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Mark's Market Blog

8-5-12: Jobs.

By Mark Lawrence

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Markets rose at the end of the week after announcements from the Fed and the ECB that they weren't going to do anything and a US jobs report that boiled down to a loss of full-time jobs, a huge increase in part-time jobs, and stagnant income for July. The market continues to trade within a rising channel (blue lines in chart below), the election is still coming, so I continue to expect the overall trend to be up for a while longer. Super Mario had a press conference Thursday where everyone was hoping to hear about his new super-secret plan to save Europe. It remains super-secret. European yields promptly shot up, European markets promptly dropped. Then Friday 2-year Spanish and Italian yields dropped, and markets shot up. That's the great thing about super-secret, you never know. . .

S&P 500 February 11 2012 to August 3 2012

The US continues to slip towards recession. UPS traffic was down in July, consumer spending was down in July. My own sales were off 40% in July compared to June. Businessmen everywhere were taken by surprise when the Supreme Court upheld the mandate in Obamacare, and now the realization has hit that we're going to have to deal with this thing that none of us understand. Businessmen hate uncertainty, so the main reaction is to cut spending to the minimum, draw down on inventories, freeze hiring, and prepare to ride out a storm. When businessmen and consumers stop spending at the same time, we call that a recession.

Friday's job report looked ok on face value - 163,000 new jobs added. Unfortunately, when you dig a bit deeper it was a little less pleasant. There was a moderate decrease in full time jobs, a large increase in part time jobs, and almost exactly zero net change in personal income or total hours worked. Those 163,000 new jobs put almost exactly no new money into the US workforce's pockets. I believe this is a reaction to Obamacare: move your workforce over to part-time employees who don't qualify for mandatory insurance.

Pretty much the entire country of India lost power for a couple of days - 600M people total. Double the population of the US. India has 26GW of idle power plants due to a shortage of coal - think six Hoover dams sitting idle while two Americas are blacked out. Transportation, lighting in schools, manufacturing plants, phone lines, water purifiers across the country, all was down. India is long out of fresh water, most of their people live on a dollar a day, most of their children are underfed and malnourished - even the rich kids - and most of their people eat onions as their #1 source of calories. This is the country we're told will vie with China to be the #1 economy this century. Sorry, I just can't see it.

From The Onion (this is all true, not satire): NEW DELHI -- According to estimates, roughly one-third of a billion Indian citizens were left without power Wednesday after workers successfully repaired the nation's electrical grid and brought all of its systems back online. "Since restoring our infrastructure to 100 percent capacity following Monday and Tuesday's blackouts, vast swaths of India are now completely without access to electricity," said the country's power minister, Veerappa Moily, who confirmed that three out of every four residents lacked access to such basic amenities as lighting, food refrigeration, and the use of simple appliances now that the country's grid had fully recovered. "We are currently not monitoring the situation, as everything appears to be functioning normally again in India." Government officials also stated that the widespread power outage had in no way compromised their ability to provide adequate sanitation to 31 percent of India's citizens.

Myanmar (Burma) recently had elections which seemed quite promising. The US eased sanctions a bit as a result. Now the house and senate are going to renew the sanctions for three years, while adding to the bill that the president may waive import restrictions if he decides that progress towards democracy continues. I would very much like to visit Myanmar, I hope this works out.

The ECB has apparently made an exception to their rules, allowing the Bank of Greece about $4b in emergency funding. This money will wind up with the Greek government guaranteeing they don't default before the September meeting of the EU, IMF and ECB. Everyone still gets to have their August vacation - after all, the EU treaty says workers have a right to a vacation.

For a couple years now US citizens haven't been very welcome in foreign banks. The Foreign Account Tax Compliance Act (FATCA) was passed a few years ago. FATCA requires every bank in the world to sign an information-sharing agreement with the IRS. Even the tiniest bank in Bhutan that has never seen a foreigner walk through its doors has to jump in bed with the IRS. If banks don't comply (or even know about the law), the US government will severely penalize them with a 30% withholding tax on most funds routed through the US. Now Greece has gotten into the act, they are requiring European banks to register Greek account holders. If you're Greek and you haven't gotten your money out, it's very close to too late. If you're a US citizen and want a foreign bank account to hide assets, forget it. Unless you also have a 2nd passport.

So far this year just over $200B in bank deposits has flowed out of Spain, presumably largely into French and German banks. It's against this that the EMS $120B bailout must be measured. Spain's foreign reserves have declined by $300B. This is a country sliding falling down a cliff towards bankruptcy. Deutsche Bank has already sold a bit over a third of their Spanish bonds. German Finance minister Schauble says Spain should apply for a bailout and terms will be discussed. Spanish minister de Guindos says Spain should get ECB loans without conditions; if not perhaps they'll default. So the next great game of chicken is set up. Collision is scheduled for October.

Italian unemployment is climbing, hitting 10.8% last month, with youth unemployment at 34%. That's a far cry from Spain's 24% overall and 50% youth, but it's pretty bad. The diaspora of educated southern Europe youth has already begun; the price for this recession / depression in southern Europe will last a generation or more.

The post office is getting closer and closer to bankruptcy, as $11.1B of required pension contributions comes due and almost certainly won't be paid. What's the house doing about it? They're renaming post offices - 60 bills have been introduced in this congress to rename post offices, and 38 have passed the house, 26 have also passed the senate. Not a single bill has any provision to reform the post office. Given the circumstances, I'm pretty sure I wouldn't want a post office named after me.

Obamagration: Details of Obama's new immigration policy have been revealed. If you:

then Homeland Security will give you a work permit and list you as not subject to deportation. President Obama has described those who qualify for the program as "Americans in every single way but one: on paper." Up to 1.4 million people could benefit. So much for congress writing laws.

Microsoft has survived and prospered for the last 30+ years as a monopoly - you run windows and office, or you can't run your business. Apple has used a variant on that model for years, having a mini-monopoly on making software that could be used by humans and nice hardware that runs it. But a few years ago, Apple changed - they came out with the iPod, then the iPhone, now the iPad. These are not monopoly products, they're close to commodities. The iPhone in particular is currently behind the curve. Last fall Apple introduced the iPhone 4s instead of the expected iPhone 5; that's when they lost their lead. Today the best phone is probably the Samsung Galaxy S III, second is likely the HTC One X; the iPhone 4s is no better than 3rd. Soon we'll get the iPhone 5, and perhaps Apple will regain the lead. But there's an important point here: Apple is no longer a monopoly, they're competing on a level field. If the iPhone 5 doesn't match up well with the Galaxy, Apple's sales will reflect that. Apple will soon release a smaller iPad, but that's coming into a field already dominated by Amazon with the Kindle Fire, and has Google trying to buy market share and presence with the Nexus 7. Apple will have an up-hill battle from day one, and profits will be hard to come by in the 7" iPad market. When the Nexus becomes available with a larger screen the iPad itself will have its first serious competition. In the chart below we see that Apple is not really a computer company anymore; they make over half their profits on iPads and iPhones. The iPhone generates more profit than all of GE or Microsoft or Google or Walmart - the value to Apple of the iPhone 5 cannot be overstated. If the iPhone 5 flops, Apple is in trouble. As a consumer company Apple stock has skyrocketed the last five years on the back of the iPhone and iPad, but the misstep on the iPhone 4s shows us a hint that they can fall nearly as fast as they rose up.

Facebook stock keeps dropping, this week down to about $21 from an opening price of $38 and a high of $46. Some are taking this as a sign of the apocalypse, comparing Facebook today to in 2000. Will the stock market lose half its value? Maybe, but it won't be because of Facebook. Everyone is still trying to figure out what Facebook does for a living and if they can ever make money. So far all we have is trendy words, like "mobile Facebook." I don't see how Facebook on a phone is more profitable than Facebook on a computer. I suppose their dream would be that as you drive around, Facebook tells you where to shop and what to buy. Given their record on privacy, I can't imagine giving Facebook access to my phone info.

I ran across a very interesting graph from Crestmont Research. This is US corporate earnings per share growth, a three year moving average. Speaking as an engineer, I don't find this graph difficult to project. This looks just like an electronic feedback system going out of control. It happens all the time to prototypes, then you find problem and fix it. What's in the future? This system will hit some sort of limit and blow up, or catch fire, or burn out the fuse. That's why we use fuses, they prevent a lot of explosions and fires. The purple line will turn down, soon, and it will go down further than it had previously gone up. Those green lines, those are exponential curves. Exponential curves don't exist in the universe, at least not for very long. This is speaking as an engineer of an electronic feedback system, I'm not an economist. Economically, maybe the correct projection is that in 50 years US corporate profits will be greater than all the gold in the galaxy. Or maybe we'll have the often-promised but never actually seen "soft landing."

How's that drought doing? It's getting worse, and is now affecting every state including holdout Maine. The plains states, our nation's breadbasket, continue to take the worst of it.

In 1930, 90% of all public school teachers had graduated in the upper third of their class. In 2012 it's 22%. Do excellent teachers matter? Compared to average, a 75% percentile teacher adds about $400,000 to their students' lifetime incomes; a 25% percentile costs their students $400,000 in lifetime income. According to Eric Hanushek at Stanford, replacing the bottom 8% of US teachers with average teachers would move the US to the top of the international math and science rankings and make a huge difference in our GDP over the long run, adding $250,000 to each classroom's lifetime expected income. But there can be no talk of replacing the bottom 8% of teachers - this would require measuring the teacher's knowledge and effectiveness, then laying off the worst. All illegal under teacher's union contracts. Paying incompetent teachers is more important than educating our children.

In 1955, GM was the largest company in the world with revenues of $105B in 2011 dollars. Today it's Apple, with revenues of 108B in 2011 dollars. How do the employment numbers of these two American industrial giants line up? Apple employs nearly twice as many people, which is spectacular good news for China, Taiwan, Vietnam.

In the last 70 years, the US has created a lot of jobs. Just not so many lately. The decade of 2000-2009 was the first since the Great Depression where the US created no net jobs. The US and Europe used to be on a nice trend line, adding about 2% more jobs each year. That all broke in about 1990; we westerners have lost the ability to create jobs for westerners.

Election Watch: Michigan has moved more solidly into the Obama camp; Romney has a decent chance of taking North Carolina, Florida, Iowa and Virginia away from Obama, bringing Romney up to 254 of the required 270 electoral votes. If I were Romney's campaign manager, I would still have no idea where I would get the required 16 more electoral votes. As we near the election undecided voters are starting to choose sides, and a majority of them, especially women, are leaning towards Obama. For my entire life I've been told "as goes Ohio, so goes the nation." Well, Ohio is going to Obama by a margin of 5 points right now. To shore up his base, Romney flew to Europe where he insulted the Brits and the Israelis. In spite of what we hear, this is not currently shaping up to be a close election - Obama is in very decent shape to win re-election by several points. At this point, given that Romney is all but completely lacking in sex appeal, we have to presume that it will take an external shock to give him a chance to win, like Greece defaults and causes a massive run on European banks and a US stock market mini-crash. Please God, wreck our economy so that I can have the faceless ineffective bureaucrat of my choice, not my neighbor's choice. . .

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