Query For The Bernank: What Is The Fair Value Of Netflix Stock Expressed In 8% Unemployment?

Yesterday, while we were listening to the Chairsatan (©Bill Gross), we made the following semi-serious realtime translation of Bernank's presentation to the sycophants' club: "Let me explain it to you: 9% unemployment: NFLX $300; 8% unemployment: NFLX $500; 6% unemployment: NFLX $1000. Kapishe?" And while we were mostly joking in our correct interpretation of the Fed's massively wrong understanding of causality between the market and the economy, Nicholas Colas of BNY today took a comparable idea and analyzed what the level of the S&P should be for unemployment to get to a Fed acceptable level based on empirial data. We quote: "By our analysis of the last forty years of history for the S&P 500 and unemployment rates, in order to get to the Fed’s 8% target in 2012, the U.S. equity market needs to climb another 35% in 2011, putting the S&P 500 at 1755. That’s not our price target, but it just may be the Fed’s." Since this is most likely the entire "sophisticated" plan laid bare of one Iosif Vissarionovich Bernank, expect to see a complete elimination of volume as the mutual fund cartel continues with the never-sell collusion, and the only incremental buying is PDs with taxpayer money and HFTs' bid-bias fully compensated by rebates for providing the PDs with the "liquidity" they need to send stocks up another 350 points. Luckily, few if any care what the joke that is the stock market actually does (see today's unprecedented low NFP volume here).

From Nic Colas of BNY.

Peanut Butter, Bananas and Bacon – The Fed and the Stock Market

Summary: Even if Fed Chairman Bernanke doesn’t want to admit it, many investors and market watchers think the U.S. central bank is explicitly targeting the stock market with its quantitative easing program. In today’s note we assess the historical relationship between stock price movements and U.S. labor markets to see what kind of advance in equities correlates with the Fed’s target of an 8% unemployment rate in 2012. As it turns out, the stock market is a reasonably good predictor of future
changes in unemployment, especially at “the tails,” when broad market indices move dramatically higher or lower. And we suspect there is some causation as well as correlation at play here: companies with rising stock prices are more likely to hire if their equity prices are marching higher, and stocks are supposed to be leading indicators of general economic growth and contraction By our analysis of the last forty years of history for the S&P 500 and unemployment rates, in order to get to the Fed’s 8% target in 2012, the U.S. equity market needs to climb another 35% in 2011, putting the S&P 500 at 1755. That’s not our price target, but it just may be the Fed’s.

Elvis Presley is playing Radio City Music Hall on February 15th. No, I am not one of those people who think he’s still alive. Elvis really has “Left the building.” But some clever concert promoters have ginned up a show that reunites many of his old band members with a digitally scrubbed voice track of Elvis singing. There’s a video component to the show as well, featuring footage of some of his famous Vegas act and other appearances. Evidently the show goes over really well with Elvis fans, and it has made its way around the world to the United Kingdom, Australia and Japan. If you have an interest, here’s a link: http://www.thegarden.com/events/elvis-presley-0211.html. Good tickets, as they say, are still available.

Of course many people associate Elvis with his oddball taste in food as much as his killer live act or iconic status in the world of rock ‘n roll. Reportedly, his favorite snack was a peanut butter, sliced banana and bacon sandwich. Sometimes with honey. The sandwich is so closely associated with Presley that many people just call it an “Elvis.” And, believe it or not, New York City’s own Mayor Bloomberg has stated that he harbors a fondness for the same creation. It would, in fact, be his “last meal” of choice. Another of Presley’s favorites, for which he supposedly flew from Memphis to Denver to enjoy, was a “Fool’s Gold Loaf”: a whole loaf of Italian bread, hollowed out, with a jar of peanut butter, an equivalent amount of jelly, and a pound of bacon. Served with champagne, included in the price.

I doubt either of these concoctions was on offer yesterday at the National Press Club in Washington D.C., but Federal Reserve Chairman Ben Bernanke did address questions during a lunch there about an ideological combination that feels about as odd as an “Elvis.” The ingredients, however, are Fed stimulus from quantitative easing, the stock market, and unemployment. The Chairman said “the purpose of monetary easing is not to strengthen stock prices per se. The purpose is to strengthen the U.S. economy, put people back to work and create price stability.” He then went on to say, “I do think that by taking these securities out of the  markets (ed: through QE) and pushing investors into alternative assets, we have led to higher stock prices and to lower market volatility.” (See a good recap of the entire speech and Q&A summary here: http://www.reuters.com/article/2011/02/03/us-usa-fed-bernanke-idUKTRE7126MA20110203).

So it should be clear that the Fed sees higher stock prices as a logical extension of their actions in the arena of monetary policy management. I’ll get to the chicken-and-egg nature of this assumption in a minute. But first we should get a handle on whether history supports any linkage between higher stock prices and the Fed’s mandate to encourage full employment. Recall that the Federal Reserve has two official directives from Congress – price stability is the other one. Since pushing stock prices higher can’t be part of the “price stability” mandate, Chairman Bernanke must feel that a rising tide of equity prices must help lift the boats of the labor market.

To assess the relationship between unemployment and stock prices, we looked at the historical record of the Labor Department’s take on the monthly unemployment rate and the 12 month return of the S&P 500 back to 1970. We assumed that there would be a lag between when stock markets moved and unemployment rates changed, as labor markets are notoriously “sticky” and tend to rise or fall only after economic conditions have shifted. So we took the 12 month historical change in the S&P 500 and compared this return to the change in the unemployment rate over the next year. We have included a few charts and a table as attachments, but here is our summary of the data:

There is some correlation between stock price movements and subsequent changes in the U.S. labor market – about 28%. That’s not an especially robust result, but we are talking about a 40-year time frame, after all, with everything from wars to tech and housing bubbles in the mix. So it is close enough for “government work.” Which is, after all, what we’re doing anyway.

The real action is in the “tails” of the distribution, when equity markets soar or plummet. When stocks drop 15-20%, unemployment picks up by an average of 1.2 points (a rate that goes from 5.0% to 6.2%, for example) over the next year. When the market falls by 25-30%, that rise in unemployment is more pronounced, at an average of 1.8 points. Conversely, when markets rise by 30-35%, unemployment drops by 0.4 points over the next year. If equities can manage a 35-40% increase over a year, the unemployment rate tends to fall by 0.8 points.

Two very important points here.

  • First, this relationship has been absent if you look at the entire period from the 2009 lows for the S&P 500 to the present day. Unemployment was at 8.6% in March 2009. It is now 9.4%. And the market has doubled over the same time frame. This is the “chicken and egg” problem. Perhaps the Fed has  broken this historical linkage with artificially low-cost capital flooding into stocks, rather than capital markets improving from genuine investor interest in equities from a visibly improving economy.
  • Second, the equity market/labor market relationship is much stronger to the downside than the upside. Simply put, a declining stock market is a fantastic predictor of rising unemployment. But a rising market has much lower observed correlation and impact.

Assuming that the long term relationship between stocks and the labor market does manage to right itself in 2011, we can draw two conclusions.

  • First, unemployment should drop 0.4 points over the next year. We reach that conclusion from tying the market’s 20% advance over the last 12 months to our historical analysis, which shows that this is the average improvement in labor markets when equities rise by this amount. This dovetails very nicely with the Fed’s own estimate of unemployment for 2011, at 9.0%, down exactly 0.4 points from last month’s unemployment rate.
  • But if you want to “dream the dream” for equities for a moment, consider that the Fed’s estimate for 2012 unemployment is 8.0%, or a full point lower than its estimate for 2011. Look at our summary table for historical stock price returns that correlate with a full percentage point drop in unemployment. It is anywhere from 35-50% in terms of price appreciation. Using the lowest end of that range, this implies a price target of 1755 on the S&P 500.

I don’t know which is stranger – a 1755 price target on the S&P 500, or one of Elvis’ sandwiches. This isn’t my price target on the S&P 500, but it may well be the Fed’s. Pass the honey… The bananas aren’t quite ripe.

Which brings us to the original question: can his Beardedness please supply American citizens with a Netflix, or at least S&P 500 fair value chart expressed in terms of jobs. 10% is 666, 9% if 1,200 8% is 1,755. Does that mean to get back to the pre-Depressionary 5%, the S&P will have to jump on the logarithmic train and hit 36,000? We honestly don't know, which is why central-planning Chairman Ben, please open up your little black book and tell us what the answer is?