A much better set of data than Chicago PMI particularly for "blue collar"
employment. Inventory once more is reported to be growing strongly (64)) as is
Capital Equipment (64). Nevertheless, as we wrote earlier Tuesday's ISM report
is a much more important indicator than these regional PMI reports.

May's Chicago PMI data came in a little light of expectations but it is still a
broadly positive piece of data that suggests a continuing increase in
industrial activity. The overall index (black) fell back to 59.70 (from 63.80
in April) and with the exception of Inventory (green), which rose to 56.4, all
major categories declined. Even so apart from employment all categories stayed
well above 50 indicating a robust increase in activity. In the case of
employment (pink) the index fell back to 49.70, a neutral reading. This is
somewhat surprising given the recent improvement in payroll data and increase
in productive activity contained in this report. Given that we have the much
more senior National ISM report due out on Tuesday we'd file this one away at
present and wait for further data. - chicagopmimay10.gif

More data suggesting that the domestic Japanese continues to recover
steadily. April's total retail sales increased by 4.9% above their level
one year ago which (ignoring the strange data spike in March 1997) is the
fastest rate of change since 1991. Although much of these gains can be
traced to the collapse in activity in 2008 and early 2009 the retail sales
index actually reached a record level for April which means that we are
dealing with growth that extends beyond a simple rebound in activity.

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

April's US Personal Consumption data came in somewhat little short of
expectations with expenditure reported to be flat (an increase of $4 bln,
or 0.04%) against consensus expectations of 0.3%. Although we place great
store against indicators of demand at the current time this particular data
series is less interesting than many others since it is the product of a
national survey by the Bureau of Economic Analysis rather than data which
is pulled directly out of the retail industry. With the retail, automobile
and housing markets all reporting good data in April it is hard to make the
case that the US consumer is seriously retrenching at present but even so
we would want to see subsequent data from this series restore the prior
trend of rising consumption.
.
As it is April's data keeps the 12 month RoC (blue) almost unchanged at
4.57%, this is still somewhat lower than the sort of growth that we saw for
much of the 2003-7 period but it should be recognized that this is a
nominal $ report and CPI rates are far lower at present than they were
during the last recovery, thus the actual improvement in the NUMBER of
goods and services consumed may be somewhat larger than the increase in
nominal $ suggest. The 3 month RoC annualizes at 4.1%, confirming the
current pace of recovery.


(See attached file: M-PCE_CUR$_Index.gif) - M-PCE_CUR_Index.gif

In considering the long overdue rebound in New Home Sales it may be that
too much significance is being put on the expiring tax credit and not
enough on the underlying affordability of purchasing a new home. The
attached chart shows the 30 year fixed rate mortgage rate (as calculated by
Bankrate.com) together with the cost of annual debt service for a New Home
sold at the Average Price (as calculated by the U.S. Census Bureau in its
monthly data release) using a 30 year mortgage. For simplicity's sake we
have assumed that 100% of the house is financed and ignored amortization
but since this is merely a historical comparison this makes no practical
difference.
.
As can be seen the cost of debt service has fallen from a high of $19,882
in June 2007 (when long term treasury yields broke out on misguided
expectation of further rate hikes) to the current level of $12,125. This
represents a drop of just over 39% over the last 3 years. Of this amount
roughly 24% comes from the actual drop in the price of the average new home
(note this is partly due to an actual fall in value but is also affected by
the trend towards smaller, less luxurious homes in the new home market) and
the remainder from lower interest rate costs. One side effect of the Greek
debacle has been sharply lower interest rates with today's GSE rate
reported at 4.78% (the bankrate.com data is slightly delayed and shows
4.86%). At the current yield the cost of debt service is close to the May
2003 low of $11,860 and less than 4% higher than the lowest cost recorded
since this data starts in October 1998. Obviously average earnings have
increased greatly over this period making the actual affordability of a new
home far greater than it was in either 1998 or 2003.
.
Our conclusion is that although the immediate releases following the
expiration of tax credits may show some decline (just as we saw from "cash
for clunkers"), ultra low interest rates and the low price of the Average
New Home makes it extremely likely that further progress will be made by
the New Home market through the remainder of 2010. Readers should remember
that sales are still only 70% of their 40 year average and 36% of their
2005 peak and so the scope for improvement even if demand remains impacted
from the hangover of the 2000's boom is still very considerable.

(See attached file: D-ILM3NAVG_Index.gif) - D-ILM3NAVG_Index.gif

Link to Michael Aronstein's interview on Bloomberg TV this morning.
Aronstein Sees `Institutional Bid' for U.S. Equities: Video

Aronstein Sees 'Institutional Bid' for U.S. Equities: Video

We had placed a great deal of value on the spring selling season showing a
rebound in activity within the new home market industry and are therefore
relieved that April's report is an excellent collection of data. Total
homes sold increased to 504K, well beyond consensus estimates of 425K and
March data was revised higher to 439K (from 411K). No doubt a portion of
these gains can be attributed to expiring tax credits but since these have
been in place since last summer without stimulating demand for new homes
(as opposed to existing homes) something more substantial would seem to be
happening. Of course this is hardly surprising since sales at the start of
2010 were the lowest on record and even at April's pace are still only
two-thirds of the 40 year average (710K units) and equivalent to data
released in May 2008. Nevertheless improvement that starts from an
extraordinarily low base always looks like this and often extends higher
for many months, and we would expect the activity in the new home market to
do so going forward even if their may be some "give-back" in next month's
data.
.
This will require a substantial uptick in the pace of home construction
since inventory levels at 211K are exactly where they were in October 1968.
Even in terms of monthly sales the current reading of 5 months is below the
40 year average of 6.4 months and this does not take into account the
extraordinarily low level of activity. Should sales only rise to their own
40 year average current inventory would be approximately 3.5 months,
matching the record low recorded in August 2003. Our belief remains that
the home-building industry should now become a positive force in both GDP
and employment reports going forward for the first time since the industry
peaked in late 2005.


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

The FRB released quarterly data for US Commercial Bank charge-offs this
morning and the report makes for interesting reading. Overall Total
charge-offs (black) were little changed at 2.96% up from 2.92% in Q4 2009.
This set a new record but the fact that the pace of increase has slowed
markedly is a significant and positive development. Perhaps more
interesting is the divergence in charge-offs across different spheres of
lending. By far the worst performing metric is Consumer loans where total
charge-offs have reached 6.52% (and credit card charge-offs 9.95%). This is
as much a reflection of the aging of receivables and the willingness of
banks to write off exposure as it is that actual delinquency continues to
deteriorate. The latter is likely to be highly correlated with employment
statistics and therefore should start to fall quickly later in 2010.
.
The most positive data is clearly supplied by Commercial & Industrial (C&I)
loans where charge-offs fell sharply to 1.95%. This is the second
consecutive quarter of rapid improvement (charge-offs peaked at 2.6% in Q3
2009) and given the highly cyclical nature of this metric it would seem
that the worst is behind the banks in the C&I sector. At their current
level C&I charge-offs are no worse than they were in the early 1990's or
last recession, unlike other areas of bank lending which remain in record
territory. This is important because the fact that the legacy C&I loan
books are starting to be under control would support our notion that this
is likely to be the quickest portion of bank lending to normalize (see
yesterday's note on this subject).

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

The current sell-off in US equities has reached the point at which clear value
is starting to appear. This is itself no guarantee that further lows will not
be recorded, but as with our earlier chart which described the expansion of
swap rates, it at least suggests that we have entered the latter part of the
correction during which an increasing proportion of sales are involuntary
liquidations (driven my redemptions, margin calls or directives to cut risk
exposure). Of course this is the major reason that the maximum pace of price
decline typically takes place right at the end of a sell-off.
.
Attached is a chart of the SPX index showing index price (white, LHS), current
P/E (green, RHS) and Bloomberg Estimated P/E (red, RHS). While the price level
of the index is no lower than it was for much of Q4 2009 the significant
recovery in both the level and future visibility of US corporate earnings means
that the index is trading at an estimated P/E of just under 13. To put this in
perspective the 13 level was only breached during the period of October 2008 to
March 2009 (the low point being 10.12 on November 21st 2008). Furthermore
during that period of crisis estimated earnings were being cut at a rapid pace
making a low estimated P/E a much less reliable guide that value was being
established than at the current time.
.
It has been our view that this correction would continue until an attractive
entry point for many equities had been established and today's declines have
confirmed that view was correct. This is decidedly not the same as stating that
a meaningful low in the SPX for the current move has been established and even
deeper value may be created by the time this move is completed. - spxperatio.gif

There are finally signs that US consumers are starting to embrace the
possibility that things may actually be getting better as May's Consumer
Confidence Index rose to 63.3, the best reading since the March 2008 survey was
taken at the same time that BSC collapsed. This is still a very low reading
(the average since 1974 has been 93.68) but it allows the index to extend its
"V" out of the range which had defined it since last spring. Interestingly
almost all of this improvement can be traced to "Expectations" which reached
85.30 in May, the best reading since August 2007 (around the time that the
media started to understand that there was a potential problem worth talking
about) and not far from the historical average of 91.58. The "Present
Situations" index remains much more muted at 30.2, exactly where it was in
December 2008. This is an excellent example of how confidence surveys distort
the actual beliefs and behavior of their constituents since there is a very
clear distinction between the worlds of December 2008 and May 2010 and consumer
behavior has improved markedly over this period. Similar bias can be seen in
the employment sub-indexes which remain close to their crisis readings despite
the very clear improvement in employment metrics in recent months. -
cofidencemay10.gif

We are starting to see the broadening and deepening of stress indicators in
financial markets that we believe is necessary to bring matters to a head.
As we wrote last week once stress builds up to a certain point that
indicates widespread concern it almost always then develops into a true
panic (we use the BFCIUS index as a proxy for overall stress in US
markets). Although certain asset classes are always at the center of the
problem (currencies and certain emerging markets being very much to the
fore this time around) by the end of the sell off price distortion is
visible across a broad array of general measures.
.
As those of our readers who followed our comments back in 2008/9 will know
we have a great respect for the US Swaps market as a general stress
indicator and while we normally default to the 5 year maturity this time
around it is the 2 year swap that seems to be particularly interesting.
Attached is a chart of the 2 year swap yield measured in bp (red), together
with the 2 year Treasury Note yield (black). As can be seen in recent days
the 2 year note yield has fallen sharply to 70 bp (which is still some
distance above the low recorded last November) while the cost of purchasing
an interest rate swap soared to 64 bp early this morning before falling
back to 58 bp at present. This means that the cost of purchasing a swap is
currently 80% of the coupon available on the note itself. Clearly an
economically unpalatable transaction such as this is not made voluntarily
but is instead part of a forced (or at least hurried) unwind of positions.
Today's market action therefore indicates that we have moved further along
the time-line of this particular panic.

(See attached file: D-USSP2_Index.gif) - D-USSP2_Index.gif

There are finally signs that the US commercial banks are beginning to
extend Commercial and Industrial (C&I) loans to their client base. Attached
is a chart of the weekly FRB H.8 data for C&I loans held on US Commercial
Bank Balance Sheets. Note that this is not quite the same as new issuance,
but is in fact sensitive to the difference between repayments and write
offs on the one hand and issuance on the other, but it is the best regular
indicator available in public data.
.
In any case the chart shows that the pace of decline of C&I loans held has
fallen very sharply since the start of 2010. This comes as little surprise
since it tends to correlate well with merger activity (a major use of
funding) and sharply higher corporate earnings (which encourage further
expansion of activity). We have not yet reached positive readings for
either the 13 week or 4 week RoC's since it needs to be noted that in late
March the FRB reclassified H.8 data to include loans held in banks'
offshore subsidiaries and this "artificially" increased C&I loans held by
about 1.7%, meaning that the recent spikes need to be adjusted downwards.
In the case of the 4 week data time has already taken care of this but the
13 week RoC should probably read closer to -4%. Even so we are at least
dealing with the sort of deceleration in "bad news" that we saw in other
economic data throughout 2009 and may therefore be back in positive territory
my the middle of summer. We would expect C&I lending to lead other
sub-categories by several weeks (for consumer) or months (for real estate
related) but it appears we are closer to the end of Commercial bank credit
contraction than many commentators appreciate.


(See attached file: D-ALCBC&IL_Index.gif) - D-ALCBCIL_Index.gif

Although the last few weeks have been the most difficult across asset
markets since early 2009 it is important to keep a sense of perspective
when looking at current degree of dislocation. This is particularly true in
corporate credit markets where we note an upsurge in commentary suggesting
that this may be the start of another complete shutdown in credit granting
similar to that experienced in 2008. This strikes us as highly unlikely and is
in fact not supported by a simple comparison of the behavior of markets
over the last month and in 2007 or 2008.
.
Attached is a chart showing the Moody's A Bond spread index (a reasonable
approximation of the average investment grade credit) together with the CS
High Yield Index II and the spread between these two indexes (lower chart).
Although credit spreads in both IG and HY credits have widened in recent
weeks the NOMINAL yield of the Moody's A Index has actually fallen slightly
since mid-April (see shaded circle). In the High Yield space both spreads and
nominal yields have increased but at 8.91% the CS HY Index is scarcely
indicating a significant degree of dislocation or a funding cost that could not
be bourne by the average issuer. Of course what this chart does not show is
the true "depth" of the market. New issuance is clearly much more
problematic today than it was 30 or 60 days ago, and we understand that
bids for secondary trades are far less willingly supplied. But this sort of
market deterioration is still typical of a "normal" sell-off rather than an
across the board repudiation of credit instruments. And so while we accept
that further stress may have to be endured before this episode has passed
we continue to doubt that its effects will be in any way comparable to the
disastrous dislocation of 18 months ago.


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

April's Existing Home Sales data showed an unsurprising burst of activity
that is no doubt partially due to the expiration of tax credits but also
supportive of the notion that volume in this portion of the economy will
continue to maintain an acceptable pace of activity going forward. Total sales
came in at 5.77mm moderately beating consensus of 5.62mm. Single Family
sales (see attached chart) rose to 5.05mm, keeping the 6 month ma (green
line) at 4.83mm units, equivalent to the level of activity seen in
mid-2002. Since this average includes the very weak data produced in the
winter of 09/10 (when the tax credits were originally expected to expire
causing sales activity to collapse) this is probably a reasonable guide to
the true underlying pace of activity and if confirmed this should be
sufficient to eventually clear the large backlog of inventory without
causing further sharp drops in home prices.
.
We state this even though reported inventory grew very sharply in April to
3.43mm units, a rise of 12.83% from March and the highest reading since
November 2008. It has been an open secret that behind the official
inventory (which represents the number of homes known to be "on the market"
by the National Association of Realtors) there is a large "shadow
inventory" made up of vacant and foreclosed property that had been kept
off the market. The fact that this surge in reported inventory has occurred
in April, at the start of the key spring selling season suggests that it is
a voluntary phenomenon where sellers (both individual and banks holding
REO) are seeking to expose more of their portfolio to the market. This is
ultimately a healthy phenomenon (given that the inventory existed all
along) and again indicates that the existing home market has reached a
level of price-clearing that is efficiently stimulating both supply and
demand. No doubt it will be a long process to complete and we believe it
will be many years before existing homes experience a substantial increase
in price but much progress has been made over the last 18 months and the
apocalyptic visions of 2008 and 2009 seem less an less plausible today.



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

As we had feared may prove the case the current correction has developed into a
broad based liquidation that exceeds the scale of anything we have seen since
the collapse of 2008/9. However, this is not the same as saying that it will
develop into anything like this scale of sell-off or have any of the spill-over
effects into actual economic activity. Our belief is that it will eventually
run its course after further forced liquidation (especially in the more crowded
of markets) and reaching a point that sufficient value has been created to
encourage new money into the market just as other deep sell-offs have done
before it. In terms of judging this level, a broad multi-asset risk measure
like the BFCIUS can be of some help (although it should not be seen as a
crystal ball).
.
As we wrote on Monday most "normal" panics expire with broad measures of risk
around -2 standard deviations away from their means. In part this is a function
of valuation models which "find value" at these levels and in part simply a
function of markets "normally behaving normally". As of last night's close this
particular measure was at -1.492, well below Monday's level of -0.813 but still
hanging in mid-air above a level that will probably be required to signal true
capitulation. This index is less helpful in terms of what this means for
specific markets but a VXO index reading in the mid-40's is close to what would
be required from the equity markets for a -2 reading overall. If the VXO does
get over 45 however it historically has tended to extend well above 50. This
would give us two SPX index targets, one around the 2010 low (1044.50) and one
somewhat lower, potentially filling the gap left behind at 1016 last
September.
.
Outside of equities we would expect corporate spreads to continue to widen,
particularly high yield and emerging market issues and for treasury volatility
and swap spreads to also move higher. At the current rate of deterioration we
seem likely to reach a climax sometime in the next 3 sessions, but keeping an
open mind and a watchful stance is really the only way to go at the moment. -
bfciusmay20.gif

As we would have expected Brazil's IBOV index has been at the heart of
today's weakness. At the time of writing the index is testing support at
the May 7th "panic plunge" (note the SPX is still over 50 points above its
equivalent level) and has already fallen below support at the February 2010
low. Round number support at 60,000 which held back in October now comes
into play but our long standing target of 55,000 (which combines round
number support with a 38.2% retracement of the recovery rally) would seem
to be realistic if this correction remains in effect.

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

The April New home construction report is a somewhat contradictory
collection of data that on balance still suggests that the corner has been
decisively turned in the construction cycle. Housing starts significantly
beat estimates coming in at 675K for total starts (650K consensus) and 593K
for Single homes, the highest reading since Q3 2008 (see attached chart).
Less positive news was delivered by Permits which fell back to 606K, well
below consensus estimates of 680K and March activity or 685K. Nevertheless
the 6 month ma (red line) for Permits continues to rise smoothly meaning
that provided future readings improve on today's data there is no reason
for alarm.
.
The implications of this data are that the demand for New Homes has indeed
improved (see yesterday's note on the NAHB confidence index) but that
Home-builders are wary that this improvement is largely driven by the
expiring tax credits for home buyers. Thus they continue to start homes for
sales which have been finalized but are far less willing to pull permits
for future sales. In this regard their behavior closely mimics that of
industrialists exactly one year ago when an improvement in new orders took
several months to translate into increased production. In the case of the
New Home market inventories are already an a 39 year low and meaning that
far less leeway remains within this market should sales continue to climb
in the months ahead.


(See attached file: D-NHSPA1_Index.gif)
(See attached file: D-NHSPS1_Index.gif) - D-NHSPA1_Index.gif -
D-NHSPS1_Index.gif

The UK continues to represent the leading edge of inflationary pressures
for G-7 economies. The April report for CPI and RPI both suggest that
policy choices within the UK run the risk of being constrained by price
rises that are pushing against the tolerance limits of both markets and the
local population. The more senior CPI index rose to 3.7% in April from 3.4%
in March, exceeding the 3.5% consensus estimate. This is the highest
reading since November 2008 but at this point remains well below the peak
seen in September 2008 of 5.2% (the UK CPI is quite sensitive to energy
prices which peaked at the same time). Of more concern is the RPI (Retail
Price Index) which while actually older is considered to be a more narrow
gauge of inflation. It is, however, used as the benchmark for most public
and private sector wage negotiations. This YoY change for this index (see
attached chart) reached 5.30%, the highest reading since the summer of
1991. With the new coalition government stating its intention to severely
restrain government spending the stage would seem to be set for a summer of
confrontation in the UK.



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

There are finally some signs of life in the homebuilding industry with a
significant improvement being reported in the May NAHB Homebuilder Confidence
Survey. Since the collapse of activity in late 2007 we have been using 20 as
the key level to follow and May's reading comfortably beat this at 22. This is
the strongest number since August 2007 and does suggest that homebuilders are
finally experiencing a meaningful change in a activity in the key Spring buying
season. Interestingly the greatest degree of improvement came in Present sales
which at 23 reached their best level since July 2007, even though Foot Traffic
stayed very low at 16 (a level last seen in August 2009). This suggests that
"tire kicking" is down to a bare minimum and gone are the days that meandering
around a new housing project represented a leisure activity. Finally Future
sales also stayed muted at 28 (last seen November 2009) which merely suggests
that homebuilders are understandably cautious about projecting the current
improvement into future activity. It should be noted that recent NAHB readings
have been accurate gauges of both Building Permit (due out tomorrow morning)
and New Home Sales (due out May 26th) and we would hope to see a similar degree
of improvement in both reports. - nahbmay2010.gif

We have been highlighting the weakness in the Chinese equity market in
recent weeks and it would seem that the collapse of that market below key
support (the SHASHR index was down a further 5.07% last night to its lowest
level since May 2009) is starting to unnerve other closely related asset
markets. Copper is a clear example of this phenomenon with today's 6.5%
fall taking the metal far below its 200 day ma. The metal is now targeting
"last ditch" support at $6,225 which marks the February 2009 low. MACD
already suggests that a greater degree of technical damage has occurred
during the current sell off and that a deeper level of support may be
needed to halt the decline. In this regard we note that the 38.2%
retracement of the recovery rally comes in at $6,047 while a 50%
retracement is $5,430.
.
Copper's decline should be seen as symptomatic of an increasing
concentration of weakness within the industrial commodity and emerging
market complexes. This weakness has China at its epicenter but can be
expected to extend broadly throughout these two areas by the time this
correction has run its course.


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

It has been many months since we have written on the BFCIUS index which
aggregates a selection of risk measures connected to equity (primarily the
VIX index), credit markets (a selection of spreads) and interest rate
markets (swaps) into a simple index. A "normal" set of conditions sees the
index read zero while each integer represents one standard deviation from the
mean (Bloomberg users may hit FCW <go> for a series on Bloomberg articles
on the index).
.
After recovering strongly throughout 2009 the index finally reached zero in
late December. The calm conditions of Q1 2010 (note the ability of 4 major
US banks to make money each and every day that quarter was not purely a
function of their carry trade profits) saw the index peak at 0.658 on April
14th. Since that time there has been a marked deterioration in the index
with the May 7th panic taking it down to -1.05 (the spike in the VIX was a
major contributor to this) and Friday's close being -0.612. This is still a
very moderate degree of stress but the history of this index has been that
abrupt declines in financial conditions tend to culminate in somewhat lower
reading than -1. We would not expect to see anything close to the ludicrous
levels seen in 2008 but a reading somewhere between -1.5 to -2.00 would
seem to be a real possibility in the coming weeks. The question of course
is which portion of the index's constituents would contribute to this
decline. Thus far equity volatility has led the charge but we would assume
that any further build up of stress would chip away at the credit markets
where spreads remain close to their recovery lows. Clearly lower quality
credits would be expected to show signs of stress first. An additional
market that needs to be watched is the interest rate market. Recent days
have seen a small uptick in Libor rates which while not large enough to
have an effect on the real economy have certainly piqued the attention of a
number of commentators (and a large chart on the front page of today's
Financial Times). We would therefore watch the swaps market quite closely for
unusual price movements.
.
Should financial stress reach the levels we are talking about we suspect
that it would be accompanied by a great deal of earnest discussion about
the strength of the underlying economy. From our perspective such
extrapolation should be resisted. Movements in the price of financial
instruments tell you a great deal about levels of liquidity and changes in
allocation but very little about their fundamental justifications. In fact
a general widening of credit spreads and lowering of equity valuations
would, once it has run its course, provide a further entry point at least
as far as the US is concerned. But between now and then some nerve and
patience may be required.


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

As we commented earlier today when looking at retail sales judging the consumer
remains strictly a matter of "watch what I do not what I say". It comes as
little surprise to us that the Michigan Index remains muted in the low 70's
although this still allows the more important 6 month ma (red) to make steady
upward progress. All signs point to the real acceleration in consumer sentiment
to more normal levels as being a "sell" rather than a buy" signal in asset
markets since it is highly likely to be closely correlated with the (long
overdue) decision by the FRB to tighten monetary policy. - michiganmay10.gif

Another very straightforward report that demonstrates the extent to which
accelerating sales are overwhelming attempts to rebuild US inventories. US
Manufacturing sales rose by 2.32% in April to $1069 Bln, the highest level
since November 2008. This takes the 12 month RoC (pink line, middle chart)
up to over 10% while the 3 month RoC (not shown) once annualized is over
15%. Meanwhile Manufacturing Inventories increased by a mere 0.36% and
remain lower than their July 2009 level. The 12 month RoC remains negative
at -5.55% (green line middle chart) and the 3 month RoC only slightly
positive at an annualized 2.8%. This has resulted in the Inventory/Sales
ratio falling to a record low of 1.24. As we have said many times in recent
weeks all data points to an acceleration in US manufacturing activity
taking place for the remainder of 2010.


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

The April Industrial Production and Capacity Utilization data released this
morning came in broadly in line with (strong) consensus estimates. this in
itself is unremarkable but as the attached chart shows the implications of
this report going forward is more interesting than it may appear on the
surface. The gains recorded (0.8% for Industrial Production and 0.6% for
Capacity Utilization) are sufficient to remove any doubt that we are now
dealing with a "V" shaped recovery in the Industrial portion of the economy
that bears a striking similarity to the mid-1970's and early 1980's.
Furthermore given that the absolute level of both measures remains muted it
is highly likely that further strong gains lie ahead. In both prior "V"
shaped recoveries peak 12 month RoC for IP (green line) managed to reach
10% compared to the current reading of 5.25%. Similarly a Capacity
Utilization reading of 77.5% to 80% would be unremarkable by historic
standards. Both readings of course would require a very substantial
increase in the pace of Manufacturing employment, a long standing
assumption of our macro-thinking.


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

April retail sales came in at a 0.4% over March, beating the consensus
estimate of 0.2%. Since the March data itself was also revised sharply
higher to 2.1% from the initial 1.6% reading this an excellent piece of
data that supports the trend of rapidly recovering consumer activity even
before the employment cycle repairs itself. April's retail sales of 366.40
was the highest reading since September 2008 and takes the 12 month RoC up
to 8.02%. At the current pace retail sales would exceed their November 2007 all
time high sometime around the middle of the 4th quarter 2010. In fact the 3
month RoC is moving at an annualized pace of just over 13%, which if maintained
would take retail sales to a new record high sometime in the middle of the
summer. Of course a sharp recovery in employment would substantially help this
process but it probably is not a necessary condition for further improvement.
It should also be noted that consumer activity has accelerated even though
consumer sentiment indexes have remained very depressed (something we had
predicted would occur). Our thesis that substantially lower housing (purchase,
refinancing and rental) costs would allow consumers to maintain core
non-shelter related consumption would seem to be well justified by the current
data.

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

Japanese economic data continues to suggest that a very rapid pace of
recovery is taking place. April's preliminary Machine tool orders rose by a
further 6.42% to 80.47 Y Bln, the highest reading since October 2008 and
roughly equivalent to their level in Q1 2004. Although we doubt that either
the 12 month (blue) or 3 month (red) RoC can be sustained (both imply an
annual increase well over 200%) we would expect orders to recover to a
healthy 110-120 Y Bln by the start of the 4th quarter.
.
Further support for a snapback recovery was delivered on Monday night with
the publication of the Japanese Leading Indicator Index which has continued
to soar up to 102.8 (a level only bettered in 2007). As can be seen on the
attached chart this data series has never experienced a "V" of this
magnitude before and the shorter term 3 month RoC gives no hint that this
data series is about to roll over. The one piece of the puzzle that remains
to be delivered is accelerating money growth. Last night's release of M2
shows broad money to be growing at 2.9% YoY. This is some distance ahead of
the 2.5% consensus but we would want to see this break the 5% level (Japan
has had extremely low monetary growth since the early 1990s) to really
confirm that the BOJ has decisively changed its monetary policy.

(See attached file: M-JNMTOT_Index.gif)

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

Brazil's retail sales continue to run well ahead of expectations with
March's sales reaching a seasonal record of R166.54 Bln, a 15.4% increase
over the March 2009 level of 143.93. This annual RoC is itself a record
(see green line on lower chart) and takes the 12 month ma up to R158.55 Bln
suggesting that the local economy is in clear danger of overheating. Data
such as this will only encourage the local central bank to step up the pace
of monetary tightening. April saw a surprisingly large 75bp increase in the
local SELIC rate (50 bp had been expected) and we continue to believe that
a very significant degree of further tightening can be expected for the
remainder of 2010. Although this may on the surface seem to be good news
for the BRL (it has rallied back to 1.77 following the release of the
retail sales data) in our experience substantial monetary tightening
typically creates the danger of a substantial correction in local liquid
asset prices (both equities and corporate debt). With the BRL largely being
captive to foreign investment flows that have the potential to dwarf simple
"carry strategies" we doubt whether this process will favor the currency
bulls by the time it is complete.


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

There is no doubt that the clear winner of the recent turbulence has been
the precious metals complex with gold reaching all time highs against
multiple currencies including the key USD spot price. Regular readers will
know that we are non too fond of this crowded space but we recognize that
this weekend's capitulation by the ECB represents something of a boost to
gold's fundamental claims as a store of value and in any case the metal has
been technically strong ever since closing above $1160 several weeks ago.
We would therefore be open minded about how far the current rally can push
the metal before becoming exhausted since we are dealing with "blue sky"
territory in an objectively un-priceable commodity.
.
Meanwhile some greater insight can be brought to bear on some of gold's more
junior cousins which remain below their 2008 all time highs. Silver, for
instance, is currently wrestling with its own key resistance at the $19.50 level
which capped its advance in late 2008 and January 2010. A move through this
level would open the way for a move up to challenge the post 1980 high
recorded in 2008 (on the day of the BSC bailout) at $21.35 Note that gold
was considerably lower in price at that time ($1,030) than it is presently
as can be seen by the subsequent drop in the silver/gold ratio (blue line)
no doubt making silver's current price seem "cheap" to those attracted to
this space. Furthermore, as a general rule of thumb we view a rising
silver/gold ratio as a proxy for an increase of speculative flows into the
precious metals space (as opposed to a simple flight to safety which tends
to favor gold much more exclusively) and therefore if this rally is "for
real" we would expect to see better gains in silver than gold going
forward.


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

-------------------------------------------------------------------------|


The National Association of Realtors (NAR) publishes a quarterly Housing
Affordability Index that measures affordability as defined by the ratio of
the US Median Income to the Income required to qualify for a 90% mortgage
on a Median priced US home. Obviously at 100 the Median home is exactly
affordable to the Median income and as the index rises homes become more
affordable. As can be seen the just published March 2010 report of 174.80
represents a record level of affordability and is dramatically different
from the readings seen at the height of the boom. The 2 year moving average
(red) also shows affordability at a record level for a sustained period of
time. This is important since the longer housing stays affordable the more
likely the decision to own a home is likely to become the "natural" choice
amongst the public. Furthermore the affordability of housing suggests that
the importance of the expiring US home purchase tax credit is probably
overstated. No doubt it has influenced the TIMING of purchase decisions but
ultimately it is the sheer affordability of houses (which is a product of
the FRB's massive intervention into the GSE credit market and the use of
these organizations to supply credit at terms that true private sector
organizations would not find attractive) that has allowed the transactional
volume of the existing home market to stay buoyant. Finally we would
conclude that provided mortgage rates remain near their current levels
there is no obvious need for median home prices to fall further even given
the massive "shadow" inventory of foreclosures that is repeatedly being
described. Indeed with median wages now rising and employment levels
starting to rapidly repair the current level of home prices should be very
easy to maintain and is more likely to actually moderately appreciate than
take another major leg down.


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

As we never tire of explaining, sentiment indexes are useful contrary
indicators at extremes. They can also offer confirmation that a turn in an
economic cycle that typically commenced several months prior is finally being
recognized. This certainly seems to be the case with the NFIB survey (attached)
which saw April post the highest reading since September 2008 at 90.6. This
takes the index out of a "crisis" reading and puts it back in a recessionary
level but just taking the index out of a well defined range represents a
significant shift in expressed opinion. We have added the official NBER
recessionary periods to the chart (despite our grave misgivings as to their
accurate tracking of true cycles) that shows how similar bursts in the NFIB
often come at the end of "official" recessions (remember the NBER itself is a
subjective body whose decisions to call the start and end of a recession are
often reflections of underlying business and consumer sentiment). We would also
remind readers that the best times to invest in a thematic tend to be when the
data is moving from dreadful to mediocre, an accurate description of today's
report. - nfibapri10.gif

The March US census data on Wholesale Inventories and Sales confirmed much of
the PMI and individual corporate reports that have preceded it. Inventories
(black) increased by a modest 0.4% in line with consensus estimates of 0.5% but
Sales (red) increased by a much more robust 2.44% reaching $348 Bln, the
highest level since October 2008. As the attached chart shows the gap between
Sales and Inventories continues to narrow rapidly and this can best be seen by
the lower chart which shows the Inventory/Sales ratio (blue). This has fallen
to a new record low of 1.13% and given the very rapid increase in sales (the 3
month RoC is 4.54%, an annualized rate of almost 20%) it seems likely that this
ratio will fall further before Manufacturers respond by substantially boosting
production. Once again we are forced to conclude that the odds of an
acceleration in domestic US economic activity greatly outweigh those of a
double-dip at the current time and that although asset markets can be expected
to remain volatile for a period of time this probably masks a good deal of
value at current price levels. - wholesaleinvsalesmar10.gif

Having been away for 2 of the busier days of the last 18 months it is hard
to decide where to catch up. From our perspective we have little to add in
terms of real time commentary on a move that is still very much in extreme
flux but we will discuss the significance of the last few day's in the
upcoming Weekly Speculator. In the meantime we will use our daily entries
to focus on some of the underlying data and particular thrown up by the
market.
.
One thing we have noted is that up until this morning the ugly breakdown in
the domestic Chinese market has not received anything like the attention
that it deserves. This is unfortunate since it appears that China has been
central to the bouts of weakness that have hit global markets both in
January/February and at present, but has understandably been shunted to the
left of the public's attention by the problems of Greece and other
sovereign debt markets. The problems in China are of course unrelated and
stem from the clear problems that the local authorities are having scaling
back the massive lopsided boom that their expansionist monetary policy
created in early 2009. Last night saw the publication of April's monetary,
inflation and housing data and taken together this demonstrated the scale
of the problems being faced at present. Chinese money supply continues to
grow at approximately 20% YoY (the last 3 months have seen a growth of
approximately 5%) and New Loans rose up to 774 bln CNY with much of these
loans ending up in the housing market where house price inflation is
estimated to have risen to a record 12.8%. Meanwhile the monthly trade
statistics show imports at a new record pace and exports continuing to
recover strongly.
.
All this points to a need for substantially tighter monetary policy, but to
complicate matters the local equity market continues to act extremely
poorly (we suspect due to capital being re-directed towards real estate
speculation). Last night saw the SHASHR index close right on key support at
the August 2009 low after an ugly intra-day reversal. Although support
should exist at 2700 (the 50% retracement of the 2008/9 gains) we doubt
that it would stem a decline that took out current support only 3% above
it. Instead we would look for the lower 61.8% retracement at 2475 combined
with round number support at 2500 as a more realistic downside target.
However, the real problem with China is not necessarily the losses
experienced within it but what the recognition of its markets problems may
mean for other popular markets that are closely associated with it. Since
early 2010 we have been extremely cautious on Hong Kong (HSI), China "H""
(HSCEI), Australia (AS51) and Brazil (IBOV) and the difficulties facing
these markets would be multiplied by a further breakdown in the local
Chinese market.

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

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

Given the febrile state of global markets it is just as well that the April Non
Farm Payroll report is an extremely robust set of data. While it probably will
not get the attention it deserves today this does not take away from its clear
signal that we are dealing with a US recovery of greater power than most
estimate and that employment in particular is likely to surprise on the upside
going forward. Total payroll increased by 290K, the highest reading since July
2005. Interestingly this reading is close to the infamous March 2004 print of
338K that forced the FRB to reconsider its 1% FDTR. Nor can this increase
solely be laid at the feet of Federal hiring since Private Payrolls increased
by 231K, the best reading since 2006. From our perspective the most exciting
data comes out of Manufacturing where payrolls increased by 44K. This is a very
strong reading that is the highest seen since October 1997 (if we ignore the
sudden reversal in mid 1998). This suggests that Manufacturing sector
employment is growing quicker than it did at any point in the 2002-7 economic
expansion. This has been a key part of our thesis for a faster employment
recovery and today's data suggests that we are on the right path. -
manufacturingnfpapr10.gif - nfptotalapr10.gif

In looking for clues as to the cause of today's remarkable market action we
would point out that the plunge in the SPX Index was preceded by extreme
turbulence in the FX market. In particular we would point out that the key
EUR/JPY cross collapsed approximately 30 minutes before the abrupt plunge
in the SPX market. This certainly suggests that a leveraged player in this
arena was forcefully liquidating positions. Of course since the EUR/JPY
cross is often used as a funding mechanism for general risk exposure this
would not limit the list of suspects to an FX specialist but the fact that
other popular currencies such as the BRL suddenly weakened does suggest
that this will prove to have something to do with the chaos that followed.


(See attached file: 1-SPX_Index.gif) - 1-SPX_Index.gif

We highlighted the poor performance of a number of EM currencies yesterday.
As would be expected those most closely linked to fiscal issues have
continued to perform the poorest (the PLN dropping 2.72% and the HUF 1.58%
so far today) but weakness has spread into the general EM currency complex
suggesting that a degree of liquidation of positions may be
commencing. We continue to view the BRL as the most important single EM
currency at the current time since in addition to its large equity market
sovereign and corporate debt denominated in this currency has been one of the
most popular destinations for investments across the globe in recent months.
Although credit is not an issue for holders of the vast majority of this paper
the currency adjusted total return certainly is. The BRL has weakened 6.18%
over the last 3 sessions, a far greater speed of decline than was seen in the
January/February sell off. Even though the cross rate still remains some
distance below the February high of 1.8975 the speed of currency related losses
must be unnerving for investors, particularly since most considered investing
in the BRL to either be a negligible risk or potential boost to returns.


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

Even within Europe today's news is not universally gloomy since there is
growing evidence that the region's largest economy is starting to recover
rapidly. Attached is a chart showing German Factory Orders. These grew 5.0%
in March well ahead of consensus estimates of 1.4%. At their current level
of 102.1 they are back to where they were in October 2008 and have
recovered 26% over the last 12 months. The 3 month RoC of 10.38% actually
represents a much faster annual improvement of 48% and while we doubt that
this pace could be sustained it seems quite probable that Factory Orders
could match their 2007 level by the end of 2010. The far lower EUR and
local German interest rates that have resulted from Greece's woes will only
help in this regard despite the alarmist commentary that suggests that a
repeat of the post-Lehman collapse in activity would result from a Greek
default. From our perspective the sharp pullback in German industrial equities
(particularly from the point of view of a USD investor) probably represents an
interesting entry point, at least once some clarity regarding Greece's endgame
has been supplied.



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

With the bulk of attention directed towards Greece it is important to keep
an eye on what is developing into a deep sell off in the Chinese local
equity market (SHASHR Index). Last night saw a 4.11% drop in the index
taking it down to close at 2872.47, its lowest close since early September.
A challenge of key support at the September 2nd low of 2770 now seems
likely to occur with further support coming in at 2700, the 50% retracement
level of the 2009 recovery rally. As would be expected this weakness has
leaked into surrounding markets although at the time of writing both China
"H" shares (HSCEI) and Hong Kong (HSI) remain above their February 2009
lows (their own key support levels). As can be seen from the attached story
these declines have caused the cancellation of the Swire Properties IPO. As
we commented earlier this week a collapse of the IPO market are a reliable
signal for the end of long expansionary bull markets and the warning signs
are clearly gathering for emerging markets.



(See attached file: D-SHASHR_Index.gif)

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

Swire Drops $2.7 Billion Property Unit Hong Kong IPO (Update2)
2010-05-06 12:18:17.71 GMT


(Updates with resumption of trading in second paragraph.)

By Chia-Peck Wong and Bei Hu
May 6 (Bloomberg) -- Swire Properties Ltd., landlord to
Time Warner Inc. and Societe Generale SA in Hong Kong, dropped
its plan for an initial share sale, which may have raised as
much as HK$20.8 billion ($2.7 billion), according to its parent
Swire Pacific Ltd.
The Hong Kong IPO pull-out was made after consulting the
joint global coordinators and considering “the deterioration in
market conditions,” Swire Pacific said in a statement to the
Hong Kong stock exchange today. Swire Pacific will resume
trading tomorrow from 9:30 a.m. local time after it suspended
share transactions today, it said.
Swire Properties, the biggest commercial landlord in
eastern Hong Kong island, shelved the sale three days after it
published the prospectus, as the Hang Seng Property Index is
poised to fall for a fourth straight week, the longest-losing
streak since January. Government measures to increase supply and
clamp down on marketing tactics of residential real estate
agents also hurt demand for Swire Properties, Credit Suisse
Group AG analyst Cusson Leung said before the announcement.
“The company is naturally disappointed at this outcome but
feels that it would be wrong to proceed with the proposed
spinoff,” Chairman Christopher Pratt said in the statement.
“Consideration was given to amending the terms of the global
offering, but it was felt that this would undervalue the world
class assets of Swire Properties.”
Asian stocks dropped for a fourth day in the longest losing
streak since January that erased this year’s gains in the MSCI
Asia Pacific Index, on concern Europe’s debt crisis and China’s
property curbs will slow the global recovery.
The Hang Seng Index closed 1 percent lower today, widening
its losses this week to 4.6 percent. Swire Pacific fell 2.8
percent today to HK$81.05 before trading was suspended.

‘Wise Thing to Do’

“A strategic pull-off under current market conditions is a
wise thing to do,” Hong Kong-based Danny Yan, a portfolio
manager at Taifook Asset Management Ltd., which oversees $400
million, said today. “Not only are the shares’ valuations a bit
stretched, property prices are also under pressure.”
The Wall Street Journal reported earlier that Swire
Properties pulled its IPO.
Swire Properties got “good interest from the roadshow,”
said Andrew Sullivan, a sales trader at MainFirst Securities
Hong Kong Ltd. Still, “investors remained price sensitive. It
was always going to be priced towards the low end. With the move
in the last couple of days, investors would have been looking
for the pricing to be dropped by another 3, or 4, or 5 percent
maybe. That’s probably just too much for the company.”

‘Cool-off’

The pulling of Swire Properties’ IPO comes a day after
insurer Prudential Plc delayed its $21 billion rights offering.
U.K. regulators are looking at whether Prudential, which is
buying American International Group Inc.’s main Asian unit, will
have sufficient capital as a combined company.
Swire Properties’ shelving of the sale may mark a “sharp
cool-off” in the broader IPO market, Taifook’s Yan said before
the announcement. “Prudential is doing the same thing. The
global market is short of money.”
Sunac China Holdings Ltd. and Excellence Real Estate Group,
two Chinese developers, last year delayed Hong Kong IPOs that
sought as much as HK$10 billion between them, according to
Bloomberg data.
Swire Properties planned to sell 910 million new shares,
equivalent to a 13.79 percent stake, between HK$20.75 and
HK$22.90 apiece, according to the company’s prospectus.
The price range valued Swire Properties at 31.4 times to
34.6 times this year’s earnings estimated by the banks arranging
the sale, two people with knowledge of the IPO said last month.

Rental Income

Hongkong Land Holdings Inc., one of the biggest office
landlords in the city’s financial hub, trades at 15.89 times
this year’s earnings per share in Singapore, while Hong Kong-
listed Wharf (Holdings) Ltd. trades at 16.63 times, according to
Bloomberg data.
Rental income from Hong Kong offices and shops accounted
for 84 percent of Swire Properties’ total revenue of HK$8.19
billion in 2009, according to Bloomberg’s calculations of
information in its prospectus.
“The problem is the whole market’s valuation is down, all
the developers have dropped” even though Swire Properties
derives most of its income from offices and shops, Credit
Suisse’s Leung said yesterday.
Created as a trading company in London in 1816, Swire
Pacific owns 42 percent of Cathay Pacific Airways Ltd., Hong
Kong’s biggest carrier, and also bottles Coca-Cola in China and
supplies offshore oil rigs.

For Related News and Information:
For stories on Swire: 19 HK <Equity> CN <GO>
IPO results and calendars: ECDR <GO>
Top fund stories: TOP FUND <GO>
Top deal stories: TOP DEAL <GO>
Top Property Stories: TOPR <GO>

--With assistance from Sophie Leung and Hanny Wan in Hong Kong.
Editors: Philip Lagerkranser, Suresh Seshadri.

To contact the reporters on this story:
Chia-Peck Wong in Hong Kong at +852-2977-6532 or
[email protected];
Bei Hu in Hong Kong at +852-2977-6633 or [email protected]

To contact the editor responsible for this story:
Andreea Papuc at +852-2977-6641 or
[email protected]
- D-SHASHR_Index.gif

This article is based on yesterday's VXO historical volatility note. The VXO
remains at 23.72 (approximately where it was when we penned the original
comment). The index did open as high as 25.70 (which we would certainly have
allowed for yesterday) but almost immediately fell back to low 20's much in the
way we anticipated. The US equity market is not totally out of the woods yet
but it is certainly trying to stabilize in a manner that suggests global
leadership resides within it.

Last night's publication of the March Australia Building Approval data
removed any doubt as to whether Tuesday's rise in the RBA Cash Target Rate
was justified. Approvals soared by 15.3% in March to 16,383, a rise of
51.6% over the last 12 months and the strongest single month of activity
since 2002. This reading has pulled the 6 month ma up to 14,774, the
highest reading since late 2004. As the attached chart shows the Australian
construction industry has an extremely cyclical history with 18,000 units
marking the peak level of activity in the cycles that crested in 1977,
1994, and 2002. Current activity is 10% below this level but at the current
pace of increase 18,000 approvals could easily be seen by the middle of
summer. We continue to predict that we are likely to see both higher local
interest rates and a correction in both property and financial asset
markets are likely in the months ahead.


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

Back in early December we distributed the attached chart which shows a 50 week
correlation of the DXY Index and the SPX. At the time we noted that this
relationship has a habit of reaching an extreme, stying there for a period of
months and then suddenly reversing and that it was potentially time for the
record negative correlation of this relationship (it reached -0.9519 in
November 2009) to reverse abruptly. Our thesis was that the US economy was
rebounding strongly and that as this became more widely recognized both the
local equity market and USD flows would be able to repair much of the damage of
recent months. As can be seen this is how things have played out since then
(see orange box) and as of this morning the correlation had just re-entered
positive territory. Since we are using a relatively long term measure (to
smooth what can be a very noisy relationship on a short term basis) it is
highly likely to trend higher as the negative months of May-November 2009 drop
out of the data and we would expect to reach a statistically significant
reading of 0.75 or higher by the middle of summer. Of course the recent turmoil
in Euro-land makes a stronger USD a fairly easy call to make today (this was
far less true in December) but our sense is that the SPX can also move higher
once the current turbulence is behind us. We would therefore expect to see this
relationship remain "in the green" for a significant period of time going
forward which has VERY important (positive) ramifications for the return on US
equities for non-USD investors and (negatively) for US investors overseas going
forward. - dxyspx55.gif

As selling pressures spread rapidly through global markets we are keeping a
close eye on the performance of a number of emerging market currencies.
Attached is a chart which we used on a number of occasions during both the 2006
and 2008 EM corrections which combines a number of EMEA currencies with the BRL
(our proxy for general EM currency flows). Interestingly what this chart shows
is that thus far currency markets have differentiated between countries on the
sovereign credit "watch list" (Hungary HUF and Poland PLN) and general EM
currencies. The latter have thus far held up relatively well against the USD
suggesting that we have not yet seen any wholesale liquidation of foreign
investments into emerging markets. We doubt that this will continue to be true
should this area continue to perform poorly and it has been our belief since
the turn of the year that total equity and currency losses in an EM correction
for USD investors could end up being much larger than most investors
anticipate. - emcurr55.gif

Although for the immediate future capital markets can be expected to be
transfixed by fears of Greece's woes spilling over into other sovereign
markets (we will address this more fully in tomorrow's Weekly Speculator)
this should not be allowed to obscure growing conformation from US economic
data of a powerful recovery that is starting to feed off itself. We would
not place the Challenger Job Cuts report on the "A" list of economic stats
but it is still a reasonable guide to employment trends particularly if a
medium term moving average (6 months) is used to smooth the data. The April
report just came in at 38,300, the lowest number since July 2006 and the
lowest April number for over 10 years. Using the 6 month ma to avoid making
too much of a single data point we can see that this has dropped to 52.500,
the lowest level since November 2000 right at the start of the Technology
recession. The Challenger report therefore suggests that US corporations
have essentially completed whatever firings have been contemplated this
cycle. With demand metrics continuing to improve across the US economy the
stage is now set for a rapid improvement in employment levels.


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

Failures of high profile IPO's are often an important indication that a popular
sector or thematic is past its "sell by date". We therefore note with interest
that the IPO of Essar Energy (ESSR LN) closed 7.25% below its offer price of
420p (reduced from the original range of 450-550p). As this story explains this
represents the worst London IPO in 8 years, hardly what would have been
expected of a large energy company based in one of the most popular of emerging
markets.

US Factory Order data for March comfortably beat consensus expectations of a
flat report by growing by 1.3%. Strength was visible in all categories with
Information Technology growing by 4.66% and Construction by 2.67% both being
notable hot spots. These gains took the overall level of New Orders up to $391
Bln, approximately the level seen in the spring of 2005. Orders are still only
86% of their 2008 peak but at the current rate of improvement this level would
be regained in roughly 12 months time. When one considers that the Goods
Producing section of the Non-Farm payroll is still some 23% below the 2007
employment level (something we have commented on before) it does suggest that
some considerable re-hiring can be anticipated to occur imminently. Regardless
of the headline number in Friday's Non-Farm payroll report the underlying
numbers in the Goods Producing (which includes construction) and Manufacturing
sectors will warrant close scrutiny. - usfactorymar10.gif

Following continued turbulence in global markets we have fielded a number
of questions regarding the chances of a deep correction in the broad US
equity market. While we always try and avoid commenting on very short term
moves in markets (getting these right often matters much less than people
suppose provided the longer term trend can be identified) our sense is that
the US market has a decent shot of holding support around the 1170 level
but that failing this any move lower to the next obvious band of support at
1150 would likely to be a very short lived affair. This view is in part
informed by the excellent run of corporate and economic news (we have not
had time to comment on the excellent Factory Order data today) that should
encourage new money into the market at lower levels but also our sense that
participants have once more been much too trigger happy on their US hedges
(EM is another matter) than would be the case in more normal times.
.
This can be seen by the recent surge in the VXO. Although the raw price of
this index may seem to be quite reasonable at 23.17 (down from 24.21 earlier
today) there needs to be an appreciation of how far it has risen since its
April 23rd low of 13.84. Once way to demonstrate this is to look at the 10 day
Historical Volatility of this index (red line on attached chart). This
shows that the last 2 weeks have seen a change in implied volatility that
was only bettered twice in the entire 2007-2009 collapse. Therefore
although it is certainly possible that the sell-off may continue for a
number of days volatility has already risen to the point that a sharp
reversal in its level can be expected to occur. Our guess is that a failure
to hold 1170 would see the VXO trade up to the high 20's but no further,
provided support at 1150 is held. On the other hand if support at 1170 does
hold then the VXO may already have seen its peak for this particular
episode. Our view remains that using puts (or volatility itself) to hedge
US equity is a very tricky pastime at present and we would far rather short
higher beta (and underperforming) emerging market names outright as an
alternative strategy.



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

Australia continues to represent the leading edge of the global monetary
tightening cycle and the RBA last night elected to continue pushing its Cash
Target Rate (RBACTR) higher, rising it to 4.50%. This puts the RBACTR back to
where it was December 2008 (when it was cut from 5.25% to 4.25%) and also means
that the rate has risen by 1.50% over the last 12 months, the fastest
appreciation since our records begin in 1998. Thus although the nominal rate is
low its speed of change may mean that rather more disruption can be expected in
those sectors which took full advantage of their mid-2009 level. The fact that
tighter monetary policy is being joined by specific measures targeting the
resource portion of the economy (see Monday's proposal of higher corporate
taxes for mining companies) further compounds the pressure that may be felt in
the coming months. - rbaapril10.gif

Today's publication of the quarterly FRB Senior Loan Officer Survey
demonstrates a perceptible loosening of restrictive lending practices that
is typical for the early stage of a recovery. Attached is a chart that
simply takes all Tightening responses (the FRB splits this data into
"Tightened" and "Tightened Somewhat" which we do not find to be
particularly helpful given the subjective nature of these descriptions) and
subtracts from them all Loosening responses. As can be seen we have now
reached the point in the cycle where a slight net loosening of credit
conditions is taking place and the current reading of -4 is approximately
where this survey was in Q1 2004. It should be noted that the vast majority
of respondents (48 out of 56) claim to have made no change over the last
quarter suggesting a degree of inertia in the face of much better levels of
overall economic activity.
.
We have always argued that a loosening of credit conditions would be
coincident with and NOT CAUSATIVE of an economic recovery and this is
precisely what seems to be occurring. We would expect to see a move into
much deeper negative territory in subsequent quarters, particularly given
the very severe degree of tightening (albeit off a base historically and
inappropriately loose standards) that took place in 2008 and 2009 and
the large number of banks who have not yet adjusted their standards to a level
more appropriate for a strongly recovering economy.


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

As we had expected the April ISM Manufacturing Report is a very strong
collection of data that suggests that the Industrial economy is starting to
accelerate strongly. The overall index came in at 60.4, the strongest reading
since June 2004 (interestingly the month that the FRB started raising the FDTR)
and the underlying data supporting further strong readings going forward. As
can be seen on the attached chart New Orders (red) continue to be extremely
robust at 65.7, a very good number given that this is the 10th consecutive 50+
report. It would seem that New Orders are starting to really encourage
Production (blue) with the index hitting 66.9, the highest reading since
January 2004, but this boosted Production was only sufficient to keep the
Inventory index (green) neutral at 49.4. Encouragingly there are increasing
signs that boosts to Production are increasing Employment (pink) with the index
rising to 58.5, the best reading since January 2005. It should also be noted
that increased activity is having a clear effect on input costs, with the
Prices Paid index (not shown) hitting 78. This is largely a reflection of
higher commodity input prices this month. Once more we make the point that a
key piece of cyclical data directly challenges the FRB to accept that the
"crisis" rate of 0.25% is no longer appropriate for the US economy. -
ismapr10.gif

We have been following Chinese monetary closely since early 2009 and a
further step along the current path of progressive tightening was taken
this weekend with the announcement that the reserve ratio for large banks
would rise to 17% (from 16.50%) and for medium banks to 15.00% (from
14.50%) both effective May 10th. As the attached chart shows this takes
the requirement to within 50bp of the record set in the summer of 2008 and
the newspaper commentary that followed this announcement suggest that a new
record will be sent by early summer. The raising of reserves comes after a
series of specific measures that directly targeted the local property
market and continues the use of "alternative" monetary policy that avoids
resetting interest rates. As ever, judging the effects of such measures is
practically impossible, but the point we would make is that once monetary
authorities seek to gain control of an economy they simply keep on
increasing the pressure until clear effects are seen to occur and typically
get increasingly draconian in their decrees as their patience wears thin.
Unfortunately super-heated sectors that rely on leverage never experience
"soft landings" (their internal dynamics simply do not allow this to
happen), instead they typically flip over into "crisis" mode. China shows
all the signs of heading to such an end-game although we would be cautious
in applying a time-period to this cycle since the battle between monetary
pressures and the market can be a long drawn out affair.

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