asset management

Market Letter (Feb 04, 2011)

Markets today:
Labor Markets: Jan Non-farm payrolls disappointed (↑36K vs. ↑145K [est] & ↑121K [Dec]) as private sector job
creation (↑50K vs. ↑155K [est] & ↑139K [Dec]) trailed expectations and came in well below the recent ADP print
(↑187K). Goods-producing sector added 18K jobs (vs. ↓7K [Dec]). The sharp gain in factory payrolls (↑49K vs.
↑14K) mirrored the strength in employment indices in regional/national manufacturing surveys. However it was
partially offset by a steep, and possibly weather-induced, decline in construction jobs (↓32K vs. ↓17K). Job creation
in the service-providing sector plunged (↑32K vs. ↑146K) following big negative swings in Transportation (↓38K vs.
↑49K) and Temp hiring (↓11K vs. ↑38K), which too were impacted by an inclement weather in Jan, arguably the
most volatile month for jobs data. Employment in Retail Trade however rose significantly (↑28K vs. ↑3K) reflecting
healthy sales gains reported by department and chain stores. Government sector continued to lose jobs (↓14K vs.
↓18K) across the board: Federal (↓2K), State (↓2K) and Local (↓10K). Payroll data for the prior 2 months was
revised up by 40K: Dec (121K; ↑18K) and Nov (93K; ↑22K). Average workweek declined to 34.3hrs (↓0.1hr) while
average hourly earnings continued to rise ($22.86; ↑¢8; or ↑0.4%) beating expectations (↑0.2%) and gaining 1.84%
YoY. Payroll employment rose by 984K over the 12-month period ending Jan 2011 (vs. 909K [Dec]). Household
Survey reported a stunning drop in unemployment rate to 9.0% (vs. 9.5% [est] & 9.4% [Dec]) as labor force shrunk
(↓504K vs. ↓260K [Dec]) and jobs rose (↑117K vs. ↑297K) to push the unemployed number to 13.863mn (↓622K);
43.8% (↓0.5%) of whom have been jobless for 27+ weeks. U-6, its broad measure, also fell sharply (16.1%; ↓0.6%).
Technical Notes: Benchmark revisions to Establishment Survey data lowered Mar’10 payrolls by 411K. Apr–Dec’10
data was revised by applying previously derived over-the-month payroll changes to the March benchmark level and
incorporating new seasonal and net birth/death adjustment factors, the latter to be revised quarterly. Household
Survey includes updated estimates for population (↓347K), labor force (↓504K), and employment (↓472K).
NY: Stocks chopped on confusing NFP, but bonds sold off precipitously as better incoming data (including hourly
earnings) raised inflation concerns against the backdrop of rising national debt. Crude declined on chatter over
Mubarak’s exit. Dollar extended its gains as the market rehashed NFP. Precious metals were soft. VIX fell further.
Close: Dow (12086, ↑0.2%); S&P (1310.3, ↑0.2%); NASDAQ (2768, ↑0.5%); R2K (800, ↑0.17%); VIX (16.19,
↓3.0%); 10yr (3.64, ↑9bp); 2/10 (289, ↑5bp); FN4.0 (73, ↓2bp); EUR (1.3587, ↓0.3%); DXY (78.03, ↑0.4%); CRB
(339, ↓0.6%); Oil (88.9, ↓1.8%); Ngas (4.31, ↓0.5%); Au (1348, ↓0.3%); Ag (29.08, ↑1.2%); Cu (4.571, ↑0.8%).

Macro Outlook:
Unemployment rate falling to 9% (↓0.4%) is not in sync with its recent FOMC projection of near 9% by Q4’11.
Besides, its unadjusted print jumped to 9.8% (↑0.7%). Similarly, the drop in U-6 (16.1%; ↓0.6%) is not supported by
its unadjusted reading (17.3%; ↑0.7%). The rise in marginally attached (2.8mn; ↑291K) is to be noted here. NFP
report was not weak, just hard to tell how strong it was. Click here to access our top global macro calls for 2011.

Portfolio Strategy:
Markets have chosen to ignore the NFP miss, but focus on the unemployment rate instead as the harbinger of
progress in the jobs market. While we do expect NFP to spike up in Feb, it is true at the same time that improvement
in labor market has been very slow. However that may not be an issue for stocks, as Bernanke made it clear
yesterday that he expects economic growth to come in decent but not great and that he will be willing to prime the
pump if that is what it takes. Therefore, equities do enjoy a central bank PUT here. S&P closed above 1307 for the
week, which points to further gains ahead. However as outlined earlier, S&P could pull back in the near term. 1285
followed by 1227 would be key support levels to watch. Click here to access our Q1 2011 asset allocation schematic.

– Shiva Ganapathy (See marcopoloam.com for more)

This proprietary and confidential document is a market commentary meant for informational purpose only and not an advice or solicitation or an offer to enter into any transaction.

Marco Polo Asset Management 75 Broad Street, New York