Monday, May 11, 2009

Green Shoots or Soylent Green

One of the all time film cult classics was the futuristic Soylent Green in which a world beset by overpopulation and food shortages depended on the government for nutritional supplement. Without giving away the ending, let is only be said that the government solved both issues in one policy. Who knows how many problems are being solved today with similar sweeping efficiency!

In early march there was a palpable acceleration of feel good data and market action. Two months later we've experienced the sharpest stock market rebound in history on the back of short covering of investments in the worst companies in the economy and Tim Geithner's loose change. The power of sentiment is great and it is important. But some perspective is helpful.

The point of the chart is to illustrate where we were and where we are. Bear market rallies are the most powerful rallies and like when we stop hitting our finger with a hammer, it feels so good.

The leading sector in the rally has been financials. That beleaguered collection of insolvent and powerful companies rode up higher on the fact that the hammering stopped. Given the trillions of loans, guarantees and bailout funds for short sellers it was a good bet the juice was no longer worth the squeeze. For example the short sale of Citigroup at 46 when it fell below its 200 day moving average looked pretty good at $1. The incremental added profit betting on the move to zero wouldn't add much to the game. At about $3/share, the technical analysis indicated a shift in risk to the upside.

What about the economic evidence to support an end to the recession. It remains in the realm of second derivatives. Less bad is the new good. The headline employment data looked good-ish. Here's the good news:

* 539,000 jobs were lost in total vs. 663,00 jobs last month.
* 110,00 construction jobs were lost vs. 126,000 last month.
* 149,000 manufacturing jobs were lost vs. 161,000 last month.
* 269,000 service providing jobs were lost vs. 358,000 last month.
* 47,000 retail trade jobs were lost vs. 48,000 last month.
* 122,000 professional and business services jobs were lost vs. 133,000 last month.
* 15,000 education and health services jobs were added vs. 8,000 added last month.
* 44,000 leisure and hospitality jobs were lost vs. 40,000 last month.
* 72,000 government jobs were added vs. 5,000 lost.

Don't misunderstand, things must get less bad before they are good, but several items give me pause.

The automotive plant closures haven't hit these data yet.

There are approximately 2 million college graduates about to hit the job market.

The Bureau of Labor Statistics has been particularly aggressive in downward revisions a month after initial release. Each month the revision has been greater job loss by between 30,000 and 100,000. So the green shoots are delicate indeed.

The statistical adjustments, which are statistically justifiable, still create obscurity. The Birth/Death adjustment calculates a projected gain or loss of jobs from failing businesses and new businesses. The BLS is assuming the net creation of 226,000 new jobs from new businesses in April.

The government creation of jobs was principally the hiring of census workers for the upcoming census, temporary workers.

I am keeping the vintage champagne corked and chilled still.

John Barnyak