Tinkerbell Talk, Parsing the Economic Tea Leaves and Market Schizophrenia

This blog tends to steer away from short-term market commentary because, as the wags say, “If you must forecast, forecast often,” and keeping tabs on the whims of Mr. Market can easily become an exercise in futility.

Getting a sense of conditions on the ground and likely business/economic trajectories is a fraught activity even in the best of times, and it’s complicated by the normal sort of cheerleading being compounded by policymaker cheerleading, or what I call Tinkerbell talk: if the officialdom can get enough people to applaud, the economy will live.

Some of my investor colleagues were discussing market sentiment today, specifically, the sudden shift from recovery optimism to double-dip fears back to a resurgence of a more positive outlook (although today’s weak close apparently was triggered a webcast in conjunction with the release of a report by Goldman’s Jan Hatzius on quantitative easing, which forecast unemployment staying stuck at 10% through 2012, with inflation falling to 0.5% and the Fed funds rate staying flatlined, which gave some investor a wee spook).

Their consensus seemed to be that the August bearishness was not deeply held (and recall how light volumes have been for months). The market is still not pricing in any kind of weak recovery (22% S&P earnings growth over the next 12 months). But despite a fair bit of optimism, there is still the fear based on the investor post traumatic stress disorder, that the bottom could fall out again (and given the flash crash, this worry appears eminently reasonable). So in a shadow of early 2007 behavior, the longs are much more likely to rush to the exits than in a true bull market.

Various reports, in typical fashion, try to make more of single data points than is realistic. For instance, Bloomberg touted, “Inventories in U.S. Rise at Fastest Pace in Two Years,” arguing that the rise in stock levels was a sign of business optimism. Ed Harrison discussed this announcement (inventories have been one of his beats) and via e-mail he read this as a “modest” increase.

In another sign of divergent opinion, Goldman is not optimistic about unemployment, while reader Francois T sent an interesting contra indicator, from of all places, Joe Paduda’s Managed Care Matters blog:

I had several conversations today that validated what I’ve been hearing for several weeks – there’s a good bit more new activity in manufacturing, construction, and logistics/transportation than there was a few months ago – activity that requires new hiring.

Evidence of this not-yet-in-the-official-reports trend comes from several sources, most importantly activity at occ health clinics. There’s been a lot of pre-employment screenings and physicals, drug testing for truck drivers and equipment operators, and a significant uptick in new workers comp injuries of late. The screenings and testings are obvious indicators of hiring, while the new injuries likely result from a faster pace of work, more overtime, and more temp workers doing jobs they are less than familiar with. (The data do indicate significant additional hiring of temp workers, with 17,000 new hires last month)

Last week’s employment report provides additional color – emplloyment was up for temporary workers and in construction. And, revisions for the two previous months indicated employment was actually higher than the original estimates.

Several work comp specialty managed care vendors are also seeing an influx of new claims, particularly among vendors that provide services common in the initial stages of a claim.

Now before we get too excited….these sort of jobs are for the most part not highly paid. If you believe Meredith Whitney, Wall Street has a lot of jobs to shed, and we may see more cuts in other less glamorous areas of the financial sector (for instance, BofA is shedding ops, an acquirer will shed jobs; a flattening yield curve means less robust bank earnings, and the response is often to cut headcount). Plus we have the ongoing reduction in state and local government, jobs. So even if this data point is true, I’m not sure how much of an offset it is to activity in other sectors.

The Paduda post also points to unrealistic employer expectations:

Anecdotally, (I know, a lot of this is anecdotal), I was speaking with the hiring manager for a Maine manufacturer; they have a bunch of open jobs that they can’t find ‘just the right person’ to fill. The manager was frustrated by the ops head’s inability to understand that the applicant pool wasn’t as deep or wide as he wanted. The net? There were several – actually, more than ‘several’, jobs that were going to be filled with people that may not have fit the ops boss’ specific criteria.

I bring this to your attention, dear reader, to suggest there are lots of employers looking for lots of workers, (three million workers, to be precise) but many of these employers are waiting to find just the right worker. It may well be they’ll soon give up their persnicketiness and start hiring who’s available. If – and when – that occurs, things will get better in a hurry.

Yves here. Honestly, this behavior suggests one of two things: employer incompetence (as in not being able to recognize the cost of missed orders v. paying a tad more or investing in training) or that employer margins or cash flow are so thin that they really can’t afford to offer better terms to workers. If the latter, the number of jobs on offer is not as bullish a sign as the commentary suggests. I’d be curious to get reader take on which factors they think are most common (as in some businesses may indeed have margin issues while others have lazy/greedy managements; the question is what is the mix).

Now there is one meaningful bullish (from a market standpoint) short -term development that hasn’t gotten the attention it deserves: the ECB is buying bonds. Ironically, the FT put a negative coloration on this, when having the ECB act to address strains will alleviate eurozone stresses short term (we remain concerned about the immediate and longer term challenges):

The European Central Bank bought €237m of government bonds last week – the biggest amount since the middle of August – in a sign of continuing problems in the eurozone.

Although the intervention is relatively small and in the millions rather than billions of euros, the fact that the ECB has had to step up its purchases highlights increasing volatility as investors fear that the eurozone debt crisis is far from over…

The extra premium – or yield spread over Germany – Portugal and Ireland have had to pay in interest rates for 10-year bonds hit record levels last week.

This spread widening comes as borrowing from the ECB by banks in the peripheral economies of Portugal, Spain, Ireland and Greece rises because of the refusal of investors to buy the debt of these countries and their banks.

Yves here. The intervention was so small as to be more important as statement of intent, that the ECB is prepared to intervene. This is hardly a long-term solution, but it does buy Eurobanks and the eurozone periphery countries some breathing room.

So the other shoe may be yet to drop, but until then, institutional investors can’t afford to stay too far from the herd, and the herd hates to bet against growth for very long.

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18 comments

  1. bob

    Crazy options week. USDX closed below important technical levels.

    Hiring- In general, they are expecting way too much, and offering way to little. Anecdotal, but looking at some ads shows employers wanting 10-15+ years in a field, and offering half of what that person was worth 3 years ago, with no benefits, essentially a 1099.

    Maybe the employees who can afford to are waiting for “just the right job”, one where they are actually paid what they are worth.

    I also have to ask how people are able to interview for positions outside of their company these days. Taking a short notice sick or vacation day for an interview probably puts you on the short list for the next productivity enhanced kick in the ass on the way out the door.

    1. homedad43

      Concur with Neal.

      As a former work comp adjuster/manager, lots of guys who are on the cusp will go out on WC if possible. The benefits aren’t great at 2/3 of average weekly wage but employers are loathe to fire someone out of WC and if a guy or girl is smart, they can push for ADA accomodation and make the employer nervous.

      There was a reason that our back injury cases skyrocketed on the first day of hunting season.

  2. Neal

    The uptick in workers’compensation claims can also be read as a negative indicator: Workers who anticipate losing their jobs (for instance, do to an upcoming reduction in force) are more likely to file workers comp claims than those who have more job security. Employers who announce that they will have to cut jobs, or who are preparing to file some form of bankruptcy, experience a surge in workers’ comp claims. There are a number of reasons for this: (1) Claims that are filed after employees receive notice of termination or layoff have a higher burden of proof than those filed pre-notice. (2) Most employees, particularly long-term employees, have some sort of underlying medical condition that they can at least argue became worse on the job. (3) Most workers comp claims are made in lower wage jobs. The reason is that higher wage jobs are not only less likely to be manual in nature, they also tend to come with better health care plans that the workers would prefer to use over the care provided by the workers comp system even if their condition is work-related. Lower wage jobs tend to aggregate in the class of employers who are less like to provide generous health care plans–if they provide any at all–to their workers. So the workers comp system becomes the poor worker’s general health care plan. This provides an incentive to file a claim–for any medical condition at all–prior to termination of employment. Workers’ comp care is cheaper than paying COBRA premiums–assuming you even have a COBRA-eligible plan at all. So if you going to lose your job, filing a workers’ comp claim is a no brainer. You can’t end up with less than if you never filed a claim at all, and you may end up receiving something substantial or at least helpful.

  3. tenletters

    “We are looking to hire an experienced and hardworking employee. $8 an hour. Must have car and phone.”

  4. Bates

    Anecdotal evidence to prove or disprove any point one wishes to accentuate abounds.

    For instance…

    I have friends from Mississippi to Maine that have been long time business associates and have closed up for good. Does that mean anything? Not necessarily.

    No new bank has opened in the US in the past 38 months. Does that mean anything? Meanwhile, many banks have been closed and absorbed by other banks.

    Many states cannot reconcile their sales tax collections with stats from the US Gov…Probably because many stores have been closed and no taxes are being collected from those closed stores.

    Gold and silver both popped higher today. Was it because people around the world are flying into a perceived safe haven or because big buyers see gold, with a 16% annual gain for the last 10 years as one of the few places to make a real return on capital? I don’t know.

    Meanwhile the debate over what is coming…more deflation or inflation or hyperinflation or a stagnant economy continues to rage. Much depends on how much more QE we are in for. Who is willing to make a call on the direction of the US Economy at this point? Not me.

    Will more financial cheerleading help Americans to overcome their fear at this point? I don’t know…but history says no.

    Point is…During times of financial stress indicators are not as reliable as during ‘normal times’…even the BLS admits that…and anecdotal evidence is just that.

  5. Hugh

    Those who see greenshoots will continue to see them even after the first frost, the first freeze, the first snows. A ouija board would be more credible. Everything that was wrong with the economy, government, and the financial sector is still wrong. Looking for signs of a turnaround in that kind of environment is either desperation or delusion.

  6. charcad

    institutional investors can’t afford to stay too far from the herd

    That herd stays fully invested because the worst thing that can happen to them is for the market to run away higher without them. If it does that’s their fault for misreading the tea leaves. But if a falling tide lowers all boats then that’s the Fed’s fault, or the Congress’, or the President’s.

    the herd hates to bet against growth for very long.

    Which growth is this? Growth in re foreclosures? Personal bankruptcies? Small business failures? Bank failures? Real U6 unemployment? Fantasy economic statistics? The trade deficit? The fiscal deficit? Rate of state and local government debt defaults?

    Albert Edwards called for an S&P 500 of 450. In a no-growth regime that seems the minimum to bring the S&P 500 dividend yield up to 5%. That’s about right with 10 year US Treasuries at 2.5%.

    And if there’s not any growth there won’t be any capital gains in share prices, either. That leaves dividend yields as the sole reason to own common stocks.

    Riskier common stock with a dead last creditor position, as the owners of Motors Liquidation Corporation common have discovered. Never heard of that company? MLC even lost the legal right to use their name, which used to be General Motors.

  7. rd

    Anecdote time:

    My son tried the college route which didn’t work out after one very good semester and a couple of bad ones. So he looked for a job in the manufacturing sector.

    He is currently working as a temp at a unionized manufacturing plant. Apparently, there were quite a few temps working with him initially and that number has whittled down to just a couple including him. It appears that the company has a deal with the union where they can hire temps on a rent-to-own basis for a trial period. They release the temps as they realize that they aren’t a good fit and then hire the last people standing. After college, my daughter got a good job (non-union white collar)last year through a similar process.

    I think the temp hirings indicate that employers are putting the toe back into the water but I would be surprised if more than half get hired on permanently. More and more employers are hiring temps on a rent-to-own basis so they don’t have to go through the pain of hiring and firing within the current legal framework. From what I have seen they frequently have to go through several candidates before getting a keeper.

    On the question of whether or not employers know what they want, I would say that many times they may not. I have seen a number of instances over the years where the combination of the HR department and the managers were so distant from actually knowing what the work was that needed to be done that they had no idea what type of candidate would be suitable. I have fielded numerous calls over the years asking if I would be the right person for a technial role that was not remotely close to my field.

    We have moved into an era where a “good manager can manage anything” so in many cases they are simply managing schedules, budget and senior management while the actual deliverable process is effectively outsourced to their staff. The manager often would not be capable of making a stab at getting the work done.

    1. PDC

      “a good manager can manage anything”

      The Gospel of all decaying business, particularly worshipped when Finance guys take the helm.

  8. anon48

    “This blog tends to steer away from short-term market commentary because…”

    …because, just as you implied further down in the article, trying to make important financial decisions based upon very short term trends or single data points is idiotic. It’s like trying to determine the direction of the tide based upon the action of a single ocean wave (without being in sight of the shoreline).

    @charcad-“And if there’s not any growth there won’t be any capital gains in share prices, either. That leaves dividend yields as the sole reason to own common stocks.”

    From a long term perspective, that’s precisely how one should observe the ROI potential of most equity investments. The hunt for the next home run is what continually inflates PE ratios beyond reason. If market investors, instead followed your sage advice, PE ratios would be much less volatile over extended periods of time, and would most like settle down at lower average ratio levels. There’d also be less pressure and incentive for management to achieve short term results, allowing for more long term planning and execution. Too bad this will never happen.

  9. yarro

    There are a bunch of companies out their who believe that there is a vast pool of competent out of work people. Simply, they are wrong. Those who are good at their jobs are mostly staying put. Unless you worked in a field particularly hard hit, the cuts did not involve the cream of the crop. There was a bunch of people in jobs that essentially were “warm bodies” that weren’t qualified, motivated, and/or in possession of aptitude for the position. Those people ended up on the street. Others in hard hit industries have job skills, but they don’t transfer to other industries so they are back to being entry level skill sets.

    When the economy first tanked, some companies cut the dead weight thinking that they could snatch up someone good cheap later if needed, but it was best to get lean now. I work for one of those early slashers. We can’t find anyone qualified, not that those they cut were either. Then again we were hiring those same types for a premium during the boom and regretting it. We are now considering hiring new grads as 1099s and hiring the ones that show aptitude. I personally haven’t seen a correlation in I.T. between having a degree and being good at your job so I am not holding my breath.

    Besides all the damage to the economy from the housing bubble, the American work ethic suffered a lot and now is adjusting as well. New grads that saw upper class men getting 65-70k/ yr w/ options, benefits, and moving expenses for a first I.T. job are rather put out when they aren’t getting offers or one 35k as a 1099 with no relocation and no benefits unless the company decides to hire them in a year when the contract runs out. A lot of them aren’t self starters, wait to be told to find something else to do once a task is complete, don’t take criticism well, won’t ask questions or for help, and they whine a lot about how the senior staff members with 10+ years experience don’t get the same scutt work they do. Others have such poor computer skills that I can’t believe they have a computer science degree and graduated with honors. I have noticed that everyone at the local Taco Bell are in there 30s or higher. Get much better service now.

  10. Psychoanalystus

    I don’t know, my friends… Last month, as I was enjoying my Greek coffee after a perfect Cretan souflaki, surfing the job boards on my iPad, it took just one email to secure a $149,000 a year shrink job at a San Diego VA hospital. So this old boy’s back in the U.S. of A, slaving his life away, rolling in tons of dough every day.

    So there, there’s no recession, no double dib, no tripple dip, no nothing — just prosperity everywhere I look… Except for my patients, half of whom are homeless Vietnam veterans…

    Psychoanalystus

    1. liberal

      Difference being, of course, that that job requires a credential, aka has a barrier to entry.

      Yes, people in fields with barriers to entry will continue to do well.

  11. john bougearel

    The stock market is an entirely different animal than the plight of the economy or consumer. Time and again (1932-1937, 2003, and 2009-2010) the stock market has shown that it does not require a job to move significantly higher or lower. The stock market seems to only require some earnings growth and some economic ‘happy’ news that things are at least becoming less bad, at least for the corporate actors. When contradictory evidence does not confirm investor optimism that things are becoming less bad for corporate actors, that is when the stock market is most likely to get whacked a bit. Other than that, it tends to do just fine on balance, regardless of sentiment and general economic conditions for Main Street.

    The reversion in sentiment towards a more positive outlook has not come as a great surprise. Contrary to what Mozillo might posit with regard to the housing crisis, the improvement in mkt sentiment did not require a “superior being” to have seen that coming.

    While higher unemployment rates will persist for years to come, the employment index of the manufacturing sector is at 60 (above 50 is expansionary) the highest it has been since 2004, when the jobless recovery first became accompanied with jobs. We can look at the mfg employment index as one of the many leading indicators that a few jobs might just be created in the private sector sooner than later contrary to Goldman’s dour outlook.

    Paduda is correct, while anecdotal, construction and temp hiring was up last month. And about as many discouraged workers returned to the workforce (300K+) as were temp hired, implying some discouraged workers are now temp workers.

    RD’s comment above however, is the ugly side to the equation. Many companies are ‘renting-to-own’ temp workers. If things don’t work out in 90 days, these temp workers are shed.

    The reticence of employers and mgmts to hire more aggressively could be attributed in part to revenue flows still being too anemic. The only way to hedge uncertainty of future cash flows is to drag ones feet with regard to hiring. The so-called recovery Geithner gladly welcomed us to, is far too anemic to get anyone’s animal spirits up in the corporate kingdom as yet.

    The sector of the economy that worries me in 2011 as far as the jobs mkt goes is the state and local govt sector becoming net shedders of jobs to meet budgets without the aid of Fed govt fiscal stimulus…The private sector will surely have to more than offset job losses in the state and local govt sectors with job gorwth north of 150k a month.

  12. GC

    With all the bullish market and economic talk emanating from Wall Street and the Whitehouse it is little wonder that at least some companies will buy into this and start some hiring in anticipation of an upturn.

    That’s the purpose of all the cheerleading.

    I think it was David Rosenberg who pointed out this week that US industry employment levels were very low, with little room for further cuts, so there is scope to take on new labour.

    Having said that they are buying into the lagging stimulus demand that is still travelling around the globe in ever diminshing ripples.

    But consumers are still delevaraging and until money creation via bank credit extension picks up to counteract it, the economy will slow and dip back into recession.

  13. Ishmael

    Can not find the correct fit. I see these kind of jobs posted all the time. Wanted, MBA from top school, 5 years of experience with top consulting firm (Bain or etc), must speak Italian and Mandrain, must be willing to travel 90% of the time. Job located in NYC. Job pays $110,000 and we have all the coffee you can drink. Oh and I forgot you need to be somewhere in the range of 30 to 40 years old and there is we offer little opportunity for growth and will dump you when you hit 40.

    As part of some of my work I help clients hire people. I look at lots of resumes. Workers have steady positions (5 to 10 years) until 2000 and then they start being at a company for less than a year a year and there might be 5 or 6 of those. I had one recruiter for one of the larger firms tell me they call those California resumes. I had a partner tell me at Egon Zender that the average tenure for a placement (now this might be finance only) was 18 months (their comment was if you have a good consulting business stay with it because there is no safety in a job). Commenting to another well known recruiter in So Cal about a consulting project that would last 12 to 18 months the recruiter quipped that lasts longer than most jobs.

    OK so yeah if you are looking for an entry level fork lift driver there could be positions out there. Higher level positions that pay well are few and far between. I recently talked to someone 3 months ago looking for a CFO. He has still not found his perfect fit (but get this he does not even have a job description or a list of requirements he is looking for). This is a billion dollar company that he told me is cashflowing multimillions. My reading is oh we are looking but we are really not buying. Kind of like all the people I see walking around on Rodeo.

    Get real, there was never even any job come back since 2000. Those jobs were created by trillions thrown away through the debt orgy and they are not coming back. The number of employed people is below the level of 2000.

    The argument about double dip is a joke. We never got out of the recession of 2000. The only reason we say we did is based on cook numbers from (I hope this does not suprise you) the government. I have consulted for 14 very large international companies to mid-size companies in the last decade. Most of them were losing money or just getting by. A couple of them filed Chapter 11 and just came out a couple of years ago.

    Until we fix a number of the long term structural problems in this country (such as the size and reach of govt) the job situation is going to remain poor to dismal. By the way it is not just the slackers out there who are looking for positions. I have a number of great people who consult for me who would like a full time position. One problem in this country is once you fall off of the boat you can not get back on. I recently consulted for a little crappy company. The CEO had been the CEO for a number of billion dollar subsidiaries for one of the world’s largest companies. A long track record of success. I mildly ask him what he is doing there and I get an answer but it is real a way of kind of saying “I fell off of the boat.”

  14. Ishmael

    One other thing at least in finance I have noticed is even though companies say they want ethics this is what they really want is someone who will not lie to them but will lie for them.

    In 2000 I had an HR friend tell me I was too rigid. You know I would not give CEO’s the numbers they need to keep their jobs despite this not being in accordance with GAAP. I was interviewing people for a significant role in a billion dollar company. I would get an answer to some questions that HR would not understand what was being said, but I would drill down hard and a number of people would then basically start telling me they got fired because they would not cook the books. It has also surprised me over the last few years, after MCI and Enron how many times I have come across material entries booked to make the numbers look better. One time after finding revenue which did not exist I had a list of people outside my office confessing like I was a priest. Recently, I did a consulting job for a chinese reverse merged public company. Their CFO was incompetent beyond belief (Chinese national) and let us just say their ethics had a lot to desire. After we indicated we would not go along with certain lack of disclosure our services were terminated. Personally, I can not believe the SEC has not delisted most of these Chinese companies.

    Recently I was called by a young femail Senior Manager for a Big 4 firm and she was asking me if the corruption she was currently seeing is how it always was and I told her no I did not see this until early 90’s. I was consulting for one of her clients and she heard a couple of us old timers talking about the coming collapse. This was like 2004 and she just thought we were senile.

    So in summary, we have a rotting to the core that started in the early 90’s and has destroyed company culture through out. This is going to lead to a very bad ending.

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