PM Dear Dairy: Barn Burner

Today’s employment figures were monsters.  The most important part was a gain of 257,000 jobs last month, vs an expected 140,000.  The unemployment rate also dropped to 8.3% from 8.5% a month ago, comfortably bettering the unchanged expectations of the consensus of surveyed economists.  President Obama took a victory lap, and who wouldn’t, even the bears saluted these numbers.

There was a vocal minority of naysayers who argued that the BLS (the Bureau of Labor Statistics, the government body that tabulates the figures) was spinning up a storm, but the market wasn’t buying it.  The benchmark S&P 500 was up 1.46%, while bonds tanked, with bond prices down nearly 2%.  The bond market sell-off was a show of confidence that the recovery is on track, and that the economy is good enough to justify higher rates.

The only fly in the ointment was the “participation rate,” that is, the percentage of the population that is counted in the “workforce.”  This percentage dropped from 64% to 63.7%, meaning that 0.3% of the population dropped out of the workforce.  This drop would tend to decrease the unemployment rate, since the employed would represent a bigger proportion of the labor force.  But at the end of the (Fri)day, this would account for part of the drop in the unemployment rate, but would do nothing to take away from the sheer number of jobs added.

Hard Hat Zone

The one percent of New Yorkers in real estate will be happy to know we’re doing some renovation here at M&C.  We’re working on the “Pages” section as you can see, adding a row of tabs so we can bring in some new features.  Today we won’t have time to do more than the “About” section, which we’ll post this afternoon.

At the top of the right-hand column you can see the BIG CHEESE POLL.  The idea is for visitors to vote once per week on whether they think stocks are headed up, sideways, or down over the next six months.  This is a simple sentiment survey to gauge the bullishness or bearishness of people who have an interest in markets and economics.  We’ll publish the results under the “Poll” tab every Saturday, along with some commentary if warranted.  Don’t be shy, vote!  Try it, you’ll be helping us to make sure the bugs are out.

You’ll notice a “Calves” section.  C’mon, who wouldn’t want to click on a tab called “Calves?”  It’s a surprise, probably not operational until mid-mooonth.

The Raging Controversy over the January Employment Report

jobsI’ve seen a lot of employment numbers over the years, but I really can’t recall anything like the controversy that this one generated after its release on Friday morning.  It seemed straightforward enough:  The consensus of surveyed economists was expecting the addition of 140,000 jobs; we got 257,000.  They were looking for an unemployment rate unchanged at 8.5%; it dropped to 8.3%.

Pretty straightforward, right?  In days past, it would have been.  Great number, 117,000 more than expected (a rare event), unemployment drops by two-tenths of a percent (also rare).  But this time out was different, and the root of the controversy was the annual revision that the BLS (Bureau of Labor Statistics) makes to its numbers.  The adjustment created a grey area for interpretation, and led to intense rock-throwing on both sides of the recovery vs recession debate.

The bulls had the wind at their backs, and the market seemed to agree. Most economists, even the bear-leaning David Rosenberg, said the numbers looked very good.  Number cruncher extraordinaire Ian Shepardson at High Frequency Economics called the number a “game changer,” though he did add that seasonal adjustments made a final verdict difficult.  But the markets cast their votes, with stocks solidly up and bonds even more solidly down, ending the day with both feet in the bull camp.

But throughout the day and on into the weekend the bears made their case.  First came CNBC’s Rick Santelli.  He acknowledged the encouraging number of jobs added but raised the issue of the drop in the participation rate as we discussed at M&C here, calling it shrinkage.  Zero Hedge, a bear, put up a series of posts poking holes at the release’s apparent bullishness, and stuck to their guns over the weekend.  The economic research boutique TrimTabs estimates employment based on government withholding tax information, and says their data showed the addition of only 83,000 jobs.

Then the mud really started flying, with Big Picture blogger Barry Ritholtz weighing in against the bears:

So today following an otherwise pretty darn good jobs report, we get the usual perma-pessimists at Zero Hedge and Rick Santelli over at CNBC proclaiming that the report showed a drop of over 1 million people from the labor force in one month. Of course, as ususal, both Santelli and Zero Hedge have a real reading comprehension problem and completely missed that this million+ people isn’t some new January phenomenon, but a result of the BLS using the 2010 census data to have more accurate data. In other words, the changes in the Household Survey to the various measures had taken place over the years prior to 2010, but for simplicity’s sake, the BLS incorporates these changes into one month (which they clearly point out).

 Zero Hedge counterpunched with a lengthy post of their own yesterday, sniping at the foundation of Big Picture’s argument:

Finally, as to some newsletter and namesdropping blogs allegation that the Labor Force did not, in fact, increase by 1.2 million in January, we have one simple question: just how does one “refute” a statement with an assumption? Because last we checked, the BLS did not provide a smoothing breakdown of how it applied its seasonal adjustment for the “population control effects” which saw the population increase by 1.7 million in January and those not in the labor force rose by 1.2 million.

A lot of the confusion comes from the methods employed by the BLS.  This isn’t all that surprising given the nature of the task, that is, trying to follow the number of jobs while monitoring the multiple changes that happen in the population over time.  If someone retires, for example, that person exits the workforce, and his job disappears.  Similarly, when a teenager enters the workforce and begins looking for a job, he is “unemployed,” and the workforce increases by one person.

To sort all this out, the BLS uses two separate surveys to calculate the various figures related to employment, the “establishment payroll survey” and the “household survey.”  The establishment payroll survey is based on a survey of about 140,000 US enterprises, and collects data related to the number of employees at these firms, and how that number has changed.  The household survey, also known as the current population survey, focuses more on demographic issues such as size of the labor force, hours worked, earnings, etc.  To complicate the picture still further, the BLS also incorporates information from the official census, conducted only once every ten years.

Getting the two surveys to line up would have to be a challenge, and it is.  There was even an academic research paper on the subject, published in March 2009, titled “Exploring Differences in Employment between Household and Establishment Data,” which found a large mismatch in the two surveys’ numbers.  Looking at data from 1996 to 2003, the researchers found that 6.4% of the employees from the establishment payroll survey were not accounted for as such in the household survey.  If that is our margin of error, we’re left to hold a finger to the wind.

Even the actual BLS news release for January’s employment data a challenge to sort through, at 42 pages.  I’m reviewing it now and will offer up an opinion shortly, though I’d never claim to serve up the last word on the subject.  Ultimately the market will decide.  We saw its first reaction, but the market has a way of changing its mind, so it may take a day or two to see where it comes out on the issue.  So far the onus is on the bears to prove themselves on this one, because the market gave the good headline news a strong endorsement on Friday.

PM Dear Dairy: Apple Records

This was a relatively quiet day, but not without its memorable aspects.  We tried the lower end of the recent range, about 1305 on the S&P 500, but rejected that level and rallied into the close.  We got an additional boost from Apple after markets had finished, reporting earnings far above expectations and sending the stock and the averages considerably higher–in the case of Apple, to record highs.  If that doesn’t speak volumes to Steve Jobs’ legacy, I don’t know what does.

A few years back there was a study by Scandanavian researchers, cited in the Wall Street Journal, that looked at the life of the CEO and how it impacted a company’s stock price.  The thrust of the piece was that if the CEO were to undergo a significant hardship such as the death of a close family member, the stock price would suffer.  If, for example, the child of a CEO were to die, the stock on average suffered a 20% decline.  (The one exception was the death of the mother-in-law, which led to a small rise in the stock price.)

Now think of Apple, a company whose CEO actually died!  Imagine the impact on the employees, on senior management, on Tim Cook.  This is a remarkable story, and we can all be inspired, Americans and non-Americans, techies and non-techies alike.

I’m not a big fan of Apple products.  I inherited a 7-year-old IPod from a friend and am lucky if I can figure out how to make it play songs.  Getting on the phone with Apple support to sort out my kids’ purchases at the Apple Store drives me completely insane.  But I am in total awe of what Steve Jobs has done, and his story remains a constant source of inspiration to me, as it is for millions around the world.  History will show he is on par with Thomas Edison, and I’m surely giving Tom the benefit of the doubt here.

With Apple hitting thinner and thinner concentrations of oxygen, it is unlikely that the S&P 500 option expiration reversal that we discussed a few days ago will occur.  This market strength lends credence to the idea that QE Europa is alive and well and supporting a broad rally in risky assets, such as stocks, junk bonds, and commodities.  Time will tell.  Despite my serious reservations about the global economy, the charts are pointing up, and for the moment, I certainly won’t argue.

One more thing:  The Fed meets tomorrow at its regularly scheduled FOMC meeting, and this is always a big deal for markets of all shapes and sizes.  Stocks get excited because you don’t fight the Fed; bonds get excited because you don’t fight the Fed; the dollar gets excited because you don’t fight the Fed; and commodities get excited because you don’t fight stocks, bonds, and currencies.

Players are particularly keen on this meeting because for the first time in the history of mankind, the Fed is going to announce its interest rate forecast.  Let’s hope and pray that their interest rate estimates are more accurate than their growth and inflation predictions.  I suspect that as with all of its assumptions, the Fed is wildly optimistic expressly for public consumption and privately knows it has a bat’s chance in hell of being accurate, but the cost is to their credibility, and to my mind theirs is pretty low.  The market will probably bounce around within a 1% range and then get on with it, whatever “it” happens to be.

PM Dear Dairy: Beggar Thy Bernanke Edition

At today’s FOMC meeting conclusion, the Fed let it be known they would be keeping interest lates low until “late 2014,” and that means at a bare minimum, 2 1/2 more years.  In times past, the market would have thought, my gosh, rates are low, but the Chairman of the Federal Reserve is so worried that he’s willing to commit to 3 more years of low rates!  Things are horrible!  Sell!

But instead markets said, things aren’t so bad, but sure, give us low rates, we’ll go for it.  Stocks put in a solid performance, gold rallied nearly $50 an ounce, and the dollar dutifully sold off.  This was a perfect “risk-on” storm.

My read is that Bernanke had two problems.  The biggest of the two was the ECB, with Mario “pedal to the metal” Draghi at the wheel.  The US has to compete with Europe in currency terms to increase the chances of avoiding recession by “out-weakening” the other.  The second problem was the election cycle.  Bernanke wants to be reappointed, and who wouldn’t, but there can’t be a smoking gun, he can’t be seen to be pumping up his boss’s chances at the polls with everyone watching.  Best to do it now, before the Republican nominee is named, in order to be seen as a nonpartisan.

So the race is on, let’s see who can out-bailout whom.  It’s a tough call, but you can bet the bank that at any rate the can is being kicked further down the road.  This is Hair of the Dog writ very very large.

Moving on, I mentioned the other day that I own natural gas, and that I would get around to explaining why.  I did, here, and I’ll follow the position with you as it develops.  So far, so good.

I’m tired, and I would bet the markets are too.  Look for a quiet night, and reasonably quiet session tomorrow.