Saturday, September 3, 2011


I guess after this morning's jobs report there is more than a bit of irony that Labor Day is coming up......

It is growing conspicuous -- and it's likely consistent with renewed signs of domestic economic weakness in that municipalities' creditworthiness is deteriorating and now coming into question (a la Meredith Whitney's thesis).

We need strong and creative pro-growth policies -- more monetary easing isn't going to cut it.

It is a fool's errand to believe that the Federal Reserve will spur any meaningful economic growth by reducing interest rates further.

Ben Bernanke, by himself, cannot save the world.

Nearly three years of easing have proved ineffective in solving nonmonetary problems. Accordingly, without strong and creative pro-growth fiscal policy changes, we will be right back in the soup.

Already business and consumer confidence has been mightily shaken -- and the propensity to invest has been sapped (perhaps even irreparably).

This is a sad state of economic and investment affairs, but it can be resolved if our leaders adopt our sense of urgency.

"(The unemployment report) is grim and scary ... hopefully it will ring alarm bells in Washington." -- Mohamed El- Erian, Pimco

On President Obama's job speech next Thursday, tax and spending initiatives will be proposed "that will have a significant impact on growth and creating jobs." -- Gene Sperling, Director of the National Economic Council

The one-year Greek note yield is now 71%. (up 1000 bps).
The two-year Greek note yield is now 47%. (up 425 bps).
The 10-year Greet note yield is now 18%(up 50 bps).

The typical conditions that precede a recession are not in place:

* large private payroll drops in excess of 175k a month (adjusting for nonrecurrings, they are still averaging about 100k growth over last four months);
* an inverted yield curve (it is not inverted);
* acceleration in inflation (inflation is contained and so are expectations);
* an increase in real interest rates (anything but!);
* bloated inventories (low inventories to sales in place now);
* retreating retail sales (they are expanding;
* negative year-over-year leading economic indicators (advancing now);
* a drop in factory orders (also advancing) and;
* outsized durable spending relative to GDP (housing and autos remain in the crapper).

As it relates to job growth, initial jobs claims, corporate profit growth and capital spending all point to improving and better payroll growth than we saw today.

But what is happening is a negative feedback loop that is taking a turn for the worse, and we don't yet know its impact on business and consumer spending.

When we figure out the disconnect between data and sentiment, we'll have a lot more clarity on what the markets will do.

Boockvar of Miller Tabak chimes in on the jobs report:

Zero net jobs were created in August vs expectations of +68k but it does include a reduction of 45k due to the Verizon strike where all will come back in the Sept data. The private sector created 17k, well below expectations of 95k. The household survey did add 331k after job losses in the two prior months but because the labor force rose by 366k, the unemployment rate held steady at 9.1%. The U6 rate rose .1% to 16.2%. Also disappointing, avg hourly earnings fell by .1% m/o/m and is up just 1.9% y/o/y, well below the recent CPI readings of 3%+ and the avg workweek ticked down to 34.2, the lowest since Jan. The avg duration of unemployment fell a hair from its record high. Manufacturers shed jobs for the 1st time since Oct '10. Jobs were also lost in construction, retail, and at the local government level (state and federal added workers). Jobs were added in finance, business services including temp, education/health and leisure/hospitality. Bottom line, the number sucked and looking to the next few weeks we'll hear more about QE3 and Obama's jobs plan and the political class will still not understand that short term steroid shots into the economy does not alter long term behavior and a price is always paid when the stimulus wears off, aka debt, taxes and inflation. The US economy needs to FERBERIZED and left alone instead of being attended to every 2 hours.

Now there is terrific pressure on policymakers to implement pro-growth fiscal policies.

They fail and we may see an emergence of a third political party!

What was opaque at Bank of America has now turned much darker.

BAC's management has repeatedly dismissed the need for new capital.

But watch what they do -- not what Brian Moynihan says.

It increasingly appears that BAC's management is as disingenuous as the Wilpon family was in their negotiations to sell a portion of the New York Mets to Greenlight's David Einhorn.

After selling preferred stock (on preferred terms to Warren Buffett's Berkshire Hathaway (BRK.B)!), selling its international credit card business and reducing, by half, its investment in a large Chinese bank, according to The Wall Street Journal, BofA is now under additional capital scrutiny by authorities.

What was opaque at Bank of America has now turned much darker.

In company-specific news, the SEC has announced that it is seeking public comment on the mortgage REITs exemption from the Investment Company Act of 1940 -- which, in theory, could result in a marked reduction in leverage allowed (and profits earned) for the sector. Mortgage REITs currently employ leverage of about 8x, which allows them to generate 17% to 18% returns on equity (and pay out a slightly less amount in the form of dividends). If forced to reduce leverage to 1x or 2x, the industry group will return about 3%. (The group was down yesterday and this news will be an overhang until resolved)

Finally, in a sign of our times, Los Angeles Dodgers owner Frank McCourt has been offered $1.2 billion to sell the team -- an offer partially funded by a Chinese-financed investor group.