I just read John Mauldlin’s weekly newsletter and he apparently got into a discussion over the much misunderstood and hated, by myself and many others, birth/death model used by the BLS. I have not been receiving the newsletter on a regular basis, some type of server issue I guess, but someone did not like what he had to say about it and I guess John misspoke about it. The whole thing about the birth/death model is it is meant to be a smoothing mechanism, I know that, everyone knows that, but it stinks and is not accurate which is what John ultimately said it was in his letter or at least it has not been accurate the last few years.

Now, I may have misspoke or led many to misunderstand what the birth/death model is and does. It is this little provision that helps the BLS make up for data they either do not receive back by survey participants or never receive, but it leaves room for interpretation and is never fixed in real time. In fact, they wait until February of the following year to correct any errors in the birth/death model that it may have had on the unemployment rate, fantastic, right? The model is not seasonally adjusted so when the BLS says 83,000 jobs were created it is not as if they added in the 147,000 (June’s B/D adjustment) figure to come up with that figure, that would be lying and a government agency would never do that.

Instead, what they do is add in the not seasonally adjusted B/D figure to the not seasonally adjusted employment figure and THEN seasonally adjust it. Now, you are thinking, big deal that shouldn’t make a big difference. Well, you may be right and you may be wrong. If you are talking 1M as a figure and the B/D adjustment is 50K it is no big deal, but if you are talking about a headline figure of 800K and the B/D adjustment is 147K (June figure) or 241K (May figure) well, you tell me, would that impact the seasonally adjusted figure? I would say yes it would. I have history on my side on this as well.

You see, in the fall of 2008 when Lehman collapsed and the world came to an end we all saw unemployment shoot to the moon, remember? Well, the BLS thought since so many people were losing their jobs and the business environment was so good that must be why so many survey respondents did not get back to them, they were busy making money! So, they added in hundreds of thousands of jobs from September of 2008 until the end of 2009. They were so aggressive in their B/D modeling they underestimated unemployment by 880,000 people, that is a pretty large underestimation by anyone’s standards considering the total ‘official’ unemployment total is 14M people and the underestimate for that time frame was about 10% of the total of the newly unemployed.

One could say, well, that is within the margin of error, but I don’t buy that since the government is the one who processes unemployment benefits and receives the initial claims data. In other words, it is pretty easy to correlate the data within a reasonable time frame, in my mind at least, but I am not a bureaucrat, so what do I know. Basically, if one removes the B/D figures from the non-seasonally figures and seasonally adjusts them you would have a bit of a difference in the monthly numbers. The series would be much more volatile, but it would also, in my mind, be more accurate and real time which seems to be something no one wants anymore with this figure which is why Santelli and Liesman get into screaming matches about it every first Friday of the month.

The bottom line is the adjustments matter, they boost the jobs number every month and they don’t come clean about any adjustments until the next year. That does not help anyone except for politicians and when more and more people are saying employment is now a leading indicator we need a better way to report unemployment. At the very least the BLS can correlate with the state data bases along with the household survey and that might give us a better view of what is going on. I think it is pretty much a proven fact that when we have the government guessing at any figure it is pretty much going to be wrong so why anyone would defend the B/D model is beyond me. The idea is fine, I guess, but how the BLS does it and how no one questions it, especially when it creeps up month after month when it really shouldn’t be, is very odd as, again, the only people who truly benefit from it is the political class.

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.

Thanks to the bankruptcy reform of 2005, brought to you by too big to fail organizations, debt collectors and Joe Biden via his lobbyist son, which makes filing for protection very difficult, expensive and a general waste of time for most as you must qualify now filings plummeted. That is until now while the economy is supposedly on the mend there is one number on the rise that is unquestionable, bankruptcies.

More Americans filed for bankruptcy in October than in any other month since the 2005 reform. The number of bankruptcy filings increased by 25% to 131,200 during October 2009 as compared to October of 2008. So far during the year of 2009 there have been a total of 1.2 million bankruptcy filings which surpasses all of 2008 1.1 million filings. Clearly this is an issue as there are so many claims that we are rebounding or turning the corner in the economy. If that were true why is it that the bankruptcy and employment numbers continue to climb, to disturbing levels.

It is also not just people filing for protection, but businesses as well with the number climbing some 30% from October of 2008. The most common form of bankruptcy for businesses is chapter 11 which rose the most in 4 months to 1,327 in October alone. Again, with things looking so good, according to economists, Politian’s or anyone else with a vested interest in talking up the economy, why is it that these businesses are failing? Clearly it is because things are not as rosy as we are being told.

To illustrate how bad this situation is going to get the estimate for Americans filing for bankruptcy this year is 1.4 million, there is only 2 months left in the year. Given how difficult it is to file for bankruptcy this shows how difficult the real world is for regular Americans. It makes me wonder if any economist or politician is paying attention to any of this at all. This is no longer a Republican or Democrat issue, but an American issue. While the banks got their bailouts and bonuses I think the regular people deserve something, besides a 1,990 page health care bill that no one will read and will do squat to improve anyone’s life.

With numbers like these and with, more than likely, an ugly employment report due this Friday it is time to get our priorities straight. The people need jobs, but the question is how do we get them since government spending destroys wealth and doesn’t create it. I would suggest some sort of long-term tax credit for hiring employees, not a onetime $3,000 who cares credit, but something with teeth. Better yet, let’s take TARP back and just cut everyone a check, they are not going to ever get rid of it anyhow, so if we are going to pay for it we might as well get the actual dollars.