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Thursday, July 02, 2009


june jobs (-467,000)

on the heels of yesterday's disappointing ADP number, a big miss for NFP. per alphaville:

Economists in a Reuters survey had forecast that 363,000 jobs would be lost in the month.

Revisions added 8,000 to payroll figures previously reported in May and April.

The report also showed the jobless rate jumped to 9.5 per cent, the highest since August 1983, compared with 9.4 per cent in May. Economists had expected the unemployment rate to rise to 9.6 per cent, which would have been the highest since June 1983.

But for green shoots enthusiasts and devotees of the second derivative, the drop in payrolls will nonetheless reassure, since it reflects a decline in the pace of job losses: the economy shed an average of 691,000 jobs a month during the first three months of the year. Monthly job losses, as measured by the Labor Department, peaked at 741,000 in January. Employers have cut 6.5m jobs since the recession officially began in December 2007.

Less reassuring is the steady and continued decline in the average number of hours worked, suggesting employers are also cutting their payroll burden by reducing the number of hours available to workers. The average work week fell to 33 hours, the lowest level since records began in 1964, from 33.1 hours in May.

the headline number not only missed the median but fell outside the range of forecasts tracked by bloomberg, the worst guess at which was (-435k).

i've also recently commented on AWHI.

as i tweeted yesterday, i'm rather irresponsibly short at the moment, having levered further into the position yesterday. today will be a thin holiday tape, so a recovery of morning losses would not surprise -- perhaps using factory orders in a few minutes here as a jumping-off point. but there have been some fairly serious wounds inflicted on the green shoots argument as the tape has stalled out since the start of may. i expect a test of the neckline around 885 of the S&P head-and-shoulders formation that everyone is eyeing. presuming we get there straightforwardly, how we react at that neckline will be the determinant on future trading direction.

as might be obvious to any regular reader, i am not optimistic about the reaction to 885 -- as just one example, as noted by pragmatic capitalist and richard russell, the lowry report measure of buying power is now approaching its march low point even as the S&P is fully 240 points north of there. in short there has been nearly no real buying interest in support of the rally -- only a moderate contraction of selling interest. should any degree of selling interest return, the possibility for big chunks of the S&P to come off in a short time is certainly there; in my opinion the systemic balance sheet remains under great stress and capacity to meet determined sales from derisking players or even a reversal of momentum traders really does not exist.

UPDATE: ed harrison conveys video of PIMCO's bill gross.

His basic point is this: no jobs and no wage growth equals no recovery.

We need to see incomes rise in order to get consumers to spend. If the Obama Administration wants recovery, they need to do more to increase incomes and worry less about bailing out the banks.

amen to that. we'll be revisiting in the public square in a few months' time the idea of the third fiscal stimulus package that everyone now calls "off the table".

UPDATE: factory orders came roughly in line, eliciting no immediate reaction against the NFP impulse. there's little in the way of news on the calendar now until next friday's international trade report, so the market will have time to digest this.

UPDATE: an excellent commentary from justin wolfers at the new york times freakonomics blog, relating to the meaning of the AWHI decline.

The latest employment numbers are out, and they are dreadful. Those commentators who saw “green shoots” out there had been focusing on the fact that in May, the economy “only” shed 322,000 jobs, which is good news when compared with the fact that the economy had been losing over 600,000 jobs per month in January, February, and March. Squint hard enough at the black line in my chart, and you can see why many were hopeful that job losses were slowing down.

But counting the number of people who lost their jobs misses an important part of the story. Focus instead on the purple line, which is the index of aggregate weekly hours worked and also counts those who’ve lost only part of their jobs. The decline in aggregate hours worked has been frighteningly consistent over recent months. Any evidence of “green shoots” appearing in recent months disappears in this broader measure. The recession continues apace. If current trends continue, we are in for a frightening time.

put simply, there are not only no green shoots -- there's not really even been a slackening of the pace of contraction. both wolfers and paul krugman take this jobs report as reason to start planning the third stimulus.

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Strangely, despite David Rosenberg's piece today being as bearish as ever, he suggests the March lows will probably hold and that S&P 800 may even be a buying opportunity. I'm really not sure what the basis is and agree with you on likely stock market downside -- however there's of course the possibility that it would take years rather than months to occur.

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pragcap had some of his comments, hbl. scary.

on the market -- it can do anything, of course. it's possible that, in spite of the lack of buying initiative, selling just doesn't materialize in size and we drift on low vol. or perhaps stimulus is better received and more effective than everyone thinks and we get an upside surprise GDP print. but i do think that the ultimate destination is delevering, and delevering means less balance sheet room for natural equity buyers.

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Others looking at the 800 level as a buying opportunity .

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Congrats on being short! Nice trade. I actually think that this quarters P/L will be OK because companies have been laying off--does wonders for cash flow in the short run. . . Also because managements were able to throw out some of the balance sheet trash in Q4 2008 and Q1 2009 when everyone was losing money/having a bad quarter. Now they need to show good performance again and they have some closet space to hide the bad stuff in--do I sound too cynical?

BTW, I'm seeing more talk of a government "gift card" distributed to all households in an effort to "get things moving again."

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funny bwdik -- that gift card is about the same idea that our office threw around of money with expiration coupons. but in the end, it's gresham's law: that "money" will get spent while cash is put to canceling debt, and little net effect. just speeds up delevering.

i'll wager that, as q2 earnings start rolling in over the next few weeks, the primary focus will NOT be bottom-line improvement (which i agree should be entrained) but top-line revenue. without revenue growth, no improvement in earnings is sustainable -- you can't cut costs indefinitely to shareholder advantage.

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For those with short positions, this is good news... lol... as my parents took my advice to open a large short position in the beginning of june.

However, I was actually expecting an improvement on the second derivative. I just thought investors would simply give up pumping up the stock market --even if there is "good" job market news -- and "accept" deflation - a world of lower real returns on assets, and possibly increasing larger risk premiums on equity assets. Although Japan had weak economic growth and relatively stable during its deflation, its market dropped. I was expecting a weak recovery, a stabilizing job market, AND a falling stock market despite the latter too.

Well, gm is correct, top line earnings will be very important as it is an upper bound. Eventually cost-cutting will lower earnings. I doubt companies would make money by selling in emerging markets if they engage in protectionism. I wonder if the disappointing equity market would attract people with "risk capital" to go to emerging markets or alternative energy and hope for the best in those sectors or hope for greater fools.

hbl... on your thoughtofferings blog... do you want to do a post on gold? i am not a gold bug (i.e. one of those libertarians who want a gold standard and rant against those evil "welfare statists," but a non-Austrian deflationista like Steve Keen and Richard Koo [Mish is obviously an Austrian deflationist]). I do expect it do well during deflation (because the opportunity cost of holding it is low during deflation, and high during periods of economic growth), and there is a potential for it to become the next bubble like gold in the early 1980s and dot-com stocks. I do agree with you that there would be point where certain gold investors (who bought it because they were so sure of hyperinflation) would sell their gold and buy assets with cash flow but we are not there yet. I see gold more as a put option whose value rises when there is a lack of confidence in currencies instead of an inflation hedge.

hbl... i do admire you. you are way ahead of the curve-- way ahead of those "contrarian" Austrian school inflationistas. I do like the appreciation of banks buying long-dated government bonds to profit from the "fat spread" (and possibly interest rate declines) and steepness of the yield curve.

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Hi Aki,

Thanks for the positive words, though for the most part I just try to synthesize what I read and avoid ideological bias. And gm's blog here is one of the top notch sources of info! FYI, I have been seeing the generalized "banks buying treasuries" theme showing up from several commentators recently (especially Rosenberg), though I still haven't gotten feedback on whether the balance sheet examples on my treasuries post are valid in the real world.

I hope to get around to more posts but I'm not sure how much I have to say on gold. It just seems so speculative and dependent on expectations rather than fundamentals... I understand that it has done well in deflation in the past but I'm not convinced (as of now) that relationship will always hold. My sense is that the "gold is money" religious disciples are a small fraction of the market (versus those worried about 70s stagflation or Zimbabwe). But international demand from populace in unstable countries, stubbornly unassailable inflation expectations in the US, etc, could give it a good run as you suggest. If I had to choose a direction I'd put the odds in favor of gold prices halving as more likely than doubling (at least as a first result, given the scale of aggregate deleveraging needed), but I wouldn't put any money on that. I can see that it could be useful as "insurance", though.

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