Another day, another all time nominal stock market high. Stocks rose by more than 2% across the board during the first full week of trading in March as the Dow closed near 14,400 on the strength of a better than expected February non farm payrolls report. The U.S. economy added 236,000 jobs last month as the unemployment rate hit a four year low of 7.7%. The numbers were quite a bit better than expectations as the establishment survey figure topped even the highest estimates and the household survey printed well below forecasts of 7.9%. What isn't true however is the following statement from Paul Zemsky, the CIO of multi-asset strategies at ING:
...the number was uniformly strong and it shows the economy continues to be on the mend.
Similarly, Darrell Cronk, regional CIO for Wells Fargo said that for his part, he just couldn't "pull [anything] negative at all [out of] this report. Probably the only thing that is potentially negative is we had some net revisions down in the month of January by about 38,000." This needs to be put in perspective. Mr. Cronk is referring to the fact that the BLS revised down January's number from 157,000 to just 119,000. This means that the total number of jobs added in January and February of this year was 355,000 -- some 227,000 less than the total number of jobs added in January and February of 2012. This extremely simple example makes the following statement by WorldWideMarket's Joseph Trevisani seem rather comical:
Progress in the labor market is unmistakable.
Furthermore, the labor force participation rate -- the percentage of those 16-64 either employed or unemployed but searching for employment -- actually fell during the month and is now at 63.5 which ties last August's print for the lowest monthly reading since the mid-eighties:
As Ellen Zentner, Nomura's senior U.S. economist noted, this decline was a rather large contributor to the drop in the unemployment rate:
This number for February essentially expresses a labor market that continues to move sideways at a frustratingly slow trend for the Fed. The unemployment rate ticked down more than expected, but more than half of that decline was because of a drop in the labor force participation rate. (emphasis mine)
Note also that we are back in the "sweet spot" as it were where economic data is good enough not to be bad but not good enough to warrant an end to quantitative easing, and this is just what the stock market (not to mention the country's largest financial institutions) want to see. Indeed, right after expressing how much difficulty he was having finding any negatives in the jobs report, the above-quoted Darrell Cronk had the following to say about the impact the number will likely have on the Fed:
...the Fed is still very dovish. Bernanke in his latest comments have not given any indications. His vice chair, Janet Yellen, is even more dovish than Bernanke and a couple of the core governors that really carry the weight on the Fed are all leaning to the dovish side. I don't think this changes the dynamic of QE and where things are at today.
Ultimately, unless there is an earth-shattering improvement in the jobs market or, alternatively, unless everyone of working-age suddenly gives up looking (a far more likely scenario given the real state of the economy), investors can probably count on the Fed to keep the spigot wide open. As I noted in a recent ZeroHedge piece, the Fed is printing around $188 million per hour and the correlation between the deployment of this new money (daily POMO) and stock prices is quite striking:
...as long as the Operation Twist was still operational (that is, as long as the only unsterilized flow coming into the market was via the Fed's MBS purchases), stocks struggled to gain any traction. [However] as soon as QE-eternity was implemented (i.e. as soon as the addict's dosage was upped to a $1.02 trillion per year pace as opposed to a mere $420 billion per year clip) stocks took off and made new highs in just a little over two months.
As long as the economy is good but not good enough, this will likely continue. The relationship between the market and the broader economy is thus a bit schizophrenic: things are going great, but we still need to print $85 billion per month. It isn't any wonder then, that the companies which comprise the market and the economy are themselves acting a bit schizophrenic. Consider for instance, the following two headlines which appeared in the same issue of the Wall Street Journal:
According to the first article mentioned above, U.S. companies have raised more than $35 billion in the first two months of the year in stock sales, the quickest pace since 2000. Meanwhile -- and this is borderline hilarious considering the pace of secondary offerings -- U.S. companies repurchased $117.8 billion of their own stock in February, the most in nearly three decades. So companies are issuing new shares at a rapid clip and are simultaneously buying back shares even faster. This contradictory behavior can be either directly or indirectly attributed to Fed policy.
Taking the indirect point first, the Journal notes that "companies are taking advantage of the stock market's record-breaking rally to raise funds." Of course, the "record-breaking rally" is attributable to $45 billion in new flow coming to market starting on January 3 (for a visual representation of this, see my ZeroHedge piece cited above).
As for the direct effect, the record cash piles companies are tapping into in order to repurchase shares are at least partially the result of last year's ZIRP-fueled corporate borrowing spree:
In returning money to shareholders, companies by and large are tapping into cash piles they have accumulated in the past few years by... taking advantage of low interest rates to borrow funds.
Of course, both stock sales and share repurchases could serve to further inflate an already stretched market as firms use cash to make acquisitions and share repurchases simultaneously inflate earnings, painting a misleading picture of corporate profitability. In other words: we are witnessing a Fed-driven rally within a Fed-driven rally.
Meanwhile, both investors and the Fed seem determined to stand behind the extraordinarily counterintuitive notion that somehow creating $188 million per hour isn't affecting inflation. At the very least, investors seem to think that the money they make from rising stock prices offsets any moderate inflation the Fed has created, thus making the whole game worthwhile. In the real world, the Dow buys 20% less beef and 60% less bananas than it would have in 1999. Perhaps more disturbing is the following observation by the Sovereign Man's Simon Black:
Today, the Dow will buy roughly 3,812 gallons of unleaded, non-premium gasoline in the United States. This is almost exactly the same as last January, just fifteen months ago, when the Dow was only 12,633...But to match its high of 10,718 gallons set in March 1999, the Dow would need to almost triple from where it's at today. (emphasis mine)
In other words, if the Dow had kept up with fuel costs, it would now be sitting at 42,000.
In the end we have an economy which is doing fine even as it isn't, we have companies who are buying back shares even as they issue them, and we have inflation without inflation. The only question is whether one chooses to participate in what Rick Santelli recently dubbed "the parlor game." I for one, remain steadfastly on the sidelines until something -- anything -- begins to make sense again.