A good employment report
Posted by Ray on April 4, 2010 under Main | 
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I am back from a much deserved break and am beginning to catch-up on the economic data that has bulls all geared up for a push to 11,000 and 1,200, for the Dow and S&P respectively. I actually have little doubt that the markets will push higher as investors like watching their stocks go up while they do nothing, which is one reason why up volume is so much lower than down volume because investors will sell fast if stocks head south. Do not get me wrong, I am bearish on the markets, but one has to trade the tape in front of them.
I was just combing through the employment report and it is not too bad, but I see this data as less bullish as the talking heads will on Monday. Why? Well, I did not like the BLS Birth/Death model adding 81K, the government adding 48K and temporary workers brining in another 40K. Those who read follow my writing know that I hate the Birth/Death model because, frankly, they make up these numbers based on some very optimistic assumptions and as you know the B/D model underestimated job losses for 2009 by about 1M. If I had a model that underestimated employment by some 17% I would probably change the methodology or just get rid of it, but not the government because this model postpones the bad news until a later date, like we saw in February with that huge adjustment.
I do not see temporary employment as a bullish signal at all, keep in mind that since September 2009 temporary employment has added 313K jobs. If temporary employment was truly a leading indicator we would see this number coming down as these temporary workers move to permanent, but this is not happening. I admit, I could be wrong about this, but I really do not believe these people will become permanent employees anytime soon. This is kind of confirmed by the hours worked data and the inventory data from the ISM report which shows hours are increasing and the inventory build is still in full force. End demand just is not there and there is still wage deflation.
There is also an uptick in disability claims as well, which is what many apply for when their benefits either run out or they cannot find work because disability pays much more than unemployment. If one looks at the duration of time unemployed they will see that 44% of those seeking a job is on the dole for 27+ weeks, not good for a “V” shaped recovery. Furthermore, 60% of those unemployed are on the dole for 15 weeks or longer, again, not good. On the bright side the participation rate is increasing, but at the same time marginally attached workers has also increased.
Essentially, I view this report as flat, excluding government jobs and the B/D model, which is good news. While this one report is good initial claims are still out of whack at well over 430K a week, that is about 2M people a month, and I believe last week’s downtick was temporary, employers hate to fire people near holidays which is why claims plummeted in December, but resumed afterwards. This will either be confirmed or disproved over the next few weeks. I firmly believe, at best, the labor markets have merely stabilized for now, but the real question is what happens when inventories are completed? We will find out, but I am sure it is not news we actually want.
The fact that we also have so many part-time workers out of necessity pointed to an extremely weak employment situation. I heard a story about a dog kennel owner who placed an ad on Craigslist.org for an “assistant” who would be in charge, this was clearly stated, dog fecal matter. This was an $8.50 an hour job, in Washington State, and he had 218 resume responses from teachers, construction workers, hospitality, and other professionals, the same sectors the BLS’s B/D model says is creating thousands of jobs. I think that story speaks for itself.
We also need some 140K new jobs a month just to keep up with the population growth, that is scary considering there are 15M people unemployed right now. This means we need, keeping the numbers realistic, 300K+ every month for about 6 years, these are back of the envelope figures, to come back up to full employment. Forget all the optimism and look at that figure realistically and you make the conclusion of whether we will reach anywhere even close to that figure in the near future, excluding government jobs as well. In short, we have serious employment problems that will not cure itself and will take a long time to correct itself.
What is going to be odd is the fact that this may cause the market to rally in the short-term, but the markets are very overvalued for anyone using a realistic earnings estimates. The parabolic move has been cheered by the media, but I believe this move is creating undue optimism about future equity prices. Yes, the data is getting better, but not Dow 11,000 better. Of course, I am bearish, but I do have longs in the biotech area, dividend stocks, precious metals, high yield and international holdings, but at the end of the day an 8% rise in frontier markets, 4%+ in high yield and is a bit crazy considering current valuations. Yes, I am making money and complaining about it, go figure, but I also have shorts and VIX calls as well. Let’s hope for better economic news, but I am less optimistic than most that we will get it.
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