Value of Perfect Information

Quick notes on the economy and markets.
 The housing market continues to show resiliency. The S&P CaseShiller home price index increased
1.6% for the month of July. Year over year comparisons are down 13.30%, which is well off of the 19%
drop at the end of January 2009. When one views the long term chart, it is very difficult to point to another
downturn being possible. Since April, the price index is on a near 15% annual increased pace.
 While the market and economy was experiencing cascading failure after failure during 2008, we made
mention of the overwhelming negative headlines versus positive ones. This pointed, according to a
study from Credit Suisse, to the most pessimistic news story metric on record. Well the news heard
index just made a significant jump. It is now at levels that have not been seen since 2007. As pointed
out by CS, it usually marks a significant jump in overall consumer confidence numbers.
 For as much as has been written about the overheating Chinese economy, their year over year consumer
inflation is still negative on a year over year basis at –1.2%. This may start to increase as we
see some of the new orders on the manufacturing front begin to stimulate some domestic spending.
However, with such a large population, domestic consumption only makes up 37% of their GDP.
Though increasing domestic consumption is a primary focus for the Chinese government, it will not
happen overnight. The dependence upon the US consumer will still be a heavily weighted variable.
 Inflation across emerging markets are still falling , however but at a decreasing pace. Perhaps the
most appealing inflation metric is the significant drop in food inflation. In the 3q of 2008, food inflation
was running at a 6.50% annual pace in the emerging markets. The last print came in at 2.50%. For
countries that often have volatile political environments, rising food prices can often multiply the rising
tensions of a slowing overall economy.
 We continue to push for an overweight in the Emerging Markets. As the economy recovers, industrial
production across the EM universe is picking up dramatically. New orders have been increasing for
Korea, China, Brazil Russia and Turkey to name a few. India’s new orders have rolled over and look to
be taking a little rest. Another issue to monitor which may greatly influence the equities of these
emerging markets is the already increasing corporate earnings estimates.
There are still many opportunities in the marketplace and we would consider any significant drop in prices
in equities (domestic and international), debt (specifically corporate and municipal) and commodities as a
point for allocating more capital for risk assets.
Ps. Happy 60th Birthday to the Peoples Republic of China. On October 1st, 1949, the People’s Republic
of China was founded. At 60 and from an economic perspective, China seems to be a youthful and spry.

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