Help Wanted


“Penny-wise and pound-foolish.” – Benjamin Franklin, Poor Richard’s Almanack

It wasn’t much of a jobs report, but for once we find ourselves saying without irony that it could have been worse. The establishment survey came up with a number of no new jobs added, a zero that the market didn’t take too well. Yet part of the subsequent market drop could also be traced to a Friday going into Labor Day weekend, which tends to repeat whatever happened the day before, only with lighter volume and fewer traders.

The consensus had been for something positive – on the radio early that morning we heard the estimate as 90,000, then saw Bloomberg carry it that morning as 68,000 while Briefing.com’s consensus dropped to 70,000. Going into the report we thought the market would have been happy with 40,000, as there had been whispers of a negative number. CNBC’s resident banshee and futures reporter “Koko” Rick Santelli guessed at zero shortly before the open, nailing it.

That finished off the month-end rally we had put in, the fifth such mark-em-up run in the last six months, as fear and profit-taking returned to the market. When one considers the divergent paths we might take over the next six weeks, we’re actually at a fairly reasonable level, one where many good companies are at cheap valuations.

Yet the market itself is still susceptible to another bout of panic. Whatever happens will get amplified by the trading mechanisms that dominate the current environment: high-frequency trading, leveraged and unleveraged ETFs, waves of retail investors that rush in after every two- or three-day rally and flee after every sell-off (we can only hope that the two groups aren’t one and the same).

We’ve more to say on the jobs report below, but we’ll leave it for now by saying that the more volatile household survey showed a net addition of 330,000 workers and people re-entering the labor force. The monthly household numbers aren’t especially reliable, but they do converge with establishment payroll data over time and some plus is better than none.

Another spanner in the works came from news that the federal government is going to call banks to account for mortgage-lending transgressions. That added selling pressure to the sector and market throughout the day. It’s been a difficult subject all along for the feds, caught between wanting to restore the credit market and especially housing to a healthy state, and growing complaints about the banks getting away with murder, having to be bailed out, then paying themselves handsome bonuses on top of it. Moronic behavior aside, the home lending business is too concentrated and needs to be spread out more, but undoing the emergency mergers of 2008 isn’t going to be easy.

There is a lot on the September calendar, with this week including the European Central Bank’s latest policy meeting on Thursday morning (along with the Bank of England) and the President’s jobs speech later that night. Many are looking for the ECB to cut rates, so Trichet will probably wait one more time just to show he can’t be pushed around. The President’s speech is eagerly anticipated by Wall Street, but unless he actually resigns, anything he says is in for a tsunami of pushback from opposition party candidates eager to outdo each other in being anti-Obama. There’s a possibility that the end result would be disappointment bigger than the initial relief.

There are German votes and decisions on the eurozone this month (in theory, as they could get pushed back), and an important Fed meeting on the 20th and 21st, which many anticipate will present a further package of stimulus. Part of the market’s recent rebound was inspired by hopes for the latter. There is also the matter of next Sunday being the tenth anniversary of a forever-infamous terrorist incident.

In sum, the rest of the month could be quite volatile, and October too. Something the post-mortem of the jobs report impressed upon us was that everybody’s positions seem as hardened as ever. Once the pols come back from vacation this month, they’re going to start right back in on each other again. So we’ll leave you this Labor Day weekend with a provocative thought: so long as the market remains range-bound, the political process both here and in Europe will remain frozen. It won’t be until markets are plunging that the politicians will be forced to climb down from their positions and stop pandering to cant and fantasy.

Lest the thought of more of the same mindless dogma and dreary headlines take you down too hard, though, look on the bright side. Although it may take a market plunge to get our leaders to act, we’d finally get something done – and prices would offer another tremendous bargain.

The Economic Beat

As noted above, although the establishment survey produced a gain of zero, the household survey registered a gain of 331,000 and as a kind of bonus, reversed the recent trend of a declining labor force. The participation rate (people actively working or seeking work) grew, offsetting the 331k gain and leaving the unemployment rate unchanged, which is actually classic recovery behavior. While we certainly don’t have a classic recovery on our hands, it’s nice to see an occasional symptom.

Other positives included an increase in the Monster employment index, which tends to lead changes in the jobs report, a large decrease in layoffs (centered in the federal sector) and a +91,000 private jobs estimate from ADP. Weekly claims are edging back up, though.

The headline shocks from the debt-ceiling crisis that we had to deal with in late July and early August clearly had an impact on subsequent hiring and general confidence, be it employer or employee. But a good piece of the July air pocket in equity prices also proceeded from the realization that GDP growth in the first and second quarter was much smaller than thought (it may also be that it was not as small as the new Bureau of Economic Analysis (BEA) adjustments).

Since the economy wasn’t growing that fast anyway, it follows that the disruption wasn’t so big either. Looking at the revised June and July data, the progression is 20,000-85,000-0, not wonderful but not evidence of a knockout punch either. We think that a revival to 100,000 would not be so difficult to pull off. Despite the catch phrase of the quarter being “stall-speed,” the economy is just as apt, under current conditions, to pull off a bounce-up quarter as a bounce-down, without much power in either direction.

The ISM manufacturing number was the other number of the week, and it managed to stay in the black, albeit narrowly, with a reading of 50.6 (50 is neutral). That’s not so bad, when you consider that it means that activity is largely the same as the month before. It was indeed a sideways report, with new orders virtually unchanged, production slightly off, inventories and imports up and prices and exports down.

The score of growing sectors to contracting was ten to six and the markets were prepared for something with a 48-handle, so the actual was a bit of pleasant surprise. A point we keep making is that manufacturing isn’t as big of a sector in the US as it was, so an ISM that goes sideways for a few months isn’t the stall it used to be, nor is one in the fifties going to deliver the GDP growth it once did. The non-manufacturing index comes up Tuesday.

However, before we leave the sector we should mention the Chicago Purchasing Managers’ Index (PMI), the Chicago version of the national ISM, and July factory orders and construction spending. The Chicago PMI came in at a better-than-expected 56.5, showing continued strength in autos and aviation, and the markets were pleased, but this was also a 21-month low that displayed broad slowing across nearly category. Factory orders in July were also okay, with a slight upward revision to durable goods (still centered on aviation) and a 1.0% increase in non-durables. Orders for communications equipment plunged.

Construction spending fell 1.3% in July, but the dollar figure was better than anticipated because of a healthy upward revision to June. Of course, July could always get revised down again as this number does tend to take big revisions. Year-on-year, private spending is up over 5% while public spending is down over 8%. That’s not the way they draw it up in the recession-fighting handbook, but common sense is often scarce during times of crisis.

The gloomy state of housing seemed to be underlined by a drop in pending home sales of (-1.0)%, while Case-Shiller data showed a slight deepening in June for the year-on-year price decline to about (-4.5)%. Anecdotal evidence by realtors certainly spoke of headline-induced sense of caution amongst buyers. The credit situation is still a mess.

Consumer confidence plunged in August to 44.5, the lowest reading since April 2009. On the other hand, July consumer spending rose 0.8%, while income was up 0.3%. The effect of the falling market and political spitting match was hard on the surveys – the Dallas manufacturing survey tumbled to minus (-11.4) from (-2.0), even though new orders and employment were both positive – yet easier on actual spending. There’s no doubt we lost a figurative engine though, and it would be a good idea to get it restarted. The minutes from the last Fed meeting suggested the same: no recession yet, but we need to keep all the engines going.

The calendar is light next week after the ISM non-manufacturing number on Tuesday. We reckon that the news flow will be dominated by Europe, where the markets are falling again over debt fears and the central banks are meeting during the week. Thursday morning will see the European and United Kingdom central banks come forth with their latest diagnoses and nostrums.

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