Defiance Capital Management

Economic and Investment Research & Analysis

The Week That Just Passed

March 26, 2010 – 5 pages

Leonardo Cardoso – Managing Director

leocardoso@defiancecap.com
www.defiancecap.com

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Defiance Capital Management Investment Research and Analysis
 Weekly Economic and Market Review: 03/26/10
Economic Review

Health of the Consumer

Consumer Sentiment – Despite a month of
Consumer Confidence, Sentiment and Retail Sales
improvement in jobless claims, as well as
10% 120.0
supporting evidence of strength in retail sales,
100.0

Y/Y Retalil Sales %∆

consumers continue to reflect some unease 5%

Indices Value
80.0
about the state of the economy. 0%

Mar-07
Jun-07

Dec-07
Mar-08
Jun-08

Dec-08
Mar-09
Jun-09

Dec-09
Mar-10
Jun-10
Sep-07

Sep-08

Sep-09
Even though the month-end overall U. -5%
60.0

Michigan consumer sentiment index inched 40.0

-10%
higher to 73.6 from a mid-month reading of 20.0

72.5, compared to the end of Feb., the index -15% YonY %∆ Tot. Retail Sales 0.0
CCI
remained unchanged. (Umich) Cons. Sent. Index

Nevertheless, the mood may be changing as both, the current and expected conditions portion of
the overall index inched higher. On the same report, the one- and five-year inflation expectations
are both unchanged at 2.7%. While consumer behavior is more influenced by the job market than
by output growth, policy makers give more weight to actual economic activity than sentiment
numbers when evaluating the economy. However, consumer sentiment and confidence indices
are a barometer of what consumers might do with their money.

Employment Situation
Weekly Unemployment Claims – On a 700,000 Initial Claims S.A.
positive note for the labor market, the Labor 650,000 I.C. 4-Week MA
Dept. reported that weekly Uempl. initial 600,000
550,000
claims (I.C.) declined by 14,000 to 442,000 in 500,000
the week ended March 20th. At 453,750, the 4- 450,000
week m.a. for Uempl I.C. registered the 400,000
350,000
lowest reading since the economic recovery 300,000
begun in early 2009. However, the positive 250,000
6/3/07

8/26/07

11/18/07

2/10/08

5/4/08

7/27/08

10/19/08

1/11/09

4/5/09

6/28/09

9/20/09

12/13/09

3/7/10

note is not enough to overcome the fact that

initial claims remain very high since the
beginning of the year, ranging in the mid to
high 400’s thousand, while the country unemployment rate still at 9.7%.

Week
Ending 12/26/09 01/02/10 01/09/10 01/16/10 01/23/10 01/30/10 02/06/10 02/13/10 02/20/10 02/27/10 03/06/10 03/13/10 03/20/10
I.C. 4-
Week MA 474,000 467,250 462,250 467,250 472,750 481,250 473,500 471,000 473,500 467,500 470,500 464,750 453,750

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Defiance Capital Management Investment Research and Analysis
Dow Jones newswire reported “In an effort to address the troubled labor market, Congress has
been working on several legislative packages. Last week the U.S. Senate approved a $17.5
billion bill to create a payroll tax credit for employers who hire unemployed Americans. On
Wed., the U.S. House of Representatives passed another $14 billion bill that provides tax relief
to small business and extend a bonds program to help local gov’t fund public works projects”. As
already mentioned, initial claims need to fall and stay below 450,000 to have some meaningful
affect on payrolls.

National Output and Inventories Conditions

Durable Goods New Orders (NO) – During Feb, 10% New Orders for Durable Goods 20%

manufacturer’s new orders for goods designed 7%

10%
to last at least three years – durable goods, rose 4%
0%
0.5%. The third consecutive month increase was 1%

Mo %∆

Yr %∆
led by strength in machinery and weakness in -2% -10%
electrical equipment and transportation. NO for -5%
Mo% ∆ of NODG -20%
Nondefense Capital Goods Ex-Air rose 1.1% -8%
Yr% ∆ of NODG
after dropping 3.9% in Jan. Year-over-year, NO -11% -30%

Jan-07

Jul-07
Oct-07
Jan-08

Jul-08
Oct-08
Jan-09

Jul-09
Oct-09
Jan-10
Apr-07

Apr-08

Apr-09
for durable goods were healthy and little
changed at up 10.9% in Feb vs. 11.1% in
January. Ex-transportation NO declined to 7.9% in Feb from 8.5% in Jan.

Gross Domestic Product – During 4Q09, US economic activity was slightly lower than
previously estimated thanks to downward revision to consumer and business spending. The
1.36% quarterly increase from 3Q09 to 4Q09 represents an annualized rate of growth of 5.5%.
Compared to 4Q08, economic activity increased 0.06%, marking the first year-over-year
increased in GDP after four consecutive quarters of year-over-year decreases.

Early estimates of 10.0% Real GDP Grow th 6.0%

1Q10 range between 8.0%
4.0%
2.5% to 3.0% 6.0%
Annualized Q.%∆

annualized rate. 4.0% 2.0%

Annual %∆
Policy makers 2.0%
0.0%
continue to think the 0.0%
Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09
Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

-2.0% -2.0%
pace of economic
-4.0%
recovery is likely to -6.0% Annualized Q. %∆
-4.0%

remain subdued. -8.0% Annual %∆ -6.0%

Most of the sharp
GDP growth during 4Q09 was due to a slowdown in inventory liquidation. Businesses in the U.S.
cut inventory by $19.7 billion in the 4Q09, after a $139.2 billion in the 3Q09 and a $160.2 billion
in the 2Q09. The slowdown in liquidation contributed 3.7% points to 4Q09 GDP.

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Housing and Construction Conditions
Existing Home Sales – Existing home sales
slipped 0.6% in Feb to a Saar1 5.02 million vs. 1,600
USA Residential Sales
7,500

5.05 million in Jan. Economists were expecting 1,400

E x is tin g H o m e s ( K 's o f
6,750

N e w H o m e s ( K 's o f
1,200
a steeper decline to 4.95 million. The National 6,000
1,000
Association of Realtors, which compiles the

U n its )

U n its )
5,250
800
report, still expects to see an increase in demand 4,500
600 New Home Sales
this spring due to the expiration of the second 400 Existing Home Sales 3,750
round of tax credit. 200 3,000

J an-00
J an-01
J an-02
J an-03
J an-04
J an-05
J an-06
J an-07
J an-08
J an-09
J an-10
New Home Sales – New home sales sank to a
new low despite big gov’t tax incentives.
Demand for new homes decreased 2.2% from the previous month to a record low Saar of
308,000. Nevertheless, median prices rose. Year-over-year, new home sales were lowered by
13% from Feb 09. Buyers are passing up on new homes in favor of cheaper “almost new”
existing homes. There were approximately 236,000 homes in unsold inventory, which at the
current annual rate of 308,000 represent 9.2 months of supply.

Prices, Productivity and Wages Indicators

No indicators in our proprietary economic model this week

Legal disclaimers and disclosures below

1
Saar – seasonally adjusted annual rate

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