It’s the last day of a volatile and uncertain quarter. The market has done a fantastic job bucking the bad news, weak economic data, taper, and Russian politics; however, it has also not broken out of a range all month and it seems to be waiting for some type of confirmation of confidence before moving higher. Nothing has changed, in the big picture. The Fed is still pumping in billions per month, economic data shows sluggish economic growth, top-line revenue growth is still coming from the emerging markets, Europe is still in a bailout can kicking-routine, and the Middle East is still volatile. So I am not sure what exactly the market is waiting for.
Perhaps the market is waiting for confirmation that the job market is improving. The fact that the job market has been improving is not in question. Over the last year I believe that, if we look at the job picture in its entirety, we have hit a bottom and have been in slow growth to stagnant growth, domestically. If we look at what has transpired since the Credit Crisis we can sum up the phases fairly simply.
Phase 1: 2008 – 2011 Companies cut costs and laid off massive amounts of workers. The layoffs and cost cutting slowed, but did not stop after 2008. Companies were starting to get lean and learn to operate in a limited credit environment with weak consumers.
Phase 2: 2011 – 2012 Learning to run lean. We didn’t see robust job growth, but we did see unemployment decline (U3 and U6). The core problem was that domestic top-line revenue did not increase strongly enough to justify strong rehiring. Add to that heavy government regulation, Obamacare, higher taxes, and fines. Much of the heavy handed interventions were justified by the government to solve the problems they believe created the credit crisis. Regardless if you believe that to be the case, it did significantly stall business growth. One of the biggest factors that continued the decline in Unemployment (as measured by the government) was that those people that were laid off in 2008-2009 were running out of benefits and falling off the roles (no longer being counted). The participation rate, used to determine whether you are not counted into the unemployment numbers, reached highs not seen since the 1970′s. By 2012 only 65% of those who were unemployed were actually counted into the unemployment number (U3), the rest were considered “disgruntled”. The government pretty much is saying they have given up.
Phase 3: 2013 – Present. We are starting to see some stronger hiring, but companies have learned how to run efficiently. Middle management has been cut significantly and companies are measuring productivity and basing jobs on revenue production. We see job growth at two ends of the spectrum, manual labor and skilled workers. However, the bloated middle class and college graduates with general degrees (history, political science, philosophy, etc.) are unable to get skilled jobs. Companies began complaining that finding QUALIFIED skilled labor has become more difficult. The nation is in need of engineers, programmers, and those strong in math and science as our nation remains a leader in high-tech and sciences. Companies are also seeing top-line revenue growth coming from the emerging markets, so jobs naturally gravitate to where the consumers are.
The nation is divided and unless you have a specialized skill (programing, engineer, mechanic, etc.) or a degree that requires a license (doctor, nurse, teacher, lawyer) it is harder to find a “well paying” job. The bulk of college students are graduating without the skills to compete in the global market.
As a partner in two businesses and having a few associates that own businesses, I find the story to be the same. There are plenty of people looking, but finding a skilled person is difficult. Resumes are loaded with little to no SKILLED experience, college degrees with no applied math/science/engineering skill are plenty. Also the work ethic of the generation and level of “entitlement” is appalling. High paying jobs are available if you have the work ethic and skills and low paying unskilled jobs are available, if you are willing.
What about Vocational Skills?
I wanted to share an interesting observation I had this weekend. I remember in High School we had a “shop class”, “home economics”, “business/economics”, and “mechanics” electives. Many of my friends had jobs in high school, while also taking these electives. Kids were graduating high school WITH practical skills. They knew how to use tools, fix a car, knew about business/economics and what an interest rate was, they knew how to make change and knew about commercial cooking, interior design, sewing, nutrition, and hygiene. They could get a job as an apprentice and quickly gain a skilled and decent paying job. Now we focus on math/science/English grads with a singular focus on going to college. A vast majority of the kids going to college will never ever use their degree and then will have to get back into the REAL WORLD and have to learn some PRACTICAL skills from scratch.
The nation needs basically three types of workers:
1. College Skilled (some requiring licenses): Nurse, Doctors, Engineers, Programmers, Scientist, Teachers, etc.
2. Vocational Skilled (some requiring licenses): Mechanics, Plumbers, Electricians, beauticians, chefs, accountants, paramedics, etc.
3. Unskilled: day labor, service worker, janitor, etc.
One big problem our nation had is we had been running “FAT” for a long time in which we had a fourth and fifth category:
4. Semi-Skilled: Middle Management and other non-revenue producers.
5. Commission worker: Real-Estate Agent / Mortgage Brokers
The fact is that job types 1-3 can actually be measured by productivity or revenue generation or revenue/cost necessity. They are ALL important jobs for any society. However, we had a massive growth in 4 and 5 that became so bloated and in some cases over-crowded and over-paid. I am certainly not dismissing or stating that these jobs in 4-5 are not important, but they certainly got over-crowded and many became over-paid.
Housing Boom = Commission Boom
The housing boom created a boom in category 5 (Commission). I think everyone knew of someone that became a real-estate agent or mortgage broker during boom as there were enough homes and sales to go around for everyone. You only needed to sell a few houses to see commission checks of $5,000 and in some cases I have heard of $25,000 commission checks or more. Companies were also running fat and I knew of one company that had several middle managers in each department. When I worked at the Stock Exchange, the exchange had 21 Vice Presidents, each one with their own office and secretary. Many of these people had skills, were good people, and certainly could be producers, but their job description boiled down to over-seeing some workers and pushing some papers around. With salaries of $100k being the norm and not really being a revenue producer or a necessary cost, they were the first to go. Companies still needed the programmers, engineers, janitors, and accountants, but they just didn’t need the guy in the middle.
Courtesy of rlretraining
Companies realized they could run lean and we saw Category 4 almost disappear between 2008 and 2011. The same happened to those that relied on commissions and Category 5 also declined back to a norm we haven’t seen in well over a decade. We still need middle management, but we just don’t need 10 when 1 can do. We still need mortgage brokers and real-estate agents, but we just don’t need 10 for each potential home being sold.
Courtesy of BPM Leader
Labor Market Slack
Category 4 and 5 will NOT see a BOOM in growth and we are talking about 100′s of thousands or people that will never get back into that field because there is a limited demand.
The other Category that is having a problem is 2, Vocational Skill. High Schools are failing our children in this category and we are sending boys and girls into the world with no REAL WORLD skills, those that go to College are also seeking degrees that have no practical applications. If we can get back to the REAL WORLD needs and REAL WORLD jobs, we can also focus on REAL WORLD education.
I do see job creation, but it will be slow. The other problem is our government’s leadership and tone has bad mouthed the job creators and business. They have fueled the “Fairness” rant and have stated that the problem is not a lack of skilled workers, but rather pay. The government is able to continue to get more support for its ideological viewpoint because it has expanded socialism, welfare, food stamps, unemployment benefits, and healthcare (Obamacare). If the government continues to become our Nanny through offering all these benefits and help, how are we ever to help ourselves?
Additionally, it has fueled an “Us” vs. “Them” attitude. Rather than thanking those that pull the wagon for others, the pullers are blamed, reprimanded, and trodden upon. I believe this dependence on the Nanny State will only fuel debt and domestic economic stagnation.
Courtesy of division of labor
What does this mean for the market? It means that domestic income and domestic consumption will continues to see tepid growth. It also means we should expect to see Top-Line revenue for the S&P 500 continue to expand in the emerging markets where their income and consumption continues to rise. Remember, business will also seek out the largest consumption growth, which will be based on job and income growth. That is not going to happen robustly in the US or in the West (Europe and Japan).
Support & Resistance
INDU 16,000 – 16,500
I think we will get to 16,500 this week. When we get there expect some resistance. A break-out will most likely be reliant on the job numbers released this week for March. Expect volatility on the unemployment and labor report.
NDX 3550 – 3700
We could see a good bounce off that bottom and into Job’s Friday. Continue to expect volatility.
SPX 1840 – 1880
The SPX has held up well, flopping around in the range and not breaking below 1840. The VIX continues to sit in Never-Never Land at 14-15 with no conviction. That can all change with the jobs report.
The broader market looks the weakest and that shows weak order flow into equities. Unless this index can get off the ground with any real strength, expect weakness to return to the other indexes.
The Jobs report (unemployment and labor) will set the tone later this week. It will either bring forth confidence in a robust recovery or confirm that the Fed can’t turn of the printers and money printing just yet. I don’t think, regardless of how the report might be spun, that we can see any real strong numbers. We may certainly see some modest improvements, but I think I laid out the broader problem for our nation faces before we see any recovery.