The Chicago PMI index traditionally offers the first insight into a new
data-month and the February 2011 report suggests that the last month has seen a
further acceleration in the pace of Industrial activity. The overall index
(black) rose to 71.2 which is the highest reading since July 1988. The New
Order index (red) rose to 75.9, the highest reading since December 1983 while
Production (blue) increased to 78.2. Growing evidence of an Inventory rebuild
could be seen with the index reaching 60.2 (olive) and Employment stayed
strongly positive at 59.8. We note that the less important Milwaukee and Dallas
Fed reports also showed similar upside surprises. Attention now turns to
tomorrow's nation ISM report with the consensus estimate of 61 looking
increasingly achievable. - chicagopmifeb2011.gif

2011 has seen an abrupt shift in sentiment towards the Emerging Market
complex and this can be seen in the change of short interest in the EEM
ETF. Readers may recall that we last commented on this data in November
when short interest as calculated as a percentage of total shares
outstanding fell to a 4 year low of 3.5% (they were to bottom at 2.84% on
November 19th). We saw this as a sign of over-confidence by investors and
we were correct in predicting that this would be followed by a period of
distinct underperformance. Furthermore the most popular market back in
November was India, whose SENSEX index has subsequently fallen from 21,000
to 17,800 (just over 15%).

As can be seen on the attached chart this has led to an abrupt change in
behavior by market participants. As of February 25th short interest had
risen to 20.59% of shares outstanding, which themselves have fallen by
23% from their November 16th high of 1,050mm to 800mm (blue lower
chart). Interestingly we have seem much less evidence of capital flight
from local emerging market equities (we base this on the stable level of
most EM currencies). This therefore suggests that the surge in EEM short
interest is a combination of "lazy hedging" (it is much more liquid than
most individual equities) and opportunistic "fast money" type investors.
This does not in itself make "short EM" represent a dangerously crowded
position for (ETF short interest can actually be substantially greater than
total shares outstanding, as it was for the US retail XRT ETF for most of
2009) but it does suggest that there may be more efficient ways of
targeting the weakness within the complex.

We have pointed out on a number of occasions that Financial and Consumer
Discretionary sectors have led EM weakness in recent months, while the MSCI
Energy index has risen strongly (over 12%) since November and the Material
sector has advanced by approximately 4% (see attached). This makes sense given
that the problems in the EM complex are derived from the monetary response to
rising inflationary pressures and we would expect to continue to see these
sectors lead any further decline. - W-..EEMSI_Index.gif -
msciemmultisectorfeb282011.gif

Further confirmation of overheating in a couple of key Middle East
economies was delivered this morning in the form of Turkey's Trade and
Iran's CPI data for January 2011. We highlighted Turkey's deteriorating
Trade Balance a month ago when the December data reached a new record low
on -$8.7 bln. January was expected to benefit sufficiently from seasonal
factors in order to lift this number up to -$4.1 bln but instead a deficit
of -$7.3 bln was reported. This takes the 12 month ma (red) down to -$6.25
bln, close to the record of -$6.34 bln recorded in August 2008, one month after
crude oil peaked at $147. We note that the Turkish Lira has been probing its
breakout resistance band between 1.60 and 1.63 for several weeks, and we would
continue to watch very closely for signs that a decisive breakout is underway,
with 1.75 to 1.80 being a range that prior moves have extended to.

Meanwhile Iran is clearly experiencing its own inflationary pressures with
official CPI (which we would imagine is about as accurate as Argentina's data)
reaching a 2 year high of 15.8%, a rise of 8.00% from January 2010's level.
Moreover this spike in CPI is centered around the politically sensitive Food
sector, where prices have risen 25.6% over the last year, compared to a much
more staid 10.8% for the "Recreation, Reading and Education" category that is
probably a better gauge of middle class inflationary pressures. It should be
noted that neither of these reports takes into account the sharp increase in
agricultural and energy commodity prices that have taken place in the last
month and so if anything understate the scale of difficulties faced by
local monetary authorities. - D-TUTBAL_Index.gif - D-IACIGY_Index.gif -

Colombia Unexpectedly Raises Rate to Tackle Inflation (1)

Colombia becomes the second EM Central Bank today to surprise by raising rates
for the first time since the 2008 collapse. Although Colombia is clearly a much
less important capital destination that Russia, today's decision indicates the
widespread fear amongst EM Central Bankers that they have waited far too long
to increase rates. We continue to expect to see a meaningful pick-up in monetary
tightening within the EM complex in the weeks ahead.

The University of Michigan Consumer Confidence Index for February was revised
2 points higher to 77.5 this morning and while we would not normally draw
attention to a fairly trivial change in data this revision means that all 3
major Consumer Confidence metrics - the Bloomberg Comfort Index (old ABC poll),
University of Michigan and Conference Board - broke out simultaneously in
February from their 3 year "depression mind-set".

This probably does indicate that we have turned something of a psychological
corner in this cycle and while consumer spending remained robust while
confidence was awful (as we had expected), both "large ticket" expenditure and
the US equity market were clearly "no go zones" for most of the last 30 months.
As we explained earlier this week, the sudden spike of positive inflows back to
US equity mutual funds since the start of 2010 is intimately connected to this
change in sentiment. Although these flows have come at the expense of
tranquility they should still be a beneficial force overall in the months
ahead. We saw the turning point in new car purchases reached last summer and
the improvement in sentiment justifies our belief that this trend will continue
to accelerate in 2011. The big question remains the housing market, and
particularly the demand for new homes which remains remarkably depressed at the
current time, given the affordability of the product both in terms of price and
financing available. - consumerconfidencemulti-survey.gif

In an unexpected move Russia raised both its Refinancing Rate from 7.75% to
8.00% and also increased reserve requirements for the second time in two
months. Bank Rossii made it clear that this decision was being made due to
"high inflationary expectations". Left unsaid is the clear political pressures
that the events in North Africa will have imprinted on the authoritarian
regime, that draws much of its legitimacy from improving economic conditions.

It would thus appear that Russia has finally joined the other 3 BRICs in
entering a monetary tightening cycle and, as has been the case in China, Brazil
and India a series of interest rate hikes and MPMP initiatives can be expected
to follow. This has important ramifications for the local equity market which
has been by far the best performing BRIC since the start of 2010. Attached is a
chart showing the performance of the 4 BRICS together with the SPX and MXEF
indexes since December 31, 2009 (all rebased to 100). Note that although
soaring crude has clearly pumped up the local RTSI$ index (light blue on chart)
in the last few days, crude oil was range-bound between $70 and $90 for the
bulk of this period. What distinguished Russia from its peers was much looser
monetary conditions, and this key advantage looks set to diminish in the months
ahead. At a time that many may see Russia's commodity production as making it a
"good bet" probably means that the opposite is the case, with the index now
having to contend with deteriorating monetary conditions even if commodities
are able to hold onto their recent gains, which itself is far from proven. -
brics201011.gif

An interesting Chart of the Day (attached for non-Bloomberg users) that
suggests that consumer credit metrics are starting to turn for the worse in
Brazil. This very much fits in with our estimate of where Brazil is in its
economic and monetary cycle. Although rising credit defaults may spark
comparisons to the conditions within US in 2007 a much better comparison is the
state of the US and UK at the end of the 1980's boom. Brazil is at risk of
suffering a fairly deep consumer led recession at the current time but not the
sort of systemic crisis that rocked global markets 3 years ago. Even so this is
hardly good news for local consumer discretionary and financial stocks, which
we would expect to underperform their US equivalents to a meaningful degree
over the next 18-24 months.

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

Brazilian Consumer Loan Defaults to Rise in 2011: Chart of Day
2011-02-25 03:01:00.0 GMT


By Alexander Ragir
Feb. 25 (Bloomberg) -- Late payments on credit to Brazilian
consumers jumped the most last month since March 2008, signaling
that loan defaults will likely rise after falling to the lowest
level in almost a decade.
The CHART OF THE DAY shows that Brazilian consumer loan
delinquencies of less than 90 days rose to 5.9 percent in
January from 5.3 percent in December. Consumer defaults, or
payments more than 90 days late, were unchanged at 5.7 percent,
the lowest in more than nine years, the central bank said
yesterday.
Policy makers increased reserve and capital requirements
for local banks in December and raised interest rates last month
to curb credit that expanded 21 percent in 2010.
“Since banks have been aggressively expanding their credit
portfolios, it makes sense that the last harvest got worse,”
said Alexandre Sant’anna, chief economist at Rio de Janeiro-
based BNY Mellon Arx, which manages 12 billion reais ($7.2
billion). “It’s probable that when the central bank implemented
the credit measures it was observing a deteriorating trend in
sectors like vehicle and payroll lending. Default rates will
probably rise.”
Banco Central do Brasil’s tighter liquidity requirements
for consumer loans with maturities exceeding 24 months increased
the cost for this type of credit. The average interest rate
charged for vehicle loans rose to 27.2 percent in January, from
22.8 percent in November, before the policy changes, according
to the central bank.
Brazilian consumer loan’s default rate is the lowest since
June 2001, Altamir Lopes, head of the central bank’s economic
research department, told reporters on Dec. 23.


For Related News and Information:
Charts Homepage: GRAPH <GO>
For emerging-market stocks news: TNI EM STK <GO>
Developing economy market moves: EMMV <GO>
Emerging-market economic statistics STAT4 <GO>

--Editors: Robert Jameson, Bill Faries

To contact the reporter on this story:
Alexander Ragir in Rio De Janeiro at +55-21-2125-2533 or
[email protected]

To contact the editor responsible for this story:
Bill Faries at +54-11-4321-7736 or
[email protected]
- codfeb242011.tif

The US New Home market virtually ground to a halt in January with headline
Seasonally Adjusted sales falling back to 284K (just under the 6 month ma
of 293K) and Non-Seasonally adjusted single month sales falling to 19K in what
was a particularly inhospitable month for touring building sites. This is
the lowest monthly activity ever recorded in the NSA data but will
hopefully will be compensated for by a somewhat stronger February print.
Even at this level of activity New Home Inventory fell to a new cycle low
of 188K and now looks likely to surpass the July 1967 low of 184K before
builders start to react to a drawdown of remarkable proportions. Clearly
everything now rests on the springtime selling season. We have seen some
encouraging signs from secondary metrics (such as the improvement in the
Conference Board survey on Consumer's Intending to Buy a Home) and also
had some indication of improving conditions from a couple of the public
homebuilders but this really needs to be translated into a meaningful
pick-up in activity over the next 90 days in order to justify a continued
recovery by the home-building sector. - D-NHSLNFS.gif - D-HSMNTOT_Index.gif -

Another good set of Jobless Claims data was released this week with single
week claims reported at 391K, the second sub-400 reading in the last 2
weeks and this time without any weather related disturbance to bring its
accuracy into question. This report has taken the 4 week ma of claims down to
402K, the lowest reading since July 25th 2008 and it would seem likely that we
will cross the psychologically important 400K level in the next week or two.

Given the clear trend of improvement (the 4 week ma of claims has fallen by
29.5K over the last 3 months) and the fact that Claims are still historically
elevated at current levels it remains likely that improving data will be
released going forwards. It certainly seems possible that we will see the
Claims below 375K by the middle of Q2 and may reach the key 350K level some
time in the summer, which would imply a much faster rate of employment growth
that either market consensus of the Federal Reserve currently believe to be
possible. - D-INJCJC4_Index.gif -

Up until this morning the EM complex showed little inclination to
accelerate to the downside. To an extent this was understandable since
many markets had already sold off sharply earlier in the month and were
pressing against strong intermediate support levels but it was still surprising
to us that greater selling pressure had not emerged within the complex.

Looking at the screens this morning it would appear that a new wave of
vulnerability has started to emerge in a number of individual markets. The two
we highlight this morning have both been discussed by us many times in recent
weeks. Although India's SENSEX index had managed to rally strongly since
hitting 17,295 on February 11th this impulsive recovery bore all the hall marks
of a bear market rally and failed just below obvious resistance at the 200 day
ma. Perhaps importantly the brief recovery in the equity market was not matched
by any improvement in local money markets and the 3 month Interbank lending
rate (blue line on chart) actually rose from 9.43% to 9.79% from February 11th
to February 24th. Key support now resides at 17,300 and should this fail
to hold the SENSEX would be pointed down towards the May 2010 low at
16,000.

Turkey has the unfortunate combination of an overheating economy and a
Middle Eastern location and this proved enough to cause the local XU100
index to break key support at its 200 day ma. As would be expected follow
through has been rapid and damaging with the index quickly moving down
another 3% to test round number support at 60,000. Interestingly the
Turkish Lira (TRY) has yet to break decisively above resistance at 1.60
which suggests that most of the selling has been by local investors. We
doubt that this will continue to be the case an any additional drawdown in
equities should start to be matched by currency weakness, - D-SENSEX_Index.gif
- D-XU100_Index.gif -

As most readers will know, we have been using the 1998/9 period as a guide to
the US equity market since last spring's decline and until the performance of
the current market and the prior period diverges markedly (as it must
eventually) we will continue to do so.

In regards to the recent sudden surge in (downward) volatility that has taken
place in the last two sessions we would note that something very similar
happened at this stage of the 1998/9 rally, but did not prove to be terminal.
In mid January the NDX index crossed 2,000 for the first time in its history,
hitting a high of 2008.26 on January 8th 1999 (see red dotted circle). Given
that the index had bottomed at 1063.27 exactly 3 months previously many people
felt the market had gone too far, too fast and the index proved unable to hold
onto its gains, falling sharply on January 12th. The catalyst for the decline
was a devaluation of the Brazilian Real (the market was still traumatized by
the Russian default and Asian collapse that took place in 1998 and 1997
respectively).

By the middle of January 13th the NDX had fallen to 1838.65, a drop of over 8%
in two sessions, but mounted a strong rally to close essentially unchanged on
the day. We have attached the Bloomberg market summary from January 13th 1999
to give a brief flavor of the reaction to this decline. January 14th was
another a very weak session but never retested the lows and the index was able
to move onto a new high (see attached). It should also be noted that although
the rally continued it did so with much greater price swings from this point on
indicating that a "two way" market had been established. Our best guess is that
we will see something roughly similar play out this time around as well. We
would not rely on too close a match of the time periods (for instance it is not
clear that we will see a strong recovery rally this particular afternoon) but
we would expect to see a generally similar pattern emerge.

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

U.S. Stocks Fall, Led by Banks, After Brazil Lets Currency Drop
1999-01-13 21:29:01.180 GMT


U.S. Stocks Fall, Led by Banks, After Brazil Lets Currency Drop

New York, Jan. 13 (Bloomberg) -- U.S. stocks fell, led by
Citigroup Inc., J.P. Morgan & Co. and other banks after Brazil
let its currency slide, threatening the profits of U.S. companies
that do business in Latin America's largest economy. A rebound in
computer-related shares such as Intel Corp. limited the decline.
``Profits for some companies could be cut by this, and when
the market's trading at high levels it's unforgiving,'' said Paul
Stocking, an analyst at American Express Financial Advisors in
Minneapolis, which oversees $162 billion
The Dow Jones Industrial Average fell 125.12, or 1.3
percent, to 9349.56, led by J.P. Morgan. The 30-stock average
pared a 261-point drop as investors concluded the 8-year bull
market isn't over. ``The strategy has been to buy on the dips,''
said Bill Allyn, head of listed trading at Jefferies & Co., an
institutional brokerage.
The Standard & Poor's 500 Index fell 5.11 to 1234.40.
The Nasdaq Composite Index fell 3.43 to 2317.32, led by Internet
stocks, after swinging between a 144-point loss and a gain of 33
points. Intel led gainers on the index after posting better-than-
expected earnings.
U.S. stocks fell with world markets after the Brazilian
central bank loosened the limits on its currency and central bank
chief Gustavo Franco resigned. That sparked concern investors
would abandon all but the safest securities, as they did when
Russia devalued last August.

Banks Fall

J.P. Morgan, Citigroup Inc. and other financial services
companies, which have an estimated $75 billion in credit at risk
in Latin America, fell.
J.P. Morgan fell 5 1/4 to 106 9/16, leading the Dow lower,
Citigroup sank 3 9/16 to 52 3/16. American Express Co. fell 3 7/8
to 98 1/2.
European markets dropped. The Bloomberg Europe 500 Index
fell 3.8 percent. The U.K.'s FTSE 100 Index slumped 3 percent,
and Spain's Ibex 35 Index fell 6.9 percent.
``A lot of people hit the panic button right away,'' even
though Brazil's ``problems have been brewing for a while, said
Richard Jandrain, head of equity investing at Banc One Investment
Advisors Corp. which manages $110 billion in Columbus, Ohio.

Internet Stocks

Internet-related stocks, many of which have doubled or more
since the start of the year, slumped. Amazon.com Inc. fell 15 3/8
to 148, Yahoo! Inc. dropped 34 to 368 and Lycos Inc. dropped 7
9/16 to 96 15/16.
Rupert Murdoch, chairman and chief executive of News Corp.,
the world's fifth-largest media company, said that many companies
in the Internet industry are overvalued and unlikely to meet
profit projections. News Corp. would ``certainly not be making
takeovers of large, or already over-capitalized companies,''
Murdoch said.
``There's no doubt we'll see a correction for (Internet)
stocks - valuations are very far ahead of themselves,'' said
Charles Lemonides, managing director at Sterling Advisors.
The economic crisis in Brazil could crimp the profits of all
U.S. companies that do business in the region. Ford Motor Co.,
which has 14.5 percent of Brazil's car and truck market, fell 1
9/16 to 61 5/16.
Appliance maker Whirlpool Corp., which was expected to get
10 percent of its revenue in 1998 from Brazil, fell 1 1/8 to 52
3/4. Xerox Corp., the world's biggest copier maker, slumped 3
11/16 to 113 15/16. It garnered 10 percent of its sales from
Brazil in 1997.
AES Corp., the largest U.S. power-plant developer, fell 4
1/16 to 38 15/16. Last month, the company said half of its
earnings within five years will come from projects in South
America. It got 30 percent of its 1997 revenue from South
America.
``This is not good,'' said Anthony Conroy, director of
equity trading at BT Global Asset Management, which oversees $300
billion. ``Certainly banks are going to get hit because of their
debt exposure. If you lent a dollar and get 50 cents back, that
hurts.''

Lucent Technologies

Lucent Technologies Inc., the top maker of phone equipment,
fell 3 7/16 to 104 7/16. It agreed to buy No. 4 network-equipment
maker Ascend Communications Inc. for $20.3 billion in stock.
Ascend jumped 5 3/8 to 80 5/16.
Contributing to concern for the profit outlook, Federal
Reserve Vice Chairman Alice Rivlin said U.S. companies are likely
to see less than spectacular earnings this year.
``All the signs point to somewhat disappointing earnings as
we move ahead,'' Rivlin said in an interview on Cable News
Network's Moneyline program. Stock prices are ``clearly very
high. You have to be very optimistic about earnings to justify
those prices, but that's been true for a while.''
Overall, the U.S. economy is ``unlikely to grow at the pace
it did in the second half of last year,'' Rivlin said.

--Philip Boroff in New York (212) 318-2602, with reporting by
Phil Serafino / csc

Story illustration: To graph the Standard & Poor's 500 Index
for the past year, enter SPX <Index> GPO D.

News by category: Regional news:
NI USS U.S. stocks NI US United States
NI STK Stocks
NI TOP Top Stories

People in the news: For news about any of the people mentioned
in this story, type WHO followed by the person's name and
<Go>.

Other codes related to this story: NI MOV Equity movers NI
OPN Market opening stories

For daily opening articles on the U.S. stock market, type TNI
USS OPN <Go>




-0- (BN ) Jan/13/ 99 16:29
- ndx19989.gif

US Existing Home Sales beat consensus estimates once more with the
headline total sales coming in at 5.36mm compared to consensus estimates
of 5.22mm. Although we are happy to see the report we would caution that
January sees the largest amount of seasonal adjustment and today's
increase in the headline number is as a result of actual sales falling
less than would be anticipated. For example a drop in Single Family home
sales to 253K in January from 354K in December has translated into a rise
in Annualized Seasonally adjusted sales from 4.48mm to 4.69mm units. As we
have said many times the key to the US housing cycle is what happens once
the springtime selling season gets underway later this quarter but sales
falling less than expected in the winter is a good start to this process.

We would also point to some encouraging metrics in the overhang of unsold
inventory, particularly in the multi-family portion of the data. Here total
units on the market fell sharply to 440K, the lowest number since February 2006
and equivalent to just under 8 months of sales. Again seasonal factors come
into play (very few new listings are added at this time of year) but we have
seen a number of data points in Permit, Construction Start and now Inventories
that suggest that the Condo portion of the US housing market may be starting to
heal much faster than most commentators realize. We would point to large pools
of investment capital attempting to mop up distressed units as a key force
behind this recovery. In today's release it was announced that distressed sales
accounted for 37% of sales (the largest portion for 12 months) while All-Cash
transactions were 32% of sales, which is 3 times the historic average.
Homebuilders concentrating on the multi-family portion of housing would
therefore appear to be the likeliest beneficiaries of this sudden tightening of
supply which could prove to be of surprising force to many observers. -
D-EHSLSL_Index.gif - D-ECSLHAFS_Index.gif -

As we argued several weeks ago, Consumer Confidence data tends to lag actual
economic developments but to COINCIDE with investor allocations. Thus it is
little surprise to see the February Conference Board poll finally break out of
its 3 year range in conjunction with a very strong equity market and (more
importantly) several weeks of strong mutual fund inflows into US Equity funds.
Since we are still far away from the sort of extreme bullish readings that
serve as a contrary indicator (unlike emerging markets such as Brazil) this is
straightforwardly good news for the US economic cycle which typically should
now have several quarters of good growth ahead of itself. Over the short term
this sort of surge may also indicate a level of over-excitement that precedes a
bout of equity market turbulence, but not an episode that does any long lasting
damage to portfolios.

Perhaps the most intriguing data in this month's survey came in the sub-indexes
which track consumers' intention to purchase items over the next 6 months. As
we noted last week, the Conference Board just changed its methodology for
conducting this survey and has only "backfilled" the data back to November
2010. What is striking is the effect on the new series on both the "Intend to
Purchase Automobile" and "Intend to Purchase House" surveys (both attached).
The former is at a remarkable 13% while the latter is indicating a surge of
intention back to peak activity. We would clearly treat the ABSOLUTE numbers in
the survey very warily (particularly given the recent change in methodology)
but we do believe that they are responding to a meaningful change in consumer
activity that is taking place in these key areas of the economy. We have
already seen this reflected in automobile sales data (although this survey
anticipates a further acceleration) but are yet to see it reflected in housing
data. Pending Sales (due out on February 28th) may be the first series that
gives a hint that this is occuring, as may statements from one or more of the
public homebuilding companies. - confidencebuyhome.gif - confidenceautos.gif -
confboardconfidencefeb2011.gif

Bloomberg Chart of the Day (originally published yesterday) on our observation
that the fall in EM Bank stocks is potentially signalling wider problems for
the EM complex.

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

Emerging-Market Bank Tumble Signals Stocks Rout: Chart of Day
2011-02-20 16:00:00.0 GMT


By Jonathan J. Levin
Feb. 21 (Bloomberg) -- Emerging-market bank stocks and the
main developing-nation index are diverging by the most in more
than two years as lenders plunge, signaling the drop in other
industries will accelerate, according to Oscar Gruss & Son Inc.
The CHART OF THE DAY shows that the 120-day correlation
coefficient between MSCI Inc.’s Emerging Markets Index and banks
gauge fell to 0.94 last week, near the lowest since October
2008. The lenders index has tumbled 10 percent from a three-year
high on Nov. 5 on concern policy makers will raise borrowing
costs. Banks usually move in tandem with other industries, and
the divergence suggests the stocks slump will deepen, said
Michael Shaoul, chief executive officer at Oscar Gruss.
“If the banks continue losing value, at a certain point
they will take the indexes down with them,” Shaoul said in a
phone interview from New York. “Weakness in the financial
sector should be treated as a leading indicator of the overall
market.”
The MSCI measure for stocks in 21 industrializing nations
has dropped 2.9 percent since Nov. 5, less than a third the
retreat for the banks gauge, as gains in energy and technology
companies blunted the losses. The declines reflect increased
investor bearishness as central banks from China to Brazil fight
rising prices by increasing borrowing costs, Shaoul said.
The United Nations’ Food Price Index climbed to a record
last month and oil surged to a two-year high of $92.19 a barrel
on Jan. 31 amid unrest in Egypt. Chinese consumer prices rose
4.9 percent in January from a year earlier and Brazil’s
inflation, as measured by the benchmark IPCA index, quickened to
5.99 percent in the 12 months through January.

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: Eric Martin, Alan Mirabella

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]
- codfeb222011.tif

It has been a busy week for emerging market central bankers with orthodox
rate hikes being announced in Vietnam (up 2% to 11%) and Chile (0.25% to
3.5%) and yet another increase in Reserve Deposit Requirements for China's
banks being announced this morning. This marks the 5th such increase since
mid-November and takes the requirement further into uncharted territory.
It is of course very hard to gauge the effect of such measures, particularly
when they are combined with rate hikes and other macro-prudential
interventions. This is as true for the Chine monetary authorities as it is for
investors which is precisely why we expect this monetary experiment to end
fairly badly.

Perhaps the best sense of overall tightness is given by the behavior of
the Shanghai 3 month overnight interbank rate "SHIBOR", although this
should only be seen as a crude estimation of monetary conditions. This
index moved forcibly higher from November to January peaking at 5.75% on
January 31st. Since that time it has fallen back to 4.71% but has found
support at that level and could be expected to move higher once these
reserve requirements come into place. More importantly, this morning's move is
a signal that more measures can be anticipated, both in degree and depth, in
the weeks ahead. - W-CHRRDEP_Index.gif -

As the headline writer for this month's Philly Fed report proclaimed
"Indicators All Point to Growth". In fact this succinct phrase scarcely
describes the power contained in this month's numbers with the overall index
(black) rising to 35.9, the strongest reading since January 2004. Strength was
seen across the report with New Orders (red) reaching 23.70, Shipments (not
shown) 35.20 and Employment (green) 23.60, which is the highest reading
recorded for this sub index since April 1973. This does not translate directly
into a comparable number of Manufacturing jobs being created but it does
suggest that this sector is seeing a meaningful re-acceleration of employment
trends at the start of 2011. Quite how this can be reconciled with the need for
an emergency rate of 0.25% for the FDTR will be up to the next meeting of the
FOMC to decide but we are sure that they are up to the task. -
phillyfedfeb2011.gif

As the holiday and weather related adjustments are wrung out of the data
it would appear that Initial Claims are running where we had expected, in
the 400K - 425K range. This week's report came in at 410K (421.7K on a NSA
basis), which was a rise of 25K from last week's surprisingly low number.
This took the 4 week ma down to 417K and we would expect it to fall
further next week as the very high report from January 21st falls out of
the data. A more meaningful drop in the 4 week average will require a
string of improving weekly data points, which would constitute something
of an upside shock to consensus estimates but would be historically consistent
with other recoveries. - D-INJCJC4_Index.gif -

We view the Bank of Israel (BOI) as one of the leading intellectual
proponents of MPMP with its governor having close academic ties to
Chairman Bernanke and several other Central Bankers. This makes Israel a
much more interesting country to keep an eye on from a monetary
perspective than would otherwise be the case. Thus far, the BOI has
followed a policy of keeping interest rates historically low, while
bringing in macro-prudential restrictions on housing credit and foreign
holders of government securities. The argument behind this combination of
policy has been that Israel's export sector could not compete with a
strong local currency, particularly since the trajectory of the US and
European recovery was at best uncertain. Although this stance was widely
praised back in the summer, it is starting to look like an unfortunate
combination of poor forecasting and bad policy as Israel's economy is
showing clear signs of overheating.

Earlier this week the BOI released an unexpected increase in CPI to 3.6%
and this morning a much faster than expected Q4 GDP report was released,
estimating growth or 7.8% compared to a 4.2% consensus estimate. One
simple way to gauge the tightness of monetary policy is to compare the
Central Bank controlled interest rate to the growth in nominal GDP (which
we assume to be an approximation of the average return on capital
available in an economy). Following this morning's release this shows the
ISBRATE to be 5.8% less than GDP, the largest spread since the data starts
in 2003. This shows the scale of difficulty in judging appropriate policy
under an MPMP framework. In Israel's case we would expect to see a
combination of a series of further rate hikes and the introduction of
further policies that directly address over-investment in local asset
markets, neither of which bode well for local asset values in the medium
to longer term. - D-ISGSANYY_Index.gif -

January housing starts were reported to have grown to 596K, a substantial
overshoot from consensus estimates of 539K. This was caused by a much
greater number of multi-family starts than had been anticipated (this
really should not have been a shock since multi-family permits spiked in
December). Our primary metric remains the Single Family Home Permit data
and this remained in depression territory at 421K. We do not expect this
metric to break out until after a significant increase in New Home Sales
have been reported (although its ability to shoot higher once it starts to
move should not be underestimated). We would therefore say that the
turning point in the housing construction cycle has not yet been reached,
but the spike in multi-family data is still worth commenting on.

Multi-Family construction by its nature involves large construction loans
with the builder supplying little or no of the required capital. It is
also subject to longer lead times for planning and engineering. As a
result this portion of home building kept on operating at a high level
after single family starts slowed from the summer of 2005 onwards. On the
other hand this sector was particularly susceptible to the disruption in
wholesale funding markets following Lehman's collapse (a point we made on
the very day of the debacle). As can be seen on the attached chart, the
ratio of Multi-Family to Single Family starts fell to a record all time
low in the middle of 2009 as funding lines became depleted and could not
be replaced. The sudden recovery in multi-family permits (last month) and
starts (in January) is therefore more a symptom of rapidly healing
FINANCIAL markets than HOUSING markets, and is a sign that a number of
large stalled multi-family construction projects have now sourced new
funding that should allow them to reach completion. This should be seen as
a particularly good sign for the Regional Bank sector which has an
outsized exposure to multi-family construction debt since it implies a lower
loss rate on construction debt may be incurred. - D-NHSPA1_Index.gif -
D-NHSPSTOT_Index.gif -

The December Industry Inventory and Sales data confirmed that both
categories of activity remained in strong recovery trends at the end of
the 4th quarter (of course this has already been established by the 4th
quarter earnings reports). Business Inventories grew by 0.8%, which was
slightly higher than consensus estimates of 0.7%. November's rather weak
report of 0.2% was also revised higher to 0.4%. Sales also had a strong
month, with growth at 1.2% for December, outstripping inventories yet
again. This kept the Inventory/Sales ratio very healthy at 1.25%
indicating that there is room for considerable inventory re-build even at
this point of the cycle. We would also note that total Business Sales are
now approximately 5.5% below their prior cycle peak and at current growth
of 8.8% per annum will surpass this target sometime in Q3 2011. -
M-MTIB_Index.gif -

The last of the winter reports for the NAHB Homebuilder Sentiment index was as
dreary as those that preceded it in recent months with the overall index
unchanged at 16, indicating no broad build up in activity took place during the
winter months. This neither proves or disproves our notion that 2011 may see a
considerable upside surprise for New Home sales since we would only start to
look at data that picked up on the key spring selling season that rolls around
the country (starting in the South and West) from mid-February to the end of
June. We are also not sure how useful this particular gauge will prove to be as
far as the public homebuilders are concerned. The latter have access to capital
and land holdings that the smaller homebuilders that dominate this survey
(February's survey had 424 respondents) are currently excluded from. We would
therefore expect to see an improvement in the metrics of the public
homebuilders somewhat before a broader industry wide survey such as the NAHB. -
nahbfebruary2011.gif

China released its monthly monetary statistics last night and these would
appear to indicate a moderate slowdown in the pace of monetary creation
has taken place in recent months. Overall M2 grew by 1.35% in January,
which took its 12 month RoC down to 17.58%. This is still well above the
growth rate of the overall economy and it should be borne in mind that M2
has now doubled in size since the summer of 2007 (US M2 is up
approximately 20% over the same period) which underlines the tremendous
amount of local liquidity that has been created in recent years. Perhaps
the best news for the local authorities in the January data is that New
Loan issuance came in significantly below expectations at 1,040 Bln CNY
(1,200 Bln consensus). January is typically the strongest months for new
loans (since the banks start the year with new quotas) and this may be the
first indication that the raft of MPMP measures (particularly increases in
bank reserves) may be having some effect at the level of credit creation.
We would stress, however, that much more would need to be done to bring
monetary growth down to a level closer to GDP growth and that January's
data is still consistent with our view that China faces growing
inflationary pressures and an investment boom on a scale which history
suggests will eventually end with some duress. - D-CNMSM2_Index.gif -

The Conference Board today announced a new methodology for measuring Consumer
Confidence (see attached release) that has led them to revise the January 2011
reading sharply higher from 60.6 to 65.6. This is enough to break the index out
of it's post-Lehman range and certainly suggests that a fairly robust recovery
in Consumer Confidence it taking hold. Readers may recall that we first
suggested this may be the case back in January, since it made sense that retail
allocations to US equity mutual funds would turn positive at around the time
that Consumer Confidence started to indicate a meaningful improvement.

In terms of the revisions to sub-indexes that make up the Conference Board data
(which are shown on page 3 and 4 of the attached release) we would note that
the "Jobs Plentiful" gauge finally moved up to (a still awful) 5.40 reading,
the highest level since May 2009, which shows a potential shift in employment
confidence may finally be underway (we would expect this index to move very
sharply whenever the non-farm payroll index finally breaks higher). The most
notable revision, however, comes in the "Plans to buy Automobile" index which
was increased very sharply to 11.9% from January's original reading of 5.1%, as
were November and December's data (see attached chart). This appears to be the
highest ever reading since the index started in 1976 (the prior peak was 11.00%
in July 1998) although the change in methodology may make genuine historical
comparison impossible for sub-indexes. Was is less controversial is that this
data is supported by the very sharp increase in Car Sales that we have seen
since the summer of 2010, and January's index suggests that this should
continue to be the case for several months going forwards. - 5489 -- CCS Media
Advisory Feb 14.pdf - confauto.gif

China's Trade Data for January 2011 was released last night and has been
well received by the world's markets since it shows a combination of very
strong local growth and a smaller than expected trade surplus. Thus
concerns about China's local economy and growing international tension
over its currency are at first glance lessened by this data but a more
considered response would be to understand the implications of the very
different nature of China's trade data for most of the last decade and
that of the last 2 years.

As the attached chart shows, from the period of roughly 1998 to 2008 China
pursued a policy of very fast economic growth in which export activity
tended to grow somewhat faster that imports. Thus the 12 month ma of the
trade balance moved from a range of $1bln - $4bln in the early 2000's to
reach a peak of over $25bln at the end of 2008, with a single month peak
of $40.09 Bln in November 2008. Following the collapse of global trade in
Q4 2008 the Chinese economy has become substantially more driven by
domestic growth. Exports have clearly continued to grow, and were up 37.7%
in 2010, but imports have comfortably outstripped their pace, growing by
51% in 2010. Indeed if one looks at 24 month RoC's for both metrics (shown on
chart) this allows us to see the dramatic difference in performance since
activity bottomed in January 2009.

As can be seen Exports have grown by a powerful 66.64% over this period, but
this has been dwarfed by a 181% increase in imports. This really suggests a
level of overheating in the domestic economy that should be troubling to most
observers since it raises questions about the need for significantly tighter
monetary policy and also the possibility that Chinese inventory levels in
commodity inputs may be accelerating far above current usage. As ever we would
avoid drawing too many conclusions from one singe data point but if this sort
of behavior were to continue into 2011 we would start to see China as a
deficit nation within 3 or 4 quarters, which really would pose a challenge
to the global consensus on financial flows. - D-CNFREXP_Index.gif -

Commenting last week on the surge in the Citigroup Economic Surprise Index
(CESIUSD index ) we made the point that the significant improvement in the
quality of data would start to push consensus estimates higher.

Looking at today's Philly Fed Professional Forecasters Report (see link)

Given that Turkey had already published awful Trade Balance data last week
(-8.65 Bln USD) today's Current Account Balance was expected to be a
record -$7bln deficit. In fact it was reported at -$7.5 bln which suggests
that not only are Turkey's imports soaring above exports, but that foreign
capital flows moderated substantially towards the end of the year. We
would caution that both Trade and Current account data are notoriously
volatile and that December's shocking numbers need to be confirmed by the
next few months reports in order for any definite conclusions to be drawn
about the absolute scale of Turkey's problems, but we are fairly certain
that the current economic policy will prove to be unsustainable.

Perhaps the best gauge in the meantime is the performance of the Turkish
Lira (TRY) which has recently been hovering around the key 1.60 level.
Since foreign flows to emerging markets in general have moderated sharply
in recent weeks we would expect to see the currency get substantially less
help from the outside this quarter. A breakdown by the currency must
therefore be treated as a definite possibility with the 1.75 level an
obvious breakout target. - D-TUCALNEW_Index.gif -

One of the clearest signs that an equity is bothered by monetary pressures
is that the typical relationship between economic statistics and prices
inverts, with "bad" economic news actually helping equity prices rally
since they help calm fears regarding future monetary tightening. We saw an
excellent example of this last night in India, where very poor Industrial
Production data for December (estimated to be growing by a mere 1.55% per
annum) was greeted by a 1,52% rally in the SENSEX (this still leaves the
index 1.55% lower in the week). Ironically it is not even clear if this
data does indicate an industrial slowdown since it can be extremely
volatile on a month to month basis (note even the 12 month RoC indicator
is notably jerky), but if it were to be taken on face value it would
hardly support the current valuation or popularity of Indian industrial
equities. Our view remains that India's central bank is facing a very
difficult period to navigate and that they are no more likely to be
successful in engineering a "soft landing" than any other central bank has
been in similar circumstances. Today's rally is also a useful reminder of
how equity declines unfold. They take time and often include substantial
short, sharp recoveries and this means that even if we are correct about
the magnitude of India's issues patience should be used when timing trades
for both long and short sales. - M-INPIINDU_Index.gif -

- Michael Shaoul Tom Keene interview Feb 10 2011.pdf -

In our interview with Bloomberg radio this morning we argued that the FRB is now
significantly "behind the curve" with its interest rate policy. We should therefore
start to see an increased degree of interest rate volatility and also an uptick in
public dissent amongst the FRB governors as the cosy consensus around the
current policy starts to fracture into a debate between "doves" and "hawks".
We were therefore very interested to see Governor Warsh resign this morning
(see attached story) and would expect to hear plenty more from him in the weeks ahead.


more...

Argentina has for many decades represented the antithesis of a stable monetary
system and there are increasing signs that the current boom will end in
familiar fashion. We highlighted a story in early January regarding a shortage
of Peso bill over the christmas holiday season (a clear sign of inflationary
tendencies) and have been monitoring the increasingly poor performance of the
local currency (ARS) which recently breached the 4.00 level for the first time
in its history (the ARS traded at parity under the old pegged currency regime,
and rose from 1.00 to 3.86 during the 2002 crisis).

Attached is a somewhat bizarre story about an attempt to intimidate local
brokerage houses into moderating private sector estimates of inflation. This is
fairly typical of the twisted logic that has blighted this country's leaders
over many decades. Although this particular effort may succeed in moderating
the published reports of CPI (or even lead to a cessation of publication) it
will do nothing to dampen the growing sense that something is amiss with this
economy.

India's SENSEX index continues to perform poorly justifying the attention
that we have paid to it in recent months. Last night's session saw the
index fall another 1.03% to 17592.77, its lowest close since July 7th 2010,
and this confirms that key support at 18,000 has now given way to the
selling pressure. With clear evidence of an overheating economy and a
heightened concern of the ramifications of consumer inflation for staple
goods following Egypt's unrest, monetary policy likely to continue to
tighten meaningfully.

If the RBI needed reminding of these dangers the January car sales data will
have supplied a timely reminder with sales reaching a new record of 184332, a
rise of over 26% over the last 12 months (see attached). The problem for
investors is that monetary tightening tends to have far more of an effect on
liquid financial assets than actual economic activity during the early stages
of a tightening cycle, which is precisely why this tends to be the most
dangerous time to be investing. This is particularly true of equities, which
are often bought with margin credit and whose very liquidity and ease of
transaction makes them the simplest asset to sell, while their excellent price
transparency means that any drop in price is rapidly communicated to other
holders (this is much less true of fixed income securities) thus encouraging
further selling pressure. Equities therefore typically lead any overall
correction in financial asset values, although later on domestic fixed income
and currencies tend to also start to behave very poorly.

The recent drop in the SENSEX has the appearance of a textbook example of the
above, which is why it is worth paying close attention to. With support at
18,000 now breached the question is whether this will prove to be a relatively
shallow affair or the start of a longer and more damaging decline. As can be
seen on the attached weekly chart the target for a more shallow decline would
now be approximately 16,000, which represents support that held during the
spring 2010 sell-off. In the event that this proved to be the start of a more
prolonged multi-month sell off we would look for a much deeper downside target,
with the large gap between 12,000 and 13,000 being an obvious target. This may
seem to be aggressive but investor sentiment was extremely bullish towards
India in late 2010 and fully matched by investor flows and the potential for a
fairly ugly episode should therefore not be dismissed out of hand. -
M-INVSDPAS_Index.gif - W-SENSEX_Index.gif -

Tomorrow will mark the 14 week anniversary of the launch of QE2 and it is
interesting to observe that the very asset that was assumed to be the
clearest beneficiary of the FRB's policy has subsequently endured one of
the worst 14 weeks in the last 50 years. We are talking of course about
the 5 year treasury note, which represented the sweet spot of the treasury
curve that QE2 would be targeting. Since the November 4th low of 1.01%
(one day after QE2 was formally announced) the 5 year note yield has risen
to 2.31%. On a percentage rate of change basis this represents the
greatest ever 14 week move in the 50 years of data that Bloomberg provides
at a remarkable 112%. This is somewhat distorted by the initial starting
point of the 5 year yield in November but even if one looks in terms of
actual basis points a rise of around 1.30% over 14 weeks still represents
one of the most rapid adjustments to the 5 year treasury yield.

A combination of massive front-running of a deliberately telegraphed
policy and much stronger US economic and corporate data have been the
cause of this reversal, but as we argued back in November a 5 year note
yield of 1% made no sense unless the US was heading into a 1930's type
depression. We would however distinguish between the straightforward "sell
on the news" move upwards from 1.% to around 2% at the end of December
from the burst higher from 2% to 2.30% that has taken place over the last
week. The latter to us represents the first hint that the marketplace is
beginning to rep-rice the medium term intentions of the FRB. The December
2012 Euro$ contract for instance now prices in the FDTR at about 2.00%.
This is still far below the 3.50% priced in back in April 2010 but it is
also a substantial amount higher than the "perma-hold" level of 75bp
priced in back in November. From our perspective the interest rate clock
in the US has started ticking with the unusually strong conviction around
the timing of a change in policy being likely to fray around the edges and
ultimately fracture in the weeks ahead. - W-USGG5YR_Index.gif -
5yearnotemovefeb82011.gif

China appears to be following a dual track of conventional interest rate
management together with macro-prudential monetary measures (such as reserve
requirements and residential lending controls). Last night it was announced the
the local benchmark "1 Year Best Lending Rate" would be raised to 6.06%
effective tomorrow, which will be the third increase since late October. As the
attached chart shows this still keeps the lending rate at a very low level
historically but it will take China's base rate to a record high versus the
FDTR. Given that China still maintains a pegged currency to the US this
demonstrates the degree of difficulty facing the Chinese authorities as they
attempt to craft a suitable monetary policy for their increasingly complex
economy. - chinaratefeb82011.gif - china-fdtr.gif

Almost 23 months into the equity rally and approximately 6 quarters into the
economic recovery there are finally signs that small business sentiment is
starting to push its way out of the recessionary mind-set that has gripped it
for the last 3 years.

January's NFIB Small Business Optimism Index rose to 94.1 (in line with
expectations), which is the best reading since December 2007. Although this is
clearly a lagging indicator (particularly for financial markets) there is
probably some truth to the notion that better business sentiment will translate
into a somewhat more expansionary strategy, with a greater tendency to boost
employment, consider new projects and conduct acquisitions. We would also
expect to see surveys such as this start to move quite quickly higher (which
does not necessarily translate into an acceleration of business activity), as
the entire mood of the nation starts to come closer to alignment with economic
reality. Once more this points to growing speculation about how much longer it
is appropriate for the FRB to hold the FDTR at 0.25% (minus 12 to 18 months in
our minds), which we expect to start to become the dominant narrative for the
US financial markets later in 2011. - nfibfeb2011.gif

The FRB's estimation of US consumer credit grew by $6.1bln in December,
considerably quicker than the consensus estimate of $2.4bln. This is perhaps
not as surprising a number as it may seem at first glance, since total credit
outstanding in December 2010 stood at $2437.8 bln and so December's growth rate
was approximately 0.25% for the month. What is much more notable, however, is
that this takes the 6 month ma of Consumer Credit into positive territory for
the first time since November 2008. It would therefore seem to be time to cease
talking about consumers "de-leveraging" and start instead to talk about them
"releveraging". At their December 2011 level consumer credit is approximately
$157bln below its December 2008 peak of $2,594bln. Growth of 6.5% over the
course of 2011 (which would be in line with consumer credit growth during the
last economic cycle) would therefore be enough to take consumer credit
outstanding to anew all time high by December 2011. - consumercreditdec10.gif

The SPX index is rapidly closing in on our target of 1334 which would represent
a doubling from its low point in March 2009 (for symmetry's sake it would be
nice if it could reach this target on Wednesday exactly 23 months after the low
was recorded). We should stress that there is nothing magical about this level,
we just chose it as a number that would be likely to cause a surge of bullish
media attention and (possibly) cause some of the few remaining shorts to cover.
It is certainly possible that our target can be exceeded by some margin, but it
is also likely that the window for this metronomic phase of the rally can be
counted in days to weeks rather than months.

Our guides in terms of timing continue to be the collapses and recoveries from
1974 to 1976 and 1998 to 1999 (see attached). We have used the former period as
a guide since the collapse of 2008 and the latter period as a guide since last
spring's sell-off. As can be seen both have proved to be useful tracking
devices, particularly in terms of timing. Both have allowed us to be very
patient with the long, steady move higher since late August but both now signal
that sometime in the next few weeks we should be entering a more difficult and
volatile trading environment.

We should stress, however, that neither of these prior periods was followed by
a deep sell-off in the SPX. 1999 saw a drawdown of approximately 13% between
July 1999 and October 1999 (roughly 1420 to 1230), while 1976 saw a couple of
10% drawdowns in price. 1999 was then followed by the final move up to the
March 2000 high at 1552, while the 1976 market remained largely range-bound for
a period of 6 years (although individual sectors such as energy were much
stronger).

In terms of the likeliest cause of a more difficult market this time around we
would point to the effect of tighter monetary policy in Emerging Markets and
possibly the US. The former has received plenty of attention from us in recent
weeks but the possibility that the FRB may start to change its tune in the face
of much stronger US data is a wild-card that cannot be entirely dismissed. -
spx19882011feb2011.gif - spx19742011feb2011.gif

Australia continues to exhibit an economy split between a buoyant mining
and commodity sector that is seemingly oblivious to the substantial
monetary tightening that has taken place over the last 18 months and a
local real estate economy that would seem to be entering a pronounced
slowdown in activity. January's Australian Industry Group (AIG)
Performance of Construction index fell to 40.2, the lowest reading since
April 2009, and the 8th consecutive sub-40 reading. Although there is
little doubt that the recent floods may have depressed this data the
accompanying comments made by the AIG suggest that the problems run deeper
than this and are more a reflection of end demand being impacted by higher
interest rates and home prices. Looking at the sub-indexes of today's data
it was notable that everything bar Input Prices (73.7) was comfortably
below 50 with the most notable weakness being in Apartment Construction
which collapsed to 23.4, a level not seen since the low-point of January
2009. This data only underlines the difficulty that the RBA has in setting
an appropriate monetary policy for the overall economy. Although
Australia's cycle is more advanced than most they are hardly alone in this
regard, with similar issues starting to become apparent across a large
swathe of the emerging market complex. - D-AICIPCI_Index.gif -

With the early wave of January's data now on the tape, the effect of the
generally solid reports can be seen on the Citigroup Economic Surprise
Index. This has reached 64.1 which is the best reading since August 2009.
The 10 week ma (red) which we consider to be a more reliable indicator has
risen up to 23.91 and is therefore still somewhat lower than the 40+ level
that is typically reached at the peak of a data cycle, but this indicator is on
pace to reach this level by this time in March. Readers should recall that
peaks in the 10 week ma of this index typically coincide with a broad
pullback in asset markets and the current data suggests that we are entering a
more dangerous phase for investing over the short to medium term.

In the case of the current cycle it is more likely to be a radical shift
in economic consensus higher (remember this is a SURPRISE index that compares
data to consensus) than a deterioration in data (2004 would be a
good example of this phenomenon) that ultimately forces this index to peak
and head lower. This of course is very relevant for the treasury curve
with yields likely to be pushed higher as consensus estimates start to
embrace a significantly faster pace of economic growth within the US. It would
therefore make sense if any weakness was seen in treasuries and high quality
fixed income prior to a pullback in the large cap US equity market. -
W-CESIUSD_Index.gif -

This Bloomberg chart of the day echoes our own musings following the release of
new car sales. The 15mm sales figure is a simple extrapolation of the 2010
sales growth rate and the historic linkage of new car and new home sales is
well borne out in prior cycles.

Despite this morning's confusing payroll data, long term treasury yields
have broken out of their recent trading ranges and both the 10 and 30 year
yields are now at their highest level since the strong treasury rally last
springtime.Thus although the move in yields is relatively small in terms
of basis points (the 10 year is up 6.5bp and the 30 year 5 bp) there is a
technical significance in today's move that suggests that yields could now
move up to challenge their April 2010 highs of approximately 4.00% and
4.80% respectively over the next few weeks. This would seem to represent a
continuation of the gradual reallocation of investment capital out of the
longer term bond market, with this morning's payroll data being deemed "good
enough" to keep assumptions about the US recovery intact.

What has not changed are participants' assumptions regarding the future policy
of the FRB. The short end of the curve remains tightly tethered to the
FDTR with the 2 year note yield moving 2bp higher to 72bp. This compares
to a level just above 100 bp last April. Although over the short term a
further steepening of the US yield curve would seem to be a likely outcome
of today's data, the overall picture emerging from US economic and
corporate data is of an economy that has no need for an FDTR close to zero
and yet we continue to see evidence of consensus hardening around a rock
solid conviction that the FRB is on hold for at least the next 12 months.
With the nominal yield available for investment grade securities now well
below the target returns of most investors the use of short term rates to
boost returns via leverage has increased markedly in recent months. The
certainty with which the FRB's policy is viewed to be on hold (which
ironically is encouraged by the transparent nature of the Bernanke led
FRB) has only served to encourage this behavior (one only has to look at
the yields available on a host of closed end bond funds to see the extent
that leverage is being used). This strikes us as one of the most likely
causes of grief later on this cycle with any change in policy ahead of
schedule leading to a forced unwind in multiple fixed income markets. -
D-USGG30_Index.gif - D-USGG2.gif -

The influence of the monthly non-farm payroll report over both portfolio
construction and the enactment of monetary policy reminds us of the way a more
ancient (we hesitate to say unsophisticated) civilization would consult "the
gods" before deciding whether to go to war or which crop to plant. Indeed
perhaps the explicitly capricious nature of this earlier model of decision
making was in some ways preferable to the slavish reliance of data that only
bears a passing resemblance to reality.

This month's payroll report showed a disappointingly small increase of 36K jobs
overall (146K consensus) and 50K of private payrolls additions (145K
consensus). On the plus side both November and December's data was revised
significantly higher and the Unemployment rate was dropped to 9.00% (due to new
assumptions about the overall size of the workforce). The best piece of news
came in the Manufacturing survey which at 49K is showing the strongest month
for employment since the middle of 1997 (we would ignore the August 1998 spike
as being purely a result of data revision). This backs up the very strong ISM
Manufacturing survey data that was released earlier this week and should
continue going forwards.

Perhaps the most remarkable portion of the survey was the assumption made about
the effect of weather on the labor-force (see attached). According to the BLS
bad weather in January historically prevents 417K from working but in January
2011, 886K were unable to work (there is no reason to assume the BLS is any
better at guessing this number than anyone else). This gives some insight into
the huge scope for data-swings made by some of the secondary inputs into the
survey, which most casual users have no idea even exist as part of the
methodology. Over the longer term these errors and omissions balance out but
they make this survey remarkably ill-suited for the manner in which it is
utilized by most observers.

Our view remains that the US labor market is starting to repair fairly rapidly
and that eventually this will be reflected by a considerable upside surprise in
this data series.

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

U.S. Workers Unable to Work Due to Bad Weather in Jan. (Table)
2011-02-04 13:32:04.889 GMT


By Chris Middleton
Feb. 4 (Bloomberg) -- The Bureau of Labor Statistics
reported that 886,000 people in nonagricultural jobs were
unable to work due to inclement weather.
The figures come from the government’s monthly unemployment
survey of households and are used by economists to help determine
if weather may have played a role in unexpected swings in payrolls.
The historical average for Jan. is 416,882 employees that cannot work
due to poor weather conditions.
*T
=======================================================================
Jan. Dec. Nov. Oct. Sept. Aug. July
2011 2010 2010 2010 2010 2010 2010
=======================================================================
Unable to Work 886 179 40 37 17 31 25
Avg. for month 417 136 63 41 49 28 32
Diff. from avg. 469 43 -23 -4 -32 3 -7
=======================================================================
NOTE: All figures are not seasonally adjusted and in thousands.
The data series starts in June 1976.
*T
To see this table in Japanese: {TNI USECO SHIHYO JBN <GO>}

SOURCE: U.S. Department of Labor {BLSW <GO>}

For Related News and Information:
To chart non-farm payrolls: NFP TCH <Index> GP<Go>
To chart changes in unable to work due to bad weather
USEMBADW <Index> GP <GO>.
For more data on employment: EMPR <GO>.
For today’s business and financial stories: TOP <GO>.
For today’s top economy stories: TOP ECO <GO>.

--Editor: Alex Tanzi

To contact the reporter on this story:
Chris Middleton in Washington at +1-202-624-1993 or [email protected]

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

The Bank of Indonesia delivered a monetary surprise last night by raising
its Reference Rate by 0.25% to 6.75% when most observers had expected it
to keep the rate unchanged. As the attached chart shows this still keeps
the rate at a very low level from a historical perspective, but the
significance of a change in monetary policy should not be ignored. Central
Banking is a notoriously lugubrious profession and therefore a shift in
direction of policy takes a long time to be enacted, but also tends to
prevail for a considerable time and (in the case of interest rates)
distance, largely because economic statistics can take a surprisingly long
time to co-operate with the wish of the central bank to cool or accelerate
an economy. In Indonesia's case the turn in rates is long overdue with all
the traditional metrics suggesting that the economy is in danger of
overheating. We show on the chart Indonesia's consumer confidence index
which was updated with January's reading a few hours after the rate
increase was announced. As would be expected this shows consumers to be in
a buoyant frame of mind, as they always are when the monetary cycle starts
to turn the screws. - W-IDBIRATE_Index.gif -

The January ISM report suggests that the US service economy is starting to
accelerate and although we do not place nearly as much reliance on this
report as the Manufacturing survey this is still a useful piece of data.

January's overall index reached 59.4, the highest reading since
August 2005 (around the time that the activity in the housing market
peaked). New Orders proved to be even stronger reaching 64.9, the highest
reading since January 2004 (this metric tends to peak earlier in a
recovery for obvious reasons) and this suggests that a significant number
of new projects and ventures are being commenced in the service sector.
This increase in activity does finally seem to be having a marked effect
on the Employment index, which rose to 54.5 in January.

As can be seen on the attached chart the Employment index last cycle continued
to move rapidly (but noisily) higher for several quarters after the New Order
index peaked and we would expect to see a similar outcome this time around. -
D-NAPMNMI_Index.gif -

The weekly Initial Jobless Claims report continues to be unusually
volatile with large seasonal adjustments and violent storms both adding to
the size of fluctuation. While this makes estimating the exact level of
Claims virtually impossible it does not disguise the substantial
improvement in this data that has taken place over the last couple of
months. This week's report saw headline Claims fall to 415K while the NSA
data fell to 459.7K (this is in line with historic spreads between the SA
and NSA data). This caused the 4 week ma to rise slightly to 430.5K as the
very low December 31st print fell out of the data. If one irons out the
recent distortions our guess is that Claims are running in the range of
410K to 420K at present, but would hope to see the key 400K level breached
later this quarter. We would stress that January's Claims data gives
little insight into tomorrow's more widely watched Non-Farm Payroll
release but do indicate a fairly brisk improvement in employment metrics
can be expected over the course of the coming months. - D-INJCJC4_Index.gif -

The January ADP Payroll data once more showed a greater improvement in
data than consensus estimates (140K) with total job gains measured at
187K. December's suspiciously high reading of 297K was revised down to a
still excellent 247K and together this takes the 6 month ma of readings up
to 111.83. This is roughly equivalent to the level recorded in January
2004 which was 2 months before the explosive March 2004 non-farm payroll
release that proved a turning point in the monetary policy conducted by
the Greenspan FRB.

A similar sort of upside employment shock strikes us as likely to occur with
the official BLS data sooner or later, particularly since the pace of repair is
so much quicker than in 2003/4, as can be seen by the "V" shaped chart of
the YoY Level (blue line lower chart). This does not necessarily mean that
it will be Friday's January Non-Farm Payroll report that supplies the
shock (readers may recall that the February 2004 report was much worse
than expected), but we would expect to see a fairly marked improvement in
the data over the course of the next 3-4 months.

Another interesting point to consider is the fact that the ADP data does not
support the commonly held view that small firms have been tardier than larger
concerns in starting to re-hire workers. Attached is a chart that compares the
employment levels at small (1 - 49 employees, 45.1% of sampled data),
medium (40-499 employees, 38.6% of sampled data) and large (>499 employees,
16.3% of sampled data) firms with the overall index (all data is rebased so
that 2001 = 100). If anything the ADP data suggests that it is larger firms
that have thus far been recalcitrant, which is particularly interesting since
they never rebuilt their payrolls after the 2000-2002 recession while small
firms would appear to have started to re-hire at a similar pace to the end of
the last recession. - D-ADP_CHNG_Index.gif - M-ADP_LEVL_Index.gif -

Today's ISM report allows us to update the relationship between this key
macroeconomic metric with the current stance of the FOMC. The attached
chart compares the level of the ISM index (red, LHS) to the 12 month RoC
in the FDTR. As can be seen during prior cycles, by the time the ISM
Manufacturing index breached 60 (today's reading was 60.8) the FRB had
already enacted a number of tightening moves. Indeed the 12 month RoC has
historically tended to peak close to the time that the ISM index reached
the current level. This time around the FRB is being much more
recalcitrant with raising rates, even though the starting level of 25 bp
is far lower than any prior cycle, presumably because very strong ISM data
has not yet translated into substantial employment gains.

The bond market would seem to have little fear of any change in the FRB's
stance. The 2 year note reacted by rising by 4 bp to 0.60% (the equivalent
of a yawn) while longer term yields edged up by approximately 6 bp.
Although we would agree that the ISM data in and of itself will have
little direct effect on the FOMC's public statements, what should not be
ignored is the excellent predictive quality that the ISM report has had
over other macro-economic inputs. By ignoring the signal from the ISM
report, the FRB and the bond market increase the risk of a faster
adjustment should employment and or housing data suddenly stat to show
signs of further improvement later in 2011. Although we see little
prospect of short term US interest rates returning to their 2007 peak for
several years we think the speed of an adjustment from the current 0.25%
in the FDTR to 1% and 2% may prove to be much quicker than the market
estimates of June 2012 and June 2013 respectively. - M-FDTR_Index.gif -

January saw another extremely strong ISM index which suggests that the
improvement in corporate guidance that has been such a notable factor in the
current earnings season is translating into greater activity in the
Manufacturing sector. The overall index hit 60.8, the best reading since May
2004 and perhaps crucially this time a significant increase in employment may
be occurring with the Employment sub-index (pink) hitting 61.7, the best
reading since May 1973 (note this does not mean anything like the same pace of
hiring as the earlier period, but it is an important improvement nonetheless).

New Orders (red) reached 67.8, the best reading since January 2004 which
suggests that inventory rebuild is being replaced by more "organic" demand
and this is supported by the fact that the Inventory sub-index (olive) only
reached 52.4. Production (blue) increased to 63.5, a strong number that helps
explain the marked improvement in the employment index. This is a very strong
report that once more suggests that even though consensus estimates of
manufacturing growth were raised substantially in recent months the actual
growth in activity has out-stripped consensus. - ismchartjan2011.gif

We continue to see a market negative divergence between EM Bank stocks and
the rest of the complex. As can be seen on the attached chart the MSCI EM
Bank index (MXEF0BK index) closed below the 400 level for the first time
since late September last night while the overall EM index remains almost
6% higher than it was at that time and 4% above its key support at its
November low (1075). This early breakdown of the financial sector is
somewhat reminiscent of what occurred in developed markets in 2007 when
most bank stocks peaked in the 1st quarter, the overall SPX peaked in
October (it is easy to forget that the energy sector did not peak until
July 2008).

With industrial and agricultural commodity prices remaining very firm the
resource sectors of emerging markets may remain reasonably well bid for the
foreseeable future, which would serve to disguise the degree of duress being
felt by the financial sector that is bearing the brunt of the effect of
monetary tightening and consequent rise in inter-bank lending rates.

This does not mean that we predict the same scale of problems for the
emerging market financial sector as in the US and Europe in 2008 (we would
use the experience of the US in the late 1980's to early 1990's as a more
realistic template for the "worst case" scenario) but we do see the
financial sector as a leading indicator of the entire emerging market
complex, just as it was to prove to be for the US and Europe 4 years ago.
Our view remains that exposure should be cut back towards emerging markets
overall and that the financial sector now represents an opportunity to play on
the short side of the ledger. - D-MXEF0BK_Index.gif -