Market Talk

I’ll tell you, if I hear one more person rationalize Friday’s jobs report by trying to explain to me the difference between the household and establishment surveys, I’ll lose what’s left of my mind. I must’ve heard that 40 times on Friday, as if nobody’d ever realized it before. When Austan Goolsbee started explaining it on Charlie Rose, I knew I’d heard more than enough. It was time to turn off the TV and pick up Marcus Aurelius’ Meditations. I needed a break.

Forget all that household/establishment nonsense. Here’s a better, if somewhat dismissive, take on the report, from Dennis Gartman, who edits and publishes the daily Gartman Letter:

Our long standing clients know that we’ve tried far more often than not to be out of the office on days when the Employment Situation Report is released for over the decades we’ve been producing TGL and for the years before than when were in Chicago and worked for A.G. Becker & Company as that wonderful firms financial futures analyst we’ve found this report to be quite silly. We really cannot think of another way to describe this report, for it is indeed silly. The revisions are huge; the “Street’s” and our misses on the report are even larger, and there is rarely sense to the report from one month to the other. There is sense over time, but we are forced to deal with it in one month increments and that we find comical.

Friday’s numbers were perhaps the most comical of all, for as everyone now knows non-farm payrolls were perhaps 1/5th of what had been expected while the unemployment rate, which should have risen even if the payrolls number had come where the Street’s consensus had expected it, fell sharply. This is stuff and nonsense, and we can only hope that Friday’s report shall chasten almost everyone on the Street to do as we try to do: be out of the office and pay this report no heed whatsoever.

But, as he goes on, there was one sort of small, interesting, notable little thing that most people left out while explaining the difference between the household and establishment surveys. That is, they left out the bit about how many people got left out of the surveys.

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We’ve previously skewered here a couple times the cockamamie notion that companies panicked and fired too many workers during the recession. That supposition was popular about a year or so ago as economists and other pundits forecast a big snap-back in employment that was supposed to arrive after last year’s midpoint.

The hiring snap-back never came, of course, and companies are the better for it as they finished 2010 with amazing profit growth. As we’ve noted before, there never was any panic — just cold, hard calculation on how to regain strong profitability in an environment of greatly diminished demand.

And it continues, with UK gas and electric operator National Grid PLC saying it’s cutting 1,200 jobs in its US business in a restructuring effort.

As reported by Newswires’ Selina Williams, note the words of National Grid CEO Steve Holliday regarding the layoffs: “It’s not a knee jerk, it has been thought through for some time.” He went on to say that despite increased revenue, the company was not earning adequate returns in all its US businesses. Operating costs “are still higher than we are recovering through today’s rates,” Holliday added.

The latest example of why corporate profits look so peachy when the jobs market is so lousy comes courtesy of the Richmond Fed’s January business survey.

The regional bank’s index of the number of employees was flat at 14, the index of the average workweek was up, to 20 from 15. The wages index fell to 13 from 16.

So, the same number of factory workers in the Richmond area are working longer hours for less pay. That is a CFO’s dream.

Now, granted, it’s not like this every month; the moves from November to December weren’t so stark. But in general, that is exactly what’s going on with the American work force these days: the same number (or less) or workers doing more work for the same (or less) pay. Why should employers feel compelled to boost wages, also, with a pool of 14 million plus unemployment Americans, plus a pool of, who knows, tens and tens of millions of third world workers who’ll do the job for a nickel?

Think the President will have anything to say about that in his State of the Union tonight? Think the Fed will have anything to say about that in its policy statement tomorrow?

I read another comment from a Wall Street type this morning crowing about the “sustainable” recovery in the U.S. The strategist is quite pleased with earnings, noting they’re exceeding “expectations,” but also pleased that sales are likewise exceeding “expectations.” This is a sign that the recovery is building some kind of momentum.

You don’t say?

Let’s see President Obama tell the nation tomorrow night that it can’t afford the tax giveaways the government, in fact, just gave away, and that he’s going to reverse them. Let’s see the FOMC on Wednesday come out and say it’s going to raise rates and scuttle QE2. Then we’ll see how “sustainable” the “recovery” is.

Any talk of the economy’s fundamental strength is useless when the federal government not only leaves the Bush tax cuts in place, afraid to upset the fragile state of the consumer, but also goes ahead and cuts payroll taxes. When the Federal Reserve has short-term interest rates pinned to the floor with the spilled beer and peanut shells, and is out there pumping $80 billion a month into the marketplace, which acts both as a continuing back-door bailout for the banks and a ready stream of liquidity to feed speculators with easy money.

Ask any state treasurer how sustainable the recovery is.

Ask anybody who saw their wages slashed if the “recovery” is “sustainable.” Ask anybody who’s lost their job if the recovery is sustainable. Ask any of the more than, well more than, one million people who have been out of work for more than two years if the “recovery” is “sustainable.”

Hell, ask them if there’s even been a recovery.

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Interesting to hear GE CEO Jeff Immelt will chair a new White House jobs panel tasked with finding ways to grow private-sector jobs. He runs a big company, but Immelt has shown more skill at cutting jobs, frankly, than creating.

GE finished 2009 with 18,000 fewer US workers than it had at the end of 2008, and US headcount is down 31,000 since Immelt’s first full year in 2002. During his tenure, GE workers based in the US as a percentage of total employees has fallen to 44% from 52%.

Maybe the company’s 2010 10-K due in February will show GE actually added jobs last year. But then again, maybe that’s just our imagination at work.

Addendum:

Here’s a dead-on take (as usual) from market strategist Joan McCullough at East Shore Partners, on this Immelt appointment:

Why do we give a flyin’ fig about this announcement from the White House? Because it hits home once again that nothing has changed. That the crony capitalism is as alive and well at the hands of a community organizer as it was with the rest before him. That the best interests of the US taxpayer are the last consideration of our rainmakers.

Photo courtesy of GE

Last night I was flipping around the stations, and came across “Defending Your Life,” the 1991 comedy from Albert Brooks. Okay, so if you don’t know the set-up, it’s this: Brooks’ character, an LA ad man, gets run over by bus and ends up in heaven, at least a waiting station on the way to heaven, where he has to, you got it, defend his life.

In one courtroom scene, the prosecutor is showing selected scenes from his life. In one, he’s practicing for a job offer with his wife, where she plays the boss and tells her, in no uncertain terms, he won’t take the job for less than $65,000. The next day, in the office, the boss quickly offers him $49,000, and he quickly accepts.

When the prosecutor asks him why he caved so quickly, he says that $49,000 “was fine, we lived fine on that money.”

We lived fine, on $49,000. Here’s the clip, starting watching at the 5:30 mark (the whole movie’s good, too, if you never saw it.)

Remember what I wrote yesterday? The “serious deterioration in wages and the value of the dollar over the past generation.” I understand we’re talking about a movie here, but Brooks is a smart writer, and he didn’t just pick $49,000 out the air. That was a good salary…20 years ago, and we’re talking about only 20 years ago. How about 30 years ago? 40?

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We’ve been over this ground many times, so in case you’ve been extremely out of touch, here it is again: Profitability in corporate America has rebounded sharply during the past year because companies aggressively cut costs — mostly by reducing their workforces — to meet a greatly reduced level of demand. Demand has picked up a little, but not enough to inspire much hiring.

Apparently this dynamic still hasn’t sunk in yet with a lot of folks because the New York Times has an explainer today titled “Profits are booming. Why Aren’t Jobs?”

It does a good job of answering the question, but feels the need to characterize it as “the enduring mystery of this Great Recession and Not So Great Recovery,” which is irritating. No mystery here whatsoever. If profits were smoking because sales were exploding, driven by incessant demand, and businesses still weren’t hiring, then yes, that’d be screwy. But that ain’t the case.

The Times could’ve actually saved some space and gotten right to the point, instead of leaving this comment from Simon Johnson for the very end of the piece: “I don’t see a pop in corporate hiring, because why should they hurry?” said Professor Johnson, the former International Monetary Fund economist. “They are paying themselves well and with demand so low, they don’t feel they are missing out on anything.”

Bingo, Mr. Johnson. What’s so mysterious about that?

First off, just forget about how the stock market reacts to this morning’s jobs report. It doesn’t matter outside of Wall Street. The market is more concerned about whether or not the jobs picture will alter the Fed’s thinking on its bond-buying program (i.e., free money for Wall Street) than whether the jobs market itself is improving. It’s a cold, hard calculus that rules the Street.

So the government reports that the economy added 103,000 jobs in December, a numerically positive number but contextually weak, and the market shrugs its shoulders. It doesn’t much care, so long as the Fed’s keeping the liquidity spigots wide open. That 103,000 is well below the Street’s expectations of 150,000, and we’d be the “whisper numbers” were even higher after ADP on Wednesday said the economy added 297,000 jobs. Hey, they were only off by 194,000. But the market figures it’s good enough to keep the Fed bond buyers employed, and that’s all the stock market needs.

Maybe things look good on Wall Street. Maybe things look good in the boardrooms of corporate America. Hey, things may even look good in Washington, a city that’s never been above buying its own spin. But in the real world, the world of 300 million Americans, the vast majority of which don’t have six-figure salaries (and even that’s not great shakes anymore, so we hear,) we are just spinning our wheels.

Second off, don’t be fooled by that drop in the unemployment rate. Yes, it fell to 9.4%, from 9.8% a month ago. Again, numerically a positive, but contextually negative. It fell not because the economy added jobs, but because 434,000 people left the labor force, gave up looking for a job, just walked away. That is not a good thing and you cannot spin it good no matter how hard you try.

For most Americans, the economy is going nowhere.

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American companies, quite obviously, do a lot of business in America. After all, this is still by a large margin the world’s largest economy. However, while they can’t ignore the U.S., while they still derive probably somewhere’s around half if not more of the profits from the U.S. market, they don’t get their profit growth from the U.S., they get it from overseas, and it’s profit growth, even more than profits, that matters most to investors.

So, it stands to reason that if American companies are getting their growth from overseas, when it comes time to expand their operations to meet that growth, they’re going to do so locally. Which means that this surge in corporate profits is fueling as much if not more hiring overseas than it is here.

From an AP story (via Detroit Free-Press) about hiring trends:

Before an afternoon pullback today, the Dow Industrials tapped their highest intraday level since before the anxious days prior to Lehman’s collapse.

Of course, markets were descending back then as storm clouds continued to darken, rather than ascending as they are now. While the financial system certainly appears to be on firmer footing than it was more than two years ago, two enormous burdens on the economy — unemployment and the weak housing sector — are actually in much worse shape. And don’t tell us the market is pricing in better times for housing and employment, because neither one shows much sign of any meaningful turnaround.

Consider this: Back in Sept ’08, the unemployment rate was an enviable (by today’s standards) 6.2%, with roughly 9.6 million people unemployed. There’s now 15.1 million jobless, up 57% — in a little more than two years. Forty-two percent of the jobless now — or 6.3 million — have been out of work for 27 weeks or more; back in Sept ’08 there were only two million out of work for that long, or 21% of those unemployed.

Now for some housing stats to consider — September 2008 existing home sales were originally reported at a 5.18M annual pace; the latest data from NAR showed October at 4.43M pace, down 14% from the pre-Lehman days. Meanwhile, housing starts for Sept 2008 ran at a 828,000 annual pace; in October this year, the pace was off 37% from back then, at 519,000.

Stocks are back to where they were 27 months ago, but the two most crucial pieces of a lasting economic expansion still in the dirt.

Make sure you listen closely for a hissing sound, citizens.