Must Read: Mike Shedlock on unemployment

This is one of the best analyses I’ve seen on the unemployment situation. Mike Shedlock (Mish) explains why he believes unemployment will continue rising, what a recovery will look like in terms of employment, and more. This is a data heavy article, but it’s worth it! An important take-away for me was that investors should keep an eye on the hours worked by part-time workers, as those will go up before full-time employment. Secondly, employment is usually discussed as a lagging indicator, but the numbers are so large and the impact so entrenched, that I can’t see a recovery without jobs stabilizing. A sobering reflection…http://globaleconomicanalysis.blogspot.com/2009/11/mish-unemployment-projections-through.html.

We see what we want to see in this market…

With a jobs report that caught the market off-guard, it’s easy to see the negatives in this market. I am a little skeptical of all the confidence in both directions. For example, I have been speaking to family offices that are piling their clients into cash and gold, convinced, absolutely, that gold is going to the moon and that the dollar is going to get crushed and inflation will be rampant. On the other side, I hear Bill Gross talking his book, convinced, absolutely, that deflation will take hold. In the meantime, the market goes up, the market goes down, and everyone says “You see, I told you so.”

Today is an interesting news day. We have the jobs report, showing 263K jobs lost in September and the official unemployment rate at 9.8%. Enough has been written about it in the last couple of hours to make your head spin, but here’s a good piece from ww.calculatedrisk.com: http://www.google.com/reader/view/#stream/user%2F03934459667588521957%2Fstate%2Fcom.google%2Freading-list

Separately, I also saw this interesting article from TechCrunch about acquisitions: http://www.techcrunch.com/2009/10/02/venture-exits-might-be-down-but-total-ma-activity-is-definitely-picking-up/. The main point is summarized in the following paragraph:

The value of venture-backed exits (which is almost entirely M&A these days) might be down about 50 percent in the third quarter, but total M&A activity (including public companies) is seeing a noticeable uptick.

We ran some numbers on Crunchbase, which keeps track of all announced acquisitions, and in the third quarter $31.8 billion worth of acquisitions were announced, double the amount from the second quarter and up fourfold from the $7.6 billion low in the fourth quarter. That number was even up 23 percent from the year before.

Depending on how you want to interpret the data, there is room for everyone. This is a perfect example of how cognitive dissonance will make us gravitate towards the news that supports our world views. So what do we do here? For clients, we are actually taking a split approach. On the one hand, we are reducing exposure to levered companies, reducing international exposure (contrary to the short dollar crowd) and looking for undervalued micro, small, and mid cap names in the US. We are still staying away from financials and we sold our real estate ETF (IYR) earlier in the week. While many investors are moving towards ETF’s, we are moving away from them, trying to pick our spots more critically, instead of trying to gain exposure to any particular market or sector here.

US Income Gap Widens as Poor Take Hit in Recession

These days, I just can’t get away from geopolitics. While my investing bias is towards value, a lot of my research and writing is on the macro, and these days, geopolitical scene. Healthcare, reregulation, and unemployment are all at the centers of the main struggles: inflation/deflation, government intervention, regulations and limits on pay, etc. Quite honestly, the article below from the NY Times yesterday was a bit of a suprise. Widening income gaps are historically negative for political stability, broad based investments, and increasing productivity. Not good signs. I’m hoping that these numbers do not a trend make.

The wealthiest 10 percent of Americans — those making more than $138,000 each year — earned 11.4 times the roughly $12,000 made by those living near or below the poverty line in 2008, according to newly released census figures. That ratio was an increase from 11.2 in 2007 and the previous high of 11.22 in 2003.

Household income declined across all groups, but at sharper percentage levels for middle-income and poor Americans. Median income fell last year from $52,163 to $50,303, wiping out a decade’s worth of gains to hit the lowest level since 1997.

Poverty jumped sharply to 13.2 percent, an 11-year high.

http://www.nytimes.com/aponline/2009/09/28/us/politics/AP-US-Census-Income-Gap.html

Bernanke Says Commercial Property May Pose Risk for Economy

For those thinking that this rally is hinting at green shoots and recovery, let me play the bear’s advocate. A few months ago, we discussed the factors needed for a recovery to be in the works. I’d like to make some updates:

1. Rental yields have NOT stabilized. All signs point to a weakening commercial property market and a residential rental market that may only be taking a breather on its downtrend. I don’t see rents going up in any major market.
2. Unemployment has NOT stabilized. It’s climbing. Forget about the quoted  statistics, the number of people working part time or “underemployed”  is rising and rising fast. Contrary to the profits implied by Goldman’s earnings, hedge funds, PE funds, etc. are not hiring the high paid workers they used to, let alone lawyers and other service providers around them.
3. Consumer credit is still shrinking as saving rates rise. Spending will continue to go down and earnings might beat the depressed estimates, but they are not gonna be good. Also, there is usually a quarter or two of  positive surprises in bear markets, fueling bear market rallies.
4. P/E’s are NOT low anymore. We will update the new P/E and rolling 10-year after earnings season, but so far, it’s still high by historical standards.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a2mAhkgbWDXc

So, be careful out there.

Unemployment Numbers

I just had to put in the whole statement. All BOLD highlights are mine…

Commissioner’s Statement on the Employment Situation News Release:

Statement of Keith Hall, Commissioner, Bureau of Labor Statistics
before the Joint Economic Committee

UNITED STATES CONGRESS

Friday, June 5, 2009

Madam Chair and Members of the Committee:

Thank you for the opportunity to discuss the employment and unemployment data that we released this morning.

Nonfarm payroll employment declined by 345,000 in May. Job losses had averaged 643,000 per month during the prior 6 months.

In May, the unemployment rate rose from 8.9 to 9.4 percent.

Since the recession began in December 2007, payroll employment has fallen by 6.0 million, and the unemployment rate has increased by 4.5 percentage points.

Job losses continued to be widespread in May, but the rate of decline moderated in construction and several service-providing industries. Large job losses continued in the manufacturing sector (-156,000), with employment declines in nearly all component industries. Employment fell sharply in motor vehicles and parts (-30,000), machinery (-26,000), and fabricated metals (-19,000). Since the start of the recession, manufacturing employment has decreased by 1.8 million, accounting for 3 out of 10 jobs lost during this downturn.

Construction employment declined by 59,000 in May, half the average of the previous 6 months. Job losses moderated in the private service-providing industries, with employment falling by 113,000 in May compared with an average monthly decline of 356,000 in the prior 6 months. Employment was little changed in temporary help, retail trade, and leisure and hospitality, following large declines in recent months.

Elsewhere in the service-providing sector, the health care industry added 24,000 jobs in May. This was about in line with the trend thus far in 2009.

In May, average hourly earnings for production and nonsupervisory workers in the private sector were up by 2 cents to $18.54. Over the past 12 months, average hourly earnings have risen by 3.1 percent. From April 2008 to April 2009, the Consumer Price Index for Urban Wage Earners and Clerical Workers declined by 1.2 percent.

Turning to measures from the survey of households, the unemployment rate increased from 8.9 to 9.4 percent over the month. The number of unemployed rose by 787,000 to 14.5 million.

Since the recession began, the jobless rate has increased by 4.5 percentage points, and the number of unemployed persons has grown by 7.0 million.

Among the unemployed, the number who have been out of work 27 weeks or more increased by 268,000 in May to 3.9 million.

These long-term unemployed represented 2.5 percent of the labor force, the highest proportion since 1983.

Over the month, the employment-population ratio edged down to 59.7 percent, the lowest level since October 1984. Since the recession began, the employment-population ratio has fallen by 3.0 percentage points.

Among the employed, the number of persons working part time who would prefer full-time work was little changed for the second consecutive month. At 9.1 million in May, involuntary part-time employment was 4.4 million higher than at the start of the recession.

Among those outside the labor force–that is, persons neither working nor looking for work–the number of discouraged workers was 792,000 in May, up from 400,000 a year earlier.

These individuals are not currently looking for work because they believe no jobs are available for them.

In summary, nonfarm payroll employment fell by 345,000 in May, compared with the average monthly decline of 643,000 for the previous 6 months. While job losses continued to be widespread, declines moderated in construction and in a number of service- providing industries. The unemployment rate rose by half a percentage point to 9.4 percent.

As Goes California?

California’s unemployment rate rose to 11.2% in March. http://www.bizjournals.com/losangeles/stories/2009/04/13/daily40.html.

Interesting highlight:

Educational and health services was the only category with a year-over-year gain, — 2.2 percent — with a 0.2 percent gain in March.

For a detailed breakdown, go here: http://assets.bizjournals.com/cms_media/sanfrancisco/calmr-1.pdf