UK

We remain constructive on the UK; nothing fabulous of course, but something through expectations - all that counts in anticipating price change. This in spite of the recent IFS report which claimed the new growth policies “are really quite small.” Thank you very much sr research economist Hellen Miller but you couldn't find you way out of a wet paper bag.

After an earlier, satisfactory exercise, we recommended Nov/9 that clients once again own the term structure, the 5-10 spread then 108,  2-10 at 168 and 2-30 at 270. (There may be far more imaginative methods to work our view, yet the curve serves the purpose.) This spread did little at first, then expanded modestly, so that on Nov/29 levels were 118 and 180 but the 2-30, only 261.  Last, 120, 185, 268.

It is easy to criticize the administration. But in fact any surprises have been to the side of prudence, not profligacy, which includes eliminating public sector excess. (Indeed, we see that with traffic at Heathrow as “better than usual,” Border Agency types are about to meet the same fate as air traffic controllers under Reagan, who similarly thought they were somehow among the anointed.)

Finally, we believe there is much more to the UK consumer than most economists understand.

All of this supports our view.

UK strategies are to be set to the side of relative strength, not weakness.


Robert Craven

US

Clients are to continue to trade the US to the side of relative vigor; that is, any surprises are to be tagged to strength, not weakness.

We have set two anchors for the desk: job-related and consumer activity. Recent data have cooperated fairly well, including the last Payroll print, subsequent claims prints, and of course, consumer activity; witness the holiday brawl to acquire a $2 waffle maker: http://www.twitvid.com/QM7T7.

Friday will see the key Nov NFP report. Jobs activity has been stronger than expected - our prediction - but of course, not absolutely strong.  As we have explained before, an interventionist administration is the key to understanding this reality. The constant threat of regulatory change is the primary retardant to small-business job creation. Now researchers at the Cleveland Fed provide academic support to this otherwise common sense view. "While the downturn and weak recovery certainly had a large negative effect on small business hiring plans, policy uncertainty has exacerbated this effect," researchers Mark Schweitzer and Scott Shane said in their report.

Clients could work our insight in any number of ways; as an illustration, Oct/11 we  recommended owning (L - S) the US term structure, then (5-10, 101 / 2-10, 188 / 2-30, 276).  There was modest expansion early on, but most recent results have been impacted by the world’s flight to sanctuary. Nov/10, the spread at 114, 183, and 289. Last, 108, 176 and 273. Unless one expects a total E-Z meltdown, remain with this or related positions.

Robert Craven

The Week Ahead and the Final Clue

We understand now that our problem all along has been that we took the E - Z elitist types seriously.  Charlie, the cowboy who works our ranch in California, noted way back, “Are you kiddin' me.  This damn thing’ll never fly.”  That was our first clue.

The final clue is that we learn today that EU types claim water does not work, and they want that in print! The clowns in Brussels are now banning drinking water manufacturers from claiming that water may help to prevent dehydration. The poor soul who dares print that water may help the body along faces two years in the slammer!  And somebody thought these morons could manage a combined currency of 17 nations?  Hah, hah.  Too much.

And the mess? The ECB will not cave to a full blown QE.  It rightly does not consider as part of its mandate the rescue of sovereigns. That is not its understanding of lender of last resort.

Next, the EFSF is going nowhere as its finances depend on the very same characters it is meant to bail out.

Thus, we think we’ve been right all along - we are headed to a smaller and more manageable E - Z. Tough to get there but nothing compared to what we face otherwise - a meltdown.



Little market-moving muscle to US releases next week. The Durables print (Wed) can be put to its room as it is prone to violent behavior. The Michigan sentiment read the same day means nothing.


Have fun as we’re off to Arizona for the Holiday to see our daughter Kim, husband Carter and granddaughter Reagan.


Robert Craven

The Week in Review

We have observed world credit markets for over 25 years; rarely have we witnessed an event so stunning as we did this week - world investors in a sudden rush to throw Germany’s debt to the wolves.

We recently recommended to short US debt to the German equivalent, this based on our view of relative fundamentals. That part worked fine, but our colleagues in London warned us there was something else.  Something else indeed. Our Chinese friends and the rest decided to lift anchor and pitch Germany in with the rest. It is not surprising then that this week the biggest percentage increase in insurance cost for default, was for German debt!

What our colleagues sensed, and we did not is that investors would look to the Germany after fiscal union, or to the Germany after a break up. Reuters, “The first outcome would imply higher borrowing costs for Germany while the second would saddle Germany with a new national currency that would appreciate so sharply that it would cripple exporters and therefore the economy.”

Never too old to learn.

Robert Craven

US Consumer

One of two desk anchors - the significant flaw to St estimates regarding US consumer activity. This anchor was set in September when observers were preparing their estimates with their eyes in the mirror.

Because our job is to isolate price change ahead, we are not so much interested in results in the absolute as vs expectations. Thus, clients knew the odds were very high that spending results would flatten estimates. This is what happened.

Now most economists, having been caught with their pants down, have hitched up and corrected their models.  Not by enough.  Thus, clients are to expect spending results to strengthen into year and through Q1, and, by more than forecast.

Fed recklessness (QEII) spiked commodity prices. Earlier, the so-called Arab Spring played its role. Now that price pressures have eased, and key - now that consumers have accepted the E-Z mess as a permanent fixture, not to worry, they are back at the malls. (Consumers may have something there.  As E-Z banks contract lending, which they will, US banks will swoop in.)

Finally, based on this surprising consumer activity economists have now elevate their Q4 GDP forecast from an average of 2.4%, Nov/1 to an average of 3.3% today.  

Better to anticipate, than to react to such a change.


Robert Craven

Tug Of War

Having had our fill of the E-Z by 7 am our time, let’s re-focus on the good ‘ol US.

Key to understanding price change just ahead, always, is to understand consensus flaw.  We have known for several weeks that economists, behaving as a crowd  - holding hands, crying out together in the dark - have mis-understood the consumer and labor sectors of our economy.  Recent releases have of course played out nicely; yet our rule still holds - if there are to be any surprises ahead, these will be to the side of vigor, not weakness.  Simple.

Despite the US downgrading by one of the now thoroughly discredited rating agencies, despite this awful reality, world investors cannot own enough of our IOU’s.  This has abated what would otherwise be increased tension in our credit markets.

Not understanding what the E-Z will cook up next, we want to avoid out rights like the plague. But our sense of risk and events tells us that clients should at least retain reasonable strategy to fit our view. The curve of course is one. A cooling of E-Z events and it will expand abruptly; any further Fed tinkering will only further such an expansion.


Robert Craven

Sanctuary

The world’s mad dash for sanctuary has proved to be corrosive to recent strategies set for purpose of illustration. As always, strategy is based on our view of economic reality just ahead, vs St consensus, that which is priced in. Clients of course can work our insight in any number of ways.

Our US anchors have held very well, today’s Claims print a fit. We have been long the US curve from Oct/11; this progressed modestly, spreads expanding, but now back to entry levels on 2 - 30, better by 12 bps on 2 - 5 but worse by 12 on 2 - 10, beat to death in the flight to safety.

We have once again been short US debt to the German equivalent, set Nov/2 with the US 10 yr then plus 16 to the Bund, then out to 28 or so, or 30 target re-set to 40 (what?) but last print, plus 17.  We will abandon this trade.

Finally, given our relatively constructive view on the UK (today’s Oct Retail Sales print fit our anchor nicely) and what we understand will be the impact of any further Bk of Eng firing, we have been long the UK curve from Nov/9.  Most levels along the curve are unchanged but 2 - 30 is worse by 8 bps.  Here again, beat to death by E-Z events.

If one understood that an E-Z Armageddon were just ahead one would abandon these, or related positions. Today’s events in the E-Z perhaps qualify!  If one feels that we may return to the link to real sector developments, one would then maintain the US and UK positions or similar. But if by a returning to normality one expects the ECB to launch a full fledged QEI, forget it. It won’t happen.

Wild cards remain the E-Z and Middle East.

Robert Craven

Piano Overhead

We have been constructive on the US consumer for some time; most others have now come to join us.

But maybe at the wrong time.

Oil is at 5 month high, the WTI benchmark up 3.2% today alone to $102.59.

Recall the spike, March and April of this year.  Economists’ models didn’t flash red until too late. Not being similarly handicapped because we never use models, we predicted ahead of this crowd that the spike (as translated to gasoline prices) would slow consumption substantially.  This was the result.

Now, the same bunch, caught flat footed earlier, are reluctant to get rolled again. This time they may luck out.

Nigerian cutbacks and bloated demand from emerging credits (China, India, L America) are frequently sited culprits. Speculators are another. So is potential conflict, Middle East. In fact, our view is that this is the primary culprit. It’s easy to say it’s mere saber rattling over there. Odds are very good that it is something more.

WTI at $102 + does not impact gasoline immediately as it would in the summer. But if prices hold, then move higher - which we have as the course of least resistance - then we’ll all have to sober up.


Robert Craven

Snapshot

UK: With price pressures subsiding, and the Bank of England about to release a sour report, first appearance is that it does not seem too bright to be long (L - S) the UK curve. In fact, our last exercise has been disappointing, an entry recommended Nov/9 yet levels are either unchanged (5-10, 2-10) or in 3 or 4 bps (2 - 30).  We don’t sense a violent leveling, so let’s stay with this one for the time being.

E-Z: We want to remain short US Notes to the German 10yr.  Consensus view was caught flat footed; most recent German releases were weaker than expected, our earlier predication. It’s true that today’s Q3 GDP print was better by a tad (0.5%) but that’s ancient history. E-Z hysteria will wear and the contraction of bank lending will wear.  The US suffers neither of their maladies.

US: The US (and China) will remain the primary engine through H1. Clients are best advised to set trades with that in mind.

Past many years we’ve averaged about 70% on sensing economic reality ahead; that is, reality vs a mistaken Street view.  The odds simply do not favor a view contrary to that provided from this center. Therefore, at the very least, use our insight as a backstop, last check before entry.

Robert Craven

Overview

Continue to set US trades for surprising vigor, not weakness.

Tomorrow’s Oct Retail Sales result will not be much to write home about, but that hesitation is priced in and tagged to E - Z violence.  Shoppers will become accustomed to this reality, if indeed it continues to be a reality, adjust, and then head for the shopping center into year end.

A headline this pm has SF Fed staff putting the odds for a recession H1, at over 50%.  Good. Since Fed staffers are the least capable of closing the pattern ahead, since they aren’t trained for it they deliver a gift from time to time.  Thus exploit, do not join any price change tagged to this well publicized story.

Finally, another leg of relative strength, and a desk anchor, is the US jobs market, but note relative, not strong. In the US the jobs market will improve despite the hindrances placed on employers by Obama. Without these, we would be hitting of 7 of 8 at the moment.  The flip side of Obama’s profoundly flawed policy is that employers were forced into efficiency; that is, they made investment decisions put off for years because new employees, even if needed, are freighted with unknown risk (Obamacare for ex). CEO’s are paid to take risk but not on an uneven and undulating playing field. This reality delays our recovery. That, in distilled form, is our jobs story.

The UK’s jobs story is illuminating, and something else altogether. Many UK employers are also on hold (witness today’s CIPD and CBI surveys) but not due to an uneven playing field at home, but to E - Z uncertainty, not a clueless administration. We note too from the CIPD that hiring in the private sector will hold up, it is the public sector which will take the hit.  Worse things have happened.

This reality is one reason we remain constructive on the UK.


Robert Craven

The Week Ahead

US releases this week carry considerable mkt-moving muscle: Oct Retail Sales on the 15th, Oct Ind Prod and CPI on the 16th, then the Nov Philly Fed survey result on the 17th. Nov/1 we said to look for a very active consumer. Correction: Now it appears that - very active - is for later. Instead, we would expect the Sales pace to fade just a little, temporarily, given the whiplash recently delivered by our European friends and the media’s role at expanding on the violence.

However, for the balance of Q4 any major surprises to be delivered from the US economy to be to the side of vigor, not weakness.

Next, we noted earlier that the German economy would slow more than anticipated.  That was the result. Others have now come to understand this reality.

Next, the West demands the ECB launch a QEI. But the ECB, unlike the Fed or Bank of England has a single mandate - price stability. Anything beyond that is planning, that is, non ruled-based activity. After witnessing the Fed’s exercise and resultant commodity price increases, not a chance. That means that Germans and other members of the willfully blind, those who pretend the euro is something it is not are soon to surrender and decide to banish the miscreants.  This is close to what we can expect - a smaller and more stable E - Z.

Back across the Channel, there’s more to the UK economy than is priced in, our view. The UK cannot escape the impact of a collapsing single currency but she will survive it. We are further cheered as it has become obvious that Osborne and others learned something from Obama’s “stimulus” tragedy. For example, the proposed $80 bln housing and road-building program will be financed through the private sector, IF of course it can be demonstrated that the return is there.  But the spirit is spot on, that is what is key.

Government-funded jobs programs have never created new jobs on net because they amount to taking water from the deep end of the pool and pouring it into the shallow end.

Henry Morgenthau Jr. was secretary of the Treasury to FDR and key architect of FDR’s New Deal: “We have tried spending money,” he said before Congress. “We are spending more than we have ever spent before and it does not work. I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!”

Finally, we do a bit of backpacking in the Sierras. Over the near term, the market view will grow that the US and Chinese consumer are quite capable and willing to pack the load for the rest as these recuperate at trail side.

Naturally the E-Z and Middle East remain potent wild cards.

Robert Craven

The Week in Review

We have had two US anchors set for clients, past several weeks.  From these was birthed the maxim that trades are not to be set based on disappointment, that is, on US weakness.

One of these is that job related activity will broach estimates, indicating more vigor than expected. This week’s Claims result fit perfectly.

The other anchor is that consumer activity will broach expectations. We have come in a tad on this one; EU developments combined with the media fetish for bad news have been corrosive to US consumer activity. Most consumers take it at face value that the US is not directly involved (forget about indirect exposure, they never heard of it).  Nevertheless, the aspect of contagion is now all over the news - Greece to Italy to France - and is beginning to scare them; they don’t know exactly why but it doesn’t matter; it is beginning to directly impact discretionary spending.

We think that is why chain store results last reported were a bit south of expectations, not as conventional wisdom would have it, because wages lag, or savings are depleted.

So we get it directly in the grocery line, and directly from our local hot dog stand - “What in the world is going on over there?”

In order of magnitude, this will shave consumer activity 10 - 12% of what it would otherwise have been, Q4. Still pretty good spending, just down to about 63 mph from an honest 70, 100 top side.

Finally, to review strategy set in place, all of which is based on our view of economic reality just ahead.  Nov/2 we recommended clients sell US treasuries to the German equivalent, to be illustrated by the 10yr, the spread (‘Old Faithful’) then US +16, last +28. Initial target set at +30, now +40. Next, we have been long the US curve from Oct/11. Given quality flight tagged to the EU, progress has been modest, 5 - 10, then +101, last +114; 2 - 30 then +276, last +289.  Finally, we recommended Nov/9 that clients once again own the UK curve. Levels are unchanged.


Robert Craven

The Two Engines That Could

Lost to many given the EU circus is in town - today’s Oct Import print for China, at +28.7% Y/Y, blowing through estimates. We featured China considerably earlier in the year, highlighting the government’s ditching of the old policy of mercantilism, for one reflecting a little more care for the consumer.  This is faithful to the latest 5-yr plan (2011 - 2015) aimed at boosting internal consumer demand as the main engine of growth.

We also note that consumer and producer prices are easing, throwing a bit of slack to the Bk of China.  As we have stated repeatedly for the past 15 months, there will be no hard landing. The rest will come to join us in this view.

The US and China will remain the world’s two primary engines through Q1.  Events in Europe, first amusing, next an irritant and now a worry, will have limited impact on both these credits.

Robert Craven

UK

Oct/6 we advised that clients own (L - S) the UK curve and, or sell the Gilts outright. That trade performed very nicely and a full exit was recommended Oct/28 (10 yr, 2.62%, 2 - 10, +202). Since that date of course the curve has come in with prices much firmer (10 yr, 2.19%, 2 - 10, +166).  Leave outrights alone but it is now time to again own the curve. There is more muscle to the UK than most understand, even including likely negative impact from our EU friends.

Robert Craven

US Term Structure

We advised clients Oct/11, with a reminder Oct/13: Today’s auction of the 30yr went well at 3.12%. "It’s the only place to be," say strategists, and, "we know the Fed is a buyer."  No matter. Remain long (L - S) the curve.

Past many years, our favorite diagram or photograph of tension in the US real sector has been the term structure. Analysis and subsequent strategy can be very complex, or, in our style, comfortably simple.

Thanks to quality flight triggered by our EU friends, progress has been modest from Oct/11. The 5 - 10yr, Oct/11, +101, last +116.  The 2 - 30 yr, Oct/11, +276, last +290.  The 2 - 10 spread however has done poorly, Oct/11 at +188, last +184.

Nevertheless, our view is for continued expansion through year end and into Q1. This is due to anchors set earlier for surprising vigor ahead and it is due to the fact that the Fed may be foolish enough to launch a QEIII.

Thus, clients long are to remain long.  Those with no position are to consider entry at the earliest opportunity.

Robert Craven

Not up to US Speed

We noted Oct/31 that Germany would not be up to US speed, reminding clients Nov 1 that we had set an anchor, that near term growth in Germany was to come inside of economists’ estimates, Q4, Q1. Since then most German releases have cooperated quite nicely. This, along with the likely shrinkage of loans in response to the EU 9% core capital rule, is motivation to our strategy to sell US debt to this credit.

On Nov/2 we noted that those who felt much of the EU poison had been priced in should set this spread (if not set already). A convenient measure is the 10yr, but of corse the strategy can be worked in any number of ways, FI, FX. Yields in the US, Nov/2 were +16 to Germany, last, + 20.  First target, +30.

Robert Craven

The Week Ahead

Although we experienced some slippage this week, it was modest; we expect clients anchors, set weeks back, to hold into year end.

US Treasury prices weakened just post Friday’s Oct Payroll release as observers were quick to note just sub-surface, signs of motion (those debt prices soon reversed on news of more Greek shenanigans). The rise in av hourly earnings by $0.05 to $23.19 was part of that.  The substantial upward revisions to the August and September reads were another. Finally, the results of the so-called “household survey” (a tad more volatile and a tad less reliable than the payroll survey) showed that the number of people with a job jumped 277M while the number of unemployed fell, resulting in a  9% print.

Naturally the barn is not alight. But why in the world anyone could have predicted a double dip is beyond us; this read should silence those types. But then, for them, it’s too late. The horse is long gone.

The recommended approach then has not changed. It is best described as one in which traders/planners do not by any means set trades or strategy based on US disappointment, but those based to gain on surprising vigor (there are however no releases next week with market-moving muscle). And part of that “surprising vigor” will be from employers who are cheered by recent developments in Washington, where for an interventionist administration and statist president, their jig is about up.  

Our EU friends will keep us entertained, representing a wild card. The elites who installed and the elites who now oversee this machinery won’t accept the fact that it can’t work; they are willfully blind, in a state of complete denial.  So we will be gifted no doubt with more violence before this thing is past.

It is in the desk’s advantage to exploit panic to acquire value, as earlier described.


Robert Craven

The Maddened Crowd, Value, and the Raptor.

There are approaches to be taken, traction to be gained even as equity, FI and FX prices fluctuate in violent fashion. This can be done by those who have a grounded view of fundamental developments just ahead. The most cerebral approach, our view, is to be free on encumbrance, ready to strike after value is inserted by the maddened crowd, and then ready to get away in the fashion of the male black widow.

For example, Monday morning’s massive quality flight put debt prices far out of range of what we considered fair value.  This distortion presented opportunity to those who were ready to pounce, as we explained Tuesday.  And the best way to do that is spreading relative activity, vigor, one sovereign to another, or, within a credit.

So the lesson is that in times of violence, unless one is an insider, then remain at the sidelines,  set to exploit exaggerated price change, raptor style.

Never, on pain of death, join the crowd; wait for them to deliver the gift.


Robert Craven

Week in Review

We had anchors set past few weeks, for clients to look for more than expected (not real strength, just relative result) for both consumer and jobs related activity. These worked very well early on. But not this week.  Instead, although chain sales reported this week were higher, they were inside of expectations.  And although the claims for unemployment benefits cooperated a tad, today’s Payroll result did not.  Finally, we expected PMI results for manuf and services to just exceed expectations but they were just inside of consensus.  So not a satisfactory week for us.

Still, we can expect US and Canadian growth to eclipse that of Europe, including Germany.  Thus, clients are urged to place that strategy recommended Tuesday, when they may free of violence spawned by our EU friends.  That would be to own the US and UK term structure, to sell the US or Canada to Germany.

Update

Those who may own some comfort regarding events in Europe, may feel that a collapse is not around the corner, or, that the potency of this wild card has diminished, are then advised to 1) buy the UK curve, 2) buy the US curve and 3) sell either the US or Canada to Germany, perhaps by the way of the 10yr, or any of the many other ways this view can be worked.

Robert Craven

Calm, Always

Over the years we have found that it is imperative one remain tethered during a whirlwind. Not that we know how the Greek deal will evolve; we don’t but we do own something of value and it is not to be lost due to a distraction, even one of this caliber.

Aside from a US curve trade (now back to entry levels) we have the luxury of being on the sidelines.  We have recommended very few trades past weeks exactly due to the EU wild card.  Others with more insight, a handle on matters over there, no doubt have done much better than we but then we know our limitations.

So it may not be the time quite yet to act on our anchors, but these are anchors nevertheless:  Growth in the US, Canada and UK will push through estimates, Q4, Q1.  We can look for growth in Germany to come inside of expectations, same period. Key - We are speaking of relative relationships, not absolutes.

For example, there is a flaw to consensus regarding UK growth ahead. This, when coupled with the expanded Bk of England operation is what motivated our very successful early October trade. We then advised exiting the last portion of that trade on Oct/28 after considering the recent CBI report (which showed manufacturing optimism dropped to the lowest level in 2 ½ years).  Then today we see Manuf PMI results far south of expectations, especially new orders.

Yet under no circumstances do we want to look to sell this spread.  Past two days it has come in considerably (2 - 10, +169, vs +202, Oct/28 / 10yr 2.21 vs 2.62) tagged to quality flt.  Fine.  We want to again look to own (L - S) the UK curve not only because of the Bank of England firing, but because we expect further cheer from the Administration, for example, the streamlining, or outright removal of regulatory and tax retardants. This is not priced in at the moment, and, this consideration will eclipse any perceived or real manufacturing weakness.

We expect the market crowd to come to agree with us; we encourage clients to set trades accordingly when the time is right.

In the meantime, back in the colonies, continue to look for a very active consumer.  This week’s chain store sale results will cooperate with that view.


Robert Craven