As I had suspected, months ago, jobless claims are rising rapidly every week now. We are almost back at 500K a week for initial claims as all those temporary workers are let go from retail, that is my suspicion at least. I remember claims that once the initial claims fell below 500K we would see job creation. However, the only creation of jobs were the wonderful accounting gimmicks from the BLS as they take more and more people out of the workforce, dropping the unemployment rate and making the monthly employment report look much better than it really is.
The trend is clear now, unemployment is getting worse. Even though the initial claims data is volatile it is the best barometer to what the employment number is going to look like. Unless the government has hired far more census workers than reported I expect the employment number to look pretty bad next week. Of course, there is the ever transparent way the BLS does remove people from the roles, but most people now look for that. It is also clear that the 1M jobs the BLS were forced to add to the unemployment number in February shows that their models are broken and should be adjusted, perhaps remove the birth/death model altogether.
There is no way that the ‘backlog of filings’ is to blame as they made the claim, a couple weeks ago, that they were all caught up. The only real reason for the worsening situation is that the job market is worsening. Even the mass layoff indicator is way up again, not a good sign, which means the employment number will get much worse. The good news is that no trader believes the data coming out of Washington and, based on the confidence numbers we saw, the public is also not buying that things are better. The man on the street usually has a better grasp on how things are out there versus the ivory tower economist who does not have a clue, usually.
On the bright side durable goods orders were through the rook, until you ex-out autos or transportation altogether. However, that number really is volatile and is not indicative of any real recovery, unless you are Dennis Kneale. There has been some improving data out there, but this is a statistical recovery and nothing more. From my perspective this makes equities very overvalued.
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.
I guess a few firms had to be to Scrooge given the 452K initial claims we saw this morning. Anyone expecting a larger number than we got is crazy because companies just do not or try not to fire people around the holidays. In fact, I am shocked that we saw claims as high as we saw today which reinforces my thought that the employment picture is not getting any better, I know I wouldn’t know a V shaped recovery if it hit me in the head because employment is a lagging indicator. That would be true for an inventory recession, but not for a credit collapse or do I have my type of recessions mixed up?
These initial claims and the ISM data is still not consistent with the magical -11K employment report we got in November, sorry for being a doubter. I simply do not trust government data and neither should you because the BLS along with this administration, any administration for that matter, will do anything to make themselves look better. For example, even though banks are not lending the BLS insists that 30K people started their own businesses in November, really, that is what the birth/death model says. Go back a year ago when things were really bad and the numbers are even higher, 100K+ people were starting their own businesses when the credit markets were frozen solid, so trust those BLS numbers all you want, I don’t.
To further illustrate this point, last month the BLS reduced the number of people in the work force by some 130K, they just took them out of the work force, why? Because they gave up looking for a job, or could not find one, and that is how you get a -11K employment report and massively revised prior reports. I wish we could all doctor our books like the government as we would all be rich. However, did you hear Steve Liesman tell you about how the BLS removed people from the workforce? Nope, you did not. Santelli told you about it and Santelli told you about how retail sales were doctored, but none of the other talking heads, why? I don’t have an answer, I really want to know why. I get that no one wants all bad news all the time, even I don’t want that, but I do want the truth.
My point is that last week and this week we will see soft initial claims numbers and December’s employment report will probably be OK, unless they doctor it up again. If they doctor the report, which will be unnecessary, it will be spectacular and completely unbelievable which will be the problem. Moving forward credibility will be an issue for the government, kind of like the USSR in the 1980’s when they said everything was fine and we knew it wasn’t, we are trying to do the same freaking thing. The thing is when 20% of the population is unemployed/underemployed, 1 out of 5 people, you cannot lie your way out of that and you will pay through the elections. This AM on Squawk even Liesman finally admitted that the Bush “economic recovery” was very poor and we are right where we were at the beginning of the decade. We need massive job growth, 300K+ a month now to turn this around and that is not going to happen.
The economy is bad and without government intervention there is no green shoots, period. The housing data yesterday proves that because that was the first look at housing starts without the tax credit, starts were down 11% when expectations were for +6%, ouch. That is quantifiable proof that the private sector is doing nothing right now and it is 110% government intervention growing the economy which has zero multiplier effect, it actually destroys wealth especially when your country has to borrow 100% of the money. That one data point on its own destroys the V shapers story, but if you combine it with any other data point it completely buries it. Let us not forget that if this was a V shape the Fed would have at least changed its language during the last meeting, but nope they did not even do that. Keep in mind I want out of this to, but I am just not delusional. Sure stocks are higher, but that doesn’t mean the economy is OK and in fact it means there is pain coming hard and fast somewhere along the way. Oh, where’s the volume?
Just how bad are things? Well, banks aren’t lending to the wealthy either. I spoke to a very wealthy friend of mine yesterday in Florida which is telling of what is really going on in the mortgage market right now. Now, I know how lending works, but there is simply no excuse for what he is going through right now in trying to refinance his condo in Florida, I know it is a hard hit area, but hear out the story before passing judgment. His condo was worth 7 figures before, but now in the high 6 figures and he has zero debt, $2M in cash, 790 FICO score and he is self employed. Now his self employed status is an issue because he has inconsistent income, $40K a year to $400K a year which is wild swings, but not bad considering he only wants to refinance $200K.
Here is the thing, he cannot get any financing from any bank anywhere. He wants to refi a portion of his condo, so it is totally secured, he has cash, credit, no debt and income with no bank wanting the business. Keep in mind I am not talking about a second lien where if he filed for bankruptcy the bank gets nothing, we are talking first lien here. So, how can this be if banks are ‘eager’ to lend, the credit markets are fully functional or the economy is just fine? It is not possible as this guy is prime to lend to. Now, if a bank is not going to lend to him, which is a collateralized loan I might add, then they are not going to lend to a small business or consumers in general.
All of this points to much tighter credit and much higher unemployment coming soon. Especially since banks are dumping TARP as fast as they can because they do not want to be told to lend by the administration or they want that one last big payday before the whole thing comes down. Actually, my belief is that why wouldn’t banks not want to repay TARP since they know they could get it back anytime they want. Either way, banks do not want to lend and they are not going. No lending, no growth.
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