Friday, June 4, 2010

The growth rate of private sector jobs is decent

According to the household survey, private sector jobs have risen at an annualized pace of 1.4% over the past six months. That number will very likely approach 2.5% next month, assuming only modest gains in employment in June, because the bottom in employment was last December. A 2.5% rate of growth in private sector jobs would be entirely consistent with a modest decline in the unemployment rate; the labor force tends to grow about 1% over time, but it has not grown much at all in the past few years, so we ought to expect labor force growth to be closer to 2% for the next 6-12 months; thus 2.5% jobs growth will only result in a minimal reduction in unemployment. In any event, while this does not look at all like a robust recovery, it is nevertheless a recovery, and I see no sign that it is about to end. The market needs to look beyond the establishment survey—things are nowhere near as bad as the headlines suggest.


John said...

Unfortunately the market is not looking beyond today's close. We had two consecutive up days for the first time since April and the traders won't hold a position over the weekend. This puts us deeply oversold again, and we should get another rally next week.

Incidently those who argue the quants provide liquidity are being proven wrong by days like today. If we had the specialists they would be buying agressively. Instead we have machines piling on increasing the volatility.

Anonymous said...
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Rob said...

桂竹桂竹 - I agree completely !

Rob said...

Now that I've agreed I really should find out what he said. According to google translate:

"Persist for a certain purpose or goal, and continuous efforts towards the direction of an established concept."

Bill said...


Can you explain to a middle age investor who puts most of his savings in his SEP/401(k) who makes the decisions on a daily basis that some small piece of negative news is enough to warrant a big sell-off? It seems that the rational analysis that you and other commentators on this blog provide means nothing to the people who control the market. Does this suggest that the idea that stocks do well over the long term is dead because it takes so little these days (perhaps because information is transmitted instantly today via the net?) to cause a panic? Is the average investor just a sap who plows his hard earned money into the market so a 30 year old hedge fund manager can wait until a new peak and then sell everything off so he can make another quick billion?

John said...


Sometimes it sure feels like that, doesn't it? During most of my career we calculated stock prices with fractions like 1/8, 3/8, etc. and there were real people called 'specialists' that maintained orderly markets by 'leaning against the order flows'. These specialists used their own capital as well as others' to accomplish this. We also had something called the uptick rule. In order to execute a short sale there had to be a trade that was higher than the preceding trade. Also, the cost of trading was much higher. A trade for an institutional investor might be $.05 a share or more. Much more for retail investors.

Today, the specialists are gone, stocks trade in increments of less than one cent per share, there is no uptick rule and trading costs are practically nothing. Computers using sophisticated algorithms trade securities automaticly at speeds that are to me, mind numbing. Large banks market these monstrosities to institutions whose time horizon may be no more than a few minutes.

Now it is true that these contraptions can take markets up as well as down. The operators don't care whether they make money on rising or falling markets. But anyone who claims these things add liquidity to markets is IMO biased or is flat out lying. There is plenty of liquidity when you don't need it and none when you do.

The conclusion I come to is that volatility is significantly increased and the playing field for individual investors is far from level. It has always been difficult for amatuers to invest alone. Today it is even more difficult. Sophisticated charting and computer technology coupled with full time traders may require investors to endure larger declines before their judgement is proven correct, while increasing the risk of selling out of despair over rising losses. Professional help IMO is almost a necessity to have reasonable hopes of success. The need for longer time horizons and more tolerance for losses seems to continue to drive individual investors away from equities. We have an SEC that SEEMS to be unaware of these problems...although I do believe they are studying them. I have little confidence much will change however. The trading volumes are too profitable for the exchanges.

My advice for individual investors is to get professional help for any truly serious money you invest in equities. If you want to play around with speculations on individual securities on your own, I think it is fine if you can take the heat. If you can't you are better off in a deposit account. You'll wind up despairing and selling out at lower prices. I've seen it over and over again. Its an old story.

I have seen many fortunes made (and lost) in the equities markets. I believe good returns can be made there but it is increasingly difficult to accomplish for amatuer individuals...but not impossible.

Much thanks to Scott for allowing me this forum to rant. This one is over.

Rob said...

Scott or John or anyone else here, a question:

We all greatly value Scott's calm, rational and surprisingly upbeat views on the economy, which he always backs with impressive-looking data. His track record shows him to be well above average in correctly reading the runes and profiting from it.

Scott's views have returned time and again to the idea that we are in a V-shaped recovery, albeit perhaps not quite as Vroom-vroom as in times past.

But I've been looking again at the chart of the Dow Jones, on Google Finance, the longterm one that goes back to 1970 ( And, with Friday's 3% decline still ringing loudly in my ears (and sizable losses perhaps affecting coolness), what I see is a degree of violence in the chart since Greenspan's infamous year of "irrational exuberance" (1995).

From that point on, it seems that a series of bubbles, combined with the use of complex derivatives, highly sophisticated computerised trading and the dangerously high levels of leverage, has made this index a manic-depressive HELLter-skelter.

I mean, it plunged from 14,000 to 6,600 in the (relative) blink of an eye. There is just no precedent for that since 1970 or, I suspect, a long time further back. It then rebounded to 11,000 and has now dropped precipitously to sub-10,000.

Looking at the Google graph is like looking at the rise of a mountainous landscape where before there was a gentle ascending slope. The "new normal" in which we find ourselves is truly hostile and scary terrain.

I, like other readers here, am much poorer after recent weeks in the markets and I have just about given up when it seems the odds are so heavily stacked against you.

So i suppose my question is this: since we are living in "interesting times" in which the investing and trading landscape has changed almost out of all recognition, what should we small fry do?

Investing is not what it was.

John said...


You have asked a good question, one that deserves a good answer...and there may be several depending on circumstances of each 'small fry' which, BTW, I consider myself among.

I have definate ideas, some of which you may read in my rant above. However, since this is not my blog and, like you, I am a guest here, I will defer to our host for his comments on such a serious subject.

Again, everyone's circumstances differ which is why I suggested for serious money, seek qualified professional guidance and advice if your experience in markets is limited.

John said...


I have been thinking more about your question and without adding anything new, I believe it would be helpful for you to reread Scott's post below titled, 'Good news from the service sector...'. Scott does a good job IMO of explaining why this is not a repeat of the '08 panic. I suspect many believe it is, and that is one of the reasons for the volatility.

It may not directly answer your question but in these difficult weeks I think it gives some additional perspective on the issues involved.

Just a thought.

Bill said...

While it certainly seems as though the economic data are much stronger now than during the 2008 panic, didn't a lot of "experts" say that the subprime mess was overblown and wouldn't cause a recession? It seems so much of whether the economy goes into recession is based on pure emotion as opposed to anything concrete. I hope sentiment improves.

John said...


We all do. Well, maybe not ALL.

Again, reread Scott's post on the service sector a few posts down. It is the best explanation I have seen on why the sovereign debt problem is not similar to the subprime collapse. In '08 there was a total lack of transparency. NO ONE knew what anybody else had or what, if anything, it was worth. Banks refused to do business with other banks and commerce froze. While very serious, the sovereign debts are known amounts, and virtually every bank knows what their counterparty banks have. The political and monetary authorities are all acting. Stress tests are nearly complete and likely will be published quite soon. Transparancy is critical, and I believe the markets will have it. Scott goes into more detail. Again,I suggest you reread it.

Each of us must come to a decision on how much volatility can be tolerated. I am continuing to operate under the assumption that this will take a long time to play out but that it is a snake everyone sees. And in my experience, seen snakes rarely if ever bite. This may yet prove to be the exception but for me the case is strong enough to stay the course. I am prepared for headline risk of restructures, financing problems, etc. but am hanging my hat on corporate earnings which should be good. At the end of the day, that is what will rule.

Bill said...

Thanks John. Now I can at least enjoy the rest of my Saturday and Sunday and stop worrying until 9:30 Monday morning.

John said...


You are welcome , Sir.

I will be right in there worrying along with you!

John said...

For those of you out there worrying along with Bill and me, I read of a technical signal that is flashing a 'bottom' call. Its not infallable (nothing is) but it is a decent indicator that has been accurate in the past.

The number of lows among all NYSE stocks has been contracting since early May. On May 6, 218 NYSE stocks made 52 wk lows. On May 25, the number was 126. And on friday, a closing low for May-June, the (preliminary) number shrank to just 40. This argues that the intensity of the decline is waning.

If this indicator holds, this is a correction in an economic expansion and NOT the beginning of a new decline.

No guarantees. Only a technical indicator. I just thought I'd throw it out there and help make the rest of the weekend a wee bit lighter.

Nite, y'all

John said...

A couple of items of note in this weekend's Barrons...aside from the usual growling from the usual Gene Epstein's 'Ecomomic Beat' column in which he makes PRECISELY the same points as Scott re the jobs gains found in the 'household survey'. He says, "..The underlying trend in private sector employment is still unmistakably positive." I also note that his column is ranked #1 most popular article in this weekend's online edition. This reinforces my belief that the majority of people are too pessimistic about the economy.

The other noteworthy item is the editorial by Joseph Quinlan, "Go Long America. The US is #1 for the forseeable future." He makes a good case for why the US is #1 in foreign direct investment and why it will likely remain that way for a long time.

I'm not trying to be a polyanna here. We have deep problems that need addressing and the bearish casemakers are doing a good job of pointing them they should. It is differences of opinion that make for healthy markets. The wind is decidedly in the bulls' face now and may remain so for awhile longer. I'm just pointing out a couple of positives that are being largely ignored by the majority.

Scott Grannis said...

Bill: re what is a small investor to do? More and more it seems to me that the market is inefficient. Sometimes it reacts with a herd instinct. It's so easy to sell (via stop orders) that too many try to do it, and this increases volatility to the downside. But is that a reason to avoid the market? On the contrary. The market's inefficiency inevitably leads to bargains for those who do their homework and are willing to put up with the volatility. I'm constantly amazed at how the market value of companies can change by 5 or 10% based on one small piece of new information. I don't believe the world can really change so much in such a short period very often. Yes, once every 5 or 10 years there is a significant event, but not every few weeks.

Scott Grannis said...

Another thought: There are two types of investors: "investors" and traders. Traders are in and out and seek to take advantage all sorts of things. Investors are generally in for the long haul. I'm an investor and I have learned to stick with things through thick and thin over many years. I try to focus only on the fundamentals. If they look good from every angle, then I stick with that until the fundamentals change. Right now I think the economy is in a growth phase and I see no sign that the growth fundamentals have changed. Meanwhile the market is behaving as if we are on the cusp of a double-dip recession. So I think the market will be proven wrong and I will eventually be rewarded for remaining long.

One thing I learned from a wise friend and colleague many years ago: When you buy something, do it with the knowledge that you will be forced to "go to sleep" for the next 5 years (i.e., you won't be able to second-guess your decision). Would you be comfortable buying the stock knowing you would have to hold it for 5 years? I have rarely had trouble going to sleep--only a handful of times in my life have market conditions made me toss and turn at night. But if market volatility makes you lose sleep, then you don't have strong convictions; you either aren't an investor or you haven't done your homework.

John said...


The following are some thoughts on your 'what should us small fry do?' question.

1. Most importantly, if you are not greatly experienced in financial markets and securities investing and are working with 'serious money' PLEASE consider professional assistance. I cannot overemphasize this. The average investor's batting average is poor at best. Even professionals are bamboozled much of the time. Find someone competent that you feel you can trust and work with them on a plan based on YOUR specific needs and circumstances. If you want to play around on the side, fine. Please don't do it with your life savings.

2. Like Scott says, markets are made up of people who can be highly emotional at times and thus create inefficient markets. It is at such times as these that both danger and opportunity coexist. If you have an advisor, discuss with him/her your options. It is here where they will prove or disprove their worth. Evaluate their advice later, after the emotions of the moment have passed.

3. Learn the lesson that the easy trade is usually the wrong trade. The opposite is also true, the difficult trade is usually the correct one. Not necessarily immediately, but before much time passes its the way it works most of the time. Test yourself constantly. What do your emotions tell you to do? Its probably wrong.

4. Educate yourself. Generally, the more knowledge you have the better your judgement is likely to be. And it is your judgement that will determine your success or failure over time. How to do it? READ. Read as widely as you have time for in the areas that will affect your financial judgement. If you can't do this, turn your money over to a pro and hope for the best, or leave it is a deposit account. I'm not kidding. If you can't understand what's going on, the sharks will eat you alive. Its like sitting in a poker game. If you don't know who the patsy is, its YOU.

5. Know your tolerance for volatility and lengthen your time horizons. This should be a prime topic to cover with your advisor. If you can't sleep, sell to the 'sleeping point'.

This is not a complete list but its a good start. Hope its helpful.

Unknown said...
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Unknown said...

As for Global EM fundamental indicators most of them are showing buying territory, so except big shock, risk trade should perform good.

Scott, do you know this study,
It looks very hermeneutic but general ideas are simple. The author also called a recovery in economy on the beginning of last year

Bill said...

Scott and John,

Thanks so much for the helpful insights. I suppose as a long term investor I'm not so much worried about my retirement account (hopefully it will grow over the next 20 years) but I do worry that all the big swings on a short term basis could cause folks to feel less wealthy and hence stop spending.

ronrasch said...

I believe the markets are very inefficient and are climbing a wall of worry. If you have technology stocks that are on the cutting edge, you may want to have some trading stock to buy and dips and sell on strength and some stock for long term. For professional advice domino analytics (quick logic top reca), next inning technology, and the gilder forum, a fun place for a conservative. You may want to use Investors Business Daily to time market dips and for technical analysis. Decision Moose also is a good timing service at a good price. For a read on economic condition Scott is a blessing.
My big concern is that O will need a war to stay in power and we may need to go to war with Iran.

Scott Grannis said...

Bill: The only thing that makes investing in equities potentially rewarding is the inherent risk. As Uncle Miltie always said, there's no free lunch.