Friday, July 8, 2011


Run, don't walk, to read the Oracle bestowing praise on GS' Blankfein in the New York Times' DealBook section today.

The current wholesale price of gasoline is $3.12 a gallon.

The resoundingly positive response to today's ADP Employment Report might be short-lived.

The price of oil has averaged $95 a barrel and bottomed at $90 a barrel in June. But today, oil is approaching $100 a barrel, or more than 10% above June's low of $90 a barrel. Should oil continue its climb I suspect July's jobs number will disappoint. And if the price of crude is sustained above $10 a barrel, the second-half jobs outlook will not be too sporty.

The ADP report is notoriously wrong-footed. The ADP employment increase in small businesses (+88,000 jobs) was in marked conflict with the negative job growth in small businesses reported on Wednesday by the NFIB. In the NFIB survey under 10% of small business owners reported adding an average of 2.8 workers, 16% of small business owners reported that they reduced their labor force by an average of 3.0 workers and the 75% of other small businesses showed no change. In total, the NFIB study yesterday came to conclusion that the average small business lost 0.23 workers per company in the month of June. (This comes after four consecutive months of positive employment gains.)

The Challenger, Gray survey indicated that the number of planned June layoffs totaled about 41,400, up by nearly 12% from the prior month of May.

While 2012 is still nearly six months away, taxes are going up, and spending is moving lower. Taking away monetary and fiscal stabilizers does not provide a good backdrop for employment or economic growth.

In other words, the jobs picture and outlook are decidedly mixed.

The ECB, as expected, raised their target rate by 25 basis points this morning.

More importantly, Trichet did not indicate in his press conference an intention to increase rates in the Setpember meeting. (The futures market's expectation is for another tightening but not until early 2012.)

Despite all the wrangling, the bailout of Greece is stillborn. There is an inevitability to the country's default in the not-too-distant future.

So will the U.S. budget compromise be kicking the can down the road, as hard decisions (cutbacks and austerity) are unlikely to be implemented given partisanship and the calendar. (We are moving closer and closer to next year's November elections.)

The eurozone contagion has spread further (to Portugal). Credit default spreads are widening across the region.

On China (i.e., the straw that stirs the world's economic growth), there are mounting concerns:

1. China's growth is slowing while inflation remains elevated. The tightening policy is seen by bulls as a positive and as nearly at its end, while Chinese officials say rate rises are not over until they are over.

2. Meanwhile, China's growth is increasingly suspect, as is its burgeoning credit load threatens growth.

3. A hard landing in China could unseat commodities and lead to lower worldwide economic growth.

Another blow to the self-sustaining recovery thesis was seen yesterday in both the Challenger, Gray survey and in the ISM Non-Manufacturing Index. The fact is that most long lead indicators (which turned down before the Japanese nuclear accident) are signaling more profound economic weakness ahead. And with 2012 bringing higher taxes and lower spending, the tailwinds of growth are quickly subsiding.

"You know what they say, 'You don't sell the steak, you sell the sizzle.'"

-- Kramer (Michael Richards) in "The Bizarro Jerry," Seinfeld

The bullish cabal has positive points to counter every concern above, and they are being comforted by a vigorous and broad advance in the world's stock markets, which indicates to them that strong growth is on the horizon. Moreover, they argue (even if they are wrong on their optimistic growth expectations) that slow growth has been discounted and that, with a continued zero-interest-rate policy, even well-below-trend-line growth should translate to higher valuations as the U.S. stock market is the best house in a bad neighborhood. Finally, the optimists argue that even if domestic growth turns much lower (as the bears expect), the Fed will be there to backstop growth.

The bearish cabal is tearing its hair out in the face of many of the above weakening or uncertain data points, reminding them of another great quote from "The Bizarro Jerry" episode of Seinfeld in which Elaine says, "I can't spend the rest of my life coming into this stinking apartment every 10 minutes to pore over the excruciating minutia of every single daily event." They argue that growth is so tepid that profits and growth are exposed to almost any external shock and that the due bills of policy (geared toward bringing the world's economies back to stability) are soon coming due.

The market is bizarre, especially in its dramatic reversal from risk-on to risk-off and back to risk-on again. It just doesn't feel healthy nor does the advance in equities seem sustainable.

Just as the market overshot on the downside a few short weeks ago, it now appears to be overshooting on the upside.