We were unsurprised to learn that the University of Michigan Sentiment Index
collapsed to 67.8 in July from 76 in June, which was in line with consensus
estimates of 67. As we have explained many times before, this index is of
little predictive value at this point in an economic cycle and we have attached
a chart of the index with prior US recessions (as calculated by the NBER) to
demonstrate the tendency of this report to fall sharply during the early months
of an economic recovery. As it is July's report shows consumers to be roughly
as confident as they were 12 months ago, despite the fact that virtually every
economic statistic is significantly stronger. This lack of belief is reflected
in portfolio allocations but not (fortunately) in consumers' day to day
purchases. As such we would see today's report as a useful indication that
sentiment in general is approaching the point that typically accompanies a
string of positive economic surprises and strong equity market performance,
both of which we would hope to see later in 2010. -
michigansentimentjuly2010.gif

Although not as important as the Chicago PMI, Milwaukee's regional index is a
useful confirmation of our earlier comments (see attached table for details).

We are generally fans of PMI data, particularly series such as the Chicago PMI
which have been around for a number of economic cycles. Therefore today's
strong July report is welcome news that helps dispute the veracity of the
earlier Q2 GDP report. Of course next week's national ISM report is far more
important, but we will have to wait for that data to be released. In the
meantime the Chicago report was strong across the board. The overall index
(black) came in at 62.3, up from 59.1 in June and comfortably beating
expectations. This is the 10th consecutive positive report and the headline
number was matched by the sub-index reports. New Orders (red) came in at 64.6
(in contrast to some official data which has suggested that industrial orders
are contracting) and Production (blue) came in at 65. Inventory (green) fell to
50.80 indicating no inventory re-build while employment stayed positive at
56.60. If the national report comes close to the Chicago data it would
significantly undermine the commonly held belief that the US economy is
currently slowing down. - chicagopmijul10.gif

The quarterly GDP report is a perfect example of the fact that official
economic statics are "manufactured" rather than "measured" and despite the
obvious appeal of such a globally relevant number the errors in measurement
and size of subsequent revisions actually make GDP one of the less useful
measures available to us. This is particularly true of "real" GDP which
combines an estimate of inflation with a "guesstimate" of economic activity
and for this reason we have always far preferred Nominal GDP as a rough
measure of activity. It is also worth noting that this measure is a far
better guide of corporate cash flows, which are themselves reported in nominal
dollars, as well as equity prices over the longer term.
.
In terms of today's report Nominal GDP was estimated to have risen by 1.05%
in Q2 2010, which took the YoY Percentage change up to 4% (blue line on chart).
Although this is still a low rate of growth it should be recognized that it is
a great improvement from the readings of 12 months ago. In fact if one looks at
the Year-over-Year improvement in Annual Nominal GDP (red line) we can see that
the current reading of 6.39% represents one of the quickest and strongest
repairs on record. There is also no obvious sign that Nominal GDP is actually
running out of steam in today's data, with Q2 activity actually representing
something of a rebound from a flat Q1. As such we would reccomend readers to
continue to focus on corporate earnings and guidance as a better guide to the
prospects of the equity market than "large numbers" such as GDP. - gdpq22010.gif

There are some clear signs that the recent collapse in treasury yields has
caused some duress in the USD swap market. At the current time of writing
both the 30 and 10 year swap spreads have moved into negative territory
while the 5 year swap is as low as 15.9 bp. 30 year swaps have actually been
negative for the vast majority of the last 18 months but have rarely fallen
below -30 bp as they have done today. Over this period there have been a large
number of municipalities and sports teams (swaps were a popular way to reduce
borrowing costs for stadium construction) who have had to expensively unwind
prior agreements to pay a fixed rate after the long bond's yield collapsed. It
is far rarer for the 10 year swap to fall into negative territory and in fact
only did so for a few days at the end of March 2010, again we would assume that
a prior issuer of credit has been caught out by the move of the 10 year note
back below 3.00% and that duress my increase if the yield continues to force
its way lower towards the 2.50% level. At the shorter end of the curve the 5
year swap remains positive at 15 bp but is approaching the low of 6.5 bp that
was recorded in March.
.
Although it is tempting to interpret lower swap rates as the market pricing
in a greater certainty that low intermediate and long term yields are here
to stay this explanation would certainly not cover the large negative spread
seen at the long end of the curve. We would rather interpret the current
rates as a reflection of the distortive effect that the massive inflow
into fixed income products are having at the current time. The news that
the world's largest bond mutual fund complex is currently raising assets at
a rate of $1 bln per week merely confirms the magnetic attraction of the
treasury market at the current time.
.
see link:
http://www.bloomberg.com/news/2010-07-28/pimco-draws-about-1-billion-a-week-retu
rns-of-10-unlikely-gross-says.html
.
Such flows are not without their victims apparently and the collapse in
swap spreads suggest should be alert for news stories surrounding outsized
losses incurred by those on the other side of the trade.

(See attached file: W-USSP30_Index.gif) - W-USSP30_Index.gif

It is our belief that the current correction in the SPX index has had an
effect on investor morale that is quite out of proportion to the actual
financial losses incurred. The SPX index is currently down approximately
8.6% from its April 26th recovery although these losses were as high as
18% on July 1st this has to be set against a 13 month 83% rally that
preceded it. Nevertheless, sentiment readings, anecdotal evidence and fund
flow analysis all suggest a substantial divestment of equity holdings has
taken place over the last 3 months and that this has not yet been stanched by
the powerful July bounce in equity values.
.
One of the indicators we use to measure this is the divergence between the
Positive and Negative Volume indexes for the SPX index. To remind readers,
the Positive Volume Index is a cumulative index of price following days in
which volume expands, the Negative Volume Index does the same for days in
which volume contracts. As can be seen on the attached chart the current
corrective phase has seen a record divergence of these two lines indicating
that market declines have typically been accompanied by spikes in volume
while recoveries have had diminished participation. This trend has remained
in place for the 10% rally that has occurred since early July.
.
Our interpretation is that this has negative short term but more positive
longer term ramifications. In the short term, if participants persist in
using the bounce as a "selling opportunity" then the likelihood of a
further corrective leg downwards is substantially increased. This remains
the most probable short term path for the SPX with downside targets being
support at 1035, the July low at 1010 or the 950-980 support range. If this
were to unfold it is likely that resistance between the current market
price and the June 31st high at 1131 would prove to be insurmountable
(although we would allow for a moderate violation of the latter). Should
volume start to switch with conviction to the bull side of the equation the
likelihood of a final corrective leg would diminish appreciably, but as the
attached chart shows, this is yet to occur. Longer term the continued
de-population of the US large cap arena is a far more positive development.
Long, sustained bull runs typically occur after substantial liquidation,
particularly one which takes place in the face of improving fundamental
conditions for the underlying assets. In the end whether or not the SPX
makes a further corrective dip the summer of 2010 seems likely to be looked
on as a frustrating missed opportunity for many investors.



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

Despite its ability to drive headlines, the Conference Board Consumer
Confidence survey is actually a fairly anodyne piece of data that tends to
confirm the views expressed in the media over the prior 30 days. As such it
comes as little surprise that the overall index fell hard to 50.4 from a
revised 54.3 last month (June was originally reported as 52.9) but we would be
hard pressed to explain what this means practically. As the attached long term
chart shows confidence remains unusually low at present but is substantially
higher than its 2009 low point. Interestingly Consumers continue to report no
improvement in the Present Situation which remains roughly where it was in
February 2009 (which surely was a far more traumatic period) and this is
typical of the unreflexive, emotional response that this data delivers. For
this reason consumer survey's can be useful CONTRARY indicators when they reach
an extreme and stay there for enough time to create a meaningful gap between
reported confidence and the underlying economy.
.
The overwhelming influence upon the poor confidence data at present would seem
to be the employment data and the "Jobs Plentiful" sub index remains extremely
low at 4.30. Historically readings at this level have been followed by
substantial improvement in employment metrics after an appropriate waiting
period. With corporate earnings once more surprising to the upside it is an
open question as to when improved financial and operational metrics will
encourage corporate hiring to accelerate. The average consumer would appear to
totally discount this possibility at the current time. - conconfjobplent.gif -
consumerconfidencejuly.gif

Gold continues to have a difficult start to the 3rd quarter and has
violated important support at $1,175 this morning suggesting that a test of
key support at the 200 day ma ($1,148) will now unfold. As we have pointed
out before, the fact that gold's weakness comes at a time that the USD is
losing ground against other major currencies means that the USD price masks
the losses measured in other currencies. The price of gold in AUD (our
favorite neutral measure of price) has broken down through multiple support
levels in recent days and at $1,297 is now over 15% below its 2010 peak of
$1,527. Gold in EUR is now testing important support at E900, below which a
fall to test the 200 day ma at E849 is indicated. We remain concerned that
an overcrowded trade such as this has the potential to unravel quickly if
participants seek to trim positions.


(See attached file: D-GOLDS_Comdty.gif)
(See attached file: D-GOLDS_Comdty1.gif) - D-GOLDS_Comdty.gif -
D-GOLDS_Comdty1.gif

Despite the significant fluctuations in volume caused by the expiration of
the housing tax credit this spring the underlying price of US homes has
remained extremely stable which is a good indication that prices have
corrected to a sustainable level at which buyers and sellers are willing to
transact. This is perhaps more important than many people realize, for one
of the great problems with a real estate correction is that uncertainty
over what the "fair value" of a home should be paralyzes both buyers and
sellers and, even if they agree, makes the appraisal process something of a
lottery. May's Case Shiller index therefore is welcome data indicating that
prices rose moderately by 1.27% to 146.43, slightly ahead of consensus
expectations. This keeps prices within the tight band between 144 and 147
which has contained all readings since July 2009 (the index bottomed at
139.26 in April 2009). Going forwards we would not expect to see more than
a moderate single digit rate of appreciation, and maintain that the volume
of houses sold and resulting absorption of foreclosed homes is a far more
important metric than the clearing price. All we wish to see from the
latter is that a stable floor has been put into place, anything more would
be a bonus.


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

The good news is that US New Home sales were reported to be 330K in June,
some distance above the consensus estimate of 310K. However, this was
counterbalanced by a large downward revision of May's number to 267K from
300K. As we have cautioned before, the New Home headline report is a
seasonally adjusted annualized projection from a single month's sales.
Although in normal circumstances this makes sense (the New Home market is
typically very cyclical) in the "post nuclear" depression of the current
new home market this leads to an exaggeration of the monthly fluctuations
in activity. Arguably the normal cyclical forces have been erased and the
market is populated almost entirely by the determined few who are not going
to allow weather fluctuations to get in the way of a home purchase. For
this reason we think it makes more sense to look at the "raw" single month
data which shows that house sales have stabilized around the 30K a month
level (360K annualized) and we would want to see a meaningful turn in the
12 month ma (red) in order to be comfortable that a sustainable recovery is
in place. In the meantime the market continues to bounce along the bottom
and home-builder construction activity continues to lag somnolent level of
sales. Total inventory fell to a new 40 year low of 210K units in June, a
metric which we stubbornly believe will one day have considerable meaning.


(See attached file: M-NHSLTOT_Index.gif)

(See attached file: D-HSMNTOT_Index.gif)

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

Japan's June trade report allows us to gain insight not just on activity
with that nation but also some of its major trading partners. Once more we
see no sign of slowing growth with total exports growing 10.47% from May
(note this data is NOT seasonally adjusted) or 27.7% YoY. This is some
distance ahead of the consensus estimate of a 23.5% YoY gain, and puts
Japan's export activity roughly where it was in 2005. As a side note,
although it is fashionable to talk about Japan's "lost" two decades this is
clearly not true of the export portion of its economy which was
approximately $3 Trillion JPY in 1990 and peaked at $7.68 Trillion in
March 2008, something that is often missed when discussing their
undoubtedly otherwise awful experience.
.
Meanwhile the geographical driving force of the recovery in exports
continues to shift back towards the United States, compared to 12 months
ago when China was virtually the entire source of gains. This can be seen
on the attached chart which compares exports to both areas. The ratio of
Chinese exports to US exports has come down some way from the peak of 1.35
to June's 1.20. This is still about 50% above the pre-crisis level and we
would expect to see this ration at least get back to 1.0 given the Japan's
US exports are still only at the level seen in the mid-1990's, underlining
the fact that the current 20% YoY growth rate should be sustainable for
several months going forwards.


(See attached file: M-JNTBEXP_Index.gif)

(See attached file: D-JNTBUSE_Index.gif) - M-JNTBEXP_Index.gif -
D-JNTBUSE_Index.gif

Although statistics such as this are essentially useless as guides to the true
severity of the problem we have long believed that the massive expansion of
Chinese lending over the last 18 months was likely to cause significant credit
problems. It would appear that the local banking regulator is starting to grasp
this and react accordingly which may bring matters to a head sooner rather than
later. With the local equity market already down approximately 30% from its
August 2009 high the ability to raise substantial new equity capital at current
prices must be questionable. We continue to believe that a Chinese banking
crisis is the most significant global macro-economic risk at present.

The AAII investor poll suffered a sharp pullback in sentiment which should come
as little surprise given the market's struggle to make headway. Bulls fell back
to 32.16% (from 39.37), Bears rose to 45.03% (37.80) and Neutrals again were
almost unchanged at 22.81% (22.83). This took the one week Bulls - Bears to
-12.87 a level which while negative is not yet extreme. This reading though did
pull the 10 week ma further down to -7.68 (see attached chart) bringing us
closer to the sort of extreme negative reading that typically follows a major
low being put into place. Historically this measure has normally reached
between -15 to -20 at this point, but given our sense that allocations have
already been heavily skewed away from equities and towards fixed income it may
be that a slightly higher (ie less negative) will suffice (the May 2005 low
occurred at -9.5 and the LTCM low in October 1998 at -8.1), but the current
reading of -7.68 still strikes us as too benign to mark the end of this
corrective phase. - aaii10weekma.gif

The attached story is an excellent example of the misuse of data that we
described in this morning's "Speculator Extra". Chart is attached for
Non-Bloomberg users.

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

‘One-and-a-Half-Dip Recession’ Hits U.S. Economy: Chart of Day
2010-07-22 14:45:25.948 GMT


By David Wilson
July 22 (Bloomberg) -- “We’re not in a double-dip
recession yet,” Robert Reich, a former member of President Bill
Clinton’s Cabinet, wrote yesterday in describing the state of
the U.S. economy. “We’re in a one-and-a-half-dip recession.”
The CHART OF THE DAY consists of seven data series that
Reich cited to help make the case in a posting on his blog. It
begins in mid-2009, when the latest recession ended according to
many economists.
Consumer confidence, retail sales, home sales, permits for
new single-family houses and the average work week have dropped,
Reich wrote, while inventories of goods and homes are climbing.
The chart displays government data on each of these indicators
except confidence, where the University of Michigan’s monthly
survey appears.
Reich, a professor of public policy at the University of
California at Berkeley, also cited rising loan defaults as a
sign of the economy’s half-dip.
Taken together, these indicators “should be causing alarm
bells to ring all over Washington,” the posting said. President
Barack Obama should demand a jobs program “that gets millions
of Americans back to work even if government has to pay their
wages directly,” wrote Reich, who was labor secretary under
Clinton.
The posting also appeared on the Huffington Post and the
Business Insider, a blog run by Henry Blodget, a former analyst
at Merrill Lynch & Co.

(To save a copy of the chart, click here.)

For Related News and Information:
U.S. economy top stories: TNI USTOP ECO <GO>
Global economy top stories: TOP ECO <GO>
Chart of the Day story menu: CHART <GO>
Charts home page: GRAPH <GO>

--Editors: James Greiff, Steven Gittelson.

To contact the reporter on this story:
David Wilson in New York at +1-212-617-2248 or
[email protected]

To contact the editor responsible for this story:
James Greiff at +1-212-617-5801 or [email protected]
- 15diprecession.gif

We commented earlier today on the sharp reduction of mortgage rates since
the start of the second quarter and as well as causing a surge in
re-financing this also seems to have counter-balanced the expiration of the
homebuyer tax credit. This should not be surprising since the effect of a
50 bp drop in a 30 year mortgage is to reduce the annual debt service of
the average existing home sold by approximately $1,000 per annum. Unlike
the tax credit, which was a lump sum and therefore affected lower priced
housing to a greater degree, a drop in mortgage rates creates greater
savings (in nominal terms) for more expensive housing. This may already be
reflected in this month's data which saw a sizeable increase in both the
median and average price of houses sold (5.2% and 4.5% respectively), which
almost certainly means that more expensive houses were purchased rather
than the price of homes increased.
.
In terms of volume total existing sales came in at 5.37mm, a -5.12% drop
from May but well ahead of consensus estimates of 5.10mm. Single home sales
(see attached chart) fell to 4.70mm which is almost exactly in line with
the trailing 6 month ma (our preferred metric). This data should go some
ways to calming fears about housing returning to the dark days of early
2009 and we view the current pace of sales as being both sustainable and
sufficient to clear the large backlog of foreclosed homes over a period of
several quarters. Once more the North East region reported significantly better
housing data than the rest of the country (see attached). Sales actually
increased by 7.87% and appear to have a more well defined recovery trend
than the overall national data. It may well be that homebuilders, real
estate brokers and lenders with a concentrated business mix in this
geographical region start to noticeably outperform their peers.


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

It is becoming increasingly apparent that European Union's economic
recovery was not derailed by the 2nd quarter's panic over sovereign debt.
May's Industrial New Order's represents a key data point taken right at the
height of the debt crisis and yet it still shows a very powerful
acceleration of demand. Overall orders increased 3.8% to 103.8, the highest
reading since September 2008. The 12 month RoC has now reached 24.61% while
the 3 month RoC is moving at a remarkable 9.49%, or over 40% annualized. We
doubt that this pace of repair will continue but it should be recognized
that orders are still almost 20% below their 2007 high of 125.28 and so
some further recovery should be anticipated.

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

As expected the June data for US Building Permits and Housing starts was a
generally weak report with total starts falling to 549K (from 578K),
somewhat short of 577K consensus. The overall Building Permit data (which
we prefer) was a slightly better report at 586K, just beating consensus of
575K, but still at a remarkably low level of activity. Interestingly this
improvement seems to have occurred in the multi-family portion of the
industry, where permits reached 165K, the best reading since February 2009.
This may be a sign that some financing is becoming available to complete
stalled construction projects (it is hard to believe that brand new
projects are being commenced) and this metric is worth watching closely in
the months ahead. The Single Family data on the other hand mirrors the
very weak NAHB report that was released yesterday. Permits fell sharply to
421K as builders remain determined to keep inventories lean until sales
recover strongly. Once again there was some regional variation in the data with
the Northeast data notably stronger than the rest of the country. It may be
that we have reached the point in this cycle that the national market is
starting to fragment into its more usual collection of regional cycles.


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

July's NAHB Sentiment index gives no hint that the US New Home market has
started a sustained recovery. The overall index came in at 14, slightly worse
than the 16 anticipated, keeping the index well below the key 20 level that to
us represents a the boundary of recovery. The more useful 6 month ma remains
stable around the 17 level. Foot Traffic remains very low at 10 (down from 13
last month). Interestingly substantial regional variations in sentiment were
once more reported with the Northeast region coming in at 23 (up from 16 last
month) and the West at 9 (down from 14). This dispersion of sentiment has been
in place for long enough (the 6 month ma for the Northeast is now 22.5) that it
may be starting to indicate a moderate recovery is taking place in at least a
portion of the US New Home market and lightening an otherwise poor collection
of data. - nahbsenitmentindex.gif

Gold continues to have a difficult start to the 3rd quarter and this
morning has fallen to a new 2 month low at $1,180.88. We note that the 21
day ma (orange) has crossed below the 50 day ma (blue) indicating a change
in short term trend, and that MACD has started to indicate a substantial
build in downside momentum. Important support at $1,175 now comes into play
and below that the much more important rising 200 day ma ($1,144). If the
latter were to give way we would potentially be dealing with the first
significant retracement of the 2008-10 rally with potential targets being
$1,042 (31.8%) and $974 (50%) being the relevant levels to watch.



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

This is an interesting article that adds some meat to the argument that the US
Treasury market is the beneficiary of very substantial investment flows at the
current time. While some would argue that this is a permanent shift in
allocation tastes that will keep yields subdued going forwards, we would always
take the view that extreme popularity typically ends up with economically
unjustified prices and eventually a strong reversal that leave many of the
later entrants impoverished and embarrassed. Although we would still be patient
with the move towards treasuries since it would seem to have further to go, we
would certainly not use the subsequent lowering of yield as an accurate
indication of future economic growth. This extends towards most "Leading
Indicator" indexes that (correctly) incorporate the shape of the yield curve in
their calculations. A flattening of the curve caused by a rush into long dated
treasuries at lower yields than are on offer in much of the equity market is
very different from a flattening caused by the FRB aggressively rising short
term rates. The former actually leads to a loosening of monetary conditions and
a lowering of credit costs for issuers while the much more typical FRB led
flattening does precisely the opposite.

It is time to update our tracking of C&I lending by Small US Domestic
banks. To remind readers we see this metric as a useful leading indicator
of the next cycle of credit growth and also a meaningful metric for
measuring a change in general small business activity. The limitations of
the statistic are that at just under $400 bln, it represents under 6% of
total US bank credit and about 32% of total C&I lending by US banks but we
still believe that it is worth watching closely at the current time.
.
As the attached chart indicates, the small improvement which first became
apparent in April has been sustained through the early portion of July.
Small Bank C&I lending has risen from its low point of $387.60 in March to
$396.43 in last week's data, an increase of 2.3% over this 15 week period,
which has seen 9 weeks of credit growth and 6 weeks of shrinkage. The 13
week RoC has now risen to 1.42% (approximately 6% annual growth) while the
trailing 52 week RoC has recovered to -3.96%. We would not classify this as
a strong rate of credit growth but we would say that there has been a
substantial change in the trend of this metric. At the very least Small US
banks have stopped shrinking their credit lines to US corporations and
arguably the next lending cycle has actually begun.

(See attached file: W-ALCBSC&I_Index.gif) - W-ALCBSCI_Index.gif

Although this month's University of Michigan Sentiment Index came in sharply
lower at 66.5 and well below consensus estimates of 74 we would hesitate to
call this reading a surprise. This index has always had a high degree of
correlation with both recent equity market movement and the prevailing mood of
financial commentary and both areas have deteriorated markedly over the last
month. A 9.5 point drop in this index is large but hardly unique, as the
attached chart shows, and is historically rather more likely to be followed by
a bounce higher next month than it is by a more persistent shift lower in
sentiment. At its current level the index tells us that few consumers feel good
about the current environment and that belief in the economic recovery has
taken a step backwards in recent weeks, this should already have been
understood to be the case. Having said this, the willingness to express concern
to a pollster is poorly correlated with actual consumer activity and it is the
latter which really needs to be monitored at the current time. -
universityofmichiganjul10.gif

As would be expected the AAII Sentiment Index shows a dramatic improvement from
last week's collapse in investor confidence. AAII Bulls rose to 39.37% (from
20.94%), Bears collapsed to 37.80% (from 57.07%) and Neutrals were essentially
unchanged at 22.83%. This led the Bulls - Bears index to rise a dramatic 37.7
points to reach positive territory at 1.57. As the attached chart shows this is
one of the largest single week positive moves on record, as well as being the
largest weekly gain since January 2009. Interestingly these very large weekly
gains tend to be made towards the end of a corrective move but also tend to be
premature signals that are followed by another abrupt decline in sentiment (and
of course the broad US equity market) prior to a decisive longer term change
for the better. This is also supported by a consideration of the more patient
10 week ma (see attached) which continues to track lower at -6.4. Prior
important lows have been made when this indicator reaches somewhere in the
range of -15 to -20 (in 1990 it was a very low -36.5) and we continue to
believe that this correction has someway to go in terms of time before it is
reliably completed. - aaii10weekma.gif - aaiichange.gif

We have argued repeatedly in recent weeks that economic cycles do not
simply unfold to schedule, and that although over the longer term clear
cyclical trends become apparent this can often take longer than
participants' patience will allow. The current employment cycle is an
excellent example of this phenomenon with the very rapid improvement in
data from the summer of 2009 through winter of 2010 halting in the
springtime. This has caused consensus to firmly embrace a slow and "jobless"
recovery as being the best that the US economy can be expected to
experience. As frustrating as this may be to observe it is actually fairly
typical behavior, but in order for our view that the recovery remains on
track to prove to be correct, employment data can only tread water for so
long. This week's appreciable drop in Initial Claims is therefore welcome
news, with seasonally adjusted Claims coming in at 429K, the lowest reading
since July 18th 2008. Obviously it is important not to read too much into a
single reading (particularly one with a very large seasonal adjustment due
to the holiday period preceding it) and for this reason the 4 week ma of claims
is a more reliable indicator of trend, but if employment were to show a marked
improvement over the summer months this would prove to be something of a
"game changer" in the recognition of this recovery.

(See attached file: D-INJCJC_Index.gif)
(See attached file: M-INJCJC_Index.gif) - D-INJCJC_Index.gif -
M-INJCJC_Index.gif

May's Census Bureau data for US Manufacturing and Sales echoed the narrower
Wholesale inventory report that was issued earlier this month. Business
inventories were reported to be growing at a very moderate pace of 0.1% over
the month meaning that they are still -1.1% below the level seen in May 2009.
More surprisingly, overall Manufacturing sales for May were reported as falling
by 0.94%, the first such fall since March 2009. This is the latest in a
number of Sales related data releases from the Census Bureau which have
been negative for May and although it is possible that this represents a
change in economic activity it is actually more likely to be a result of an
internal seasonal adjustment to the way that body is calculating its data.
Certainly May's ISM and other PMI data (which we generally prefer to this
type of Census Bureau data) in no way suggested that sales had slowed or
even fallen and there have been very few such comments from corporations
(as opposed to much publicly voiced concern as to what will happen in 6 or
9 months time). The accuracy of these numbers can best be gauged by the
upcoming earnings season which we expect to show increasing sales across a
broad array of businesses.
.
In any case this month's data leaves inventories at an near record low in
relation to sales and we continue to believe that this will matter
eventually and that a rebuild of inventories will lead to a substantial
boost in production later on in this recovery. In the meantime the market
is caught in the cross currents of some mediocre economic data and corporate
earnings that continue (early in the earnings season) to beat consensus.
Over the longer term the latter should win out but their may well be
further turbulence before this corrective phase has run its course.


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

US Advance Retail Sales for June were reported slightly lower than
anticipated, dropping -0.5% compared to a consensus estimate of -0.3%. This
shortfall was partly ameliorated by a revision of May's data up 0.1% and by
the fact that Retail Sales ex-autos were in line with consensus at -0.1%.
We do not view this data as indicating a meaningful shift in consumer
activity and even after today's report retail sales remain firmly within
their recovery trend although the 12 month RoC has now slowed to 5.03%..
Obviously we would prefer stronger data but this month's shortfall is well
within the tolerance limits of this data series. Looking back on the last
few months reports we suspect that the March report substantially
overstated sales as rising by 2.12% that month and that subsequent reports
have suffered an element of give back. This sort of swing is common in
seasonally adjusted census data of this type and has been particularly notable
in a host of data-series during the current recovery. This is a good example of
the adage that economic data tends to be far more volatile than the actual
economic activity it claims to measure and for this reason we would rely more
on the upcoming earnings reported by major retailers in order to judge the
state of consumer spending.

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

The German DAX index has been one of the world's best performing equity markets
so far this year (+3.87% in EUR) which helps make the case that the key German
manufacturing sector is recovering steadily. On the surface this morning's ZEW
Sentiment report would seem to challenge this view. This report is a diffusion
index measuring the responses of approximately 350 institutional investors and
analysts and the headline number measures expectations for economic growth over
the next 6 months. As can be seen (blue line of chart) these expectations have
deteriorated markedly over the last 2 months and July's number fell to 21.2,
well below consensus estimates of 25.3 and the lowest reading since April
2009.
.
As would be expected this data has been accompanied by stories suggesting that
it is now more likely that a Euro-zone "double-dip" will occur but a more
considered examination of the data paints a different picture. If one instead
looks at the Current Situation index (red line on chart) then it appears that
June saw a substantial improvement in the recognition of the German recovery
with the index reaching 14.6, the first positive reading since July 2008. The
question clearly is which of these indexes to pay attention to and the answer
to our eyes is clearly the Current situation. As can be seen from the chart it
is far less prone to give a "false signal" of a recovery until it eventually
peaks or troughs at an extreme level (88.7% of correspondents thought things
were getting better in June 2007, 92.8% thought things were getting worse in
May 2009). Perhaps more importantly it has a fairly good correlation with the
performance of the DAX index (unlike the headline Expectations index). Today's
report is therefore a useful confirmation that Germany continues to recover and
we would expect their local equity market to remain near the "top of the pack"
for developed market returns for the rest of 2010. - zewjul10.gif

There are several points of concern in the attached article. Clearly the simple
fact that as much as 44% of "completed" deals are being held on the books of
the banks underwriting them is a structural weakness but this is magnified by
the fact that the volume of issuance is also up sharply. Moreover there is an
increased tendency for quick private offerings to "Qualified Investors" with as
much as 39% of all debt sales taking place via this route. Rapid expansion of
credit combined with lower underwriting standards and curtailed due diligence
is typical of the latter stages of a long expansion and tighter monetary policy
therefore poses a much greater risk for the brazilian economy than most
participants realize at the current time.

When taking over Hong Kong from British rule in 1997 the Chinese
authorities coined the phrase "One Country Two Systems" to describe their
approach to their new possession. Such creative schizophrenia may well now
be necessary to allow the monetary authorities to navigate between the
needs of the domestic and export driven economies, or put another way
between the needs of industry and those of the real estate and financial asset
markets.
.
June's data paints a stark contrast between the very rapid increase in
exports and the first signs that the housing market in under duress.
Exports actually reached an all time high of $137.40 Bln and are currently
growing by 44% per annum. Note that June's data covers the period following
the collapse in the EUR, and the consequent appreciation of the USD linked
CNY, making the strength of Chinese imports all the more notable. There is
also no hint in this data of global demand for Chinese goods softening
following the panic over European sovereign credit earlier this quarter.
Imports had a less strong showing in June and the annual RoC has fallen to
34.6%. It is too early to consider this to be evidence of a slowdown (and
34% is still a remarkably fast rate of change) in the internal Chinese
economy but it is worth noting that in 2009 Chinese imports were growing
far quicker than exports and at the very least it does seem that Chinese
stockpiling of industrial metals and other commodities has considerably
diminished in recent months.
.
Meanwhile the Chinese housing market is showing signs of cooling. Regular
readers will know that we have been following Chinese monetary policy very
closely over the last 18 months and the considerable reduction in loan
production and monetary growth has already had its effect upon the local
equity market. It is starting to appear as if housing may also be
feeling the strain. There have been a number of stories suggesting that
transactional volume has plummeted (unfortunately there is nothing like the
same quality of data available for Chinese home sales as for the US) and
this morning's data suggests that house prices in a number of key markets
actually fell slightly in June. The attached chart shows the 6 month ma of
Chinese New Loan Issuance (this data is too volatile to look at any single
month's activity) and compares this to national price appreciation. As
would be expected there is a lag of around 6 months between a change in the
pace of loan growth and that of home prices. It should also be recognized
that although national house price appreciation of 12% is hardly shocking
this hides the tendency of markets to create "hot spots" within which the
greatest appreciation and new home development takes place. The massive
production of housing means that the "market cap" of this portion of the
economy has expanded far more than 12% over the past year and it may well
be that new loan growth of around 650 bln CNY per month is insufficient to
keep it afloat but any lossening of credit risks overheating in the
industrial sector. Furthermore the problem now may be the demand for
housing credit as much as its supply since borrowing to purchase investment
houses in a flat to down housing market is rarely an attractive
proposition.

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

May's Commerce Department data for May continues to show a very slow rate
of Inventory rebuild. Total Inventories were estimated to be $398 Bln an
increase of 0.5% while April's increase was revised downwards to 0.2% (from
0.4%). This comes as little surprise given the other data for May
(primarily PMI) that has already confirmed a lack of Inventory rebuild.
What comes as more of a surprise is the negative report for total Wholesale
Sales which fell -0.3% for the first negative month since March 2009. A one
off negative print, however, is hardly unusual during a recovery. Indeed we
note that multiple negative reports for Wholesale sales were generated in
2005, 2004, 2003 during the last recovery and in 1993.1994 and 1995 in the
cycle before that. Furthermore the sub indexes show continued sales growth
for such items as Durable Goods, Furniture, Computers and Computers with
the only large shortfalls being in Lumber which fell -8.7% (hardly a
surprise given the collapse in housing starts), Farm Products which fell
-6.9% and Alcohol which fell -2.1%. May's data therefore leaves the picture
unchanged, Wholesale inventories remain very skinny and provided sales
maintain their upward path greater production will be required.



(See attached file: D-MWINTOT_Index.gif)

This article embellishes on the point we made yesterday but it should be noted
that by advancing over 4% (for the SPX index) since these polls were taken a
good portion of the index's oversold and "over-feared" condition has already
been corrected. The only thing that has been definitively established over the
last week is that key support has been moved 30 points lower from 1040 to 1010,
while strong resistance exists at 1075 and the 50 day ma (currently 1100.18).

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

Extreme Pessimism Sets Stage for U.S. Stock Rally: Chart of Day
2010-07-09 14:13:06.753 GMT


By David Wilson
July 9 (Bloomberg) -- Pessimism toward U.S. stocks is
almost as prevalent as it was at last year’s lows, according to
two gauges of investor sentiment that suggest the market may be
due for a rebound.
The CHART OF THE DAY displays the results of weekly surveys
by the National Association of Active Investment Managers and
the American Association of Individual Investors since the
beginning of 2009. Each appears in a separate panel.
This week’s reading for the manager index was 13.47, the
lowest since March 2009, when the latest bear market in stocks
ended. Survey responses can range between 200, indicating that
managers are borrowing to profit from stock-market gains, and
minus 200, showing the use of leverage to bet against shares.
The top panel tracks the active-manager readings, and the
bottom panel shows the percentage of bulls among respondents to
the survey of individual investors. The latter dropped this week
to 20.9 percent, also the lowest level in 16 months.
“This is a positive development” because it signals that
this week’s advance in stocks will last, according to a posting
yesterday on the Traders Narrative financial blog. The Standard
& Poor’s 500 Index rose 4.7 percent in the past three days after
dropping 16 percent from April 26 through July 2.
Many analysts view investor sentiment as a contrarian
indicator. They see extreme pessimism as bullish, based on the
assumption that optimism will eventually return and demand for
stocks will rise accordingly.

(To save a copy of the chart, click here.)

For Related News and Information:
Technical analysis of U.S. stocks: TNI TA USS <GO>
Stock market top stories: TOP STK <GO>
Chart of the Day story menu: CHART <GO>
Charts home page: GRAPH <GO>

--Editors: James Greiff, Steven Gittelson.

To contact the reporter on this story:
David Wilson in New York at +1-212-617-2248 or
[email protected]

To contact the editor responsible for this story:
James Greiff at +1-212-617-5801 or [email protected]
- 437535784.tif

One of our key assumptions about the current correction has been that sentiment
measures would need to show far more distress in order to complete the process
of liquidation. Thus far most of the data has been poor without really
signalling capitulation, but this week's AAII poll is arguably of the order of
magnitude that we had been looking for. Bulls collapsed to 20.94% of
respondents (the 4th lowest reading since early 2008 and the lowest reading
since March 2009) while Bears reached 57.07%, the highest reading since March
5th 2009. The Bulls - Bears fell to -36.13 also the lowest reading since March
2009 (when it reached -51). It is hardly surprising that this poll was
completed just prior to the SPX index mounting a 3% single day rally and it may
be that this week's poll marks the low-point for this particular survey during
this correction. Having said that history shows that it takes several
consecutive ultra-low readings in this poll in order to complete a correction.
For this reason we like to track a 10 week ma of the data. As can be seen prior
major lows have been made when the 10 week ma reaches anywhere from -8.10 (in
October 1998) and 14.5 in March 2003 to as low as -23 in March 2009. The
current level of -5.49 therefore still looks to be a little high to register
the end of the current correction and we still expect a new low to be
registered both in the 10 week ma and the US equity market itself.
Nevertheless, this week's collapse in sentiment is one of the first strong
technical signals we have seen that suggest that the sell-off has triggered the
sort of down-shift in sentiment that is required to complete it and allow for a
powerful and sustained rally in its aftermath. - aaiisentimentpoll.gif

The fact that news of better than expected ICSC data for June was
preannounced yesterday (helping fuel the powerful one day rally) does not
diminish the importance of the data. In the event the final release came in
a little lower than the anticipated 3.5% gain announced yesterday, but at
3.0% this is still a robust month for sales and keeps the steady repair of
retail consumption on track for another month. As the attached chart shows
the 6 month ma (red) remains virtually unchanged at 3.68% following the
addition of June's data. As regular readers will know we put a lot of emphasis
upon demand metrics at the current time and June's ICSC data is a helpful
counter balance to the prevailing view that the US economy has stopped
recovering.




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

The local German equity market has performed substantially better than its
European counterparts (the DAX index is up just over 1% YTD at the time of
writing) and the justification for this can be seen in May's trade data
which shows a substantial acceleration in activity rather than the
Euro-centric slowdown that many assume to be occurring. May imports rose
E9.08 bln (14.84%) to a new recovery high of E70.27 Bln. Even though this
monthly gain is exaggerated by April's unexpected decline of E4.77 Bln
(since we are dealing with seasonally adjusted data we assume that April
was somewhat better than reported and so May's surge is probably overstated
even if the ending level is correct) it should still be recognized that
import activity is now very close to its July 2008 peak of E71.10 and that
the current 12 month RoC of 34% means that a new record should be recorded
over the summer. Export data was similarly punchy with export's reaching a
new recovery high of E80.82, a rise of E6.80 or 9.19% (again May's gains
are probably overstated due to a sharp drop in April's data). At their
current level exports are within E5 Bln of their June 2008 high of E85.10
Bln and should be able to record a new high by the start of the 4th
quarter. While some will no doubt quibble that May is too early a period to
see the effects of the recent shake-out of confidence we are impressed by
today's data and it suggests that Europe's largest economy is enjoying a
recovery that is on much sounder footing than many assume to be the case.

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

We have long highlighted the start of Q3 as a crucial time for gold. This
is because it has been our belief that gold has been the beneficiary of
very substantial institutional inflows which typically climax around the
turn of a quarter and therefore major tops and bottoms are often formed at
that time. For whatever reason this appears to be particularly true for
commodities. We note for instance that Copper peaked on July 8, 2008 at
$8,940 and Crude Oil on July 15th 2008 at $147.27 and therefore are
watching gold's progress very closely at the current time.
.
Gold has had a disappointing start to the quarter. Its headline USD price
has fallen back from its June 21st all time high of $1265.30 to $1,192.78
and the metal has violated support at both its 50 day ma ($1,216.21) and
$1,200. It should be noted that this weakness has occurred at a time that
the USD itself has suffered losses meaning that gold measured in other
currencies has shown a greater degree of decline. We would highlight gold
in EUR (red bars) and AUD (green bars) as being particularly important
currencies to monitor. In the case of the EUR price we have just violated
key support at 950 and in AUD key support at $1,400. At present all of
these violations are moderate enough to be excusable but we are mindful of
today's date being July 6th and gold needs to repair its recent damage
quite quickly if it is not to signal a decline of greater magnitude.


(See attached file: D-GOLDS_Comdty.gif)
(See attached file: D-GOLDS_Comdty1.gif) - D-GOLDS_Comdty.gif -
D-GOLDS_Comdty1.gif

We have found ourselves repeatedly commenting in recent weeks that despite the
fact that there have been a number of high profile economic data "misses" in
recent weeks these do not in total represent a clear signal that the US economy
is in fact contracting. There is nothing unique or even unusual about this
state of affairs and the fact that the equity market has repriced risk
substantially and a large number of economic commentators have revised their
forecasts lower does not have any bearing over the future path of the recovery.
Having read a great deal of commentary in recent days we are reminded of the
brief period of confusion that unsettled markets and commentators quite
unnecessarily in the middle of 2005. This period was the subject of an
excellent commentary by Bloomberg's Caroline Baum at the time (see attached)
and it seems to us that many of the faults in analysis that she highlighted 5
years ago remain just as relevant today. Clearly the stakes are now somewhat
higher for the upcoming earnings season but expectations look to us to be quite
achievable while underlying valuations are cheap. Although we doubt that the
sell-off is complete (we would expect somewhat more of a crescendo in its final
phase) it already strikes us as overdone.

May's Non-Farm Payroll report is a generally mediocre collection of data
that confirms that no acceleration of employment growth has yet occurred during
the US economy's recovery. Overall total payroll's shrank -125K (in line
with estimates at -130K) but this negative number was largely caused by
Census jobs expiring. Private payrolls therefore give a better guide to the
current recovery and these showed a gain of 83K over the month, somewhat
lagging the estimates of 110K. The main cause of this shortfall appears to
be the Construction sector where employment fell by -22K, which is hardly
surprising given the housing start data published for May, while
Manufacturing posted a disappointing gain of 9K jobs although this does at
least stretch the streak of consecutive positive Manufacturing reports to 6
which is the longest streak since 1994/5.
.
In terms of overall Private payrolls a monthly gain of 83K is clearly
insufficient pace of repair to allow for brisk economic growth and as the
attached chart shows monthly Private payroll gains of around 250K - 350K are
typically seen during a robust recovery. On the other hand employment
cycles do take many months to unfold and over that period produce almost as
much "noise" as "signal". We do not deny the fact that recent employment
data has lagged our expectations but we do take issue with the notion that
things cannot improve significantly from the current sluggish rate of
hiring. Nevertheless today's report suggests that the rhetorical
environment will remain downbeat at least until corporate earnings shed
some light onto what is actually happening at the level of sales and
earnings. In this regard it should not be ignored that the vast majority of
data that people have taken issue with (including today's report) with still
allows for an improvement in activity at the corporate level and this
ultimately is what should drive equity valuations in one direction or
another.


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

Unsurprisingly US Pending Home sales have fallen back very sharply
following the expiration of the tax-buyer credit. The headline index fell
back by a remarkable 30% to 77.6 (2001 = 100) which is the lowest reading
on record since the data started 9 years ago. Of course if activity
remained at this level we would be alarmed but we have consistently argued
that a reasonable moving average (we use 6 months) should be used to
interpret volatile data such as this and including today's data this has
fallen to 96.5. Provided future months show a rebound in pending sales
April and May's data will simply have to be seen as "two ends of the same
horse".that average out around the mid 90's. It should also be recognized
that the headline data is seasonally adjusted. Although this would normally
make sense (given the seasonal nature of the housing market) this can cause
reals distortions when an overriding macro force such as tax-credit
expiration comes into play, The NSA index (blue line) fell back to a much
more reasonable 89 level in May and although this is low for this time of
year it still represents an acceptable level of absolute activity. No doubt
some will seize on today's data as evidence that a "double dip" in housing
is underway but this would be a substantial intellectual overreach on the
basis of today's report.


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

Despite the poor reaction to this morning's release it is actually another
broadly positive report that is supportive of a continued recovery in
Manufacturing activity and not in any way typical of the begining of a lapse
into recession. It is true that the overall index fell back to 56.2 from 59.7
in April and therefore missed consensus estimates of 59, but the major reason
for this shortfall was a very sharp drop in the Prices Paid sub-index (not
shown) to 57 from 77.5 (consensus was 70). This in itself is not a cause for
concern and must largely be related to a substantial drop in commodity input
prices that should already be understood to have occurred. In any case the
Prices Paid index in itself is not particularly predictive of future activity.
.
The rest of the report remains broadly in line with the recent releases in
prior months. New Orders (red) fell back to 58.5 (from 65.7) but this keeps
them in their recent range and still represents a good rate of increase. The
same can be said of Production (blue) which fell to 61.4 (66.6). Inventories
(green) continue to be subject to moderate drawdown at 45.8 (45.6) and
Employment is repairing steadily at 57.8 (59.8). The fact that data of this
quality has been greeted by a new YTD low in the SPX tells you everything you
need to know about the state of market sentiment. This again indicates that
although in the short term lower prices are likely to be posted significant
value is being ignored in the current market. - ismmay10.gif

Although investors greatest concerns are currently directed to the future
performance of US economy (which we continue to believe is experiencing a
broad recovery) the clearest evidence of slowdown is now visible on the
other side of the world in China and its closely linked economies. Last
night's release of PMI data for both China and Taiwan were disappointing
(although still indicating a moderate expansion) but it is Australia that
continues to show the greatest pace of deterioration in activity.
.
Last night's release of Building Approval data was another very poor
data-point with approvals dropping 6.6% to 13,412, the lowest reading since
last October. Although the absolute number itself is still reasonable (the
40 year average is 13,042) it must be recognized that this has been a
highly cyclical statistic over its multi-decade life (as indeed is the
entire Australian economy). Prior collapses in activity have taken
approvals down to the 10,000 level before stabilizing and a similar drop in
activity would seem to be in order this time around. We continue to see
Australia's woes as an important early warning for other "late-boom"
economies who experienced very robust real estate markets following the
collapse in global interest rates in 2008.



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