A rather bullish employment report

Posted by Ray on January 8, 2010 under Main | Be the First to Comment

If you believe the recession is not over or we are due for a double dip then this employment report was certainly bullish for put options or leveraged bearish ETF’s. If you are a long only bull today’s report should make you move a bit more defensively. While the rate of firings has certainly been declining the real question is why are we losing this many jobs at this stage of the supposed recovery? I can hear it now, employment is a lagging indicator, sure, for an inventory led recession you would be correct, but not for a credit collapse, sorry.

More on the employment report in a second, I love government data, but there was a piece of a lesser reported report data released today as well. Credit contracted at a hefty $15B clip last month compared to the consensus estimated $5B, this is a problem for the V shapers. Contracting credit at this level means that consumers are still deleveraging and it indicates that they will be buying less iPods and Kindles in the near future. However, consumers shedding debt is a good thing because debt is wealth destruction and maybe the government will begin to figure out what the majority of Americans have already figured out, spending money you do not have is not a good idea.

Do we really have 10% unemployment? Not a chance, it is much higher. The BLS is constantly taking people out of the employment pool which lowers the unemployment rate, except on the U-6 report. Let’s not forget about the BLS’s birth/death model which is constantly giving us a major fudge factor for jobs. For example, in December this model added 59K jobs, meaning the BLS estimates that 59K people started their own companies. It gets better, if you go to the BLS website birth/death page it shows that during April of 2009 it estimates 226K people started their own business, when no credit was available. This fudge factor was so bad that the BLS will have to adjust the numbers at some point in time, like February 2010 when the BLS will add, officially, 800K to the unemployment rolls, because even they cannot hide how bad it was/is forever.

The length of time it takes people to find work is at record levels, the medium time frame is 20 weeks, but it takes about 40% of unemployed people 29+ weeks to find a job, if they find one. This is where it gets interesting because the longer it takes to find a job the more discouraged you get and the less you look. The less you look, the less “attached” you are to the labor forest and the BLS will just remove you if you stop looking for work, see no evil, hear no evil…

Basically, if the BLS left the “marginally attached” people in the employment report the official unemployment report would have grown to about 10.4%. Now, after spending $1.6T in stimulus and job creation bills this is just getting less encouraging and downright scary, unless you are delusional to reality. There was one bright spot in the report, well 2 bright spots, November was revised to positive 4K, which is completely unbelievable and inconsistent with all the data for the month of November, and temporary help increased for December. I want to say this again, at this stage f the recovery, how can we still be shedding jobs when every pundit has said that firms have cut to the bone or over fired? Clearly they were wrong.

While I do not believe the November employment report, simply because it does not match any of the interim data, let’s assume it is correct and we had +4K in job creation, so what? Sure, that might make some feel better for potential future job growth, but it was, in large part, due to temporary employment hiring for the holidays, so it is relatively meaningless. Even with all this infrastructure spending and stimulus we are still losing a construction job, which is not good. With productivity at a mythical 9% we are still losing manufacturing jobs, which is horrible. Temporary employment is just that, temporary and meaningless.

Everyone is making a big deal over this temporary employment hiring because it is a precursor to more hiring, supposedly. No, it is not, sorry. I would like to agree with everyone that large seasonal temporary hiring will lead to more hiring in the future, but it is not, period. Here is why, these temporary jobs were created exactly when most temporary jobs were created, October, November and December, this is for the holiday shopping season. I would expect these people to start being laid off in the middle of January after the shopping season is done.

My view on temporary help is pretty simple and I know many will disagree with me and that is fine, but temporary help is brought on to keep costs low and, in this case, to prepare for the inventory rebuild. After that is done the temporary help is let go and the company does not have to pay any severance or, while they are working for the firm, any benefits and they pay temporary workers a lot less than their fulltime counterparts. I do not believe it is leading up to fulltime employment or a precursor to more hiring in the future in this case. In the past that may have been true, but in this recession or depression we are going to have a very uneven recovery or a double dip and firms know this so temporary help is just as the name implies, temporary.

If CEO’s really believed in a V shaped recovery like most of the pundits why in the world are they net sellers of their stock? My point is pretty simple, if employment was going to improve and demand was going to pick up CEO’s, who know their companies and industries the best, would be buyers of their stocks, they are not. If they are not buying their own stock they surely are not going to hire these temporary workers, sorry.

To sum up today’s employment report, it was horrible. I was not expecting a report this bad and I am a bear. The absolute irony is that the market did shrug off this bad news so it is likely that we will see 11,500 or maybe 12,000 on the Dow and 1,200 on the S&P 500 before the big selloff comes, but don’t kid yourself, there is going to be a selloff. That is unless you think the markets are supposed to go straight up and break all resistance with absolutely zero volume? The unfortunate part is that by the time the correction comes there will be many more unsuspecting people sucked into the market only to suffer more losses. Regardless, let us hope we do not have more employment reports like this, if we do I do not know what to tell you because that would be a signal of a major fundamental problem with the economy.