A new report was released today showing significant improvement in the labor market today. As you know, there were 6 people unemployed for every 1 job opening not too long ago, but that has changed. Now there are only 5.5 people for every 1 job opening, let the good times roll! While this is good news it is not at all very promising considering the government is hiring thousands upon thousands for the census.
Does anyone even ask themselves if the recent positive data is only indicative of a low quality unsustainable recovery? From my point of view that is all it is, a low quality unsustainable growth spurt. How a negative 36K job report last week was considered good is beyond me as most bulls predicted positive job growth now. What I found very interesting is the fact that all the pundits were blaming bad weather for a bad jobs report when there were no or limited snow storms when the survey was conducted. Furthermore, snow really does not cause a huge decline in payrolls, a statistically significant impact anyhow, but let’s not let the facts get in the way of a recovery story.
There have also been many large firms still forewarning of layoffs coming in the near future. While this may make for higher profit margins it is not good news for a country that is over 2 year into a recession, or whatever we want to call it now, and we are still losing jobs, albeit at a lower rate. Less bad is not good, but that is how the data is being spun which is ridiculous. It is not that I want the market to crash or that I want things to get worse, quite the opposite in fact, I just want an honest take on what is happening out there. Telling people that they have lying eyes is just crazy, but that is what everyone is doing.
This is true of the government data which has conveniently reduced the workforce in order to reduce the unemployment number. I just saw a report which shows that if you add in all the people the government takes out, because they are discouraged, the unemployment rate jumps to 11-11.5%, but even that is low. If we go by the U-6, which we should, as that is the equivalent of what we used during the 1930’s, the rate is sky high. We just came off of a low quality recovery from the 2000-2003 recession which spurred the current recession and clearly the further we kick the can the worse the problem becomes. Stop kicking the can and let people know how bad it is, stop the government intervention (we are now paying people to short sell their homes!) and let the bad debt get cleaned away by the system.
If we do this the problem may not just get kicked down the road, but it might get fixed. Of course, health care is now taking the spot light so who cares about jobs or what is happening in the real world. While I do not favor political intervention in the economy I want Congress to really pass a jobs bill, i.e. a comprehensive bill that provides employers tax cuts, what can I say, I am optimistic.
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.
Regular readers know that I am or have become a bigger proponent of income investing lately and if you don’t know what I am talking about you should be reading my material more. However, there seems to be preconceived disconnect with my philosophy and what you believe to be true about interest rates moving forward. Some people see my bullishness on bonds in the face of rising interest rates as purely insane, especially given what treasuries are doing, but I can assure you it is not.
Keep in mind I am talking about investment grade corporate bonds and high yield bonds, my favorites are ‘BB’ and ‘BBB’ rate paper in an ETF format, I do not like mutual funds because of the once a day pricing. As an aside I do like selective sovereign debt as well, but don’t go out and buy Eastern European government debt or anything, be selective as the risk return is there, but supply is going to be an issue moving forward so it will pay to be extremely selective in 2010. Anyhow, back to corporate debt and why I like it.
Treasuries are entering a bear market for the first time in my memory and I expect there to be a bear market until the next crisis hits, so for only a few months. The reason there is a bear market is simple, supply, end of story. You cannot issue an endless amount of paper and expect the market to eagerly accept it without paying more for it because people, foreign central banks in this case, know they will never fully be repaid for the US debt they buy now, it is mathematically impossible for the US to repay its debt so don’t shoot the messenger hate the calculator. Because of that mathematical probability interest rates on treasuries are going higher and, according to those wonderfully bullish, and misguided, government data figures investors are pricing in interest rate hikes which kill treasuries and other high grade corporate debt, high grade being the operative word, so remember that please.
High grade corporate debt is technically, and in my opinion, anything rated higher than ‘A’ and issues interest rates slightly above treasury yields. We are talking about your really safe corporate paper issued by IBM and similar firms. Essentially, those are a riskless investment which is why your yield is so close to treasuries and why those bonds will get crushed when/if interest rates go higher. For those who do not understand how bonds work think of bonds and interest rates like a teeter-totter with interest rates on one side and bond prices on the other side, when one goes up the other side goes down. Therefore rising interest rates are bad for bonds because new bond issues will have higher yields so your existing bond will have less appeal in the marketplace and if rates go down new issue bonds will have lower rates which means your existing bond will be more attractive because it has a higher interest rate. Make sense, good.
All of that is important because we are at zero interest, technically we are in the negative interest rate area because of quantitative easing and deflation which is bond friendly. However, this red hot economy we are in, sarcasm is my trademark, many people are expecting an interest rate hike to happen at some time this year and they are right. The Fed will raise interest rates in 2010 from 0-.25% to .25-.50%, wow. There is an outside chance that rates may go to 1% by the end of the year, but that is pure speculation right now because the economic data or ‘recovery’ is spotty at best. Even if rates go up it is relatively meaningless to lower grade corporate bonds because it does not hurt the spread as badly as it does for higher grade corporate bonds.
What I mean is newer higher grade corporate debt and treasury debt will have higher yields than current issues so existing paper will get slammed. However, existing lower quality corporate paper will do OK as we would need rates to go up substantially in order to really hurt the spread. I am not saying that there is no risk in lower quality corporate debt, defaults will be a huge issue moving forward, but I am also betting that the Fed’s liquidity programs end up not going away either. In fact, I would speculate that the Fed’s balance sheet will continue to expand over the next 12 months, perhaps double again if the FASB gets its way and the SIV’s have to be added to banks balance sheets right away, but again that is speculation right now.
If the Fed does actually raise interest rates this would be a bullish signal to the markets because it means we have real growth in the economy as well. This means lower grade paper would perform better, even if that growth is only at lower levels. However, higher interest rates will not be good for stocks, in my opinion, which is why I shifted focus to lower quality corporate bonds and to companies like Alteria. I would not expect, even if the economy is cruising, to see rates go much higher than 1-1.5% though because the Fed is stuck and it cannot move rates higher or to a meaningful level ever again. Regardless, corporate bonds of ‘BBB’ or ‘BB’ and selective ‘junk’ should do OK moving forward in the face of higher interest rates because of what I said previously. We will not see huge returns like that of 2009, but I think they will do better than stocks moving forward, plus you are first in line when the company folds, something to think about.
Why the Fed is stuck
What do I mean by that, a meaningful level? You see, the US is in a debt trap that we cannot escape from, it is simple mathematics. The Fed will not be raising rates to protect the dollar, they want a weak dollar that is for another post, they do not really care about inflation as they really want massive inflation but we cannot create it. The Fed will raise interest rates to keep politicians off of its back and that is about it, but raising rates higher than 1.5% presents problems that the US cannot handle.
Congress just had to raise the debt ceiling by a few hundred billion to fund the government for the next 6-8 weeks, unbelievable, and a more ‘permanent’ fix of raising the debt ceiling to about $14T will be coming soon.
I know this is no big deal to liberal democrats because, after all, under Bush we had to raise the debt ceiling 7 times and to them 8 or 9 wrongs make a right, but this is a major, major problem. Considering that raising the debt ceiling to $14T moves the total US debt to just about 100% of GDP marks a new low for the US and is the greatest amount of debt any country has ever attempted. What I am saying is that our current debt servicing costs with the Fed holding rates at 0% and using QE is about $500B+ a year and our average maturity of our debt is less than 10 years, again this is a first in all of the world’s history.
If the Fed moves rates up past 1.5% then that debt servicing cost will go up, dramatically, and there will be major consequences that the American people are not ready to face. Forget the debt ceiling, we will repeal that silly little rule, especially since we have to raise it almost every year anyhow. Within 7 years out debt servicing costs will begin to take its toll on the national budget squeezing out typically paid for items, like earmarks. Defense spending will have to decline immensely which is why the US remains a superpower even though we have a relatively small manned military compared to say a China, India or North Korea. The dollar will decline much further, it will anyhow as the latest rally, which I anticipated, is a head fake and was driven by Dubai, Greece, Fear, short covering and the selling will comeback harder and faster than you could ever imagine.
All of the senseless spending is coming home to roost, now. China is telling us where to stick it as there is not enough dollars to buy our debt, which is kind of funny in a sick way, and they said no to strengthening their Yuan which makes sense for them and smells of protectionism to me. When we demand a foreign country make their products more expensive in the US just so we can shrink out trade deficit thereby boosting our GDP and sell more products to them that is protectionism, straight up. I do not like to be so grime, but many of the things I foresaw and have been keeping to myself are coming out in the open. Things are not good, but hey as long as the market keeps going up, who cares right? Well, you will when it comes crashing down around you. Fixed income never looked so attractive right now.
While I am convinced there is no pricing power for retailers and deflation is here to stay for the foreseeable future today’s PPI data was not encouraging. Of course, Steve Liesman has no idea how to look at the data and refuses to acknowledge that this data shows higher prices in any form. Whether you believe it or not, and I do not believe much in terms of government data anymore, this data shows higher prices.
However, Liesman does not seem to understand higher prices and ignores any inflationary numbers. He seems to think that zero interest rates is a great thing. He also claims, in the clip below, that all the data is getting much, much better, huh? Yes, the data is marginally better, but it is still bad news and Liesman just simply has no clue. After all, this is the same Steve Liesman who missed the Russia meltdown as it happened in front of him, only to take credit for calling it later when he took the Pulitzer later on. Mr. Liesman, I had respect for you 1 year ago, but now you are just a clown.
Santelli really hammers Liesman, rightfully so. Keep in mind this is the same morning show where they hammered Ron Paul for the audit the Fed Bill, which the media, most Liesman, has grossly distorted and framed as taking the Fed’s “independence” away. That is a joke and totally inaccurate as the bill merely removes secrecy away from the Fed, nothing more. Read the bill Mr. Liesman, you idiot.
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