New Home Sales 2-26-13

TRADEX GLOBAL INTERNAL COMMENTARY

New home sales surged!!!  Single family sales came in at an adjusted annual rate of 437k, which was significantly above the consensus of 339k.  This was also 16% higher than the revised December rate.  Homebuilder sentiment has been gaining strength, but we are now also seeing sales pick up.  Today we saw both increased sales and increased prices, making for a good day in the housing sector.  We follow this sector very carefully and have been saying that steady improvement will be the new-normal for the foreseeable future.  This is positive news on a day where markets gyrated up and down 100 points due to Italy and the Fed.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

New home sales surged in January, rising almost 16% from December in another sign of an improving housing market. Sales of new single-family homes in January came in at a seasonally adjusted annual rate of 437,000, the government said Tuesday. The results bested consensus estimates of 381,000. The pace of sales was almost 29% above the January 2012 estimate of 339,000, and almost 16% above the revised December rate. The strong showing in January follows an uptick in home builder sentiment and housing starts in recent months that hadn't been matched with an increase in sales. "Now, we're seeing sales pick up," says Patrick Newport, economist with IHS Global Insight. The homebuilding industry has been starved for good news for years. Last year's new home sales totaled 367,000, making 2012 the third lowest year on record for new home sales. They hit record lows in 2011. IHS Global Insight expects new home sales to rise to 464,000 this year. IHS doesn't expect new home sales to return to more normal levels, above 800,000 a year, until 2015. Increased new home sales are a strong indicator of increasing consumer confidence in the overall U.S. housing market, says John Tashjian, principal, Centurion Real Estate Partners. As buyers absorb existing inventory, builders will ramp up construction starts, which is also give the economy a "much needed shot in the arm," Tashjian says.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Case-Shiller - 2-26-13

TRADEX GLOBAL INTERNAL COMMENTARY

Home prices rise the most in 6 years!!!  The Case-Shiller Index of Property Values in 20 cities increased 6.8% YoY from December 2011.  The increase slightly outpaced the median projection of 6.6% and 19 of 20 cities showed an increase.  Record low borrowing and better employment is fueling home price appreciation.  The impact of HPA is being felt via lower foreclosures and lower loss severities if a home does go into foreclosure.  The home sector is clearly coming out of a depression and the increases are all off the bottom.  Regardless, we are still very encouraged by the strength of the move.  This bodes very well for our Liquid Real Estate Strategy and for the overall economy.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Home prices in 20 U.S. cities rose in December by the most in more than six years, a sign the housing-market recovery is strengthening. The S&P/Case-Shiller index of property values increased 6.8 percent from December 2011, the biggest year-to-year gain since July 2006, after advancing 5.4 percent in November, a report showed today in New York. The median projection of 30 economists surveyed by Bloomberg called for a 6.6 percent advance. Nineteen of 20 cities showed gains. Near record-low borrowing costs and gains in employment are fueling demand and boosting property values as the number of houses on the market drops and foreclosures ease. The improvement is shoring up household net worth and confidence, which may underpin consumer spending even as an increase in the payroll tax reduces take-home pay. “The key here is it’s not as if we’re getting all the juice from one area, it’s broadly based across the country,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who correctly projected the year-over-year increase. “Rates are low, prices are attractive, so affordability is high, and the labor market is gradually healing as well. If you were in the market to buy a home, right now it’s a good time." Another report showed residential property values climbed 0.6 percent in December from the prior month, according to data from the Federal Housing Finance Agency. They were up 5.5 percent in the fourth quarter from the same time a year earlier.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

2013 Scenario: Musical Chairs Will Cost Negatively-Convex Investors

The Tradex Group Weekly Blog

February 25, 2013

By Michael Beattie, Chief Investment Officer

2013 Scenario: Musical Chairs Will Cost Negatively-Convex Investors

What’s coming down the pike on interest rates and negatively convex investments?

It’s a fair - and relevant – question, given the fact that many investors are negatively convex in a big way, and thus exposed if interest rates rise.

Thanks to automatic $1.2 trillion budget cuts in the federal budget on March 1^st (political types call those cuts a “sequester”), investors are still getting out of equities and putting more assets into bonds.  According to Citigroup, bond fund inflows for the second week of February totaled $2.6 billion, compared to $1.8 billion for equities.

No doubt, those investors are in search of safe harbor investments, and are expressing some anxiety over the volatility of the stock market and are growing increasingly skittish about the U.S. economy.

But be careful what you wish for…  Fixed income investors may not be accounting for interest rate risk.  Currently, the federal funds target rate stands between 0% and 0.25% — historic lows by any measure.  If inflationary pressures begin to swell, interest rates have nowhere to go but up.  The question isn’t if rates will rise, but when.

Make no mistake, if rates rise (as will inflation), those fixed income investors will lose money.  When investors are long credit, they have negative convexity if rates spike upward.  Most investors hold these negatively convex securities right now, such as corporate high-yield bonds and exchange traded funds that earn some (small) yields in their portfolios.

That investment path, to a point, is understandable.  Investors aren’t getting much yield from Treasuries, where the 10-year bond is returning a measly 1.98%, as of February 24, 2013.  Yet reaching out for longer-term bonds and bond ETFs has left fixed income investors exposed, and at significant risk.

Call it a dangerous game of musical chairs.  When the music stops, and interest rates rise, some of these investors will be left without a chair.  That could prove to have a catastrophic impact on client portfolios, especially since investors in many cases really aren’t earning more than 5%, making the convexity a big “risk versus reward” issue.

What to do to get out of the negative convexity trap?  We recommend turning to positively convex securities, such as agency interest-only (I/O) mortgage derivatives where the asset value rises when interest rates rise, or to be outright short high-yield bonds where prices are expensive and risks of interest rates rising and further destroying value are large.

As stated above, since rates have already hit near ‘rock-bottom’, there’s really nowhere to go for them but up.  And that’s where mortgage IO derivatives and short expensive high-yield bonds can protect investor’s portfolios, providing strong returns even as rates rise.

Consider that strategy before rates rise, and insulate the fixed-income portion of your investment portfolio from collateral damage due to negative convexity.

Jobless Claims - 2-21-13

TRADEX GLOBAL INTERNAL COMMENTARY

Don't panic yet, but the weekly jobless claims number was higher than expected, and the 4-week moving average rose to 360,750 from 352,750 last week.  The 4-week average, which is less volatile, really is the number to watch.  It still feels as if the layoffs are pretty much done, but companies are just not confident enough to expand at this point.  The continuing claims, which were up 11k, is also concerning as more people are out of work for extended periods of time.  CPI, which increased by 1.6% YoY, shows tame inflation and very little ‘Fed Printed’ money hitting Main Street.  I still believe that we will see Washington and the Fed changing strategy to get money directly into the economy by direct lending, and not waiting for banks to get aggressive with lending.  This could possibly have a major effect on employment.  As I see it, financial assets rising do not put people back to work!  Keep nimble out there - Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Applications for unemployment benefits in the U.S. rose for the first time in three weeks, returning to levels seen prior to the holiday period and indicating little change in the pace of firings.  Jobless claims increased by 20,000 to 362,000 in the week ended Feb. 16, the Labor Department reported today in Washington. The median forecast of 48 economists surveyed by Bloomberg called for an increase to 355,000. The number of applications in three states and the District of Columbia was estimated because of the holiday-shortened week, a Labor Department spokesman said as the data was released. Companies are maintaining their staffing levels even amid concern that rising gasoline prices and a January tax increase will damp consumer spending. Looming cuts in government spending also threaten to slow growth, a sign that hiring may be limited in coming months.

“It’s a stable level of claims,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York, which predicted claims would rise to 365,000. “The main issue is the pace of hiring is not picking up. Businesses feel very uncertain about the outlook.” The cost of living was little changed in January for a second month as a drop in energy costs offset gains in clothing, hotel rates and airline fares, another report from the Labor Department showed today. Over the past 12 months, the consumer- price index increased 1.6 percent, the smallest year-over-year gain since July.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

In This Trading Environment, “60-40” Is A Losing Proposition

The Tradex Group Weekly Blog

February 18, 2013

By Richard Travia, Director of Research

In This Trading Environment, “60-40” Is A Losing Proposition

Change is constant on Wall Street – even a 24-year-old with a simple 401k plan knows that.

And that’s a good thing. Investment strategies that hang around for a while tend to resemble a loaf of bread left on the kitchen counter for a week or so. First it grows stale, and after a while you start to question whether the bread is healthy to eat or not.

In short, it’s a trust issue.

The same goes for Registered Investment Advisors and Broker/Dealers wedded to a traditional 60-40 equities and fixed income portfolio strategy model.

Whether it’s stubbornness or fear of trying a new approach, financial services professionals stick to traditional investments, and avoid alternative ones – to the detriment of their clients’ portfolio performance.

That’s a big mistake. In this chaotic investment environment, I wouldn’t want to be long only in any traditional equity or fixed income position – you really need to be diversified among both traditional and alternative investments.

That not only enhances returns historically, but it can also provide more stable cash flow, and leverages robust return opportunities in non-traditional investment sectors like shorting, interest rates, mortgage securities or commodities to name a few.

How good are those returns?

According to a NACUBO-Commonfund Study of Endowment Results from 2003 to 2012, the Standard & Poor’s 500 index returned a measly 2.7%, while 472 university endowments of all sizes consistently outperformed the index. The key factor in that over-performance? The study reports endowments with the greatest exposure to alternative assets easily outpaced the S&P Index, with average annual yields of 6.9%.

For RIA’s and Broker/Dealers, there are additional reasons for blending more alternatives into traditional portfolios. Let’s review some advantages and differences between traditional and alternative investments: 

Alternative Investments	Traditional Investments
Absolute performance objective	Relative performance objective
May use leverage	Limited or no leverage
Performance dependent primarily on alternative investment manager skill	Performance generally dependent primarily on market returns
Historically low to moderate correlation with market indices	Historically high correlation with market indices
Typically have reduced liquidity ranging from monthly to 12-month-plus lock-ups	Typically offer daily liquidity
Generally higher fees, which may include performance fees	No performance fees but may include fixed management fees for professional management.

Source: Morgan Stanley

So where should RIA’s and Broker/Dealers focus when discussing alternatives with their clients?

Target these three key areas:

Diversification – Brokers don’t talk about it much, but the traditional definition of diversification really doesn’t hold water. It’s really not about allocating client funds to dozens, or even hundreds of stocks and bonds (i.e., in the traditional 60-40 model). Instead, focus on strategy diversification, mixing in different alternative options.  Long/Short Equity, Long/Short Credit, Volatility Arbitrage, CTA’s and Mortgage Trading are some strategies that offer a diverse way to access relatively liquid asset class opportunities.

Risk evaluation – Financial services professionals should focus on targeting risk factors of both traditional and alternative investments. That said, the risk story you engage your client with is a good story to tell. Alternatives come from an asset class of investments that offer significantly different risk/return scenarios. In addition, alternatives have little correlation with each other – and to the S&P 500 or any common bond index. That gives you ample wiggle room to reduce risk in your clients’ portfolios.

Returns – As stated above, a portfolio blended among stocks and bonds and alternative investments beats a “traditional-only” portfolio model. Tout that advantage, and talk up the reduced risk and increased diversification, and your investors will be more receptive to abstaining from that stale loaf of bread on their portfolio tables.

Jobless Claims 2-14-13

TRADEX GLOBAL INTERNAL COMMENTARY

Jobless claims drop 27k to 341k and beat even the lowest forecasts by economists.  The four-week moving average was slightly higher at 352k (this is a more accurate number).  Companies feel more confident not to do any additional layoffs, but at this rate unemployment is likely to hang around at 8%.  Way too high to see meaningful interest rate hikes!  I still maintain that printing money only to be stuck at the Fed, or in a bank vault, will not get the private sector going.  I think that the Fed and Washington will come out with some more direct fiscal stimulus where they lend directly to the private sector or lend against some form of IOU.  The employment picture is just improving too slowly and I think something will change soon to unleash the sleepy animal spirits in the private sector.  Either way, this number is not too bad.  Keep nimble, from Miami...Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Claims for jobless benefits plunged last week, showing U.S. employers have little need to trim staff as demand improves. Applications for unemployment insurance payments decreased by 27,000 to 341,000 in the week ended Feb. 9, fewer than any of the 49 economists surveyed by Bloomberg projected, according to Labor Department data issued today in Washington. Another report showed consumer sentiment last week climbed to the highest level in a month. A drop in firings will probably help workers feel more secure in their jobs, which, combined with a housing-market rebound and rising stock prices, may bolster consumer confidence and in turn spending. Sustained pickups in hiring and incomes would ensure that households have the means to overcome the burden of a higher payroll tax. “The labor market is improving, but only at a very steady pace,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who had the lowest forecast in the Bloomberg survey. “What we need is an acceleration in hiring to move the unemployment rate lower.” The Bloomberg Consumer Comfort Index rose to minus 35.9 in the period ended Feb. 10 from minus 36.3 in the prior week, another report showed. The gauge advanced for a second consecutive week, led by waning pessimism about the economy. Shares were little changed as the drop in claims tempered concern over disappointing economic data from overseas. The Standard & Poor’s 500 Index rose less than 0.1 percent to 1,521.12 at 10:52 a.m. in New York after reports showed economies in Europe and Japan shrank more than forecast in the fourth quarter.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

On the House: Opportunities in Liquid Real Estate

The Tradex Group – White Paper Series

February 11, 2013

By Michael Beattie, Chief Investment Officer

On the House:  Opportunities in Liquid Real Estate

The U.S. real estate market is an under-appreciated, and overlooked investment opportunity – and financial advisors who take that stance risk missing out on a real portfolio game-changer for their clients.

“Huge” maybe an understatement.

The total market size in LRE is about $10 trillion, with hedge fund firms holding approximately $60 billion in assets.

Interest is burgeoning in real estate, thanks to a “perfect storm” of economic and industry trends that are breaking in favor of investors, especially those looking for growth and liquidity.

Fleeing Safe Haven Investments

The growth in real estate portfolio opportunities comes at a time when investors are clamoring for higher yields, and stronger growth appreciation.

Increasingly, money managers view the fixed income market as an inefficient, and even unattractive market (much more so than stocks), but see real opportunity in leveraging that inefficiency by beefing up their liquid real estate holdings.

While it’s true that many investors have fled to the ‘safe haven’ of government bonds in the past few years, don’t expect that flight to continue, as inflation picks up steam thanks to the Federal Reserve’s sustained policy of quantitative easing, which is starting to eat into fixed income returns.

With bond market returns sliding back to just 1% or 2%, a well-placed investment in LRE should make a steady double-digit return in 2013, and potentially more than that if the real estate market picks up steam and/or interest rates rise.

Enter liquid real estate, which could prove to be the newest safe haven for both income and growth-minded investors.

Consider these emerging factors in the U.S. real estate market:

Commercial Mortgage Backed Securities On the Rise – Industry estimates point to $48 billion in the CMBS sector in 2012, a figure that analysts say will rise in the first quarter of 2013, as more debt matures and lower fixed income yields fuels demand for MBS investments. By and large, if the commercial real estate market is healthy, rentals are up and occupancy is robust, then the market is more liquid, and thus more appealing to investors.

Maturities Story Grows More Positive – Back in 2005 and 2006, just as the real estate bubble hit, millions of investors poured cash into commercial mortgage backed holdings. Now, after the downturn, a heavy dose of those CMBS maturities are coming due in the next six-to-nine months, and that’s attracting more and more private equity firms. Such investors are looking to buy up distressed properties, usually in the form of single-asset purchases, and then sell them off at major gains, on a piecemeal basis.

Multi-Family Market Growing Rapidly – Large urban areas like Los Angeles and Miami are already seeing strong demand for multi-family properties, as institutional dealmakers pour more capital into purchases. That’s fueling more demand among key investors, and is driving up the value of multi-family properties.

Global Investors See U.S. Real Estate As “Save Haven” – Foreign investors, especially those in the already-rattled Pacific Rim and in Europe, view the U.S. commercial real estate market as a viable opportunity this year. China investors (especially banks), in particular, see the U.S. real estate market as a better bet, risk-wise. With ample cash on hand, foreign investors have to put their money somewhere, and increasingly, that somewhere is here. With more capital flowing into the domestic market, deals are closing faster, and more units are under construction (see China Development Bank’s move to finance the construction of 200,000 multi-family homes in Southern San Francisco).

Three Areas For Opportunity

How to leverage solid opportunities in real estate? Three opportunities take front and center.

Consider that the trend of “serious” delinquencies for U.S. RMBS has improved across all sectors in the fourth quarter of 2012, according to a new mortgage market index from Fitch Ratings. Additionally, the agency expects RMBS delinquencies to continue their descent throughout 2013.

Fitch says its 60-plus day delinquency index was pegged at 28.6% at the end of Q4-2012, down from 29.1% in Q3. That represents a downward slide of  30.6% from Q4-2011.

According to Fitch, the improvement “reflects positive selection in the remaining pools, loan modification efforts by servicers, and positive home price trends.”

Those trends have resulted in a 5% rise in the average price of a U.S. residential home from January 2012 to January 2013. “Helping the price increase was low mortgage rates and a lower percentage of distressed property liquidations,” Fitch stated.

Another factor supporting a healthier housing sector is the high number of “bad” borrowers flushed out of the mortgage market. All the above trends come at time when distressed RMBS bonds are undervalued, and may well, in many cases, be worth par.

An Opportunity in Agency I/O’s

Mounting signs of vibrant growth in the U.S. housing sector presents solid opportunities in another mortgage sector – Mortgage derivatives ( Interest/Only (I/O) securities). I/O derivatives collect the interest portion of a mortgage payment and offer an option adjusted spread OAS, also known as a hedged return, in the low-to-mid double digits, with no leverage.

The prices of these securities fluctuate based on the CPR (conditional prepayment rate), or the expected amount of prepayments in the underlying mortgage pools. As prepayments increase, prices fall and as prepayments slow, prices rise.  Prepayments in agency mortgages can come from refinancing, which has recently been attractive to borrowers due to historically low interest rates and/or government programs such as HARP and HARP 2.0. Prepayments in non-agency RMBS have a life of their own and tend to have different prepayment characteristics.

In that regard, Agency I/O derivatives are extremely sensitive to prepayment speeds, as more and more Americans refinanced their homes in a sustained era of low mortgage rates. As noted above, though, government programs like HARP and HARP 2 were highly effective in helping homeowners refinance. But as 2013 progresses, now that HARP is winding down, most homeowners who could refinance, by and large, have already done so.

As a result, prepayment speeds are hitting a high water mark, and will likely decline through the rest of 2013, especially if interest rates rise, as many economists predict may eventually happen. As rates rise, homeowners are less incentivized to refinance their homes.

Leveraging “Distorted” Bond Spreads

Another opportunity in the current mortgage security market is via relative value agency RMBS trades.

Due to extreme government intervention, and the steady purchases of mortgages by the Federal Reserve, low coupon agency mortgages are mispriced relative to where these securities actually should be priced. That spread in price creates a good opportunity for investors to take a short position in low-coupon agency mortgages versus a long position in high-coupon agency mortgages.

The key here is adhering to a trading model designed to monitor historical spreads. When these spreads get distorted, the trade is put on - typically with some leverage. As spreads revert to more historical norms, the trade is closed out.  This trade is highly liquid, and should result in better-than-average returns in 2013, given the opportunity created by the government and Federal Reserve interventions.

---------------------------------------------------------------------------------------------------

Summary: Three Ways To Play Liquid Real Estate

The optimal investment strategies in today’s LRE market calls for a three-pronged approach:

Distressed Non-Agency RMBS/CMBS Strategy - Go long on subprime bonds, in direct opposite of the approach savvy investors took in 2006, when the real estate market was tanking. Focus on distressed RMBS and CMBS bonds that can be stressed to draconian levels of default and extreme loss severities with positive results, and reap the rewards as real estate values appreciate.

MBS Derivative Strategy - The optimal current MBS Derivative strategy primarily consists of IO (interest-only) securities. These I/O securities collect the interest portion of a mortgage payment. The prices of these securities fluctuate based on the expected amount of prepayments in the underlying mortgage pools. Prepayments in agency mortgages have been elevated from refinancings, due to historically low interest rates and/or government programs such as HARP and HARP 2.0, but we believe prepayment speeds have peaked and prices are set to appreciate.

Relative Value Strategy – Another tack for  investors to take is in relative value. Here, the idea is to leverage the spread between US Treasuries and agency mortgages, or expensive agency MBS vs. cheap agency MBS.  Returns aren’t as robust with this strategy, but deploying relative value trades can reduce the overall volatility of a portfolio.

There’s little doubt that the upside in liquid real estate investments is substantial in 2013. In a fixed income environment where yields are wafer thin, a pivot to real estate  - and the price appreciation and interest payments that the sector is offering right now – may result in solid portfolio growth throughout the year.

MBA Mortgage Applications 2-6-13

TRADEX GLOBAL INTERNAL COMMENTARY

Mortgage applications jump!  The total number of applications was up 16% from the previous week and the refinance index was up 15% from the previous week.  The mortgage rate was up on the week to 3.73% from 3.67%.  The share of applications to refinance was 78% of the total, down from 79% the week before.  This number is volatile and sometimes is not the most accurate factor in refinancings, but the market focuses on this.  IO’s are usually priced on the latest weekly number instead of the 4-week average, which I believe gives a clearer picture.  The plain fact is that most borrowers who could refi have already done so, and the “hidden” cost to refi is the new guarantee “G” fees that the agencies are charging which are not reflected in the mortgage rate.  The fees have been going up and will continue to rise as the government has found a new income stream!  We stand by our prediction that the prepayments are going to dramatically slow, and that IO securities will rise significantly in the next 2 quarters. With that being said, we are still keeping a watchful eye.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

The total number of mortgage applications filed in the U.S. last week jumped 16% in the U.S. last week, the Mortgage Bankers Association said Wednesday. The refinance index rose 15% for the week ended Feb. 1 from the previous week, according to MBA's weekly survey, which covers more than three-quarters of all U.S. residential-mortgage applications. On a seasonally adjusted basis, the purchasing index increased 2.2% from the prior week, MBA said. Low interest rates have attracted new buyers and prompted many homeowners to refinance their existing mortgages. In the latest week, however, interest rates crept higher. The share of applications filed to refinance an existing mortgage totaled 78%, down slightly from the prior week's 79%. Adjustable-rate mortgages, or ARMS, made up 3.7% of total activity. The average rate on 30-year fixed rate mortgages with conforming loan balances rose to 3.73% from 3.67% in the prior week. Rates on similar mortgages with jumbo loan balances edged up to 3.96% from the previous week's 3.95%. The average rate on 30-year fixed-rate mortgages backed by the Federal Housing Administration, or FHA, increased to 3.53% from 3.48% in the previous week. The average rate for 15-year fixed rate mortgages edged up to 3% from 2.95% in the prior week. The 5/1 ARM average rate climbed to 2.72% from 2.6% a week earlier.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global

Personal Income & Unemployment 1-31-13

TRADEX GLOBAL INTERNAL COMMENTARY

Personal income exploded upward.  American income growth rose 2.6% last month, the biggest gain in more than eight years.  Much of the gain is attributed to dividends and special payments disbursed before the new tax increases, but ordinary wage increases still grew at one of the fastest paces seen in the last year.  Regardless of how we got it, the increase of 2.6% is much better than economists’ estimates of 0.80% income growth.  The big rise in incomes will put the consumer on good footing to start the New Year off.  The income gains also helped push the savings rate to 6.5%, the highest since May 2009. 

A separate report showed that initial jobless claims increased from the prior week 38k to 368k; the four-week moving average of claims is still a respectable 352k.  We are looking for the four-week moving average to get below 300k before we start the growth party.  We will wait and see the jobs number on Friday (it was disappointing, but revisions were strong), but if the ADP is close and we add anything north of 170k (actual was 157k) would cause us to take it very positively.  Keep nimble – Michael Beattie

EXTERNAL RESEARCH COMMENTARY

American income growth surged in December as companies rushed to make dividend payments before higher tax rates set in, while buoyant wage growth also gave a lift to households. U.S. personal income rose 2.6 percent last month, the biggest increase in eight years, the Commerce Department said on Thursday. While much of the gain was due to special payments aimed at beating tax increases due to begin this month, wages still grew at one of the faster rates seen last year. That should lend support to consumer spending and provide some underlying momentum for the economy despite a surprise contraction in gross domestic product during the fourth quarter. "Even abstracting from the one-off surge in dividend payments ... the general tone of this report was quite encouraging," said Millan Mulraine, an economist at TD Securities in New York. The increase in overall personal income was well above analysts' expectations for a 0.8 percent gain. However, another economic report showed an increase in new jobless claims last week, and U.S.stocks traded lower as investors sifted through the mixed data, while prices for U.S. Treasuries were higher. The big rise in incomes put consumers on stronger footing entering the new year, even if the gains may not have been distributed evenly throughout the workforce. Most extra dividend payments went to wealthier households with more investments. Still, wages and salary payments grew 0.6 percent last month, building on a sizable 0.9 percent gain in November. The income gains helped push the saving rate, the amount of disposable income households socked away, to 6.5 percent, the highest since May 2009. That offers a cushion for consumer spending as the temporary boost in incomes from investments unwinds and households deal with higher tax rates that took effect this month. Last month, consumer spending rose a modest 0.2 percent, which was just below the pace expected by analysts. The Commerce Department report also showed cooling inflation, which could help the U.S. Federal Reserve continue easy-money policies aimed at boosting employment. Prices rose 1.3 percent in the 12 months through December, down a tenth from the reading in November and well below the Fed's 2 percent target. A core price reading, which strips out volatile food and energy prices to provide a better sense of inflation trends, was up a tame 1.4 percent from a year ago.

A separate report from the Labor Department showed initial claims for state unemployment benefits increased 38,000 last week to 368,000. However, the increase followed a week where new claims were at their lowest in five years and still pointed to an economy where employers are adding jobs, albeit at a lackluster pace. The four-week moving average for new claims, which provides a better sense of underlying trends, gained 250 to 352,000. A report on Friday is expected to show employers added 160,000 jobs to their payrolls in January after an increase of 155,000 in December. The unemployment rate is seen holding steady at 7.8 percent. U.S. small businesses boosted employment in January by the most in nine months, helped by hiring in the transportation and real estate sectors, the National Federation of IndependentBusiness said. The NFIB said the net change in employment per firm rose to 0.09 this month from 0.03 in December.