Monday, February 4, 2013

Markets Continue Their Economic Disconnect

It's always nice to look at a daily portfolio update and see the equities portion of a portfolio going up, but I've never found it comforting when I can't put a finger on why.

Unfortunately most of the economic talking heads commentaries are just political propaganda in a poor disguise.  Paul Krugman: enough said.

Jeffries Economic Forecasting group, headed up by Ward McCarthy, has consistently tracked the fundamentally weak numbers from the labor market.  The divergence between payrolls data and the establishment survey has always been a statistical feature for analysts to deal with, but the current divergence is striking.

As JEF notes in their current bulletin, the establishment survey shows that since the recovery's start in the first quarter of 2010 , the private sector has added 6.11 million jobs, with public sector jobs shrinking net by 610 thousand, for a net jobs addition of 5.5 million.  This sounds good, but the household survey is less encouraging.

The bottom line is that 8,786,000 jobs were lost during the horrific financial downturn, and 3,297,000 more jobs have to be added before the economy gets back to where it was pre-crisis, never mind employing new or returning labor force entrants.  Movements in the unemployment rate, as the authors point out, are dominated by changes in the participation rate, which is down to 63.6% versus 66% at the start of the recession.

What about the rising equity markets, you say?  Surely, they are discounting higher expected streams of corporate profits from a stealth, but improving recovery.  Look at the housing sector.

David Rosenberg, the Chief Economic Strategist for Canadian firm Gluskin Sheff has an illuminating current presentation, which could be called "bearish" in this ebullient market.  I found an older version of it, with the same essence, on Business Insider. This particular slide shows the sharp upticks in the U.S. stock market have coincided with the announcements of  QE1, QE2, and Operation Twist.  The search for fundamental economic underpinning goes on.

Meanwhile, the distortions for business decision making caused by the unconventional monetary policy continue apace.  Jeffries notes the "insatiable" investor demand for yield: Mohawk Industries priced a ten year offering at a paltry 30 basis points over Treasuries.  Mohawk is a split-rated (Ba1/BBB-) issuer with a cyclical business exposed to residential construction and remodeling.  But, the "good news" about housing is old news and surely should have been discounted.  Mohawk is not a strong issuer, which is what a 30 basis point spread would seem to suggest, but this is a desperate investor market.

The Jeffries team also notes the weak bidding for Treasuries, apart from the Fed. As they say, "...both the price action and customer flow at the long end are troubling...The long end is effectively being propped up by Fed purchases."  No good fundamentals here either.

Finally, remember those corporate coffers filled with cash to invest in business expansion?  Large chunks went to special dividends and irrational share buybacks.  Today, we're told that the distorted yield curve from the Fed's policies is forcing corporations like Ford to spend $5 billion for this year's contribution to its corporate pension funds.

As we begin the week, let's hope that the markets re-equilibrate.  In so doing, perhaps they can send a signal to Washington--including the Fed--that feel good asset markets are not a drug of choice for a sputtering economy.

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