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Weekly Bull/Bear Recap: October 14-18, 2013

Weekly Bull/Bear Recap: October 14-18, 2013

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Published by Rodrigo C. Serrano
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.
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.

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Published by: Rodrigo C. Serrano on Oct 18, 2013
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| Rodrigo C. Serrano, CFA| SIPA | Columbia UniversityMaster of InternationalAffairs ’14 Candidate| New York City, NY| 01-305-510-0181| rcs2164@columbia.edu
 
!5.00!!!6.00!!!7.00!!!8.00!!!9.00!!!10.00!!!11.00!!!12.00!!!13.00!!
     6      /     1      /     0     2!     1     2      /     1      /     0     2!     6      /     1      /     0     3!     1     2      /     1      /     0     3!     6      /     1      /     0     4!     1     2      /     1      /     0     4!     6      /     1      /     0     5!     1     2      /     1      /     0     5!     6      /     1      /     0     6!     1     2      /     1      /     0     6!     6      /     1      /     0     7!     1     2      /     1      /     0     7!     6      /     1      /     0     8!     1     2      /     1      /     0     8!     6      /     1      /     0     9!     1     2      /     1      /     0     9!     6      /     1      /     1     0!     1     2      /     1      /     1     0!     6      /     1      /     1     1!     1     2      /     1      /     1     1!     6      /     1      /     1     2!     1     2      /     1      /     1     2!     6      /     1      /     1     3!
China&GDP&YoY&
Chart: RCS InvestmentsSource: National Bureau of Statistics
 – 
(chart courtes of freestockcharts.com)
 
 Weekly Bull/Bear Recap: October 14-18, 2013
This objective report concisely summarizes important macroevents 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
Ø
 
Public officials pass extensions to bring an end to thegovernment shutdown and raise the debt ceiling. Near- term uncertainty has been lifted and markets haverallied in response. The S&P 500 has hit an all-timehigh, slicing through resistance of 1,725-1,730.Furthermore, given the political damage self-inflicted by the Republican Party, the next deadline will likely beaccompanied with a smooth passage of a beneficial long-term plan for the U.S. economy
i
.
Ø
 
Chinese YoY GDP growth of 7.8% matchesexpectations and remains above the official target of 7.5%. "We expect global demand momentum to pick upas the economic upturn in the U.S. and Europe takeshold and see this as key to our growth projection forChina," said
 
Louis Kuijs, chief China economist at RBS, who forecasts full-year growth of 7.7 percent for 2013,and 8.2 percent in 2014
ii
. The result is furtherconfirmed by a rise in profits of state-owned firms
iii
.
Ø
 
Europe is finally recovering, corroborated by a solid August rebound in industrial production. The MoM reading of +1.0% bested expectations of a 0.8% rise.“Today’s data confirm that the large industrial production decline recorded in July was just statisticalnoise, while the underlying trend remains upwards, assignaled by improving manufacturing surveys,” saidMarco Valli, chief Eurozone economist at UniCreditResearch
iv
.
Ø
 
In the U.K., jobless claims plunge the most since mid-1997, indicating a healing labor market
 v
. Meanwhile,retail sales grow at their fastest pace since 2008 on aQoQ basis, virtually guaranteeing that the island-
 
Disclaimer:Pleasefirstconsultyourfinancialadvisorforallimportantinvestmentrelateddecisions
2
!10$!5$0$5$10$15$20$25$30$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$10/1/13$
Philly&and&Empire&Index&New&Orders&
Philly$Index$Empire$Index$
Chart: RCS InvestmentsSource: Philly and New York Federal Reserve Banks
!2.0%!1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%4/30/06%4/30/07%4/30/08%4/30/09%4/30/10%4/30/11%4/30/12%4/30/13%
China&CPI&)&YoY&3M&Avg&
Chart: RCS Investments
 
Source: National Bureau of Statistics
!10$0$10$20$30$40$50$60$
      5       /      1       /      1      0$      7       /      1       /      1      0$      9       /      1       /      1      0$      1      1       /      1       /      1      0$      1       /      1       /      1      1$      3       /      1       /      1      1$      5       /      1       /      1      1$      7       /      1       /      1      1$      9       /      1       /      1      1$      1      1       /      1       /      1      1$      1       /      1       /      1      2$      3       /      1       /      1      2$      5       /      1       /      1      2$      7       /      1       /      1      2$      9       /      1       /      1      2$      1      1       /      1       /      1      2$      1       /      1       /      1      3$      3       /      1       /      1      3$      5       /      1       /      1      3$      7       /      1       /      1      3$      9       /      1       /      1      3$
China&Exports&YoY&3&Mth&Avg.&
Chart: RCS InvestmentsSource: National Bureau of Statistics
nation’s recovery accelerated from a 2
nd
quarter pace of 0.7%
 vi
.
Ø
 
Despite the political follies that consumed investorattention over the past week, economic activity quietlycontinues to expand. The Philly Fed manufacturingindex slips less than expected from a 2.5-year high to astill solid 19.8 in October (0 delineates expansion fromcontraction). Internals of the metric, such as neworders, remain robust
 vii
. While the Empiremanufacturing survey falls to 1.5 over the same month,new orders suggest the weakness is fleeting
 viii
.
Ø
 
Furthermore, the Fed’s Beige Book indicates that theeconomy continues to expand at a modest to moderate pace
ix
. Housing construction “continues to pick upsteam.” It seems that the government shutdown has notsignificantly affected business activity, a recurring butfutile theme recently brought up by the bears. WithRepublicans licking their wounds and likely to agree toa long-term deal with less conflict, increasing clarity in2014 will result in accelerating economic growth.Bear
Ø
 
 While the bulls may point to proof of a Chineserecovery in this week’s GDP numbers, the poor qualityof this growth (dependence on fixed-asset investment,housing, and dreadful fiscal dynamics) makes it a nearcertainty that it is unsustainable:
o
 
One of the country’s long-standing pillars of economic growth, exports, posts a surprisedecline in September of 0.3% on a YoY basis vs.expectations of a rise of 5.5%. Export growthhas plunged since topping out in mid-2010. Themalaise is evident by a sluggish start to theCanton Fair this past Tuesday
 x
.
o
 
Meanwhile, higher than expected consumer price inflation for September (actual 3.1% vs.2.8% expected and vs. 3.5% target rate set by the central bank– yellow line) marks a bottomfor the inflation cycle, making increasedmonetary stimulus a difficult proposition tocontinue supporting growth
 xi
.
o
 
On the fiscal side, ballooning debt, deep fiscaldeficits, and withering real M1 money supply
 
Disclaimer:Pleasefirstconsultyourfinancialadvisorforallimportantinvestmentrelateddecisions
3
!5.0%&0.0%&5.0%&10.0%&15.0%&20.0%&
      3      /      1      6      /      1      2&      4      /      1      6      /      1      2&      5      /      1      6      /      1      2&      6      /      1      6      /      1      2&      7      /      1      6      /      1      2&      8      /      1      6      /      1      2&      9      /      1      6      /      1      2&      1      0      /      1      6      /      1      2&      1      1      /      1      6      /      1      2&      1      2      /      1      6      /      1      2&      1      /      1      6      /      1      3&      2      /      1      6      /      1      3&      3      /      1      6      /      1      3&      4      /      1      6      /      1      3&      5      /      1      6      /      1      3&      6      /      1      6      /      1      3&      7      /      1      6      /      1      3&      8      /      1      6      /      1      3&      9      /      1      6      /      1      3&
MBA$Purchase$Applica0ons$Index$
YoY&1&Mth&Avg.&
Chart: RCS InvestmentsSource: Mortgage Bankers Association
growth are unmentioned by the mainstreammedia. “Fitch Ratings warns that the pace of  loan growth over the last five years takes Chinainto uncharted waters, with debt jumping from$9 trillion to $23 trillion, or 200pc of GDP. Theeconomic “efficiency” of debt has collapsed.Each extra yuan of debt now yields just 0.18 yuan of GDP growth.
 xii
Ø
 
The Fed’s reckless policy of QE-infinity is setting thestage for another housing bubble. Indeed Dallas FedPresident Richard Fisher
 xiii
has issued a warning thatgrowth of asset appreciation is unsustainable. In fact,his contention is confirmed by the resurgence of home-flipping
 xiv
 
 xv
. Furthermore, he states that monetary policy is not a panacea without fiscal support (likely notforthcoming). Worse is the fact that despite his warnings he will continue to support QE: “I don't like the course we're on... but my view will be to stay thecourse at the next meeting." In sum, the Fed has boxeditself in.
Ø
 
Speaking of a housing bubble, the YoY growth rate inmortgage purchase applications has just entered double-digit contraction territory.
Ø
 
In Europe:
o
 
Increased taxes are choking any sign of recoveryin Spain
 xvi
. The proof is in the industrial-orders pudding
 xvii
. Souring economic data will only lead to new records in delinquencies andimploding credit growth
 xviii
.
o
 
In Italy, Letta’s government is already looking atits next challenge after presenting its 2014 budget
 xix
. Protests have begun
 xx
and will dragon economic expansion, a developing headwind likely not accounted for in rosy growth projections.
Ø
 
Coincidence? Revelations by Edward Snowden onNSA spying leads to collapsing sales of IBM and otherhardware companies’ products to China
 xxi
.
-- (I have no position in IBM or other hardware companies)
.

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