Thursday, February 06, 2014 - Waiting on the Friday Jobs Report

Waiting on the Friday Jobs Report

by Sinclair Noe

DOW + 188 = 15,628
SPX + 21 = 1773
NAS + 45 = 4057
10 YR YLD + .04 = 2.70%
OIL + .57 = 97.95
GOLD + .20 = 1258.80
SILV + .05 = 20.05

The number of Americans filing new claims for unemployment benefits fell more than expected last week. Initial claims for state unemployment benefits declined 20,000 last week to a seasonally adjusted 331,000. There have been some interesting reports this past week on jobs, including the controversial research from the CBO and the other from the New York Fed.

Competition for jobs is still fierce. Although it varies with the company and the job, on average 250 resumes are received for each corporate job opening. In addition, out of every 1000 people who view an online job posting, 100 people will apply, 4 – 6 will be selected for an interview, 1 – 3 will be invited for a final interview, 1 will be offered the job, and 80% of those who get a job offer accept it.

The Wall Street Journal shows how the very backbone of the labor market, men in their prime (for measurement purposes, 25 to 54), are out of work to an unprecedented degree. More than one in six men ages 25 to 54, prime working years, don’t have jobs—a total of 10.4 million. Some are looking for jobs; many aren’t. Some had jobs that went overseas or were lost to technology. Some refuse to uproot for work because they are tied down by family needs or tethered to homes worth less than the mortgage. Some rely on government benefits. Others depend on working spouses.

The trend has been building for decades, according to government data. In the early 1970s, just 6% of American men ages 25 to 54 were without jobs. By late 2007, it was 13%. In 2009, during the worst of the downturn, nearly 20% didn’t have jobs. Although the economy is improving and the unemployment rate is falling, 17% of working-age men weren’t working in December. More than two-thirds said they weren’t looking for work, so the government doesn’t label them unemployed

The monthly jobs report comes out tomorrow morning. We’ll wait and see.

The largest decline in exports since October 2012 helped widen the trade deficit by 12% in December to $38 billion. When adjusted for inflation, the trade gap rose to $49 billion. In its first estimate of fourth-quarter GDP last week, the government said trade accounted for 1.33 percentage points of the economy's 3.2% annual growth pace during the period. However, the deficit in December was bigger than the government had assumed, and that means fourth-quarter GDP growth will likely be lowered when a revision is published later this month.

A separate report showed US productivity rose at a strong 3.2% rate in the fourth quarter, that follwos a 3.6% increase in the third quarter productivity as businesses managed to step up output sharply while keeping a lid on hiring and hours worked.  For all of 2013, productivity rose just 0.6%, the smallest gain since 2011.

The rise in fourth-quarter productivity helped keep down unit labor costs, which is a measure of the labor-related cost for any given unit of output. They fell at a 1.6% rate, showing no wage inflation pressures in the economy. For the year as a whole, unit labor costs were up just 1.0 percent, the weakest reading since 2010.

A Manhattan jury convicted former SAC Capital Advisors portfolio manager Mathew Martoma of what prosecutors described as the most lucrative insider-trading scheme ever. After more than two days of deliberation, the jury found Martoma guilty of getting secret tips from a neurologist about the results of a clinical trial involving an Alzheimer’s drug, enabling SAC to make about $275 million in profits or avoided losses.

In recent years, US Attorney Preet Bharara has exacted guilty pleas or convictions from seven former portfolio managers or research analysts accused of illegal trading while at SAC. Six of the hedge fund’s former employees have pled guilty to insider trading charges for activities that took place from 1999 through at least 2010. Michael Steinberg, another SAC executive fought similar charges in court and he was also convicted last November. And so this raises the question of why Steven Cohen, the founder of SAC, hasn’t been criminally charged; there is an unbroken string of convictions or guilty pleas against everyone except the big target. There was some question going into the trial about whether Martoma would turn on Cohen, but Martoma did not point a finger at his old boss.

Cohen has not been accused of criminal wrongdoing, but the Securities and Exchange Commission brought a civil case against him in July, alleging that he failed to supervise Steinberg and Martoma. That case is pending. In November, SAC agreed to pay $1.2 billion to settle charges of insider trading, but Bharara indicated he might still pursue Cohen and the agreement does not provide criminal protection or immunity for any individuals.

Last week a judge in New York approved most of an $8.5 billion settlement between Bank of America and a group of mortgage securities investors. At issue in this case are 530 mortgage-backed securities involving troubled loans issued by Countrywide Financial. A group of the largest investors in the bonds agreed to settle their claims with Bank of America, which bought Countrywide in 2008.

But another big investor in the bonds, including and led by AIG (the insurance company), refused to sign the pact, arguing that the settlement was a fraction of the overall losses. AIG also argued that the trustee for the bonds, Bank of New York Mellon, shirked its responsibility to push for more money in the settlement. One of the Countrywide bond investors, Triaxx, has argued that the claims could potentially affect $31 billion of loans. Now, a new judge in the case, has put the settlement on hold and will hold another hearing on the case in a couple of weeks.

New York state's top financial regulator has demanded documents from more than a dozen banks including Barclays, Deutsche, Goldman Sachs and RBS as part of a probe of trading practices in the $5.5 trillion a day forex, or global foreign currency exchange markets. Regulators are stepping up their investigation following the banks' decision to fire or suspend at least 20 traders following reports that employees at some firms had shared information about their currency positions with counterparts at other companies.

Standard & Poor’s lowered Puerto Rico’s credit rating to junk status on Tuesday; maybe you didn’t notice. Puerto Rico’s bonds traded lower, but there was nothing close to the kind of mass sell-off that might indicate a panic. The Governor of Puerto Rico says they will try to renegotiate almost $1 billion in debt deals; they might even issue a couple of billion in new bonds. Bankruptcy is not an option because Puerto Rico is not considered a state or a municipality; it is a territory and as such it falls in a kind of legal limbo. Hedge funds are smelling blood in the water but waiting for more carnage before stepping in; bond prices have dropped to 65 cents on the dollar; the hedge fund sharks are waiting for prices to drop under 50 cents.

The Senate failed to move forward on a three-month extension of assistance for the long-term unemployed that would allow people who have exhausted their unemployment insurance to continue receiving benefits as long as the government offset the $6 billion cost. The vote was 55-to-42, falling short of the 60-vote threshold to break a Republican filibuster effort. Ultimately, how to pay for the program proved too big a hurdle for senators to overcome.

It appears that immigration reform is dead. House Speaker John Boehner cited executive actions by the Obama administration that have changed or delayed implementation of the president’s health care law, saying: “The American people, including many of my members, don’t trust that the reform that we’re talking about will be implemented as it was intended to be. There’s widespread doubt about whether this administration can be trusted to enforce our laws, and it’s going to be difficult to move any immigration legislation until that changes.” So, if we’re waiting on the GOP to trust Obama before they’ll pass immigration reform.., well it’s just dead as a doornail.

Apparently trust was not an issue in passing a farm bill this week. The Senate signed off on the Federal Agriculture Reform and Risk Management Act of 2013 and has sent it to the President for his signature. The “reform and risk” part of the legislation refers to a change in direct cash payments to farmers under a subsidy system, which is being replaced by crop insurance. Time will tell whether that is risky or prudent.

For the past 2 years, European Central Bank President Mario Draghi has been saying he’ll do “whatever it takes” to get the Eurozone back on a growth path; just not today. The European Central Bank today left its benchmark interest rate unchanged, choosing to wait for additional data before deciding whether to address evidence that the euro zone is sliding into deflation. For the past 4 months, consumer prices in the EU have been below 1% and in January prices slipped to 0.7%. Draghi insisted there is no deflation.