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David Rosenberg: "This Is The Worst First Half To A Year Since 2002"
Some insights from R #4 of the RRRR (for an explanation on the alliteration, see here) on the market...
Is it the correction that is unusual, or is it the fact that in a matter of 12 months, the S&P 500 managed to shoot up 80% — and amidst the weakest recovery in real final sales in recorded history? The few times that the market had ever rallied so sharply off such a deep interim bottom were both in the 1930s, and we saw a pullback of around 40%. So, the reversal of the past three months very likely has further to go, and, sadly, many market participants are still not braced for it. The old buy-the-dip habits die hard.
The 12% slide in the market in Q2 wiped out $1.6 trillion of paper wealth off the books. In a particular ominous sign, the 3.7% decline in the S&P 500 this past week stood in stark contrast to what we usually see this time of year because seasonally, the equity market rallies three-quarters of the time heading into the fourth of July festivities — the 4.6% decline so far this week stands in stark contrast too.
Taking into the year as whole, with the S&P 500 off nearly 8%, this goes down as the worst first half to any year since 2002. That year, if you recall, was an aborted recovery as opposed to a classic double-dip; however, it didn’t really matter because a market priced for over 3% and got basically near zero growth in the second half of that year, did not bottom until October. As for the much-maligned Treasury market, universally deemed to be in some sort of bubble — well, the total return to date is 6%, the best first-half finish in 15 years (not to mention coming off the steepest yield decline since last May).
And on the latest NFP disaster. At this point even Joe Biden has given up.
U.S. nonfarm payrolls came in light in June with the closely-watched private payroll tally coming in at 83,000 against expectations of 110,000. As was widely expected, the headline of -125,000 was dominated by the drop-off in Census hiring (though we must add here that the 147,000 boost the headline data received from the Birth-Death model is pure fantasy). Private payrolls for May were also revised to show a lower 33,000 gain instead of the initially reported increase of 41,000.
The unemployment rate turned in a surprising decline in June, to 9.5% from 9.7%, and this got the equity market excited for a millisecond — the consensus was looking for a bump-up to 9.8%. However, this was nothing more than a statistical illusion because the labour force plunged 652,000 in the steepest decline of the year and second largest falloff in the past 15 years. If not for that, the unemployment rate would have jumped to 10%.
Besides, what is important for any labour market expert is the ‘employment rate’ — the employment-to-population ratio — and it actually sank to a four-month low of 58.5% from 58.7% in May. But it pays to note that in the past two months, nearly one million Americans have dropped out of the labour market, and by our calculations, the number of discouraged workers — those who have become disengaged and have given up the job search altogether — rose 124,000 in June to an all-time high of 1.207 million last month. It is getting so tough to find a job, in fact, for those still in the hunt, it is taking an average of 35.2 weeks to find a job, which is unheard of. Nearly 46% of the ranks of the unemployed are populated with people who have been out of work and looking fruitlessly for at least six months — again, this is without precedent.
The story beneath the story is one of a renewed weakening in labour market trends as the effects of the fiscal and monetary stimulus fades, the inventory cycle peaks out and the impact of the tightening in financial conditions and softening in demand abroad begin to kick in. At this stage of the cycle, if this were a normal recovery following a normal recession, we should be seeing private payrolls printing well in excess of 150k with near consistency; in this cycle, we have had the grand total of two months of that so far, and now the hiring trend is clearly slowing.
We see that not only in the headline but also in the diffusion index for private sector hiring, which fell from 54.8% in May to 52.2% in June. This tells us that almost half of the companies in the survey are no longer adding to their payroll. It should also not be lost on anyone that the companion Household survey, which has more sensitivity to what is happening at the small-business level compared to the nonfarm payroll survey, showed a 301,000 job plunge in June and that followed a 35,000 falloff the month before — the steepest contraction for the year and the first back-to-back declines since last fall.
The amount of slack in the U.S. labour market is palpable, and the seeds of deflation are being sown. When I went to school back in the late 1970s, you learned that wages are “sticky” and, as a result, deflation is virtually impossible. Well, it’s time to throw those old Economic 101 textbooks into the garbage bin. Concessions are clearly the order of the day, as one would expect with an aggregate unemployment rate (the U6 measure) stuck in the stratosphere at 16.5%. To put that U6 jobless rate into perspective, and keep in mind that we are supposedly a year into an economic expansion, it never even pierced 10.5% in the recession and jobless recover in the 2001-2003 cycle.
Unless the laws of supply and demand have been repealed in the labour market, it would stand to reason that wages would come under downward pressure, and this was one of the most, if not the most important, takeaway in today’s report because average hourly earnings dropped 0.1% in June — THIS IS A 1-IN-50 EVENT! — and this dragged the year-over-year trend down to 1.7% from 1.9% in May, and 2% at the turn of the year. It’s a good thing that we are headed towards a prolonged period of consumer price stability because if the headline inflation rate were to stay at 2% indefinitely, we would be talking about a sustained decline in real wage-based personal income based on the lingering huge amount of slack prevailing the labour market. In the name of trying to be as hopeful as possible, at least our forecast of eventual 0% inflation will limit the erosion in real take-home pay when measured in “real” terms.
The workweek fell 0.3% as well so what that in turn means is that average weekly earnings — the proxy for wage-based personal income coming out the payroll report — contracted 0.4% last month. At least that provides some explanation as to why auto sales slipped 6%, consumer confidence sank and chain store sales came in below plan in June.
What was particularly disconcerting in the payroll data was the sharp slowing in factory payrolls — from 38,000 in April, to 32,000 in May, to 9,000 in June in what was the low water-mark for the year. Not only that, but in line with the soft ISM reading, the diffusion index for hiring in the manufacturing sector sank to 52.4% from 62.2% in May, the most pronounced decline since June 2008 when the recession was in full swing.
We say this is disconcerting because it was the manufacturing sector that carried the ball for this nascent recovery and it increasingly looks as though the inventory cycle is in the process of being truncated. Who is left to pick up the baton? Nobody we can think of. Retailers are certainly not looking at a bullish consumer outlook or they wouldn’t have cut their workforce by 7,000 in June after an 11,000 slice in May. If banks were looking at stronger loan demand, they too likely would not have slashed 15,000 from their payrolls after cutting 12,000 in May. Construction firms shed 22,000 after a 30,000 slice in May — no surprise here. This begs the question that without hiring out of the banks, the retailers, the builders and now the manufacturers, it stands to reason that we are in for a prolonged period of labour market malaise. Let’s not confuse pessimism for realism.
The outlook is not constructive as the components of the payroll report that tend to “lead” all faltered. Revisions tend to build on themselves and once again, they were on the downside. The workweek fell 0.3% and by 1.2% in manufacturing. Temp agency hiring slowed in June, to 21,000 from +31,000 in May and was the smallest tally since last September. And, we finished the month of June with initial jobless claims at 472,000, which history would suggest is consistent with net job losses. There is no more important metric to watch over the course of the next month.
The U.S. Congress has been busy putting the finishing touches on the financial reform bill. There is obvious tension and debate over what to do in Afghanistan after a 10-year presence. The ecological disaster of our lives is in day 73. The government has frittered away valuable taxpayer resources on short-term quick fixes to fuel spending and confidence from cash-for-clunkers, to cash-for-appliances, to homebuyer tax credits, to continued extensions in jobless claims that would make Newfoundlanders blush. We need a war room dedicated to reviving the moribund labour market, but in a way that is less intrusive, not more.
According to White House projections, in the aftermath of all this fiscal stimulus and government intervention over the past year-and-change, the unemployment rate by now should be close to 8%, but it is nowhere near that mark (as if that is a laudable goal — its nearly two-percentage points higher than the peak of the last recession). So something isn’t working, and it is because there is no attack on impediments in the way of more durable job creation such as payroll tax reductions, permanent reductions in corporate tax rates, elimination of the minimum wage and greater efforts at retooling and retraining the near-15 million unemployed.
If our kids are the future, then the current 18.2% youth unemployment rate is a disaster that deserves more attention than it currently receives. Incentives to spend more are not the answer. We need incentives to employ. It’s probably time to dust off the Economic Recovery Act of 1981 (and we are sure Peggy Noonan would agree!).
Much more in the full note from Gluskin Sheff
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"So something isn’t working, and it is because there is no attack on impediments in the way of more durable job creation such as payroll tax reductions, permanent reductions in corporate tax rates, elimination of the minimum wage and greater efforts at retooling and retraining the near-15 million unemployed."
Ay-men! Preach on it my brutha! Can I get a hallelujah!!!
You can get the whole archive - Ned
https://ems.gluskinsheff.net/Articles.aspx
might need to subscribe for free.
Taking into the year as whole, with the S&P 500 off nearly 8%, this goes down as the worst first half to any year since 2002.
And in 2002 we didn't have the PPT.
The so-called PPT (President's Working Group) has been around since March 1988. It was very definitely active in 2002 and every year since. It was always hidden behind the scenes and never acknowledged, unlike today where the manipulation is so blatant.
"It was always hidden behind the scenes and never acknowledged, unlike today where the manipulation is so blatant."
I was thinking the other day about why the PPT would finally expose their blatant manipulation. And I think I have the answer.
At this point, mostly because of the HFT but not exclusively, it's more effective for the manipulation to be public than hidden. This allows more people/machines/institutions to get behind of or in front of the manipulation, anticipating it will be there, which magnifies the effect. This is to the PPT's advantage.
For example, PIMCO can now publicly declare what and why they are doing something (we expect the government to do "A" because they have said they will, so we will do "B") which helps drive the herd in that direction, making the effect bigger than if it was done on the QT. Combine this with mountains of money being pushed into the system along with the "normal" methods of manipulation and you might have an order of magnitude increase in effectiveness.
I haven't thought this out completely but it makes sense.
Robert McHugh, PhD -- yes one of those pesky PhDs - developed a proprietary indicator to track the involvement or lack thereof of the PPT. I have followed him for many years and I must admit that THIS indicator of his is worthy of an A++. He correlates this with another one of Demand/Supply Pressure. He can tell if "deep pockets" have been saving the markets on particular days.
Last night he said, "We got a new sell signal in our Plunge Protection Team indicator Thursday, which means me are now in a zone where PPT intervention will not stop a significant slide".
To your point, he as written extensively how the PPT sets up the markets to encourage shorts and then uses them to panic the markets to the upside. I have watched as his indicators have done exactly this.
Anyways, you are definitely correct and if you (just for grins) want to see his work, you can get a Free 30-Day Trial with just any e-mail address and a first name.> www.technicalindicatorindex.com
Thank you for the feedback. It strokes the ego to know I'm last in line with a "new" thought. :>)
But I will check this out carefully. Thanks again.
EDIT: What The Hog said.
Anyone in a bond fund might wanna be heading for the exits. I just moved everything I had in Pimco Total Return back to fixed rate account. The past two days, even as the equities markets have continued to sour, treasury rates have not moved lower as usual. This tells me, US Treasury rates are getting ready to be sent forcibly higher even if stocks continue their decent. IMO, they are expecting another massive QE, with more debt issuance, and that will put the US on notice. QE is coming faster than many think. Gross will finally start feeling some pain. The bond trade is too over-crowded for the vigilantes not to make their move. TBT looks like a good play from here as well.
Agree. Bond bubble would be overcrowded trade blowup #3 for the month, behind EUR/USD and gold. Lots of scorched lemmings this week. Also agree about QE2 getting much closer. Not sure Ben and co could tolerate another market death spiral. Too ego bruising if nothing else.
Based on Rosenberg's article and insights seems to me that you are going to make Mr. Rosenberg mad if you buy TBT now.
Most of these jobs are not going to come back because they were the product of the SUGAR HIGH that we had with an unreal housing market and the UNREAL CONSUMPTION that came with it.... is going to take years if not decades.
jk--worth your doing the math on the leveraged ETFs.
1/12/2009 Barrons "One-Day Wonders" By Tom Eidelman slug "Leveraged ETFs' numbers don't always add up."
You can run a spreadsheet with daily % changes up/down and watch the sag.
- Ned
Our beloved friends at Zero Hedge provided us with an analyzis about this fact for TBT in the article:
http://www.zerohedge.com/article/guest-post-tbts-decaylicious-existenceshown-mathematically
Thanks Pam. - Ned
Agreed - if you want to play it just roll with TLT puts.
Would you move out of pimco low duration?
Personally, no. Long duration, maybe, but IMO low duration is about as safe as you can get in this crazy world.
"If our kids are the future, then the current 18.2% youth unemployment rate is a disaster that deserves more attention than it currently receives."
Unemployed youth have brought down governments...
re: 18.2% youth u/e.
I think we need to bring in more Mexicans to do the
jobs we aren't allowing Americans to have a shot at.
We could get the illegal immigrants to do the rioting as well. Most of the unemployed kids are engaged in gaming anyhow -- can't be bothered with all this economics voodoo.
Off topic, but what is with oil today (off $4)? Interesting that oil is pounded again today but gold is spared. Truly another indicator of economic recovery when oil tanks in summer...
Oil price tracks economic activity? Gold tracks government despotism?
Victory for the bulls
worst tap dancing accident since 1954
Since we were beaten by the Dutch, I'm no long so drunk, and I'm able to tell you that the Baltic Dry Index closed the week with a sharp drop today, and it's at 2280:
http://www.dryships.com/pages/report.asp
It is rapidly approaching the 1-year low of 2163 reached at September 24. Something is not smelling good for the international "real economy".
What you are smelling are fumes from the Gulf of Mexico...Wait till everyone figures out that some of the most highly priced beach front property now has the same value as a toxic dump? Commercial Crash in GOM real estate, anyone?
Julio Cesar made a nasty mistake and he is the one eliminating his team.
Do you think he is going to go through the same treatment as Barboza got for his 1950 poor performance, taken into account that Cesar committed a real mistake contrary to Barboza who simply misperformed?
If not, would you mind explaining why?
I sincerely hope nobody does an Andres Escobar on Julio. Andres only scored an own goal; Julio did that plus reduced Brasil to 10 men.
Sisyphus
Happy Zero Hedge anniversary. You are one ZH year old this week. Thank you for your contributions over the last year.
PS: I got the picture from your mom. :>)
Hey CD, thanks! I am glad that I found ZH in its infancy and stuck with it to see it blossom. I knew I had struck gold; 'twas only a matter of time before the entire world took notice. And now they have. I am mostly a lurker with very little to add to the discourse. It is folks like you who make this site what it is. So, thanks for all the hard work y'all put it. It makes me and all of the rest of us a much more informed and prepared citizenry. Keep it up!
kind of off topic: around 1.18pm huge execution ~5M shares in JPM moved the stock for a split second about a couple pct, 5 mins later was removed from the tape. i've seen this kind of manipulation several times in these stocks (jpm, bac, spy, csco, intc etc) : huge executions used to trigger stops and 5 mins later are completely removed from the tape
ps: if you care to check it out, another one in spy 1.55pm ~5.2M share is still there
UPDATE 2.16pm : SPY EXECUTION REMOVED
When you notice things like that, could you kindly take a screenshot and send them to TD. Or post them somehow. Maybe use http://pdfcast.org/
i will. i've seen it too many times already and it's hard to believe that these are simply 'accidents' or 'glitches'
Thanks!
Agreed. A Roulette table in vegas may have a few thousand dollars on the line at any given time. Yet how often does a "fat finger" happen? How often do they roll back the wheel?
Off the subject can someone explain this to me?
http://www.netdania.com/Products/live-streaming-currency-exchange-rates/...!DXX|ms_dla&name=US%20Dollar%20Index
It's most noticeable at the 5minute and 1hour interval.
June 30 at approximately 23:00 hours. WTF is that? Did some foreign country dump US Treasuries and then the Fed intervened and bought back those securities? Who did that and why is there such a huge jump? And why that late at night to do it?
Looking at the entire years before I don't see anything remotely close to that huge move.
Too many broke charts to be ignored. Downdraft is picking up steam. Even permabulls have their limits
HAPPY FOURTH OF JULY WEEKEND:
http://williambanzai7.blogspot.com/2010/07/happy-fourth-of-july-weekend....
http://www.gunlaws.com/NationalTrainingWeek.htm
Get your sorry butts to the range.
Chicago defies Supreme Court, approves new handgun restrictions...
http://www.suntimes.com/news/cityhall/2458402,new-chicago-gun-law-passed...
WB7
Can I purchase Rhode Island? I like Watch Hill and it would be fun to own it along with the rest of the littlest state of the union.
is this your blog ? great work :)
Yea ! More money for the HFTs
http://www.marketwatch.com/video/asset/us-to-buy-equities-2010-07-02/2A5A1FF5-49C9-4E29-85F5-A07C77906FFC
I wouldn't bet the farm on the second half, either.
TODAY
MUST
END
POSITIVE
Why? Also, this market is bullshit. Pure bullshit.
By Jove, ... I think they'll make it !
Break out the champagne.
YES ! YES ! YES WE CAN !
15:42:50 SP500 1027.51 +0.14
This blatant manipulation is so disgusting it makes me want to puke.
The last 5 min. are seeing a lot of action... to the downside.
They get an E for EFFORT.
Nothing helped. Thanks for playing.
Better luck next time.
Psst: There are no real bids to bring this market back up.. but don't tell anyone!!!
No investors left to jump with the program trading.
"The pumps don't work cause the vandals stole the handles" - Bob Dylan
I'm not a fan of calculating % increase from "the low of S&P 666." S&P 500 didn't spend much time in the 600s or 700s. Really, looking at the charts, the market tended to consolidate around S&P 800. So I calculate the rally from 800. As of now, we're up 25% or so from S&P 800. And 33% down from the all time highs.
If the Chinese hit the skids, it will be an ugly october.
Inverted stick-save ! Did somebody forget to set the real-time clocks on the servers ?
The last six months, the last year, the last five years, I can deal with.
First half of the year is am arbitrary point.
Markets do not move based on where the Earth is relative to the Sun.
For God's sake, use rolling averages and rolling forecasts.
Rosie left Merrill after maintaining from March 2009 that the rally was for suckers.
http://www.businessinsider.com/henry-blodget-merrills-rosenberg-goes-out...
Unless this is a permanent website for sore losers, how about considering the bullish case that the market is selling at 60-year earnings yield valuation lows relative to bonds here?
http://www.ism.ws/ismreport/mfgrob.cfm
http://www.mkmpartners.com/economic.html
Just sayin'...
All investors, traders and market watchers consider that. Most here have seen through it.
First, see Hussman on the danger of comparing our current situation to anything recent. Stocks on long term measures are still expensive.
Hussman Funds - Weekly Market Comment: Current Archive
I can't help adding a piece of the latest from Bill Gross too, linked by TD above: must read for Jim O'Neill, anyone who swallows the latest GS nonsense about BRICs and especially the 'N12'.
The balance between equities and bonds, and the use of any internal measures based purely on equities, such as the P/E ratios, all sit inside a huge macro environment. When that is stable, close to equilibrium, then fine take wahtever ratios you prefer. When the macro environment on a global scale is broken, when the flows of money around the world are as broken as they are now, as far from equilibrium, then you simply take risk off.
For example, your view says debt problems in Greece shouldnt affect the SPX at all. I think experience has proved that to be false. Maybe the next earnings season will convince you.
Updated DOW chart:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Certainly a lot of details like that to take into consideration. Thanks windows vps | cheap vps | cheap hosting | forex vps