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Saturday, June 5, 2010

Market Thought... re-evaluation

The technicals of the market continue to look horrible, and frankly I do not think they matter at the moment. The one indicator I am keen on is the 10yr treasury. The yield is about to retest a level (3.0-3.1%) that (if severely broken) may signal deflation, which would relate to a weak equities market.

The piss-poor Jobs Report was so bad, it made me take a long-hard look at my bullish market thesis. Since Friday morning I have been thinking, reading and contacting people that can help me piece the puzzle together.

1. Jobs:

The private jobs growth of 41K was piss poor. On Friday I contacted some Head Hunter friends of mine, and what they are seeing does not corroborate with the Jobs Report.

-One firm is seeing record numbers, and a sense of stress with companies looking too specifically for criteria regarding talent. It appears a tipping point is being achieved where 'good-enough' talent have to fill a company's desired role.

-June was also considered a busy month, but July and August are generally slow. Then a drastic pick up in Sept. (This next report maybe more reflective of what the Hunters were seeing.)

Obviously this is very qualitative, and not scientific by any means. (If I had the time and resources to contact over 20 or so ground level Head Hunters or a few executives I could produce a more quantitative model of expectations. The only quantitative model I have regarding full time employment expectations is MWW stock. One can assume if the private jobs market is good, the trading habits of a forward looking stock would indicate this. But right now the stock is not indicating the qualitative findings.

One thing that can corroborate the qualitative findings is the high productivity rate for corporate America. My discussions indicate to me, the level is unsustainable, and a point for optimism.

2. Corporate Profits:

The market is driven by profits, or expectations of profits, (everything else is essentially noise that people assume will affect profits) and the 'Hours and Earnings of all Employees' still increased, and it has consistently increased since last year.

This current Jobs report is the only one that would lead to the lack of sustainability toward Employment Earnings. With so much public sector job increases, it is hard to argue otherwise. But there is still a lot of stimulus money not spent yet, along with the gradual reduction in productivity level from job growth, corporate profits should remain high for the rest of 2010. (And with the global economy growing, companies positioned for the growth will continue to grow profits.)

3. Europe (from banks-to-politics)

I still believe there is a 'perceived negativity' in Europe that is acting as a domino effect. The risk of default or breaking of the Euro is squashed. Austerity measures are being passed across the continent, and countries that need help are being dragged kicking and screaming via the IMF. In my opinion, this risk is being reduced. However, a domino effect of the default is jump-starting rumors regarding high profile bank failures, along with derivative losses from others. The ECB apparently has been on this, and is taking action. (article) With their own stress tests established, this may alleviate this domino-effect. (I also think a awesome buying opportunity will be established for STD when or if a secondary is required from the stress test. I will be looking to buy STD if a secondary is announced.)

Also, the decline in the Euro does not worry me. The rate of decline is a concern, but this will begin to mitigate itself (as the markets find an equilibrium) to present a new carry trade the Hedgies can exploit. (Just like they did with the dollar/yen for years.) I find it hard to believe anyone was not expecting the Euro to decline once the Greece situation was first mentioned in the early parts of the year.

4. China Slowing:

The Chinese have proven time and time again that they have too much control over their economy. I mean some of the numbers that come out of China w/respect to bank lending can swing wildly, and make me scratch my head. We can see consumers borrow north of $190b in one month, then borrow close to nothing the next month. Also, their government has too much money to let their 'economic miracle' simply dwindle now. Over the last 20 years they (the controllers of their economy) have shown to have too much control, and I do not think they will loose it just yet. (But I do think commodities continue to under-perform due to their direct involvement in China slowing down their real-estate construction boom. That is just common sense.)

Fact of the matter...

The cold truth is that the US and global economy can be sustained and grow with a higher unemployment number. Corporate profits are growing. Political leaders are doing what they have to do to maintain stability, even though sometimes we cringe at what they do.

The austerity measure will hurt some, the unemployment rate will hurt some, but those 'some' just do not matter with respect to the economy.

(Although the above statement seems arrogant, keep in mind, I will be one of those 'some' in a few months as I will be laid-off due to Pfizer's closure of a vaccine manufacturing site. I do not make that statement lightly. My knees and knuckles are too bloody from trying to continuously better myself, and my family's, well being to carelessly make that statement. It is merely a point of fact.)

1 comment:

  1. Echo,

    Read the Going DARK post... hoped I was reading it wrong. A sincere good luck to you and your's as you move to something new.

    I too scratch my head on jobs (I work for a medical device company which had a 10% RIF announced earlier this year- March was damn scary for me. I've seen private equity friends cut to the bone. mid management MBA's taking less in restructuring, in many fields. Depending on where one looks, the economic improvement is difficult to see. In the end, corporate profits benefit (probably).

    Thanks again for sharing your honest and thourough thoughts.