Friday, December 3, 2010

Morning Note...


Happy Friday… After the last couple of days of outright ebullience, a more somber mood has taken hold of the markets this morning as the much-anticipated November Change in Nonfarm Payrolls release from the Labor Department disappoints, as +39k jobs were created in the month versus the prior +172k and the estimated +150k.  Futures are down ~60bps as the Unemployment Rate rose to 9.8%.  Further, the “Underemployment Rate,” or the U6, which also includes those who have given up looking for work, stands at roughly 17%.  When you also consider that the recent unemployment benefits extension is beginning to expire for many Americans and that the Bush tax cuts extension vote yesterday by the House may have been little more than posturing ahead of a more realistic Senate vote, recent bullishness has been somewhat tempered.  If jobs fail to materialize, however, that sets the stage for political pressure to ensure the tax cuts are maintained and that QE2/ZIRP is justified and that maybe we’ll even see QE3 one day soon… Europe stable (-50bps on average) as the most recent bond offerings have gone off cleanly and the troubled countries bond spreads vs. the “safe haven” German spreads have narrowed.  EUR/USD +90bps at 1.3335.  Asia mixed overnight.  Oil -60bps.  Gold +75bps. 

I thought Knight’s Fixed Income Dept. summarized this morning’s jobs data nicely:

With unemployment rising to 9.8% as job seekers re-enter the market (the pool of available labor rose 239K during the month and the civilian labor force rose 103K) we could have been okay with this report as it is normal for job recoveries to begin with encouraged workers.  However when combined with NFP of 39K and Private Payrolls of 50K, it is hard to be encouraged.  Discouraged workers rose and the "underemployment" level remains at 17%.

Where are the positives?  The prior month was upgraded from 151K to 172K for NFP and up 1K to 160K for private payrolls.  There was also not a distortion from the oft criticized birth/death ratio as new businesses were assumed to have resulted in a loss of 8K jobs.  Thus, the number is "cleaner" than usual.  Also temporary help rose for the fourth consecutive month, usually a positive sign of future permanent hiring, but we have seen it give a false positive before in this market. 

But that is basically it.  39K is pretty far from 150K and 50K is a far cry from 160K.  What is close?  Well, 9.8% is pretty close to 10%.  Unemployment cycles are longer at the zero bound and the retooling of workers and demand from an economy geared toward housing production is a lengthy process. 

On the topic of bullishness, BTIG’s Mike O’Rourke also reminded us about the AAII sentiment indicator last night:

Domestically the recovery story remained on track.  Same Store Sales in the retail industry were widely better than expected as were Pending Home Sales.  Our favorite indicator, Initial Jobless Claims, upticked to 436,000.  They continued the pattern of two steps forward and one step back.  Regardless, this reading was still the 3rd lowest reading since August 2008.  Next week's number will be an important one.  The first week of December generally sees the largest percentage jump in the Non-Seasonally Adjusted number, and the seasonal adjustment usually only adjusts for 60%-70% of the rise.  Even considering those headwinds, we expect the seasonally adjusted number to be in line with today's reading or better.  AAII Sentiment is at (or above) the 65% bullish level (Bulls/(Bullls + Bears)) for the second consecutive week (as well as 5 of the last 7 weeks).  As we always point out, 70% is the sell signal threshold.  The caveat is that if the economic data shows material improvements as occurred in 2003, then the signal loses its significance.  It appears as though this environment is playing out in a similar manner.  U.S. Markets also benefitted from the European stability - let's hope that is not an oxymoron.  The big problem with having a two-day rally in the Euro is that it is usually followed by a selloff.  Nonetheless, we suspect that come 8:30 am tomorrow, the driving force behind trading will be the BLS Employment Situation report. 

BCAP cuts KR, SWY.  BofAMLCO ups CAN, IACI, SWS.  CITI ups DD.  FBRC ups NSM.  GSCO ups PMCS.  JEFF ups KND.  JPHQ ups BBBB, POR.  PIPR ups PWER.  WEFA ups YGE.  CITI cuts EBAY, ECL.  BofAMLCO cuts ACGL.  GSCO cuts MRVL.  MSCO cuts CMG.  NOMU cuts PSUN.  UBSS cuts TMX.  WEFA cuts BRCM, CSIQ, JASO, SOLF, ULTA. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  Name the only animal with four knees.
                                                                                                                                                           
Yesterday’s Question:  What is the nearest planet to the Sun to be orbited by a moon?

Yesterday's Answer:  The Earth is actually the closest planet to the Sun to be orbited by a moon. 

Best Quotes:  Briefing.com summary…

Page One: Jobs Report Cools Down Hot Market Last Update: 03-Dec-10 09:02 ET

The equity market made another strong showing Thursday, distancing itself entirely from the notion that it would struggle if ECB President Trichet refrained from announcing plans to increase bond purchases in the eurozone.  Alas, there were no struggles on Thursday as the S&P 500 rode a better-than-expected pending home sales report to a 1.3% gain.

Given the growing level of angst over Europe's debt situation and the military skirmish between North Korea and South Korea at the end of November, it is hard to imagine December getting off to any better start.  The S&P 500 has surged 3.5% in the first two days alone and is within a snowball's throw of hitting a new 52-week high.

The latest push to own equities has come in the face of rising bond yields, which suggests to us an asset reallocation trade has been an added source of support for the stock market in early December as participants have been warming up to the idea that the U.S. economy -- and the U.S. consumer specifically -- is faring better than most assumed to be the case.  Call the recent data an economic hot toddy if you will.

The November employment report, however, has thrown some cold water in the warm mix.   

The headlines for the November employment report disappointed in just about every respect.

Nonfarm payrolls increased a modest 39,000 (Briefing.com consensus +130,000); private payrolls were up 50,000 (Briefing.com consensus +140,000); the unemployment rate jumped to 9.8% (Briefing.com consensus 9.6%); average hourly earnings were flat (Briefing.com consensus +0.1%); and the average workweek held steady at 34.3 hours (Briefing.com consensus 34.3).

The struggles of the labor market shone through in the indication that the percentage of people unemployed 27 weeks or longer ticked up to 41.9% from 41.8%; meanwhile, the "real unemployment rate," which also accounts for marginally attached workers and persons employed part-time for economic reasons, remained unchanged at 17.0%.

The latter number suggests one out of six workers over the age of 16 is either unemployed or underemployed.

Fortunately, there were upward revisions to September and October nonfarm payrolls, but a net gain of 38,000 jobs between those two months will be small consolation given the optimism that had been building in the wake of an improving initial claims trend and the recent ADP Employment Change report that estimated a 93,000 gain in private sector payrolls in November.

One of the more peculiar elements in the November report is that the jump in the unemployment rate was not the result of more discouraged workers coming back to look for work.  The civilian labor force increased by 103,000 to 154 mln, but that increase is in line with normal population growth.  The participation rate held steady at 64.5% as the number of employed fell by 173,000 to 138.9 mln.

The swing in the unemployment rate is a bit confusing when taking into account other reports/surveys pointing to increased hiring activity.

Of course, in a labor force of 154 mln workers, there isn't any great statistical significance between the 39,000 increase in nonfarm payrolls and the 130,000 consensus estimate.   Nonetheless, there is quite a psychological difference for a market that had been expecting the headline surprise to be on the upside this time around.

Not surprisingly, the futures market saw a quick reversal, as did the Treasury market.  The S&P futures, which were up three points ahead of the release, are now down eight points.  The yield on the 10-year note, which touched 3.04% earlier this morning, is back down to 2.91%.