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Rosner Testimony March 30 2011

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ADP said the private sector added 201k jobs in March, the 3rd month in the past 4 above 200k. It was though slightly below expectations of 208k and Feb was revised down by 9k. Gains were again led by small and medium sized businesses in both goods producing and service providing sectors. Manufacturing specifically added 37k jobs and the financial sector grew by 4k jobs. Construction suffered another lost 5k jobs and the decline from the top is now 2.126mm. Bottom line, while slightly below estimates, the pace of job gains is good and certainly encouraging to see but we still have years to go to get back what was lost in the recession if this current pace persists. Friday’s Gov’t Payroll report is expected to show a gain of 190k, 210k of which is in the private sector, with an unemployment rate of 8.9%.

We continue to watch the low volume levitation run as we head towards a denouement of the end of quarter window dressing, Friday’s NFP and the end of QE2 on June 30th. Earnings are good, analyst consensus for 2012 is very strong (too strong?). The hope is that the market might be able to “grow” into a reasonable valuation.

The sell off post Japan was shallow, and the snapback rally has moved up smartly. But as we mentioned yesterday, the volume has been abysmal, and the February highs were not taken out — yet — and they are a stone’s throw away.

Will Friday’s NFP report be a sell the good news situation? The gathering economic strength makes it more likely than not that the liquidity gusher will be turned off at the end of QE2. What might that do to traders thoughts?

And what of the wild card: QE3.

Here’s where things get tricky: It might not matter, because QE3 may already be here.

Keep in mind, Quantitative Easing is a term that was invented in Japan in the 1990s. While many believe that QE3 is dead in the US, from a global perspective, the Bank of Japan’s massive liquidity stimulus and intervention into the bond market is the equivalent of a US QE3.

Relative to the size of their economy, the BoJ spewed the equivalent of their own QE2 — in just 3 days.

How does that liquidity affect how you trade?

As I’ve previously noted, many experts say that the Fukushima plants will keep on leaking for months. See this and this.

And the amount of radioactive fuel at Fukushima dwarfs Chernobyl.

As the New York Times notes, radioactive cesium is the main danger from the Japanese nuclear accident:

Over the long term, the big threat to human health is cesium-137, which has a half-life of 30 years.

At that rate of disintegration, John Emsley wrote in “Nature’s Building Blocks” (Oxford, 2001), “it takes over 200 years to reduce it to 1 percent of its former level.”

It is cesium-137 that still contaminates much of the land in Ukraine around the Chernobyl reactor.

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Cesium-137 mixes easily with water and is chemically similar to potassium. It thus mimics how potassium gets metabolized in the body and can enter through many foods, including milk.

So it is bad news indeed that, as reported by New Scientist, cesium fallout from Fukushima already rivals Chernobyl:

Radioactive caesium and iodine has been deposited in northern Japan far from the Fukushima Daiichi nuclear plant, at levels that were considered highly contaminated after Chernobyl.

The readings were taken by the Japanese science ministry, MEXT, and reveal high levels of caesium-137 and iodine-131 outside the 30-kilometre evacuation zone, mostly to the north-north-west.

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After the 1986 Chernobyl accident, the most highly contaminated areas were defined as those with over 1490 kilobecquerels (kBq) of caesium per square metre. Produce from soil with 550 kBq/m² was destroyed.

People living within 30 kilometres of the plant have evacuated or been advised to stay indoors. Since 18 March, MEXT has repeatedly found caesium levels above 550 kBq/m² in an area some 45 kilometres wide lying 30 to 50 kilometres north-west of the plant. The highest was 6400 kBq/m², about 35 kilometres away, while caesium reached 1816 kBq/m² in Nihonmatsu City and 1752 kBq/m² in the town of Kawamata, where iodine-131 levels of up to 12,560 kBq/m² have also been measured. “Some of the numbers are really high,” says Gerhard Proehl, head of assessment and management of environmental releases of radiation at the International Atomic Energy Agency.

While Japan has been exposed to very high levels of cesium, so far, the levels of cesium in other parts of the world appear to be relatively low:

And see this.

But anyone who believes that Fukushima cannot possibly become as bad as Chernobyl has no idea what they are talking about.

I am aghast.

I am watching Squawk Box, and the stream of misstatements, political jargon, and sheer falsity is overwhelming me.

Let me clarify this for you, Joe Kernan: You want to know what the biggest threat to the economy in a century was? RECKLESS OVERLEVERAGED, UNDER-CAPITALIZED BANKERS and the COLLAPSE OF THE FINANCIAL SYSTEM THEY CAUSED.

Remember that little glitch? I know it was a long time ago wat back in 2009, but THAT is and remains the biggest threat to the economy.

Hey Squawk Producers! Please book me as a guest host (again). I will happily spend 3 hours correcting Joe Kernan about the errors of his assumptions, biases and cognitive foibles to everyone’s lasting benefit.

The only drawback is that whence the show is over, it will require a team of experts to reassemble the little Kernan bits back into a television host . . .

I used to love this magazine back in the day — when I was piss broke and didn’t have 2 nickels to rub together, I always managed to have enough money for a subscription. It was so far ahead of its time, most of it would easily fit into your average snarky website

Let’s see how well it holds up over the decades . . .

Spy Magazine September 1991

‘We can overcome’ continues to be the market message over the past week as Japan, the Middle East, rising energy prices (amongst others), and more moderate than expected Q1 growth aren’t proving to be any sort of roadblock. I believe this gets put to the proper test starting one week from Monday when Alcoa starts Q1 earnings releases because we’ll hear from the horses mouth the impact of higher raw material costs and the major disruption in the economic activities of the 3rd largest economy in the world will have both on profit margins and production. In the meantime, jobs data over the next three days and the ISM mfr’g figure will be a great snapshot of the state of things. The yen is down for a 4th day and has lost all of what it gained post earthquake and the Nikkei is at a 2 1/2 week high. Economic confidence in the EuroZone was a touch below expectations and fell slightly from the highest level since Aug ’07.

Philippa Dunne & Doug Henwood are the minds behind The Liscio Report on The Economy. Their real time, proprietary research based on state witholding and sales tax receipts is used by professional traders’ to obtain a unique insight into the state of the employment situation and the US economy. See the Liscio Report site for more info on their subscription services.

This is their first guest post for The Big Picture:

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Mismatching the facts

We are hopeful that a recent report from researchers at the San Francisco Federal Reserve on the job prospects of recent graduates will finally bury the assertion that the unemployment rate is persistently high because workers lack the skills for the jobs that are available, or live in the wrong region. As our subscribers know, we have never been fans of Minneapolis Fed President Narayana Kocherlakota’s skills mismatch theory of unemployment. Serious flaws in his argument were evident when he first presented it back in August, and yet a surprisingly large number of market participants lionized his conclusions.

The biggest problem is that a longer look at a central component of his argument, the relationship between job openings and the unemployment rate, does not support his conclusion. Although Kocherlakota was correct that in July 2009 the Beveridge Curve, a gauge of how efficiently the job market is functioning, suggested that the unemployment rate should be lower than the BLS was reporting, up until then it had indicated no problem in the relationship between its two components, job openings from the JOLTs series, and the unemployment rate. It’s worth noting that earlier in the year, the number of unemployed had fallen by about a quarter-million more than job openings had increased, but the important point is that surely if there were a mismatch between skills and jobs, or regions and workers, it would have been apparent long before the repercussions of the financial meltdown took down the labor market. Scientist Richard Dawkins has noted that gullibility is delightful in a child but horrifying in an adult, and it was dispiriting that so few analysts pointed out the suspicious and sudden timing of the supposed mismatch of our workers and available jobs.

By limiting his study to the job openings data from the Job Openings and Labor Turnover (JOLTs) series that begins only in 2000, Kocherlakota missed the important fact that the Beveridge Curve has a history of swinging wide before falling back into its more normal pattern. The graph below shows the curve by decade, an idea taken from a SF Fed Economic Letter by Rob Valletta and Katherine Kuang, employing the Conference Board’s Help Wanted index as a proxy for JOLTs data in the decades prior to 2000. (Using the period of overlap between JOLTS and HW, Valletta estimated a consistent vacancy rate series going back to 1960 that he kindly shared with us.)

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The labor market is usually thought to be functioning more efficiently the further down and to the left (i.e. closer to the origin) the curve is on the graph. The further out it is, the more friction, like regional and sectoral mismatches. The curve for the 2000s (which is based on data through June 2009, when the relationship prevailing earlier in the year started to break down) shows a much better functioning labor market than in earlier decades, especially the 1980s.

Until, that is, we get to recent history, as shown by the red dot marking September 2010. But as Valletta and Kuang point out, the curve shifted about 4 points to the right between the 1960s and the early 1980s before moving leftward by about 2.5 points between 1984 and 1989, a period when the variations in the NAIRU (Non-accelerating Inflation Rate of Unemployment) were considerably smaller than the movement of the curve would suggest. (Note recent improvement in this metric.)

But there is no shortage of evidence that we are moving through a period of severe and sticky cyclical unemployment. First, of course, the recession was unusually severe, and the major reason employment took such a hit was the hit to GDP. As the graphs directly below show, the loss in output was greater than any earlier recession, but the difference between the change in GDP and the change in employment wasn’t out of line with earlier experience.

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Another thing that is really different about this cycle is the share of permanent job losers, as opposed to those on temporary lay-off. The percentage of the employed who have lost their jobs permanently hit a record high, in 40 years of data, at the end of 2009, and has come down only slightly since, while the percentage of those on temporary layoffs hit a record low in 2009 and has yet to recover. This composition makes re-employment a lot harder, as does the large number of workers employed part-time for economic reasons. Currently those working part-time against their will constitute 5.9% of the total employed, barely down from July’s 6%, which was well over 2 standard deviations above the series’ 55-year average. They will probably find full-time work before the currently unemployed find any work. Many of the current long-term unemployed may never work again.

Piling on

In The Labor Market and the Great Recession, a paper prepared for a Brookings Institute panel last spring, Michael Elsby, Bart Hobijn, and Aysegul Sahin review the grim pathologies of our labor market, and point out that in almost every aspect, the downturn was the worst since the 1930s. Concerning Kocherlakota’s argument they note that instead of a divergence in outflows from unemployment between industries in structural decline and those not in decline, the rates of sectoral outflow have converged. (Outflow rates in the financial, durable goods and information sectors were all lagging the total when Elsby et al. published.) They also found that while inflows into unemployment in the early part of the recession were dominated by the weaker demographics—the young, the less educated, the nonwhite—the rate of exit has been broadly similar for all subgroups. So both for sectors and demographics, the problem is largely an aggregate one.

Elsby et al. also argue against Kocherlakota’s (and others’) point that the extension of unemployment insurance benefits is major cause of the high unemployment rate. They calculated that the extension of benefits likely added between 0.7 and 1.8 points to the 5.5 point rise in unemployment, and probably at the low end of the range, which is well below estimates circulating in response to Kocherlakota’s speech, and noted that the JOLTs quit rate was (and is) remarkably low, which suggests that employed workers, who presumably have the qualifications employers desire, are skeptical about the possibility of finding new jobs.

In their SF Fed Economic Letter mentioned above, Kuang and Valletta also took a look at the regional and sectoral behavior of employment, and found little evidence for the mismatch thesis. If there were a serious mismatch problem, you’d expect to find major disparities in employment across geography and industry: healthy regions or sectors would show shortages of workers, and sickly ones would show surpluses. But in fact Kuang and Valletta didn’t see that: current regional and sectoral variation is little different from past cycles.

In early March, newly minted SF Fed President John Williams noted that the NAIRU has probably risen from 5% to 6.7%, with half of the increase coming from extended unemployment benefits (which will wane soon enough), and the rest from the severe shocks the labor market, and especially the construction sector, has experienced. He notes that the NAIRU will likely fall back over the next few years on its own.

In Mid-March SF Fed researchers Bart Hobijn, Colin Gardner, and Theodore Wiles took a look at unemployment rates for two groups, those 21 to 23 years old with a college degree (the cohort sample), and those 21 to 25 years old who have a college degree but did not have one 12 month before (the matched sample). They selected these groups because recent graduates are subject to none of the constraints that go into the mismatch theory: they are seldom eligible for unemployment insurance benefits; they are well educated; and they are usually mobile. But the unemployment rates for both groups are higher than the overall rate: the cohort’s rate bottomed at about 5.8% early in the recession, has risen steadily since, and is now 10.7%; the matched sample’s was 7.9% at the beginning of the recession and is now 15.7%. If the mismatch theory were true, this would not be the case.

Stepping back

To put this all into the correct perspective, the US labor market is tracking the average trajectory of labor markets following major financial crises closely. In the 15 major financial crises in 13 rich industrialized countries identified and studied by the IMF, labor markets did not regain their pre-crash momentum for about 5 years. As those who familiarized themselves with the aftermath of financial crises early on understood, our labor market was going to suffer extensive long-term damage. To give you an idea of how severe that damage has been, in the last few years dramatic job losses have caused the long-term relationships of various components of the Bureau of Labor Statistics’ models to break down. For example, the balance between business births and business deaths that is the basis of the birth/death model, and has been remarkably stable in past business cycles, currently does not hold, which is why we have had two years of unusually large downward benchmark revisions. Although the job market is showing signs of improvement, a painfully slow recovery with persistently high unemployment is what we should have expected, and it’s what we have. There is no reason to concoct explanations for any of the details.

When Kocherlakota was appointed president of the Minneapolis Fed, some of his colleagues remarked that he is data-driven and changes his views when the data insist he do so. In that case, we should be hearing something from him on this issue soon.

-Philippa Dunne & Doug Henwood

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Sources:
The Labor Market in the Great Recession, May 2010 (May 2010)
http://www.nber.org/papers/w15979

Inside the FOMC (August 17, 2010)
http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?id=4525

Is Structural Unemployment on the Rise? (November 8, 2010)
http://www.frbsf.org/publications/economics/letter/2010/el2010-34.html

Will the Financial Crisis Have a Lasting Effect on Unemployment? (February 22, 2011)
http://www.frbsf.org/economics/speeches/2011/john_williams0222.php

Recent College Graduates and the Labor Market (March 21, 2011)
http://www.frbsf.org/publications/economics/letter/2011/el2011-09.html

Bureau of Labor Statistics’ comments on 2009 benchmark (February 23, 2010)
http://www.bls.gov/ces/cesbmart09.pdf

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If you would like to talk to us about customized research or would like more information about The Liscio Report, please call Marni at 877-324-1893, or click here to email us.

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Financials were largely left out of Tuesday’s rally. Are the banks telling us this bull market is broken? Find out from Fusion IQ CEO Barry Ritholtz.

BANK OF AMERICA AS MARKET BAROMETER

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Special Rally Edition!

Tonight I will be on Fast Money on CNBC at 5:15 pm discussing the market rally from the post Japan lows, and what to do if we a) breakout or 2) breakdown

Key thoughts on the rally:

Bullish:

Good Breadth (A/D).

Last week, I mentioned SPX 1310-1315 level — we broke thru there today

February highs must be decisively taken out — its only 2% away from here!

Bearish:

Poor volume; today was 2nd light day of the year; C = almost 10% of daily volume. (Strong volume shows conviction, and reflects new buyers + institutional enthusiasm).

Few stocks have both good valuation + good technical setup (warrants caution)

Neutral:

End of quarter window dressing, NFP, post Japan relief — explains some of the lift

If the market breaks out over the Feb highs, we would use SPYs for exposure;

Downside trade strategy: 1) tight stops on longs; 2) QID/SDS for the fast trade (but not for a long term hold); 3) Cash to redeploy at more attractive levels

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Video posted here