I’ll have a long-term piece next week, but I wanted to kick off the New Year with some random thoughts.  

The Dow is up 165 points as I pen this on the first day of the year.  Traders came in determined to get the market up and going early after a very slow December.  Sentiment and consensus readings are all wildly bullish for 2010.  But, don’t place much faith in what happens the first day of the year.  On January 2, 2009, the Dow closed higher by 259 points.  Ten days later the Dow was down by 561 points.  Being up big the first day of the year is just common.  Traders always seem excited at the start of a new year.  

After much perusing of periodicals, economic forecasts, and market newsletters, as well as watching annoying business television shows, there are three big themes that seem to be prevalent in 2010.  1.  Stocks will rise globally, foreign stock markets will outpace the U.S., and China will surge.  This is of course conventional wisdom at the beginning of every year.  2.  The dollar will continue to decline in 2010.  3. Longer-term interest rates will rise sharply.    

I’ve got news for those consensus thinkers.  If they are correct about either #2 or #3, they will be wrong on #1.  

The simple fact is that this economy will remain in the deleveraging mode for years to come.  We will have a series of hopefully minor recessions followed by minor recoveries.  We’re in the first minor recovery right now.  This one will fade soon.  The lack of job growth and the secular conversion of U.S. consumers from spenders to savers simply eliminate the likelihood of a rousing and long-term recovery.  

I also think we’re going to see a surprisingly grim second half of the year for the housing market.  Bernanke might stretch this out by adding to mortgage purchases.  Without that, mortgage rates alone will kill housing.  But banks are going to have to start selling the homes they have in foreclosure.  The pipeline of homes is expanding rapidly.  The banks’ strategies of “pretend and extend” can only go on so long.  

The short version is that I don’t see any big trends emerging this year.  But after a decade in which we saw two massive stock rallies and the biggest house price surge of all time all followed by collapses, I’m not sure a quiet decade would be such a bad thing.  I think we could all use a break from the roller coaster we’ve been on.  How about a ride on the tea cups instead?

For the past few months, stock traders have lived off of the weak dollar.  As long as the dollar was weak, that’s all they needed for prices to rise.  The theory was this would continue to pump money into higher risk trades around the globe.  The follow to this theory is that a rising dollar would be very bad for global risks trades.  

Last week the dollar started to rally, and stock pundits are now scrambling to spin the story to a positive one.  They seem to be having some success today.  The dollar is rallying, after falling at first, yet stocks are flying.  Some of this is merely because stock traders feel they are “owed” the traditional Santa Claus rally.  But pundits are now trying to spin the dollar’s rally as positive as a sure sign of recovery here.  Come on guys, you can’t have it both ways.  

The fact is that those global leverage plays are in danger.  One estimate is that there might be as much as $1.5 to $2.0 trillion in leveraged plays globally that rely at least partially on a weak dollar.  Just focusing on the euro, which is now 1.43 roughly, the danger zone probably is a dollar rally that carries it to below 1.40.  

It’s clear that the dollar’s rally has already had an impact on gold, which is now down $130 in less than two weeks.  But the big risk is those leveraged trades, especially the ones in which the assets were emerging market and high-yield debt instruments.  Be afraid, be very afraid. 

I commented on the WesCorp web site extensively on the Bernanke re-appointment and his ”honor” as  Time Magazine’s Person of the Year.  I think you know how I feel about Ben’s performance.  He’s sincere in what he believes, but he is playing academic what-if games with the real world’s global economy.  I think a year from now, Time Magazine might be running a cover that says “What Were We Thinking!”

The monthly job reports over the past year have been uniformly bad.  But, Wall Street spin-meisters were very good at turning bad news into good.  I’ve often been guilty of raining on the Wall Street parade by pointing out the reality of the numbers.  Finally, at long last, I am pleased to able to report on a jobs report that was truly good in almost every way.  Nonfarm Payrolls fell by only 11k vs. the expected -125k, and the Unemployment Rate fell to 10.0% from 10.2%.  There were also upward revisions of a +159k to prior months. The workweek, which had been sitting at a post WWII low and is a good leading indicator for jobs, actually rose by a full .2%.  I’m not done yet with good news. Hiring of temporary workers also rose by a strong 52,000.  This too is a good leading indicator for jobs.  While most of this hiring might be related to seasonal demand, it does still mean that businesses are lean enough to actually need new workers.  If even a small portion of the increase in activity is maintained, this could indicate that actual full-time hiring is ahead.    

Most of you have seen my chart this year my Nonfarm Payroll projections for 2009 in which I had the month of December actually turning slightly positive.  I didn’t feel very good about that forecast last month, but this report could be leading us there.  We won’t know that until January 8.  But the fact is this was the best payroll report since December 2007.  That’s a long stretch of bad news.  I’m glad to see the string broken.

After the first really good report in almost two years, I hate to mention anything negative, but it wasn’t all roses.  First, there were still sizeable losses in construction and manufacturing jobs. The size of losses shrank a bit from the prior months but was not insignificant.  Second, there are still questions about how much the seasonal factors might have made the numbers look better than they really were.  Third, the Bureau of Labor Statistics also said the pool of available workers shrank yet again.  As you recall, we need to see the pool grow because that is a sign that discouraged workers believe there jobs out there.  I’m sure that there might be other nits to pick once economists get a chance to dig into the details, but there is no denying this was at least one pretty good report.  In the first paragraph I characterized the jobs numbers as good in almost every way.   As long as there is even a 1,000 payroll loss and the Unemployment Rate is double digit, the job market will remain almost there.

Perhaps today was nothing more than a group of markets in the hands of a very few junior traders and none of the movements were related.  We’ll know better next week.  But, we did see something of possible note.  Until a few hours ago, the stock market had been responding positively to every tick lower in the dollar. This has been going on for weeks now.  The dollar was weak last night, seemed to be stabilizing this morning, but absolutely plunged in the last few hours.  The dollar broke down to new one-year lows against most major currencies. 

 You would have expected a surge in stocks, but the Dow is up only 30 points with 30 minutes of trading left in the day.  I’ve said in the past that, at some point in time, the weak dollar will cease being a positive for stocks and begin looking like a threat.  The threat would come from foreign sellers of U.S. assets given once their dollar losses threaten to overcome gains from U.S. stocks.  Given the size of today’s move in the dollar (1.496 to 1.5142 vs. the euro), we may be nearing that inflexion point.  If it had been business as usual, stocks would have surged to triple digit gains.  I’m probably jumping the gun here, but it’s something to watch for next week.  Remember the 1987 lesson?  The initial trigger for the crash was foreign equity selling because of dollar losses.

The home tax credit bill extension was signed into law on November 6, but homebuilders must not have been too confident of its passing in October because they slashed housing starts back to the lowest level since April.  The annualized pace is now 529 thousand.  Just for a point of reference, the peak pace was 2.2 million in 2006, and the ten-year average is 1.5 million.  But builders might also be realizing how much demand was pulled forward in July and August.  Back in those months, it appeared certain that the home tax credit would expire and a November 30 closing date was an absolute.  I think this pulled a lot of future demand forward.  The extension of the home tax credit will continue to help, but I think this will no longer be that big of a positive.  I think builders know this also.  

Speaking of gifts, that home tax credit extension also included yet another gift for homebuilders.  This had to do with granting them the ability to file for tax refunds from prior years based on this year’s losses.  The bill didn’t say homebuilders exclusively, but the way the bill was designed, the intent was clear.  The tab for this one could be $45 billion.  

Just think about the money poured into trying to save one sliver of our economy.  Then think about the money poured into the banking system that nearly died of self-inflicted wounds.  Very little in the way of real money has found its way into the broader economy. Need evidence of that claim?  How about a 10.2% Unemployment Rate.  I think this sums it up best – Never have so many (tax payers) done so much (trillions of dollars) for so few (builders and bankers).  

I posted the paragraphs below on the WesCorp web site this morning, but I thought it was worth repeating here: 

I am beginning to believe that the Federal Reserve Bank of the United States of America is on a mission to drive the dollar into the dirt.  By doing so, they must believe they can inflate our way out of our debt debacle.  They apparently also believe that asset-inflation will actually help the process along.  The Fed likely believes they can ultimately defeat inflation when it suits them.  How else can you explain recent comments by Ben Bernanke, Janet Yellen, and fresh comments by St. Louis Fed President Bullard?  Bullard is somewhat a new kid on the block (April ‘08) and will be a voting member for the first time next year.  He has just released text of a presentation in which he suggests the Fed will not raise rates until 2012!  Yes. A Fed official on record telling every global speculator to sell dollars, leverage up and go for the gold – literally.  This irresponsible rhetoric by the Fed is becoming suspiciously purposeful.  Back in 2003, Ben Bernanke acquired the moniker “helicopter Ben” because he made comments that he thought the Fed could be justify dumping dollars from helicopters if it prevented a depression. I guess we didn’t take him seriously enough.  

In Bullard’s defense, he did follow that 2012 comment up with a qualifier.  He said that the risk of keeping rates too low too long would weigh heavily on the Fed.  Huh?  So, perhaps in context the meaning wasn’t the same.  But the 2012 headline will remain in the minds of traders.   

Perhaps our best hope of preventing the Fed from driving us off a cliff is that even the greedy markets will get worried about killing the golden goose by creating an abundance of bubbles.

In the immortal words of Rep. Joe Wilson, I say to Ben Bernanke “You Lie!”

Ben Bernanke is speaking to the NY Economic Club today and the text has been released.  Most of it is strictly boilerplate economic stuff.  The economy remains weak but has begun a rebound.  Unemployment is too high.  There is more work to do on the economy.  The financial system has improved but challenges remain.  blah blah blah.  He did reference the dollar though, which was somewhat surprising.  Fed Chairmen typically stay away from that in speeches.  What he said was pretty lame though — “Fed will watch the dollar closely” and  ”Fed policy will ensure dollar stays strong.”  The last statement certainly is a lie.  The Fed had a chance to demonstrate that with a subtle wording change in the last FOMC meeting, and they did nothing.  Clearly the Fed is perfectly happy to see dangerous asset bubbles inflate all around the globe.   They think we’ll safely inflate our way out of the latest debacle. They are wrong.

Very briefly after the headline that Bernanke was, in fact, aware of the existence of the dollar, the dollar rallied and stocks sold off slightly.  But that has already reversed as it has become clear that Bernanke’s emphasis is still on “low rates for an extended period of time.”  This is clearly his mantra now.  He chose to repeat that for emphasis.

I had my doubts about Bernanke when he took over.  But I thought he couldn’t do worse than Greenspan and might be able to improve.  I was wrong. He is heading down that same disastrous path even after seeing the wreckage that Greenspan wrought with the same policies.  Bernanke is digging a new hole, right beside and possible even bigger than the one Greenspan left.

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. 

The FOMC did exactly as Wall Street instructed them and left “low rates for an extended period of time” unchanged.  The FOMC has just signaled to the markets that they are perfectly OK with ramping up global leverage plays and allowing the dollar to fall.  As much as it pains me to say it, I fear that this Fed is going to allow devaluing the dollar in order to inflate our way out of the debt trap.  Bernanke and Co. would deny this, but it’s the only thing I can think of now to explain their lack of action, knowing they are risking another debacle of bubble implosions down the road.  Bernanke has given global speculators the green light to put the world’s financial system back at risk.

Speaking of games . . .  It’s widely known that Wells Fargo, thanks to their takeover of Wachovia, has more than $100 billion in Option ARMs on their balance sheet — which are facing resets requiring principal payments as well.  Given the horrendous equity positions of the borrowers, walk away risk is very high. But Wells Fargo has announced they will NOT require borrowers to meet the contract.  Wells is changing mortgages to interest only for another six to ten years.  This is a risky bet and a ploy to kick the can down the road.  We just simply cannot face the music.

It’s Warren Buffett to the rescue!  Markets around the globe were getting crushed last night and early this morning.  The dollar was surging and there was bad news on some big banks. UBS said losses were growing, and RBS and Lloyd’s had to go back for another helping of government support.  Most markets were down between 2-3%, and that looked like where the U.S. would open.

Buffett to the rescue

Enter Warren Buffett.  He announced that Berkshire Hathaway would buy the 77% of Burlington Northern Railroad it doesn’t already own and pay a big premium.  The total cash will be $34 billion plus the assumption of $10 billion in debt.  This is Buffett’s biggest-ever single play.  He termed it an “all-in” bet on the U.S. economy.  Few people will argue against Buffett, though even he would admit his share of mistakes.  His biggest sin has been that he has often been early on making moves.  But, he has rarely been wrong over the long-term. I’m hoping the early-but-not-wrong pattern holds.

The irony of this whole story is that if Warren is correct and the U.S. economy rebounds soon, rates will go up.  If rates go up, the dollar will follow.  If the dollar starts moving higher, the global carry trades will implode.  If global carry trades are forced to be unwound, the stock market will tumble.  Implosion of global carry trades means that global speculators will have to sell currencies and buy dollars to repay borrowing in dollars they took out here at near 0%.  For the past couple of months I’ve written about the danger of asset bubbles.   Frankly, I would like to think this is starting now.  I would rather see these carry trades forced to unwind now as opposed to later — when the damage could be much greater.

So, you can thank Warren for saving the market today if you wish.  But you should really thank stock traders for being so dumb they don’t even understand what Warren’s actions really mean.

For the glass half-full crowd, the Dow closed down 250 points, which was at least better than the -286 points level where the Dow stood with about an hour to go before the close.  Continuing that theme, on a month-over-month basis the Dow actually escaped the dreaded month of October by remaining unchanged on the month with a tiny 5 point loss.

For the glass half-empty crowd, the close on the day wiped out all of yesterday’s rebound and then some.  The S&P closed at 1036, which was below the 50-day moving average and below a key support level of 1042.  The Dow closed even on the month but down 3.8% from the high during the month.  The S&P and NADAQ both closed lower on the month and down over 6% from their highs of the month.

So what happened today?  Nothing really.  In the post below I talked about a game being played by big speculators with big computers.  Yesterday the programs all said buy and today sell.  The only news today was that the employment component of the Chicago ISM index fell, but that certainly wasn’t the reason for the sell-off today — any more than the GDP report was the reason the markets rose yesterday.

But before you get totally comfortable expecting the stock market to continue to sell off, remember that just yesterday traders were certain that stocks would continue to rally. What happens one day has no bearing on what might happen the next.

Looking ahead to next week and the FOMC announcement, the stakes are higher than they have been for months when it comes to the wording of the statement release.  Should the Fed change the wording of the statement to indicate that some sort of plan to withdraw monetary stimulus is under consideration, then that would send a strong message to the currency markets.  The dollar should rally sharply, and that would put immediate downward pressure on stocks.  Conversely, no indication of a shift away from “low rates for an extended period of time” policy would be an all clear signal for traders to resume dollar-bashing and stock buying.

Of course as soon as the FOMC meeting is out of the way, we’ll be staring down the barrel of the next Nonfarm Payroll number.  Should be a fun week.