Weekly Bull/Bear Recap: Sept. 16-20, 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 Ø Risk markets receive two large unexpected tailwinds, propelling many bellwether indices to all-time highsi. First, Lawrence Summers, seen by investors as more hawkishii, removes his hat from contention as the next Fed chairmaniii, leaving Janet Yellen (more dovish) as the frontrunner for the positioniv. Second, current Fed chairman Ben Bernanke shocks markets by announcing no change to monetary policy instead of beginning the tapering process as expectedv. Both events imply that easy monetary policy will remain in place until the economic recovery gathers steam. The maxim stands, “Don’t fight the Fed.” o As Bespoke observes, “The market has gotten off to a rip-roaring start to September. With a month-to-date gain of 5.48%, this is the 7th best start to the month (through 14 trading days) for the S&P 500 since 1928.” vi Ø The U.S. economy is slated to pick up over the rest of the year. o The Conference Board’s Leading Index rises more than expected. “The latest reading points to more pep in the pace of economic activity in the near term”, said Ken Goldstein, an economist at the organizationvii. o The manufacturing sector in the U.S. is gaining strength, expanding by the most this year. This result confirms both a recent improvement in ISM indices in early September as well as a strong Philly Fed index result this weekviii. These data points spur confidence that the sector

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

120# 110# 100# 90# 80# 70# 60# 50#
2/1/08# 6/1/08#

S&P$500$and$Dow$Industrials$

2/1/09#

6/1/09#

2/1/11#

10/1/07#

10/1/08#

10/1/09#

10/1/10#

6/1/11#

10/1/11#

10/1/12#

2/1/10#

6/1/10#

2/1/12#

6/1/12#

2/1/13#

Source: Bloomberg; Indexed at 100 on 10/07

Chart: RCS Investments

!"#$%&'(#)*+("%,%-.")/.*0)'1"23%4(4%%
$"!!# ("$!# ("!!# '"$!# '"!!# &"$!# &"!!# %"$!# %"!!# !"$!# !"!!#
%)%)%&# ()%)%&# $)%)%&# +)%)%&# ,)%)%&# -)%)%&# %)%)%'# ()%)%'# $)%)%'# +)%)%'# &)%)%&# ')%)%&# *)%)%&# &)%)%'# ')%)%'# %&)%)%%# %!)%)%&# %%)%)%&# %&)%)%&# *)%)%'# ,)%)%'#

Source: Federal Reserve

Chart: RCS Investments

6/1/13#

40#

      will spark a pickup in growth over the second half of the year. Total U.S. industrial production rises 0.4%, led by a 5.2% jump in auto production. Overall the gains were broad basedix. o An improving economy is the reason for rising interest rates as per Scott Grannis at Calafia Beach Pundit. Among improvements in the economy are the low level of weekly unemployment claims, the strong rate of growth in vehicle sales, and ISM and Markit surveys indicating a strengthening service sector both in the U.S. and Europe.x Ø Speaking of Europe, the region experiences a decrease in political risk and continues its string of publishing better than expected economic data. o Berlusconi backs down from his threat to derail Italy’s coalition. Even he knows not to disrupt the healing process taking place throughout the Eurozone.xi o ZEW economic sentiment, gauging the 6-month outlook for the 17-nation Eurozone, surged from 44 to 58.6, smoking analyst’s projections of a rise to 46xii. § Stabilizing global demand and an improved outlook for the Eurozone are buoying confidence in Germany’s recovery as wellxiii. o In Spain Industrial Orders, a leading indicator of manufacturing activity, surprises to the upside, posting a year over year (YoY) gain of 1.8% in July vs. -8.1% the prior month and is better than the -3.3% expected by analystsxiv. o In the UK, the Bank of England raises its growth forecast after receiving better than expected economic figures from the manufacturing and business sectorsxv, strengthening the standing of the Conservative party vs. its opponent, the Labour partyxvi. Ø Get ready for some handsome gains in emerging market currencies and fixed-income paper according to Societe Generale’s Kit Juckes. “The next phase is that we will see huge inflows into EM assets as investors take advantage of better yields and less expensive currencies.”xvii  

80$ 60$ 40$ 20$ 0$ !20$ !40$
1/1/06$ 6/1/06$

ZEW$Eurozone$Exp.$Of$Eco$Growth$

4/1/07$

9/1/07$

2/1/08$

7/1/08$

5/1/09$

3/1/10$

8/1/10$

1/1/11$

6/1/11$

4/1/12$

9/1/12$

2/1/13$

12/1/08$

10/1/09$

Source: ZEW

11/1/06$

Chart: RCS Investments

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

11/1/11$

2  

7/1/13$

!60$

      Bear Ø The bullish ebullience is deafeningxviii due to the Fed not tapering vs. expectations of a taper. A prudent investor however will take a step back and see the forest for the trees. Here are a few thoughts to ponder: o What does the Fed’s inaction tell us about the true state of the economyxix (all the while main U.S. equity indices are at all-time highs)? o When will investors realize that QE has been a gargantuan failure with the now added enormous risk of executing an exit policyxx? Consider: § National gas prices notched their 1000th day above $3.00 this week for the first time in historyxxi. § The recovery has clearly benefitted the rich at the expense of Main Streetxxii. § Furthermore, despite one of Ben Bernanke’s primary reasons to undertake QE (to lower long-term interest rates thereby stimulating economic activity), interest rates have nearly doubled from their lowest point (1.39%) in mid-2012. o By 2015, the fed funds rate should be at 3% according to 3 officials. But another 3 believe the rate should be at 0.25-0.50%, with the other 13 somewhere in betweenxxiii. Is this disparity supposed to inspire confidence in that they know what they’re doing? (Source: Federal Reserve)  

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

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      Ø In Europe: o Inflation data out of the Eurozone offers a hue of strengthening deflationary forces. Eurozone CPI rises just 1.3% on a YoY basis from 1.6% in July, far lower than the ECB’s target of just under 2%xxiv. Meanwhile, nominal wages are contracting throughout the periphery, the result of choosing internal devaluation versus depreciation of currenciesxxv. o Car sales in August fall to an all-time lowxxvi. o Pavlos Fyssas, a 34-yr old activist rapper, is killed by a member of Greece’s Golden Dawn political party (the 3rd largest party in Greece at present), prompting Ekathimerini’s Nikos Xydakis’s claim that Greece has hit its societal Red linexxvii. This event may lead to renewed unrest in the country.xxviii o Catalonia pushes for independence from Spainxxix, potentially making the Iberian Peninsula the next flashpoint of the Eurozone crisis. Ø After extensive coverage of leading indicators on previous Weekly Bull/Bear Recaps, some coincident indicators of the housing market are starting to weakenxxx; among them, Building Permits and Housing Starts reports are worse than expectedxxxi. Meanwhile, higher borrowing costs are sapping consumer confidence as Bloomberg’s Consumer Comfort survey shows that Americans’ views on the economic outlook fall to the lowest in a yearxxxii.   Ø How plausible is the U.S./Russian agreement to confiscate all of Syria’s chemical weapons? “Syria’s promised pace would be ambitious even in a country without a civil war”, said Michael Kuhlman, chief scientist for national security at the Battelle Memorial Institute in Columbus, Ohioxxxiii. Furthermore, this week’s developments are already causing headaches among the involved partiesxxxiv.  

!"#$%&'()*+,%-$(.&/(0-.+-$(1"1(234((
010!234536! !#$%$$!! !'$%$$!! !($%$$!! !)!!!! !"($%$$&! !"'$%$$&! !"#$%$$&!
(*+*$,! -*+*$,! .*+*$,! (*+*+$! -*+*+$! .*+*+$! (*+*++! -*+*++! .*+*++! (*+*+(! -*+*+(! .*+*+(! (*+*+/! -*+*+/! ++*+*$,! ++*+*+$! ++*+*++! ++*+*+(! .*+*+/!

010!7859:36!

Source: Commerce Department

Chart: RCS Investments

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

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                                                                                                                      i http://www.businessinsider.com/global-markets-rally-september-19-2013-2013-9?utm ii http://www.investopedia.com/terms/h/hawk.asp iii http://rationalcapitalistspeculator.tumblr.com/post/61415699671/summers-drops-out-of-fedrace iv http://www.reuters.com/article/2013/09/17/us-usa-fed-idUSBRE98F11L20130917 v http://rationalcapitalistspeculator.tumblr.com/post/61608631347/via-in-surprise-fed-decidesnot-to-taper-the vi http://www.bespokeinvest.com/thinkbig/2013/9/20/september-strength.html vii http://www.upi.com/Business_News/2013/09/19/Leading-indicators-rose-in-August/UPI61741379606738/?spt=hs&or=bn viii http://www.dailyfinance.com/2013/09/19/philly-fed-factory-activity-index-hits-highmanufacturing/ ix http://www.cnbc.com/id/101036560 x http://scottgrannis.blogspot.com/2013/09/interest-rates-are-up-because-economy.html xi http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=13135083 xii http://news.xinhuanet.com/english/business/2013-09/17/c_132729044.htm xiii http://www.reuters.com/article/2013/09/17/us-germany-economy-zewidUSBRE98G0DC20130917 xiv http://www.rttnews.com/2190122/spanish-industrial-orders-rebound-in-july.aspx xv http://www.ft.com/intl/cms/s/0/322e8b00-2041-11e3-b8c600144feab7de.html#axzz2fMJ2YHD6 xvi http://www.reuters.com/article/2013/09/19/us-britain-poll-idUSBRE98I09820130919 xvii http://www.businessinsider.com/the-first-phrase-of-the-no-taper-rally-is-over--now-hereswhat-the-next-phase-will-be-2013-9?utm xviii http://www.marketwatch.com/story/the-what-me-worry-market-2013-0917?siteid=rss&rss=1 xix http://money.cnn.com/2013/09/18/news/economy/federal-reserve-taper/ xx http://globaleconomicanalysis.blogspot.com/2013/09/fed-bizarro-world-one-sided-risk.html xxi http://blogs.marketwatch.com/energy-ticker/2013/09/16/a-thousand-days-of-gas-above-3-agallon-aaa/ xxii http://economix.blogs.nytimes.com/2013/09/10/the-rich-get-richer-through-therecovery/?_r=1& xxiii http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20130619.pdf xxiv http://www.ibtimes.com/euro-zone-inflation-falls-significantly-lower-ecbs-target-mariodraghi-says-key-interest-rates-will xxv http://online.wsj.com/article/SB10001424127887323527004579078712030098376.html xxvi http://www.businessweek.com/news/2013-09-17/european-car-sales-resume-slide-inaugust-as-vw-peugeot-tumble?utm xxvii http://ekathimerini.com/4dcgi/_w_articles_wsite3_1_18/09/2013_519141 xxviii http://www.businessinsider.com/thousands-of-greeks-to-demonstrate-after-activist-isallegedly-stabbed-to-death-by-neo-nazi-2013-9 xxix http://rationalcapitalistspeculator.tumblr.com/post/61476784699/via-madrid-seeks-talkswith-catalonia-to-avoid
Disclaimer:    Please  first  consult  your  financial  advisor  for  all  important  investment  related  decisions  

 

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                                                                                                                                                                                                                                                                                                                                                                          xxx http://online.wsj.com/article/SB10001424127887323342404579077141054009338.html xxxi http://www.bloomberg.com/news/2013-09-18/builders-began-work-on-fewer-u-s-homesthan-projected-in-august.html xxxii http://www.bloomberg.com/news/2013-09-19/americans-views-on-u-s-economic-outlookdrop-to-one-year-low.html xxxiii http://www.bloomberg.com/news/2013-09-20/kentucky-nerve-gas-arms-show-destroyingweapons-not-easy.html xxxiv http://www.zerohedge.com/news/2013-09-20/syria-sends-inadequate-chemical-weaponsreport-us-russia-plan-indefinitely-postponed    

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

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