In what is turning into an interesting day for housing statistics, the release of
Census Bureau estimations of US Homeowner and Rental data supports the argument
we made earlier regarding investment capital being drawn into the existing home
market.

As can be seen on the attached charts, there has been a radical shift away from
home-owning and towards rental occupancy since the housing market peaked in
2006. Aggregate rental units bottomed in Q2 2004 at 32.9 mm units, but did not
start accelerating higher until Q1 2007 when they broke through 35mm units for
the first time. Almost 5 years later this figure has reached 38.7mm units and
the current 3 year rate of change is roughly equivalent to that seen in the
late 1980's when home ownership was substantially less popular than it is today.

As for home ownership, this has slipped from 76.5mm units in Q4 2006 to 75.3mm
units today. This means that the percentage of home owners has dropped from a
peak of 69.3% in June 2004 to 66% in Q4 2011, almost exactly where things stood
in late 1998. Although the mid 1980's and early 1990's saw sharply lower
home-ownership rates, the 30 year mortgage rate averaged 9.70% between 1985 and
1995 and was well into double digits for most of this decade.

We would therefore argue that the excess ownership of property that took place
in the early 2000's has now been fully corrected and that there has been a
spike in rental demand that has not been met by either single or multi-family
construction. It is therefore no surprise that rental markets are buoyant in
many metropolitan areas. - D-HOWNOWN_Index.gif -

This morning's publication of the Case Shiller Home Price index shows that this
gauge of US home prices remains negative with the index falling by -3.7% over
the last 12 months, a little more than estimates of a -3.3% decline. Although
we would prefer to see positive data, the overall state of the index indicates
that the US existing home market is bumping along the bottom as far as prices
are concerned, while activity (which is not shown by this gauge) seems to be
increasing appreciably.

One of the main causes for this uptick in transactions has been significantly
increased interest by professional investors in the single family home market.
Although the hassle of accumulating and renting a large number of individual
homes has traditionally made this an unattractive undertaking for those wishing
to build a business with large scale, the extraordinarily attractive rental
yields on offer in many regional markets means that this effort is well rewarded.
Rental yields on single family homes in many markets is over 10% per annum,
well above what can be achieved by purchasing multi-family properties let alone
the local bond market.

Furthermore the fact that a large overhang of property in foreclosure exists is
actually attractive to an institutional investor seeking to build up a large
portfolio, meaning that relatively large pools of capital are starting to be
drawn to this marketplace. We are therefore arguably transitioning from the
"distressed" to the "opportunistic" phase of the current housing cycle, making
it hard to imagine that significantly lower prices could arise in most markets.

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

Foreclosures Draw Private Equity as U.S. Sells Homes: Mortgages
2012-01-31 05:00:01.7 GMT


By John Gittelsohn
Jan. 31 (Bloomberg) -- Private equity firms are jumping
into distressed housing as the U.S. government plans to market
200,000 foreclosed homes as rentals to speed up the economic
recovery.
GTIS Partners will spend $1 billion by 2016 acquiring
single-family homes to manage as rentals, Thomas Shapiro, the
fund’s founder said. That followed announcements this month that
GI Partners, a Menlo Park private equity fund, expects to invest
$1 billion, and Los Angeles-based Oaktree Capital Management LP
will spend $450 million on similar housing.
“It’s a massive market,” Shapiro said in a telephone
interview from New York. “We’re starting to see this as a
billion dollar opportunity to buy rental housing.”
Creating more single-family rental properties is one of a
series of programs introduced by President Barack Obama’s
administration aimed at reviving the housing market. An
S&P/Case-Shiller index of property values in 20 cities has
dropped 32 percent from its peak in July 2006 and 12 percent of
homeowners with a mortgage are either delinquent or in
foreclosure. Last week, the administration revised its Home
Affordable Modification Program, increasing government
incentives for mortgage investors Fannie Mae and Freddie Mac
when they forgive debt on homes that lost value as a way of
preventing delinquent borrowers from losing their houses.
Increasing rentals may reduce lenders’ losses on foreclosed
and surrendered properties, according to a Federal Reserve study
Chairman Ben S. Bernanke sent to Congress on Jan. 4. Private
equity funds began focusing on these investments in September,
after the administration asked for proposals to sell the
government’s inventory of foreclosed homes -- about half of all
houses seized from delinquent borrowers.

Initial Transactions

The Federal Housing Finance Agency, which oversees Fannie
Mae and Freddie Mac, plans to complete initial transactions in
the first quarter of this year, offering some of the 180,000
foreclosed homes in their inventory to private operators as
rental properties, Corinne Russell, a spokeswoman, said in a
telephone interview.
The Federal Housing Administration, which also will
participate in the rental program, had 32,170 real-estate owned
homes seized from borrowers, also known as REOs, as of Dec. 31,
according to spokesman Lemar Wooley.
Possible aspects of the program include public-private
partnerships to share the risk and profits, “seller financing”
guaranteed by the government and rent-to-own opportunities for
tenants, according to a November memo.

‘Really Getting Involved’

“It marks the first time that institutional investors are
really getting involved, and in the process providing a higher
quality product to a tightening rental market,” Oliver Chang, a
Morgan Stanley analyst based in San Francisco, said in an e-mail
last week.
About 7.5 million homes with a current market value of $1
trillion will be liquidated through foreclosures or other
distressed sales by 2016, according to an Oct. 27 report by
Chang. That will add to the estimated 20 million single-family
homes already operated as rentals, which have yielded annual
returns averaging 8.1 percent since 1990, Chang’s report said.
Rentals can produce cash flows, known as a capitalization
rate or cap rate, that reduce losses more than reselling
foreclosed homes at a time of weak demand, the Federal Reserve
report said.
“Preliminary estimates suggest that about two-fifths of
Fannie Mae’s REO inventory would have a cap rate above 8 percent
-- sufficiently high to indicate renting the property might
deliver a better loss recovery than selling the property,” the
Fed paper said.

Gambling on Vegas

While there may be opportunities, investors should be
cautious about borrowing to invest in markets such as Las Vegas,
where a transient population and economy dependent on a single
industry like gaming, make it hard to see an exit strategy,
Kenneth Hackel, managing director heading securitized products
strategy for CRT Capital LLC, said in a telephone interview from
Stamford, Connecticut yesterday.
“For the kind of properties I looked at, and in most
cases, capital markets aren’t excited to finance the REO-to-
Rental marketplace at this stage,” said Hackel, who toured Las
Vegas homes on the market this month. “Once you establish a
track record and have some positive cash flow in place, then
perhaps you can get some interest in having leverage. But I
think as a first step, investors are best served by looking at
this on an unlevered basis.”
The U.S. homeownership rate was 66.3 percent for the
quarter ending Sept. 30, as low as 1998 levels and down from a
peak of 69.2 percent in December 2004, according to the U.S.
Census Bureau. The fourth quarter report comes out today.

Turning to Renting

“New households have a much higher propensity to be
renters,” Thomas Lawler, a former economist with Fannie Mae
who’s now an independent housing consultant in Leesburg,
Virginia. “And a lot of folks who are losing their homes to
foreclosure are now renters.”
Demand for rental housing helped boost shares of the 12-
member Bloomberg Apartment Real Estate Investment Trust index 13
percent over the past 12 months compared with a 2.1 percent gain
for the S&P 500 Index. It’s also attracting private equity funds
to single-family homes, which historically have been an
investment for small investors.
Cerberus Capital Management LP, Deutsche Bank AG, Fortress
Investment Group LLC, Starwood Capital Group LLC, TCW Group Inc.
and UBS AG are among the financial firms that submitted
responses to the federal request for information in September,
according to a list obtained by Bloomberg through a Freedom of
Information Act filing.

‘Easily’ Raise $1 Billion

“We believe we’ll easily be able to raise $1 billion this
year in total,” said Rick Sharga, executive vice president of
Carrington Mortgage Holdings LLC in Santa Ana, California, which
will manage the homes bought with Oaktree Capital’s money. “The
ultimate fund could be several times that.”
Carrington currently manages more than 3,000 rental homes
for Fannie Mae, mostly in California, Arizona, Nevada and
Florida, Sharga said.
Single-family home rentals can yield cash flows that are
300 basis points, or 3 percentage points, higher than
apartments, said Gregor Watson, principal of McKinley Capital
Partners LLC of Oakland, California, which has invested $100
million in the past two years, buying more than 400 foreclosed
homes in the San Francisco Bay Area and other western U.S.
cities. McKinley’s largest financial backer is Och-Ziff Capital
Management Group, a New York-based investment fund with $28.9
billion under management as of Nov. 1, Watson said. Jonathan
Gasthalter, an outside spokesman for Och-Ziff declined to
comment.

New Asset Class

“This will be a new institutional asset class in the next
24 months,” Watson said.
GTIS, which has $2 billion of assets, expects to hold its
homes about five years, waiting for housing prices to recover
before selling, Shapiro said. If housing prices don’t rebound,
GTIS can exit by forming a real estate investment trust with
shares sold to investors attracted by the rental income, similar
to REITS for multifamily, industrial or office properties, he
said.
“Single family dwarfs any of those asset classes,”
Shapiro said. “When you think about the number of homes that
are going to be rented and institutionally owned, they’re going
to become its own asset class.”
GTIS, which has invested $225 million in partnerships with
homebuilders such as Hovnanian Enterprises Inc. since 2010, will
hire in-house staff to manage the rental properties in each
area, Shapiro said. He declined to disclose his expectations for
returns on investment.

Buying in Bulk

“We think the important thing is on the operations and
management side as opposed to playing a numbers game, like I’m
buying for 30 cents on the dollar to a 12 percent yield,” he
said.
GTIS expects to buy homes in bulk from banks, Fannie Mae
and Freddie Mac, Shapiro said. Properties will also be bought
individually at courthouse auctions and through short sales,
when lenders agree to sell for less than the balance of the
mortgage, he said.
GTIS will start buying in cities in Nevada, Arizona and
California -- the states with the three highest foreclosure
rates, according to RealtyTrac Inc. -- and Florida, which
RealtyTrac ranked seventh in December, Shapiro said.
“The key is being able to efficiently manage these
homes,” he said. “That’s why we’re targeting select markets.
Our intention is to rent them, to hold them for long term.”

For Related News and Information:
Top Stories:TOP<GO>
Housing and construction data: HSST <GO>
World real estate indexes: RMEN <GO>
Stories on U.S. real estate: TNI US REL <GO>
Top Bloomberg real estate stories: TOPR <GO>

--Editors: Pierre Paulden, Rob Urban

To contact the reporter on this story:
John Gittelsohn in Los Angeles at +1-323-782-4257 or
[email protected]

To contact the editors responsible for this story:
Daniel Taub at +1-323-782-4229 or
[email protected];
Rob Urban at +1-212-617-5192 or
[email protected].
- M-SPCS20_Index.gif

Germany's seasonally adjusted unemployment rate fell to a new
post-reunification low of 6.7% in January, and has now fallen by 0.7% over the
last 12 months. As we have argued before, the concept of the Eurozone entering
a recession in late 2011 seems to be simplistic at best, and in the case of
Germany itself totally incorrect. If anything Germany's economic data is
entering the zone which indicates that a risk of overheating is present in at
least portions of the domestic economy.

Fueling this process is the dramatic drop in the local benchmark 10 year
interest rate from 3.23% in April 2011 to 1.82% today, which can only be seen
as stimulative. Meanwhile the willingness of the ECB to lend huge funds via the
LTRO against ABS securities can be expected to lead to significant demand for
instruments backed by reliable German payment streams. We would therefore be
alert for any signs that issuance is starting to accelerate in this marketplace
and follow the domestic housing market quite closely, since this should benefit
from the combination of very low unemployment and interest rates.

It should be remembered that the excesses of the Eurozone's peripheral nations
a decade ago was largely caused by a monetary policy that was kept very loose
to match the needs of a sluggish German and French economies. It is therefore
ironic that the exact revers may be taking place today, with the ECB locked
into a monetary policy that looks far looser than one that the Bundesbank would
follow for a standalone German economy. - D-GRUEPR_Index.gif -

Although Brazil's Industrial Production index increased by 0.9% in December
(the strongest monthly increase since May) this still missed expectations of
1.0% growth, while November's data was revised slightly lower to 0.2% from 0.3%.
This completes a fairly miserable year for this data series, which fell by
1.15% over the course of 2011, only the second drop since 2001. Although the
magnitude of the decline is small, it should be recognized that since December
2007 the index has only risen by a cumulative total of 2.8%. Thus we would
argue that Brazil's economic cycle has quietly made a transition away from one
fueled by rapid gains in local productive activity to one which is dominated by
consumption and financial activity. The danger remains that any further
slippage of industrial activity will place this portion of the economy into
recession territory, increasing the burden on the other sectors as motors of
Brazil's overall economy. - M-BZIPTLSA_Index.gif -

Although India's local equity market and currency have enjoyed excellent starts
to the year this is much more a reflection of investor flows than any
improvement in underlying data. Of particular concern to us is the state of the
local real estate market which is showing many of the troubling signs of a
transition from boom to bust.

Attached are two charts that display housing sales and inventory data for
India's major cities calculated by Liases Fora Real Estate Rating and Research.
As can be seen overall hosing sales have moderated significantly during the
second half of the year with Sales in Q4 hitting 68.28mm sf down from 101.33mm
sf in Q2. Sales are still up almost 16% on a YoY basis, but this partly
reflects a weak quarter reported in Q4 2010.

Much more troubling is the fact that stable sales has been accompanied by a
dramatic surge in inventory. This has grown from 409.8mm sf in December 2009 to
593.41mm sf in December 2011, an increase of 183.6mm sf or 44.8%. At the
current pace of sales it would take 8.69 quarters or 26 months to clear
inventory (by comparison US New and Existing Home Inventory both peaked at
around 12 months of sales in the last cycle).

Looking at the various local markets by far the worst data can be found in
Mumbai, which had until recently been the strongest local market. In Mumbai
sales have plummeted to 7.59mm sf down from peak sales of 20.28 mm sf in Q2
2009. Inventory has soared to 119.85mm sf or 15.79 quarters of sales
(approximately 44 months). Note that Inventory has stopped growing over the
last quarter which means that construction has essentially ground to a halt.
Local interest rates of up to 20% for real estate developers means that the
cost of maintaining inventory at current levels is prohibitive but it is hard
to believe that local developers and real estate investors will be able to
clear the current inventory without substantially lowering prices, which may
take the value of property well below its mortgage value. We would therefore
expect to see a substantial delinquency cycle in mortgage related credit over
the coming quarters.

Our assumption Mumbai is the leading market for India we would expect to see
other major cities follow suit (this was very much the experience in the US
where markets such as Florida and Nevada peaked a few quarters before the
overall market). Even if the RBI was to start cutting the local reverse repo
rate in the near future the dynamic of inventory outpacing sales would seem to
be an insurmountable issue without a distress cycle of some magnitude and
duration. - Q-.INDIASAL_Index.gif - Q-LIASMUSF_Index.gif -

Brazil's Private Sector Loan data continues to show robust credit growth while
default rates remain at their recent elevated levels. Total private sector loan
growth for December was $11.6 bln (1.03%), taking total credit growth for 2011
up to $154 bln or 15.62%. This is some $11 bln less than nominal credit growth
in 2010 (when annual credit growth was over 20%) and the annual pace is the 2nd
lowest since the 2003, at the start of the current economic cycle (2009 saw
credit growth of only 5.75%). In nominal terms this is still the 3rd largest
expansion of credit, which is interesting given the fact that most of Brazil's
economic data pointed to a downshift in activity (particularly in the consumer
sector) during the second half of the year. This suggests that Brazil's
economic activity is becoming increasingly reliant on credit creation.

In terms of the various types of credit being created Housing (red) remains a
standout, growing by 2.69% in December and 44.48% for the year. Housing credit
has now breached the $200 bln level for the first time, and is likely to exceed
Commercial credit outstanding (blue) for the first time during Q1 2012. Other
categories of credit grew by rates close to total credit formation.

Meanwhile loans 90+ days late remain at elevated levels. Consumer Defaults
(black) flat-lined at 7.3%, but this keeps the default rate in an obvious and
powerful uptrend. We still expect to see the 8.00% level approached later this
year. Business Defaults (blue) remain much lower at 3.9% but it should be noted
that this is still at the upper bounds of the last 10 years of data. A move
above 4% would signal that greater stress is being felt by the business sector.
The Total Default rate nudged downwards to 5.5%, but remains at a level that is
substantially elevated from the 4.5% reading of 12 months ago. It seems likely
that the July 2009 peak of 5.84% will be challenged in 2012. -
D-BRCDDEFT_Index.gif - D-BZLNPTOT_Index.gif -

The Census Bureau estimation of New Home Sales came in slightly below
expectations at 307K vs 321K consensus, a miss that is well within the error
tolerance of this data (the 90% confidence band is estimated by the Census
Bureau to be +/- 13.7%). This keeps official home sales data rooted to the
depression-range that has contained readings since mid-2010 and we are still
waiting for a clear recovery signal which would be given by sales pushing above
the trailing 36 month ma, which is now at 332K (blue dotted line).

It is notable that the Census Bureau fails to reflect the improvement seen in
both Homebuilder Sentiment and actual reported sales by public homebuilders. In
situations where public estimations clash with private sector data we always
side with the latter, although we would still hope and expect to see an
improvement in the official data during the key spring selling season. We are
unsurprised to see a moderate pullback in homebuilding equities following this
data's release since these had enjoyed a powerful run up in recent weeks, but
do not view this data as a cause for concern. It will be at least 60 days
before any clear evidence of recovery in the key spring selling season can be
revealed to be present or a mirage. Meanwhile estimated inventory fell to 157K,
a new all time low and equivalent to just over 6 months sales even at the
current depressed level of sales. - D-NHSLTOT_Index.gif -

A very good commentary from Bloomberg's Caroline Baum, which makes many of the
same points that we discussed in this morning's Weekly Speculator:

http://www.bloomberg.com/news/2012-01-26/-fool-in-the-shower-to-give-fed-a-good-
scalding-caroline-baum.html

Initial Jobless Claims rose to 377K this week, slightly above consensus of 370K
and 21K above last week's 356K level (revised up from 352K). Since the latter
was clearly a reaction to the surprisingly high 402K reading that had preceded
it, the spike higher in this week's data only represents a return to the current
trending level of claims. This is shown by the 4 week ma, which almost exactly
matches this week's print at 377.5K.

As can be seen on the attached chart, this week's reading is a little over 50K
below the level of claims seen a year ago, and we believe that this is a
realistic estimation of the pace of repair in the current cycle. If this is
maintained through the rest of the quarter we should approach the key 350K
level by Easter, prior to seasonal adjustments making further progress
significantly harder. Of course a surge in construction activity would
ameliorate this seasonal headwind but it is too early to be sure that this will
occur. In any case, even without a further improvement in the pace of repair,
Initial Claims look likely to be back to normal levels far in advance of the
"late 2014" time-frame that the FOMC now considers to be realistic for raising
the FDTR. - intitialclaimsjan262012.gif

The FOMC's January's statement (see link)
(http://www.federalreserve.gov/newsevents/press/monetary/20120125a.htm)
makes it clear that the FRB is unmoved by the recent strong improvement in US
economic data, and the much better tone of analysis contained in its own beige
book.

Although the FOMC statement notes "some further improvement in overall labor
conditions" it goes onto state that "growth in business investment has slowed".
The evidence for the latter statement is scanty to say the least, and in any
case employment is part of the FRB's "dual mandate" while business investment
no more than an uncertain means to an end. The statement also uses unchanged
language for housing ("remains depressed"), making no comment on the recent
strong data that suggests (at least to our eyes) that the cycle is turning.
Finally, the moderation in risk metrics in global financial markets goes without
comment, whereas the buildup of stress was commented on several times in the
angst ridden summer.

Most importantly the statement pushes out the "window of permanence" for the
current ultra-low interest rate environment. Prior statements stated that these
were "warranted.. at least through mid-2013" whereas today's statement uses "at
least through late 2014" as a guideline. No doubt the forecasts that will be
published later this afternoon will offer justification for this radical policy
of inaction, but this will not make the outcomes predicted any more likely to
occur than countless other FRB forecasts that have long been discarded in the
dustbin of history.

The marketplace has reasonably enough taken the FOMC at its word and has
immediately reduced the implied expectations of future LIBOR rates in the
Euro-dollar marketplace. As the attached chart shows, LIBOR is now expected to
be no higher than 68 bp in March 2014 and 92 bp in September 2014, down from 81
bp and 111 bp at last nights close. 6 months ago (before this new policy of
promising multi-year inaction), LIBOR was expected to be 191 bp and 243 bp in
March and September 2014 (see red line). This crushing of medium term rate hike
expectations can be best seen in the 5 year treasury note which reached a new
all time low yield of 0.76%.

Although it is hard to think of a single economic metric that has not performed
better over the last 6 months, the power of the FOMC's promise has seen
expectations of future interest rates pulled radically lower. We do not doubt
that the FOMC believes in its time-lines and certainly means to give the US
economy every chance of recovery. Nevertheless, we cannot help but think that
this new linguistic weapon has taken upon a life of its own. Today's extension
of the promised ultra-low rates lifetime only increases the chances that in the
end, the FOMC will be forced to recognize that local economic conditions changed
more rapidly than they had anticipated. In seeking to bestow calm they are
arguably placing a linguistic time bomb at the heart of the interest rate
complex. - liborrates.gif

US Pending Home Sales dipped slightly in December with the index falling -3.5%
to 96.6 (Jan 2001 = 100), compared to consensus expectations of a 1% drop. This
miss is well within the error of tolerance of this volatile series, particularly
in a month like December, in which activity typically shrinks sharply in the
non-seasonally adjusted (NSA) data. The latter actually shows that December
2011 was the strongest December since 2006, again suggesting that the US home
market has started to recover meaningfully in recent months.

Seasonally adjusted sales continue to show strong improvement, provided one uses
a sensible moving average to smooth the monthly bumps in data. We have
typically used the 6 month ma for this data (red line on chart) and this has
risen to 92.13. If one ignores the short term boost from housing tax credits in
2009/10, this is the strongest reading since October 2007. Clearly we will want
to see the recent improvement follow through into the key March - September
peak selling season. Better data in the dead of winter is welcome but not
nearly as important, in terms of the actual number of transactions being entered
into, as the same reading in a busier season. - D-USPHTOTL_Index.gif -
D-USPHNSA_Index.gif -

It is rarely good news when an asset class is assumed to be immune from market
forces. In the case of gold its status as "quasi-money" has led to the argument
that it has the characteristics of permanent safe haven. As our quote in this
article makes clear, gold from our perspective is simply another financial
asset whose price reflects the balance between buying and selling pressure.

Price gains combined with low volatility is typical of the accumulation phase
for a large, popular global trade, but this never removes the risk that a wave
of liquidation will follow in an increasingly disorderly scramble for the
exits. We are not making the case that gold faces this outcome in the immediate
future, but the elevation of the metal to the status of a "one way must own"
asset does indicate that its popularity has moved beyond healthy appreciation.

Attached is a link to this morning's interview with Michael Shaoul

http://www.bloomberg.com/video/84803040/

The RBI surprised most observers this morning by electing to reduce the reserve
requirement for Indian banks from 6.00% to 5.50%. As welcome as any move
towards looser monetary policy may be, this strikes us as a fairly irrelavant
move since the reserve requirement has not been a major tightening tool of the
RBI over the last 24 months. As the attached chart shows back in the 2007/8
tightening round both the reserve requirement and the reverse REPO rate peaked
at 9.00%, whereas this tightening cycle has seen far more emphasis placed on
the REPO rate (now 8.5%) than the reserve requirement.

Not surprisingly the strains in the Indian monetary system have been far more
about the cost of funds (real estate developers have been paying over 20% in
sme instances) than the total amount of funds being lent. This loosening move
by the RBI may have a modest effect on the latter but the cost of funds for
many borrowers is likely to remain high, and above the potential return on much
economic investment in many cases leading to strains on profit margins. The RBI
therefore remains well behind the curve of deteriorating conditions although we
recognize the symbolic importance of taking the first step to loosen monetary
policy.

As is invariably the case the local equity market has responded positively to
this change in direction by the RBI. The SENSEX index closed up 1.46% and has
now gained 9.97% since the start of 2012. It is a measure of the damage wrought
in 2011 that this gain still keeps the index very much in its longer term
downtrend, and we still expect this strong recovery rally to run its course and
be followed by another period of difficulty as the damage to the local economy
becomes more obvious to observers. - W-RBICRR_Index.gif - W-SENSEX_Index.gif -

This story marks the first high profile discussion of an issue that we have
written about on many occasions since the summer of 2009, when (in the case of
Continuing Claims) it first became obvious that seasonal adjustments were
behaving abnormally in much of the US economic data.

Clearly the "double double-dip" scares of spring and summer of 2010 and 2011
and subsequent seasonal recoveries of data in the fall and early winter have
finally woken Wall Street's economists up to this issue, although ironically
their timing may be awry in bringing this to their clients' attention. This is
because one possible explanation of this recent seasonal swing in data is the
absence of the construction industry from the current US recovery. The direct
and indirect boost from construction spending takes place in the spring and
summer and then turns into a seasonal drag in the fall and winter months.
Removing this activity therefore has the effect of making spring/summer data
appear weaker and fall/winter data stronger than it probably is. In most other
economic recoveries, construction spending has rebounded strongly far earlier in
the bounce back of general economic activity making this far less of a factor.

In any case it should be remembered that not all data is seasonally adjusted,
and that corporate profits most definitely are not. A sensible, balanced
interpretation of data (something Wall Street has never been very good at)
reveals that we have undergone a fairly radical recovery in large portions of
the US economy over the last 36 months, but that this is also arguably a new
economic cycle whose forces are not felt evenly across the board.

Recent data (even allowing for favorable seasonal effects) suggests that
multi-family construction is now growing quite rapidly and that the single
family home industry is finally stirring to life. If this follows through into
the key springtime season then perhaps less of a draw-down in US economic data
will take place in 2012 than in the prior 2 years, although we would still
expect the trickiest time for overall data to be from April to August.

The SNB's massive intervention to stop the CHF appreciating through €1.20 this
summer has thus far been a successful policy, at least if this is measured from
achieving the narrow aim of this measure. However, in placing the target of the
exchange rate at the center of policy, the SNB has ceded control of money supply
to the marketplace, particularly since the EUR has lost significant ground in
recent months.

As could be expected, accelerating money supply (M2 is growing by 9.79% YoY as
of December, up from under 5% in June) and low ultra-low interest rates appear
to be invigorating a local housing market that was already in decent shape
prior to this loosening of monetary conditions. Attached are the quarterly
House Price Indexes (Overall, Single Family and Condominium) that show that
Swiss house prices are now rising at 4.2% per annum. As can be seen, the Swiss
Housing Market has experienced a number of booms and busts over the last 40
years, with the mid 1970's and late 1980's both seeing YoY House Price
Increases (HPI) above 20%.

The latter episode peaked in early 1990 and was followed by a violent decline that
saw the overall index fall by almost 38% over the decade of the 1990's. The
overall index remains over 10% below its 1990 peak 22 years later. The level of
current prices and pace of increase do not yet approach the problematic levels
of this period but it is fair to say that the SNB has created ideal conditions
for local real estate speculation. With no change to the exchange intervention
likely to occur, we would expect to see some exciting times develop in the
months ahead. - D-SZREG_Index.gif -

The December Existing Home Sales report continued the string of housing data
that suggests that a meaningful recovery in activity is underway. Total Sales
reached 4.61mm units, marginally less than a bullish consensus of 4.65mm and up
from 4.39mm units last month. We do not think that the small miss is
statistically significant and December's sales rate is the best since August
2007 if one excludes the periods when the tax credit was in effect.

Single Family home sales rose to 4.11mm units also the best sales since August
2007 (ex tax credits). As the attached chart shows this takes sales through the
trailing 60 month ma for the first time since June 2006. The current rate of
sales is equivalent to that seen at the start of 1998, which was a dull home
market but hardly one in crisis. Looking ahead we would hope to see sales climb
back up above the 4.5mm level later in 2012.

The other very interesting data in the report was the inventory of Single
Family homes. Even allowing for the important seasonal effects (realtors
typically pull listings in the run up to the holiday season and then re-list
unsold homes in the early springtime) the drop of inventory by 250K homes to
2.08mm was a large one, and this is the lowest December inventory reading since
2003 and the lowest monthly reading since March 2005. Inventories fell by 510K
over the course of 2011 (as we explained last month a good portion of this took
place in the restatement of NAR data to correct prior errors). We obviously
expect to see a bounce in inventories in the new year but we do seem to have
made significant progress in absorbing the overhang of existing homes in recent
months.

As we have outlined in recent days pools of investment capital are now starting
to be attracted to the existing home market as a source of stable rental income.
This should help boost the absorption rates in a number of key markets in the
coming months. There is still clearly a long way to go but what may have
seemed an intractable process 12 or 24 months ago is now starting to look like
a crisis with a beginning, a middle and an end. - D-EHSLSL_Index.gif -
homesforsaledec11.gif

A very interesting deal that underlines the point that the mis-match between
home prices and rental yields in large parts of the US is starting to draw in
substantial investment capital. We expect this sort of activity to be a major
source of additional demand for existing homes over the coming months.

Brazil's central bank cut the benchmark SELIC rate to 10.50%, a move widely
expected by observers. Since the fear generated by last summer's brutal decline,
sentiment towards Brazil has gone through a process of repair that is typical
for the mid stage of a long bear market, and one of the sources of calm is the
belief that the central bank change of stance will automatically restore the
positive conditions that existed 18 months ago.

This all reminds us greatly of the state of mind present in the US in mid 2001,
when many thought that the economic problems were moderating and that the local
equity market offered good value. Back in the summer we used a chart of the SPX
index from 2000 - 2002 and overlayed the performance of the IBOV index from
early 2000 to the current date. As can be seen there is a significant
resemblance between the overall shape of the charts with powerful declines
being followed by periods of calm and short but sharp rallies.

We have now added the actions of the 2 central banks, with the FDTR for
2000-2002 (red) shown with the SELIC for 2010-2102 (blue). This shows how
monetary policy chases a market lower until eventually sufficiently loose
conditions are created to allow a recovery to take hold. Our assumption is that
Brazil is still in the middle of this long painful process no matter what the
short term performance of local financial assets suggests. - spxibov.gif

Even though the headline data shows total Housing Starts falling by 4.1% to
657K (compared to consensus of 680K) the December 2011 Housing Start and Permit
data is actually an encouraging set of data. The reason for the shortfall in
Starts was a sharp drop in Multi-Family Starts from 235K to 187K (-20.43%).
This data is always extremely volatile from month to month (see blue line on
chart), but Multi-Family starts are equally clearly in a strong recovery trend
from the 2009 low of 58K and the trailing 12 month ma (our favored guide) has
risen from 88K to 177K since June 2010 (300K - 350K would be normal conditions).

The great "black hole" in construction data has been that concerned with Single
Family Starts and this portion of the report was very encouraging. Single
Starts grew to 470K, up from 450K last month and the best month's data since
April 2010, when the homebuilder tax credit was boosting data. Single Family
Permit data (see separate chart), which we prefer to use as a guide, rose to
444K from 436K. This modest rise was sufficient to take the data through its
trailing 36 month ma (red line), which itself has started to turn. We have
argued for several years that this would represent a reliable signal that the
construction cycle was moving back into gear and based on the NAHB report and
this month's Housing Starts, it would seem that the signal has been delivered
right on time. - D-NHSPSTOT_Index.gif - D-NHSPA1_Index.gif -

As we had hoped, last week's spike in Initial Claims (revised higher to 402K
this morning) was made up for by an extremely low print of 352K this week which
suggests that holiday distortions were at work. This week's number was well
below consensus of 384K and was the lowest single week's data since April 2008.
The 4 week ma has tracked back down to 379K following this report and remains
on course to approach the key 350K level sometime around the end of the current
quarter. It is becoming increasingly clear that the employment cycle has turned
and we are seeing far less resistance to this fact in street commentary,
although most projections still strike us as too timid in terms of the
potential for recovery. - D-INJCJC4_Index.gif -

We are starting to see some significant change in street sentiment towards the
homebuilding sector. Chart attached for non-Bloomberg users.

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

Builder Views, Shares Bolster Case for Housing: Chart of the Day
2012-01-19 05:01:00.2 GMT

By David Wilson
Jan. 19 (Bloomberg) -- Homebuilders and stock investors
anticipating a rebound in U.S. housing are on the right track,
according to Michael T. Darda, chief economist and chief market
strategist at MKM Partners LLC.
As the CHART OF THE DAY illustrates, the National
Association of Home Builders/Wells Fargo index of housing
sentiment and a Standard & Poor’s index of publicly traded
builders have climbed this month.
The monthly confidence indicator, released yesterday, rose
four points in January to 25. The latest reading was the highest
since June 2007 and exceeded the average estimate of economists
surveyed by Bloomberg. S&P’s gauge advanced 4.5 percent today to
its best level in about a year.
Housing will rebound “in fits and starts,” Darda, who is
based in Stamford, Connecticut, wrote yesterday in a report. He
added that he’s optimistic because homes are affordable,
commercial banks are “gradually healing” and a growing number
of new households are forming.
Affordability rose to records last year, according to
indexes from the homebuilders and the National Association of
Realtors. Banks stopped tightening criteria for mortgage loans,
according to a Federal Reserve survey. The number of households
rose in 2010 at the fastest pace in four years, Census Bureau
figures showed.
The potential for future foreclosures, relatively tight
bank-lending standards and restraints on household income and
employment are likely to hamper any recovery, the report said.
Most builders see their sales prospects as poor, as January’s
sentiment reading was less than 50.

For Related News and Information:
Affordability: HOIXHOI% <Index> HOMECOMP <Index> HS <GO>
Lending standards: FRLSTSMP <Index> GP <GO>
Number of households: HOUINUM <Index> GP <GO>
Charts, graphs home page: CHART <GO>

--Editors: Joanna Ossinger, Jeff Sutherland

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:
Nick Baker at +1-212-617-5919 or
[email protected]

- bloombercodjan19.gif

Having stuck our neck out regarding the possibility of a recovery in the US New
Home market taking place we were relieved to see a stronger than expected NAHB
Homebuilder Sentiment report issued this morning. The overall index rose to 25,
which is the strongest reading since June 2007. To put this in perspective this
was the period between the first subprime lenders filing for bankruptcy and the
report of unexpectedly severe losses in 2 mortgage funds managed by Bear
Stearns, when most observers believed that Treasury Secretary Paulson was
correct in expecting the subprime problems to remain "contained". Total annual
new home sales at that time were just under 800K units, compared to 320K of
today, which is a reminder of how sentiment indexes respond to changes in
activity rather than levels of activity.

In pushing to 25 the NAHB survey is signaling that the mood of Homebuilders is
finally starting to respond to a pickup in activity. We still need to see this
follow through into the key spring selling season but there is now reason to
believe that the key turn in the New Home cycle has been made. We note that
improvement was registered in Foot Traffic, Present and Future Sales which
helps underline the sense of general improvement. Clearly all activity remains
extremely depressed in historic terms, as does sentiment itself but the sudden
surge in the price of home-building shares seems to be built on much firmer
foundations that the false dawns of 2010 and 2011. - nahbjan2012.gif -
nahballjan2012.gif

One of the strange things about 2011 was that a collapse in long term US
treasury yields was not accompanied by a surge in mortgage refinance
applications. As the attached chart (which we used extensively back in 2010)
shows, substantial drops in long term interest rates have historically caused
the MBA Refinance Index to spike above the 4000 level (our subjective
definition of a refinance boom) and to stay there for a number of weeks. Last
September saw the briefest of breaches but activity quickly fell back to below
3000.

This lack of refinance activity meant that existing homeowners were not by and
large benefiting from lower long term interest rates since many had already
taken advantage of the collapse in yields back in 2010. Ironically the flight
of US capital out of the Eurozone and back towards the US Treasury market
largely fixed this problem since it has resulted in another leg down for long
term Treasury yields and taken the standard GSE 30 year mortgage rate down to a
new all time low of 3.88% (using Bankrate.com data).

With the holiday season lull now behind us it is apparent that homeowners are
now starting to take advantage of yet another opportunity to lock in lower
rates. This means that the summers drop in yields is finally having a
stimulative effect on the consumer sector and that yet another transfer of
income is being made from savers to consumers.

On a technical note it also means that duration hedging from MBS holders is now
a factor in the day-to-day treasury market, which helps explain why long term
treasury yields have actually dipped while the broad equity market has tested
multi-month resistance. This dynamic should remain in place until the current
pool of eligible home-owners have completed their applications, which based on
prior spike should take a number of weeks to play out. - D-MBAVREFI_Index.gif -

Many times in our notes we discuss the intrinsic volatility of economic data
leading us to caution that a large divergence from consensus or prior readings
for a particular month should be treated with skepticism, unless it is part of a
well defined multi-month trend. In the case of China's "big picture" data our
concern is precisely the opposite, that the complete lack of surprise from
month to month creates a concern that the data has somehow been rendered
insensitive to changes in actual economic activity. For the record we are
prepared to believe that this is as true in upswings as it is in downswings, and that
the steady growth reported in the boom of 2009 and 2010 probably understated
actual activity, but with much now riding on the possibility that China's local
economy has hit the wall for the current cycle, we draw no comfort from the fact
that official data still portrays no substantial change in the pace of growth.

December's data showed Industrial Production growing by 12.8% (compared to
12.3% consensus and 12.4% last month), Fixed Asset Investment growing by
23.8% (24.1% consensus and 24.5% last month) and Retail Sales YTD by 17.1%
(compared to 17.0% and 17.0%). All of this fed into a GDP report of 8.9%,
which beat consensus of 8.7% and moderated slightly from the Q3 pace of
9.1%. This confirmation of the softest of landings was treated with some
relief by the local equity market (the SHASHR index was up 4.18% today)
and has given a firm bid to the entire emerging market complex.

Despite the feeling of well being, other recent data out of China is
somewhat less encouraging. This tends to come out of secondary sources and
deals with narrower segments of the economy but tend to be based on actual
economic transactions, which make them somewhat more credible than big
picture statistical estimates. Chinese New Car Sales for instance were
recently reported to have grown 4.61% in 2011 (see chart). Although this
is still positive growth and 2011 saw record sales, the pace of growth is
far more moderate than that seen in all prior years other than the 2008/9
collapse. Normally we would expect a decline of this magnitude of a key
large ticket consumable to have some effect on local Industrial Production
and Retail Sales, but in China's case no such reaction has occurred.

We also note that China's real estate statistics were released on Sunday
night and these also point to sharply reduced growth in sales. Total
Residential Sales measured by area grew by 3.9% on a YoY basis, the
slowest pace since February 2009. Total Residential Construction on the
other hand was still growing at an annual pace of 23.4% in December, a gap
to sales that will clearly lead to a rapid build up in unsold units unless
sales recover unexpectedly.

Our belief remains that conditions in China have deteriorated meaningfully
over the course of 2011 and that any loosening of monetary conditions by
the PBOC would be a belated reaction to this occurrence. We expect China
to be a source of disappointment for corporate earnings going forwards and
those looking to gauge the state of the Chinese economy will learn far
more from the reports of non-Chinese companies doing business in China
than official statistics. - M-CNVSPSGR_Index.gif - D-CHRESPRY_Index.gif -

Assuming that this morning's newswires are correct, today will be the day that
S&P's Sovereign Rating department makes the subjective decision to lower its
ratings on a number of Euro-sovereigns including France.

We have noted before that S&P seems to have a particularly "active" sovereign
credit department that seems to have bought in wholeheartedly to the role of
"ratings vigilante" in the developed world while equally aggressively upgrading
emerging market economies that arguably have been aided by unsustainable
cyclical forces.

Be that as it may, the upcoming downgrades reflect a reality that has been
fully priced into the market. We (and many others) spent the entire summer
pointing to the dislocation between French and German sovereign yields and it
is clear that the market's preference for the latter represents a degree of
risk distinction within the marketplace that is more important than the number
of letter "A"s in a rating. At the same time the nominal yield of France's debt
remains extremely low at approximately 3%, which indicates that France has a
ready market for its paper at yields which would have seemed remarkably scanty
in the pre-crisis days of 2007.

This is hardly an unmanageable situation and we doubt that any recent
purchasers of French debt will feel the need to dump holdings in response the
the S&P report. In fact we would argue that getting this matter out of the way
at the start of 2012 is probably to the market's overall benefit since it has
been something of a distraction for the last few weeks. European financial
stress has lessened significantly following the ECB's radical actions and we
expect this process to continue for a while longer. Eventually Europe's
governments will either take a more prudent fiscal path or face the wrath of
the markets, but this judgement will be delivered by the marketplace itself and
not by a risk committee of a major ratings agency. - W-GFRN10_Index.gif -

We were very interested to see that China's FX reserves fell by $20 bln last
quarter, marking the first quarterly fall since Q2 1998, when reserves totaled a
mere $140 bln and most observers feared that China would devalue the CNY
following the collapse of a number of Asian currencies in 1997.

The current quarter's drop comes under starkly different conditions. China's
reserves have ballooned to $3.181 trln (almost $300 bln larger than the FRB's
bloated balance sheet) and no-one is talking about an emergency CNY
devaluation, but perhaps this current decline will prove to be a much more
meaningful indicator than the blip of 14 years ago.

As the attached chart shows, the speed of FX reserve buildup has been slowing
sharply for a number of months. The 6 month nominal change in reserves
(histogram) peaked at $443 bln in February 2011 and fell to -$16 bln in
December (the first ever negative 6 month change). The annual change of
reserves was $333 bln, the lowest since 2006 in nominal terms and 2000 in
percentage terms. Even if reserves were to stabilize at the current level, this
would still mean that China would no longer be the recipient of the $400 bln+
inflows that its economy has become accustomed to.

We are aware of the fact that China had been placing increasing reserves into
non USD currencies and to the extent that they saw fit to pile into the EUR at
$1.45, they would have suffered mark to market losses in their reserve
calculation that would not be indicative of a change in flows. However, we do
not believe that these losses would account for the size of swing that has
taken place in recent months, and instead would point to a shrinking trade
balance and much lower FDI inflows as more important factors.

Whatever the precise cause the change in the pattern of reserve accumulation is
a very important influence on local monetary conditions. We continue to believe
that these have deteriorated much more substantially than most observers
realize, and that the PBOC is some distance behind the curve with its current
policy. Although we do expect them to ease reserve requirements in the near
term (a move largely priced into the market) we do not see this as reversing
the deterioration in external flows, or the severe pressures emanating from a
dramatically over-built housing sector. - chinafxreservesdec11.gif

One of the great difficulties in following an economic cycle is that data
can significantly surprise in both directions over the short to medium term.
Over the longer term the power of the cyclical move becomes obvious but market
participants, commentators and central bankers tend to have a very
difficult time discerning noise from signal on a real time basis.

This is why monetary policy tends to stay too tight and investors too patient
in a cycle that in retrospect is seen to have deteriorated markedly (the
opposite is true during a recovery, as the US is currently demonstrating). Two
good examples of what we expect to be "positive noise" were released this
morning in the form of Indian Industrial Production and Brazilian Retail Sales.

Indian Industrial Production data had collapsed sharply in recent months
reaching the surprisingly low figure of -5.1% YoY in October. This number
was revised higher to -4.7% this morning and supplemented by a much
stronger than expected November print of 5.9%. As welcome as this might
seem the attached chart demonstrates that all we are witnessing is a
whipsaw within a clearly deteriorating trend. The metric we use to declare
this is a 6 month ma of the YoY growth. Even after November's bounce this
has fallen to 3.28%, under half the growth rate seen in November 2010 and
the switchback between October and November simply serve to cancel each
other out.

Something similar can be seen in Brazil's retail data. Here overall sales
for November were estimated to be up 6.8% from November 2010,
significantly better than the 5.4% estimate. As welcome as this bounce may
be, it still keeps the trend of deteriorating sales growth intact. The
trailing 6 month ma has slipped from 10.59% in November 2010 to 6.12%
today. In any case December's sales data is by far the most important
month in the year and we would not assume any change in trend has occurred
prior to the release of this data. - M-INPIINDU_Index.gif -
M-BZRTRETA_Index.gif -

This morning saw some interesting conformation of our belief that portions of
the Eurozone economy remain in much better shape than consensus believes.
Attached is an article on the preliminary estimate of Germany's fiscal deficit,
which is now expected to be €17.3 bln, approximately one third of the original
target of €48.4 bln. Higher than expected revenue was an important component of
this better result, which underlines the extent to which the domestic German
economy has started to accelerate in recent months, even before the ECB
dramatically loosened monetary conditions in the 4th quarter.

With funding stress in Europe now starting to alleviate, we would expect the
stronger portions of the Euro-zone economy to start to react to this renewed
monetary stimulus. We are struck by the irony that the excesses of peripheral
Europe in the early years of this century was largely a result of the very
loose monetary conditions required by the large European economies (including
Germany). We could well witness the reverse occur over the coming months and we
are increasingly intrigued by the possibility of a domestic boom in certain
European economies.

After being spoiled by a string of positive surprises from US economic data,
this morning's releases reminded us that data typically swings around reality.
Weekly Initial Claims came in at 399K, up sharply from last week's 375K
(revised up from 372K) and consensus expectations of 375K. This has the effect
of pushing the 4 week ma up to 381.8K from 374K. Given the volatility of
employment data over the holiday period we are not surprised by this week's
report and would hope that future releases maintain the improvement in Claims
data that has been in evidence over the last few months.

This morning also saw disappointing Advance Retail Sales data released by the
Census Bureau. This showed overall sales rising by 0.1% versus consensus of
0.3%. This shortfall was compensated for by an upward revision of last month's
data to 0.4% from 0.2%. Retail Sales ex-Autos were weaker at -0.2% versus 0.3%
consensus and were only revised upwards by 0.1% last month. Given that this
data is simply a statistical estimation of national sales and that it always
lags the release of actual retail sales by major chains, we can never understand
why anyone pays too much attention to it. In any case, the headline MoM% change
is less useful than looking at the actual index of sales (see chart). This
shows that sales have been in a very steady uptrend for several quarters and
are growing by somewhere between 6% and 7% YoY. There is absolutely no evidence
that US consumers are becoming topped out, in fact with employment improving
and consumer credit now starting to be utilized it would be more rational to
expect an acceleration of sales from this point on. - D-INJCJC4_Index.gif -
retailsalesdec11.gif

The January Beige Book

see link: http://www.federalreserve.gov/fomc/beigebook/2012/20120111/default.htm

It is interesting to note how out of phase Mexico appears to be with the rest
of the emerging market complex, with the country living up to its reputation as
the "51st state" rather than being tied to conditions in Latin American
countries.

While this appeared to be a negative factor 24 months ago, Mexico now seems to
be benefiting from continued robust US growth and by detaching itself from the
Latin American boom of 2009/10 looks to be in much less danger of taking part
in the bust phase of the cycle.

Mexican car sales are a good example of this phenomenon since they much more
closely resemble the US new car market than that of Brazil or other emerging
markets. Mexico saw car sales plummet by almost 30K a month (37%) between 2008
and late 2009 but has since seen a robust recovery in sales. December's sales
were a very healthy 116K units, 10.76K greater than December 2010 (10.25%) and
sales are up 25.8% since December 2009. Sales are still approximately 30K below
their peak 2006 & 7 level, indicating that further improvement in 2012 can be
expected.

We will be very interested to see if dedicated EM and Latin American focused
mandates start to view Mexico as something of a safe haven in 2012. From an
economic standpoint simply being out of phase would appear to be a big
advantage versus their regional peers. - mexicocarsalesdec11.gif

An interesting article that outlines a fairly major shift in the perception of
US automobile sales versus emerging markets. We have tracked US and EM car
sales very closely over the last year and came to this conclusion several
months ago, but it is important that others are now starting to agree with our
assessment even though the possibility of EM demand actually shrinking does not
yet seem to be considered.

We are somewhat nonplused by the stories being released complaining that the
massive injection of liquidity into the Eurozone banking system has somehow
failed since it has merely resulted in the pooling of passive capital in the
deposit facilities of the ECB.

Any observer with a working memory should recall that this was precisely the
outcome of the FRB's injections both in 2008 and under QE2, over which period
the excess reserves of commercial banks parked at the FRB rose from almost
nothing to a peak of $1.68 trln this July. It is only since July that banks
have started to draw on these reserves for lending (they had fallen to 1.534
trn at the end of December 2011) but it is clear that the new lending cycle
started to gather momentum several months before the draw-down of reserves
commenced.

Given the chaotic conditions of Eurozone funding markets in early December it
was unrealistic to expect that an injection of liquidity would be used for
immediate lending, particularly since there is no evidence of significant pent
up demand. What it has done, however, is restore some calm into the most
extended portions of the funding complex. As the attached chart shows the 3
month €/$ swap rate has fallen sharply from a peak of 157 bp on November 29th
to 89bp this morning. 80 bp would appear to be the key level to cross, since it
was the break above 80 in late July which coincided with the broad collapse of
global financial markets.

USD 3 month Libor has also started to track downwards as we suggested it would
at the start of the year. This morning's fix came in at 57.65 bp, the lowest
rate since December 23rd. Libor is still very extended but the change in
direction is probably more important than the level.

With funding pressures ameliorating we have seen much less attention paid to
Euro sovereign yields which remain very extended. Participants have started to
view this as a "chronic" rather than an "acute" concern in the manner we had
hoped. We have attached 2 charts comparing the correlation of the SPX and the
DAX to the spread between France and Germany's 10 year yields. As can be seen
the very close relationship that was established at the height of "€urobsession" has
now broken down into a fairly meaningless one. While we would not rule out further
bouts of panic later in 2012 the introduction of the LTRO facility should be viewed
as a major turning point in this crisis, regardless of the short term actions of the
banks. - liboreurusdswap.gif - frangermdax.gif - frangermspx.gif

The last few months have seen one of the strongest runs for US economic data
versus expectations, allowing the Citigroup Economic Surprise Index (CESIUSD)
to reach 88.80, a level close to the record high of 97.50 seen in March 2011.
However, it should be noted that last March's stunning recovery actually came
from a better starting point than the current "data surge". The low point for
the CESIUSD in 2010 was -64.30, which was recorded on the eve of Chairman
Bernanke's Jackson Hole speech in late August, whereas in June 2011 the CESIUSD
fell to a remarkably low 117.20 (it should be noted that 2011 data itself was
still somewhat better than 2010 data, but it missed the more optimistic 2011
expectations by a greater margin).

Thus over the last 150 days the CESIUSD has risen by a remarkable 187 points,
which appears to be the largest 150 swing in the 9 year history of this index,
surpassing even the surprise generated sudden "V" shaped recovery of 2009. The
response of the US equity market to this situation has been tepid to say the
least. As of last night's close, the SPX index had fallen approximately 5 points
over the prior 150 days. This compares with a surge of over 200 points in March
2010 and almost 400 points in at the end of the 2009 positive data run. Of
course both those moves started off much lower SPX starting points, but the
reticence of investors to fully embrace the recovery in US data is still an
interesting phenomenon that we doubt is (and certainly hope is not) sustainable.

As for US data itself, we would expect this to remain strong through the
remainder of the positive seasonal adjustment period (which will arrive with
Easter). However, we would expect an aggressive upgrading of economic consensus
to take place in the coming weeks, which means that the CESIUSD should start to
decline fairly rapidly by the end of Q1. This really means that the window of
opportunity for an equity market breakout is very much front loaded into 2012
and therefore we are pleased to see the SPX index testing resistance at its
October 2011 high this morning. - cesiusdspx.gif

The attached article outlines the current views of a number of Wall street
strategists (including ourselves) and contrasts their thoughts at the time of
the draw-down last September with their outlook for 2012.

http://www.bloomberg.com/news/2012-01-10/bull-market-for-stocks-defying-most-str
ategists-seen-continuing-by-birinyi.html

Contrary to conventional wisdom, it is becoming abundantly clear that the US
consumer has started to "re-leverage" in a normal and healthy response to
better employment conditions and buoyant retail sales. November's outstanding
consumer credit data helped make this point by increasing by $20.37 bln (0.83%),
the highest nominal change and percentage since November 2001.

Since this number is historically very volatile and subject to revision we
would exercise some caution in interpreting today's data. Over $14.7 bln of the
gain is in non-revolving credit which is dominated by student loans and
automobile loans. The former is clearly less related to general consumption
than other forms of consumer credit. As can be seen on the attached chart, Non
Revolving credit is now at an all time high of $1,679 bln.

Revolving credit (which covers credit cards) grew by $5.60 bln (0.71%) to
$798.27 bln. This is still $174 bln (18%) less than the September 2008 peak of
$972.20, but this metric is now growing on a YoY basis for the first time since
February 2009. Overall credit has grown by 3.15% over the last 12 months, the
fastest pace of increase since October 2008. Interestingly, this puts credit
growth back where it was in the middle of 1993, a period which followed the
last overall contraction in outstanding credit, and was followed by several
years of above normal credit growth. - D-CCOSTOT_Index.gif

China's December Monetary data has been welcomed by market participants since
it suggests a moderate easing of local conditions took place at the end of the
year. However, we take little comfort from the data since a more considered
perspective shows that the largesse of 2009/10 has been replaced by a much more
austere set of conditions. Although the numbers themselves may look generous (a
13.6% M2 growth still tops major economies) it must be remembered that economic
activity is much more sensitive to changes on conditions than the conditions
themselves.

As the attached chart shows, at 13.6% M2 growth is 6.1% below the level of
December 2010 and 15% below the level of December 2009. Furthermore, narrow
money measured by M1 has seen its growth rate collapse to 7.9% from its peak of
almost 39% in January 2010. The modest bounce in December's data looks no more
convincing than the bounces of March and June 2011, both of which were followed
by further contraction.

As for Loan data, which has taken on a heightened importance for those
following the local property market, this too showed a modest improvement in
December rising to 623 bln CNY from 562 bln. This still only puts December in
line with the trailing 12 month ma of 610 bln and should not be confused with a
change in lending conditions. Total lending by China's banks has flat-lined at
just over 600 bln CNY over the last 15 months and we suspect this has become a
convenient number for the monetary authorities and banks to target.

However, since the uses for these funds have continued to increase
substantially over this period the effect is to tighten local lending
conditions. We attempt to illustrate this on the attached chart which compares
cumulative New Loans (light blue) with cumulative New Construction (pink).
Given the quality of China's data we would be wary that comparing "two myths
don't make a fact" but the chart does demonstrate the extent to which
Construction alone now overwhelms new credit issuance (note that there are many
other uses for loans competing with the construction industry for funds). In
fact the Construction data cuts off in November 2011 and so this chart actually
understates the extent to which credit issuance has been left behind. -
M-CNLNNEW_Index.gif - D-CNMS1YOY_Index.gif -

It is hard to think of a more bullish backdrop for US equities given that the
US equity market was flat in 2011 (although most active managers were not) than
fund withdrawals that approached the level of 2008, when the SPX index lost
-38.5%.

The opposite is true when looking at emerging markets. Foreign equity flows
remained positive in 2011, which given Europe's issues, must have been mostly
directed towards emerging market equities. This shows the difficulty US retail
investors (and their advisors) have had in ceasing to believe that this is the
best place to invest.

Note this data clashes with the more widely followed EPFR data that suggested
that EM flows were negative in 2011. The EPFR data is derived from a
proprietary estimation of actual inflows into emerging market indexes from all
global funds while the ICI simply measures flows into the actual funds
themselves. For various reasons (not least their simple availability on a
public website) we prefer to use ICI data. EM debt flows (not covered in this
article) were of course much stronger in 2011, at least for the first half of
the year, and were a very poor performer from the summer onwards.

Interview concentrates on US Employment, homebuilding and regional banks.

http://www.bloomberg.com/video/83811138/

We are finally starting to see official data released out of China that to some
degree confirms the anecdotal stories surrounding the state of the economy in
general and real estate market in particular.

Last night saw the release of the quarterly "Entrepreneur Confidence Index"
which is an official poll conducted by China's National Bureau of Statistics
seeking to ascertain the confidence of local "entrepreneurs" in various key
industries.

As can be seen on the attached chart the overall index (black line) has
contracted sharply over the last 12 months falling from 137 to 122, the lowest
reading since Q3 2009. However, unlike the sharp collapse in confidence in
2007/8 this deterioration has not been evenly spread across sectors but has
instead been concentrated in the real estate sector (red line). Here Confidence
has fallen to a record low level of 81.5 and has dropped 39 points over the
last 4 quarters (histogram). As might be expected this collapse (which will be
sensitive to sales of apartments and houses) is not yet fully reflected in
construction confidence (green) which is falling sharply but remains at a
relatively high 127.2.

We saw a similar process in the US housing market in 2005/6 when sales abruptly
collapses but builders kept on building for several quarters. This indicates
that the real economic blow from the substantial decline in real estate
transactions is yet to be fully felt in the wider Chinese economy (and by
extension industrial commodities). This is not a cause for relief, since it
appears to be only a matter of time before declining home sales start to slash
construction projects. We would expect this to spill over into wider industrial
activity (blue) where confidence has also fallen sharply but remains positive
at 117.8. - chinaentrq411.gif

Just as we try and stay calm when the Non Farm Payroll report throws us a
curve-ball (see last August when an initial report of zero jobs sparked panic
from Wall Street to the White House), so we try and take a single month's good
data in our stride as well.

December certainly qualifies as the latter with the headline print of 200K
comfortably beating expectations of 155K. November's data was revised 20K lower
to 100K, but this was made up for by an upward revision of 12K for October.
Private Sector Payrolls (which we watch more closely) rose to 212K beating
consensus of 178K (revisions were similar to overall data). As the attached
chart shows, this takes the trailing 12 month ma of Private Sector Payroll gains
up to 160K, which is equivalent to the level seen in early Q4 1993 and Q1 2005.
Given that this month's NFP payroll data is accompanied by very good Initial
Claims and ADP Payroll data, it seems fairly clear that the US employment cycle
is enjoying a very normal (at least for the last 20 years) recovery.

This still of course leaves unemployment at a historically high level, although
even here there is now clear evidence that the level is starting to drop quite
sharply. This month's data saw unemployment drop to 8.5%. We are well aware
that this number is a statistical fantasy, but as long as it is a consistent
one it still helps act as an indicator over the medium term. It is also the
number most readily accessed by the general media when discussing the state of
the economy and although 8.5% seemed terrible when we crossed this level on the
way up in March 2009, it feels somewhat better to be moving past it in the
opposite direction.

In sum we view this month's report as a helpful aide in turning global
sentiment towards a more positive consideration of the US economy, and by
extension equities that are sensitive to the local economy. -
M-NFP_PCH_Index.gif - D-USURTOT_Index.gif -

Further confirmation of a slowdown in Brazil's industrial economy came this
morning with Industrial Production growing by 0.3% in November versus consensus
of 0.5% and October's poor number revised lower to -0.7% from -0.6%. This takes
the YoY change down to -2.5%, its worst reading since October 2009 when the
Brazilian economy was rebounding strongly from the 2008 collapse. As the
attached chart shows, the trailing 12 month ma has now rolled over and we
believe that this data has entered a drawdown that should prove to be
meaningful, although given the volatility of the data, it will be punctuated by
individual months offering hope of a recovery.

Clearly part of the Industrial slowdown is caused by a slipping of demand for
local vehicles. December Manufacturers' data for vehicle sales was released
this morning and this showed sales at 348,415 units, a drop of 8.7% from
December 2010. December is traditionally the busiest month for sales and the
December 2010 level of sales was a very high target to match up to, but the 12
month ma has now declined for several months and it would appear that demand
has started to wane. This is interesting since both Brazilian employment and
credit growth data continues to be very strong. Any deterioration in either of
these metrics can be expected to place further pressure on car sales. -
M-BZVLTLVH_Index.gif - M-BZIPTLSA_Index.gif -

The ADP Employment report posted a significant upside surprise of +325K jobs
created in the private sector. Not only is this well above the consensus
estimate of 178K, but it is the largest single month's gain posted in the 10
year history of the index.

We are less surprised than many observers to see this sort of gain reported. We
have made the point time and again that employment data is very volatile on a
monthly basis and that seasonal adjustments seem to be greatly favoring data
between Labor Day and Easter and then reversing (we believe this is largely
caused by the absence of the construction industry in this recovery). Thus we
would take this single print with a pinch of salt and continue to use a longer
term 12 month ma. This rose to 162.5K, the strongest reading since the summer
of 2006 and also equivalent to the pace seen in Q4 2004.

We do however believe that US employment is getting significantly better (a
fact underlined by this morning's fall in Initial Claims to 372K, taking the 4
week ma down to 373.5K). This looks to be an increasingly normal employment
cycle with the pace of job creation at least as good as that seen in the early
1990's and mid 2000's. No doubt many will continue to concentrate on the much
larger drawdown in employment this time around that still needs to be addressed
(a fact made clear on the attached chart). However, economic data and corporate
profits are ultimately driven by CHANGES to rather than the LEVEL of
employment, and the power of recovery has been substantially underestimated by
most observers.

Of course we still have tomorrow's BLS data to contend with, and this may fail
to echo the very strong ADP data in this particular month. However, although
these two studies can differ significantly in any given month they do tend to
confirm each other's moves over the longer term. The combination of much better
Initial Claims and now ADP data suggests that the corner has been turned in the
employment cycle no matter what tomorrow's print turns out to be. -
M-ADP_CHNG_Index.gif

Attached is an interesting story that explains gold's sudden overnight plunge
on 9/26 to $1532 (circle on chart) that we assumed at the time was margin
selling. Our only surprise is that a relatively small account being liquidated
could have created such a large decline, but we would imagine that a large
number of stop loss orders in the overall market were triggered during the
liquidation. That level acted as support during last week's selling wave which
bottomed at $1,522. The completion of calendar based selling allowed gold to
recover in a predictable manner, but the metal still looks hard pressed to
establish itself above $1,600. We would expect to see a retest of last week's
low before too long.

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

Citigroup Sues Hedge Fund Manager in Singapore Over Gold Losses
2012-01-04 02:15:13.88 GMT


By Andrea Tan
Jan. 4 (Bloomberg) -- Citigroup Inc.’s Singapore unit sued
Hong Kong-based hedge fund manager Raghavendran Rajaraman,
seeking to recoup $1.03 million in trading losses the bank says
he incurred after gold fell from a record high in September.
Rajaraman had $19.2 million worth of gold in his account on
Sept. 23 which the bank sold, along with other collateral, on
Sept. 26 “in the face of a rapidly deteriorating market,”
leaving a $1 million shortfall, according to a Nov. 18 lawsuit
filed with the Singapore High Court. The first closed hearing is
scheduled for Jan. 27.
Gold plunged 11 percent in September, the most since
October 2008, after futures reached a record $1,923.70 an ounce
on Sept. 6. The bank liquidated Rajaraman’s account after it
reached a so-called forced sell level and got his authorization,
according to court papers. Gold for February delivery in New
York was at $1601.30 an ounce at 9:55 a.m. Singapore time.
Rajaraman works with hedge fund 3 Degrees Asset Management
and was a currency options trader with Citigroup in Singapore
until 2007, according to the lawsuit.
He hasn’t filed his defense and didn’t return three calls
to his mobile-phone. Richard Healy, Rajaraman’s lawyer at
Oldham, Li & Nie, declined to comment.
“We intend to pursue the case and it’s inappropriate for
us to comment further,” said Citigroup’s Singapore-based
spokesman Adam Abdur Rahman.

3 Degrees Plan

Rajaraman isn’t a 3 Degrees employee, Moe Ibrahim, founder
of the hedge fund, said in a phone interview. “There was a plan
to launch a fund together but it never came to fruition,”
Ibrahim said.
Citigroup breached its agreement by closing his account
without prior notice, according to an Oct. 7 letter from Oldham,
Li & Nie to the bank’s lawyers including William Ong at Allen &
Gledhill LLP.
“As a direct consequence of the bank’s breach,” Rajaraman
suffered a $1.7 million loss, representing his collateral,
according to the letter. He incurred a further $1.03 million
loss as the bank prematurely liquidated the account instead of
waiting for 24 hours after the account reached the force-sell
level, Rajaraman’s lawyers said in the letter.
The case is Citibank Singapore Ltd. v Raghavendran
Rajaraman S826/2011 in the Singapore High Court.


For Related News and Information:
Top Legal Stories: TLAW <GO>
Bloomberg legal resources: BLAW <GO>
Top commodities: CTOP <GO>
Top metal stories: METT <GO>

--Editors: Douglas Wong, Joe Schneider

To contact the reporter on this story:
Andrea Tan in Singapore at +65-6212-1325 or
[email protected]

To contact the editor responsible for this story:
Douglas Wong at +852-2977-6451 or
[email protected]

- D-GOLDS_Comdty.gif

Attached is a link to an interview held with Bloomberg Asia TV on the prospects
for major emerging markets in 2012.

http://www.bloomberg.com/video/83639792/

See link: http://www.federalreserve.gov/monetarypolicy/fomcminutes20111213.htm

The December FOMC minutes contained little to surprise anyone who had read the
statement issued at the time of the meeting. The minutes show an FOMC still
largely in "recovery denial" with the substantial improvement in US economic
data (particularly in employment and housing) provoking little reappraisal by
the committee.

This morning saw the release of the Census Bureau's estimation of annual
construction spending. As with most of the data coming out of the Bureau, it is
very erratic on a month to month basis, but over the course of the longer term
can prove to be a useful indication of where we are in a cycle.

The November report estimates an increase of 1.2% took place compared to
consensus of 0.5%. At the same time, the October estimate of 0.8% was revised
down to -0.2%. This somewhat contradictory set of data is resolved over the
longer term, as can be seen on the attached chart. It would appear that after
almost 5 years of steep decline, construction spending bottomed in 2011 and has
now just started to move back into a growth position (see blue histogram). The
cumulative draw-down in annual activity since 2006 has been somewhat more than
$400 bln and reached peak 12 month momentum in October 2009 at over -$180 bln.

This is particularly interesting, since construction spending is typically one
of the stronger contributors to early cycle growth. As can be seen in the prior
recovery, construction spending grew almost $100 bln per annum in 2003 and
accelerated from this point on. Although we doubt that this sort of pace will
be approached for the foreseeable future, we do now expect construction to start
to contribute to the overall economy to a meaningful degree and the swing from
significant drag to positive force should have a measurable impact on measures
of aggregate US economic activity. - constructionspendingnov11.gif

December's ISM report got the monthly data cycle off to a robust start with the
headline index reaching 53.9, ahead of the consensus reading of 53.5 and
November's 52.7. This is the strongest reading since June 2011, when fears of a
US slowdown started to take hold. Interestingly, the June print of 55.3 was
boosted by a very high Prices Paid reading of 68.0, which is not a particularly
positive way for the ISM to expand (since it indicates inflationary pressures
may be building). This sub-index was at 47.5 in December underlining the
quality of this month's reading.

This is also shown in the performance of the key New Order (red) index which at
57.6 is at the highest level since April 2011 and a Production reading (blue)
of 59.9, which is also the best reading since April. Moderate Inventory (olive)
draw-down remains in place at 47.1, suggesting that current activity is easily
sustainable. Finally, Employment (pink) posted a solid reading of 55.1, which
ties in with recent improved metrics in Initial Claims releases. Overall this is a
very decent set of data. - ismdec2011.gif

The notion that the Eurozone entered a recession in late 2011 (or will do so in
2012) seems to be fairly widely held at the current time and yet this viewpoint
is not readily supported by much of the current economic data. This disparity
is most striking in the case of the domestic German economy which remains in
better shape than at any time since re-unification took place two decades ago.

The publication of the December unemployment rate brought further confirmation
of this, with the percentage unemployed falling to a post reunification low of
6.8%. Adding to this intriguing situation is the fact that the sovereign crisis
has arguably been very stimulative for the German economy. The benchmark 10
year bund yield has fallen from 4.4% in April 2011 to 1.90% and this has taken
credit costs down for the industrial sector with it.

At the short end, the ECB's decision to cut rates to 1.00% has also been
beneficial to Germany. Furthermore an important ramification of the massive
uptake of the ECB's 3 year LTRO facility is that the ECB is now much less
likely to raise its short term rates for a considerable period of time. This is
because any decision to raise rates would force liquidation of any sovereign
credits bought with the aid of the ECB's largesse.

In an area the size of the Euro-zone it is always a mistake to generalize over
the state of the economy. The focus of recent months has very much been on
which portions of the continent may be at risk of falling apart. We would
suggest that given the powerful change of stance by the ECB this now needs to
be balanced by an appreciation of which parts of the continent will be able to
take advantage of much more stimulative monetary conditions. -
germanunemploymentrate.gif