Well, the markets liked it.
NFP’s soft number 138k number for April — and the 36,000
downward revisions for the prior two months — heartened equity and bond
holders alike, as both asset classes rallied.
Focusing on the hope the Fed might stop sooner — rather
than why they would — is a short sighted habit of wishful thinking by
investors.
Quite bluntly, we simply do not see the Goldilocks scenario
— strong GDP, modest employment improvement, well contained inflation — as
supported by the data. Our read of the
strong Q1 GDP and Durable Goods data was a result of a horrific Q4 2005,
following the disruption of Katrina and Rita. Rather than taking the hot Q1 numbers
as proof of strength, we interpret this as little more than Q4 activity getting
pushed forward. Concurrent with that, we read the weak hiring data as a sign
that higher fuel prices and increasing interest rates are beginning to take a
toll. Further, it appears we are on the verge of feeling the impact of the
cooling housing market.
Additionally, for those who wish to obsess over what the
Fed’s next move is, consider the underlying data as more mixed than benign. Average hourly earnings up 3.8%
(annually), hours worked rose incrementally. We know the Fed tracks wage push
and labor utilization closely. Barring
proof of a significant slowdown, we expect at least 2 more increases from the
FOMC.
The 0.4% gain in hours worked is in line with where it has been for the last couple of years. But the 0.8% gain in average weekly earnings was the largely increase since 1996. Wages and salaries are accelerating significantly.
Unit labor costs in the first quarter were up 1.4% year over year. One data point cannot be used to draw trend conclusions.
Futures are pricing in a 30% chance of a hike in June, down from 48% prior to the data.
Lots of money betting on the one and done but its still the an extra meeting away. Once the May meeting is over and June becomes the front month it will be interesting to see where the bets are being laid.
the massive FED easing since 2001 has created either
i) little to no inflation
ii) very visible and large inflation
Looking at commodities and housing prices, it is obvious that ii) has happened. But for some reason, the market is totally acting like number i) took place. So, in my view the market has totally set itself up for a major correction to bring it inline with reality.
I’m waiting for the revisions.
I have to wonder when or if the US economy starts running out of people with the right skills to add to payrolls. The falling USD is going to make outsourcing less attractive. Exporters and import replacement businesses might see increased demand, but where will the supply of skilled workers come from?
Good point. There may be plenty of skilled workers out there, but many would never work again for a large corporation. If they did take such a job, many would never trust management, or the corporation, and would use the company as much as possible on the way to somewhere else. The focus on short-term results has poisoned the attitude of the US workforce.
>>>I have to wonder when or if the US economy starts running out of people with the right skills to add to payrolls. The falling USD is going to make outsourcing less attractive. Exporters and import replacement businesses might see increased demand, but where will the supply of skilled workers come from?<<< Boy, you are pessimistic. Both college applications and graduating students are at their highs. In addition, as BR has noted the older generation is continuing to work more years. I don't see where you get that there is a lack of supply of skilled workers.
>>>Good point. There may be plenty of skilled workers out there, but many would never work again for a large corporation. If they did take such a job, many would never trust management, or the corporation, and would use the company as much as possible on the way to somewhere else. The focus on short-term results has poisoned the attitude of the US workforce. <<< Why do people find it necessary to speak for the others? IOW, why do you think many never trust management and have a poisoned attitude? Where do you draw such conclusions that it is the view of others except that it is your own personal view.
>>>the massive FED easing since 2001 has created either
i) little to no inflation
ii) very visible and large inflation<<< Or moderate inflation Or inflation in some areas and not others Or speculation in markets including housing which has led to increased prices that will recede when speculation decreases as liquidity dries up. Or any combination there-of but its nice to live in a black and white world of such facile choices isn't it? >>>Looking at commodities and housing prices, it is obvious that ii) has happened.<<< Food has not gone up at much more than normal levels. I know my weekly costs for Gold and Cooper have nearly tripled from zero to zero. Monthly payments on mortgages were greatly reduced by cheap interest contributing nothing to people's out of pocket cash flow costs and Rents have gone up at nothing more than the standard increases and as interest goes back up houses won't be able to sell for the same prices. Housing "inflation" driven by cheap interest and speculation will be reversed when both of the drivers are removed. It may be a period of stagnation to allow the economy to catch up to the current prices but the cost of housing is not a major driver of inflation. People paying rent are paying no more and people with mortgages are mostly not making any bigger payments. People on the ARM path are facing difficulties in a couple years but that will only tend to decrease housing as those buyers default. so yes, you make a great point. Inflation is rampant and we will soon be buying bread with money in wheel barrows.
You’ve been saying for weeks that the market has it all wrong. And you don’t agree with how the jobs report today was looked upon by the market either. Again the market doesn’t agree with you. Dow up 115. I’ve been very conservative this year because I usually agree with your advice. But it sure doesn’t look like your call of Dow 6000 will happen anytime soon. Are you still sticking to that call? Thanks.
Before we all agree with Bear-y Ritholz, let’s look at another well-regarded employment indicator, the Employment Cost Index, which was released with GDP earlier this week.
ECI rose 0.6% for the quarter, and 2.6% YOY, which is LOWER than the previous 12 months’ 3.6%. Slower growth in benefit costs is decelerating wage pressures — higher deductibles, more health care cost containment, more firms closing DB plans and only offering DC. See yesterday’s Watson Wyatt report for trends on DB’s long, slow demise: only 30% or so of Fortune 100 firms are offering DB to new employees now.
Swood:
I never disagree with the market, but I have been disagreeing with the majority viewpoint on the economy, inflation, employment, and the advantages of the end of the Fed cycle. (I disagreed back in January 2000 also).
On this call, I may be right, I may be wrong, but I will let the overall track record can speak for itself.
To answer your query, I am still looking for 11,800 on the Dow, 1350 SPX, and 2600 on the Nazz first half. (This 2006 market forecast can be seen in Business Week Year end issue) I anticipate up to a 25% sell off in the S&P into Q3/4.
I rely on my own analysis, quant data and historical parallels where I can (See this) for example. Your mileage may vary . . .
If you believe that I have it wrong, feel free to buy lots of US Equities right here. That’s what makes a market!
There have been less than two weeks in the history of the stock market when the DJIA has closed above its present level. The market can certainly go higher from here, but to infer a little from Barry’s post, is this the spot where you get aggressively long? Is the biggest speculative bubble in history nearly erased in six years? If so, that sure was easy.
And another thing:
Over on RM, JJC is talking about a “spring fever giddiness” in the market. And he’s encouraging investors to stay long and strong. In my own trading experience, giddiness+long = losses
The S&P at 1350 is rational and reasonable. Sow is Dow 11,800. It’s all of the other sh*t that is absurd. Small caps are only overvalued by about 50% historically. They are a literal bargain. The techs aren’t moving so why buy them at 39x PE. You should buy Transports. They are only 3x the historical median valuation. Or banks or financial institutions. Many are only trading at the highest valuations in 15 years. Or maybe a metals stock. How about Phelps Dodge. Copper at $3.50 and Freeport says it costs 9 cents to mine.
The laws of physics also applies to stocks. Or, never step in front of a Mack truck. I believe the markets will only remain irrational as long as they are irrational.
I mean “So” not “Sow”. I’ve got grains and pork on my mind. Commodities everywhere.
>>> I don’t see where you get that there is a lack of supply of skilled workers. <<< Among other things, the Fed beige book. The most recent comment was: "A majority of Districts note that labor markets, at least for skilled workers, are tight or are tightening".
What is interesting about this bullish move right now is the large number of sectors already in bear markets. Look at the housing stocks (minus today) health care, utilities, auto parts, autos, biotech, Media, etc etc etc. Strip out commodities, oil, and the companies that move dirt and transport those products and you have a market on shaky grounds. Markets top when it’s late stage value stock rotation. Less and less stocks are making new highs while more are making new lows… If my analysis is right and the music does stop (regardless of what the moronic Fed does) we are going to have one nasty correction.
Robert,
You are right on. There’s one fly in the ointment. The new highs/new lows is awfully strong and doesn’t typically fall off of a cliff. And, the nontech a/d line is doing fine. Volume across the board is weakening. Even in the leaders. Eventually, we would run out of buyers at a certain price even if fundamentals were fine. But, with so much money in hedge funds that are mostly long only regardless of what they say, I wonder if they might keep pushing till we are at levels only pigs would love.
There is a possibility we will get some sector rotation and keep this thing going. ie, Those underperforming stocks could come to the forefront and provide additional fuel for more advances. I wouldn’t bet my life on it but it could happen.
Over on RM, JJC is talking about a “spring fever giddiness” in the market.
Hey, don’t knock Cramer. He just went “bullish” on two stocks I own, and I am now reaping the rewards.
Yo Jim . . . Keep up the good work. I got some more stocks for you to recommend on your show.
“Is the biggest speculative bubble in history nearly erased in six years? If so, that sure was easy. ”
Looks way too easy, couple this with a tightening FED and commodity price run ups, a 1970’s style stagflation looks more and more probable! How much cheap s.it can we buy from the Chinese? Or alternatively, what can USA offer the Chinese? Just a big market for their cheap wares!
Pump up the Dow, pump up the Dow! Something must show that things are OK! Ignore Hookergate and Goss resignation. Must bring re-election! Must escape impeachment!
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BBA49CA5E-E61E-480E-835D-2842FD8E9560%7D&siteid=google
Why is no one talking about this? The dollar keeps falling in light of all these “gains.” Is Bernanke to just let the dollar to continue to slip or will he raise rates to save it. Without a strong dollar we ain’t got $hit.
Why is it when the historical top price of oil is the topic for the MsM they refer to the real price per barrel and not the nominal price? However when referring to the high in the Dow it is the nominal price which takes precedence over the real price.
Marc Faber recently addressed this in a very enlightening piece about the Dow versus gold.
Barry,
Good work as always. I will weigh in Sunday on this in “The Song Remains The Same”…..
We need to get the “Led” out…
Estragon: Judging from what I can see in part of the tech industry, one vital skill that we have run out of is being able to write resumes that make it past the automated HR databases/staffing processes.
Aside from age discrimination, exaggerated expectations of being able to sign on the elusive “top talent” in this market, and asking for more specialty skills than the job at hand actually requires, employers have shot themselves in the foot by replacing human judgement in the hiring process by keyword matching and other “efficiency” measures.
I have been hearing over and over from hiring managers that they only get garbage from HR.
So whatever demand for domestic hiring remains may be hampered by “HR productivity”. I refuse to believe there is an actual talent shortage.