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“Get the habit of analysis - analysis will in time enable synthesis to become your habit of mind.”

                              -Frank Lloyd Wright

Conclusion: Below we’ve highlighted some key excerpts from our last week of research notes and global economic data synthesis.  If the data is telling us anything, it is that risk is back on. (Not that it was ever truly off.)  In Europe, both sovereign and bank debt CDS spreads continue to flash warning signs as yields and CDS spreads are widening.  In Asia, we are getting continued evidence of inflation (Chinese CPI +4.9%) and growth slowing (Japan revised Q4 GDP lower to -1.3%).  Finally in the U.S., we are getting more evidence of the consumer getting squeezed due to declining home prices (Corelogic had national home prices down -5.5% in January) and accelerating gasoline costs.

 

Long Macro Positions

 

Longs oil via etf OIL; Long grains via etf JJG; Long corn via etf CORN; Long gold via etf GOLD; Long Canadian Loonie vie etf FXC; Long Germany via etf EWG; Long Chinese Yuan via etf CYB; Long yield curve flattening via etf FLAT; Long healthcare via etf XLV; Long energy producers via XLE

 

Short Macro Positions

 

Short Spain via etf EWP; Short the U.S. Dollar via UUP; Short industrials via XLI; Short homebuilders via XHB; Short treasuries via SHY; Short emerging markets via EEM

 

Key Research Excerpts

“Up until last week, it can be strongly argued that the dollar’s decline has been aided by a confluence of dovish US monetary policy (QE2) and incredibly lax fiscal policy (the CBO revised up the US federal budget deficit by +46% through FY13).”

“We know QE2 is ending in three months; will the Fed be tempted to step on the gas pedal some more? Reasonably strong US GDP growth forecasts of around +3.5% for 2H11 suggest that QE3 is not consensus – yet.”

“Corn is facing a serious supply shortage in the year 2010-2011 as corn output is estimated at 814.3 million tons while corn demand will flirt with 836 million tons. According to a Feb. 9th USDA estimate, approximately 43% (4.95B out of the 11.6B bushels) of corn demand in the US is for ethanol use.  This only adds to gasoline costs as gasoline is comprised of 10% ethanol.”

“The average U.S. household will spend about $700 more for gasoline in 2011 than it spent last year, bringing total motor fuel expenses up 28 percent to $3,235, based on an annual pump price of $3.61.”

“According to the latest American Pulse™ Survey of 5,224 respondents, 80.3% of registered voters agree that the increase in gas prices is one of the worst problems affecting the United States. The survey asked respondents to list the worst problems currently affecting the United States, and registered voters mentioned in order of frequency: unemployment (80.4%), rising gas prices (80.3%), weak economy (70.6%), national debt (69.4%) and rising food prices (61.9%).”

“The Bloomberg Consumer Comfort Index dropped to minus 44.5 last week from the prior week’s minus 39.7, which was close to the highest in almost three years.” 

“The unemployment rate was a surprise at 8.9%, but it is likely an aberration as more discouraged workers than previous months did not enter the labor force.”

“We have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down.  If this level is held, we expect to see unemployment improve.  That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 8.9%, it's 10.9%. So when we say that claims of 375-400k will bring down the unemployment rate, we are actually referring to the 10.9% actual rate as opposed to the 8.9% reported rate.”

“Despite a surge in personal income growth, real spending declined in January. Real personal consumption expenditures slipped by 0.1%, marking the first decline since April 2010. Nominal spending rose by 0.2%, which was about half of the average pace from the previous six months.”

“If you've been wondering when home prices in the U.S. would officially double-dip, your wait is over.  Corelogic reported the Home Price Index for January hit 134.94, the lowest value since 2003.  On a YoY basis, the index fell -5.7%, an acceleration from December's pace of -4.7% YoY (upwardly revised from -5.5%).  Looking at sequential changes, the story is similar. The Index fell -2.5% MoM in January, the largest sequential decline since February of 2009.” 

“According to estimates from the Congressional Budget Office (CBO), the Federal budget deficit for February was $223BN which is an increase of about 1% from February 2010. Revenues actually grew year-over-year by 3%, which is marginally positive.  This is also the 10th straight month of year-over-year revenue increases.  On the flip side, and despite all of spending cut rhetoric, expenditures were up 5% from February 2010.”

“Our Risk Monitor for European banks shows a widening for the Greek banks week-over-week, bucking the trend of tightening across most European banks: tightening for 31 of the 39 reference entities and widening for 8.”

“One small reason Europe needs to raise interest rates is the fact that European gasoline prices are at an all time record of $8.632 per gallon.”

“Currently, the European Financial Stability Facility (EFSF) is funded with €750 Billion, composed of €440 Billion from the 16 Eurozone members; €250 from the IMF; and €60 Billion from European Commission. One pressing issue is that the entire €440 Billion is not all liquid, for guarantees against the money are needed to retain its AAA rating, which effectively leaves only €250 Billion for access. Many argue that should a country far greater than Greece or Ireland need a bailout, say a Spain or Italy, the funds are inadequate.”

“Japan revised its Q4 GDP estimate LOWER again to -1.3% (don’t forget that the US has done the same with Q4 GDP, twice).”

“China reported a huge sequential slowdown in Exports for February at +2.4% (lowest level of demand since early 2009).”

“South Korea raised interest rates to 3% (2nd rate hike for 2011 YTD with the #1 reason being inflation).”

Daryl G. Jones
Managing Director