The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

The monthly jobs report is a flawed statistical series. Its just not flawed in the way you may think it is.

Monthly Non Farm Payroll Data is about a marginal change in measures of short term job changes — it is a tiny change in employment numbers relative to an enormous base of the people in the USA who are employed. What BLS actually measures is a single and relatively small data point — a very noisy series, subject to frequent revisions — against this much larger pool.

Here is what we wrote about this last year:

“To begin with, you need to understand the size and scope on the Labor market, and what is actually being mode led. There are [more than] 140 million Americans working full time in the country today. Another 15 million or so would like full time jobs, but don’t have one. They may be working part time or not at all.

What the monthly Employment Situation report measures — in near real time — is the net changes in that number. Take the total net number of new hires, subtract the job losses, and you get the marginal change in Employment.

Since our starting number is so big (140m+), and the monthly net changes are so small (200k), the overall change is a statistically small number. Typically, the net change is between one tenth [of a %] (140k) and one quarter [of a %] (350k). During the height of the 2008-09 crisis, the net change was approximately half a percent (700k).”

Now, this isn’t to suggest that the NFP data, however modest the monthly data series may be, is without value. There are lots of juicy morsels of statistical goodness buried within. However, one needs to tease it apart carefully and contextualize the number series relative to other economic information. What it is not is an end all bombshell number it is made out to be by the 24 hour news channels with lots of air time to fill. (And No, we don’t need a countdown ticker to the second as to when the jobs report comes  out).

People seem to get confused about two things: 1) The actual problems with the BLS model; 2) The value of this data series to investors.

The flaws in the series should be apparent: You are dealing with data that is cyclical, very difficult to measure in real time, based on statistically small changes of a very large number. No, the White House does not order BLS wonks to fake the data. Yes, Seasonal Adjustments are pretty standard statistical measures. No, the Birth Death adjustment is not the boogey man its described as. The grand conspiracists talk a good game, but have never proven their cases.

As to the value to investors, these days, NFP’s impact on Fed thinking is probably its most significant element.

I always find it pleasing when a meme gets pushed from the blogosphere into the MSM. The moderate statistical significance 0f NFP is the latest such example.  Here is the WSJ:

“The most-watched economic report of the month also is the most exasperating because it is hard to achieve precision when measuring changes in a very large number. For example, the consensus expectation for Friday’s nonfarm payrolls report is for growth of 163,000 jobs during April. But the two competing government surveys, payroll and household, are about 770,000 jobs apart in their estimates of jobs lost since the downturn began.

Even murkier is the official unemployment rate, which fell to 8.2% last month and is expected to hold steady in April. An alternate measure of unemployment known as U6, which counts discouraged workers, sits at 14.5%. The difference between the two gauges of unemployment is near a record.

All this imprecision should cause investors to take Friday’s report with a giant grain of salt.”

A giant grain of salt indeed.

As wonk statistician George Box stated 3 decades ago, “All models are wrong, but some are useful.” The key to NFP is understanding what aspects of the monthly release are useful. To me, that would be the overall trend, and three internal measures: Hours worked, temporary help, and wages paid.

~~~

BLS data released at 8:30am EST
http://www.bls.gov/ces/

>

Previously:
Contextualizing the NFP Data (April 1st, 2011)

(Mis)Understanding the Birth Death Adjustment (July 3rd, 2010)

A Short NFP Q&A (November 4th, 2011)

Source:
For Job Gauges, Never the Twain Shall Meet
SPENCER JAKAB
WSJ May 3, 2012
http://online.wsj.com/article/SB10001424052702303877604577382033126417006.html

>

Today, I want to bring a simple analysis to your attention. It is based upon the chart of GDP versus the total stock market valuation:

Another measure bodes worse, however. That’s a comparison of the total value of U.S. shares with the yearly output of the U.S. economy (see chart). The stock market is once again the larger of the two. When that happened during a dotcom stock bubble in 2000 and during the U.S. housing bubble in 2006, the result was a stock plunge in subsequent years.

It contains several flaws worth noting.

The first is our longstanding admonition against evaluating investments against a single variable (See this, this and this). But even based on that simplistic analysis, Stocks relative to GDP are not anywhere near a danger zone.

In 2006, stocks crossed GDP at about an 8 trillion dollar capitalization.It took another 4 years and a gap of about 70% ($9.5 trillion GDP vs $17 trillion equity valuation) before the market topped out and reversed.

The same pattern held in 2003 — Equity capitalization crossed at about $11 trillion, and it took another 4 years and 70% before markets topped out near $19 trillion.

Hence, even if you want to use GDP (versus Capitalization) as your single variable, it is rather premature basis for calling the top in equities.

While there are lots of reasons to be concerned about future S&P500 gains, earnings and market cap relative to GDP isn’t one of them.

>

Previously:
Single vs. Multiple Variable Analysis in Market Forecasts (May 2005)

Understanding How to Analyze Market Metrics (July 2008)

Complexity, Context, Probability & Bias (March 2012)

Source:
Stocks Have Outgrown the Economy
Jack Hough
SmartMoney, May 02, 2012
http://blogs.smartmoney.com/advice/2012/05/02/stocks-have-outgrown-the-economy/

Rosenberg, exactly 5 years ago today in May 2007:
>
click for full report

>

Invictus here.

In my Barron’s Big Money post, I mentioned attending a small dinner in October 2007 at which David Rosenberg was the speaker. In comments, Hamann asked if I could provide any additional insight into what he had shared that night.

While I cannot produce his presentation from that evening, I have found, and posted in Think Tank, his 55-page deck from May 2007. This report is exactly 5 years old today.

There are many interesting slides -  Page 8 for starters. And virtually the entire section on the housing market, Page 27 in particular. The whole deck is worth a browse. (I’m considering updating as many charts as I can to incorporate the last five years; should be an interesting exercise. Will post here if/when I get that done.)

In keeping with Rosie’s devilish sense of humor, the deck’s title – Soft Now, Hard Later? (referring, of course, to economic “landings”) – got meetings off on a lighthearted note (about the only lighthearted part of those meetings), as the requisite Pfizer/Viagra jokes circulated among a giggling audience. That was about the extent of what they found humorous once the session got underway. And, for the record, word came from on high that the title was too provocative and needed to be changed, which it was. Absolutely no sense of humor in those ivory towers.

Enjoy.

@TBPInvictus

I’ve written about this before, but since Paul Krugman just posted about it, perhaps it’s time to revisit the issue. Professor Krugman’s chart, in my opinion, doesn’t go far enough in that it does not provide sufficient context. While the chart does show the YoY percent decline in Real Government Expenditures & Investment, it does not give us the context of how Obama’s doing versus his predecessors, which I think adds the proper perspective.

So, how is the tax and spend socialist Obama doing on government spending relative to previous White House occupants? Let’s have a look at Real Government Expenditures & Investment and index it to 100 at presidential inaugurations:

(Click through for ginormous)

(Source: St. Louis Fed, Series GCEC1, author calculations)

So, it’s clear to see what spendthrifts the Democrats have been and how fiscally responsible the Republicans are what a canard it is to claim that Obama has been spending like a drunken sailor. In fact, Clinton and Obama have been the most fiscally responsible of the last five administrations – by a long shot (and do we really need to talk about St. Ronnie?). Of course, none of this matters because people just know what they know, notwithstanding the facts.

Oh, and do we really need to discuss what the graph above would look like rendered on a per capita basis?

@TBPInvictus

See also:

Joe Weisenthal, Obama, The Austerity President

Gene Epstein, Where Government Shrinks

And adding a late entrant, H/T to Abnormal Returns: The Government Investment Drought

Appending:

It’s fairly clear to see what it is I’ve been missing: Obama is a tax and spend Democrat, until the facts prove otherwise, at which point it becomes Congress that is responsible for the country’s purse strings. Except that, predictably, Mitt Romney didn’t get the message:

“So it came as no surprise when he told an Ohio audience Friday that massive government borrowing and spending under President Barack Obama was putting America “on track to becoming Greece.”

“Describing Obama’s “government-dominated society” as a breach of America’s tradition of letting free enterprise thrive, Romney said, “In my view, that takes us down a path to becoming more and more like Europe. And Europe doesn’t work in Europe.”

By the way, while I recognize the issues posed by the debt and deficit, does anyone think that maybe it’s at least a reasonable idea to borrow money at negative real interest rates?

I’m particularly amused by the suggestion that I should “stop posting unsolicited political claptrap and spare us all.” Thanks for that. I’ll take it under advisement. Send your complaint to Ritholtz and by all means don’t drop anything in the tip jar.

And, by the way, I’ve done the per capita chart I alluded to above, and it shows exactly what you’d expect it to show – even more of the same.

And to Joe Friday: Exactly.

Once again, its hard to put the Apple earnings into context. There are 5 key areas to look at: iPhone, iPad, Mac, Retail Stores, and International growth.

The numbers are simply immense:

Earnings:

• Apple had net income of $11.6 billion on revenue of $39.19 billion. Earnings per share were $12.30 (versus Street analysts consensus of $10.06 per share, $9.52 billion in profits on revenue of $36.8 billion);
• Profits rose 94%; revenues gained 58.9%for Q1
• Apple’s cash = $110.2 billion at end of Q1 (up from $97.6 billion at year’s end)
• ~$74 billion of Aple’s cash is held offshore.
• Gross margin rose to 47.4% from 41.4% a year earlier.
• Apple has beaten Wall Street’s consensus estimates in 16 out of its last 17 quarters;
• Apple has 360 million cumulative iOS device sales.

iPhones:

• Apple sold 35.1 million iPhones — up from 18.65 million units a year ago.
• iPhones (+ ecosystem) are 57.9% of Apple’s sales, up from 52.7% prior Q.
• iPhones are now available in more than 100 countries and at 230 wireless carriers (versus 90 countries and 186 carriers a year ago).
• iPhone sales in Asia Pacific doubled.

iPad:

• iPad sales were 11.8 million units — up more than 150% from a year ago.
• Since its launch two years ago, Apple has sold 67 million iPads (Tim Cook: “It took us 24 years to sell that many Macs, and five years to sell that many iPods, and over three years for that many iPhones.”)
• iPad channel inventory was about 2 million at the end of the quarter, which is below the company’s target range of 4-6 weeks of iPad inventory.
• App Store has 600,000 apps, 200,000 of them specifically for iPad.

Everything else:

• China accounted for $7.9 billion of revenue — about 20% of Apple’s total; this is a 300% gain from year ago levels.
• Two years ago, Apple sales in China were 2% pf total.
• Apple sold 4 million Macs during Q, up 7% vs Q1 2011;
• iPod sales were 7.7 million units, down 15% vs Q1 2011;
• iTunes sales = $1.9 billion Q1 — an annual run rate of about $8 billion per year (up 35% year over year).
• Retail store revenues jumped 38% from 2011 Q1;
• 24th straight Q that the Mac has outgrown the broader PC market.
• Non Mac PC shipments in the United States totaled 15.5 million units in the first three months of 2012, representing a 3.5 percent decline from the same period last year

Previously:
Apple +iPad by the Numbers  (March 7th, 2012)

Sources:
Apple 8K
All Things D
WSJ
Bloomberg
NYT
All Things D (2)

Interesting pair of lists from Wonkblog of the fastest growing and dying industries in the United States.

I like to parse lists like this to find what is consistent amongst the members.

The top 10 fastest-growing US industries
1. Generic pharmaceuticals
2. Solar panel manufacturing
3. For-profit universities
4. Pilates and yoga studios
5. Self-tanning product manufacturing
6. 3-D printer manufacturing
7. Social network game development
8. Hot sauce production
9. Green and sustainable building construction
10. Online eyeglasses sales

-Wonkblog

What might these all have in common:

The top 10 dying US industries
1. Photofinishing
2. Newspaper publishing
3. Appliance repair
4. DVD, game, and video rental
5. Money market and other banking
6. Recordable media manufacturing
7. Hardware manufacturing
8. Shoe and footwear manufacturing
9. Costume and team uniform manufacturing
10. Women’s and girls’ apparel manufacturing

-Wonkblog

Thoughts? What are consistencies amongst each group?

Invictus here.

A few items of interest (I hope) that I’ve been thinking of lately.

What Type of Jobs Recovery Are We Having?

Everyone’s seen Bill McBride’s employment chart, which he dutifully updates every month (along with just about every other economic release that comes out). Bill’s chart shows the percent change in employment relative to the peak month. And there is simply no denying its ugliness.

However, the picture is a wee bit different when we look at the actual recovery, which is to say if measure job growth from the trough and not the prior peak:

Source: St. Louis Fed, Series USPRIV

What we clearly see is that, from a trough-to-date perspective, we’re tracking almost spot-on with the 1991 recovery and, yes, ahead of the Bush Boom recovery. Of course, lest I get skewered, this is not at all to say that I find this recovery in any way satisfactory. It is not. However, as I’ve said many times, if anything was really different this time it was the depths to which we plumbed, not necessarily the pace of the recovery. This chart supports that thesis.

Dividends vs Interest

As the Fed has kept interest rates at the zero bound, it has punished savers. Yet those who reap dividend income have now almost fully recovered. From the BEA’s Income and Outlays, we can get a picture of how one group has recovered while the other not so much:

Now, there are many possible reasons that the chart looks as it does. For example, less money in interest bearing accounts (a distinct possibility that I’ve not yet explored) would obviously result in less interest being paid, all else being equal. But the rise in dividend income favors the investor class, and the lack of interest income is clearly a drag on conservative investors who cannot take the risk of more aggressive investments. To be perfectly clear: I am not suggesting a rate rise or criticizing recent Fed policy; I’m simply demonstrating graphically something we all know to be true.

And a Note from Rich Bernstein

Merrill Lynch’s former US Strategist, Rich Bernstein, hung a shingle on his own advisory shop a while back. I’ve always respected Rich and continue to follow his work. His most recent piece [PDF], on the increasing difficulty of truly diversifying, is very interesting.

For all the talk about hedge funds, it would seem from Rich’s Chart 9 that perhaps the whole 2/20 setup isn’t providing folks with much (if any) diversification or benefit:

Rich goes through correlations asset class by asset class (some are shocking), and the results are a bit scary. I highly recommend the entire piece.

@TBPInvictus

And a clarification: I should have, but didn’t, run the USPRIV chart from employment troughs; I ran it from NBER troughs of economic activty (i.e. the ends of recessions). It doesn’t matter much in the scheme of things, but it does matter somewhat. I apologize for not being clear on that point, and will run another chart in the near future.

Matt Trivisonno looks at real time payroll withholding taxes on a year over year basis. He calls it the “greatest economic indicator of all time.”

Hyperbole aside, it is a pretty interesting data series. Here are Matt’s comments from last week:

“Viewing the job market through the withholding-tax data, we see steady year-over-year growth continuing from February to March.>

First quarter withholding-tax collections came in strong with a 5% annual growth rate. (2011 looks weak on this chart because of the tax cut.):
>

~~~

Calendar March was up only 2.64%, however there was one less business day in the month this year. Using a daily average instead, calendar March was up 7.30%. However, the calendar is a little askew because of leap year, so 7.30% is likely over-optimistic. If instead, we look at the data in 4-week time-periods, we see that the annual growth rate was 4.2% for weeks 9-12:

>

>

Friday’s “Employment Situation” report (a.k.a. “Non-Farm Payrolls”) is derived from surveys done during the “reference period”. That’s the week which contains the 12th of the month. For the March report coming out on April 6th, that’s week #11 of 2012. Comparing to week #11 from last year, we see a 4.05% growth rate:

>

>

Source:
Withholding-Tax Collections Continued Strong in March
Daily Jobs Update, by Matt Trivisonno

>

My Sunday Washington Post Business Section column is out. This morning, we look at the annual premature housing recovery.

The print version had the full headline The eternal optimism of spring — except in housing; the online version had the longer Spring brings signs of hope and renewal — except in the housing market).

Here’s an excerpt from the column:

“Ahhh, winter is finally over. Each year about this time, flowers push up through the soil, trees begin to bud — and the stories about a real estate recovery appear.

Am I skeptic? But of course. To understand why, let’s consider a few questions . . .

Which of course, we do, looking at shadow inventory, affordability, and valuation.

I like the way the Post put heavy emphasis on the Ned Davis Charts in the print edition:
>
click for ginormous version of print edition

>

Source:
Spring brings signs of hope and renewal — except in the housing market
Barry Ritholtz
Washington Post, April 8 2012
http://www.washingtonpost.com/barry-ritholtz-on-investing-house-prices-are-down-mortgage-rates-are-low-but-is-the-real-estate-market-ready-to-rebound/2012/04/05/gIQAnveZzS_story.html

Washington Post Sunday, April 8 2012 page G6 (PDF)

The following comes from a collection of data tidbits assembled by Morgan Housel at Mötley Fool. They used the click-bait title, 50 Amazing Numbers About Today’s Economy — but I decided to just ignore that hyperbole and check it out anyway.

Here are a few of my favorites:

50. The S&P 500 is down 3% from 2000. But a version of the index that holds all 500 companies in equal amounts (rather than skewed by market cap) is up nearly 90%.

40. In 2009, 5% of Americans accounted for 50% of all health care costs.

39. As the market was “flat” from 2000 to 2010, S&P 500 companies paid out more than $2 trillion in dividends.

29. The average vehicle on the road today is 10.8 years old — an all-time high, and two years older than in 2000.

28. Just five companies, Apple (AAPL), Microsoft (MSFT), Cisco, (CSCO) Google (GOOG), and Pfizer (PFE), now hold nearly one-quarter of all corporate cash, equal to more than a quarter-trillion dollars.

21. Netflix (NFLX) is now responsible for about one-third of all Internet bandwidth.

12. For the first time since 1949, the U.S. is now a net exporter of fuel products like gasoline and diesel.

11. The period from March 2009 to March 2012 was one of the strongest three-year market rallies in history — stronger, in fact, than the 1996-1999 bull market.

2. As the economy tanked in 2009, the top 25 hedge fund managers collectively earned $25.3 billion. On average, that works out to about $2,000 a minute for each manager.

If this sort of stuff floats your boat — and you know it does mine — then go check out the full piece. Fun stuff . . .

>

Source:
50 Amazing Numbers About Today’s Economy
Morgan Housel
Motley Fool April 5, 2012
http://www.fool.com/investing/general/2012/04/05/50-amazing-numbers-about-todays-economy-.aspx