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Weekly Bull/Bear Recap: Sept. 2-6, 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

The global economy has clearly stabilized.

o

China’s economic adjustment is proceeding in bullish fashion. The Communist Party’s targetof annual 7.5% growth rate in GDP will beachieved. Results of Purchasing ManagerIndices (PMI) for the manufacturing sector of 50.1

i

and 51.0

ii

from HSBC/Markit and theChina Federation of Logistics & Purchasingrespectively show increased mettle of internalcomponents of the economy

iii

.

o

Meanwhile Europe’s recession-wracked periphery finally sees light at the end of the tunnel. Spain’s manufacturing sector records itsfirst growth reading in more than 2 years,supported by firming global trade flows

iv

; whileItaly’s service sector contracts at the slowest pace in 2 years

v

. In Deutschland, “Germany'sservice economy joined its manufacturing sectorin achieving an accelerated pace of outputexpansion in August, helped by the fastest rise innew business since the start of the year,” saysTim Moore at Markit

vi

.

o

In Australia, the island-continent reports better than expected economic growth in the secondquarter, ensuring that the land down under willextend its 22-year streak of expansion.

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Meanwhile, the U.S. economy continues to confound the bears:

o

The manufacturing sector is set for a second half revival. The Institute for Supply Management’s(ISM) manufacturing index hit its highest levelin more than 2 years, notching a reading of 55.7

viii

; this headline reading was supported byan increase in the New Orders sub-component.

o

Meanwhile, the ISM’s service sector index waseven more impressive, implying the recovery issustainable and Fed tapering is appropriate.This index notched a reading of 58.6, the highestin more than 7 years and was buttressed by thestrongest result in its New Orders sub-component (60.5) since February 2011.

o

Jobless claims continue their decent (4-weekaverage is now the lowest in nearly 6 years); while auto sales continue their trend higher.Both metrics suggest that the job marketcontinues to heal and the American consumerremains resilient.

ix

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Despite increasingly clear signs of a bottoming in globalactivity, sentiment remains downbeat according toBank of America. As growth picks up, more investors will buy risk assets as they too become aware of the present nascent trend.

x

35.0040.0045.0050.0055.0060.00

3 / 1 / 2 0 0 6 6 / 1 / 2 0 0 6 9 / 1 / 2 0 0 6 1 2 / 1 / 2 0 0 6 3 / 1 / 2 0 0 7 6 / 1 / 2 0 0 7 9 / 1 / 2 0 0 7 1 2 / 1 / 2 0 0 7 3 / 1 / 2 0 0 8 6 / 1 / 2 0 0 8 9 / 1 / 2 0 0 8 1 2 / 1 / 2 0 0 8 3 / 1 / 2 0 0 9 6 / 1 / 2 0 0 9 9 / 1 / 2 0 0 9 1 2 / 1 / 2 0 0 9 3 / 1 / 2 0 1 0 6 / 1 / 2 0 1 0 9 / 1 / 2 0 1 0 1 2 / 1 / 2 0 1 0 3 / 1 / 2 0 1 1 6 / 1 / 2 0 1 1 9 / 1 / 2 0 1 1 1 2 / 1 / 2 0 1 1 3 / 1 / 2 0 1 2 6 / 1 / 2 0 1 2 9 / 1 / 2 0 1 2 1 2 / 1 / 2 0 1 2 3 / 1 / 2 0 1 3 6 / 1 / 2 0 1 3

ManufacturingISM

NewOrders6MAvg ISM3MAvg

Chart: RCS InvestmentsSource: Insitute for Supply Management

4.55.56.57.58.59.589101112131415161718

2 / 1 / 2 0 0 6 8 / 1 / 2 0 0 6 2 / 1 / 2 0 0 7 8 / 1 / 2 0 0 7 2 / 1 / 2 0 0 8 8 / 1 / 2 0 0 8 2 / 1 / 2 0 0 9 8 / 1 / 2 0 0 9 2 / 1 / 2 0 1 0 8 / 1 / 2 0 1 0 2 / 1 / 2 0 1 1 8 / 1 / 2 0 1 1 2 / 1 / 2 0 1 2 8 / 1 / 2 0 1 2 2 / 1 / 2 0 1 3 8 / 1 / 2 0 1 3

LightVehicleSales

TotalLightVehicleSales LightTrucksRHS

Chart: RCS InvestmentsSource: Ward's Automotive Group

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Bear

Ø

The increasing likelihood of the Fed tapering its QE program is having profound negative effects onemerging markets

xi

as interest rates rise and investors become uneasy. This budding development is a crystalclear signal that the global recovery has been built onunstable foundations. The second disorderly phase(2008 was the first) of the “Global EconomicRestructuring” process is inevitable.

o

Mexico’s Agustín Carstens, China’s ZhuGuangyao, and Indonesia’s Chatib Basri

xii

alladmonish a hasty exit from QE. Unfortunately, the Fed follows two principal mandates(maximum employment and stable prices), butfails to recognize that it has now assumed a 3

rd

unofficial mandate of maintaining stable global pecuniary flows

xiii

. Indeed the Fed’s tapering policy has become just as important than theongoing Syrian civil war for financial markets.

xiv

Ø

The bulls point out that global economic activity hasstabilized. Germany, the 3

rd

largest exporter in the world, according to the CIA’s World Factbook,apparently didn’t get the memo, posting a 1.1% and2.5% drop in exports on a MoM and YoY basisrespectively

xv

. Furthermore copper, the Phd. ineconomics, has just failed to break through resistance at$337-$340, which signals that the recent panoply of encouraging data is temporary.

Ø

Lost in the deluge of hopium

xvi

from recent economicdata, political trends in the Eurozone are critical andflat out worsening.

o

Berlusconi is ready to pull the plug on Italy’sfragile coalition and has even created a cryptic video heralding the event

xvii

. Furthermore,Italy’s finances are beginning to slip out of lineas the state’s sector borrowing requirementroughly doubled at the end of August from thesame month in the previous year

xviii

. This is due to a deeper than expected recession, a trendillustrated by a worse than expected ServicesPMI index

xix

(the service sector accounts foralmost 75% of Italy’s economy, according to theCIA World Factbook; est 2012). These eventsare not ongoing unnoticed as Italian 10-yr BTP

-10-50510152025

1 1 / 1 / 2 0 0 6 3 / 1 / 2 0 0 7 7 / 1 / 2 0 0 7 1 1 / 1 / 2 0 0 7 3 / 1 / 2 0 0 8 7 / 1 / 2 0 0 8 1 1 / 1 / 2 0 0 8 3 / 1 / 2 0 0 9 7 / 1 / 2 0 0 9 1 1 / 1 / 2 0 0 9 3 / 1 / 2 0 1 0 7 / 1 / 2 0 1 0 1 1 / 1 / 2 0 1 0 3 / 1 / 2 0 1 1 7 / 1 / 2 0 1 1 1 1 / 1 / 2 0 1 1 3 / 1 / 2 0 1 2 7 / 1 / 2 0 1 2 1 1 / 1 / 2 0 1 2 3 / 1 / 2 0 1 3 7 / 1 / 2 0 1 3

GermanyExportsYoY

Chart: RCS InvestmentsSource: Bundesbank