The Week in Review

Key releases this week were on net, a disappointment, one reason the 10 yr Treasury yield fell from a 3.37% Monday to a 3.30%, Friday.

Of course there are always many factors impacting Treasury prices, including both fiscal and Fed policy, and the occasional flight to quality from folks panicked about one event or another. But the major influence, ongoing, is just plain old real sector developments. Nothing fancy here whatsoever.

For example, Oct/7/2010 the 10 yr was at 2.40%. Nearly everyone looked for dismal economic performance ahead - lousy key releases that is. End of October we advised our clients to look for just the opposite. Sure enough, Dec/8 the10yr printed 3.33%, being a witness to "surprising" vigor. Then the market crowd really got behind the growth mantra, the 10 yr printing 3.53%, Mar/7. About this time we reversed course, warning our clients that there was a piano directly overhead. Yet exuberance continued into early April, the 10 yr printing 3.60% on Apr/8. The trout were still keyed in to the fly long departed. But finally, folks began to catch on. Last print - 3.30%. A interesting little journey.



The equity market went the other way this week, celebrating, but then it’s had a life of its own for some time now.

Key economic data presented nothing to cheer about. Q1 GDP came in under expectations, and key - as we had predicted they would be, those expectations had been shaved substantially from a month earlier. Next, Jobless Claims were up 25M vs market expectations for a decline. Nothing to cheer about there. Both Personal and Disposable Income grew moderately in March. OK, not bad. But Real Consumer Spending was up only 0.2%, not a stick in the eye maybe, but no spark either, suggesting that spending slowed at the end of Q1.

If there’s one primary player which has thrown the ‘ol engine a curve ball, it is oil. We got downright personal with folks several weeks ago and stated that it’s foolish to be constructive (lower prices) on crude. If you are, don’t let your friends know it. Why commit social suicide?


Robert Craven

Q1 GDP - Lesson Provided - An Alert

Today’s US Q1 GDP release, +1.8%, completes a recent exercise for our clients, and, provides a lesson in market observation.

We predicted Mar/23 that forecasters would cut their estimates for GDP substantially. After a few weeks, all had done so. Today’s result was even below that new consensus.

We’re not seers, no brighter than the next guy. Key is that, as trout are slow to recognize, then slow to give up on a certain insect (see our Apr/3 post - Observations at Stream Side) so the market crowd are always 1) slow to adopt a new reality and 2) slow to let it go, willfully blind to what a few independent observers can easily understand to be reality.

This is a great little guide in one’s voyage through the market maze, and it’s every bit about crowd behavior.

Finally, to today’s discouraging Jobless Claims release (429 vs 390, consensus). We predicted Apr/25 in Potential For Worry, the Week Ahead that both today’s GDP and Jobless Claims releases carried more potential to worry the market than to cheer it. That was the result.

Robert Craven

Today’s Durables Orders Number - An Alert

We noted in the Week Ahead that this number carried a greater potential to worry the market, than to cheer it. That is because another weak report, on top of the last, would be taken as trend setting, bothering equities and firming bond prices.

Instead, today’s release for March, +2.5% was nearly double expectations, and the prior month was revised to a small gain (vs - 0.9%). There was but modest market reaction.

Durable Orders are notoriously volatile, flying in every which direction month to month.

Perspective: Trend is key and we see that these hard goods orders have risen 29.8% since bottoming in Mar/09. This is pretty good news, although the level is still 16% below its Dec/07 peak.

And the key non-defense capital goods shipments component, the proxy for capital spending, is slightly above the Q4 average. We can assume then that capital spending expanded modestly in Q1.

Robert Craven

Bad News For Fed Watchers

Bernanke’s press conference tomorrow is bad news for the Fed watching industry! None of them like us very much anyway since we started the whole thing rolling back in late ‘93; now the rest are actually going to have to find something productive to do.

Background: Pre - 1994 the Fed never announced a policy change; a legion of Fed watchers had to read it in the tea leaves. They’d watch reserves for example to determine any change. Eventually, Greenspan would leak the decision to one of two WSJ reporters, an illegal act which would see any of the rest of us taking our meals through a slot.

After change was announced in 1994, we got all sorts of hate mail. There were 500 tea leaf readers on Wall Street without anything to do.

Tomorrow’s briefing is good news however for many in Congress who have been demanding more transparency. The reverse side is that it could provide insurance against political meddling, no doubt a prime motivation for the briefing in the first place.

Another reason for the historic change may be wild commentary by other policy makers, often at odds with formal policy. Bernanke does not like this stuff. It was rampant in the old days, one point of contention in our testimony. Jerry Jordon for example, the then president of the Cleveland Fed was a loose cannon. Gov Wayne Angell was close behind. Both were dangerous because the market crowd didn’t know any better but to take them seriously.

Bernanke’s comments will of course be measured; he knows markets could swing wildly on the wrong word. He will defend QE II, tell us it will end in June, and, he will outline just how this generosity can be successfully reversed, "if necessary." There are different ways this can be done. One is to sell the cattle herd back. That is, take the money out of the system that way. The Fed may also boost the interest it pays on bank reserves, so called excess reserves held at the Fed. The idea is that this would discourage the banks from venturing elsewhere. They could also stick with the Fed Funds, the rate banks charge each other of O/N loans, and nudge that upwards.

Just how they do it, if they do it, will impact interest rates somewhere along the yield curve (90 days - 30 yrs). We’ll try to provide a heads up on that.


Robert Craven

Moonshine

Grandpa used to have a still, out there in the Kings River bottom land, E of Fresno.  Most folk just looked the other way.  All that water and all that corn mash - distilled right down to just a little bit of pure power.  Quality, delivered at midnight in the back seat of a 1930, straight-eight Nash.

There are still a few talented moonshiners out there.  We're thinking now of the economic variety. They have a known, consistent method and a trusted product; that is, they have a track record. All the rest are just Wall Street kids. And they make bad whiskey. It's dangerous to drink their stuff.

Our job at this center is to deliver only the Real McCoy - just a shot, clear and potent - up to the bar.  You can take it from there.

In that spirit, let's look at our exercise the past six months, delivering the good stuff.

October 2010 most looked for continuing weakness.  Remember? Most looked for employment and spending to go nowhere, including two business planners who happen to be our clients. We told these two to look for more vigor, and why.  By December, others came to agree, discarding the bad whiskey. The economy cooperated.

Both employment and spending improved nicely. That strength carried into Q1, surprising almost everyone. By then, all of the market crowd were fans of the economy. All looked, including nearly all economists, for more of the same.  They started buying the cheap stuff again. Mid-Q1 we told our two planners that was wrong, that Middle Eastern turmoil and crude would force economists to cut their estimates for GDP; they did just that, surprising nearly everyone, including themselves.

Why are employment and spending such key sectors right now?  Because a lagging in both makes for the two-tiered, layered recovery and thus the disappointment for example of those who depend on discretionary consumer activity for a living.

Where are we going the next six months?

There's a governor placed on the economy now; she can't race at full power. The otherwise self-sustaining process is being hampered. Oil prices are not a blip and they are not here to stay. They are a phenomena of the intermediate term, and, an effective brake over that period. And during that period, wages will not keep up with this and other commodity-related costs; yes, those costs ex'd out by our friends at the Fed.

Another drag is that to be applied by the ECB and the Bank of China - higher official rates. That's no fun for US exporters.

Aside from these, the old Nash would be firing on 7 or her 8 by the end of Q2.


Robert Craven

Potential For Worry - The Week Ahead

We’ve got a full week of economic indicators and the first ever post-meeting press conference given by a Fed president.

Indicators are important if they carry market-moving muscle. We’d rather our clients be armed up front, than not.

We have several housing related numbers this week (beginning with today’s March New Home Sales) but none of these carry much muscle.

March Durable Orders (new orders for hard goods) on Wednesday however carries plenty of muscle, and the greater potential to worry the market than to cheer it. This key number was off 0.9% in February when it was expected to be up 1.2%. A component of this release is so-called Non-Defense Capital Goods Shipments, something which is really a proxy for capital spending so it’s important. That February component was better by 1.1%. Thus, the February release was mixed but another decline in the headline number for March combined with a decline in the Shipments component will greatly worry the markets, indicating a stall.

Thursday’s Q1 GDP advance report is also key. Q4 was up 3.1%. Estimates for Q1 have been significantly reduced due to higher energy prices. Consensus is now + 2%. But even a number through expectations won’t cheer much because the market crowd is becoming a believer in our piano just overhead. Also key on Thursday is the Jobless Claims report. Recall that this number disappointed last week (higher than expected). An improvement is expected (390 vs 403). Both of these releases then carry more muscle to worry the market than to cheer it.

Wednesday we will have Bernanke’s testimony. The FOMC meets for two days this week (Tues, Wed). The policy statement will be released early (12:30 pm ET) then Bernanke’s press conference at 2:15. World markets will hang on every word. We’ll have a special issue prepping our clients for this event.


Robert Craven

Thank you Barack Obama. Thank you Ben Bernanke. The Week In Review

For those who still question the two-tiered nature of this recovery, this week must have waylaid those doubts. No, it’s not about to collapse on itself, souffle fashion. That was predicted much earlier by a seer or two; we told our clients that was wrong. However, there is no denying the layered look.

The corporate world is lean and mean, healthy and profitable.

One individual played a key role in this US corporate transformation (although he’s modest about his accomplishment) and then another in the follow-up stock market performance we have witnessed recently. These two partnered up, working in concert; the first is Barrack Obama; the other is Ben Bernanke.

From the get go Obama scared the pants off of corporate America. We had that from CEO’s directly. His activist agenda (now mostly in tatters) meant that every new employee represented a threat. Thus the corporate world made changes long delayed, changes which did not postpone the need for new people but eliminated that need entirely, and permanently. Productivity! This goes a long way in explaining the stellar results in corporate earnings. And this explains in a sentence or two the so-called “jobless recovery.” It isn’t, but it seems that way to many.

Bernanke deserves credit too. Bernanke’s role is that he flooded the markets with liquidity. Nobody knew what to do with it all at first. Some went offshore because there didn’t seem to be much fun sticking around the house. And US bonds aren’t any better than a stick in the eye to a lot of folks, especially when there is the good risk of higher rates (lower prices) ahead. And Blue Chips seemed expensive. But Bernanke’s unending generosity eventually sparked an appetite for all kinds of things, including all kinds of stocks - that is, for companies which otherwise would have gone begging - money was so plentiful, might as well take a shot. That’s today’s reality. It’s that simple.

In the meantime, the rest of Americans - the other tier - are experiencing some pick up, some hint of recovery, or have just read about someone who has. Nothing stellar - Thursday’s Jobless Claims result showed that - but it’s catching on. And once the required retraining and relocation takes place, that adjustment forced on the American work force, the employment picture may look downright rosy.


Robert Craven

Employment

One exercise of ours is to predict key US economic release results vs expectations. This may not provide value to all of our clients. It is perhaps of no interest to business planners, of moderate interest to investors but of course of key interest to trading desks, extending a long leg up regarding market response. An earlier product dedicated purely to that exercise was very successful.

We had advised our clients Mar/10 to expect better employment figures than consensus, following weeks. That worked well. We ended this exercise Apr/7 with that day’s Claims result a tad better than expected. We ended the exercise for the simple reason that we lost the “feel” that is required for success.

Today’s key Jobless Claims result was not as good as expected, initial claims staying above the 400M level for the second consecutive week, something that has not happened since late January.

We know that employers were cheered by results of Nov/2, further cheered as a new Congress quickly set about to make repairs. We know this, not from our own prediction, but from the words of key business leaders themselves, a chorus actually.

That change, and extended tax cuts together sparked US consumer spending, employment and spending then moving in tandem. We know spending will be slowed, near term, by higher gasoline prices. We’re not sure regarding employment, not sure if today’s figure indicates a trend.

The exercise ahead is to understand reality for both of these sectors for Q3.


Robert Craven

Oil Revisited or Why You’re Not Traveling This Easter

We predicted earlier that higher crude would cause forecasters to shave US GDP estimates. They have done so.

From late February we’ve had WTI (near contract then 99) at 120 but that was/is the first stop tied to Middle Eastern conflict, particularly the threat of, or an actual Iranian / Saudi shootout.

This is the reason we cautioned clients late February that it was simply foolish to be constructive (lower prices) on oil and to most certainly treat any price drop as a correction, not trend. We didn’t foresee a trashed dollar, nor change in demand, nor slim inventories.

Today analysts who apparently know a whole lot more about oil than we do, tag this strength to, sure enough, 1) a trashed dollar, 2) more demand and 3) slim inventories.

I don’t know, I guess the younger guys have passed us by. They’ve got all kinds of models showing this and that. And then one bullish analyst said today that if we get a couple of hurricanes, crude is going to the moon. Well sure, acts of God come in handy when you’re on record. But further Middle Eastern conflict and threat of blockage or interruption is not an act of the God we know; it’s instead a near certainty.

Let the dollar strengthen, let inventories bloat, let June WTI trade at 108 tomorrow (last, 112). Nothing has changed.

It remains foolish to be constructive on crude.


Robert Craven

The Federal Reserve, The Debutante Ball and The 15 Parrots

Alan Greenspan thrived through complexity. That is, he snowed his opponents.

Ben Bernanke is instead intellectually honest; he’s not trying to hide the decision making process as did his predecessor. Thus, we will have an explanation of policy intent Apr/27 following the 2-day FOMC meeting. This is a debutante ball, a coming out, something which we and two other individuals, like good parents, funded Oct/19/1993 in the halls of Congress.

So we want to prepare our clients up front for this event. Relevant background material serves as a good start.

In our Sep/5/10 sketch - Caught Flat Footed - we predicted the Fed may launch another stimulative program. That was announced Nov/3 and called QE II.

We have offered several past issues explaining the workings of the Federal Reserve for those who have a job or are otherwise occupied, but do have at least a passing interest. We have also explained the mechanics of QE II and, how it can be reversed. It’s pretty simple stuff. Want to flood the markets with money? Buy that herd of cattle at the asking price, credit the rancher’s bank’s account at the Fed. The source of the money? Thin air naturally. Want to reverse QE II? Sell a herd of cattle at the market price, debit the rancher’s bank’s account at the Fed and you’re done.

We anticipated QE II, yes, but saw it as unnecessary and still do. See our sketch of Dec/5/10- Too Big For Its Britches for the reasons why. We did not agree, understanding that QE II serves not other purpose but to 1) fuel commodity price inflation abroad and 2) bolster the equity prices of otherwise less deserving US firms. The US economy was not in need of more liquidity for goodness sake. The ground is saturated. It all runs off.

But now there is rancor in the ranks. Some policy makers are taking our side. There is always disagreement among policy makers naturally but in the old days it was hidden - all were supposed to tow the party - Greenspan’s - line. For example, Greenspan hosted a conference call before the hearing we attended, coaching all the governors and district bank presidents how to answer our inquires (as they had them in advance). They did just that, sounding like 15 parrots. (Ref., HR28, Hearing before the Committee On Banking, Finance and Urban Affairs, Serial # 103 - 78, US GPO, 1994)

No more. We have democracy at the Fed, freedom of expression.

We’ll see how Bernnake handles this bunch, Apr/27.


Robert Craven

JAPAN REVISITED - Our Feet To The Fire

Most of us old folk remember Paul Samuelson; his Economics 1-A text was popular for years, maybe still is. But Samuelson said something once about the risks that went with the territory - “to be published is to be found it.”

This plagues the profession to be sure but we have no intent of acquiring Samuelson’s paranoia. In an earlier piece we referred to a track record or Scorecard. It’s easy to fill in the blanks with success and hope clients forget the rest.

In that spirit, we must revisit our work on the Mar/10 Japan earthquake and economic repercussions.

We noted Mar/14 - Having the advantage of working closely with Japanese institutions, past years, we can confidently advise our clients to look for more rapid resuscitation than is now priced in. We then stated on Mar/15 that in the world-wide market sell off, the market crowd had over reacted. We predicted markets would recover, and noted again that it was best for clients to expect more resiliency in recovery, not less and that this is to serve as an anchor as this event continues to unfold. This was the correct appraisal. Observers expect Q2 Japanese GDP to slip but for Q3 GDP to be positive.

However, we predicted Mar/16 the high risk of repatriation - Japan selling US assets in a panic, taking the money home and tanking our bond and stock markets in the process. It did not happen, at least not to any appreciable degree. Next, we predicted Apr/1 that Japan will issue bonds and that, although the Bank of Japan denies it, we expect them to at least partially finance this effort. As of today the Japanese government says they hope to avoid issuing new bonds, and, if they do, the Bank of Japan still denies that they will buy any of them! Finally, we predicted this event was either a wash or modest spark for the US economy. We don’t have that answer yet.


Robert Craven

Deliverance, The Movie and Standard & Poors

Remember the movie folks? Burt Reynolds put an arrow right through a good ‘ol boy whose improper intentions were directed towards his (Burt’s) friend. It wasn’t pretty.

Now we’re not making a case that S&P's types are strange or anything, like being inbred, like seeing a family reunion as a dating opportunity. No. No. In fact, these guys are sticks in the mud. No risk of them dating their first cousin. Heck. They probably don’t date at all.

These credit types are no fun. They don’t play the banjo on the porch, they don’t dance to fiddle music. Can you imagine one of them at the picnic out at the ranch? We’re all milling about, chicken and potato salad in hand, stories told, jokes aplenty, hugs all about. But who is that over there under the big oak, note book in hand, eyes downcast, a sledge hammer by his side?

Nope, they're no fun but by accident they provide some from time to time. This time, and without knowing it, they have provided a deliverance of much needed fiscal discipline.

S&P’s tinkering today was mostly ignored by institutional fixed income investors. US bond prices in fact firmed, did not tank. And why? The warning was seen as a call to discipline, one which most believed would be set in place anyway. This notation only accelerated the change. It was not seen as a prelude to a cut in US credit.

And it plays right into the hands of the most potent fiscal disciplinarian force alive today in the US - The Tea Party.


Robert Craven

US Economy Ahead

We will conclude our last exercise. Clients were alerted up front that forecasters (who were all looking in the other direction) would in fact trim their US GDP estimates, tagged to oil. That has occurred. Thank you very much.

Better not to linger, but get on to the next.

The next exercise is to again isolate any major flaw in consensus regarding the US economy ahead. When we can do that our clients have a leg up as to market change over the near to intermediate term. We don’t provide the Holy Grail, but with a sense of the landscape ahead, our clients are better prepared than most. It’s then up to them.


Robert Craven

Better to Anticipate Than Be Bush Wacked

Earlier today we reviewed our method. In this piece, we highlight a very satisfactory result.

Late February we predicted that the risk was for at least a 1 ½% cut in US GDP tagged to oil; mid March we predicted that forecasters would catch on and would lower their US GDP forecasts in the near term.

Forecasters have cooperated very nicely. From today’s Reuters “At the start of 2011, growth looked solid. The U.S. unemployment rate was finally dropping, consumers were in a spending mood, and economists were busily upgrading first-quarter growth projections to the range of 4 percent.

Those forecasts are falling fast. Many economists now think the U.S. economy grew at a sluggish 1.5 percent to 2 percent pace over the first three months of the year, and one forecaster even raised the possibility of a negative reading.”

The lesson here folks is a simple one: It is far better to anticipate major economic news events, than it is to react, far better to understand economic reality, price change ahead than be bush wacked.


Robert Craven.

Method

It is our habit to preview each week’s potential market-moving economic releases. This week’s release schedule is light so we decided instead to review our method for those Charter Subscribers newly signed on.

There is nothing unusual about our exercise. We aim to isolate major economic opportunity before it is priced in. When we do that our clients own price change ahead, either equity or fixed income or both, and in the case of business planners, the economic landscape ahead.

Price discovery is set by consensus and consensus is set by the several dozen major security firms and banks in the US, that is, the forecasts of their economists broadcast by the vehicle of the press. Thus, it was the general consensus last week that drove equity prices; it was the general consensus last week that drove interest rates, that drove oil prices. We all know this.

We understand economics at this shop but we do not forecast. There is no value provided in that. We are strategists. Our aim is to identify major flaws in consensus. If there is a major flaw to a consensus and we have it in hand, up front, then we have price change in hand.

We focus primarily on the US economy but also on offshore events if we believe they may impact our clients. Recent events in Japan, the Middle East and the EU are examples. Our success at this exercise can be seen by simply clicking on Scoreboard, to the right of this column.

We do not recommend specific trades in this product but do highlight Actionable Sector Strategies which provide guidance and security for clients’ specific trading or planning decisions.

We have endorsements available, many from major institutions. These also can be seen at our website.

That’s it folks. Enjoy the product.


Robert Craven

Retail Sales! Inflation! Oil! And Crowd Behavior At Its Best - The Week in Review

Witness two news headers, Friday pm: Reuters, referring to headline CPI - “US Inflation Contained.” Five minutes earlier, the AP, referring to the real world - “Consumers feel the pinch of pricier gas and food.”

The Fed can call the tail a leg all it wants. Some of us know it’s still a tail.

So instead of 35 pages of graphs and prose, let’s see if we can distill things a bit, capturing the recent journey.


First, very early Q4, forecasters had the US economy for H1 going nowhere. We felt otherwise. Forecasters later came to agree. By mid-Q1 they were, at first reluctantly, and then in a burst, flying in a new direction (crowd behavior at its best).

Next, mid-Q1 the same crowd, willfully blind as always (crowd behavior at its best) missed the next turn, not acknowledging 1) that Middle East unrest was not a blip but a revolution and 2) that higher crude prices would prove corrosive to growth. Why? For the single reason that an authority figure (always demanded by a crowd), in this case Bernanke, told them to relax.

Now, once again the same crowd of forecasters are slow to let go (crowd behavior at it best) but, like our trout about to “key in,” are beginning to embrace a new theory - that gasoline prices just might prove corrosive. Thus, they will continue to shave their US GDP estimates, something we predicted earlier that they would do.



So today we have countervailing forces. The US engine wants to burn on 7 of 8 and would, but for the impact of higher oil.

We intend to understand the outcome of this contest early on, to continue to spotlight economic reality for our clients before it becomes news.


Robert Craven

The CPI, Fashion in Central Banking and the Fast Draw

We all recall Abe’s story - just because you call a calf’s tail a leg doesn’t make it so. And so it goes with today’s inflation report. The Federal Reserve is excused because one of them, Art Burns, snowed the BLS and Congress, Alan Greenspan style, to ex out any dangerous stuff.

Today’s CPI headline was as expected, up 0.5% yet because core was up only 0.1% the Federal Reserve by calling the tail a leg can sit tight for a bit.



In the old days folks we just plain had more fun. Politics played more of a role in worldwide central banking - no politician in his right mind wants their central bank to stomp on growth - and a lot of the central bankers went along, Burns style. That’s no longer in fashion.

It’s the fashion nowadays among central bankers to be tough hombres. We know some of them personally. It’s good for their career. Like Wyatt and Morgan Earp, they practice their fast draw at every opportunity.

Bernanke has just forced those at the ECB and Bank of China to clear leather.

Bernanke’s Federal Reserve through the policy of supplying liquidity in great excess, liquidity we in the US never needed, liquidity which like rain on saturated ground flows elsewhere, is the key culprit in triggering commodity inflation offshore (see our post of Feb/16 for background).

Now it’s understood that certain excesses are no longer appropriate. Thus, the ECB and Bank of China have already lifted their key interest rates because it’s in fashion to do so. After today’s news - higher core numbers for the EU and China, these guys will move again in the near term.

These developments cannot help our recovery, one which others have now come to understand is already being hampered by events in the Middle East.

Robert Craven

But For The Few of Us

It is easy now to sense US vigor. It wasn’t early October, 2010.

It’s easy now to understand that higher crude will cut into US GDP. It wasn’t late February.

It’s easy now to understand the Japanese will sculpt a recovery, and quickly, and that their stock market, after collapsing 14% at one point, Mar/15, was a buy. Any fool knows that. Any fool didn’t, Mar/15.

For the few of us who can set an anchor in the midst of a storm, those few of us can provide value to our clients.

And that is exactly what we do.


Robert Craven

ANCHORS and Client Security

We set what we call “anchors,” these designed to provide security in the decision making process for corporate planners, investors and traders. Those who have been with us for a while are very familiar with the concept.


We have only one of these anchors outstanding at the moment. That would be our caution on the Middle East set late February 2011. We stated then that the course of least resistance for crude (WTI) is north, and put a 120/125 top side on that commodity. We don’t know we’ll see that price but we know it is foolish to be bearish on crude prices.

We stated also that higher prices will cause forecasters to cut their GDP estimates (already in progress).

Early this week, children at a major security firm predicted prices would now head much lower. The market crowd always demands an authority figure or god and so prices tanked.

If these analysts are intimately familiar with Saudi, or Iranian military plans, or both, then there is something to their claim. Otherwise, it is just noise.



Robert Craven

Retail Sales and Kids at the Keypad - An Alert

Retail Sales for March came in this morning up 0.4%, just under expectations (+0.5%) and the weakest gain in 9 months.

In The Week Ahead we predicted that consumer spending will slow. Thus, we cautioned our clients not to take it to heart if today’s Retail Sales release was through expectations, and for the simple reason this will not be trend. Not that is over the intermediate term.

In March we predicted that forecasters - kids at the keypad - would begin to sober up, to shave their US GDP forecasts due to events triggered by Mid East unrest. Finally they have done so, on average shaving 0.7% from Q1 estimates.

We are not oil analysts and never pretended to be. We do understand however that the very real risk remains for much higher crude, and this tied to what amounts to the heart of darkness in the Middle East - potential Saudi / Iranian armed conflict. Until we may understand that is resolved, clients are to remain on guard.


Robert Craven

Retail Sales and the Bear / CPI And The 5-Legged Calf - The Week Ahead

The US consumer has been driving a 4-speed and he’s just shifted up, now in 3rd. That gear won’t handle what’s just ahead.

We predicted vigor in consumer spending long before most other observers (thank you very much). Now these who missed the trail all want to camp with us. But there’s a bear about in the form of $5 gasoline so we’re long gone.

Spending just ahead will slow; it will not stall but will certainly slow and this is naturally tied to oil. Thus, assume the Apr/13 release for Mar Retail Sales exceeds estimates. The market crowd will be cheered. Don’t be.

Next, March CPI is to be released on Apr/15, Friday. Since Federal Reserve chair Uncle Art Burns convinced the BLS to ex out most of what counts (at Nixon’s urging, with the ’72  election in mind) CPI presents little problem to Bernanke.

Headline CPI jumped in Feb primarily due to energy prices. Imagine what headline Apr CPI will do! But to the Fed, no problem. Energy prices are about 15% above year ago levels (as of Feb) yet core consumer prices (ex food & energy) are up only 1.1%, yr to yr.

How convenient.

This reminds us of Abe’s story about the calf. During a Congressman’s boasting about a supposed McClelland “victory,” Lincoln brought up the story about the 5-legged calf. Seems there was a boy who when asked how many legs his calf would have if he called its tail a leg, replied, “five,” to which the response was that calling the tail a leg would not make it a leg.


Robert Craven

Oil - An Alert

After Friday’s spurt in oil prices many look for a correction. If so, we caution taking that to heart. Course of least price resistance for crude is to continue to be north.

Friday’s spike in oil prices is attributed by observers to a weaker dollar, to fears of violence in Nigeria, to better US demand, to a blackout in Venezuela, to Japan’s boosted appetite with nuclear off line, to the extenuation of events in Libya.

No doubt some or all of these play a part but the heart of darkness is growing Saudi - Iranian tension in the region; all the rest pale by comparison.

From the Jerusalem Post: “The Saudi intervention in Bahrain last month ensured, at least for the moment, that the reigning al-Khalifa family would survive. But it has also set the scene for a growing, open confrontation between Tehran, which wants to extend its influence and power into the energy-wealthy Arab monarchies and emirates of the Gulf, and Western-aligned Saudi Arabia, which sees itself as the protector of Sunni power in this area. This rivalry is being played out around one of the most strategically vital areas of the world. It contains vital US air bases and the headquarters of the US Fifth Fleet. The security of world energy supplies depends on stability and the expectation of continued stability here.”

It is this rivalry and potential conflict which motivated us weeks ago to advise clients to look past Libya.

This most powerful of potential events effecting oil prices will remain with us for some time.


Robert Craven

Time To Sober Up - The Week In Review

The Street have come to understand that the US economy is at escape speed, all now looking in that direction. Sure enough, events this week illustrated that unemployment is still improving (Claims), that consumers are visiting department stores like crazy.

Mark Twain reminded us, “Whatever new thing a consensus coppers (colloquial for ‘bets against’) bet your money on that very card and do not be afraid.” Well, it’s not quite that easy, but you get the idea.

We were cheerleaders for the US economy when there was no one else in the stadium. Now the stadium is near capacity.

But those fans have yet to appreciate the impact of a new game rule - Mid Eastern tension and impact on US GDP by the way of crude prices.

Consider this week’s so-called Chain Store Sales result (which represent perhaps 10% of all retail sales but provides a pretty good litmus test). Results are reported Yr to Yr. Yesterday’s numbers seemed encouraging, folks buying like crazy. Now can any reasonable observer believe that results like these will continue with $5 gasoline? No.

The situation in the mid east will prove to be corrosive. This should not be a surprise. The surprise will be the extent of damage. Gas prices are heading higher than most even now appreciate.

Federal Reserve officials warn us that higher oil will not spark inflation. Thank you very much. That was never the real risk.

We have the worst, top-side impact of higher energy at 1% of GDP.


Robert Craven

Much Higher Crude

Understanding crude prices today is not the domain of the economist, nor he who has knowledge of reserves, tankage or inventory levels. It is the domain of the social scientist.

Most have come to acknowledge what is now termed the Arab Spring but they may not have adjusted to the further risk of violence which will accompany that adjustment.

Our clients were warned late Feb, early March that the course-of-least resistance in crude would be higher over the intermediate term, with 120/125 WTI the high side risk.

That is, 1) higher over the intermediate term because of the dynamics of the region and 2) the high-side risk of 120/125 because of Iranian / Saudi tension.

We advised then that any improvement in crude prices (lower) was to be taken as a correction, not trend. That unfortunately has proven to be correct.

Today’s quake in Japan, better world economy, demand “outstripping supply,” the Libya shut down, all seem to conveniently play a part. Yet it is general unrest in the Mid East which will keep crude prices under pressure. It is the event of Iranian / Saudi armed conflict which will print our target.


Robert Craven

Employment Results - As Predicted

On Mar/10 the important Unemployment Claims result exceeded expectations - more claimants. Did this indicate a reversal as many feared, an end to improvement in employment?

We told our clients that day not to worry, that this was a fluke, not trend and that employment figures would exceed expectations over the near term. We provided an anchor.

Result? Two of the subsequent Claims numbers were lower than expected, one at expectations, so that worked well. Even more importantly, the Mar Payroll result of Apr/1 was better than expected.

Finally, today’s Claims figure also cooperated, coming in a tad below consensus (fewer claimants than expected).

This ends this exercise. Results were satisfactory, allowing our clients to anticipate price change. 


Robert Craven

The Governor

No, not Moon Beam.

Instead, remember those old steam engines, lawn mowers and tractors? They had a “governor." If the engine spun too fast, little gizmos were thrown out, a trigger activated, and the engine prevented from further gain. Webster: “An attachment to a machine designed to afford automatic ...limitation of speed or power...such an attachment activated by the centrifugal force of whirling weights opposed by gravity or by springs.”


Well folks, we’ve got our very own governor in the form of Iranian / Saudi tension.

It’s not news any longer that the US economy is at escape speed. Our clients were aware before most others.

Now the market crowd are all believers. Encouraged by forecasters and by evidence, the market crowd, after a 180, are rushing past even us, charging to the surface, ignoring the osprey’s shadow.

This bunch dismissed turmoil in the Mid East as a blip, encouraged to do so by authority figures (which a crowd can never do without). One of these was Bernanke.


Background: The market consensus is set by a few dozen major US firms. Investors and traders don’t make it up - it’s fed to them. And it is this consensus of future economic reality which is priced in at any given moment (equity, fixed income). All we have to do is to identify the flaw, if any to this consensus, and we become the owners of the knowledge of future price change. Simple and effective.


Forecasters went to 3% for US GDP and were about to go to 3.50% or higher. This is what they were thinking in February and most of March. And all of this bunch had dismissed crude as a retardant because their formulas and idols told them to do so.

Their formulas did not account for the Middle Eastern quest for human dignity.

Now, forecasters are beginning to worry. They saw yesterday what an all time high for Brent (in Sterling terms) did to UK consumer psychology. As Grandma Craven used to say, “It knocked it a winding.”

On Mar/23 we predicted that forecasters will begin to reduce their estimates for 2011 GDP in the near term, preparing our clients for this reality up front. Look for headlines to support this anchor in the days ahead.

Robert Craven

Non-Manufacturers Ease Off a Tad - An Alert

The ISM surveys about 400 firms in 60 sectors, including mining, construction, communications, agriculture, and wholesale and retail trade in their Non-Manufacturing survey. Today we obtained a look at New Orders, Order Backlogs, Employment, Inventories and Prices Paid, for March. These sectors represent maybe 90% of the US economy.


We noted Apr/3 in our preview of the week that this valuable read would likely exceed expectations, again. This was not the result, the read falling below consensus at 57.3 vs 59.7 in February; still expanding nicely of course, but at a bit of a slower pace.

Non-manufacturing activity increased very impressively the 6 months through Feb, translating to more jobs. We’re not sure what to make of today’s slightly less robust March read. We expected higher crude to kick in, just not this quickly.


Robert Craven

The European Union and Killing Time at the Press Desk - A Special

What with a wild card event every day or two nowadays the kids at the US press desks have been busy. But there’s days of slack too. Like this week. Here’s where the European Union comes in. It’s bad news if you’re over there. For here, it amounts to filler.

Most now understand that shenanigans in the EU club seem detached somehow, claiming little power of impact on the US economy. They may not know why, but that’s ok; they’re right anyhow.

Short of a failure of the currency itself we don’t care very much what happens over there. Our banks are not very exposed. We don’t greatly depend on Europe as a market for US goods.

The whole bunch combined barely belly up to the bar as a US equal.

Niall Ferguson puts it perfectly: “Workers in the periphery took monetary union to mean they should be paid as well as workers in the German core. But their productivity didn’t rise to German levels. At the same time, people in countries like Ireland took the post-1999 reduction in interest rates—one of the most obvious benefits to the periphery of euro membership—as a signal to go on a borrowing binge. The result: Ireland and Spain behaved a lot like Florida and Nevada. House prices bubbled, then burst”

Now what? The European Union with Germany running the show has cobbled a package together. This will provide short term relief. There is no long-term relief. The EU won’t work. It defies human nature.

Margaret Thatcher was right.


Robert Craven

Track Record

We’ve made a point of accountability over the many years we’ve set strategy. We compile and publish a complete, ongoing track record.

In that spirit we must revisit our post of Mar/16 and our warning to clients of possible potent repatriation on the part of panicked Japanese institutions, and, our prediction that US interests would be hit.

We noted that by judging Yen strength that day, they (the Japanese) were doing so already, and with great determination. And we concluded as follows: “Thus, it is not the physical destruction that we fear. That if anything adds to US GDP by the way of US firms involved in reconstruction. It is not a long absence of Japanese demand that we fear, for we have already highlighted the reality of quick resuscitation. No, it is abrupt, short-term retrieval of offshore investments, an emergency fund for the Japanese when needed. Over the near term, US interests will suffer the consequences.”

The last sentence is not accurate. It seems most or all financing will be handled internally. Our job is to offer up calm during chaos. Seems we offered more chaos than calm on this one.


Robert Craven

Balancing Act

We’ve got the equivalent of an economic ledger, the debits and credits, and everybody wanting to own the identity of the bottom line before the next guy.

Our purpose is to discard the overflow of information, distill what is pertinent and present that to the client. We don’t offer graphs, charts or long-winded explanations, leaving these adornments to others.

The US economy is stronger than most expected it to be a few months ago. Clients were prepared for that fact, having the understanding of reality ahead of the market crowd. Then as recently as mid-Mar we predicted employment results which would again exceed estimates. That has been the result.

Now the crowd has accepted our premise. Once they do that they are slow to let go. While they were adjusting, we identified a threat or potential debit, something corrosive to our own view for vigor - that would be crude as tied to the Mid Easter revolution. That will detract from US GDP.

So we have this situation: We have more vigor than others expected and we have a potential threat that even now most have yet to acknowledge. That’s our ledger.

The average estimate for 2011 US GDP is now 3% and was set to go to maybe 3.75% by mid Q2 (although forecasters didn’t know that). IF that is, all is equal. All is not equal. Crude prices are to erase perhaps 1% from GDP, our worst case. That’s our balancing act.


Robert Craven

Observations At Stream Side - The Week Ahead

The economic release stream is scant this week; we will have a look at March non-manufacturing activity, courtesy of the Institute for Supply Management. This is a valuable read for vigor and employment in agriculture, mining, construction, transportation, communications, wholesale and retail trade. The release will likely exceed expectations.

But the key release by the way of market-moving horsepower is that for new unemployment Claims, for the Apr/2 week, released on Thursday. We told clients that the last figure would fall below expectations; that was the result. If that happens again the market crowd will be greatly cheered.

To understand market tension (and thus have a leg up on price discovery) one must understand crowd behavior. Key - a long time is needed for ideas to establish themselves in the crowd’s mind; once established, it takes just as long for these to be eradicated.

Observations at stream side provide a useful guide. Trout will take some food on the surface; not much however as it’s not worth the effort. They prefer to take nymphs near the bottom; that’s a lot easier and a lot smarter- there are no osprey (fish hawks) down there.

But occasionally a very large variety of stream fly will die and settle by the thousands on the surface. The salmon fly for example is a dozen times as big as the normal fly, a heck of a meal. But at first even though the salmon flies are drifting overhead in clear view of the trout the trout continue to feed as before. They see the salmon fly alright but that doesn’t register. They’re busy with the nymphs. Suddenly, and no one knows just when it will happen, the trout become “keyed in,” forsaking caution, shooting to the surface, slurping up as many salmon flies as they can.

The osprey’s shadow overhead or fly line carelessly slapped on the water - no matter, nothing will interrupt the orgy. Like members of any crowd, trout shed their individual identify and acquire that of the crowd itself. Reason, caution and judgement are exiled.

Soon the drift is over but the trout remain keyed in; they continue to mill near the surface long after, wasting energy, taking only little meals because the salmon fly have all drifted downstream.. Members of this crowd are looking in the wrong direction, once again missing the turn.

Thus, Q3, early Q4 our crowd had embraced the notion that the US economy was stuck. Ample evidence existed to the contrary, floating just overhead, but it was wasted on the crowd. Then something happened; suddenly the crowd abandoned their pattern, rejected their last notion, hanging it in effigy as if they were betrayed (there is nothing more vicious than a crowd which feels betrayed by the idol they once worshiped) Quickly, they accepted the new idol, that of economic expansion, especially that related to employment. Once again, they were all believers.

Another strong employment figure (Claims) will feed the frenzy. Yet the osprey, in the form of potentially much higher oil prices, glides just overhead.


Robert Craven

We Don’t Need No Stinking Formulas - A Special

Ok, so the Mountain Police are no longer about. Still, they had a point. They didn’t need a badge, template, rule-of-thumb or anything else; they operated on pure instinct. So should we.

We have highlighted the risk from the Middle East, to be delivered through the vehicle of crude prices. Our role here is to provide comfort to our clients, to provide (once again borrowing from the past) a bridge over troubled waters, and guidance.

The dynamic associated with the Middle East is not a thing of economics. It is a thing of political science perhaps, more accurately, human science.

Most of us want a say in our future. This applies equally to what on the surface appears to be a raucous and unruly mob in the Middle East. Yet what many now call an Arab Spring has still not registered by the way of implication with most Americans, including perhaps, most investors, most planners.

That is why we cautioned earlier to look past Libya. Crude (WTI) printed 108.31 today but clients are to recall that our top-side target set late Feb is 120.

Keen observers, keen enough that is to discard the headlines, understand this is not just tied to Libya. The business of the Middle East is a singular one - to be dangerous.

We have monitored events in the Middle East for 5 years, an earlier blog dedicated to that exercise. And so, those of us who understand the dynamics of this region know for example that it is the malign influence of Iran which can be found wherever there is unrest, in Bahrain, in Yemen.

Sure, Bahrain is tiny little island. But the violent crackdown there by authorities poses a larger potential threat than Gaddafi could ever cook up over in Libya. We’ve already highlighted the rivalries between the Saudis and Iran and the Bahrain link up.

Then there’s Syria. If the Syrian regime were to be severely weakened by popular dissent Iran's influence in Arab affairs would almost certainly be reduced -- in both Lebanon and the Palestinian territories. That’s not a bad thing. Yet a weakened government there might spark open conflict between the Sunnis and the Alawites in Syria, who hate each other. This could greatly disturb the whole region, and as one observer noted, provide a nightmare scenario for the West.

See what we mean?

So it’s a stew; but one thing’s for sure - these folk are prone to violence. And so are most of the leaders, and all of them, this writing, are totally paranoid. We can therefore not dismiss a direct Iranian / Saudi conflict. We cannot dismiss an Israeli (remember them?) strike.

So unlike the youth of Wall Street, we don’t need a formula to understand the likelihood of impact. We don’t need a template to know that present crude prices are cutting into spending; we don’t need a rule-of-thumb to know that something north of 110 for three months will cut 1% from GDP. And that folks, is the risk.


Robert Craven

Those Pesky Offshore Events - The Week in Review

The US economic engine - just when she’s on the way to sparking on 6 of 8, one of those dog gone pesky offshore events threatens to throw a wrench into her works. Let’s take a look.

But first, let’s review the US economy. Our clients received a major heads up Q4. Forecasters were looking in the wrong direction. We predicted that when they sobered up, they would suddenly revise their US GDP estimates, much higher. This was the result. That pattern is closed.

Now to the present. This week was packed with key releases. We predicted strength in jobs, factory activity and vehicle sales. Factory activity was little changed, jobs cooperated nicely; Mar vehicles sales have yet to come in, this writing. We also predicted on Mar/24 after that day’s better than expected Claims print that the number of unemployment claimants would head even lower. Thursday’s number did just that.

Looking ahead , vigor will continue (aside from pesky offshore events) but key for our clients - most forecasters have finally caught on, depriving us of that major leg up which comes with early discovery.

Developments in the European Union appear to many to be a threat to the US economy but are not. A Special edition on this topic is in the works.

Developments in Japan have cooperated nicely with our anchor. Past a day or two of panic, markets there and in neighboring countries have recovered. There have been pipeline stoppages, delivery delays, but nothing not now priced in. A rescue package is near completion. Repatriation has so far been limited; Japan will instead issue bonds and although the Bank of Japan denies it, we expect them to at least partially finance this effort.

The yen is now at pre-quake levels vs the $. The horse is long gone from the barn. Even Warren Buffet agrees with us. It counted a great deal to understand this reality on Mar/14; it’s not worth much now. This pattern is closed.

Events tied to the tragedy will not throw a wrench in the works, will not act as a retardant on US GDP but will act as either a wash or modest spark. Eventually, observers will come to understand this reality.

Finally, we borrow copy from our Mar/4 post on the Mid East: During the weeks ahead we suggest investors and planners adhere to our anchor and acknowledge the glaring risk associated with this region. Course of least resistance for crude prices to remain higher over the intermediate term. It is foolish to believe otherwise.

Higher crude is not so much an inflation threat as a retardant and a powerful one if maintained through Q2. Clients can expect forecasters to begin to shave their US GDP forecasts, linked to this event. They just don’t know that yet.


Robert Craven

A “Jobless” Recovery? Don’t Think So. An Alert

Private employers, free from the threat of suffocation presented by Barack Obama’s earlier statist ways, have taken heart. The future is no longer one of threat piled upon threat. Given the sudden 180 at the White House, it just might be ok to take on a few new employees after all.

In today’s Mar Employment release we saw that private enterprise drove almost all the gains, adding 230M jobs after 240M in Feb. As one news service nearly shouted out, this is the first time private hiring topped 200M in back-to-back months since 2006.

The jobs market is not booming but is improving very nicely, generating sustained increases in private sector jobs.


Robert Craven