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

The US Consumer, The Analyst and The Cliff

In today’s Q1 GDP revision, consumer activity was revised lower. We all now know that consumer activity was hit by higher food costs, but especially by higher gasoline prices.

Early Q4 the Street/financial media had the consumer going nowhere. We advised instead (a crowd of one) that the consumer would come alive into 2011. Sure enough. Thus by mid Q1, the Street/ financial media had the consumer at full stream ahead. We advised instead (a crowd of one) that consumer activity would be slowed substantially by higher gasoline prices. We predicted then that most economists would eventually catch on. They did. In a few weeks they cut their GDP estimates by an average of about 1 ½%, having been twice snakebit in five month's time.

Herein lies a lesson in observation. It is this: Market observers, almost without fail, overreact, tearing off in one direction, willfully blind until they go off the cliff. Scratching their way back up, off they go in the other direction, to soon again be converted to crow bait.

And so it was with analysts and the consumer. Missing the turn just ahead in early Q4 and not wanting to be burned again, economists wholly embraced the consumer, jettisoning all caution at the same time. Heedless of the osprey overhead, like trout, they keyed in, failing to account for gasoline just as the frenzied trout fails to account for the osprey. Again analysts were flattened.

This cycle will repeat, always. To understand this dynamic is to be well armed.


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

Speaking of Releases

Most of us know that certain economic releases are key to market response, indeed, to our own portfolios. Active investors who ignore these do so at their own peril.

Several internet services list these events, both US and offshore. One sample: http://www.fxstreet.com/fundamental/economic-calendar/.

Each lists the event and its description, then assigns a volatility measure (*’s, !’s, etc). We recommend the client consult these sites. They are not competition, but a complement.

The main value is the list, with description of the details of each release. Good. That saves us the print.

The assignment of volatility by these services is sometimes accurate, mostly not, but that’s ok. That’s our job, or the beginning of it. We extract from the list just those events with market-moving muscle (ignoring the rest).

As we refine this part of our service we will eventually predict the odds of result; that is, predict which side of consensus the result will fall and we will do that on the order of 70% of the time.

Our service will then be unique to the industry.


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

The Japan Factor

We noted just a few days after the tsunami that its net impact on US activity would be minimal, perhaps a wash, that supply shortages to US industry, especially vehicle assembly, would be at least partly met by Japanese competitors, and at any rate, this negative would be offset by Japanese demand for concrete and other building materials later in the year. Today’s April Durables release indicated that vehicle production was off considerably, especially - no surprise - by those facilities owned by Japanese, due to component shortages. We may have under-estimated this factor, and it’s too early to judge if we’re right on demand from rebuilding.

Robert Craven