Wednesday, June 30, 2010

• The S&P/Case-Shiller 20-City Composite Index rose 0.8% m/m on a seasonally

unadjusted basis in April 2010. On a year-over-year basis, prices were up 3.8%, the third y/y
gain since December 2006. Of the 20 cities included in the index, 18 showed m/m gains in April.
(In March, 16 cities had shown m/m declines.) RGE believes that the first-time homebuyer tax
credit has merely delayed correction in the housing market, where clearly deflation has yet to run
its full course. RGE Monitor – While it is often difficult to determine the ‘consensus’ view. I
believe the current consensus anticipates another leg down in home prices after expiration of the
tax credit. If that is correct, that down move is beginning now.

Case Shiller 20 City Home Price Index – YoY % gain

• EconoMonitor Post by Rachel Ziemba: On June 29 the conference board announced a

downward revision in its almost brand-new leading indicator for China, suggesting that the
Chinese growth trajectory will be slower than expected. Markets characteristically did not react
well, with the Shanghai stock exchange falling over 4%, extending its losses to 26% from the
peak. But liquidity rather than just the news about the revision seems more likely to be the cause.
The market moves seem to be due to a confluence of factors restraining liquidity, like a big IPO
(the Agricultural Bank of China) that deterred investment from other equities and restrained
inflows. Expect Chinese authorities to start injecting more liquidity. – RGE Monitor
• In an unusual parliamentary move, the conference committee working on the financial
reform bill was apparently never gaveled closed, allowing Dodd and Frank to reopen it last night
and remove the $19 billion bank tax Frank added at the last minute to pay for it. (The tax
alienated Republican Senators, but the WSJ says it was largely written by Republican aides.)
Democrats were apparently just one vote short in the Senate, and Massachusetts Republican
Senator Scott Brown said the tax was his only objection, so they should have the votes now. The
bill will now be financed with a $5.7 billion FDIC bank levy and an early end to any new use of
unallocated TARP funds, according to the WSJ. – FTN
• ECB 3-month tender - the relatively small amount of demand at the 3-month tender (only
EU131.9B) is being taken as a positive - the fear had been that ~EU220B+ would be taken up at
this 3-month tender ahead of Thurs' EU440B 12-month expiration (some worst case scenarios
feared that EU440B+ would be taken up); Note that our European trading desk has been better
for sale from the HF community (esp. in futures) following the ECB’s loan announcement.
• European Bank stress tests - WSJ report that the European bank stress tests are being
expanded to include a further 60-120 banks, that it will test for whether an institution can
withstand the effects of a sovereign debt default in the Eurozone and it will be published in 2H
July (potentially setting a catalyst for when this whole issue can be resolved by the market) – I
hear a lot about how these stress tests are going to be the ‘all clear’ signal for markets, as they
were for banks in the US last year. Are expectations aligned for disappointment?
• Double-Dip debate - “Warning signals of a double-dip recession flash brightly across the
world” – the London Telegraph warns that global bond markets are flashing warning signals of a
sharp slowdown in growth across the world; meanwhile, the FT warns against jumping on the
"double dip" bandwagon just yet says the ECRI may be getting too much attention the ECRI
itself is cautioning against reading too much into the recent move.

ECRI Weekly Leading Index