U.S. stocks rose Friday, not by much, but the numbers were green as the ZIRP trade rolls on.
Stocks had no reason to rise on Friday, let’s be serious. Take everything into consideration – record low hours worked data, which means meaningful employment gains will be hard to come by; a jump to 10.2% unemployment; a decline in labor force participation, which means the jobless rate will continue to spike in the months ahead; and Washington in complete freak out mode as they worry about the state of the labor market. This is the most worrisome event of them all as Congress is dead set on putting additional policies in place in their attempt to “fix” things in the short term, an agenda that will surely carry pernicious longer-term effects.
But that’s from the lens of labor-market fundamentals. As we’ve talked about for some time now, and a Sunday night WSJ piece appropriately touched on, what’s bad is good for stocks. Just maybe the jump in the jobless rate received a cheer from the market. ZIRP lives so long as the labor market is in shambles and stocks like that. However, it also means the last leg of this stock-market rally has zero to do with what’s going on in the economy, it is nothing more than the chasing game – lurching to capture any additional return that may remain. At some point though, the market must show it can grow on its own and the Fed must reverse course. The market will anticipate these events and that is when market psychology shifts on a dime, again. The longer ZIRP lives the more damaging its removal will be.
Industrials, consumer discretionary and health-care shares led Friday’s gains. Financials, utilities and energy were the losers on the session.
Volume was especially lackluster with just 1.034 billion shares traded on the NYSE Composite – about 20% below the six-month average.
The broad market recaptured 3.20% last week. This bounce nearly erases the losses of the previous two weeks – the S&P 500 is flat over the past seven weeks.
Market Activity for November 6, 2009
October Jobs Report
The Labor Department reported that payrolls declined 190,000 in October, a bit more than the -175,000 expected. The previous month’s data was revised substantially more positive though, showing a decline of just 219K vs. the -263K estimated last month. Revisions for both September and August showed 91,000 fewer jobs were lost than previously estimated.
Over the past six months jobs losses have averaged 272,000 per month, this is a huge improvement from the previous six months in which losses averaged a super-high 645K per month. The current level of job losses has finally moved to a range that is no longer at the deep levels of the prior three recessions and that is an important development – for the short term, and I’ll explain what I mean by this below.
In terms of specifics, the goods-producing industries shed 129,000 jobs last month, a deterioration from the 114,000 decline in September – just barely worse than the three-month average of -124K. The construction segment cut 62,000 positions, an improvement from the 68,000 reduction in September – a little better than the three-month average of –65K. Manufacturers shed 61,000 positions, significantly worse than the 45,000 loss in September – and worse than the three-month average of -54K.
The service-providing industries shed 61,000 positions, a huge improvement from September’s 105,000 decline – in line with the three-month average of -63K. The trade and transportation segment lost 66,000 jobs, exactly the same as September – the three-month average is -53K. Retail slashed 40,000, which was a bit better than the 44,000 cuts in September – three-month average is -35K. Business services posted its second straight month of increase, adding 18,000 payroll positions after September’s gain of 3,000 – three-month average is positive too at +5K per month.
The best sign in the report was the rise in temporary work, which is the best indicator that job losses will ease substantially in the coming months and we’ll print some mild job gains in the not-to-distant future. Temp services added 34,000 positions, after a 7,000 gain in September – that number was revised up as it showed a 2K decline via last month’s employment survey.
Government employment came in unchanged as a 19,000 increase in federal government jobs offset declines in state and local employment – state and local budget are in a world of hurt and will remain that way for a long time. In fact they are likely to even erode from here as federal government stimulus injections are making those budgets look better than they actually are.
The unemployment rate, which was the newspaper headline, jumped to 10.2% from 9.8% as we are in the process of testing that post-WWII era record of 10.8% hit in December 1982.
The labor force participation rate fell, which actually held back the rise in the jobless rate (you would normally see a large increase in participation for the unemployment to jump like this). This means when these workers feel good enough about things to look for work again the jobless rate will jump. One expects that the now 93 weeks of available jobless benefits (99 weeks for those in the 27 states with unemployment rates above 8.5%) is marginally decreasing the sense of urgency to look for work. Bienvenue a le au pair etat.
The U6 jobless rate – this figures includes the official jobless rate, plus those marginally detached (those too discouraged to look for work during this survey period), and those working part time because they can’t find full-time work, which probably reflects labor-market torpor more than anything else -- jumped to 17.5% in October from 17.0% the previous month. This measure was re-calculated in 1994, so we can only view it to that point.
In terms of its previous methodology the U6 jobless rate hit 14.0%, which is still below the postwar record of 14.3% hit in 1982.
The average duration of unemployment hit 26.9 weeks from 26.2 in September.
Stocks had no reason to rise on Friday, let’s be serious. Take everything into consideration – record low hours worked data, which means meaningful employment gains will be hard to come by; a jump to 10.2% unemployment; a decline in labor force participation, which means the jobless rate will continue to spike in the months ahead; and Washington in complete freak out mode as they worry about the state of the labor market. This is the most worrisome event of them all as Congress is dead set on putting additional policies in place in their attempt to “fix” things in the short term, an agenda that will surely carry pernicious longer-term effects.
But that’s from the lens of labor-market fundamentals. As we’ve talked about for some time now, and a Sunday night WSJ piece appropriately touched on, what’s bad is good for stocks. Just maybe the jump in the jobless rate received a cheer from the market. ZIRP lives so long as the labor market is in shambles and stocks like that. However, it also means the last leg of this stock-market rally has zero to do with what’s going on in the economy, it is nothing more than the chasing game – lurching to capture any additional return that may remain. At some point though, the market must show it can grow on its own and the Fed must reverse course. The market will anticipate these events and that is when market psychology shifts on a dime, again. The longer ZIRP lives the more damaging its removal will be.
Industrials, consumer discretionary and health-care shares led Friday’s gains. Financials, utilities and energy were the losers on the session.
Volume was especially lackluster with just 1.034 billion shares traded on the NYSE Composite – about 20% below the six-month average.
The broad market recaptured 3.20% last week. This bounce nearly erases the losses of the previous two weeks – the S&P 500 is flat over the past seven weeks.
Market Activity for November 6, 2009
October Jobs ReportThe Labor Department reported that payrolls declined 190,000 in October, a bit more than the -175,000 expected. The previous month’s data was revised substantially more positive though, showing a decline of just 219K vs. the -263K estimated last month. Revisions for both September and August showed 91,000 fewer jobs were lost than previously estimated.
Over the past six months jobs losses have averaged 272,000 per month, this is a huge improvement from the previous six months in which losses averaged a super-high 645K per month. The current level of job losses has finally moved to a range that is no longer at the deep levels of the prior three recessions and that is an important development – for the short term, and I’ll explain what I mean by this below.In terms of specifics, the goods-producing industries shed 129,000 jobs last month, a deterioration from the 114,000 decline in September – just barely worse than the three-month average of -124K. The construction segment cut 62,000 positions, an improvement from the 68,000 reduction in September – a little better than the three-month average of –65K. Manufacturers shed 61,000 positions, significantly worse than the 45,000 loss in September – and worse than the three-month average of -54K.
The service-providing industries shed 61,000 positions, a huge improvement from September’s 105,000 decline – in line with the three-month average of -63K. The trade and transportation segment lost 66,000 jobs, exactly the same as September – the three-month average is -53K. Retail slashed 40,000, which was a bit better than the 44,000 cuts in September – three-month average is -35K. Business services posted its second straight month of increase, adding 18,000 payroll positions after September’s gain of 3,000 – three-month average is positive too at +5K per month.
The best sign in the report was the rise in temporary work, which is the best indicator that job losses will ease substantially in the coming months and we’ll print some mild job gains in the not-to-distant future. Temp services added 34,000 positions, after a 7,000 gain in September – that number was revised up as it showed a 2K decline via last month’s employment survey.
Government employment came in unchanged as a 19,000 increase in federal government jobs offset declines in state and local employment – state and local budget are in a world of hurt and will remain that way for a long time. In fact they are likely to even erode from here as federal government stimulus injections are making those budgets look better than they actually are.
The unemployment rate, which was the newspaper headline, jumped to 10.2% from 9.8% as we are in the process of testing that post-WWII era record of 10.8% hit in December 1982.
The labor force participation rate fell, which actually held back the rise in the jobless rate (you would normally see a large increase in participation for the unemployment to jump like this). This means when these workers feel good enough about things to look for work again the jobless rate will jump. One expects that the now 93 weeks of available jobless benefits (99 weeks for those in the 27 states with unemployment rates above 8.5%) is marginally decreasing the sense of urgency to look for work. Bienvenue a le au pair etat.
The U6 jobless rate – this figures includes the official jobless rate, plus those marginally detached (those too discouraged to look for work during this survey period), and those working part time because they can’t find full-time work, which probably reflects labor-market torpor more than anything else -- jumped to 17.5% in October from 17.0% the previous month. This measure was re-calculated in 1994, so we can only view it to that point.In terms of its previous methodology the U6 jobless rate hit 14.0%, which is still below the postwar record of 14.3% hit in 1982.The average duration of unemployment hit 26.9 weeks from 26.2 in September.
The duration of long-term unemployment (the percentage of the unemployed that have been out of work for over 27 weeks) held at the record high of 35.6%.
The average weekly hours worked data fell back to the record low (data goes back to 1964) of 33.0 from 33.1 in September – it’s dropped back to this record low three times now. Unfortunately, we’ll need to see this figure head to 34.0 before employers even think about adding jobs. The average over the past decade is 33.8 hours per week.Ok, so we’ve endured 22 months of jobs losses now and they have been massive, unprecedented in the postwar era in many ways. Nearly 7.5 million payroll positions have been lost during this stretch and with the exception of the 602K decline in December 1974, even when adjusting for the expansion in the labor force, the monthly losses are without precedent – again, in the post-WWII era. The duration of this level of decline has no comparison, not even close.
As a result of this period of deep job losses, we will soon see the number of payroll decline move to a statistically insignificant level, < 100K per month, and mild payroll increases should arrive by mid-2010. (Notice, this is changed from the estimate that they’ll arrive by early-2010 that I mentioned in Friday’s letter based on the hours worked figure that can’t get off the mat, and even then the job additions look to be slight unless that hours worked number spikes). However, the unemployment rate, which usually takes only about 10-12 months to come down by 2-3 percentage points once it peaks, may remain very elevated for a long stretch this go around. As we touched on Friday, the Fed is at zero – as if I need to remind anyone. This means that the tightening campaign, which almost always induces recession and causes labor market weakness, will be substantially more aggressive than what is typical. We should not expect the normal Greenspan-era ¼ point increases, they will be more substantial. Further, this tightening campaign will accompany higher tax rates this time – a nasty economic brew. These are the unfortunate thoughts the investor must be aware of. Just as the stock-market cheers the fact that ZIRP lives, it will jeer when it’s euthanized (whether it’s on the Fed’s longer timeline, or is more abrupt as much higher interest rates will be necessary to rescue a drowning dollar). The average time period in which the Fed has begun hiking rates following a peak in the jobless rate is six months. One month is the shortest period of time and 22 months is the longest. We have not yet seen the unemployment rate peak, but even if this were it, one can be sure the Fed is going to wait longer than the average – unless forced to move by some other event. The longer they wait, the more abrupt the tightening campaign will be.
Consumer Credit
The Federal Reserve reported that consumer credit fell $14.8 billion, or 7.2% at an annual rate, in September. This marks the eighth month of decline and the longest streak since records began in 1943. Borrowing for both revolving (such as credit cards) and non-revolving (such as auto loans) continue to tumble due labor market conditions and high delinquency rates – that is, both the supply of and demand for loans is on the slide.
Not that we needed further evidence, but credit expansion will not be here during this expansion, an element of the economy that had been especially present over the past two economic recoveries –credit expansion aided in smoothing out personal consumption until job and income growth returned. One of the major problems right now is that the Fed’s extended easing campaign in the period 2002-2005 that kept rates too low for too long encouraged a debt burden that we now must work through – it will take a while to accomplish.
Revolving credit fell $9.93 billion in September, or 13.3% at an annual rate. Non-revolving credit declined $4.87 billion, or 3.7% at an annual rate.
An Auspicious and Horrible Century
Today’s date marks the 20th anniversary of the fall of the Berlin Wall -- the reunification of Germany. November 9 also marks the terrible, evil event of Kristallnacht – 71 years ago. We should never forget either occurrence, particularly the actions that brought them about.
Have a great day!
Brent Vondera, Senior Analyst
The Federal Reserve reported that consumer credit fell $14.8 billion, or 7.2% at an annual rate, in September. This marks the eighth month of decline and the longest streak since records began in 1943. Borrowing for both revolving (such as credit cards) and non-revolving (such as auto loans) continue to tumble due labor market conditions and high delinquency rates – that is, both the supply of and demand for loans is on the slide.
Not that we needed further evidence, but credit expansion will not be here during this expansion, an element of the economy that had been especially present over the past two economic recoveries –credit expansion aided in smoothing out personal consumption until job and income growth returned. One of the major problems right now is that the Fed’s extended easing campaign in the period 2002-2005 that kept rates too low for too long encouraged a debt burden that we now must work through – it will take a while to accomplish.
Revolving credit fell $9.93 billion in September, or 13.3% at an annual rate. Non-revolving credit declined $4.87 billion, or 3.7% at an annual rate.
An Auspicious and Horrible Century
Today’s date marks the 20th anniversary of the fall of the Berlin Wall -- the reunification of Germany. November 9 also marks the terrible, evil event of Kristallnacht – 71 years ago. We should never forget either occurrence, particularly the actions that brought them about.
Have a great day!
Brent Vondera, Senior Analyst
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