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February 5, 2010 – LUNCH WITH DAVE
The Household survey did show a nice rebound of 541k in January and almost
half the gains were in full-time positions. Not only that, but the number of folks The working-age population
working part-time for economic reasons plummeted 849k, or by nearly 10% — in the U.S. plunged 92k in
talk about an eye-popper. January; such a decline has
occurred but five times since
Be that as it may, keep in mind that the January rebound in Household 1951
employment fell short of recouping the entire 589k plunge in December and the
job count here is still 1.5 million lower today than it was in July. After four
months of decline, the labour market (officially defined) rose 111k (well short of
offsetting the 661k plunge in December) and together with the rebound in
Household employment, all the job market ratios improved:
The working-age population plunged 92k in January and such a decline has
occurred but five times since 1951 and they most happen in January, so we could
well be spending an inordinate amount of time analyzing a report that is rife with
bad sampling. For example, we also found that despite the great headline in the
Household survey, adult-male employment (aged 25 years and over) actually fell
75k and has declined now for 18 months in a row. Moreover, the adult-male
unemployment rate yet again was at 10% in January, a level it has either been at
or breached for six straight months in unprecedented string dating back to 1947.
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February 5, 2010 – LUNCH WITH DAVE
Taking a big picture viewpoint, the U.S. labour market remains fundamentally
weak. Despite the clarion calls for recovery from the legions of Wall Street While there will be many
economists and strategists, the reality is that labour market gaps remain very economists touting today’s
wide; here we are more than two years after the recession officially started and the U.S. employment report as
ranks of the long-term unemployed continue to swell. The average duration of some inflection point, the
unemployment rose to a record 30.2 weeks from 29.1 weeks in December; and reality is that the level of
for the first time ever, we have more than 6.3 million Americans (up from 6.1 employment today, at 129.5
million in December) who have been looking for a job with no luck for at least six
million, is the exact same
level it was in 1999
months. That is an unprecedented 41.2% share of the pool of unemployment.
While there will be many economists touting today’s report as some inflection
point, and it could well be argued that we are entering some sort of healing phase
in the jobs market just by mere virtue of inertia, the reality is that the level of
employment today, at 129.5 million, is the exact same level it was in 1999. And,
during this 11-year span of Japanese-like labour market stagnation, the working-
age population has risen 29 million. Contemplate that for a moment; fully 29
million people competing for the same number of jobs that existed more than a
decade ago. That sounds like pretty deflationary stuff from our standpoint.
Not only that, but consideration must be taken that in 2009, we had a zero
policy rate, a $2.2 trillion Fed balance sheet and an epic 10% deficit-to-GDP
ratio. You could not have asked for more government stimulus. Yet
employment tumbled nearly 5 million in 2009.
Here we are in 2010, and what we have on our hands is a situation where the
outer limits of deficit finance have already been probed, and the Fed has pledged
to start shrinking its balance sheet and withdraw its critical support for the
mortgage market. Yet the deleveraging in the household sector is ongoing and it
now looks as though the economies in Asia and Europe are going be slowing down,
not speeding up, in coming quarters. And of course, heightened concerns over
sovereign credit quality suggest that risk premia globally are set to rise after a year
in which we had the calm before the storm. Heightened risk premia means
uncertainty, volatility and in turn a very clouded economic outlook that transcends
today’s data release, which has already consumed too much of my time.
A TECHNICALLY-DRIVEN MARKET
Yesterday’s sharp and broadly based decline in the equity markets was the
worst session since April 20 of last year. The S&P 500 is now down 7.6% from
the mid-January peak and the Asia-Pacific market is just 40 basis points shy of
seeing a 10% correction after having its worst session in 10 weeks; emerging
market equity funds lost $1.6 billion in net redemptions in the past week, the
largest outflow in nearly six months. Financials were clobbered 4.2% and led
the decline, though basic materials weren’t too far behind. Volume swelled as
all the major averages fell off — not a good sign for the bulls.
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February 5, 2010 – LUNCH WITH DAVE
I went for a 5km run at the club I recently joined (I aim to lose 30 pounds ASAP Since this is a technically-
just to get back to being fat again, and the 30 pounds after that will finally take driven equity market, we are
me back to my college days). Fast Money came on the tube and it was almost bound to get a 50% reversal
laughable to see them all grappling for the reasons why the selloff occurred. of the bear market rally,
China here. Greece there. No, sorry. Remember Bob Farrell’s eleventh rule: which would take the S&P
“it’s the news that makes the market; not the other way around.” 500 to 912 — so keep your
seatbelts on
This is a stock market that is as overpriced as it was heading into the October
1987 crash and as the case back then, it wasn’t about the fundamentals but
about policy discord between the U.S., Japan and Germany. A market priced for
perfection requires perfection on all fronts.
The comments on Fast Money were that the fundamentals hadn’t changed —
this selloff is pure emotion. Really? We had a 70% rally from the March low in
advance of any serious turn in the economic data — this was purely a bear
market rally that was rooted in the technicals (and short coverings). How do we
know? Because at the January 19 high in the S&P 500 of 1150 it had
completed a 50% retracement off the slide from the October 2007 highs to the
March 2009 trough.
Meanwhile, its seems that Mr. Market had already started to top out back in
We are still long-term bullish
mid-September, yet so many pundits still believed we were still in the throes of a
on the commodity sector and
bull phase market even though a vivid topping formation was becoming
precious metals but the
increasingly evident. How about that slide in bond yields yesterday? In the charts do point to a further
realm of technical analysis, a break towards 3.2% on the U.S. 10-year Treasury correction in the comings
note yield cannot be ruled out over the near-term. weeks/months … keep your
power dry for now
We are still long-term fans of the commodity complex and precious metals but
again, the charts are indicative of a further correction in coming weeks and
months so keep your powder dry and be ready to add to long-term positions in
the areas of the investment arena that are in secular bull markets.
The U.S. dollar has broken out on the upside, and while this is more a reflection
of the problems overseas than anything overly encouraging state-side, the
charts again are telling a story of a flight-to-safety not unlike what we
experienced in late 2008 and early 2009. It is a countertrend rally in the
greenback but this could last a while longer — the DXY tested the 90 threshold in
the last such up-move nearly a year ago, which would imply another 10% rise
from current levels (ie, this countertrend rally may only be 40% of the way done).
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February 5, 2010 – LUNCH WITH DAVE
Again, countertrend rallies in the U.S. dollar are not generally associated with
upward movement in the commodity complex, so expect to see further near- We are currently seeing a
term declines in the resource space. Although the chart of gold against the euro countertrend rally in the U.S.
and many other currencies still looks quite constructive. dollar… all of a sudden, the
USD looks like the one-eyed
Moreover, talking about policy discord. Yesterday, New York Fed President man in the land of the blind
Dudley expressed concern over how weak the recovery is likely to be and that
the odds of a double-dip recession “are not zero”, and dissenting voter Hoenig
from Kansas City continuing to express his view that rates are not going to stay
where they are indefinitely (even though they’ve been at zero in Japan for well
over a decade).
On the global data docket, we see that German industrial production fell 2.6%
MoM in December, more than wiping out the 0.7% gain the month before and a
huge disappointment to the consensus forecasting community that had penned in
a 0.6% advance. To be sure, if President Obama gets his wish of doubling exports
in the next five years, he is going to need a little help from his friend otherwise
known as the greenback. For the time being, there are other countries in the
world, notably in Europe (the Euro is now at an eight-month low) and in Japan, that
probably need a good dose of currency depreciation even more.
The Sterling is also getting pounded in the aftermath of comments out of the
Bank of England to the effect that more quantitative easing will be forthcoming
“should the outlook warrant it”. There is even less pressure now for a Yuan
revaluation seeing as China’s current account surplus has collapsed 35% in the
past year. The Indian rupee is succumbing to huge capital outflows. And so long
as the commodity complex is in correction mode, rest assured that the likes of
the Loonie, Kiwi and Aussie will be trading defensively as well.
All of a sudden, the USD looks like the one-eyed man in the land of the blind.
With that in mind, have a look at the article on the tough choices facing
Euroland policymakers — default or bailout? — on page B1 of the NYT (Fraying At
the Edges: The Economic Weakness of Some Members May Test the Eurozone).
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February 5, 2010 – LUNCH WITH DAVE
The jobless rate did dip in December, to 8.3% from 8.4%, but we have already
ascertained that it would take a move down to 7.5% to prompt the BoC into Canadian employment data
action. At the pace the unemployment rate has been declining in the past six is like a yoyo — massively
months we won’t see that critical point (7.5%) until we are into the winter-spring outperforming expectations
of 2011. in November, then massively
disappointing in December
Moreover, this is a case where the headline was a lot stronger than the details: and now again massively
surpassing expectations in
• December was revised to -28,000 from -2,600 initially, so taking the revision the January
into account, the headline was actually fractionally below expected.
• Manufacturing payrolls were down 15,700 (that would be akin to a 160,000
plunge in the U.S.A.).
• The once-hot construction industry lost 400 jobs and this was the second
decline in the past three months. This is the sector the BoC is relying on to
offset losses in export-oriented sectors.
• All the gains were in part-time. Full-time employment edged up 1,400 but that
offset less than 5% of the 29,400 slump in December.
• Those working part-time because of business conditions and actually want a
full-time jobs surged 34,600, which was the largest increase in seven months.
• While the official unemployment rate did edge down, the more inclusive R8
measure (similar to the U6 statistic in the U.S.) rose to 12.3% from 11.1%.
Now, this statistic is not seasonally adjusted; however, keep in mind that in
January 2009, when most folks thought the world was coming to an end, this
broad measure of labour market slack was sitting at 11.0%.
• You look at the industry breakdown and what you also see is a ‘low quality’
jobs performance — public administration +11,000, accommodation/food
services +14,100 and business, building and support services +34,400. The
other 85% of the Canadian employment pie shed 16,500 jobs last month. In
other words, this was one lopsided report.
• Hours worked did edge up 0.2% MoM, but that was due to a spike in services,
which is very difficult to measure — hours worked fell 0.2% in the goods-
producing sector, the second decline in the past three months.
• While average hourly earnings did rise 0.7% MoM this is a notoriously volatile
metric and the YoY trend, as BoC Governor Carney went out of his way to point
out in his speech yesterday, is slowing down markedly — from 4.8% a year ago,
to 2.4% at the end of 2009, to 1.8% now. This is the weakest trend in 6½ years.
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February 5, 2010 – LUNCH WITH DAVE
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February 5, 2010 – LUNCH WITH DAVE
Despite the loss of 452,000 jobs in the final quarter of the year, output in the
nonfarm business sector exploded at a 7.2% annual rate. This is indeed the
Houdini recovery. And with the downward revisions to employment, these
productivity numbers are likely to show double-digit gains and make a mockery
of the advances we saw during the tech revolution of the 1990s. Catch my drift
— GDP growth is dramatically overstated and by perhaps as much as three
percentage points.
But there were deflation thumbprints all over yesterday’s quarterly productivity
report. Real compensation per hour sagged a 1.9% annual rate. Unit labour costs
as a result, and this is a key fundamental driver of the inflation process, fell 4.4%
at an annual rate and are flat or down now in each of the past four quarters.
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February 5, 2010 – LUNCH WITH DAVE
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We went into the databank, and back to 1947 we have seen plenty of times
when output growth rose at over a 7% annual rate in any given quarter — over
60 times in fact. But never before has happened in the context of declining
employment — normally such growth in output is met by a 650,000 quarterly
increase in employment, not a decline in excess of 400,000 As we said, it’s the
Houdini rabbit-out-of-the-hat recovery.
To put 480k in jobless claims into proper perspective, it is 80k higher than the
level prevailing in the aftermath of 9/11; and just about in line with the peak
posted in the 2001 recession. And this is with zero policy rates, a $2.2 trillion
Fed balance sheet and a 10.5% fiscal deficit-to-GDP ratio. The vagaries of a
post-bubble credit collapse.
Page 9 of 12
February 5, 2010 – LUNCH WITH DAVE
Best
• Primary metals
• Turbines/engines/power transmission
• Computers/electronic products
• Automotive
• Paper products
• Basic chemicals
Worst
• Commercial aircraft
• Farm machinery
• Construction machinery
• Industrial machinery
• Appliances
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February 5, 2010 – LUNCH WITH DAVE
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