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Art Cashin Explains Why The ADP Conundrum May Soon Be Resolved

Tyler Durden's picture




 

Readers of Zero Hedge know that we put
precisely zero weight and/or credibility in yesterday's ADP number:
month after month it has proven to have no predictive ability when it
comes to forecasting the Nonfarm
Payroll Number. On the other hand, we have also been very skeptical of
the BLS data, if for no other reason, than due to the traditional
Birth/Death adjustment fudge factor. Yet Wall Street needs economic data
to which it will respond in a kneejerk, or otherwise, format. Therefore both numbers are important from a trading, if not investing, perspective. This morning, Art Cashin
picks up on these two key points and resolves the ADP conundrum, or
rather, tells his readers to wait until tomorrow's data to discover if
ADP may have finally redeemed itself from the compost heap of economic
indicators.

From Art Cashin's daily note:

Alea Jacta Est! – As you probably recall from sixth grade, “alea jacta est” is Latin for the phrase – “The die is cast”. You may further recall it was the phrase that Julius Caesar uttered upon bringing the Roman legions that were under his command across the Rubicon River. Tradition had held that generals could lead their troops no closer to Rome than the banks of the Rubicon. To cross was to be in rebellion. Caesar’s “the die is cast” was his acknowledgement that there was now no turning back.

We took this mental stroll to the banks of the Rubicon because of Wednesday’s ADP payroll estimates. That connection may be a touch more difficult to translate than Caesar’s Latin.

For years there have been two camps on the monthly release by the BLS of the “nonfarm payroll” numbers.

One camp says the numbers are volatile and hard to predict, but do have their basis in the real economy. The other camp believes the payroll data is either useless, or worse, misleading. They think the numbers are distorted badly by the inclusion of data based on the BLS “Birth/Death” model. The Birth/Death is not of humans but rather of companies. When companies are born (start up), it is assumed they hire workers and when they die (close down), they lay off workers.

Each month the BLS estimates (guesses) how many businesses were born or died. It then estimates (guesses) how many workers these estimated companies were estimated to hire or fire. They then put their estimate into the monthly number.

Most folks in the second camp believe it was the inclusion of a whopping B/D estimate that allowed the BLS to announce, much to the surprise of most economists an unexpectedly strong 244,000 new jobs in April.

So, getting back to our allusion to Caesar and the die being cast, Friday’s numbers may give clear victory to one camp or the other. Wednesday morning’s ADP estimate was for payrolls to rise only 38,000 not the 190,000 expected. Most folks in “Camp One” immediately cut their estimates by 50,000 to 100,000. That left the consensus somewhere around 75,000 to 110,000 for Friday. “Camp Two” says the BLS usually throws in about 200,000 B/D jobs in May, so Camp Two is still looking for a number in the 175,000 or 200,00 range. Friday morning could be very, very interesting.

...and just because it is always so informative, here is the History lesson:

An Encore Presentation

On this day in the year 455 A.D., the Eternal City of Rome found itself under attack for the third time in less than 50 years. The once impregnable seat of the Roman Empire had been overrun by the Visigoths in 410. Recouping, they fought off and ultimately bought off the Huns just twenty years later. Now outside the gates stood the Vandals, a Germanic tribe that had originally inhabited the Baltic area of present day Lithuania, Estonia and Latvia. (Their primary contributions to history include triple bypass surgery {patient standing} and conventions.)

So, on this day, these fun loving conventioneers, the said Vandals, swarmed into Rome to see the sights the Goths had told them about. Apparently, they had arrived during the "off season" thus denying them the culture tour. In frustration, they began to knock the heads off the statues (dipso facto - vandalism). When they started to run out of statues, they began to knock the heads off people.

When they started to run out of people with heads, they began to think about the alternative - the government. What about the Emperor? Maybe he had some gold and goodies that the Goths and Huns had overlooked. And anyway, the Vandals figured, they hadn't lopped off an Emperor's head in nearly six weeks.

Now the Emperor, one Petronius Maximus, was not too keen on entertaining the Vandals. First of all he had only got the Emperor job a year ago (so he wasn't sure if his pension was vested yet). Also, his protectors, the Praetorian Guard, when they heard the word "Vandal", looked like a kid who was told there was liver for supper.

So, when Maximus saw the Vandals headed down his block, he adopted a tried and true strategy of government leaders - he put on women's clothing and tried to sneak out the back door of the palace like he was headed for the "Tony" Awards.

The people of Rome mistook this clever and courageous strategy for either mediocre transvestitism or simple cowardice and they stabbed Maximus in the bodice. Not finding any other girls or even guys in girl's clothing the Vandals decided to go sack and burn somewhere else.

The bulls could have used a good disguise yesterday as the bears made the Vandals look like girl scouts. By the closing bell there was a lot of rubble at the feet of those who had been looking for the foundation of a new leg up.

 

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Thu, 06/02/2011 - 09:52 | 1332028 hedgeless_horseman
hedgeless_horseman's picture

Art is a fossil.  Truly I tell you, nobody uses this old stale data from ADP or BLS.  At this point, I believe that everyone running money has at least one executive from a large http://www.napeo.org/ ">PEO (with a network log-on) in his or her expert network.  Better data begets better decisions.

It's not like change in payrolls at large PEOs (aggregated from several PEOs) is insider information, right?

Why else do you think Wall Street analysts would take such good care of so many low-level wonks at Administaff and the like?

Thu, 06/02/2011 - 09:53 | 1332064 drivenZ
drivenZ's picture

somebodies using it for something...albeit it for momentum or whatever but it certainly helped the market tank yesterday. 

Thu, 06/02/2011 - 10:11 | 1332071 hedgeless_horseman
hedgeless_horseman's picture

That is the dumb money...the "smart" (see my post above) money is always already positioned, ergo, "sell the news."

For years there have been two camps on the monthly release by the BLS of the “nonfarm payroll” numbers.

What Art fails to mention is that both camps are populated entirely with sheep being led to the slaughter.

Thu, 06/02/2011 - 23:41 | 1334816 rocker
rocker's picture

Wisdom comes with age.  Don't you think Art already has that figured in?  He is there for that wisdom.

  Please. Don't be so immature. The older guy has been there, done that and spit most out already.

Thu, 06/02/2011 - 10:00 | 1332088 Withdrawn Sanction
Withdrawn Sanction's picture

Art may be a fossil, but like a fossil, he's a survivor.  The key here is not his analysis of the data (the trees), but the analogy he uses (the forest).  He's telling us something very plainly, albeit not directly for those unacquainted with history.

Thu, 06/02/2011 - 10:10 | 1332098 hedgeless_horseman
hedgeless_horseman's picture

I like Art, but Edwards and McGee are dead and buried.

by hedgeless_horseman
on Fri, 09/03/2010 - 09:41
#562073

Fundamental analysis?  Earnings?  Technical analysis?  Charts?  We don't have a prayer when Ben has his finger on the button under the table

You can take the ghosts of Graham, Dodd, Edwards, and McGee, as well as every CFA on the planet to manage a portfolio.  I'll take one insider at 33 Liberty and my performance will wipe the men's room floor with your's.

You didn't see Raj employing any technical analysts, did you? 

Thu, 06/02/2011 - 13:46 | 1333073 jeff montanye
jeff montanye's picture

you exaggerate the powers of the federal reserve, imo.  but only time will tell.  

Thu, 06/02/2011 - 14:15 | 1333236 hedgeless_horseman
hedgeless_horseman's picture

Do not understimate the power of the Dark Side.

If no more QE and the S&P stays above 1200 or so and the 10y stays below 4%, then you are right.

Thu, 06/02/2011 - 12:21 | 1332654 Carl Spackler
Carl Spackler's picture

Exactly, Withdrawn Sanction.

Art is "a survivor"...which means he is consistently clever or a fantastic risk manager.

Aside from that, he is a skilled story teller.

Even though many of us know that the BLS' NFP data is BS, the market still jerks when it is released, so you have to pay attention to it.

 

Thu, 06/02/2011 - 23:50 | 1334821 rocker
rocker's picture

My bet is Art watches. Just like the fox. Waits for the extreme, either way, and then makes his money. Yup.

Thu, 06/02/2011 - 09:45 | 1332038 SheepDog-One
SheepDog-One's picture

I GUESS Bernank could try putting on a dress. Probably does it all the time anyway.

Thu, 06/02/2011 - 09:48 | 1332057 NotApplicable
NotApplicable's picture

And he likely runs like a girl.

Thu, 06/02/2011 - 09:48 | 1332043 Dr. Engali
Dr. Engali's picture

You gotta love Art. Maybe the only credible  man on the floor.

Thu, 06/02/2011 - 09:49 | 1332052 Temporalist
Temporalist's picture

There are so many Rome analogies floating around today it's like the meme that won't quit.

Thu, 06/02/2011 - 09:46 | 1332053 Anaxagoras
Anaxagoras's picture

BLS May Jobs +250k!!! I mean, if you're just going to make it up anyway (birth/death "adjustment'), why not make it up BIG.

Thu, 06/02/2011 - 09:53 | 1332066 NotApplicable
NotApplicable's picture

Soon, comrade, soon.

Thu, 06/02/2011 - 09:57 | 1332078 Caviar Emptor
Caviar Emptor's picture

Art! They don't make them like him anymore. 

Regardless of what BLS says the NFP is on Friday, we've moved into a new paradigm this May when compared with May 2010: right up through the Spring of 2011 it was still possible to rationalize that the "Slow Recovery" story was still real and plausible. 

That's out the window as the Depression now enters year 3 and heroic stimulus measures have failed. 

It goes back to what I said in 2008-9: the massive loss of employment  and opportunities wasn't just part of a cycle. It was The Downsizing of America, the result of 3 decades of relentlessly giving away the farm through offshoring and reckless over financialization. 

Thu, 06/02/2011 - 10:01 | 1332102 FieldMarshal
FieldMarshal's picture

Just looking at the methodologies of the two surveys, its hard not to say that the ADP release would be more accurate and harder to manipulate.  Why anyone believes the BLS numbers is beyond me.  Its getting into CPI territory for fiction.

Thu, 06/02/2011 - 10:01 | 1332103 DosZap
DosZap's picture

 than due to the traditional Birth/Death adjustment fudge factor.

 

Someone telll me WHY they use this stupid phrase?.

People near death are not working, anymore than newborns.

This has to do with Pop Growth,how does it affect the jobs market at all?.

Idiotic.

Thu, 06/02/2011 - 10:18 | 1332143 flattrader
flattrader's picture

Just go here for the real unemployment story.

http://www.shadowstats.com/alternate_data/unemployment-charts

This guy has the best handle on the number which hasn't budged much.

Just eyeballing it, the range seems to be 22-23% since the start of this disaster.

Thu, 06/02/2011 - 10:20 | 1332153 Kilgore Trout
Kilgore Trout's picture

If Art had written the high-school history books I used, I might have actually read them.

Thu, 06/02/2011 - 10:39 | 1332220 spanish inquisition
spanish inquisition's picture

I like Art, he is based in old school reality that we may resurrect some day in the future.

Currently we have Wall Street creating new realities, just as it is done in the government. With all winners they will write the history when they determine how they want to be remembered at some later date. As they say in Hollywood, we'll fix it in post.

It is what it is, til it ain't.

Thu, 06/02/2011 - 10:43 | 1332226 trav7777
trav7777's picture

All the Ministries of Truth will show full employment even when nobody knows anybody else who has a job.

If the EPA's disconnect of radnet post-Fukushima wasn't all you needed to know, then you aren't amenable to education

Thu, 06/02/2011 - 10:59 | 1332295 monopoly
monopoly's picture

Art is real. Am so tired of this market I raised mostly cash, except for my physical, a little FAZ and TWM. That is it. Wearing me down.

Thu, 06/02/2011 - 11:21 | 1332378 Rikky
Rikky's picture

I think you're being a little harsh in bashing the ADP report as something that's a bunch of unpredictable, useless, fossilized data.  The data that is used in the report comes from REAL PAYROLL across 500k+ companies ranging from 5 to 50k employees.  The data is REAL, the problem is the algorithms Macroeconomic Advisors uses to construct their predictions.  What ADP needs to do is get rid of Macroeconomic Advisors and find a company that is more skilled at building predictive models.

Thu, 06/02/2011 - 11:34 | 1332436 hedgeless_horseman
hedgeless_horseman's picture

It is REAL...REAL stale. By the time it hits the press that data has been viewed and shared more than an Internet photo of Christina Hendricks in a tight gown. 

Thu, 06/02/2011 - 14:11 | 1333213 Rikky
Rikky's picture

i know for a fact that isn't true.  in fact the only people who view the data at this level and detail is Macroeconomic Advisors.  Folks to use it internally for sales and marketing purposes but that's it.  ADP isn't a loose lips company in fact they are very conservative and don't share there data with anyone hence why the ADP report was a big deal.

Thu, 06/02/2011 - 14:36 | 1333355 jsmfr
jsmfr's picture

Keep in mind that the B/D adjustment is to the non-seasonally adjusted data.  You can't take the B/D adjustment and compare it to the reported seasonally adjusted change.  For instance, in April, B/D was +175K, and unadjusted increase in payrolls was +1169K, so B/D accounted for 15% of the rise. In March, B/D was +117 versus unadjusted +925K, which was 13%. February was +112K /+811K for 14%.

Thu, 06/02/2011 - 23:54 | 1334825 rocker
rocker's picture

Do you think your data matters to anyone.  Not, unless it actually reflects reality.

Thu, 06/02/2011 - 23:56 | 1334827 rocker
rocker's picture

Just a note to the wise ones.  Zero Hedge has some of the best data anywhere. The Hedge Rules on.  

Thu, 06/02/2011 - 22:05 | 1334624 AldoHux_IV
AldoHux_IV's picture

This is why these numbers aren't to be trusted-- they only serve to prolong the agenda of moronic greedy fools.

Thu, 06/02/2011 - 23:49 | 1334824 rocker
rocker's picture

+10  Sort of like the first of April. Fools Day.  Eh.

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