First, the weekly initial claims data today was another squishy soft 448,000 and continuing claims dropped a tad, but are way too high. This confirms that job shedding is still the order of the day, 2 ½ years later, and that is not good news. To think that we can post strong job growth or that “employers are on the verge of hiring” with numbers like this is absolutely ludicrous and I would question what drugs one would be taking to suggest otherwise. Seriously, if employers are about to hire why are weekly claims still in nose bleed territory? Why is the work week at 33 hours? Why are wages, the trend at least, lower? Sure, the numbers are better, but less bad is simply less bad.
Now to the myth, conservatives and some economists suggest that unemployment insurance keeps people out of work longer than if they did not have the insurance. The people who make this claim point to old studies or junk science studies to verify this claim. So there is no mistaking my thoughts on this let me be succinct about this, they are utterly and hopelessly wrong. Either they saw what they wanted to see in the data or did not understand what they were looking at.
Studies, and I know this to be true after authoring several of them in my career, rarely surprise the author in regards to their actual conclusion versus the prewritten thought of what the results will be. Essentially, a person’s bias always comes through in the writing and how the data is interpreted. In even worse cases the results will confirm the person who actually pays for the “independent” study thoughts or position, shocking, but very true. Try, for example, to find a study written for the insurance industry that is harsh on insurance industry product. This is what happened with these unemployment insurance studies, they are literally junk science.
Anyone who suggest that receiving $300 a week is worth passing up any job is clinically insane and disqualified right from the beginning. Yet, that is what most of these studies suggest. What they conclude is that a person receiving unemployment benefits will pass on jobs that paid less than their last job and, by some miracle, the person will only accept such a job if their benefits are about to run out. I am not making this up, this is, basically, what these studies conclude. What the person who wrote this nonsense has not done is think through why the previous stated result actually happens, which is why these studies should be disqualified as nonsense.
I am sure you have figured out why people will take any job right before their benefits run out, but let’s talk through it anyhow. Since the person is living large on $1,200 a month unemployment benefits, when their apartment costs $1,500 a month plus other cost of living expenses, they will pass up a $60,000 a year job because it pays them less than their previous $150K a year job. Why would that be? Perhaps this is because they need to make that level of income, because of kids and a lifestyle built on the $150K a year income, or they like not doing any work and collecting $1,200 a month in unemployment benefits. After all, who doesn’t like deficit spending? The intellectual heavyweights claim that this is evidence that unemployment insurance keeps people from taking “any” job and causes people to stay on the benefit until the very end.
Again, that conclusion is nonsense. I agree that some jobs may be passed up because it pays people a lot less than what they were making before, but we are talking about a huge disparity between what the person actually made before and the proposed new income, usually 30%+ disparity in past and potential income opportunities. I highly doubt any of the authors of the study would take a 50% pay cut to “take any job” versus waiting to take the right job with similar income. They literally think that a person who is unemployed should take any job, that is reckless thought and employers would disagree with this conclusion.
Employers often turn down well qualified candidates because they are “over qualified,” why would that be? Simple, because the employer knows the person is just taking “any job” and will leave when another opportunity arises. That is why people who are overqualified are not hired as employers know that high turnover will be disruptive to customers and his/her business and add additional expenses down the road. Instead the employer waits for the right employee to come along. This aspect of the unemployment insurance studies is completely ignored and, instead, the authors say that employees and employers, to a certain degree, should act recklessly and take any job that comes along which will cost employers, nationwide, billions of dollars in future expenses all because unemployment insurance is making people lazy.
Can you see how the studies on this topic are inaccurate and misleading? They reject reality and replace it with their own fantasy land beliefs. What is really funny is that they would never, unless they actually had no choice but to take it, a job that would pay them ½ of what they are currently making, but everyone else should because they are on that “generous” public dole of $300/week. The results are skewed because of the authors bias and because people will take any job if their unemployment benefits are about to run out. However, that is not an example of “these people are lazy” it is an example of “these people are desperate and will take any job.” Even though the taking of just any job is out of desperation the authors accept this as a “see, I told you so” which is a very disturbing way of interpreting the data.
Sponsored studies should not lose their integrity and confirm the sponsors predetermined conclusions, but they almost always do. This is why when a study is quoted the sponsor should also be disclosed so the person reading or watching can figure out that the study is biased towards a certain conclusion. You may be asking yourself, why are these sponsored studies biased towards a preconceived conclusion and rarely differ? It is because the research business is a tough business and if one firm will not do it another will, for $50,000 to take a little piece of one’s soul and integrity. You will never get rid of sponsored hit pieces, but if the sponsor is disclosed you might be able to figure out which way it is biased towards.
The bottom line is that unemployment benefits are a good thing and we need to keep them. No one is secretly getting rich off of these benefits, but merely using the benefit to pay the basic bills and feed their family. To suggest anything different is insane and merely ideology coming to the surface. But I can assure you of one thing, if they were unemployed they would not turn down the benefit which makes them a hypocrite.
I first came to the conclusion that temporary hiring was not the forward looking indicator it may have once been, actually I always thought it was a poor forward indicator for more employment. However, most pundits, friends and even some commenter’s felt I was wrong, but I never wavered on my belief that today’s temporary hiring was merely a cost cutting method and not indicative of a better job market in the near future. Apparently the Associated Press now feels the same way along with some other sources, i.e. David Rosenberg, and such.
My belief was that employers were simply hiring temporary workers for pure financial reasons, they are less costly, easy to terminate and right now you can get highly skilled workers for a fraction of the cost by hiring them temporarily. It was more than that though as inventories dropped to such low levels the need to restock, a large portion of that mythical 5.7% 4Q GDP print, which made employers hire people. However, why hire a fulltime employee when employers know the business cycle is severely damaged and restocking is a short-term boost only? Employers know their business and they know what real demand is meaning they know there is no real end demand at this stage of the game. Yes, deflation is here to stay for now.
My theory was confirmed by the AP’s article and some of the economists quoted. Here is what a portion of the article said:
“I think temporary hiring is less useful a signal than it used to be,” says John Silvia, chief economist at Wells Fargo. “Companies aren’t testing the waters by turning to temporary firms. They just want part-time workers.”
The reasons vary. But economists and business people say the main obstacle is that employers lack confidence that the economic rebound has staying power. Many fear their sales and the overall economy will remain weak or even falter as consumers spend cautiously.
Companies also worry about higher costs related to taxes or health care measures being weighed by Congress and statehouses. That’s what Chris DeCapua, owner of employment firm Dawson Careers in Columbus, Ohio, is hearing from clients.
That basically hits the nail right on the head and then some. There is just no way to know if the recovery is real or a stimulus induced liquidity rush. On top of that, the unknown about taxes and health care are a huge problem for employers as they do not know if having more employees will cost much more than just a year ago. Yes, Washington is working on a jobs bill to reduce taxes on employers, but that bill was slashed by the Senate leadership from some $85B to $15B, I mean why bother with a $15B jobs bill anyhow?
I have advocated for the government to stop their Keynesian policies as they will create much bigger problems than we have now, but I even concede that we need a jobs bill now. Tax breaks would be a start for hiring, but do not kid yourself this is a short-term fix, see Jimmy Carter’s same attempt and its aftermath. No company is even going to hire until real demand actually comes back anyhow so we need to spark demand. How we could do this is by simply reducing patrol taxes and income tax rates and implement a TEMPORARY, I cannot stress that enough, national sales tax. This way the government will not sacrifice tax revenue and people will feel richer with the tax break.
I do not expect Washington to embrace any reasonable solution and that temporary sales tax would end up being permanent so it is not the best idea ever, but it is certainly better than what they are trying now. Perhaps if they mandated the tax had to expire in a year it might fly, but I doubt it. The primary problem with trying to spur job growth is that it needs to involve tax cuts, but we cannot cut taxes as it will kill the deficit, see Greece for the end result. This is why we would need to replace one tax with another unassuming tax for now as one would certainly make up for the other. Again, it is not perfect, but it is much better than what is being proposed in Washington.
Unemployment will continue to weaken for sometime into the future. Yes, we will have decent unemployment numbers over the next couple of months for the Census, but, again, don’t kid yourself as those jobs are very temporary. The caveat to the higher unemployment figure is that the BLS continues to take people out of the workforce which means if the government has its way we could be at 5% “official” unemployment by the end of next year. It doesn’t mean it’s true, but let’s face the facts, governments around the world do what they have to do to make things “look good” in order to not create a panic. Again, look at Greece for the lengths a government will go to in order to make things look good.
While demand is weak, unemployment is high and deflation is here to stay, for now, I still believe precious metals are a fantastic play. I like Palladium, silver, platinum and gold, in that order, for precious metals as I do believe we are in for a bumpy ride in the FX market. As the dollar strengthens these prices will come down and be a screaming buy, in my opinion. I see deflation being the current conditions for prices I also foresee some problems in the currency market which will benefit precious metals in a positive way in the near future. Plus, the summer time is usually the best time for precious metal prices. I am now a buyer again, scratch that, I am a selective buyer now of most metals.
The ISM is due tomorrow at 10:00 AM and this is a pretty important number because it may confirm whether or not we are seeing economic expansion or not. The estimates are for a print of 53, but many are expecting a number below that print. I am in the camp of a number below 53, perhaps closer to 50, but any number above 50 is considered economic expansion. However, if we get a print below 52 it will show a downward trend since the cash for clunkers program ended and proof that without government intervention the economy cannot stand on its own.
I urge everyone to read beyond the headline number when the report comes out, regardless of the number. The underlying data is important since it will give you a gauge of employment, orders, inventory and a bunch of other important information that will help you figure out what is going on in the real economy. My feeling is that if this number disappoints it will not be good for the markets and, in my opinion, even if the number is met it may not be good enough because of the lofty valuation of equity prices.
On Friday there were several people on the TV saying how healthy this correction is for the “new bull market” and they are right about the correction being healthy. However, I disagree on the whole new bull market theory simply because of a lack of participation from retail investors and the weak volume we have seen all the way up. Even if you look at GDP estimates moving forward you will see that 3Q09 is the best that most economists expect and from here until 4Q10 they expect GDP to decline into a negative number once again, even Goldman expects this to happen.
No one knows what will happen in the future, but what we do know is that the foundation for a meaningful recovery is not here yet. Credit is contracting, not expanding, unemployment has leveled off at severely negative levels and that is not good and is a leading indicator. The only thing that was positive in 3Q09 was earnings and all the growth was from overseas which proves the US is in poor shape at best. If things were getting better the Fed would raise rates to at least .25%, but they cannot because that will kill banks who are buying treasuries right now. If you are an economist I guess statistically things look OK, but the problem with economists is they are terrible at real world observations and see what they want to see.
In the real world, things are very bad and the recession is not abating in any way shape or form. In fact, from the folks I talk to most feel this is a depression, not a recession. This is confirmed by the recent consumer sentiment numbers that came out last week as well, again if things were so good why did the sentiment index fall so much? If you have a secure job things are great I am sure, but if you are a regular person or your firm depends on financing from CIT, well, too bad because you are too small to save, sorry. I guess you should have given more to the winning political party or unionize to win favor and get a seat at the table with the big boys. Oh, let us not forget that an astounding 40% of some $7T in US debt has to be rolled next year on top of the new debt we need to issue to keep the lights on. Regardless of that ISM number I am staying short.
This stunning statement came across the close of CNBC from Tyler Methison who apparently quickly polled strategists after the close today for confirmation. How this is not the beginning of a correction is beyond me as this week’s trading has been nothing but negative, unless you are short the market of course, however this is the stance CNBC is taking. I am afraid much like 2007 and early 2008 it will take much more for the bulls to believe that the market is overheated and ready to come back to reality.
What is causing the pullback? Pick your poison. The technical’s, today the S&P smashed through its 50 day moving average, compliments of Mark, and the transports have been signaling trouble for about a week now. There is the weak consumer confidence which suddenly sank yesterday and, frankly, should have sent the market far into the red. Then there is the weak top line earnings which I have been warning about since the second quarter as the consumer is dead broke and credit is contracting at a 15% annual rate, you cannot have an economic expansion without credit creation. Finally, there is the dollar, my personal favorite indicator lately, which has gained some strength lately which is drawing money out of equities.
Goldman Sachs was also no help today as they announced they are trimming their 3Q09 GDP estimates from 3% to 2.7%, which is really not surprising given a weak consumer. This may have been the ultimate trigger considering stocks have priced in a V shaped recovery with a strong GDP number built in. As a matter of fact, not only did the market price in a +3% GDP for the third quarter, but I have a feeling it priced in a much stronger 4Q09 and 1Q10 GDP figure as well, which is kind of crazy since may retailers are starting to warn about weaker holiday sales. Wal-Mart now has some 100 toys priced at $10 or less compared to last year at only 10 or so toys prices at $10 or less, that is Wal-Mart entering a price war, but with who exactly, The Dollar Store?
Under Armour also, in a roundabout way, warned its 4Q numbers were going to be weaker than expected. This is the shopping season and these are popular products warning that sales are going to be weak during the holidays. If this doesn’t tip you off that the recession is not over I don’t know what will. I realize that employed economists who do not leave their ivory towers much and place way too much emphasis on government transfers think the recession is over, but if they talk to real people perhaps they would realize that data points are more than just data points, they are people and they are hurting.
Some 500K a week initial jobless claims is not good news, it is horrible news and bad for the economy. Cost cutting means nothing if you are firing the very people who you depend on to buy the products you sell. That is exactly what is going on and why unemployment is a leading indicator of our problems. As long as economists are unwilling to listen to that basic fact and try to get you to believe in a jobless recovery, which is a myth I might add, then nothing will get solved.
The markets could get much, much worse in the near future, especially if unemployment or GDP numbers are slightly worse than expected. If the numbers are better than expected we will have a bounce, but I would not expect it to last very long. Traders are getting tougher to please as they are expecting more because they were told everything is better and as they see things progress in the opposite direction they will take the market lower. Yes, I am a bear and I am short, but you already knew that or should have known that as I made no secret about it and I tried to give everyone fair warning.
Disclaimer: I currently hold SPY Jan 2010 100 puts, SPY March 2010 90 puts, SPY June 2010 89 puts, SDS, SKF
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