Weekly Recap & Outlook – 01.08.10

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Capital Markets Recap

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There’s an old investment saw that says the first five market days of January determine the month’s direction.  So far, we’re up by 2.6% or so since the end of the year, so the odds are good that January is going to be a decent monthBe the closest to the closing value on the Dow Jones Industrial Average on January 29, 2010, and I’ll send you a $50 Amazon.com giftcard.  To submit your guess, click here.  If you’re a Tower Bank/Private Advisors employee you’d better have an account with us or you’re out of luck.  More likely, you probably just come over and talk to us, trying to get free advice.

As usual, I have little insight to add to the table above.  In contrast to other weeks where I press on undeterred, I think I’ll leave it that way.  Here, instead, is a technician’s look at the S & P 500, a common proxy for U.S. stocks.

spxI’ve highlighted the three most important Fibonacci levels.  61.8% is the Golden Mean (it’s 61.8% of the distance from high to low), and it (1,227; +7.25%) should present some stiff resistance for the market. On the other hand, if the market makes it through that level, there’s minor Fibonacci resistance at 1,360 (+18.9%) but little beyond that.  Think that’s far fetched?  We’re toying with the idea that the non-consensus, contrary call might be for a stronger-than-expected economy.  If that leads to stronger-than-expected earnings, it could bring some of the bond money (see the Williams Inference Center update post, above) back to stocks and push them considerably higher, setting us up for mid-year ka-whomping (aka correction.)

Top Stories

  • China is raising its central bank’s key lending rate.tim
  • Tim Geithner‘s New York Fed, while he was at the helm, told AIG executives to withhold the details of its Credit Default Swaps payments to various banks.  These payments were made at 100% of their face value, instead of the lower market values.  In short, the NY Fed told AIG to skirt SEC requirements directed at promoting transparency.  Watch for a Congressional hearing.
  • Google announced the launch of its Google-branded mobile phone, the Nexus One.  Read more here.  You’ve gotta watch these folks.  The WSJ featured a story today on Google’s application to the Federal Energy Regulatory Commission to buy and sell power at market prices–wholesale, that is.  Pretty soon, your energy bill may come from Google.  More likely, the company is trying to fulfill its own green mandates.  The article estimated that Google sucks up enough electricity to equal the output of two conventional electric power plants.
  • Paul Krugman said he sees a 30-40% chance “of second U.S. recession as stimulus fades.”  He would, since he’s a serious Keynesian, and to them, it’s all about expansionary monetary and fiscal stimulus. 

This Week

Today is the first Friday of the month that markets are open.  That means today is Nonfarm Payrolls day, that day when we find out 1) how many jobs were cut or added in the prior month; and 2) what the Unemployment Rate is.  Recall that the NFP number comes from the Establishment Survey, a survey of established businesses.  A criticism of it is that it misses smaller businesses and the self-employed.  Those figures are captured in the Household Survey, which should be self-explanatory.  That survey is also the source of the unemployment rate.  So, it’s one report with two key figures from two separate surveys.  From the same report also comes some lesser figures, like the Average Workweek and Average Hourly Earnings.

There are a couple of other moving parts that can complicate the headlines.  First, there are the seasonal adjustments.  These are made to compensate for the fact that there may be seasonality with employment.  For example, year-end plant shutdowns may predictably reduce the NFP # at year-end.  Second, the Bureau of Labor Statistics knows that its Establishment Survey misses some businesses, so it performs periodic [business] birth/death adjustments.  Third–and this is the most fundamental of them all–there are changes to the Labor Force.  This is the pool of folks who are either employed or wanting to be employed.  It ebbs and flows, and changes in nonfarm payrolls have to be considered in light of it.  For example, if the unemployment rate rises and the labor force rises it may not be all bad.  Instead, it might just signal that the economy appears to be improving and more [presently-unemployed] folks are looking for employment, and vice versa.

In the month of December 85,000 jobs were lost.  Economists had expected a loss of just 10,000.  Jobs were lost in almost all categories.  The only areas where there were gains were healthcare and, promisingly, temporary help.  The chart below displays both series (click to enlarge).


The labor force, however, fell sharply, contracting by 661,000.  That took the labor force Participation Rate (ratio of labor force:population) down to 64.6%.  That’s the lowest it’s been since 1984, and the number of folks not in the labor force rose by 843,000, which is the fifth highest reading ever in the history of the series.

Wanna see a real record?  Not one of these things that go back to 1985 or 1973?  Check out the percentage of the unemployed who have been unemployed for 27 weeks or longer.  That number in the upper righthand corner is 39.8%, the highest since the data has been recorded.













Meanwhile, the Unemployment Rate held steady at 10.0%, but based on a lower participation rate.  If the labor force hadn’t fallen by (-)661,000, I estimate the unemployment rate would have risen to 10.4%.

The Liscio Report today determined that the probability of someone unemployed finding a job during the month of December was just 21.5%.   Just to depress you further, the Household Survey showed a seasonally-adjusted loss of 589,000.  Not allowing for a seasonal adjustment, employment fell by 1,179,000.  Yikes!

The only bright spot in the report was Temporary Employment.  While it rose at a slower rate in December it was, nonetheless, positive.  In the past, a rising temporary employment number augured well for Nonfarm Payrolls.

I’m not quite finished depressing you.  In December, the population grew by 181,000.  So, not only do we have a lousy economy to deal with and employers reluctant to think about considering entertaining the thought of hiring more folks, but we have a growing population of folks eligible to work.  Indeed, those between 16-19 years are experiencing an unemployment rate of 27.1%.

While interest rates are becoming a concern (see below), one factor mitigating against that outcome is the continued consumer deleveraging, which is on display in the chart below and to the right.  In November, Consumer Credit outstanding dropped by a single-month record rate of $17.5 billion, which was just a bit off from what economists were expecting (-$5 bil.)

Just a bit outside. sound bite

 With the interest rates the price of a loan, a reduction in demand–or is it quantity demanded? can’t recall–for loans should result in a decreased price (i.e. interest rate) . . . ceteris parabis.  It’s the ceteris parabis part–all else equal–that’s going to get us, naturally.

Next Week

Tuesday – the NFIB releases its Small Business Optimism index.  Economists don’t provide estimates for it, however.  It still looks very depressed, although, according to Ned Davis, the year-over-year point change suggests increasing optimism amongst the nation’s growth engines.beige2

Wednesday – the Federal Reserve releases its Beige Book, the reason for which is shown at right.  The book will report on economic activity in all of the Federal Reserve’s 12 districts.  It’s not a graphable sort of thing, just a bunch of slow reading.

Thursday - while it’s clear that the market for jobs is not a good one, there does seem to be some hope on the side of job losses.  Initial Jobless Claims continue to trend in the right direction, although claims rojcse slightly this week and are expected to rise even more slightly in the coming week.  You can see the distinct trend in the chart to the right.

Friday – while our 2010 outlook survey that you took (you did take it, didn’t you?  If not, click here, and it’ll pop up in a separate internet window) showed inflation being a problem in 2011 (58.8% of respondents), the spread between Treasury Inflation Protected Securities and nominal Treasuries has jumped up to the highest levels since mid-2008.  That spread is the inflation level implied.  We still believe that there is enough slack in labor and capacity utilization that inflation won’t be a problem.  That’s not to say that interest rates won’t rise, but it’ll be a result of an increase in the real rate of interest, not the inflation component.

Here’s the formula:  Nominal Interest Rate = Real Interest Rate + Inflation Premium

Higher interest rates could be disastrous for a couple of reasons.  First, it means mortgage rates will head higher, squelching a housing recovery.  Second, it’ll make the Option ARM reset wave that much worse.  Third–oh, why go on.  Suffice it to say that one of our key strategy services–one which is awfully funny about seeing its name in a blog–calls it “the big macro concern for 2010.”

Well–and where in the world did that digression come from, anyway?–the Consumer Price Index data is due out, and it’s likely to fan some of those inflation fears, at least at the headline level, where the year-over-year rate is expected to be 2.8%–1.8% at the core level.

The Empire State Manufacturing index is expected to have popped up to 12 after dropping like a cempredit score in December.  Such is the wont of surveys of attitudes instead of hard, quantifiable data.  The green line in the chart to the right marks the delineation of expansion and contraction, but maybe it should be drawn with a crayon to emphasize the fuzziness of it.

We get the twin release of Capacity Utilization and Industrial Production, both of which have increased nicely of late, but, as the graph to the lower left shows, have a long way to go to get back to previous levels.  That “get back” part is the slack that underlies the low inflation notion.  Oh, and the University of Michigan puts out its version of Consumer Confidence for the first part of January.  Yawn.


Enough wasted pixels for one week.

Here’s wishing you a healthy and prosperous 2010.

Graig Stettner, CFA, CMT – Tower Private Advisors – Brussels, Belgium


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