Tower Private Advisors
- Unemployment looks ugly
- Housing might be showing some strength
- Christmas cheer
Capital Markets Recap
We pay a lot of money to get investment strategy recommendations and ideas. We’ve recently seen them all come into alignment. That sort of comment might cause one to worry that that view is consensus, but it doesn’t seem to be, and the folks we subscribe to are good, so good that to second guess them, we’ve got to ask ourselves if we feel lucky, like this guy did.
Well, we don’t, so we’re beefing up equity allocations like this:
- Reducing bond and large-cap stock exposure in favor of:
- Increasing small-cap stock exposure
- Increasing mid-cap stock exposure
- Increasing emerging markets stock exposure
Going back to 1959, December has been the single-best month for stock market performance. Next year is the third year of the Obama Administration’s first term–hey, now; I heard that–and that has historically been the best of the four. You’ve likely heard that, what I’ll bet you didn’t know was that the single-best month of all 48 months in an administration is January of year three, as in January 2011.
Our Strategas service recently published a report titled, Why We’re Still Bullish Until the Bill Comes Due: Four Catalysts That Make it Hard to be Short. Here are those “potential bullish” catalysts, paraphrased with permission.
- A likely extension of the Bush tax cuts
- An improvement in employment
- A move to the center by the Obama administration [ala Clinton in 1994]
- A second round of European quantitative easing.
The biggest story of the week, in my opinion–certainly the most anticipated–was the Nonfarm Payrolls report that was released today. It was presaged–or so everyone hoped–by Wednesday’s ADP Employment Change report. That report measures just private payrolls (i.e. no government jobs) and has been a chronic under estimator of the monthly (first Friday) report from the Bureau of Labor Statistics. Thus, when Wednesday’s ADP report came in far better than the consensus estimate, and when October’s figure was revised upward, the market was primed for a big number today. In fact, the consensus estimate was for an increase of 160,000 private sector jobs, including 5,000 from manufacturing, and 150,000 headline jobs, meaning that public sector jobs were expected to have contracted. The gloomiest forecast was for a headline increase of 75,000. When the number came out at 39,000 headline jobs, 50,000 private sector jobs, and a drop of 13,000 manufacturing jobs, S & P 500 futures fell from +4 to -6 in short order.
The Unemployment Rate, which is the most-widely-recognized economic series in the country, rose from 9.6% to 9.8%. Most economists expect an increase in the unemployment rate as the economy improves, but they expect it to result from an increase in the labor force as more folks become confident in their ability to find a job. There was no such increase this month, making the unemployment rate increase just that. For all of the current economic purists, the U6 Unemployment Rate, the worst version, which includes the underemployed (classic example: wannabe engineer working as Walmart greeter), stayed at 17%. But it’s worse than that. In 1994, the Clinton administration–relax, I’m an equal-opportunity taker of pothots–made a change to U6. They said that it really shouldn’t include the long-term discouraged workers. Fortunately, John Williams maintains an excellent website, called Shadow Statistics, where he adjusts for such economic shenanigans and comes up with an eyeballed 22.5% nastiest unemployment rate (click here to view the nastiness). Quick, call Sean Hannity–there, see, a potshot at the conservative entertainment economics talk-show hosts.
At least one commentator on Bloomberg radio said that the release just didn’t square with her view of the world–nor, apparently, with any other economist’s view. She did this in the same way you know what’s coming when someone says, “now, I don’t like to gossip . . . “ I think she had a point, though. Other reports that have come out this week have not mirrored the ostensible weakness in today’s report. For example, the employment component indexes of both the Dallas Federal Reserve’s Manufacturing Survey and the Chicago Purchasing Managers Survey reported improvements in employment. The market seems to have restrained its knee, as the S & P 500 trades back up to nearly even at 3:26. In the words of technical analysis, we call that a divergence: the reports do not confirm each other, making them both suspect.
Here was how David Kotok, of Cumberland Advisors wrote up the news:
Today’s Employment Report
December 3, 2010
Today’s employment report is a disappointment. We will skip most of the numbers since they are available in all the press releases.
Markets got ahead of reality; this is weak economic recovery. Expectations vs. reality is the issue at hand.
The United States faces the worst employment conditions seen during the entire Post World War II period. We have one out of 20 college graduates without work and seeking work. This is double the norm. It means the highest paid component of the labor force is languishing. The US economy needs rising labor income to accelerate. It does not have it in either the highest paid or the lowest paid cohort; nor does rising labor income appear anywhere in between.
The human tragedy is large. One out of eight single moms is unemployed. These folks teach, nurse, do administrative services, or may clean your office. They usually commute to work. They often use public transportation because their household budgets are tight. They have kids at home and try to maintain a household. They use day care. They face an enormous struggle. They exemplify the human tragedy at work in the US labor force.
If you look at the U-6 unemployment rate, you realize that 1 out of 6 in the labor force has income from work that is either zero or something less than it was three years ago. One out of six. That is an unprecedented and monumental number.
To understand the dynamic at work in the US one has to drill into the headline number. It is not pleasant reading. When labor force participation rises again, it will drive the unemployment rate above 10%. Today’s report was 9.8%. Right now, the number of discouraged workers who are not in the labor force is setting all time records.
Markets will interpret this negatively at first. They will focus on the chronic unemployment that is growing more pervasive in the US.
Financial analysts realize that this will extend the already “extended period” of Fed QE for many more months. The zero boundary in US interest rates is certainly now imbedded for all of 2011.
Expectations were jerked back to reality today. We remain fully invested in the US stock market. We remain invested in the US bond market in spread product, not treasury securities. We emphasize very high-grade state and local government bonds, both tax-free and taxable. There is huge and growing liquidity with no place to go. And there is no inflation threat on the horizon for an ”extended period.”
Have a good weekend.
David R. Kotok, Chairman and Chief Investment Officer
You can sign up for David’s free e-mails by visiting Cumberland Advisors’ website here.
Also, the President’s Deficit Reduction Commission failed to come to a consensus over what needs to be done to reduce the Federal debt by $3.8 trillion. The 18-member panel needed 14 votes to forward the plan to Congress for a vote. According to the Huffington Post, when the bi-partisan co-chairmen couldn’t get support from their colleagues for the “hawkish” proposal, which included plans to raise the retirement age and taxes, they chose to not even put the recommendations to a formal vote.
Housing data was mixed this week. Mortgage Applications fell by 16.5%, but a curious thing happened on the way to the forum: a drop in refinances obscured what looks like genuine improvement in purchase applications. In the chart at right (as always, click to enlarge) the bottom panel shows purchase, and while it’s admittedly from a low level, the trend seems to be turning–and in a nice, gradual fashion. Similarly positive, Pending Home Sales jumped by 10% versus the expectation for a (-)1% drop. The CaseShiller Home Price Index, however, fell by (-)1.51% versus the expectation for 1.31% improvement. While the CaseShiller team says that the delay in reporting (this week’s report covered the period ended 9/30) ensures quality reporting, it is delayed, nonetheless.
Key Indicators to Watch
- Initial Jobless Claims (Thursday) – Weekly
- University of Michigan Consumer Confidence (Friday) – preliminary December
My favorite Christmas music of all time is Handel’s Messiah. The entire work was written in 24 days, which is a masterful feat, considering that it comprises 52 movements. If you’re not a complete rube you might be familiar with its climactic Hallelujah Chorus. (That alone does not assure your non-rubeness, however). (Wikipedia does a pretty good job of covering the work at the link here.) When the Hallelujah Chorus was sung, King George is reported to have stood up for it. As a result, everyone else in attendance did so, too–and that is a tradition that is still practiced. Here is Wikipedia’s version of events, and since it’s from the internet you can count on its veracity.
In many parts of the world, it is the accepted practice for the audience to stand for this section of the performance. The tradition is said to have originated with the first London performance of Messiah, which was attended by King George II. As the first notes of the triumphant Hallelujah Chorus rang out, the king rose to his feet and remained standing until the end of the chorus. Royal protocol has always dictated that when the monarch stands, everyone in his (or her) presence is also required to stand. Thus, the entire audience and orchestra stood when the king stood during the performance, initiating a tradition that has lasted more than two centuries. It is lost to history the exact reason why the King stood at that point, but the most popular explanations include:
- He was so moved by the performance that he rose to his feet.
- Out of tribute to the composer.
- As was and is the custom, one stands in the presence of royalty as a sign of respect. The Hallelujah chorus clearly places Christ as the King of Kings. In standing, King George II accepts that he too is subject to the Lord of Lords.
But enough of my droning. If you’re still reading then you’ll want to watch the video below. I remember, growing up, a word my dad used to describe something awesome . . . “heavy.” Well, this is heavy stuff.