Back in the March/April period I wrote that I thought the worst was over, temporarily at least, for the stock market. In the April 1 post I even suggested that the Dow could get back to 10,000 before the rally was over. But realistically, I didn’t really think stocks would get that high. I also thought that as the year progressed, the risk of a setback would grow. I thought by September or October at the latest, the stock market would be in another downdraft. I WAS WRONG WRONG WRONG.
What was my big mistake? I expected the markets to be rational. I’ve been around too long for that sort of thinking. Once a certain psychology takes over, fundamentals cease to exist. That’s certainly the atmosphere we’re in, and I’m not about to predict when and from what level the rally will stall out.
From a fundamental perspective, I was right. I was most worried about jobs and financial institutions. In the most fundamental and long-term sense of all, job growth remains a significant problem. Bank problems are absolutely still with us. Banks are still failing at a near-record pace, but the FDIC has hit on efficient and quiet ways for these to play out. Big bank problem loans are growing, but the banks, with full cooperation with regulators, are disguising the problems. This is now a clear strategy. As long as the banks are allowed to in effect kick the can down the road, they can continue to earn huge spreads. The hope is that eventually those big earnings will build capital enough to cover the eventual losses.
The bottom line of this is that I was wrong. But am I ready to jump on board. Come on. You know me better than that. I can just not get past how horrendous our employment situation is. I can also not get over the fact of how much of this rally is based on a weak dollar. Eventually a weak dollar simply has to start working against us. But, I certainly won’t deny that the market is more likely to trade higher than lower. I would like to think that traders would wake up to reality someday, but that no longer seems likely. As I’ve written in the last few posts, this isn’t your father’s stock market. This is a different ballgame with different rules. Rules that even the Fed seems complicit in creating.
But being wrong on the market won’t prevent me from railing at it. I’ve copied in the space below a recap of the latest jobs number.
A Very Scary Christmas
For at least the past twenty-five years, economists and analysts of all sorts have wrung their hands as the Christmas season approaches. Will the consumer spend given the headwinds of the’87 stock crash, the ’98 Asian meltdown, ’00 tech bubble burst, September 11, Hurricane Katrina, etc.? The answer in all cases was yes, yes, yes. For more than two decades you never really had to worry about the spending habits of Americans. Have card will travel.
The dependable American consumer always came through – until 2008. Although the immediate financial meltdown crisis was abating during Christmas ‘08, longer-term concerns had not. The monthly Nonfarm Payroll headlines had gone from roughly -75k per month through August to a huge -681k for the November data. The last number was the one that hit the newspaper headlines on December 6 – not exactly the best timing. While credit availability and other problems were factors as well, the poor sales at Christmas contributed greatly accelerated job cuts by businesses that carried well into the first part of 2009.
The stock market looks better this year. Certainly the Wall Street buzz is ridiculously positive. But, are consumers really better off, and will those old spending spirits return? The results of sales this Christmas season are almost as critical as it turned out that last year’s were. The latest Unemployment Report might help us determine that. We’ll also take a look at mortgage rates in 2010 when Santa Claus (the Fed) is scheduled to leave town.
More Time to Shop!
The good news is you’ll have more time to do your Christmas shopping this year. The bad news is it’s because you’re fired. The latest Unemployment Report was grim. Nonfarm Payrolls fell by 190k. That is worse than expected but not significantly worse than the -175k economists foresaw. The BLS also revised lower by 91k the job losses for August and September. This could be construed as good news, but that’s just spin. Jobs are being lost. A few economists are touting the fact that the three-month moving average of job losses is now down to 185k. One thousand is too many in an economy that needs to be generating growth of at least 150k to 200k per month. The only modestly good news was one of the leading indicators in the report, that of temporary workers. Temporary workers grew by 33k, the first increase in almost two years. Some of that might have been additions ahead of the Christmas season, but let’s take that at face value as good news.
The rest of the report was all bad. The headlines in newspapers over the weekend screamed “Unemployment Rate Soars to 10.2% – Worst in 26 Years!” Of course the next 20 pages of the print editions will be ads to buy early for Christmas. But, that headline could have a negative psychological impact heading into the season. The worst news in the 10.2% was that the rise from 9.8% to 10.2% came despite the fact the BLS lowered the available labor pool. As you know, a rising unemployment rate is not a bad sign if it is rising because the labor pool is increasing. That can be a sign of optimism that jobs will be available. But, the BLS added even more workers to the discouraged workers category and reduced the size of the pool. More bad news was in the other leading indicator category, the workweek. The workweek was expected to rise by .1% from the post-WWII low of 33. Instead, it remained at 33.0. The last piece of bad news came from the household survey. The “establishment” survey is the one from which the Nonfarm Payroll number is derived. This covers larger businesses. The household survey comes from surveys of individual households. In that survey, 589k jobs were lost last month, not 190k. And over the past three months, 1.8 million jobs were destroyed, not the 555k as reported in the Nonfarm Payroll number. The true unemployment rate (unemployed+discouraged workers+under-employed) stands at 17.5%.
As many of you know, my theory for a job market turnaround was based on the highly complex theory that businesses would eventually run out of people to fire. Based on this latest data, they’re still find bodies. The leading indicators I watch most closely are not turning around as they should have long before this time. Perhaps most disturbing is that we still have people leaving the work force in droves. Maybe the next few months will see a miraculous turnaround, but just being “less bad” isn’t going to cut it anymore. Now taking what we have learned in the latest data, let’s consider what this means going into the Christmas season.
If you focus on the just the Nonfarm Payroll number, you might think that at least -190k sounds better than -681k headline of last December. No argument there. But since December 2008, 4,226,000 more people are unemployed than during the Christmas season last year. Add to that number roughly another 2,000,000 people that are working part-time that were working full-time last year. How reasonable is it to expect the Christmas sales will be robust? About as reasonable to expect that you can squeeze blood from a stone.
But let’s try to look as some positives, as there are a few mitigating factors. Even with the horrendous unemployment situation, over 80% of the working population still has jobs. Some of those consumers might have cut back drastically last year and held off buying during this past year due to fears of job losses that weren’t realized. With economic headlines at least appearing more positive and the stock market in far better shape, you could definitely see how those still employed could ramp up spending. But this is a hope not supported by any relevant data or surveys. Preliminary surveys are saying that consumers are expected to spend 1% to 2% more this year. Considering the number of newly unemployed this year that will spend much less, those estimates of Christmas sales are implying that the currently employed will ramp up spending far more than 1% to 2% to make up for those who have lost jobs. But with this latest 10.2% unemployment headline number staring at them and with the next one likely worse, can we really expect good Christmas sales.
Certainly the Wall Street spin will be positive. The year-over-year comparisons we’ll see from stores will be good. Comparing sales to last year’s sales sets a low bar to clear. The other consideration is that existing retailers will have gained market share given the number of retailers that closed up shop in 2009. Think about Best Buy’s sales this year in the context of not competing with Circuit City. How about a retailer like Kohl’s without a Mervyns down the block? Certainly there will be some feel-good stories coming out of the numbers. But, once you total up all the sales from fewer retailers, what will the gross sales be? That will be what determines how businesses will approach 2010 staffing levels.
If sales are strong enough to deplete inventories plus encourage managers that the economy is truly rebounding, we could see producers add jobs next year. Conversely, a weak season could easily trigger another retrenchment by businesses. In the three months ahead of December 2008, businesses cut payrolls by 1.1 million. In December alone, after realizing how much the recession was impacting activity, payrolls were cut by 681k. In the first three months of 2009, post Christmas 2008, payrolls were slashed by 2.1 million workers. Of course these jobs weren’t all retail or even retail related. But businesses generally were afraid of the drastic decline in the level of activity they had seen and were seeing. While Wall Street is still yammering about an inventory recovery, the consumer counts for 70% of the economy. There will be no sustainable recovery without the consumer.
Over my many years of being involved in the markets I’ve always thought the obsession over Christmas sales was unwarranted, and I’ve been right. But, we haven’t been in a true job-based recession in the last several decades either. Comparing this recession to any other post WWII recession is not valid. The consumer always seemed to be able to weather whatever storm was besetting the markets and the economy, but they are the storm this time.
