Weekly Recap & Outlook – 07.08.11

Tower Private Advisors


  • Gimme a “p” . . . gimme an “i”  . . . gimme a “g” . . . gimme an “s” . . . what’s that spell?
  • Ugly payrolls report

Capital Markets Recap

Top Stories

Other than the Payrolls report discussed below, I’d chalk up the downgrade of Portugal‘s sovereign debt to junk status takes the cake. The likelihood of a default by the reference party (i.e. the debtor, a default by which is being insured against) can be determined by looking at Credit Default Swap pricing given certain assumptions. Here is a look at default probabilities for the PIGS. It is not pretty. What it says is going to happen is what some prognosticators say won’t happen. Something has to give. I’d always vote against the prognosticators. Greece is a foregone conclusion (45.26% probability of default in 1 year; 79.85% in 3) and Portugal looks like the next one; it’s respective default probabilities are 25.12% and 53.66%. And then what? Spain now has a higher likelihood of default than Italy.

This Week

It never fails, despite a very weak linkage between the ADP Private Employment report and the Bureau of Labor Statistics’ Nonfarm Payrolls report, a good number in the former–it usually comes out on the Wednesday before the Friday NFP report (this week’s was on Thursday because of the holiday)–always incourages Wall Street to bet on a similar result from the latter. As the “it never fails” part suggested, this week was no exception. Before we get to this week’s nonsense, here’s a bit of backgound.

  • While a little too neat, the difference between the two since the January 2001 inception of the ADP report has been darn close to zero–in the context of 153 million labor force, 8.69 is less than a rounding error.
  • A regression of the differences shows that the differences have been increasing modestly.
  • The ADP report is far more likely to produce a number higher than the NFP report (66% chance).

Still, that all being known, a 157,000 print in Wednesday’s Thursday’s ADP Employment report was enough to goose equities higher. Today’s Nonfarm Payrolls report was just a bittt outside, producing as it did job gains of just 18,000 (57,000 private payroll jobs) and an Unemployment Rate of 9.2%. (In addition, last month’s NFP number was revised downward from 54,000 to 25,000).

Here’s the only happy bit of information I could conjur up from the report–and from the sound of all the trained professionals blabbering on today, there doesn’t seem to be anything else–is that the unemployment rate is still in a downward trend, as can be seen below. And, yes, all of you Glenn Beck-ers, the U6 Unemployment Rate, the one that purports to include all the unemployed (there are still more, however), is in a downward trend, too, as is also on display in the chart below. Just to keep the snide remarks evened out, it was under the Clinton Administration that the current incarnation of U6 was created. The 1994 adjustment took out the long-term unemployed from the statistic. Oh, yes, there’s that old standby of happiness:  hey, look, the employment rate is 90.8%; let’s look on the bright side, here.

The Average Work Week for all employees fell by 0.1 hours–well, that’s just six minutes, you say. Yes; you’re right, but it’s six minutes for 139,306,268 employed workers. If I did my figuring correctly, that amounts to the equivalent of 348,266 workers losing their jobs. check my math and logic, yourself, at left.

In the first week of any month, this is the only report that matters, and that’s especially the case in this it’s-the-jobs-Stupid economy. That certainly was the case this week; it was as if yesterday never happened.

Next Week

Key indicators to watch

  • NFIB Small Business Optimism (Tuesday) – June
  • Federal Reserve releases minutes of June FOMC meeting
  • Producer Price Index (Thursday) – June
  • Initial Jobless Claims (Thursday) – weekly
  • Consumer Price Index (Friday) – June
  • Industrial Production (Friday) – June
  • Capacity Utilization (Friday) – June
  • University of Michigan Consumer Confidence (Friday) – preliminary July

Regional indicators

  • Empire State Manufacturing survey (Friday) – June

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