For an accurate read on the June non-farm payroll report, you need look behind the headline numbers. The establishment survey showed that non-farm payrolls fell -125,000 in June however we need to exclude 225,000 census workers that dropped off the rolls and thus we have non-farm payroll growth of 100,000. If you want to back out 17,000 additional government jobs that leaves just 83,000 net new private sector jobs created in June.
The Household survey was even less impressive with a net reduction of -301,000 jobs in the month of June. For the first 4 months of the year the household survey averaged 416k new jobs per month, however adding in May and June that average has nearly halved to 221k per month. The household survey is notoriously volatile month to month however we now have 2 consecutive months of poor data from the household survey.
The unemployment rate fell to a seasonally adjusted 9.5% but again the headline number doesn’t tell the full story. A falling unemployment rate is usually a positive sign but not when it is brought about by a huge number of job seekers exiting the workforce. The household survey estimates that a whopping -652k workers gave up looking for work in June as shown by the falling labor force participation rate which fell 0.3% to 64.7%, the lowest reading since January.
The chart below suggests That those expecting a V shaped recovery in the jobs market are going to be very disappointed. Double dip or not, US unemployment will remain high for several years to come.
The average hourly work week for production and non-supervisory workers, a leading indicator of job growth coming out of recessions, has stagnated for the last 3 months at 33.4 hours. Average weekly hours work for all employees actually fell slightly to 34.1 hours, not a good sign.
No signs of improvement for the long term unemployed, the average duration of unemployment hit a new record of just over 35 weeks in June whilst those unemployed for 6 months or more remains north of 45%.
Overall, the June employment report was disappointing. Although more jobs were added in June than in May it is still not enough to keep up with the growth in the labor force. The debate has now turned to whether we are headed for a double dip or just a slowdown in growth. Comments in the mainstream media citing double dips as rare are not helpful or insightful. That fact that a double dip has only occurred once in the post war period, or 1 in 10 times is hardly an exhaustive sample from which to draw on, particularly given the nature and depth of the most recent recession.
As Lakshman Achuthan of ECRI has observed, we should expect more and frequent recessions over the next couple of decades than has been the case in the preceeding 2 decades. The evidence whilst not yet clear, indicates the next recession may not be too far away.
Interesting debate, although the protagonists probably agree on more than they disagree. A couple of observations, Kroeber is a touch arrogant and overconfident, always a bad sign. More importantly though, Kroeber dismisses a lot of economic history with a version of the “this time it’s different” argument.
Kroeber cites the volatility in Chinese GDP over the last decade or so and says that while those swings are significant they are not of the type that would produce a huge crash. While correct, that argument completely ignores the fat tail problem. Just because China hasn’t experienced a massive crash in the last 20 years is no indication that they won;t in the future. It’s the same argument used by the believers in the so-called ‘great moderation’, the belief that the economic cycle was dead and severe recessions a relic of the past all the while being blind to the build up of hidden risks in the financial system.
The odds are that China doesn’t have a severe crash, but dismissing the possibility out of hand doesn’t make you smart if it doesn’t happen, it makes you lucky, and if it does happen, and you are have invested heavily in the opposite outcome, it makes you poor.
Faber ends with a warning about the Australian property market and recommends shorting the Australian dollar, I strategy I wholeheartedly agree with recommended some time ago.
I’m glad this guy is back in the media. Such a simple message that so few in the mainstream seem to able to grasp. I love this quote in reference to the market meltdown of last week:
“When a bridge collapses, you don’t look at the last truck that was on it, you look at the engineer.”
Nassim Nichloas Taleb has been on a self-imposed media hiatus for a year until he recently broke his silence on CNBC. After the interview I wouldn’t be surprised to see him take another year off. If you are going to have Taleb on at least put him with someone who has a clue, not that muppet Dennis Kneale who wouldn’t know a black swan if he fell over one. Taleb’s message is very simple, ignore his words at your own peril.
If you don’t already, do yourself a favor and read the Monthly Market Observations at the Contrary Investor.com released on the first business day of the month. In their March issue a few months ago, they explored the relationship between the S&P500 and it’s 50 day moving average.
As shown above, during the stock market rally from 2004 – 2007, the S&P500 never fell more than 5% below it’s 50 day moving average. That pattern has played out again so far in the current rally that is just a little more than a year old. As the good folks at the contrary investor note, whilst that seems like a useful trading tool with the benefit of hindsight, such a small sample is not a sound base for an investment strategy going forward.
Thus to put this indicator to the test, they took a look at immediate post recession rally’s going back to WWII, the results are shown in the series of charts below.
As the charts show, although it is not absolutely perfect, there seems to be more than just a coincidence to the 5% below the 50 day MA indicator for post recession rallies. Of course, this indicator will work just fine until it doesn’t. As of Friday we are now sitting right on top of the 5% below the 50 day MA band, represented in a slightly different way below. There is a good chance we could find out this week if the S&P500 passes the 5% test yet again.
It was as if the April non-farm payrolls report went completely unnoticed on Friday as volatility in global financial markets continued to take center stage. In case you missed it, the headline nfp number showed a net 290,000 jobs were added in the month of April. This was ahead of expectations, and even more so after subtracting the less than expected 66,000 temporary census workers added during the month. Also there were significant (121k) upward revisions to prior months, February was revised up 53k whilst March was upgraded by 68k.
As noted many times on this blog before, the household survey has been pointing to strong job creation for a number of months already. Since January the household survey shows a net 1.663 million jobs have been added. This is reinforced by the sizeable revisions to the establishment data for prior months. Just as the establishment survey underestimated job losses in early 2008 it is now underestimating job gains.
However, even with the household survey adding a net 550k jobs in April, the unemployment rate rose to 9.9% reflecting a huge surge of entrants into the labor force. A net total of 805k new entrants entered the labor force during April and since there were only 550k net new jobs added the remaining 255k are adding to the ranks of the unemployed. This is a typical trend seen in recoveries and is shown below by the spike in the labor force participation rate.
The data is clearly showing that the US labor market has bottomed. Even if you are in the double dip camp, you have to acknowledge that employment is trending up and will probably do so for at least the remainder of this year albeit with an unemployment rate likely to stay above 9%.
The average hourly work week for production and non-supervisory workers, a leading indicator of job growth coming out of recessions continues to tick up slowly, rising to 33.4 hours in the month of April.
For America’s long term unemployed the news continues to get worse. The average duration of unemployment is now at 33 weeks. On top of that, a record 45.9% of those unemployed have been so for more than 26 weeks.
With 4 months of improving job growth the trend is clear, the US economy is now adding jobs and it cannot be explained away by census worker hiring, companies are clearly adding to payrolls on a net basis. Although the rate of job growth in April is the strongest in 4 years, we need to see that kind of growth and preferably higher, month in and month out for the next few years to make a serious dent in the unemployment rate.
As I alluded after BGL’s 1H10 results, the company’s full year forecast looked a tad conversative. Today BGL came out with a upgrade to FY10 EBITDA guidance. Previously the company said they expected to come in at the top end of the $2.5 – $2.8m EBITDA range. Today the company announced they expect to produce in excess of $3.0m EBITDA for FY10. Given the new outlook I have upgraded my FY10 NPAT forecast from $1.3 – $1.4m with risk to the upside.
Based on those numbers BGL is worth $0.24 a share. The company also announced that they did in excess of $300k EBITDA for April. Given that outlook coupled with the current earnings momentum, EBITDA in excess of $4m for FY11 is well within reach. My forecast for FY11 NPAT is $2.2m with a 1c a share dividend payout (assuming no further acquisitions). That gives a valuation of $0.43 a share based on FY11 numbers. Still plenty of upside in BGL over the next 12 months as long as the global economy doesn’t implode in the meantime.
Jim Chanos of Kynikos Associates guest hosted CNBC’s squawk box this morning and was once again vocal about the looming Chinese property bubble. He had an interesting anecdote, which I could not verify on any mainstream news sources, that a certain large property developer in China started offering a hefty 15% discount on it’s projects. Click below for the interview.
Chanos also noted that the Shanghai stockmarket has been a poor performer this year. Is the Chinese market signaling that something is up? The Shanghai index was the first to recover bottoming out in November of 2008 and then topping out in August 2009. Will the Shanghai market lead the world down? There is an increasing amount of of chatter around the Chinese property bubble. Investors would be well advised to keep an eye on developments in China as well as the ongoing dramas in Europe.
Marc Faber appeared on Bloomberg television on Monday talking about Greece, China commodities and much more. As usual, he is provocative, interesting and more importantly makes a lot of sense.
Since the bull market began in March 2009, there has yet to be a correction of 10% or more in the S&P500. We nearly got there back in January with a little more than an 8% correction but that elusive 10%+ correction has yet to materialize. Looking at previous rallies off steep bear market declines, the current rally would seem to be long in the tooth.
The current rally has eclipsed the 1982-83 rally in magnitude terms and is almost there in terms of duration. None of this means that a 10% correction is imminent, after all, post the relatively shallow bear market of 1990, the S&P500 rose for almost 8 years straight without a 10% correction. All it demonstrates is that based on the historical data of market rallies that follow severe bear markets, that the current rally would appear to be closer to the end than the beginning.
Another indicator that is often present just before corrections is extreme levels of bullish sentiment. The chart below courtesy of stockcharts.com shows bullishness at extremely high levels, the type of levels seen in mid 2007. While Individual investors remain skeptical, shown by net outflows from US mutual equity funds over the past year, investment advisors are becoming more and more bullish.
Increasingly, bulls are pointing to the strong earnings of corporate America as a reason to push the stock market higher. Certainly earnings have been beating expectations and they look especially good compared to the earnings of a year ago. The Latest estimate from S&P puts 2010 operating earnings at about $78 and a record $95 for 2011. I’ve even hear talk of $100 or more for 2011. Those type of earnings may well come to pass but what I find interesting is the tendency for those with a bullish outlook to lengthen their time horizons, and why not? If you put plug in $100 for S&P500 earnings, you get a 2011 PE of less than 12x based on the close of April 30th. That makes stocks look cheap.
However there are two problems with that kind of analysis, firstly it ignores the fact that earnings and the stock market often don’t move in tandem and secondly that analysts are notorious for getting their forecasts wrong. On this blog I have repeatedly pointed out how analysts are slow to see the writing on the wall at turning points in the economy. They were slow to downgrade their earnings estimates in 2007 and 2008 and they have now been running to catch up to the recovery in earnings.
For example in Nov 2007 when it was clear that problems were brewing, the consensus of analysts was predicting the S&P500 would produce operating earnings of $105 a share for 2008, the final result was a less than half that estimate at $49.51. The lesson is not to put too much faith in forward earnings estimates. A more conservative approach such as Bob Shiller’s trailing 10 year average earnings yields a PE of 21.5x, a level usually associated with poor stock market returns for the coming decade.
A rally long in the tooth, overly bullish sentiment and stretched valuations provide the right scenario for a correction and Friday’s action may have been the beginning. As usual it is impossible to point to a catalyst that would set off such a correction but there is no shortage of candidates at the moment. In addition to the above, we have the prospect of a non-result over Greece, further problems in the Euro-zone (which are only a matter of time), more revelations about Goldman Sachs or another investment bank (witness the possible DOJ probe into alleged silver market manipulation by JP Morgan as reported on King World News) or a less than strong employment report this coming Friday.
Or we may continue to shrug it all off, kick the can further down the road, as seems to be the general approach by governments around the globe in response to their economic problems, and continue to climb the wall of worry. Either way, May is shaping up as an interesting month for the markets.
Additional Note, May 3rd 2010:
As noted by a poster over at Seeking Alpha, the Bullish Percent chart shown above does not refer to bullish sentiment by investors. What it measures is the percentage of stocks that have a buy signal based on the point and figure chart system. A reading of over 70% is considered overbought whilst a reading over 80% is even more overbought. Obviously the recent top around 87 represents a severely overbought condition.
What I was trying to convey is that this index coupled with investor sentiment which is very bullish from an investment advisor’s point of view (not individual investors), points to an overbullish, overbought condition that is often associated with sharp corrections.
