Week in Review

We heard that the dynamic of “surprising growth” for the US had lost its luster.

Those who performed this eulogy must now wince at the thought that to be published is to be found out.

After identifying relative vigor ahead early Q4 while most others were looking in the mirror, there was the risk early Q1 that our horse had played out, that insight provided through Q4 was no longer of much worth. But it was not to be.

Coming into Q1 clients were advised to rely on certain sectors of the US economy to deliver something through consensus.  Releases this past week were a satisfactory fit. Manufacturing was one of these and it cooperated. Consumer activity was another.  We expected a tad more from this sector, recent reads, but then Jan vehicle sales fit well.  We can expect a revival in consumer spending from the present pace, into Q2. Finally of course, jobs-related activity was another anchor.

The monthly Payroll print is not as important to economic reality ahead as the world market crowd makes it out to be.  It is key of course, just not the Holy Grail. The panic surrounding the release (and we have traded into over 150 of these in our career) is almost amusing. But it can also be quite deadly which is why we rarely come into these with outright exposure.

What can we fetch from today’s release, what leading characteristics?  For one, the strength in goods-producing hiring was impressive. And we can see confirmation of our anchor; that is, it is clear now that job creation is accelerating.  Over the past three months job creation has averaged 201M per month vs 133M the prior three months and 78M the three before that. However, we can also see from today’s print that there is nothing very impressive about earnings nor hours worked that go with these jobs.  They increased modestly. Oh well, can’t have it all.

What are clients to do now? Since we did not lift anchors set earlier, clients hopefully came through this week with one position or another set to profit from surprising US vigor.

For now, if equity oriented, look for the averages to expand, exactly as they have done from our first heads up, Oct/11.

If FI, know that course of last resistance for the term structure is wider; consider 5 – 10; try to capture some of this in the short end too with Euro calendar spreads, perhaps Mar/12 – Mar/13 because as we said earlier, the Fed is mistaken regarding their FF target. Resort also to perhaps the most versatile instrument of all; that is, look to place options spreads on the note, perhaps the bear put spread the most appropriate of the lot, the risk limited to the debit required to establish the spread.

Given the shenanigans of the E-Z types, execute only at the margin. If neutral into today’s release, don’t rush. Just know that fundamental developments ahead are to exceed estimates in spite of what it delivered from these clowns, and, that they don’t have to get all their problems fixed for us to do very well.

Wild cards remain in place, not the least of which is violence in the mid east – dismissed by most but as real as ever.

Robert Craven