Today’s Employment Report, also, Europe
David R. Kotok
April 6, 2012
Some holiday-weekend observations in bullet form.
1. The Jobs report was a disappointment to markets and to forecasters. Many of the components were negative surprises. In fact, little in it was positive. Stock futures sold off immediately. What happens by Monday’s opening is another matter. Government job losses seem to have run their course and are flat.
2. There is an issue in the number crunching. Stan Shipley of ISI summed it up well: “The contentious issue of the birth/death model has reappeared. This adjustment by the BLS is designed to capture newly established businesses that are missed in the survey. The problem with that adjustment is that there is no cyclical factor. New business formation sinks in a recession and rebounds sharply as the economy recovers.” Note that the birth-death adjustment does not capture these inflection points with any meaningful benefit.
3. Oil prices keep “hanging in.” It is not clear that the oil price has peaked. The US price reference is WTI; its distortion continues from inventory issues and pipelines running in the wrong direction. Eventually that will neutralize, and then we will again have a better US oil-price reference. Meanwhile, Brent stays in the low to mid 120s. Worldwide demand for oil is rising and production capacity is following slowly. Thus, the tightness in the oil market is likely to continue for a while.
4. Europe “ain’t over.” It is worsening. We have written about Spain and Portugal; see www.cumber.com. The socialist candidate (Hollande) in France has called for a 75% tax rate on the wealthy and a penalty on those citizens who wish to leave. He is ahead in the polls. France has a two-step election process. It will be interesting.
5. Note that France, a birthplace of liberty, now wants to force citizens to stay. So does the US. Ask your accountant about US tax code treatment of departing citizens. Key here is to distinguish between countries that say, “Come here because you want to” and those that say “Stay here because you have to.”
6. Greece is in a downward death spiral. The private losses on Greek debt are mostly taken. The government/institutional/official losses are in the hands of politicians and still lie ahead. The Greek economy shrinks as the debt burden grows. This perpetual subsidy from others is on an unsustainable collision course with eventual Greek financial collapse. Meanwhile, 92 members of the Greek parliament have offered amendments to water down the austerity budget (hat tip to Barclays). The Greek prime minister vows to defeat all of them. Next week Greece will announce its bank recapitalization plan. Those banks that are deemed “viable” will be able to gain financing from the ECB. Those that are not will need to fund liquidity from the Greek central bank under the Emergency Liquidity Assistance (ELA) program (hat tip to Credit Suisse). Note that ELA lending is central bank advances with lower-grade collateral. The Greek tragedy continues.
6. We are tracking ELA balances in every euro zone country. It is not easy to do. The central banks of the 17 euro zone nations do not break it out in a single available figure. They also report with a lag. There is little reporting consistency among them. Greece has only revealed its ELA balance through November. We estimate it was about 40 billion euros then, up from about 7 billion in July. We have no idea what the balance is today. The European Central Bank could separately identify each country’s ELA balance but chooses not to do so. Why not? Consider this: would you deposit your money in a bank that was in a national system with rising ELA? Not if you are sane. The flip side is that Eurozone folks have to guess. So they move money faster than they otherwise might and cause a bank run and an increase in that country’s ELA. It is always better to cut off a small loss and be forthright about it than to maintain a growing loss and try to hide it. But politicians do not know how to learn that lesson.
7. Fed Chairman Bernanke speaks at the opening dinner of the Atlanta Fed conference. Every word he utters on Monday night will be parsed. He is supposed to take some questions that have been pre-sorted or screened. This forum gives him an opportunity to offer an updated view of monetary policy after digestion of the weaker than expected employment report.
8. Also, note that Bill Dunkelberg’s NFIB survey data is coming on Tuesday. It offers clues into the job situation in the private, non-publicly traded half of the US economy. NFIB members are the job-creating engine. Their hiring plans are instructive. We will look for Dunk’s newest numbers.
This is a powerful weekend for Christians and Jews. Today is Good Friday; this year it coincides with the first day of Passover. In Jewish tradition, the day starts at sunset. The Last Supper was a Passover Seder. The greatness of the western freedom-loving heritage is rooted in the Exodus from Egypt and in the rejection of slavery. We should all celebrate that tonight.
In the modern era, slavery comes in many forms. Not all taskmasters carry whips. There are those who use words to deceive us. Sadly, we elect some of them.
We wish our readers all the best for their holiday celebrations, whatever their form. For our country and others in the freer portions of the world, we wish and pray for the preservation and defense of those special liberties we enjoy every day. We are so very lucky to have them. Most of the world does not.
David R. Kotok, Chairman and Chief Investment Officer