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News that Moves: Specious Jobs Report, Yellen Concerns, Carnage in State Budgets

ECONX Jobs Report Surprises

The market got a kick out of the May employment report, as it cheered the news that “only” 345K nonfarm payroll jobs were lost during the month. That was indeed much better than the consensus estimate of -520K. Moreover, the April nonfarm payrolls data was revised up to show a decline of -504K positions versus an originally reported -539K…

The other headline that jumps out is the unemployment rate, which spiked to 9.4% from 8.9% and is at its highest level since 1983. The big uptick is owed in part to an increase in the civilian labor force, meaning there were more people looking for jobs. That is being read in counter-intuitive fashion, though, as a sign that it reflects increasing confidence in the economic recovery…
RCM Comment: The markets are fluctuating wildly as all try to digest the payroll numbers. My take – trying to make decisions today using this payroll information is an exercise in futility. Why the disdain you ask? Well here are a few reasons:

The payroll numbers are notoriously volatile

The numbers will be revised in the months to come, which is a nice way of saying they were wrong to begin with

The government creates the numbers and, to say the least, we have a healthy skepticism for government creations
And perhaps most important, as an experienced trader I can testify that the direction markets take on payroll announcement days often has no followthrough.
Instead of wasting our time dissecting specious numbers, let’s analyze something a little more important to the health of the economy and perhaps a little more concrete. Take a close look at the following graph and meet me at the bottom….

 

The key to this graph is the red line. The ‘New Notice of Defaults’ was surging even before mortgage rates spiked. In the last 30 days mortgage rates have spiked roughly 20% from low to high. I’m loath to see how this increase will effect notice of defaults in the coming months. Fed governor Yellen voiced her concern today when she said the, “rise in Treasury, mortgage yields is “disconcerting“.

RCM Comment: I mentioned in the June 1st post

that other states were going to follow California into the budget abyss. Well….
Carnage in state budgets is getting worse – NY Times
NY Times reports the carnage in state budgets is getting worse, a report said, with places like Arizona being hurt by falling revenue on multiple fronts, like personal income and sales taxes. Other states are having mixed experiences, with some tax categories stable, or even rising, even as others fall off the map.
The report, by the National Conference of State Legislatures, also provided a scorecard for how well drafters of state budgets read the recession’s economic tea-leaves — and the short answer is, not very well. Thirty-one states said estimates about personal income taxes had been overly optimistic, and 25 said that all three major tax categories — sales taxes, personal income taxes and corporate taxes — were not keeping up with projections. Even gloomy-Gus states that saw the recession coming and low-balled their tax estimates had little room for celebration, the report said. “The handful of states that have weathered the economic decline reasonably well are starting to report adverse revenue developments,” it said. “The news is alarming.”

 

 

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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