The Employment Report and Current Events

Posted by Ray on February 5, 2011 under Main | Be the First to Comment

The world is in a very tough spot right now and the word of the day is social unrest. On top of the news from the Middle East we got some, in my opinion, pretty bad jobs numbers on Friday. Of course if it was a good report it is because of the ‘economic recovery’ and when the report is bad it is because of snow, rain, wind, Earth or whatever else they want to say instead of the truth, the economy stinks.

There was not one good piece in the jobs report, not one. Sure, an unemployment rate of 9% was the headline given to us, but doesn’t this strike you as being odd since the BLS just added in some 300K under reported job losses from last year? On top of that we had, unadjusted, horrible initial claims reports for January and even the adjusted reports stunk. Even though the economy did add jobs governments are laying people off which is a problem as this will likely continue on into the future. Overall, there is still some 5 people for every open job right now, think about that and then think about how long it will take for unemployment to actually come down, especially with new workers coming into the work force through population growth.

We are not going anywhere in the near future and for proof of this look at Bernanke’s speech the other day when he basically guaranteed QE3. As an aside, I love how he said QE2 worked because asset prices, stocks, and bond yields were going up. Umm, wasn’t QE2 supposed to create negative real interest rates? And since when do we use the stock market as a barometer for economic growth? In fact, QE2 did work if you thought it would benefit stocks, but it has failed miserably for the other areas it was supposed to help, i.e. jobs, economic growth and negative real interest rates.

However, QE2 did have a successful side effect that only a few people have realized, it has overthrown a couple of governments and probably will topple a few more in short order. Remember how I said you can get inflation without money velocity? It is kind of happening and just imagine what will happen when banks actually lend again. Now, Ben says food prices are from emerging market demand which is true, but it is also because of bad harvests, which will continue, and the fact that commodities are valued in USD’s which have been sliding down in recent weeks.

This means food prices have risen for the poorest countries in the world to levels that are just unsustainable. When food prices rise in America we can weather the storm for a while, but in some countries food at lower prices consume 50%+ of the average families budget so they do not have the luxury of riding out the storm or cutting back they simply go without. They can only do this for a little while before something gives and we have witnessed what happens when that something gives way. I also believe we have only seen the beginning of the problem as no one has figured out that this year’s wheat harvest is likely to be very, very, bad and we will see much higher prices in a few months. The weather is whacky and I have a strong suspicion that the Midwest will not produce what we are used too this year. If that happens things could get very interesting and perhaps, just maybe, we will stop paying farmers to grow food in order to turn it into fuel, use sugar instead which we pay farmers to not grow… get the picture yet?

Things are getting interesting and I am trying to stick around to see how it all ends. In the meantime I believe that one must be long commodities, silver and softies for sure, and stocks until QE is over, which is likely to be never. I say that with a caveat as I believe if QE3 does happen stocks might get very choppy and at some point people will figure out that ZIRP + interest on excess reserves + QE = Really Bad News and is bad monetary policy. Then again, only a few have figured it out so far so maybe I am too optimistic.

The Birth/Death Model

Posted by Ray on July 10, 2010 under Economy | Be the First to Comment

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.

The employment report will be bad, worse than you think

Posted by Ray on July 1, 2010 under Economy, Markets | Be the First to Comment

Everyone is expecting a bad employment report, especially after the ADP report on Wednesday and the initial claims data this morning, but I think it will be worse than most people believe. Estimates are for modest private payroll growth, meaning poor of course, but given the weak data that came in waves this month it is bound to be less robust than we think. I am one of the few who believe there is a very strong possibility of private payroll losses tomorrow, not merely a weak report, but a disastrous report.  I am not referring to the census workers being laid off either.

I expect huge losses in construction jobs which will offset any manufacturing gains we have. The housing, initial claims and extended jobless benefit data points are what lead me to believe that we will see a train wreck tomorrow. It is clear that the economic indicators are rolling over, from the ISM to the ECRI all the way to housing, which should not shock anyone. What most people fail to realize, but not economists, is that housing represents some 20% of GDP and the data we saw is telling us that the construction industry must have been shedding jobs, in the residential market, like crazy. This is also why the home buyer tax credit is going to get extended as well, of, and it is also an election year.

Overall, I do not believe a bad employment report is priced into the market and that is certainly not good news for the bulls. I am also curious to see what the birth/death model adjustment is going to add to the mix, while many in bobble head says the B/D adjustment is not a big deal, well, they are wrong. As I have said many times, the B/D model underestimated unemployment by 880,000 jobs last year, that is a big deal so these adjustments do matter, sorry Mr. Liesman. I also believe we will see wages stagnate with the work week getting slightly longer, why hire more people when you can have existing employees work more hours? It is unclear whether or not the unemployment rate will increase, I suspect it will, because the unemployment benefits were not extended by the Senate leaving 1.7M unemployed without a check. In other words, 1.7M people might have all of a sudden decided to look for a job, any job, which will increase the unemployment rate. The rest of the report will reflect what we know, it will merely confirm it for us.

The $60,000 question is whether a really bad employment report is priced into the market or not. I am inclined to believe that nothing is really ever priced in especially if the report is worse than expected. The market is due for a bounce and I actually thought we would get it today, it looked like we were at some points throughout the afternoon, but it did not happen. The market is definitely oversold, but markets can remain oversold or overbought for long periods of time, heck we were overbought for how long and no one complained. The market is in bad shape from a technical perspective and there are enormous headwinds in front of us from a weakening economy to the troubles in Europe. The one thing I am confident about is my 900 price target for the S&P is intact and we are well on the way to that level or lower. One hedge fund manager I spoke to has a Dow target of 3,800 and thinks we will reach new lows on the S&P 500 so next to him I am a raging bull.

If the report is bad it is possible we will trade higher to retest that 1040 – 1048 level which would be an ideal level to consider looking at short positions, depending on conditions at that point and your investment objectives, there are never any sure things. The other unknown about tomorrow is the 3 day weekend that is in front of us. I am fairly confident few will want to be short into the long weekend, but I am equally as confident that few will want to be long either. Many traders may not be around which could mean a low volume indecisive day altogether. However, if I am right and it the report is a negative number I am fairly confident we trade lower, but this market is full of surprises, both up and down.

There is one item that makes me a bit more bearish than usual and that is the way AAPL has been trading. I realize it has been plagued with some rumors or truths, I do not own Apple products, happily, so I do not know what is true or not true, but it certainly has not been able to catch a break lately. This was supposed to be the ‘safe’ stock with $50 per share in cash and THE product to own and it has fallen sharply off of its highs. Everyone loves AAPL and everyone owns AAPL, I am using AAPL as most used GS at the beginning of the year, as the canary in the coal mine. What AAPL is saying is there is a gas leak as the stock has fallen 30 points from its all-time high and it cannot shake off bad news. The weakness in stocks like AAPL are telling me that investors are treading lightly in risk assets, not to mention that they were overvalued, oh the emails I will get for that comment.

The bottom line is that even if I am wrong and the employment report is ‘good’ with a +150K private employment print, unlikely in my opinion, it really isn’t good news, just less bad. With unemployment officially at about 10% and underemployment pushing 16% we have a real structural employment problem in America. It is so bad that Vice President Biden admitted that many of the 8M jobs lost will never come back, this is the same guy who said we would be swimming in hundreds of thousands of jobs every month ‘very soon’ a couple of months ago. This is deflationary and the fact that wages are basically stagnant is deflationary. The credit markets are telling us that deflation is the immediate risk at this point. Retail sales show that there is no end demand, running at a mere 1%, all of this mixed with high unemployment is if not actual deflation disinflation which is very bearish for stocks. We will continue to have a P/E multiple compressions because of this disinflationary force and earnings estimates will come down, a lot. In short, even if we have a good day tomorrow, unless we see some real inflation equity prices are heading lower.

Bring on the European Stress Test

Posted by Ray on June 7, 2010 under Main | Be the First to Comment

Look, things in the U.S. are certainly better, even though I am bearish on the economy, but they are just a “less worse” type of better rather than a true recovery or whatever you want to call it. Someone once commented that I would not know a V shaped recovery if it sat on my face, or something to that, as the recession in the early 1980’s saw a lag in initial claims of some 6 months before the recovery in employment happened. Boy, I hope that person is reading this because that comment was made in august or September of last year, almost a full year ago, and initial claims barely broke the 500K mark as we speak, is that the ”V” we are looking for? The fact is in a post credit collapse employment is a leading indicator, I said it a year ago and I am saying it now and the only difference is the unemployment rate is HIGHER today than a year ago.

What changed over the last 12 months?

Nothing. Wait, I take that back, a lot. The U.S. is now $3T more in debt, we performed a “stress test,” which we are telling the ECB to do, more on that in a minute, and the Fed expanded its balance sheet by how much? What did we get for all of that? A 5.2% GDP print based on inventory a rebuild that was probably premature, if we take away the stimulus would firms have rebuilt their inventories so much? I think not. Unemployment is slightly better thanks to temporary jobs and government hiring, not exactly what I would call “robust” at all. The bottom line is all my criticism of the stimulus was right, it failed.

The banks are better you say, right? Are they? If you think that, well, I just don’t know what to tell you. Did the banks get rid of the “toxic assets?” Did they write all their bad debts off? Did real estate values increase? How about commercial real estate, is that sector flying strong again? No. Are banks loaning money again? Sure, if you have a credit score of 850 or better and don’t need the money they will gladly make a loan to you. However, if you need to refinance your home you better hope you qualify for a government program or you are out of luck. The “stress test” was a joke and meant nothing because we are at the outer limits of the stress test, remember, 10% unemployment, etc., etc.? What saved the banks was one thing and one thing only, the repeal of mark-to-market account, period, end of story.

If we brought back mark-to-market accounting today we would have a handful of big institutions left, I guarantee it. Just look at Wells Fargo’s balance sheet with the “Pick-A-Pay Loans” they inherited, worse, they bought, from Wachovia, the LTV’s, except for Texas, God Bless Texas, are all horrible. I am not saying WFC would fail, I am just saying they would have to realize pretty significant losses is all. It is no coincidence that right after, literally right after, the repeal of mark-to-market accounting rules by the FASB, by Congressional pressure I might add, bank earnings went through the roof. What replaced mark-to-market accounting? Mark-to-model accounting, do you know who made that model famous? Enron, need I say more?

Europe

Now, Timmy Geithner is over in Europe telling the Europeans to do a “stress test” to let the world know all is well. Sorry Tim, I do not think this will work since it is technically not the banks in question, but rather the sovereign debt that they are holding. Why not do a stress test on governments instead, maybe that will solve the problem. This is a banking problem, again, that was brought on by huge deficit spending and countries inability to service their debt loads, this is big, huge actually. While this will impact banks it is not really banks that caused it, but politicians who decided to bribe the people with their own money.

It is likely that one of the PIGS, or whatever we are calling them now, will default given the issues they have and the inability of politicians to say no to spending. It is just odd, it always has been, that the people demand all this gravy from the government in the form of give a ways, tax credits or straight cash in some form. Don’t these people realize that they are only getting back their own money? Actually, if governments spent less and had lower debts that means they would have lower overall taxes which means the people would have more money on their own… they would be better off! However, the people insist on being bribed with their own money and politicians are only too happy to oblige.

The point is that this bigger than the banks as we are talking about the solvency of countries now. Bailouts are much more difficult to do for countries and the implications of a default by any country has widespread ripples that most people have no idea can or would occur. Even if Hungary or Greece defaults it is a huge deal and will impact governments and banks all over the world. I have been saying this for months now, Greece is a big deal and all those people saying it is not are, well, disqualified to render their opinions anymore as the markets have spoken and they have sided with me.

Run a stress test, it doesn’t matter because it really doesn’t matter Tim. The problem is with government spending this time and I do not think mark-to-model accounting can fix this problem.

The real problem

The real problem is I do not know where the sovereign debt problems will end, I know it will get worse. I know that more European countries will succumb to this very same issue as most European countries are socialist by their very nature and their debt levels are very high. As the weaker countries fall they will drag the stronger countries down with them, it is just how it works. I made a call that the Euro will fall to 1.18, we are about there. Do I think it will go lower? Yes, to parity in the near future. I think 1.16 is the next level, but the ECB will have to intervene and China has to intervene as a weak Euro is a major problem, it is, another story for another time. The currency will not survive without a mechanism to eject the weak states, period.

After the carnage in Europe is done, I do not have a timetable for that, it could be tomorrow or 10 years from now, but more than likely it will be sooner rather than later, the debt problems will spread, to the U.S. We have $13T in debt and an economy that is not recovering, I am not happy about that, but those are the facts. We are spending $4.9B a day, 3 times the amount George Bush, not exactly the face of fiscal conservatism I might add, was spending. We are in major trouble and what are our politicians doing? Trying to figure out how to get stimulus 3 out the door, that’s what.

I have been saying for months that our debt to GDP level is almost at parity, but it takes the Drudge Report for people to start listening? OK, at least people are listening now. The problem is we have no politicians willing to take the steps to fix out problems. Go ahead, elect the Republicans, look what they did from 2000-2006, they really helped to speed the process up, in my opinion. Of course, out current President and Congress has surely kicked what the Republicans did into hyper drive as they added 30% to our debt load in less than 2 years, that is $3T, an astounding figure. Neither of these parties really want to fix the problems, in my opinion, because they have a vested interest in perpetuating the problems so they can stay in power, it is just how it works.

What this means is we are all in very big trouble. I am not talking about, oh, gee, go buy an ounce of gold and protect yourself from inflation, I am talking about the Weimar Republic, hyperinflation, type of trouble. I see no way out besides inflation and in a big way. As Paul Krugman points out, there is a big difference between Greece and the U.S., we can print our own money. We also know Ben Bernanke has no problem with hitting that print money either. I am also confident that the Fed is, basically, completely incompetent.

If we cannot go to the market to finance our debt, which we have trillions of dollars of that most of it matures in under 10 years, the Fed will monetize it. That is how we will deal with our sovereign debt crisis, we will print our way out of it and it will be the very worst thing we can do. Instead of cutting our government, spending or doing anything else that is logical, because politicians want to get reelected, they will choose to inflate their way out. Will gold protect you? Yes, but so will food and any other useful commodity including toilet paper. It disturbs me to no end that we are where we are and that the President is listening to the likes of Mr. Krugman who thinks deficits don’t matter, they do, and that since we can print money it is OK, printing money is not OK.

In the meantime I am still short the market. We will have a bounce I am sure and I almost took a nice broad long position today, but I passed. While I am sure we will have that bounce I did not think the risk reward was worth it. My target is still 900 on the S&P 500.

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.