Recession Omen - Consumer Confidence Collapse on Payroll Tax Hike

By Markos N. Kaminis:

Tuesday’s consumer confidence report could be offering important insight into the real impact of the payroll tax break expiration. Confidence soared once politicians got out of the way of the stock market. However, as Americans noticed shrinkage in their paychecks, the consumer view changed. The government itself thinks there should be a 1.5 percentage point drag on economic growth as a result, but in a consumer driven economy, everything is at stake.

The Conference Board reported its Consumer Confidence Index for March Tuesday morning. The index, which had gained more than 10 points last month on new hope for stocks and the economy, shed all of its gains this month I believe on the reality of lighter paychecks. Economists surveyed by Bloomberg were expecting a slight slippage in the index, to 68.0, from the 69.6 reported in February. What they got was a far worse result, with the Consumer Confidence Index falling nearly 10 points to 59.7.

Stocks ignored the recession warning signal, with all the broader indexes higher on the day, as gold retrenched. However, the ignorance of the major indexes was in the shadow of the move of a broader grouping of stocks measured by the iShares Russell 2000 (NYSE: IWM), which was only fractionally higher toward the close. That was against the 0.7% gain of the S&P 500 Index at 3:30 PM ET.

Broad Indicator	Tuesday Through 3:10 PM
SPDR S&P 500 (NYSE: SPY)	+0.7%
SPDR Dow Jones (NYSE: DIA)	+0.6%
PowerShares QQQ (Nasdaq: QQQ)	+0.4%
iShares Russell 2000 (NYSE: IWM)	+0.1%
SPDR Gold Shares Trust (NYSE: GLD)	-0.3%

The Confidence Report showed that the consumer view for the current situation fell off. The Present Situation Index dropped to 57.9, from 61.4. Still, the news about the future was even worse. The Expectations Index collapsed to 60.9 from 72.4 last month.

In the past I’ve talked about the importance of the Present Situation measure versus the Expectations measure. We want to see improvement in the present situation to realize real economic gains. Stocks may move on “expectations” just as well though. Still, we cannot really consider this measure as a good gauge of the economy unless the overall gain is driven by the Present Situation Index. Expectations can change on a whim, for instance on the passing of the fiscal cliff or the debt ceiling issues.

The truth today is that Americans are seeing smaller paychecks because of the expiration of the payroll tax break. This was made real for me when last week I shared a meal with a maintenance worker from my church. Vangelis told me that he no longer liked President Obama, because his taxes went up. When Americans feel like they’re poorer, they are less likely to spend. With so many just getting by, a little less income makes a big difference. Also, the expiration of the tax break is not viewed as such, but as a tax increase by people who are not following the complicated news flow. Tax hikes have a way of killing spending, whether they are real or perceived.

Last week, I talked about the Fed’s economic forecast, which were hardly changed even despite their own acknowledgement that the payroll tax break expiration and the sequester spending cuts could burden economic growth by as much as 1.5% this year. I said The Fed’s Math Just Doesn’t Add Up. What might add up though is if consumers stop spending, as indicated by the sentiment result Tuesday. Then the Fed’s nearly unchanged GDP expectation for 2.3% to 2.8% growth this year could also be exposed. Make no mistake about it, in this consumer driven economy, the March message from consumers could signal a recession. I’ll be following this week’s GDP revision and Personal Spending data so you may want to follow along.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Ignore the Home Builder Pessimism

By The Greek:

Earlier this week, the National Association of Homebuilders’ (NAHB) Housing Market Index showed an intensified level of pessimism for homebuilders. Yet, I’m telling you not to worry about it, because it doesn’t matter.

The NAHB’s Housing Market Index (HMI) dropped 2 points in March, after shedding a point in February. The HMI fell to a mark of 44 in March, from 46 the month before, and made fools of economists who on average were expecting the index to improve by one point to 47.

The NAHB explained the falloff and the third straight month of flat to deteriorating data on ancillary issues. The industry group said that builders were still seeing increasing demand for new homes, but were frustrated by “bottlenecks in the supply chain for developed lots along with rising costs for building materials and labor.” And despite what seems like a better capital position for housing lenders like Bank of America (NYSE: BAC), according to the Federal Reserve, credit availability was reported as an ongoing problem. The NAHB also regularly mentions faulty appraisals, which include the values of sold distressed properties as comparables.

Yet, I’m telling you that there’s nothing to worry about. This index has remained underwater since the real estate market collapse, despite the nascent success of the nation’s largest builders. That’s the issue here. The NAHB is made up of builders, large and small, liquid and insolvent. Many small builders remain constrained by an inability to access capital. However, the large publicly traded builders including those listed herein are doing fine and dandy and are on an optimistic high today. They have access to capital, and the ability to steal market share from their humbled brothers. The evidence of their success is clear here.

Publicly Traded Builder	Year-to-Date Gain Thru 03/21/13
SPDR S&P Homebuilders (NYSE: XHB)	+13%
K.B. Homes (NYSE: KBH)	+40%
D.R. Horton (NYSE: DHI)	+26%
PulteGroup (NYSE: PHM)	+16%
Ryland Group (NYSE: RYL)	+14%
NVR (NYSE: NVR)	+14%
Toll Brothers (NYSE: TOL)	+10%
Lennar (NYSE: LEN)	+10%
MDC Holdings (NYSE: MDC)	+5%

They are not all higher on the year though. Beazer Homes (NYSE: BZH) and Hovnanian (NYSE: HOV) are in the red. Some of the difference has to do with regional variation. Some of the once hottest markets fell far from their peaks, but those same markets are on fire today again, including Phoenix, Las Vegas, California and Florida. K.B. Homes’ (KBH) west coast operations are a big reason for its performance this year. The HMI Report showed that the three-month moving average for the West Regional Index was up four points in March, and was easily in positive territory above 50 at a mark of 58. The Northeast Index was unchanged at 39, while the Midwest and South Indexes skidded by a point each to 47 and 46, respectively.

The part of the report I’ve always found most interesting is where builders are asked to report on current sales conditions, forward expectations and actual prospective buyer traffic. I find the first two measures are purely perceptional, and that the measure of real traffic tells a different and truer story for the majority of builders, who are mostly small. The index measuring current sales conditions fell by four points to reach a mark of 47. The measure of sales expectations for the next six months rose by one point to 51. However, the measure of prospective buyer traffic rose three points, and still measured deeply under breakeven sentiment at a mark of 35. Remember, though, it doesn’t matter because the real estate recovery is underway nonetheless. It’s just being enjoyed by a select few publicly traded companies which have garnered a good deal of market share from the least among their peers.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

MARKET CORRECTION WARNING - The Fed Will Cut Economic Forecasts

By Markos N. Kaminis,

The Federal Reserve is on record discussing the economic impact of sequester spending cuts and austerity-like measures. However, the investment community may still not be prepared for what I expect the Fed to do on Wednesday, so this should be a value-added economic read. I expect a market correction starting as early as Tuesday and through at least to the 2:00 PM Fed releases, if not beyond. We broke this expectation in an article about Exxon Mobil (NYSE: XOM) earlier this morning at Seeking Alpha, and the market immediately began to look lower.

The Federal Reserve, through the Chairman’s semi-annual address to Congressional Panels, indicated that it agreed with the Budget Office’s estimated cost of sequester spending cuts on the economy. Chairman Bernanke suggested that the sequester cuts would likely cost economic growth 0.6%, and would contribute to a 1.5% drag upon economic growth this year caused by austerity-like measures, including the payroll tax break expiration.

The Federal Reserve’s most recent economic forecasts do not likely include sequester cuts, and might not include the impact of the failed fiscal cliff issues, including the expiration of the payroll tax break. In the Fed’s December forecasts, it projected Real GDP growth of 2.3% to 3.0% for 2013 and a slightly better pace for 2014. The Fed’s December forecasts marked only a slight revision lower from their September view, with the 2013 estimate at that time set for 2.5% to 3.0%. Because of the only slight downgrade in growth expectation, it would seem the Fed’s December view did not include much of a weighting for the sequester failure. It might also imply a lack of inclusion of the other stimulus removal by the Federal government.

So, it seems that at least a portion of the 1.5% cost to economic growth is not included in the December forecasts. It would seem certain that the 0.6% drag was not included. Considering recent downgrades to Wall Street forecasts for corporate earnings this quarter, and the other economic considerations that need to be reconciled, there could be further reason to expect economic forecast cuts on Wednesday.

The run up of the stock market has been substantial this year, with the SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrial Average (NYSE: DIA) and the PowerShares QQQ (Nasdaq: QQQ) up 9.3%, 11% and 5.2%, respectively. However, if an economic question is posed Wednesday, and as speculation about this builds today, stocks should correct. Likewise, the securities which had been hammered during the stock market rise, for instance, the SPDR Gold Shares Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV), should gain. Still, Fed discussion may sooth the pain, if the Federal Reserve discusses a better long-term outlook. I advise investors to take appropriate action.

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Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Would Obama Prefer 7.1 Million Unaccounted for Jobless Americans Just Drop Dead?

By Markos Kaminis:

Major media is celebrating another decline in the flow of initial jobless claims today, but it’s missing the story on the long-term unemployed. It is certainly good news that new filers for unemployment benefits are declining in numbers as the weeks progress. However, it’s unacceptable that the long-term unemployed whose benefits have expired fall off the radar and are unaccounted for, and perhaps left to die.

The Department of Labor’s Weekly Initial Jobless Claims Report showed yet another improvement for the period ending March 9. Claims fell by 10K from the prior week and measured 332K. That was far below the expectations of the economists surveyed by Bloomberg, who in their infinite wisdom foresaw an increase this week to 350K. The four-week moving average for jobless claims illustrated the trend that both market and media seem to be celebrating today. The average declined by 2,750, to 346,750. Not coincidentally, the SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrials (NYSE: DIA) and the PowerShares QQQ (Nasdaq: QQQ) were each safely in the green through early trading. The shares of employment services firms Robert Half International (NYSE: RHI) and Monster World Wide (NYSE: MWW) were relatively unchanged through 10:00 AM and better reflected the slow pace of hiring activity in this country.

The report is undoubtedly good news if you have a job. Your job security is improving. However, for those of you who have been unemployed for more than 27 weeks or longer, some 40% of the total unemployed count, the government doesn’t know you exist any longer. We’re assuming you’ve retired comfortably and are living out your last days without a care or concern. If you are still active, we expect you’ve started up a solar panel company after all of our efforts to make your sweet solar dreams come true.

The truth, though, is that those poor people have lost their homes, crammed into apartments with higher rent rates along with other struggling souls, and are either selling furniture on Craigslist or walking dogs under the table to keep from eating further into their savings. Otherwise, perhaps they are members of the mass of people, some 1 in 6 Americans, collecting food stamps and hopefully still being accounted for by the government as a result. Somehow, I doubt the accounting is perfect though. Have you ever been to one of these offices? From what I hear, you’ll feel better putting a pencil through your eye, especially if it’s a lead pencil (the poisoning will help); just imagine the Department of Motor Vehicles times ten and that’s what you would experience if you got the bright idea to try to collect food stamps or some other relief our taxes and our government provide for us… at least that’s what I hear. I invite you to share your experiences in the comment thread below for the enlightenment of the rest of us.

The Jobless Claims Report shows the total number of Americans receiving benefits of some sort under all programs actually increased by approximately 218K in the measured period ending February 23rd. However, at 5.6 million that figure was down sharply from last year’s 7.4 million. Certainly some of the difference in the count is represented by very happy Americans that are once again holding jobs. However, it also includes a bunch of people you might now inaccurately refer to as bums. Indeed, my latest analysis of the Employment Situation Report shows that there has been a significant change in the labor force participation rate over the last seven years. If we had the same proportion of our population in the labor force count today as we did in 2006, unemployment would be 11.8%, not 7.7%, and underemployment would be 18%! Furthermore, the trend in February would have been reported as deteriorated and not improved, as the government data expressed. That’s a tough chew, and it runs counter to the enthusiasm stocks are trading on today. The fact is that some 7.1 million Americans are missing. Are they assumed to be happily retired? Perhaps the government would prefer they just drop dead already?

It’s a good thing that big layoffs from large companies are declining in number, but we’ve still recorded big cuts at big firms like J.P. Morgan Chase (NYSE: JPM) and Citigroup (NYSE: C), and a little scrape at Goldman Sachs (NYSE: GS) recently. And the news from the nation’s small businesses has not been good, with the NFIB’s Small Business Optimism Index marking lower ground than the troughs of recent recessions this month. Small businesses do a lot of the hiring and firing in this country, so there’s little hope for the long-term unemployed who have been left to die. We need to address this issue by making it a priority in corporate America to prioritize Americans for jobs who have been unemployed longer; that’s if we care to revive our economy to its once super-healthy status. Government incentives to corporations which do so would be helpful in that regard. Those readers interested in critical analysis of data are welcome to follow along with this column.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Buffett Genius Fails Apple

By Markos Kaminis,

There is a theory going around the corporate world that allowing your stock price to rise beyond the reach of round-lot seeking civilian investors builds a sophisticated shareholder base. It’s a theory born of investment genius, and one seemingly shared by Apple (Nasdaq: AAPL), but it’s a theory that has just been effectively challenged.

The theory goes that a sophisticated investor base will do less trading and prove to be less reactionary to temporary anomalies and news flashes. As a result, companies with ridiculously large stock price figures are supposed to see less volatility in their shares. It should provide for a steady stock price that best reflects the value of a company, which makes perfect fiduciary sense. After all, what is best for shareholders is best for a public company. When you can keep your stock price clear of noise, you help to keep it as close to its intrinsic value as possible. Perhaps not coincidentally, it should also allow corporate bonus incentives tied to stock price performance to be unadulterated by sinful day traders and greedy profit seekers, otherwise known as the efficient market. This begs to question whether an excessively high stock price fosters inefficient valuation, but that will be the subject of an academic research report well suited for the blog.

The idea was born of Warren Buffett genius, as far as I know; or at least Buffett’s Berkshire Hathaway is most famous for it. Berkshire’s A Class Shares (NYSE: BRK.A) trade at a preposterous $155,411.27, and yes, I satirically included the cents to pose protest to the silliness that some might call a form of class warfare. It is really not class warfare, though, because those interested in riding along with Buffett genius can still buy the B Class Shares (NYSE: BRK.B), which trade at a pauper’s price of $104. Other companies with high trading points, like Google (Nasdaq: GOOG), for instance, have determined to offer other classes of shares to maximize capital access opportunities.

In Berkshire’s case there very likely is a real impact to the shareholder base. It’s because of the significance of the numbers and the fact that they represent dollars. As the share price rises toward the big bucks that better resemble the cost of a home (though not anywhere near New York), it gets impossible for little guys with big dreams to afford even one share.



Chart at Yahoo Finance

However, that genius did not prove true for Apple over the last six months as the company’s shares fell 39% from their September intraday high of $705 to their $432 close last week. Though, I suppose an Apple (AAPL) fanatic might attribute that to the share price just not reaching that certain threshold point where the short-sighted could no longer get in. In any event, it’s one of the reasons one might argue against an Apple stock split, or at least one of those I listed in September 2012. For those of you praying for AAPL to keep falling so you can buy a share, I also made the case for an Apple stock split just to be fair.

In recent works about Apple, I have attributed the stock’s performance to investor concern as to where future growth will come from. I have indicated that For Apple, No News is Bad News. Though some will argue that despite the stock’s performance of late, there’s no problem, I have suggested The Problem with Apple is Apple and what seems a late in arriving next best thing, which I have openly hoped would be an Apple Television.

This turn of events for Apple seems to say that no matter how high a stock price is kept, the operating performance of a company and expectations about its future will always dictate what its investors do, whether they are small-money bearing individuals, affluent and wealthy people, or sophisticated institutional investors.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

We Must Address American Labor Force Attrition & Atrophy

By The Greek:

The latest Weekly Initial Jobless Claims Report looks harmless enough to the casual reader, but upon closer inspection, it continues to reveal great attrition in the American workforce. It’s the reason why I recently suggested the real unemployment rate was closer to 11.8% than the government’s reported 7.9% rate.

Weekly unemployment insurance filings increased by 20,000 in the period ending February 16, but only rose to 362K. That’s mild enough for a market used to rates running nearer to 400K for what seems like the last decade now. Indeed, the claims count was just a few thousand higher than the economists’ consensus expectation for 359K this week, as compiled by Bloomberg. The four-week moving average for jobless claims reveals a less dynamic environment, with an 8,000 increase in the latest period, to 360,750.

However, what is bothering me today is the ongoing trend in American labor that is hiding the true state of affairs. A tragic number of Americans have been unemployed for far too long, with some 4.7 million Americans or 38% of the total unemployed count out of work for at least 27 weeks. The way the system works is that these people are counted for as long as they are letting the government know about their situation. They have incentive to do so when collecting unemployment insurance, either through the regular program or the extensions program. But if they are to continue to be counted post the expiration of their 99 weeks of extended benefits, then they must file for welfare or some sort of other government support and report their ongoing unemployment. I’m not even certain the government has its act together well enough to count people who remain in the system in this way.

So, as a result, what we have seen is a shrinking labor force count that a lot of economists want to attribute to demographics and the retiring of baby boomers (some 10K a day estimated). However, the employment participation rate has dropped too substantially too quickly, and I think it’s because of the factor I’m laying out for you here today.

In this weekly report, the Department of Labor offers information on the total number of Americans receiving benefits of some sort through all programs. Now, extended benefits are no longer being offered in any state to those Americans just now filing for their regular benefits. In the period reported, for the week ending February 2nd, the total number of unemployed Americans receiving a benefit of some sort was 5.6 million.

Please take a seat now as I report to you something very important. In the just reported February 2nd period, this number dropped by 307,848. Some will say it’s due to an improving American economy and retiring baby boomers, but it is surely also due to American laborers simply falling off the radar screen. It’s unfortunate and it angers me. We must get a good count of these people, so that the government can focus on helping them in some way, either through training programs or some sort of support if they are not receiving any currently. I have a great concern that many jobs lost as a result of the financial crisis may never be recovered, and that certainly will be the case if we do not go the extra mile here.

Now, there is a worker shortage in construction, as I heard from Toll Brothers (NYSE: TOL) during a recent investor conference I attended in Philadelphia. So, many of the long-term unemployed and some of the forgotten described herein will start to hear about new opportunities at homebuilders now. Though, builders recently backed off a bit in terms of their enthusiasm about prospective buyer traffic.

Also, there are small mortgage lenders hiring like mad now in order to fill the mortgage lender shortage that has arisen. It’s due to the destruction of so many firms through the real estate collapse, and the burden major mortgage lenders still bear today, especially Bank of America (NYSE: BAC), Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS). Many of the day’s biggest lenders, including Wells Fargo (NYSE: WFC) and J.P. Morgan Chase (NYSE: JPM) are applying tighter standards today as well. But BofA and the others are also shy to lend more due to the size of their outstanding mortgage loan bases and lingering questions about MBS liability. Plus, the returns have not been very attractive, thanks to Federal Reserve created synthetic demand for MBS.

We need to get a good count of the real unemployment rate so that we may target those struggling Americans for training and other forms of support. It’s time for Americans to go the extra mile and to give our struggling brothers a leg up before they fall down for good. I believe if this situation were better understood, the SPDR S&P 500 (NYSE: SPY) and the SPDR Dow Jones Industrials (NYSE: DIA) would not be quite as hot as they have been this year. But the truth always comes to the surface, so we have an opportunity to preserve the situation if we act on long-term unemployment rather than stand by waiting for it to heal or go away.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Hot and Bothered by the Housing Market Index

By The Greek:

It’s not the one point decline in the Housing Market Index that worries me, but the why and the how the index declined. I think the component measures of this index say a lot about the real state of housing inclusive of smaller non-public builders. As far as the public companies go, I continue to see those firms gaining market share due to their capital advantage and crisis survival, where smaller builders failed. Still, even the larger builders face some negative fallout from the crisis and that is also discussed herein.

The National Association of Homebuilders (NAHB) reported its Housing Market Index (HMI) for the month of February Tuesday. The HMI declined by a point to a mark of 46, down from 47 in January. Economists were looking for another increase in the recently improving trend that would have taken the index to a mark of 48 this month. The NAHB attributed the softness to the usual suspects, an uncertain employment situation and constraints to consumer borrowing. Obviously, that second factor is for the industry’s own good and the result of the excesses of the financial crisis and real estate collapse.

However, the NAHB added a couple new issues to the spectrum of challenges facing homebuilders. The organization indicated that rising materials costs and a labor shortage in construction were working against recovery. The labor issue was a topic that came up during the presentation by Toll Brothers (TOL) at the Emerald Groundhog Day Investment Forum, which I was privileged to attend this year in Philadelphia. Construction shed jobs measuring in millions through the industry purge post real estate collapse, but it should be luring manual laborers back as it regains steam. Still, many of those former construction workers will have developed new skills and found other work by this point, and that’s the issue the industry must confront now. It pushes the cost of labor higher, though both higher materials costs and labor are also the result of housing demand in this case, and that’s a good thing.

What has me hot and bothered about the HMI this month are the component indexes, which continued to illustrate a difficult truth. The NAHB offers measures of the industry’s current sales conditions, forward sales expectations and traffic of prospective buyers. While both the current sales conditions metric (down 1 to 51) and the forward sales expectations read (up 1 to 50) marked ground above the break-even threshold of 50, the real measure of actual prospective buyer traffic remained deeply underwater. With the traffic mark falling by four points to a level of 32, it represents a sad state of affairs that actually deteriorated in February. Expectations can be built on what builders are reading here and elsewhere about the housing recovery, but prospective buyer traffic is a true measure of actual activity, and it says a lot about the state of housing.

What it tells us is that the many small builders still being surveyed by the NAHB remain troubled due to a lack of access to capital and their relative inability to compete in terms of pricing and marketing. This is the reason why this recovery is so bifurcated, with the surviving large public builders gathering up massive market share from the purge of the disease stricken little guys. That said, the news of the overall index slippage still harmed housing stocks broadly Tuesday, with many major builders seeing share price decline.

Builder & Ticker	2/19 Change
SPDR S&P Homebuilders (NYSE: XHB)	-0.2%
PulteGroup (NYSE: PHM)	-1.8%
D.R. Horton (NYSE: DHI)	-1.6%
K.B. Homes (NYSE: KBH)	+0.8%
Toll Brothers (NYSE: TOL)	-0.5%
Beazer Homes (NYSE: BZH)	-0.8%
Lennar Homes (NYSE: LEN)	-0.7%
Hovnanian (NYSE: HOV)	-4.3%

Of this group, K.B. Homes (KBH) likely benefited from the appearance of Weyerhaeuser’s (NYSE: WY) CEO on CNBC Tuesday, and the company’s continued enthusiasm about its strongly improving California market. KBH has serious west coast exposure. The NAHB Likewise had some good news to report on a regional basis for the West Coast. The regional metric for the West showed a four point uptick to a reading of 55. The Northeast measure was up three points to 39, but the Midwest and South regions both deteriorated by two points to 48 and 47, respectively.

Toll Brothers (TOL) was down slightly ahead of its later reported earnings disappointment, but readers of this column should have been prepared for that given our expression of concern yesterday regarding visibility into the current result for TOL (see page 2). Our report linked here, offers insight into the rest of the week for real estate as well.

The HMI data reminds us that this recovery is not all encompassing, with varying degrees of activity by region and by industry player. The change in industry shares on such a small adjustment also tells us that much of the good news is priced in to homebuilder shares, making them especially sensitive to bad news.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Explaining the Divergence in the Market and Economy

Considering the depth of economic contraction just reported in Europe, and given the GDP contraction just reported in the U.S., are stock investors laughing at hellfire as they bid shares higher? How safe are the latest stock gains considering the most recent economic data?

Stocks are on a tear, with securities that track the broader indexes all up substantially since the start of the year. The market has moved impressively higher when tracking the indexes from off the lows of mid-November, and if we look as far back as the start of June 2012, the gains are even more impressive. There’s a trending bull market no doubt, but the economy seems to be deteriorating outside of the recovery in real estate. So has the market ignored an important detour sign as it continues to run higher? Is there a moronic mismatch and divergence between stocks and the economy?

Market Security	Year-to-Date Gains	Since Mid-Nov.	Since Early June
SPDR S&P 500 (NYSE: SPY)	+6.9%	+13%	+21%
SPDR Dow Jones (NYSE: DIA)	+7.2%	+12%	+18%
PowerShares QQQ (Nasdaq: QQQ)	+4.3%	+10%	+14%

What Got Us Here
One driving force in 2012 was the ongoing revival of the once critical and still important real estate sector. Data has noticeably improved in housing, and served as an important relief valve for the market’s concerns. It’s for good reason too, as housing affordability offers homebuyers a special opportunity today. There may not be a better time to buy real estate in terms of home and mortgage value for a generation.

Certainly, an important catalyst behind this year’s gains was the passing of the fiscal cliff and the debt ceiling fiascos at the start of the year. The removal of those troubling issues from the investment equation has sort of given stocks an all-clear signal, and one which we sounded for stocks at the blog as well.

Likewise, after tensions intensified on the Greek elections, they were also soon relieved when the result was not a radical overhaul of the Greek government or a disturbing change to Greece’s agreements with its troika financiers. Europe’s finally escaping its debt crisis in late October, thanks to a brave declaration in July and later follow through by ECB chief Mario Draghi, was an important driver for stocks from November forward.

What’s Different Now?
Today the data seems to be clearly deteriorating again, not improving, and yet stocks continue forward for the most part. Fourth quarter GDP, just reported for the U.S. a few weeks ago, showed more significant impact than was anticipated by economists. It’s estimated that GDP actually contracted by 0.1% in the fourth quarter.

Much of the blame in the U.S. can still be attributed to the Congressional fumbling of the fiscal cliff issue. I predicted this stalling of economic activity through the close of 2012 as Americans anticipated debilitating changes. The good news is that it would, therefore, be temporary, which could imply the market is now looking forward to better days. The market does predict economic changes and tends to gyrate up and down as it incorporates future risk and reward possibilities.

However, this past week, the outlook for Europe got much worse. The euro area economy was estimated to have contracted by 0.6% in Q4. It was down 0.9% compared to the fourth quarter of 2011. The outlook gets worse when considering that European lynchpin, the German economy, likely also contracted by 0.6%. The critical French economy fell by 0.3%. And though outside the euro zone, the economy of the United Kingdom fell by 0.3% as well, after exiting recession in Q3. Long-term GDP charts show a trajectory that is simply depressing, and it appears things might get worse before getting better; and when recovery might take place remains questionable. Unemployment was just reported higher in Greece, up to 27% now, and radical governments are gaining steam across Europe. Yet, a look at European shares seems to show no fear, similarly to U.S. shares.

ETF Security	YTD Gain	52-Week Gain
iShares S&P Europe 350 (NYSE: IEV)	+2.4%	+14%
Global X FTSE Greece (NYSE: GREK)	+9.5%	+5.3%
iShares MSCI Germany (NYSE: EWG)	+0.6%	+15%
iShares MSCI France (NYSE: EWQ)	+0.3%	+15%
iShares MSCI UK (NYSE: EWU)	+1.6%	+9.4%

Capital Flow Support
Perhaps it’s about time for markets to pause and recalibrate, but it would seem that inflows into equity funds might not allow for that. The four-week average for capital flows into equity mutual funds increased to $12.1 billion in the period ending February 13, 2013. It is not due to an exodus from bond funds, though, as capital seems to be coming from money market funds (down $5.7 billion), as those have trended lower. Fund flows show that the little guy on Main Street is coming back into the investment game. This could be yet another factor behind the apparent divergence between economies and markets.

Capital is also coming out of gold and silver, whether it is from investments in the metals or the securities allowing investors so many new ways to hold interests in precious metals. The SPDR Gold Shares Trust (NYSE: GLD) is down 10.3% from its October 4, 2012 peak and the Market Vectors Gold Miners ETF (NYSE: GDX) is down 26% from its September 21 peak. The iShares Silver Trust (NYSE: SLV) is down 15% since October 4, 2012. So capital has been coming out of precious metals for at least as long as the market’s trajectory higher has steepened. Investors are seeking higher return and accepting greater risk.

Looking Forward
The divergence in stock performance and the economy could be explained by an ingenious market looking forward to an improving economy, and accepting more risk for return, or by individual investors chasing stock momentum despite signs of economic deterioration. In actuality, it’s a combination of the two that have worked to drive shares higher.

Moving forward, the market should begin to weigh concerns about the budget now and a potential government shutdown, but those issues are not as concerning as the debt ceiling and fiscal cliff forays were. Thank God, It seems the U.S. government has now realized the importance of keeping the full faith in credit of the United States out of political play. There’s also a question as to whether increased payroll taxes are affecting consumer spending or not, and so we’ll need to keep an eye on consumer spending trends and signs. We might expect the market to take a breather here as it evaluates these issues, but if capital continues to flow into stock funds, then a bid should remain supportive of stocks.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The True Unemployment Rate is 11.8% Not 7.9%

America deserves to know what the true rate of unemployment is, and it’s probably a lot higher than the reported rate. The government’s data excludes many Americans who have fallen out of the labor force, and not by choice. Not including these people assumes many have chosen early retirement, but the number of lottery winners hasn’t skyrocketed, so we think it’s more likely that these people have simply fallen off the radar screen. When Americans stop receiving unemployment benefits, their key incentive to report their unemployment to the government is lost. But even as they don’t report as unemployed, they live like they are. In our calculations here, we’ve determined true unemployment is likely 11.8%, not the 7.9% rate just reported by the government. Underemployment is likely closer to 17.9% than the government’s reported U-6 figure of 14.4%.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

True Unemployment Rate

Starting with the Reported Data
Nonfarm Payrolls increased by 157,000 on net in January, and private nonfarm payrolls (excluding public sector job creation) grew by 166K, short of the 185K economists’ consensus. The Unemployment Rate was likewise worse than expected, with the rate increasing to 7.9% from 7.8%, against the economists’ consensus forecast for an improvement to 7.7%. So the employment situation deteriorated in January, and was poor even before adjustment.

Underemployment incorporates people who are not satisfied with their less than full employment and also includes those desperate Americans who are detached from the labor force. However, even the traditional underemployment rate misses what may be a significant number of Americans who are not working and would like to be. To uncover those forgotten Americans, we replace the current labor participation rate with the one that existed when unemployment was under 5.0% instead. It makes sense to use such a participation rate if you believe population growth and the maturing of Americans at least matches the number of seniors retiring by choice and Americans passing away prematurely. Obviously there are demographic trends at play here that may be skewing the participation rate, including the aging of the baby boomers which is costing participation. Still, because of the relevant issue of long-term unemployment in America today and workers falling off the labor force radar screen while still interested in working, I believe these adjusted figures provide an important perspective of the true state of American labor.

Under-Employment
The calculation of the under-employment rate, or the U-6 by government notation, takes into account the number of Americans working part-time for economic reasons and the detached workforce. Working part-time for economic reasons is equivalent to folks who would prefer full-time employment but have had their hours cut or have had to otherwise settle for part-time work. Detached workers are those Americans who have not recently looked for work, sometimes because they do not believe work exists for them today. In getting to the U-6 underemployment figure, we’ll need to include these groups of workers with unemployed Americans. If we add back the excluded 2.443 million displaced workers to the labor market, and include the 7.973 million underemployed part-timers in the unemployed count, January underemployment is found to be ((12.332M + 2.443M + 7.973M) / (155.654M + 2.443M)) * 100 = 14.4%. In December, the rate was also ((12.206M + 2.614M + 7.918M) / (155.511M + 2.614M)) * 100 = 14.4%.

This data can be skewed by any of its components. Starting with the denominator, the reported labor force count increased in January by 143K, which would dilute the numerator and moderate the unemployment rate. Note also that in January the number of detached workers decreased by 171K and the number of forced part-timers increased by 55K. It’s hard to say whether detached workers disappeared off the radar screen and or got part-time jobs or other work. Most importantly, the number of people reporting unemployed status was up by 126,000; it was also up in December by 164,000. That is an absolutely pure data point marking negative change in the employment situation. The end result of the changes in the component data netted into something less than significant enough to change the underemployment rate, versus the increase in unemployment reported in January.

Historically speaking, U-6 underemployment is improved, as you can see by the table here. However, this improvement may be for another reason (a bad one) which is unaccounted for by this data, and which we discuss in the paragraphs below.

Monthly Period	U-6 Unemployment Rate (Seasonally Adjusted)
December 2009	17.1%
December 2010	16.6%
December 2011	15.2%
December 2012	14.4%
January 2013	14.4%

What About the Forgotten?
I often talk about the great degree of long-term unemployment plaguing our nation today and how this has uniquely impacted reported employment data. The number of Americans unemployed for 27 weeks or longer was relatively unchanged in January at roughly 4.7 million. This represented 38% of the total unemployed count. The proportion is down from recent history, though it continues to reflect poorly on the state of labor. That’s because the longer people remain unemployed, the harder it gets for them to find jobs in their specialty fields due to eroding and outdated skill sets. I’m concerned that improvement in the proportion of long-term unemployment is partly due to Americans simply falling out of the labor force count rather than finding new work.

For this reason, it’s worth considering what the unemployment rate might be at labor force participation rates seen in the recent past. The labor force participation rate was 63.6% in January 2013. That compares against 66.4% in December 2006. Now, maybe that past participation rate reflected the excesses of the mortgage, construction and finance industries that resulted from greed and the fault of the rating agencies and those industries. Those faults are still bearing out in layoffs, like the significant cuts announced last year by Bank of America (NYSE: BAC) and again late this year by Citigroup (NYSE: C). Still, let’s calculate what the unemployment rate would be at such a participation rate, because if the economy had not been so disrupted by the financial crisis, perhaps those employed in the synthetically fattened fields might have found other work.

Applying the 66.4% rate to the noninstitutional population count in January 2013, we get a civilian labor force count of 162,456,232, versus the 155,654,000 reported (Note calculation error exists because of the seasonal adjustment to the labor force count. I’ve attempted to back into that adjustment and apply it to the theorized labor force count, resulting in this figure for the adjusted labor force: 162,506,691). After that adjustment, the difference from this January’s workforce count is 6,852,691 million Americans who would be added to the unemployed count as well. So if those nearly 7 million Americans have simply fallen off the radar, the true unemployment rate could be as high as 11.8% (not 7.9%), which is up from 11.7% in December 2012. Likewise, the real underemployment rate could be as high as 17.9% today, which is unchanged from December 2012.

Those are significant figures reflecting a poorer state of health for American labor and the economy than the government’s calculations. It’s clear that we need to continue to stimulate job creation in America. Despite much of the recently celebrated economic data, excluding the just reported GDP contraction in Q4 2012, we cannot ignore this fact. Given the message conveyed by the very important GDP and employment reports, an economic reality check has indeed been served to the nation.

The SPDR S&P 500 (NYSE: SPY), SPDR Dow Jones Industrial Average (NYSE: DIA) and the PowerShares QQQ (Nasdaq: QQQ) have gained approximately 5.1%, 6.1% and 2.7%, respectively, year-to-date through January 2013. Fueled by massive capital flows and the removal of fiscal cliff fear and debt ceiling concerns, gains could continue. However, given these two important economic data points just reported, perhaps capital will be spread out to include lower beta bearing sectors and asset classes. The performance of employment services stocks Friday was mixed to modestly improved, perhaps reflecting the conflicting currents in the market. The shares of several of the nation’s largest employers, however, were decidedly higher, likely on those same capital flow and macroeconomic drivers discussed previously.

Stock	Friday’s Change
Robert Half Int’l (NYSE: RHI)	+0.7%
Korn Ferry Int’l (NYSE: KFY)	+0.5%
Monster Worldwide (NYSE: MWW)	-0.2%
Manpower (NYSE: MAN)	+1.5%
Wal-Mart (NYSE: WMT)	+0.8%
McDonald’s (NYSE: MCD)	+0.7%
Target (NYSE: TGT)	+1.2%
Sears (NYSE: SHLD)	+1.3%

The increase in the flow of Weekly Initial Jobless Claims last week also offered a reminder to investors who have perhaps overdone the celebration. However, remember that stocks will tend to lead the economy by approximately 6 months. In conclusion, the economic takeaway here should be that America’s unemployment situation could be significantly understated. Fiscal and monetary policy should thus remain supportive of economic growth, and job creation and small business support should be given highest priority.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.