Support at 1083 has now decisively given way and the SPX is rapidly
converging on the first "opening gap" at 1070-2. Given that this sell-off
is being driven by extreme weakness in commodities and emerging markets we
believe that it will contiunue at least into Monday and possibly several
sessions into next week. This makes the two lower targets of 1040 and 1016
much more realistic targets for the SPX Index. We would expect that in emerging
markets losses will exceed these amounts by a considerable margin.

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

Faster than expected GDP growth would normally be expected to be a big
boost for copper but of course we have entered the point at which "good
news" is "bad news" for the commodity complex since a strengthening USD and
risk of tighter monetary policy going forward are both sizeable problems
for this crowded area of capital markets. For copper itself (which has thus
far held up better than other commodities) $6,750 looks to be key support,
with perhaps some additional support coming in at $6,500. Below that a
rapid test of the 200 day ma ($5,993) would be indicated.

(See attached file: D-LMCADS03_Comdty.gif) - D-LMCADS03_Comdty.gif

We have argued many times in recent months that the ley to the employment cycle
is the inventory cycle, with a decisive turn in the latter leading to a rapid
improvement in the former. Following the release of very strong Q4 2009 GDP
data and a powerful inventory re-build comes the Chicago Fed PMI report. This
overall was an excellent set of numbers with the overall index at 61.5, New
Orders at 66.4 and Production 66.6, all strongly positive reports. Inventory
Depletion was minimal at 48.7 and as we would have expected this led to a very
sizeable improvement in the Employment Index which soared to 59.8 from 47.6.
.
Attached is a long term chart of this index which puts this data in
perspective. As can be seen readings around 60 are a rarity for this data
series while the Annual RoC of 25 also puts the improvement in Employment
conditions amongst the fastest ever seen. Of course thus far this improvement
means that we have gone from the horrific data of late 2008 to the flat data of
2009. What makes the Chicago PMI data so interesting is that it suggests that
the start of 2010 will see a rapid period of Employment GROWTH. We await
confirmation from the more senior nation ISM data (to be released on Monday
February 1st) and the monthly non-farm payroll report next Friday. -
chicagoempjan10.gif

One way to gauge the strength of the current rebound in GDP is to look at the
quarterly change in Nominal GDP (which is annualized) and then look at how this
has changed over the preceeding 4 quarters. Attached is a chart which conducts
this study going back to 1955. As can be seen we have recovered from the record
low reading of -5.4% recorded in Q4 2008 to a 6.4% reading in Q4 2009 (blue
line top). The 4 quarter or Annual RoC (red line bottom) has therefore soared
to 11.77% (the difference between these 2 readings). This is the greatest such
annual rebound since Q1 1971 and also suggests that the pace of recovery is
even faster (measured over a single quarter) than that seen in the disastrous
collapse of Q4 2008 (when the Annual RoC hit -9.9%). We are not surprised at
the muted market response thus far to this data, but this should not be allowed
to obscure its deep significance for economic activity going forward. -
gdpq42009.gif

When the 3Q 2009 GDP data was released we pointed out that it appeared that
the inventory cycle was finally beginning to turn and that given the record
pace of depletion the positive contribution to GDP from an inventory rebuild
could be expected to be very sizeable going forwards. Today's release of 4Q
2009 GDP data shows the veracity of this claim, with nominal growth of 6.4%
being recorded, the highest reading since Q1 2005. Attached is an updated chart
of GDP with annualized inventory change. As can be seen inventories still are
shrinking at a $40 bln pace in nominal terms (black line), or by 0.28% of
nominal GDP (green line). What is important to realize is that we should now
expect a very powerful inventory rebuild, with the black line forcing its way
somewhere between $100-$150 bln over the next couple of quarters.
Furthermore this increase in production will require significant re-hiring
of workers. Our thesis of a powerful "V" shaped recovery which combines an
"inverted V" in unemployment remains very much intact.
.
In the aftermath of this release we will be very interested to see how the
USD performs. Stronger US economic data should prove to be a powerful
magnet for financial flows particularly given the real problems emerging in
the Euro zone and many emerging markets.


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

The December release of Hong Kong money supply data confirms that the
slowdown in Chinese mainland monetary growth is being felt in its closely
linked economies. Attached is a chart of Hong Kong Total M2 (this includes
HK$ and Foreign Currency flows) which clearly shows a marked deceleration
in growth has taken place in recent months. Indeed the 3 month RoC (red) is
actually shrinking at a 2% annualized rate while the 12 month RoC has
slowed to 5.3%, a pace which is quite inadequate to keep up with the
massive appreciation of the local real estate market. Again the point to
absorb is that conditions have ALREADY tightened; concerns about what
happen next are to an extent secondary to this realization, although
obviously further tightening will make things even more difficult going
forward.


(See attached file: M-HKM2TL_Index.gif) - M-HKM2TL_Index.gif

Some interesting data from FRE regarding the changing nature of US refinancing.
The highlight is the fact that 33% of homeowners used the lower interest rates
to allow them to pay down their principal to a degree. This compares with a low
of 4% in 2006 Q2. On the other hand 27% borrowed more than 5% more than the
prior mortgage (compared to 88% in 2006 Q2). Therefore although the word
"de-leverage" appears prominently in the release (and no doubt in the
commentary that will follow) what this really represents is a sensible
moderation of excess by consumers. Indeed the total level of "Cash-Outs" still
increased by $14.7 Bln this quarter (see Column 2 of second table). Other
interesting data include the fact that the average interest rate for new
mortgages was 84% of the loan being refinanced (a considerable saving if a
little less than the 80% rate seen in 2009 Q2) and that the collateral value of
property refinanced fell by a moderate 2%.

The idea that the potential for Commercial Real Estate losses were being
grossly exaggerated has been one of our core beliefs for several months. We
therefore are happy to see a story like this getting prominence and agree that
the US regional banks are an excellent way to play it.

As we expected the SPX index has overwhelmed key support at 1083 pointing
the way for a test of one of the 3 opening gaps marked as arrows on the
charts. It continues to be our view that weakness is being led by the EM
and commodity complexes and that the US domestic market is a fairly
reluctant participant but this is not to say that it is immune from further
losses in the short term. Interestingly the VXO index has re-calibrated
itself in the manner we anticipated. 24 (blue line on lower chart) is where
we think sentiment starts to enter a "corrective" mood, and this level was
crossed just as the SPX broke support. Looking ahead we would be surprised
to see the VXO exceed 30 for more than very brief periods even if the SPX
were to fall to the lowest of the 3 opening gaps (1016).


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

Brazil Said to Tighten Derivatives Disclosure Requirement Jan. 28 ...

An interesting story. Readers with reasonable memories may remember that
rampant use of currency derivatives (known as TARNs) led to massive losses in a
number of large corporations (Sadia being perhaps the best known example) back
in 2008. You would think that a costly episode such as this would have dampened
enthusiasm for such instruments but it may well be that the powerful gains in
the BRL during 2009 proved to be too hard to resist. In any case we would argue
that it is emerging market currencies that probably hold the key to the depth
of decline in the current correction, and that the BRL is one of the most
important instruments in this regard. We would also be very alert to any
indication that EM credit spreads (both corporate and sovereign) are starting
to widen. If anything the credit markets may be even more overcrowded than
equities at the current time.
<>

The NAHB Sentiment survey suggested that December's New Home Sales were
mediocre and this was confirmed by today's announcement that 342K homes
were sold, somewhat less than the consensus estimate of 366K. To an extent
this news was balanced by a revision of the November data up to 370K from
355K but the data confirms that no significant recovery in New Home Sales
took place in 2009. As we have stated before the key really is what happens
in the crucial spring selling season. December is an extremely quiet month
(the non-seasonally adjusted sales were 23K for December) making it far
less relevant for the industry than the peak selling season of February -
July. Apart from sales, inventory continued to decline but by a much slower
rate than had recently been seen, indicating that a balance has been struck
between new starts and sales at the current torpid level of activity. This
is a long way from saying that the industry is prepared for a pickup in
demand. With inventory languishing at multi-decade lows any rebound in
activity that even approached 50% of a normal spring activity (March
averaged approximately 107K sales during the 10 years between 1997-2007)
would likely create shortages in selected markets.



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

It is several months since we last took a look at the EUR/JPY cross rate.
Although it is no longer the "uber-indicator" of global capital commitment
(since there is far less leverage overall in the system and in any case the
yield gap has radically tightened between the two monetary systems making
this sross far less popular as a funding source) it is probably still a
reasonable proxy for currency commitments. As a result we are intrigued to
see both a breakdown in price through support this week combined with a
confirmation of the move lower by MACD (lower chart). At the current time
the index is threatening the 125 level below which there is little support
until 120. As we noted earlier today the scope for losses in FX exposure
(either directly or via un-hedged ownership of local equities and debt
securities) seems to be quite high in a number of popular EM and developed
currencies. The EUR/JPY cross is therefore worth keeping an eye on at the
current time.


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

As we continue to watch the fallout from the uncertainty of Chinese
monetary policy one of the notable market developments has been the rapid
back up of a number of emerging market currency rates. Nowhere is this more
obvious than Brazil where the BRL has fallen 5.61% since the start of the
year without generating significant comment. As a result the total YTD
losses for a USD investor are currently 10.02%, and actually even higher if
the investor added funds in the first few sessions of January (as many
retail investors did thorough their 401K plans). As the attached chart
shows the total return for a USD investor greatly outpaced the (already
spectacular) returns for Brazilian local investors. It is equally true that
the scope for reversal in early 2010 in commensurately larger for foreign
investors. Indeed the IBOV rebased in USD is now less than 2% above its
level at the start of Q4 2009 meaning than the tens of billions of US funds
invested since that time are mostly underwater at the current time. The
scope for a reversal of flows in the short term should therefore not be
underestimated.

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

The FHFA Price index effectively measures the "non distressed" housing
market. As such is declined far less than measures such as the Case-Shiller
Index and has also been slower to rebound, but it is still a very useful
data-source for the bulk of the US property market that remains outside of
foreclosure. As the attached chart shows we appear to have put a definitive
low in place for national house prices and may actually have established a
moderate but steady appreciation going froward. December saw the index rise
0.7% taking the 12 month RoC (blue) back into positive territory for the
first time since September 2007 while the 3 month RoC (red) is increasing
at an annualized pace of 3.2%. With existing home sales remaining
relatively buoyant this is quite an encouraging piece of data.


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

The January Consumer Confidence index came in a little stronger than
anticipated at 55.90 compared to December's 52.60 and consensus estimates of
53.5. This improvement was the result of a number of small incremental
improvements in the underlying sub-indexes without any particular piece of data
sticking out. As the attached chart shows this keeps the index (blue line)
still trapped in a range of values in the mid-50's which is consistent with the
current stage of the cycle. As the scale of recovery becomes more apparent (and
particularly once it leads to actual employment growth) we would expect to see
a surge in confidence. The Present Conditions Index (red line) should prove to
be particularly sensitive in this regard. Although it rose strongly from 20.20
to 25.00 in January it remains at an extraordinarily low level both in absolute
terms and relative to the overall index. Sentiment can be quite stubborn in the
initial stages of both a recovery and collapse in economic conditions but once
it starts to move the change can be both powerful and rapid. We would
anticipate a significant (positive) change in this metric over the next 3
months. - conboadconfidencejan10.gif

Chinese "H" shares continue to take the brunt of monetary tightening
concerns which was exactly what we had expected. The HSCEI Index broke down
through its 200 day ma last night making it the first major emerging market
to do so and the "distribution" pattern that we highlighted last week has
now developed into straightforward liquidation that looks set to continue.
Indeed even the calendar is a negative force with the Chinese New Year
falling relatively late this year at February 14th. It is a reasonable
assumption that many participants will want to lighten holdings in advance
of the multi-day closure of local markets. Our guess of where the index is
heading is the pink band on the chart. This combines a 38.2% retracement of
the 2008/9 recovery with price support at the July low and round number
support at 10,000. A fall to the lower portion of this band would represent
a 28.5% decline from the 2009 high. Given that at this point we are dealing
with a fear of deteriorating fundamentals rather than their actual
deterioration this should more than suffice for a corrective wave at the
current time.
.
Of course the real question is how widely this turbulence spreads. Both the
China "A" (SHASHR) and Hong Kong (HSI) benchmarks closed right on their own
200 day ma's. We would expect them to break support should the HSCEI
continue to head lower. Other local markets such as Taiwan (TWSE) would
still need to fall over 5% to hit their own 200 day ma's. Given its extreme
popularity perhaps the greatest danger is for a breakdown in the Brazilian
market (IBOV). At last night's close of 66,220 it is exactly 10% above
price and "round number" support at 60,000 and 12.5% above its own 200 day
ma (57,977). Both are realistic targets if the current sell-off gathers
momentum.


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

The December Existing Home Sales data came in at 5.45mm homes, well below
the consensus estimate of 5.90mm, but in line with our own prediction of
5.25mm - 5.5mm that we made when the Pending Sales data was released on
January 5th (we simply assumed that Existing sales would fall at the same rate
as Pending sales which is ultimately what occurred) . Single family home sales
(see attached) fell 16.84% to 4.79mm units, still well above the levels seen in
the first half of 2009. From our perspective the November and December data are
a pair with the former considerably overshooting to the upside the and latter
to the downside, both influenced by the anticipated demise of home-buyer tax
credits that actually did not come to pass.
.
This should mean a rebound of sales in January and February with our guess
(nothing stronger than that) being that sales should recover to something
like 5.90mm - 6.10mm units. If maintained, this level of activity would be
more than enough to absorb future foreclosure inventory without requiring
another break in price. Of course March marks the proposed end of the FRB
intervention in the MBS market, and with it the threat of higher mortgage
rates, but it is premature to imagine what exactly will transpire both
politically and within the capital markets at that time.

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

Further confirmation of the effect of China's monetary excess on its
immediate neighbors can be seen in today's release of the Taiwanese
Industrial Production data. The index rose to 114.51 (2006=100), close to
the May 2008 all time high of 116.30 and the highest ever reading for a
December (a seasonally moderate month for production). The 12 month RoC is
now a remarkable 47% and there is every likelihood of a new peak of
production being recorded in Q1 2010. Strength was seen across industries
and we would particularly note the surge in Consumer Goods (97.25 up from
89.42 in November). This data suggests that the worldwide inventory
drawdown is starting to reverse quite rapidly and again suggests that a
number of the countries that have had a "good crisis" are approaching the
point of overheating.

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

Having had the weekend to digest Friday's turbulent session we offer our
interpretation on the SPX index's short term outlook. As the attached chart
shows considerable technical damage was wrought in the sell-off, but one of
the interesting aspects of the multi-month rally is that it has been
characterized by a number of damaging mini sell-offs that ultimately gave
way to further gains. Looking ahead key support clearly resides at the 1083
level, which marks a series of lows made during November and December. The
SPX still gets the benefit of the doubt for as long as this level holds.
Should the 1083 level be crossed the likelihood would increase that we are
dealing with a significantly deeper correction than any seen since at least
July 2009 and possibly the entire recovery rally. Under this more bearish
scenario we would highlight the 3 "opening gaps" (blue arrows) that were
left behind between September and November. These can be found at
1070-1072, 1040-1042 and 1016-1019. Our assumption is that any deep
correction of this type would be a short lived affair, with a fairly rapid
rebound in those equities whose fundamentally sound position had been
confirmed by the current earnings season. We would also note that the SPX
left an "opening gap" at 1148-1150 last Wednesday, and although it is still too
early for this to be considered a useful short term recovery target this
does suggest that the SPX will revisit its 2010 high sooner or later.
.
One sign that participants overreacted in the short term is the violent
surge in the VXO index. We had been using the 16-20 range for "normal"
conditions and supposed that 24 (blue line) would cap any deeper corrective
phase. This proved to underestimate the "muscle memory" of the 2008/9
collapse. Participants are far more willing to pay up for "protection" than
they have been at other times. As ever we note that the price of insurance
is far more related to THE HISTORIC PROXIMITY OF THE LAST DISASTER than THE
LIKELIHOOD OF THE NEXT ONE OCCURRING. This is of course what makes
insurance underwriting such a profitable business across multiple cycles.
In terms of the VXO even a deep correction as outlined above should not see
the index break through 30 on a sustained basis and we would expect to see
the level of implied volatility fall back again very sharply whenever this
corrective move is completed.




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

Confirmation of the potential power of the US recovery was delivered this
morning by the Conference Board Leading Indicator Index. This came in at 1.1%
versus an expected 0.7% while the December data was revised up to 1.0% from
0.9%. Attached is a chart showing the 6 month ma of this data series going back
to 1970 which shows that the LEI index has never had such as sustained period
of high readings over this 40 year period. This echos the readings seen in the
ECRI Leading Indicator index (which tends to move earlier in a cycle) last
fall. While we would not draw the conclusion that this will be the STRONGEST
recovery in the last 40 years we would at least continue to suggest that it
will be a robust one which will lead to a much earlier re-appraisal of monetary
policy than the consensus believes. - cbleijan2010.gif

We view the HSCEI Index (which represents China "H" shares) as being in the
epicenter of Chinese liquidity concerns and therefore continue to monitor it
closely. The index broke important short term support last night and closed
just below the 12,000 level. A test of the 200 day ma (11,627) now looks to be
a formality. If negative sentiment continues to build it may well be that the
200 day will be overwhelmed in which case we would be targeting a significantly
deeper decline. We note that the 38.2% retracement of the 2008/9 rally comes in
at 10,398 and we would keep that level in mind should the 200 day support fail
to hold. - sg2010012126701.gif

This is quite an important development since a sequential improvement in the
property price data suggests that a low in market prices is being put into
place. With buyers and sellers comfortable (or at least knowledgeable) about
where the market was pricing property this would allow the delinquency cycle to
move onto the next phase. Although this would involve an uptick in foreclosure
activity (and thus look unhealthy at first glance) the closing out of
non-performing loans and replacement of weak owners by newly capitalized
entrants (with significantly lower entry prices) is a necessary phase in the
recovery from a lending crisis.

Some interesting data this morning regarding Building Permits. Regular
readers will know that we view this as a far more important data series
than Housing Starts since it historically has given more reliable signals
(we have no idea why this is the case from a fundamental perspective). As
can be seen from the attached chart permits rose much more powerfully than
anticipated with total permits reaching 653K (580K consensus) up 10.9%
from 589K in November. Single family permits (our favored metric) rose
8.32% to 508K, the strongest reading since September 2008. This is the
first sign that homebuilders are responding to the massive inventory
drawdown by preparing to increase activity. We are still in "nuclear
winter" territory but as ever it is the familiar "V" that we draw our
readers attention to. The very rapid turn of activity in 1983 (see yellow
box) is a useful guide to how quickly things can turn once a building cycle
gets going.


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

When looking at consumer confidence measures we always try and explain that
these are CONTRARY indicators when at EXTREMES. Furthermore for an "Extreme" to
be created you really need to keep the index at a very high or low level for a
number of months. A single outlier really does not allow you to conclude that
an excess of optimism or pessimism is present in a market.
.
We are therefore very interested in the attached chart which shows Australian
Consumer Sentiment (as measured by the Westpac-Melbourne Institute). This is
one of the few non-US measures with multi-cycle historical data making it a
useful guide for current conditions. As can be seen the January measure came in
at a very high 120.1 (the 25 year average is 101.1) while the 6 month ma (red)
has moved up to 117.7, approaching the record levels seen in 1994 and 2005. The
former is obviously the more interesting of these periods since 1994 was a year
in which tighter global monetary conditions led to very sharp declines in
commodities, which had an outsized effect on the Australian economy. With
recent events in China hinting at a reprise the warning signs from Australian
Consumer Sentiment need to be heeded. - westpacjan10.gif

China Asked Some Banks to Limit Lending, Regulator Liu Says Jan. ...

An interesting story that justifies our belief that Chinese monetary stimulus
is rapidly diminishing.
<>

It is no great surprise that the NAHB Homebuilder Sentiment Survey remains in
the "turgid teens" with this month's reading coming out at 15 versus consensus
of 17 and December's 15. This is too small a change to make anything
significant out of but it does indicate a lack of improvement in an industry
still bumping along a record low rate of activity (when adjusted for
population). Our view has been that the earliest the New Home market cap start
to improve is the next Spring selling season. Interestingly back in 2006 and
2007 much hope was placed by homebuilders in the Springtime boost in activity
only to be disappointed by a lack of activity when the time comes. This time
around no-one is expecting an upsurge in activity to occur, which would
naturally make it more interesting if it were to do so. In the meantime this
month;s NAHB data suggests that housing starts, permits and new home sales data
will remain very muted in their December release cycle due over the next 2
weeks. - nahbjan2010.gif

We put out a note 10 days ago regarding a surprising surge in UK PPI and
suggesting that readers keep an eye out for inflationary pressures that may
be developing in that country. Today's release of the December RPI (the
equivalent of US CPI) will have done nothing to calm those concerns. The
overall index (black line) reached 218, only slightly below the all time
high of 218.40 reached in September 2008 and arise of 2.40% over the last
12 months (green line). The quarterly RoC (blue line) is 1.25%, an
annualized pace of 6.00%, well ahead of the stated target of 2.00% target.
To make matters worse the UK RPI ex mortgage interest (red line) is rising
even faster and has recorded a new all time high of 217.20 in December and
is growing by 3.80% YoY. Clearly the price of mortgage interest (all
mortgages in the UK are variable rate and linked to the BOE base rate) only
has one way to go, making the rise in RPI ex-mortgage interest all the more
significant. The data may not yet be alarming but the chances of
inflationary pressures accelerating in the UK look to have risen
considerably. Since we see the Uk as a leading indicator for other developed
economies this cycle (particularly the US) this will be an interesting story to
follow in the months ahead.


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

One of the metrics we follow - although we would suggest using a decent moving
average (like 10 weeks) to track something like this (or the modified "Farrell"
Index - ask for more details) since the AAII poll can be very volatile over a
single week. We would agree with the conclusion though. Investor sentiment is
now positive, but much less so than is was in (say) late 2003, even though this
recovery rally is much more powerful than the one experienced 7 years ago.

Record Cash Means S&P 500 at Half its 2007 Valuation (Update1) Jan ...

An issue we have talked about many times in recent weeks. Note quote in middle
of article.
<>

The University of Michigan Consumer Confidence Index came in slightly below
expectations at 72.8 this morning. Even so this figure is sufficient to keep
the improving trend intact, although it hardly suggests that consumers are
rapidly changing their appreciation of conditions. However, this reticence is
really all connected to consumers' Future Expectations. These actually dropped
to 67.5 from 68.9. Current expectations on the other hand improved sharply to
81 (see chart), the best number since March 2008 (the last survey before the
run on BSC). This suggests that conditions really are starting to improve
markedly but that consumers are allowing their feelings to be swayed by the
constant drip of negative commentary. This is actually a bullish condition in
our opinion, and so this data is more encouraging than a simple glance at the
headline would suggest. - currentconditions.gif - univmichiganindexjan10.gif

This data series can be a little sluggish in the early stages of a recovery
(no doubt a factor of the difficulty in gathering accurate information in
real time) and so we were relieved to see the December numbers reported in
line with expectation. Industrial Production grew by 0.6%, the sixth
consecutive monthly growth. Our belief is that production actually
accelerated significantly between November and December (this is based on
ISM data and corporate statements) but this is not shown in today's data.
Capacity Utilization also improved to a still very low 72%. This is an
important factor in the ability of manufacturers to ramp up production.
There is massive slack available in both machinery and employment, while
capital is available and historically cheap in both the bond and commercial
paper market. We would therefore expect to see significantly stronger data
reflected in both these numbers in the months ahead. Since Capacity
Utilization has traditionally been a key metric for the FRB (even though it
is not particularly reliable), this may therefore have an impact on the
timing of any future tightening.



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

As we pointed out in the wake of December's very poor report the Empire
Manufacturing data can be quite erratic in any given month (note the false
warnings given in April 2003 and May 2005, marked as red arrows on chart).
January's reading came in at a healthy 15.92, some distance ahead of consensus
(12) while the December data was nudged up to 4.50 from 2.55. Given the
inventory data and statements from a number of large industrial concerns it is
very hard to believe that we have not commenced a vigorous expansion of
activity (if only to replenish inventories). We now await the similarly
unreliable Industrial Production and Capacity Utilization data which will be
released at 9.15 am. - empiremanufacturing.gif

China's December Monetary Statistics confirm that monetary creation has
crested for the current cycle. There is still a rapid increase in M2 but
nothing like the pace seen a year ago. As the attached chart shows
December's data showed a 1160 Bln CNY increase (1.95%) in M2, which is not
extraordinary for this seasonally strong month. This data caused the 12
month RoC (green) to nudge down to 27.57%, but a better guide for the next
12 months is the 3 month RoC (brown), which is only growing at an
annualized rate of 14.2%. This reduction in monetary growth can also be
seen in New Loan activity (red) which at 379 Bln is a fraction of the
issuance seen in early 2009. Our chosen measure of marginal liquidity is
the percentage of local equity market capitalization represented by New
Loan issuance. This is shown on the second chart as coming in at 1.59%,
with a 6 month ma of 1.74%. This is actually historically tight based on
the 10 years of data we have available. Since reserve requirements are being
raised in mid January we would expect to see a further dip in monetary
creation going forward. With China currently home to the largest pool of M2
globally Chinese monetary creation has global significance, particularly
for its main trade partners on the import side of the ledger (Brazil,
Australia) and closely linked local economies (Hong Kong, Taiwan). With the
pace of monetary creation slowing and the capitalization of local financial
and real estate assets increasing rapidly the odds of a liquidity shock
occurring at some point in 2010 seems reasonably high. In our opinion this
makes China and its related markets (the countries listed before are not an
exhautive list but are the most significant) an undesirable place to invest at
the current time.


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

Comments are pulled from last night's Weekly Speculator.

Today's publication of Census Bureau inventory and sales data mirrors the
earlier report on Merchants Wholesale data. The inventory rebuild cycle has
finally commenced with inventories (black line) growing by 0.41%, almost
exactly the same as October's number. This means that the 3 month RoC has
turned slightly positive although the annual drawdown (green line) remains
at an extraordinary -11.3%. The growth in inventories would have been more
rapid if it were not for an even quicker pick up in sales (red line). Sales
grew by a very rapid 2.05%, the fastest growth since November 2007 and
sales are now only down -0.39% on an annual basis. As a result the
inventory/sales ratio (blue line) has fallen sharply to 1.28, a figure more
often seen at the height of a boom rather than the beginning of a recovery.
Our conclusion once more is that the US is set for a rapid acceleration of
the manufacturing recovery in the coming months.


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

The secret to staying sane over the course of a cycle of this magnitude is
knowing the character of the plethora of data series that are released.
Today's Advance Retail Sales number is what we call a "drunken sailor"
statistic, at least on a monthly basis. That is it tends to lurch higher
and lower with significant amplitude from one month to another. Of course
over a longer period the statistic becomes more useful as the "signal"
starts to overwhelm the "noise". Attached is a chart showing the monthly
and annual change. The monthly number is clearly very poor at -0.3% versus
0.5% consensus. However, last month's data was increased by 0.5% accounting
for a good portion of the dip and we would expect the rest would turn up in
next month's number. We say this with some confidence since a pretty decent
holiday season has already been reported by a large number of retailers across
retail segments. The yearly chart is more instructive and traces a clear
and powerful "V" without any hint of deviation. Of course this is largely a
reflection of last winter's disastrous sales falling out of the data but
you can only recover from where you fall and it is all about the shape of
the recovery at this point in the cycle rather than the nominal level
reached to date. We see nothing in today's data to make us deviate from our
view that the retail sector has recovered well in recent months.




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

Our view on Japan for several months has been that although its
unpopularity amongst investors makes it intriguing we could find little
technical or fundamental encouragement to take a contrary (positive) view.
In recent weeks this has started to change. The local market has performed
very well on a relative and absolute basis (without the benefit of calendar
flows unlike many other equity markets). There have been signs that the
change of government is allowing policy to break out of its straightjacket
(the possibility of Japan Air Lines being allowed to pass through
bankruptcy would have been unthinkable before) and some of the economic
data is finally suggesting that the Japanese economy has started to recover
strongly. Attached is a chart of Japanese Machine Tool Orders (bln JPY)
that shows a sudden spike in activity in December. Orders reached 60.03 Bln
a 26.8% rise from November and are now almost three times the level seen in
March 2009. Of course they are still only 40% of their March 2008 peak
(141.83) but now the familiar "V" shape on the chart suggests that further
repair will be seen in the months ahead. Our conclusion is that Japan
warrants further attention at the current time.


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

China continues to dominate investor's attention as a combination of
crowded markets and tightening monetary policy threatens to produce a
significant reverse. Perhaps the best that could be said is that the
tremendous attention given to the NY Times article regarding Jim Chanos's
beliefs suggests that we are almost certainly dealing with the "C" word
(correction) rather than the "B" word (bubble) at the current time. Looking
at the HSCEI Index (which is made up of the largest liquid Chinese "H"
shares) we can see clear signs of "distribution" since October, a notion
further confirmed by MACD's steady slippage to sequentially lower levels.
This sort of pattern is typically resolved by a fairly sharp fall down to a
level where new buying power can be mustered, the most obvious target being
the 200 day ma at 11,507 (approximately 8% below last night's close). Below
the 200 the next target would be the 38.2% retracement of the 2009 rally at
10,817. A fall below the December 21st low of 12,163 would suggest that the
resolution of the distribution pattern has commenced.


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

As we explained yesterday, the recovery of the Chinese Export economy opens
the door to more aggressive (or at the current time significantly less
loose) monetary policy. 48 hours after this data was released the Chinese
central bank has announced a hike in the reserve requirement by 50 bp to
16% for large banks and 14% for small banks starting January 18th. While
this in itself is hardly a momentous hike it should be recognized that
reserve requirements were the only portion of the Chinese monetary system
that were not radically loosened during the crisis of 2008 (see attached
chart). The move should also be interpreted as a change of direction, the
first step on a journey whose destination is substantially tighter monetary
policy.
.
There seems little doubt that this is justified with numerous data points
and anecdotal stories regarding an over-heating local economy. Indeed, we were
intrigued to see the attached story released today regarding mainland
Chinese buyers becoming a force in the international art market. The
emergence of a new body of high-end collectors has always been an accurate
indicator that wealth creation has reached a level of excess that rarely
ends smoothly.

(See attached file: M-CHRRDEP_Index.gif)

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

New York, London Art Sales Lure Chinese Money, Christie’s Says
2010-01-12 04:58:59.598 GMT


By Le-Min Lim
Jan. 12 (Bloomberg) -- Mainland Chinese are buying more art
at Christie’s International’s auctions in New York and Europe as
their purchases “rose significantly” last year using wealth
produced by a growing economy, Christie’s said.
Mainland China residents bought the most-expensive items at
Christie’s New York jewelry auction in October and more than
doubled their purchases of Chinese art last year at sales in
London and New York, said Andrew Foster, president of Christie’s
Asia, in a statement. Nine of the 10 priciest items at the
second part of a Paris auction of Yves Saint Laurent’s effects
in November were bought by Asians, Christie’s said, without
saying how many were Chinese.
The past two years have seen the Chinese outbid Americans
and Europeans for top-end Asian antiques and gems at art sales
in Hong Kong, the world’s third-largest auction market after New
York and London. Now, the Chinese are expanding their collection
beyond traditional art to include watches, wine, jewels and some
Western art, said Foster.
“The trend is crystal clear,” said Foster, who’s also
Christie’s chief operating officer. Asia’s “wealth is migrating
to art and lifestyle purchases, and not only in Hong Kong.”
Hong Kong is leading the global recovery in the art and
auction markets, said Foster. Like rival Sotheby’s, the company
holds biannual sales in the city. In 2009, Christie’s Hong Kong
sales tallied HK$2.7 billion ($348 million), with buyers paying
27 percent more per lot at the second auction than the first.
Foster said “passion” is returning to the Hong Kong art
market. “The head evaluates, but the heart rules the art
market.”

For Related News and Information:
Top Arts and Lifestyle Stories: MUSE <GO>.
Christie’s Auctions CHRS LN <Equity> TCNI AUCTION <GO>.
London art auction news search: STNI LONDONART <GO>.
Most-read auction stories: MNI AUCTION 1M <GO>

--Editor: Frank Longid

To contact the writer on the story:
Le-Min Lim in Hong Kong at +852-2977-6603 or
[email protected]

To contact the editor responsible for this story:
Mark Beech at +44-20-7330-7593 or [email protected].
- M-CHRRDEP_Index.gif

It is interesting to note that the SPX was up 1.78 in December beating the
returns of every Hedge Fund category in this Bloomberg survey. This shows
extent to which current allocations have been directed away from domestic US
equity exposure (note the poor performance of "Long Bias" and "Macro", while
"Long/Short" lost -3.2%).
.
December was an interesting month because strong economic data created a robust
local market together with a stronger USD. The latter's reversal meant that
emerging market returns came under pressure and most commodities behaved
poorly. Of course so far January has been a very different story (it pretty
much had to be given the inevitable concentration of 2010 allocations towards
the global-growth ex-US thematic that has gripped the investing public's
imagination) but the poor relative performance in December highlights the
crowding of current allocations and the resulting danger of relative or
absolute dissapointment later on this cycle should the US equity market and the
USD outperform expectations.

It is exactly a year ago since we made the (then controversial) argument
that Chinese monetary growth was highly likely to spark a recovery in trade
volume and suggested that readers start monitoring this data closely. As
December's data demonstrates the controversy is well and truly over and if
anything the speed of growth has surpassed even our expectations. Total
Chinese exports grew to $130 bln in December, a record for that particular
month (the prior record being $114.42 in December 2007) while imports
soared to $112.29, the highest reading for any single month. Both sets of
data suggest that the collapse in activity in 2008/9 has been fully
repaired. There are some interesting implications to be drawn from this
data.
.
Firstly the strength in exports reflects the fact that the global economy
is starting to recover rapidly although the data showed the strongest
growth in exports to EM and Australia, US exports were 15.9% above December
2008 and EU exports 10.2% above December 2008. These are respectable
numbers that can be expected to accelerate in the next few months. The
notable laggard was Japan where exports only grew by 5%, which is an
indication of the fact that Japan's recovery has thus far lagged other
developed economies. This may cease to be true going forward.
.
Secondly, imports have grown a remarkable 55.7% YoY. Even allowing for the
collapse in activity at the end of 2008 this is quite something and
indicates an acceleration of the level of activity in China's internal
economy that must be considered unsustainable over the longer term.
Moreover, our feeling has always been that the Chinese authorities would
tolerate surging imports for as long as it took exports to recover (thus
securing a market for the manufacturing base) but thereafter would be much
more likely to tighten local monetary conditions and drain excess
liquidity. December's data therefore offers important fundamental
confirmation of the global recovery while simultaneously pushing forward
the date at which global liquidity levels prove insufficient to support
global asset prices. As ever the safest time to invest in a thematic is
while it remains controversial and not when it is widely embraced by the
entire spectrum of the investment community and its commentators.


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

Today's report suggests that the US inventory cycle turned decisively in
November. The importance of this is hard to overstate since it will effect
a number of key economic metrics going forward and also suggests very rapid
growth in corporate earnings. Looking at the data we see that the overall
Inventory level (black line on first chart) rose 1.49%, the largest
percentage increase since October 2004. Perhaps even more importantly
Merchant Wholesaler sales (red line on first chart) rose by a very large
3.29%. This appears to be the largest 1 month increase in sales since
January 1993. This combination has led to a collapse in the Inventory/Sales
ratio (green line on first chart) to 1.14. Thus although Inventories are
being rebuilt in NOMINAL terms sales are continuing to rise faster and so
effectively the drawdown relative to requirements is continuing (remember
this is precisely what the ISM data has been suggesting for the last few
months). Again this points to a need for manufacturers to boost production,
something we expect them to be willing and able to do.
.
The second chart looks at some of the inventory changes in specific
industries (all rebased so 2003 = 100). Here we would note very rapid
rebuild of computer inventories (pink) but few other signs of rebuild. We
would point out that Apparel inventories (dark green) continued to fall in
November and since we now know that the December shopping season was better
than expected this would be one industry where rapid re-build will be
particularly necessary. All in all though this is an extremely positive
report.


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

Our guess (estimate would be too strong a word for such a flaky data-series)
for this months reading was a range of -50K to 100K and in the event today's
number came in slightly lower at -85K. Although we would prefer to see a
stronger number we would view today's release as in line with expectations and
well within the error tolerance for a "neutral" employment report. We therefore
do not expect a significant market reaction although today's report may buy
some more time for tired trades such as gold. We also think it important that
November's number was not revised sharply lower (in fact it was bumped up from
-11K to +4K) since this confirms the sharp improvement in this report over the
last 12 months. In fact at 596K (and 605K for November) the 12 month nominal
"change of change" is one of the highest readings seen in the last 40 years. As
we have argued before as long as the shape of the chart remains "V" shaped we
would ignore the jagged nature of this data. It strikes us as highly unlikely
that having eliminated almost 7mm jobs over the last 14 months US employers
would magically halt at precisely the correct size of labor force. We continue
to believe that re-hiring will become a major thematic of 1H 2010. -
nfpdec09.gif

Our view of the UK is that the extent of its exposure to the credit crisis
and subsequent scale of fiscal and monetary response relative to the size
of its economy means that it will serve as a useful early indicator for
other similar but less extreme economies (such as the US). As such we were
interested this morning to see the first signs of inflationary pressures
building in the UK in the form of the PPI (Manufacturing) Index. This rose
to a new all time high in December of 116 (2000 = 100) making it one of the
very first global inflation indexes to surpass its pre-Lehman levels. Given
that most commodity input prices remain well below their 2008 peaks this is
quite an achievement. As the attached chart shows PPI is currently growing
by 3.48% annually while the 3 month RoC is 1.05% which is 4.20% annualized.
Neither of these numbers are in themselves alarming (yet) but they are at the
high end of levels recorded over the last 20 years while local interest
rates remain at historic lows. As a rule of thumb PPI measures tend to lead
CPI by 6-12 months and on this basis it may be that the UK will be
experiencing clear inflationary (CPI) pressures by the middle of summer.


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

Gold appears to have failed at its Dubai low ($1138 - $1140) which we had
expected to be strong resistance. While in itself this is not such a big
deal the fact that it has happened in the first week of January is a clear
warning that calendar flows are diminishing rapidly. The run-down of new
allocations is always a time of vulnerability for crowded and popular trades
such as
gold.
Looking
ahead the short term range seems likely to be defined by the green line ($1168)
which marks a 61.8% retracement of the December decline and $1,074 which
marks the December 22 low. A breach of either of these levels would suggest
a move of greater magnitude has begun. The ultra-short term bans is defined
by $1140 and the 50 day ma (Currently $1126), with a breach of wither of
these levels indicating a potential move that tests the range limits. As with so
many things tomorrow's non-farm payroll report (or rather its effect on the
USD) seems likely to determine the direction of the next move for the metal.


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

Today's Initial and Continuing Claims data confirm the significant
improvement of employment trends seen in recent weeks. The Initial Claims
came in at 434K, pulling the 4 week average down to 450.3, the lowest
reading since September 12th 2008. Continuing Claims fell sharply to 4802K
(4981 last week) although this improvement is largely the result of
Claimants falling off the regular roll and moving onto the Emergency
facilities. This week's data would therefore be consistent with a neutral
non farm payroll report although what the actual number will be is anyone's
guess.
.
This is not the same as saying that we have reached a period of stasis in
the labor market. It would be more accurate to say that we simply have not
yet reached the point of rampant re-hiring. Interestingly yesterday's
Conference Board Online Ad report (see yesterday's comment) was a really
key piece of data in this regard that suggests that the re-hiring cycle may
have begun in December. If the reduction in the pace of firing was the
surprise for Q4 the amount of hiring should be the surprise of Q1 and Q2.

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

As we have written many times in recent weeks employers stopping firing is
one thing, employers actually re-hiring is another. Unfortunately there are
far less statistics available to judge the latter but one relatively
youthful gauge is the Conference Board Online Help Wanted Index (HWOL).
Since mid 2005 this index has measured online job advertising which clearly
combines both actual hiring trends and also a steady shift from print to
online advertising on the part of recruiters. The survey has also not been
"battle tested" in a recession and recovery prior to the current cycle
which is a further limitation. On the other hand it is a relatively simple
index that intuitively should reflect changes in hiring trends, and
certainly the index fell from readings around 4.6mm - 4.9mm in early 2007
to readings just above 3mm in early 2009.

As the attached release shows the December data shows a sudden increase in
the index with an increase of 255K advertised postilions. This is the
second largest monthly increase since the survey commenced (the largest was
337K in November 2005) and takes the total up to 3,641K, the largest total
since December 2008. As such it is one of the first pieces of data to
suggest that actual re-hiring may be taking place in the US economy
although we would always be cautious about drawing too many conclusions
from a single data point. This will however be an important data-series to
watch in the months ahead.


http://www.conference-board.org/economics/helpwantedOnline.cfm

(See attached file: Copy of National_historical.xls)
Copy_of_National_historical.xls

The December Challenger Total US Job Cuts Announcement Index offers further
evidence that US employers have run out of wither the ability or
inclination to trim their work forces. The December 2009 reading came in at
45,094, the lowest single month since December 2007. This takes the 3 month
average down to 50,374, the lowest average since November 2000 right at the
start of the technology driven recession. Of course this index tells us
nothing about future hiring intentions (Challenger does publish a Job
Hiring Index but it is too unreliable to be considered useful data) but it
does suggest that Q4 2009 has witnessed a dramatic halt to the
deterioration of US employment that was unanticipated by the vast majority
of observers. Our suggestion is that the actual growth of payrolls in 2010
may prove to be just as unsettling for those still wed to the notion of a
"jobless" recovery.


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

The November Pending Home Sale data showed a very rapid contraction of -16%
from the October data and clearly shows the effect of regulatory distortion
upon consumer behavior. It would appear that October's number was
artificially boosted by the threat of tax credit expiration in November
leaving less new contracts to be sold in November as a result. Of course in
the end the tax credit was extended and so we would expect to see
December's pending home sales recover from November's level. Given the
close relationship between Existing and Pending Home sales this will lead
to a sharp drop in the Existing home sales data (almost certainly in next
month's numbers), our estimate being that Existing sales will fall back to
the 5.25 - 5.5mm level. However, this drop will almost certainly be of a
very short term nature with a subsequent rebound taking Existing Sales back
up to somewhere around the 6mm level. There is plenty of statistical and
anecdotal evidenced to suggest that the existing home market has started a
sustained recovery, we have no objection with the notion that government
stimulus is exaggerating the extent of recovery other than to point out
that this is precisely the intention of the policy in the first place.
.
Furthermore we would be open to the notion that the housing market could
recover even without the current tax credit being extended, at least after an
initial drop in activity. We would use the "Cash for Clunkers" episode as a
guide which ramped up car demand for a short period of time before expiring
in the late summer at which point demand immediately collapsed. However,
subsequently demand has recovered strongly evidencing a more "natural"
recovery in automobile demand with today's initial reports suggesting that
December's data will confirm this trend. Our viewpoint remains that the
recovery in consumer demand is real and is likely to accelerate if the
employment situation improves in the manner we anticipate.



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

The December 2009 ISM survey offered further evidence that the manufacturing
recovery substantially accelerated in Q4. The overall index (black) rose to
55.9, the highest reading since April 2006. Perhaps most importantly New Orders
accelerated to 65.5 from 60.3 (red line) the strongest reading since December
2004. This, to us, seems to be the key to the current cycle since a growing
order book will ultimately force even the most sceptical of manufacturers to
boost production. There are some signs that this is happening with the
Production index (blue line) improving to 61.8, but this rate of improvement is
still insufficient to rebuild inventories with the Inventory index (green line)
still showing drawdown at 43.4 (up from 41.3 last month). This is of course
good news in terms of the sustainability of the current recovery with further
acceleration in Production indicated even if New Orders start to slow their
growth. Finally the Employment index (pink line) moved higher to 52, indicating
a moderate growth in manufacturing employment. As we have stated before this
number is ikely to move sharply higher at around the same time that inventory
re-build becomes apparent. - ismdec09.gif

The start to a new year typically brings with it a substantial reallocation of
investment capital and as a rule of thumb these flows typically favor
those asset classes that have outperformed in the previous period. It
therefore comes as little surprise to see the commodity complex post strong
gains across its spectrum with copper and heating oil making new recovery
highs and sugar a new 27 year high (a move that seems about to go parabolic
- see attached). Today's gains have been sufficient to power the S&P GSCI
index 2.5% higher and through what had been very strong resistance at 530, a
level which combined a 38.2% Fibonacci retracement of the 2008 collapse and the
500 day ma.
.
The question now is whether these calendar flows will be sustained long enough
to spark off another round of gains that would possibly target the 600 level
for the index (a 50% retracement of the 2008 collapse comes in at 599.72) or
whether they will become exhausted after a matter of days and signal a
reversal. Our sense is that while some of the major commodities such as crude
and gold may only register limited gains some of the smaller more peripheral
names may get quite frothy in the first weeks of 2010. Notwithstanding the
possibility of gains these are never the sort of markets that we ourselves feel
comfortable playing in since speculative flows have a habit of reversing
suddenly just as capital reaches its peak commitment.


(See attached file: D-SPGSCI_Index.gif)

(See attached file: M-SB1_Comdty.gif) - D-SPGSCI_Index.gif - M-SB1_Comdty.gif