Economic Data – Jobs & CPI
We come to the close of October with Halloween just a day away. No doubt this month has been full of fright: from a government shutdown to a failing Obamacare roll-out. Yet, with all the fright out of Washington, the market continues to move higher and a big thanks must be forwarded to the Federal Reserve and their ongoing money printing scheme, which looks to have no end in sight. New Fed Chairman, Yellen, the most dovish of all, will soon (if confirmed) take the helm and will certainly keep the radical Keynesian policy moving along and we may even see an increase in QE money printing. Earnings season has been met with mixed results, but there has been nothing to dampen the mood. If am frequently asked if this market is getting frothy (over extended) and if we were to measure it strictly from top-line revenue and profit margins, it does seem over valued (but not alarmingly so). However, it is not the fundamentals (or lack thereof) that is driving this train; the Fed’s monetary policy is one of the core drivers in this market rally.
Economic Data – Jobs and Inflation
Jobs ADP Private Payroll Report
October saw a halt in economic data streaming from the government agencies as the government shutdown. Ironically, the market didn’t care and pretty much shrugged it off. As I talk with colleagues, read reports, and review the data, there seems to be an ever growing disconnect between what the government is reporting and what the economy is REALLY experiencing. While there has always been a whiff of discrepancy between government data and the real economy, it was usually at the margins. However, since this credit crisis and the years of fall-out, the gulf between government reporting and economic reality is becoming ever so noticeable. It is starting to seem like government data and the political circus is operating in a bubble in Washington, because, frankly, the market didn’t care if they released any data last month as it had very little impact on the market. Once we pile in the shutdown, the Obamacare failings, IRS probes, phone tapping, the huge changes in reporting data, and a smattering of Keystone Cop debacles that can only be defined as idiocracy, it’s no wonder the market is starting to ignore government reporting data.
So, as we wait for the Labor Report to blow more smoke up our bums that the unemployment rate has dropped and that we are creating millions of jobs, we get a dose of reality this week with the ADP report (private sector payrolls). The ADP report reflected that the private sector created only 130,000 jobs in October, even lower than the 150,000 estimate that had taken into considerations all the October volatility that was spurred by the government shenanigans. What is further concerning was that the initial September report was also revised lower from 166,000 to 145,000. The majority of jobs came from the service sector. Large business added 81,000 jobs, while the rest was from small and medium business (under 50 employees).
This will certainly have economists scrambling to revise their Labor Report lower, as expectations are currently at 148,000. However, I have to wonder if the market even cares any more about the Labor Report. Of course, if it has any REAL change beyond expectations, we could see it impact the market; however, for the most part, we have all become numb to how lack-luster it is, especially with the monthly parading of the President talking about how many millions of jobs are created and the huge drop in the unemployment rate. It is starting to fall on deaf ears. primarily because the government data doesn’t bear out the reality on the ground.
No doubt there is some strong growth out there, but these are sector specific. North Dakota is booming on an oil explosion and some areas in Texas and California are also seeing some strength. However, if we look at the U.S. as a whole, the job creation, consumer demand, savings rate, debt to income ratio, pretty much everything is stalled. I am not claiming we are in a contracting and declining economy, but I am saying that job growth and economic boom has been significantly impeded and we remain stagnant.
Predominately what continues to cause these problems is Federal Policies, rather than the typical supply/demand cycles that traditionally drive economies. I sometimes get nasty emails and comments that I don’t know what I am talking about, so I put to them a simple question; “If my view is so utterly wrong and that our economy is not stagnant, then WHY is the Federal Reserve continuing to print $85 billion a month to fund government deficit spending, to boost employment, and trying to jump start inflation?” It’s pretty simple and it sure doesn’t matter your ideology, even the Keynesians believe we have stalled and this economy is on life support. They are pumping BILLIONS of dollars per month into it to keep it going. That alone should be clear enough that this is not some robust economy that is creating millions of jobs, as the President claims. The Federal Reserve is acting and commenting in the exact polar opposite of what our politicians are telling us and now the President just nominated the most Keynesian Dovish person of all, ironically, to keep such policies going. I put it to you, is not the President being somewhat disingenuous about how robust our economy and job creation is, if he just nominated a Federal Reserve Chairman who has stated the exact polar opposite and wishes to continue, if not expand, their “easy” monetary policy? I am sorry for the rant, but I just find the whole political rhetoric game absurd while at the same time we are printing billions.
Social Security and CPI
Now we get into another sore topic for me, the CPI (government’s method of measuring inflation). [sarcasm on] Well, it’s that time of year again; those people trying to make ends meet on Social Security are getting their whopper Cost of Living Adjustment (COLA) to their Social Security benefits. This year it will increase a stunning 1.5%, since the CPI reflects that inflation only increased by 1.5%. [sarcasm off]
Whether we agree or not with the Social Security scheme, adjusting their benefits by the CPI is an embarrassment. President Obama’s budget proposal included changing the CPI model again to the new Chain-CPI, which reports a lower rate of inflation. It was added to a budget proposal to SAVE money by LOWERING the benefit adjustments, because the Chain-weighted CPI runs at a lower rate. Politicians of both parties have openly even discussed how the new CPI model will help keep Social Security going a while longer by lowering the adjustments. Now their marketing spin, as it has been in the past (each time they change it), is that this latest and greatest model is even MORE accurate.
As we come full circle, I hope that I have shown briefly why this gulf between economic reality and what the government is reporting is not only widening, but is increasingly becoming noticeable. The market is no longer giving it too much weight and now the citizens are starting to become aware. I mean you can only tell people for so long that you are creating millions of jobs, there is no inflation, and that the economy is growing strongly before they stop and say, wait that is not what’s happening. Of course there will be those blind ideologues, who have drunken the Kool-Aid, that you will never convince. Proof to me that the comprehension of risk, economics, and probabilities is not inherent to society can be seen all around us; Las Vegas, the 100′s of millions (and growing) dumped into lotteries, Indian casinos springing up everywhere, just to name a few. Even if people CAN do the math, they would prefer to ignore the math.
You can choose to ignore the math, but in the end you can’t avoid it.
For now we continue to ignore it.
Support & Resistance
We are right there pushing up into the 15,700 area. This is the peak that we came off of in July and September. Will we break-out higher this time? Before we do, I think we could be in for some selling pressure.
This index continues to inch higher. Apple earnings were a mixed bag and didn’t drive the market higher or lower. Yet I feel this index has some more upside and if we do, it could be fueled by some short-covering.
The SPX is also inching higher and making new daily highs. The volume is a little lite and the VIX is holding up in the mid 13′s as if it doesn’t really buy into this rally at this point. We haven’t had the Bears fully capitulate and there has been NO short covering rally. So this upward climb can continue a little more.
The one index that is in full stall at this point is the broader RUT. There is just not the order flow coming in with any force into the broad based market yet and the Bears remain on the side lines. The 10-year yield is at 2.49% and while it has come down it hasn’t really pushed down lower into the 2.2% range that would help drive more money into equities, which is the Federal Reserve’s plan.
This morning the hearing on Obamacare will be in full swing with the HHS Secretary Kathleen Sebelius testifying. It is expected that she will pass the buck and blame the contractors (ironically, some of them have been outsourced off-shore). However, yesterday news reports show that the contractors had told her and others that there is NO WAY the system will be ready to launch and that they have not done extensive testing. Sebelius and the administration decided to go forward, despite warnings from their own contractors, as it was obvious that President Obama, for political reasons, could not capitulate to his Republican foes. Now it is all coming down and biting him in the bum.
As to those questioning the claims that Obamacare has driven up costs, well I am here to tell you as someone that buys insurance to cover his family, my costs have skyrocketed. By the way, we don’t have any pre-existing conditions and are not chronically ill. We were just made aware, yet again, that are premiums are going up again and we didn’t even USE our healthcare last year. We are pushing well above $11k a year.
Anyway, today’s testimony should make for some good entertainment as both Republicans and Democrats will certainly be grandstanding.
By the way, the Healthcare.gov website is down this morning as she is about to testify. Yikes!