• Market recap
• Facebook
• Nonfarm Payrolls Report

Capital Markets Recap

Top Stories

The Facebook IPO continues to garner a lot of attention. Here’s a great video on the subject.

This Week

There was one economic release that mattered this week, the monthly Nonfarm Payrolls Report. It was far better than expected, with 243,000 jobs added versus an estimate of 140,000. In addition, December’s figure was revised upward by 3,000. Private Payrolls grew by 257,000, also above expectations (+160,000); December revised up 212,000 to 220,000. Likewise, Manufacturing Payrolls grew by 50,000 instead of the anticipated 50,000; December revised up from 23,000 to 32,000. The Unemployment Rate fell to 8.3% from December’s 8.5%, while the Average Workweek grew by six minutes.

Among those commenting on the numbers was Mohamed El-Erian, of New-Normal/PIMCO fame, who said, in a Bloomberg, interview that the numbers were “really good,” but that there’s still some structural employment problems (read: skills mismatch), while a Deutsche Bank economist said that 200,000+ per month for 12 are needed to bring down the unemployment rate by 1%.

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• Capital Markets Recap
• Amazing earnings
• Muffins

The Dow Jones Industrial Average is a dinosaur, created in a time when computers didn’t exist. Accordingly, it was created in a way that was easy to calculate. Holding in the DJIA are weighted by price, so an $80 stock has twice the weight in the index of a $40 stock, and that can often lead to distortions when the highest-priced stocks have significant moves. Today, that’s what happened. Just three stocks contributed 55% of the index’s drop.

Top Stories

A local financial institution with which I am well acquainted announced record earnings this week. Tower Financial, as you can read from the linked press release, my employer, announced that it had record core earnings in the fourth quarter of 2011 and for the full year. The quarter’s earnings were $2.8 million, for the full year, $10.1 million. Core earnings is another of saying no-fluff earnings. Core earnings are what we earn doing banking stuff. If we throw in some fluff, like a deferred tax asset that flowed to the bottom line, but which is really just an estimate of a future tax benefit, we had record earnings of $3.4 million for the quarter and a monster $6.6 million for the year. You can click here to view the entire press release.

As usual, Fort Wayne’s Journal Gazette just couldn’t say enough about our phenomenal results, as you can see below in the gushing write-up.

Tower’s earnings more than double

Tower Financial Corp. on Thursday reported record annual earnings of $6.6 million, or $1.36 per diluted share, for 2011. The results were more than double the $3.2 million, or 69 cents a share, posted for 2010.

The Fort Wayne-based parent of Tower Bank also reported record fourth-quarter earnings of $3.4 million, or 71 cents per diluted share, a four-fold increase over the $884,000, or 18 cents a share, reported for the same three months of the prior year.

Michael Cahill, Tower’s president and CEO, in a written statement, described the results as “a significant milestone” for the company. But, he added, that work isn’t complete.

“We still have significant opportunities to expand our impact in our local communities, improve our service levels and efficiencies, and acquire new customers,” Cahill wrote.

Muffins

I didn’t have time to do a proper Weekly Recap, so here’s my daughter’s recipe for Pumpkin Apple Streusel Muffins (her artsy photo), which she got from another blog. Sorry; that’s going to have to suffice. Click on the recipe to go to the blog from whence it came.

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• France, Italy, and other countries downgraded by Standard & Poor’s
• 4th quarter earnings season commences
• Increasing number of workers willing to voluntarily quit their jobs

Capital Markets Recap

Top Stories

• It was leaked–as it was for the U.S.–that France would lose its AAA credit rating, dropping to AA+. Apparently, Standard & Poor’s gives a 12-hour advance notice to governments of countries being downgraded. As someone from brokerage firm Miller Tabak put it, what politician can keep news like that quiet. This shouldn’t have surprised markets much. When the U.S. was downgraded, it was roundly noted that any decision not to downgrade France, which looks worse than the U.S., would be assurance that the U.S. downgrade was politically motivated. Italy drops to BBB+.
• Apple said the iPad3 will have better screen resolution, have a faster processor, and be able to work on next-generation wireless networks. It’s supposed to go on sale in March.
• Raymond James is buying the brokerage house Morgan Keegan from Regions Financial, as that financial institution rushes to shed assets.
• Record high correlations amongst stocks lead to, in 2011, funds trailing the S&P 500 by the widest margins since 1997.
• The fourth-quarter earnings reporting season kicked off this week, with, as usual, Alcoa leading the way. The company reported its first quarterly loss since 2009. So, what’d the stock do? Well, naturally, it rose.

• The earnings season begins in earnest next week (just 4 companies reported this week) and then 123 the following week. I’ve seen data that suggests that analysts are overly pessimistic with respect to earnings. That results in a lowered bar and might allow for some nice earnings surprises.

This Week

The NFIB released its Small Business Optimism index this week. It rose from November’s level (92.0) to 93.8 in December. While the index has rebounded to exceed pre-recession levels, it remains about 5% below the average level, as can be seen below.

Here’s a bit of happy news. Every month, the Labor Department releases its JOLTS (Job Openings Labor Turnover Survey.) It reports on job openings and job separations. While job openings remained at 3.2 million in November, separations rose to the highest level since August 2010. Part of that was a result of an uptick in the Layoff Rate, the rate of Voluntary Quits rose to its highest level since September 2008. Voluntary quits are usually a sign of confidence in an improving labor market. The index, however, has only existed since late 2006. Still, we shouldn’t look a gift horse in the mouth.

Initial Jobless Insurance Claims rose quite sharply this week, from an upward-revised 375,000 to 399,000. According to a Bloomberg news story, that raises fears that temporary holiday hiring may be reversing.

Hiring by package delivery companies and retailers during the holidays to meet demand for gifts may now be giving way to an increase in dismissals. At the same time, claims figures are subject to greater volatility during this time of year, as the government has trouble adjusting the data for the seasonal swings in employment.

So, smooth the data! Here it is with a mid-2011 regressed trend (still heading down), a 1-month smoothing (heading up), a 2-month smoothing, and a 3-month smoothing (heading down, but just slightly.) It may be difficult to adjust, but so far the indications seem to be that the trend will continue.

The week’s last economic release was the University of Michigan Consumer Confidence index. With a jump to 74.0, it’s back to May 2011 (74.3) levels and isn’t that far from the post-recession high of 77.5. Still, taking a look back at the four prior recessions (1980, 1982, 1990, 2001), the current reading is only above the average post-recession reading of the 1980 recession.

Next Week

Key indicators to watch

• Empire State Manufacturing index (Tuesday) – January
• Producer Price Index (Wednesday) – December
• Industrial Production (Tuesday) – December
• Capacity Utilization (Tuesday) – December
• Consumer Price Index (Wednesday) – December
• Initial Jobless Claims (Thursday) – weekly
• Philadelphia Federal Reserve index (Thursday) – January

Housing indicators

• MBA Mortgage Applications (Tuesday) – weekly
• NAHB Housing Market Index (Wednesday) – January
• Housing Starts (Thursday) – December
• Building Permits (Thursday) – December
• Existing Home Sales (Friday) – December

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• Festival of charts
• Earnings season about to kick off
• 200,000 jobs added in December
• Unemployment rate drops to 8.5%

Prior posts

• Where did all the jobs go?
• Some new features

Hey, if you like this post–or any other–you can click the e-mail icon at the very bottom to send it right to a friend. I don’t know how most of social media works, but you can add it to your Facebook page, Tweet it, Digg It, StumbleUpon it. You can also subscribe to future updates in your blog reader or iGoogle. Do that with the subscribe button, which ought to be northeast of this sentence. Speaking of stumbling, this blog is stumbling headlong into 2010.

Capital Markets Recap

Top Stories

• Fed Policy Makers Urge More Housing Aid – indeed, Bank of America rallied hard on Thursday (+9.7%) on hopes of a White House plan to ease refinancing of existing mortgages. An unnamed source at Tower Bank with the initials Steve McElhoe said something like… current for three months on payments=refinance with no appraisal, no credit check. Click here to send Steve an e-mail to get in line.
• Stocks Show Too Much Earnings Pessimism, Citigroup says – “investors appear to be bracing for a 20 percent earnings decline in 2012,” Buckland wrote. “This seems too pessimistic, even for recessionary Europe.” Bloomberg published the following chart showing that world stocks are 23.5% below their average price:earnings ratio of the last forty years.
• Inventory Restocking to Propel U.S. Manufacturing
• Lampert Cuts AutoZone as Clients Pull Money Amid Sears Losses – Eddie Lampert is the CEO of Sears and also runs a hedge fund. Thought at one time to be the savior of Sears, he has instead been a flop.
• Earnings season kicks off next week, with six of the S&P 500 companies reporting. As usual, Alcoa will lead the charge.
• In my opinion, the barometer for the crisis in Europe is comprised of yields on Spanish and Italian sovereign debt. Recently, those rates have begun to kick back up, as can be seen below.

• The Federal Reserve’s Open Market Committee released the minutes of its December 2011 meeting, and here’s what they looked like, according to Wordle. Wordle clouds are created from text, with the most frequently occuring words showing up the largest.

This Week

As I mentioned last week, there weas really one report that mattered today, and that was/is the Nonfarm Payrolls report. As they say, it came out better than expected. Economists had expected 155,000 jobs to be created; the survey said 200,000 jobs were created, 212,000 of them (hello?) were in Private Payrolls. Some higher level math indicates that the government sector contracted in December by (-)12,000. Manufacturing payrolls grew by 23,000, far better than the 6,000 increase economists had expected. That data all comes from the Establishment Survey, a survey of about 160,000 companies and government agencies. The Unemployment Rate, however, comes from the Household Survey, which surveys about 60,000 households (source: Shadow Government Statistics). As you might imagine, the establishment survey doesn’t catch any self-employed or workers from home, nor does it capture the smallest employer.

There are three important numbers in the household survey:

1. Civilian noninstitutional population (16 years and over)
2. Civilian labor force 
3. Unemployed

The labor force is made up of those who are employed and unemployed. Easy enough, right? Not so fast. If you were camped out in Freimann Square during the week of the survey, holding up a sign that says, “We are the 99%. Give us back our government,” you might have had a hard time looking for a job during the survey week. According to the Bureau of Labor Statistics, you would have been considered neither employed nor unemployed; you would be considered “a person not in the labor force.” To be considered unemployed you have to have lost a job and be actively looking for a new one.

From these three statistics, two bigger statistics are determined. The Unemployment Rate is #3 divided by #2. The Labor Force Participation Rate is #2 divided by #1. Several dynamics arise from this. First, the population is generally always rising; it’s inexorable. Second, the labor force fluctuates based on, generally, the economy. Employment rises as the economy improves; those looking for jobs expect better job hunting prospects as an economy improves. Both conspire to swell the labor force and vice versa. The third changes in the same way. From the other side, as the economy weakens more lose their jobs and continue to look for new ones; they are the unemployment rate. Others get discouraged, give up looking for jobs, and, thus, leave the rolls of both the unemployed and the labor force.

All that leads to a conundrum or paradox or whatever you call it. A deteriorating economy can produce a lower unemployment rate, and an improving economy can produce a rising unemployment rate. Consider a country with a population of 100,000. In our country, in month one, 60,000 are considered to be part of the labor force; 30,000 of them are unemployed by looking for employment. Therefore, the unemployment rate = 50%. In month two, bizarrely, the population remains unchanged at 100,000, but half of the unemployed have given up looking for jobs. The labor force falls by 15,000 to 45,000, while the unemployed fall from 30,000 to 15,000. To get the employment rate we divide the unemployed (15,000) by the labor force (45,000), and, voila, the unemployment rate falls to 33%! In contrary fashion, an improving economy can produce a pool of unemployed–via increasing job seekers–that grows faster than the labor force and, thus, raises the unemployment rate.

That’s all a long-winded–as usual–way of saying that we have to look at more than just the unemployment rate. We also have to consider the labor force. In December, it fell by 50,000 (-0.03%) from November. The unemployed, however, fell by far more, 226,000 (-1.70%), leaving us with an unemployment rate of 8.5%, down from 8.7% in November. We should, eventually, see a rise in the unemployment rate as new job seekers swell the ranks of the unemployed.

What follows is a series of charts related to the labor force.

First, here is a look at the Labor Force going back to 1984. It’s not seasonally adjusted, but from the repeating, saw-tooth line, it’s clear there are seasonal patterns. The labor force swells when school’s out and shrinks when it’s back in session, etc.

So, that’s why certain series are reported as Seasonally Adjusted. In the chart, below, the same series has been seasonally adjusted.

For all the conspiracy theorists–and they’re out there…”but the non-seasonally adjusted data tell a different story…”–here’s what they look like together.

On the next chart you’ll see the labor force along with the population. Notice the unrelenting advance of the population. Notice the erectile disfunction in the labor force…just sorta peters (sorry) out after 2007 and doesn’t come back.

Dividing the labor force by the population produces the Labor Force Participation rate, which is shown in the bottom panel, below. I mentioned in early December that the labor force participation rate hasn’t been this low since 1984.

Here’s one last look at labor force participation. The same percentage of a number that’s 36.6% larger is a number that’s 36.6% larger–brilliant, I know. That leaves us just 206,000 short of 100,000,000 who are not in the labor force that could be. I think that’s pretty scary, and if you want to know what’s even scarier, read the series of articles referenced in this post. Some jobs have been completely destroyed, vaporized.

Next Week

Key indicators to watch

• NFIB Small Business Optimism (Tuesday) – December
• JOLTS – Job Openings and Labor Turnover Survey – (Tuesday) – November
• Initial Jobless Claims (Thursday) – weekly
• University of Michigan Consumer Confidence (Friday) – preliminary January

Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

With offices in:  Bangkok  |  Fort Wayne  |  Paris  |  Craigville 

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• Doug Kass’s 2012 list of surprises
• Meredith Whitney lambasted for muni bond call
• Mixed bag of economics

Capital Markets Recap

Every firm is rolling out its version of 2012 lists and forecasts. From what I’ve read, it seems to be more of the same–2012 will look like 2011. If anything, the second half might be better than a rocky first half. If you’re tired of all the slit-your-wrists doom and gloom, check out hedge-fund guy, Doug Kass‘s list of 2012 Surprises. In a slightly different vein, they’re possibilities that few others are anticipating. He has enjoyed a pretty good track record with these. The original story can be found here.

1. The U.S. stock market approaches its all-time high in 2012.

2. The growth in the U.S. economy accelerates as the year progresses.

3. Former Presidents Bill Clinton and George Bush form a bipartisan coalition that persuades both parties to unite in addressing our fiscal imbalances.

4. Despite the grand compromise, the Republican presidential ticket gains steam as year progresses, and Romney is elected as the forty-fifth President of the United States.

5. A sloppy start in arresting the European debt crisis leads to far more forceful and successful policy.

6. The Fed ties monetary policy to the labor market.

7. Sears Holdings declares bankruptcy.

8. Cyberwarfare intensifies.

9. Financial stocks are a leading market sector.

10. Despite the advance in the U.S. stock market, high-beta stocks underperform.

11. Mutual fund inflows return in force.

12. We’ll see merger mania.

13. The ETF bubble explodes.

14. China has a soft landing (despite indigestion in the property market), and India has a hard landing.

15. Israel Attacks Iran.

Late in August 2011, I posed the question of what price gold would be at year end. A handful of hardy souls submitted their carefully-wrought forecasts. Gold was about $1,850/ounce at the time, and only about 10% of guesses were for a price lower than that. It’s going to close about $1,565 today, about 16% below that August price. Two guessers both said $1,500, so those two folks will each receive an Amazon gift card.

Top Stories

You might recall that, one year ago, the municipal bond market was in an uproar. Analyst Meredity Whitney had appeared on 60 Minutes, suggesting that there would be $50 – 100 billion in municipal bond defaults. Many publicly derided her, and we certainly didn’t sell any municipal bonds because of the story. In fact, there were great values to be had, as folks dumped the bonds like bad habits. David Kotok of Cumberland Advisors–who, by the way, has the best free e-mail service around (click here to sign up)–was one of those folks who loudly derided her claims. In an e-mail this week, he cites a post on the Huffington Post website that is a S C A T H I N G response one year on. You can read the Cumberland Advisors recap, which includes the Huffington Post article in its entirety, by clicking here. The title of the piece is “2011: The Year 60 Minutes Misled Americans About Municipal Bonds.” If you own municipal bonds you owe it to yourself to read it. Here are a couple of excerpts:

• 60 Minutes let a pundit claim these problems translate into near-term massive municipal bond defaults. Meredith Whitney, the pundit, had written a report, “Tragedy of the Commons,” which supposedly backed her claims.
• Contrary to 60 Minutes’s assertion, Meredith Whitney, a banking analyst, did not have a great track record. Gullible reporters had given her great PR for an October 31, 2007, call on Citigroup that had been correctly made many months earlier in her presence by my friend Jim Rogers, a legendary investor. They appeared on television together, and at the time she refuted Rogers. [GPS emphasis]
• Subsequently, Whitney wouldn’t justify her analysis saying “Quantifying is a guesstimate at this point.” (“Whitney Municipal-Bond Apocalypse Short on Specifics,” by Max Abelson and Michael McDonald, Bloomberg News, Feb 1, 2011.) 60 Minutes admitted it had never reviewed her much-touted report. The report never mentioned sizable defaults, only that there “invariably” would be defaults.

Delicious!

This week there didn’t seem to be any European meetings, summits, scoldings, or anything else. Spain announced $11.5 billion in spending cuts, while its tax revenues will have to be boosted, as its deficit was larger than expected. Yields on Spanish government bonds, meanwhile, fell to new lows for the second half of 2011 (bottom panel below.) Italy had what some are calling a successful bond auction, issuing bonds at rates well below one month ago.

That has more than a passing correlation to a news story that the European Central Bank‘s (ECB) balance sheet had grown to 2.73 trillion Euro ($3.55 trillion). (For comparison purposes, the Federal Reserve’s balance sheet is presently $2.817 trillion large.)  That marked an increase of 10% in one week, as the ECB loaned considerable sums to European banks. Contrary to public opinion, European bankers aren’t stupid–dumb, maybe–they know a spread over the low cost of the ECB’s loans when they see one, and it’s likely that much of those loan proceeds went to invest in bonds of Spain, the safest of the PIIGS.

This Week

While indicators next month will tell us how December shook out, this is, naturally, the last report on releases in 2011. We expect that the economy in 2012 will be much like 2011′s, slow growth, but with no recession. Housing could become a tailwind for the economy in 2012, which will be a welcome change from the last four years. While hiring hasn’t yet begun to pick up, certainly the rate of firings has slowed down. As with 2011, as with stocks, so it is with the economy in 2012: much will depend on what happens in Europe. It’s a foregone conclusion that Europe is in some sort of recession. A mild one shouldn’t hurt the U.S. too much; a deep one or a crisis that turns worse will substantially increase U.S. recession risks.

With respect to economic indicators, it was a mixed bag. One of my former, cliche-challenged colleagues would have called it a mixed bag of worms. On a year-over-year basis, the CaseShiller Home Price index fell about in line with economists’ estimates and the September decline. (CS data runs about two months in arrears, so this week’s data reflected October figures.) They fell another (-)3.40%, although the price level remained above the March 2011, low, which was the lowest level of the last five years. On a positive note, Pending Home Sales for November rose by 7.3%, confounding economists, who expected a barely noticeable rise of 1.5%. This series looks a whole lot better than other housing-related indicators, down, as it is, just 20% from 2005 levels.

The Conference Board’s Consumer Confidence Survey bounced nicely in December, coming in at 64.5, versus economists’ estimates of 58.9, and well above November’s 56.0 reading. While that leaves the reading still 42% lower than 2007 peak levels, it also takes the indicator back to the improving trend begun in 2009.

There were four regional activity indexes that came out this week from Richmond, Kansas City, Milwaukee, Chicago, and Dallas. All but one was worse than expected. Two were better than the previous month’s reading; two worse; one unchanged. Initial Jobless Claims remained below 400,000 for the fourth week in a row, while the four-week moving average remained pointing down. At this time of year, economists and others are quick to point out that claims are volatile, and the moving average is a better gauge.

While economists spent much of the second half of 2011 worrying too much about the economy, under-estimating its strength, they’re recently begun too over-estimate its strength, as is on display below.

 Next Week

 Key indicators to watch. Only one matters next week. The rest get relegated to side shows.

• Nonfarm Payrolls (Friday) – December
• Unemployment Rate (Friday) – December
• Change in Household Survey employment (Friday) – December – This won’t be the headline report–the first two will take that place–but this could be the more important report, as it tends to be near turning points. Make no mistake, if we’re in a turning, it’ll be like an aircraft carrier turning, not a Mini Cooper.

With this last blog posting of 2011, I hope that 2012 is a good year for you and yours.

Graig Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

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•  ’Ever hear of a bond ladder?
• Economic strong patch

Capital Markets

Top Stories

The period beginning with today’s close and through next Friday’s trading marks the period known for the Santa Claus Rally. According to Mark Hulbert, since 1896, this week has been positive “78% of the time. That compares to a gain rate of 54% for all other weeks of the year.” On average, the gain is 1.07%. Of course, the phenomenon has a saying to go along with it:  “If Santa Claus Should Fail to Call, Bears May Come to Broad and Wall.”

Pacific Investment Management Company, aka PIMCO, made the Bloomberg top stories four out five days this week. Here are the headlines:

• PIMCO Predicts “Risk Off” in First Part of 2012. That’s in keeping with one of our best service’s historically-based composite performance for the S & P 500 index. Rough sailing through July, followed by a second-half rally. Evoking images of The Karate Kid, the Risk-on/Risk-off phenomenon refers to the tendency of all risk assets (cyclical stocks, corporate bonds, commodities) to move as one. When the risk switch is turned to the ON setting, they all go up; when OFF, they all go down.
• PIMCO’s El-Erian Sees Risk Europe May Spark Lehman-Like Crisis. This one of the PIMCO wise men sees a 1-in-3 chance that “the Euro Zone will break apart and trigger a financial crisis akin to the one that devastated the global economy in 2008.”
• Gross’s Reversal Too Late as Total Return Headed for Redemptions. Well, this is so ridiculous and typical. You might recall Bill took to his soapbox in the late Spring to share what he thought of U.S. Treasury debt and how his Total Return Bond Fund was positioned accordingly. (I think he went to far as to say he was short some Treasuries, betting they’d go down.) I mean, do you think getting 3.5% from the U.S. government for ten years is a sound investment? We are Greece, folks. And, to boot, the latest Consumer Price Index reading was 3.5%. Of course, everyone piled on the man widely known as the Bond King for being such a fool. His fund is back to +3.5% on the year, and the lemmings are still leaving.
• PIMCO Forecasts U.S. May Stagnate Amid Data Showing Growth. PIMCO sees this occuring as a result of the European crisis and a slowdown in China.

Chew on the implications of this headline for a while:  BP Deems Solar Unprofitable, Exiting Business After 40 Years. Wouldn’t the money-grubbing, capitalist, 1% scum of BP have been able to make a dime off solar if anyone could?

Do you think this might be a problem?

If you have trouble interpreting the graph, it’s saying that 20% of Italy’s debt has to be refunded next year. Do you think investors will want to give the country 20 years to pay it back? Mightn’t they try to be compensated for the risks by demanding a higher interest rate?

Here’s the same chart again, but with a different isuer. Could be almost the same chart–and Bill Gross catches flak for wanting to avoid its debt. Do you think investors will want to give the country 20 years to pay it back? Mightn’t they try to be compensated for the risks by demanding a higher interest rate?

What is it with these countries? Here is Spain.

At least twice this week I have heard that 2012 promises to be 2011, all over again. I take that to mean high correlations, high volatility, and many nail-biting moments.

This Week

We seem to have entered what one firm we follow, has termed a U.S. strong patch. This week, we saw good housing, jobs, and consumer confidence reports. All is not rosy, naturally, that won’t happen until the economy gets out of first gear. Still, it’s better than the alternative.

On the housing front, the National Association of Homebuilders Housing Market Index saw, virtually, its best level since late 2007, save for a one-month better reading in mid 2010. This index essentially tracks the mood of homebuilders. The biggest drivers of the improvement were Present and Future Sales, along with Traffic. The best-looking region for new home sales is in the South, according to this index.

Housing Starts and Building Permits were both almost 10% higher than expected and well over October figures. Viewed from 2009 and these indexes look pretty healthy.

Viewed in a longer-term context–I’m sure you know where this is going–the picture isn’t quite so healthy. Still, I’m sure there’s some Chinese philosopher somewhere who said something like, “every long journey begins with a single step.”

Initial Jobless Claims fell to their lowest level since early 2008. A four-week moving average is commonly used to smooth out the week-to-week volatility of the series, and it continues to point down, also reaching the same relative low. That helps confirm the firing side of the picture is improving, but hiring has yet to pick up, of course.

Lastly, but not leastly, University of Michigan Consumer Confidence index rebounded smartly from November’s 64.1 reading, to 69.9, and that’s a cool 25.4% above the Congressional-ineptitude-induced low from August. Here’s a look at what a 15th-century mathematician might think of the rebound in the index. Leonardo Fibonacci discovered a series of patterns (ratios of proportion) occuring in nature (broccoli and nautilus shells) and in other places (Egyptian pyramids, Last Supper painting). We can apply the same ratios, namely, 38.2%, 50%, 61.8%, which are the biggies of the sequence, to security price fluctuations and, why not, economic series, like University of Michigan Consumer Confidence. Absurd! you say, and I’ll grant you that, but it’s a slow news day, so check this out.

The index peaked in early 2007 at 96.8, fell all the way to 55.4 in late 2008. The critical levels of the move–and what we’re really after, the retracement, or the rebound–are highlighted in orange below. Notice, that, on four occasions, the index has been rejected at the key 38.2% and 50% levels. As–probably better make that when–the economy improves, the 61.8% level (81 in the index) will prove to be difficult to surpass.

Next Week

Quite a few meaty reports considering it’s a holiday-shortened week.

Key indicators to watch

• Conference Board Consumer Confidence (Tuesday)  – December
• Initial Jobless Claims (Thursday) – weekly

Regional activity indicators

• Richmond Fed Manufacturing Index (Tuesday) – December
• Dallas Fed Manufacturing Activity (Tuesday) – December
• Chicago Purchasing Manager Index (Thursday) – December
• Milwaukee Purchasing Manager Index (Friday) – December

Housing indicators

• CaseShiller Home Price Index (Tuesday) – October
• Pending Home Sales (Thursday) – November

 Here’s wishing you a Merry Christmas!

Graig Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

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Capital Markets Recap

Top Stories

This Week

Let’s get the bad news out of the way.

Initial Jobless Claims were about 12,000 higher than expected and 9,000 higher than last week’s figure. That moved the figure back above the once-important 400,000 mark, and that uptick was enough to point the less-volatile four-week moving average higher, although just barely so. Last week’s figure was revised upward by 3,000 to 396,000, so there’s an axe to grind for everyone.  Either, it’s see the government once again manipulated the statistics (never mind that it’s the government announcing the revisions, too), or see, the increase was really only 6,000 (an increase from 396,000; not 393,000).

Speaking of axe grinders, I’ve got a bit of an axe–’guess it’d be a head instead of a bit–to grind, myself. One prominent investment pundit, Dennis Gartman, says watch the revisions, as those are just as important. The idea is that once the revisions start following the direction of the indicator they’ll reinforce the validity of the indicator. ‘Trouble is, the biggest downward revisions in the last ten years came in the midst of the 2008-2009 recession. Here’s a chart. After the chart, I’m going to lose a few of the readers of this blog and troll for some new readers by hoping for a lucky Google search.

A local radio personality, Pat Miller, who is on WOWO during my drive home when I alternate between it and NPR, took the government-conspiracy angle recently, by pointing out that the government’s earlier statistic had been revised upward (those rascals). He didn’t bother to point out that almost all of the revisions are in that direction, nor that the government provides the revisions, too. ‘Some conspiracy, when the government tells the truth a week later. In addition, the biggest revisions–ever–have been downward. If anything, the government statistics are too pessimistic. And, yes, I understand–and agree–that the employment picture is painted with too many shades of pink and that inflation might even be worse.

Aside from jobless claims, one would be hard-pressed to find a week of better economic news…

The ADP Employment report on Wednesday conspired (there it is, again) to push stocks higher, helping the 1%, while the 99% freeze in their tents, when it was released to show that 206,000 private payroll jobs had been added in November, versus economists’ expectations of just 130,000 additions; October’s figure was 110,000, but that was revised upward (the right direction, according to Dennis Gartman) to 130,000 this week. That set up expectations for a decent Nonfarm Payrolls report today from the Bureau of Labor Statistics Manipulation. In a way, the report didn’t disappoint; in a way it did. The economy was shown to have added 120,000 public and private jobs in November, according to the survey of established establishments (big, brick-and-mortar employers); private payrolls rose by 140,000 (yep; you figured it out: government payrolls fell by (-)20,000.) The Unemployment Rate, however, is calculated from a broader survey base, a survey of households (“hello, Mr. Poncherello? can you tell me how many in your household are employed? and you’re with the California Highway Patrol?”). The latter is a much bigger survey group, so the numbers are bigger. For example, the Establishment survey shows that 534,000 jobs have been created, cumulatively, over the last four months; the Household Manipulation survey, on the other hand, shows that 1,284,000, cumulatively, were created over that time. Back to the unemployment rate…it’s now down to 8.6%, closer to the 8.0% threshhold, above which a President has never been reelected over some period of time–can’t recall which.

In addition to the Trilateral Commission’s involvement, there is some fundamental trouble with the unemployment rate. It only considers the unemployed as a percentage of the Labor Force, and the labor force is determined as the portion of the working age population that is either working or willing to work. Arguably, some of the folks camped out in Fort Wayne’s Freiman Square were not considered in the labor force. The ratio of labor force to working-age population is called the Labor Force Participation Rate, and it’s presently at 64.0%. For what it’s worth, that’s as low as it’s been since early 1984, and it fell by 0.2% in November…a rounding error, you say. Except that a rounding error on a working-age population of 237,830,000 amounts to a lot of people.

 The statistics that comprise the unemployment rate, from the Bureau of Labor Statistics are shown below. The 8.6% (“below 9%!”) will be trumpeted about. In Fort Wayne’s evening paper, in fact, the headline said this:

“Jobless rate falls to 8.6%, lowest in 2 1/2 years”

But it’s not all good, sort of a mixed bag. Yes, more folks found jobs, but it’s also true that the labor force fell, and that’s rarely a positive development. When this moribund economy kicks into gear, the labor force will rise, not fall.

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Below

• The country shaped like a boot gives a boot
• Good economics on the margin

Hey, thanks. Yeah, I know: it says 2008.

Capital Markets Recap

Top Stories

As the chart above indicates, one of the week’s big stories was the replacement of Italy’s Slime Minister, Silvio Berlusconi. That came on the heals of a big spike in Italian interest rates. As the chart below attests, interest rates rocketed higher. At one point they reached 7.50%, which marked a 50% increase from just 24 days earlier. Italy’s Senate also approved an austerity budget, which should serve to reduce the country’s budget deficit. That should appease the European Central Bank (see comments below), which seems to somewhat recognize that the solution to a debt problem is not more debt. It wants to see these problems fixed at the country levels, by getting budgets in line.

So, what? you say. Well, Italy runs a budget deficit, which means they have to borrow to fill the gap. They are not self funding.  They are always going to the international capital markets for more funds. The chart below shows it has  €37.3 billion of debt that needs to be refunded yet in 2011–and it’s due about every two weeks:  11/15…11/30…12/15…12/27…12/30.

Now take a look at Lincoln National Corporation. If its debt starts getting downgraded and market participants start selling the bonds, it’s borrowing costs will go up, but it won’t matter until they have to borrow again, which really isn’t until 2015, when it has big line of credit (yellow section) that has to be renewed.

In addition to having to constantly refund its debt, it’s the world’s third largest issuer of debt, so there is a lot of it out there. That makes Italy both too big to save and too big to fail. What’s more, the European Central Bank says it won’t just crank up the printing presses to buy Italian debt, which is the solution most often bandied about. Here’s a look at the 20 largest debtor nations–notice the distant third place Italy’s in.

…which brings us to #3 in the list. The United States has a bit of a debt problem, as I think you’re aware, and like the Italians, we seem to have an affinity for 2012. That’s when we have to refinance $1.2 trillion of debt, about 22.5% of our total debt outstanding.

This Week

In Monday’s Precap, I highlighted just four economic indicators to focus on this week. Each one of them was better than expected. On Tuesday, the NFIB’s Small Business Optimism index was released. It came out at 90.2 versus expectations of 90.0 and a previous figure of 88.9. With this week’s indicator, small business optimism has now improved for two months, following a six month slide from February through August. But it’s recouped just 35% of the six month’s decline.

The monthly Job Openings and Labor Turnover index (JOLTS) was released on Tuesday. Economists don’t bother to produce estimates for it, but it showed that there were 7.2% more job openings (3,354,000) in September than in August. Speaking of August, the indicator is now at its best level since August 2008, just before Lehman Bros. went belly up. That still leaves job openings 30% below the level of March 2007, the peak of the new millenium, when there were 4,755,000. job openings.

Initial Jobless Claims were better than expected this week. Whereas economists expected 400,000 new filings, there were, instead, 390,000. Last week’s figure was revised upward from 397,000 to 400,000. This and other indicators are subject to revisions of the data. Now, Tuesday’s NFIB survey is not. The results are tallied up, and that’s it, but with most government statistics, some of the data is estimated, and when it’s later known, the figures are revised.

Here’s a look at jobless claims, announced and revised. In the top panel, the white line is the figure that’s announced; the orange line is the revision that shows up a week later. The bottom panel, the histogram, shows the revisions. Since more jobless claims is bad, fewer good, I’ve coded the upward revisions red, the downward revisions green. Notice that most of the revisions are upward, for whatever reason.

At least one commentator has suggested that it’s the revisions that must be watched, implying that in a strong labor market the revisions will be downward. But that argument doesn’t seem to stand up to scrutiny. Featured below is the same chart going back to 1997, the earliest period for which revisions are available to me. You should notice that the quality of the chart is not as good as the one above. That’s because I intend for you to click on it to open up the full-screen version–the gigantic version. When you do, what you will see is that it doesn’t appear to be a function of recession (shaded red in bottom panel) or expansion. Rather, it appears that the estimates now are closer to the revised figures, although still favoring over estimating. Notice especially the data at far left. Then there was much more volatility in the revisions. In fact, in the last recession, there were as many downward (i.e. good) revisions in 12 months as there were in the 36 months before the recession.

Finally, University of Michigan Consumer Confidence was better than expected, jumping to 64.2 from 60.9 and above estimates of 61.5. You can see from the chart below, that at the end of August confidence had deteriorated to almost as low as the end of 2008.

Next Week

Key indicators to watch

• Producer Price Index (Tuesday) – October
• Empire State Manufacturing (Tuesday) – October
• Consumer Price Index (Wednesday) – October
• Industrial Production (Wednesday) – October
• Capacity Utilization (Wednesday) – October
• Initial Jobless Claims (Thursday) – weekly
• Philadelphia Federal Reserve index (Thursday) – November
• Leading Economic Indicators (Friday) – October

Housing related

• NAHB Housing Market index (Wednesday) – November
• Housing Starts (Thursday) – October
• Building Permits (Thursday) – October

 Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

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In lieu of a report last Friday, here’s a very brief look at the week ahead. It’s not looking good for a Weekly Recap & Outlook this Friday.

Below

• Q3 Earnings season wrapping up
• Payrolls report not as bad as some characterized it
• A look at the economic releases for the week

Capital Markets

 With 17 companies in the S&P 500 reporting earnings this week, the Q3 earnings season wraps up. Thus far, postive earnings surprises account for 69.2% of the releases. That’s not quite as good as the last quarter, when 71.1% of companies beat the estimates. On average, companies reported year-over-year earnings growth of 16.69%. That’s slightly better than the 16.22% pace of the second quarter, but it doesn’t look the disaster that one might have expected in the midst of the summer stock carnage.

Last Week

Last Friday, the market ostensibly declined because of a less-than-stellar Nonfarm Payrolls report. Economists had expected that 95,000 were added in October; instead, just 80,000 were added. Part of the miss had to be because of increased optimism by economists following Wednesday’s ADP Employment Change report. That report ostensibly sparked a rally that day, when it was reported that 110,000 private sector jobs had been added, above the 100,000 that economists had expected. The Unemployment Rate fell to 9.0% from 9.1%. For that 91st person of 100 who found the job, the 0.1% is clearly important. With respect to the economy, as a whole, cheerleaders need not apply.

There was, however, some good news buried in the release. First, payrolls for the last two months were raised by 102,000, which is better than an icepick to the forehead. Second, recall that there are two surveys conducted by the Bureau of Labor. The Establishment Survey canvases large employers, while the Household survey canvasses households, which, necessarily, includes smaller employers than in the former. While the Establishment Survey figure was the lowest in four months, the Household survey was virtually as high as anytime in the last 18 months.

This Week

There’s not a lot on tap this week in terms of economic indicators. Tuesday morning will give us a glimpse at the small business sector, with the release of the National Federation of Independent Business’ Small Business Optimism index. This should be one of our best gauges for hiring, as the small business sector is, of course, the engine of jobs growth in the U.S. Here’s an excerpt from the Small Business Administration’s FAQ:

Small businesses…

Represent 99.7 percent of all employer firms.

Employ half of all private sector employees.

Pay 44 percent of total U.S. private payroll.

Generated 65 percent of net new jobs over the past 17 years.

Create more than half of the nonfarm private GDP.

Hire 43 percent of high tech workers ( scientists, engineers, computer programmers, and others).

Are 52 percent home-based and 2 percent franchises.

Made up 97.5 percent of all identified exporters and produced 31 percent of export value in FY 2008.

Produce 13 times more patents per employee than large patenting firms.

The chart below gives a look at the overall Optimism index (top panel) and the Hiring Plans index (bottom panel). Not surprisingly, optimism waned through the summer, bottomed out at the end of August, and bounced a little. Hiring plans, however, didn’t. Still hiring plans remain in a gradual upward trend.

On Tuesday, the Bureau of Labor Statistics will release its monthly report on Job Openings and Labor Turnover (JOLTs) index. This indicator has been around since 2000, and it provides a wealth of information.

For example, here’s the broad index of Job Openings, along with its two components, Private Sector Openings and Government Sector Openings. As of August, there were 3,056,000 job openings, with 90% of them coming from the private sector. Of course, it’s not as high as in 2007, but it’s 50% higher than July 2009.

The JOLTs survey also produces statistics breaking down the folks who leave their jobs for various reasons. The categories are Layoffs, Voluntary Separations, and Other, which includes retirement, transfers, death, and disability. When we look at these categories (below), we can make at least one interesting observation: the rate at which folks are choosing to leave their jobs is as high as it was immediately before Lehman Bros. filed bankruptcy and the economy plunged into its deepest recession since the great one. That suggests, probably among other things, that current workers are increasingly optimistic about their job prospects. By definition, there is no job mis-match amongst those currently employed, but, clearly, as Occupy Everything evidences, there is a great mis-match in skills and other aspects since there are 3,056,000 jobs going unfilled. Otherwise, those folks would all be submitting resumes, right?

Anyway, here’s the Separation stuff.

Thursday will bring us the weekly Initial Claims for Unemployment Insurance report. Historically, 400,000 filings has been the demarcation between an expanding and contracting labor picture. Economists expect this week’s figure to tally 400,000, which, excepting 10 weeks in the first third of 2011, is the lowest that filings have been since mid-2008. Depending on if you’re a half-full kinda person or half-empty, you either see this as darn-good-why-it-hasn’t-been-this-good-since-W or see-it-just-can’t-get-any-better-even-with-two-b’jillion-dollars-of-so-called-stimulus, respectively.

On Friday, we get the preliminary November figures for University of Michigan Consumer Confidence. I thought about highlighting the blip up in the last U of M report (middle panel, below) versus continued downbeat assesments from the Conference Board (top) and ABC News (bottom) surveys, but when I looked at it relative to almost any sort of history it became a “what blip?” In the panels below I have indicated the last time the readings have been as downbeat as now–save for ’08-’09–and looked at the performance of U.S. stocks over the next two and a half and five years (table).

Much like the cover story phenomenon, consumers are great at extrapolating what they have experienced into what they think they will experience, but they’re quite poor at predicting what will happen. That’s what makes the consumer such a good contrary indicator.

“Very neat and clever, Mr. Obvious Insights,” you say, “but we’ve never been in a situation like this; we’ve never [INSERT OMEN HERE], and [INSERT FAVORITE DOUR POLITICAL OBSERVATION HERE], and, naturally, you’ve forgotten that [INSERT GEOPOLITICAL OBSERVATION HERE.]“

I would respectfully tell you that you are correct, but that–save, perhaps, for your political observation, which is arguably your opinion–there’s not a person alive who doesn’t know that, and that group includes all the survey participants included below. Thus, it’s unlikely that you could surprise a survey participant into liquidating his/her 401(k) on the basis of one of your observations, and that’s the nature of contrarian investing: investors’ portfolios reflect their present thinking.

Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

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1. Historically, from now to year’s end has been a good time for stocks

2. There’s too much pessimism, and that means investors have fled stocks for the safety of cash . . . earning 0%*

3. Valuations are relative low, and dividends are relatively high (see * above)

Read on for all the details.

Market Update

With the situation in Europe still up in the air, it’s too soon to say the worst is over for stocks. The Europeans have one summit, follow it up with another, and then declare that a final answer will be provided at a third date. At each occasion, market participants hope that a solution will be forthcoming. Domestically, there are still concerns that low growth might turn into no growth, or negative growth; i.e. recession. Still, with October more than half over, the calendar becomes very friendly toward stocks. September has historically been the worst month, but October has had more memory-searing drops, like Black Monday in 1987.

The market’s action of the past few months did much to shake investor confidence. I’ve included below just two indicators that suggest the selling of August 9 was climactic, shaking out the weakest hands.

1. Selling climaxes – these occur when a stock reaches a 52-week low but finishes the week with a gain. Recently, those skyrocketed, indicating that a lot of folks could take it no longer and sold at the bottom.
2. Investor sentiment surveys – surveys of both professionals and individual investors show record high pessimism. Historically, these have marked market bottoms of various degrees.

•In addition, stock valuations are supportive. While stocks aren’t dirt cheap as a group, there certainly are groups of stocks where this is the case. As a group, valuations are reasonable. Dividends have been higher, but relative to interest rates, dividend yields are very high.

The pessimism is high from other angles, too. First, Citigroup maintains several Economic Surprise indexes. Those indexes track economists’ forecasts for economic indicators to what those indicators actually turn out to be. So, for example, each week economists publish their estimates for weekly claims for unemployment insurance. This week, for example, they’re forecasting 401,000 new claims will have been filed. If 395,000 claims are filed, the economists will have been too pessimistic; if 415,000 claims, then too optimistic. Citigroup charts that ongoing relationship, and for the U.S., since June 2, economists have been consistently too pessimistic. Here’s what that chart looks like.

In many ways, until just a couple of weeks ago, the market’s action felt worse than in early 2009, when everyone was nearly certain the world was about to end. Clients and others certainly radiated this feeling, with some saying the equivalent of—as one client did, “I think I’m going to take my toys and go home.” Do you count yourself among those? Don’t feel bad. The National Association of Active Investment Managers is an association of,

“registered investment advisors who provide active money management services to their clients, in order to produce favorable risk-adjusted returns.”

One thing NAAIM does is survey its members to, essentially, gauge their sentiment toward stocks. One thing its members do is FREAK OUT!  As you can see below, they recently registered their worst sentiment reading since late 2008.

With selling climaxes, sentiment surveys of individual investors, and anecdotal observations, one can make a strong case for a retail investor class that has fled from stocks in the short term. (On a longer-term basis, one could say that small investors have never returned to stocks, in that they report lower allocations to stock now than in 1999.) Throw in economists’ forecasts and the NAAIM survey and one can add in professional pessimism. Finally, the press continues to pipe a funeral dirge, as evidenced by another dandy cover story from The Economist, which is shown below—oh, my; this one’s a beauty!

Combine the calendar and pessimism toward stocks with progress in Europe—they’re saying the right things—and a better than expected corporate earnings season, and the fourth quarter could turn out to be a pretty good one. That leaves us feeling pretty good about stocks. Our key strategy services have yet to confirm this view with official shifts, but they seem to be leaning that way. If they do, we are likely to allocate more to stocks, less to bonds and cash, and to become more aggressive within equity portfolios.

Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

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