Daily Insight

U.S. stocks gave back early-session gains as energy and financial shares put pressure on the broad market. The day’s major economic release, the weekly jobless claims data, actually offered the best result on the direction of claims we’ve seen in a while; however, a negative energy report reminded the market of the economic weakness and lack of demand that remains – more on that below.

Traders sort of put the screws to energy stocks after that report, and financials took a little heat too as RealtyTrac stated U.S. foreclosures surpassed 300,000 for the eighth month in a row. The bigger issue is the inventory that has yet to hit the market as banks are delaying the foreclosure process.

All 10 major S&P 500 sectors declined on the session, although the broad market jumped 6% over the past couple of weeks so a day of weakness is hardly consequential. The S&P 500 has bumped against the 1100 mark twice now, yesterday and on October 19, only to retreat. This is probably going to be an important level for technicians over the very short term.

Eight stocks fell for every one that rose on the NYSE. Some one billion shares traded on the exchange – that’s three days in a row now; the six-month average is 1.25 billion.

The $16 billion 30-year Treasury auction didn’t go quite as well as the 3 and 10-yrs earlier in the week, but those were very successful auctions – this one was still pretty good considering the duration. The yield was a bit higher than the pre-auction expectation (4.469% vs. 4.424%) and the bid to cover was 2.26, down from the 2009 average of 2.43. Indirect bidders (foreigners) totaled 44%, which is in line with the 2009 average.

These long bond sales are definitely trickier events as 4.46% for 30 years only looks good in this low inflation, weak economic environment we find ourselves. But with Fed at zero, the dollar’s trend lower and the largest budget deficits since WWII (all factors that have great potential to crush the long bond), the government is surely very happy people are out there buying this stuff at these levels.

Market Activity for November 12, 2009
Crude Oil

The weekly Energy Department report showed crude supplies rose 1.76 million barrels last week to 337.7 million (5% above the 5-yr avg. for those keeping track) – a one million barrel build was expected.

Gasoline stockpiles rose 2.56 million even a refinery runs are at the lowest level since Hurricanes Gustav and Ike hit the Gulf coast n September 2008. Refineries operated at 79.9% of capacity (the average rate is closer to 88%). Demand is ugly, fuel consumption tumbled 4.3% to 18.3 million/day last week (12% below average).

This report is not a good sign for those expecting average economic growth to emerge.

Mortgage Applications

The Mortgage Bankers Association’s index of applications rose 3.2%, fueled by an 11.3% jump in refinancing activity for the week ended November 6 – this follows a 14.5% surge in the prior week as the 30-year fixed mortgage rate held below 5.00% for these two weeks. We’ll note, the refinancing index running at only a third of 40% of where it was back in April and is just 30% of the spike during the refi wave of 2003 – the vast majority of those who can refinance their mortgage likely already have.

The purchases index fell 11.7%, marking the fifth-straight week of decline – the purchases index fell to the lowest level since December 2000 (and that is only because of an anomalous one month slide in 2000, one really has to go back to 1998 to match this level of purchases. Apparently, a sub-5.00% 30-year mortgage rate isn’t enough to unfreeze buyers as they saw the tax credit expiring. That credit has been extended now and we will see if it has the same effect on sales as it had over the previous few months. It all depends on the degree to which the original timeline of the credit front-loaded home buying. Of course, home sales also have to contend with troubled labor market conditions. Those thinking housing is out of the woods need to think again.


Jobless Claims

The Labor Department reported that initial jobless claims made additional progress last week, falling 12,000 to 502,000 – this is the lowest level since hitting 488K in early January.

While 500K is an elevated level, the trend of the past two weeks is a very good sign as we’ve been looking for sub-500K as real evidence that labor market losses have bottomed. That does not mean the jobless rate will fall. To the contrary, it will rise for sometime and the upward move may still have some spike to it (remember the latest monthly jobs report saw the unemployment rate rise significantly even though the labor force participation rate fell. We still need to see that participation rate rise, as more workers come back in to look for work and that means meaningful increases in the unemployment rate ahead. But for the monthly job losses reading, as we talked about last week, those numbers will move to statistically insignificant levels of < 100K per month over the next couple of months and then to mild gains.

The four-week average of initial claims fell 4,500 to 519,750.

Continuing claims fell for an eighth-straight week, down 139,000 to 5.631 million, although more because of traditional benefits running out than job creation, as the exhaustion rate chart illustrates below.

Extended benefits also show there is some expiry going on as the EUC (Emergency Unemployment Compensation) program showed claims rise (more recent laid off workers moving from traditional to EUC), while extended benefits fell (the longer-term unemployed exhausting the extensions).

For a run down of how this works: Workers can apply for EUC when the standard 26 weeks of claims run out. EUC has four tiers (the second to fourth tiers are known as extended benefits: Tier 1 pays an additional 20 weeks, Tier 2 pays another 13 weeks, Tier 3 offers another 13 weeks and Tier 4 adds yet another six weeks – all automatically enroll those who are eligible when they run out of the previous tier. You can kind of see now how many unemployed workers are unlikely to have quite the sense of urgency to look for work, which is a reason there’s such a gap, a record gap, between U3 and U6 unemployment rates (U3 being the official jobless rate of 10.2% and U6 being U3. plus those that didn’t look for work during the month, plus those working part time for economic reasons).

A Tier 5 was added when Congress passed another extension measure last week, but since the emergency and extended claims data is only available through October 24, it shows a decline in extended claims. This figure will pick back up thanks to another extension when we get the next couple of weeks of data.

All in all, the claims data suggest that the pace of firings continues to decline, yet a pick up in hiring has yet to become evident.

But it’s Friday, so have a great weekend!


Brent Vondera, Senior Analyst

Daily Insight

U.S. stocks gained ground as the S&P 500 moved to a new 13-month high. The broad market pared early-session gains on a quiet Veterans Day of trading (the bond market was closed, they’ve get more days off than a government job) but held to enough of that rally to now have completely erases the late-October pullback.

Financial led the way yet again, but basic material stocks weren’t far behind as the Bank of England signaled they will keep rates at emergency levels and left the door open to more government bond purchases. As this follows the Fed’s pledge to keep standing on the accelerator, the trade into commodity-related material stocks rolls on. Energy shares weren’t able to participate in the rally, ending the session essentially flat as the latest data out of Mastercard showed gasoline demand fell 2.3% in the latest week and is up just 2% from the very weak levels of a year ago.

Advancers beat decliners by a two-to-one margin on the NYSE Composite. Volume was weak as barely one million shares traded on the exchange, although I was expecting even less considering the holiday.

Futures are pointing lower this morning even with the news that Hewlett-Packard will purchase networking gear maker 3Com. Such deals usually get investor optimism going, maybe the market sees it as a bad deal. HP clearly wants to take on Cisco, they may be stretching themselves on this one.

Also, Wal-Mart just released quite good quarterly results, maybe too good as it shows discounters will reign supreme this holiday season, reminding this fairly euphoric market that the consumer is in rough shape – as if anyone needs reminding.

Market Activity for November 11, 2009
Holiday Sales, and More Importantly Spending Trends Beyond

And speaking of holiday shopping, we received some welcome news out of FedEx yesterday as the second-largest U.S. package-delivery company projects handling about 8% more shipments on their busiest day of the Christmas season. The company expects to handle 13 million packages on December 14, up from 12 million on December 15, 2008. The forecast is based on “positive signs” via the latest GDP and industrial production reports. For sure, what were likely good spending numbers during October probably also stoked their forecast. We’ll get the October spending numbers on November 25.

This is all fine and dandy, certainly expectations we would celebrate under normal circumstance, but the reality remains that households are dealing with a nasty combination – the highest level of joblessness in 26 years (and rising) and very high levels of indebtedness. We can get excited about higher holiday sales (and let’s hope this is true considering the year-ago period occurred smack-dab in the middle of credit-market chaos and a relative shutdown in spending), but basing expectations on the latest economic numbers that have been boosted by short-term stimulus programs may not prove to be the wisest thing to do. This is a theme we’ve talked about for some time now as the indicators that economists/analysts/businesses have historically looked to for evidence of what will occur in the near future may not work well this go around.

The stimulus is temporary, this form of stimulus must be as the levels of government spending, aggressive monetary accommodation and incentives to keep consumer debt levels high cannot last. Therefore, we’ll see more choppy activity instead of the typical development of things flowing and trending higher during the normal expansion. Indeed, consumers will have to work down debt levels and this will adversely affect spending, a situation that will prove more difficult and elongated if the jobless rate remains elevated for an extended period. This must occur in order to get back to normal and it’s why I remain quite skeptical about growth prospects – a skepticism that long time readers understand has not been my nature.

So let’s hope the holiday shopping season is stronger than that of the year-ago period. But don’t hope for too much because fundamentals do not support such behavior.

The China Trip

President Obama and his Treasury Secretary Tim Geithner are making a trip to Asia, actually Geithner has been there for a couple of days explaining to Japanese and Singaporean officials about how the administration will deal with massive budget deficits in the intermediate term – you know how to read these statements: higher across the board tax rates.

I believe President Obama arrives in Asia today and the main focus of the trip is to talk to Chinese President Hu Jintao about the “need” to strengthen the yuan (Chinese currency). I’m sure that’s going to go over really well as our own currency is devalued on weekly basis.

It was just Monday night in which the Chinese got in front of this trip by making the explicit statement that they’ll keep the yuan pegged to the U.S. dollar – meaning they are not going to allow it to rise. Then, suddenly, by Tuesday night they revised their statements to say they may gradually re-peg the yuan to a higher level against a basket of currencies. (This has its own implications. When the yuan is pegged to the U.S.dollar it means the Chinese must buy dollars to keep the pegged rate intact, which means they must buy Treasury securities. If they go to a basket that means their need to buy our government debt is reduced.) This revision to the statement comes after intense pressure from other countries in the region. The dollar has gained some support over the past two days as governments in Thailand, South Korea and Russia buy dollars (devaluing their own currencies) because the yuan is sliding in value against those currencies due to its peg to the dollar – as the dollar slides so does the yuan. It appears there is a race to the bottom as a destructive zero interest-rate policy by the Fed affects behavior across the globe. Widespread devaluation of currencies is not a good sign for future global growth.

But the administration goes to China with the overall belief that large amounts of Chinese exports funnel into the U.S. (well, at least before consumer activity took a turn for the worse), thus allowing higher levels of prosperity in China, only because their currency is fixed at what the administration judges as a low currency value. This is a flawed premise. The Chinese were not “dumping” goods into the U.S., as if to take advantage of the American consumer. The administration seems to be ignoring a vital piece of this puzzle – monetary policy.

Look, I’m not trying to play the Chinese apologist here, I frankly despise communist regime, and while they appear to have shifted to a softer communism that government can hardly be trusted. But darn, one cannot look at this as if we were preyed upon. Let’s concentrate on getting our own policies right and the rest will fall into place.

But the flood of imports from China in the previous few years was not nearly so much the result of the Chinese holding the yuan from rising as it was a function of our Federal Reserve’s stance back in 2002-2005, a topic we’ve spent much time on over the past several years. Chinese goods don’t arrive on our shores unless there is demand to support those shipments. (Besides, we should remember that the Chinese yuan has been pegged to the U.S. dollar since the mid-1990s – with the exception of an adjustment a couple of years back; this peg helped them escape the direct effects of the Asian Contagion in 1997-1998. I don’t remember anyone expressing a problem with this pegged rate until the Fed’s actions began to create market distortions. The people who should be, and probably are, complaining are the Europeans as the yuan has declined in value along with the U.S. dollar against the euro.) The goods really began to flood in when the Fed kept rates too low for too long earlier in the decade. This monetary policy fueled a consumer credit expansion that drove demand for these imports. So long as the Fed doesn’t royally screw up, the degree of trade deficit with China would not be nearly as wide. For that matter, the housing bubble would have never occurred. While literally everyone takes the blame for this mess, it’s starkly ironic to see the Fed largely escapes criticism.

When our government officials fail to understand, or simply ignore, the preponderant reason driving the topic with which their argument is based, it sort of makes their goal tough to achieve. We’ll find out who holds the whip hand during this visit to China. I don’t like the probable intermediate term answer to this question, based on the obscene level of deficit spending we’re engaged in.

Going Off

Emerson Electric’s CEO David Farr didn’t hold back in expressing his opinion of U.S. policy yesterday at an industrial conference in Chicago, saying: “Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing – cap and trade, medical reform, labor rules.” He stated tax rates and regulations are pushing his company to create jobs in emerging market regions, “places where people want the products and where the governments welcome you to actually do something.” He didn’t stop there, going on to project his own question and answer: “What do you think I am going to do? I’m not going to hire anybody in the United States. I’m moving. They are doing everything possible to destroy jobs.” Wow!

This guy is going to take a lot of heat for these statements. I can see the coming accusations of anti-patriotism. But his attitude just shows he cares and wants to wake people up. He could be like the vast majority of multi-national corporate CEOs, who say nothing for fear of a backlash, but go ahead and move jobs overseas anyway due to higher domestic costs – and we should not only concentrate on the labor cost differential (which is simply the difference between rich and relatively poor societies), if we were to slash the corporate tax rate and implement a regime of streamlined and common sense regulations instead of insane mandates that do nothing but drive costs higher and destroy jobs we wouldn’t see so much outsourcing occur. (For the record, not all outsourcing is bad, some result in increased profitability and thus more higher-paying jobs here at home, but certainly more of it than would otherwise be beneficial occurs due to policy that drives capital away.)

So, Mr. Farr will certainly be labeled as anti-patriotic, but it is the business leaders that remain quiet, for fear of a backlash, who assist in damaging American exceptionalism.

Economic Data

We get back to economic data releases after essentially nothing over the past three days. This morning we await the weekly jobless claims data.


Have a great day!


Brent Vondera, Senior Analyst

Afternoon Review

S&P 500: -0.07 (-0.01%)

Today’s slight loss snapped an impressive streak of gains for the S&P 500 – the index had finished higher on every single trading day this month.

The U.S. dollar traded all over the place despite early gains that came on news that Fitch credit analysts said Britain is the most likely of the major economies to lose its AAA credit rating.

Several Fed officials delivered speeches today, which reiterated their view that the economy will recovery slowly and the unemployment rate will continue to rise in the near-term. There was also mention that financial reforms are needed to avoid a repeat of last year’s credit crisis.

In other news, the Fed’s latest survey of loan officers showed that credit conditions had tightened again, although less than in its previous survey. The results also revealed that banks are ramping up purchase of securities, notably Treasuries, instead of making loans. This is no surprise and has been happening for quite a while now. Banks borrow at practically nothing and earn a risk-free return on Treasuries. This trade is a lay-up for the banks and far easier than dealing with credit cards or business loans.

The Fed can create as much money supply as they want, but that doesn’t guarantee it will create credit. Without willing lenders and able borrowing, the cheap money will continue to flow into assets from equities to commodities to corporate debt.

Most market participants acknowledge recent gains have been fueled by cheap money, but there still is quite a bit of disagreement regarding the sustainability of the rally in coming months if the real economy remains sluggish.


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Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stocks rolled on wave of investor euphoria Monday, now almost completely recouping the losses of late October, as the nitrous oxide boost from global governments and central banks continues to stoke equity-market traders.

Stock-index futures showed strong investor sentiment in pre-market trading and that rushed into the official trading session. This weekend’s G-20 meeting dovetailed last week’s Fed meeting (you know, where Bernanke & Co. explicitly stated their zero interest rate policy (ZIRP) lives on) as all nations involved agreed to maintain measures of support to the global economy.

The market could have also been driven by the results of Saturday night’s health-care bill in which the House barely passed the measure 220-215. This was clearly a pyrrhic victory and it’s very likely the bill is DOA in the Senate, at least in its current form. I’m certainly not saying some wonderful common sense-based legislation is going to suddenly appear. But the most horribly harmful and foolish proposal is going down – unless they use the reconciliation process.

Financials were the top-performing sector, even as the Fed confirmed what many have been guessing -- banks are taking their basically zero-cost to borrow and using as much of these funds to buy Treasury securities as is going to loans. This should have put the screws to the banks stocks. (This is not to suggest that banks should be boosting loan originations. If they are concerned about problem loans on their books, then they shouldn’t be growing by making new loans. Too, the demand for loans is weak as well, particularly from the consumer side as households work down already heavy debt burdens. It’s kind of a dual issue for small businesses. Some need financing, but remain locked out of the credit markets. Others have no desire for additional credit, as the NFIB survey continues to show, as many see no reason to expand.) This is not the stuff that economic growth is made of. Borrowing at close to zero and investing in 1%-4% yielding Treasury securities may boost banks’ interest income in the short term, but the music stops when the Fed must eventually unwind policy, and that means Treasury yields shoot much higher as this source of government debt dries up. In addition, the lack of demand for credit also shows there is little confidence among business regarding future sales prospects.

Commodity-related basic material shares were the second-best performing group on the session as that G-20 meeting goosed the trade.

Advancers smoked decliners by an eight-to-one margin on the NYSE. Nearly 1.2 billion shares traded on the exchange, in line with the six-month daily average.

Market Activity for November 9, 2009
The Dollar

The U.S. dollar looks to make another dive for the 74 handle on the Dollar Index (and it did move to the 74 handle briefly before bouncing off the intraday low), a level that should begin to get policymaker’s attention. If the greenback cements that move it may be “Katy bar the door” time as the buck may slide back to the all-time low of 71.35 in quick order, this will surely get the Fed’s attention.

The greenback rallied in the final two weeks of October as there was some uncertain as to whether the Fed would change its statement regarding the latest meeting. Would they removed the word “exceptionally” (referring to the low levels of fed funds) and thus signal a removal of ZIRP – the emergency level of fed funds – in the near future. But when the Fed’s meeting concluded and the “exceptionally low level of the federal funds rate for an extended period” phrase remained intact, it was a clear sign the pedal to the metal stance will be with us for a while. This is damaging to the dollar and the gold trade shows it – breaking through $1110/oz. yesterday morning.

There doesn’t seem to be any policymakers (at least domestically) who currently see a falling dollar value as a problem. For sure, the conventional wisdom views this as a good thing in that it will boost U.S. export activity. If the dollar continues to decline, we’ll see yet again how flawed conventional wisdom can be.

It’s all up to the Fed from here, don’t wait for the Treasury Department to offer assistance because they are the conventional wisdom – so is the Fed for that matter, but I’m trying to give them the benefit of the doubt; although I’m not sure why. Just as the previous administration wrongly judged, this one also believes a lower dollar will benefit U.S. growth and jobs. They forget one very important reality. As capital leaves the U.S. (a falling, and unstable, currency value coupled with the very high probability that tax rates on investment are going higher does not promote capital inflows) it will create jobs in the places that that capital finds it will be best treated. My concern is the Fed will not focus on the dollar until it is already obvious we have a problem. If this occurs, the reversal of monetary policy will be quick, abrupt and very damaging.

This Week’s Data

We have a very quiet week on the data front, so the letters will be short as a result. There is not a major economic release until Thursday, which brings the usual jobless claims data.

What we’ll be watching for is a move below 500K on initial jobless claims, a level that has proven elusive since January. We saw claims fall to 488K in the first week of the year, only to deteriorate big time, jumping to 675K by February. For evidence that some net job creation is occurring, we’ll need for initial claims to at least make it back to the high 400K level.

On Friday we’ll get the trade balance (September), import prices (October) and the University of Michigan’s consumer confidence reading (November).

On trade, the market will be looking for evidence that the weak dollar condition is helping export activity.

On import prices, the data results will remain unconcerning, but this will change come the November data. This is when the year-ago comparisons become very easy and all of the inflation numbers begin to move higher.

On the confidence reading, despite the market’s focus on the easy-money trade, I think traders will still need to see a rebound from October’s drop. (It’s important to remember that the UofM confidence reading does not include a labor market component, as the more watched Conference Board’s confidence reading does. Thus, the UofM’s measure remains at a higher level, but still well below the long-term average.


Have a great day!


Brent Vondera, Senior Analyst

8 months since S&P 500 bottomed

The S&P 500 bottomed exactly eight months ago and has since rallied 64%. The U.S. economy was still contracting when the rally began, which is no surprise since financial markets tend to predict the direction of the economy anywhere from three to six months into the future.

As it turns out, third quarter GDP grew at a 3.5% annualized rate, vindicating the stock market’s rally. Whether the market has rallied too much is an entirely different discussion for another day. Today, I examined sector performance since the March 9 low. Take a look at the table below.

Clearly, economically-sensitive stocks have been outperforming strongly, something that one expects in bull, not bear, markets. “Cyclical” sectors outperformed in the eight months since the S&P 500’s bottom, with the financials sector jumping 140.6%, the consumer discretionary sector adding 81.5%, the materials sector growing 78.6% and the information technology sector gaining 77.7%. In contrast, “defensive” sectors like healthcare, utilities, and telecom underperformed.

The results in the table above should come as no surprise because these are often the sectors that benefit the most during this stage of an economic cycle. The diagram below from S&P Equity Research illustrates this very well.


Tomorrow I will explain why these sectors often perform the way they do in the different stages of the economic cycle.

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Peter J. Lazaroff, Investment Analyst

Daily Insight

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.

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