The U.S. Economy's 'New Normal'

by: TraderRob


But first, a quick view at Friday's S&P 500 trading. (Click to enlarge)

S&P 500 - Friday June 4, 2010 (intra-day)
Yes, sports fans, that's what "missing the boat" on an Employment Situation report looks like... (S&P 500: -3.44% @ 1064.88).
Friday, the world listened as non-farm private sector payrolls increased by only 41,000 jobs. Census hiring added 411,000, manufacturing 29,000, mining 10,000 and other temporary service jobs 31,000, while construction and financial services lost 35,000 and 12,000. The headline came in at 431,000 non-farm payrolls added, while April was revised down by 20,000. For those of you unconscious last Friday and visually impaired, markets sold the news.
Take a moment to listen to the stance of Bill Gross, the head of PIMCO, the world's largest bond fund, on the anemic jobs report last week and his strategy for navigating a sustainable path through the "new normal" economy, in the United States and abroad.
Following Gross' comments on Friday, the manager of the PIMCO "Total Return Fund," Mohammed El-Erian, weighed the outcome at the G20 in Sunday's Financial Times:

I fear that all this may continue to catch off guard at least three dimensions that are still significant in today’s marketplace:

  • Mindsets that have difficulties recognizing regime shifts, preferring instead the illusionary comfort of the more familiar cyclical frameworks;

  • Approaches that focus excessively on rates of change and inadequately on levels; and

  • Investment portfolios that are over-exposed to equity and credit risk, and that maintain insufficiently hard interest rate duration.

Clearly the boys over at PIMCO have their doubts on the sustainability of the World Economy, but what's more disconcerting is that G20 leaders are beginning to publicly admit similar fears.


This week starts slow from a U.S. Economic Data viewpoint, where Monday will bring only the U.S. Consumer Credit report. Revolving Credit declined in March by $3.2 billion, while car loans kept the headline number positive, at $2.0 billion in March. On the heels of weak jobs data, traders will be quick to write off the consumer on Monday if it seems that revolving credit continued to decline in April.

Tuesday traders will watch the ICSC Goldman Store Sales and Redbook Sales, to get a gauge on weekly spending patterns. But the focus will shift to the bond auctions in the afternoon, when 4-wk and 3-yr Treasury debt is set to be offered. U.S. Treasuries appreciated 1.51% on Friday as markets sold off and we expect to see a strong auction on Tuesday.

Wednesday will focus primarily on normal weekly readings, as the MBA Mortgage Applications and EIA Petroleum Status reports come in. The MBA report should show continued weakness from the mortgage purchase category, which -4.1% and -3.1% over the past two reporting periods, securing a new 13 year low for purchase applications. The headline MBA Applications number held up at 0.9% and 11.3% last week and the week prior, due to refinancing founded on low mortgage rates.

The EIA report showed a net decline of -1.9 million barrels in crude inventories, marking a short term peak in inventory near 365 million barrels and weak yearly gasoline demand growth at 0.5%.

On Thursday it's all about jobless claims. If claims come in higher than the 448,000 consensus or if the 4-week average rises for a fourth consecutive week, we're likely to see downward pressure on Thursday.

Friday will bring Retail Sales, Consumer Sentiment and Business Inventoriesreports. Retail Sales are expected to maintain last months 0.4% rise, whileSentiment will most likely maintain the six month plateau around the 73 reading.

Business Inventories have been a solidly healthy portion of the recovery in the U.S., because vicious slashing of inventories "on the way down" has allowed for a sustained inventory replenishment during the recovery of retail sales. We saw 0.4% and 0.5% growth in March and February and expect to see 0.5% growth reported in April, as the ratio of Inventory/Sales has trended lower to 1.24, symptomatic of quality sales growth. (If retail sales come in soft, we'll expect to see some nervous reaction to the inventory report, as a higher I/S means unsustainable growth.)


It has been our stance for some time and will remain our stance that U.S. Government debt will benefit from increased risk throughout the world in the short-term, but will ultimately fail as a long term investment when the outlook for government revenues fails to meet a sustainable level, given the current liabilities of the Treasury and an unsustainable recovery.

We are recommending that clients dollar cost average over the next 12 months into vehicles that allow short exposure to U.S. long term debt, such as TYO (Direxion 10-Year Treasury Bear 3x), while maintaining overweight short positions in U.S. equities (NYSEARCA:SDS), short Crude Oil (NYSEARCA:DTO), and long CBOE volatility (NYSEARCA:VXX).

This week will likely begin with some relief for the euro on G20 plans to cut costs in euro states, while the hangover from Friday's U.S. jobs data could continue into a "no news" Monday trading session. Look for pops to add to shorts early in the week, but keep stops tight leading into jobless claims and Friday's data.

Disclosure: Long DTO, Long SDS, Long VXX, Long TYO