04/6/17

WILL FRIDAY’S LABOR REPORT SURPRISE ON THE UPSIDE?

By: Kent Engelke | Capitol Securities

Equities advanced led by shares of financial companies and energy. The catalyst was the ADP Private Sector Employment Survey which greatly exceeded expectations. Data points of considerable significance include job growth for good producing industries, which include manufacturers and builders, have just had their strongest two months since 2002. Job gains for medium and small sized companies rose at the greatest pace since June.

Many times I have commented the correlation between the ADP and BLS data has declined, but the large upside surprise increases the likelihood that Friday’s estimates for the BLS statistics are perhaps low.

The ISM Non-Manufacturing Index however posted a nominally disappointing statistic, easing to the lowest level in five months. This data was largely ignored focusing instead on the bullishness of the ADP statistics.

I believe that if tomorrow’s BLS data exceeds expectations by the same amount as ADP, there will be first quarter growth estimates with a “3” handle.

Yesterday was the release of the Minutes from the March 15th FOMC meeting. In my view, much had already been disseminated given initially the general lack of market reaction.

As inferred, the last 60 minutes of trading, the Dow retraced about a 150-point gain only to close lower by 40 points. The S & P 500 declined about 0.60%. According to Bloomberg, it was the largest one day reversal in 14 months.

Some are speculating the reversal was the result of Minutes stating that equity prices are “quite high,” while others suggest it was the result of Paul Ryan commenting “tax reform could take longer than health overhaul.”

Regardless of the reason, I believe yesterday’s reversal was a direct result of the massive influence that ETFs and algorithmic trading has upon the markets where according to the SEC, 90% of the volume is the result of such activity.

What I found interesting was the Commodity Futures Trading Commission (CFTC) appointed its first Chief Market Intelligence Officer who will report directly to the CFTC’s chairman.

This new position is designed to “understand, analyze and communicate current and emerging derivatives markets dynamics, developments and trends — such as the impact of new technologies and trading methodologies upon the markets to ensure market manipulation including spoofing and unbalanced trading does not occur.”

As I noted many times, about 15 months ago, an SEC commissioner stated “because of the change in trading mechanics an unbalanced playing field may have emerged, benefiting only a few.”

Generally speaking, I am against greater regulation, but in today’s new trading era, I do believe there are abuses where activity is not justified by the underlying macroeconomic or geopolitical conditions, where security analysis and macroeconomic thesis is all but disregarded for the sake of the cheapest execution.

What will happen today? President Trump will meet his Chinese counterpart today for a two day meeting. Will there be any provocative headlines? Also released today is the Challenger Job Cuts survey. This is a third tier indicator, but at times has been of some significance.

Last night the foreign markets were down. London was down 0.33%, Paris was up 0.26% and Frankfurt was down 0.15%. China was up 0.33%, Japan was down 1.40% and Hang Sang was down 0.52%.

The Dow should open quietly higher amid the Fed’s stated but well known intent of shrinking its balance sheet amid policy makers’ concerns that stocks have gotten expensive. The 10-year is off 5/32 to yield 2.36%.

03/13/17

IN MY VIEW IT IS ALL ABOUT THE LABOR PARTICIPATION RATE

By: Kent Engelke | Capitol Securities

Employers added jobs at an above average pace for a second month. The 235,000 increase followed a 238,000 rise in January that was more than previously estimated and was the best back to back rise since July.

Some are discounting the rise because of the unseasonably warm weather, but the data does coincide with a surge in economic optimism following Trump’s victory.

The labor participation rate (LPR), which I believe is a good proxy of the strength of the jobs market, also rose, rising to 63.0%, the highest participation rate since December 2013. The LPR was 62.6% in November.

This data all but ensures the Federal Reserve will increase rates next week.

Commenting further on the LPR, the LPR was around 66.1% in 2008. It was on a downward trend since reaching a 45-year nadir of 62.5% in November 2015 and has remained in this zone since then. A strong case can be made that the vast majority of the drop in the unemployment rate from 10% to 4.7% was the result of the plunging LPR as there are less workers in the workforce, thus a lower unemployment rate. It is estimated that if the LPR was around 2008 levels, the unemployment rate would be about 9%.

The prime age participation rate (people aged 25-54) rose to 81.7% up from 80.6% in September 2015, which matched the lowest since 1984.

Has the trend reversed itself? The answer to this question is pivotal regarding monetary policy and interest rates and perhaps equity performance.

A case can be made that wage gains may remain modest (as was the case in both January and February’s data) because of this huge pool of labor which will permit the FOMC to maintain more of an accommodative policy than the headline data may otherwise suggest.

As noted many times and as indicative by every business and consumer sentiment survey, optimism is surging because of the election. Is this change in sentiment — aka the unleashing of animal spirits that have been caged since 2008 — going to translate into increased activity and capital formation that permits greater growth than anticipated?

If annual growth accelerates to over 3% for the first time in 10 years, the Trump administration may be viewed in the same light as General Patton, the abrasive general who was instrumental in defeating Hitler.

To place this anemic growth into perspective, according to the Bureau of Economic Analysis, this is the first time since record keeping commenced in 1929 that the economy did not grow at 3% or higher for one year in a 10-year stretch.

This record shattered the previous record of four year from 1930-1934.

If growth does accelerate to over 3% for a myriad of reasons, there is great potential that Main Street will outperform Wall Street.

To remind all, the last time Main Street did outperform was in 2005, the last year annual growth was over 3%. The US expanded by 3.3% during 2005.

Because of the data, fed funds futures are now suggesting a 30% chance of four interest rate hikes in 2017. Wow! This is the first time in over ten years the market is perhaps suggesting more hikes than thought on January 1.

Markets closed nominally higher on the news.

What will happen this week? The Fed meeting concludes Wednesday; there is a host of inflation data, retail sales statistics, consumer confidence and housing information as well as a key vote in the Netherlands which may further impinge globalism.

Last night the foreign markets were up. London was up 0.25%, Paris was up 0.09% and Frankfurt was up 0.07%. China was up 0.76%, Japan was up 0.15% and Hang Sang was up 1.11%.

The Dow should open flat ahead of a busy week. The 10-year is up 1/32 to yield 2.58%.

03/6/17

DID FRB CHAIR YELLEN TELEGRAPH A STRONG LABOR REPORT?

By: Kent Engelke | Capitol Securities

Did FRB Chair Yellen telegraph a strong labor report for Friday? Yellen commented “an interest rate increase would be appropriate at the central bank’s upcoming meeting if employment and inflation continue to meet policy makers’ expectations.”

Fed funds futures, which are a gauge of market sentiment, are now suggesting a 96% chance of interest rate increase on March 15. Seven days ago the odds were less than 40%.

As noted the other day, the markets have now discounted three interest rate increases for 2017, the amount the Committee suggested in late 2016. I do think it is noteworthy that at the start of 2016, central bankers expected to make four rate increases, but only did one and that was in December.

Because of these missed outlooks, many have become complacent about the risks within the sovereign debt markets; risks that I think are substantial. Several weeks ago, I opined about the possibility of more rate increases than expected because of stronger growth, the result of uncontained “animal spirits;” animal spirits that have been caged for over eight years because of regulatory zeal and crushing tax policies. This zeal/policy has now been perhaps caged if not reduced.

Is market focus now switching from attention to Trump’s proposals to data and how this data will affect monetary policy? This week is a heavy data week and if the markets respond to these statistics, the answer is yes.

As noted above, Friday the all-inclusive BLS labor report is released. Analysts are expecting a 4.7% unemployment rate, a 190k and 185k increase in nonfarm and private sector payrolls respectively, a 0.3% increase in hourly earnings, a 34.4 hour work week and a 62.9% labor participation rate.

Markets Friday were relatively unchanged with the exception of oil which rose about 1.5% as the major oil ports in Libya were seized by militants.

Last night the foreign markets were mixed. London was down 0.34%, Paris down 0.42% and Frankfurt down 0.37%. China was up 0.48%, Japan down 0.46% and Hang Sang up 0.18%.

The Dow should open moderately lower on monetary policy concerns. The 10-year is unchanged at 2.48%.

03/17/15

U.S. Worker Replaced By Lower-Cost Foreign Worker Makes Impassioned Plea To Senators

“I saw Americans being replaced. We brought in H-1B workers. Didn’t matter if [they] had skills or not. We brought them in, sat them in cubicles, and watched the Americans train [their own replacements]… They call it ‘knowledge transfer’ but we all know that’s an illusion. It’s all about cheaper labor.”

BACKGROUND:

H-1B labor market expert and Rutgers professor Hal Salzman also testified at today’s hearing that:

· The U.S. supply of high-skilled graduates far exceeds the hiring needs of the STEM industries

· Future demand for computer science graduates can be met by just half to two-thirds of the current annual supply of U.S. computer science graduates

· Guestworker supply is large and highly concentrated in the IT industry, and is likely a factor in both stagnant wages and job insecurity

· The predominant function of IT guestworker visa programs is to facilitate the offshoring of IT work

· The number of guestworkers is equal to two-thirds of current entry-level and early-career hiring

· Proposed high-skill guestworker legislation such as I-Squared, the SKILLS Act, and S. 744 would expand the supply of guestworkers to levels greater than the total number of new technology jobs; these changes in immigration policy would provide enough guestworkers to fill every new job opening in the IT workforce, with a reserve large enough to allow firms to legally substitute young guestworkers for their incumbent workforce

· “Green Cards for Grads” provisions in I-Squared, S. 744, and other bills would provide incentives for colleges and universities to establish or expand current Masters programs as “global services” that offer a green card for the price of a graduate degree, and that are offered primarily or even exclusively for foreign students

“People aren’t commodities. We compare labor to commodities, but they’re not commodities. They’re human beings. They have families. They have hopes and dreams. They want stability in their life. They would like to have a good job at a company like the biggest utility in California—California Edison [where hundreds of Americans were laid off and replaced with guest workers]… We have no obligation to yield to the lust of big businesses… Mr. Zuckerberg is worth $27 billion, I guess he is 27 years old, I’m not sure. So he wants more foreign workers. I would like to think he might want to pay his employees more and maybe not have quite so many billions, if he’d like to be helpful, and maybe he could get more local workers.”

01/28/15

Obama’s Economic Shell Game

By: Bethany Stotts
Accuracy in Media

Whether in his State of the Union or his recent campaign-like visits to the states, the President has been touting an economic recovery that his policies have supposedly fostered after he inherited a dire recession from George W. Bush. This narrative, repeated over and over through the years, is filled with half truths and exaggerations. Yet a complicit media is more than willing to look the other way from Americans suffering at the hands of a weak recovery with any numbers it can get its hands on.

To add insult to injury, the President’s proposed $320 billion in new tax increases makes it obvious that he’s “not serious about governing,” according to a Washington Post opinion piece by former Bush speechwriter Marc Thiessen. But, he argues, this political ploy will only work if the right is distracted by it.

Similarly, John Podhoretz writes for the New York Post that Obama gleefully “trolls,” or enrages his political opponents, to elicit ad hominem, spittle-filled disgust regardless of policy merits and the Democratic Party’s health. So when Americans hear the President proposing new taxes and claiming the country boasts a healthy, recovering economy, they may assume he’s tone deaf. However, he’s deliberately “trolling” for political effect.

The President is also fond of touting that the federal deficit has fallen from 10 percent of GDP to three percent of GDP, but such a claim couldn’t even fool Politifact, which rated the assertion as “half true.” “Obama is laying the blame for the high deficit-to-GDP ratio entirely on Bush, when the figure covers time in office for both presidents,” they say. “The statement is partially accurate but leaves out important details, so we rate it Half True.”

From where I come from a “half truth” is really a lie. Add to the list of false assertions the evergreen claims by President Obama that a) he has made the best of a terrible recession, and b) that our economy is now going strong because the unemployment rate is now below six percent.

“The widely publicized unemployment rate, eagerly awaited each month by pundits and policy wonks, has become little more than a shell game in which officials keep the public guessing about the real state of the economy,” pointedly wrote Jay Schalin of the John W. Pope Center for Higher Education Policy back in 2012.

Reporting by The New York Times exposed that where once someone would have qualified as officially unemployed, they may now remain uncounted as “out of the labor force.” “In particular, there seems to have been an increase in the number of people who once would have qualified as officially unemployed and today are considered out of the labor force, neither working nor looking for work,” reported David Leonhardt last August.

Yet the Times, after the State of the Union last week, congratulated the President for his efforts to “cement an economic legacy that seemed improbable early in his first term, when the country was in near-economic collapse.” What then, is the President’s economic legacy of recovery to date?

Millions of people are not being counted in the most recent official unemployment rate of 5.6 percent. Schalin pointed his readers to a more accurate barometer—the labor participation rate. It currently sits at a 36-year low.

The falling labor participation rate, reports Jeffrey Scott Shapiro for The Washington Times, “translates to more than 7 million fewer workers in the workforce.”

The Wall Street Journal reports that a “U.S. economy that suddenly looks healthy” isn’t “luring back many of the millions who dropped out of the labor market during the down times.”

The outlook for America’s jobless and uncounted is dismal. “Over the past three months, an average of 6.8% of those outside the labor force either found a job or began looking for one,” reports The Wall Street Journal. “That means people are entering the labor force at the lowest pace in records kept since 1990, down from more than 8% in 2010.”

But the media instead carefully misinform the public to boost presidential credibility. The Washington Post, after the State of the Union address, called our President “cautious over the past two years not to gloat over news of fitful economic growth, mindful that the economy remained tenuous and public confidence uneasy.” Now, however, “with the jobless rate well below 6 percent, the stock market nearing record highs and his job-approval ratings rebounding, Obama on Tuesday night dropped his veneer of reserve and appeared to delight in having proved his critics wrong.”

What exactly is the proof?

“Jobs are up, but wages are down,” noted Politico’s Timothy Noah about December’s job numbers. “In five-and-a-half years of economic recovery, the median income should have increased. Instead, it is lower. … Stagnating wages have displaced unemployment as the nation’s chief economic concern, and wages are becoming a central political concern too.”

Ironically, the Post’s own fact-checkers, after taking apart the President’s speech, found that “it is too early to say that this positive response from small businesses means ‘wages are finally starting to rise again.’” In other words, our President lied—again.

“Politicians can lower the U-3 [unemployment] rate—and make things seem better than they are—by making it easier for people to leave the workforce,” noted Schalin.

At a national level, welfare dependency is at higher levels now than under George W. Bush, millions of Americans are signing up for Obamacare subsidies, the rich are getting richer while the poor are getting poorer, and median income is now comparable to 1995 levels. “Today median income is on par with where it was in 1995, which is one of the reasons many Americans still don’t feel the economy has truly improved,” reported CNN Money in December in the last line of its article.

The first line touted more positive Obama-centric news: “The Obama recovery was looking a lot better on Friday after a particularly strong jobs report made 2014 the best year for hiring since 1999.” CNN must have thought it could put some positive spin on this official numbers game.

In the last year of Bush’s presidency, 17.1 percent of Americans received welfare assistance. That figure now stands at nearly one in four—23 percent—according to Shapiro.

“A 2013 Pew Research study of U.S. Census Bureau data found simply that the rich got richer and the poor got poorer during the Obama economic recovery,” reports Shapiro. The study stated that our recovery boosted the incomes of the upper 7 percent by over a quarter, while the “mean net worth” of households in the remaining 93 percent “dropped by 4%.”

Chuck Todd of NBC News’ deserves a veritable medal for media bias. He opened his co-authored article, “Telling the Recovery Story: Obama Hits the Road to Tout Economy,” by pointing to Massachusetts Governor Deval Patrick’s (D) criticism of the President that “one problem I think that the president has is that he doesn’t tell that story [the “explosive growth in corporate profits, in stock market returns, employment that’s come back strong”] very well or very regularly.”

“Well, Obama is now trying to tell that story a bit better,” comment Todd and his co-authors.

“One reason why the White House feels more confident in touting the economy is that the country has seen its longest stretch of good economic news during Obama’s presidency,” he and his co-authors wrote. “And that’s been reflected in a media that usually emphasizes bad news over good news.”

Todd has said in the past that he found his off-the-record conversations with President Obama “very nourishing.”

Simply put, a lot of Americans can’t—and won’t—swallow economic spin of such mammoth proportions, either from the media or from our President.