Tuesday, May 07, 2013 - Good Times Roll

Good Times Roll

by Sinclair Noe

DOW + 87 = 15,056
SPX + 8 = 1625
NAS + 3 = 3396
10 YR YLD + .01 = 1.78%
OIL - .64 = 95.52
GOLD – 17.70 = 1453.60
SILV - .08 = 24.06

The fun started in Asia as a weak yen sent Tokyo stocks to their highest level in almost five years while Australian shares closed lower after briefly erasing declines following the Reserve Bank of Australia's to cut key interest rates. The yen has now lost one percent since Thursday; the result is a rally in the Nikkei, supported by upward revisions in earnings expectations for Japanese companies. Japan's Nikkei 225 is up more than 50% in the past six months and overnight breached 14,000 for the first time since 2008. This is known as Abenomics, named after Shinzo Abe, the Japanese prime minister who has instituted a very aggressive form of monetary easing, much more aggressive than what the Federal Reserve is doing in the US; the plan will double Japan's monetary base by the end of 2014.

Later in the week, we'll see if Abenomics is gaining traction as Japanese automakers report earnings; of course, it may still be too early to see Abenomics result in stronger earnings, but over time, a weaker yen should result in more car sales for the likes of Toyota and Honda. The world has done OK while Japan has stagnated. If Japan were to go back to something like a 3% growth rate, that would make a big difference to the global economy. This might be a potentially serious opportunity to improve the pace of global growth.

Then the fun spread to Europe. ECB President Mario Draghi has said he'll do whatever it takes to push the euro zone economy forwards. Last week the ECB cut rates, keeping downward pressure on the euro although the stronger German data pushed it back above $1.31 against an easing dollar. Germany, the region's largest economy, reported a rise in industrial orders in March, confounding expectations for a drop. The German DAX Index finally topped the highs of 2007. For the first time in a couple of years, Portugal completed a sale of 10-year bonds. The bond sale puts Portugal on course to exit its bailout on time, and qualifies it for a ECB debt support program. The 10-year note yields 5.6%, safely below the 6% level that is considered a danger zone. The MSCI Global Index edged past its June 2008 high.

The good times then spread to the US, where Wall Street saw new record highs. There isn't much economic news to move the markets this week. The economic news last week wasn't great but it was better than expected, and so everything is moving higher. Small caps moved to new highs; Dow Transports are confirming with new highs; even emerging markets are pulling out of a skid; the S&P 500 has been up 11 out of the past 13 sessions; we've seen 10 record highs this year. It has been an impressive run. Will it last forever? Of course not. Will it continue longer than you think? Probably, or it could end tomorrow.

More than 400 earnings reports from S&P 500 companies are now in the books, with 47% beating estimates on sales, 72% beat on earnings per share; the aggregate earnings per share beat is 5.4%, and year to year earnings per share grew by 2.5%. Annual sales growth is negative 1.4%; that indicates companies are still cutting costs; there are limits to this strategy.

Of course, it's difficult to make sense of earnings reports these days. A new report from Ernst and Young surveyed 3,500 staff in 36 countries; 20% said they had seen financial manipulation in their companies in the last 12 months. In addition 42 percent of board directors and top managers surveyed said they were aware of "some type of irregular financial reporting".

And despite scandals and regulatory failures in the wake of the credit crunch, almost a quarter of top financial services staff surveyed said they were aware of manipulation and almost 10 percent of all staff said their companies had understated costs, overstated revenues or used unprincipled sales tactics.

At some point demand has to increase or the fun stops. Consumer credit expanded at a slower pace in March. Non-revolving debt led the way; things like auto loans and student loans. Credit card debt fell by 2.4%.

In a follow-up to last Friday's jobs report, today the Bureau of Labor Statistics released its Job Openings and Labor Turnover Summary, also known as the JOLTS report. There are about 3.8 million job openings in the country; there are about 12 million unemployed people looking to fill those jobs. Employers aren't firing people any more, but they're not hiring people, either. Employers still see demand as too weak to justify ramping up hiring. Consumers have been too busy picking through the wreckage of their finances to spend a lot of money.

So the stock market is flying high even as customers are pulling in their wings. What's keeping the markets at these highs? Central banks keep pumping up the bubble. This year is a year where all market behavior is basically nonsense. In an environment where you have the central banks pushing down all yield levels on whatever is supposed to be a fixed-income investment. With key economies like the United States seeing a patchy recovery but others struggling to maintain growth, major central banks around the world have shown over the last few weeks they intend to keep stimulus flowing freely for the time being. Let the good times roll.

A follow-up to reports that New York Attorney General Eric Schneiderman will sue Bank of America and Wells Fargo for violating terms of the National Mortgage Settlement; this was the $25 billion dollar settlement for allowing banks to overcharge people, use fake documents and otherwise abuse customers; and it wasn't really $25 billion because the banks could write off full amounts of short sales and loan mods; and this will shock you – most of the write-offs are short sales. Part of the deal would require the banks to actually respond to loan modification requests and to stop losing paperwork and stop abusing customers. This has proved to be too much for Bank of America and Wells Fargo, so the New York AG has said he'll sue; not for money; apparently he'll sue for equitable relief.

What is equitable relief? Apparently it would be an injunction to force BofA and Wells to comply with the servicing standards in the Settlement. Now, they didn't comply with the original settlement, so why would they comply with an injunction? Who knows.

“I'm going to put if very bluntly. I regard the moral environment as pathological...these people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes. They have no responsibility to their clients... to counter-parties in transactions. They are tough greedy aggressive and feel absolutely out of control...and they have gamed the system to a remarkable extent.”

That's a quote from a recent speech by economist Jeffrey Sachs. It's only remarkable because Sachs is considered part of the establishment; a former economic advisor for the IMF and the United Nations. But the abuses by the banksters have become so blatant that they can't be overlooked. The Too Big To Fail Banks have admitted to money laundering to the worst drug cartels and terrorist organizations. No indictments. The banksters admit to millions of separate counts of perjury in the robo-signing scandal. No indictments, instead they reach a settlement and then violate the settlement. Again, no indictments. 

And if the Big Banks don't comply with the injunction to make them comply with the settlement..., well, I'm not sure but I'm guessing there won't be any indictments, just another limp wet noodle lashing.

Friday, May 03, 2013 - Jobs on the First Friday in May

Jobs on the First Friday in May

by Sinclair Noe

DOW + 142 = 14,873
SPX + 16 = 1614
NAS + 38 = 3378
10 YR YLD + .12 = 1.75%
OIL + 1.47 = 95.46
GOLD + 3.30 = 1471.70
SILV + .30 = 24.23

If you've been a regular listener over the years you know that I get a little wonkish on the first Friday of each month. That's the day we get the monthly jobs report. I consider this to be one of the most important economic reports and so I spend a little extra time covering it. Stick around, and we'll make you an expert.

Today, the Labor Department reports there were 165,000 net jobs added to the economy in April. The unemployment rate dropped to 7.5%, down from 7.6% in March; that's the lowest level since December 2008. The number of jobs added beat estimates of a gain of 135,000 to around 155,000. The number of new jobs created in March was revised up to 138,000 from 88,000, while February’s figure was revised up to 332,000 from 268,000. With the revision, the 332,000 jobs gained in February was the biggest monthly gain in jobs since November 2005. So, the economy created 114,000 additional jobs in March and February than initially estimated. The average for the past three months is about 211,000 jobs. It is widely estimated that the economy needs to add 250,000 over an extended period of time in order to see the unemployment rate drop below 6%.

The number of people employed part-time for economic reasons, involuntary part-time workers, increased by 278,000 too 7.9 million, offestting a decrease in March. These are people working part-time because their hours have been cut back of they couldn't find full-time work.

The number of part time workers increased in April to 7.92 million from 7.64 million in March. Nearly one in five new workers hired in April took jobs as temps, indicating companies are reluctant to add permanent employees.
These workers are included in the alternate measure of labor underutilization,U-6, that increased slightly to 13.9% in April.

According to the BLS, there are 4.35 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 4.61 million in March. This is trending down, but is still very high.  This is the fewest long term unemployed since June 2009. The longer those people stay out of work the more their skills erode, making them less attractive to employers.

One issue worth emphasizing from this and past reports is that there is zero evidence that the prolonged period of high unemployment is due to a lack of skills of the workforce. This is known because there are no major areas of the economy in which we see the standard signs of a shortage of skilled workers: rising wages, increasing hours, and large numbers of vacancies. However at an even more basic level, the rise in unemployment rates has been roughly proportionate across education levels.

In fact, the unemployment rate has gone up slightly more for college grads relative to its pre-recession level than for people without high school degrees.

Total nonfarm employment is up 2.077 million over the last year, and up 783 thousand so far in 2013; for a 2.35 million annual pace. Private employment is up 2.166 million over the last year, and up 813 thousand so far in 2013; for a 2.44 million annual pace. This would be the strongest annual rate for private sector job growth since 1999 if this pace continues for the entire year. The increase in hiring in April took place entirely in the private sector, which added 176,000 jobs. Professional services added 73,000 workers; bars and restaurants hired 38,000 people; and the retail business generated 29,000 jobs. Construction cut 6,000 jobs, even as home-builders added workers.

The concentration of overall employment gains in low-productivity service-sector jobs is not a promising sign for restoring the economy. The National Employment Law Project reports that while 58% of jobs lost in the financial crisis of 2008 were middle income, 60% of jobs gained in the recovery pay low incomes.

So, for now, government is acting as a drag on jobs; cutting 11,000 net jobs in the last month. Public payrolls continue to shrink and they have been shrinking for 4 years. State and local governments lost 3,000 jobs in April. Federal government layoffs are ongoing with many more layoffs expected due to sequestration spending cuts.

 Hourly earnings edged up 4 cents in April to $23.87, but they’ve risen only 1.9% over the past 12 months. However, aggregate weekly hours were down 0.4%; this is a measure of the total number of hours worked. In April, companies hired 165,000 more workers, but they cut everyone’s hours by 12 minutes on average. That doesn’t sound like much of a decline, but spread out over the 135 million-strong work force, the decline in hours worked is the equivalent of firing more than 500,000 workers while keeping hours steady. That sounds worse than it is. If we average the first four months of the year, we find that aggregate hours grew at a 1.2% annual pace, consistent with about 2% growth in gross domestic product. This month's decline in aggregate weekly hours may be the first indication of the effects of furloughs from the sequester.

Overall, the U.S. economy is severely under-employing labor resources with only 59% of the working-age population actually working; the lowest level since 1983. This isn't enough to ease the backlog of job losses since 2007; estimates range between 3 million and 8 million during the downturn back then. So, even though we see improvement, we just can't seem to get up to cruising speed. This is part of a structural problem with the recovery; all the economic gains have gone to the top, leaving the middle class with less; and that money doesn't circulate at the same velocity as money that goes to day to day living.

That number may not be entirely accurate. The weak economy has pushed many workers into the shadows of the underground economy. When we look at the long-term unemployed, and the people who have fallen off the government ledgers you may be wondering what happens to those people. We know the government stops counting them, but they are still here; they still need daily meals;they still need a roof over their head. The shadow economy is a system composed of those who can't find a full-time or regular job. Workers turn to anything that pays them under the table, with no income reported and no taxes paid.

Estimates are that underground activity last year totaled as much as $2 trillion, roughly double what it was in 2009, and possibly up to 8% of GDP. The underground economy is often associate with illegal activity, also undocumented workers, and more and more it is associated with work done for cash that never gets reported. There are dangers associated with the shadow economy; a lack of workplace protections for example. But some income is better than none, but it's a sign of how bad things are and how we have to get the real economy moving again.

And so stocks moved to record highs because today's jobs report confirmed everything the stock market wallows in. The economy gained enough jobs to keep slogging along without giving the Federal Reserve reason to reconsider Quantitative Easing, and the fact that the government's budget cutting slowed jobs growth further confirms the fact that the Fed can't fix the economy on their own and therefore they can't relax or try to exit from QE. This is exactly what Wall Street wants; fiscal policy that restrains economic growth and monetary policy that continues to pump massive infusions of capital into the market without overheating the economy.

Twisted? Yes.

Some reading material over the weekend:

Jeffrey Sachs was interviewed by WSJ MoneyBeat and the professor responded to comments he made at a Phlly Fed conference in May, basically saying that most of Wall Street's daily business is “criminal behavior”, and he is amazed by the sheer number of scandals. I've been talking about for years. Welcome to the bandwagon Dr. Sachs.

Next, Professor David Romer from UC Berkeley offered this post looking at how we can prevent the next catastrophe. The basic idea is that financial shocks are not rare; they are largely caused by the banksters; small scale policy solutions aren't much of a solution; we need to cut the financial institutions down to size. Welcome to the bandwagon Dr. Romer.

Your next reading assignment is Dr. Joseph Stiglitz from Columbia University, and Nobel Prize winner. Stiglitz offered this post looking at lessons from the financial crisis and what that can teach us about theory and policy. Stiglitz says markets are not stable, efficient or self correcting and we need structural transformation not halfway measures, and now is the time for big action. Dr. Stiglitz has been on the bandwagon for a long time and I always enjoy reading his work.

Pope Francis called for an end to slave labor and human trafficking as well as greater efforts to create dignified work for more people. This is ancient economic wisdom and it is good to here it coming from Vatican City.