naked capitalism

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.