Weekly Bull/Bear Recap: Sept.

23-27, 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 the U.S.: The American Chemistry Council announces that economic growth is set to continue until at least 2015 as per the organizations leading indicator, which hit its highest level since June 2008i. Housing may have hit a bump, but thats a far cry from a renewed downturn as the bears suggest. Momentum remains quite robust: o U.S. home prices as measured by the Case-Schiller Index rise for their 14th consecutive monthii at their fastest pace in 7 years on a YoY basis. Rising home values will help buoy consumer spendingiii as a positive wealth effect dominates consumer psyche. o Furthermore, New Home Sales bounce back in August, rising 7.9% MoM (12.6% YoY)iv, suggesting that housing demand remains resilient even in the face of higher interest rates. o Even better, what many think is the primary headwind for the housing market is already dissipating. Falling interest rates are having a positive effect on demand. Mortgage applications as per the Mortgage Bankers Association increase for the second week in a rowv. o Need more proof that the housing recovery has staying power? Check out lumber prices. The uptrend continues. Consumption is set to surprise to the upside in the months ahead for the following reasons: o The 4-week average of jobless claims has fallen to levels last seen in June 2007 (pre-recession). Claims have plummeted at a 27% annualized rate in the

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

Case%Shiller+Index+(Composite+20)+
220! 200! 180! 160! 140! 120! 100!
1/ 31 /0 1/ 0! 31 /0 1/ 1! 31 /0 1/ 2! 31 /0 1/ 3! 31 /0 1/ 4! 31 /0 1/ 5! 31 /0 1/ 6! 31 /0 1/ 7! 31 /0 1/ 8! 31 /0 1/ 9! 31 /1 1/ 0! 31 /1 1/ 1! 31 /1 1/ 2! 31 /1 3!
Source: Case-Shiller Chart: RCS Investments

Index!

YoY!Change!

!20.00!! !15.00!! !10.00!! !5.00!! !)!!!! !(5.00)! !(10.00)! !(15.00)! !(20.00)!

450$ 400$ 350$ 300$ 250$ 200$ 150$

Lumber'Prices'

1/ 9/ 09 5/ $ 9/ 09 9/ $ 9/ 09 1/ $ 9/ 10 5/ $ 9/ 10 9/ $ 9/ 10 1/ $ 9/ 11 5/ $ 9/ 11 9/ $ 9/ 11 1/ $ 9/ 12 5/ $ 9/ 12 9/ $ 9/ 12 1/ $ 9/ 13 5/ $ 9/ 13 9/ $ 9/ 13 $
Source: Bloomberg Chart: RCS Investments

 past 6 months. The chances of a worker being fired today are almost as low as they have ever been.vi This development is leading analysts to increase their estimates for payroll growth. Heres more, the Bureau of Labor Statistics announces in its preliminary annual benchmark revision that the economy actually created 345,000 more jobs than initially expectedvii. o Personal Income growth is picking up as per the Commerce Department, hitting its highest YoY growth rate of the year at 3.71%viii. o Falling gas prices are beginning to act as a tailwind, falling to $3.42, their lowest level since January.ix o Meanwhile, the Feds Flow of Funds report indicates that household net-worth has hit an alltime high. Furthermore upward revisions to past reports show that balance-sheets have recovered more than expected. Net worth at a new high, financial assets at a new high, real estate values recovering, debt declining: what's not to like? x o Finally, Lender Processing Services reports that the percentage of loans in foreclosure fell to a 4.5-year lowxi. Longer-term trends (such as production costs in China continuing to rise at a 15-20% clip) lead Harold Sirkin, senior partner at the Boston Consulting Group, to proclaim that the Manufacturing Renaissance in America will become a major theme in the years to comexii. In Europe: European Central Bank (ECB) chief Mario Draghi pledges more Long Term Refinancing Operationsxiii, indicating that continued monetary stimulus will be applied to ease economic contraction. The first LTRO in late Dec. 2011 provoked a recovery from the flash crash; the S&P 500 surged roughly 13% after the operation was implemented. In Italy, consumer confidence surges to 101.1 from 98.5 in Septemberxiv and has now increased by 17% over the past 4 months. Meanwhile that trend is emulated by ISTATs sister business confidence survey, which rose to 96.6 from 93.4, its best reading in 2 yearsxv. The worse is clearly over for Italy, a country the bears were particularly focused on in recent weeks.
!700.00!! !650.00!! !600.00!! !550.00!! !500.00!! !450.00!! !400.00!! !350.00!!
3/1/07! 7/1/07! 3/1/08! 7/1/08! 3/1/09! 7/1/09! 3/1/10! 7/1/10! 3/1/11! 7/1/11! 3/1/12! 7/1/12! 3/1/13! 11/1/07! 11/1/08! 11/1/09! 11/1/10! 11/1/11! 11/1/12! 7/1/13!

U.S.$Jobless$Claims$

!300.00!!

Source: Deparment of Labor

Chart: RCS Investments

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

 To begin the week, HSBC reported that Chinas manufacturing sector remained in growth mode, rising to a six-month high and signaling that a rebound in the worlds second largest economy has been gaining steamxvi. Bear Without notice it seems, the U.S. economy continues to display signs of weakening as uncertainty looms regarding a possible government shutdown as early as next weekxvii not to mention an increasing probability of a government default on Oct 17th xviii: o The slowdown in manufacturing persists. The Richmond Feds manufacturing index prints 0 (a stagnant reading) vs. expectations of 17; Markits Purchasing Manager Index (PMI) indicator underwhelms as wellxix; Durable Goods Orders (both core and headline readings) disappointxx. o The bulls postulate on how rising home prices will buoy consumer spending. Shouldnt consumer confidence rise as well? Thats not the case as per the Conference Boards confidence index, which hits a 4-month lowxxi. This result is further confirmed by a couple of other confidence indicators, the Gallup Pollxxii and University of Michigans sentiment surveyxxiii. Finally Wal-Mart, a bellwether for consumer spending sounds the alarmxxiv. o Taking a step back and analyzing the big picture, while job creation is occurring Julia Coronado, chief economist for North America at BNP Paribas, points out that the quality of these jobs is overwhelmingly of the part-time variety.

3.00% 2.00% 1.00% 0.00% !1.00% !2.00%

Core%Dur.%Gds%Orders%-%3M%Avg%

Source: U.S. Department of Commerce

o Finally, Richard Koo, Chief Economist for Nomura Research Institute and an authority on balanceDisclaimer: Please first consult your financial advisor for all important investment related decisions

9/1/09% 11/1/09% 1/1/10% 3/1/10% 5/1/10% 7/1/10% 9/1/10% 11/1/10% 1/1/11% 3/1/11% 5/1/11% 7/1/11% 9/1/11% 11/1/11% 1/1/12% 3/1/12% 5/1/12% 7/1/12% 9/1/12% 11/1/12% 1/1/13% 3/1/13% 5/1/13% 7/1/13%

!3.00%

Chart: RCS Investments

 sheet recessions (think Japans), notes that the Fed is now in the throes of a QE trap. The U.S. economy will be in a perennial state of weakness as stronger economic data will increase speculation of an end to tapering, leading to higher interest rates, which will cause renewed weakness and a shelving of taperingxxv. A vicious cycle is now in effect.xxvi A resounding win for Merkel translates simply to more of the same policy prescription, austerityxxvii. Furthermore, German Finance Minister Wolfgang Schubles claim that The world should rejoice at the positive economic signals the euro zone is sending almost continuously, is absolute poppycock. o The French manufacturing sector continues its 18month string of contraction with Markits PMI falling to 49.5. The countrys service indicator rises to 50.7. All in all, stagnation for the Eurozones second largest economy, a verdict further solidified by a lackluster INSEE Business Survey result of 97 from 99. Is there hope on the horizon? No! The beatings are set to continuexxviii. o In Italy, the bulls point to consumer and business confidence staging a remarkable rebound. Alas the hard data (what really matters) tells a distinctly different tale; retail sales for July fall 0.3% vs. expectations of a rise of 0.3%xxix. Taking a step back we also see that the fiscal picture of the country with the 3rd largest sovereign bond market in the world, behind Japan and the U.S., has darkened considerably since Berlusconis ouster in Nov. 2011xxx. o In Spain, retail sales plunge 4.5% vs. expectations of a 3.8% drop. This is now the indicators 38th consecutive negative reading. With austerity set to continue, a judicious analysis of the Eurozone economy and the regions political trends foretells continued brewingxxxi unrest as economic stagnation replaces years of contractionat best. o Meanwhile, a poor showing in Italian retail sales, coupled with renewed threats from Berlusconis Forza Italia Party of pulling the plug on Enrico Lettas governmentxxxii are marking a turning point in Italian 10-yr BTP yields. They are back on the rise.

2/1/08$

6/1/08$

2/1/09$

6/1/09$

2/1/10$

6/1/10$

2/1/11$

6/1/11$

2/1/12$

6/1/12$

2/1/13$

10/1/07$

10/1/08$

10/1/09$

10/1/10$

10/1/11$

Source: INE

Chart: RCS Investments

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

10/1/12$

6/1/13$

6$ 4$ 2$ 0$ !2$ !4$ !6$ !8$ !10$ !12$ !14$ !16$

Spain&Retail&Sales&

 While the name Edward Snowden has largely disappeared from quotidian speak, the effects of his rogue dissemination of National Security Agency secrets are deafening. Brazils Dilma Rousseff, president of the 2nd largest economy in the Western Hemisphere, denounces American spying at the UN General Assembly, calling it an offense to the nations sovereignty and totally unacceptable xxxiii. Insidious distrust is infecting global liberal institutions. i http://www.calculatedriskblog.com/2013/09/chemical-activity-barometer-for.html ii http://www.investing.com/news/economic-indicators/s-p-case-shiller-home-price-index-rises12.4-in-july-253040 iii http://marketrealist.com/2013/09/case-shiller-home-price-index-continues-march-upward/ iv http://www.washingtontimes.com/news/2013/sep/25/us-new-home-sales-jump-79-percentaugust/ v http://www.fool.com/investing/general/2013/09/25/mortgage-applications-head-higher-forsecond-week.aspx vi http://scottgrannis.blogspot.com/2013/09/the-private-sector-is-ready-to-go.html vii http://www.calculatedriskblog.com/2013/09/employment-preliminary-annualbenchmark.html viii http://www.latimes.com/business/money/la-fi-mo-consumer-spending-personal-incomeeconomy-20130927,0,3808811.story ix http://www.dailyfinance.com/2013/09/27/consumers-boost-spending-incomes-rise-august/ x http://scottgrannis.blogspot.com/2013/09/dramatic-improvement-in-household.html xi http://www.calculatedriskblog.com/2013/09/lps-mortgage-delinquency-rate-declined.html xii http://www.bloomberg.com/video/sirkin-coronado-on-u-s-labor-marketNfXXENuZTv~QOnzXgOFpjQ.html xiii http://www.ifamagazine.com/news/ecb-ready-for-more-ltros-says-draghi-283569 xiv http://www.bloomberg.com/news/2013-09-25/italy-consumer-confidence-rose-to-two-yearseptember-high.html xv http://www.bloomberg.com/news/2013-09-27/italy-business-confidence-rises-to-two-yearhigh-on-growth-hopes.html xvi http://www.bloomberg.com/news/2013-09-23/china-manufacturing-gauge-rises-to-highestlevel-in-six-months.html xvii http://thehill.com/blogs/floor-action/senate/325165-senate-approves-measure-to-keepgovernment-operating xviii http://tv.msnbc.com/2013/09/25/raise-debt-limit-before-october-17-or-risk-defaulttreasury-warns/ xix http://www.businessinsider.com/markit-us-flash-pmi-september-2013-9 xx http://www.reuters.com/article/2013/09/25/us-usa-economy-idUSBRE98M0KO20130925 xxi http://www.investing.com/news/economic-indicators/u.s.-cb-consumer-confidence-falls-to79.7-in-september-253047 xxii http://www.zerohedge.com/news/2013-09-25/us-economic-confidence-slumps-six-monthlow
Disclaimer: Please first consult your financial advisor for all important investment related decisions

 xxiii http://www.zerohedge.com/news/2013-09-27/consumer-sentiment-plunges-5-month-lowsbiggest-miss-2013 xxiv http://www.zerohedge.com/news/2013-09-25/wal-mart-nails-consumer-recovery-coffinshut xxv http://www.marketwatch.com/story/feds-evans-taper-may-be-delayed-until-early-20142013-09-27?link=MW_latest_news xxvi http://blogs.marketwatch.com/thetell/2013/09/26/richard-koo-says-vicious-cycle-takinghold-as-fed-faces-qe-trap/ xxvii http://www.nytimes.com/2013/09/24/world/europe/vote-for-merkel-seen-as-victory-forausterity.html?pagewanted=all&_r=0 xxviii http://www.cnbc.com/id/101061276 xxix http://www.rttnews.com/2194052/italy-july-retail-sales-decline-more-than-expected.aspx xxx http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=13411805 xxxi http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=13400332 xxxii http://globaleconomicanalysis.blogspot.com/2013/09/italy-on-verge-of-downgrade-tojunk.html xxxiii http://us.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=13411590

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