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We have never seen such a grossly misinterpreted Employment Report in our 30 years in this biz. But the nature of the wise-guy-dominated markets is to shoot first and analysis later. So if you dont want to know the truth or if in the words of Jack Nicholson "You cant handle the truth" ignore the following.
About release of the report, we immediately noticed some huge red flags. How could non-farm payrolls explode 308k when a) the unemployment rate increased to 5.7%; b) wage growth was less than expected at 0.1%; c) the "employed population ratio" actually FELL to 62.1% from 62.2%; d) the "employment participation rate" was unchanged at 65.9%; e) total employment was unchanged at 138.3m and most importantly f) the avg workweek fell 0.1 to 33.7, which is near a 40-year low (33.5)! (See table A-1.)
When dissecting the numbers we learned that NSA service job wages fell 8 cents and they accounted for 230k of the 308k job growth. Leisure & hospitality wages NSA fell 4 cents; and NSA avg hours worked fell 0.3. Something is obviously wrong. Healthcare contributed 36k jobs, leisure & hospitality 28k, retail 47k, government created 31k and the phantom jobs estimated to be created by small business was 153k! This is now known as the business birth/death rate. Apparently a large number of workers entered the workforce in order to force the unemployed rate higher, but still something seemed incredibly wrong.
After the close, our good friend and astute, no nonsense economist, ex-Fed official and investment adviser (at Van Hoisington Management), Lacy Hunt, provided the answers to the conundrum. Of the 308k jobs created (Establishment Survey), 296k are part-time jobs (Household Survey)! Let us repeat and lets be very clear, almost all jobs created in what is heralded as a great employment report are part-time jobs. "In March, the number of persons who worked part time for economic reasons increased to 4.7 million, about the same level as in January. These individuals indicated that they would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs. (See table A-5.)" People want full-time but cant find it. Lacy opines that Congress did not renew unemployment benefits so many people took whatever they could get. This accounts for the surge in people entering the workforce. http://www.bls.gov/news.release/empsit.t05.htm Lacy noticed other salient points in the report. The average weekly paycheck in February for the private sector was $524.58; in March it fell an astounding 88 cents to $523.70. The area of job growth shows even worse numbers. The average weekly paycheck for leisure & hospitality workers is $225.55. Retail is $364.50. Now everything fits and conforms, especially to the large fundamental trend of persistent lowering of US living standards as those in Asia increase. This is great news for Bush and the US!?! And this is reason for TV broken-clock jackasses to hoot and holler?!? But there is more.
"The index of aggregate weekly hours of production or nonsupervisory workers on private nonfarm payrolls fell by 0.1 percent in March to 99.0 (2002=100). The manufacturing index was down by 0.3 percent over the month to 94.1. (See table B-5.)"
In the Employment report there is this illumination in Table A-7: "NOTE: Detail shown in this table will not necessarily add to totals because of the independent seasonal adjustment of the various series. Beginning in January 2004, data reflect revised population controls used in the household survey." So we checked to see why the caveat. "More unemployed" increased 182k; but in the table, men age 20+ saw unemployment increase 182k. Women age 20+ had a 142k increase in unemployment. That totals 346k more unemployed by real math, but not BLS math. http://www.bls.gov/news.release/empsit.t07.htm
The Employment Report is 180 degrees from what is being propagated. As we have regularly stated, especially during Slicks term: 1) due to the proliferation of fast money, operators and investors react to headline data and news without thought or analysis and 2) commentators, pundits, gurus etc. tend to rationalize market moves rather than analyze the data or events. PS The hedge fund industry is headed for a major reorganization and philosophical change. Too many knee-jerk lemmings try to quickly make small percentage moves under huge leverage. And we dont want to get into the fund of fund gatekeepers that are populated by many with no trading, investing or business experience.
Now lets see who in the industry does the requisite analysis of the employment report and has the nerve to say the emperor has no clothes. But you now know the facts and reality. The market will realize this in due time, and it wont be a pleasant adjustment. Wells Fargo (Minneapolis) economist Sung Won Sohn is the only other economist that we saw mention that part-time jobs were most of the jobs gain.
Construction jobs increased 71k in March. Midwest Research notes "Industrial construction volumes (millions of sq ft) reached their highest level in over 2 yrs during 4Q03; vacancy rates have flattened out, but remain at/near 9-yr highs." Despite 9-year highs in vacancy builders keep building. Of course its due to Easy Als bubble policies. Giving cheap money to builders is like giving cheap beer to frat boys. Most will consumer it even when it is imprudent and self-destructive. This explains why bubbles, let alone reflated bubbles, are so pernicious. They encourage mal-investment in areas with over-capacity, which just exacerbates the big-picture problems and eventual adjustmentMidwest Research also notes that scrap iron prices fell almost 15% in March, the first decline in 9 months due to the absence of Chinese buying. The evidence is clear that Chinese officials want to slow down its economy. http://www.midwestresearch.com/disclosures/index.asp
The ECB refrained from lowering rates on Thursday. The market expected a cut because Euro economic fundamentals, especially Germany, are receding. Wed guess the ECB has joined the BoE, BoC and BoJ fear of inflation camp. Good thing the Fed sees no inflation and they can remain patientWeekend reports say the BoE might hike rates this week due to inflation, especially in British homes.
Poor Martha Stewart gets cheesed for a few thousand dollars while 9/11 profiteers and the people who had the employment report early on Friday made millions. S&P futures started to soar at 7:20 CST; USUs started tanking at 7:24. At one point bonds fell 4 handles on the panic. This should give late-night sweats to Fed, banking and brokerage officials. If bonds can collapse that fast on the perception the Fed might hike rates 25 bps (on a grossly misinterpreted report at that) what will transpire when a serious problem, rate hike or market-generated surge in rates occur? To avoid a series of LTCM mishaps, risk models better be run with something other than rate assumption that reflect the halcyon times of the past many years. PS Journalists get the data at 8Am CST. The WH and various officials have the report by Thursday afternoon.
The ECRI "US Future Inflation Gauge" jumped to 118.8 in March from Febs 115.7, which was revised higher. Every reading since June has been revised higher. There is profound significance here beyond the surface issue of increasing inflationary pressure. The founder of ECRI, Geoffrey Moore, was Easy Als mentor and one of his professors. Al reportedly still closely follows Moores work. But Al has to ignore inflation due to the big-picture of unserviceable debt and the intractable diminution of US living standards due to the ascent of Asia and other developing countries. http://www.businesscycle.com/freedata.php
Today We thought a foreign open would occur; foreigners short dollars would pour into stocks on the open. However, any opening rally will be mitigated by bloodshed from the coordinated Shiite militia uprising in Iraq on Sunday. Iraq violence will escalate as the June 30 handover of power day nears. Nevertheless wed look for a top today or tomorrow on a Turnaround TuesGlobally bonds are down sharply overnight.
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