Week in Review

The collective market view is that we are experiencing a moderate slowing: in China, due to Bk of China braking; in Japan, as expected, due to the tragedy; in the UK, sideways but with the threat of a lift over its head; in the EU, the reality of the periphery disassembling, only Germany and France packing the load; and finally, in the US, with manufacturing slowing, with signs of employment doing the same and with the reality of gasoline and Fed policy (lower $) smacking the consumer where it hurts.

We are not in a sweet spot at the moment; we cannot detect just where there may be a major flaw in consensus, just where resides the next opportunity for our clients. We’ve got a long weekend ahead, so plenty of time for thought.


Robert Craven

April Income and Spending

We did not highlight this release as it carried little potential to move the market.. Wages & salaries were up 0.4%, or 3.3% above their year ago level but gasoline prices were the piano which fell on the shopping crowd so that spending came in just below expectations and the past three months were revised slightly lower.

With lower crude, observers expect some improvement in consumer activity. Just ahead we’ll take a look at this and other key sectors.


Robert Craven

Market Mind

No impact from the Q1 GDP revision (as expected) but a major worry delivered by Claims, the very risk we noted in our prep for this event.

The market crowd will now look for employment to follow manufacturing - south. Whether this is reality or not has nothing to do with it; those who disagree, at least for the short term, will be rolled over.


Robert Craven

Releases Tomorrow

We’ll have the second estimate for Q1 GDP. Though this is history, such revisions can deliver market impact. Don’t look for much this time.

Jobless Claims however packs a potential punch. Market view is now for a slowing in the one-time paladin of recovery - manufacturing. This leaves employment. The entire free world’s taken its fingernails down to the quick monitoring the US labor market. Recall that last week’s Claims release was very encouraging - claimants far below expectations. The same can be said for April Payroll (May/6) - encouraging. Thus, if tomorrow’s release is below expectations, it will be taken as a confirmation. There will be a modest market reaction. If the release if far through expectations - more claimants - it will be seen as a turning point, and greatly worry equities, sparking bonds (lower yields). These are the dynamics as we approach this event.


Robert Craven

A Recap - The Week in Review

We saw this week that the US factory sector took a breather in April, from the explosive pace of Feb and March, meaning new orders and shipments grew more slowly. We’re not sure how to explain this yet, or if it is trend.

We saw this week that US housing remains in the tank, and to no one’s surprise.

We saw this week through the Claims release some further improvement in the US employment market.

We saw this week that price pressures are building in the EU and UK and that both central banks are now more likely brake. The EU can handle it (German, French vigor) but the prospect represents a nightmare for the UK.

We saw that the EU continues to experience problems with the periphery, an old story. Today there is speculation of Greece defaulting on their debt. We recall when Russia defaulted on their debt. That was a game changer for markets in the US.  This is not.

Finally, we saw today that the Bk of Japan is pleased with the pace of resuscitation and so plans no special support plan. Japan’s Q1 GDP was off 0.9% vs Q4, to no one’s surprise (it captured two weeks of tsunami impact). Days after the crisis we predicted a positive Q3. The Bk of Japan, and now most world observers agree.


Robert Craven

Fun With Economics

See? It’s easy. Economics doesn’t have to be a sedative.

Didn’t we say early this morning that both Jobless Claims and the Philly Fed manufacturing result could provide some good old fashioned excitement? Sure enough, the number of claimants dropped far below expectations (5:30 am), cheering stock holders. Sure enough, the Philly data (7 am), at least the headline, in the tank, worrying the same bunch.

Come on folks! Admit it. How could you not have fun with this stuff? Take it home. Throw it around the dinner table. Pretty quick and with practice you’ll have as good a view of economic reality ahead as the Street "ex-spurts."

You’ll dream of average hourly earnings, mining output, capacity utilization and unfilled orders; you’ll swoon to retail sales; your heart will stop on a weak payroll number.

Stay tuned for the time of your life.


Robert Craven

Jobless Claims

Far fewer applied for unemployment benefits the May/14 week than expected. This is a good thing; it supports our view that employment activity ahead will trend higher.

Some observers noted that higher gasoline prices discouraged the employer. Those prices discouraged spending as we predicted in late February, but had little if any impact on employment decisions.


Robert Craven

Surprise Before The Weekend?

What might move the market crowd before the weekend?

There is a key US Manufacturing release today, a survey conducted by the Philly Fed which over the years, our experience, has correlated well with not just regional but country-wide manufacturing activity ahead; naturally then thus release packs muscle. It will either show a continued booming, or a slight easing in the pace of expansion. This is priced in. Only a very weak number will worry equities and push bond yields lower.

We also have Jobless Claims today. Not just US but world focus is on US job creation - we are the world’s engine (sorry China, you don’t even come close) and everyone wants to know on how may cylinders we’re burning. This release carries plenty of horsepower to either worry or cheer the market crowd. Those dependant on discretionary spending - our nursery pals, our friends who own a picture frame business, our plastic surgeon buddy - none of them are being overrun by clients. Sorry, but it’s simple - good ‘ol trickle down holds the key.

We also have Existing (Used, Pre-Owned) Home Sales today for April. The media makes quite a bit about this and related housing releases. Forget it. They don’t mean a thing in this environment. Housing is sunk and no single release will change that view. That is why (as we predicted) although Housing Starts tanked on Tuesday, the markets not only did not shudder, they did not even blink.


Robert Craven

HAVING FUN YET?

Always figured economics was boring? Never thought you would wait breathlessly for Payroll, thrill as Manufacturing flattened estimates, cheer latest Vehicle sales as if you were at the ball game?

We’re here so you can have a good time with this stuff, and maybe learn something in the bargain.

Welcome Aboard.


Robert Craven

US Manufacturing - An Alert

We also highlighted Manufacturing in yesterday’s Week Ahead. The first of this week's three releases pertaining to this sector was this morning's NY State Index. While the pace of expansion was not quite as strong as expected (New Orders slowed) it was still strong. And Key - Factory managers were more upbeat about the future than earlier. Employment grew to its fastest pace since May/04!

Robert Craven

The World Beast

We had a bit of a mortgage problem here in the States back in ‘08. As a result, Iceland imploded. What? This week we witness China’s output slowing to just a mini explosion from a full-blown explosion, and crude drops off the screens. Last Thursday US Claims blew through expectations (more claimants) and next day a dozen currency traders in Japan go out the window.

Holy cow!

The world markets - one big, throbbing organism, connected by nerve, muscle and fiber, a colossal beast which quivers, jumps, turns summer salts and mashes anything in its way.

And what insight can we fetch from all of this? Easy. Never take the markets or yourself too seriously; remember that a little levity goes a long way.

And always - our motto - Keep It Simple.


Robert Craven

Sweetheart On Parade - The Week In Review

My goodness! Aside from Osama’s departure we had a routine week, then - a weak Jobless Claims release on Thursday (more claimants than expected) and all hell breaks loose! Equity prices dive; crude, other commodity prices head to the sewer; bond yields plummet. Offshore markets shudder.

One number, and all that?

Market tension was at the tipping point. Sometimes it takes just a speck of information to trigger the mad rush; emotion is, as always, taken to the extreme.

We’re constructive for Q3 but told our clients that both this Claims release and April Payroll carried the potential to worry the market. Claims, fine, that worked but we were wrong on Payroll.

That grand old work horse, that US engine, she’s still pulling the wagon. She’s thrown off a few more government types while she’s taken on the private sector as she fights her way past everything the administration can throw at her.

She’s the grandest horse that God ever made. And she’s never looked finer than before!

That ‘ol campaigner, Sweetheart-On-Parade.


Robert Craven

Today’s April Employment release - a world focus.

We’re constructive on the US economy into Q3 but we expected today’s particular release to be a worry. We were wrong.

Average earnings didn’t change much, up only 0.1% but private sector jobs gained 268M, the largest increase since Feb/06 and a nice number. And government jobs shed 24M which can’t be a bad thing.

Robert Craven

Timing

We warned late March that gasoline prices would cut considerably into consumer activity, would cut considerably into GDP. Wall Street, resorting to all sorts of fancy formulas, disagreed. A growing chorus has now come to understand. It is too late.

Next, we predicted that the high risk of further violence in the Middle East put a floor under crude, yet that commodity plummeted today on the threat of a slowing economy. We’re not oil analysts but we understand the Middle East pretty well.

Finally, we noted Monday that tomorrow’s Payroll release carries great potential to worry the market, a little to cheer it. It’s not going to be awful, but likely south of expectations (+190M).

Robert Craven

Employment Worries

We warned clients that today’s Jobless Claims result but especially tomorrow’s April Employment result carried far more potential to harm the market than to cheer it. Sure enough, today’s Claims blew through estimates, printing 474M, the highest last August. There were special factors involved but these weren’t a secret to any forecaster.

Robert Craven

The Week Ahead

There are plenty of economic releases this week. We have Manufacturing and Construction data on Monday, Factory Orders and Vehicle sales on Tuesday, and April Non-Manufacturing data on Wednesday; then we have Q1 Productivity on Thursday. It is know that manufacturing is vigorous, that anything to do with housing (construction) is not. Vehicle sales are important given gasoline prices. But it is Friday’s April Employment Report that is the key release by the way of market-moving horsepower.

It’s easy in this business to get lost in the details, and the noise provided by the media.


Background: On Mar/10 the Jobless Claims result exceeded expectations - more claimants, bad news - and worried the markets considerably. We told our clients that this was not trend and to adhere to that anchor. The following three Claims numbers cooperated (lower) as did the March Payroll result of Apr/1 - better than expected. On April/7 the Claims result again came in a tad south of expectations. With that, we closed this exercise, meaning we could no longer assign a risk to the jobs numbers; we had lost the "sweet spot."

That brings us to this Thursday’s Claims result and Friday’s Employment report. We cannot assign a risk of result to either (result vs expectations) but can say that the Payroll number especially carries far more potential to harm the market than to cheer it. This is because the market crowd expects an economic rebound from the reduced pace of Q1. A Payroll result at or a tad better than expectations will merely fit that view. A result inside of expectations, especially for private sector jobs, will be taken as a new trend, providing a worry to equities and a boost to bond prices.


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, tagged to gasoline prices. We’re not sure regarding employment.

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


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

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