Today was interesting to say the least, a massive rally on the back of no real news, I guess stress tests that really don’t stress banks balance sheets were the primary driver along with a technical bounce, but other than that all the other news was negative. Let’s review the bullish news that moves the markets 3%. Dallas Fed President Fisher calls out Congress and the President by saying they are inhibiting growth by creating confusion, no surprise there. Delinquencies on homes are stabilizing at extremely high levels, CNBC.com. Reis Inc. released a report showing that retail shopping center vacancies are rivaling all-time highs at 10.9% and rents are dropping, they should recovery by 2016, somehow that must be bullish. Lindsay Lohan is going to jail, I guess, for 90 days, now that really is bullish for whoever makes the drugs to sober people up.
I guess on the heels of all that bullish news it is little wonder that the market rallied so hard today. The only other piece of news that would have sent us to 11,000 for sure is if we declared war on Iran, based on this track record. We blew through several layers of resistance on the SPY, which I am short and yes today did hurt, thank you for asking, and we could reach as high as $107.12 on the SPY, but overall it is still in a bearish trend, sorry. The volume was nothing to write home about today either and, frankly, yesterday’s mammoth reversal speaks volumes about the condition of this market, it is structurally unsound. However, we have some pretty big news coming up Thursday morning, retail sales and initial claims data will dominate the headlines.
First, if you watched CNBC this morning and caught El-Erain from PIMCO he said something you might have heard before. He said; “Unemployment is no longer a lagging indicator, but a leading indicator.” Any idea where you would have read that? I have been saying that for months now and many have said some pretty nasty things to me about making that claim. What El-Erain and PIMCO have figured out and the people who have no clue that a “V” shaped recovery does not exist have not figured out is that in a post credit collapse world unemployment is not a symptom of the cancer, but part of the actual cancer itself. If the credit collapse occurred because people could not pay their bills it would stand to reason that the more people who are unemployed the worse the problem will get. Perhaps this is why mortgage modifications are failing and defaults are picking up on credit products, depending on how a default is actually measured nowadays. It is just nice to have a high profile person repeat what you have been saying even though he has no clue who I am.
As for the initial claims tomorrow, my guess is that they will be ugly, again, as in +450,000, but less than the 472,000 from the week before because of the July 4th holiday. Employers tend not to fire people before the holidays, but they will be elevated in my opinion. If, for some reason, initial claims are above 470,000 that will be horrible news and my guess is that will merit a reversal of fortunes in the markets. It is just amazing that we are coming up on 3 years into this thing and we are still seeing initial claims coming in at well over 400K a week. I know the President likes to make the claim that when he came into office over 750,000 people were filing for initial claims a week, but that was for only a few weeks during the peak of the crisis and, frankly, the fact that we have stabilized at 450K a week is nothing to really brag about, sorry.
To make matters worse the emergency extension of unemployment benefits were not passed before Congress went home for the holiday. That left almost 2M people without unemployment benefits and, in my opinion, that will have an impact on retail sales. How much of an impact? I do not know, but more than most people think. The other major thing people have to remember about retail sales is that many retailers closed a ton of underperforming stores so you are looking at retail sales numbers from the top performing stores they have to offer. No longer can we say that these figures include the dogs of the industry which means the figures you see can actually be much weaker, or stronger, than they initially appear. Regardless, credit is still contracting, unemployment is still sky high and that means retail sales are probably not going to be as strong as most people think, but analysts knew this and started heavily revising estimates lower. Not to mention that retailers have zero pricing power so even if sales are good their margins are going to be miniscule.
There is little to be bullish about out there as all the data has been bad and should not be read any differently than being bad. The ISM was bad, the employment report was bad, the housing data is horrible, the political picture is uncertain and the charts are certainly bearish, just look at the RUT. I am not saying don’t own stocks, but be careful what you own, strong balance sheets and dividends are key. Anyone outright bullish on this market is either selling you a fund or is simply out of their mind. Patience is key and there is no need to jump into any stock for any reason as we are in for a bumpy ride. I don’t even think earnings season will do much for us, sure 2Q10 earnings will be good, but the outlook will be not so bullish.
Initial claims came in at -457K this morning, this is not good, and last week’s figures were revised from -472K to 476K, really not good. This has little to do with the oil leak in the Gulf and anyone making that claim disqualifies themselves from the conversation. This has to do with a weak economy, pure and simple. We are entering a double dip recession and as the stimulus is pulled back it is going to get worse, much worse.
Your first warnings came from Best Buy and Fedex, but no one listened to what they had to say. Frankly, the real warnings were always in the weekly claims reports, but everyone dismissed them as a “lagging indicator” which is simply not true in a post credit collapse economy. If we were in a normal inventory recession I would agree that employment is a lagging indicator, but when the economy blows up because people cannot pay their bills, well, employment is a leading indicator. That is where economists missed the mark and failed to adjust their models, those that fail to change will go the way of the dinosaur, it is inevitable that natural selection weeds out the weak and that is what is happening now.
To top off the situation we did the worst thing possible, we tried to cure a debt problem with more debt. You cannot do that, it just doesn’t work. Take a look at Greek bonds, the 10 year is over 10% again, why? They have austerity measures in place. They have access to special funding, etc. yet their bonds are yielding over 10%. That is telling you there is no fix for the problem as the smart money is always, I cannot stress this enough, always in the credit markets. We have treasuries climbing with 2 year yields pushing .64%! Are you kidding me? This is not normal and while I bought when yields hit 1.10% on the 2 year, taking much flak from friends and family I might add, I figured the yield would drop to .77% or so, within the trading range, but they broke out. This is a sign that things are not as they seem and extreme caution is merited. Where treasury yields can go is the big question, certainly zero is not out of the question and negative yields have happened before, watch the credit markets.
Europe is a problem and will continue to be a problem, remember that the EU is China’s biggest market and the EU is responsible for 30% of the S&P 500’s earnings, not an issue for 2Q, but 3Q I would not be long in 3Q. Unemployment in the U.S. will climb higher, I am sad to report, especially as Europe deteriorates and much to Mr. Krugman’s chagrin forcing the EU members to increase their deficits is not a good idea. Their deficits are the problem and making them bigger will not solve their problems. Europe could lead to much higher unemployment in the U.S. and one has to remember that Europe did make the Depression much worse in America in the 1930’s as well, history does repeat itself.
To top it all off we do have the moratorium for drilling in the Gulf, it may get overturned again, but assume it will not. What does that mean? That means at least 10,000 jobs will be lost within the first few weeks. After that it could get worse as it creates a negative feed loop and the loss of one job means others will lose their jobs over time. From my lens the moratorium is insane. The leak is horrible, we all know that, but this is the first oil leak we have had in the region, ever, out of how many wells? Perhaps if the government puts a safety inspector on each rig that may solve the safety concerns, but that idea was rejected. Instead, let’s halt the entire industry and watch them all go to Mexico or Brazil instead so we can lose those jobs for years to come in the best case scenario or forever in the worst case scenario.
Employment is indicating things are mildly better, but merely stabilized at “less bad” which is not good overall. Housing, the release yesterday, solidified that we will have a double dip as housing is about 21% of GDP and we just saw the worst housing data since they started recording the data series. How much more evidence do we need to have? We also created false demand which means we had distorted housing data for the past year. How in the world are we supposed to know how far forward we pulled demand? Months? Years? This is the problem with Keynesian economics especially when it is used wrong, which we certainly did.
The bottom line is this, unemployment is going to grow outside of government rolls, period. Housing is going to go lower meaning GDP is going to be bad in the second half of this year, if not negative. The employment report, due out soon, will show more government jobs which will not be positive for the markets. The ISM surveys are rolling over. The leading indicators are pointing down, hard. Inflation is nil right now. Treasuries are telling you something big is going to happen. Europe is in major trouble. How you can believe the long only permabulls being paraded on the TV is beyond me. They get paid to have your money in their funds whether it goes up or down. I get nothing whether you invest or not. Frankly, the facts at this point are irrefutable.
Unreal, it is just unreal, here we are 2.5 years into this recession and we are still seeing initial claims well over 450K a week, how? The pundits told us that employment had turned the corner months ago and we are in a strong “V” shaped recovery, but employment is a lagging indicator and should show real strength by March 2010. Well, it is half way through June and the only sector showing strong job growth is temporary government jobs, some recovery.
The 4 week moving average of initial claims is at 464,000 people, this is unbelievable and is not a good sign. To put this into perspective every month 1,856,000 are filing for initial jobless claim benefits, that is twice the amount of people that live in the entire state of Montana or two thirds of the population of Las Vegas, three times the amount of people that live in Boston Ma, you get the picture now? That is a lot of people. This is not a sign of job creation or job growth so it is beyond me how the President could have stood on that podium a couple weeks ago and proclaimed there is proof that the economy is getting stronger everyday when so many people are losing their jobs every day, not getting jobs.
I may be bearish and all, but this is beyond what I would call bad news and downright scary. People are not leaving their jobs for greener pastures, they are being laid off because business stinks. The proof was n the CPI which shows clear lack of pricing power or deflation dropped .2%, even taking out energy prices were only higher by .1% which shows zero pricing power except for iPads. What this means is the market is severely overvalued as it deserves to be trading at much lower price multiples based on deflationary pressures. We are not in 1930’s type deflation, but we are certainly heading in that direction, especially with Europe in turmoil right now.
To say there was any strength in today’s figures is simply lying to yourself and trying to spin bad news. I am sure the market will head higher because, well, the market sees no bad news until it is sitting on its chest, but it is clear as day that GDP is rolling over and employment is worsening, not improving. Would I short the market? Yes, but if you do not want to go short sell into rallies and buy bonds or stay in cash because when the market realizes it needs to compress P/E multiples we will move from 1,100 on the S&P to 900 in the blink of an eye. The market is not the discounting mechanism everyone tells you it is, just remember September of 2007 we hit all time highs when the crisis was hitting full steam, so higher stock prices is not indicative of a healthy economy.
One final thing, the parade of bulls on CNBC are long only mutual fund asset managers, where is their bread buttered, by having your assets in cash or in their funds? Think about that when listening to them dish out their “timely advice.”
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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