Have We Seen The Peak Of Employment?

Authored by Lance Roberts of StreetTalkLive,

In my November 5th report on employment I stated: “…when taking into account the recent slate of economic weakness, post-election we are likely to see many of the recent job gains revised away as the data aligns itself with overall economic activity.  The STA composite employment index is likewise pointing towards higher jobless claims numbers in the months ahead and falling export orders will continue to impact corporate profitability and their need to increase employment.”  Since that time jobless claims did indeed rise, and with the release of the November jobs report, we saw the previous two month’s gains in employment revised down by a total of 49,000.  October employment of 171,000 was revised to just a 138,000 advance while September was brought down to 132,000 from 148,000.  

What is important to remember is that the BLS only publishes revisions to the prior two months even though it has data for months prior.  This is why the annual revisions to the employment data can be significant.  Furthermore, given the weakness in the employment components of the major economic surveys, as shown by my composite employment index, we should expect to see negative revisions to the 2012 data employment data next year.



There has been much debate about whether the domestic economy is in a recession.  A bulk of the arguments against recession are based on the four primary indicators used by the National Bureau of Economic Research (NBER) who officially date the beginning and end of recessionary periods.  The inherent problem with this analysis is that the data is subject to annual revisions, which the NBER waits for before determining recessions, which potentially leads to a significant lag in the final determination of the recession.  The chart below shows recessions and the announcement dates by the NBER.



As you can see the bulk of the damage to investors was done prior to the official announcement by the NBER.  This is why there is significant debate currently about the economic state as investors try to determine when the next recession may occur.  It is the problem of the data lag that requires additional analysis of a variety of other economic indicators which have both; 1) a strong history of recession indications and, 2) are not subject to large annual data revisions.  Currently, many of those indicators from the economically sensitive sectors of manufacturing and production (see here, here, and here) are warning of economic weakness and should increase investor caution.

Peak Employment?

Employment, is one of those economic data series that are subject to large annual revisions.  Currently, there is little argument that the economy is beginning to slow with even the major Wall Street firms ratcheting down Q4 GDP to 1% annualized growth.  This brings into question the sustainability of employment in the future as businesses become more defensive to offset the impact of the ongoing recession in Europe and slowdown in China.

While the most recent employment report showed gains in November this is not necessarily an indication that an economic recession has been avoided.  The table below shows every Post-WWII recession and where monthly employment stood prior to the start of the recession.  With the exception of 1957 employment growth was positive, and in some cases expanding, prior to the recession.  



The point here is that positive net changes to employment are not necessarily an indication that the economy is expanding.  It is important to remember that businesses are generally reactionary, rather than proactive, about the current economic environment.  Businesses make investment, and hiring decisions, on historical data from the previous month or quarter.  This is why businesses are typically the last to hire and the last to fire as they react to trailing demand figures.

The chart below shows the three-month net change of employment.  


As you can see employment tends to peak around 1,000,000 jobs.   That peak was reached in 2010 and has slowly been deteriorating since.  This is why Bernanke has been implementing extraordinary monetary policy in order to stimulate weak employment growth.  Unfortunately, businesses do not hire employees due to monetary policy but rather increased consumer demand.  The problem is that, according to the NFIB, “poor sales” remains one of the top concerns – not exactly a sign of strong end demand.  While employment has grown on a monthly basis, as shown by the inset bar chart, the trend of that growth remains weak.

Commercial lending trends also point to a potential peak in employment.  When an economy is expanding businesses need to typically borrow money to increase facilities, production and inventories.  That expansion leads to increases in employment.   The chart below shows the historically high correlation between the annual changes in commercial lending and employment.



While it is still very early to tell it appears that commercial lending may have recently topped and turned down.  This would be consistent with the weaker economic trends seen recently which portends to weaker employment growth in the months ahead.

One of the arguments that we have made repeatedly in recent months has been that the nascent housing recovery is not fueling economic growth and employment as expected.  The chart below shows residential construction employment versus housing starts.  In the latest report construction employment declined for the fourth month in a row and is now down 7.1% on an annualized basis.



With housing only a small contributor to economic growth, roughly 2.5% of GDP, and the majority of the activity occurring in multi-family properties – the need for expanded employment has not materialized.   The issue for housing remains the sustainability of economic growth which is rapidly being called into question.

As the economic underpinnings continue to deteriorate, as witnessed by corporate outlooks during the recent earnings reports, the drive to expand employment weakens.  As we have been discussing since the beginning of this year the rising cost pressures into production have steadily deteriorated profit margins as cost cutting measures have been exhausted.  

While it is too early to say that employment has peaked for this current recovery cycle – there is mounting evidence that this may indeed be the case.  It will be some time before we get the final revisions to the 2012 economic data from which the NBER will be able to ascertain the official state of the economy.  However, as history has shown, the damage to investor portfolios will have already been done.  It is for this reason that we continue to review reports of underlying economic activity which can provide clues as to the strength, and trend, of economic growth.  It is from that analysis that we can avoid a bulk of the recessionary drag before the NBER makes it official.

"Better Off On Benefits"

There is “no point” earning less in a minimum wage job is how Leanna Broderick – 20-year-old mother of two – justifies the benefits she claims adding that “she is better off on benefits” and would not get a job unless she could continue her luxury lifestyle, which includes designer outfits, holidays abroad, clubbing, lunches out and expensive gifts for her daughters Zelekah, two, and Zakirah, one. The UK’s Daily Mail reports that Leanna saved GBP2,500 (~USD4,000) last year while living on GBP15,480 (~USD25,000) which she intends to spend on iPads and gold earrings for her kids – adding that “This way, taxpayers know I’m raising two well-brought-up kids.” However, all is not rosy in Leanna’s house as she fears next year may not be so lavish because of Government benefits cuts. “I’m not against the cuts, but only if the Government helps me find a job,” she said, “In the meantime, I’ll stay on benefits and get as much as I can out of it.”


Via The Daily Mail:

While many families are worrying about how to afford Christmas this year, one jobless single mother has revealed she receives so much in benefits she has £2,000 to spend on designer gifts, clothes and partying.


Mother-of-two Leanna Broderick plans to buy 20 presents for each of her children, including Burberry and Ralph Lauren outfits, iPads and gold jewellery.


The 20-year-old, who has never worked, claims nearly £15,500 a year in state handouts.




She claims she is better off on benefits and would not get a job unless she could continue her luxury lifestyle, which includes designer outfits, holidays abroad, clubbing, lunches out and expensive gifts for her daughters Zelekah, two, and Zakirah, one.


‘Last year, I saved £2,500 and my kids had 50 presents each, including Burberry and Ralph Lauren clothes and dolls, DVDs and CDs.


This year, I’ve saved £2,000 and they’ll get 20 presents each, including iPads and a new Disney-themed bedroom to share, with designer wall art and bed linen,’ she said.


She is also buying gold earrings for Zelekah, who has pierced ears, and keeping £300 for the sales and £150 for a New Year’s Eve outing.


Miss Broderick, who left school at 16 with no GCSEs, said: ‘I don’t care if people get annoyed. I don’t take advantage, I just choose to save – it’s smart.’


She said there was ‘no point’ earning less in a minimum wage job and having to pay for childcare on top.


After becoming pregnant at 17 with her on-off 23-year-old boyfriend, Miss Broderick was allocated a temporary three-bed council house.


When Zelekah was eight months old she considered working in care, but then became pregnant again by the same man.


Now split from the girls’ father, she has a new two-bedroom council flat in Croydon, South London, with a garden, which is paid for by her £111 weekly housing benefit – part of £1,290 a month total claim.


She said: ‘I didn’t want to miss out on my kids’ childhoods or have someone else raise them. I’m not one of those girls who gets pregnant for the benefits.’


The money for Christmas comes from the £250 she saves each month, which she said shows she is ‘really responsible’.


She adds: ‘Anyone who thinks people on benefits don’t deserve nice things is talking rubbish. I work 24/7 as a mother.


This way, taxpayers know I’m raising two well-brought-up kids.’


But she admits Christmas might not be so lavish next year because of the Government’s benefit cuts.


‘I’m not against the cuts, but only if the Government helps me find a job,’ she said.


In the meantime, I’ll stay on benefits and get as much as I can out of it.’

The full feature appears in Closer Christmas issue, on sale now or go to www.closeronline.co.uk

Is This What The Long-Term 'Nominal' Stock Market Bulls Are Banking On?

The Fed is set to become considerably more dovish in 2013 and beyond as Evans and Rosengren become voting members. It seems unlikely that any new ‘Bernanke’ would drastically alter the Fed’s path; and so we present the ‘Doves’ path to prosperity (in nominal terms).


‘v’ is for voting members…

Chart: adapted from Barclays


Via BofAML:

The rise of the doves means Fed policy should stay easy even if the data continue to show improvement.


Over the past several weeks, the markets have focused on who might succeed Chairman Bernanke once his term as Fed Chair expires in January 2014. With President Obama winning re-election, we expect continuity in Fed policy in 2014. Meanwhile, as the end of the year approaches it is worth noting that the 2013 FOMC could be one of the most dovish in some time. Thus, market participants should be careful not to price out further Fed easing on somewhat better data.


Doves rule the nest


Four of the five voting positions on the FOMC rotate among the regional Fed presidents. The president of the New York Fed is a permanent voter, by virtue of being the ex officio vice chair of the FOMC. Current New York Fed President Bill Dudley skews to the dovish side. He will be joined in 2013 by two über-doves: Chicago’s Charles Evans and Boston’s Eric Rosengren. Evans was an early proponent of quantitative “thresholds” for interest rate policy; recently, other Fed officials (such as Rosengren) have supported that approach for asset purchases as well. These two also favor focusing on achieving a substantial labor market improvement, which portends easy policy throughout 2013.


Joining Evans and Rosengren are two presidents to the hawkish side of the spectrum: St. Louis’s James Bullard and Kansas City’s Esther George. Note that we know a lot about Bullard’s views, as he speaks regularly; George has given very few speeches to the national press and so her perspectives on monetary policy remain a bit of a mystery. Bullard is interesting because he was an early advocate of taking a flexible approach to the balance sheet — but may not support further expansion under current economic conditions. He has long opposed putting much emphasis on forward guidance. Neither is likely to be quite as hawkish as Lacker this year, or Fisher and Plosser the year before, but one or both may dissent more often than not. But they will remain a distinct minority.


A gaggle of governors


The governors also retain a dovish bent, as Bernanke and Yellen have recently been joined by Jeremy Stein, a fellow academic who supports further Fed support for the economy. The remaining Governors have backgrounds in something other than economics. Daniel Tarullo and Sarah Bloom Raskin have consistently supported the majority; to date, so too has recent appointee Jerome Powell.


The 14-year appointment of the seventh Governor, Besty Duke, ended early this year. She has stayed on to allow the Fed to operate with at least five Governors since the start of 2012. President Obama is now likely to appoint a replacement next year. Moreover, should Chairman Bernanke decide to retire, President Obama would fill a second position in his second term. Two appointees in a four-year presidential term is actually fairly low historically. Bernanke and Duke are the last Governors not appointed by Obama, but most presidents have appointed a majority of Governors during their term in office. Yet as the Fed now places more emphasis on forward guidance, long-term targets, and communications, the impact of these appointments may persist beyond 2016.


More immediately, the doves largely support the idea that policy should be kept easy “for a considerable time” after the recovery is underway. Market participants thus should be cautious not to overreact to better near-term data: the Fed isn’t likely to turn notably more hawkish any time soon.

Jimmy Hoffa Warns Of "Civil War" As Michigan Governor Signs "Right-To-Work" Into Law

Minutes before Michigan Governor Snyder signed the ‘Right-To-Work’ bill into law…


… Teamsters head Jimmy Hoffa appeared on CNN, as seen in the clip below, warning that:

“This is just the first round of a battle that’s going to divide this state. We’re going to have a civil war,”

as the bill to weaken unions’ power is passed. If Hoffa is right, look for Michigan GDP to soar: after all it is one of the more Keynesian states in the union.

Via AP: Michigan Gov. Snyder signs right-to-work bills

LANSING, Mich. (AP) — Michigan Gov. Rick Snyder has signed right-to-work legislation, dealing a devastating and once-unthinkable defeat to organized labor in a state that has been a cradle of the movement for generations.


He put his signatures on the bills Tuesday, hours after the state House passed the measures as the chants of thousands of angry pro-union protesters filled the Capitol.


Snyder says a failed ballot proposal to enshrine collective bargaining rights in the constitution triggered the discussion that led to the passage and signing of right-to-work.


During a news conference, he called the protests “an exercise in democracy.”

Jim Hoffa, of the International brotherhood of Teamsters explains his perspective:


Via CNN:

Jimmy Hoffa, president of the International Brotherhood of Teamsters, said Tuesday he expects Michigan unions and lawmakers to break out into “civil war” after the state legislature passed right-to-work bills that would weaken unions’ power.


“This is just the first round of a battle that’s going to divide this state. We’re going to have a civil war,” Hoffa said on CNN’s “Newsroom.”


The Republican-controlled state House passed two bills that had already been approved by the GOP-dominated state Senate. Gov. Rick Snyder, also a Republican, is poised to sign the bill, which would allow workers at union-represented employers to forgo paying dues.


As thousands of protestors gathered at the state capitol on Tuesday, Hoffa called the legislation a “tremendous mistake” and “a monumental decision to make” by outgoing lawmakers in a lame duck session.


“What they’re doing is basically betraying democracy,” he told CNN’s Brooke Baldwin. “If there’s any question here, let’s put it on the ballot and let the people of Michigan decide what’s good for Michigan.”


Proponents of the legislation say it gives workers more freedom, while opponents say a less robust union presence will negatively affect workers’ rights. Hoffa also argued that those who don’t pay union dues will be considered “free riders,” as they’re getting the same benefits from union representation without the cost.


Hoffa pointed to Michigan’s recovering auto industry, saying the Wolverine State has bounced back from the recession without being a “right to work” state.


“This is basically a step backward,” he argued.

Tempting Tuesday – Things Begin to Look Up Again

Tempting Tuesday – Things Begin to Look Up Again

By Phil of Phil’s Stock World 

Now what?


Suddenly we’re heading back over our 50 dma lines and all that “death cross” talk is getting questionable (although the Nasdaq still needs an impressive recovery to avoid making its). As our Big Chart (above) shows, we’ve wiped out most of that drop below our Must Hold lines and now, in the bigger picture, we’re back to consolidating for what could be a big finish to the year.

Much of the outcome, of course, is up to the Fed tomorrow and expectations are high for a big boost in QE to make up for the termination of Operation Twist.  Anything less than an additional $45Bn a month pledged in tomorrow’s statement will be disappointing and might reverse equities yet again. It’s a little early to go gung-ho bullish – just in case the Fed disappoints.

[For more stock ideas, see this week’s Market Shadows newsletter, Tables Can Turn. Our contributing writers are bullish: Richard set up a trade idea for DEG in There is No Spoon. Dr. Paul Price reviewed Unloved Stocks (which Rocked), and prescribed more POT, and Lee Adler sees QE3 money flowing into the marketsFor the Full Market Shadows Newsletter click on this link.]

We have no need to chase as we did our buying at the bottom – like HOV, which was our bullish featured pick in the morning post on November 16th, when the stock was at $4.30 (now $5.38 – up 25%). Like the trade ideas I’ve been posting this week, a lower entry could have been made by buying the 2014 $4/7 bull call spread at .75 and selling the $4 put for $1.40 for a net .65 credit. Not even a month later, the bull call spread is $1.10 (up .35) and the short put is .80 (put is down .60 – but we shorted it, so we’re up .60 on the put).

These are sensible ways to play stocks in a choppy market. We give ourselves 15-25% hedges to the downside – built into the spread – and we leverage our upside considerably so a 25% gain in the stock returns 146% on our investment. That same day we had additional bullish trade ideas on AAPL, IMAX, CLF, FAS and ABX – just a typical day of bottom-fishing at PSW.

We were fortunate, so far, to have made a pretty good bottom call at Dow 12,500 and now we just have to keep an eye on that 13,100 line and make sure it doesn’t fail. Once we get past the Fed tomorrow, we could be set up for a move back to 13,600 – if Bernanke can manage to instill a bit of investor confidence going into the close of the year.

There are still plenty of opportunities out there. Just yesterday we still had plays on IMAX and AAPL in the morning post and, during Member Chat, we added bullish trade ideas on NOV and GDX early in the morning – in anticipation of another bullish day.  GDX took off but NOV is lying flat so far and our trade idea on that one was an artificial buy/write, selling the 2015 $55 put for $7.40 and buying the $60/82.50 bull call spread for $10, which is net $2.60 on the $22.50 spread that’s currently $8.44 in the money.

Of course, we have other strategies that let us generate a cash income while we wait for this position to mature and we discussed that in chat yesterday.  Early this morning we discussed yet another bull call spread on AAPL, which has a 122% upside over 24 months with no margin requirements – these are the kind of opportunities we can take advantage of, even in this very choppy market.

Asia was generally flat but Europe is up 1% this morning, mainly on news of German Investor Sentiment (ZEW Survey) jumping to 6.9 in December, a big reversal from -5.7 in November.  This is the fist time the index has been positive since May and, as we discussed on  Friday – the German markets have been kicking our asses all year and we’d rather see them do well while we try to catch up than to see them pulled down to our level, which is less than 1/2 of their gains for the year.

So plenty of room to run if investors get in the mood, and that mood will depend on the Fed tomorrow and whatever Fiscal Cliff pronouncements we get out of Washington this week.  Small Business Optimism is dreadful at 87.5, now heading back to 2010 lows.  It isn’t just the hurricane or the fiscal cliff – optimism has been declining all year but the break below 90 is very serious and is something we do need to keep an eye on next month.


For the Full Market Shadows Newsletter, Tables Can Turn, click on this link.

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