Will This Economy Ever Create Job Growth?

Economists missed the jobs estimates by a wide margin Friday morning. The nonfarm payrolls report showed the economy shed -263,000 jobs in September, far more than the consensus of -175k jobs.

This is a disappointing number for investors. We need to see the number of job losses continuing to decline. That plays into stronger consumer confidence, and strong personal spending, which is the biggest component in the GDP calculations (consumer spending accounts for nearly 70% of GDP).

On the flip side, I have said in the past that this recovery is not going to be smooth sailing. Rather, the economic data coming in will be lumpy at best. At times, it will look like the path to recovery is at our doorstep, while at other times it will appear we have taken a step back. I think today's jobs report falls into the latter category.

The news pushed the S&P 500 lower Friday morning (as of writing), all the way down to its 50-day average near the 1020 level. It is the first test of the 50-day average since July. It also marks more than a -5% correction from its highs last week, and I am not in the camp who says we have to have a 10% correction here. So while there may be some additional downside, my guess is we have seen the worst of this decline already.

Bearish sentiment is already on the rise, quickly, as the put/call ratios have been very elevated the last few days. I would expect to see similar dislocations in the investor surveys. So my thesis is that the "stair-step" market is still alive, and I will look to use this pullback as another buying opportunity.

The dollar is moving lower now, pushing oil back to $70 and gold back above the $1000 level; the 10-year yield is hovering near 3.20% after a dip all the way down to 3.10%; and the VIX is now down a touch after briefly topping the 29.50 level, an elevated level for this index.

Trading comment: On Thursday I added to a few stocks, including BIDU and GS. I also think STEC is very attractive at these levels, even thought the technicals are broken. In ETF land, I've added a little to financials (XLF) and tech (XLK).

Disclosure: Long BIDU, GS, [[STEC]], [[XLF]], [[XLK]], [[VXX]]

Comments

[TradingHelp...:]

Washington is quite happy at the progress of the recovery. Equities are recovering strongly. Corporate earnings surpassed forecasts and high employment means big business can keep a lid on costs - wages - further improving margins.

In the eyes of the privilged few everything is going to plan - the transfer of wealth, influence and control is continuing to flow from the man on the street and taxpayers to Wall Street and their pals in DC.

Looking forward corporate profitibility, especially in the banking and financial sector, will continue to improve sharply whilst tax-payers can look forward to a decade of higher taxes, and squeezed public services to pay for the mistakes and incompetence of the top 1% that 'led' us into the mess in the first place.

Suffer, quietly, the interest and tax slavery that is being prepared for you.

Conform, consume, obey.

Oct 04 08:10 AM

[User 353732:]

Jobs, that matter to the middle class, are created by start ups(by definition a start must hire at least 1 or 2 people), small businesses and useful innovation that creates new supply which creates its own demand which generates new revenues and hence, income and jobs.

The current Regime is manifestly hostile to start ups(entrepreneurs are punished and good risk taking is penalized while criminal bubble making with tax payer money is glorified); small businesses are financially suffocated (systematic and persistent credit starvation and increasingly vindictive regulations); useful innovation is stifled(by an addiction, to the stultifying status quo of failed business models, incompetent managements, ruinous organizational practices and strategically moribund industrial and financial corporations ).

This triple hostility ensures that the Structural or Embedded unemployment/underempl... rate in the economy will be substantially greater than has been the American experience until 2009. Never have so few destroyed so much job creating POTENTIAL for so many, so quickly, in American economic history.

Oct 04 08:34 AM

[logicalthought:]

>>Bearish sentiment is already on the rise... So... I will look to use this pullback as another buying opportunity.<<

While I generally find sentiment to be a very useful contrary indicator, I'm starting to think it may be misleading in the current situation. Because companies have already cut expenses to the bone, the key to more corporate revenue (and hence profit increases and hence higher-- or even stable-- stock prices) now depends on the job situation. (In other words, employment has now become a LEADING indicator.) So the fact that the job situation is so bad (and still worsening!) makes the average retail investor not a "contrary indicator" but, rather, sort of a "channel checker" who's out there in the field observing first hand how bad things are for the only metric (i.e., employment) that's left to drive stock prices higher (and, in fact, keep them from melting back down, due to PE multiple compression). In other words, the "smart sentiment" here may NOT currently be in the steel & glass towers of Wall Street.

Oct 04 08:46 AM

[punk_ash:]

America has been a place where the best minds innovate and get paid well and support lots of service jobs.

But those jobs are going away since the current generation is only qualified in Law, MBA, marketing, acting, dancing.

Oct 04 09:44 AM

[punk_ash:]

That was the intent of the start ups. But those start ups turned into hit and run operation. Launch a start up, get some revenue going, sell equity, insiders sell and run. Bag holders trade with each other trying to pinch pennies, while brokers making money on them, the product never showed up. I am glad we have no more start ups popping up.


On Oct 04 08:34 AM User 353732 wrote:

> Jobs, that matter to the middle class, are created by start ups(by
> definition a start must hire at least 1 or 2 people), small businesses
> and useful innovation that creates new supply which creates its own
> demand which generates new revenues and hence, income and jobs.<br/>
>
> The current Regime is manifestly hostile to start ups(entrepreneurs
> are punished and good risk taking is penalized while criminal bubble
> making with tax payer money is glorified); small businesses are financially
> suffocated (systematic and persistent credit starvation and increasingly
> vindictive regulations); useful innovation is stifled(by an addiction,
> to the stultifying status quo of failed business models, incompetent
> managements, ruinous organizational practices and strategically moribund
> industrial and financial corporations ).
>
> This triple hostility ensures that the Structural or Embedded unemployment/underempl...
> rate in the economy will be substantially greater than has been the
> American experience until 2009. Never have so few destroyed so much
> job creating POTENTIAL for so many, so quickly, in American economic
> history.

Oct 04 09:46 AM

[Mad Hedge F...:]

ujn For the last six months there has been a great big whopping contradiction in the markets. The stock market has been discounting a return to the “Roaring Twenties,” while the bond market has been anticipating another “Great Depression.” After yesterday’s publication of the Labor Department’s September nonfarm payroll number showing the loss of another 263,000 jobs, it looks like the bond market now has the upper hand. This takes the unemployment rate up 0.1% to 9.8%, and total job losses for this recession to 7 million. The really disturbing aspect of this number is that 57,000 teachers were fired, as states chop budgets to the bone. This is really eating our seed corn by the bushel full. Of course, I have been banging pots and pans, setting off distress flares, and yanking the fire alarm, trying to alert readers that this kind of disappointment was coming (click here for “Risk Reversals Can Be Such a Bitch” and here for “Stocks Offer No Value”). Shares have dropped 5% from last week’s peak, as the bond market soared, the ten year yield reaching nosebleed territory of 3.05%. The dollar maintained its flight to safety status, which to me is one of the great ironies of all time. It’s like that reprobate, alcoholic uncle with the bad teeth, who, when your car breaks down in the middle of a downpour in a bad neighborhood, will always let you crash on his sofa. Let’s call him your Uncle Sam. You have to hand it to PIMCO’s inveterate card counter, Bill Gross, who says this is all about transitioning to a “new” normal of 1%-2% real GDP growth. That’s why he was loading the boat with bond yields at 4%, a “ballsey” move at the time, which now smells like roses. I guess that’s why they call him the “Bond King.”

Oct 04 09:57 AM

[CautiousInv...:]

With private credit contracting, household savings increasing, consumer spending constrained and money multipliers falling there can be no doubt that we are in the midst of what will surely be a prolonged recovery from a depression. Policies that created unsustainable growth and various asset bubbles are highly inappropriate to addressing today’s underlying problems. Rather than blindly applying fiscal stimulus and more of the same monetary policy, we need to critically examine our circumstances and uncover obstacles to growth and opportunities for growth.

Indisputably the largest obstacle to credit expansion and economic growth is failure to deal with the avalanche of toxic debt plaguing bank balance sheets; banks are hoarding capital and only lending to AAA creditors, preferring to take risks in proprietary trading of stocks, bonds and derivatives. That banks are compromised is easily seen in fears to burden them with actuarially sound FDIC fees; reluctance to impose responsible accounting reforms to better disclose their financial health; artificially low overnight interest rates; and the practice of paying banks interest on excess reserves held by the Fed. There are multiple models to follow in requiring banks to write-downs impaired assets; the point of this comment is to say it should be done without recommending a specific course.

With this obstacle removed and realizing that the US consumer is no longer interested in, or capable of, serving as the engine of global consumption, it’s glaringly obvious that economic policies must be tilted towards rebalancing the economy and expanding the relative role of both private investment and exports. This is diametrically opposed to recent efforts funded by predations to expand consumer spending through the stimulus bill, C4C and the first time homebuyer credit. Not only are these initiatives not aligned with the trajectory of the consumer and result in poor quality growth/spending, simply bringing purchases forward and leaving a consumption crater in the future, but the first time home buyer tax credit results in the production of additional homes at a time when there is an excess in the stock of housing.

The policies that replace these misguided efforts must flow from the development of a quasi-national industrial policy; we must identify industries and technologies of the future and identify those that best match our capabilities and resources, giving priority to those opportunities with compressed lead times, large employment potential and clear export potential. This study, which might be done by the Boston Consulting Group, must be free of congressional interference and look at our country as if it were a business and the policies as a blueprint for the future; should we fail to embrace this perspective, we will be reduced to a village forever squabbling over an ever shrinking economic pie.

I am not a futurist but some of the technologies believed to be capable of supporting an industry complex include: nano and micro technology, renewable and green energy, battery storage and replenishment, stem cell development, molecular biology and bioinformatics, internet 2.0, enhanced internet infrastructure, robotics, bio-agriculture, life extension technologies, upgrade of electrical grid infrastructure and nano medicines.
Irrespective of the area(s) chosen, the most important point is that we begin to implement a coherent, rational and internally consistent program to expand private investment, employment and exports through providing grants, subsidies, tax incentives and other to incentives to the private sector to develop and commercialize promising technologies. We need a new suite of industries to replace obsolete or non-competitive industries to meaningfully expand employment.

This would be the backbone of our industry revitalization plan but in the shorter-term we could (1) implement a schedule of corporate tax reductions graduated to increase profitability, boost employment and expand investment, (2) assist small businesses obtain credit, (3) freeze cap and trade, (4) kill all proposals to review corporate tax deductions, and (5) suspend efforts to strengthen unions through “open votes”. The reckless handling of the budget and continued mulcting of the people must stop; gaping deficits must be cured through spending reductions easily accomplished upon even a cursory review of department/agency duplication, overlap and waste.

Oct 04 10:41 AM

[Vuke:]

Punk Ash has it nailed perfectly. Markets, under the guise of raising capital, have been turned into casinos supported by a corrupt alliance of financial houses and the media. Together they have been complicit in a Ponzi scheme to bilk the public of their future.

There is a long and slow decline coming as retail buyers shy away. The only thing maintaining markets at current levels is the steady decline of the dollar and massive intervention through stimulus and other programs.

Markets will return to their real function and, eventually, contribute to job creation and economic growth as recognition grows that those financing and growing start ups have a responsibility to do their best.

Buyers too, have responsibility as to where they put their money. Throwing dollars into a story on the hopes of a quick killing is gambling, not investment.

Oct 04 10:48 AM

[conceptwizard:]

Businesses in their first 90 days of life accounted for 14% of hiring in the U.S. between 1993 and 2008, according to the Bureau of Labor Statistics.

But this recession is taking a particularly heavy toll on business creation, as sources of small-business funding dry up and would-be entrepreneurs become more risk-averse. When entrepreneurs do launch businesses, they are hiring fewer employees on average. The trends threaten to damp growth in jobs and economic output for years.

Company formation typically dips slightly in recessions. Earlier this decade, business starts -- including new businesses and units of existing businesses -- fell 9% between the third quarter of 2000 and the first quarter of 2003, the BLS says.

This time, the decline has been steeper. Business starts fell 14% from the third quarter of 2007 to the third quarter of 2008; the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995. The number ticked up slightly in the fourth quarter, the latest data available. But those new establishments created only 794,000 jobs, the fewest since the government began tracking the data in 1993.

Oct 04 12:21 PM

[Old Trader:]

punk_ash,

That's probably the narrowest definition of a start up I've ever heard! If you're talking about the internet bubble, you're correct, for the most part, but any publicly traded company was once a "start up" (not too mention all of the privately owned companies).


On Oct 04 09:46 AM punk_ash wrote:

> That was the intent of the start ups. But those start ups turned
> into hit and run operation. Launch a start up, get some revenue going,
> sell equity, insiders sell and run. Bag holders trade with each other
> trying to pinch pennies, while brokers making money on them, the
> product never showed up. I am glad we have no more start ups popping
> up.

Oct 04 12:29 PM

[Mark Bern:]

Punk_ash - I am involved in what I believe would be defined as a start up. I own half the company and we employ only the two founders via our payroll. However, we also employ, via contractual agreements, a lawyer (about 1/4 of his business) a real estate agent (nearly all of her business), and a varying number of construction contractors (on any given day we have at least three and sometimes we may have as many as ten), as well as a lawn mowing service (90% of his business).

My point here is that this is just one example of the backbone of job creation in our economy. The majority of jobs in the U.S. are created by small businesses and start ups like ours, not by big manufacturing firms like GM (GM and other large manufacturing firms have been consistently cutting employees from their payrolls for more than a decade).

Granted, the dot Com bubble gave rise to a lot of "start ups" that had ridiculous business plans with no hope of ever turning a profit. Many of us in the investing world made huge mistakes in gambling on those IPOs. But some investors made tons of money. Someone does their research better than others and they win; others lose. That's how the game works.

At some point, my little company will probably hire a lawyer to work internally because it would make more sense to pay a salary than to keep paying for work piecemeal. We will eventually hire a full-time real estate broker and perhaps a contractor, as well, to manage, maintain, and improve our housing inventory. It will take a few years to get there, but we are confident that, since we are increasing our profits during this environment, we will eventually get there. But we could get there a lot faster with a more pro-small business Administration.

I never imagined that we would have to rely upon credit cards for short- and intermediate-term cash flow needs, but we have; simply because there are no alternatives. The banks won't loan any money, even on real estate (not even at 50% of market value) to a small business. So, we do what we have to do and pay higher interest rates than we would during a normal lending environment.

The current environment, supported by the Administration, is pro big business and anti-small business and new business formation. That is the recipe for negative growth. We will be okay, but the country may not, at least not for some time, until policies at the Federal government level change.

Oct 04 06:36 PM

[punk_ash:]

Yes, most public companies were once startups. But they focused on American Ingenuity and innovation and not stock options. I was a telecom engineer, and few care about work anymore, its stock options, cash them and run to Bahamas for a vacation or just retire.

On Oct 04 12:29 PM Old Trader wrote:

> punk_ash,
>
> That's probably the narrowest definition of a start up I've ever
> heard! If you're talking about the internet bubble, you're correct,
> for the most part, but any publicly traded company was once a "start
> up" (not too mention all of the privately owned companies).

Oct 05 02:49 AM

[Gedankonomist:]

"Economists missed the jobs estimates by a wide margin Friday morning. The nonfarm payrolls report showed the economy shed -263,000 jobs in September, far more than the consensus of -175k jobs. "

Kinda makes you wonder why they are being paid $100,000 plus per year at the academic institutions who employ them? Or why parents spend $40,000 plus per year continue to send their kids to there? How long will it be before these people learn?

Oct 05 04:28 PM