Analysis of the Jobs Report, Record Low Yields and Stock Market Action

by the Curmudgeon with Victor Sperandeo

Executive Summary:

The U.S. Bureau of Labor Statistics (BLS) reported on Friday   that non-farm payrolls surged by 287,000.  That was well above the consensus estimate of 180,000 and 22% above the highest estimate in the range, according to Econoday.  The 287,000 new jobs were the highest number since December's 292,000 but that was eventually revised downward to 262,000.

However, May's disappointing jobs increase was revised down further – from 38,000 to an even more puny 11,000.  At 2.0 million, the number of long-term unemployed (those jobless for 27 weeks or more) changed little in June and accounted for 25.8% of the unemployed.

The unemployment rate increased by 0.2% to 4.9% in June, while the number of unemployed persons increased by 347,000 to 7.8 million. These increases largely offset declines in May and brought both measures back in line with levels that had prevailed from August 2015 to April.

1.8 million persons were marginally attached to the labor force in June, about unchanged from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed, because they had not searched for work in the 4 weeks preceding the survey.  Does anyone care about them?

The stock market didn't seem to notice the downward May payroll revision, those without jobs not counted as unemployed, or the uptick in the unemployment rate, but instead celebrated the June surprise increase in non-farm payrolls.  Both stocks and bonds were higher on Friday, in what seemed like a feeding frenzy. The DJI added 205 points and the S&P rose above its previous record high during intra-day trading to close less than one point below it at 2129.90 (see Note 2. below).

Victor's Comments on the Jobs Report: 

The BLS employment situation report looked good on the surface, but it was really mixed. Not bad, but not as good as it seemed.  And with lots of questionable data. The unemployment rate went from 4.7% to 4.9% and payroll jobs increased by +287,000.  That was tempered by May's downward revision to only +11,000 new jobs, rather than the +38,000 first reported.

Let's use one example to dramatize my point about the good and the bad:

·       Good: The leisure and hospitality sector showed an increase of 59,000. It has been a leader in employment.

·       Bad:  The Birth - Death model rose to +82,000 (mirage jobs as we've explained in several Curmudgeon posts like this one).

We've cautioned readers not to believe that net "New Businesses" are being formed to the extent the government says they are via the Birth-Death model.  If the jobs number "looks good" traders buy the market (like they did on Friday). How the number is calculated is not relevant to traders. But I stress, an investor should never, ever believe a government number without first checking how it was derived.

-->So although being the strongest headline jobs number in five years, it's bogus because it has a huge fabricated number in it (via the birth death model).  Also, there are seasonal adjustments which can't be trusted for accuracy.

Inconsistencies and Points to Ponder:

·       The "household survey" companion report did not confirm the non-farm payroll report as it rose by only 67,000.

·       While average hourly earnings went up, average weekly earnings went down. All earnings reported increased or decreased by only fractions of a percentage point.

·       The number of unemployed moving to employed fell, while the employed to unemployed rose.  This has not occurred since 2011.

Part of the explanation is the birth - death model, and part is the fact that the people who were not in the labor force (classified as not in or out of employment) came into the work force. This was the cause of the rise to 62.7% in the "labor participation rate," which moved above last year's 38-year low of 62.4%. 

Source: Greg Weldon (by subscription only).

John Williams Shadowstats Commentary #809: 

·       Headline Month-to-Month Payroll and Unemployment Data Are Rubbish,

·       Heavily Skewed by Inconsistent and Not-Comparable Seasonal Adjustments

·       Private Surveying Shows Plunging Employment Circumstances

·       Last Seen During the 2009 Economic Collapse

·       June 2016 Unemployment Rates: U.3 Rose to 4.9%, but

·       U.6 Notched Lower to 9.6% and the ShadowStats-Alternate Rate Eased to 22.9%

·       The Fed Will Not Buy These Numbers, Legitimately

From the ShadowStats subscribers only report:

“In the headline May 2016 detail, U.3 unemployment plunged from 5.0% to 4.7% with 484,000 unemployed simply disappearing from the labor force, with no offsetting big surges in employment or marginally-attached workers. In the headline June 2016 detail, U.3 unemployment rose from 4.7% to 4.9%, with the number of unemployed surging by 347,000, but with no offsetting decline in employed, and despite a jump in marginally-attached workers. The story here is that the headline monthly numbers are not consistent. Each month’s data are published with a set of seasonal adjustments unique to the headline month. While the last five years of the monthly data are recalculated with the new month’s seasonal adjustments, they are not published on a comparable basis.” 

Mary Anne and Pamela Aden via Dow Theory Letters (via email to subscribers):

·       Today’s positive jobs report was almost like an excuse for bullishness, and the markets responded.

·       Worrisome signs include: slow growth worldwide, the Dow Theory bear signal, still in effect, and especially the lowest interest rates in recorded history.

·       Bonds are signaling that all is not well, and Alan Greenspan and other experts are warning that another debt crisis is inevitable. 

·       This may explain why safe havens like gold and US government bonds have been star performers this year.

Victor's Comments on the Markets:

Gold and silver were up for the week. It should be noted that gold is at new intermediate term highs in all currencies.  Bonds and notes closed at NEW all-time low yields.  They were both up in price on Friday. Stocks also closed up for the week. So did the dollar. However, oil and grains were down for the week.        

Bonds ignored the jobs data and the yields closed at 1.36% on the 10-year T note and 2.1% on the 30-year T bond1.  In large part this was because Japan, the UK and the EU investors bought US Treasuries as the yields were significantly higher than their countries sovereign yields (some Japanese government bonds have negative yields).  The rise of the dollar (that goes with strong looking economic data) also contributed to the buying of US government debt.

Note 1.   Prior to the 2008 financial crisis, the record low yield on the 30-year T bond was 4.5%.  It now yields less than half its previous record low yield!  The record high yield was 14.36% on August 1, 1981.

Chart Courtesy of Yahoo Finance


Stocks are the odd ball rising asset, because world economies are still slowing (even before Brexit).  Please keep in mind that the last Dow Theory primary signal in stocks was a bear market.  

Even if the S&P 500 were to close at a new all time2 it is not going to be confirmed by many other important indexes. The Russell 2000 high was 1295.80 (6/23/15) while Friday's close was 1177.36 (-9.14%). Many others stock indexes are similar.

Note 2.  According to Yahoo Finance historical prices, the S&P 500 closed at 2,130.82 on May 20, 2015 and at 2,128.28 on July 20, 2015.  It closed at 2129.90 on Friday, July 8, 2016.


Beware of a bull trap! I remain a bear on stocks, but am not short.

End Quote:

With various markets acting at fundamental cross purposes, please consider this quote by a legendary stock investor:                                                                                                                                

“The main purpose of the stock market is to make fools of as many men as possible.”  by Bernard Baruch.

Good luck and till next time...

The Curmudgeon


Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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