From: US GIO <us.gio®jpmorgan.com> To: Undisclosed recipients:; Subject: Eye on the Market, October 26, 2010: From Nehru to Now Date: Tue, 26 Oct 2010 17:52:01 +0000 Attachments: 10-26-10_ EOTM_-_From_Nehru_to_Now.pdf Inline-Images: image00 1 jpg; image002.png Eye on the Market, October 26. 2010 Topics: US/Chinese smoke signals; a close-up on India It looks like U.S. equity markets are heading for our 2010 target, 1175-1225 on the S&P 500. Profit trends are supportive (60%-70% of companies are beating modest Q3 revenue and earnings expectations). But we harbor no illusions about where the latest equity market rally came from. Look at how the Treasury rally coincided with a declining equity market until Bemanke's Jackson Hole speech in August. Thereafter, weak growth and labor markets coincided with a Treasury rally and rising equity markets; bad news became good news. The reality of QE2 is more a rejection of the strong recovery view than its validation. What will the Fed actually do? Public statements on the topic have been all over the map, so the Vaticanesque wait will continue until November 3M. I find it interesting that the older our clients are, the more concerned they are that another round of Fed money-printing may be a big mistake. 10 year Treasury rates and the S&P 500 Percent Level 420% 1250 3.95% • 10 year Treasury S&P 500 (RHS) (LHS) 1200 3.70% • 3.45% • 3.20% • 295% • 2 70% • 2.45% • 2.20% No -09 Jan-10 Source: Bloomberg. Mar-10 May-10 Jul-10 Sel;•10 1150 1100 1050 1000 950 900 More smoke-signals: a Chinese Party communiqué mentioned "economic development" 13 times, and "economic growth" only 2 times. References to leading industries included technology and energy efficiency, but now exclude real estate and autos; another comment mentioned a new pattern of growth relying on consumption, investment and exports. This suggests a gradual move to more household consumption and a smaller trade surplus, which