Thursday, March 4, 2010

Morning Update/ Market Thread 3/4

Good Morning,

Equity futures are slightly higher after being down overnight. Below is a 60 minute chart of the DOW futures on the left and a 5 minute chart showing the S&P’s overnight action on the right:

The dollar is up slightly, bonds are down, while both oil and gold are down just a little.

Jobless claims fell by 29,000 last week to 469,000, a still very high figure, a figure that has been at or near the 500k range for quite some time. Here’s Econoday’s report:

Jobless claims swung lower, down 29,000 to 469,000 vs. expectations for 475,000. There are no special factors in the Feb. 27 week. The prior week, when heavy weather increased filings, was revised 2,000 higher to 498,000. The weekly data for February show steep swings whether up or down. The four-week average, which helps smooth out volatility, fell 3,500 in the week to 470,750, a level showing no significant change from late January to indicate no improvement for tomorrow's non-farm payroll headline which is expected to fall 50,000. Markets showed no reaction to this morning's report.

Continuing claims fell 134,000 to 4.500 million in data for the Feb. 20 week. The drop marks a significant move lower for the data, pointing to an uncertain mix of hiring and benefit-expiration. The unemployment rate for insured workers slipped 1 tenth to 3.5 percent.

Turning to the Emergency Claims, here are the numbers for the week directly from the Department of Labor:
States reported 5,687,574 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Feb. 13, an increase of 207,632 from the prior week. There were 1,929,723 claimants in the comparable week in 2009. EUC weekly claims include first, second, third, and fourth tier activity.
Emergency claims are nearly 3 times as many as the year prior and for the WEEK rose by 207,000. How many of the current claimants will be doing the same in 6 months? We’ll see.

According to the Productivity and Costs report, productivity is soaring and labor costs are plummeting – a miracle for business, right? Here’s Econoday:
Both productivity and costs were revised better than expected for the fourth quarter. Businesses clearly are focusing on cutting labor costs to try to boost profits or cut losses. Nonfarm business productivity was revised up to a sharp 6.9 percent boost from the initial estimate of 6.2 percent. This followed a revised 7.8 percent surge in the third quarter. Today's report includes annual revisions which raised the Q3 figure. The consensus had called for a 6.3 percent revised gain for the latest period. Unit labor costs fell an annualized 5.9 percent in the fourth quarter, compared to an initial estimate of minus 4.4 percent and a revised third quarter plunge of 7.6 percent. The market forecast was for a 4.5 percent drop in costs.

The fourth quarter jump in productivity reflected a 7.6 percent spike in output, following a 2.2 percent gain the prior quarter. Hours worked edged up a mere 0.6 percent after a 5.3 percent annualized drop in the third quarter. Compensation cost inflation is nearly nonexistent as compensation rose only 0.6 percent, following a 0.4 annualized percent dip in the third quarter.

Year-on-year, productivity rose to 5.8 percent in the fourth quarter from 4.6 percent in the third quarter. Year-ago unit labor costs fell to minus 4.7 percent from down 2.7 percent the previous quarter.

Today's productivity and cost numbers are good for businesses trying to get back to a healthy cost position. But it also indicates that businesses are still slow to hire.
Here’s the deal. The productivity numbers are inflated for the same reasons that GDP is inflated, the output is measured in dollars with all the false accounting and statistics rippling through the reports. What people have yet to figure out is that the very same people who represent “labor costs” when out of work or when taking pay cuts have less to spend into the economy. This is the opposite of a virtuous cycle, it is like choking yourself and saying that it’s a good thing. Yes, increases in productivity are good, but like all things there has to be balance. When I see growth numbers in the 7% range, I immediately know that we are talking about paper increases and that the odds of those increases being real are very low. If they were real, they would be very unsustainable. Deflating labor costs at that rate should scare the heck out of the markets and out of the Fed. Creating the sustainable inflation they seek with falling wages is simply not possible.

Could the real reason labor costs are falling be that capital is fleeing the United States, creating manufacturing and real production elsewhere while we simply paper over our economy? Please follow the link to view a report showing how $8 of $10 stimulus dollars are going overseas:

Green Stimulus Jobs Going to China

In the markets, there is a potential megaphone top forming in the futures. If that is occurring we should see a new higher high today that follows last night’s lower low. That same pattern is not as clear, however, in the day only market indices, I see more of a potential Head & Shoulders pattern forming with the neckline on the DOW at about 10,400, or about 1,117 on the SPX.

If that is occurring, then we should not make a new high today. Both of these patterns are potential topping patterns, indicating that a couple more days time will likely be required to break the current range. Obviously, that could happen tomorrow on the very important monthly jobs report. I’ll try to keep both patterns updated in the daily thread below.

The links we’ve been placing about Freedom’s Vision and the Swarms are still paying off, I appreciate everyone’s help in that regard. We’re still planning on Opening Day Swarms this Saturday, so please make sure that you visit the site on that day and participate, I appreciate it. Hey, when your money is based upon debt, your country is not free and that’s the point of the Swarms…

Lynyrd Skynyrd - Free Bird: