This
appears to be a record 20 day RoC (60.8%) on a percentage basis although
many months have seen an absolute increase of 48bp. Perhaps the better
question is why so many people were willing to pour into the 2 year future
at a 60 bp yield when the economic data in the US had been trending higher
than expectations for a number of months. Then again, as the attached chart
demonstrates, turning points in economic cycles typically take place
against a very crowded consensus betting in precisely the opposite
direction. As recently as June 2007 a record short position in the 2 year
note future was established, within weeks of the recognition that the
sub-prime crisis was anything but contained.
.
Looking ahead we would be very surprised to see the 2 year note yield
anything close to 0.60% again this cycle and the current move, as extended
as it is, may reach as far as 1.20% in early 2010 should a significant
portion of the Speculator's position be forcibly unwound. For the 2 year
note to move beyond this level will take significantly stronger economic
data than we have seen thus far, together with a hint by the FRB that they
are reconsidering their position. We doubt that this combination will occur
before the end of Q1 2010 at the very earliest but as ever being open minded
(and avoiding the crowd) has been the key to navigating this crisis.

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

The CTA (Commodity Trading Advisor) community was one of the great winners
of 2008, with "non correlated" trading strategies (more accurately these
generally involved trend-based short positions) leading to massive
outperformance against virtually all asset classes and tremendous inflows as a
result. As is often the case following a period of great success for an
investment strategy, 2009 has proved a tougher period to navigate, at least of
a relative basis. Attached is a chart of the Lyxor Short Term CTA index
together with its relative performance to the SPX index. According to this
index the average short term CTA is just over break-even for the year (the
index is up 0.5%) in the face of 24.7% rise in the SPX and excellent returns in
a host of other asset markets.
.
What is perhaps more interesting is the very poor performance of CTA's
since the sudden rise in the USD at the start of December. Month to date
(through December 22nd) the index has fallen 4.35% in what has generally
been a benign investment environment (the SPX was up 2.8% MTD through
December 22nd). This suggests that CTA's had formed a very crowded
short-USD trade and have suffered accordingly. We would also highlight the
coincident decline in gold and sudden burst higher in longer term treasury
yields. All of these moves have the feel of a sudden reallocation of
capital transforming a steady trend into an unstable reversal, with the
rise in the USD being the primary catalyst for a host of other forced
liquidations. There is nothing to suggest that this process has run its
course at the present time and we would therefore be alert for any other
sudden reversal in trend, particularly those which could generally be
classified as "anti-US recovery" since this appears to have been a major
thematic driving 2009 CTA allocations.



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

The Initial and Continuing Claims data continues to show steady improvement
with Initial Claims falling to 452K (470K consensus) from last week's
reading of 480K. This is the lowest weekly reading since September 4th
2008, just on the eve of the Lehman collapse. Continuing Claims fell a
further 110K to 5076K and this drop represents the final wringing out of
the Seasonal/Non-Seasonal Adjustment that we have followed since September.
Any further improvement in Continuing Claims will have to be driven by
actual employment (unless the DoL go on to create a Seasonal distortion
that understates claims). It remains notable that although the state of US
employment at the turn of the year is far healthier than most thought
possible 3 or 6 months ago the consensus remains that little actual hiring
will take place in 2010. We see no reason for the perspicacity of the herd
to have improved and therefore hope to see some clear signs of employment
growth in the first half of 2010.

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

The NAHB survey had set us up for a disappointing set of New Home sale data
and this proved to be correct with annualized sales at 355K falling well
short of the 438K consensus and October's sales revised downwards to 400K.
However, in light of yesterday's existing home data what this clearly
represents is a growing disparity between these 2 markets, with a surge in
the far larger Existing Home sales rate coming at the partial expense of
New Home sales.
.
Attached is a chart of both sales series together with the percentage of
New Home sales compared to Existing Home sales. This has plummeted to a new
all time low of 6.15%. Those who believe that cycles often turn after a
capitulation therefore now have their potential trigger (although the same
could have been said in the springtime). As we have written before, the
earliest that the New Home market will be able to month a recovery will be
next Spring's selling season. In terms of actual sales we are prepared to
see weak data over the winter months but would not expect this to fall
below January 2009's reading of 329K units. Neverthless, what should not be
lost in today's weak sales rate is the fact that inventory continues to shrink,
falling to 235K homes. This is quite simply insufficient should there be any
sustained increase in sales in 2010.


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

During the initial phase of the recovery we spent some time looking at the
Bloomberg Financial Conditions Index (BFC Index) which combines a
collection of credit spreads and equity volatility measures to gauge the
level of risk present in US asset markets. The gauge is set at Zero for
"normal" market conditions and each integer represents a single standard
deviation from the mean. The Index is far more sensitive to Credit rather
than equity markets (reasonably enough when measuring financial stress).
.
As can be seen from the attached chart the BFC Index has finally re-entered
positive territory this morning after a period of over 2 years in negative
territory. The final push over the line was supplied by the collapse in the
VIX below 20 yesterday (also the traditional demarcation point for a "calm"
equity market). Interestingly we suspect that although calm financial
conditions represent good "absolute" news for credit markets we suspect
that this index turning positive will herald a period of relative
underperformance for US credit versus equity markets, since the former has
far less upside once spreads have normalized. Attached is a chart of the
iBoxx IG Index together with its relative performance against the SPX. As
can be seen the iBoxx index has stalled in recent weeks while the SPX is
threatening to finally put the 1100 level decisively behind it. If this
does occur it would trigger a decisive breakdown in the relative
performance of investment grade credit versus blue chip equities. With
massive retail and institutional allocations currently in fixed income
investment vehicles 2010 may well see some frustration and "performance
angst" amongst investors.


(See attached file: D-IBOXIG_Index.gif)

(See attached file: W-BFCIUS_Index.gif) - D-IBOXIG_Index.gif -
W-BFCIUS_Index.gif

November's existing home data continued the encouraging trend of repair
that has been visible since last Spring. Total sales were reported at 6.54
mm homes, well ahead of the 6.25mm consensus estimate and a 7.39% increase
from October's data. The Single Family Home data, which we follow more
closely, showed an even greater improvement rising by 8.46% to 5.77mm homes,
the highest reading since April 2006. As the attached chart shows the 12
month RoC has now risen to 42.12% and the 3 month RoC to 29.08% (which
would be almost 120% annualized). The annual rate is now approaching the
record level that was seen in the 1982/3 housing recovery and may actually
exceed this in Q1 2010 even if sales only stabilize from here.
.
Meanwhile housing inventory remained uncomfortably high at 3mm units, while
the Inventory as Months of Sales ratio dropped to 6.2 due to the pick up
in sales activity. Of course behind this data is the still considerable
"shadow inventory" of foreclosed and heavily delinquent homes. Nevertheless
this is a well understood problem and the only way to clear the inventory
without a catastrophic drop in values is to keep the volume of transactions
at a healthy level. In this regard November's data is straightforwardly
positive and it continues to be our belief that the final recovery rates
for residential real estate will be somewhat greater than consensus.


(See attached file: M-EHSLSL_Index.gif)
(See attached file: D-EHSLHAFS_Index.gif) - M-EHSLSL_Index.gif -
D-EHSLHAFS_Index.gif

Sterling becomes the first G-7 currency to test its 200 day ma. Given the
market's recent contemplation of sovereign risk it should come little
surprise that the GBP would come under greater pressures that some other senior
currencies. Certainly there is no better way to turn the sentiment of local
traders against their own currency than to force through a last minute
populist bonus tax and it would be ironic if this proved the catalyst for
sharply lower sterling.


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

Rampant Chinese monetary growth has been one of the most well (albeit
belated) understood aspects of the 2009 recovery but their are now some
signs that a reduction in new loan issuance combined with a massive
increase in the capitalization of regional equity and property markets have
tightened local liquidity conditions by a greater degree than is widely
appreciated. In recent days the prospect of a stronger USD has come into
play. This both tightens monetary conditions (since less intervention is
required to keep the currency peg fro the RNB and HKD in place) and also
threatens to remove the competitive advantage that exporters have enjoyed
against regional economies with floating exchange rates. Clearly both of
these factors are considerably negative influences
.
Attached is a chart of Chinese New Loan issuance expressed as a percentage
of the market cap of the Shanghai and Shenzen "A" share indexes. As can be
seen the 6 month moving average (red line) has fallen from a peak of nearly
8% to the current reading just below 1.7%. This is not much greater than
the readings seen in late 2007 and early when local authorities were making
no obvious attempt to stimulate speculative activity. The effect of this
relative tightening can be seen in regional equity markets. The Shanghai
"A" Index (SHASHR) has failed to penetrate strong resistance at 3500 and is
clinging on to key at 3275. In some senses, however, this market looks
healthier than that of Hong Kong (HSI) and the China "H" shares (HSCEI)
look a little worse at present. The HSI is testing key short term support
while the HSCEI has broken down through it. Both indexes show rapidly
deteriorating momentum with MACD falling to negative levels unseen since
the recovery got underway. If weakness continues to be exhibited we would
not be surprised to see all 3 indexes fall and test their 200 day ma's
early in 2010.




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

(See attached file: D-SHASHR_Index.gif)
(See attached file: D-HSCEI_Index.gif)
(See attached file: D-HSI_Index.gif) - M-.CHBOOM_Index.gif - D-SHASHR_Index.gif
- D-HSCEI_Index.gif - D-HSI_Index.gif

There has been a dramatic turn in sentiment towards the USD in recent days
and this was demonstrated this morning by the news that the Powershares DB
US Dollar Index Trust (UUP) had issued all available registered shares to
Authorized Participants. As a result no further shares will be created
until the current S-3 Registration Filing has cleared the SEC, at which
point an additional 240K units would become available. The attached chart
shows the DXY Index together with shares outstanding in the UUP. As can be
seen this instrument has been massively traded in recent days with far
greater speculative flows into it than were seen in the much longer "flight
to safety" rally in the DXY a year ago. Nevertheless with a total cap of $3
Bln it cannot be said to be a crowded trade, given the scale of the USD
market, but rather a powerful indication that sentiment has changed
decisively in recent days.


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

As we had expected a turn in the USD has put tremendous pressure on the
crowded commodity complex in recent sessions. While this has mostly led to
sharply lower prices, in the few trades that had attracted substantial
short interest strong gains have been registered. The clearest example of
this is Natural Gas whose dramatic 2008/9 collapse attracted near record
short interest at its low. As of December 8th there were still -156K
contracts outstanding in the hands of Large Speculators (blue line, LHS on
attached chart) and the general unwinding of commodity positions has
therefore led to substantial buying pressure for natural gas, taking the
continuous contract up to its highest level since January 2009. With
multiple trends reversing rapidly December looks set to be a very ugly
month for the CTA community.


(See attached file: W-NG1_Comdty.gif) - W-NG1_Comdty.gif

December's Philly Fed report was generally positive and continued to show the
familiar trend of increased orders encouraging manufacturers to address their
inventory drawdowns. The overall index rose to 20.40 (from 16.70) and this is
the highest reading since April 2005 which is itself significant. New Orders
continued to improve but at a slower rate than November with the reading
falling from 14.8 to 6.50. This reading can be extremely volatile over a
monthly basis and we would use a 3 month average (9.17) as a guide for trend.
What is notable about this report is that it indicates significant improvements
in Shipments, Unfilled Orders (flat at 0.00) and Delivery Times (6.20 versus
-12.70). Inventories continue to be drawn drawdown but at a much slower rate
(-7.40 versus -17.30). Most encouragingly the Number of Employees turned
positive at 6.30 (from -0.50), the first positive reading since December 2007.
In summary we would call this a good report which conforms to the recent trend
of improving US industrial data. - phillyfeddec09.gif

There is little doubt that the sudden rebound in the USD has the potential
to mark a major turning point in the performance of this currency, and
since prolonged dollar weakness has been a central premise driver global
asset allocations in 2009 this has the potential to affect far more than
the international cost of goods and services. Attached is a weekly chart
ofthe DXY index together with its 30 (green) and 10 (blue) week ma. As can
be seen the 10 week ma offered an excellent demarcation of trend throughout
the 2008 rebound and 2009 collapse in the DXY and the breakout above this
indicator was therefore a vital technical indication that something
important was underway. The 30 week ma has been effective resistance since
the index started to decline in 2006, with only brief periods above this
level being recorded since that time. This morning's violation of this
average is therefore a notable accomplishment although it would have to be
maintained through week-end to be confirmed. Even a failure at this level,
provided it was only followed by a moderate pullback, would be quite
acceptable. The fact that the USD's strength has arisen at a time of
relative calm for asset markets makes it far more trustworthy that the
panic-driven flight to safety that pushed the currency higher in late 2008.
Sentiment has also rarely been worse towards the US currency and economy
than it was early in the 4th quarter.
.
Morevoer, the effect of the recent rally has been to turn weekly MACD back
in a positive direction before it could confirm the 2009 decline. This
again suggests that the failure to exceed the 2008 lows will be technically
significant over the longer term. With many global portfolios carefully
designed to either minimize USD exposure, or outright bet against it, a
change in trend will put many assumptions under pressure. Most clearly this
relates to emerging market equities and commodities (particulalry precious
metals) and we would be alert for signs of weakness in both arreas in the
coming sessions.


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

Both Continuing and Initial Claims were reported to be roughly in line with
expectations this morning. This is perhaps more important than it appears
since last week's positive data had enough seasonal adjustment (due to the
effect of the Thanksgiving holiday) applied to it to require confirmation
from later reports. This weeks data has far less seasonal issues and
therefore now have greater confidence in the veracity of the current data.
Although this still falls a long distance short of being "healthy" it
represents a massive improvement from the summer months. Furthermore the
trend is really the important thing to follow and we would hope to see both
Initial and Continuing Claims continue to fall sharply in the New Year.



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

The November CPI report was in line with expectations with the monthly increase
at 0.4% taking the YoY index back into positive territory (1.8%) for the first
time since March 2009, but still well below the peak reading of 5.6% recorded
in July 2008. Thus (as we argued yesterday) it is fair to talk about the end of
deflation as a legitimate macro-economic risk and to instead consider the
likelihood of an inflationary scenario developing. The latter is still open to
question, at least in terms of its ultimate severity, although we would note
that the PPI/CPI ratio (our favored leading indicator) has resumed its positive
uptrend and reached a level unseen since August 2008 (see chart). Our estimate
is that CPI will not cause serious concerns before the end of Q2 2010 at the
earliest.
.
Nevertheless, what this weeks PPI and CPI data does do is remind investors how
unrewarding Treasury investments are at present. The current level of CPI means
that all Treasury maturities of 4 years or less yield less than the current
rate of CPI. That may not be cause for panic but at the very least it is pause
for thought. - ppiandcpi.gif

The November Building Permit and Housing Start data came in as expected this
morning and while all data recovered strongly from October's very light level,
construction activity remains close to a generational low . Our favored metric
is the Single Family Home Permit Index, which rose from 449K annualized to 473K
homes. This is the highest reading since September 2008 indicating that a slow
recovery in activity continues to be in evidence. It has long been our belief
(arguably too long) that this recovery will at some point accelerate, and out
template for this is the recovery of 1982/3 (yellow box on chart) that started
off very meekly before eventually exploding higher. Nevertheless for this to
occur we believe that sales must themselves move significantly higher
triggering a substantial shortfall in housing. It inventory. Given the highly
cyclical nature of this industry it now seems unlikely that this will occur
before the Spring selling season. In the meantime the home building industry
will bounce along its bottom without doing any real harm to itself or the
larger economy.



(See attached file: D-NHSPA1_Index.gif) - D-NHSPA1_Index.gif

In recent months a growing divergence between the state of the New Home and
Existing Home market has been in evidence with the former greatly lagging the
strong recovery seen in the latter. This month's NAHB reading suggests that
this trend has continued in December and we now see little chance of a
turnaround before the Spring selling season. The December reading of 16 shows a
small drop from November's 17, but does not suggest that anything significant
developed. Present Sales matched this fall while Future sales fell from 28 to
26. Foot Traffic was steady at 13. In recent months the NAHB has been a good
guide to the more important Building Permit and New Home sales data that is due
to be released later this month, and today's data does not suggest that we will
see a significant improvement in either from their currently depressed level.
On the other hand such activity is already priced into the Homebuilding sector
at the current time and we would not expect any great reaction to today's data.
- nahbdec2009.gif

This morning's PPI release caused some excitement since at 1.8% it was
significantly above the consensus estimate of 0.8% and took the YoY index
back into positive territory for the first time since December 2008,
reaching 2.4%. This is clearly a strong single month report and follows
similarly robust readings in August (1.9%) and June (1.7%). Indeed the 12
month swing from the November 2008 reading (-2.7%) to November 2009 (1.8%)
is 4.5%, the largest such swing since the data commenced in 1947. This certainly
reflects a remarkable change in the state of the US and global economy over
this period, but also the fact that commodity markets were in free-fall 12
months ago and have since rebounded strongly without, (apart from gold),
coming close to their 2008 prices.

Therefore although this month's reading is strong,this data is still some
way from suggesting that we have entered a period of inflationary build up
and instead still mostly reflects the very rapid decline in PPI that took
place in late 2008. Indeed the overall PPI Index level (177.4) remains 3.2%
below its peak reading recorded in July 2008 (183.4). The 3 month RoC (red
line)is probably the best current guide of trend and is indicating an
annualized PPI of 6% over the next 12 months. This would be high but not
alarmingly so. Nevertheless, the bias is now towards stronger readings and
today's data does banish the concept of deflationary pressures building up.
This in itself is a significant change in circumstance. Our own belief
remains that inflationary pressures will not become a significant concern
(at the level of CPI) until Q3 2010, this being 2 years after the
commencement of very loose monetary policy, but in light of the
extraordinary nature of this cycle we are open minded about this deadline.


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

It has been a busy morning for Industrial Data with a disappointing Empire
State December survey closely followed by stronger than expected Industrial
Production data for November. The latter is clearly the more senior release
(in fact it has been around since 1920) and we had commented last month
that the October release of a 0.1% increase jarred with all other
Manufacturing data releases. Although that number was revised down to 0.0%
this month the November figure of 0.8% more than made up for this
downgrade. As with all "heavy" census type data we like to take a step back
from the monthly fluctuations and look at a longer term trend such as a 12
month RoC. As the attached chart shows Industrial Production has clearly
been recovering since the summer and the 12 month RoC has traced a clear
"V" shaped bottom that should extend into positive territory some time
around the start of 2010 Q2. Capacity Utilization (a data series that the
FRB has traditionally paid attention to even though it tends to be of
questionable accuracy) also improved to 71.3 but this still indicates a
substantial degree of slack in the system. However, the continued drawdown
in inventories means that the true level of capacity utilization is
somewhat higher since production is running below the level needed to
replace current sales in many industries.
.
The Empire Manufacturing data was far less positive with a reading of 2.55
representing a substantial miss from the expected 24. This is a cause for some
concern but we would caution that this is a relatively junior and youthful
data series (it commences in 2001) that has shown itself to be erratic in
other periods of recovery. The attached chart highlights very weak readings
registered in April 2003 (at the start of the recovery) and May 2005 (the
mythical "soft patch") that wrong-footed followers of this index in the
past. In terms of the current release the greatest cause for concern was
the fact that New Orders fell very sharply to 2.20 from 16.66. Much better
news came from Unfilled Orders which at -21.05 suggest that substantial
backlogs are developing, while Inventory remained very negative at -18.42.
As such it is a report that gives pause for thought but falls short of
ringing the alarm bells.


(See attached file: D-IP_Index.gif) - D-IP_Index.gif - empirestatedec09.gif

Apple Says IMac Popularity Leading to Shipment Delays (Update1) ...

Given the record drawdown in inventories we have been expecting to see
anouncments of failures to meet delivery deadlines and shipment delays. We
commented last week that the computer sector showed the smallest
Inventory/Sales ratio of all the major categories in the October Merchant
Wholesale data and it is therefore little surprise that a popular brand such
as the iMac would be experiencing shortages at the current time.
<>

As we have commented before the Consumer Sentiment data at this point in a
cycle tends to be highly correlated with the economic data and market
conditions that immediately precede it. Therefore it comes as little surprise
that after a very positive series of releases (particularly regarding
employment) the overall University of Michigan Index should have improved to
73.4, comfortably ahead of the consensus estimate of 68.8. This of course still
keeps the index within its 2009 range and therefore by itself does not suggest
that consumers are signally a sustained growth in confidence.
.
However, when one looks at the "Current Situation" index it becomes clear that
something of a breakthrough has occurred in recent weeks with this index rising
sharply to 79.1, its highest level since March 2008. This is still a poor
reading but it does suggest that a number of consumers polled have started to
feel more confident about where things stand at present even if they remain
unwilling to project this improvement into the future (the Future Conditions
Index only rose to 69.7 from 66.5). Again this is absolutely typical of the
recovery from an period of economic trauma, and certainly ties in with the
better than expected retail numbers reported this morning. -
currentsentimentdec09.gif - conssentindexdec09.gif

The November release of Chinese Monetary and Trade data suggests that there
has been a slowing of stimulus since the summer months but that monetary
excess remains prevalent in that Economy. Chinese M2 is still growing at
over 29% on a YoY basis (green line on first chart) but the 3 month Roc
(brown line) has fallen to 3.1%, an annualized rate of 12.4%. Since this
RoC is still greater than that of Chinese GDP, money supply still meets our
definition of being stimulative, but given the pace of price appreciation
and the rate of new issuance of Chinese equities and speculative real
estate projects we are clearly in a later phase of this investment cycle
that implies a growing hazard in those speculative markets. Ultimately it
is oversupply that tends to promote a collapse in asset markets, but the
creation of oversupply is itself very sensitive to the pace of increase in
monetary stock.
.
We would continue to use the Trade data as a guide to future Chinese
stimulus, with the closer this gets to its pre-crisis level the more likely
stimulus is to be reduced. As would be expected the pace of Import recovery
(which is sensitive to domestic demand) greatly outstrips that of Exports.
The latter is probably the key to the cycle, they are improving rapidly but
still need to grow by another 10-15% before they could be said to be
acceptable to the local authorities.


(See attached file: D-CNMSM2_Index.gif)
(See attached file: D-CNFREXP$_Index.gif) - D-CNMSM2_Index.gif -
D-CNFREXP_Index.gif

The November release of Advance Retail Sales is overall a strong set of
data. The headline rate came in at 1.3%, well ahead of the 0.6% expected
and even though the October data was revised down to 1.1% from 1.4% this
still suggests and accelerating trend of recovery. At $352 Bln The current
level of expenditure is very close to that seen at the end of 2005. This
trend becomes even more obvious when looking at Retail Sales less Autos and
Gasoline (which corresponds more closely with general retail expenditure
than the headline number). This rose 0.6% to $258.8 Bln, approximately the
same level as September 2007, while the current 3 month RoC would annualize
at approximately 5.2%, or roughly the same pace of sales growth experienced
during the last economic recovery. As we commented earlier this week when
looking at consumer credit data the alarmist projections for a collapse in
US consumer demand that have been popularized this year look to be
increasingly unjustified.


(See attached file: M-RSTATOTL_Index.gif)
(See attached file: M-RSTAXAXG_Index.gif) - M-RSTATOTL_Index.gif -
M-RSTAXAXG_Index.gif

The large disparity between the Seasonally and Non-Seasonally adjusted
Continuing Claims data was finally removed this week with precisely the
type of brutal (and unexplained) recalculation that we had anticipated when
we first brought it to our reader's attention back in September. Thus while the
raw NSA data rose by 12.3% to 5374K (the week around Thanksgiving has
historically seen a large surge in Claims) the headline Seasonally Adjusted
data fell by 303K (5.55%) to 5157K, the lowest level since February 20th. This
brings the historical gap between these measures back into historical alignment
and justifies our assertion made back in September that Continuing Claims were
being substantially overstated in the headline data. The attached long term
chart of Continuing Claims shows that the pace of repair in 2009 now
matches anything seen in 1974/5 or 1982/3, with the 13 week RoC falling to
-17.6%.
.
Going forward the Initial Claims will perhaps be more important to follow.
As we wrote above, this time of year tends to be extremely volatile for
claims data and although the Seasonally Adjusted Initial Claims moved only
slightly higher to 474K (from 457K last week) the raw data surged to 665K.
It will take another couple of weeks for the seasonal factors to settle
down but we do not think this week's data suggests a change in the clear
trend of improving employment metrics.


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

Today's release of October Inventory data continues the series of data
points that suggest that an acceleration in US economic activity has taken
place since the start of the 4th quarter. The overall inventory number rose
for the first time in 13 months (a record sequence for inventory drawdown)
increasing by 0.34% versus a consensus drawdown of -0.5%. Inventory Sales
(red line on Chart 1) continued their run of positive growth (now 7 months)
increasing by 1.24%. As a result the Inventory/Sales ratio (green line on
Chart 1) fell to 1.16, its lowest level since August 2008 just before the
inventory drawdown commenced. As regular readers will be aware we consider
an inventory rebuild to be a very important step in the US recovery that
will in turn have noticeable effects on a number of other key data series
(most importantly employment and corporate profitability).
.
As would be expected the turnaround in inventories has dispersed
considerably amongst the various sub-industries. We have included a number
of notable categories on chart 2 to demonstrate this. The 2 major
categories showing inventory build are Automobiles (red) and computers
(pink). The latter has a very small Inventory/Sales ratio of 0.61 (compared
to an average of 0.81), suggesting that production really needs to increase
quite rapidly in the coming months in the computer sector. We would also
highlight the very rapid decline in apparel inventories. Inventory
reduction has been a key element in retail strategy during the crisis.
Again any acceleration in retail demand risks seeing empty shelves appear
in a number of locations.


(See attached file: D-MWINTOT_Index1.gif)

(See attached file: D-MWINTOT_Index.gif) - D-MWINTOT_Index1.gif -
D-MWINTOT_Index.gif

An interesting article that confirms our feelings than currently most
allocation strategies resemble a barbell. Lots of Treasuries and corporate
bonds on the one side, some EM debt equity, commodities and "alternatives" on
the other, with far less than normal allocated to the traditional middle ground
of the US equity market.

There are finally some signs the the DXY Index may have established at least an
intermediate low and the index has finally managed to force its way above the
declining 50 day ma that has defined its long downtrend in 2009. Given that the
USD has been highly negatively correlated with asset markets in general, and
the US equity market in particular, the question is whether a bout of USD
strength would automatically lead to a weaker local equity market.
.
While the answer may seem to be obvious a consideration of the long term
relationship between the SPX and DXY index shows it to be more complicated.
Attached is a chart showing the 52 week correlation between these 2 indexes
(weekly 1990-2009) and as can be seen they have enjoyed a somewhat
schizophrenic relationship over the years. Furthermore periods over very high
correlation (over 0.8 or below -0.8) have abruptly given way to the opposite
state of affairs with a very short transition period on a number of occasions.
The key for the current period is to identify the cause of a stronger USD
(assuming that this is what is starting to develop).
.
If what we are witnessing is a global flight from risk in the wake of (utterly
foreseeable) downgrades of Greece and a potential bankruptcy for Dubai, Inc
then it is fair to assume that the DXY will remain negatively correlated and
that a recovery in the USD will coincide with a fall in the SPX. On the other
hand, if the recovery in the USD is driven by a stream of better than expected
US economic news and corporate earnings then this may be precisely the time for
the correlation to move back into positive territory with a recovering USD and
rising SPX (at least for domestically focussed issues) taking place
simultaneously. As with most turning points the answer will only be obvious in
retrospect, but since the latter is the least expected of the two we naturally
prefer it.
(See attached file: D-DXY_Index.gif) - D-DXY_Index.gif - dxyspxcorrelation.gif

One of the central pillars of the "new normal" consensus is the need and/or
wish of US consumers to deleverage and for a short period this seemed to
be reflected in the monthly US census consumer credit data. Indeed credit
outstanding fell by $46bln in Q1 2009, an annualized rate of decline of
7.28%. Fortunately (though not surprisingly from our perspective) this
period proved to be an aberration and recent months have seen a much slower
pace of decline. October's data continued this trend by coming in at -$3.5
bln, substantially better than the -$9.4 bln expected. Furthermore September's
data was revised strongly higher to -$8.8 bln from -14.8 bln (this data series
is very volatile at the best of times on a month by month basis).
.
As as a result the annual RoC of credit has stabilized at -3.57% and if the
recent trend of improvement remains in place through Q1 2010 the 12 month RoC
would have a good chance of moving back into positive territory This data
matches the activity in retail sales which may be somewhat subdued but in no
way suggest that the US consumer has radically changed consumption patterns on
a permanent basis.

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

Further confirmation of the improvement in US employment was supplied this
morning by the Conference Board Employment Trends Index (ETI) this morning.
This index aggregates the following statistics and then indexes them such
that 1996=100.:

Percentage of Respondents Who Say They Find “Jobs Hard to Get” (The
Conference Board Consumer Confidence Survey)
Initial Claims for Unemployment Insurance (U.S. Department of Labor)
Percentage of Firms With Positions Not Able to Fill Right Now ( National
Federation of Independent Business Research Foundation)
Number of Employees Hired by the Temporary-Help Industry (U.S. Bureau of
Labor Statistics)
Part-Time Workers for Economic Reasons (BLS)
Job Openings (BLS)
Industrial Production (Federal Reserve Board)
Real Manufacturing and Trade Sales (U.S. Bureau of Economic Analysis)

As such it is a very slow moving indicator that takes a considerable shift
in data to turn around (it also trends higher over time due to the nominal
nature of many of the statistics). While this slow moving nature makes this
survey a poor indicator of a turning point in a cycle (we rely on Initial
and Continuing Claims as leading indicators) it makes it much more useful
as a confirmation of a turn which has already taken place. As the attached
chart demonstrates this index has put in a clear "U" (due to its
construction it has never registered a "V" even in the most vigorous of
recoveries) while the 3 month RoC (red line) has moved strongly into positive
territory. Although the Conference Board themselves still expect this to be
a weak employment recovery the rapidity of improvement of this indicator
really suggests otherwise.




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

Very good article on the employment cycle from today's NY Times (note this was
published before today's Non-Farm Payroll release.

Attached is a chart of the 90 day LIBOR rate (black) together with the
expectations priced into the EURO$ marketplace for this rate in September '10,
December '10 and March '11. As the chart shows LIBOR (and of course FDTR)
expectations have been radically reduced in recent weeks with the September '10
estimation falling from 140 bp on September 29th to as low as 77 bp this
Monday. In the wake of today's payroll report this yeld has backed up to 100
bp, and has been matched by similar moves in later futures.
.
In every cycle we have followed the yield of EURO$ futures with 9-15 months of
life remaining has either peaked or troughed just before a key piece of
economic data that changes the consensus view of the economy (for instance
yield of the June 2008 Euro$ peaked at 5.40% on June 14th 2007 just before the
news that two BSC mortgage funds had imploded) and then started a reverse that
made their prior extreme look to be remarkably foolish (the June 2008 Euro$
expired around 3%). If we are correct about the current cycle this week's
yields for the attached contracts will not be exceeded to the downside and the
FRB will have raised rates significantly above where the market currently
prices their activity by the end of 2010. - libordec0309.gif

When asked how to build a portfolio that takes advantage of a US economic
recovery our simple advice has been to buy the equities of companies that "make
things" and "move things". The most accurate guide to the latter is the DJ
Transportation Index (TRAN) and it is therefore encouraging to see this
index break above what has been strong resistance at 4050. It is important
that this gain is held into the close and extended in the coming session,
thus allowing MACD to confirm the move by extending above its own declining
trendline. Having consolidated for nearly three months we would expect to
see substantial follow-through for any sustained breakout.


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

It has been a central part of our investment thesis for several months that the
USemployment would turn far quicker than consensus estimates and that the
substantial improvement in the Continuing and Initial claims data would
eventually be reflected by a substantial improvement in the Non-Farm
Payroll report, and so today's release comes as more of a relief than a
surprise from our perspective.
.
The headline data shows the US labor market in approximate equilibrium
(remember we explained yesterday that re-hiring would allow this to occur
with Initial Claims still significantly higher than normal) while the
disappointing October data (-190K) was revised to a much more healthy -111K.
What is important to recognize is that in all prior cycles a deep
contraction of employment that corrects itself to equilibrium has always
been immediately followed by a period of rapid additions to payrolls,
although the erratic nature of this data series also means that the
improving trend can easily be jolted by a "rogue" month (see blue line on
top chart for examples). The key therefore is to use smoother rates of
change (we like the 3 and 12 month RoC) that should continue to show a
clear rate of improvement over the coming months.
.
It is also notable that the unemployment rate "fell" to 10.0% from last
month's 10.2 reading even though payrolls were slightly negative. As we
explained at the time there were plenty of reasons to be suspicious of
October's large uptick, most clearly the disparity between the seasonal and
Non-Seasonal unemployment rates. This gap shrank slightly to -0.6% this
month but there are still reasons to believe that the 10% number is
overstated. Again the main point to draw off the chart is that in prior
cycles once the unemployment rate started to decline from an extended level
(above 8%) it continued to do so for a number of quarters.

(See attached file: D-NFP_T_Index.gif)


(See attached file: D-USURTOT_Index.gif) - D-NFP_T_Index.gif -
D-USURTOT_Index.gif

It has been a central part of our investment for several months that the US
employment would turn far quicker than consensus estimates and that the
substantial improvement in the Continuing and Initial claims data would
eventually be reflected by a substantial improvement in the Non-Farm
Payroll report, and so today's release comes as more of a relief than a
surprise from our perspective.
.
The headline data shows the US labor market in approximate equilibrium
(remember we explained yesterday that re-hiring would allow this to occur
with Initial Claims still significantly higher than normal) while the
disappointing October data (-190K) was revised to a much more healthy -111K.
What is important to recognize is that in all prior cycles a deep
contraction of employment that corrects itself to equilibrium has always
been immediately followed by a period of rapid additions to payrolls,
although the erratic nature of this data series also means that the
improving trend can easily be jolted by a "rogue" month (see blue line on
top chart for examples). The key therefore is to use smoother rates of
change (we like the 3 and 12 month RoC) that should continue to show a
clear rate of improvement over the coming months.
.
It is also notable that the unemployment rate "fell" to 10.0% from last
month's 10.2 reading even though payrolls were slightly negative. As we
explained at the time there were plenty of reasons to be suspicious of
October's large uptick, most clearly the disparity between the seasonal and
Non-Seasonal unemployment rates. This gap shrank slightly to -0.6% this
month but there are still reasons to believe that the 10% number is
overstated. Again the main point to draw off the chart is that in prior
cycles once the unemployment rate started to decline from an extended level
(above 8%) it continued to do so for a number of quarters.

(See attached file: D-NFP_T_Index.gif)


(See attached file: D-USURTOT_Index.gif) - D-NFP_T_Index.gif -
D-USURTOT_Index.gif

This is an interesting story and local consumer demand seems to be the hot
spot for EM allocation. As the attached chart shows the outperformance of
EM Consumer stocks versus the overall index is very much a recent
phenomenon since these stocks lagged during the long 2001-2008 EM rally.
Their defensive qualities in the 2008 collapse started the process of
outperformance but their ability to extend this throughout the frenetic
recovery rally is more surprising. This performance has not gone
un-noticed. We note that a new China Consumer ETF was launched this week
(CHIQ) and would expect other single country or regional EM Consumer ETF's
to follow in the coming weeks. It seems likely that this theme will attract
more speculative capital before it is exhausted but those allocating
towards it should understand that this is now a very well-worn thematic.



(See attached file: W-MXEF0CS_Index.gif)

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

Emerging Consumer Stocks Rise to Record on BRICs (Update1)
2009-12-03 14:40:56.570 GMT


(Adds companies, quotes from second paragraph.)

By Michael Patterson
Dec. 3 (Bloomberg) -- A gauge of consumer stocks in
developing nations climbed to an all-time high as confidence
increased that economies led by Brazil, Russia, India and China
will drive the world’s recovery from recession.
The MSCI Emerging Markets Consumer Staples Index rose 0.7
percent to 343.64 at 2:01 p.m. in London, surpassing its record
closing high of 343.06 reached in October 2007. The measure has
added 64 percent this year, driven by gains in Brazil brewer Cia.
de Bebidas das Americas, tobacco company ITC Ltd. of India and
Hong Kong hygiene-product maker Hengan International Group Co.
Investors are snapping up food and beverage companies,
tobacco producers and household-goods makers in developing
nations as rising incomes and lower borrowing costs spur
consumers to boost spending. The so-called BRIC economies may
grow 9.2 percent as a group next year, compared with 2.1 percent
growth in developed nations, according to Goldman Sachs Group
Inc. MSCI’s gauge of consumer-staples stocks in advanced
countries is still 11 percent below its peak.
Consumer companies are poised to lead further gains in the
BRIC markets, Mark Mobius, who oversees more than $30 billion as
executive chairman of Templeton Asset Management Ltd., said in
an Oct. 1 interview with Bloomberg Television in Hong Kong. In
China and India, consumer incomes are “moving up at a fast
pace,” he said. In Russia, Mobius is switching from commodity
stocks to “consumer-oriented” companies, he said.

‘Strong Leadership’

The MSCI emerging consumer staples index trades for 19.6
times analysts’ estimates for 2009 earnings, according to data
compiled by Bloomberg. That compares with 16.6 times for the
MSCI Emerging Markets Index, which includes 10 industry groups.
MSCI’s gauge of so-called consumer discretionary companies
in developing nations is still 9.4 percent below its all-time
high. The index of retailers, automakers and homebuilders has
led this year’s advance in emerging-market stocks, rising 108
percent. The overall MSCI gauge has gained 75 percent this year.
“Our regional growth outlook suggests that domestic demand
in the BRICs and the wider emerging world continues to show
strong leadership,” Jim O’Neill, Goldman’s chief economist in
London who coined the BRIC acronym in 2001, wrote in a research
note yesterday.
Consumer staples shares are the second industry group after
health care to climb to a record this year, MSCI indexes show.
The broader emerging index is 26 percent below is October 2007
peak.

For Related News and Information:
Global stocks stories: TOP STK <GO>
MSCI Emerging Markets Index market map: MXEF <Index> IMAP <GO>
Feature stories on stocks: TNI STK GREET <GO>

--Editor: Stephen Kirkland, John Kohut

To contact the reporter on this story:
Michael Patterson in London at +44-20-7073-3102 or
[email protected].

To contact the editor responsible for this story:
Gavin Serkin at +44-20-7673-2467 or [email protected]
- W-MXEF0CS_Index.gif

The ISM Non-Manufacturing Data series is not nearly a valuable data point
as its Manufacturing counterpart since it lacks historical depth of the
latter and also the whole notion of inventory, backlogs and deliveries are
significantly less meaningful in a service rather than a manufacturing
environment. The lack of data going back to other deep recessions (1974/5
and 1981/2) also makes it far harder to interpret the current data.
Comparisons to the 2000-2 recession mean little given what occurred this
time around.
.
Having said this we would still rather see a stronger number than a weaker
one and November's data was disappointing in this regard. The overall index
dipped below 50 to 48.7, indicating a modest contraction from October. The
overall index is calculated as the average of Business Activity, New
Orders, Shipments and Employment (each with a 25% weigting). As the
attached chart shows Employment continues to lag badly and at 41.6 is still
in negative territory. New Orders held up the best and remain quite
positive at 55.1 while Business Activity fell back to 49.6. As with the
Manufacturing data New Orders strike us as the key to this point in the
cycle, and really the most obvious conclusion from this data is that
Non-Manufacturers are having a hard time believing that the recovery is
sustainable. This hardly makes them unique and while this lack of confidence
may be a drag on current activity it may not remain so later in the cycle.


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

Pensions Eliminating Stocks Add $40 Billion to Corporate Bonds Dec ...

An interesting article that underlines the clear trend towards higher fixed
income allocations at institutions at the expense of equities (particularly US
domestic issues). We have of course seen this story before (in 2007 the article
would have talked about "alternatives" rather than fixed income). Such heavy
flows are always indicative of an asset class moving beyond its "sweet spot",
even if the additional institutional flows help mask this for a number of
months. From our perspective investment grade fixed income now provides little
tangible reward while exposing a portfolio to considerable future interest rate
risk. While we clearly understand that it has a place in any balanced
institutional portfolio this should not be at the expense of a reasonable
equity allocation.
<>

This week's release of unemployment data supports the notion that employers
are rapidly running out of either the compunction or ability to trim their
labor forces. The Initial Claims number fell slightly to 457K, the lowest
reading since September 5th 2008 and this pulled the 4 week ma down to
481.3K. As we have said before, at this point in the cycle it is the shape
of the chart that matters more than the actual level reached. We are still
above the level in Initial Claims that would typically signal a gain in
overall payroll data but we are closing in on this level fairly rapidly and
there are reasons to believe that the need to re-hire will emerge far
sooner this time than the two prior "jobless" recoveries.
.
The Continuing Claims data rose slightly on a seasonally adjusted basis to
5465K but it should be noted that the Non-Seasonally adjusted data fell
very sharply this week by 296K to 4787K. The reason for this discrepancy
is far from clear and having got these two data series into rough
equilibrium last week we are back to the pattern of the seasonally adjusted
data significantly overstating Claims when a "normal" seasonal adjustment
is applied to the original raw data. Given the fact that the more senior
(but less useful) Non-Farm payroll data is to be released tomorrow we would
expect only a muted response to today's data.



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

As we await the more important weekly Continuing and Initial Claims and
monthly Non-Farm payroll reports today's Challenger Job Cut announcement
underlines the rapid decrease in firings that has taken place since the
summer (and has been reflected in plunging Initial claims). The November
reading of 50,349 is the lowest reading since July 2006 and reflects the
exhaustion of employment capacity across a variety of industries. The
smoother 3 month moving average 57,477 underlines this point. Clearly the
Challenger data is very much junior when compared to the official
statistics but this does not mean that it should be ignored as an
indication of a key trend in the employment cycle.
.
Of course for the employment data to actually improve companies will have
to start actually hiring and there is yet to be any clear sign that this is
happening (see yesterday's note on the ISM data). Indeed the Challenger
"Jobs hiring" number stayed very weak at 10,076 in November but it should
be noted that re-hires are not typically accompanied by formal
announcements and as a result the "Hiring" data series has never been a
particularly good indication of employment trends.



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

The ISM Manufacturing report for November 2009 came in a little weaker than
expected at 53.6 versus a consensus of 55 and October's reading of 55.7.
However this still keeps the index in positive territory and most of the
deterioration can be traced to the Prices Paid index which fell sharply
from 65 to 55 and Inventory data which fell from 46.9 to 41.3. Since both
of these have favorable implications (the former less inflationary
pressure, the latter greater scope for production increases) the overall
report can be categorized as broadly favorable.
.
Perhaps most encouragingly the New Orders index rose slightly to 60.3 (from
58.5 in October), keeping it in strongly positive territory. As a result
although Production stayed positive at 59.9 (63.3) the Inventory Drawdown
re accelerated to 41.3 (46.9). The Employment number (which tends to be
highly correlated with the Inventory index) also deteriorated but remained
slightly positive at 50.8 (53.1). This reading, if maintained in future
months, indicates a cessation of future firings rather than an imminent
surge of re-hiring but given the pace of Inventory drawdown it may prove to
be underestimating the capacity of Manufacturers to boost employment later in
the cycle. Indeed, the whole point of this data series is that it is cyclical
and tracks changes in sentiment. There is still a widely held belief that the
pace of improvement in New Orders will not be sustained into 2010 and this
assumption continues to influence manufacturers' actions an opinions. The
accuracy of this assumption seems to us seems to be the key determinant either
way.



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