Rebel Traders – Analysis Without The Hype

On Wednesday evening, President Obama will hold his State of the Union address. Advance talk is circulating that President Obama will emphasize a new push to create jobs in America. Short of creating a Works Projects Administration (WPA) type program (established during the Great Depression and was the nations biggest employer before World War II, providing nearly eight million jobs) there is simply not much the President can do.

He can spent more stimulus funds that create a slew of temporary projects which give the illusion that the jobs market is improving, but creating real jobs that last is something that is nearly impossible for the Government to create.

It is often said that unemployment lags the real economy. But, it is different this time. Yes, it really is different this time. How do we know it is different?

The chart below depicts how many weeks people are unemployed. At no time has the duration of unemployment been as high as it is now. The chart says it all…

The President will probably try to convince the people that his administration has already created or saved nearly 1 million or more jobs from the stimulus package last year. But if it is based on the calculations discussed in my previous post on the subject (President Changes Definition), then I would be worried about any promises of new jobs.

All through the late 70’s and the 80’s American’s were told how great it would be in a ‘new global economy’. And many others warned that America’s strength in manufacturing would suffer. And suffer it did, today the United States makes very little. Everything from steel processing, electronics, and even customer support for your American bank is in another nation.

For America, the ‘new global economy’ has been a bust. As consumers we want everything to be cheap, and in that demand for lower and lower priced products they are being manufactured in countries where their employees can be paid just a fraction of what it would cost to be made here in America. Some companies even resort to manufacturing products in third world countries where child labor is used and unsafe working conditions prevail. This is what we get when the Wal-Marts of the world take over and push family run business out, and push cheap products made in China and other countries on the consumer while paying their employees here next to nothing.

Cheap products are one thing, but what are we really sacrificing just so we can get that toy for $5.00 cheaper, or the cheap products (with some even being unsafe) from the million dollar stores across America?

As Americans, are we guilty of creating the demand for cheaper and cheaper products? Are we responsible for the decline of America’s once great dominance in the world as a manufacturer? Or has all of this been a result of a global economy that seized the United States consumer with the enticement of cheap products? All good questions and no easy answer. But I would like to see some large American corporations actually make their products here for a change.

Take Apple (AAPL) for example. Not one product they sell is made here in America that I am aware of. Because everything revolves around ‘more profits’ they have to keep finding ways to make the products cheaper so they employ cheap labor in other nations. We can’t force American companies to manufacturer their products here because they would just move the company to another nation. Perhaps the only way to restore America to a goods producing powerhouse is to boycott any company that does not make their products here at home. But even that would be nearly impossible, because not much is made here anymore so we have little choice.

American’s are held hostage by every company that sells us our televisions, sneakers, clothes, and even the toys for our children. 

Where does it end?

The latest state by state breakdown of the employment situation does not look good at all. In December, 43 states reported rising unemployment rates.

From the Bureau of Labor Statistics:

Regional and state unemployment rates were generally higher in
December. Forty-three states and the District of Columbia recorded
over-the-month unemployment rate increases, four states registered
rate decreases, and three states had no rate change, the U.S. Bureau
of Labor Statistics reported today. Over the year, jobless rates
increased in all 50 states and the District of Columbia. The national
unemployment rate was unchanged in December at 10.0 percent but was
2.6 percentage points higher than a year earlier. […]

December 2009 State Unemployment Changes

The Obama Administration Changed the Definition of “Jobs Saved” to Goose Up the Numbers…

We have always known that the government will put itself in the best possible light, no matter what the real story is. Most people are too busy or just simply don’t care for the facts. They only want the ‘headline’ and adopt the attitude of ‘if the government says it then it must be true’.

Recently the Obama administration has gone all out to claim that the Obama stimulus plan is working and has helped to save or create numerous jobs. There are some numbers being tossed around that would have the President, in his upcoming State of the Union address, announce that his administration has created or saved over 1.5 million jobs.

And just how will the government substantiate that claim? Start counting everyone who received federal stimulus money, even if the jobs were never in danger in the first place! That’s how.

On December 18th, 2009, the Obama administration changed the guidelines on how recipients of stimulus money report jobs saved or created. Originally, the guidance was that any entity that received federal funds would report the actual jobs that were created with the funding, or at least were saved from extinction. In other words, the jobs would have to be new or the existing jobs were slated for the chopping block.

But I guess that was not showing enough growth, so on December 18th the guidance was quietly changed (so the public does not know about it) to now count jobs as being saved, even if they were never in jeopardy.

The extremes the government will take to make themselves look good. President Obama, will you announce in the State of the Union address that your figures count jobs that were never in jeopardy? somehow I feel you will conveniently skip that part.

See Rep. Darrell Issa’s letter to the chairman of the Recovery Act Transparency Board voicing his concern on this matter:

Darrell Issa CA January 8 2010

December employment report:

Nonfarm employment data reveals a loss of 85,000 jobs, the unemployment rate remains unchanged at 10.0% (U-3 data) with the broader measure (U-6) of the employment situation moving back up to 17.3%.

Those unemployed for 27 weeks and over moved up to 6.1 million. That translates to 4 of every 10 unemployed people have been jobless for 27 weeks or longer.

Temporary work showed growth in December of 47,000, however it is important to note that temporary help hiring in December is expected and much of that temporary help is in the retail sectors. This reinforces my statement last week of watching for large declines in the subsequent months as the temporary help is let go.

The jobs data is bad enough, but what is still extremely discouraging is that the average hourly earnings is still flat, coming in at a paltry 0.2 percent rise.

My own forecast remains unchanged for the unemployment rate to reach a minimum of 10.5% by mid 2010.

The initial reaction in the market was a dramatic drop in the futures (S&P), see insert image of futures at time of employment report.Also shown is a chart depicting important levels to watch today on the S&P E-mini’s (/ES).

Today I received the following bit of news off the wires…

Thursday, January 07, 2010 7:19:57 PM
(US) According to a Sr. Obama Administration Official, Obama will make a statement on the economy at 2:40 PM EST

Well this means one of two things. The first is that the jobs report on Friday morning will be ‘better than expected’ and he will want to gloat how much the administration is doing. Or, the jobs report will not be all that great, and he will want to gloat how much the administration is doing.

Analysts expectations for Friday’s employment data is a mind boggling range of anywhere from -270,000 to +300,000, with the consensus for a flat (zero net gain) jobs data report. I encourage you to read the excellent article put together by Mish Shedlock on the massive 43% jump in emergency unemployment claims in just the past month. Mish, along with Tyler at Zero Hedge have put together some extremely interesting data concerning unemployment claims, and it does not paint a pretty picture.

Action in the market today was once again muted with the major indices ending mixed. Boeing (BA) and Bank of America (BAC) had parabolic type upward moves today which kept the Dow Industrial average in the green. Looking at these two charts these moves appear very unstable as each has penetrated the upper Bollinger band.

More after the jobs report in the morning.

As is many other states across the country. A topic I have spoken of on a number of occasions is the declining tax revenues that will continue to suffer and will lead to the next wave of unemployment (spoiler alert – this is a topic in my 2010 predictions).

Consider the following from the Pittsburg Times

Pennsylvania state tax revenue fell in comparison to last year, largely due to its residents earning and spending less, according to third-quarter data released Tuesday by the U.S. Census Bureau.

The Quarterly Summary of State and Local Tax Revenue reported Pennsylvania had third-quarter tax revenue of $6.64 billion, down 6 percent from $7.09 billion in the third quarter of 2008. Year-to-date, Pennsylvania tax revenue totaled $23.08 billion in 2009, down 9 percent from $25.24 billion in 2008.

A vast majority of the drop can be attributed to Pennsylvania residents making less money and, in turn, spending less. The two largest classifications of taxes — general sales and gross receipts, (which declined 7 percent for the quarter and year-over-year), and individual income tax revenue, (which declined 9 percent from the quarter and 14 percent year-over-year), account for three-quarters of the drop in state tax revenue. The drop in general sales and gross receipts for the first three quarters of the year totaled $475 million, and the drop in individual income tax revenue totaled $1.15 billion.

Corporate net income tax revenue was down 11 percent in the quarter and 22 percent year-over-year. This tax brought in about $347 million in the third quarter of 2009, down from $390 million in the prior year quarter. Year-to-date, the tax brought in $1.33 billion in 2009 compared to $1.7 billion in 2008.

The category of corporations in general brought in about $69.4 million in the third quarter, down 58 percent from $164 million in the prior year quarter. For the year, this category brought in $433 million through three quarters of 2009, down 33 percent from the $646 million the tax delivered in the first three quarters of 2008. [...]

[...]Other than revenue from licenses, few categories brought in more tax revenue in 2009 than in 2008. One exception was alcoholic beverage tax revenue, which was up 12 percent in the quarter and 9 percent year-over-year. [...]

Watch for 2010 to include more layoffs from local, county, and state government agencies and departments. There will be one of two ways to correct the significant decline in tax revenues going forward. Increase taxes or layoff more workers. Either one is a blow to the economy.

You see, the green shoots that so many were calling as signs of sustainable growth did not turn out to be perennials, instead they were just short term annuals, and many of them have already died off.

[...]If numbers are correct, N.J. job losses in November made up 60% of U.S. rate [...]

[...] The release of November’s payroll employment by the New Jersey Department of Labor and Workforce Development continues the odyssey of strange monthly numbers that have accompanied the recession. New Jersey lost 10,900 private-sector jobs in November, which in itself is not unusual — during the 22-month recession (January 2008 to November 2009), the state has lost, on average, 8,232 private-sector jobs per month. Thus, New Jersey’s November’s loss, while higher than the average recessionary monthly loss, is not significantly out of line with it.

What is strange is that the United States as a whole lost just 18,000 private-sector jobs in November. If both the nation and state numbers are to be believed, New Jersey by itself accounted for more than three-fifths (60.6 percent, or 10,900 out of 18,000) of the nation’s total November private-sector job loss. That appears to be unreasonable. So, as we have suggested before, caution must be used in analyzing monthly numbers, particularly since annual benchmark revisions, which will be released in the first quarter of 2010, promise to alter them substantially. [...] (Source: NJ Biz)

I’ll take the bet that the New Jersey data is more accurate than the U.S. data.

One week ago I said to mark your calendar for on November 6th, 2009 would be the day when your local news reports that the nations unemployment rate reached 10%. Unfortunately I was correct with this economic analysis. I say unfortunately because the statistics reveal that many Americans are facing extremely hard times and today’s report shows that those facing hardship rose yet again.

The top line number says that unemployment now stands at 10.2% (U-3 measurement), but the even worse bit of news was the data under the hood. The more accurate measurement of unemployment (U-6) reveals that the distressed labor situation is now 17.5%. That was another prediction I made that unfortunately came true.

The U-6 data is defined as follows:

Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

The full report is contained here:

Unemployment Data Released November 6 2009

With the more realistic data statistic revealing that 17.5% of Americans can’t find work or who have fallen off the rolls is very troubling. It is often said that unemployment is a lagging indicator. If we were in a cyclical recession I would agree. However this is not a ‘normal’ cyclical recession. This is a recession that grew out of the credit market demise that subsequently impacted every aspect of business, labor markets, and most of all the ability for people to spend money.

It is extremely important to differentiate the type of recession that the Unites States, and a large number of other nations is currently experiencing. A normal cyclical recession is merely an over production of goods and/or services which gets ahead of actual demand. When inventories and production exceed demand then businesses must begin to cut back. That includes cutting production, reducing the work force, and cutting costs. One thing leads to another and it quickly becomes a downward spiral. When demand reaches an equilibrium with output then a steady revenue flow is established once again and soon growth follows until the next cycle.

Cyclical recessions are actually a healthy way of re-balancing the system, to reduce the ‘bubbles’ in the system. But what we have on our hands now is a recession that resulted in runaway credit. In this case it was not a result of over production or too much inventory, it was a runaway production of credit. That runaway credit; along with Wall Street firms and banks capitalizing on that very same credit found every way possible to take that credit and leverage it to extreme levels that once things fell apart it was a monumental disaster that destroyed the foundation of the entire economy.

The parents of this recession are Mr. Wall Street and Mrs. Credit. And the marriage of these two was presided over by the Federal Government who allowed them to breed financial time bombs. Those time bombs were and still are made up of exotic mortgage backed securities, derivatives, and other types of swaps which all sought to take advantage of the runaway credit that went parabolic.

Never in the history of the United States has credit been such an influence in every aspect of our lives, the function of business, and the function of the nation as well. Credit; when kept in check is one thing, but to have allowed credit to grow (via over leveraging) it was only a matter of time before the whole thing blew up, and indeed that is what has happened.

In a normal cyclical recession eventually the demand/supply ratio gets back into alignment. That is the same thing that must happen now but only substantially more so. There is one huge problem however, the Government and banks are refusing to suffer the consequences and restore a healthy balance. Instead the banks are being flooded with liquidity in order for them to make even more credit available. The Government is enacting every possible stimulus measure it can to goose more people to take on more credit to keep the terminally ill credit system alive just one more day.

In 2008 the Financial Accounting Standards Board (FASB) was brought before Congress and they were persuaded to change accounting rules that then allowed the financial institutions and banks the ability to hide the losses in a maze of number games. Everything is being done to ‘prevent’ the natural restoration of the system. The administration is attempting to convince the American people that they are able to report a growing GDP.  But that growth is on the backs of bailouts, stimulus spending to goose the data, and by the changes in accounting rules to name just a very few. All the while the real issue is not being addressed and only festers more and more under the disguise of a shinny new suit, lipstick, and new shoes. Remove that shinny apparel and we still have an economy that is on life support.

One of two things will happen. One is that the system will be allowed to finally balance itself which means the credit system will be allowed to return to healthy levels once again. Doing so will be extremely painful for the economy as it will mean losses will be forced out. The other thing that would happen is the result if the first one does not occur. And that second option will be far worse than anything we have seen yet as the credit system continues to expand by artificial means. The end result of such action is very likely to put the United States in a situation where its own reliance on credit can no longer be extended. The nation will reach ‘end game’.

The nation is at a crossroad, either the Government takes the proper course to balance the system, or it will head down a dead end road. Right now it appears that the Government is revving the engine and is about to head towards the dead end at full speed.

JUNE CHANGE IN NONFARM PAYROLLS:  -467,000

JUNE UNEMPLOYMENT RATE:  9.5%

INITIAL JOBLESS CLAIMS: 614,000

CONTINUING CLAIMS: 6,702,000

THE EMPLOYMENT SITUATION: JUNE 2009

Nonfarm payroll employment continued to decline in June (-467,000),

and the unemployment rate was little changed at 9.5 percent, the Bureau

of Labor Statistics of the U.S. Department of Labor reported today.

Job losses were widespread across the major industry sectors, with

large declines occurring in manufacturing, professional and business

services, and construction.

Unemployment (Household Survey Data)

The number of unemployed persons (14.7 million) and the unemployment

rate (9.5 percent) were little changed in June. Since the start of the

recession in December 2007, the number of unemployed persons has increas-

ed by 7.2 million, and the unemployment rate has risen by 4.6 percentage

points.

In June, unemployment rates for the major worker groups–adult men

(10.0 percent), adult women (7.6 percent), teenagers (24.0 percent),

whites (8.7 percent), blacks (14.7 percent), and Hispanics (12.2 per-

cent)–showed little change. The unemployment rate for Asians was

8.2 percent, not seasonally adjusted.

Among the unemployed, the number of job losers and persons who com-

pleted temporary jobs (9.6 million) was little changed in June after

increasing by an average of 615,000 per month during the first 5 months

of this year.

The number of long-term unemployed (those jobless for 27 weeks or

more) increased by 433,000 over the month to 4.4 million. In June, 3

in 10 unemployed persons were jobless for 27 weeks or more.