I just read a story where Larry Summers, White house economic advisor, is blaming the weather for a potentially ‘distorted’ jobs report this Friday. Seriously, we are still going with the bad weather? It must be snowing everywhere, the UK, Greece, China, the Ukraine, Dubai, etc. The data all over the world, including today’s ISM number, is rolling over and in some areas it is just plain scary. I got news for you, it has nothing to do with the weather, at all.
Over the past few weeks more and more companies announced layoffs, not a good sign, and the initial claims data went way up over the past 4 weeks. The data started to roll over before the snow hit the ground. Not to mention, but the last time I checked it usually snowed in the winter time anyhow. I realize we had a few days of snow, but nothing major and it is beyond me how snow would be firing people. I will say that the weather impacted retail sales, but not all this other data.
Let’s not forget that the vast majority of the bad weather was also in the Northeast so I am very excited how the bad weather in NY caused California to have increased unemployment figures. Never in my life have I seen such a snow job being perpetrated by the talking heads and now Washington blaming bad weather for horrible economic data. What will happen next month when we have even more layoffs and there is no weather to blame? Maybe we will blame the sunshine because people are so broke they cannot afford sunglasses… wait that kind of admits the economy stinks, never mind.
My point is that the data, well before the snow, rolled over viciously and it is the economy that is the problem. We are over 2 years into this thing, recession/depression, whatever, and we are still losing jobs, that is not good. The unfortunate part is we spend trillions only to be in a position where employment is continuing to contract. It is fair to say that the stimulus probably helped a little, but clearly it was not as big of a help as the administration claims. As an aside, it will be interesting to see if some municipalities file for bankruptcy in the next couple of weeks, maybe that is because of the bad weather as well.
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.
With all of this talk about a V shaped recovery and a complete economic rebound it is amazing to see how many firms are still cost cutting. Of course by cost cutting I really mean firing people in order to improve margins or boost profitability. The question is if we are really in a recovery and everyone is talking about business stabilizing, albeit at lower levels, and there is a return to growth how can firms still be downsizing?
Well, simple there is no V shaped recovery because when you take government heroin out of the equation there is no economic growth. I am fairly certain that Friday’s employment report is showing that firms are not hiring and that employment will continue to “lag” the real economy for some time to come. Not only are firms still firing people, but consumer credit is also being paid down and contracting at a pretty healthy rate, $14B vs. the $10B estimate. Again, I do not want the facts to get in the way of a perfectly bogus recovery story.
If we examine the headlines we see some disturbing trends with top tier firms and their plans to cost cut, fire people. For starters Johnson and Johnson is laying off about 6% of its work force, J&J is a defensive name folks who thrives no matter what the real economy is doing so for them to be laying off so many folks is kind of scary in my book. Moving on, Electronic Arts also reported great earnings and the fact that they are cutting some 1,500 jobs, sounds promising to me. Sprint is another firm who has actually improved its business, but they are now laying off some 2,500 people. Not to mention Microsoft, who makes enough in a month to buy most sports franchises or something crazy like that, is laying off 800 people.
Not all of these firms are in top physical condition, but if we were in a recovery there is no way that these firms would be announcing job cuts now, 4 months after the recovery was announced, supposedly. We have very healthy initial claims reports of over 500K a week and so far, excluding the BLS magic formula, which added 86K jobs last month which means the real official jobs report should have been 276K instead of 190K. That data points to continued weakness in the economy and a lack of hiring by firms and as for the great productivity report I suggest you read the NYT’s article showing that the data is flawed, like I always said it was.
Essentially, employers are getting more out of people at a much lower cost so why in the world would they hire? To put it bluntly, they are not hiring and have no incentive to hire anyone until real orders pick up which, at this rate, should be by 2012 giver or take a few years. It is amazing how hard people will work when they fear losing their jobs and that is exactly what is happening now. I am sorry if I do not see the rose colored news like everyone else, that is what happens when you go below the headlines, but we have real problems here. Even though I am not bullish on US stocks, no one is based on the pathetic volume I might add, I am bullish on the Asian economies and see real value there.
As for the US I think we are still heading for that correction and I am sure we will get it, I am not sure when of course, but it will come. It should have come last week, but it did not and anyone who as traded for any period of time will tell you that something is majorly wrong with this market. No one’s model, except for Goldman Sachs, is working and we continually drift higher on literally no volume. Look at today we traded significantly less shares with a 200 point up day on the Dow? Compare that to last Thursday or even Friday and you will see how weak that volume is. I have no idea why it is behaving like it is, but I do know that whatever the reason it is not natural, again any trader will tell you the same thing if they have been around for more than 10 years.
So, with all of these major firms cutting jobs now instead of 6 months ago how can we say there is a recovery? There is no real evidence to point to, even the ISM reports show serious weakness in the economy, except for government sponsored growth which is fake at best. When defensive names are cutting jobs we should take notice as that is a signal that something is wrong. As for the market it is not a forward looking instrument, it never has been, and the next few days should be interesting. We could hit that 1120 mark on the S&P 500, but I doubt it will hold and even if it does hit that level it does not mean the economy is rebounding, the data would indicate that and the data is weak.
It is kind of crazy to think that someone would shell out billions in this environment to buy a railroad when loads are way down. This purchase also saved the transports index from a complete breakdown which would have, according to Dow Theorists, a broad decline in all of the markets. Whether or not this was a good move, I do not know since I do not follow the railroads, but I do know that it temporarily saved the transport index as it is up pretty big today.
If one wants to draw a conspiracy theory to all of this, they could very easily. After all, Mr. Buffet is very close to the Obama administration and he did invest heavily last year knowing things were very bad, worse than he let on. He also did this on the day that the transports were about to meltdown as well, so, as I said one could very easily draw conspiracy theories from this purchase. However, I believe the transports will still meltdown, it will just take a bit longer than expected.
As for the ISM data yester, as David Rosenberg put it, you got 55.9 from all those regional readings. Right, that is believable. Rosenberg also called into question the GDP number as well, which I did as well, as we had a decrease in hours worked, but a 3.5% print. Well, with the government steroids, sure it is possible, but if you knock out government forget it as the historical average is -.5% GDP growth with that type of hours worked. However, that ISM number did scare this bull and I did knock out my January puts, at only a 205 profit, only to have a reversal in the market.
So, my point is if this market was for real it would have rallied on yesterday’s huge ISM number and what happened? It fizzled out and almost posted a negative day, that should scare you if you are long. As for the rest of the week, the FOMC might change its language in its decision, but other than that don’t get too excited. The ADP number will give you insight into Friday’s number, but when Friday comes around, check out the BLS.gov’s birth/death model to see what voodoo they added to the number, I know the government never would stretch the truth or anything. Thursday, if we do not crack below that 500K initial claims, there is no recovery, sorry.
This question is being asked by many people, especially the media which I find interesting since they are supposed to be in tune with the experts. Clearly we are taking a breather and I suspect that the downtrend will continue as we were way overbought. There is a caveat to this, liquidity.
My primary thought has always been that liquidity was the primary driver of this parabolic rally that we have had. That liquidity remains the wild card in markets as some liquidity will be removed through, supposedly, the Fed reaching its limit on quantitative easing. However, money is definitely abundant and can continue to drive stocks higher, but, in my opinion, that just increases the danger of a steeper decline.
I do not think anyone is surprised by the ISM data today as the primary driver of the increase was artificial stimulus form the government, primarily the cash for clunkers program. Unfortunately the demand from this stimulus will be short lived and as the market is telling us the good news was already priced into equities. One must also remember that the ISM flipped positive in 2002 as well, but proved to be false as the pain continued for months afterwards.
Furthermore, sales reported by Ford and Chrysler today were not so hot as they missed estimates. This shows that these firms should not be boosting production as demand is still very lax and will more than likely not improve as unemployment continues to be a major problem. As I have said previously, unemployment is the primary problem we face now as this is a credit led recession, not an inventory recession.
Realize that the ISM number is good news, but I believe it to be completely supported by government intervention, which is bad. The government cannot intervene forever and when they stop, which they have to a certain extent, then we will have real demand data, which is pretty bad. I know you have been hearing the talking heads trumpet the good news as the end of the recession is over and everything is great now, but that may not be true. As I said above, the ISM had a very similar rebound in 2002, but the recession went on.
We are still having problems with real estate which is been a bit convoluted with the data that you have been presented with, but based on what we see only lower end homes are moving and prime mortgages are now defaulting. There is no question that the economy is in better shape than a year ago, but the problems are still here. Frankly, all that has happened is that banks have relaxed accounting rules and the government simply supported the whole system. If the support system was removed and accounting went back to where it should be the whole thing would fall apart and everyone knows that.
As far as real estate it is estimated that over 2 million new home sales are because of, drum roll please, the $8K tax credit! Take that away and there goes demand. My point is that artificial demand has created more of a problem than a solution because when real demand is figured out the market will retract significantly. Creating confidence in a system that is sure to disappoint when support is removed is just plain wrong, but that is what we have.
Yes, liquidity can drive the markets higher, but what we are seeing today is just the beginning. People have figured out that good news has already been baked into the cake and demand is not real demand so people are exiting stocks for safer investments. Today, gold, silver and short-term treasuries are doing fairly well, which is what I hold I might add, while riskier assets are getting hit pretty good today. Outside of precious metals and defensive names, like Wal-Mart or McDonald’s, I am not inclined to buy anything right now.
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