Weekly Bull/Bear Recap: October 14-18, 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 Public officials pass extensions to bring an end to the government shutdown and raise the debt ceiling. Nearterm uncertainty has been lifted and markets have rallied in response. The S&P 500 has hit an all-time high, slicing through resistance of 1,725-1,730. Furthermore, given the political damage self-inflicted by the Republican Party, the next deadline will likely be accompanied with a smooth passage of a beneficial long-term plan for the U.S. economyi. Chinese YoY GDP growth of 7.8% matches expectations and remains above the official target of 7.5%. "We expect global demand momentum to pick up as the economic upturn in the U.S. and Europe takes hold and see this as key to our growth projection for China," said Louis Kuijs, chief China economist at RBS, who forecasts full-year growth of 7.7 percent for 2013, and 8.2 percent in 2014ii. The result is further confirmed by a rise in profits of state-owned firmsiii. Europe is finally recovering, corroborated by a solid August rebound in industrial production. The MoM reading of +1.0% bested expectations of a 0.8% rise. Todays data confirm that the large industrial production decline recorded in July was just statistical noise, while the underlying trend remains upwards, as signaled by improving manufacturing surveys, said Marco Valli, chief Eurozone economist at UniCredit Researchiv. In the U.K., jobless claims plunge the most since mid1997, indicating a healing labor marketv. Meanwhile, retail sales grow at their fastest pace since 2008 on a QoQ basis, virtually guaranteeing that the island

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

(chart courtesy of freestockcharts.com)

China&GDP&YoY&

6/1/05!

6/1/07!

6/1/08!

6/1/09!

12/1/02!

12/1/03!

12/1/04!

12/1/05!

12/1/06!

12/1/07!

12/1/08!

12/1/09!

12/1/10!

6/1/11!

12/1/11!

12/1/12!

6/1/02!

6/1/03!

6/1/04!

6/1/06!

6/1/10!

6/1/12!

Source: National Bureau of Statistics

Chart: RCS Investments

6/1/13!

!13.00!! !12.00!! !11.00!! !10.00!! !9.00!! !8.00!! !7.00!! !6.00!! !5.00!!

 nations recovery accelerated from a 2nd quarter pace of 0.7%vi. Despite the political follies that consumed investor attention over the past week, economic activity quietly continues to expand. The Philly Fed manufacturing index slips less than expected from a 2.5-year high to a still solid 19.8 in October (0 delineates expansion from contraction). Internals of the metric, such as new orders, remain robustvii. While the Empire manufacturing survey falls to 1.5 over the same month, new orders suggest the weakness is fleetingviii. Furthermore, the Feds Beige Book indicates that the economy continues to expand at a modest to moderate paceix. Housing construction continues to pick up steam. It seems that the government shutdown has not significantly affected business activity, a recurring but futile theme recently brought up by the bears. With Republicans licking their wounds and likely to agree to a long-term deal with less conflict, increasing clarity in 2014 will result in accelerating economic growth.

30$ 25$ 20$ 15$ 10$ 5$ 0$ !5$ !10$

Philly&and&Empire&Index&New&Orders&
Philly$Index$ Empire$Index$

1/1/13$ 2/1/13$ 3/1/13$ 4/1/13$ 5/1/13$ 6/1/13$ 7/1/13$ 8/1/13$ 9/1/13$ 10/1/13$

Source: Philly and New York Federal Reserve Banks

Chart: RCS Investments

Bear While the bulls may point to proof of a Chinese recovery in this weeks GDP numbers, the poor quality of this growth (dependence on fixed-asset investment, housing, and dreadful fiscal dynamics) makes it a near certainty that it is unsustainable: o One of the countrys long-standing pillars of economic growth, exports, posts a surprise decline in September of 0.3% on a YoY basis vs. expectations of a rise of 5.5%. Export growth has plunged since topping out in mid-2010. The malaise is evident by a sluggish start to the Canton Fair this past Tuesdayx. o Meanwhile, higher than expected consumer price inflation for September (actual 3.1% vs. 2.8% expected and vs. 3.5% target rate set by the central bank yellow line) marks a bottom for the inflation cycle, making increased monetary stimulus a difficult proposition to continue supporting growthxi. o On the fiscal side, ballooning debt, deep fiscal deficits, and withering real M1 money supply

60$ 50$ 40$ 30$ 20$ 10$ 0$

5/1/10$ 7/1/10$ 9/1/10$

China&Exports&YoY&3&Mth&Avg.&

1/1/11$

3/1/11$

5/1/11$

7/1/11$

9/1/11$

1/1/12$

3/1/12$

5/1/12$

7/1/12$

9/1/12$

1/1/13$

3/1/13$

5/1/13$

7/1/13$

11/1/10$

11/1/11$

Source: National Bureau of Statistics

Chart: RCS Investments

10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% !1.0% !2.0% 4/30/06%

China&CPI&)&YoY&3M&Avg&

4/30/07%

4/30/08%

4/30/09%

4/30/10%

4/30/11%

11/1/12$

4/30/12%

4/30/13%

Source: National Bureau of Statistics

Chart: RCS Investments

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

9/1/13$

!10$

 growth are unmentioned by the mainstream media. Fitch Ratings warns that the pace of loan growth over the last five years takes China into uncharted waters, with debt jumping from $9 trillion to $23 trillion, or 200pc of GDP. The economic efficiency of debt has collapsed. Each extra yuan of debt now yields just 0.18 yuan of GDP growth.xii The Feds reckless policy of QE-infinity is setting the stage for another housing bubble. Indeed Dallas Fed President Richard Fisherxiii has issued a warning that growth of asset appreciation is unsustainable. In fact, his contention is confirmed by the resurgence of homeflippingxiv xv. Furthermore, he states that monetary policy is not a panacea without fiscal support (likely not forthcoming). Worse is the fact that despite his warnings he will continue to support QE: I don't like the course we're on... but my view will be to stay the course at the next meeting." In sum, the Fed has boxed itself in. Speaking of a housing bubble, the YoY growth rate in mortgage purchase applications has just entered doubledigit contraction territory. In Europe: o Increased taxes are choking any sign of recovery in Spainxvi. The proof is in the industrial-orders puddingxvii. Souring economic data will only lead to new records in delinquencies and imploding credit growthxviii. o In Italy, Lettas government is already looking at its next challenge after presenting its 2014 budgetxix. Protests have begunxx and will drag on economic expansion, a developing headwind likely not accounted for in rosy growth projections. Coincidence? Revelations by Edward Snowden on NSA spying leads to collapsing sales of IBM and other hardware companies products to Chinaxxi. -- (I have no position in IBM or other hardware companies).

MBA$Purchase$Applica0ons$Index$
20.0%& 15.0%& 10.0%& 5.0%& 0.0%&
3/16/12& 4/16/12& 5/16/12& 6/16/12& 7/16/12& 8/16/12& 9/16/12& 1/16/13& 2/16/13& 3/16/13& 4/16/13& 5/16/13& 6/16/13& 7/16/13& 8/16/13& 10/16/12& 11/16/12& 12/16/12& 9/16/13&

YoY&1&Mth&Avg.&

!5.0%&

Source: Mortgage Bankers Association

Chart: RCS Investments

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

 i http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=14297360 ii http://www.cnbc.com/id/101122981 iii http://www.reuters.com/article/2013/10/18/china-soe-profits-idUSL3N0I82A520131018 iv http://www.ft.com/intl/cms/s/0/f31e27ba-34b6-11e3-814800144feab7de.html#axzz2i59OiCT9 v http://www.bloomberg.com/news/2013-10-16/u-k-jobless-claims-drop-by-most-since1997.html vi http://uk.reuters.com/article/2013/10/17/uk-markets-sterlingidUKBRE98M09E20131017?type=GCA-ForeignExchange vii http://www.4-traders.com/news/Philadelphia-Fed-Business-Index-Stands-at-High-198-inOctober--17372329/ viii http://www.newyorkfed.org/survey/empire/empire2013/2013_10Report.pdf ix http://www.cnbc.com/id/101118020 x http://www.nytimes.com/2013/10/16/business/international/at-canton-fair-signs-of-a-chineseexport-slowdown.html?_r=0 xi http://www.bloomberg.com/news/2013-10-14/china-exports-unexpectedly-drop-as-foodprices-stoke-inflation.html xii http://www.telegraph.co.uk/finance/china-business/10380937/Chinas-soaring-fiscal-deficitrings-alarm-bells.html xiii http://www.reuters.com/article/2013/10/17/us-usa-fed-fisher-qeidUSBRE99G0MP20131017 xiv http://www.marketwatch.com/story/the-return-of-the-million-dollar-house-flip-2013-10-17 xv http://www.zerohedge.com/news/2013-10-17/home-flipping-bubble-pops-all-uber-wealthywhere-it-explodes-350 xvi http://globaleconomicanalysis.blogspot.com/2013/10/vat-increase-backfires-in-spain.html xvii http://www.moneycontrol.com/news/international-markets/spanish-industrial-new-ordersfalls-unexpectedly_972412.html xviii http://www.zerohedge.com/news/2013-10-18/spanish-bad-loans-soar-new-record-high xix http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=14301816 xx http://ca.news.yahoo.com/italian-protests-against-letta-government-disrupt-transport111425253--business.html xxi http://www.businessinsider.com/nsa-revelations-kill-ibm-hardware-sales-in-china-2013-10

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