| Rodrigo C.

Serrano, CFA
| SIPA | Columbia University
Master of International
Affairs 14 Candidate

| New York City, NY
| 01-305-510-0181
| rcs2164@columbia.edu

> If you look at traditional
valuations measuresyou would
not see stock prices in territory
that suggests bubble-like
conditions. Dr. Janet Yellen

Weekly Bull/Bear Recap: Nov. 18-22, 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 anchoring as well as
confirmation, conservatism, and endowment biases.

Bull

>) In U.S. news

On the Fed front:
! The Senate Banking Committee has endorsed Dr.
Janet Yellen by a 14-8 vote
i
. The final step is a
plebiscite result of simple majority
ii
by the Senate to
confirm her nomination. Note that Dr. Yellen has
stated that she will continue monetary easing to aid the
recovery = powerful bullish tailwind.
! Chicago Fed President Charles Evans states, I am not
in a hurry myself to reduce the flow of purchases. Id
rather wait just a little bit longer and have more
confidence. The benefits of Fed stimulus far outweigh
the risks, with unemployment above the long-term
trend and inflation below the Feds 2 percent target
iii

! New York Fed President William Dudley becomes
more optimistic on the U.S. economy. He cites an
improving labor market and accelerating economic
growth as constructive indications of an economy close
to achieving escape velocity. Furthermore, he stresses
that monetary policy will remain accommodative given
that there are few signs of asset bubbles developing.
iv

! Atlanta Fed President Dennis Lockhart says that
monetary policy will remain very accommodative and
that tapering will not occur until financial markets and
the economy are ready.
v

! While prospects of tapering as suggested by the FOMC
minutes this week may be nourishment for a bearish
catalyst
vi
, the Fed will make sure that it will use other
tools to prevent this event from being perceived as
monetary tightening




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o One such tool that received considerable
attention was lowering the interest rate on
excess reserves (IOER) that banks keep at the
Fed. Lower interest rates would encourage
banks to make more loans into the economy.
vii

The aim of the game here is to use forward-
guidance as a tool to help replace asset
purchases.

Economic headlines:
! Consumer spending will surprise to the upside.
o Despite falling consumer confidence and
uncertainty created by the government
shutdown, retail sales for October suggest a
more resilient consumer than expected by the
bears.
viii
The economy is gaining momentum.
o Even better, after dropping a good bit, the
Gallups poll of consumer confidence is in the
midst of a rebound, just in time for the holiday
shopping season. (Source: Gallup Poll
ix
).


o The national price of petrol continues its decent
and is now at its lowest level in more than 2.5
years, freeing up disposable income.
! Meanwhile in housing, despite the headwinds of fiscal
uncertainty and rising mortgage rates, the NAHBs
sentiment index has remained above 50 since May and
has stabilized after two months of declines.
x

! Government shutdown? No sweat! says the
manufacturing sector. A solid preliminary Markit PMI
of 54.3 from a final reading of 51.8 in October
demonstrates dissipating uncertainty as a solution was
reached
xi
.
! Furthermore, tumbling jobless claims signal little
disruption from the temporary Federal closure.
xii






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Chart: RCS Investments Source: ISTAT
>) In Europe financial risk has decreased, courtesy of a nascent
rebound:
! Italian industrial orders, a leading indicator for business
activity, for September surges into positive territory on
a YoY basis. A result of 7.3% marks the first positive
print in 11 months and the strongest reading in more
than 2 years.
xiii
Strength exuding from foreign orders
implies that global flows are firming.
! Meanwhile in Spain, Catalonia tempers its earlier
demands for independence.
xiv
Spanish 10-yr yields are
at their lowest in 3 years.

>) Asia:
! Another sign of increasing international trade flows
appears in Japan, where the strongest YoY pace of
export growth in 3 years is indicative of improving
economic prospects for the worlds 3
rd
largest
economy.
xv

! Meanwhile, Chinese home prices for October
emphasize broad gains with 69 of 70 markets posting
YoY increases. The average price of new homes in all
cities rises to a record high and underscores continued
strong demand for housing.
xvi



Bear

>) Global economic growth continues to disappoint despite
sanguine expectations:
! The OECD cuts its global growth forecast, this time by
roughly 15% in 2013 and 11% in 2014
xvii
. The Parisian
organization cites the end of monetary stimulus in the
U.S. as the reason for a slowdown in emerging market
economies, a dynamic covered by a prior Weekly
Bull/Bear Recap report
xviii
.
! Meanwhile in China, Novembers preliminary reading
for the HSBC manufacturing PMI index falls more
than expected to a two-month low of 50.4 (hardly in
expansion territory) from a final October reading of
50.9
xix
. Interestingly, new export orders within the
report imply that global trade flows are NOT
rebounding as the bulls suggest
! This development is further confirmed by a recent
breakdown in bullish copper price action as well as a
rising stock of inventory
xx
.




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> What is at stake now is the
future of the European ideal itself.
Voters will not simply be asked if
we should do a little more or a
little less but whether we still
want Europe or not. French
President Franois Hollande
! In Europe economic data continues to diverge,
exhibiting the fault-lines of a deteriorating gold
standard-style regime. Anti-euro parties are allying as a
result.
o While Germanys manufacturing and service
PMIs indicate a faster pace of expansion,
French PMIs indicate the obverse
xxi
.
Simultaneously Hollandes support dwindles to
record-lows according to IFOP
xxii
. Despite tax
increases across the social spectrum, 2013
revenues still disappoint.
xxiii
More austerity is in
store.
o Meanwhile, Italian retail sales fell
unexpectedly
xxiv
in September by 2.8% vs. the
same month in the prior year vs. a rise of 0.2%
YoY in the prior month.
o The European anti-euro establishment is
opening the political silos for the upcoming May
2014 parliamentary elections while Germany is
still with out a government.
" Marine Le Pen of the National Front
party and Geert Wilders of the Dutch
Party for Freedom announce a
noteworthy alliance, proclaiming it as a
first step to liberate Europe from the
monster of Brussels.
xxv
Meanwhile the
CES and KAS warn that more anti-euro
alliances will be forming.
xxvi

" Indeed, a meeting of anti-euro parties
from 5 nations last Friday is a concerted
effort to mold a common strategy to
thwart further integration.
xxvii

" This has led to leaders of France and
Italy warning that the EU faces an
existential threat.
xxviii


>) Investors have become numb to a subtle long-term
deterioration in the U.S. economy:
! While data focused on by the bulls implies improving
consumption, news on the ground tells a starkly
different tale. Numerous bellwether retailers, such as
Wal-Mart, Best Buy, and Target
xxix
are experiencing
margin erosion as they cut prices on products. Stores
have too much inventory
xxx
, which doesnt bode well
for 2014.
xxxi





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> I cannot look at myself in the
mirror; everything I have believed
in I have had to reject. This
environment only makes sense
through the prism of trends
Hugh Hendry
! If the economy is indeed improving, why are consumer
prices experiencing their slowest growth in 4 years?
xxxii

Core CPI isnt exactly sounding oncoming-inflation
bells either. Meanwhile neither PPI measures nor unit
labor costs
xxxiii
show building inflationary pressures in
the pipeline. Can the Fed taper in these conditions
without seriously rocking the boat?
! In housing, weakness in purchase applications over the
past few months is now reflecting in coincident
indicators such as existing home sales. For October,
transactions fell 3.2% from the prior month, worse than
expectations of a 1.9% drop. Meanwhile the YoY rate
sinks to 6% from 10+% in the prior months.
xxxiv
First
time homebuyers, which usually account for 40% of
sales in a healthy market, only make up 28% of sales.
xxxv


>) Global business confidence is deteriorating while investor
sentiment reaches deafening bullish levels; we have a serious
disconnect in expectations.
! International confidence continues to sour as the next
federal budget and debt ceiling deadlines approach on
January 15 and February 7 respectively
xxxvi
. This
development may affect near-term economic
performance as businesses hold back on investment.
Meanwhile investor sentiment on U.S. equities is at the polar
opposite.
! Bullish attitude is at an extreme when looking at
sentiment as per the National Association of Active
Investment Managers sentiment index (circles = major
market top/bottom). The same can be said with the
Investors Intelligence Survey
xxxvii
.



! More bears are flushed out. First David Rosenberg,
then Jeremy Grantham, and now Hugh Hendry: one
after another the bears are throwing in the towel
xxxviii
.
Are there any bears left?
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:

i
http://www.bloomberg.com/news/2013-11-21/five-senate-republicans-back-yellen-for-u-s-
fed.html
ii
http://rationalcapitalistspeculator.tumblr.com/post/67812613482/simple-majority-now-only-
needed-to-pass
iii
http://www.bloomberg.com/news/2013-11-19/fed-s-evans-says-bond-buying-may-total-
more-than-1-5-trillion.html
iv
http://www.reuters.com/article/2013/11/18/us-usa-fed-dudley-idUSBRE9AH0TL20131118
v
http://www.cnbc.com/id/101220738
vi
http://online.wsj.com/news/articles/SB10001424052702304337404579209262828299516
vii
http://www.ft.com/intl/cms/s/0/aaa492ca-520d-11e3-adfa-
00144feabdc0.html#axzz2lPF6cJsS
viii
http://www.dallasnews.com/business/retail/20131120-u.s.-retail-sales-rose-a-solid-0.4-in-
october.ece
ix
http://www.gallup.com/poll/151550/Gallup-Daily-Economic-Confidence-Index.aspx
x
http://www.reuters.com/article/2013/11/18/us-usa-economy-housing-nahb-
idUSBRE9AH0ME20131118
xi
http://www.marketwatch.com/story/us-markit-flash-pmi-rebounds-in-november-2013-11-21
xii
http://www.usatoday.com/story/money/business/2013/11/21/weekly-jobless-claims/3661841/
xiii
http://www.rttnews.com/2226448/italy-industrial-orders-rise-for-second-month.aspx
xiv
http://www.scotsman.com/news/world/catalonia-backtracks-from-cry-for-independence-1-
3169804
xv
http://www.reuters.com/article/2013/11/20/us-japan-economy-trade-
idUSBRE9AJ00120131120
xvi
http://www.marketwatch.com/story/china-oct-home-prices-accelerate-vs-year-earlier-2013-
11-17
xvii
http://www.usatoday.com/story/money/business/2013/11/19/oecd-global-growth/3637195/
xviii
http://rcsinvestments.wordpress.com/2013/09/06/im-back-weekly-bullbear-recap-sept-2-6-
2013/
xix
http://www.cnbc.com/id/101216016
xx
http://online.wsj.com/news/articles/SB10001424052702304607104579213840453586778
xxi
http://www.businessinsider.com/france-november-flash-pmi-2013-11
xxii
http://www.presstv.ir/detail/2013/11/17/335171/hollandes-popularity-hits-record-low/
xxiii
http://www.cityam.com/article/1384751974/france-reveals-55bn-shortfall-tax-receipts
xxiv
http://www.rttnews.com/2228613/italian-retail-sales-decline-unexpectedly-in-
september.aspx
xxv
http://www.ft.com/intl/cms/s/0/a185cf08-4d3d-11e3-bf32-
00144feabdc0.html#axzz2lRQTTKce
xxvi
http://pr.euractiv.com/pr/ces-study-warns-more-alliances-between-populist-parties-101186
xxvii
http://www.reuters.com/article/2013/11/15/us-europe-farright-strategy-
idUSBRE9AE0MO20131115
xxviii
http://en.europeonline-magazine.eu/italy-france-worried-about-populist-threat-in-mays-
eu-electionseds-epa-photos_306098.html
xxix
http://www.reuters.com/article/2013/11/21/us-target-results-idUSBRE9AK0Q920131121




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;

xxx
http://www.reuters.com/article/2013/11/20/us-business-inventories-
idUSBRE9AJ0QU20131120
xxxi
http://www.bloomberg.com/news/2013-11-19/wal-mart-touts-98-tv-as-holiday-seen-
weakest-since-2009-retail.html
xxxii
http://www.thehindubusinessline.com/news/international/dip-in-us-inflation-could-
postpone-fed-taper/article5375128.ece
xxxiii
http://www.reuters.com/article/2013/11/19/us-economy-costs-idUSBRE9AI0LN20131119
xxxiv
http://www.marketwatch.com/story/existing-home-sales-hit-lowest-pace-in-four-months-
2013-11-20
xxxv
http://business.time.com/2013/11/20/u-s-existing-home-sales-fall-3-2-percent-in-october/
xxxvi
http://www.bloomberg.com/news/2013-11-22/obama-plunges-in-investor-poll-as-stocks-
make-new-highs.html
xxxvii
http://www.zerohedge.com/news/2013-11-21/scariest-chart-stock-bulls-ever
xxxviii
http://www.zerohedge.com/news/2013-11-22/hugh-hendry-capitulates-cant-look-himself-
mirror-he-throws-towel-turns-bullish