I’m not sure the optimism was full justified, however. The stress tests are a political joke in my view and the employment report was far from good, which we’ll get to below.
On the banks, while they remain more than “well capitalized” for now, they have quite a road ahead of them as consumer default rates continue to rise and it’s early days for commercial real estate delinquency and default rates.
The banks have gotten a bad rap with regard to capital as the government has tried to change the way that capital is counted, but they were also able to convince the Fed to scale back capital deficiencies. In short, it seems kind of reckless to recommend an investment in bank stocks merely because of these stress test results; there’s simply too much game playing. All you have to know is that the industry is going to have to deal with a high level of non-performing loans for an extended period. While the very positive yield curve helps them to offset these losses (they will be very profitable on the interest-income side as they borrow near zero and lend at 5-6%) but that will not remain in place for much longer than a year, if I had to guess; at which point, they will be dealing with a yield curve that may not be so accommodating.
That said, financials were the best performing sector on Friday. The other market-beating sectors were energy, industrials and basic materials – the reflation trade.
Tech-related sectors, information tech and telecom, were the only two of the major 10 S&P 500 industry groups that failed to close to the plus side.
As we’ve talked about on several occasions, the top end of this trading range is 935 on the S&P 500. It will be important to watch whether or not we hit a wall at 930-935, or we go on to make a higher range.
The broad market has just completed another week of big gains, up 5.9% -- the S&P 500 has increased in eight of the past nine weeks and is 39.5% above the March 9 low.
Market Activity for May 8, 2009
April Employment Report
The Labor Department reported that payrolls declined 539,000 in April, which was well below the 600,000 expected. This lower-than-expected reading was accompanied by a downward revision for the prior two months – 66,000 worse than previously printed.
The economy has now shed 5.7 million payroll positions since January 2008, nearly half of which has occurred in the last four months.
The bulk of the losses occurred in the manufacturing and trade&transportation components of the survey.
The thought that the worst has been seen is probably correct, but it’s really tough to have conviction on this point as the decline in payrolls was cushioned by a large 72,000 gain in government jobs (most of which were due to hiring for the 2010 census – obviously very temporary positions).
Goods-producing sectors shed 270,000 positions. The construction component cut 110,000, a bit below the three-month average of -119,000. The manufacturing component slashed 149,000, also a bit better than the three-month average of –163,000.
Service-producing industries cut 269,000 positions. Trade and transportation jobs were reduced by 126,000; business services cut 122,000 positions and retail shed 47,000 positions – all of these were also a bit better than the three-month average of losses
Education and health continues to be the only component that has yet to show a monthly decline during this 16-month labor-market contraction. The segment added 15,000 positions in April.
Again, the government added 72,000 jobs and 66,000 of those was for the 2010 census. Take that number out and total payroll losses for April would have outpaced the estimate of 600k by 5k.
The unemployment rate rose four ticks to hit 8.9%, the highest since September 1983 – although back then the number was falling from the high of 10.8%.
U6 -- another measure of unemployment that includes those counted in the headline unemployment rate, plus marginally attached workers (those who want a job and have looked for one in the past 12 months but have not searched during the four weeks prior to this data report, and thus not counted in the headline figure), plus those working part-time for economic reasons (they can’t find full-time work so settle for part-time) -- fell to15.4% from 16.2%. While very high, it’s a good sign to see this figure halt its march higher. This is about the only good news of the report.
The average duration of unemployment continued to rise in April, up to 21.4 weeks from 20.1 in March.
The number of long-term unemployed (those jobless for 27 weeks or more) jumped 498,000 to 3.7 million – 27% of those officially termed unemployed.
Since we’ve hit 8.9% it seems the peak forecast for joblessness is 10% -- which is the number we’ve seen the Fed throw around. The jobless rate has been known to rise an additional percentage point, even as the jobless claims figures comes crashing lower.
Now, we haven’t yet seen claims plunge, they have eased from the peak hit four weeks ago, but the precipitous decline in claims that occurs as the economy rebounds certainly has not yet begun. It also seems to me that when the economy does begin to add jobs again it will be so in a very tepid way – there will be a lot of headwinds still to deal with even when GDP returns to the plus side. But still, it seems a number very close to10% unemployment will be where we peak out, based on what is currently known
And this all brings us to the productivity number we touched on in Thursday’s letter. If employers remain very cautious with regard to adding jobs when growth returns, this means shorter-term productivity will improve substantially – output will meaningfully outpace hours worked.
What does this mean? It means that corporate profits will surge. The question is: If the economy does rebound in a healthy way, as Fed monetary policy remains extremely easy (and combines with nearly a trillion in additional government spending) will it send commodity prices significantly higher and crimp that profitability as a result?
This is one more reason current policy makes the environment of investing, in my opinion, feel like crossing a road in which you’re not quite sure the traffic signals are in sync. Does that “walk” signal truly mean that that monetary and fiscal policy 18 wheeler, carrying all of its potentially adverse ramifications in the trailer, will stop? In which case, you are free to venture down the road of multi-year returns. Or will it blow right through and flatten you if the appropriate level of caution is disregarded?
Have a great day!
Brent Vondera, Senior Analyst
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