October's consumer credit default data from S&P/Experian confirms that
default rates decisively peaked last summer. This is perhaps one of the
best indicators that the employment cycle also turned at this time since
bank credit card default in particular tends to be very sensitive to an
increase in newly unemployed. It is therefore worth noting that this
metric has fallen very sharply from its peak of 9.14% in April to the
current (still elevated) level of 6.91%. The Composite index is dominated
by mortgage credit with the latter improving from 3.71% in April to 2.91%
in October. Automobile credit default has been more volatile and remains
essentially where it was in April but this is a reflection of the fact
that this particular metric never exploded during the prior crisis. This
appears to be the first time in the modern history of US credit that automobile
debt experienced significantly lower rates of default that mortgage credit
during a recession (we actually predicted this would occur back in 2007) which
tells you everything you needed to know about the quality of mortgage
underwriting which was in place at the height of the housing cycle. -
D-SPE_COMP_Index.gif -

US Consumer Confidence measures remain remarkably muted this far into a
recovery, but as recent retail data has shown this does not translate into any
dampening of consumer activity. Although November's Conference Board headline
data did technically beat consensus at 54.1 this is still a very low reading.
Furthermore the Present Situation index remains stuck at 24 indicating that
consumers are not willing to admit to any improvement in current conditions
over the last 18 months. Unless the entire population being polled is
unemployed this simply makes no sense and points at the central weakness of
this type of data, namely that it is a reflection of emotional considerations
rather than an economic measurement. The current "recovery denial" is actually
quite typical and as can be seen on the attached chart is very similar to the
performance of this index in the early 1990's. A similar situation can be seen
in the employment sub-indexes where the "Job's Plentiful" index has hardly
budged in response to a very large reduction in Initial Claims. From our
perspective the longer Consumer Confidence remains muted the better since we
would expect a sizeable move higher to be accompanied by a wholesale
re-appreciation of the state of the US economy including a sudden realization
by the FRB that monetary policy once more badly lags the scope of recovery. -
confidenceemploymentnov10.gif - confidencepresentnov10.gif

With the key national ISM report due out tomorrow the regional Chicago PMI
report gives some reason for continued optimism regarding the industrial
economy. The overall index (black) came in at a strong 62.5, comfortably
beating consensus (59.9). New orders accelerated to 67.2 which is the best
reading since May 2007 right on the eve of the sub-prime crisis. Production
also reached a new multi-year high of 71.3, the best reading since February
2005, but this still kept the inventory number just below neutral at 48.4.
Finally employment kept up the string of positive readings at 56.3. A repeat of
this data in tomorrow's national poll would be more than sufficient. -
chicagopminov10.gif

An article on European debt that we contributed some ideas to.

Due to their erratic nature we do not ascribe much importance to the various
regional FRB measures of manufacturing activity. Nevertheless, the very sharp
rebound in a number of these measures in the immediate aftermath of the FRB's
implementation of QE2 does bear some comment. Today's Dallas Fed Manufacturing
Index is typical of recent data, coming in at 16.2, far higher than either
consensus (4.5) or October's data (2.6) and bringing into question the veracity
of the sharp deterioration that was reported in the summer months. It therefore
seems likely that future FRB communiques (which typically draw heavily off
internal data) are likely to be considerably more upbeat than the dismal tone
that accompanied summer's data-panic. This week's publication of the Beige book
(due Wednesday at 2.00 pm) will be the first opportunity to see the extent that
the substantial improvement in macroeconomic data has had on the FRB's internal
thinking. - dallasfednov10.gif

Brazil's October Private Sector Loan data, which was released this morning, saw
an acceleration in local credit growth which will increase the pressure to
tighten monetary conditions. Total Private Sector loans grew 2.03% taking
the training 12 month RoC up to just under 18%. Credit growth over the
shorter term has been even faster with the trailing 3 month RoC increasing
at an annualized rate close to 30%. Housing loans showed the fasted rate
of increase, up 2.98% in October and 51% over the prior 12 months. In
general private sector credit usage in Brazil greatly lags that in
developed nations (due to historically high interest rates) and so the
aggregate indebtedness of the economy is far from problematic overall.
However, very rapid increases in credit typically come at the cost of poor
underwriting standards and uneven asset price inflation, both of which
tend to lead to significant problems at the end of cycles. Today's data
therefore shows the extent of the problem facing the local central bank as it
attempts to rein in some of the speculative impulses that have taken hold in
recent months. - M-BZLNPTOT_Index.gif -

We continue to monitor India's SENSEX index closely since we view this
index to have been at the center of speculation for the emerging market
complex this autumn. The index continues to perform poorly and was unable
to take advantage of Wednesday's excellent session for global equities as
rumblings from the local corruption scandal continued to dominate
headlines. As of this morning's close the index had fallen to 19,136, a
drop of 9.3% from its recent all time high. Losses were concentrated in
the infrastructure and real estate sectors which are seen to be at the
heart of the scandal with the BSE Real Estate index falling 13.5% over the
course of the last week. We noted with interest this morning that India's
capital market regulator spoke of taking "all steps to protect investor
confidence" and that it will "investigate all unusual market activity".
However well meaning these comments may have been, in our experience
language such as this often precedes the uncovering of substantial issues.
Meanwhile a good test for the market's resolve will be the upcoming IPO
of Shipping Corp of India which is being partially privatized in a sale
commencing November 30th and we will be following the progress of this
transaction and the overall market with interest. - D-SENSEX_Index.gif -

October's New Home Sales data proved to be as poor as would have been
expected with sales reported at 283K. Although at first glance this seems
like a large miss from consensus of 312K readers should realize that the
volatility of this data is much higher than normal given the depressed
absolute level of activity and the shortfall represents around 2,000 homes
sold nationally which is simply statistical noise. In any case the data
shows no pick-up in activity and confirms that we will simply have to wait
for the next spring selling season to see if any appreciable increase in
activity becomes apparent. Even so it is worth noting that housing
inventory continues to shrink, a reflection of the fact that almost no new
homes are being built at present. At 202K nominal inventory is now at the
lowest level since June 1968. This still represents 8.6 months of sales at
the current level but this metric is now extremely vulnerable to any
sustained improvement in sales activity. Our view continues to be that the
New Home industry is an "embedded call" in the economic recovery since
trailing measures of GDP and employment already reflect the awful state of
the current market and will get no worse if the industry remains in its
nuclear winter for the whole of 2011 while any improvement would result in
a beneficial effect on a host of economic metrics. - D-NHSLNFS.gif -

We have spent much of the last two years explaining that US consumer confidence
is a contrary indicator that should not be confused with the future activity of
consumers. We note that the University of Michigan survey for November was just
revised upwards to 71.6 but this still indicates a very low rate of confidence
is in place. The opposite situation is currently in place in emerging markets
with levels of consumer optimism that surpass any prior level in most available
data series. Even allowing for the relatively short time that such data has
typically been compiled (Brazil is typical in only starting to publish
sentiment data in mid-2005) recent reports have been strong enough to send our
"contrarian antennae" twitching.
.
Looking at this mornings release of Brazil's November consumer confidence for
instance we see the overall index (green on attached chart) reaching a new
record of 125.40 while the "Current Situation" reading (not shown) reached a
remarkable 147.50. Both these readings are well above the levels reached in
2008, which reflects the fact that the summer's collapse turned out to be
merely a pause in the long economic cycle that commenced in 2002. What is
interesting to note is that soaring consumer confidence has coincided with a
decidedly mediocre 2010 for Brazilian equities with the IBOV index (blue)
essentially unchanged on the year (up 0.81% at the time of writing) despite
massive foreign and domestic inflows into the local market. We would note that
asset markets generally have a far better track record of "seeing round
corners" than measures of consumer sentiment and although we would not describe
brazilian equities as weak we would certainly call them disappointing at the
current time. This situation deserves to be monitored going forwards. -
brazilconsumercondifence.gif

It is very interesting to note the calmness with which the DAX index has
treated the Irish debt crisis since this is a marked difference to its reaction
last April when Greece was forced to seek a bailout (see attached chart). There
are several reasons for this change.
.
Firstly German banks have relatively little direct exposure to Ireland.
Secondly Ireland's woes represent far less of a shock to investors in
general. Perhaps most importantly though is the massive progress that the
German economy has made over the last 6 months with the industrial sector
in particular powering forwards on the back of excellent global demand for
its products. This change in circumstance can clearly be seen on this
month's IFO survey (see attached) which polls the view of 7500 German
Businesses on their assessment of the current business environment.
November's reading of 109.3 (2000 = 100) is a record high poll, which
probably reflects the surprise felt by correspondents that the recovery
has been so robust as much as the actual conditions themselves. Although
we never like to see sentiment metrics reach new positive records (since
they tend to be contrary indicators) we have enough visibility regarding
the next few months to be reasonably comfortable in the performance of the
German equity market and its ability to hang tough in the face of some
turbulence indicates its potential for global leadership going forwards. -
D-DAX_Index.gif - D-GRIFPBUS_Index.gif -

Given the inherent volatility of official statistics we are always
reluctant to be too specific in our predictions of data, but one area that
we have stuck our necks out on is predicting a fairly rapid drop off in the
weekly Initial Claims data going forwards. This prediction is based on our
observations of prior cycles (the data tends to improve rapidly after
being stuck at a plateau) and understanding of how the seasonal adjustment
process should start to have a significant downwards bias for the data
(primarily since much fewer construction jobs are there to be lost to
weather shutdowns and the fact that both retail and industrial concerns
are likely to remain more active than normal).
.
We were therefore relieved to see this week's claims data come in well
below expectations at 407K (consensus was 435K), which is the lowest
reading since July 18th 2008. This takes the 4 week ma of claims down to
436K, well below the key 450K level and the 200 week ma of this measure.
This is potentially a decisive turn in the employment cycle (although we
would still want to see it confirmed by data going forwards) and we would hope
to see this measure continue to force its way below the psychologically
important 400K level by the end of winter. If we are correct this would
require a sizeable change in consensus estimates regarding employment
growth and economic activity in general and offer excellent fundamental
support to the increasingly robust performance of equities that are
sensitive to the US economy. - D-INJCJC4_Index.gif -

US Existing Home sales remained tepid in October with total sales coming
in just below consensus at 4.43mm units (a 2.2% drop from September) and
Single Family homes also falling 2% to 3.89mm units. This takes the
trailing 6 month ma down to 4.07mm as the boost from the Homebuyer tax
credit program has now dropped out of this indicator of activity. Although
activity has slowed sharply since this artificial boost the indications are
that it can be expected to stabilize at the current level, which is almost
exactly where things stood in March 2009 before the tax-credits were enacted.
We would also hope that the improvement in payroll statistics and continues low
mortgage rates entice a growing number of new entrants into the housing market
over the coming months. We would not expect to see anything better than a
steady improvement but there is no reason why sales cannot move back up to the
4.50 - 4.75mm range that was in place at the end of the 1990's (current
activity is roughly where things stood in Q4 1997). Importantly the total
inventory of homes remains steads at 3.26mm, which probably indicates that
supply from foreclosures are being dribbled onto the market in line with sales
activity. Although the supply of sales remains very high this is more of
an issue for home price appreciation than for the level of sales. We are
clearly in for a long drawn out recovery process for the existing home
market that may take up the first half of the decade to fix but this is
no-bad thing for the overall US economy since it would mean a ready supply
of reasonably but also steadily priced homes, rather similar to what took
place in a number of regional markets in the early 1980's and 1990's. This
can actually represent a decent backdrop for overall consumer activity
since, as we have argued before, funds that were previously tied up
servicing mortgages and paying rent can now be diverted towards both
discretionary consumption and savings. - D-EHSLSL_Index.gif -

Attached is a Bloomberg "Chart of the Day" column which is based on an
observation we made regarding the collapse of Emerging Market short interest
over the summer months. The Chart shows total short interest in the iShares
Emerging Market ETF (EEM) as a percentage of total shares outstanding. Note we
referred to Emerging Markets as a "benign bubble" since this is the term that
we have seen pop up in numerous commentaries over the last few weeks. In doing
so we simply wanted to point out that the space is not the "no brainer" trade
that many seem to believe at the current time. The key point to understand is
that the trend of monetary policy tends to be the key influence on asset prices
and the divergence between the path of the US (and other developed markets) and
the Emerging Market complex has rarely been more pronounced than it is at the
current time. Copy of chart is attached for non-Bloomberg users.

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

Emerging-Market Short Interest Signals ‘Bubble’: Chart of Day
2010-11-23 03:01:00.0 GMT


By Jonathan J. Levin
Nov. 23 (Bloomberg) -- Investors are the least bearish on
emerging-market equities in almost five years after a six-month
rally that trounced U.S. stocks.
The CHART OF THE DAY shows short interest as a percentage
of shares outstanding on the MSCI Emerging Market Index touching
the lowest level since January 2006, according to data compiled
by Oscar Gruss & Son Inc. The developing index is up 30 percent
since May 25, beating the Standard and Poor’s 500 Index’s 12
percent gain.
The optimistic reading doesn’t account for perils such as
the possibility that central banks will have to raise interest
rates to stem inflation after the U.S. Federal Reserve committed
to injecting $600 billion into the economy, said Michael Shaoul,
chief executive officer at Oscar Gruss & Son.
“This is part of what I would call the benign bubble,”
Shaoul said in a telephone interview from New York. “It’s like
you’ve got to be in on this. Being short emerging markets is
seen as almost sinful.”
All America Latina Logistica SA, Latin America’s largest
railroad company, leads gains in the emerging market index in
the past six months, surging 269 percent in Sao Paulo trading.
Wintek Corp. is up 126 percent in Taipei and Seoul-based Hanwha
Chemical Corp. has jumped 122 percent. Prospects of higher
borrowing costs in developing nations such as China, India and
Brazil may damp the rally, Shaoul said.
“That’s a clock ticking against the asset class,” he
said.

For Related News and Information:
Mexican stocks: MEXBOL <Index> CN <GO>
Ranked world equity returns today: WEIS1 <GO>
Mexican market map: MEXBOL <Index> IMAP <GO>
Bolsa index member-ranked returns: MEXBOL <INDEX> MRR1 <GO>
Emerging-markets monitor: EMMV <GO>

--Editors: James Attwood, David Papadopoulos.

To contact the reporter on this story:
Jonathan J. Levin in Mexico City at +52-55-5242-9276 or
[email protected].

To contact the editor responsible for this story:
David Papadopoulos at +1-212-617-5105 or
[email protected]
- cod112210.gif

Hong Kong Adds New Stamp Duties, Tightens Mortgages (Update1)

Yet another example of EM tightening. Bank of Taiwan also dropped maximum LTV's
of "luxury" propert to 65% from 70% last night.

 

We routinely monitor US monetary aggregates on Friday morning and were
somewhat surprised to see a massive surge in M1 outstanding reported in
last night's H.6 release from the FRB. According to this report M1 grew by
a massive $91.80 over the last week, a 5.13% increase. If this data is
correct (and we would not rule out an error or subsequent revision) it
would be the second largest percentage gain on record (lagging only the
massive boost after the 9/11 attacks) and by far the largest nominal one
week change to the money supply. We are unable to think of an obvious
reason for this increase (the small purchases thus far made under QE2
could not explain it) and have found no explanatory note in the release
(see link http://www.federalreserve.gov/releases/h6/current/h6.htm )
other than the usual caveat that "week to week changes are highly volatile
and subject to revision". Since we very much doubt that anything truly
happened on this scale over the last week would would imagine that either
this week's data will be simply "revised away" or, more interestingly,
represents a much needed "catch up" of official data with underlying
reality. The latter would be a significant occurrence that would suggest
that the FRB (to the extent it looks at its own monetary data) would have
been radically underestimating the leakage of its monetary stimulus into
the broad economy. In any case we will have to await the next few data
releases before we have a better idea of what exactly is going on and we
will therefore be watching the data with much more interest than usual. -
W-M1_Index.gif -

Oldest Trucks Since 1979 May Mean 56% Rise in N. America Output

An interesting story on the ageing of the US truck fleet that mirrors the data
on the average age of US automobiles that we discussed a few weeks ago. It is
our belief that we are reaching the point in this recovery that the stretching
out of product lifetime, which occurred across virtually all consumer and
corporate goods in 2008 and 2009, starts to turn into an accelerated demand for
replacement. This is the corollary to the inventory cycle which is already in
full "rebuild mode". Although cars and trucks are a classic example of large
ticket items our belief is that this phenomenon will extend to a myriad of
other household and corporate goods allowing the growth in US consumption to
continue to surprise to the upside.

 

Scanning the myriad of advisory letters and commentary over the last few
weeks the one notion that is repeated time and again is that of emerging
markets as a "benign bubble" that investors should maximize their exposure
to. Furthermore India has emerged as a clear favorite amongst large
markets and is very much the "last BRIC standing" given the fact that
concerns about China spillover to Brazil and Russia has never fully
recovered from its 2008 collapse. It is therefore interesting to note that
the benchmark SENSEX index has performed somewhat worse than the average
emerging market during the recent bout of weakness, falling 7.2% from its
all time high of 21,108 to this morning's close at 19,585, compared to
the overall MSCI Emerging Market index which is down 4.2%. This decline
takes the index back to where it was in late September and through
important trend support at the rising 50 day ma and takes MACD back to neutral
territory indicating that the powerful positive momentum that was in place a
few weeks ago has been exhausted.
.
It is too soon to be able to tell if this is a start of a meaningful correction
(in which case we would use the 200 day ma at 18,100 as a downside target) or
simply a pause in its relentless appreciation, but for obvious reasons, extreme
popularity and poor performance do not normally combine for long periods of
time. - D-SENSEX_Index.gif -

Korea Bond Tax May Spur More Nations to Raise Barriers (Update2)

Although this morning's headlines are dominated by the news that China will be
raising it's banks reserve requirements this is merely the formal announcement
of a policy change that has been common knowledge for over a week. Far more
interesting is the news that Korea will follow Brazil's lead and seek to
institute a bond tax to discourage foreign inflows. It is increasingly
important to understand that emerging market monetary policy has shifted
sharply back in the direction of tightening with financial assets in particular
the focus of new policy initiatives.

 

Today's MBA mortgage delinquency data confirms that mortgage delinquency has
crested for the current cycle. Overall delinquency (not including
foreclosed homes) fell by the largest percentage on record for a single
quarter in Q3 2010, dropping -0.72% compared to the prior record drop of
-0.40% in Q2 1998. This takes the index back down to 9.13%, almost exactly
the level reached in Q1 2009. This is still an awfully high level for total
delinquencies but the speed of decline is quite encouraging and somewhat
ahead of expectations. Total foreclosures are also starting crest at 4.39%
(note this does not include already foreclosed homes sitting on the banks'
books as REO) having been as high as 4.63% in Q1 2010. There is clearly a
long way to go before we can talk about "normal" levels of delinquency but
at least the trend has turned. - D-DLQTDLQT_Index.gif -

It is somewhat ironic that just two weeks after announcing its QE2 policy the
FEB's own internal data is suggesting that the summer slowdown to have been a
figment of its imagination. November's Philly Fed report (a more volatile and
less reliable regional version of the ISM Manufacturing Report) for instance
came in at 22.50 this morning, way ahead of consensus expectations of 5. This
equals the level reached in December 2009, but is a much more impressive feat
given that activity has now been recovering for approximately 18 months. This
compares of a -7.70 reading for August which was released just a week before
Bernanke's Jackson Hole speech and a week after the FOMC's hint that QE2 would
be enacted. The sub-index reports were strong across the board and we would
highlight New Orders (red) at 10.40 and Shipments (not shown) which rose to
16.80 from 1.40 last month. Inventories (not shown) continued to shrink but at
a far slower rate (-5.90 compared to -18.60) than in the prior month. Perhaps
most encouragingly the Number of Employees index (green) rose to 13.30, the
highest reading since August 2007. Again this is volatile data which would need
to be confirmed by subsequent reports but overall this is an excellent economic
report. - phillyfednov10.gif

Initial jobless claims held on to their recent improvement this week with
the headline number reported at 439K. The non-seasonally adjusted data
showed a sizeable drop to 407.5K but due to the Veteran's Day holiday
falling last Thursday the data is subject to a fairly large seasonal
revision. In any case today's data continues to pull the 4 week ma lower
to 443K, the lowest reading since September 5th 2008 and comfortably below
the key 450K level. Consensus now calls for a further gradual improvement
in claims going forward but we would be hopeful that something more
positive develops. The next few releases of this data are therefore
unusually important to follow before the holiday season makes it harder to
discern any change in trend. - D-INJCJC4_Index.gif -

Although we do not have a particular view about the attraction of the upcoming
GM IPO we have been very much in favor of the global automobile sector for
several months. The attached Bloomberg "Chart of the Day" column correctly
makes the point that this sector has not only been at the centre of the recent
rally but (thus far) has resisted the temptation to join in the current
correction.

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

Auto-Stock Rally Proves Well Timed for GM’s IPO: Chart of Day
2010-11-17 16:08:58.580 GMT


By David Wilson
Nov. 17 (Bloomberg) -- Auto stocks rallied worldwide at
just the right time for General Motors Co. to make one of the
world’s largest initial public offerings.
The CHART OF THE DAY compares an MSCI Inc. index of
automakers and auto-parts producers with the MSCI World Index, a
benchmark for developed markets, since the latter began rallying
from a 12-year low in March 2009. Both were set to 100 when the
MSCI World hit bottom.
Since Sept. 1, the percentage-point gap between the auto-
industry gauge and the MSCI World has increased more than
sixfold. The differential as of yesterday’s close was about 25
points, the widest margin in the past 20 months.
GM boosted the size of its IPO by 31 percent today and
expanded a concurrent sale of convertible preferred shares by 33
percent. Investors had ordered more than seven times the amount
of common stock in the largest U.S. automaker than was
available, according to a person familiar with the deal.
“Anyone doing an IPO might want to use this as a case
study,” Jeremy Anwyl, chief executive officer of Edmunds.com,
an auto website, said today in a statement. “It’s so well
scripted.” Anwyl cited GM’s $2.16 billion profit for the third
quarter and plans to cut debt by $11 billion, among other
developments.
The IPO will total $22.7 billion, including $4.6 billion of
preferred, if the common shares are priced at the upper end of a
$32-to-$33 range and all the stock registered for sale is sold.
The amount would exceed the record $22.1 billion raised from
Agricultural Bank of China Ltd.’s initial sale in July.

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

For Related News and Information:
GM’s IPO: GM US <Equity> TCNI INI <GO>
Initial public offering data: IPO <GO>
Auto-industry top stories: TNI AUT WWTOP <GO>
Charts, graphs home page: GRAPH <GO>

--Editors: James Greiff, Charles W. Stevens

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]
- codnov172010.gif

This is one of the first times in many weeks that we have seen a large bond
offering scaled back due to poor demand. Supply for all global fixed income has
been enormous since the early summer and the recent sharp back up in interest
rates would appear to have tipped the equilibrium against issuance to a degree
at the present time with buyers getting somewhat more selective. We would not
draw too many conclusions off any single deal but the straightforward success
of all new bond offerings should not be taken for granted going forwards.

As we had explained a few weeks ago the rapid spike in mortgage
refinancings that started this summer was approaching its terminal period
based on the length of time that prior refi-booms had remained in place.
The reason for this is simply that it rarely takes much longer for 3-4
months for the pool of homebuilders able and willing to refinance to
complete the application process and move on with a lower rate intact.
This depletion of new applicants now appears to be underway with the MBA
refi index falling very sharply to 3831 this week, just below the 4,000
level that we use as an indication of a "refi boom". This has important
ramifications for intermediate US Treasuries which saw a large increase in
demand from MBS holders over recent months. As can be seen on the attached
charts spikes in refinancings are typically followed by much quieter
periods of activity (for obvious reasons) which are accompanied by a rise
in interest rates of around 50-100 bp (using the 10 year note). One reason
for the back up in rates is the elimination of MBS duration hedgers from the
buy side of the market and potentially the need for them to reverse tracks
and sell a portion of their treasury holdings as repayment assumptions
change. We would expect this familiar pattern to play itself out once
again and although the $600 bln from QE2 will have a moderating effect on
the upward pressure it still seems likely that US intermediate yields will
be in a rising trend going forwards. - D-MBAVREFI_Index.gif -

The benefit of tracking US Building Permit data rather than Housing starts is
that the former is significantly less volatile on a month to month basis (we
assume this has something to do with the methodology behind the creation of
these 2 rough estimations of activity). In September the Housing Start data
showed a large bounce in activity which was abruptly reversed in October.
Building Permits on the other hand suggested no such increase in activity last
month and similarly no decrease in activity in October (see attached). In any
case both data series point to an extremely low level of home-building at the
current time with the current pace of activity (using the 6 month ma) being
roughly 40% of the average over the last 40 years. We remain stubborn in our
belief that this will eventually translate into a housing shortage and rapid
increase in activity but recognize that first actual sales of new homes will
have to accelerate considerably. We therefore would simply note the potential
for home-building to become a positive force in US macro-economic statistics
later on in this cycle without posing any threat to the downside given the fact
that a pathetic level activity has already been in place for several quarters.
- bpermitsoct10.gif

Tax-Exempts Tumble as California Sells $10 Billion: Muni Credit

We have been monitoring the rapid sell off in mini-bond closed end funds and
ETF's internally over the last few days. Despite the quotes in this article
claiming that fears of stagflation or hyper-inflation (or both) are driving
these rapid moves we doubt this is the case. There is also no real sense that
the CDS market is hinting at the sort of extension of credit-risk from
Ireland;s woes that could be expected to occur. Rather it simply appears that
municipal bonds are undergoing the same reversal of capital flows that other
asset classes have experienced post QE2 (see last note on this subject) but
that the liquidity in this marketplace and in the proxy instruments used to
play in it is quite insufficient to accommodate this upsurge in redemptions.

 

If the promise of QE2 was the tide that lifted all ships then its formal
announcement has seemingly been rather more unkind to asset markets.
Attached is a chart that looks at the performance of the
ThomReuters/Jeffries CRB Index, the SPX and the 10 year treasury note
since the close of August 10th with each instrument rebased at 100 on that
date. As can be seen the CRB index had advanced approximately 12% by
November 3rd and rose another 5% through November 9th with a number of key
agricultural and industrial commodities making all time or multi-decade
highs. Although this was described as investors preparing for the effect
of QE2 in generating inflation via USD debasement, it was nothing more
than a wave of over-excited speculation in commodity markets which appears
for the time-being to have blown itself out. The rapid sell-off over the
last week is therefore no less than would be expected with just under 50%
of the entire post August 10th gain being reversed at the time of writing.
The equity market saw a more measured response overall and although the
SPX rose approximately 10% in just under 3 months it should be recognized
that this only took the market back where it was in late April, since
which time both corporate earnings and macro-economic data have improved
significantly. Although the SPX has also given up around 45% of its gains
we would be much more optimistic of its ability to find support somewhere
close to the current price level and later on retest (and hopefully
surpass) its high. In fact should commodity prices get back under control
this would remove the specter of margin pressure that was beginning to
build in certain industries that rely significantly on commodity inputs.
.
Perhaps most interestingly the one asset class that is being directly
targeted by QE2 now shows the smallest net change. The total return of the
10 year note (as measured by Ryan Labs) has returned to almost exactly the
level that it was at on August 10th. As we argued in early October there
would be nothing strange about treasury yields moving higher as QE2 gets
to work. Moreover if this rise in yields was in response to better than
expected economic data this would be a normal and healthy reaction. Our
guess is that in the absence of QE2 related flows the 10 year note would
currently be somewhere between 3.25% and 3.75%, a level which is low
enough to be economically stimulative and well below the level that would
be indicating an inflationary concerns in the US economy. - D-CRY_Index.gif -

Today's Manufacturing Inventory report represents more evidence that the
long-awaited inventory rebuild began in earnest this summer. September's
data was a strong 0.9% increase (0.8% consensus) which was made even
better by August's data being upgraded to 0.9% from 0.6%. This takes
inventories back to $1,403 bln, their highest level since March 2009. The
12 month RoC is now a healthy 6.86% and looks likely to rise somewhat
higher going forwards. Sales also continued to advance, rising 0.52% to
$1,101 Bln, their highest level since October 2008. The 12 month RoC of
sales has moderated from its very high readings earlier in 2010 but looks
likely to remain in the 5-8% range going forwards. Despite the recent
rebound in inventories the inventory/sales ratio also remains on the low
side at 1.27 suggesting that industrial production can be expected to
continue to expand for the foreseeable future. Note that since this data
is for September it basically reflects the already very strong picture
painted by corporate earnings for the 3rd quarter rather than offering new
insight, but it is still a welcome confirmation of recovery. - M-MTIB_Index.gif
-

The US Census Bureau estimation of Advance Retail sales for October was
another strong data-point for this portion of the economy with the
headline number rising 1.2%, well above consensus of 0.7% and September's
sales being revised 0.1% higher to 0.6%. This takes total sales back up to
$373.10 bln, approximately equal to their level in August 2008. Sales are
also now within 2% of their November 2007 all time high ($379.96 bln) and
look likely to surpass this number sometime in Q1. As happy as we are to
see this number reported we would caution that official data tends to
swing around more than underlying activity and today's report seems a
little stronger than the same-store sales data released by the various
retail chains earlier this month. We would therefore not rule out the
possibility of a data miss either in November and December which simply
underlines the importance of using smoothed longer term moving averages
and rates of change when considering the implications of data. In that
regard the 12 month ma and RoC for advance retail sales are both
unambiguously positive and support our belief that the current recovery is
starting to feed off itself in the manner we expected. - M-RSTATOTL_Index.gif -

Thus far QE2 has proved to be a classic example of "buy on the rumour sell on
the news" with the US Treasury Yield curve (with the exception of the 30 year
bond) collapsing between the initial hint of this policy on August 10th and its
formal announcement on November 3rd and subsequently reversing this entire
movement in under two weeks. Following another sharp back-up in yields this
morning the entire yield curve from 1 year onwards is now at a higher yield
than it was on August 10th (note the 7 year yield which is interpolated is
within a quarter bp of its August 10th close). Attached is a table of yields
for August 10th, November 3rd and November 15th together with a spread chart
that shows the change in yields between these 3 periods (white line shows drop
from August 10th to November 3rd, Orange line back up from November 3rd to
November 15th and Yellow line net change for entire period). As we had expected
the sharpest moves have been in the "belly" of the curve with the 2 year yield
moving 23bp (more than 66% of its entire yield of 33.5 bp on November 11th) and
the 5 year yield 40 bp. Given that the the FRB has not actually started
purchasing debt under its QE2 mandate it would be premature to proclaim the
policy a failure, but the intial "honeymoon" effect of encouraging participants
to rush into treasuries ahead of the FRB would appear to have ended with
something of a hangover. Whether this effect spreads to other asset classes
remains to be seen, but the sustainability of some of the extraordinary gains
in the commodity complex over the last few weeks must be open to question, -
yieldcurvetable.gif - yieldcurvechart.gif

Bloomberg Chart of the Day story based on our 30 year bond/mortgage comments
(chart attached for non-Bloomberg users).

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

U.S. Homebuyers Pay Less to Borrow Than Treasury: Chart of Day
2010-11-12 16:08:31.316 GMT


By David Wilson
Nov. 12 (Bloomberg) -- U.S. homebuyers can borrow more
cheaply than the government for the first time, thanks to the
Federal Reserve’s push to jump-start the economy.
The CHART OF THE DAY illustrates this by comparing the
average rate on 30-year, fixed-rate mortgages with the yield on
30-year Treasury bonds. The figures appear in the top panel and
are compiled by Freddie Mac and Bloomberg, respectively.
The mortgage rate fell 7 basis points in the week ended
yesterday to 4.17 percent, the lowest since Freddie Mac’s data
began in 1971. It was 16 basis points lower than the Treasury
bond’s yield yesterday, as the chart’s bottom panel depicts.
Each basis point equals 0.01 percentage point.
“This makes absolutely no fundamental sense,” Michael
Shaoul, chief executive officer of Oscar Gruss & Son Inc., wrote
in an e-mail yesterday. Even so, it’s “an accurate reflection”
of how the Fed’s plans to promote economic growth by purchasing
Treasury securities have influenced investors, he added.
The central bank is beginning to buy $600 billion of debt
in a second round of quantitative easing, which policy makers
announced last week. Eighty-six percent of the purchases will
target bonds maturing in 2 1/2 years to 10 years, according to
the Fed’s New York branch. The 10-year note is a benchmark for
mortgage rates.
Thirty-year home loans have exceeded 30-year Treasury
yields by an average of 1.3 percentage points since February
2006, when the Treasury resumed selling the securities. The gap
narrowed from 1.6 points during the first period of bond sales,
lasting from 1977 to 2001. The latter figure was derived from
Freddie Mac’s data and bond yields compiled by the Fed.

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

For Related News and Information:
Freddie Mac mortgage data: ALLX NMCM <GO>
U.S. housing top stories: TNI HOM USTOP <GO>
Bond market top stories: TOP BON <GO>
Charts, graphs home page: GRAPH <GO>

--Editors: David Henry, James Greiff

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]
- codnov122010.gif

We spent a great deal of time looking at the Citigroup US Economic
Surprise Index (CESIUSD) over the summer and it proved a useful guide to
the progression of the summer sell off and recovery (the index has
recovered to +36 at the time of writing). Citigroup also produce a number
of other regional surprise indexes that we monitor from time to time.
Interestingly the worst looking data appears to be in the emerging market
arena (CESIEM index for Bloomberg users) where although the economic data
remains strong it ability to surpass very rosy consensus estimates seems to be
waning. At +9.90 the index remains positive but is now lower than at any
point since May 2009. Given the strong recent allocations to emerging
markets and almost universal sentiment that this asset class represents a
"benign bubble" that is deserving of full participation the deterioration in
the quality of data versus consensus is worth watching closely going forwards.
- W-CESIEM_Index.gif -

It continues to be a remarkable week in Treasury markets as crowded long
positions in the middle of the curve look to be forcibly unwound under
some duress. At the time of writing the 5 year swap rate (which we
highlighted earlier this week) has risen another 16bp taking the 5 day RoC
(calculated as the percentage change of yields over the prior 5 sessions)
to a near 26%. In terms of basis points the move is 39bp since last
Friday's close which still counts as a sizeable move in absolute terms and
takes this yield back above its close on August 10th when the FRB first
suggested publicly that QE2 would be considered. There is still plenty of time
this session for a recovery by the close but at the time of writing is does
appear that there is some duress in the Treasury markets. - D-USSWAP5_Index.gif
-

US Consumer Sentiment remains virtually unchanged since the height of the
summer "data panic" even though virtually every economic metric (including
employment) has recovered significantly over this period, which helps explain
the continued exit of retail flows from US domestic equity mutual funds despite
the excellent short term performance of the equity market. As recent month's
have shown poor consumer sentiment does not automatically have dampening effect
on actual retail consumption and so there is little significance to today's
data which in any case was in line with consensus. Going forwards the way to
use this data series will be watch out for an abrupt surge higher which would
be signaling the sort of abrupt improvement in sentiment that typically
accompanies a short term peak in both asset markets and economic data. -
umichigannov10.gif

It did not take long for the implications of China's October economic data
to take effect on the local equity market with the SHASHR index falling
just over 5% to close at 3127.32. As dramatic as this fall is in terms of
a single session it really only reverses the rapid gains that took place
at the start of November and keeps the index just above important support
at the 3100 level. There are strong rumors of an imminent rate hike in
China sometime before Monday morning but we doubt whether this
particular move will prove to be terminal to the equity market's recovery and
even less so with regards to the runaway housing market. The history of prior
battles between Central Banks and speculative asset markets is of a prolonged
battle in which the Central Bank at first appears impotent and only later on
disastrously effective. Our sense is that China is still in the former part of
this process. As we have noted earlier this week one the aspects of the current
cycle will be the heaping of blame on the Federal Reserve for creating global
excess liquidity. This is a little rich given that China has allowed its
nominal M2 to exceed that of the US by over 20% (in an economy less than a
third the size) but the although the anger they feel may be misplaced it does
not make it any less genuine and we continue to believe that the world post QE2
will see increasingly bifurcated monetary policy between the developed and
emerging markets. - D-SHASHR_Index.gif -

If one of the major aims of both "Credit Easing" and "QE2" was the
reduction in US mortgage rates then to a great extent both can be viewed
as a "success". Indeed today's release of weekly mortgage rates by Freddie
Mac shows that the 30 Year Fixed mortgage rate has fallen to 4.17% which
is not only a record low but is also 15bp BELOW the rate on the 30 year
Treasury bond. This makes absolutely no fundamental sense but is an
accurate reflection of the way the investment flows have become radically
distorted in the run-up to QE2. The FRB can hardly be blamed for investors
rushing to asset backed securities that are not being purchased by the FRB
and shunning the 30 year Treasury bond at the same time. At the same time
the febrile atmosphere in fixed income markets that has developed over the
last few weeks can hardly be described as healthy and the FRB is certainly
responsible for encouraging it.
.
In any case a 4.17% mortgage rate (3.57% for those willing to fix for a
mere 15 years) is likely to keep the current refinancing boom going for a
while longer with the MBA Refinance Index remaining in the mid to high
4000's since early August (see attached chart). The great losers remain US
and global savers who continue to see the income on savings progressively
squeezed by current FRB policy. - D-NMCMFUS_Index.gif - D-MBAVREFI_Index.gif -

We have directed a great deal of attention to China this week and continue
with a summary of the October mass release of economic data that took
place last night. This paints the picture of an economy still buoyant on a
wave of domestic liquidity creation, but also one which is showing some
clear inflationary tendencies and deceleration of activity from their
prior remarkable levels.
.
Looking at monetary data first we can see that despite several steps to
tighten conditions bank credit granting remains very high. Total new loans
granted were 587.7 CNY, much higher than the estimated 450 bln and in line
with the trailing 6 month ma. As a result M2 and other measures of money
continue to rise rapidly. M2 has grown 19.4% over the last 12 months and
is still growing by approximately 15% if one annualizes the last 3 months
of growth. This rapid growth of money (together with international
speculation in agricultural commodities) is starting to have a marked
effect on inflationary measures. Both PPI and CPI rose rapidly in October
with PPI reaching 4.4%. This is still well below the peak of 8.7% which
was recorded in February 2008 but the upward trend seems well established
and to require substantially tighter monetary policy going forwards. As
the chart demonstrates China has a history of inflationary cycles much
greater than that typical in major developed economies with CPI peaking at
27.7% back in October 1994, and this is recent enough to be an influence
on today's monetary authorities.
.
As to the actual measures of economic activity these are still extremely
robust but somewhat less so that 12 months ago. In part this can be
ascribed to the law of numbers. Fixed Asset investment cannot be expected
to grow indefinitely at 33% and the current reading of approximately 24%
is hardly shabby (and broadly in line with M2 growth as one might expect).
Retail sales growth also remains powerful at around 18% (see yesterday's
comment on luxury goods demand). The weakest data came in the form of
industrial production which has slowed to approximately 13%. Again this
cannot be called weak but it is somewhat below M2 growth and the typical
level recorded over the course of the cycle that started in 2002/3 (the
average reading since December 2002 is 15.4%). In summary this data both
explains China's current hubris and the genuflection of others before it
while outlining the very considerable policy challenges that lay ahead. -
D-CNMSM2_Index.gif - D-CNCPIYOY_Index.gif - D-CNRSACMY_Index.gif -

There is no little irony to the fact that Moody's chose to upgrade China this
week to Aa3, a higher rating than Dagong Global credit granted to the US a few
days earlier. Of course the timing is hardly coincidental since both ratings
actions were designed to garner publicity in the run up to the G20 summit.
Still the difference in tone could hardly be more striking, with deference and
admiration some of which may prove to be prematurely bestowed:
.
For instance the claim that "In particular, we premised our action on the
ability of the Chinese authorities to protect systemic stability from the
underlying threats arising from the extraordinary credit expansion evident in
2009" may seem less justified in a few months time if Chinese inflation metrics
continue to push their way higher (see separate note on M2 and inflation that
will be published later this morning). Nevertheless the Moody's statement is an
accurate reflection of the general appreciation for how things stand today and
they are not alone in underestimating the challenges that may lay ahead for the
Chinese authorities.

Fed Dissenter Hoenig to Speak to House Republicans (Update1)

Hoenig's speech on December 2nd has the makings of compelling theatre although
one should never underestimate the ability of the House procedures to dull the
edge of the sharpest knife. In any case Hoenig seems determined to create the
maximum dissent possible towards current FRB policy between now and his
December 31st retirement. We would imagine that he will be even more vocal
thereafter as an unshackled ex-governor of the FRB.

 

The apparent emergence of China as a source of global financial stability
is one of the most telling episodes of the 2008 financial crisis that
seems likely to have long lasting political as well as economic
repercussions. It also has left the Chinese authorities with an almost
impossible task of balancing the needs of its rapacious domestic economy
with the increasing calls to aid "global rebalancing". We would very much
see the issuance of yesterday's downgrade of the US sovereign credit
rating by a "private sector" ratings agency as part of the build-up to
G-20 summit at which the Yuan exchange rate is likely to prove a key issue
for discussion.
.
Meanwhile the authorities struggle to get the balance of monetary policy
correct at home with this morning's anouncement/rumour that large Chinese
banks will be required to hold an addtional 0.5% in their deposit reserves,
taking this up to 17.5% which was the level prevailing just before the
crisis took place. As we mused yesterday one effect of QE2 would seem to
be a re-invigoration of the EM monetary tightening cycle. The need for
tighter domestic measures appears to be quite severe. Evidence continues
to mount of a consumption and housing boom developing in China that is
reminiscent of the 1980's in the US and UK with many of the same cultural
shifts in the desire to consume conspicuously. Attached is a fascinating NY
Times article on the demand for luxury goods in China that makes the point that
although accross the EM complex luxury demand is growing fast their
appears to be something exceptional about the surge in Chinese demand. It
also includes the memorable quote from Gucci's CEO "The first thing they
say now is 'Don't treat me like Chinese and just show me the leather'". A
cultural statement that both Gordon Gecko and Jay Gatsby could readily
associate with.

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

China Looms Large in Luxury Industry's Vision
2010-11-09 22:06:50.417 GMT


By LIZ ALDERMAN
(New York Times) -- LONDON — When Chinese shoppers stride
into a Gucci store these days, they had better be shown the
highest quality of the couturier’s haute de gamme.
“The first thing they say now is, ‘Don’t treat me like a
Chinese and just show me leather,”’ Patrizio di Marco, the
president and chief executive of Gucci, said Tuesday. Instead,
they demand the best shoes and bags in crocodile or python —
especially ones that brandish the badge of heritage.
If heritage is the tool fashion houses have turned to in the
wake of the global financial crisis, then the actual market the
luxury industry sees guaranteeing its future is China, according
to Mr. di Marco and other speakers at the luxury conference
convened by the International Herald Tribune. And, while China
booms, the industry is turning back to basics with more mature
markets, appealing to the emotions of consumers who have become
far more discerning, by dusting off legacy products.
“Before the crisis, consumers didn’t feel depressed — people
still bought on impulse,” said Mr. di Marco. “Now the impulse is
pretty much gone. That’s good for the industry because you have
to live through a time of crisis,” and eventually companies start
emphasizing “what’s important because that’s what consumers
want.”
But China is also turning to luxury to validate its rapid
evolution from a basic emerging market into a sophisticated
economic powerhouse — and heritage products are the most
desirable way to burnish that image, according to the industry
leaders speaking here.
China is now the major driver of growth for luxury goods.
The industry sees the country as having almost unlimited
potential over the next 5 to 10 years.
But China’s nouveau riche are also undergoing a remarkable
transformation that has luxury firms scrambling to capitalize on
its own rich heritage.
“Five years ago, everyone was talking about the BRICs,” said
Michele Norsa, chief executive and managing director of Salvatore
Ferragamo Italia, using the acronym for the world’s
fastest-growing emerging markets: Brazil, Russia, India and
China. “Now the difference between China and the others is huge,”
he said.
China has leapt ahead of other emerging markets in part by
investing in airports, railways and highways that connect cities
where income levels, and the demand for luxury as a badge of new
wealth, are rising rapidly.
Mr. Norsa noted that airports like the new one in Beijing
will see tens of millions of people passing through each year.
These “new cathedrals” are the markets of the future, he
suggested.
But, like Jennifer Woo, president of the 160-year-old Hong
Kong-based chain Lane Crawford, he noted that China is a market
where firms have to work hard to win customers. “The reality is:
China is not easy,” Ms. Woo said.
Unlike Russia and India, where only the wealthy tend to buy
up-market, China’s middle class is interested in luxury and ready
to pay luxury prices.
Perhaps more important, luxury industry executives said,
Chinese consumers are going out of their way to seek designs that
have a unique way of burnishing their own heritage.
“There is nothing more dangerous than creating with a
formula,” said Alber Elbaz, the artistic director at Lanvin, who
has dipped time and again into the firm’s archives for
inspiration.
Lanvin is one of the few houses lucky enough to have a long
heritage. Tommy Hilfiger, the American designer, lacks the
decades-long history of some of his competitors. But marking 25
years in fashion, he has turned to the American heritage to build
an identity that has given his brand appeal across a range of
ages and cultures, allowing him to engineer a strong turnaround
for his firm in recent years.
At Burberry, Angela Ahrendts, the chief executive, and
Christopher Bailey, the chief creative officer, have also tapped
heritage to secure a turnaround that began five years ago when
the two decided to dust off a “rough diamond” — the famous
Burberry trench coat — and turn it into a polished, must-have
item that appeals across genders and generations around the
world.
“You can really only build something new if you destroy the
old,” said Karl Lagerfeld, the designer, in a conversation about
the industry and his relationship with the heritage of Coco
Chanel. Chanel, he said, lost the respect of her peers in the
1960s when she dismissed jeans and miniskirts. Today, Mr.
Lagerfeld suggested, haute designers like Mr. Elbaz do well to
heed stores like H&M. “Inexpensive and very expensive have more
future than what is in between,” he said.
Stories like Burberry’s have particular appeal in China. “In
the last 30 to 40 years they forgot about their past,” said Mr.
Norsa. “Today they want to get in touch with it: They remember
they were an empire and aspire to be more sophisticated than they
are now.”
Brands with a long family history, like Hermès, particularly
appeal to the Chinese “self-made man,” who has worked hard to
obtain a higher rank and are educating themselves on the value of
what they buy.
“Five years ago, people there couldn’t distinguish French
wine from Italian wine,” Mr. Norsa noted. “Now they have
developed a knowledge of brands in a very short time.”

Copyright 2010 The New York Times Company

-0- Nov/09/2010 22:06 GMT
- D-CHRRDEP_Index.gif -

Due to Thursday being Veteran's Day the weekly BLS employment statistics
were released a day early and make interesting reading. Initial claims
fell to 435K, the lowest reading since July 9th. Non-Seasonally adjusted
claims rose to 449.9K, but as we had explained 2 weeks ago the annual
seasonal adjustments to the data now start to work strongly in favor of
the headline data moving lower. More importantly the 4 week ma of Claims
has now fallen to 446.5K, the lowest level since September 12th 2008 on
the eve of Lehman's demise. This breakdown below 450K strikes as as a very
significant development. Although in theory economic statistics such as
this should not be subject to "support" and "resistance" in the manner of
a price chart, it should be understood that the official data is the
product of a convoluted process of estimation and adjustment rather than
an accurate real-time measurement of reality. It makes perfect sense to us
that this produces data that is tightly clustered around a given level or
range until very powerful evidence emerges that a definable trend away
from this level has been established. Hence prior employment cycles show a
similar pattern of an initial decline from the crisis spike in Claims,
followed by a period of stasis at an elevated level and finally a second
powerful leg downwards. Of course this improvement in data also reflects
an improvement in actual employment, but the effect of the latter is
magnified by the need for the data to catch up a little after months of
inactivity. Should the next couple of Claims reports pull the 4 week ma
down another 10K or so this familiar pattern would be emerging on the
chart. - D-INJCJC4_Index.gif -

As we wrote earlier this afternoon the mid-range of the US yield curve
looks likely to be a key battleground over the coming sessions and this
afternoon has seen a sizeable back-up in intermediate rates. This looks to
have put sizeable pressure on the swaps market where spreads had already
widened significantly over recent weeks. As a result today has seen the largest
ever single day percentage move (ie the size of the move in bp as a percentage
of the yield at the start of trading) in the 5 year swap rate for a
positive move in yields (11.05% at the time of writing) although there were 2
greater DOWNSIDE moves recorded in 2008 (see attached chart). It is also
interesting to note that moves of nearly 10% were recorded in early July
2003 and April 2004. In both cases these marked the early stages in a
substantial backing up of interest rates, but at that time the FRB was
merely talking about indulging in QE (at least in June 2003) rather than
actually employing it as active policy. - D-USSWAP5_Index.gif -

The launch of QE2 appears to have left the 30 year bond at the wrong end
of the gangplank as, unlike other asset classes, this instrument has not
benefitted from the concept of another large glob of liquidity being added
to the global pool. Even though we recognize that the FRB will not buy
these bonds directly the same could be said of commodities and equities or,
more pertinently, corporate credit that have all seen inrushes of
speculative capital in recent weeks. The 30 year bond on the other hand
continues to get "cheaper" which is perhaps the greatest sin in a momentum
driven market. Today's rise in yields has taken the instrument through its
200 day ma, which has been a technically significant measure since late
2008. As ever we would not get too excited unless this breakthrough is
sustained and built upon, but it may well be that the lone "free market"
maturity is indicating much more belief in the recent uptick in economic
data than the rest of the yield curve currently demonstrates. Provided
this rise in yields remains reasonably contained this is a healthy development.
It is an indication that the cycle of recovery is in fact picking up steam and
is reminiscent of the back up in long term yields that took place in early 2004
as economic data finally improved to the point that recovery was obvious to
all observers.
.
How the rest of the yield curve responds is open to conjecture. The ultra
short end of the curve seems likely to remain anchored for as long as the
FRB maintains its current stance (there is absolutely no indication that
this is about to change) but readers should recall that the 2 year note
traded with a yield of 70-90 bp earlier this year and could easily do so
again. 5-10 year portion of the curve seems more vulnerable to higher
yields. This appears to be the area which has seen the greatest inflow
of speculative capital seeking to "front run" the FRB. This has led to the
30 - 10 year spread blowing out to a series of new records (it is 159 bp
at the time of writing), which is remarkable given the relative
interchangeability of these instruments. The vulnerability of this portion
of the curve is likely to be heightened by the fact that refinancing
activity, which are generally sensitive to the 30 year bond yield, should
start to slow sharply in the coming weeks. This would mean sharply lower
demand from the MBS community for the intermediate portion of the curve
and leave the FRB with a greater hole to fill than they may originally
have anticipated. It continues to seem lkely to us that QE2 will unfold
against a backdrop of rising longer term interest rates. - D-USGG30_Index.gif -

We couldn't help notice this release scrolling by earlier this morning stating
that Dagong Global Credit Rating China's "first private sector rating agency"
had decided to downgrade the US to an A+ rating (Equivalent to S&P's rating for
Cyprus, Slovakia and, ironically, China itself). Our initial response was to
dismiss this as a publicity stunt (it succeeded in catching at least our
attention) but on reflection it struck us that perhaps it reflects the emerging
market world-view regarding the launch of QE2 and the administration of the US
economy in general. If this is so then it is a very radical and simplistic
viewpoint to take. $600 bln of Treasury purchases by the FRB will actually not
alter the US's net indebtedness by a cent, it will merely change the identity
of the owner of the debt. The concept of deliberate USD depreciation is also
overplayed, particularly since the sharp drop in price has taken place in
advance of the FRB actually implementing its policy. But the palpable anger
(mixed with gloating) that is present in this release if demonstrative of the
current dismissal by many international investors of the US capital markets as
an attractive destination for investment capital. We also wonder whether this
wave of indignation over QE2 marks the end of the period of cooperation and
coordination between global Central Banks. In particular we believe that
concerns over the US following an "irresponsible" policy may prove the spur
that sets the EM monetary tightening cycle back into gear after its 6 month
hiatus. These are both factors which weigh in favor of a US allocation at the
current time.

Official data is finally picking up the acceleration in inventory rebuild
that we had anticipated would take place in the second half of 2010.
Today's Wholesale Inventory data estimated September's increase at 1.5%,
well above the estimated 0.7%. In addition August's data was revised to a
strong 1.2% from the initial reading of 0.8%. As the attached chart shows
this takes inventories back to where they were in March 2009 but they
still remain approximately 10% below their peak level recorded in August
2008. Since sales themselves continue to recover there is still plenty of
room for inventory rebuild. The inventory/sales ratio remains
historically low at 1.18% and there is reason to believe that sales
themselves should be about to accelerate due to continued strong retail
and corporate demand for end-product. The industry specific sub-indexes
show tight inventories in general, although the Apparel (green) drawdown
appears to have abruptly reversed. We would be particularly aware of tight
inventories in Automobiles (Red) given the strong retail sales of
automobiles that have already been announced in October. - D-MWINTOT_Index.gif
- D-MTISAPPA_Index.gif -

The FRB Senior Lending Officer survey continues to show a moderate degree
of loosening of lending standards. Out of the 57 banks surveyed 49
reported no change in standards. One bank reported "tightening somewhat"
(down from 2 in July) and 7 banks reported "easing somewhat" (same as
July). This is in line with the FRB statistics on outstanding loans that
suggest that a moderate increase in C&I lending has taken place since the
early summer even if this metric remains negative on a 52 week and YTD
basis. Looking back at the last cycle it should be noted that the "eased
somewhat" category did not get through the 10 level until March 2004
survey and was at 13 in June 2004 when the FRB started raising rates.
Standards therefore still remain tight but are at least moving in the
right direction but in any case it should be understood that loosening of
standards and increases in bank lending itself follow economic activity
rather than lead it. - D-SLSSARTS_Index.gif -

A Bloomberg Chart of the Day that makes precisely the same point that we did on
Friday, namely that the current employment cycle is broadly similar to prior
recoveries.

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

Private Job Growth Shows U.S. ‘Panic’ Unjustified: Chart of Day
2010-11-08 16:27:52.910 GMT


By David Wilson
Nov. 8 (Bloomberg) -- U.S. job growth in the current
economic recovery is stronger than the “panic” displayed by
policy makers would suggest, according to James W. Paulsen,
chief investment strategist at Wells Capital Management.
The CHART OF THE DAY compares the percentage change in
private payrolls since June 2009, when the latest recession
ended, with the comparable figures after the two previous
contractions, occurring in 1990-1991 and 2001.
Employers outside of government have added to their
workforce in every month this year, according to data compiled
by the Labor Department. Since the streak began, the number of
jobs has risen by 1.12 million.
“This job-market recovery seems quite normal,” Paulsen
wrote in a Nov. 5 note to clients. Getting more Americans back
to work may be a matter of patience, rather than “never-ending
monetary and fiscal stimulus,” he said.
Federal Reserve policy makers cited the need “to foster
maximum employment” in a Nov. 3 statement after agreeing to a
second round of bond purchases, amounting to $600 billion. The
quantitative easing was also designed to head off deflation.
Private employment has fared better this year than nonfarm
payrolls, which fell in June through September as federal census
workers lost their jobs. The decline ended in October with an
increase of 151,000, which exceeded the estimates of economists
in a Bloomberg survey.

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

For Related News and Information:
U.S. employment: NFP T <Index> CN <GO>
U.S. economy top stories: TNI USTOP ECO <GO>
Global economy top stories: TOP ECO <GO>
Charts, graphs home page: GRAPH <GO>

--Editors: Charles W. Stevens, James Greiff

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]
- codnov8th2010.gif

One of the primary justifications for the launch of QE2 is the stubborn refusal
of US employment to improve along with the recovery in corporate activity. It
is therefore interesting to note that the St Louis Fed's own employment data
shows a significantly more robust improvement in unemployment than the more
widely used official BLS monthly data. Attached is a table and chart showing
changes of Unemployment in each Federal Reserve district though September 2010
(remember last Friday's BLS data was for October). As can be seen a drop in
unemployment was reported in every FRB district in September with most
districts seeing a drop of over 0.3%. This contrasts with BLS data which was
flat for September at 9.6% (and for October as well) and shows the effect of
different methodologies on estimating this number. Nevertheless the FRB data is
showing an unmistakable trend of improvement across the entire country with all
but 2 districts (San Francisco and Atlanta) reporting lower rates of
Unemployment than the official BLS metric (thick black line on chart). We
continue to suspect that the BLS data underestimates the recovery in employment
that has already taken place but would imagine that this will be rectified
later this cycle (there is no bias at the BLS, just institutionalized
inaccuracy). As to the FRB it has chosen its path and seems to be more bothered
about fighting for its place in history (witness the bizarre fight over
Friedman's posthumous blessing that took place this weekend) than sensibly
reconciling the various measures of the economy.

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

U.S. Unemployment Rates by Federal Reserve District (Table)
2010-11-08 14:12:40.67 GMT


By Alex Tanzi
Nov. 8 (Bloomberg) -- Following are unemployment rates by
Fed district as reported by the St. Louis Federal Reserve Bank.
*T
======================================================================
Sept. Aug. July June May April March
Fed District 2010 2010 2010 2010 2010 2010 2010
======================================================================
Boston 7.837% 8.267% 8.843% 8.551% 8.687% 8.823% 9.301%
New York 8.192% 8.449% 8.726% 8.421% 8.339% 8.402% 8.997%
Philadelphia 8.522% 9.178% 9.608% 9.417% 9.412% 9.137% 9.787%
Cleveland 9.210% 9.540% 9.993% 10.068% 9.839% 10.217% 11.010%
Richmond 8.233% 8.742% 8.744% 8.779% 8.517% 8.446% 9.397%
Atlanta 10.438% 10.752% 10.587% 10.615% 10.171% 10.181% 10.811%
Chicago 9.623% 10.123% 10.709% 10.525% 10.112% 10.730% 11.730%
St. Louis 9.078% 9.371% 9.647% 9.512% 9.177% 9.353% 10.386%
Minneapolis 6.240% 6.587% 6.581% 6.656% 6.273% 6.823% 8.065%
Kansas City 7.158% 7.316% 7.434% 7.432% 7.131% 7.070% 7.666%
Dallas 7.869% 8.378% 8.497% 8.545% 7.995% 8.050% 8.174%
San Francisco 11.026% 11.230% 11.424% 11.066% 10.853% 11.051% 11.749%
======================================================================
For a CHART comparing the unemployment rates by Fed district
normalized to the start of the recession in Dec. 2007, see
{G ECO 63 <GO>}, the thick white line is the U.S. unemployment rate.

SOURCE: St. Louis Federal Reserve

*T
--Editors: Alex Tanzi

For Related News and Information:
For today’s business and financial stories: TOP <GO>
For today’s top economy stories: TOP ECO <GO>

To contact the reporter on this story:
Alex Tanzi in Washington at +1-202-624-1959 or [email protected]

To contact the editor responsible for this story:
Marco Babic at +41 44-224-4112 or [email protected]
- fedunemployment.gif

We have written a great deal about the unreliability of US economic data
when viewed as a single monthly (or weekly) data point so it is only fair
to report that this is an international phenomenon inherent in the
production of official statistics and not a specific failing of the US
authorities. A good example this morning comes from Germany which
simultaneously reported a poor set of Industrial Production figures and a
stunning set of Export data. Industrial Production (black) was reported as
falling 0.8% from August prompting some negative headlines on the news
services regarding the impact of tighter fiscal policy on production.
Looking at the chart we very much doubt that production is in fact slowing
meaningfully at this point in the recovery but suspect that September's
drop is simply a "give back" from the strong August report that preceded
it. German Industrial Production remains 8.6% below its February 2008 but
grew by just less than this percentage over the last 12 months. The trend
of recovery seems to be powerfully established and we would expect a new
record level of activity to be reached sometime in 2011.
.
Driving this production is an extremely fast growth pace for Exports.
These were reported as growing by 3.04% in the same month that Production
supposedly declined. This takes total exports to E84.31 Bln, within
touching distance of their June 2008 record of E84.98 Bln. This implies
that German companies are seeing export demand accelerate despite the
headwind of a stronger EUR over the summer months, making it even harder
to grant credence to the notion of a drop in Industrial Production. -
D-GRIPI_Index.gif -

It has been some weeks since we published an update on the Citigroup
Economic Surprise index (CESIUSD). Readers should recall that we first
used this index back in July to show that the volatility of US economic
data greatly exceeds that of actual activity and we argued that investors
should remain patient in the face of a slew of poor macro-economic data
releases. We also suggested that the collapse in the quality of data would
likely result in a panicked response by the FRB but would be followed by
several months of better than expected economic data. As the attached chart
demonstrates this is precisely how things have played out.
.
A fall in the CESIUSD to -30 coincided with the August 10th FOMC
announcement that the Fed's balance sheet would be kept at constant size
via additional treasury purchases (2 on chart). Economic data continued to
deteriorate and the CESIUSD made its low of -64.3 at the end of August
just before Ben Bernanke addressed the annual Jackson Hole conference and
promised that the FRB "is prepared to provide additional monetary
accommodation through unconventional measures if it proves necessary,
especially if the outlook were to deteriorate significantly".
.
In fact since this time the economic outlook has improved markedly with
virtually every metric that had caused concern in the summer months
signalling an improvement consistent recovery and much of the worst data
being corrected by subsequent revision. Indeed by the time the FOMC met on
September 21st (4 on chart) the CESIUSD had recovered to approximately
-10, indicating that data had only been moderately below consensus for the
prior 90 days, not that this was reflected in their statement. This week's
official launch of QE2 (5 on chart) was sandwiched between an excellent
ISM Manufacturing report and today's far stronger than expected Non-Farm
Payroll data in response to which the CESIUSD has risen to +26. As the attached
weekly chart of the index shows, other upswings of this magnitude have
typically followed through with enough momentum and staying power to pull
the daily index up to the 60-70 range and the 10 week moving average up to
around +50. In other words we should expect several more weeks of better
than expected economic data. Given that consensus itself can be expected
to be notched up significantly following recent events this may well be
consistent with data that suggests a meaningful acceleration in economic
recovery.
.
To an extent the equity market has already picked up on this trend
(although we do not believe it has fully priced in the potential upside)
and it is the improvement in macro data and corporate earnings since late
August (Rather than the promise of QE2) that we believe has driven the strong
recovery in this market. Fixed income on the other hand has been insulated
from a move up in yields by the promise of the FRB wading into the market. As
a result we have had the unusual scenario of much better economic data being
marched with lower yields in all maturities up to and including the 10 year
note. We doubt that this combination can continue much longer and a continued
trend of better economic data would probably see sufficient capital
re-allocation in the private sector away from high quality fixed income to
overwhelm the input of new funds from the FRB. As a result we would expect to
see Treasury yields move higher in the weeks ahead but not dramatically so. -
W-CESIUSD_Index.gif - D-CESIUSD_Index.gif

Our distaste for this data series has been well documented and this
month's positive report indicates the futility of using it as a "real
time" gauge of economic activity since the poor August and September
reports have now been adjusted higher by a total of 110,000 jobs. As for
October this came in much better than expectations (60K) at 151K with
Private Sector payroll advancing by 159K and September's number revised up
to 107K (from 64K). This represents the sort of upside report that we had
been waiting for and is much more in line with the improved tone of
corporate guidance that we have recently seen as well as the numerous
private sector employment data sources that suggested an acceleration in
hiring. Nevertheless today's data should not be mistaken for "reality", it
merely represents a much needed upwards adjustment in the BLS's estimation
of the state of employment in 2010.
.
This does not make the data wholly useless since there is no doubt that a
longer term view of this report does uncover clear cycles of employment.
Attached is a chart of the 12 month moving average of Private Sector
employment changes (we are using this measure to eliminate the distortion
from Census hiring in the overall data). As can be seen October's report
takes this measure up to 92.25K which is a dramatic improvement from the
low-point in June 2009 of -558K. As with other data the key question is
what happens from this point on. The popular view is approximated by the
red dotted line, with only moderate gains from this point on, and yet this
flies in the face of historic precedence even if we look at the relatively
"jobless" recoveries from 1992 and 2003. In fact the current 12 month rate
of employment growth is almost exactly the same as it was in February 1993
and April 2004 and these cycles peaked with 12 month growth of
approximately 300K and 200K respectively. We would suggest that the blue
dotted line is a much more realistic rate of employment growth over the
next 18-24 months, not that it will always be obvious looking at the
monthly data at the time of release.
.
From our perspective this summer's panic by the FRB and subsequent
introduction of QE2 looks even less justified following today's data. In
fact as can be seen the last 2 FDTR rate cycles were implemented with 12
month Private Sector payroll growth of 205K in February 1994 and 134K in
June 2004. Current market prices suggest no significant FDTR hikes through
2012 (the December 2012 LIBOR market is consistent with a FDTR of
approximately 0.75%) and the FRB fully endorses this radical view. Weak
employment growth is the most commonly cited reason for this scenario but
as historical appreciation of prior employment cycles makes it far less
obvious to occur than most suppose to be the case.

The current rally in US equity markets looks likely to extend to at least
a new 2010 high for most key large cap indexes and has in fact already
done so for the Dow Industrials this morning. What is perhaps not as
obvious is the scale of recovery in some individual pockets of the market
that threatens to extend above the peaks recorded in the 2003-7 bull
market. Most obviously the NDX index comes to mind with the current price
of 2186 less than 3% below the 2007 high of 2239. As we have written
before this represents the clearest evidence that the 2008 crisis was
"financial" rather than "industrial" in nature (the NDX has no financial
members) and suggests that the 2008 collapse was a mere interlude in the
very long term project to repair the damage wrought the 2000-2 collapse.
This scenario would suggest further upside for the index in the months
ahead with a conservative target being a 38.2% retracement of the 2000/2
collapse at 2231 and a more aggressive target being a 50% retracement at
2805. Most investors would be delighted to see the index "split the
difference" and recover to somewhere close to the 2500 level. This
certainly strikes us as possible although we would imagine that some
substantial pullbacks (as occurred in 2004, 2005 & 2006) would need to be
navigated along the way. - W-NDX_Index.gif

One gauge of the anticipated effect of QE2 is the dramatic divergence of
the 30 year bond yield (which is currently outside of the FRB's asset
purchase plan) and the rest of the yield curve. Prior to this summer the
spread between the 30 and 10 year treasury yield had never exceeded 110
bp. In August it reached nearly 130 bp and following yesterday's FOMC
meeting the spread has widened to a new record of 157 bp this morning. We
have become used to markets ignoring fundamental drivers in recent months
and to historical trading relationships being overwhelmed by capital flows,
but it is still extraordinary to see participants chasing a 10 year
instrument whose yield is now over 60% less than that available for the
longer maturity prior to the FRB purchasing a single bond under its new
mandate. More than anything this shift in yields indicates that for the
time-being Treasuries have become a source of capital APPRECIATION rather
than their traditional role of capital PRESERVATION with yield attached.
We do not view this as a healthy development and it underlines the deeply
distortive effects that current monetary policy is having on the balance
of returns available for savings and investment. - D-USGG30_Index.gif

As most readers will be aware we are currently somewhat obsessed with the
state of the US automobile market since it strikes us as one of the most
obvious sources for upside surprise over the coming months. Our thesis is
fairly simple; between the late 1990's and 2007 US car sales remained
steady at around 17mm units (meaning the were not part of the "housing
bubble", and during the late 1980's and mid 1990's were stable at around
15mm units during healthy economic times. Demand for cars fell off a cliff
in 2008 dropping over 40% to bottom at 9.34mm units in February 2009.
Ignoring the spike and collapse caused by the "Cash for Clunkers" program
sales can be seen to have recovered fairly steadily in what is starting to
resemble a classic "V" and yet both those within the industry and outside
continue to be wary of another setback in demand and to at best only
assume the sort of moderate growth indicated by the maroon line on the
chart.
.
The widespread embrace of this muted recovery scenario ignores the fact
that there are increasing signs that demand is already accelerating.
October's sales of 12.25mm came in significantly higher than was expected
as recently as late September. We recognize that this data is volatile but
with sales still only 70% of their historic norm and other metrics of
consumer discretionary spending proving to have recovered close to their
2007 highs we would suggest that it is far more likely that demand
continues to rise rapidly (if noisily in the months ahead). This is
particularly true since cars strike us as a classic "me too" product, by
which we mean that while driving a 63.9 month old car (the average age of
a vehicle being replaced by a new car in 2010 according to Polk.com) may
seem fine and prudent it becomes substantially less desirable when one's
friends and neighbors are driving around in cars that are 62 months
younger. This "viral" demand is one of the reasons why the car market has
historically been so cyclical over the decades with periods of
under-consumption being replaced by much more fertile sales cycles. As the
attached chart shows it took around 3 years for the car market to return
to prior peak activity after the collapse in sales in 1981 and 1991, which
would give us a target of around 17mm cars sold by Q1 2012, a rate of
growth indicated by the dotted blue line on the chart. Even if this
estimate proves overly aggressive we would still be betting on something
far more robust than the tepid recovery anticipated at the current time
although we recognize that the data will be noisy and we can expect a few
more scares from data shortfalls along the way. - D-SAARTOTL_Index.gif

The recovery of the US new car market seems to us to be one of the most likely
catalysts for further economic recovery and the early signs from October's
sales data indicate that this will prove to be a solid month for sales (we will
comment in more detail tomorrow morning once the data is complete). One factor
to consider is the radical ageing of the existing motor-vehicle stock, despite
the impact of the "cash for clunker" program in 2009. Attached is a survey from
Polk.com (a well regarded source for information on the US car industry) that
suggests that the average age of cars held by new car purchasers rose from 54.6
months in Q1 2008 to 63.9 months in Q2 2010. Although the author of this
release suggests that this may represent a "permanent" shift in the length of
car ownership we very much doubt that this will prove to be the case. Rather
the lengthening age of the average car in the street indicates a latent demand
for replacement that is likely to be a positive factor for sales growth for
several quarters going forwards.

The Census Bureau estimate of Total US Manufacturing New Orders came in
much stronger than expected in September with total Orders reported as
rising 2.1% versus consensus estimates of 1.6% and Augusts data being
revised upwards from -0.5% to 0.0%. To our eyes this data series is
typical of this summer's "data-panic" and subsequent recovery in the very
same series that spread the delusion of a slowdown in activity. It can be
no accident that much of this data came from official sources, with the
Census Bureau being responsible for the majority of the negative releases
that have subsequently been followed by upside surprises.
.
We very much doubt that manufacturing activity did in fact surge in this
manner in September, but we are equally sure that it never slowed down
at the start of summer. As we argued at the time, economic statistics are
FAR MORE volatile than underlying economic activity (see Specualtor Extra
"Stats Don't Kill Markets") and there has not been a shred of evidence in this
quarter's earning season that the deterioration of economic metrics this summer
and subsequent strong recovery is reflected in actual corporate activity. The
picture from the private sector has been for a far more steady state of
affairs, with a definite positive trend of accelerating recovery About the only
metric not to recover is the confidence of the FRB in the state of the economy.
We will refrain from commenting further until this afternoon's release of the
FOMC statement but the need for additional emergency action now looks far
more tenuous than it did in on August 10th when the FRB first mentioned
that it was considering the launch of QE2. - M-TMNOTOT_Index.gif

Although we do not take the ISM Non-Manufacturing index very seriously as
an economic indicator (it has non of the predictive pedigree of the
Manufacturing index) it is a widely watched measure and we are always happy to
see some positive data in a popular series. October's data was indeed strong
with the overall index rising to 54.3 from 53.2 last month. This beats
consensus estimates of 53.5 and suggests a moderate acceleration of activity in
the service economy (as we state above we do not believe this survey to be
particularly sensitive to actual changes in activity) and certainly no
indication of a slowdown. New Orders (red) also remained strongly positive at
56.7 and apart from Inventories (we are not sure what these represent in a
service metric) which fell to 47.5, all other sub indexes were above 50. -
D-NAPMNNO_Index.gif

China Orders 50% Down Payment for Second-Home Funds (Update1)

Another example of an "alternative" tightening measure being introduced in an
emerging market economy. These moves are starting to coalesce around attempts
to limit foreign speculative inflows into capital (particularly debt) markets
and attempts to dampen domestic speculation in property markets. While these
efforts are unlikely to have immediate effect they do start the clock ticking
for a timely exit, particularly since monetary regulators are likely to get
increasingly frustrated with their apparent inefficacy and therefore
increasingly aggressive in their resolve.

 

As we approach the mid-point of the monthly "payroll week" we have further
positive data from private sector reports. Although the Challenger Job
"Hire & Fire" reports typically bear little real time correlation to the
official public data they are a useful guide to the trend in employment in
the broad US economy. For the last 12 months the number of Job Cuts
measured in this survey has been unusually low and October's number of
37,986 kept this trend intact. The trailing 6 month ma of approximately
38K represents the lowest rate of announced firings since the technology
boom of the 1999/2000. Interestingly the "Job Hire" report has now
signalled 2 consecutive surges in announced job hires, with October's
reading of 124,766 the 3rd highest since the data starts in 2004. This
takes the training 6 month ma back up to 49,450. We would caution that
this metric is volatile and particularly sensitive to large seasonal
employment swings in the retail and manufacturing sectors. For these
reasons it is not widely followed or relied upon by the economic
community. Nevertheless a sustained surge in this metric cannot be
interpreted as bad news and our growing conviction is that we have reached
the point of recovery in which private sector organic job growth becomes
increasingly apparent. - D-CHALTOTL_Index.gif - D-CHALHIRE_Index.gif

Given that the SPX index peaked at 1219.80 most readers will be aware that
this level is of great technical significance. It is therefore interesting
to note that the area between 1187 and 1207 also comprises an area that
contains the 50, 70 and 150 month ma. It is highly unusual to find a
concentration of long term moving averages such as this within a 2% band,
in fact you would have to go back to the 1970's to find anything similar.
Of course this convergence is largely a reflection of the fact that the
SPX index has essentially made no progress since 1998, and, after suffering
two separate collapses, has recovered to roughly where it was in late 2004.
Nevertheless the location of the convergence at the current price level
does suggest that we have entered a key battle ground and that the
eventual breakout or breakdown that develops will have medium to long term
implications for the broad direction of the US equity market. Note that we
stress "long term". There is likely to be considerable "noise"
accompanying any decisive move by the equity market but long term guides
can be useful in illuminating the "path of least resistance" and it will
therefore be interesting to watch the battle unfold in the coming weeks. -
M-SPX_Index.gif

There are some faint signs that the BOJ may finally be opening the
monetary spigots. October's report of the Japanese Monetary Base showed a
monthly rise of 1.13% which took the 12 month RoC up to 6.4%. This
compares to an annual gain of only 2.11% back in March and indicates at
least an element of QE may be at work. This is still clearly nothing like
the scale seen in the US and Europe during the crisis of 2008 (growth rates
exceeded 150%) or even that seen in Japan in 2002 when the annual monetary
growth rate peaked at 36.3% but it is a change in trend that should be
monitored closely going forwards. - M-JNMBMOB_Index.gif

As the FRB sits down to discuss the implementation of QE2 it is
interesting to note that two key central banks chose to raise rates last
night. The RBA increased its Cash Target Rate (black) to 4.75% citing
"medium term inflation risks" while India's RBI increased the REPO cut-off
rate to 6.75%. As the attached chart shows both rates remain well below
their pre-crisis levels and we would imagine that we are only at the
mid-point of what will prove to be a series of monetary tightening moves.
Thus almost exactly 6 months after this summer's "data-panic" commenced it
seems that monetary policy is once more diverging between the emerging and
developed economies. While the conventional view is that money should be
chasing the stronger economies of the emerging market complex this ignores
the role that monetary policy tends to have on investment returns over the
medium to longer term. We would rather be exposed to a market with very
(we would argue inappropriately) loose monetary policy and a recovering
economy than the potentially explosive mix of well regarded economies,
rampant flows and tightening monetary policy that is now on offer in the
majority of emerging markets. Last night's news should therefore be
treated as an "amber light" that the summer lull in monetary tightening
appears to have ended. - D-RBATCTR_Index.gif

Readers may recall that we used 1998 as a template during the summer in order
to make sense of the market's decline. As the attached "Chart of the Day"
column explains this turned out to be a useful comparison.

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

Rallies in Worst Months Show Bull Market Momentum: Chart of Day
2010-11-01 16:52:55.290 GMT


By Whitney Kisling
Nov. 1 (Bloomberg) -- Gains during the worst two-month
period for stock investors have coincided with some of the most
powerful rallies in the Standard & Poor’s 500 Index.
The CHART OF THE DAY shows the biggest September-through-
October advances for the benchmark gauge for U.S. equity over
the past 30 years, including a 13 percent increase over the past
two months. After a 12 percent gain in the two months during
1982, the index more than doubled through 1987, while the 15
percent surge in 1998 was followed by a 39 percent climb through
2000, Bloomberg data show.
“Visually, there are similarities,” Laszlo Birinyi,
president of Birinyi Associates Inc. in Westport, Connecticut,
wrote in an e-mail to Bloomberg News today. He said in August
1998 that he was still optimistic the stock market would rally.
“We will get through, because when the cause of a crisis or
decline is known, the market is able to adjust and adapt and
take measures,” he said today.
Stocks overcame the biggest increase in government interest
rates on record under Federal Reserve Chairman Paul Volcker in
1982, and rebounded from the Asian financial crisis and collapse
of Long-Term Capital Management in 1998. The S&P 500 has surged
16 percent since July 2 as investors bet the Federal Reserve
will stimulate the world’s largest economy through an asset-
purchase technique known as quantitative easing.
The S&P 500 reached its 2010 low in July as concern grew
that European countries such as Greece and Spain would default
on their debt and weaken the recovery from the first global
recession since World War II. The rebound accelerated after Fed
Chairman Ben S. Bernanke indicated during an Aug. 27 speech in
Jackson Hole, Wyoming, that he may be willing to pump more money
into the economy.

For Related News and Information:
Graphing: GRAPH <GO>
Chart of the Day: CHART <GO>

--Editors: Chris Nagi, Nick Baker

To contact the reporter on this story:
Whitney Kisling in New York at +1-212-617-7904 or
[email protected].

To contact the editor responsible for this story:
Nick Baker at +1-212-617-5919 or [email protected].
- cod111.tif

Exco CEO Proposes $4.36 Billion Buyout of Company (Update2)

One of the implications of the "earnings yield" priced into many equity issues
lagging the underlying corporate debt yields to such a degree is that an uptick
in MBO and/or LBO activity can be expected to occur. While the Private Equity
industry continues to operate under the cloud of 2008, corporate management is
generally under no such encumbrance. It may well be that it is MBO activity
that provides a greater boost to buyout activity than many expect this time
around.

 

We have kept an eye on this relatively new data-set (it originated in 2006)
over the last 18 months since, while it has yet to prove its pedigree as a
reliable indicator, our distrust of the official Non-Farm Payroll data makes
all other inputs regarding US employment welcome. The HWOL index measures new
job-postings on 1200 websites and amalgamates them into a monthly total. The
data-set is noisy and needs to be adjusted to allow for the tremendous increase
in the use of on-line versus printed adverts in recent years but it does appear
to point to a growing demand for new hires. October's reading came in at 4409K,
a 2.65% increase over September and the best total since postings collapsed in
September 2008. The 6 month ma (red) which is a more reliable gauge, remains in
a well defined uptrend that shows no sign of deteriorating over the summer
months. Whether this will translate into better Non-Farm payroll data this
Friday is far from clear, but it is hard to interpret the rise in th HWOL index
as anything other than a positive metric for US employment. - hwoloct10.gif

Throughout the dismal summer data-flow the ISM Manufacturing Index kept
signalling that this portion of the US economy remained on track for recovery.
October's data points to an unmistakable shift towards higher levels of
activity, the sort of "organic" acceleration that we would hope to see at this
stage of the recovery. It comes as no surprise that this has occurred against
the backdrop of legislative inertia and prior to the launch of the expected (if
unnecessary) launch of QE2 later this week. Looking at the data in detail we
see that the headline index (black) rose to 56.9 from September's 54.4, some
distance above expectations of 54. This is a very healthy reading this far into
a recovery and is supported across the board in the various sub-indexes. Most
importantly the New Order index (red) is once more strongly positive at 58.9,
suggesting that the signs of timidity creeping into the data during the summer
(September's reading was 51.1) represented unwarranted caution by Purchasing
Managers. Production (blue) also repaired itself to 62.7, up from 56.5 in
September. The Inventory index (olive) continues to show moderate rebuild in
progress at 53.9 but Customer Inventories (not shown) remain negative at 44 (up
from 42.5) suggesting that material shortages remain at the retail end of the
supply chain. Finally the employment index (pink) rose to 57.7, the 11th
successive positive reading for this metric. As we wrote above this is an
excellent set of data that supports the recent recovery in equity prices
connected to the US domestic economy. - ismoctober2010.gif