US Consumers remain sullen in their conviction that things are not getting
better for the US economy. October's University of Michigan poll came in at
67.7, essentially unchanged from the prior 4 readings even if it technically is
the lowest reading since November 2009. As we have written before this is far
more of a problem for the current administration which faces mid-term elections
than it is for the equity market. The very fact that consumer confidence has
remained where it was at the height of this summer's spurious "double-dip"
alert indicates the irrelevance of this measure for predicting future activity.
This emotional gauge is simply not sufficiently sensitive to actual changes in
economic activity, let alone possesing any predictive value. Later on this
cycle consumer confidence can be expected to rise to a new recovery high, but
only once sufficient economic data has been released to settle the recovery
debate decisively in favor of sustained growth. The equity market on the other
hand is unlikely to show such indecisiveness and to the extent that a surge in
consumer confidence indicates a rush of retail investors to re-engage with the
equity market it would probably represent a short term "sell signal" for the
market. - univmichoct10.gif

October's Chicago PMI suggests that the more important National ISM survey,
which is due on Monday, will be another strong piece of data. The overall
Chicago Index (black) came in at 60.6, somewhat ahead of consensus (58). New
Orders (red) posted a very robust 65 while Production (blue) hit a new recovery
high of 69.8. This suggests that Manufacturers are starting to look ahead with
significantly more confidence and the effect of this boost in Production can be
seen in both the positive Inventory (green) and Employment (pink) data which
came in at 54.9 and 54.6 respectively. - chicagopmi.gif

One sub index in today's GDP report that did catch our immediate attention was
the inventory data. Writing exactly one year ago we pointed out the tremendous
pace of inventory drawdown and explained that a reversal of this trend was
inevitable and would act as a considerable boost to GDP. As can be seen the
contribution from inventory growth in the current report is roughly similar to
the decline suffered a year ago. The collective failure to anticipate a
reversal in inventory data is typical of the attempt to "exceptionalize" the
current cycle. We have moved somewhat from the collective denial that the
collapse in activity could be reversed with most now accepting that a weak
recovery has taken hold but sceptical that activity can continue to accelerate.
This again is absolutely typical for a recovery that has got to this stage but
having come this far there is every reason to expect organic growth to start to
feed off itself. - gdpinventoryq32010.gif

Regular readers will know that we ascribe little importance to the official
measures of GDP since their connection to "real" activity is quite tenuous, and
in any case the data looks at a period of time that has already been much more
relavantly covered by corporate earning releases. Nevertheless we recognize
that data of this magnitude sets the tone of the macro debate and will no doubt
be the subject of a tremendous body of research in the days ahead. Looking at
today's report we continue to see a recovery which is on track. For those who
choose to look at the economy as a "fixed" snapshot economic growth remains
tepid at best (and hence the claim that it is vulnerable to slipping back to
recession) but if one looks at the progression over the last two years as a
"rolling script" then the recovery from the collapse in 2008 ranks as one of
the quickest improvements of Nominal activity. This can be seen on the attached
chart that shows Nominal GDP YoY together with the change of this measure over
the prior 4 quarters which adds up to a very powerful 6.96%. As to Annual GDP
Nominal growth at 4.4% this compares closely to the level seen in Q4 1991
(4.2%) and Q2 2003 (3.8%). The latter period strikes us as particularly
relevant since it marked the final panic by the FRB which chose to cut the FDTR
to 1.00% in June 2003, and to (briefly) publicly discuss the possibility of
purchasing Treasury securities. - usgdpq32010.gif

The recent furore regarding foreclosure proceedings should not be allowed to
obscure the fact that home-owner delinquency metrics have started to improve
rapidly in recent months. Today's release of 90 day delinquency rates by Fannie
Mae shows the percentage of late loans in August falling to 4.70% from July's
4.82%, and February's peak of 5.59%. Delinquent loans are still higher than
they were in August 2009 (4.45%) but since peaking have been falling by roughly
the same rate that they increased during their rapid run-up in 2007-10. Clearly
the drop in employment lay-offs since 2009 and downward shift in mortgage rates
are having a palliative effect on new delinquency. The clean-up process still
has many quarters to run but at least the flow of new problem loans seems to be
drying up at the source. - fnmdelinquency.gif

As we have noted before, US Initial Claims have been suspiciously anchored to
the 450K level over the last 7 months. Stasis such as this is unlikely to occur
in actual economic activity and is far more likely to be a result of
"smoothing" at the DoL which creates this estimate each week based on a limited
sample survey of national offices. We would therefore expect this range-bound
period to be followed by a fairly determined move in the direction of the
breakout and there are some reasons to hope that this will be downwards.
Today's single data-point of 434K is encouraging but not conclusive. It does
have the useful effect of taking the 4 week ma (see attached) down to 453.3K,
the lowest reading since July 23rd, but still keeps this indicator above the
key 450K level. On the other hand the current earnings season is strongly
suggestive of further hiring by US corporations and the seasonality of the
employment data is about to swing strongly in favor of lower headline data. As
can be seen on the attached chart of NSA claims the months between October and
January typically see a very sharp increase in lay-offs for seasonal reasons.
There are certain factors in the current recovery that make this less likely to
occur in 2010. First construction employment is already extremely low and thus
likely to be only a minor source of seasonal lay-offs from "winterized"
building projects, secondly the need for manufacturers to address depleted
inventories may keep employment somewhat higher than in prior years. A lower
rate of seasonal layoffs would translate into a significant drop in the
headline number, particularly since we suspect that the DoL has been running
fairly high estimates over the summer months. - initclaimsnsa.gif -
initialclaims4woct282010.gif

US New Home sales remain in their nuclear winter with virtually the entire
increase in reported sales to 307K (consensus 300K) being accounted for by
seasonal adjustments. As the attached chart of non-seasonally adjusted
sales shows the single month slaes for September were virtually unchanged
at 24K (25K in August) underlining our point that the normal seasonality of
the new home market has largely broken down at the current depressed level
of activity.
.
As gloomy as current activity may be it is also fully priced in to both the
homebuilder sector itself and the wider economic metrics. On the other hand
very few estimates allow for any substantial improvement in activity for
the next 24-36 months, much in the same way that very few saw the
possibility of a collapse in activity 5 years ago. This does not itself
guarantee that activity will improve sooner than expected, but it does mean
that any improvement in activity would constitute a substantial upside
shock to most observers. This would include homebuilders themselves who
continue to match building programs to depressed sales, allowing total
inventories to fally to a new 40 year low of 204K units. We doubt that
anything very interesting will happen prior to next spring's selling season
but even if actual sales remain flat between now and then the seasonal
adjustment process will show some improvement in the headline number. We
therefore doubt that the homebuilding sector will be a source of downside
surprise going forwards.

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

Reading this article it occurred to us that perhaps we should start to talk
about the "New Maybe". The problem with an extreme view such as the "New
Normal" is that it requires investors to overlook the massive valuation gap
between equity markets that are supposedly set to deliver poor medium-to-long
term returns in favor of the "safer" but overvalued credit markets that at best
are set to deliver historically low total returns. For the architect of the
paradigm to now ascribe odds of 55% to this economic outcome is hardly
reassuring to those who have followed this advice wholeheartedly (although we
note that this merely seems to be a clarification rather than a change in El
Erian's estimate of probable outcomes). Our belief remains that this recovery
is well within the bounds of the historically normal, and that asset classes
that combine great relative (and decent absolute) value with massive
under-allocation by investors typically end up performing much better than
anticipated. This was true of emerging market equities and commodities at the
start of the last cycle and seems likely to be true about US equities today.

Bond Trading Shrivels After Lula Tax Increase: Brazil Credit

Since we were on the road at the time we did not comment on the decision to
increase the foreign investor tax in Brazil. As this news story explains the
tax would appear to have had an immediate effect on investor flows and trading
volumes but there is a wider general point that should be considered. We see
this tax as part of a growing global trend for Central Banks to "get creative".
In developed markets this has generally taken the form of Quantative Easing,
while in Emerging Market economies Central Banks have been experimenting with
novel forms of tightening. In both cases the historic interest rate tools have
been abandoned; in the case of developed economies because they are already at
or close to zero and in emerging markets due to concerns about higher interest
rates stimulating yet more inflows and stronger local currencies. Thus for
instance the Bank of Israel decided to keep its interest rate at a very low
2.00% yesterday but to directly address the bubbly local real estate market
with a requirement for higher bank reserves for "risky" loans (as defined by
loan to value ratios). We would point out that Central Banks have had a very
poor record of controlling asset cycles with traditional "simple" interest rate
tools. Their branching out into the "alternative policy" universe is likely to
lead to further complication and opportunity for mishap going forwards.

 

After 2 weeks on the road visiting clients we will resume our daily notes
with a positive set of data out of Europe. Eurozone Manufacturing output
for August was reported to have risen by 5.21% to a new recovery high of
109.10, putting activity back to where it was in the summer of 2006. As
with much official data the one month number is a rough estimation which
tends to be far more volatile than actual activity (it would seem that
July's number was too weak and August's probably too strong) but both the 3
month and 12 month RoC suggest that European Manufacturing Orders have been
growing by approximately 20% for the last year or so and show no sign of
slowing at present. This performance has been reflected in recent corporate
data and suggests that despite the significant structuring issues facing
this continent industrial activity continues to repair rapidly. Indeed at
the current rate new orders will be back at peak levels by the end of
spring 2011.


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

A "Chart of the Day" that echoes a point we have been making during our current
round of client presentations. US Retail investors have greeted the recent
appreciation of the local equity market as a massive "selling opportunity".
This is a very positive indication that the gains are set to be extended over
the medium to longer term. Retail flows that conflict with market performance
over multiple months are a strong contrary indicator (normally it is retail
continuing to buy an asset class 2 or 3 months after it has made its peak) and
we are therefore encouraged by the continued outflow of retail funds from the
US equity market.

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

Investors Shun U.S. Stocks at Unprecedented Rate: Chart of Day
2010-10-20 04:01:00.7 GMT


By Lu Wang
Oct. 20 (Bloomberg) -- Individual investors are removing
money from U.S. stocks during a rally at an unprecedented rate,
a sign the gain will lose momentum because of a “buyers’
strike,” according to LPL Financial Corp.
The CHART OF THE DAY shows that for the first time in a
quarter century, a three-month gain in the Standard & Poor’s 500
Index failed to drive inflows into U.S. mutual funds and
exchange-traded funds, according to data compiled by Bloomberg
and Jeffrey Kleintop, chief market strategist at LPL in Boston.
“While individuals may have overcome to some degree their
distrust of the durability of the economic recovery and policy
makers in Washington, they remain distrustful of the integrity
of the U.S. stock market,” Kleintop wrote in a note dated
yesterday. “Without the return of the individual investor to
the U.S. stock market, further gains in the current rally may be
hard to come by.”
Individuals shunned equities in favor of bonds following
the 2008 financial crisis. The selling picked up again after May
6, when a 20-minute plunge briefly erased $862 billion from the
value of U.S. equities. About $45 billion has been withdrawn
from U.S. mutual funds since the end of June while about $94
billion was added to debt funds, according to data compiled by
the Washington-based Investment Company Institute. At the same
time, the S&P 500 has climbed 13 percent.

For Related News and Information:
Graphing: GRAPH <GO>
Chart of the Day: CHART <GO>
Data on fund flows: http://ici.org/pdf/flows_data_2010.pdf

--Editors: Joanna Ossinger, Stephen Kleege

To contact the reporter on this story:
Lu Wang in New York at +1-212-617-2564 or [email protected].

To contact the editor responsible for this story:
Nick Baker at +1-212-617-5919 or [email protected].
- codoct202010.tif

Finally a media story that echos the point we have been making since the start
of the second quarter, namely that the contration of credit for corporations
has ended. The fact that this is true for many small business may come as a
surprise to most (including the corporation named in the title) but is
supported by the steady increase in C&I credit outstanding on small banks'
balance sheets (a chart we have highlighted a number of times in recent months).

September's NAHB Homebuilder Confidence index showed the first improvement in
sentiment since the collapse seen last springtime. The overall index rose from
13 to 16 (see attached) which keeps the index in the "dead zone" but at least
registers an uptick in the metric. Future sales were also much better at 23.
Given the sensitivity of recent homebuilder start and sales data to this index
in recent months we would hazard a guess that the September New Home data will
be somewhat better than consensus. Readers should also consider that the
seasonal adjustments will now start to work in favor of the headline data
magnifying the effect of any increase in absolute "raw" activity. We would not
go further than that at this stage, today's data still counts as "noise" rather
than "signal" but it is a step in the right direction that will have to be
continued in order to mean anything. - nahbconfidenceindex.gif

Chairman Bernanke's career at the FOMC has been punctuated by several long,
keynote speeches, starting with the two made in October and November 2002 (when
he was a mere governor) regarding inflation. As we have argued before, one of
Bernanke's positive attributes is that he "means what he says and says what he
means", in direct contrast to his predecessor. Today's long speech deserves
some time for digestion before it is commented on in detail but it does appear
to signal that the final preparation for the launch of QE2 is being undertaken
by the FRB. It also suggests that the FRB is about to introduce "psychological"
as well as monetary tools into its arsenal, with an attempt to directly affect
market prices by use of explicit rhetoric. "Good luck with that one" is our
initial reaction, but we were particularly surprised to see Chairman Bernanke
single out market expectation of further FRB hikes:
.
"A step the Committee could consider, if conditions called for it, would be
to modify the language of the statement in some way that indicates that the
Committee expects to keep the target for the federal funds rate low for longer
than markets expect. Such a change would presumably lower longer-term rates by
an amount related to the revision in policy expectations"
.
We trust that the Chairman is aware of the dramatic shift in recent market
expectations for FOMC hikes. The current pricing for 90 day LIBOR (attached)
suggests no rate hikes prior to September 2011. The market estimates this rate
to be at 1% in September 2012 and a mere 2% in March 2014. This represents a
shift in timing over around 90 days from what the market was pricing in late
September, and a shift of over 18 months from what was expected back in April.
With the bulk of recent macro data now surpassing consensus and corporate
earnings suggesting that the 3rd quarter was robust it is hard to believe that
the current curve is realistic, even though Chairman Bernanke would appear to
endorse its pessimistic outlook. - eurooct152010.gif

No sooner had Chairman Bernanke's doleful speech text been released (we will
comment on this separately) then some very encouraging economic data regarding
retail sales was released. Official data backs the private sector
pronouncements from the retail sector that September was a strong month for
sales, with total sales estimated at $367bln, up 0.6% from August. Even more
encouragingly August's data has been revised upwards to 0.7% from 0.4%, which
has the effect of taking sales to a new recovery high. Sales are now up 7.34%
over the last 12 months, a much quicker rate of increase than seen during the
last economic recovery. As a result retail sales are now larger than they were
on the day Lehman collapsed (another worthy milestone for any macro data
series) and are only 3.5% below their 2007 record of $379 billion. At the
current pace of repair the US consumer will mark a new record of consumption
sometime towards the end of Q1 2011. We note Toyota's comments yesterday
regarding new car sales, which suggests that this sector at least is enjoying a
strong start to October. With industrial inventories still extremely depleted
stronger retail sales pretty much guarantee stronger industrial production in
the months ahead. For the corporate sector at least, the power of the US
recovery seems to be significantly underestimated. - retailsales.gif

Earlier this week we pointed out that Chinese monetary policy has now been
expansionist for a number of months and that an acceleration in the price of
local financial assets could be expected. Even so were were surprised at the
speed of the move in the local SHASHR index, which gained 3.19% last night to
close at 3113. The index has now gained 11.9% since reopening after the Autumn
holiday 6 sessions ago. Spurring the gains in the equity market is evidence
that the local property market reinvigorated itself over the summer months.
September's official housing data shows that property prices have gained 9.1%
over the last year. Perhaps more importantly the volume of property
transactions continues to accelerate with the total volume of sales (measured
by area) growing 8.2% and the value of sales growing by 15.9%. The latter is
roughly comparable with the growth of M2 (19.1%) over the same period, and is
of course fuelled by this overly rapid pace of monetary expansion. The response
of the Chinese authorities to this data will be interesting to follow. Thus far
their determination to slow speculative forces has been half-hearted except for
the brief period of tightening that took place almost exactly one year ago. Our
bet would be that things get somewhat hotter before they are forced to take
more draconian action. - shashroct15.gif

Our last note mentioned the effect of refinancing on demand for longer term
paper but it should be recognized that this really refers to maturities in the
7 to 10 year range. If one goes out further to the 30 year bond there are some
signs that investment capital may be seeking to exit the treasury market.
Attached is a chart of the 30 to 10 year Treasury spread which has blown out to
an unprecedented 139 bp this afternoon. This is some 10 bp higher than the
record set earlier in 2010, and indicates a failure of the long term bond to
follow the rest of the treasury curve lower in recent weeks. Thus far the 30
year bond can only be said to have consolidated around a low and is not
breaking to the upside, but the record spread is once more indicating a level
of highly unusual trading in the treasury market, and possibly a level of
duress amongst one or more participants who played for a flattening of the long
end of the yield curve. - 30to10yearspread.gif

It is worth noting that the MBA Refinance index has started to surge higher
once again with this week's data 14.6% higher than last week and back over the
5000 level. This takes the 10 week ma up to a new high of 4590 and suggests
that record low mortgage rates have led to a substantial wave of refinancing,
reducing consumers' monthly cash expenses and freeing up revenue for savings
and discretionary spending. The surge in activity also helps explain the
continued strong demand for longer dated treasuries (together with the wish to
front-run the FRB) even as the equity market has gained considerable ground.
Eventually this unusual correlation will break (we assume the equity market
will be the survivor) but there are good technical reasons why both markets may
continue to perform solidly at the current time. - mbarefioct132010.gif

Another example of a Central Bank on hols (see not on China) is that of the
RBA. Having led the charge to higher interest rates earlier in 2010 (the Cash
Target rate was raised from 3.5% in November 2009 to 4.5% in May 2010) the RBA
has now been on hold for almost 5 months. This, together with a strong recovery
in industrial commodity prices, appears to have started to reinvigorate local
activity with a series of sentiment indexes picking up on a change in local
conditions. Last night's release of the Westpac-University of Melbourne
Consumer Sentiment index is an example of this trend, with september's reading
coming in at 117, a substantial rise from August and come distance above the 6
month ma of 112.1. As with China the short term prognosis for local financial
asset prices is rosy but the Central Bank appears to be slipping rapidly behind
the curve. Should the concerns regarding the US appear to be a mirage (or at
least radically overstated) the RBA and others will be left struggling to
control an overheating economy (which at least they would be familiar with in
this land of historic booms and busts). - australiaconsumersep10.gif

One of the main effects about this summer's US "data panic" has been to halt
the stream of monetary tightening measures that were taking place earlier this
year within the emerging market and commodity producing nations. Perhaps most
importantly (in terms of scale) China's rapid slowing of monetary growth
appears to have significantly reversed in recent months. September's data
showed New Bank loans of CNY being issued, well above consensus of 500 CNY.
This took the 6 month ma of this measure up to 615 CNY, compared with the 368
CNY that was recorded in January 2010 at the height of Chinese tightening. The
effect on M2 can be seen on the lower chart, with this measure of monetary
growth now growing at 19% well above the rate of nominal GDP. Chinese M2 is now
an astonishing $1.78 Trillion LARGER than US M2, having been about $1 Trillion
smaller prior to the Lehman crisis. The strong summer recovery in asian
emerging markets and industrial commodities becomes much easier to understand
when viewed against this monetary data and we would not be surprised to see the
local Chinese equity market mount something of a recovery in the coming weeks.
Whether today's data sparks a renewed resolve among Chinese policy makers to
"get serious" about controlling credit growth remains to be seen, but the
measures taken so far do not seem to have done more than cause a 6 month hiatus
in monetary growth, followed by a return to aggressive lending that is of a
significantly higher volume than the pre-crisis level. - chinamoneysep10.gif

We heartily endorse the latest comments by Hoenig regarding the desirability of
QE2 (especially his admission that the FRB "often mismanages exit policies")
but we doubt that his calls for reason will be heeded by this body. It should
be recognized that Hoenig is due to reture at the end of December and as a
"dead duck" governor is likely to see his dissent tolerated with benign neglect
but his comments are in line with our own thinking as outlined in last week's
Speculator Extra "QE2 and all that sail in her".

The August Wholesale Inventory report strengthens our belief that the Inventory
rebuild cycle has begun in earnest. Wholesale inventories were estimated to
have risen 0.8% in August (consensus was 0.5%) while July's data was revised
0.2% higher to 1.5%. We therefore have two consecutive reports that reflect the
sort of pace of inventory re-stocking that is typical of a strong manufacturing
recovery and we would expect September to follow suit. This clearly has
positive ramifications for both macro data such as GDP (which we ourselves care
little about) and for actual industrial activity (which we care about greatly).
We should expect to hear some comments in the upcoming earnings conference
calls regarding inventory policy that underline this shift in manufacturing
consensus. Looking forwards the most encouraging thing to note is that
Wholesale sales data continues to recover from the "data-blip" suffered in the
springtime, meaning that the re-build in nominal inventory levels is still
hardly making a dent in the inventory/sales level. This is a highly positive
dynamic that has been largely ignored (or dismissed) in much macro-commentary
over the summer. We would expect this to change sometime in the 4th quarter and
is likely to be one of the major catalyst in shifting (professional) economic
consensus back towards a more accurate assessment of the recovery. -
mwinsep10.gif

The ever mysterious non-farm payroll report was something of a disappointment
this morning, but one which the market tellingly took in its stride. Our
distrust of this data has been well recorded, and we looked askance the
Manufacturing employment report that suggested net job losses in September,
something that flies in the face of numerous private sector data points. This
data was further undermined by the Wholesale Inventory report that was released
90 minutes later. As to the headline data we are willing to believe that the
public sector is retrenching (not altogether a bad thing in our opinion), but
not to the degree that it will imperil the recovery. The private sector payroll
growth still looks to be healthy enough, provided one uses a sensible moving
average to smooth out the data. The attached chart uses a 12 month ma that has
now risen to a little over +60K. This is comparable with private sector
employment growth in Q4 1992 and Q1 2004 and certainly in consistent with a
continued improvement in employment going forwards. We would admit that the
pace of employment recovery has disappointed us this summer, but time-frames in
macro forecasts are far from precise and nothing in today's data derails our
belief that a continued improvement in the economic environment is likely to
unfold. - privatepayrollssep10.gif

We do not normally comment about individual stocks but we do think it is worth
noting that IBM closed at a new all time high of $138.72 last night, surpassing
its prior peak which was recorded on July 13th 2009. This gives us the
opportunity to consider the change in valuation of US bell-weather companies
over the intervening "lost decade". As the attached chart shows at its 1999
peak IBM traded for a P/E (green bars on chart) of just under 37, compared to a
current P/E of 13, and an Estimated P/E (red dashed line) of 11.78. Back in
July 1999 the 10 year note yielded 5.70%, while the FDTR had just been raised
to 5.00%. Clearly IBM in retrospect (and at the time for those with insight)
was a singularly unattractive investment 11 years ago. Today its beauty is in
the eye of the beholder but it should not be lost that the corporation has
increased its earnings per share just over 3 fold over the intervening period,
while the 10 year treasury note now offers investors under half of the coupon
available in 1999 backed by a government that has turned a budget surplus of
approximately $90 bln into a deficit of $1.3 Trillion. We know where our money
would rather be for the next decade. - ibmandspxvaluation.gif

We have become used to the very low level of announced job cuts in recent
months and September kept this run in place with only 37,151 announced
firings. Although this is higher than August's 34,768 it is still one of
the lowest readings over the 10 year history of the survey and this data
lowers the 6 month ma to 34,348 which is comparable to its level in the
summer of 2000 at the height of the technology driven expansion. As we have
learned over the summer, a collapse in hirings does not necessarily lead to
new jobs being created (at least in the short term) but this month's data
does show a very substantial rise in job hiring announcements to 123,076. The
vast majority of these job hires is in the retail sector with two companies
(Toys R US and Best Buy) accounting for 80,000 low paid seasonal hires.
.
It is therefore tempting to dismiss this data as irrelevant and we would do
so if it were not for the fact that very strong Challenger hire data has
previously been followed by very strong Non-Farm Payroll data after a lag
of a month or two (see attached chart). Clearly we would not base a hard
prediction on today's report (particularly since we only have 6 year worth
of data to consider) but it is a relationship worth considering not so much
for September whose report will be released this Friday but when the
October and November releases are made.


(See attached file: D-CHALTOTL_Index.gif)

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

We do not consider the ISM Non-Manufacturing index to be anything like as
useful an indicator as the Manufacturing survey, but at the current time any
positive data is a useful buttress against the mistaken notion that US
economic activity slowed in recent months. September's index reading was
53.2, a little higher than the consensus estimate of 52 and showed positive
readings in all sub-indexes apart from Inventory change (47) and Backlog
(48). The most notable upside surprise came from Export Orders which at 58
had the highest reading since June 2007, while total New Orders were reported at
a healthy 54.9. Although we view this data to be of only limited use in terms
of understanding the level of actual activity it is certainly supportive of
our general argument that the US recovery remains on track.


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

An interesting story that makes an useful point. The only thing we would add is
to the extent markets are becoming increasingly correlated this also increases
the potential for mispricing of individual securities - in both directions. As
we have argued before, at a time in which "macro is king" it is becoming an
increasingly "bottom up" investment environment, where sector and stock
selection should be able to generate substantial LONG TERM outperformance on
both the long ans short side of the market.

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

Blame Correlation for Making Your Job Harder: Chart of the Day
2010-10-03 23:00:01.0 GMT


By Alexis Xydias
Oct. 4 (Bloomberg) -- Global stock markets are moving in
tandem as never before, frustrating investors who are looking to
stand out from the crowd by producing outsized returns.
The CHART OF THE DAY shows the average weekly correlation
among the 45 markets in the MSCI All-Countries World Index,
based on data compiled by Bloomberg and HSBC Holdings Plc going
back to 1990. The closer the number is to 1, the more the
markets are moving in lockstep. The coefficient has climbed to
more than 0.8 this year from 0.3 at the start of the 1990s. The
red line is the 52-week moving average.
“Correlation makes it very hard to outperform and it also
says that you are not being sufficiently rewarded for taking
risk,” said Garry Evans, HSBC’s Hong Kong-based global head of
equity strategy. “Also, if you can’t get any diversification
benefits from going to overseas markets, maybe it makes more
sense to stay at home.”
The advent of a more globalized economy, people’s
increasing willingness to invest outside domestic markets and
the growing popularity of exchange-traded funds that mirror
indexes have strengthened synchronicity, Evans said. John
Clemmow, a New York-based analyst at UBS AG, wrote in a report
last month that the trend is a result of China’s emergence as
the dominant center of economic growth.
Correlation is not limited to stocks. Moves in the Dow
Jones Industrial Average this year matched copper prices by the
most since at least 1988, producing a correlation coefficient of
more than 0.9. The correlation of the Dollar Index, which tracks
the U.S. currency against those of six trading partners, and
Japan’s Nikkei-225 Stock Average has been as much as minus 0.85
in 2010, the widest since 1988.

For Related News and Information:
World Indexes: WEI <GO>
Graphing homepage: GRAPH <GO>
Global stocks stories: TOP STK <GO>
Developed Markets Page: DMMV <GO>

--Editors: Andrew Rummer, David Merritt.

To contact the reporter on this story:
Alexis Xydias in London at +44-20-7073-3372 or
[email protected].

To contact the editor responsible for this story:
David Merritt at +44-207-673-2639 or
[email protected].
- cofdayoct032010.tif

One of the striking things about the summer's deterioration in official data is
the extent to which it has started to be undermined by anecdotal evidence and
private sector reports. Last week we looked at the Chase Bank survey of small
businesses and this morning we have a similar report to look at produced by
ThomasNet (formerly Thomas Register), a 110 year old middle-man for industrial
purchasers and suppliers. According to the September 2010 semi-annual report
(link is included at the end of this e-mail) the "industrial/manufacturing
sector (is) surging forward, accelerating the momentum of its recovery with the
promise of further expansion to come".
.
Regarding industrial employment the report states that "Despite the "jobless
recovery," the industrial sector is bucking the trend with company growth
leading to the creation of new jobs. A robust 34 percent of respondents say
they plan to hire new employees this year. While many companies are adding new
jobs, the IMB also shows layoffs winding down. Nearly 60 percent of respondents
plan to keep head count level this year, and only eight percent plan to
downsize". Although this report lacks the pedigree of the ISM data (this is
only the 3rd report that has been published) or the official stamp of the
Census Bureau (perhaps mongrel is a better term for the latter's data) it is
the result of a widespread survey of over 3,000 businesses made by a respected
independent 3rd party. We would therefore reccomend spending the 5 minutes it
takes to read the report in full (see link
below)
http://www.thomasnet.com/pressroom/Industry_Market_Barometer.html

US pending home sales continue to recover steadily from their post-tax
credit collapse with August's sales index showing a 4.31% increase in sales
from July to 82.3. Granted this is still a very low pace of activity but
the rebound of almost 10% from June's low is still encouraging and August's
sales were somewhat ahead of consensus estimates for a 2.5% rise (even
allowing for a downward revision of July's data). Interestingly this data
shows the familiar pattern of a breakdown in seasonality as other housing
metrics and we have included the non-seasonally adjusted (NSA) data to
demonstrate this. As can be seen much of the improvement in the headline
data has been thanks to the seasonal adjustment getting far kinder while the
number of actual sales has remained static. As we approach the traditionally
quiet winter selling season it will be interesting to note how stable the NSA
data remains, since a flat or even moderately negative performance would result
in a very positive upwards adjustment to the headline data. Given the above we
would therefore hope to see further significant upside surprises from this data
in the coming months.

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

Since we were out of the office on Friday we did not comment on the release of
September's ISM Manufacturing data. Our take on this report is that it is
consistent with a continued recovery in Manufacturing activity and would
suggest that readers pay particular attention to the surge in inventory rebuild
activity that was reported. At 55.6 the inventory index has reached its highest
level since 1984 and while these numbers cannot be historically compared (since
this is a diffusion index and not a measure of indexed activity) it does appear
as if Manufacturers are finally addressing the massive inventory drawdown that
took place in 2008/9. Since this drawdown was of the magnitude of 1.5-2% of GDP
(it is pointless being more accurate with official data) this represents
$200-$300 bln of activity lost to inventory drawdown. It is our belief that a
rapid inventory rebuild is one of the most likely upside "macro shocks" for the
US economy at the present time.

.
Of course not all the data was as positive, with the drop in New Orders to 51.1
attracting much concern. Our take is that there is nothing particularly
surprising about this drop, coming after 15 months of consistently growing
orders. In fact as can be seen on the attached chart the New Order index
typically surges in the aftermath of a recession (pink shaded areas) and then
pulls back 12-18 months later. On a number of occasions it has even dropped
below 50 (September 1984, January 1992 and March 2003 al being good examples)
before once more pushing higher. We do not doubt that the deterioration in
sentiment over the summer led to some "hold-back" of purchase orders, but we
also expect that if consumer and corporate end demand remains robust in the 4th
quarter Manufacturing New Orders will respond positively. - ismneworder.gif -
isminventoryindex.gif