Jobs and Half-Truths

April 2009 Job Report

Some points for consideration:

• Job losses in February and March turned out to be deeper, according to revised figures
• Employers cut 681,000 positions in February, 30,000 more than previously reported
• 699,000 jobs cut in March, more than the 663,000 first reported
• Unemployment rate climbed to 8.9 percent, the highest since late 1983,
• Total unemployment: 6.35 million
  

Source: http://finance.yahoo.com/news/Layoffs-slow-to-539K-in-April-apf-15180898.html

Canada reported a net increase of 10,000 jobs. Amazing? Not really, unfortunately. Many of the unemployed workers decided to be their own boss and to work for themselves.

Conclusion:

Headline numbers tell us that things are less bad, but let us look deeper. Let us look at U6. U6 includes part-time workers who want to be full time. That figure is 15.8%.

U6
"The comprehensive unemployment rate which is referred to as U6 and 
includes part time workers that want full time jobs and discouraged
workers that have stopped looking but will take a job if offered, rose
to 15.8% from 15.6% and 9.2% in April 2008."

Source: The Big Picture by Peter Boockvar

Half-Truth is not enough: Other comments for last week

1. Why is WFC, and banks for that matter, rising on the belief that all is well based on an easy stress test? Bank stocks are up. Banks are selling shares to raise capital, using expensive high p/e shares (WFC). The bank is essentially improving balance sheets at the expense of the sucker investor. Show me actual improving earnings. Then I'll buy WFC.

2. China is a net saver. It has net cash. It is no longer buying and funding the U.S. in its spending spree. It might say it is, or it might do so to reduce its exposure to US assets. Whatever media says, China is not a net consumer. 10-year and 30-year Treasuries will essentially fall further than current levels.

3. USD may collapse, finally...but where is the money going to go? Another currency? Probably not. Gold? Maybe. Silver? Maybe. What about oil? Have small positions in all of those areas to hedge against the USD.

4. Inflation is a greater likelihood again at least in the short term, because energy prices are rising. You often hear of CPI ex-energy. Well, energy is still a big cost for companies and consumers...well at least the ones who still have a job and need to commute.

5. One abating decline in job losses does not make a trend. Watch price levels but do price in an economy but estimate total unemployment ~10% for the US. That equates to an additional 1M - 1.5M jobs lost. The bank stress test used 9.5% unemployment. 

6. Commercial real estate is the next problem on the horizon that has not been priced into the market. Read up on it.

Reasons to be a Positive Bear

1. ADP Reported few job losses in April.

Source: http://www.adpemploymentreport.com/

Approximately 491,000 jobs were lost in the private sector. The markets expected a fall of 645,000.

2. LIBOR spreads are now under 1%. When Lehman collapsed last year, the spread was over 4%. Teck Corporation was able to raise over $4B from the debt markets (albeit the yield on the debt is around 10%). Last month many thought Teck would collapse under its existing debt obligations.

3. The "Stress Test" was leaked to the markets. How convenient. The "leak" is preparing the markets to price in and accept that Bank of America will need $34B. Citi will need around $5B. Wells Fargo will need 15B (didn't Buffett champion this company?). Full results come tomorrow, but as Warren Buffett said, the test will not have much meaning or value.

Analysis and Conclusions:
Market "pros" will continue to cheer on the rally, the recovery, the recovery by end of year, "less worse" unemployment, and a "bottom." The latest earnings reports have all exceeded lowered forecasts. The lowered earnings forecasts were reasons the stock market fell two months ago. Beating the lowered expectations would conversely justify a rise in the stock market.

A rising market does not in itself justify a return to "good times." I has, however, very quickly fueled a mini-bubble for specific sectors, namely the resource sector. Teck Corporation did not improve fundamentally overnight. It is still in heavy debt due to expensive acquisitions. Its survival depends on rising commodity prices. The same can be said for the energy sector.

In effect, it is possible that a mini-bubble may emerge in oil/energy. Excess money in the system needs to flow somewhere. This is assuming that money is indeed in excess in our economic system. If the banking sector is not recovering, then money will be "stuck" in the same (subprime, etc.) debt that is a drag in the economy.

This is the tug-of-war that must be closely monitored.

A user on kaChing.com brought this clip to my attention:


Investors need to keep adapting to the changing winds. This is not to be interpreted as a promotion of day trading, swing trading, or momentum trading. It simply means that if the economy is truly improving, then adjust a portfolio accordingly, in small steps.

Reasons to be a Growling Bear

The Numbers:

1. 742,000 jobs were lost in the U.S. on a seasonally adjusted basis in March, up 36,000 from last month's revised figure of 706,000
2. January 2009 housing prices fell 19% (this negates the positive aspect of higher new home sales and new existing home sales
3. A phased GM bankrupcy. Splitting the "good" assets from the "bad" would be the best approach in enabling the market to determine asset values.

The Details:

2 - Source: "The New Year Didn’t Change the Downward Spiral of Residential Real Estate Prices According to the S&P/Case-Shiller Home Prices Indices"

Graph illustrating the hardest hit cities:

















Source: http://seattlebubble.com/blog/2009/03/31/case-shiller-seattle-home-prices-just-shy-of-20-off-peak/

Notes:
The U.S. government employment figures will be released this Friday.

Oh Canada ... Jobs

March 13 (Reuters) - The Canadian economy shed more jobs
than expected in February, losing a net 82,600 posts in the
month as the unemployment rate jumped to 7.7 percent, the
highest since 2003, Statistics Canada said on Friday.

                    Feb 2009         Jan 2009

  Jobs gain/loss     -82,600        -129,000

   full-time         -110,900        -113,900

   part-time          +28,300         -15,100

   Unemployment rate  7.7 pct         7.2 pct

   Participation      67.4 pct        67.4 pct

   Labor force        18.315 mln      18.292 mln

Source here.

Comments:
In relative terms, the unemployment situation for us is no better
than that of the U.S.

Continue to expect weakness in:

• Automotive and manufacturing (Ontario)
• Housing and construction/contracting
  
• Resources sector (energy sector in Alberta, forestry in B.C.)
  

All Cash

This was the comment made in regards to Castlemoore's Focus Portfolio on Tech Talk:

Depression, not Recession. That’s the Impression.

There. We’ve used the “D” word. And we’re not the first.

While everyone agrees that depressions are extreme economic situations to be avoid at extreme costs—the U.S. stimulus package is a case in point—it’s hard to find a consensus as to what the term actually means. Many consider it to mean a contraction of 10% or more in U.S. GDP, which has happened twice, and a severe case to be a 25% fall, which happened once.

We know that recessions are part of naturally occurring economic cycles, irrespective of measure taken by governments and central banks to manage them. Therefore, one way to define a depression is as an economic retraction that is not simply “naturally occurring”. In other words, it involves some type of structural change which might not be evident at the time and may, in fact take years to recognize.

And what causes us to recognize it is usually the remedies imposed to insure that it doesn’t happen again. In the case of the current economic malaise, we expect that new regulations pertaining to lending practices of banks to a large part of that remedial package.

Whether or not we are in or are entering a depression, we at CastleMoore were depressed enough to sell out everything and start back at square one. Of course, we say this tongue-in-cheek, but we certainly are aware of the dangers that lie in wait for unsuspecting investors who have and continue to fall into the value trap engendered by continued declines in the financial markets.

Our plan was to ease out of the cash position we had amassed, deploying more of it as we became increasingly confident that the intermediate rally was firmly entrenched.

We continue to hold fast to the notion that, once the dark smoke of economic uncertainty clears there will be a once-in-a-lifetime buying opportunity.

For now, it’s back to square one.

If you like to receive bi-monthly newsletter, know more about our model portfolios or access an audio file of our investment philosophy, “Modern Financial Fiascos”, click on the link http://www.formdesk.com/castlemoore/register . We are also accepting interest for an upcoming webinar later in March which can also be indicated on the same form.

CastleMoore Inc. uses a proprietary Risk/Reward Matrix that places clients within one of 12 discretionary portfolios based on risk tolerance, investment objectives, income, net worth and past investing experience. For more information on our discipline and methodology please contact us.

Comments and Analysis: 40% of the mutual funds held by investors are in money market cash funds. People (are they speculators or investors?) are stuck on old ways, thinking in old terms by buying on value or buying on the dips. The wrong action, it seems, is pulling the trigger and deploying the cash on the dips. Yet, how can uncertainty in the foreseeable future most accuately valued? That is the question.

Assessing Impact of Proposed U.S. Stimulus Package

The unemployment figures for January in the U.S. was startling. Despite these figures, the stock market rallied. From past patterns in stock activity, this is a bullish signal, to a limited degree. The bullishness last week signals that a "bottom" may have been reached.

I would contend that a market bottom won't be known yet, because it cannot ever be predicted. Bottoms are only known after the fact. It would also be more prudent for the investor to wait for a S&P 500 re-test of the bottom @ 741.02 reached last November.

This current blog entry by Chris Lau was sponsored by ProfessionalStockTraderLive.com. ProfessionalStockTraderLive.com is your source for learning how to become a better and successful trader and for following trades in real time.



The market is pricing in the stimulus package. It is almost impossible for the market to refuse to rally, since both the allure and the injection of a massive amount of money into the economy will necessarily result in a higher market index. Investors would be wise to remember that when money is printed, U.S. debt must be sold. There must be a buyer. That buyer is China and Japan, along with other foreign countries.

Being bearish on TLT would be one of many investment ideas I have discussed in past entries.

Is the Stimulus Package Enough?

The stimulus spending bill in Congress is supposed to create 3.7 million new jobs. However, the assumption is that each new dollar of government spending will generate $1.50 to the economy. This calculation is made with a GDP multiplier of 1.5. This multiplier was estimated by the Federal Reserve’s FRB/US model.

See this article.

To paraphrase:
"Production and work create GDP, so it is more accurate to say that 1 million more jobs produce 1 percent more GDP.”

If a GDP multiplier of 1.5 is a constant for all government spending, then why don’t they propose spending $10 trillion to make us $15 trillion richer?"

Analysis:

The stock market is assuming that the flow of funds from the stimulus package will result in an increase of 150% in economic output.

The market fails to do is recognize:

1) Who is consuming the added debt
2) The funds will not result in 1.5x, because the funds are being used for an assortment of investments that will not impact GDP output (example: covering bank losses)

Calculation of Lost Wages

Below is a line table of lost income based on total and monthly unemployment of 7.6% in the U.S. Assume the figures provided by Bloomberg are appropriate, in that average wage would most accurately represent lost annual wages.

Note:
- Severance has not been factored in.
- Cost reductions for companies have not been factored in.

Title:
Item Number)
Value
Details

1)
3,570,000
Total Unemployment, U.S.

2)
$614.72
Weekly Average Wage, @39.8/hrs

3)
598,000
January Unemployment, U.S.

4) $114,116,620,800 - ie $114B/yr
Total lost income (annualized) @7.6%

5) $19,115,333,120 - ie $19B/yr
Total lost income (annualized) for jobs lost in January 2009

6)
Spending Multiplier = GDP / Change in Investment - What good is this? There are too many unknown variables!

7) 6,570,000 Unemployment, Dec 2009 (estimate, based on Bloomberg.com article)

8) $210,012,940,800 i.e. $210B / yr
Total lost income if 6,570,000 jobs are lost by December 2009

I haven't applied a GDP spending multiplier to it yet, for the reasons mentioned previously. There are too many assumptions that will make economic cost estimates accurate. In addition, the impact on GDP will be higher since income has a direct impact on the economy. This will make any impact estimates very inaccurate.

So, in the above I used only the calculation, annualized over 12 months:

# Unemployed x Average U.S. Income x 52 weeks

...and for item #8, calculated the cost to the economy by December 2009.

The point of this calculation is to illustrate that investors must monitor the unemployment rate in the coming months. Investors must then weigh it against current and future stimulus policies. Investors must not look at US$827B and assume that amount will result in US$827B consumption. The banks remain the known unknown "black hole" in this equation. Just how much government money is still required to shore up bank balance sheets remains largely unknown.


Blog Site Update and Creation of kaChing Discussion Groups

First, I have created two groups to help readers become better investors.

• Beginner's Guide to kaChing Trading Unauthorized beginner's starting point for new kaChing users.

• Intelligent Investing - Benjamin Graham taught Warren Buffett how to invest. He was worth $62B as of December 2008. While he employs a "buy and hold forever" approach, this group will focus on the securities analysis approach for holdings worth to make that list. The goal for members here will be to make the elite list and to perform above the average user on kaChing. Concept and practice is based on the book "The Intelligent Investor" by Benjamin Graham.
  

kaChing has created an API (Application Programming Interface) to allow bloggers and sites to link their portfolio. See top of page. This will give more freedom and transparency to not only the users on kaChing, but for bloggers such as myself. With 145 followers, users will want openness in the rationale between an evolving investment thesis and the actions taken to achieve an investment goal.

Bye Bye, Bank of America?

Business Week magazine wrote an article questioning the survival of Bank of America. It, like Citigroup has a negative balance sheet. Its assets are greater than its liabilities.

With home prices falling, asset values will continue to fall. An intelligent investor would avoid this stock on those merits alone. But TARP and other extraordinary bailout measures are keeping this stock, and the allure for "value investors" to go long on Bank of America, alive.

When media says we are chartering to the unknown, this is in fact nothing new. The only thing new is that the unknown is different.


More from Peter Schiff:



Eye on the (Right) Ball: Job Figures

From the Bureau of Labor Statistics @ BLS:
"Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment has declined by 3.6 million since the start of the recession in December 2007; about one-half of this decline occurred in the past 3 months. In January, job losses were large and widespread across nearly all major industry sectors."

Analysis:

When it rains, it pours.

The investment thesis has always been that job losses would be weakest in banking, automobile, manufacturing, and to some extent, consumer goods (shopping and retail). This suggests that job losses will continue to spread throughout the economy.

This also means that any stock market rally will be subject to a grim correction. Still, TARP is an unknown variable for the market. Any large and costly package will necessarily result in a rise in the stock market. How long the market will sustain the rise is, however, questionable.

Don't ... Be ... Fooled ...

Over the past three days, the market has been trading unconvincingly on the upside. This is in contrast to late-December, when most positive momentum was attributable to low volumes (people were on vacation) and "Obamarama" (TARP and other massive relief programs).

There is only one similarity to positive trading in the past few days to the positive late-December trading: both appear to be bullish "head fakes."

Why is that said?

Unemployment.

Let's take a step back and look at non-manufacturing activity. The Institute for Supply Management said its non-manufacturing index came in at 42.9 in January compared with 40.1 in December. This activity feeds into employment requirements in the economy. It shrank.

It is not known how many more fake rallies the markets will encounter in the near-term. What the investor will certainly encounter are headline stories and claims for what the "market bottom" will be. While a bottom by definition can never be predicted, it may only be revealed in 20/20 hindsight.

How Does the Investor Avoid the Head-Fake?

From this Reuter's article:
"To me the key is really the employment report. We have to have at least three months of increases in non-farm payrolls to be able to say that we have the economy bottoming."
- Sung Won Sohn, professor of economics at California State University in Camarillo, California.

Some Job Cut Headlines (Feb 1st - 4th)
Pennsylvania State - 3000 jobs
Panasonic - 15000 jobs (worldwide)
Hudson Bay - 1000 jobs (Canada)
Macy's - 7000 jobs
Glaxo - 6000 jobs (worldwide)
PNC Financial Services Group Inc - 5,800 jobs

Nightly Business Report reported the real unemployment rate - U6 - that which includes people who stopped looking for work - at 13.5% as of December 2008 (compared to 8.5% in January 1998 when U6 started getting tracked). Again, the number is not the only thing that is important. It is the direction that it is/has heading, and right now unemployment is growing.

FOMC Statement

http://www.federalreserve.gov/newsevents/press/monetary/20090128a.htm

Highlights:

• Global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant
• The Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

Analysis:
A prediction for a lack of inflation both challenges and contradiction my call for being long on gold. However, the policy taken by the U.S. to save the banks will not be healthy for the U.S. bonds or the U.S. dollar in the long run. Still, in the short run, the U.S. dollar will out-perform other currencies.

Mass Layoffs Summary (U.S.) for 2008

http://www.bls.gov/news.release/mmls.nr0.htm

Keep your Eye on the Ball - All Three

One - Jobs

Company - Job Cut for January 26

Caterpillar Inc. - 20,000 jobs,
Sprint Nextel Corp.- 8,000 jobs
Home Depot Inc. - 7,000 jobs
Texas Instruments - 3,400
Pfizer - 8000 jobs (total will be 20,000)

Total: 207,120 jobs lost in the U.S.
2008 Unemployment total: ~ 2.6 Million (7.2% unemployment rate)
U.S. Unemployment projection is 10% by late-2009 or 2010.

Advertising Announcement: this current blog entry by Chris Lau was sponsored by ProfessionalStockTraderLive.com. ProfessionalStockTraderLive.com is your source for learning how to become a better and successful trader and for following trades in real time.

Two - Home Prices
Case-Shiller Housing Prices for November 2008 (U.S.):

The most important figures to review are the Composite-10 and the Composite-20. The Composite-10 illustrates the price change for 10 Metropolitan areas in the U.S. Likewise for the Composite-20, but for 20 areas.

Significance?

The -10 and -20 are down the most year-over-year since the housing bubble burst. Both are down about 25% from the peak.

November     November/October  October/September   1-Year
Metropolitan      2008           Change             Change        Change
Area             Level           (%)                (%)           (%)
------------   ---------     ----------------  -----------------  -------
Atlanta          116.57          -2.7%              -2.4%         -11.2%
Boston           155.03          -2.6%              -1.1%          -7.4%
Charlotte        125.61          -1.9%              -1.8%          -5.3%
Chicago          141.44          -2.8%              -1.6%         -12.5%
Cleveland        107.43          -1.2%              -1.0%          -5.2%
Dallas           118.34          -1.9%              -1.2%          -3.3%
Denver           127.65          -1.1%              -1.5%          -4.3%
Detroit           83.42          -3.1%              -4.5%         -20.7%
Las Vegas        138.04          -3.3%              -2.8%         -31.6%
Los Angeles      175.85          -2.2%              -2.6%         -26.9%
Miami            169.62          -2.2%              -3.0%         -28.7%
Minneapolis      133.22          -2.1%              -3.3%         -16.3%
New York         186.81          -1.6%              -1.0%          -8.6%
Phoenix          130.54          -3.4%              -3.3%         -32.9%
Portland         162.62          -2.3%              -1.9%         -11.5%
San Diego        155.47          -2.3%              -3.0%         -25.8%
San Francisco    135.28          -3.0%              -4.2%         -30.8%
Seattle          166.23          -2.5%              -1.4%         -11.2%
Tampa            160.86          -2.8%              -3.4%         -20.9%
Washington       180.50          -2.4%              -2.7%         -19.4%
Composite-10     166.05          -2.2%              -2.1%         -19.1%
Composite-20     154.59          -2.2%              -2.2%         -18.2%

Source: Standard & Poor's and Fiserv
Data through November 2008

This current blog entry by Chris Lau was sponsored by ProfessionalStockTraderLive.com. ProfessionalStockTraderLive.com is your source for learning how to become a better and successful trader and for following trades in real time.

Three - Consumer Confidence

• 37.7 in December 2008 (versus a revised 38.6)

Analysis:
These figures obviously add to the doom and the gloom. It is for this reason that the governments are acting on creating aggressive stimulus packages (see the two previous blog entries). Investors need to be cautious on the consumer discretionary sector. There has been speculation that many malls will close, and many retail companies will be bankrupt this year.

Still, I am optimistic on the companies that thrive in this environment. This includes Family Department Stores (dollar stores) and McDonalds ($1 burgers, value menu).
The other sector to therefore avoid is the commercial real estate sector, and especially the companies that rent out retail space.