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
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