Weekly Bull/Bear Recap: Sept.

2-6, 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 The global economy has clearly stabilized. o Chinas economic adjustment is proceeding in bullish fashion. The Communist Partys target of annual 7.5% growth rate in GDP will be achieved. Results of Purchasing Manager Indices (PMI) for the manufacturing sector of 50.1i and 51.0ii from HSBC/Markit and the China Federation of Logistics & Purchasing respectively show increased mettle of internal components of the economyiii. o Meanwhile Europes recession-wracked periphery finally sees light at the end of the tunnel. Spains manufacturing sector records its first growth reading in more than 2 years, supported by firming global trade flowsiv; while Italys service sector contracts at the slowest pace in 2 yearsv. In Deutschland, Germany's service economy joined its manufacturing sector in achieving an accelerated pace of output expansion in August, helped by the fastest rise in new business since the start of the year, says Tim Moore at Markitvi. o In Australia, the island-continent reports better than expected economic growth in the second quarter, ensuring that the land down under will extend its 22-year streak of expansion.vii

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

 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 Managements (ISM) manufacturing index hit its highest level in more than 2 years, notching a reading of 55.7viii; this headline reading was supported by an increase in the New Orders sub-component.
New Orders 6M Avg 60.00 55.00 50.00 45.00 40.00 35.00
9/1/2006 9/1/2007 9/1/2008 9/1/2009 9/1/2010 9/1/2011 9/1/2012
3/1/2006 6/1/2006 3/1/2007 6/1/2007 3/1/2008 6/1/2008 3/1/2009 6/1/2009 3/1/2010 6/1/2010 3/1/2011 6/1/2011 3/1/2012 6/1/2012 3/1/2013

ISM 3M Avg

Manufacturing ISM

12/1/2006

12/1/2007

12/1/2008

12/1/2009

12/1/2010

12/1/2011

Source: Insitute for Supply Management

Chart: RCS Investments

o Meanwhile, the ISMs service sector index was even more impressive, implying the recovery is sustainable and Fed tapering is appropriate. This index notched a reading of 58.6, the highest in more than 7 years and was buttressed by the strongest result in its New Orders subcomponent (60.5) since February 2011. o Jobless claims continue their decent (4-week average is now the lowest in nearly 6 years); while auto sales continue their trend higher. Both metrics suggest that the job market continues to heal and the American consumer remains resilient.ix Despite increasingly clear signs of a bottoming in global activity, sentiment remains downbeat according to Bank of America. As growth picks up, more investors will buy risk assets as they too become aware of the present nascent trend.x

12/1/2012

6/1/2013

Light Vehicle Sales

18 17 16 15 14 13 12 11 10 9 8 9.5 8.5 7.5 6.5 5.5 4.5

2/1/2006

8/1/2006

2/1/2007

8/1/2007

2/1/2008

8/1/2009

2/1/2010

8/1/2010

2/1/2011

8/1/2011

2/1/2012

8/1/2012

2/1/2013

Total L ight Vehicle Sales

Source: Ward's Automotive Group

Light T rucks RHS

Chart: RCS Investments

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

8/1/2013

8/1/2008

2/1/2009

 Bear The increasing likelihood of the Fed tapering its QE program is having profound negative effects on emerging marketsxi as interest rates rise and investors become uneasy. This budding development is a crystal clear signal that the global recovery has been built on unstable foundations. The second disorderly phase (2008 was the first) of the Global Economic Restructuring process is inevitable. o Mexicos Agustn Carstens, Chinas Zhu Guangyao, and Indonesias Chatib Basrixii all admonish a hasty exit from QE. Unfortunately, the Fed follows two principal mandates (maximum employment and stable prices), but fails to recognize that it has now assumed a 3rd unofficial mandate of maintaining stable global pecuniary flowsxiii. Indeed the Feds tapering policy has become just as important than the ongoing Syrian civil war for financial markets.xiv The bulls point out that global economic activity has stabilized. Germany, the 3rd largest exporter in the world, according to the CIAs World Factbook, apparently didnt get the memo, posting a 1.1% and 2.5% drop in exports on a MoM and YoY basis respectivelyxv. Furthermore copper, the Phd. in economics, has just failed to break through resistance at $337-$340, which signals that the recent panoply of encouraging data is temporary. Lost in the deluge of hopiumxvi from recent economic data, political trends in the Eurozone are critical and flat out worsening. o Berlusconi is ready to pull the plug on Italys fragile coalition and has even created a cryptic video heralding the eventxvii. Furthermore, Italys finances are beginning to slip out of line as the states sector borrowing requirement roughly doubled at the end of August from the same month in the previous yearxviii. This is due to a deeper than expected recession, a trend illustrated by a worse than expected Services PMI indexxix (the service sector accounts for almost 75% of Italys economy, according to the CIA World Factbook; est 2012). These events are not ongoing unnoticed as Italian 10-yr BTP

25 20 15 10

Germany Exports YoY

5
0 -5 -10
11/1/2006 11/1/2008 11/1/2010 11/1/2011 11/1/2012
11/1/2007 11/1/2009

7/1/2007

3/1/2008

7/1/2009

3/1/2010

3/1/2011

7/1/2011

3/1/2012

7/1/2012

3/1/2013

Source: Bundesbank

Chart: RCS Investments

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

7/1/2013

3/1/2007

7/1/2008

3/1/2009

7/1/2010

 yields are on the precipice of completing an inverted head-and-shoulders, signifying a bearish technical event. o Meanwhile, news of a 3rd bailout for Greecexx threatens to dominate German airwaves as elections approach (Sept 22) and strengthens Alternative for Germanysxxi platform of opposition to the Eurozone project. In Syria, Russia has stated that it will aid Assads government should strikes from the West occurxxii, further increasing tensionsxxiii. A strike on Syria and its possible repercussions would cause a surge in gas prices, resulting in another headwind for the American consumer. In the U.S not all economic data is sunshine and rainbows. In fact, one of the main sectors expected to carry the recovery is significantly weakening. o The Mortgage Bankers Associations Purchase Index continues its downtrend as higher interest rates have deterred buyers. Weakness in this metric has already begun to spill over into new home sales as well as o consumer confidence. Bloombergs Consumer Comfort survey has now declined for a fourth straight week to its lowest level since Aprilxxiv. Furthermore, Gallup Polls U.S. Economic Confidence Index is similarly forming a topxxv. o Finally, while firings arent prevalent, as pointed out by the bulls, hiring remains tepid according to todays job report. Moreover, the labor force participation rate continues its fall xxvi(now down to levels last seen in 1978). i https://mninews.marketnews.com/index.php/hsbc-china-august-pmi-sees-manufacturingsector-expansion?q=content/hsbc-china-august-pmi-sees-manufacturing-sector-expansion ii http://www.reuters.com/article/2013/09/01/us-china-economy-pmiidUSBRE98000H20130901 iii http://www.reuters.com/article/2013/09/04/us-china-economy-hsbc-pmiidUSBRE98303920130904 iv http://www.markiteconomics.com/Survey/PressRelease.mvc/901ade0de412421d824f635a9b2 ac3a2 v http://www.reuters.com/article/2013/08/05/us-italy-services-sectoridUSBRE97406O20130805 vi http://www.reuters.com/article/2013/09/04/us-poll-german-idUSBRE9830AJ20130904

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

 vii http://www.bloomberg.com/news/2013-09-04/australia-s-economy-expanded-faster-thanexpected-last-quarter.html viii http://www.ism.ws/ismreport/mfgrob.cfm ix http://www.bloomberg.com/news/2013-09-05/ism-august-non-manufacturing-index-rose-to58-6-from-56.html x http://blogs.marketwatch.com/thetell/2013/09/03/stock-optimism-almost-back-to-march2009-levels-b-of-a/ xi http://www.ibtimes.com/indias-manufacturing-pmi-contracts-first-time-over-4-years-neworders-output-fall-faster-rates xii http://www.telegram.com/article/20130905/NEWS/309059730/1002/BUSINESS xiii http://www.bloomberg.com/news/2013-08-25/fed-officials-rebuff-coordination-calls-asstimulus-taper-looms.html xiv http://www.futuresmag.com/2013/09/06/markets-look-to-g20-meeting-for-fed-taperingclari?t=financials xv http://www.ibtimes.co.uk/articles/504264/20130906/germany-exports-imports-trade-deficitecb.htm xvi http://www.urbandictionary.com/define.php?term=hopium xvii http://www.businessinsider.com/silvio-berlusconi-records-government-collapse-video2013-9 xviii http://www.news-republic.com/Web/ArticleWeb.aspx?regionid=1&articleid=12732063 xix http://www.markiteconomics.com/Survey/PressRelease.mvc/c06756e0924443d4a8d4891b62 748cb9 xx http://www.marketwatch.com/story/greece-headed-for-third-bailout-eurogroup-chief-201309-05 xxi http://online.wsj.com/article/SB10001424127887323423804579020822696853720.html xxii http://www.bloomberg.com/news/2013-09-06/u-k-stocks-little-changed-before-u-semployment-report.html xxiii http://www.cbsnews.com/8301-202_162-57601648/russia-cancels-syria-lobbying-missionto-d.c.-more-russian-war-ships-reportedly-head-for-mediterranean/ xxiv http://www.bloomberg.com/news/2013-09-05/consumer-comfort-in-u-s-declines-for-afourth-straight-week.html xxv http://www.gallup.com/poll/125735/Economic-Confidence-Index.aspx xxvi http://www.bloomberg.com/news/2013-09-06/payrolls-in-u-s-rose-less-than-forecastjobless-rate-at-7-3-.html

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