Industrial, commodity-related basic material and energy, along with technology shares led the way. Financials, consumer, telecom and utility shares were down on the session.
While the jobs data was not bad in terms of the degree to which payrolls declined -- a drop of 85,000 is a statistically insignificant number, the long-term unemployment numbers are more than disturbing. But when the market is going on what I believe is a very short-term mindset, easy-money delight, what is bad remains good. Because of this I wouldn’t have been surprised to see quite a substantial sell off if the data had shown a 100k increase in payrolls.
I saw a Bloomberg News reporter state that the market is excited about what this jobs data means for profit growth. For sure, the lack of hiring will help earnings advance – recall that we have talked about how there could be a couple of big-bang quarterly earnings results over the next year. Heck, slash 7.5 million payrolls and firms are going to show some level of profit growth even if sales remain weak. While there’s a good shot growth may be pretty strong for a couple of quarters, if the profits are mostly due to massive cost-cutting via payrolls this will obviously keep final demand lackluster, which means the growth is short-lived. Add in the consumer credit situation and the chance that final demand sticks is low.
So, I look each and everyday for positives to give me more confidence that a durable recovery will emerge, but the more I look the more problems I find. The bulls seem to be awfully short-sighted these days, and what we’re seeing is not a move higher based on fundamentals but a continued move to riskier assets based upon the Fed holding interest rates artificially low, in my opinion.
Volume was weak again, I really thought trading activity would rebound back to normal levels with the holidays behind us, as just 950 million shares traded on the NYSE Composite – 18% lower than even the pathetic average of the last six months. We should be seeing at least 1.4 billion trade per day.
For the week, the broad market gained 2.6%. This marks the seventh weekly gain out of the last 10 and puts the S&P 500 up 72% from the March 9 intra-day low. I should be really excited about this, but the move above 900-950 on the index just doesn’t feel right to me based on the headwinds – a number of challenges I laid out in the year’s first letter a week ago.
I think one has to build a market valuation analysis around $65 in S&P 500 earnings (earnings peaked at roughly $85 in 2007 and the cycle trough just recently came in at $45) and that means a value of 950 puts the S&P 500 at 15 times – a multiple that is right in line with the long-term average. It is tough to justify a multiple that’s above the average in light of the challenges we face.
Market Activity for January 8, 2010
December Jobs ReportThe Labor Department reported a jobs report that was worse-than-expected as payrolls declined 85,000 in December (the consensus expectation was for no change, with +85K at the high-end of the range and -100K at the low end). The November payroll figure was revised higher to show a 4K increase, previously reported as an 11K decline – marks the first positive reading since December 2007. Still, all of these numbers are statistically insignificant as anything within +/- 100K is.
One thing that people were focused on was the revisions for the previous couple of months, expecting more positive changes – this is important because the revisions generally portend the future trend. While the November reading saw a positive revision, the October data was revised a bit lower, so no effective change. In terms of industry, goods-producing industries shed 81,000 jobs -- a decent deterioration from November’s -58K; in line with the three-month average of -83K. The construction segment cut 53,000 – double the decline of November and worse also compared to the three-month average of -45K. (Keep in mind though that we had some nasty weather in December and this surely damaged the monthly figures for the segment.) The manufacturing segment shed 27,000 – better than the -35K in November and an improvement relative to the three-month average of -37K. (It seems the better employment figures within the regional factory reports were correct in signaling some improvement.)
The service-producing industries cut payrolls by 4,000. This is nothing, completely insignificant, but is a large deterioration from the 62,000 increase registered in November. The three-month average is +13K. The trade and transportation segment cut 37,000 – more than the -32K in November but better than the three-month average of -43K. Retail payrolls declined 10,000 – an improvement from the
-14K in November and also the three-month average of -21K. Business services payrolls increased 50,000, boosted by another nice pick up in temporary hiring. Temp. help increased 47,000, following +89K in November – the three-month average is +49K. Temporary hiring is a key component to watch as historically it has proved to be a nice signal that at least mild overall job growth will soon follow.
Ex-post office, the federal government added jobs but state and local gov’ts cut jobs -- states are in a world of hurt and are going to present a problem for quite some time; the Medicaid expansion will put the states on a path of financial ruin if it is ultimately passed In total, government jobs declined 21,000, but this figure is going to pick up in the months ahead. Hiring for the 2010 census will begin in earnest over the next couple of months. This is going to distort the jobs figures as (if memory serves) 800,000 workers will be needed, and those additions will be spread out over a multi-month timeline. However, it won’t be long again before the census workers are hunting for employment as this is a six-eight week gig.
The unemployment rate held at 10%, but this number is going meaningfully higher. Why? Because the civilian labor force plunged 661,000 during December. These are people who removed themselves from the labor market because they didn’t look for work during the previous four weeks – termed the “discouraged worker.” When the labor force increases, workers returning to look for work as they feel better about the chances of finding a job, the jobless rate will rise. This why the unemployment rate is a lagging indicator, continues to increase even as the economy has moved to expansion mode. That said, I think the degree to which the rate still has to rise is more pronounced this time. Look for 11% by summer.
Taking a minute to clarify the two surveys that make up the jobs data: The Establishment Survey is used by the Labor Department to measure the change in payrolls – the +/-monthly jobs number you read in the headline; it is a survey of 150,000 businesses. The Household Survey is how the government measures the unemployment rate, this number includes the self-employed; it is a survey of 60,000 households. The U6 unemployment rate (also referred to as under-employment), which includes discouraged workers and those working part-time because they can’t find full-time work, ticked back up, rising to 17.3% from 17.2% in November – although still below the high of 17.4% hit in October.
The number of unemployed that have been out of work for at least 27 weeks (the longest duration the labor statistics track) is now 4 out of every 10 – actual percentage is 39.8%. The average duration of unemployment rose to another new high, increasing to 29.1 weeks from 28.6 in November – the third straight month in which it has exceeded the 27 weeks figure. This completely jibes with what the jobless claims data has been suggesting as continuing claims keep rising. 
The average weekly hours worked reading also failed to improved, holding at the low level of 33.2 hours. The figure rose in November from its record low of 33.0 in October, but we need to see something closer to 33.8-34.0 before firms begin to substantially add workers. Hours worked were adversely affected by weather, particularly construction jobs, so one hopes some improvement would have resulted otherwise but we’ll need confirmation from the data in the coming months. 
Last month I mentioned that the excitement over the November jobs report appeared a little amateur. There were a lot of people that expected the data to magically begin to post increase beginning in December and statistically significant improvements beginning in January. But it doesn’t happen this way, especially since there remains too much room with which to stretch current employee workloads, as that weekly hours worked figure suggests. However, we should begin to see a trend of positive monthly results by February/March and with some luck statistically significant increases by early summer. The problem is that firms are not seeing much by way of sales growth and that means they’ll wait eveWhile that’s the brighter side of the situation, the labor market participation rate continues to make new 25-year lows and that means there will be an enormous number of people re-entering the workforce when they feel better about the labor outlook. This means we will have to see more than the usual 100K/month job growth for an extended period in order to bring the jobless rate lower. Based on what the data is suggesting, we may need 200K/month for more than 12-18 months to even bring the unemployment rate back to 8.0-8.5% by mid-2011. And even this rate is elevated from a historical perspective, the peak level of joblessness during the normal recession. To get back to our long-term average of roughly 6%, we could be waiting until 2014-2015.
I think the response we have taken to combat this serious downturn is actually doing more harm than good My concern is that as the jobless rate rises just ahead of the 2010 election, Congress will scurry to endeavor upon polices they believe will increase jobs in the short term, but does significant damage to the longer-term situation.
Consumer Credit
A point we’ve touched on a number of times, the slashing of credit-card lines, is going to work as a drag on consumer activity. There are approximately $4.5 trillion in credit-card lines outstanding (a significant percentage of which is for businesses, which is not relevant to this topic) and $874 billion is drawn upon via the consumer. These lines of credit run off of models based upon the national delinquency rate, and since delinquencies are at a record level, according to Fitch Ratings (I assume they mean post-WWII record), that means these lines will continue to be cut.
The latest Federal Reserve data on consumer credit was out Friday, showing it got whacked by $17.5 billion in November (a decline of $5 billion was expected) and is down for 10-straight months – both are the most on record. Records go back to 1943.
Have a great day!
Brent Vondera, Senior Analyst
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