Weekly Bull/Bear Recap: October 7-11, 2013

This objective report concisely summarizes important macro events over the past week. It is not geared to push an agenda. Impartiality is necessary to avoid costly psychological traps, which all investors are prone to, such as confirmation, conservatism, and endowment biases. Bull In U.S. news: Janet Yellen, a Brooklynitei, becomes the most powerful woman in the worldii. In the past and today, she firmly espouses continued monetary stimulus to aid the recoveryiii. The aphorism Dont fight the Fed is true now more than ever. Furthermore and as expected, politicians have begun to move forward in negotiations (the Republicans have no choiceiv v) on resolving the deficit and raising the debt ceiling. This resulted yesterday in the 2nd best daily performance of the year for the S&P 500. Ultimately politicians know that they cannot let a default occur. Meanwhile, the American Association of Railroads intermodal traffic report shows absolutely no sign of an economy thats slowing, let alone going into recession. vi

| Rodrigo C. Serrano, CFA | SIPA | Columbia University Master of International Affairs 14 Candidate | New York City, NY | 01-305-510-0181 | rcs2164@columbia.edu

AAR#Intermodal#Trac#
Intermodal#YoY# 9# 7# 5# 3# 1# !1# !3# !5#
2/ 18 /1 4/ 1# 18 /1 6/ 1# 18 /1 8/ 1# 18 / 10 11# /1 8/ 12 11# /1 8/ 1 2/ 1# 18 /1 4/ 2# 18 /1 6/ 2# 18 /1 8/ 2# 18 10 /12# /1 8/ 12 12# /1 8/ 1 2/ 2# 18 /1 4/ 3# 18 /1 6/ 3# 18 /1 8/ 3# 18 /1 3#
Source: American Association of Railroads Chart: RCS Investments

12#per.#Mov.#Avg.#(Intermodal#YoY)#

 Households are becoming more comfortable with the use of credit. Consumers are more willing to spend, but theyre more cautious about ensuring they have sufficient income, said Gregory Daco, senior U.S. economist at Oxford Economics USA in New Yorkvii.

In Asia: Yi Gang, Deputy Governor of Chinas central bank, appeases the bulls with his assertion that the country will surpass the 7.5% official target. He also states that economic growth would maintain near 7% for the foreseeable future.viii Japanese Core Machinery Orders, a leading indicator of capital investment, rose a solid 5.4% in August according to the cabinet office. This result prompted the government to positively amend its assessment of economic performanceix. Furthermore, household confidence remains on an upward trendx. In European News: German industrial production rebounded in August amid strong auto demand. The upward trend of production in the manufacturing industry continues, said the economy ministry in a brief statement. The weakness of the winter season is over.xi At Harvard University, European Central Banks Mario Draghi thumbs his nosexii at Euro critics. "In the dark days of the crisis, many commentators on this side of the Atlantic looked at the euro area and were convinced that it would fail. They were wrongthey had underestimated the depth of Europeans' commitment to the euro." xiii Furthermore, he reinforces the ECBs willingness to cut rates should market volatility returnxiv. This is in addition to the promise of additional LTROs. Dont fight theECB. While the Syrian civil war continues, international tensions have come down remarkably due a relatively smooth commencement in the destruction of the governments chemical weapons cachexv. This has led to tumbling oil prices. In turn, falling gas prices will act as a growing tailwind for the U.S. consumer. --------------------------------------------------------------------

48# 46# 44# 42# 40# 38# 36# 34# 32# 30#

Japan%Household%Condence%

Source: Economic & Social Research Institute

10/1/12$

11/1/12$

12/1/12$

4/ 1/ 11 6/ # 1/ 11 8/ # 1/ 1 10 1# /1 /1 12 1# /1 /1 1 2/ # 1/ 12 4/ # 1/ 12 6/ # 1/ 12 8/ # 1/ 1 10 2# /1 /1 12 2# /1 /1 2 2/ # 1/ 13 4/ # 1/ 13 6/ # 1/ 13 8/ # 1/ 13 #
Chart: RCS Investments

4$ 3.9$ 3.8$ 3.7$ 3.6$ 3.5$ 3.4$ 3.3$

Gas$Prices$

Source: American Automobile Assocation

Chart: RCS Investments

Disclaimer: Please first consult your financial advisor for all important investment related decisions

10/1/13$

3/1/12$

4/1/12$

5/1/12$

6/1/12$

7/1/12$

8/1/12$

9/1/12$

1/1/13$

2/1/13$

3/1/13$

4/1/13$

5/1/13$

6/1/13$

7/1/13$

8/1/13$

9/1/13$

3.2$

 Bear The government shutdownxvi is beginning to critically affect the tepid U.S. recovery. To begin, investors are now in the second week of flying blind as the release of a significant amount of economic data has been delayed. Important indicators not reported this week include: retail sales, producer and consumer price indices, the JOLT report, export price indices, and the trade deficit. Last week investors were deprived of the all-important payrolls report and August factory ordersxvii. Jobless claims skyrocket by 66K from 308K to 374K, their highest level in more than 6 months. The 4-week average ascends to 320K from 305Kxviii. Widely ignored, signs of a faltering consumer are seen in retailers sales reports for Septemberxix (Gaps sales disappoint as wellxx) as well as confidence indicators. University of Michigans consumer sentiment survey falls to a 9-month lowxxi and mirrors the trend in Gallup Polls Economic Confidence Indexxxii.

400# 390# 380# 370# 360# 350# 340# 330# 320# 310# 300#
1/ 1/ 13 # 2/ 1/ 13 # 3/ 1/ 13 #

Jobless'Claims''

Source: Deparment of Labor

Chart: RCS Investments

In Asia: Chinas recovery may already be showing signs of stumbling. While still showing growth, HSBCs service PMI for September prints weaker than expectedxxiii. Furthermore, sentiment of future business conditions is at its second weakest level in series history. Japan reports yet another weak current account (CA) figure. For three decades the country ran solid CA
Disclaimer: Please first consult your financial advisor for all important investment related decisions

9/ 1/ 13 # 10 /1 /1 3#

4/ 1/ 13 #

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 surpluses until the Fukushima nuclear disaster in 2011 forced the country to begin importing most of its energy. Continued mishaps in the cleanup of the disaster areaxxiv are sure to keep public opinion opposed to nuclear fuelxxv. This will lead to consistent weak CA readings. Furthermore, Mr. Abes plan of weakening the Yen translates to higher import costs, adding upward pressure to nominal import values. These developments signal a deterioration in external and fiscal dynamics of the most debt-laden country in the worldxxvi. Japan is a ticking time bomb. Meanwhile In Europe: Various August industrial production reports throw cold water on the recovery thesis: o Spains INE reports that its indicator fell back into negative territory with a -4.0% YoY result. Furthermore Spanish think tank CIS reports that nearly a third of Spaniards believe the economy will actually worsen over the coming year, contradicting rosy government forecastsxxvii. o In France, INSEE reports its measure rose a paltry 0.2% MoM, less than the +0.6% expected by analysts. While all indications were pointing to an upward turn in the business cycle, this latest data showed that French manufacturing is still on a falling trend, despite structural reforms.xxviii o Italys respective index, on a YoY basis, slumped 4.6% according to ISTAT.xxix The result was worse than expected. This indicator has been negative for 1 month shy of two years. In Germany, new industrial orders, a leading indicator, contracted in August for the 2nd consecutive month.xxx In Greece, more of the same. Over 50% of the countrys youth remains out of workxxxi, the perfect incubator for extremist political partiesxxxii and civil unrest. Job and wage cuts are set to continue.xxxiii

Italy&Industrial&Produc0on&1&YoY&
10$ 5$ 0$ !5$ !10$ !15$
1/1/06$ 5/1/06$ 9/1/06$ 1/1/07$ 5/1/07$ 9/1/07$ 1/1/08$ 5/1/08$ 9/1/08$ 1/1/09$ 5/1/09$ 9/1/09$ 1/1/10$ 5/1/10$ 9/1/10$ 1/1/11$ 5/1/11$ 9/1/11$ 1/1/12$ 5/1/12$ 9/1/12$ 1/1/13$ 5/1/13$

!20$

Source: ISTAT

Chart: RCS Investments

Disclaimer: Please first consult your financial advisor for all important investment related decisions

http://en.wikipedia.org/wiki/Janet_Yellen http://www.washingtonpost.com/business/economy/for-federal-reserve-nominee-janet-yellin-trademarkpatience/2013/10/09/7e545a90-30fa-11e3-9c68-1cf643210300_story.html iii http://www.csmonitor.com/Business/2013/1009/Janet-Yellen-Where-she-stands-on-five-key-economic-policyissues/Tapering iv http://thehill.com/homenews/administration/327935-white-house-sees-gop-on-ropes v http://thehill.com/blogs/ballot-box/presidential-races/328151-as-cruz-hews-to-hard-line-other-2016-contendersgo-mute-on-shutdown vi https://www.aar.org/newsandevents/Freight-Rail-Traffic/Documents/2013-10-10-railtraffic.pdf vii http://www.bloomberg.com/news/2013-10-07/consumer-credit-in-u-s-rises-13-6-billion-on-auto-purchases.html viii http://www.marketwatch.com/story/china-2013-gdp-growth-to-exceed-75-central-bank-2013-1010?dist=beforebell ix http://www.scmp.com/business/economy/article/1328820/japan-signals-durable-recovery-government-pursuesabenomics x http://www.investing.com/news/economic-indicators/japanese-household-confidence-rises-more-than-expected253697 xi http://www.businessspectator.com.au/news/2013/10/10/european-crisis/german-industrial-output-rebounds xii http://idioms.thefreedictionary.com/thumb+nose+at xiii http://www.ibtimes.co.uk/articles/512846/20131010/mario-draghi-european-monetary-union-harvardkennedy.htm xiv http://www.rttnews.com/2201367/ecb-s-draghi-guidance-allows-further-rate-cuts-if-market-volatilityreturns.aspx?type=gleco xv http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=13843072 xvi http://www.zerohedge.com/news/2013-10-08/shutdown-now-6th-longest-history-longer-average-all-others xvii http://www.pewresearch.org/fact-tank/2013/10/02/federal-government-shutdown-the-data-casualties/ xviii http://www.zerohedge.com/news/2013-10-10/jobless-claims-go-ballistic-government-shutdown-computerglitch-blamed xix http://blogs.marketwatch.com/behindthestorefront/2013/10/10/ugly-september-sales-raise-holiday-seasonstakes-for-retailers/ xx http://blogs.marketwatch.com/behindthestorefront/2013/10/11/gaps-surprise-sales-drop-adds-to-industryholiday-worry/?mod=MW_story_latest_news xxi http://www.reuters.com/article/2013/10/11/us-usa-economy-sentiment-idUSBRE99A0GC20131011 xxii http://www.gallup.com/poll/165287/weekly-drop-economic-confidence-largest-2008.aspx xxiii http://www.reuters.com/article/2013/10/08/us-china-economy-pmi-idUSBRE99702120131008 xxiv http://rt.com/news/fukushima-radiation-japan-nuclear-974/ xxv http://www.nytimes.com/2013/10/03/world/asia/former-prime-minister-declares-opposition-to-nuclear-powerin-japan.html?_r=0 xxvi http://www.lse.co.uk/macroeconomicNews.asp?code=pwo91nmr&headline=UPDATE_1Sharp_fall_in_Japan s_current_account_surplus_puts_focus_back_on_debt_pile xxvii http://www.euroexchangeratenews.com/euro-exchange-rate-news-spain-sees-industrial-output-decline-4year-on-year-confidence-falls/5217 xxviii http://www.france24.com/en/20131010-french-industrial-output-rises-less-expected xxix http://www.bloomberg.com/news/2013-10-10/italy-industrial-output-unexpectedly-falls-as-recessionlingers.html xxx http://www.rttnews.com/2199506/german-factory-orders-fall-unexpectedly-in-august.aspx xxxi http://www.businessspectator.com.au/news/2013/10/11/european-crisis/greek-unemployment-climbs xxxii http://www.ft.com/intl/cms/s/0/e5046b8c-3261-11e3-b3a7-00144feab7de.html#axzz2hSCpv5MB xxxiii http://rt.com/business/greece-uneployment-july2013-record-985/
ii

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