Thursday, December 17, 2009

Miracle on

The November jobs report was much better than expected. The unemployment rate fell to 10% and net payroll jobs declined by only 11,000. These types of numbers were not expected to happen until Q2, 2010. This is good news.

The unemployment rate still could increase in the next few months as discouraged workers begin looking for jobs again. But remember, this is caused by more jobs becoming available and people feeling better about finding work. Improved economic conditions can cause the unemployment rate to increase in the short-term.

Some conservative commentators downplayed the report and tried to diminish the data for political purposes. Yes, the economy is still not good. Yes, the government is not doing the correct actions to help (see last week’s post) and we still have a long way to go. But there is no way to view the November report as anything but good news. You can debate about how good the news is, but that seems rather pointless and childish and it can actually be detrimental to the economic recovery (more on this later). For a very positive (perhaps too optimistic) outlook on the data, see these articles. Article 1 Article 2

But are things really getting better? Back in October I commented on my friends Jeff and Kurt (pseudonyms of Jerry and Kirk), two highly-skilled professionals that had been unemployed for a year. Here is an update on their situations.

Long-term unemployment puts stress on a family and on Thanksgiving Day Jeff’s wife (only in her 40’s) suffered a minor heart attack. She works full-time and is the main source of the family’s income. This is one of the sad personal stories of the recession, similar to what is happening to numerous people throughout the country.

But don’t reach for the tissue box just yet. Because eight days later, after being unemployed for just more than a year, Jeff received a job offer for a great position. Jeff’s wife is going to be alright. Ring some Christmas bells; it’s going to be a great holiday at Jeff’s house.

What about Kurt? Incredibly, Kurt received his first job offer on the very same day as Jeff. That’s right, I’m telling you that the two people I wrote about in October, that had been unemployed for over a year, received their first job offers on the very same day. In December no less, which is the weakest month for hiring. (If you don’t believe me, send an e-mail and I will pass it on to Kurt and Jeff for confirmation).

And it gets even better. Jeff received a second job offer a few days after the first one and Kurt ended up deciding between three offers. This has all the makings of a holiday movie. I’m thinking of writing a script and calling it “Miracle on”.

Good news such as this gives us hope and hope is important for everyone to have right now. There is a psychological/spiritual element to macroeconomics. Recessions usually intensify when people become pessimistic about future economic conditions (In our present case it was more like panic). Recessions end and recovery begins when optimism returns. Economists use the term “animal spirits” to describe the economic changes caused by changes in people’s attitude. The term is often used when economists have no rational explanation why things are getting better or getting worse. This means that trying to discredit good news can actually hinder the economic recovery by keeping people pessimistic.

The economy has gone through much turmoil in the last two years. Many people are going through serious hardships, struggling to make it in what seems to be a cold, dark, world. Some people have given up hope.

But we remember a story of a people also facing hardships in a cold, dark, world. They had received a promise, but that promise remained unfulfilled. Almost everyone had given up hope. It was into this situation that hope was born. It happened suddenly and it came quietly. It would have gone totally unnoticed except for angelic beings proclaiming good news. Good news, indeed.

Merry Christmas

You Can Provide Hope

My friend Duane (a big fan of this blog) is director of the Refuge of Hope mission in downtown Canton, Ohio, a city hit harder than most by the recession. Please consider donating the last $21 of your gift budget to provide Christmas dinner for a table of ten hungry people. You can make a donation on-line (either Pay Pal or credit card) by following this link. Refuge of Hope

Thursday, December 10, 2009

We’re From the Government and We’re Here To Help

“Can 535 politicians, heavily influenced by lobbyists, make better spending decisions than the other 220 million adults in the United States?” – Joseph Y. Calhoun II, Alahambra Investments

Basic economic theory says that individuals in free market economies make better decisions about the allocation of limited resources than do government entities. Government intervention is needed to serve as a “referee” to make sure participants follow the rules (the referees watching the financial crisis “swallowed their whistles” this time.)

The financial crisis has motivated the government to get very involved in the economy and institute several programs intended to help. The major problem is that most of our congressmen are either lawyers or career politicians, or both. Politicians are experts at getting reelected, not solving business problems.

Most of the programs involve giving away “free money” in one form or another. “Game Theory” states that after the government writes the rules for these programs, the participants will act in a way to maximize their own benefit. Or scam the system if possible.

Let’s see how well the government programs are working so far:

Troubled Asset Relief Program (TARP)

The Plan: The government was supposed to purchase or insure up to $700 billion of "troubled" assets to stabilize the financial system and rejuvenate the credit markets.

Free Money: Given to big banks the government likes for the purpose of stabilizing the banks and encouraging them to resume lending.

The Game: The banks take the money and stabilize their balance sheets. Their stock prices go up and ---- yes, big bonuses for everybody. The lending increase to help boost the economy? Not going to happen. And as soon as the government wanted to exert more control over the banks, suddenly the money was no longer free and they sent it back.

The Result: The TARP was greatly needed at the time to stabilize the financial system, but implementation was inefficient and tainted by politics. It failed miserably in attempting to loosen the credit markets.

American Recovery and Reinvestment Act of 2009 (Stimulus 1)

The Plan: I'm not really sure there was a plan. It was an unfocussed, hodge-podge of tactics involving $787 billion. There was some safety net spending and some aid to states for key services support. There was only $100 billion allocated for infrastructure. Jobs were supposed to magically appear keeping the unemployment rate under 8.5%.

Free Money: Much of the free money flowed to politically important states and to politically important workers and basically anyone who could spend it and claim that jobs were saved or created.

The Game: Gimme some of that stimulus money. Such as $31 million for renovating two small Canadian border posts in Montana and $3.5 million for an under road tunnel so turtles and alligators can cross the road safely in Florida. For more examples: See Article

The Result: Money is spent for many wasteful projects and few jobs are created. Unemployment topped 10%. Only 25% of the money had been spent through September but it did help increase GDP in Q3. If this program would have been submitted as a project in a business class, it would have received an “F” grade.

The General Motors and Chrysler Takeover

The Plan: Temporarily take over two bankrupt car companies until they can become profitable on their own

Free Money: Not so free to the car companies since they are under government control. Tons of free money to the United Auto Workers union and retirees.

The Game: Really not much of a challenge. The UAW didn’t give up much and received plenty.

The Result: The government is now trying to run car companies when the government can’t even run the government. This should turn out well.

Cash For Clunkers

The Plan: Give people money for trading in their old gas guzzlers for a new more fuel-efficient, less-polluting, ride. This would stimulate car sales and clean the air.

Free Money: $4,500 for anyone needing or wanting a new car. Politicians were amazed that so many people would take advantage of them handing out free money. So many people took the deal that the program initially ran out of money. This should have been a major red flag that something was wrong and the amount was too large. No, they didn’t get this and allocated even more free money for distribution.

The Game: The biggest users of this deal were Ford F-150 owners who turned in their slightly used F-150s to buy new F-150s. When people who drive pick-up trucks can figure out how to scam the system, the program has some real problems. (Just kidding)

The Result: Auto sales spiked during the program and then fell afterwards. It looks like the program didn’t generate many marginal sales and had negligible effect on air quality. A very expensive program with lackluster results. Also, is it any coincidence that the first industry to get a targeted stimulus is the one the government now owns a piece of? Surprise, surprise, surprise.

First-Time Home Buyer Tax Credit

The Plan: A tax credit for first-time home buyers intended to stabilize house prices and reduce inventory.

Free Money: $8,000 for first time home buyers. Again the free money is very popular.

The Game: Anyone that was considering buying a home in the next 12 months bought it now. This means many sales were pulled forward with no guarantee that sales will continue after the program ends (that is why it was extended). However, the number of eligible buyers for the program is shrinking.

The Result: It has stabilized prices and reduced inventory in the low-priced segment, but has not helped the rest of the housing market. Economists would argue that the program was unnecessary because depressed housing prices combined with historically low mortgage rates already offered a tremendous incentive to buy.

Stimulus – Part 2

As congress considers “Stimulus Part 2”, let’s hope it’s much more job focused than Part 1.

Here are some ideas:

- After the Minneapolis bridge collapse in 2007, the buzz was that all older bridges in the country needed to be replaced. So do it now! It will create jobs and save lives. Win – Win.

- In 10 years it is expected that the highways and railroads won’t be able to handle the increase in traffic and freight. Expand the infrastructure today when there is less traffic and it will create jobs now and lead to economic growth down the road.

- There is also expected to be a strain on the electrical supply and grid sometime in the near future. Upgrade it now. Build some new nuclear plants too.

- And since there is a move to renewable energy, how about building some wind farms and promoting solar panel use and production.

Thursday, December 3, 2009

The Good, The Bad, and The Beautiful - Unusual Economic Indicators

There is still much uncertainty about where the economy is headed in 2010. The GDP forecasts for Q1, 2010 from the latest Wall Street Journal Economic Panel range from -2.0% to +5.0%. The average of all respondents is +2.8% and the average of my personal “Super Seven” economists is +2.6%. Because there is so much uncertainty from the top economists analyzing the traditional economic indicators, it is a good time to look at some unusual ones.

The Strange Indicators:

Men’s Underwear

The theory is that men will delay underwear purchases in tough financial times. Mintel (a consumer research group) is forecasting sales to decrease 2.3% this year and fall another 0.5% next year. Reportedly, sales have increased since the summer.

My Read: This indicator was first proposed by in the 1970’s when men’s underwear choices were very limited. I think it is difficult to use the general data as a predictor today. There might be something useful here, but more in depth data analysis is needed.

Men’s Ties

The theory is that business people wear bright colors when they have confidence in economic conditions and positive attitudes. One economist has claimed that more men are now wearing pink and fuchsia neckties, after wearing much more muted tones earlier in the year.

My read: This one is difficult to measure. Although there could be data available if tie vendors track sales by color. Watch the business news and draw your own conclusions.

Women’s Lipstick

The theory is that during recessions women will compensate for reduced spending on clothes and other fashion items by buying more lipstick, an inexpensive alternative. This theory was first proposed during the previous recession during which lipstick sales spiked. However, it is not holding up this time. Lipstick sales are down about 11% this year. Makeup sales however are up 8.5%.

My read: The lipstick “index” has been proven unreliable so forget it. However the makeup sales could be relevant. Are women making fewer trips to the spa? Are they attempting to cover up the results of stress?

The Hot Waitress Index

The theory is that as layoffs increase, attractive women will have to take jobs as waitresses to make ends meet. I am not making this one up and the linked article makes a good case for the index relating to conditions in New York City. See article.

My read: This theory sounds like it was developed by a group of guys at a bar late at night. There is no baseline and it is difficult to measure. Again, you will have to be the judge on this one.

Unusual, But Logical, Indicators:

The Cardboard Box Index

Many things get shipped in boxes so production of boxes should increase before production of the goods that go into the boxes. Box production jumped in April and the recession probably ended in July. Sales have been relatively flat since however.

My read: Indicator is only good for certain industries and is more short-term in nature. Not showing much of a trend right now, but should grow in 2010.

The Baltic Dry Index

The index measures sea freight rates which typically are very sensitive to changes in demand due to the long lead times of ship construction. This index surged earlier in the year, but that was caused by activity in China. It then fell back, but it has shown strong growth so far in Q4.

My read: Positive movement, but watch China factor.

Scrap Metal Prices

The theory is that increased prices of scrap metal precede increased economic activity. Scrap aluminum and copper prices are up, nickel prices are down. Scrap steel prices are showing modest recovery.

My read: Good indicator, positive trend.

Coal Futures Prices

Coal is a source of energy connected to industrial production. The expected future price of coal should be related to the future demand for coal and thus give indications of economic direction. The index has been less reliable recently due to Chinese demand. Future prices are trending up, but not consistently.

My read: Not as reliable as in the past, but trending positive.

Indicators I See:

Sunday Morning Breakfast Index

I note the number of cars in the parking lot at a family restaurant I pass every Sunday morning. When the economy was strong, the lot was jammed. Early this year, the lot was less than half-full. There was an increase in the summer, but then it flattened out. However, there has been a slow, but steady increase the last two months.

Optional Medical Tests

A source in this industry told me business was very slow in Q1, but has improved every quarter.

The Christmas Lights Index

There are fewer and less extravagant Christmas light displays in my neighborhood this year. Is it because people need to reduce their electric bills or are they feeling less festive?

The Human Relations Job Postings Index

My fellow job seeking friends have reported a recent increase in job postings for HR positions. Speculation is that companies need to bolster their HR departments before hiring other positions.


Considering the 12 indicators as a group: seven are positive, three are negative and two are neutral. Somewhere between 2-3% GDP for Q1 sounds about right.

Thursday, November 19, 2009

Credit Crunched

Another of the factors supporting the Model “T” forecast of a “UL” shaped recovery is tight credit (See “What the Model “T” says about the Economic Recovery). To understand the impact of credit on the current economy, we need to go back to September of 2008.

Just a few days before the start of the financial crisis, I was on the phone discussing the transportation market with my friend Tom (a big fan of this blog) who worked for a New York investment firm. Suddenly he became alarmed when one of the commercial paper markets he was following on his computer “stopped working”. I asked him if that was bad. He said he didn’t know, because he had never seen it happen before. We now know just how bad it was.

Much has been written about what was happening in the financial industry when the crisis hit, but not much has been reported on what happened in the manufacturing and small business sectors as a result. Most recessions begin because of decreased business spending as part of the ups and downs of the business cycle. This recession began in December 2007 and appeared fairly typical until the financial crisis hit in mid-September 2008. Before the shock, there were even some indications that the recession might end in 2008.

The financial crisis led to the so-called credit crunch. Suddenly, banks were reluctant to lend money to anyone for anything. Because much of business spending (especially capital equipment and small business) is reliant on credit, companies that were weathering the recession up to that point were forced to stop spending. The sharp, fast, pullback in business investment turned a normal recession into The Great Recession. Industrial orders dried up quickly and companies started laying off workers (both blue and white collar) and people panicked. Consumers then also cut purchases. Once a recession bites significantly into consumer spending, it starts a downward spiral that is difficult to contain and the economy spun out of control.

The government did try to help. Remember the TARP? (Troubled Assets Relief Program) The $700 billon program was done primarily to stabilize the financial system. However, the very important secondary goal of the program was to enable banks to start lending again at pre-crisis levels and to encourage them not to hoard cash to protect against future loan losses. It failed miserably in this regard. For example, one commercial trailer manufacturer had seven large orders at the beginning of December 2008. This was enough to continue production into mid-January 2009. Within two weeks, every one of the orders was cancelled due to lack of financing. Multiply this impact across business sectors and you end up with a -5.4% GDP in Q4, 2008 and a -6.4% in Q1, 2009.

If credit availability of C & I (Commercial & Industrial) loans is a key factor for economic recovery and the TARP failed to remedy this, you might think the government would try something else, a Plan “B” perhaps? No. They moved on to the stimulus, saving the auto industry and healthcare reform, etc.

So what has happened to business credit availability in the last 12 months? IT HAS GOTTEN WORSE! The Fed reported that banks were continuing to tighten their credit standards in October. Almost 90% of banks reported that credit standards were tighter than historical norms. (Barron’s). The National Federation of Independent Business (NFIB) Index of “Credit Difficulty” is very near the historic high that was set a few months ago. C & I loans in Q3 fell 28% from last year. (Market Watch). Outstanding revolving credit (used extensively by small businesses) recently plunged 7.8%, the largest decline on record (Wells Fargo).

What are banks doing with all that TARP money? The Wall Street Journal just reported that the country’s four largest banks are hoarding cash reserves to protect themselves against future losses. This is what the TARP was supposed to discourage, not encourage.

Barron’s is forecasting that credit availability may not improve until the second half of next year and will not return to normal levels until 2011. When businesses can’t borrow there is no business expansion, they have trouble meeting payrolls and they can’t refinance their debt. It is difficult to expect a strong economic recovery if businesses and consumers do not have access to affordable credit.

Disclaimer Statement

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research. The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

Thursday, November 12, 2009

The Housing Market Impact

One of the factors supporting the Model “T” forecast of a “UL” shaped recovery is a continued weak housing market recovery (See “What the Model “T” says about the Economic Recovery). Residential construction is very important to the model because it is based on commercial transportation factors and housing has a big impact on freight. Trucks are involved at all stages of the process. They are used to move dirt and raw materials, then construction materials and finally for consumer products to furnish and enhance the completed dwelling. During the housing boom, certain factors in the model rose in tandem with housing starts; of course they fell just as hard after the bust. Housing is not a leading indicator for freight. They tend to move together and how closely is dependent on housing’s overall influence on the total economy at the time.

Housing is also an important factor in economic recoveries. It has led the recovery in the previous seven recessions going back to 1960 (David Berson, PMI Group). Consumer spending has historically been the other key recovery factor.

If the housing market is so important to recovery, it is vital to determine the “basic economics” of the sector as we approach 2010.

Factors Impacting Demand

Demand for houses is being propped up by the first-time homebuyer tax credit, government backed FHA loans and very low interest rates. This has recently increased sales of existing homes, but this demand is not normal. A very high percentage (90%, Inside Mortgage Finance) of these sales are foreclosures, short sales (lenders agree to the sale of a home for less than the balance of their mortgage) and distressed sales (due to job loss).

September new home sales were at an annual rate of 402,000. While this is 22% above the January low (the low base number inflates the percentage increase!), it is 8% below a year ago and a whopping 48% below 2007 actual. New home sales, especially at the high end, are restricted by tight credit, weak consumer confidence and wage reductions. Future demand is limited by a declining number of first-time buyers, reduced FHA loans and possible higher interest rates.

Factors Impacting Supply

September housing starts were only 590,000 (seasonally adjusted annual rate). The numbers had been improving after bottoming out, but have now flattened. There is still 7.5 months of inventory, but this is better than earlier this year. Existing home inventory is 3.6 million and growing. There were 937,840 foreclosures in Q3.

The number of foreclosures is expected to rise due to:

- There are a large number of houses that are in the process of foreclosure or delinquent on payments

- Many adjustable rate mortgages will rest at higher rates in 2010 and 2011

- The number of voluntary foreclosures (otherwise known as strategic defaults, being underwater, etc.) caused by people with mortgages larger than the value of their homes is growing. There were 588,000 (1 out of every 5) of these defaults last year. Moody estimates that currently one third of all mortgages are underwater.

- More foreclosures are occurring on expensive homes and prime loans as higher income people lose their jobs and are unemployed for an extended time.

Amherst Securities Group forecasts that 7 million properties may be foreclosed upon and be dumped into the market. It would take 1.3 years to sell this inventory at current sales levels. Adding to possible supply increases is the “shadow inventory” (because it lurks behind the numbers and can’t be counted). This inventory consists of banks that are holding foreclosed and distressed properties off the market now, with plans to put them up for sale when the market (and prices) improve. It also includes home owners who need to sell, but are waiting for the same thing.

Impact on Prices
Housing prices are down 32% from peak (Case- Schiller, although this varies widely by market). Due to the strong expected increase in supply and the forecasted tepid increase in demand, Fiserv is forecasting prices to fall another 11%, bottoming in the summer of 2010. Moody’s says Q3, 2010. If the supply of foreclosed homes pours out on the market too quickly, prices could drop another 25%, back to 1998 “pre-bubble” levels.

The Forecasts
The WSJ Economic Panel is forecasting (averaged) housing starts at 840,000 a 260,000 increase over 2009. This seems optimistic considering September building permits were only at a rate of 573,000 and the National Association of Home Builders (NABH) Builder Confidence Index is at a very low value of 18. The NAHB 2010 forecast of 716,000 housing starts looks more realistic, but still could be high.

What it Means
The economy will have problems growing above trend next year (3%) with the housing market this weak. The commercial transportation market can expect another poor year (although better than 2009) in 2010. Which means the Model “T” predicts a sluggish stock market for most of next year.

Disclaimer Statement

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research. The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

Thursday, November 5, 2009

Did the Economy Really Grow at a 3.5% Pace?

The latest GDP figures released last week indicated the economy grew a 3.5% rate in Q3,the largest increase since Q4, 2004. This surprised many people and even some economists because it does not seem like the economy is improving that much.

Estimating GDP is a complicated process based on many calculations and assumptions. It is not an exact number, but it is the established standard in measuring economic growth. Ed Wallace (Business Week) believes that no one really knows where the economy now stands because all of our measuring tools do not work as well due to the scope and severity of this recession. See Article

One simple factor that impacts most economic statistics is that they are often quoted as a percentage change against a base number. Because these base numbers are much lower during this recession, it makes announced percentage increases sound better than they actually are. For example, take an industry where the average yearly output is 200,000 units. Due to the recession, 2009 output will be only 100,000 units. When it is announced next year that the industry has increased 20%, the real gain is only 20,000 units and the total output is still only 120,000 or 40% below average. This factor helps explain that while the economy may be growing, it is going to feel like we are still in a recession for awhile.

Is the economy really improving? Yes it is. Almost all other the major indicators are showing signs of life. The ISM (purchasing manager’s index) increased again in October; auto sales are growing, factory orders are up. The two major leading indicator indexes (ECRI and the Survey of Leading Economic Indicators) have been showing very positive signs. The economy did grow in Q3, although maybe not at 3.5% and the recession probably officially ended in July.

What Is Happening In Transportation?

Even though the transportation industry is a leading indicator going into a slump, it is a lagging indicator coming out of one. The transportation industry lags recovery because there is always slack (too much over capacity) that has to be consumed by economic growth before things improve. But if the economy really grew 3.5% in Q3, the transportation industry should be showing some improvement now in Q4. So what impact is a 3.5% growth rate having on the transportation industry?

Not much. Trucking firms have stopped shrinking their fleets, but freight volumes are improving slowly at an uneven pace. FTR Associates reported that freight did increase in September but was still down 7% from last year. The American Trucking Association Truck Tonnage Index fell in September after two increases. The CASS freight index slipped in October also after two increases. Similarly, rail carload freight remains down 10-14% from last year.

What About Q4?

Based on the evidence it does not appear the 3.5% growth rate, even if real, is sustainable. Only 17% of the Wall Street Journal’s Top Economists Panel are forecasting a higher Q4 GDP versus Q3. Even the Fed said that economic activity is likely to remain weak for a time. However, economic growth at a slow and steady pace should continue.

The stock market however may have priced in a stronger recovery. The 3.5% GDP is consistent with the recent increase in the S&P 500. If the economy continues at a 3.5% pace, stock prices will be able to hold and even increase. If growth slows, there is a danger that the market is overpriced and a correction would be expected.

Because the “Model T” is based on transportation industry factors and these factors have not improved much, the model is still predicting a bottom of around 580 for the S & P 500 Index. This bottom would be reached sometime in mid-2010, with a recovery starting late in the year.

Disclaimer Statement
The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.

The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

Thursday, October 29, 2009

The Unemployment Problem - Part 2

“I’m not really unemployed. The government stimulus package just hasn’t saved or created my job yet.”

The government’s response to unemployment was to pass a $787 billion stimulus package that was designed to save jobs --- mainly their own. It has probably “saved” more jobs than it has created so far by funneling money to important political constituencies in key political states. And what about the notion that the stimulus will eventually create jobs in 2010 and 2011? That offers little comfort to people who are going to run out of money in 2009.

Having “solved” the unemployment issue, the government has gone to work on reforming health care, tightening financial regulations and fighting global warming (cap-and-trade). But health insurance doesn’t help the hungry, financial regulations are meaningless to those draining their savings and people concerned about losing their homes are feeling the heat, but it has nothing to do with carbon emissions.

Some people even believe the debate about healthcare and cap-and-trade has actually hurt the creation of new jobs, since they impact business costs. Companies may delay hiring workers until they know what their new costs are.

It is easy to view the reporting of 15 million unemployed workers as just a statistic. But these numbers represent 15 million individuals, many with families which are going through pain, stress, and life challenges. Throw in a few million struggling underemployed people (characterized by the Jim Croce song “Working at the Car Wash Blues”) and you have a significant social malaise. This should be the government’s top priority, but for some reason it is not.

Personal Observations

My current situation gives me a unique perspective on what is happening in the job market. Consider me as an “embedded analyst” in the economic battle. The following are my “boots on the ground” observations:

1. The situation is pervasive. There are four couples in my wife’s immediate family. Three have been impacted by job losses and the fourth is dealing with a significant pay cut applied to a tight household budget.

2. The situation is unique. Many degreed, professionals with 20-30 years of continuous experience with one company have been downsized. This has led to the formation of and expansion of job seeker support groups throughout the country. A large group in the Cleveland, Ohio area is now drawing close to 300 unemployed people at their meetings and has recently maxed out the parking lot at the church where they meet.

3. It takes considerable more time to find a job. People that have jobs have a difficult time understanding just how tough things are. I have two friends, Kirk and Jerry (names changed to maintain some dignity). They are superior, high-quality, workers and outstanding individuals. Under any normal circumstances, they should never experience involuntary unemployment in their careers. They both have been job hunting for around a year. To see more examples go to: and .

4. The job market is improving. A friend just told me he has more leads than any time in the last six months. The bottom of the job market was probably in July or August, but don’t look for strong growth real soon. This is again consistent with the “UL” recovery curve I introduced two weeks ago.

Cue Jim Croce:

“Tried to find me an executive position
But no matter how smooth I talk
They wouldn't listen to the fact that I was a genius
The man said we got all that we can use
Now I got them steadily depressin', low-down, mind-messin'
workin' at the carwash blues”


The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

Thursday, October 22, 2009

The Unemployment Problem - Part 1

Last week’s post identified “continued high unemployment” as a hindrance to future economic recovery. Unemployment is in the news every day and economists are predicting that it will take longer for the jobless rate to fall after this recession. What makes this time different?

In previous recessions (we will ignore the one in 2001 for now) an economic downturn would send many factory workers out of the workforce as demand for products dropped. There would be some reduction in white-collar workers at firms with weak balance sheets or those that went bankrupt due to the bad economic conditions. When demand improved, the blue collar workers returned to their factory jobs and the white-collar workers found new jobs at companies in growing industries or new start ups. The pain for most people was short-term and 26-39 weeks of unemployment insurance usually provided an adequate safety net.

This time is very different. Blue-collar workers are getting hit as usual, but skilled, degreed, white-collar workers have been cut in record numbers. The 2001 recession was a preview of this as the workforce was much less manufacturing based than the 1990’s. But with the economy continuing to be much less manufacturing based and this recession being about four times as severe, the impact on the white collar work force is intensified.

Here are the stone cold numbers. There have been almost 8 million total jobs lost since December 2007. There are over 15 million people unemployed. There were only 2.4 million jobs openings in August (this is 1.8% of the total number of jobs, an all-time low). This means there are roughly six unemployed people for every job opening. It is taking on average six months for people to find work, but 5.4 million people (36% of total unemployed) have been unemployed more than six months.

The forecasts are for the unemployment rate to peak at 10-11% sometime between February and May of 2010. Please be aware the unemployment rate can give “false readings” at the bottom of the employment cycle. The unemployment rate is calculated from a monthly census bureau survey that determines if people have jobs or are looking for work. People who are unemployed, but have given up looking for work are not counted as unemployed. Therefore the job situation could be getting worse, but the unemployment rate could actually decrease in a given month.

The unemployment rate is calculated as follows:

(Total people unemployed and looking for work / (Total people employed + total people looking for work).

Conversely when job growth begins, the unemployment rate can actually increase as many people who had previously stopped looking start searching again (they are now counted again as unemployed). So you may soon hear the confusing news reports that 200,000 new jobs were created last month and unemployment went up .2%.

The forecasts for when unemployment will fall to traditional levels range from 2014 to 2017. Why will it take so long this time? Many of the blue-collar jobs have been lost for good. Manufacturing plants and warehouses continue to be closed and consolidated. There are also structural issues with white-collar job growth. Many of these jobs were created in the economic growth cycle that started in the 1990’s. The jobs were needed to create structures and systems that facilitated corporate growth. However now that the infrastructures are in place, it takes fewer workers to actually maintain them. Dr. Dave Altig (Macroblog) reports the percentage of employee separations labeled as permanent is at 65%, an all-time high.

This is why it will take longer for job growth to return during this recession. This recession is more severe and there are structural changes going on in the economy that will restrict the traditional rate of job growth in the economic recovery.

It is strange for the stock market to rally when unemployment is high and increasing. But companies have cut expenses so much that they are making profits on much fewer sales. Of course the biggest reduction in cost has been workers. So this is just a short-term solution to the problem. In the long run, companies need new customers, generating increased sales, to grow. However, many of these potential new customers don’t have jobs. You can’t win at this game forever.

Thursday, October 15, 2009

What the Model “T” Says About the Economic Recovery

Tim, one of my fellow job seekers, told me last week he had found a new job. However, I could tell by his stoic expression and lack of enthusiasm in his voice that there was a catch. “They are going to make me an offer when things pick up”, he explained. Then he asked, “Don, when are things going to pick up?”

The truthful answer is I don’t know and if fact, no one knows. It is so difficult to forecast anything in the current economic situation. These conditions have not existed previously, or at least not since the 1930’s, and economic models and indicators may not be very accurate as a result.

For example, every month the Wall Street Journal surveys 50 of the top economists in the country and publishes their forecasts for the major economic indicators. There is a wide disparity in opinions about how the economy will perform in Q1, 2010 (the start of which is a mere 77 days away). The most optimistic forecast is for 5% growth, the most pessimistic is -1.0%. So you have a huge six percentage point difference in GDP predictions. Barring a major event, it is virtually certain that the real number will be between these two extremes. The average of all the respondents for Q1, 2010 is 2.6%. The average of the high and low forecasts is 2.0%. A forecast of 2% is as legitimate as the rest of them and so simple even a caveman (who knows some math) can do it.

The optimistic economists are predicting a “V”-shaped recovery, with the economy snapping back after the sharp downturn. This has happened in the past, but doubters say the continued weak financial system will prevent this from occurring this time. Many economists are forecasting a “U”-shaped recovery, with the economy treading water for a period, before gaining strength. The pessimistic economists forecast an “L” pattern, with the economy very weak for a long period of time. There is much talk about a “W” shaped recovery; with at least one quarter of negative GDP occurring after a recovery has begun. It is significant to note that not one economist in the WSJ survey is predicting a “W” type recovery.

The general consensus is the recovery will be very gradual. Because it is starting at a low level, the recovery will take more time to gain momentum.

The reasons behind the slower recovery forecast are:

▶ Continued high unemployment
▶ Increase in the savings rate
▶ Continued weak housing market and declining commercial real estate market
▶ Credit markets remain tight

Because economic recoveries are traditionally started by increases in consumer spending and a growing housing market, you can understand why the National Association of Business Economists is predicting a “slow and painful” recovery.

What does the Model “T” say about the economic recovery? Although the model is designed to predict movements in the stock market and not the economy, when certain forward looking components of the model are graphed, it forms he pattern shown below.

Definitely not a “V”. Somewhere between the “U” and the “L”, so maybe call it the “UL” recovery pattern. The Model “T” cannot predict timing since several of the components tend to lag economic recovery.

A gradual recovery has begun, hopefully strong enough to get Tim his job offer soon.

Disclaimer Statement:

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.

The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

Thursday, October 8, 2009

Is The Model "T" Forecast Too Low?

The response to the blog has been very positive. But several people have questioned whether the 580 number (S &P 500 index) is too low when the index is currently above 1050 (see the first post). I have to agree, I think it might be too low. But the great thing about the Model “T” is that the model doesn’t think, it doesn’t read the newspaper and it doesn’t surf the Internet. It just forecasts based on inputs, with no emotional bias.

If 580 is indeed too low, what factors could cause this? First, the model does not take into account government intervention. And we have seen extensive government intervention in the banking system, stimulus bill, General Motors takeover and programs to boost the auto and housing industry. It would be difficult to add these factors to the model because they have never been tried before and their long-term impact is uncertain.

Second, all models attempt to predict the future based on how things have operated in the past. The Model “T” is based on factors in the transportation market. The transportation market may not be as significant to the economy as it has in the past due to the decline in domestic manufacturing. Therefore a large drop in the transportation segment factors will not have the same negative impact to the model as previous cycles.

If the bottom of this cycle was the 676 low reached in March, then maybe the Model “T” did its job and was off by only 96 points (not too shabby). Of course this assumes that the stock market and economy hit bottom then and with the help of the successful government stimulus efforts began a new recovery cycle.

But the Model “T” does have a timing aspect to it and it indicates that the stock market fell too low, too fast, in Q1. This was due to emotional panic caused by the financial crisis. Once that panic stopped, optimism has replaced it and the market has risen in the words of Nouriel Roubini (Dr. Doom) “too much, too soon, too fast”. The stock market has been driven by more emotional factors than usual over the last 12 months and understandably so.

While many of analysts are predicting continued good things for the stock market, Robert Pracher (Elliot Wave International Inc.) recently said his model is forecasting the S & P 500 will fall “substantially” below the March bottom of 676. Economists predicting a market correction cite weak consumer spending, a fragile economy and continued problems in the banking and housing industries as reasons.

If government stimulus is important and the Model “T” is based on the transportation industry, a relevant question is: How much has the government’s actions benefitting the transportation industry? The answer is, not much. FTR Associates (a respected industry forecasting firm) reports that truck freight volumes continue to drop with no significant improvements until mid-2010. Railroad freight is still down more than 10% from last year.

It appears the government’s economic interventions were successful at stabilizing the economy and the stock market, but they may have extended out the down cycle. This opinion is supported by Chris Ciovacco ( who predicts the stock market may not fully correct until well into 2010 based on his model. He also infers that 676 may not be the bottom. At this point the 580 forecast of the Model “T” does seem low; however it is interesting that the model is providing a forecast similar to other, more sophisticated, statistical models.

Disclaimer Statement

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.
The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

Wednesday, September 23, 2009

What Is the Model "T" and How does It Work?

The “T” in Model “T” stands for transportation. The premise of the model is that certain factors in the freight transportation industry are leading indicators for the general economy and cycles in the S & P 500 index. In short, the model is designed to predict directional changes in the S & P 500 index months in advance.

The theory behind the model is that the freight transportation industry is a microcosm of the general economy, but it experiences the directional changes before other industries. Freight transportation is impacted by the movement of raw materials into production and the movement of finished goods out. It is impacted by imports since the goods must be redistributed from the ports. Manufactured export goods actually produce more freight since the finished goods need to be moved to a port. Services have minimal impact on the model.

The relationship between the transportation sector and the stock market is a very old concept. Charles Dow actually developed his Transportation Index 12 years before starting the Dow Jones Industrial Index. The classic “Dow Theory” is based on the Transportation Index confirming changes in the Industrial Index. So the Model “T” is a new extension of this old theory.

I first started to develop the theory behind the model at the beginning of this decade. I had discussed the theory several times with my boss at the time who was a very active stock trader. I remember going into his office in early 2001 and laying out the case that if the theory was correct, then we should sell all our stocks immediately. After the discussion, we both decided it made sense, but neither of us was willing to risk missing out on more profits if the market continued to go up and neither of us sold our stocks. Only four weeks after this discussion, the market started its deep descent.

Sometime after that I discovered another industry person had come up with a similar theory. After several discussions, I was able to identify the key transportation inputs and developed a predictive model, the Model “T”.

So Does It Work?

Unlike 2001 when I didn’t move my money, this time I did. I moved much of my money out of stocks in April of 2007. This turned out to be a bit premature, but still a very good move. I moved the rest of my money out of stocks in October 2007, two weeks after peak. The Model “T” is not this precise, it just happened that way. Both times I sold my stocks, my friends, co-workers and financial advisors thought I was crazy. And in the words of Billy Joel, “You may be right, I may be crazy”, but all of them lost big money after the market tanked.

The Model predicted in February 2008 that the S & P would hit 1000 (did it in October 2008). It predicted in October 2008 that the index would hit 850 (there in January 2009) and in November 2008 predicted 750 (February 2009). In 2008, I started sharing the Model’s predictions with a few financial people who follow the transportation industry. Of course they also thought I was crazy (cue Billy Joel again) but my phone started ringing in March (when the S&P dipped under 700 and the Model was at 680) with questions about whether the market had hit bottom.

When recalculated in March however, the Model indicated that the S & P 500 index would bottom out around 560. Surprisingly at the time, this gave the Model more credibility with some of my financial professional friends. You see, several very sophisticated models, developed by well respected PhDs, were also showing an S&P bottom between 500 and 600. I theorize that my less sophisticated model was picking up the same factors in a much more simplified calculation.

Time for an Acid Test

But as you know the S&P has gained around 60% from its low point in March bringing the credibility of the Model into question. Almost all of the economists forecasting a lower number for the S&P have abandoned their forecasts and have been very quiet lately. The notable exception is David Rosenberg who is still forecasting a large market correction.
The Model “T” now predicts a bottom at around 580. It would indicate that what we are experiencing is a huge “bear-market rally”. So bulls beware! Future posts will explore factors that could be impacting the accuracy of the Model.

I hope you will continue to follow this blog as we see how accurate the Model “T” turns out to be. Please pass this on to anyone who is interested in the stock market and ask them to e-mail me at if they want to be put on the list to receive posting alerts. Again, anyone who wants to be removed from the alert list should also e-mail me now.

Disclaimer Statement

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statement s made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.

The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).