Defiance Capital Management

Economic and Investment Research & Analysis

The Week That Just Passed

March 05, 2010 – 6 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: 03/06/10
Economic Review

Health of the Consumer

Chain-Store Retail Sales (Same Store Sales or “ SSS”)
Apparently, the inclement weather during February did not hurt chain-store retailers too much.
Most retailers posted accelerating Y-on-Y sales growth rates compared to growth rates in
January. Prices seem to be firming up due to lower obsolete inventories, therefore, no steep
discounts. Some retailers reported rising traffic and higher transaction.

However, sales in dollar amount were mixed as some retailers reported an increase in nominal
sales while others reported a decrease. The bottom line is that cold weather could in fact have
hurt sales; nevertheless, caution is prudent when people are only looking stuff and not really
buying. Pay attention to the volume of shopping bags next time you are at the mall because
consumer confidence dropped to a 10-month low in February amid concerns about
unemployment and gov’t gridlock. Furthermore, March sales should benefit from an earlier
Easter than last year and this report points to an encouraging Ex-Auto and Gas data for the next
week’s industry wide Retail Sales Report.

o Retailers reporting increase in Y-on-Y SSS and beating consensus estimates: AEO, ANF,
ARO, BKE, DDS, FDO, FRED, GPS, JCP, JWN, LTD, M, ROST, TGT, TJX
o Retailers reporting increase in Y-on-Y SSS and missing consensus estimates:
o KSS, SKS
o Retailers reporting decrease in Y-on-Y SSS: DUCK
o Influential retailers that do not report monthly SSS: WMT, BBY, AMZN

Employment Situation
Weekly Unemployment Claims
The 4-Week MA for Uempl Initial Claims is 700,000 Initial Claims S.A.
trying to resume its downward direction. After 650,000 I.C. 4-Week MA
600,000
reaching a 2009 year low of 460,250 on 550,000
12/26/09 and an YTD 2010 low of 440,750 on 500,000
01/09/10, the 4-WMA of Uempl. Claims for the 450,000
400,000
week ending on 02/27/10 decreased by 3,500 to 350,000
470,750; resuming its downward direction but
1/3/09
1/31/09
2/28/09
3/28/09
4/25/09
5/23/09
6/20/09
7/18/09
8/15/09
9/12/09
10/10/09
11/7/09
12/5/09
1/2/10
1/30/10
2/27/10

not indicating any significant improvement in

monthly nonfarm payrolls.

Week
Ending 12/12/09 12/19/09 12/26/09 1/2/10 1/9/10 1/16/10 1/23/10 1/30/10 2/6/10 2/13/10 2/20/10 2/27/10
I.C. 4-
Week MA 468,000 465,750 460,250 449,750 440,750 447,000 457,000 469,500 469,000 467,750 474,250 470,750

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Monthly Employment Report
Uempl Rate – From the household survey, the 1,000 Household Survey 11%

Unemployment Rate
10%

In thousands of people
unemployment rate remained at 9.7% in Feb. 500
9%

Taking into consideration the small uptick in 0 8%

7%
the initial claims for unemployment insurance (500) 6%
5%
since mid Jan 10, the unemployment rate met (1,000)
4%
consensus expectations. (1,500) 3%

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
Nonfarm Payrolls – Private and gov’t payrolls ABS ∆ in Pop. Empl. Uempl. rate 12 per. Mov. Avg. (ABS ∆ in Pop. Empl.)

declined each by 18,000 jobs, bringing the

total decline for nonfarm payrolls in Feb 10 to 500 U.S. Nonfarm Payrolls 2%
36,000 jobs; much more palatable than

Monthly ABS ∆ in Nonfarm

300
726,000 job losses 12 months ago. It turns out 100 0%

Pay rolls (000's)

that the bad weather hand was a flop as

Yr %∆
(100)
-2%
expectations were to a 50,000 fall in (300)
(500)
employment. Nevertheless, 3,297,000 were -4%
(700)
lost from Mar 09 to Feb 10; the 12-month (900) -6%
peak was from Aug 08 to Jul 09, where

Jan-07

Jul-07
Oc t-07
Jan-08

Jul-08
Oc t-08
Jan-09

Jul-09
Oc t-09
Jan-10
Apr-07

Apr-08

Apr-09
6,782,000 jobs were lost during that period.

Despite minute job creation in Feb for mining and manufacturing, the decrease of 60,000 goods
producing jobs is attributed to a decline of 64,000 jobs in construction, which followed a 77,000
jobs decline in Jan. On a positive note, service-providing jobs increased by 42,000 in Feb after
an increase of 20,000 in Jan; service-
35.0 Workw eek and Hourly Earnings Data 0.8%
providing jobs have now increased three 0.7%
34.6
out of the last 4 months. 0.6%

Avg.Hourly Earnings -
Avg. Workweek Level

0.5%
34.2
0.4%
- # of hours

Mo %∆
0.3%
33.8
Avg. Workweek and Hourly Earnings – 0.2%
33.4 0.1%
While the avg. workweek remained below 0.0%
33.0 -0.1%
34 hrs in Jan, wage inflation was
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

inexistent as the hourly earning increased

by only 0.1% vs. a 0.2% in Feb Avg. Weekly Hours - Total Private Hourly Earnings Mo. %∆

National Output and Inventories Conditions

ISM Mfg. Index 1.6% ISM Mfg Index, Chicago PMI and Mo. ∆% LEI 70%

The ISM index eased a bit. Strength in the 1.2%

60%
employment component and backlog of 0.8%
orders bolds well for the manufacturing 0.4% 50%
sector; however, an increase in customers’ 0.0%
inventory may be a signal that items are not
Jan-07

Jul-07
Oct-07
Jan-08

Jul-08

Oct-08
Jan-09

Jul-09
Oct-09
Jan-10

40%
Apr-07

Apr-08

Apr-09

-0.4%
flying out of the shelves. The overall index
-0.8% 30%
decreased to 56.5 in Feb 10 from 58.4 in Jan
Monthly ∆% LEI ISM Mfg Index Chicago PMI
10. The index was at 35.7 in Feb 09.

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ISM Non-mfg. Index (Biz Act.) 70% ISM Mfg Index Biz Act. Index
Helped by an increase in the employment index
the ISM Non-mfg diffusion index increased to 60%

53.0 in Feb 10 vs. 50.5 in Jan 10. The

50%
employment index posted its best reading since
Apr 08; however, it still below the all important 40%
50.0 mark.
30%
00 01 02 03 04 05 06 07 08 09 10

Mfg New Orders (NO), Shipments (SH), 15% New Orders Shipments
Inventories (INV) and Unfilled Orders (UO)
Factory NO, up nine of the last 10 months, 5%
increased 1.7% in Jan led by strength in

Yr %∆
-5%
transportation equipment (NO Ex-Trans
increased only 0.1%). NO for durable goods -15%
(previously released in mid-Feb), was revised
down to a still strong increase of 2.6% for Jan -25%

Jan-07

Jul-07

O ct-07

Jan-08

Jul-08

O ct-08

Jan-09

Jul-09

O ct-09

Jan-10
Apr-07

Apr-08

Apr-09
10 and a healthy 9.7% vs. Jan 09. NO for non-
durable goods increased 0.9% as the price of
petroleum and coal went up. Factory SH, up seven of the 8 months, increased 0.3% in Jan 10
after increase of 1.8%, 1.6%, 0.9% and 1.3% in Dec, Nov, Oct and Sept 09, respectively.
Furthermore, January strong NO suggests continued strength for SH in the near future. Factory
INV, up three of the last 4 months, increased 0.2% in Jan 10 and is likely to keep increasing as a
new building cycle begins. The inventories-to-shipments ratio was 1.29, unchanged from Dec 09.
After decreasing for 15 consecutive months, Factory UO inched up 0.1% in Jan 10. The unfilled
orders-to-shipments ratio was 5.54, up from 5.44 in Dec 09. The improvement in UO is
consistent with a tightening in available capacity.

On a separate note, NO and SH 8% NO and SH for Non-defense Capital Goods Ex-Air 20%
for Non-defense Capital Goods 4% 10%
Ex-Air, where NO is a good
0%
proxy for business investments 0%
Mo % ∆

-4% Yr % ∆
and SH is a good proxy for GDP
-10%
business equipment components, -8%
plummeted 4.1% and 1.7% -12% -20%
respectively in Jan 10. A
-16% -30%
recovery cannot happen if these
J an-07

J ul-07

O c t-07

J an-08

J ul-08

O c t-08

J an-09

J ul-09

O c t-09

J an-10
Apr-07

Apr-08

Apr-09

components do not go up.

Nevertheless, the ISM Mfg
report released earlier this week Mo% ∆ of NO_NDFCG Ex-Air Mo% ∆ of SH_NDFCG Ex-Air
Yr% ∆ of NO_NDFCG Ex-Air Yr% ∆ of SH_NDFCG Ex-Air
points to strong manufacturing
activity in February, suggesting
strength for the upcoming Industrial Production Report (03/15/10) and Durable Goods Orders
(03/24/10). Overall, the manufacturing recovery seems to be underway.

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Housing and Construction Conditions
Construction Spending
January Construction Spending dropped a less
5% Total Construction Spending
than expected 0.6% to a seasonally adjusted rate
of $884 billion after plummeting a revised 1.2% 0%
in Dec 09. YTD total construction has declined by

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
-5%
9.3%. Private construction has now declined for
10th consecutive months. Nevertheless, private -10%
residential was up 1.3% in Jan while private
nonresidential was down 2.1%. Public -15%
Yearly %∆
construction spending was down 0.7% – its 6th -20%
consecutive decline, but up 2.1% on the year.

Pending Home Sales Index

Despite a higher Y-on-Y comparison, the monthly 150 Pending Home Sales Trend - Feb 09 = 100 390
trend has been lower since Sept 09 when the 340
pending home sales index reached 114.1, then 130 290
falling to 90.4 in Jan 10 (our chart shows the 240
monthly and yearly trend line with Feb 09 being 110 190
140
the base of 100). Some blame the bad weather
90 90
during Feb 10 for the drop in the index but the Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan-
fact of the matter is that since the expiration of the 08 08 08 08 09 09 09 09 10

buyers tax credit in Nov 09 home sales have been Monthly Trend ∆ Yearly Trend ∆

declining. There is hope for an increase in activity

in March before April’s expiration of the buyers’ credit; nonetheless, unless there are more
stimuli or the economy improves dramatically, the outlook after April is dark. Foreclosures still
flooding the markets and buyers are conservative (supply is much bigger than demand).

Prices, Productivity and Wages Indicators

Productivity and Cost
U.S. productivity rose at the end of 2009 by more than previously estimated as companies
disregarded economic expansion and squeezed more out of their current staff, cutting labor costs.
The Labor Dept. reported that non-farm labor productivity increased by a saar of 6.9% during
4Q09 vs. a consensus of a 6.5% increase. Output rose at a 7.6% annual rate, while hours worked
increased by 0.6 hrs – the first rise in hours worked in more than two years. According to the unit
labor cost, so far there are no signs of inflationary pressures in wages. This should influence the
Fed to keep the lid on interest rates for the near future. Usually, big productivity gains occur first,
signaling the end of the recession and the beginning of a recovery, followed by employment rise
and finally wages increase.

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