Employment Report

Posted by Ray on June 4, 2010 under Main | Be the First to Comment

What is there to say? I was closer than most analyst who estimated 500-700K with my 300-400K call. However, as I said before the vast majority were temporary jobs and in this case it was government Census temporary jobs which is a double negative as they create a tax burden and will end very soon. Construction jobs, so much for the 2.7% jump in spending, lost 37K jobs and private temporary jobs also jumped at a healthy rate, all bearish.

On the plus side, hourly income had some increase and the work week had a nice uptick, but that is it. The uptick was also not out of the norm so disinflation is still strong and on a longer term trend the direction is down to flat for income, not good news. Without government we would suffer job losses and we will head into a double dip by 3Q10 for sure. The initial claim data is validating all of this information so I am not out of line or a doomer, it is all data driven.

The Birth/Death model added a stunning 215K, not seasonally adjusted, to the report which helped lower the overall unemployment rate. This was the largest addition via the birth/death model, officially, since the Lehman collapse, why? With a stunning 430K headline number there was little need to pad the B/D model this much, you would think, but there was. You see, the unemployment rate would not have dropped otherwise if they left it alone so with the addition of a little BLS magic Obama and Company have a minor victory. I do not like the model and it needs to go as it underestimates unemployment every year.

Regardless, we are in for a bumpy ride and the markets had reached their highs for the years and had rolled over for good now. I feel good about being short here. Europe is in major trouble and things in America, on the employment front, are in rough shape. The economic data certainly does not support elevated P/E multiples so look for value, dividends and high quality bonds. Moving forward a nice healthy cash position is probably advisable as if some people are right, myself included, we are in real trouble here. My short-term S&P target, 1017 with a medium term target of 900.

What a wild ride

Posted by Ray on May 26, 2010 under Main | Be the First to Comment

The past 2 weeks we have seen the markets do things that simply do not seem natural from freefall flash crashes to intraday 300 point turn around rallies. However, there is one thing that is pretty clear, I would not buy this pull back. As David Rosenberg points out and a few other non-perma bull market strategists, not that there are many left, point out is that these wild swings are not normal in a bull market.

Think back to the market of late 1999 to the early 2000 and you will remember such swings, but do you remember how it ended? If you bought on those dips you never made your money back, ever if you bought the NASDAQ and you would have barely broke even in the S&P 500 if you sold at the peak in 2007. I think it is safe to assume that this market action is a sign of a sick overbought market trying to lure you in to buy one more time before it robs you blind, don’t do it. To be clear, I believe the broad market will move lower, I think 900 to 950 is not an unreasonable target, but we could move much lower than that. Before you say it, no the fundamentals are not so strong that we could not see the lows of last March, more on that in a minute.

I am not saying do not buy great individual companies, not at all, I am bearish on the market, but I like some individual names. I am bullish in the biotech area as there are tons of patents expiring in the next few years and you will see big pharma buy many of these names, but I also like big pharma too. Look at the yields and the rock bottom P/E’s, they are dirt cheap and you should look at some of these names, but biotech is not a prisoner to the business cycle, as long as it is well funded and near approval for a drug. I also like consumer staples that pay dividends, boring names, but they pay you to hold them and no matter what the economy is doing you will always need toilet paper and a toothbrush, I hope at least. I also still like high quality bonds and can make a case for treasuries right now, but use your own discretion, I would stay away from high yield, I sold mine a couple months ago.

Why do I think boring and income is the best model right now? Well, the market is going to correct even more than it already has, kind of a simple explanation. Income strategies, which I have been on the record for supporting since last year, makes sense because we are living in disinflationary, possibly deflationary, times where real yields are much higher than what we think. I am a long-term inflationist, come on look at all the money being printed and Obama wants to double exports in 5 years, you cannot do that with a strong dollar, but right now deflation is the name of the game and income makes sense. Deflation also means stocks need to be trading at much lower multiples than most people think and that is why I think this correction will potentially be much deeper than most people believe. Time will tell who is right about that.

The Fundamentals!

What about the fundamentals? Are they better than a year ago? Sure. Do they support a 20 P/E multiple on the S&P 500? Nope. Do you really think the housing data since the homeowner tax credit implementation was actually real data? No way. How about unemployment, do you believe temporary jobs are going to lead America to the next level of prosperity? Well, all the amazing job growth has been only in the temporary job area, let’s not forget that the actual employment report numbers are tinkered with via the birth/death model which added 188K jobs to last month’s employment report. For those of you who don’t know, the birth/death model are estimates the BLS uses to predict how many new business are started based on how many business died and population growth, it is fantasyland stuff basically.

What about corporate earnings? They have been good, but I do not believe they are sustainable. First, the stimulus is running out, that is a very important thing to remember moving forward. Second, a cool 30% of the S&P 500’s earnings come from Europe and up until lately U.S. companies enjoyed, globally, a weaker dollar which is over since the new sovereign debt issues are driving the value of the dollar higher. In technology a large percentage of earnings came from Asia and I do not believe that will continue much longer because of what is happening in Europe, Greece was a big deal indeed.

You see, Europe represents 20% of the worlds GDP and, believe it or not, China’s top importer is not the U.S. it is the EU. So, if the EU is going to have lower growth because of austerity measures, which they will, it will automatically be a drag on world GDP, but it will specifically hurt China. If China begins to slow down that is very bad news since China is “the recovery story of the world” or some other tag line the media gave it. In other words, China will be buying less from the U.S., exporting less to the EU and the EU will be buying less from the U.S. Also, China will be running, more than likely, trade deficits not surpluses which means they do not need to buy our debt. Can you see the problem now?

Greece is/was a big deal not on its own, but because it was locked in with the other PIIGS which were locked into the EU as a whole. It is all very bad news and no matter what CNBC says we are all still coupled with each other. It is the interlocking of the global economy, especially in the debt markets, that is the problem and there is no escaping it. I am afraid that even when governments guarantee debts that may not be enough anymore because, as the price of gold is proving, people are losing faith in money. Our whole system is based on faith and when that faith is damaged that is when problems get out of control and I believe we are just about at that point. The rumor yesterday was a .50% rate cut, how is that good for the Euro? If anything that would have brought it closer to parity to the USD. Printing another trillion just won’t calm markets because it means nothing. At this point I cannot see much of anything from Europe that will calm the markets.

The only things they can do is let the PIIGS default on their debt and kick them out of the EU, not necessarily in that order. Anything else will just prolong the problem and the printing press is the cause of the problem, not the solution.

Joe, please pass whatever you’re smoking

Posted by Ray on April 23, 2010 under Politics | Be the First to Comment

I am not a fan of the current administration, I think most people know this by now and no I am not a racist or anti-government, but the action lately has just gone over the top of prudent governance. Joe Biden, at a fund raising event, said that the economy will be adding 500,000 jobs a month in the near future. Joe, whatever you are smoking, please pass it because you are feeling no pain and I could use that for a little while.

The notion that this economy will create 500K jobs a month in the “next few months” is absurd and irresponsible. How in the world will this happen? We are still seeing 450K+ a week in initial claims which shows that employers are still laying people off. The work week is still well below 40 hours, coming in at a little over 33 hours a week, and wages are starting to deflate. If this economy was going to create 500K jobs in the next few months we would not be seeing what we are seeing. I understand this administration is under tremendous pressure to boost employment, but there is a difference between giving people hope and flat out lying, Joe is doing the latter.

I suspect he made this statement because census hiring will kick into high gear for April and with the passage of the health care bill the government will begin hiring for the new agencies being created. However, those jobs are not “real” jobs, yes they pay people and they do work, but they are not private sector jobs which actually create products or services. Government jobs create nothing and are actually a drain on the citizens of the country as the salaries for these positions must be paid for by some type of tax or fee which sucks capital out of the economy.

Clearly Joe was being Joe when he made that statement because, as usual, it was reckless and inaccurate, like most of the things Mr. This is a Big F****** Deal says. I see a trend with this administration that is eerily like that of FDR’s administration, please read The Great Depression: A Diary by Benjamin Roth to see the similarities, which would not stand for criticism of any kind. I get many do not like the Tea Party because there are a few nut jobs in the crowd, as with any crowed, but look at what they are doing to them. They branded them anti-government, racist and dumb which is largely unfounded accusations and I seem to recall liberal rallies which were supported by the Democrats as citizens exercising their right to free speech. However, when the speech is criticizing the Democrats, well, they can’t have that now, can they?

Regardless, let’s take a look at another report about the health care bill. A new report from the Associated Press today says the bill will cost far more than what was projected by the CBO and by the Democrats, are you really surprised by this? The bill will cost $311B between 2010 – 2019 and, which the CBO already admitted, will raise premiums for everyone. However, there is way more cost than most people think about, let’s take a look at some back of the envelope costs.

The bill mandates that everyone has to have coverage or face a fine, but because of this mandate the government will offer generous subsidies up to individuals/couples making $88K a year. Who knows if these subsidies get bigger or smaller in the future, but we will use what we know for sure. The good news is that the poor will get “free” coverage and as your income increases so will the amount you will have to pay. The range of premiums owed is based on a sliding scale and will cost you between, assuming you make less than $88K, 3% – 9.5% of your income.

That is a heavy burden on a family even making $88K a year and for the kind of poor, making, say, $50K a year, you are taking a big chunk of a person’s income which they have no choice but to pay. On $50K a year they will end up paying about $1,500 a year for health insurance, $125/month, that is a lot of money considering the bi-weekly pay is about $1,200 for someone in that income range. This means that money will impact their standard of living perhaps preventing them from even owning a home. At the very least this bill will pull billions out of the economy every year, that is not what we need right now.

If we look at the 32M this bill will insure times the estimated about they will have to pay, the number gets pretty ugly. If we assume the average person will pay $3,500 a year in premiums, who much money will that take out of the economy? The answer, $112,000,000,000, almost 1% of the current GDP. If we look at the average subsidy you will receive, which the government, i.e. other taxpayers, will provide people, how much would that be? The answer, $288,000,000,000 (32M x $9,500 – average subsidy by my calculations based on current insurance premiums on an annual basis). I am not sure how Congress came up with the cost of this bill being only $930B or so, but I do not want whoever crunched those numbers to do my taxes.

The point I am making is that this bill which is being bragged about by the Democrats is not good for business and not good for the middle class. Let’s not forget that the real middle class, couple, will more than likely make more than $88K per year which means no subsidy at all for them. Paying for a $12K or $1,000 a month for a health insurance policy is a lot to ask. Most people do not realize that making $100K in today’s world is not that much money, after taxes, mortgage payments, property taxes, energy costs, kids and so forth.

The worst part is that the GAO has estimated that by 2020 93 cents on every dollar collected by the government through taxes will have to go towards entitlement programs. That means only a small portion will be available to go towards everything else we have, you know, like debt servicing costs. Does anyone think taxes on everyone are not going to go higher? I know, they promised that only the rich will pay higher taxes, news flash, politicians lie, shocking. If we do not have a VAT, value added tax, it will have to come from higher income taxes and, more than likely, we will end up with a VAT AND income taxes which would be horrible. I am not even going to go into the tax base they used to calculate this, but I will say it is absurd.

No one did not want to reform health care we just wanted it done right. I think people would have been for the stimulus if it was done right. The problem is that these programs were not done right and will cost us all dearly in the future. This is not about party lines, the Republicans stink as well, this is about the countries very survival. To put this into perspective, Obama just said I walked into a bad situation with trillion dollar deficits and $8T in national debt. Well, it is Obama’s second year in office and the national debt is now reaching $13T and somewhere along the way we are being told that 2 wrongs make a right, because bush did it first.

This is unsustainable and I mean any annual deficit is now unsustainable. Adding even $500B a year is irresponsible and will have catastrophic consequences let alone adding trillions more to this figure. People say we have to run deficits because we have trade deficits. What they don’t tell you is our trade deficits are not that big and we have enough debt outstanding that would cover our trade deficits for a very, very long time. I believe we are past the point of no return and freezing spending after increasing the budgets of government agencies by 20% is doing nothing to reduce our long-term debt obligations. Just like we are seeing in Greece now, this will all come to ahead very soon and who will bail us out?

In the meantime, if you actually believe we will have 500K a month job growth in the next few months while initial claims come in at 450K per week, pass me whatever you’re smoking.



The Crisis Has Just Begun, But…

Posted by Ray on April 6, 2010 under Economy, Main | Be the First to Comment

There is some hope that the next aftershock might be muted, a little bit at least. The President just launched his new initiative to save the housing market which involves principal write downs, but no one is asking the really big question, why? With an industry report due out shortly you will see why, according to Diana Olick of CNBC the foreclosure report coming will set a new record. Am I surprised? Nope and you should not be either.

The mortgage mania was an era that will probably never be repeated again by private lenders, it continues through the FHA though. Many believe or believed the worst was over for mortgages blowing up in 2009, but they clearly had not read any meaningful material on the subject. If one read any of the numerous books about the credit crisis, aka lend anyone with a heart beat some money to buy a house they could not afford, they would know that 2009-2010 (the beginning of 2010 at least) was the lull before the storm. Whitney Tilson has probably the best book about the subject with many interesting charts in it, but most telling is that the last 12 months was merely the eye of the storm.

What happens next is really anyone’s guess, but what we all know for sure is that the problems that existed in 2008 are still on the books right now and the problems were merely covered up with the FASB’s suspension of rule 157, mark-to-market accounting rules. As you know firms can now make-to-fantasyland what they feel all that worthless paper is worth, I wish we could run our books like that because I have a painting of some dogs playing poker that I know will be worth millions in a few hundred years. Regardless, the next wave of the crisis is starting to break now as we have resets on prime mortgages, Alt-A’s and even some sub-prime that will begin now.

Why do you think the major banks were so quick to agree with Obama and begin to really renegotiate those loans? It is because they know that the problem is still there and needs to be dealt with since mortgage modifications clearly have not worked, there-default rate is through the roof. Obama knows that the mortgage problem is still very real as well and if the FASB goes back to mark-to-market, well, we are right back to September of 2008 and now the Fed and the government have zero ammo left besides outright nationalization of the banking sector. This is why Obama has offered rich incentives to all parties to begin this program, to help avoid the next wave, but I have little faith that the program will work based on the modification failure. This has nothing to do with politics as I think this is the best plan to deal with the problem, but it is a huge problem and principal write down’s will mean losses for some banks.

The interest rate reset issue is also why you will not see the Fed raise interest rates soon either, along with that other little problem known as the national debt. All the talk about Hoenig getting rid of the “extended period” talk is just a side show. While he might have bubble concerns, rightfully so I might add, he merely wished to change the language, but it means, essentially, the same thing. According to the FMOC minutes here is what was said on the whole dissent issue:

“Kansas City Fed President Thomas Hoenig again dissented on this count, favoring a more flexible commitment to keep rates low “for some time,” according to the minutes, which did not elicit major market reaction.

Fed officials expressed concern about renewed weakness in housing and persistently high unemployment, saying the threat of a vicious cycle had not fully receded.”

His dissent was for the markets, not because he really disagrees with the low interest rate policy. The Fed knows that the housing market is a mess, as they stated in their minutes, and they know that there are plenty of adjustable rate mortgages ready to reset, the terms stink I might add. Sub-prime resets are usually fixed to a maximum of, if memory serves me correctly, 15%, but the real issue is the deterioration of the prime mortgages which has yet to really get started. The prime mortgages, in my opinion, is just one of the reasons rates will not increase as the resets are prime plus (insert risk premium here). If these mortgages can be written down problem solved! Kind of.

Whether or not this new initiative will actually solve the problem remains to be seen, but as I said earlier it is just about all we got left without the government actually buying the houses and letting people pay rent to live in the house. Luckily we are not doing, oh, wait we are doing that to, never mind. Again, another shock to the system will be devastating and this is why the big banks are all over this new modification program, but it is unclear whether or not homeowners will go for the plan or not, see the latest GSE study on how Americans view homeownership. No matter what, unless there is another accounting gimmick, the banks will have to take some losses in the near future albeit smaller losses than a foreclosure.

Of course, the media is not looking at this data and merely parade people wearing rose colored glasses in for their interviews, but this problem is real and it is getting closer. I do not believe it will be as bad as 2008, but it certainly can turn as bad if the problem is not cut off over the next few months. If this new program fails or has a low participation rate that may be a problem. The other unreported issue is the SIV accounts that need to be brought on the banks balance sheets in the near future, those are the accounts that banks “sold” their CDO’s to in order to securitize them, but since 2008 that paper has not moved.

In short, the problems have not changed or gone away. All those who told you everything is fine are either lying or do not have a clue what was written. With 4 negative days in the past month and a rising tide still lifting all boats I think that alone should be a warning that we are still in very unusual times. Let’s face it, markets never go parabolic without having a not so bullish ending and with the banking system still impaired I believe there is a recipe for disaster in the not so distant future.

When in doubt blame it on the snow

Posted by Ray on February 26, 2010 under Main | Be the First to Comment

It was funny to see many of the pundits spin bad data on the weather. This equates to my daughter saying the dog ate her homework. It is hard to believe the snow is to blame for higher initial jobless claims when we are in the middle of winter. However, I will concede that retail sales will be pretty horrible because of the weather, but other pieces of data, well, not so much of that weak data can be blamed on some snow.

Housing starts stink because the housing market is in trouble and even massive government stimulus is not helping. My guess is this data will probably improve in March to April because of the last minute rush to buy homes, but I would not count on that being much of a bump. What is worse is that the President wants a permanent moratorium on foreclosures which is doing no one any good and, in fact, will hurt banks that would not be able to collect or sell an asset that is earning them anything. I am referring to Obama’s demand that before a foreclosure can happen it has to pass through the re-modification process. Capitalism is officially being suspended until further notice.

As far as jobless claims are concerned, they are going to get worse as far as I can see. I am basing this on antidotal evidence of firms continuing to announce layoffs and a jump in the mass layoff indicator a few days ago. It is crazy to think employment will improve when you have blue chip companies announcing layoffs and claims are heading back above 500K a week. This is not because of the weather it is because the economy stinks. David Rosenberg calls this a Houdini recovery and he is correct. Besides a statistical recovery and a rally in equities, which is odd considering the dismal news over the past 2 weeks, the average person is worse off than they were last year. Again, unless it has been snowing for 8 months it cannot be blamed on the weather.

Perhaps it is snowing in Greece as well, that will explain their financial problems. It is true that the weather hurts certain things, but it has a rather limited impact on employment. After all, snow removal companies would probably be hiring. The weather might hurt retail sales, but with more people using the internet, me included, to shop I would not buy the soon to be claim that the weather killed retail sales. This is all about uncertainty in the world and to deny that there is uncertainty is simply crazy.

We have problems all over the place from domestic issues to possible sovereign defaults. Let us not forget we will witness municipal bankruptcies in the near future as well, chapter 9 is the more likely bankruptcy procedure. Health care reform is back and will be passed, whether you like it or not, and believe me you should be careful what you wish for because this means higher premiums for everyone. Do you really think Anthem raised prices 39% because they wanted to? Nope, it is because, I as speculated months ago, they know they are out of business in 4 years. All of these things mixed with tight credit conditions means tons of uncertainty.

Why the markets are not down 200 points, I do not know. However, it appears that Goldman Sachs was a huge buyer or S&P 500 futures yesterday, according to Zero Hedge reports, which made this a futures driven rally, check out the trading between 3 and 6AM for more weird futures action. I do not want to spread conspiracy theories, but all I am saying is the markets are trading very odd right now. I am still very bearish, how could anyone be bullish with the horrible data we have seen as of late? This is not 1 week of bad data, but 2 months worth of bad data and the market ignores it, weird.