The Week Ahead

Eventually, insight surrenders its luster, sheds its horsepower. This is part of the cycle - economists catch on, reality is priced in and we move to the next opportunity.

Our method is to set anchors for clients so they may weather the storm, that confusion regarding economic reality just ahead.

Early on we put the spotlight on three US sectors where clients could expect results to flatten estimates – manufacturing, job creation and spending. Having the flaw to economists’ models in hand gave us a leg up on price discovery.  These were set Q4 and again, early Q1.   But are they still needed?

It seems most of the vigor we identified in manufacturing is now priced in. So we don’t expect this week’s related releases to vary much from expectations.

We explained in Friday’s sketch that job creation (and soon too, earnings) will continue to broach estimates.  That anchor has of course served us very well and remains in place.

This brings us to spending. There has been some slippage; Retail Sales for Jan were disappointing, only modestly above the Q4 average pace.  But recently we have seen a burst from the consumer, in vehicle sales for example, higher earned income or not.  On Tuesday we have Retail Sales for Feb and we can expect these to come in better than forecast.

Crude prices remain the piano just overhead.  The average price for regular gasoline is $4.35 in our neighborhood.  At that price, the consumer may drive 3 miles to a restaurant but not the 15 to get to the old favorite.

Despite an upcoming 6-nation summit with Iran, violence is still very much a possibility, especially if the mullahs miscalculate.  The Saudis say they will chip in, but don’t count on it as they too could be in the crosshairs.  But we don’t need violence, simply the enduring threat of the same. Then five dollar a gallon gasoline will severely brake the world’s #1 engine.

Robert Craven

Today's Feb Non-Farm Payroll report

Background: There are two reports, both released by the Bureau of Labor Statistics (BLS). One is the “establishment survey” covering over 400,000 businesses from 500 industries (it is “non-farm” now as too many BLS samplers were run down by bulls or shot as trespassers). This is the most comprehensive labor report available and covers about 1/3 of all non-farm, non-self-employed workers. From this beauty we get jobs by industry, then hours worked and earnings, weekly earnings being a reliable leading indicator.

The second survey, the “household survey” measures results from roughly 60,000 households.  From this little dandy we get a figure representing the total number of individuals out of work, thus the unemployment rate.  It goes without saying that this is a lagging indicator.

The “establishment” measure is larger than the “household” but excludes agriculture and the self-employed. The “household” report runs a smaller sample but since the self-employed are included, it can be more useful during times of a recovery, as these jobs are the litmus paper for such an event.  This survey is a type of census really, which is why for example the unemployment rate may lift while at the same time the headline can show an increase in jobs.

All in, the report is closely followed and for a good reason - it has a respectable track record of predicting cycles.

Result: Job creation in Feb was strong and the prior two months were revised higher. And private sector employment increased nicely. It will become more difficult for the willfully blind to miss what is obviously an acceleration in job creation. We also see that hourly and weekly earnings increased in Feb, but at a modest pace.  We would have preferred to see something more, and no doubt will over the intermediate term. In the meantime US consumers won’t let this modest inconvenience get in the way of shopping – they’ll borrow the difference.

Strategy:  It is very easy to cherry pick to fit one’s bias but it means death in this business to do so.  We identified US Q1 2012 strength in Q4 when the rest were looking for weakness, and some famous names, a double dip.  So at some point we need to acknowledge that our view is priced in, that economists have finally come to understand what we understood months back.

Yet most now predict a slowing, a loss of momentum because that is the easiest mental exercise; it is based on precedence, recalling early 2011.  These individuals are mistaken.  Thus we can look for continued surprising vigor in job creation ahead. 

From time to time we apply a trade to translate our insight to the bottom line. For example, from Feb/16 we have looked for Eurodollar prices to erode the further out the strip and recommended owning the (L) Sep/12 – (S) Sep/13 spread, then -13.  Our target was -25.  Last -20.

We have also predicted for weeks that the course of least resistance in the term structure was wider.  It hasn’t gone much of anywhere given events in the E-Z and flt to sanctuary.  But we are right re direction so do not under any circumstances look for the reverse. If interested in this exercise, look to own both (L)5 – (S)10 or 2 – 30.  Both will move along at a modest rate, nothing spectacular.

Robert Craven

IRAN

Our view has been all along that Iran is bluffing.  Bluffing or not, we still could highlight this situation a few weeks back as a real threat to US growth, given the near-term direction of gasoline prices.

Key is that the mullahs get their choreography just right.

As part of the dance, further talks have been scheduled, this time with six world powers - US, UK, Fr., Ger., Russia & China. The last set of talks, in Istanbul of Jan/11 broke down.

We have written often of tension in the Middle East, of impact on crude, then impact of higher gasoline prices on US consumers.  In this case, although the mullahs sound crazy, we believe they are not. They have no intention to bomb Israel or anyone else. It is that they are a failed theocracy (oxymoron) and so need an enemy offshore for sake of diversion.  That would be the West.

Of course we can get in a lot of trouble if they misjudge, taking the dance a tad too close to the edge of the stage.  But if things go right for them, they’ll be able to remain in power by appeasing the masses with gifts from the West.  If not, they fear they will be thrown out – the West’s preferred method all along; yet lacking the support of Obama, the last attempt (2 years ago) failed.

The mullahs can’t risk another uprising.

Robert Craven

The Week Ahead

There are two dynamics impacting the view of the mkt crowd just ahead; more accurately, just how they will be misled.  One is that economists still under-estimate US vigor for H1, relaying on a replay of 2011 to set them right and reclaim their dignity.  The other is that these same observers under-estimate the impact of crude, thus the impact of gasoline prices on the American consumer.

We must realize that consumer activity is significantly threatened. We were the first to understand US vigor when others were looking the other way; we want to be first to understand that being curtailed, if indeed, it is to be so.

We have two key releases this week (neither of which will shed any light on the impact of crude): the ISM Feb Non-manuf survey Monday and Feb NFP on Friday (Factory Orders (Monday) are rarely a mkt mover as we already have the Durables component). We can expect the Feb ISM survey to come in just a tad, worst case, but when we see that print we should recall that business activity in the service, construction and gov’t sectors accelerated in Jan to is best pace in nearly a year.  Not too bad. It’s simple folks. A cyclical expansion is currently in place and it is gaining strength.

Finally, to Friday’s Feb Payroll release. We’re not sure re the headline print, but high-powered jobs will expand, esp manufacturing.  And av hours worked and salaries will also pick up.  No steam roller, but certainly a contradiction to last week’s Income and Spending print.  Consumers are optimistic. They’re borrowing for better times ahead.  We’re not launching a satellite here folks.

Consumer reaction to gasoline is key and for that we will have to wait.  That is part event, part wild card.

We no longer have the E-Z as a wild card; only as an irritant, seemingly unending.

Robert Craven

The Week in Review

In all years we’re been at this, we’ve rarely seen as confused a bunch of observers as we had last week.

Headline Jan Durables tanked on Tuesday but a moment later we found Feb consumer confidence was at a 1 yr high; Q4 GDP (R) was a tad better on Wed and the Chicago NAPM and Rich Fed manuf survey flattened expectations that day, then Claims continue to cheer on Thursday, but then Jan Personal Income and Spending went nowhere, and the national NAPM fell inside of expectations. Then we found that vehicles sales in Feb were at their highest level in nearly 4 years (making a large contribution to Q1 GDP).  And merchants reporting their sales reported gains that exceeded St estimates. "This was a very strong month. A new life has been breathed into the retailers," said Ken Perkins, president of Retail Metrics, a research firm. "Consumers are starting to feel much better about their overall situation."

My goodness, what is an economist to think?  It’s so easy after all to look for a repeat of last year; if it’s one thing economists like, it’s precedence (which is why most get into a whole lot of trouble).

Best is not to think, at least not too much.  Getting all tied up in knots does no good.  For those who can relax, and back away and in so doing gain perspective, it is those who will be gifted with ownership of the economic landscape just ahead.  This process cannot be forced, but will come naturally for those who do not resist (in the fashion of the Tao).

Next, voting members of the FOMC this week continue to back away from the scenario of FF’s in the cellar into 2014, except that is, Bernanke who just Wed made the case for an accommodative stance; not just now, but likely later.  He probably knows that won’t happen, but it’s cheerleading and the Fed loves to put on that skirt and grab the pompons.

Robert Craven

ISM Manuf Survey

Background:  As we noted post the Chicago release yesterday, the ISM national survey is thorough; it canvases 18 manufacturing industries questioned by the way of Production, New orders, Supplier deliveries, Inventories, Employment, and  Exports and Imports.

Then a diffusion process is applied to the answers, which recall can be only “better,” “same” or “worse.” The result is calculated by taking the percentage of respondents that reported conditions better than the previous month and adding to that total, half of the percentage that reported no change in conditions. Thus, a 50 would indicate and equal number of respondents reporting “better conditions” and “worse conditions.”

Result:  This measure hit the highest level in Jan (54.1) since June/11.  The pace of growth nationwide is not booming (it is in some regions) but is still gathering momentum, all in. This is true despite today’s less-than-expected result.  But the Feb print did not fit our anchor set for this sector, being weaker than consensus. Thus we did not provide a reliable set for our clients.  We must be careful not to marry any view. Perhaps manufacturing is due for a pause, Q2, but we doubt that.

We see today that New Orders grew a tad slower than earlier, that Export orders grew more quickly than earlier, that the pace of Production growth came in just a tad and that Inventories declined slightly.  Finally, we see that Employment grew just a bit less quickly. Still, this was the twenty-ninth consecutive month of expansion for factory jobs, which of course bodes well for manuf jobs in next weeks NFP report.

The factory sector has grown for 31 consecutive months. No barn burner, but if we recall estimates for this activity several months ago, it was for stagnation. We could not predict for our clients then the exact result, but we did predict that these results would flatten estimates. We’re not prefect as today’s miss shows and so will re-gather at bit, gain some perspective, and be back.


Robert Craven

Feb Chicago NAPM

Today’s Feb Chicago (and perhaps more than you knew you needed to know!)

View:  Manufacturing - a smaller portion of US activity than the early days, but as good a lead as they come.

Background: This trusty release and others like it used to be just the “NAPM” to those of us old enough to remember, or the Nat Assoc of Purchasing Managers survey.  There are 163 districts in the US; most are affiliates of the umbrella - Institute of Supply Mgmt, which decided to get heavy handed and change the regional survey name to Purchasing Manager’s Index (PMI) instead, the name of their own survey. And eventually the idea is that the districts will all change name, to indicate their allegiance; for example, the Board of the Houston NAPM on Jan/2011 approved the name change to ISM – Houston (but not, we hear, without a brawl in the board room!).

Still, many districts send out their own survey, proudly clinging to tradition. There is also the national survey for manuf and, as of June/1998, one for non-manuf (due tomorrow and Mar5 respectively), both compiled by the national organization and both reflecting the entire US; in the case of manuf it includes 18 industries. The information in the regional reports is not used in calculating the national report – “no way we trust those guys!” All the districts use the same questionnaire - five (5) sub-indexes, weighted as follows: Production, .25 / New orders, .30 / Supplier deliveries, .15 / Inventories, .10 and Employment, .2. - but with Exports and Imports added to the national survey and weighting changed a tad.

Then a diffusion process is applied to the answers, which can be only “better,” “same” or “worse.” The result is calculated by taking the percentage of respondents that reported conditions better than the previous month and adding to that total, half of the percentage that reported no change in conditions. Thus, a 50 would indicate and equal number of respondents reporting “better conditions” and “worse conditions.”

Result: The key Chicago district read slowed a tad in Jan but from a very solid pace; factory activity has now been growing in this region for 30 consecutive months in fact and faster than the average for the whole country. Because inventories are lean, production gains are strong.   With today's read, we note that the Employment print was the highest since 1984 and New Orders were through the roof, their highest level since Mar/11.  Past years we have found a sound correlation between the Chicago Employment read and NFP.

Desk Strategy: We have isolated the manufacturing sector as an anchor for clients for several months, predicting that results would exceed estimates for this sector and that they should trade with that in mind. With an occasional miss, that was the result.

It is true that manufacturing does not make up the large percentage of activity it did in the old days but we have found that its leading characteristics are sound, especially those of the Chicago region and the ISM national results, and especially the New Orders and Employment components.  These releases are key in soundings for the seascape just ahead. The factory sector is not roaring naturally, but getting close. It is not firing on 8 of 8 but 6+ of 8 and heading to 7, contrary to market view which had it in a near-term stall.  No way. There is more 1) domestic and 2) offshore demand than economists have yet come to grips with.  They will make that correction in the near term, and with that, GDP.

Robert Craven