Stocks continue their September dance, going nowhere fast, admirably marking time between Labor Day and the mid-term elections. November 2 cannot get here quickly enough for most of the remaining participants in the market. There's no upside to either the market or the economy in sight and lingering fears of a stagnation or limited growth potential in the US have investors, traders and casual players on the sidelines.
The slow pace of the market is making for some dull reporting - this blog included - and the days of "everybody's an investor" seem to be officially and permanently gone. The ownership society has given way to a nation of savers, worriers and soon-to-be-retirees.
For the second straight day, stocks ramped up at the open and sold off throughout the day. Even though the major indices have recorded gains in five of the past six sessions, there's an unmistakable, unsustainable feeling to it all.
Dow 10,415.24, +28.23 (0.27%)
NASDAQ 2,236.20, +7.33 (0.33%)
S&P 500 1,104.19, +5.32 (0.48%)
NYSE Composite 7,034.17, +34.23 (0.49%)
Advancing issues led decliners again, though the margin has narrowed, 3331-2352. New highs remained well ahead of new lows, 378-59, and volume was, again, sub-par. It's gotten to the point that reporting on the lack of volume in the markets is not even news. It is really becoming the "new normal."
NASDAQ Volume 1,602,241,250
NYSE Volume 3,365,649,250
Oil fell 42 cents, settling at $74.25. The precious metals failed to sustain their elevated levels for a day, with gold down $6.70, to $1,248.90, and silver off by 16 cents, to $19.81. There seems to be a surplus of everything except new credit unless one is a major corporation with a AAA rating, from cash to oil to homes to stocks. There's even evidence of a worldwide oil glut developing.
The effects of cheaper oil - some say as low as $40-50 per barrel would certainly fit into the deflationist argument, though the Fed and European central bankers are doing everything they can to avoid such a scenario. If deflation becomes inevitable, while a boon to middle and lower classes, the effect on paper wealth - in stocks, bonds and derivatives - could be devastating.
Despite what experts are saying about inflation running rampant, it's still a difficult concept to embrace when unemployment remains at record levels, consumers are more concerned about paying down debt than buying new things and home prices may begin a second leg lower.
Oversupply is inherently deflationary, but the force of the central banking cartel continues to push against reality.
Thursday, September 9, 2010
Wednesday, September 8, 2010
Revisiting the Inflation-Deflation Argument
Just as there are two sides to a coin is a misstatement (What about the edge? Isn't that a side?), the inflation vs. deflation argument is simply too large and too complex, complete with changing circumstances and misguided definitions, for most people to comprehend, much less care about.
For purposes of argument, let's just assume that for most people, the manifestation of inflation will be higher prices, and of deflation, lower prices. That cuts through the stringent definition of "increase/decrease in money supply, debt, etc."
Food prices have been going up. Energy prices have been relatively stable. Housing prices have been going down if you're buying, but stable if you're renting. As is readily shown, deflation and inflation have been coexisting quite amicably. The real question is when will the Federal Reserve demand more inflation in order to keep the government's cost of borrowing and printing more money at a minimum?
Currently, the Fed is in a very accommodative phase, meaning that interest rates are as low as they can make them, ZERO, which, in most times, would cause inflation. It actually is, which is the Fed's dirty little secret, but hardly enough to satisfy the politicians, who need to see inflation ramp up enough so that companies and individuals will spend, spend, spend, because they see the no value in holding a currency declining in value.
That day, week, month, year is coming, as soon as home prices stabilize and demand ramps up. Unfortunately for the Fed and our treasured politicians, that day is still far away, as home prices will continue to fall as long as banks keep foreclosing and adding to the already-bloated inventory. That's why the biggest banks are slowing down their foreclosure processes, because they don't want to ignite an all-out depression in home values. There needs to be some balance and at least a perception that home prices aren't falling off a cliff. That scenario would cause even more homeowners to default on purpose (strategic default), figuring that their home will never again be worth what they paid for it.
Since the cost of paying off a mortgage is much larger - for most folks - than what they typically spend on food and fuel and other basic necessities, lower home prices fuel deflation, but there are few who have that advantage because just as home prices fell, banks tightened lending standards, so the overall effect isn't felt across the economy because so few people are actually benefitting from lower mortgage costs.
Meanwhile, just about everything else - besides consumer electronics - is either experiencing price stability or inflation (food, mostly), making the overall effect one of moderate inflation, which is, in Fed terms, fine for now, but not for the future. The Fed needs to see more inflation, which is absurd from a consumer perspective, but perfectly in line with the "unstated" goals of the Federal Reserve. Increased inflation will make today's federal deficits easier to pay going forward. Of course, we'll never touch the debt, another matter altogether, nor will the USA ever be able to meet its obligations for Social Security and Medicare once the baby boomers begin retiring (and getting age-related ailments) in droves.
The end-game will be within 8-12 years, when the US must either significantly restructure those entitlements or default or print amounts of money so extreme as to debase the currency entirely. The Fed and its political friends are taking the slow, "kick the can down the road" approach, leaving it for others to fix. Anyone who believes Barack Obama or any current member of congress wishes to tamper with reforming Social Security should understand that they won't touch this "third rail" of government, only because it means re-election. Maybe, if Obama is elected to a second term, he might tinker with it sometime around 2015 - after the mid-terms and before the end of his second term, though that is wishful thinking.
Generally speaking, the deflationary pressures experienced during much of 2009 have ceased to exist and inflation has begun to creep back into everyday life. The only way to keep the deflationary lid on in one's personal life is either to spend less, save more, use less, or a combination of all of the aforementioned. Of course, doing so lowers one's standard of living somewhat, though not to extremes, which is, after all, the net end result of deflation, much preferable to having one's savings and income constantly eaten away by inflation, the scourge of all savers and the major threat in coming years.
By creating massive amounts of money, the Fed managed to stave off deflation, though not necessarily the nastier aspects of a depression. Absolutely unacceptable levels of unemployment still exist and have not been contained. The underclass of American society has grown larger in recent years as unemployment benefits are morphing into welfare checks. For those at the bottom, life is surely a nasty affair. The middle class is still being squeezed while the upper class continues to enjoy the benefits of very discretionary upper-income tax breaks.
While most of us struggle for solutions and seek answers to the deflation-inflation riddle, the upper class need not worry themselves with these minor details, as they have much more than they need in terms of money and security. The situation won't correct itself, and there seems to be nobody even remotely interested of doing what's right for the "better good."
With that, we see that stocks gained modestly on Wednesday. There was little to move them, as the rhetoric of sovereign default in the Eurozone diminished rapidly into the ether overnight.
Dow 10,387.01, +46.32 (0.45%)
NASDAQ 2,228.87, +19.98 (0.90%)
S&P 500 1,098.87, +7.03 (0.64%)
NYSE Composite 6,999.94, +40.00 (0.57%)
Advancing issues held sway over decliners on the day, 3859-1849. New highs remained well ahead of new lows, 345-54. Volume was not quite as pathetic as recently, though the general volume was and is still depressed by some 30-40% over what it was prior to the implosion of 2008, a fact of life that cannot be avoided.
NASDAQ Volume 1,892,425,500
NYSE Volume 3,431,570,500
Crude oil price gained 58 cents, to $74.67, close to the mean level of the past 18 months. Gold backed down a bit, slipping $1.70, to $1,255.60. Silver pushed past $20.00 during the day, but closed just below it, up 9 cents, to $19.98.
Generally, the market was awaiting some kind of catalyst, though none appeared. Stock indices continue to trade in a fairly well-defined range, initiating thoughts of prolonged stagflation in some.
That very well may be where all of this is heading. Higher prices in a stagnant economy, something of a bland state of despair. It's not very pretty, but about the best image one can conjure considering conditions.
For purposes of argument, let's just assume that for most people, the manifestation of inflation will be higher prices, and of deflation, lower prices. That cuts through the stringent definition of "increase/decrease in money supply, debt, etc."
Food prices have been going up. Energy prices have been relatively stable. Housing prices have been going down if you're buying, but stable if you're renting. As is readily shown, deflation and inflation have been coexisting quite amicably. The real question is when will the Federal Reserve demand more inflation in order to keep the government's cost of borrowing and printing more money at a minimum?
Currently, the Fed is in a very accommodative phase, meaning that interest rates are as low as they can make them, ZERO, which, in most times, would cause inflation. It actually is, which is the Fed's dirty little secret, but hardly enough to satisfy the politicians, who need to see inflation ramp up enough so that companies and individuals will spend, spend, spend, because they see the no value in holding a currency declining in value.
That day, week, month, year is coming, as soon as home prices stabilize and demand ramps up. Unfortunately for the Fed and our treasured politicians, that day is still far away, as home prices will continue to fall as long as banks keep foreclosing and adding to the already-bloated inventory. That's why the biggest banks are slowing down their foreclosure processes, because they don't want to ignite an all-out depression in home values. There needs to be some balance and at least a perception that home prices aren't falling off a cliff. That scenario would cause even more homeowners to default on purpose (strategic default), figuring that their home will never again be worth what they paid for it.
Since the cost of paying off a mortgage is much larger - for most folks - than what they typically spend on food and fuel and other basic necessities, lower home prices fuel deflation, but there are few who have that advantage because just as home prices fell, banks tightened lending standards, so the overall effect isn't felt across the economy because so few people are actually benefitting from lower mortgage costs.
Meanwhile, just about everything else - besides consumer electronics - is either experiencing price stability or inflation (food, mostly), making the overall effect one of moderate inflation, which is, in Fed terms, fine for now, but not for the future. The Fed needs to see more inflation, which is absurd from a consumer perspective, but perfectly in line with the "unstated" goals of the Federal Reserve. Increased inflation will make today's federal deficits easier to pay going forward. Of course, we'll never touch the debt, another matter altogether, nor will the USA ever be able to meet its obligations for Social Security and Medicare once the baby boomers begin retiring (and getting age-related ailments) in droves.
The end-game will be within 8-12 years, when the US must either significantly restructure those entitlements or default or print amounts of money so extreme as to debase the currency entirely. The Fed and its political friends are taking the slow, "kick the can down the road" approach, leaving it for others to fix. Anyone who believes Barack Obama or any current member of congress wishes to tamper with reforming Social Security should understand that they won't touch this "third rail" of government, only because it means re-election. Maybe, if Obama is elected to a second term, he might tinker with it sometime around 2015 - after the mid-terms and before the end of his second term, though that is wishful thinking.
Generally speaking, the deflationary pressures experienced during much of 2009 have ceased to exist and inflation has begun to creep back into everyday life. The only way to keep the deflationary lid on in one's personal life is either to spend less, save more, use less, or a combination of all of the aforementioned. Of course, doing so lowers one's standard of living somewhat, though not to extremes, which is, after all, the net end result of deflation, much preferable to having one's savings and income constantly eaten away by inflation, the scourge of all savers and the major threat in coming years.
By creating massive amounts of money, the Fed managed to stave off deflation, though not necessarily the nastier aspects of a depression. Absolutely unacceptable levels of unemployment still exist and have not been contained. The underclass of American society has grown larger in recent years as unemployment benefits are morphing into welfare checks. For those at the bottom, life is surely a nasty affair. The middle class is still being squeezed while the upper class continues to enjoy the benefits of very discretionary upper-income tax breaks.
While most of us struggle for solutions and seek answers to the deflation-inflation riddle, the upper class need not worry themselves with these minor details, as they have much more than they need in terms of money and security. The situation won't correct itself, and there seems to be nobody even remotely interested of doing what's right for the "better good."
With that, we see that stocks gained modestly on Wednesday. There was little to move them, as the rhetoric of sovereign default in the Eurozone diminished rapidly into the ether overnight.
Dow 10,387.01, +46.32 (0.45%)
NASDAQ 2,228.87, +19.98 (0.90%)
S&P 500 1,098.87, +7.03 (0.64%)
NYSE Composite 6,999.94, +40.00 (0.57%)
Advancing issues held sway over decliners on the day, 3859-1849. New highs remained well ahead of new lows, 345-54. Volume was not quite as pathetic as recently, though the general volume was and is still depressed by some 30-40% over what it was prior to the implosion of 2008, a fact of life that cannot be avoided.
NASDAQ Volume 1,892,425,500
NYSE Volume 3,431,570,500
Crude oil price gained 58 cents, to $74.67, close to the mean level of the past 18 months. Gold backed down a bit, slipping $1.70, to $1,255.60. Silver pushed past $20.00 during the day, but closed just below it, up 9 cents, to $19.98.
Generally, the market was awaiting some kind of catalyst, though none appeared. Stock indices continue to trade in a fairly well-defined range, initiating thoughts of prolonged stagflation in some.
That very well may be where all of this is heading. Higher prices in a stagnant economy, something of a bland state of despair. It's not very pretty, but about the best image one can conjure considering conditions.
Tuesday, September 7, 2010
Markets Slump on Abysmal Volume; Politics Plays the Market
Let's face it. The financial meltdown that occurred in the Fall of 2008 damaged Wall Street far beyond anyone's imagination. Whether the crisis was real, contrived or a true panic, the number of participants since then - and the fruitless bailouts that followed - have diminished greatly. While everyone wanted to believe that more players would show up after the Labor Day holiday, the expected rush of traders simply failed to materialize this Tuesday, a stark reminder of the lack of confidence spreading across US markets.
The continuing low-volume regime should surprise nobody. After shrinking from 4-6 per cent in August, the "marketeers" last week managed a roughly 4% rebound in just the first three days of September. Investors are not foolish people generally, and they can sense when something is not right. The consensus among individual investors is that the market is completely rigged in favor of the big brokerages, hedge funds and other not-so-visible participants and have thus departed, some for good.
There's also the question of overall liquidity which has affected the velocity or volume of trade. Smaller firms and individuals are strapped for cash, in addition to being wary of the market, and simply cannot play. This has been the resounding theme since mid-summer, and appears to be actually getting worse as the November elections near.
Indices and averages are being hoisted and levered down by the same parties in an attempt to lure in more suckers (investors), but nobody seems to want to play this game any more. It's pretty obvious that politics are going to play a huge role in the direction of stocks over the next few months, so, despite the market being an unsound place for money, there are two definite directional plays that could be made rather simply.
First, the powers that be are nearly certain to desire an end to the reign of Democrats. President Obama and his cohorts in congress haven't made many friends on Wall Street, so the big money is courting Republicans in the Fall. The first trade is to go short from now until the elections, with the best time to get out right at the end of October. After that, go long, presaging Republican victories in the House and maybe even taking a majority in the senate.
These moves have nothing to do with fundamentals, only with the perception Wall Street wishes to make. They and their Republican lackeys want the economy on its knees heading into November, showing the Democrats to be weak and ineffective, and they have the perfect vehicle with which to accomplish their goal, the thinly-traded, but highly-watched stock market. The Dow should fall below 9500 at some point in the next two months (should be there already), and then immediately after Republican wins on November 2, rally back above the magical 10,000 mark, probably going as high as 10,700 or thereabout.
Sad but probably true, the stock market is no longer a secure platform for trading stocks, but more a political vehicle of the controlling elite. Today's sorry volume figures - and all those of the past four weeks - give credence to this approach.
Stocks spent the entire day trading in a narrow range in the red, finishing at the lows of the day, indicating not only a lack of participation, but a lack of confidence. Not surprising, since the best the Obama administration can do these days to spur the economy is suggest another $50 billion be spent on roads, bridges and airport runways. While that's great for the concrete makers and construction workers, it has no meaning in the lives of average Americans who don't shovel, grind or gird.
Obama also outlined an estimated $200 billion in tax breaks for businesses that invest in new plants and equipment and a $100 billion extension of business tax credits for R&D and, as usual, absolutely nothing for small businesses, those with between one and ten employees, which are the backbone of the economy and entrepreneurship. The federal government would better serve the people by just handing out checks to everyone or doing nothing rather than trotting out the old "infrastructure" canard. It's been done and accomplished nothing already, so another crack at it is merely more grandstanding by a president and advisors without clues. Tax breaks for big business also won't serve to stimulate growth in the economy or create jobs.
Dow 10,340.69, -107.24 (1.03%)
NASDAQ 2,208.89, -24.86 (1.11%)
S&P 500 1,091.84, -12.67 (1.15%)
NYSE Composite 6,959.94, -95.09 (1.35%)
Declining issues took the measure of advancers, 4366-1388, though new highs remained to the high side of new lows, 259-50, though these figures are likely being influenced significantly to the upside by the number of stocks recently delisted (a big secret) and the usual pumping up of otherwise losing issues. As explained earlier, volume continued to be absurdly low, to a point that is increasingly difficult to describe.
NASDAQ Volume 1,566,149,625
NYSE Volume 3,036,956,000
Oil was down again, losing 51 cents, to $74.09. Gold traded in record territory, up $8.10, to $1,257.30 at the close, while silver slipped a little after an impressive weeks-long run, dropping just three cents, to $19.88.
Trading was so thin and reaction to Obama's new proposals so negative, it left many wondering just how long the economy can hold on without another significant decline in not only stocks, but in the overall quality of life. Being that we're only in the second or third inning of this particular baseball analogy, there are sure to be more foul balls than home runs in coming months and years. The market could spin out of control at any time, though the small number of players left on the field might prevent a real slide from happening with the ferocity witnessed in 2008 and 2009.
The continuing low-volume regime should surprise nobody. After shrinking from 4-6 per cent in August, the "marketeers" last week managed a roughly 4% rebound in just the first three days of September. Investors are not foolish people generally, and they can sense when something is not right. The consensus among individual investors is that the market is completely rigged in favor of the big brokerages, hedge funds and other not-so-visible participants and have thus departed, some for good.
There's also the question of overall liquidity which has affected the velocity or volume of trade. Smaller firms and individuals are strapped for cash, in addition to being wary of the market, and simply cannot play. This has been the resounding theme since mid-summer, and appears to be actually getting worse as the November elections near.
Indices and averages are being hoisted and levered down by the same parties in an attempt to lure in more suckers (investors), but nobody seems to want to play this game any more. It's pretty obvious that politics are going to play a huge role in the direction of stocks over the next few months, so, despite the market being an unsound place for money, there are two definite directional plays that could be made rather simply.
First, the powers that be are nearly certain to desire an end to the reign of Democrats. President Obama and his cohorts in congress haven't made many friends on Wall Street, so the big money is courting Republicans in the Fall. The first trade is to go short from now until the elections, with the best time to get out right at the end of October. After that, go long, presaging Republican victories in the House and maybe even taking a majority in the senate.
These moves have nothing to do with fundamentals, only with the perception Wall Street wishes to make. They and their Republican lackeys want the economy on its knees heading into November, showing the Democrats to be weak and ineffective, and they have the perfect vehicle with which to accomplish their goal, the thinly-traded, but highly-watched stock market. The Dow should fall below 9500 at some point in the next two months (should be there already), and then immediately after Republican wins on November 2, rally back above the magical 10,000 mark, probably going as high as 10,700 or thereabout.
Sad but probably true, the stock market is no longer a secure platform for trading stocks, but more a political vehicle of the controlling elite. Today's sorry volume figures - and all those of the past four weeks - give credence to this approach.
Stocks spent the entire day trading in a narrow range in the red, finishing at the lows of the day, indicating not only a lack of participation, but a lack of confidence. Not surprising, since the best the Obama administration can do these days to spur the economy is suggest another $50 billion be spent on roads, bridges and airport runways. While that's great for the concrete makers and construction workers, it has no meaning in the lives of average Americans who don't shovel, grind or gird.
Obama also outlined an estimated $200 billion in tax breaks for businesses that invest in new plants and equipment and a $100 billion extension of business tax credits for R&D and, as usual, absolutely nothing for small businesses, those with between one and ten employees, which are the backbone of the economy and entrepreneurship. The federal government would better serve the people by just handing out checks to everyone or doing nothing rather than trotting out the old "infrastructure" canard. It's been done and accomplished nothing already, so another crack at it is merely more grandstanding by a president and advisors without clues. Tax breaks for big business also won't serve to stimulate growth in the economy or create jobs.
Dow 10,340.69, -107.24 (1.03%)
NASDAQ 2,208.89, -24.86 (1.11%)
S&P 500 1,091.84, -12.67 (1.15%)
NYSE Composite 6,959.94, -95.09 (1.35%)
Declining issues took the measure of advancers, 4366-1388, though new highs remained to the high side of new lows, 259-50, though these figures are likely being influenced significantly to the upside by the number of stocks recently delisted (a big secret) and the usual pumping up of otherwise losing issues. As explained earlier, volume continued to be absurdly low, to a point that is increasingly difficult to describe.
NASDAQ Volume 1,566,149,625
NYSE Volume 3,036,956,000
Oil was down again, losing 51 cents, to $74.09. Gold traded in record territory, up $8.10, to $1,257.30 at the close, while silver slipped a little after an impressive weeks-long run, dropping just three cents, to $19.88.
Trading was so thin and reaction to Obama's new proposals so negative, it left many wondering just how long the economy can hold on without another significant decline in not only stocks, but in the overall quality of life. Being that we're only in the second or third inning of this particular baseball analogy, there are sure to be more foul balls than home runs in coming months and years. The market could spin out of control at any time, though the small number of players left on the field might prevent a real slide from happening with the ferocity witnessed in 2008 and 2009.
Friday, September 3, 2010
August Jobs -54,000; Stocks Soar. Can Anything Be Trusted?
Total Nonfarm Birth/Death Adjustment +115
Why is that the most important number in this month's Non-farm Payroll Report issued by the Bureau of Labor Statistics (BLS)?
It's because the Birth/Death adjustmentis employed by the BLS to estimate the number of business openings (births) and the number of business failures (deaths) and is imputed into their formulas to come up with their monthly estimate of total US employment, better known as the monthly Non-Farm Payroll report.
Accordingly, when the BLS believes that there are more businesses opening than closing, the number is positive, boosting the overall employment picture, and the opposite when more businesses are failing.
From the charts provided by the BLS themselves, the birth/death model is accounting for a rapidly-expanding number of new businesses in the US (predominantly small businesses) as compared to businesses closing their doors. Should we be inclined to believe this fantasy, we would think the US economy, specifically small business, is booming and hiring new workers, though we know this is not even remotely the case.
We can make some comparisons and use other data to demystify the claims of the BLS. Specifically, we can look at the number of businesses filing for bankruptcy in 2010, and magically, we find a WSJ report that gives us a glowing headline - in support of the BLS birth-death model - though the devil, as usual, lies in the details.
The article states that while Chapter 11 reorganizations were down 17% in the first half of 2010 as compared to 2009, but Chapter 7 filings remained flat. So, what does this really tell us? Since Chapter 11 keeps a business's doors open, while probably reducing to some extent either wages or workers or both, that's positive, since fewer businesses are jumping through the Chapter 11 hoops and thus laying off fewer workers. But, when it comes to Chapter 7, which is liquidation, and was flat as compared to 2009, we should evidence no upside benefit to the birth-death model.
Now, let's check on new business startups, which is the "birth" part of the equation.
Here's an article which postulates that the average new business is hiring fewer employees now than in the past, which makes sense, as regulations and required filings have increased the small business burden while technology has allowed workers to be more productive. Add in the quest for outsourcing and you get the perfect scenario for new businesses not putting on as many employees as they used to, so when the BLS imputes the data for business births, they should consider that any new business will likely add fewer jobs than previously encountered.
On the positive side, the Ewing Marion Kaufmann Foundation reports that 2009 was a banner year for entrepreneurship, making the claim that, on average, 558,000 new businesses were started EACH MONTH in the year.
That is a monumental claim, postulating that 6,669,000 new businesses were formed in he year. Were that number even close to being true, the gains from new businesses should have almost completely eclipsed the losses from 2007-2008.
In contrast to the claims made by Kaufmann, which uses BLS data for baseline methodology, the WSJ posits that the number of new businesses fell by 24% in 2009, and 2008, though reportedly strong, was no banner year.
Outplacement firm Challenger, Gray and Christmas find that new business creation has fallen precipitously in the first half of 2010:
The Challenger study puts the figure at 3.7% of surveyed job-seekers, the lowest two-quarter average on record. The firm began collecting data in 1986.
The World Bank chimes in with a study of their own, stating:
Going back to the BLS birth/death charts, we note that in 2009, when business births were supposedly on the upswing, the BLS shows the model producing sizable gains in March, April and May, but then becoming pretty static for the remainder of the year. In 2010, the model number falls off a cliff in January, at -427,000, but then rebounds and posts gains in each proceeding month, eliminating and overshadowing the January losses.
In conclusion, there are simply too many numbers being thrown around in opposing directions for all of them to be right or to draw any conclusion except that the BLS birth/death model is structurally inconsistent, at times in opposition to competing data and more than likely employed to massage or move the overall non-farm payroll data month to month in whatever direction is politically palatable at the given moment.
Simply put, the birth/death model, on top of or imputed into raw estimates and seasonal adjustments, shrouds the entire non-farm payroll data in layers of stealthy and obscure adjustments.
Finally, here's a 2009 story from Bloomberg that screams, U.S. Job Losses May Be Even Larger, Model Breaks Down. That is about as close as one can come to saying that the government figures are useless and probably should not be trusted without actually saying it.
With the joyous news that August non-farm payrolls decreased by only 54,000 - beating expectations - stocks were off to the races, gapping once more at the open to lock in as many short sellers as possible. The markets maintained their positive bias throughout the remainder of the session, finishing close to their highs.
Investors looked past a terrible ISM Services index reading of 51.5 in August after showing 54.3 in July. Not surprisingly, bank stocks were among the leaders.
Dow 10,447.93, +127.83 (1.24%)
NASDAQ 2,233.75, +33.74 (1.53%)
S&P 500 1,104.51, +14.41 (1.32%)
NYSE Composite 7,055.03, +88.78 (1.27%)
Advancers clobbered declining issues, 4934-1488. New highs overwhelmed new lows, 415-49. Volume was non-existent, yet another signal that the rally is made on nothing but desire to trade, and is probably being directed by a small number of insiders.
NASDAQ Volume 1,512,487,250
NYSE Volume 4,127,134,500
Of the commodities we track, silver was the only winner, cementing a lengthy rally with a 28 cent gain, closing at 19.92. Gold slipped $2.30, to $1,249.20, while crude oil fell 42 cents, to $74.60.
It was quite a remarkable week for stocks. The Dow, which closed at 9985 just last Thursday, has managed a gain of 462 points in the last six sessions. There is likely more upside, though it may be limited in size and duration, as resistance begins around 10,600 on the Dow and 1125-35 on the S7P 500.
Enjoy the Labor Day holiday by not laboring. Get out and have some fun. Life is too short not to.
Why is that the most important number in this month's Non-farm Payroll Report issued by the Bureau of Labor Statistics (BLS)?
It's because the Birth/Death adjustmentis employed by the BLS to estimate the number of business openings (births) and the number of business failures (deaths) and is imputed into their formulas to come up with their monthly estimate of total US employment, better known as the monthly Non-Farm Payroll report.
Accordingly, when the BLS believes that there are more businesses opening than closing, the number is positive, boosting the overall employment picture, and the opposite when more businesses are failing.
From the charts provided by the BLS themselves, the birth/death model is accounting for a rapidly-expanding number of new businesses in the US (predominantly small businesses) as compared to businesses closing their doors. Should we be inclined to believe this fantasy, we would think the US economy, specifically small business, is booming and hiring new workers, though we know this is not even remotely the case.
We can make some comparisons and use other data to demystify the claims of the BLS. Specifically, we can look at the number of businesses filing for bankruptcy in 2010, and magically, we find a WSJ report that gives us a glowing headline - in support of the BLS birth-death model - though the devil, as usual, lies in the details.
The article states that while Chapter 11 reorganizations were down 17% in the first half of 2010 as compared to 2009, but Chapter 7 filings remained flat. So, what does this really tell us? Since Chapter 11 keeps a business's doors open, while probably reducing to some extent either wages or workers or both, that's positive, since fewer businesses are jumping through the Chapter 11 hoops and thus laying off fewer workers. But, when it comes to Chapter 7, which is liquidation, and was flat as compared to 2009, we should evidence no upside benefit to the birth-death model.
Now, let's check on new business startups, which is the "birth" part of the equation.
Here's an article which postulates that the average new business is hiring fewer employees now than in the past, which makes sense, as regulations and required filings have increased the small business burden while technology has allowed workers to be more productive. Add in the quest for outsourcing and you get the perfect scenario for new businesses not putting on as many employees as they used to, so when the BLS imputes the data for business births, they should consider that any new business will likely add fewer jobs than previously encountered.
On the positive side, the Ewing Marion Kaufmann Foundation reports that 2009 was a banner year for entrepreneurship, making the claim that, on average, 558,000 new businesses were started EACH MONTH in the year.
That is a monumental claim, postulating that 6,669,000 new businesses were formed in he year. Were that number even close to being true, the gains from new businesses should have almost completely eclipsed the losses from 2007-2008.
In contrast to the claims made by Kaufmann, which uses BLS data for baseline methodology, the WSJ posits that the number of new businesses fell by 24% in 2009, and 2008, though reportedly strong, was no banner year.
Outplacement firm Challenger, Gray and Christmas find that new business creation has fallen precipitously in the first half of 2010:
CHICAGO, July 19, 2010 – A new survey shows that start- up activity plummeted in the first half of 2010 as would-be entrepreneurs were either scooped up by employers or scared off by fragile economic conditions, a tight lending market and uncertainty over the sustainability of the recovery.
The Challenger study puts the figure at 3.7% of surveyed job-seekers, the lowest two-quarter average on record. The firm began collecting data in 1986.
The World Bank chimes in with a study of their own, stating:
We find that firm births contribute substantially to gross and net job creation. New firms tend to be small and thus the finding of a systematic inverse relationship between firm size and net growth rates is entirely attributable to most new firms being classified in small size classes.
Going back to the BLS birth/death charts, we note that in 2009, when business births were supposedly on the upswing, the BLS shows the model producing sizable gains in March, April and May, but then becoming pretty static for the remainder of the year. In 2010, the model number falls off a cliff in January, at -427,000, but then rebounds and posts gains in each proceeding month, eliminating and overshadowing the January losses.
In conclusion, there are simply too many numbers being thrown around in opposing directions for all of them to be right or to draw any conclusion except that the BLS birth/death model is structurally inconsistent, at times in opposition to competing data and more than likely employed to massage or move the overall non-farm payroll data month to month in whatever direction is politically palatable at the given moment.
Simply put, the birth/death model, on top of or imputed into raw estimates and seasonal adjustments, shrouds the entire non-farm payroll data in layers of stealthy and obscure adjustments.
Finally, here's a 2009 story from Bloomberg that screams, U.S. Job Losses May Be Even Larger, Model Breaks Down. That is about as close as one can come to saying that the government figures are useless and probably should not be trusted without actually saying it.
With the joyous news that August non-farm payrolls decreased by only 54,000 - beating expectations - stocks were off to the races, gapping once more at the open to lock in as many short sellers as possible. The markets maintained their positive bias throughout the remainder of the session, finishing close to their highs.
Investors looked past a terrible ISM Services index reading of 51.5 in August after showing 54.3 in July. Not surprisingly, bank stocks were among the leaders.
Dow 10,447.93, +127.83 (1.24%)
NASDAQ 2,233.75, +33.74 (1.53%)
S&P 500 1,104.51, +14.41 (1.32%)
NYSE Composite 7,055.03, +88.78 (1.27%)
Advancers clobbered declining issues, 4934-1488. New highs overwhelmed new lows, 415-49. Volume was non-existent, yet another signal that the rally is made on nothing but desire to trade, and is probably being directed by a small number of insiders.
NASDAQ Volume 1,512,487,250
NYSE Volume 4,127,134,500
Of the commodities we track, silver was the only winner, cementing a lengthy rally with a 28 cent gain, closing at 19.92. Gold slipped $2.30, to $1,249.20, while crude oil fell 42 cents, to $74.60.
It was quite a remarkable week for stocks. The Dow, which closed at 9985 just last Thursday, has managed a gain of 462 points in the last six sessions. There is likely more upside, though it may be limited in size and duration, as resistance begins around 10,600 on the Dow and 1125-35 on the S7P 500.
Enjoy the Labor Day holiday by not laboring. Get out and have some fun. Life is too short not to.
Thursday, September 2, 2010
Nice Show, But Everybody Knows It's a Fake
Stocks continued to rally on Thursday, following up on the ridiculous upside surprise from the first day of September. There are many reasons to doubt that the US economy or US stocks are actually worth investing, and the overwhelming opinion from the average Joes and Janes of the world is that stocks are really just for suckers.
Outflows from mutual funds continued for the 17th consecutive week, so, if anyone is thinking that this is a good time to buy into the market, there are quite literally hundreds of thousands of people who are fleeing equities as quickly as they can. Bonds funds and cash are the asset classes du jour, and probably will remain so unless radical changes are made to the way Wall Street handles trading.
Investors have become wary of the Street's "wild West" approach and many believe the game is rigged against the small investor. These people have a case, after the meltdown of 2008, Bernie Madoff and the "Flash Crash" this past May. One cannot blame them for being careful; after all, it is their money we're talking about.
Today's action was in contrast to the prevailing news, again, as initial unemployment claims remained stubbornly high at 472,000 for the reported week and productivity was reported to have declined by 1.8% in the second quarter after slowing 0.9% in the first. About all this economy needs is less productive people working at the few jobs remaining. Unit labor coast are also on the rise, another bad omen for publicly-traded corporations.
For the most part, trading is, and has been, orchestrated by the five big banks - Goldman Sachs, JP Morgan Chase, Bank of America, Citigroup and Morgan Stanley. That's reflected in the overcrowding of trades and the herky-jerky motion of the indices. When the big boys act in unison, with large blocks, markets jump. It truly does crowd out the small investor. The playing field is dramatically tilted in favor of HTFs (High Frequency Traders) and big money.
Nonetheless, the show must go on, so the money was spent today to boost stocks once again, though the rally may be cut short by tomorrow's non-farm payroll, which, maybe this time, will actually be regarded as something substantial to trade off. The past few monthly employment reports have been on the weak side. if not outright horrible, but traders seemed to keep their wits on days when the numbers are released. It's the following Monday that all hell breaks loose, giving more credence to the rigged nature of the markets.
Dow 10,320.10, +50.63 (0.49%)
NASDAQ 2,200.01, +23.17 (1.06%)
S&P 500 1,090.10, +9.81 (0.91%)
NYSE Composite 6,966.25, +55.27 (0.80%)
As expected, advancing issues finished well ahead of decliners, 4327-2026. New highs bettered new lows, 360-56, but volume reverted back to a pathetically low level. The indication is that there was some allocation into winning positions, though without much commitment.
NASDAQ Volume 1,691,904,250
NYSE Volume 4,269,796,500
One telling sign that the rally in equities is mostly a figment of the imaginative inside traders was that oil stood still, finishing unchanged at $73.91. Gold continued to close in on all-time highs, finishing up $5.20, to $1,251.50. Silver rocketed ahead another 28 cents, to $19.64. It has been by far the best performer over the past two weeks.
David Rosenberg penned a thoughtful piece, claiming that we're in a Depression, not a recession, and, of course, he's right.
Outflows from mutual funds continued for the 17th consecutive week, so, if anyone is thinking that this is a good time to buy into the market, there are quite literally hundreds of thousands of people who are fleeing equities as quickly as they can. Bonds funds and cash are the asset classes du jour, and probably will remain so unless radical changes are made to the way Wall Street handles trading.
Investors have become wary of the Street's "wild West" approach and many believe the game is rigged against the small investor. These people have a case, after the meltdown of 2008, Bernie Madoff and the "Flash Crash" this past May. One cannot blame them for being careful; after all, it is their money we're talking about.
Today's action was in contrast to the prevailing news, again, as initial unemployment claims remained stubbornly high at 472,000 for the reported week and productivity was reported to have declined by 1.8% in the second quarter after slowing 0.9% in the first. About all this economy needs is less productive people working at the few jobs remaining. Unit labor coast are also on the rise, another bad omen for publicly-traded corporations.
For the most part, trading is, and has been, orchestrated by the five big banks - Goldman Sachs, JP Morgan Chase, Bank of America, Citigroup and Morgan Stanley. That's reflected in the overcrowding of trades and the herky-jerky motion of the indices. When the big boys act in unison, with large blocks, markets jump. It truly does crowd out the small investor. The playing field is dramatically tilted in favor of HTFs (High Frequency Traders) and big money.
Nonetheless, the show must go on, so the money was spent today to boost stocks once again, though the rally may be cut short by tomorrow's non-farm payroll, which, maybe this time, will actually be regarded as something substantial to trade off. The past few monthly employment reports have been on the weak side. if not outright horrible, but traders seemed to keep their wits on days when the numbers are released. It's the following Monday that all hell breaks loose, giving more credence to the rigged nature of the markets.
Dow 10,320.10, +50.63 (0.49%)
NASDAQ 2,200.01, +23.17 (1.06%)
S&P 500 1,090.10, +9.81 (0.91%)
NYSE Composite 6,966.25, +55.27 (0.80%)
As expected, advancing issues finished well ahead of decliners, 4327-2026. New highs bettered new lows, 360-56, but volume reverted back to a pathetically low level. The indication is that there was some allocation into winning positions, though without much commitment.
NASDAQ Volume 1,691,904,250
NYSE Volume 4,269,796,500
One telling sign that the rally in equities is mostly a figment of the imaginative inside traders was that oil stood still, finishing unchanged at $73.91. Gold continued to close in on all-time highs, finishing up $5.20, to $1,251.50. Silver rocketed ahead another 28 cents, to $19.64. It has been by far the best performer over the past two weeks.
David Rosenberg penned a thoughtful piece, claiming that we're in a Depression, not a recession, and, of course, he's right.
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