Market Talk

Obviously, Japan is the big story, the very big story. But there’s something else worth pointing out today: inflation expectations here in the U.S. In short, they are rising, maybe faster than the Fed expected, and that may create problems for the central bank that it wasn’t exactly expecting to face this soon.

This is perhaps best illustrated by the story of William Dudley, the head of the New York Fed, who took a trip across the East River this morning to speak to the Queens Chamber of Commerce. You can read about his prepared remarks in this WSJ write-up by Newswires’ Michael Derby. But the really interesting part occurred when he took questions from the audience.  Derby elaborates:

New York Fed President Dudley just faced down a Queens, N.Y., audience that was having a hard time buying his contention inflation is low and likely to stay that way.

He was challenged by one audience member, who said, “when was the last time, sir, you went grocery shopping?” Dudley responded “I certainly acknowledge food prices have gone up.” But he added some prices are lower and he noted “today you can buy an iPad 2 that costs the same as an iPad 1, that’s twice as powerful,” as an example of favorable price dynamics.

His example was greeted with widespread grumbling in the audience, in an unusual display of discontent at a Fed speech. Dudley’s struggle is a harbinger of the trouble policymakers are likely to face over coming months, amid the good chance food and energy prices are on a sustained move higher.

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If we were in a bar having a beer, I’d have at my disposable a plethora of extremely accurate words with which to describe this morning’s jobs report. But seeing as this is a family blog, I’ll keep it to the G-rated words.

The jobs report stunk. The market got shivved in the back by the BLS, which reported the economy added only 39,000 jobs in November. That’s well below the consensus estimate (as compiled by a Dow Jones survey of economists) of 144,000, and well, well below the so-called whisper numbers that we hear floating around, which trended closer to 200,000.

Futures on the DJIA, which had been up about 30 points before the 8:30 a.m. release, immediately dropped, currently down around 62 points. It isn’t clear that this one report will wipe out all the optimism that’s been flooding down Wall Street, a street where the sun seemingly shines on both sides of the street almost all the time anyhow, but it’ll put a dent in it.

Listen, the reality is we’re no more screwed today than we were yesterday. It’s just that today more people now realize it. Even if the report had come in as expected, 144,000 jobs in a month is barely enough to keep up with population growth, to say nothing of whittling down the unemployment rate. Which, as it turns out, actually rose to 9.8% from 9.6%.

As our colleague Kathleen Madigan reported, the rate rose not because discouraged workers had re-entered the labor force, a common occurrence at this point in a, ahem, recovery, but on a drop in the number of employed and a rise in the number of jobless.

That puts an exclamation point on another sad data point: November marked the 19 consecutive month the unemployment rate has been over 9%, a fresh post-war record.

Want more? Hourly wages rose by a penny. Even with inflation as weak as it is these days, wages aren’t keeping pace.

Today’s report from the BLS is unquestionably a disappointment,” Miller Tabak’s Dan Greenhaus writes in a post-mortem. He notes though there are two caveats: the report is out of line with other reports suggesting more strength, and a poor report at this point in a recovery isn’t unusual.

We got a lot of jobs-related data this morning, as the Wednesday before the monthly BLS report has become a sort of de-facto run-up to the queen mother of data points. The market took it all as very good, of course, since it was already in full-on rally-mode. The reports were generally positive, to be sure, but didn’t show the kind of strength necessary to spark expectations that the economy is going to stop scudding along and start growing strongly. That’s important to keep in mind.

We’re just spinning wheels here, folks. The reality is this: the unemployment rate isn’t going anywhere meaningful any time soon. The Fed knows this. Anybody who actually works for a living knows this. Sure, the big, massive, historic layoffs are over. But companies are now in the tweaking stage. Notice anybody getting laid off where you work? It comes in dribs and drabs now; a few jobs here, a few positions eliminated over there.

It’s more than drips or drabs if you’re, say, a Newark, N.J., police officer.

Companies in a number of industries (See table below) have boosted their profit per employee, according to data from the research firm Sageworks. This means companies are now making their profits using fewer employees, and unless demand rises such that they’re going to lose business by not having enough staffers around to produce enough widgets, companies aren’t going to start hiring, because to start hiring means to cut into their profit margins. Sageworks’ Melinda Crump wrote this:

Industries have right sized and adjusted for slowed sales by cutting expenses that include employee costs. Fewer employees now mean that these industries have increased efficiency over slowed sales and may not be looking to hire quickly if the economy sees only modest growth. Companies have been adjusting to slower sales for a while now, and strong growth is the only push that would call for a scaling of economies and increases in payroll back to 2006 levels…some industries such as manufacturing and construction may be evaporating, shrinking the total work force for years to come.

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This isn’t the time for a divided government, and I don’t necessarily mean Democrats controlling one branch and Republicans another. I mean this isn’t the time to have the two parties that ostensibly run this nation squabbling like a bunch of children out in the schoolyard, while the school’s on fire. But it seems like that’s what we’re gonna get.

While the GOP is pretty clearly going to take the House, creating the much ballyhooed gridlock, the Senate seems a long shot. The conventional wisdom on Wall Street is that this is a good thing; if Washington is locked in its own box, it can’t get in the way of private enterprise. But, as Miller Tabak’s chief economic strategist Dan Greenhaus pointed out to me a little while ago, “gridlock” is a benefit for the stock market and businesses in a fully functioning economy. Needless to say, that is something we do not have right now.

Further complicating matters: Greenhaus says he went back 100 years, and couldn’t find a single example of a situation where the President had a split Congress. Usually, he said, both houses turn together. What this could mean, obviously all the returns aren’t in yet, is that Obama may have less to fear from Congress than, say, Bill Clinton did in 1994, since nothing that comes out of the House will get past the Senate, Greenhaus said. So this idea that Obama may have to tack to the center just may not come to fruition this time around.

“These guys can’t come close to repealing healthcare,” Greenhaus said of the tea partiers, “but they’re gonna give it a try.” So the GOP, out of some ideological zeal, is going to waste as much time trying to repeal the healthcare bill as the Obama administration did trying to get it passed. Meanwhile, precious time will be wasted (remember, this is not a fully functioning economy.)

And all the big questions and problems, tax cuts, financial reform, government spending, won’t be solved with a hopelessly divided government, he said.

He pegged the over/under on GOP advances in the House at 50; less than that would rob the Republicans of a clear victory, and a larger mandate. But more than how many seats change hands, he said, is how the divergent views of the new Republican Congressmen play out. The rowdy tea partiers who are making the big splash tonight may not hold much sway with the GOP leadership. Their policies sound good, he said, but they don’t poll so well. That dynamic will be more important that how many seats are won or lost tonight, Greenhaus said.

You’re probably going to hear a fair amount today about that income and spending report this morning, how wages and spending both rose more than the Street expected. Just keep this in mind: transfer payments.

We’ve written about this before, but it bears repeating: consumer wages apart from transfer payments, items like unemployment benefits and social security payments, have been and are still stagnant, especially when measured against inflation.

Our colleague Kathleen Madigan pulled out some tidbits from the report: Of the $59.3 billion gain in income in August, $35.8 billion came from transfer payments. That was up from just $500 million the month before. The reason for the big surge was the cut-off and subsequent renewal of unemployment compensation.

So roughly 60% of the gain came from the largesse of Uncle Sam. Then there’s the inflation picture. Wages, on a yearly basis, are up just 0.8%, Miller Tabak’s Dan Greenhaus points out. That’s a smaller rise than inflation as measured by the personal consumption expenditures index, which rose 1.5% overall from a year ago; the “core” PCE was up 1.4%.

Now, that last number is below the Fed’s preferred rate of 1.5-2%. Think about that: as low as inflation is right now, it’s still outstripping any wages gains, apart from transfer payments, people are seeing.

So, yes, spending did rise, but it has little to do with any real recovery among consumers. What’s more telling about the state of the consumer is the savings rate, which crept up to 5.8% from 5.7%. Animal spirits may have returned to Wall Street, but there’s just dispirit on Main Street.

“Before we turn meaningfully positive on the consumer and the effect increased spending will have on economic performance, we would like to see a turn in ‘organic’ incomes,” Greenhaus writes. “Over the last three months though, no such turn has been observed.”

Seems to me the economy will truly have “recovered” when jobs are being created that pay meaningful wages, wages that rise faster than inflation. A lot of those jobs need to be created, by the way. Millions. Any idea where those are coming from in the next three months? In the next three years?

Stocks have been getting quite the lift from both the election cycle and the Fed’s loose money policies, while mixed economic data have been just encouraging enough to keep the bulls contented. This allowed stocks to craft a technical break-out, and sans some game-changing bit of news, it may hold through at least election day.

Hold is about what they’re doing today; futures up a hair on a relatively quiet morning. Wal-Mart offering $4.6B for South Africa’s Massmart and Unilever in a deal for Alberto-Culver. Dallas, Richmond Kansas City Feds post regional surveys this week. Chicago PMI on Thursday. Final reading on 2Q GDP comes Thursday, ISM manufacturing survey comes Friday.

S&P 500 futures up 1.30, DJ futures up 16. Ten-year yield at 2.55%, euro’s flat at $1.3492, although it was weaker earlier.

I opined on Friday’s News Hub that the election cycle, and the Fed, were driving things here, and there’s an article in today’s Journal that bears out at least the former. We’ve been hearing for some time that traders are looking to the election, and the widespread notion that the GOP will take back at least one or even both houses of Congress. E.S. Browning says, in fact, the market is already pricing it in:

Investors are debating whether the November election will have an impact on the stock market. Actually, it probably already has.

In election years, the stock market typically hits a roadblock in the first half of the year, as investors worry about the looming vote. But money managers typically are looking three to six months ahead when making investment decisions, and by summer they are forced to start looking past the November vote. Much of the election rally can take place before the outcome is known, as investors worry less about the looming election and focus on the coming year.

The thinking on the Street seems to be that the GOP is more business-friendly, for one thing, and will act as a counterweight to the “anti-business” Obama administration (although it’s beyond me how any party that would front that monument to appeasement called the Dodd-Frank Bill could be described as “anti-business.”) Maybe. But this isn’t necessarily a moment in history that will benefit from gridlock. If the GOP, which apparently stands for “Glenn Or Palin” these days, just grinds Washington down to a halt, we will be even worse off for it.

Miller Tabak’s Dan Greenhaus makes the point:

We cannot envision gridlock being good for markets or the economy at this point in time. Will there be a halt to some policies the market perceives as harmful? Of course. But with the economic realignment ongoing, the country would be served by a rectilinear and somewhat unified Congress. We hope that the decision making process becomes more unified from here, but the probability of such unification remains less than absolute.

I’m not saying the Dems have all the answers; Lord knows they don’t. But this idea that a Republican victory in November is going to be a panacea is just so much GOP pablum.

Shut your eyes, citizens. Just shut your eyes.

Not so hot, friends and countrymen, not so hot at all.

This morning’s reports on consumer prices and inflation-adjusted earnings, what they call “real” earnings, were both broadly flat, and when flat is not what you’re looking for, not what you’re looking for at all, that’s not a very good thing.

Consumer prices excluding food and energy, the s0-called core prices that get so much derision when everybody thinks the government’s trying to mask inflation by excluding those two categories, were flat, the Bureau of Labor Statistics reported. On a yearly basis, prices were up 0.9%. When you consider, too, that the Fed kept its fed funds interest rate at zero that whole time, then those numbers are very precarious indeed.

The news on wages wasn’t any better. Average hourly wages were flat in August compared to July, and up 0.5% compared to a year ago. If you think a 0.5% raise over a year is enough to cover all the necessities of life, then God bless you.

What these two reports show is an economy that is basically stagnant, with a not-insignificant chance of getting worse. Wages aren’t growing, prices aren’t rising, and all that ties back to the fact that everybody is still in the middle of this great unwind, this broad deleveraging of debts. We aren’t going anywhere. Indeed, even a cursory glance at the news over the past day or two tells you we’re going backward: a Census Bureau report shows that wages fell over the past decade, while the bureau also reported that now one in seven Americans, 43 million people, are living in poverty.

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Not exactly a healthy market.

It’s hard to yank our attention away from the disaster that was the New York Jets last night in the Meadowlands, but this is Market Talk, not the Sports Guy report, so we’ll try and focus (but it really is hard.)

The latest evidence of the state of the economy crossed the Tape this morning in the form of Best Buy’s quarterly earnings and the Commerce Department’s report on August sales. In both cases, there were the proverbial upside surprises that get the Street boys so excited, but in both cases as well, a read past the headlines contains useful and cautionary information.

Best Buy’s big headline was, to be sure, an eye opener. The company, the nation’s largest electronics retailer, posted profit growth of 61%, well above Street views of 40% (and even that would’ve been pretty eye opening.) The shares immediately jumped, and you could almost hear the bulls snorting in their pens. I mean, 61% profit growth is a big number. Really big. Unusually big when you consider that sales, you know, sales, were up only 2.9%. Do those two numbers seem at all related?

They don’t, and they aren’t. A host of factors helped Best Buy produce that gaudy profit-growth, but real, actual, old-school sales wasn’t one of them. Stock buybacks helped, as did a sharply lower tax rate, as did higher margins. US sales rose only about 2%, and US same-store sales actually slid. That should tell you something about the relative strength of the US consumer (albeit, full disclosure here, I did buy a new flat-screen TV at Best Buy this quarter, but, as you’d expect these days, it was on sale (and, of course, we waited as long as possible, until our old set was lost in a sea of purple tint.))

Still, Best Buy shares are up 6.1%.

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You get the feeling the economy's missing something.

Don’t be fooled by the stock-market reaction, that revision to 2Q GDP reported today was awful. Commerce Department now says gross domestic product in the second quarter rose at a 1.6% annual rate, down from the 2.4% it originally report. For the vast majority of Americans, an economy that is growing at a 1.6% rate is barely distinguishable from a recession, no matter what spin anybody puts on it.

What do these numbers say to you? 5%. 3.7%. 1.6%. That’s GDP for the past three quarters. See a trend there? Those numbers have been steadily falling as the government’s varied and myriad stimulus programs have been running out. The problem is, nothing has come along “organically,” as the wonks like to say, to replace the stimulus. The plan all along was, the feds would spend freely, the Fed would lend gratuitously, and the economic would restart, at which point the stimulus and liquidity programs could be withdrawn.

It hasn’t worked that way, and this morning’s report clinches that, and raises the specter of the “double-dip” (if you believe the first dip ever ended, that is.)

“Certainly the GDP report is better than expected,” Miller Tabak’s Dan Greenhaus wrote this morning. “However, taking a step back reminds us that 1.6% growth is, simply put, atrocious. It is not enough to meaningfully affect the unemployment rate and we repeat our belief that GDP will not settle into a 1-2% ‘steady state’ for six or eight quarters.

“If that happens, and it looks like for now it might as we currently believe 3Q GDP will grow at most 2% with not much more expected for 4Q, a move one way or the other will have to occur. For now and absent meaningful monetary or fiscal stimulus, we are inclined to believe that move will be to the downside.”

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For most of this year, while the stock market’s been flopping around like a fish, the bond market has been steadily rising, with bond yields steadily falling. It’s hard to say exactly how much of this is due to investors seeking the safety of bonds and how much is due to the Federal Reserve consciously keeping yields low. Suffice it to say that while investors have been dumping stocks, look at mutual fund flows, the sell-side on Wall Street, those “bulls” who somehow always are somewhere telling you now’s the best time to buy stocks, have been crying that bonds are in a bubble, and that bubble is bound to burst.

It’s quite amazing that this crowd, which didn’t see any bubble in stocks in 2000, which didn’t see any bubble in housing or stocks in 2007, somehow suddenly has crystal clarity on the subject. They don’t. They’ve just been in stocks for so long, they can’t conceive of a time when stocks wouldn’t be the best investment around.

I read the best rebuttal to this argument I’ve yet to see this morning (albeit David Rosenberg has also been banging this drum loudly and convincingly) from Capital Economics’ Julian Jessop. Pay particular attention to his first line, because that sums it up in a nutshell.

An asset bubble develops when prices move far out of line with anything that could reasonably be justified by fundamentals. That was the case with dot.com stocks in 2000 and many property markets since. However, the current low levels of bond yields (and even further falls) would be consistent with the prospect of a very long period of near-zero short-term interest rates, low or negative inflation, and lacklustre returns on riskier assets that increase demand for the safety of government bonds. After all, these factors have kept Japanese government bond (JGB) yields very low for many years – much lower than the levels currently seen in the US and Europe – despite the dire fiscal position in Japan.

Admittedly, structural factors have also played a key part in driving down JGB yields, including a large pool of captive domestic buyers. But similar factors may come increasingly into play in the US and Europe too, as changing regulatory requirements and additional QE prompt both private institutions and central banks  to hold more government bonds on their balance sheets.

The upshot is that we see no compelling reason why bond yields cannot fall further in the US and Europe from their current levels, without this amounting to a bubble.

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