How crazy is crazy?

Posted by Ray on June 2, 2010 under Economy | Be the First to Comment

A few things have been out there that just blew me away over the past couple of days. The first was when I saw a video of Jim Cramer advocating for the Treasury to issue $2T in 30 year paper to solve our debt issues. The second is that some talking heads believe that we will get a 700K print for the NFP, non-farm payroll (employment report), on Friday. It leads me to believe that most people in the world have just lost their mind or at least lost touch with reality. There is some logic to the aforementioned items, but reality just does not work like that and when one throws out an idea make sure it is feasible first or make sure it is a clean number, as in the 700K NFP on Friday.

First, Jim Cramer, the man I love to hate, but I respect the hedge fund manager as a take no prisoner SOB who got the job done, but this “I am going to make you mad money” thing, well, I think not. He has been giving out some decent advice lately, too little too late, but nevertheless, he has advocated high dividend stocks for sometime which is a good strategy as I see deflation. However, he said yesterday that the Treasury should issue $2T in 30 year paper while rates are low because we have too much short-term debt, he is right, and we will eventually have funding issues, he is right again. The issue I have is that the U.S. has $13T in total debt with much more coming so $2T does nothing to “solve our debt problems” and the bond market would reject $2T in 30 year paper. I mean come on, the market would demand a higher yield than 4.23% for that size paper. This is also the same guy who said, no more than 8 months ago, that Treasury should issue a 5% 30 year Retirement Bond as well, yeah right.

If one has been paying attention to the bond auctions they would notice that there is a reason Treasury is issuing shorter maturities, no one wants long-term paper from the U.S. government. Investors would just assume buy 10 year TIPS instead which offer some protection from the inevitable inflation risk that exists. Why would Treasury want to steepen the yield curve even more than it already is? If Geithner has half a brain he will try to move our maturities out to the 10 year mark and if Treasury swamped the 30 year they would move the yield up on the 10 year. It is just a bad idea and it impresses no one, period. I am surprised that Cramer would even say such a thing as he did run a ton of money, but, well, I guess I am not surprised.

The other hot issue of the day is the employment report due out at 8:30 AM EST Friday morning, it is THE report on the first Friday of each month. This month we are due for some really interesting data I suspect, especially given the smooth work last month in the Birth/Death model, I know I talk about that a lot, but it is important that you look at that figure and understand it. I see some estimates that we will see a print of 700K on Friday and, frankly, I would not be surprised, it won’t be real, but I would not be surprised at all.

The NY Post ran a story on how some Census workers were hired for a few hours, paid, fired and rehired which will boost the NFP figure on Friday. Are those accusations true? I don’t know, but it would not surprise me if they were. All I know is that it would be awfully tough to pull off a huge private sector growth figure with 460K+ weekly initial claims and with many blue chip companies announcing more layoffs, H-P is laying off 9K, seriously. There are still almost 6 people available for every open position which is not good news or bullish for new hiring. I am not saying it is getting worse, but I am saying it is not getting better.

There are specific area’s to watch and the first one is the actual unemployment rate, I think we will see it uptick to 10.2%, remember we now have an oil spill which impacted a very large area. Another area is the BLS Birth/Death model, obviously, which may add another hefty 200K to this month’s report. I also believe you must subtract all government jobs out of the report since they are temporary and we need private sector jobs to pay for government jobs to begin with. The U-6 report is also very important as it will show the under employed, which is a huge, and growing, problem in America that everyone turns a blind eye towards. Finally, temporary jobs are no longer a bullish indicator. Perhaps a year ago they were, but if they are not converting to fulltime employment by now they never will, sorry, but subtract them out.

The other painful part of the report is the time it takes to find a job, this is the heart breaking, in my opinion, part. The vast majority of unemployed are taking far longer than 6 months to find work, in many cases more than a year, this is the worst since the DOL has ever recorded, it started keeping records in 1948. Basically, those are Depression era numbers there are just no other times in our history where it took so long to find work and I can assure you people are not voluntarily staying unemployed to collect that whopping $400 a week unemployment benefit check. This is a major problem and it is not getting better, sadly, and you need to look beyond whatever the headline number is to see what the real situation is like. I am sure Joe Biden and President Obama will be patting themselves on their backs on Friday, but I can assure you that whatever the number is it will be the equivalent of Enron accounting.

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.

Risk off, Risk On

Posted by Ray on May 10, 2010 under Main | Be the First to Comment

As I watch the pre-market activity and commentary from the airheads on CNBC it just boggles the mind. Last week these same people said the world is coming to an end, which meant buy to me, but today the “market is soaring.” Investors must get confused when they watch this porno for the mind as they flip-flop every day. Cramer says do not buy until Dow 9,000, but tonight he will say I told you to buy on Friday! He did not, he was a bear, which is why I thought I should buy. This market is bipolar and, to me, and the commentary you hear is insane. I am bearish on the market, but like individual companies.

We went from market crashing last week to the market is the place to be, today at least. I think this is a strong bounce rally before it declines more, I would not commit new money today or yet unless you are renting this market. The only reason we are getting a bounce today is because of a $1T bailout of Europe, ouch! I do not believe this is a real bounce and volume will be pitifully light, as all up days are, and this market is really just responding to short-term oversold conditions. This will be a good time to de-risk ones portfolio, IMHO.

The problem in Europe is not resolved, anyone who thinks it is needs to check their meds, as the funding package is merely treating the symptoms of the crisis not the source of the problem. Essentially, the bad behavior of the PIIGS is being rewarded, but they should be punished, and all the ECB is doing is taking the risk off of the speculators, rewarding their behavior as well, and giving that risk to the central bank. On top of that, the number should be shocking to the markets, $1T is a very large number and above where most people saw it. Not to mention, a good chunk of that is coming from the IMF, a.k.a. the U.S. which is the top funder of the IMF.

The U.S. is broke and borrows all of our capital, like most countries nowadays, so we are simply bailing out debt by issuing more debt. Who does that make sense? It does not. This bailout will not fix the problem long-term and merely kicks the can down the road for a little while. It will blow up at some point and now the bond vigilantes will look at other countries, i.e. the UK, U.S. or Japan, IMHO. They should have left the situation alone and let the PIIGS default to introduce a mechanism to kick them out of the EMU, but no, we are going down the bailout route, again! Not only that, but they are spreading the risk around to other countries now, unreal.

But the fundamentals of the U.S. economy are strong, say the bulls, which is why the market will scream today. Well, I will say things are much better, but not enough to justify the markets run-up and not strong enough to send the market up whatever percent today, this is a technical rally based on some, IMHO, troubling news. I look at the NFP figures from Friday, which I called a fraud and I stand by that comment since 188K were “made up estimates” from the BLS. When one subtracts out the 188K birth/death model figures, which NO commenter on the TV is talking about, except Rick Santelli, we have a figure of +102K. That is a great number right? Not really. Consider this, if we back out the 188K make believe BLS numbers, remember the birth/death model is responsible for the BLS revising unemployment up by 800K in February. We have a baseline number of 102K. If we subtract out government jobs, which are most temporary as well, think Census, we are down to about +48K. You could subtract out temporary hiring as well, but they are jobs, just not permanent, IMHO. No matter how one looks at it, except for CNBC, the ADP figure was accurate and the employment report was less robust than most think, but hey, let’s not let the facts get in the way of buy, buy, buy.

Overall, I fail to see how many classify this as a strong recovery after we spent trillions and 2 years later we are still at 10% unemployment and we have an anemic recovery at best. I am not saying things are not getting better, rather I am saying we have stabilized for really bad to just less bad. I believe a double dip is coming and this market is so not priced for a double dip. If we add in the Europe craziness the market is much less attractive, IMHO. The $1T, which should scare you in the U.S. as you are on the hook for a large portion of that because we are the top funders of the IMF, is a huge number and underscores how bad of shape the EU is really in. We have merely are fighting a debt crisis with more debt, sure there are austerity measures, but they are not going to fix the problem and the Greeks are apparently great at hiding assets.

Yet again, we are socializing the profits of speculators which were lambasted in the European media via the governments over the weekend, unreal. Instead of bailing out the PIIGS they should have instituted an ejection mechanism instead, that would save the Euro, but now they kicked the can down the road and are making other countries issue debt to fix the debt crisis, no sovereign country has cash on hand so they borrow it, see the problem? Austerity measures or not, it is a problem that will be with us for a long time. This is a reflexive rally built on a news event which was actually bad news. How does one support its currency by issuing a slush fund for bailouts? You can only defend a currency through higher rates or taxation, that really is not the case here as Greece will still have debt-to-GDP ratio of 150% by 2014, or there about.

This rally is somewhat justified, but I would be extremely careful with buying into this. Tonight Cramer will revise his call from Friday and Kudlow will continue with his “V” shaped recovery nonsense, but the problems are still there lurking in the background waiting to reappear. Buy gold because this is not over and what the EU did was inflationary, when that inflation will hit, I do not know, but it will in the EU and in the U.S. The other issue is, where will the vigilantes go next? The UK, U.S., Japan or will they stay in the EU? At the end of the day it was probably best to let the PIIGS default so the market can clear the bad debt, but let’s not have the market solve the problem, let’s tinker with it so another bomb can blow up somewhere else.

Oh, let’s not forget one of our GSE’s, which are “sound,” requested another $10B from the government. Yup, a sure sign of how strong things are.

The myth of unemployment insurance

Posted by Ray on April 29, 2010 under Main | Be the First to Comment

First, the weekly initial claims data today was another squishy soft 448,000 and continuing claims dropped a tad, but are way too high. This confirms that job shedding is still the order of the day, 2 ½ years later, and that is not good news. To think that we can post strong job growth or that “employers are on the verge of hiring” with numbers like this is absolutely ludicrous and I would question what drugs one would be taking to suggest otherwise. Seriously, if employers are about to hire why are weekly claims still in nose bleed territory? Why is the work week at 33 hours? Why are wages, the trend at least, lower? Sure, the numbers are better, but less bad is simply less bad.

Now to the myth, conservatives and some economists suggest that unemployment insurance keeps people out of work longer than if they did not have the insurance. The people who make this claim point to old studies or junk science studies to verify this claim. So there is no mistaking my thoughts on this let me be succinct about this, they are utterly and hopelessly wrong. Either they saw what they wanted to see in the data or did not understand what they were looking at.

Studies, and I know this to be true after authoring several of them in my career, rarely surprise the author in regards to their actual conclusion versus the prewritten thought of what the results will be. Essentially, a person’s bias always comes through in the writing and how the data is interpreted. In even worse cases the results will confirm the person who actually pays for the “independent” study thoughts or position, shocking, but very true. Try, for example, to find a study written for the insurance industry that is harsh on insurance industry product. This is what happened with these unemployment insurance studies, they are literally junk science.

Anyone who suggest that receiving $300 a week is worth passing up any job is clinically insane and disqualified right from the beginning. Yet, that is what most of these studies suggest. What they conclude is that a person receiving unemployment benefits will pass on jobs that paid less than their last job and, by some miracle, the person will only accept such a job if their benefits are about to run out. I am not making this up, this is, basically, what these studies conclude. What the person who wrote this nonsense has not done is think through why the previous stated result actually happens, which is why these studies should be disqualified as nonsense.

I am sure you have figured out why people will take any job right before their benefits run out, but let’s talk through it anyhow. Since the person is living large on $1,200 a month unemployment benefits, when their apartment costs $1,500 a month plus other cost of living expenses, they will pass up a $60,000 a year job because it pays them less than their previous $150K a year job. Why would that be? Perhaps this is because they need to make that level of income, because of kids and a lifestyle built on the $150K a year income, or they like not doing any work and collecting $1,200 a month in unemployment benefits. After all, who doesn’t like deficit spending? The intellectual heavyweights claim that this is evidence that unemployment insurance keeps people from taking “any” job and causes people to stay on the benefit until the very end.

Again, that conclusion is nonsense. I agree that some jobs may be passed up because it pays people a lot less than what they were making before, but we are talking about a huge disparity between what the person actually made before and the proposed new income, usually 30%+ disparity in past and potential income opportunities. I highly doubt any of the authors of the study would take a 50% pay cut to “take any job” versus waiting to take the right job with similar income. They literally think that a person who is unemployed should take any job, that is reckless thought and employers would disagree with this conclusion.

Employers often turn down well qualified candidates because they are “over qualified,” why would that be? Simple, because the employer knows the person is just taking “any job” and will leave when another opportunity arises. That is why people who are overqualified are not hired as employers know that high turnover will be disruptive to customers and his/her business and add additional expenses down the road. Instead the employer waits for the right employee to come along. This aspect of the unemployment insurance studies is completely ignored and, instead, the authors say that employees and employers, to a certain degree, should act recklessly and take any job that comes along which will cost employers, nationwide, billions of dollars in future expenses all because unemployment insurance is making people lazy.

Can you see how the studies on this topic are inaccurate and misleading? They reject reality and replace it with their own fantasy land beliefs. What is really funny is that they would never, unless they actually had no choice but to take it, a job that would pay them ½ of what they are currently making, but everyone else should because they are on that “generous” public dole of $300/week. The results are skewed because of the authors bias and because people will take any job if their unemployment benefits are about to run out. However, that is not an example of “these people are lazy” it is an example of “these people are desperate and will take any job.” Even though the taking of just any job is out of desperation the authors accept this as a “see, I told you so” which is a very disturbing way of interpreting the data.

Sponsored studies should not lose their integrity and confirm the sponsors predetermined conclusions, but they almost always do. This is why when a study is quoted the sponsor should also be disclosed so the person reading or watching can figure out that the study is biased towards a certain conclusion. You may be asking yourself, why are these sponsored studies biased towards a preconceived conclusion and rarely differ? It is because the research business is a tough business and if one firm will not do it another will, for $50,000 to take a little piece of one’s soul and integrity. You will never get rid of sponsored hit pieces, but if the sponsor is disclosed you might be able to figure out which way it is biased towards.

The bottom line is that unemployment benefits are a good thing and we need to keep them. No one is secretly getting rich off of these benefits, but merely using the benefit to pay the basic bills and feed their family. To suggest anything different is insane and merely ideology coming to the surface. But I can assure you of one thing, if they were unemployed they would not turn down the benefit which makes them a hypocrite.

Greece IS a big deal

Posted by Ray on April 27, 2010 under Main | Be the First to Comment

Apparently the markets, that wonderful forward looking discounting mechanism, did not see or have fear what is happening in Greece. It is safe to assume that this proves that the markets are not efficient and it fails to see potential problems. What is interesting is that Greece and Portugal were not or should not have been a surprise to the markets since we have all known about the issues with the PIIGS for months now. How anyone could have been surprised by this news today is beyond me. I guess the junk rating on Greece may have been a surprise, but come on, when the 2 year note was yielding 11% how in the world can it be anything other than junk?

The market has gone up for 8 weeks in a row and while the talking heads thought this perpetual “tortoise rally” was normal anyone who has even a little investment experience knew it was not. I still remember Dennis Kneale, last week, calling people who held cash “fraidy cats” because the market is back and it will be a bull market forever. The world does not work like that and the risk trade has been, frankly, out of whack. Money has been pouring in to everything from high yield to emerging markets in the expectation of a steady 1-2% a day. This was verified from mutual fund flow data reported last week which showed investors moved more money into equity funds, for the first time in a longtime, and, in my mind, confirmed we must be near a top, dumb money always moves in after fantastic rallies.

Whether or not this was a top remains to be seen, but it certainly looks like it from my lens. I have been wrong before and might be again, which I admit. However, even though I was wrong it doesn’t mean that the markets were right either. Earnings are better, I still see some misses in revenue though, but the underlying macroeconomic data has merely gone from very bad to just plain bad. When we cheer a 57% confidence reading that is a problem because that it is a horribly low number. The housing data is not verifiably strong when you have, like in October, a rush of people buying for the tax credit right before it expires. If the housing numbers stay “strong” for May then you may say housing is rebounding, but I highly doubt we will see such strong numbers at that time. Housing is a key indicator because it employs so many people and homes were the collateral that were the bad debt sitting on bank balance sheets.

Unemployment remains incredibly high, use the U-6 data not that foolish headline number, which is a severe problem. Given that weekly claims have stabilized at -450K is horrendous at best. That number shows that private employers are still shedding jobs and I am confident that the employment report next week will show “stellar” job creation in the government sector and in the temporary help area, those are not good areas to see growth in. I am a believer that the temporary help is just that, temporary and will not convert into fulltime employment, we would be seeing that conversion by now, but we are not. Housing problems plus high unemployment will keep the economy down for some time.

On top of the squishy soft economic data being heralded as a full blown recovery, don’t get me wrong less bad is a welcomed improvement, we have a sovereign debt crisis. People claim that Greece is only 2% of Europe’s GDP and dismiss their troubles. That is a bad idea because while they are right about Greece they conveniently forget that all the PIIGS account for some 13% of Europe’s GDP and they are all in trouble. Spanish and Italy’s bonds have been trading lower pushing their yields up over 4% and Portugal was officially downgraded, that is all really bad news. Each country, individually, is not a big deal, but combined we are talking about the potential to default on hundreds of billions of dollars worth of sovereign debt.

To put this into prospective, France owns some $781B of PIIGS debt, if they all default what will happen to France? They will be in trouble, of course. Then there is Germany, how much PIIGS and French debt do they have? I do not know, but I assume a lot. What will happen to Germany if they get stuck with declining value of all that paper? They will have to bailout their banks, I assume France would have to do the same for their banks as well. That, basically, puts the banking system in jeopardy again, in less than 2 years. What I am explaining, probably in a horrible way, is what contagion looks like and it doesn’t end there either. The U.K. has exposure to all these countries and they are already in horrible financial shape and the series discussed above makes the U.K. susceptible to the contagion.

U.S. banks have exposure to both European banks and sovereign debt which means out fragile banking system could face another challenge. Let us not forget that the U.S. is also heavily indebted, along with Japan, and people may start to question the safety of U.S. Treasury debt, as they should I might add. From my lens, in a worst case scenario, meaning this all happens, it would be a coin toss as to which country goes next, either Japan or the U.S. given their immense debt loads. This scenario is unlikely or has a low probability of happening, but it is possible and it could trigger a global currency crisis.

This explains why gold went up today in the face of a stronger dollar and a rush of selling from the market. Even silver held its own today in the face of dollar strength. This shows that gold is still a flight to quality, it is also in a bull market as well, and it is a trusted currency. In fact, gold’s rally today is why I think it is possible for a global currency crisis because if this was another credit crisis, like 2008, it would have sold off for liquidity, but it did not. I am not sure if I would be buying gold right now because I already own a position, but if I did not own any gold I would be a buyer.

All is not well in the global markets and people should stay nimble as to where to put their assets until things settle down. I would say this decline is extremely bearish and way overdue, the higher the market went the worse the selloff would be, which could make it worse. It was insane to think that volatility would not comeback and that people went from sheer panic a year ago to such utter complacency this year. The worst part about all of this is if this does trigger another crisis what can the Fed or the governments do to calm the markets or remedy the situation? Nothing, they already spent all their ammo and they even had to borrow some to boot. I am not saying this will trigger another crisis, but it certainly has all the ingredients for one, if you look at the big picture.