The Revised March Retail Sales report has just been released. Both the headline
data and Retail sales ex-Autos were revised higher by 0.3% suggesting a
considerable acceleration in consumer activity took place that month.

It has been notable how strong the various regional PMI reports have been for
April's data (we await final confirmation from the national ISM report on
Monday) and this suggests that a considerable increase in Industrial activity
has taken place at the start of the 2nd quarter. Today's Chicago PMI continues
this trend with a strong headline number of 63.8 (up from 58.8 and ahead of
consensus estimates of 60) being matched by excellent sub-index performance.
New Orders (red) remain key and improved to 65.2 (a very strong number given
that this data has been positive for 7 months). This was matched by Production
(blue) at 63.1, a level that was only sufficient to keep Inventory (green)
stable at 50.1. Finally employment (pink) improved to 57.2, its 4th consecutive
month above 50. All in all this is a very positive report. - chicagofedapr10.gif

Today's Q1 GDP report appears to be an acceptable collection of data but as
ever we would hesitate to draw too many conclusions from such a "heavy" set
of official statistics, particularly in advance of the revised publication
of estimates (we would instead continue to rely on corporate earnings and better
cyclical data such as the ISM survey to gauge the strength of the
recovery). Under the headline numbers a couple of sub indexes bear closer
scrutiny since they give some insight as to the fortunes of specific
portions of the
economy.
Firstly, we would
highlight the Inventory data which has now swung into positive territory for
the first time since Q4 2007. At an annual pace of $33.20 Bln Inventory growth
is no the highest since Q3 2006, although still well below the level required
to repair the massive drawdown seen during 2008/9. We would expect to see much
stronger numbers over the next 2-3 quarters as Manufacturers start to address
their growing order books with greater onfidence.
.
We would also draw attention to a good Personal Consumption report, which
reached a new all time high of $9,372.7 Bln this quarter. Contrary to most
people's expectations the Consumer portion of the economy has actually held
up much better than the Industrial economy, despite a very rapid increase
in unemployment and the (alleged) over-indebtedness. This can be see on the
attached chart which shows how the proportion of GDP accounted for by
Personal Consumption has actually risen during this crisis by more than a
full percentage point (see shaded oval). Given the capacity of the
Industrial economy (and corporate sector in general) to rebound strongly
going forwards it may be that some of these "relative" gains will be given
back (this would of course be a healthy development) but the general point
that should not be lost is that the US consumer has contributed fully to
the recovery in US economic activity and can be expected to continue to do
so in the months ahead.


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

We note that the Bank of Japan (BOJ) issued its monthly statement last
night which included a clear commitment to increase credit growth within
the Japanese economy (making it the only major Central Bank to still be
moving towards looser monetary policy). As ever the focus was on consumer
inflation, which remains negative with Consumer Prices ex food dropping
-1.2% through the 12 months ending March 2010.
.
Although we can understand the BOJ's current position it should be
recognized that outside of the narrow focus of inflation other metrics
suggest that something more encouraging is taking place within the Japanese
economy. Last night's busy calendar included data from both the Vehicle
Manufacturing and Homebuilding sectors that both suggest a considerable
recovery is underway. Looking at the Vehicle data first we can see that
March Production reached 945K which is close to the 5 year average for this
month (967K) and a 72% increase on activity a year before. Given the
dramatic degree of underproduction since late 2008 (which can be gauged by
the 12 month ma on the chart) we would expect to see this metric move above
its 5 year average for a period of time in the months ahead. Meanwhile in
the housing sector it is becoming increasingly clear that the cycle low in
production is in place with starts rising to 854K units. This level is
approximately 65% of the 30 year average (1310K units) suggesting that it
should be quite easy for this industry to post significant gains going
forward. Ultra-loose monetary policy tends to be an inefficient tool if
judged by its ability to repair specific problems within an economy (in
this case a very low rate of inflation) but this should not disguise the
fact that it can have very significant effects on certain portions of the
economy, particularly those that are capital intensive and interest rate
sensitive. Clearly both these sectors qualify in this regard and both
should be expected to benefit considerably from the BOJ's largesse.

(See attached file: M-JNVHPROD_Index.gif)
(See attached file: M-JNHSAN_Index.gif) - M-JNVHPROD_Index.gif -
M-JNHSAN_Index.gif

Calvin Klein Underwear Cachet Drives Shoppers Choosing Fashion

Yet another story outlining the rapid return to normality in consumer
expenditure. Again what remains striking is that despite the obviously positive
message in this story the authors and their interviewees still feel the need to
issue a warning that things are unlikely to continue getting better. Of course
given the cyclical nature of such behavior, the considerable deferment of
spending from late 2008 through mid 2009 and a repair to employment we would we
would expect to see a considerable further improvement in consumer activity
from this point on.

 

Last week we highlighted the sudden move in Canadian short term interest
rates that followed some aggressive comments by the Bank of Canada (BOC)
regarding the need to hike rates sooner rather than later. As the attached
chart shows the 12 month Canadian Bankers Acceptance rate (red line) has
stabilized around the 1.40% level anticipating 100 to 125 bp of tightening
from the current 25bp level. This almost certainly will prove to be an
underestimation of the BOC's eventual degree of tightening but we would not
expect the market to price in more at the current time. We continue to see
the sudden move in Canadian rates to be a good template for what may occur
in the US. Here we can see that the 12 month LIBOR rate (black line) has
been edging up in recent weeks and is now back above the 1.00% level for
the first time in several months. This still hardly prices in the sort of
move that we think is likely by May 2011 and also does not represent a
decisive change in sentiment by the market. Today's FRB statement does have
the potential to change things should they decide to modify the language in
their statement away from the "extended period". On balance we judge this
to be unlikely although it is long overdue based on the considerable
improvement in economic data. In this regard the fact that some of the
FRB's own data series (we commented on both the Dallas and Richmond Fed
Indexes yesterday) have started to signal a strong recovery can be expected
to have some impact on their hide-bound decision making process. Should no
change in language be forthcoming the two month gap in the FRB meeting
schedule would open up a considerable window for market to take matters
participants to take matters into their own hands. A move by 12 month LIBOR
above 1.20% would suggest that the market was losing patience with the FRB.


(See attached file: D-US0012M_Index.gif) - D-US0012M_Index.gif

Both yesterday's Dallas Fed and today's Richmond Fed regional PMI releases have
been well above consensus and both have had particularly strong New Order
sub-indexes. Attached is a chart of the Richmond Fed Index which shows that New
Orders have soared to an all time high of 41%. As regular readers will know it
is all about demand metrics at the present time and altough we would wait for
the vastly more reliable ISM report (due out May 3rd) before making any final
conclusions there are already strong hints of an accelerating recovery in
industrial demand. The other point we would make is that strong improvement in
official Fed data is that much more likely to influence internal discussion
within the FRB than data produced outside of that organization and therefore it
will be interesting to see if the April 29th FOMC statement reflects any change
in appreciation or the current economy, particularly since there is no May
meeting schduled this year.

April saw a marked improvement in Conference Board Consumer Confidence with the
overall index moving up to 57.90, the highest reading since August 2008 on the
eve of the collapse of the GSE's and Lehman. Although this gain is a positive
there are good reasons to argue that consumers are still unrealistically
pessimistic given the sizeable improvement in economic and corporate data that
has been reported in recent months. One way to show this is looking at the
spread between the Overall index and the Present Situation Index (see chart 1).
The latter remains far troubled at 28.60, and is -27.10 points below the
overall index (as a comparison it was 65 in August 2008). As can be seen
periods in which this spread is strongly negative typically preceed very
positive moves in both indexes. Interestingly the Present Situation Index (red
line) also tends to be much less "noisy" once it actually starts to move
higher. A move above 40 by this index would signal strong proof that Consumer
Confidence has decisively turned (cont)
.
A further signs of undue pessimism can be seen in the data related to
employment. The spread between "Jobs Hard to Get" and "Jobs Plentiful" (blue
line on Chart 2) remains very high at 42.30 and has hardly changed despite the
quite dramatic improvement in employment metrics over the last 6 months. Again
there is little unusual about this sort of "confidence drag". Here we would
look for a rapid decline below +20 to indicate a more realistic appraisal of
the economic situation was being indicated by consumers. -
confidencepresentapr10.gif - confidencejobsapr10.gif

Another tough session in China as concerns related to the domestic property
market continue to weigh on the market. The SHASHR Index bounced off last ditch
support at 3,000 (the index hit 3,004.63 before rallying to close at 3,048.28,
down 2.07%) but remains very much in a corrective move. Although China "H"
shares (HSCEI) and Hong Kong (HSI) have so far held up a little better both are
currently testing important (but less critical) support at their 50 day ma. We
would expect them to follow any breakdown by the domestic Chinese market and
all 3 indexes should be watched fairly closely in the day's ahead. -
sg2010042727357.gif

Based on this morning's RTY index note.

Perhaps no sector has confounded expectations more than retail in recent
months with intense short activity being overrun by a far more robust
rebound in sales than most considered possible to occur. As the attached
chart shows the RELX chart has not only recovered over 90% of its 2007-2009
decline but has also broken out relative to the SPX Index. Even so this
sector still attracts considerable negative commentary with many still
anticipating a slowdown in the "over-indebted" US consumer (see today's
Bloomberg article that highlights the large bearish put positions in the
XRT ETF). We continue to argue that consumer spending is likely to remain
robust and should actually start to accelerate as the US employment cycle
starts to move back into a period of strong job creation.


(See attached file: W-RELX_Index.gif)

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

Options Bets Against U.S. Retailers Double as Estimates Rise
2010-04-26 12:58:22.148 GMT


By Jeff Kearns and Matt Townsend
April 26 (Bloomberg) -- Traders have doubled their bearish
bets against U.S. retailers in the options market, speculating
next month’s reports on sales and unemployment will disappoint
investors after a record 12-week rally.
The ratio of puts to sell the SPDR S&P Retail exchange-
traded fund versus calls to buy it has jumped to 4.1-to-1, close
to the highest level since August, and put trading surged to a
nine-month high on April 23. Wagers are most concentrated on
contracts that pay off should the ETF fall 18 percent by May 21.
Derivatives traders are diverging from equity analysts, who
have increased 2010 profit growth forecasts for the industry to
9.5 percent from 8.8 percent at the beginning of April,
according to data compiled by Bloomberg. Reports next week may
show sales at retailers slumped this month and the U.S.
unemployment rate held at 9.7 percent, the International Council
of Shopping Centers and economists said, while data released
April 7 showed consumer credit shrank in February.
“Retailers face contracting credit, high unemployment and
no real visible spending catalyst on the horizon,” said Kevin
Nichols, vice president for ETF strategy at Newedge Group in New
York. “The put-call ratio has doubled since the beginning of
the year. That magnitude of increase usually marks a directional
bet, more so than a hedge.”

Wal-Mart, Amazon.com

By purchasing puts on the ETF, traders are betting against
companies from Wal-Mart Stores Inc., the largest retailer, to
online merchant Seattle-based Amazon.com Inc. and business-
supplies seller Office Depot Inc. in Boca Raton, Florida. The
62-company security surged 27 percent to $45.12 since Dec. 31
through the end of last week, or triple the gain by the Standard
& Poor’s 500 Index.
Same-store sales at 31 U.S. retail chains rose 9 percent in
March from a year ago and may be unchanged or decline 3 percent
this month, the New York-based International Council of Shopping
Centers said. Most chains report sales on May 6. While revenue
increased in the first three months of this year, the gain came
in comparison to a year earlier when the economy was in the
depths of the worst recession since the 1930s.
The Labor Department’s May 7 report may show the U.S.
unemployment rate is still near the 26-year high of 10.1 percent
reached in October, according to the median estimate of 13
economists in a Bloomberg survey. Consumer credit fell by $11.5
billion in February, 16 times more than forecast and the 12th
contraction in 13 months, the Federal Reserve said April 7.

12 Straight Weeks

The retailer ETF has risen 12 straight weeks. All but two
stocks have advanced this year, led by rallies of at least 80
percent for Los Gatos, California-based Netflix Inc. and
AnnTaylor Stores Corp. in New York.
David Schick, a retail analyst for Stifel Nicolaus & Co. in
Baltimore, said that Americans are still wary of spending.
“You have to see jobs and a perception of jobs to continue
to move in the right direction,” Schick said. “That could turn
the easy comparison momentum into real momentum. It’s a long way
from seeing that happen. It doesn’t mean it won’t. We just don’t
know if that’s the outcome yet.”
Many U.S. retail chains report April sales at stores open
at least a year on May 6. About 70 including Wal-Mart of
Bentonville, Arkansas; Cincinnati-based Macy’s Inc., the second-
largest U.S. department-store company; and Minneapolis-based
Target Corp., the second-largest U.S. discount chain, report
quarterly results during the two-week period that ends May 21,
which is also the day that next month’s options expire.

Triple the Average

Options strategists including those at Susquehanna
International Group LLP have noted higher-than-average volume
for bearish options on the retail ETF since April 13, when put
trading surged to 143,486 contracts, the most in almost three
months. Put volume jumped to 99,441 on April 22 and 191,315 on
April 23, triple the four-week average.
“The vast majority of recent SPDR S&P Retail flow has
involved protective trading,” strategists at Susquehanna in
Bala Cynwyd, Pennsylvania, wrote on April 23. Some of the
largest trades were initiated by investors making bearish bets
using options expiring in May, June and September, they said.
Outstanding put options have almost quadrupled this year to
879,982 contracts, while open interest for calls has nearly
doubled to 217,232. Puts account for 18 of the ETF’s 20 largest
levels of open interest.
May $37 puts are most widely owned, with 70,063 existing
contracts, and their open interest has grown the fastest over
the past two weeks, according to data compiled by Trade Alert
LLC, a New York-based provider of options market analytics. The
retail ETF hasn’t closed below $37 for two months and a decline
to that level would be an 18 percent slide from the last close.
“I’ve been seeing institutions accumulate bearish
positions,” said Frederic Ruffy, senior options strategist at
WhatsTrading.com, a New York-based provider of options-market
analysis. “There’s going to be a lot of data in the first week
of May.”

For Related News and Information:
Retail ETF Put-Call Ratio: XRT US <EQUITY> FHG 4 14 <GO>
Retail ETF Members by Weight: SPSIRE <EQUITY> WGT <GO>
Equity Derivatives Home Page: EDRV <GO>
U.S. options news: NI USO BN <GO>
Most-active U.S. options: MOSO US <GO>
Biggest Options Volume Increases: OVI <GO>
For employment data: EMPR US <GO>

--With assistance from Lynn Thomasson and Andrew Dunn in New
York and Vincent Del Giudice in Washington. Editors: Nick Baker,
Chris Nagi

To contact the reporters on this story:
Jeff Kearns in New York at +1-212-617-8138 or
[email protected];
Matt Townsend in New York at +1-212-617-1853 or
[email protected].

To contact the editor responsible for this story:
Nick Baker at +1-212-617-5919 or [email protected].

- W-RELX_Index.gif

Since mid January we have commented a number of times on the strong
outperformance of smaller cap equities. The Russell 2000 Index (RTY)
continues to make strong gains and actually accelerated out of its rising
trend on Friday (see attached short term chart). It now seems likely that
the index will challenge its 2008 high at 764.38 (approximately 3% above
Friday's close at 741.92) and has managed to exceed a 76.4% retracement
(735.20) of the entire 2007-2009 collapse from 856.48 to 342.57. This
suggests that in the medium to longer term a challenge of the 2007 all time
high is a credible prospect, although we would imagine that some
consolidation and back-filling would be required before the final leg of
this journey commenced.
.
Meanwhile in relative terms the RTY has already marked a very significant
milestone with last week's close representing a new 20 year relative high
against the SPX Index. As the attached chart chows the relative performance
line has broken out of a 4 year period of consolidation and looks likely to
continue to gain considerable ground before this rally has run its course.
This bout of out-performance could therefore have more technical
significance than many may suppose, particularly since it comes after a
bear market collapse that saw far less "relative" damage to the RTY than
has typically occurred in prior declines. We would therefore be open to the
idea that smaller cap equities may have started a multi-month period of
outperformance, but the ultimate proof will be how this index holds up
during the next broadly corrective move that cuts across equity markets.


(See attached file: D-RTY_Index.gif)
(See attached file: W-RTY_Index.gif) - D-RTY_Index.gif - W-RTY_Index.gif

This is precisely the sort of thing we were looking for this earnings season.
Of course the fact that it is now being finally recognized does mean that
current market prices are at least starting to discount the recovery.
Nevertheless although the sweet-spot for investing is always when matters
remain more controversial the balance of risk/reward still suggests it makes
sense to remain broadly invested.

One of our core macro assumptions has been that the US New Home Market
would recover from its record low pace of activity during the key Spring
selling season. We are therefore relieved to see that the March New Sales
data shows clear signs of recovery with actual sales of 38K representing an
annualized SA pace of 411K, well above the very low consensus of 325K. It
is also significant that the February data was revised higher to 324K from
308K. As happy as we are to see this recovery it still keeps New Sales in
the ultra-low range that has contained them since the collapse of Q4 2008
and we would want to see future sales push through the 450K in order to
establish that a new positive cycle of growth is underway. Should this
occur readers should be aware of the highly cyclical nature of the New Home
market (and if they are not the attached chart will remove any doubt). In
this regard it should be noted that the 30 year average for New Home sales
is 733K, some 80% above their current level of activity. We would also note
that inventory also fell in March to 228K, the lowest level since March
1971, meaning that only a moderate increase in sales will force a
construction to increase accordingly.
.
Of course the clear beneficiaries of such trends are the public
homebuilders and the market has not been slow to react to better data. The
S&P Super-composite Homebuilder Index (S15HOME - see attached chart) has
broken out to a new 18 month high this morning and has risen 30% YTD. These
gains need to be put in historical perspective and it should be realized
that this index still trades at 30% of its peak 2005 valuation. A sustained
improvement in housing metrics should therefore see further gains and a
medium term move up to 400 for the index certainly seems possible, with
some stiff resistance around the 360 level standing in the way of this
target.


(See attached file: D-NHSLNFS.gif)
(See attached file: W-S15HOME_Index.gif) - D-NHSLNFS.gif - W-S15HOME_Index.gif

The existing home sales data has followed precisely the same pattern that
automobile sales did under the influence of the "Cash for Clunkers" program.
Sales were massively stimulated by the original tax credit program last summer
but this then led to a rapid drop off in sales activity later in the year and
questions about the sustainability of the existing home market's rebound. As we
suspected this drop-off in activity was short lived and existing home sales
have recovered back to a respectable level of activity. We like to focus on the
Single Family data (which has a much longer history) and it can be seen that
the current month's sales of 4680K units matches the 12 month ma almost
exactly. This puts the US Existing home market roughly where it was in the
early 2000's, a perfectly healthy time for home sales. This level of activity
is high enough to slowly absorb the continued flow of foreclosed units over the
coming months. Furthermore with delinquency metrics having peaked at the end of
2009 and employment moving into positive territory peak foreclosure activity
should be recorded some time between Q3 and Q4 2010, allowing inventories to
fall moderately thereafter. - existinghomemar10.gif

The global monetary tightening cycle has seen another important milestone this
week with the Bank of Canada (BOC) signalling to markets that it is prepared to
increase rates ahead of any move by the FRB. This is important since Canada has
close ties to both the US economy and the "Go Go" camp via its large commodity
related sector. Clearly the recent strength of US data has allowed the BOC to
start to address the strength in its local economy and to admit that the
current rate of 25bp is inappropriately low. The market has not been slow to
take notice with the 12 month forward yield (see attached) moving strongly
higher to 1.44%. This rate was 1.16% a week ago and spent many months in a
"zone of indifference" anchored around the 80 bp level. As we have argued
before stability in short term rates that remains in place in the face of
changing economic data typically gives way to a fairly violent move once the
shift in economic activity becomes unambiguous. We would expect to see a
similar abrupt move in US rates later in 2010 but in the meantime Canada will
form a useful template to follow. - canada12m.gif

Several months ago we highlighted the recovery in the UK PPI Index and
suggested that the UK would probably lead any inflationary cycle in the
developed economies. March's CPI (and RPI) data certainly suggest that this
will indeed prove to be the case with the headline CPI Index recovering to
3.4%, far in advance of the 3.1% expected. The RPI Index (which is generally
used for wage negotiations based on the cost of living) is showing an even more
rapid increase at 4.45% (4.8% excluding mortgages). The willingness (or even
ability) of the BOE to keep the current extremely loose monetary place will
come into doubt should future releases confirm that inflationary pressures are
taking hold. - ukcpimar10.gif

With all the attention focussed on SEC charges against Goldman Sachs and
consequent losses in the equity market, the rapid losses in gold should not
be ignored. This metal has had a good recovery from the depths of its
February decline but never quite convinced us that its upside move was more
than a reflection of quarterly investment flows. Today's decline confirms
that the brief breakout above key resistance at $1,160 should be ignored
and attention shifted to important support offered by the combination of
the 21 and 50 day ma's. A breach of the latter ($1,117.16) would point the
metal once more in the direction of an overdue test of its 200 day ma
($1,067.32).


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

Cheung Kong Says China Property Cooling Is ?Timely? (Update2)

China announced a number of measures to cool property speculation last night.
It is little surprise that these measures have been initially welcomed but from
our perspective when speculative markets meet regulatory forces there are
really only 2 possibilities: Either the markets simply sail on upwards or the
policy is draconian enough to promote a collapse. Of course the former
typically leads to the latter as policy is steadily tightened by increasingly
frustrated regulators. Despite the international plaudits for the Chinese
authorities handling of the post-Lehman crisis we doubt that this story will
play out any differently from the myriad of other times that it has played out
before.

 

Yesterday's NAHB survey hinted at a material improvement in Homebuilder
activity and more concrete evidence of this has been supplied by the March
Home Starts and Building Permit data. Not only did March's data comfortably
beat consensus but February's data was also revised sharply higher for both
Permits and Starts.
.
We always use the Single Family Building Permit data as our benchmark for
following this industry (for whatever reason Permits tend to be much less
"noisy" on a month-to-month than Starts) and this metric certainly showed a
substantial improvement from 514K in February to 543K in March. This is the
best reading since August 2008 and the attached chart shows the
unmistakable signs of an initial "V" threatening to turn vertical in the
manner that it did following the collapse of activity in the early 1980's.
We would judge 600K as the critical level that needs to be surpassed in
order to indicate that a "melt-up" in activity is underway but March is
certainly a substantial move in the right direction.


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

There are finally some signs of improvement in what has been a particularly
dismal data series in recent months. As we have discussed before the fact that
this index is compiled by a survey of 417 builder/respondents makes it very
skewed towards the smaller private builders (who undoubtedly are still
suffering greatly) and therefore significantly understates the recovery being
felt by the larger public builders. The latter have now written down land costs
to a realistic level and have access to debt capital should they require it.
Even so we do believe that this survey should respond positively to any genuine
repair of the industry even though it may take many months of recovery to force
it back into positive territory above 50.
.
April's data shows the overall index rising to 19 from 15, this keeps the index
just within the "box of torpor" bound by the 20 level. The main source of
improvement was in the Present Sales Index (up 5 points to 20) and the Traffic
Index (up 4 points to 14) while Future Sales only grew modestly (by 1 point to
25). We would hope to finally punch back into the 20's for the overall index in
next month's report. - nahbapr10.gif

On the surface today's release of March Industrial Production looks to be
disappointing at 0.1% versus a consensus estimate of 0.7%. This shortfall
was partly explained by a revision of February data back up to 0.3% from
0.1% but to a much larger degree by the contrasting performance of the
various sub-indexes. Overall Manufacturing (which is what most readers
probably think Industrial Production measures) grew by 0.9% in March,
taking the YoY increase up to 4.6%. This is clearly a decent rate of
increase although it is not sufficient to make a large impact on
inventories given the fact that overall sales continue to rise. The exact
performance of the various sub-categories are included on the attached
table but as ever we would caution that this is official survey-based data
and we would refrain from drawing too many conclusions about the exact
performance of the various sectors.
.
As can be seen The really weak data comes under the category of Utilities and
this can largely be explained by a shift in the weather from a very cold
February to a warmer March. There is no sense that the -5.7% drop in
Electricity usage or -10.1% drop in Gas have anything to do with a reduction in
factory utilization and in any case this drop would have a positive effect on
the next report since these categories will be being compared to a much lower
base.
.
Meanwhile Capacity Utilization continues to push itself higher reaching
73.2%. This is still much lower than the level reached at the start of most
FRB tightening cycles and this data has often been cited by the FRB as
being of great importance to decision making. However, this ignores the
fact that while the level remains low the scale of improvement is very
rapid and therefore suggests that the "emergency" of 2009 is over.
Unfortunately we doubt the FRB will view things this way at the present
time.


(See attached file: D-IP_Index.gif) - D-IP_Index.gif - ipmar10.txt

A good sign for the US large cap equity market. PIMCO are apparently going to
try and muscle into the (tired) EM trade and this approach allows them to keep
their "New Normal" thesis (which allows for strong growth in emerging markets)
while expanding their franchise from bonds (and commodity linked notes) into
equities. The fact that they are ignoring their backyard in favor of more
exotic offerings speaks volumes of the degree to which the medium and longer
term prospects for US equity returns are under-appreciated.

February's Dept. of Commerce Manufacturing Inventory data suggests that the
long delayed Inventory rebuild has finally commenced with the February data
coming in at 0.5% higher than January. This had the effect of moving the 3
month RoC back into positive territory at 0.94%, an annualized rate of just
under 4% and we would view this as being conclusive evidence that the cycle
has turned. Interestingly at the current pace it would take almost exactly
4 years to return inventories to their August 2008 peak and this strikes us
a far too slow an improvement to be realistic, particularly given the
degree of drawdown in many industries whose sales are recovering strongly.
We would therefore expect future reports to show a far greater degree of
inventory repair, which would have obvious positive implications for
production metrics. The only negative side to today's report were
relatively weak sales numbers with February sales growing by 0.3%. Since
this contrasts with much stronger data supplied by virtually every other
sales activity metric reporting February activity and so we are inclined to
ignore it as an outlier.


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

In contrast to Brazil (see earlier note) The US economy continues to
exhibit a strong but healthy recovery. Today's release of Advanced Retail
Sales confirmed the data supplied by last week's ICSC Retail Survey. March
was clearly a very strong month for retail activity with Advanced Sales
reported at 1.6% versus consensus of 1.2%. This number is further improved
by the fact that February sales were revised higher from 0.3% to 0.5%. At
the current level of $363.2 bln Advanced Retail Sales have recovered 62% of
the reduction between the November 2007 peak of $379 Bln and the December
2008 trough of $335.5 Bln and are back to the level seen in Q1 2007. As readers
will be aware we put enormous emphasis on Demand metrics at the current
time and so we view today's data a strong confirmation of our current
bullish economic view.
.
The one thing the US does have in common with Brazil and its fellow "Go-Go"
economies is inappropriately low interest rates. Quite what there is about
any of the current data that speaks of an "emergency" is beyond us and
pressure on the FRB to change its stance seems certain to mount in the
coming months.

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

There are few better examples of a "Go Go" economy than Brazil at present
and February's retail sales underline the extent to which overly loose monetary
policy (particularly historically low interest rates) are fueling a consumer
boom. Total retail sales for February 2010 (typically by far the quietest month
of the year) rose 12.3% above their 2009 level. This is the 3rd strongest
annual increase on record (the largest being June 2004 at 12.85% and February
2008 at 11.82%). This number is all the more striking since unlike in most
countries Brazil's retail activity never collapsed in late 2008. In fact
February 2009 was a small new record for that month (3.84% above 2008).
Although the capital market already anticipates higher interest rates in Brazil
we very much doubt whether the full extent of monetary tightening that will
ultimately occur has been factored in at the current time.


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

We continue to monitor Australian Sentiment measures which we see as a leading
indicator of monetary stress in the "Go-Go" portion of the global economy.
Attached is a chart showing the 6 month ma (only) of the Westpac-Melbourne
Institute Consumer Confidence Index. As readers will know we always look at
sentiment measures as good CONTRARY indicators once they have reached and
extreme level and maintained this for several months. Of course the difficult
period that follows typically only commences as sentiment starts to
deteriorate. Looking at the attached chart we can see that the small drop in
April's number to 116.1 from 117.3 in March has been sufficient to create a
definitive turn in the 6 month ma. This period is long enough to create very
few "false" signals provided the turn is made at either a positive or negative
extreme (the February peak of 118.32 would certainly qualify in this regard).
The data therefore suggests that the best days of the current boom are behind
us, but this does not mean that the RBA will be on hold. The nature of cycles
is that tighter monetary policy will still be required to cool down the more
rampant portions of the local economy and in response both Consumer Sentiment
and economic activity in credit sensitive portions of the economy deteriorate
markedly. - westpacapril10.gif

It is worth noting that Platinum is EXACTLY on its 61.8% retracement line
($1,706) at the moment. The metal did in fact exceed this level on new
quarterly flows this week but will probably fail to close just below it today
meaning that the violation of resistance is not conclusive. If the metal were
to establish itself above $1,706 this would suggest that the entire move lower
is likely to be recovered in the coming months but resistance here should be
considerable. A failure to hold this level would point to a degree of
consolidation or loss. In this case support at $1,500 is an obvious target or
in the case of a deeper correction a move back to the 38.2% line at $1,339. -
sg2010041339805.gif

We continue to be struck by the dual-cycle nature of the current global
economy. On the one hand we have the "Go-Go" economies of the Emerging
Markets and their developed counterparts which are arguably still
completing the economic boom that commenced in 2001/2 while the larger
developed economies of Europe, Japan and the US are still emerging from the
debris of the 2008 collapse and are therefore in the early stages of a new
economic cycle. While most commentators perceive risk (of a slowdown) in
the latter group and opportunity in the first we see things quite
differently. With regards to risk this can most clearly be seen in measures
of sentiment, be they Investor, Consumer of Business indexes.
.
A good example of this was provided today by the simultaneous release of
the NAB Australia Business Confidence Index and the NFIB Us Small Business
Optimism Index. The NAB Index remained at a historically high 16 in March,
with the 6 month ma (time is a much neglected factor when considering
sentiment) just below at 15.55. This is the sort of reading that comes at
the end of a great investment cycle rather than the beginning, as
businesses stretch plans to accommodate the rosiest scenarios possible. The
NFIB data could not be more different as the index remains stuck in the mid
80's, a level unseen since the vicious collapse of 1980 (not shown) when
the Volker led FRB took the FDTR up to 20%. As we have argued before
businessmen (and women) are no better than analysts, bankers or regulators
at understanding cycles. Furthermore their reticence during the early stage
of a recovery never actually prevents the business cycle asserting itself
(nor does their over-confidence protect them from a collapse). The NFIB
data simply confirms that very few small businessmen believe that things
are getting better. If one assumes that they have therefore not yet
adjusted their production or hiring levels this is actually good news going
forward since it indicates that they going to be forced to play catch up if
overall demand continues to expand in the manner of recent months.


(See attached file: D-NABSCONF_Index.gif)
(See attached file: D-SBOITOTL_Index.gif) - D-NABSCONF_Index.gif -
D-SBOITOTL_Index.gif

The March monetary data for China shows that New Loan activity has
continued to shrink back rapidly with total loans reported as 510 bln RMB,
a drop of 27% from February and 63% from January's 1393 bln RMB. This
slowdown is somewhat less noticeable in the overall monetary data with M2
continuing to rise by 2.2% in March, a pace which is in line with both its
12 month (22.5%) and 3 month (32% annualized) rates of change. However, M2
growth should lag New Loan activity by a few months and we would therefore
expect to see a far lower rate of M2 increase by the summer of 2010.
.
Meanwhile when looking at the effect of credit on local asset prices our
favored liquidity gauge has been to look at a 6 month ma of the ratio of
size of New Loans to the market cap of the local equity market. This is
shown on a separate chart and shows that March's loans only represented
2.08% of local market cap while the 6 month ma has stalled at 2.72%. New
credit issuance is therefore significantly smaller in relation to local
asset prices than it was 12 months ago, or has been for most of the last
decade. There is of course no magic number that announces an end to the
cycle but credit fueled booms need continuous replenishment to keep asset
prices moving in the right (from the speculator's and their lender's
perspective) direction. Should New Loan issuance continue to tighten this
will make it considerably more difficult for this investment cycle to
extend through the end of 2010.



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

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

We are no great fans of the "gold trade" since we find the fundamental
arguments being made to justify its ownership to be tenuous at best.
Nevertheless, from a technical perspective, we have to recognize the scale of
repair and progress that has occurred in recent sessions. We set gold the
target of succeeding its January 2010 high during the 2Q allocation progress
(something we judge to be over by today's close) and the metal has just about
achieved this aim at the current time. Furthermore MACD has recovered to the
point where it could be said to be confirming this move. If gold manages a
positive close above $1160 the odds of a move up to challenge the key $1,200
level would have grown significantly.


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

February's Wholesale Inventory data suggests that this portion of the
Manufacturing Industry is finally starting to address the massive drawdown
in Wholesale Inventories with a sizeable 0.62% rebuild being reported in
the data. This is the 4th consecutive positive number in the last 5 months
which suggests that the inventory cycle has turned decisively but the
recent gains have not yet started to put a meaningful dent in the 15%
drawdown that rook place between August 2008 and September 2009.
Furthermore, it is important to realize that total Wholesale Sales have
risen further than Inventories in recent months meaning that the
Inventory/Sales ratio has continued to deteriorate. In February for
instance although Inventories grew by a healthy 0.6% Sales grew by a faster
0.8% (the fact that Inventories grew off a higher base means that the ratio
is little changed). The tightness of Inventories in specific industries can
be seen on the second chart. We would particularly note that Computers
continue to have a near record low inventory/sales ratio and that the ratio
in Automobiles continues to fall rapidly. Since we already have good demand
metrics for March it is reasonable to assume that unless production grew
much more rapidly than anticipated Inventories will remain very tight in
next month's data. This means that the really positive impact of the
Rebuild cycle still lies ahead of us.

(See attached file: D-MTISAPPA_Index.gif) - D-MTISAPPA_Index.gif -
wholesaleinvmar10.gif

Deere Equipment Shortage Prompts Kansas Farmer to Buy Dragotec

Inventory shortages costing sales is one of the key drivers that we are looking
for this quarter (since it would presumably lead manufacturers to boost
production) - this article certainly suggests this is occuring in the case of
DE and farm equipment.

 

In contrast with many commentators we always view sentiment indicators as
good CONTRARY indicators once they reach extreme levels and sustain them
for a number of week or months. In this regard we were intrigued to see the
Q1 2010 report of the China Entrepreneur Confidence Index came in at 135.5,
a large increase from the Q4 2009 reading (127.7) and not far from the
record 143.1 seen in June 2007. One of the advantages in this index is that
it has been around for over a decade (a long time for a Chinese sentiment
index) and arguably the universe of "Entrepreneurs" is less changed than
other portions of this society over this period (although it is certainly
larger and more prosperous) making historical comparison more reasonable.
In any case this index has certainly proved to be a good contrary indicator
for local asset prices in the past, as the attached chart demonstrates. The
current reading does not quite represent an immediate sell signal but it
does suggest that a significant top in China will be experienced in a
matter of weeks to months rather than in several quarters or years as some
believe.


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

The ICSC Chain Store Index represents the first aggregate data for March
retail sales and can only be described as a strong report. Even allowing
for the fact that Easter fell earlier than normal this year and therefore
pushed holiday consumption back into March, a move up from 3.7% in February
to 9.0% in March is an impressive gain. The 9% gain is also the strongest
reading since April 1998 and more than repairs the greatest negative
reading this cycle (-7.7% in November 2008). It therefore represents
further confirmation that the US consumer continues to return to their
pre-crisis consumption habits, and it is important to recognize that this
has occurred in advance of a meaningful improvement in employment (as
opposed to a dramatic reduction in new jobs lost). More data will be
supplied on April 14th in the form of the US Census Advance Retail Sales
data, but it is important to realize that both the ISM Manufacturing and
the ICSC reports have now both indicated that corporate and consumer demand
continued to grow strongly in March.

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

Hoenig has been a noted dissenter in recent months and is starting to get more
explicit. Our own view remains that the FRB will end up somewhere in the
1.75-2.00% range by the end of 2010.

As all readers will be aware US new car sales have been very depressed over
the last 18 months and there are signs that in part this has led to a shift
in demand to used cars leading to a degree of shortage in the used car
market. We base this claim on the strong gains seen in used car prices in
recent months, with the Manheim Used Vehicle Index hitting a new all time
high in March of 119.9, a 13% increase over the last 12 months. Of course
over time higher prices for used cars will simply shift a portion of demand
back to the new car market, and this is simply another reflection of the
fact that although consumer demand was significantly disrupted by the
financial crisis it was in no way extinguished. In fact there is every
reason to believe that there is a substantial amount of deferred
consumption waiting to be enacted as the economic picture improves and that
consumer expenditure can therefore continue to surprise on the upside.


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

March saw a massive increase in the level of Brazilian Vehicle sales with
the total soaring 60.09% to a record 353,738 from February's level, and
over 30% higher than March 2009 (which was itself a record for March at the
time). In part this represents a last minute rush to take advantage of
government tax breaks which are expiring and no doubt this will be
reflected in a degree of pullback in the next couple of months, but
activity at the current level (the 12 month ma of 271K is probably a fair
reflection of where we will end up) strongly suggests that the historically
loose local monetary policy is starting to stimulate consumer behavior to
the point that will alarm the central bank. Of course Brazil is hardly
unique in this regard, this is a story which is playing out across the
spectrum of EM and EM-related economies at present, but if the springtime data
continues to roll in well ahead of expectations some hard decisions are
likely to be forced upon central bankers in the weeks ahead.



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

The February report for the Japan Leading Indicator Index (JLEI) showed a
continued improvement with a reading of 97.9 (up from 96.9 in January), the
strongest reading since July 2007 and the 13th consecutive monthly
improvement in this data. This suggests that the Japanese economy is still
recovering vigorously from its 2008 collapse and we would expect to see
further positive readings in this data (it is worth noting that the index
is based on 2005 activity being 100 and this level should be easily
attainable this cycle). Furthermore, as this chart demonstrates, strong
rebounds in the JLEI typically result in a somewhat greater appreciation in
the NKY Index than has been seen to date and we still see sufficient upside
in the Japanese equity market to warrant new capital being committed at the
current time.


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

Friday's Non-Farm payroll report was a generally positive set of data with the
headline number of 162K coming close enough to consensus estimates (184K) not
to cause alarm, particularly since the January and February reports were
revised higher by more than the small shortfall. As regular readers will
understand, our attention was drawn to the Manufacturing and Goods Producing
reports (the latter includes construction and transportation) both of which
entered postive territory. For Manufacturing this represents the 3rd
consecutive positive report, the first time this has occured since April 2006,
while the 3 month ma of positive additions has reached 15K, the best reading
since May 2004 (one month before the FRB starting its tightening cycle). The
Goods Producing sector is even more significant since the addition of 41K jobs
is the first positive report in exactly 3 years. From March 2007-February 2010
a total of 4569K Goods Producing jobs were eliminated, or over 20% of the total
March 2007 jobs. The total Goods Producing jobs lost since the cycle peak of
April 2006 is slightly higher at 4806 (over 23% of April 2006 employment). This
has always struck us as a wholly unrealistic degree of job destruction for it
to be permanent. With this series finally pushing back into positive territory
and the inventory cycle still largely unaddressed we would look for a very
rapid rebuild in Goods Producing employment in the coming months. Even if only
50% of the total jobs lost were re-captured this would still call for
approximately 2,400K re-hires, a far greater degree of positive employment than
would normally occur in this portion of the economy.
.
Please note that due to the Passover holiday there will be no further notes
published until Wednesday morning. Any crucial data release that occurs on
Monday or Tuesday will be discussed at that time. - nfpgpmar10.gif

March's ISM Manufacturing survey delivered results in line with our
expectations and this key metric continues to suggest that a much more vigorous
rebound in manufacturing is taking place than has been broadly recognized. The
overall index (black line) improved to 59.6 (from 56.5 last month) which is the
best reading since July 2004 (interestingly this was one month after the first
FRB hike in the 2004/6 hike cycle). The most important data is supplied by New
Orders (red line) which improved to 61.5 (59.5)indicating that orders continue
to grow very rapidly and this fully justifies our concept of a "virtuous
circle" where Sales require greater Production which in turn requires
Re-employment of labor. Production data (blue line) recovered to 61.1 (58.4)
while Inventory data (green line) finally moved into positive territory at
55.3, a very high reading that has not been bettered since July 1984 which
suggests that we are finally seeing the sort of rush to re-build inventories
that we have been anticipating. This has yet to be fully reflected in the
Employment index which moderated to 55.1 (56.1) but this still represents the
4th consecutive month of positive employment data. All in all this is a very
positive data set and one that suggests that whatever tomorrow's "non-farm
lottery" throws out the manufacturing employment cycle is about to turn
strongly positive. - napmmar10.gif

The monthly NACM Credit Manager Index (CMI) is a survey of approximately
500 credit managers (in both manufacturing and service industries) taken in
the last 10 days of the month. As with other diffusion indices a reading
above 50 indicates an improvement other the prior month's numbers. As can
be seen from the attached chart, after collapsing in late 2008 and
recovering in mid 2009, the CMI index forced its way into positive
territory in October and has held around 55 for the last 3 months (remember
that flat-lining at 55 represents a steady improvement not stagnation).
March's 55.7 reading is the best on record since June 2007. Perhaps more
significantly the pace of sales has been accelerating strongly, with the
March Sales Index hitting 65, the best reading since June 2006. This is
clearly a much better indication of future activity than a lagging
sub-index such as delinquency and suggests that non-bank credit is starting
to flow once more into the US economy.


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