How much of a disappointment was Friday morning's BLS Non-Farm
Payrolls report? Yes, 18,000 new jobs is still a positive number.
But Thursday's much better than expected ADP report set us up for a
letdown today. Here’s the way I described the situation on Thursday
evening in a note to a group of our portfolio subscribers:
"A strong day for the broad market was just what
the doctor ordered to shake off all this sovereign debt malaise,
right? It's nice to see the S&P 500 above 1,350 and I have to
admit I am surprised at this strength... but I'll take it! That ADP
jobs report certainly helped too. Coming in twice expectations,
this gauge already has Wall Street economists upping their forecast
for tomorrow's BLS report. The consensus before today was around
100k new jobs and now we are getting new estimates north of 150k
based just on the good news from ADP.
Needless to say, tomorrow should be an
interesting day in the market with the rubber band stretched like
this. Tension between bulls and bears, especially after a period of
consolidation and doubt, is exactly what propels markets. We could
launch higher tomorrow on a good jobs number, or we could fall hard
on a disappointing one that confirms the slow-down is entrenched. I
am not of the school that says 'bad number = good news because QE3
will come and save us.'"
What's Wrong with the Economy?
There is always so much confusion about the economy
and the stock market and what government should or shouldn't be
doing to facilitate their growth. I am not confused and I think I
can help, so I am going to quickly describe some of my views of the
markets and the economy in very simple terms.
In fair warning, I will use general observations
over statistics, which will actually make it easier for you to
argue against my ideas if you disagree with them. It's often harder
to argue with a misused piece of data.
Mine is an optimistic view that is also
conservative. In other words, while I think some things are
structural problems that will continue to haunt -- and there are
always compromises to be made between ideals and the realities of
human nature -- I am bullish overall on American ingenuity,
productivity, and capital markets.
There is nothing wrong with the economy. It is
working amazingly well, and mostly because the global economy is
still humming and emerging markets (EM) have sustained demand for
American products and know-how. Even though the US is still a
powerhouse engine of global demand and growth, our up-and-coming
peers in Asia, Europe, South America, and Africa were not derailed
in their middle-class dreams just because of our crisis.
Who really thought in the spring of 2009 that we
would see the recovery and growth we have seen for the last two
years?
As an arm-chair economist and trader, I thought so,
and a few real economists and large fund managers I pay attention
to also did. In the spring of 2009, I told investors in interviews
on CNBC and FOX Business and Bloomberg that what we had before us
was a systemic, generational banking crisis that just handed us a
generational, market buying opportunity.
EM vs. QE
I knew I had an extraordinary, once-in-a-generation
opportunity to advise investors at the recession lows of 2009 to
buy long-term positions in cyclicals, energy, technology and
biotech, recommending Caterpillar (CAT) at $40, Foster
Wheeler (FWLT) at $19, "buying all the dips" in Apple
(AAPL), and backing up the truck on the iShares NASDAQ
Biotechnology Index ETF (IBB) at $65 and "putting it away." The IBB
recommendation was a conservative, long-term, no-brainer to me.
Little did I know how big the biopharma M&A tsunami of 2009-10
would be as well over $100 billion in deals were done!
Later in 2009, as the animal spirits of our economy
caught fire again from emerging markets (EM), I became interested
in buying materials and commodity stocks again, especially as I
grew to understand the global dynamics of population growth,
urbanization, and changing food demand.
Not even Warren Buffett was so optimistic (of
course, that's not saying much since his "long-term" is so much
longer than anyone else's). Most investors were not so optimistic,
I think because they had so much guilt about quantitative easing
(QE) and its explosion of debt. Or they just wanted to be able to
say "I told you so!" if another unsustainable credit bubble
emerged.
We needed QE and the TARP program and everything
else that Bernanke and Paulson did in 2008 and 2009 to stave off
financial collapse. As I've said for nearly three years, in the
midst of a fear-driven credit crisis where contagion could spread
systemic breakdowns in all sorts of financial institutions, it was
always about confidence first and foremost.
And if you don't understand why QE2 or any other
flavor of monetary and fiscal support was still needed two years
later, then you don't really understand the depth and severity of
the Japan deflationary spiral. I have been writing about the steady
hand of Bernanke for over two years and recapped many of those
ideas in a series of articles you can find in my June 30 piece
"Summer Pullback Over? Not So Fast."
But in the end, while QE got us out of the ICU, it
was EM that nursed us back to health.
QE Next Will Not Create Jobs
My satisfaction with the job Bernanke has done
doesn't mean I want to see any form of QE continue indefinitely. I
still believe that deflation is the worse of two evils, as I think
he does. And so I will accept a further round of QE if he thinks it
necessary to prevent said evil.
But, it may not do much to create jobs. That should
be evident to all. What's missing in the jobs equation is a
full-blown recovery in housing. Most economic recoveries form a
self-reinforcing feedback loop with construction industries and
jobs.
And QE has always been intended, at least by half,
to prevent a further collapse in housing. That part of the patient
still could put us back in the ICU. And that's why many of my
articles for the past two years about the economy and FED policy
have had some variation on the theme "Bernanke's Eye on
Housing."
What About the Deficit and the Debt
Ceiling?
I don't pretend to be smart enough to know what to
do about the budget and debt spiral. It's a big, long-term problem
and it should be debated for a while. A few months more without a
solution won't make a difference.
So, raise the ceiling and then continue the debate
about spending cuts and long-term solutions to our debt problems.
Let us not raise a gun to our heads to force a solution.
I tend to be more sanguine than most on this issue
after a decade of listening to economic doomsayers preach about the
death of the dollar etc., whether due to Japan and China selling
their Treasury holdings or a downgrade to our AAA rating.
And after Paulson and Bernanke reacted with bold
and creative initiatives during the 2008 crisis (remember how they
had to keep reinventing what the TARP was for, when it was really
just about restoring confidence?), I know there are many backroom
conversations going on to prevent another disaster.
The heads of central banks are always having
private conversations about market sentiment and perception. In the
fall of 2008 when they orchestrated a lowering of interest rates
around the world, I coined the term "global central bank" or GCB.
They know it's a confidence game and they are not about to lose
this round over the stupid US debt ceiling.
I guess the question among people who think like me
is, "Could there be a political stalemate in Congress that derails
our economy?"
Stalemates and Double-Dips
What is going on now is letting Congress "work it
out of its system." Let everyone grandstand and politicize it to
their advantage. You don't want the impression of a master plan
that’s already been advised by "wise men" behind the scenes.
This is like when you give your teenagers new rules
about the car. You have to let them fuss and complain about it for
a while before full implementation. Not a great analogy, but off
the top of my head, you get the idea. Since we need Congress for
this one (Bernanke can't create a solution by himself this time),
we have to let them bitch 'n moan.
For these reasons, I think we avoid a long
political stalemate, which would, of course, be disastrous for the
market. Hopefully smart economists and investors are busy educating
Congressmen and women what happens when you rip confidence from the
biggest economy and debtor in the world. It's all relative in a
global economy, but it's still a US-centric globe as we learned 2
years ago.
This said, a short stalemate in August will still
take market down -- until some form of certainty is known and
believed by institutional investors. I would recommend reading what
the boys from PIMCO or Blackrock are saying and doing now.
I like to go to their much bigger macro-investing
brains when I don't have a clue. So, while I am pretty sure we
won't see a double-dip recession -- and I still think we see the
S&P at 1,500 by second quarter next year -- I will just be
looking ahead for more specific clues in the second quarter's
earnings reports for the strength of our ability to get there.
Kevin Cook is a Senior Stock Strategist for
Zacks.com
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