Is Jobs Growth Reaching a Higher Level?

I want to highlight a divergence between sunny views of the labor market expressed in a Bloomberg article today with the ongoing Gallup survey of hiring/not hiring responses of American workers.  Bloomberg's story is more opinion than presentation of new data.  It is called (sic) Payrolls Growth Vault to Higher Pace at U.S. Companies (LINK).  It has anecdotes and some modest info.  Here is a representative small section:

 Companies from Ford Motor Co (F). to a California tortilla maker are stepping up hiring as the economy improves. The result, say Maury Harris of UBS Securities LLC and Allen Sinai of Decision Economics Inc.: Payroll growth is vaulting to a faster pace of about 200,000 a month, after averaging 167,000 in the second half of last year.

“The new normal is 200,000,” said Sinai, chief executive officer of the New York-based investment-research company. Payrolls may rise 216,000 this month after climbing 236,000 in February, the most since November, he estimates. 

Russell Price, a senior economist at Ameriprise Financial Inc. (AMP) in Detroit, predicts employers will take on 2.5 million workers this year, after hiring 2.2 million last year. 

“And that may be a little bit on the conservative side,” added Price, the top-ranked payrolls forecaster for the two years ended in January, according to data compiled by Bloomberg.

Anyone who remembers the robust jobs market of most of the '90s remembers that these are relatively modest expectations.  They are perhaps consistent with a continued Goldilocks scenario for financial markets- strong enough to allow continued moves toward fiscal balance and also to allow ultra-low interest rates to continue.

These reports do not fit with the continued recessionary-level of hiring/not hiring seen by respondents to Gallup's daily survey (LINK).  This is at a +15, the same level that it had dropped to in September, 2008 before Lehman went under and when jobs were being shed at a rapid pace, later analysis showed.  This metric is flat as a pancake for the past year.

My own sense is that businesses have been pushing a lot of workers quite hard the past few years, and it's time for them to accept lower profit margins.  Just as equipment does, people wear out.  Here's hoping for more people working shorter hours.

 

Thoughts on Cyprus

The shenanigans with Cyprus have a passing similarity to Lehman in its last days, though many differences remain.  Lehman was shopped.  South Korea comes to mind.  Cyprus is being shopped.  Somehow I doubt that the West will let it "fall" to Russia.  Cyprus is too near to Syria, where the West and its Arab allies appear to slowly be squeezing the Assad regime, and with it Russia's naval base in the Mediterranean.  If so, though, will Russian interests still help to force a disorderly event in Cyprus?

Two articles in the Greek e-paper Kathemerini discuss the latest, with insights into dissension in Europe.  LINK, LINK.

The second of these is interesting.  It shows substantial criticism within the European Parliament of how this situation was handled.

It strikes an American who knows nothing special about Cyprus as quite odd that an insured depositor or a safe and sound bank in Cyprus would have to be assessed a "tax" on deposit to bail out a shareholder or bondholder of an unsound bank.  Why not force the uninsured, and if necessary, insured depositors of the insolvent banks, plus their senior or co-equal stakeholders, to take the losses?

Or else, why not place the burden on society at large, including citizens/residents would own other assets, such as real estate, stocks and bonds?

There may be unintended consequences of this situation.

In a stock market that per Value Line is "frothy" and per Jeremy Grantham is poised to underperform even moderate inflation on a 7-year basis, there's a lot to preserve by increasing cash and decreasing exposure to the continued Goldilocks scenario.

European Events Support the Fortress America Theme

Whatever will be in Europe, will be...

No matter.  In the summer and early fall of 2011, when it became clear that the US economy and markets were stronger than those of Europe, I went to and announced on The Daily Capitalist a "Fortress America" investment theme.  That applied to bonds, muni bonds being the low-hanging fruit as even AA and AAA-munis were then yielding more than Treasuries; then it applied to stocks when I invested/traded them-- AAPL being my #1 stock in 2012 and at times my only one- though it is international.

This theme continues.  It also applies to China and Japan.

Jeremy Grantham's latest valuation favors "high quality" US stocks over bonds or general stocks.  Only emerging markets rate a little better on his 7-year time frame, at the expense of greater expected error rates of what will occur versus what "should" occur.

Thus for an American, investing is easy.  Tax-exempts for income and stable asset value, Treasuries to hedge stocks, and research to find "high quality" stocks.

The Cyprus thing changes little from this side of the pond.  Will it be good for gold?  Could be, but per my latest Seeking Alpha piece, I'm concerned that the disinflationary aspects of the fiscal normalization, welcome though that direction is, resemble the trends of the later '90s, which depressed gold's price.

So maybe there's no rush to commit more funds to gold if one already has a position in place.

The rest of the world looks to be a bit more trouble than an American needs from an investment standpoint.

Gold and Gold Stocks Could Be Ready to Rock

Jim Sinclair and his coterie may just be right.  $1600 could be in the rearview mirror now or soon.  The Cyprus mess could be a catalyst.  From a gold-bullish standpoint, I like the fact that the US media are almost ignoring it.  Also, the other thing I like is that oil is down and gold is up.  This is the one fundamental trend that actually increases the attractiveness of gold stocks.  We saw this after Lehman collapsed.

ABX has a new CEO who has stopped almost all exploration and is focusing on financial returns (he was the CFO under the prior CEO, Mr. Regent).  This could be a winner for a while.  Another very small company that is not a miner and has a high but fixed cost of gold production is a South African processor of old gold waste DRDGOLD, symbol DRD on the NYSE.

Greenspan Bullish: Uh Oh

This could be really, really bad.  The man who warned against stocks with nearly four unbelievable full years of bull bull BULL lying ahead has perhaps rung the bell at the top (LINK).

Greenspan: No 'Irrational Exuberance' in Stocks Now

That's a bad enough headline to stop here.  But let's not...

Greenspan said in a " Squawk Box " interview that stocks by historical standards are "significantly undervalued" even considering the recent moves higher. He added that the payroll tax increase didn't dent spending because of rising asset prices.

OK.  Meanwhile, at end-January prices, Jeremy Grantham's model had as its central tendency that US stocks were priced to slightly lag anticipated 2.2% annual price inflation every year (on average) for the next seven years.  But that was at lower prices.  

Grantham has a better track record than the Maestro.  But of course prior success doesn't guarantee future results, etc.  So we shall see.

Japan Plans To Use Sub-Sea Methane For Fuel

This is very interesting.  Who knew?  If anyone remembers Julian Simon, the optimist who debated the Club of Rome guys in the 1970s who said the world was running out of numerous natural resources, he  would have liked this one (LINK):

Japan cracks seabed 'ice gas' in dramatic leap for global energy 

Japan has extracted natural "ice" gas from methane hydrates beneath the sea off its coasts in a technological coup, opening up a super-resource that could meet the country's gas needs for the next century and radically change the world's energy outlook.  

Definitely worth a read.

BofA lays off property appraisers

Perhaps the property rebound, a la Housing Bubble 2.0, isn't so strong after all, given that interest rates have been rising and job growth is not booming yet.  Bloomberg reports (LINK, bold emphasis added):

Bank of America Corp., the second- largest U.S. lender, cut about 5 percent of staff in its appraisal unit last month as the firm rid itself of delinquent mortgages, said two people with knowledge of the move.

The job reductions at LandSafe, a business with more than 1,000 employees and acquired in the takeover of Countrywide Financial Corp., began Feb. 22, said the people, who requested anonymity because the dismissals were private. Appraisers, who estimate the market value of properties, and regional managers were cut, Tracy Sanderson, a LandSafe senior vice president, told staff in a Feb. 25 e-mail.

“While we have known we were overstaffed since the fall, we did everything we could to delay impacts as long as possible,” Sanderson said in the memo obtained by Bloomberg News. “We were hopeful that our volume would return and potentially reduce the number impacted.”...

About 70 percent of work done by LandSafe appraisers was related to transactions for soured loans, including the auction of bank-owned properties and short sales in which a borrower’s home is sold for less than the amount owed, said one of the people. The bank’s expected increase in originations this year isn’t enough to offset the drop in work resulting from having fewer delinquent loans to service, the person said.

The rest of the article discusses, among other things, declining mortgage volumes for the industry as a whole, which lately have mostly been refis rather than new loans.

This is not a disaster per se, but given the bullish action in bank and homebuilder stocks, it makes me wonder if the Street is not ahead of itself on this theme.

A Little More On the Very Complex Financial System

I have finished a first reading of Nassim Taleb's latest book, Antifragile.  It's not an easy read, and it does not tell me what to do in the world of investing, but it's quite thought-provoking.

Bloomberg.com is running today an opinion piece that is more accessible than Antifragile, and is along the same lines.  It argues for more transparency and simplicity in the financial "system".  It's a good read (LINK).  Hint:  the title about embracing complexity is misleading.  Here's a core paragraph:

Complexity also helps financial institutions hide the risks they create. Despite the advertising of the International Swaps and Derivatives Association and others who create and sell derivatives, these products are only sometimes used for hedging and much more frequently for speculation. In the latter case, they are exceedingly useful in obscuring information that would be crucial to the proper judgment of values and risks. Consider the derivatives that helped Italy’s Banca Monte dei Paschi di Siena SpA hide hundreds of millions of dollars in losses as it sought a taxpayer bailout. Anyone making deals with a bank enmeshed in a largely invisible web of contracts with far-flung counterparties does so with a very incomplete view of the risks involved. 

We simply do not know what risks we are, or are not, taking with our investments these days.

Stocks Accelerate Up As Economic Data Does Not; Crash Risk Rising?

Is the stock market responding traditionally, sniffing out economic acceleration when it rises, or it is manipulated?

ECRI is among the mainstream voices that has recently addressed this.

The ECRI latest writeup was followed by media appearances.  In the second part of Lakshman Achuthan's Bloomberg TV appearance, he comments that the economic data look recessionary both as reported by the government and the private sector, but that the only data that do not look that way are from market sources.  Thus he almost explicitly blames the Fed and the powers that be in distorting market signals.

He also highlights the 1926-7 recession in defending ECRI's recession call.  He points out that the stock market rose straight through that recession before going on to bubble until summer 1929.  

The implication is consistent with what one hears everywhere:  this stock market is going higher, and there is plenty of time to exit before a crash.

We shall see.  One worrisome sign comes from this from SentimenTrader:

March 1, 2013 Rising debt and receding cash have put investors' brokerage accounts in a deeply negative position - one of the worst in history.  January's change was the 2nd-most negative ever.

(Clicking on this does not enlarge it.)  If you look hard, you will see little red dots near the peaks in 2000, 2007 and 2011.  I think we are at a similar level.  One thing about Mr. Market-- he will inflict pain on weak hands harshly.  I am hearing the same silly theme everywhere, that a mere $85 B in monthly Fed bond buying can continue to levitate tens of trillions of dollars worth of assets.  Meanwhile, the rising bond yields are damaging the balance sheets of bondholders everywhere.  In the Japanese post-1995 experience and in the US ZIRP experience, this has within a year at most been followed by an economic downturn.

One did not see the following stories in the media in 1986, 1995, and probably not in 2005 (LINK, LINK):

For the middle class, expenses grow faster than paychecks

and 

More than 25% of Americans raiding 401(k)s to pay bills 

One also sees continued flatlining from Gallup's hiring-not hiring metric.  Over the past few years, that flatlining has been associated with a quick drop in rising interest rates.    Gallup's estimate of the % of the population employed is unchanged from one year ago, the same as the household survey.

Thus I suspect that adjusting for government deficit spending funded in large measure by the Fed, the US would still be in recession.  Whether it actually is in recession as ECRI argues is not my argument.

My guess is that now that the deficit is shrinking as a % of (inflated) nominal GDP, we are at high risk of starting to see further deceleration of economic activity.  At the same time, the "bond vigilantes" who have made Jeff Gundlach happy by letting him buy 10-year  T-notes above 2% will have done their job.

I'm suspicious of a crash in stock prices and interest rates this year, possibly next.  This is March, and in March 1987, I was sensing during that rising rate environment underlying weakness in the stock market but not in the economy.  Now I am seeing something more like 1999.  Instead of the NAZ trading at some insane multiple of earnings, but where the leading stocks had rapid growth, now the new version of the NAZ is the Russell 2000 (IWM), where the iShares guys who run the IWM index find an average P/E well over 25 and a P/E/G of about 5:1 based on 5-year average growth of only 5%.  

People such as Stanley Druckenmiller are telling us not to worry, we have a few years.  So is  Lakshman Achuthan, though more subtly.  I'm watching gold, silver, oil and Dr. Copper.  Let's see if they either break down or melt up (They may do neither).  If the former, I'd expect stocks and bond yields to do the same.  If the latter, bonds are toast.

ECRI Updates, Remains Bearish On The Economy

I'll have more to say after I reread this, but ECRI has responded to the many critics of its 2011 and beyond recession call with a new and interesting position paper.  Here's the LINK.  I do think it's worth thinking about.  One of the facts they adduce is that non-exchange-tradable commodity prices have lagged those listed on exchanges.  There are indeed underlying deflationary pressures that are being held at bay by leveraged speculators.

They highlight the 1927 recession and hint that we may be in for a bubble surge in stocks such as was seen into summer 1929-- and as was seen in the late '90s.  My preference is to play it safe

Sunday Night Potpourri

Two bits of potpourri.  One is that you may have already seen that per ZH, the BBC confirms that the Swiss people indeed are more "revolutionary" than the Socialist countries (LINK):

Swiss referendum backs executive pay curbs

There was outrage in Switzerland over a $78m pay off, later scrapped, to the outgoing Novartis chairman.Swiss voters have overwhelmingly backed proposals to impose some of the world's strictest controls on executive pay, final referendum results show.

The other is that investors are getting more and more believing of the strength of the bull (LINK):

Short Sales Fall 53% With U.S. Bull Market Starting Fifth Year
Investors reduced bearish stock bets to the lowest level since at least 2007 as the bull market in American equities begins its fifth year.
Short sales in the Standard & Poor’s Composite 1,500 Index fell to 5.6 percent of shares available for trading in February, down from a record 12 percent during the credit crisis and the lowest ever in data compiled by Bespoke Investment Group and Bloomberg starting six years ago. 

Investor's Intelligence shows a dangerous chart:  the NYSE bullish percentage has risen from a fairly low level in the past 18 months, and has begun to roll over.  The rollover is the danger sign, not the high bullish level.

The belief is that the US economy is a supertanker, and that the Fed's ministrations are either harmless or not really necessary.  Yet at 7% of GDP, the Fed's money-printing effort likely continue to cover up for the Reinhart-Rogoff continuing depressed state of the economy.

Given all the money-printing, underlying good economic dynamics should show much faster nominal growth than has been measured.  It appears that there is no nominal GDP recession, but it's hard for me to see such a high P/E when there is such widespread underlying weakness.

The best solution for Japanese investors during their prolonger ZIRP period was to purchase shares of Japanese multinationals at fair prices, such as Honda (HMC) on dips.  This might be a good strategy at home, along with shares of truly stellar domestic companies on dips.

Meanwhile, the gold bugs are making a more effective case than befiore that sentiment is washed out.  That doesn't mean  a new money buy should be made, but let's watch for a trigger.  I am also watching for a test below the reaction low around $1522, which would force lots and lots of liquidation.  Gold has cycled from massively in favor in summer 2011 to moderately out of favor, and stocks have gone the other way.

Thinking different.

Fragile Economy, Fragile Markets

Evidence is growing that the insouciance about the US economy's ability to withstand the sequester is looking like a top in the economy.  Gas prices are near records for the date.  Charles Biderman of TrimTabs is so alarmed by the tax withholding data he is seeing that he is calling a recession as being underway (that may be beyond his capabilities.)  Investor's Intelligence shows a very high bullish consensus of advisers beginning to roll over.  It is that rollover that has preceded every serious stock market decline since the 2009 bottom.  Gallup's daily polling of consumers continues to show no growth in the key hiring/not hiring metric.  This has flat-lined or even trended slightly downward for the past year.  Europe is not fixed, China has recently instituted monetary tightening, Japan is not fixed, Brazil is not fixed, Canada is not fixed.  Australia is not fixed.  India and Russia may or may not be OK in their high-inflation ways, but they are too small to matter.

Yet the Russell 2000 sells close to 30X earnings when negative earnings are taken into account (IWM ETF's measurement), yet the 5-year annual earnings growth rate is only 5%.  That is, BTW, worse than the P/E/G of the SPY at the peak in 2000.  This is a small stock bubble as sure as the NAZ was in a bubble in 1999 and 2000.

Commodities look toppy, except for gold, which has been declining for 5 months in a row.  This is approximately how it acted last year, culminating in a stock market correction to the low of the year.  That correction was bailed out by Draghi's talking, leaks of QE 3, and Apple/Google.

The authorities are already on Internet bubble 2.0 and housing bubble 2.0.  There is a limit to the number of bubbles that can be blown.  Isn't there?

In addition, it may be in the President's political interest to see a stock market correction/crash here.  Then he could call the R's the party of Herbert Hoover.

Meanwhile, even though the sequester is fiscally responsible on its face, Treasuries are selling off overnight on the futures board.

The combination of rising bond rates, high gasoline prices, wild speculation in small stocks as well as bubble stocks such as AMZN, and a bear move in gold (a mark of global liquidity) argue for a correction.  There are also high levels of insider selling in many stocks.

The one "but" re stocks is that patient money may simply prefer stocks such as IBM and CVS, yielding about 1.9%, over a 10-year T-bond yielding 1.9%.  Ten years from now, assuming the Fed stays the money-printing course if "necessary", those stocks likely will see their dividends double; but said dividends could go much higher if each company ceased shrinking shares outstanding via buybacks.  Both CVS and IBM could easily be yielding 5% right now if they stopped buying back shares.

Strong free cash flow positive dominant companies are decent buy and hold vehicles now.  So is cash.  Exposure to Treasuries and gold makes sense.  All of the above assume no leverage and the ability to wait out a period of lower prices.

Powerful forces are at work in this period that is in the interior of Extremistan.

OK, back to the back end of Taleb's "Antifragility".

Let's see if we are moving back to a period resembling 2011 or even 2008 where you go to sleep with markets up a lot and by the next morning they have shifted to down a lot, or up a lot more; or vice versa.  Thus anything you think about the economy or markets is right and wrong almost simultaneously.

No one ever said things would always be simple.

OK, back to the back end of Taleb's "Antifragility".

Trend To Lower Global Interest Rates Revives

Bloomberg.com is revealing amazing moves down in global interest rates that are already at or near record lows (LINK to UK rates, click around for those of other major countries).  Japanese JGB's have been collapsing, to 68 basis points on the 10-year and 186 bps on the 30-year.  This with the threat to create 2% inflation!  Just as happened when the US lost its AAA rating from S&P, now the UK has lost its AAA rating to Moody's and its interest rate structure has started to collapse.  Following the equivocal Italian election, German interest rates, which had been trending down anyway, moved sharply lower.

If governments were really "stimulating" anything much, interest rates would be rising in response.  This looks to me as though we need to watch out for an unwanted downturn in the global economy.

With taxes having risen beginning in January, and with about 1/2 of one percent of economic activity (annual rate) scheduled to be withdrawn from the US economy in a few days, can Treasury rates at home fail to drop in sympathy?  If rates in major countries drop, and ours stay up, that would not be good for the president's goal to double exports.

Meanwhile, I lost the link, but I saw an article on the 'Net today quoting a JPM exec that an awful lot of bad deals were being done in commercial real estate by the competition that had run out of many sound loans to make.  Of course, he (she?) said that JPM was only making good loans.

I have heard this from bankers before. The last time I personally heard this was from my Smith Barney broker, probably in 2007 (maybe in 2006), that BofA was making terrible loans, and was stealing business from Citigroup (which then owned Smith Barney).  Well, it turned out that we were near the peak of the economic cycle, and both BofA and Citi were making horrible loans by the boatload.

While I am not at all a deflationist, I still think that if the stars align as they may be doing, we could see much lower interest rates come to the US by the end of 2014.  After all, the trend is your friend until it ends.

Comments on the Selloff and the Sequester: Still Cautious After All These Years

Things are beginning to resemble 2011, though with tech and the Russell 2000 small stocks as the "rage" this year, rather than commodities in 2011.  If past is prologue, stocks will survive a scare and rally.  Then, later in the year, "the horror, the horror" that most of this "recovery" from the Great Recession was exactly as Reinhart/Rogoff expected.

If the above scenario comes true, and of course it's pure speculation, we will see what we will see.  If my long-held Japan scenario continues to play out this year, new lows in long-term T-bond rates loom before yearend.

The speculative way to play this is to buy EDV or ZROZ.  Somewhat less speculative is to directly purchase a zero coupon T-bond of the longest duration possible.  In either of the above cases, one is basically gambling on reversion of long-term bond yields to the Japanese mean, as it were.   I and some of the accounts I manage are long EDV (we are Vanguard clients, and EDV is commission-free to Vanguard clients) and zero-coupon T-bonds, plus the more sedate TLT.

Regular readers know that the last time I had anything really nice to say about the US stock market came in early August 2011 after the mark of the beast 6.66% down day on the Dow  Even then, my bullishness was tepid.  Unfortunately, the late September recession call by ECRI made me step away from stocks and focus on the muni market, which was seriously undervalued relative to Treasuries.  Oh well...

But it looks to me as if the Russell 2000 is this market cycle's equivalent of the NAZ in the later '90s.  It's for mo-mo players only.  A lot has to go right with the economy for it to be even a fairly good investment on a multi-year basis.

One final thought.  The media is downplaying the effect of the sequester on the economy.  How, the mouthpieces ask, could a mere $85 B spending cut by the Feds harm the "recovering" juggernaut of the  economy?  Doesn't the stock market predict a boom ahead?

Yours truly thinks that the Fed is all in and cannot "stimulate" more, and the second derivative of fiscal stimulus will turn definitely negative if the sequester takes hold as legislated.  If anyone thinks this is somewhat the opposite of the situation in early 2009, given the tax increases that took hold on Jan. 1, please join me in raising your hand.

I am all for less unbalanced budgets.  I just think that in the investment world, they tend to lead to stock market selloffs and renewed bull markets in Treasuries.