What The Media Missed: Jobs Growth Isn't "Surging." It's Slowing

What The Media Missed: Jobs Growth Isn't "Surging." It's Slowing - help wanted 1 6


BREAKING: The Bureau of Labor Statistics is 90% sure that the U.S. economy added somewhere between 42,000 and 270,000 jobs in the month of December.


Wait, what?


That's right. The BLS, which is charged with calculating montly jobs gains, released today's labor market report showing 156,000 new jobs were added in the month of December. But based on the way this data is collected, the U.S. economy may have added or subtracted an additional 114,000 jobs from that initial jobs estimate.




Interestingly, and more importantly, year-over-year jobs growth continued to slow. To be precise, jobs growth has slowed from 2.3% (year-over-year) in February 2015 to today's rate of 1.51%. The year-over-year growth rate captures the big picture better than blindly staring at these uncertain monthly oscillations. The long-term trend is that jobs growth continues to slow.

These nuances got lost in the shuffle of mainstream media headlines


Most media outlets suggested that jobs growth has been chugging along. Nevermind that the 156,000 number missed Wall Street consensus' estimate of 180,000. Here's mainstream media reporting on this morning's jobs report:


  • CNN Money: "The U.S. job market kept up its overall momentum right up until the end of 2016."
  • MarketWatch: "The U.S. added 156,000 new jobs in the final month of 2016 and worker pay rose at the fastest pace since the Great Recession, reflecting a surge in employment over the past six years that’s left many companies complaining about a shortage of skilled labor."

Chart of the Day: The Absurdity of predicting Monthly Jobs Growth 


Now take a look at today's Chart of the Day below. This captures the wide range of possible outcomes for the BLS's calculation of monthly jobs growth. This should throw cold water on anyone trying to come up with a montly estimate. Alas, Wall Street continues to guess. Here's Hedgeye U.S. Macro analyst in today's Early Look note published just before the 8:30 a.m. Jobs Report:


"Below is a friendly updated reminder from the BLS on the standard error in the NFP estimate.  To summarize, if NFP prints +114K this morning, the BLS is 90% sure we gained between 0 and 228K jobs."


In other words, Wall Street consensus should know better than to predict 180,000 jobs in December. With a range of plus or minus 114,000 jobs for a given month, economists could just as easily pull their nonfarm payroll estimate out of thin air.


What The Media Missed: Jobs Growth Isn't "Surging." It's Slowing - BLS CoD  2


P.S. If you'd like to dig into this a bit further, here's the exact language from the BLS explaining in detail the chart above and how the monthly Jobs number is derived:


"What does this chart tell us? The red dot for total nonfarm employment shows a gain of 161,000 jobs in October, as we reported on November 4. That number is an estimate based on our montly sample survey rather than a complete count of jobs each month. Different samples of employers might give us different estimates of employment change.


We can measure the sampling error, the variation that occurs by chance because we collected the number from a sample of employers instead of all employers. With our measure of sampling error, we can calculate a confidence interval. The blue bar for total nonfarm shows the 90-percent confidence interval ranged from 46,800 to 275,000.


We call this a 90-percent confidence interval because, if we were to choose 100 different samples of employers, the October nonfarm employment change could be between 46,800 and 275,000 in 90 of those samples."

McCullough: This Book Is The ‘Bible’ of Financial Market Knowledge


Need to get up to speed on the complex, inner workings of financial markets?


We’ve got the book for you. Check out The Misbehavior of Markets by deceased mathematician and deep-thinker Benoit Mandelbrot.


“Read this one slowly,” says Hedgeye CEO Keith McCullough.


Mandelbrot is the father of fractal geometry (a field of mathematics that attempts to define how complex systems change as they get larger in scale). His theories applied to markets tries to make sense of states of seeming randomness.


If all of this sounds daunting don’t worry, Mandelbrot’s style is accessible and laden with insight. He also dissects what works and doesn’t work in financial markets. And Mandelbrot never shies away from taking to task current Wall Street orthodoxy. Take this excerpt for instance:


“The financial industry has developed other tools. The second-oldest form of analysis, after fundamental, is “technical.” This is a craft of recognizing patterns, real or spurious – of studying reams of price, volume, and indicator charts in search of clues to buy or sell. The language of the chartists is rich: head and shoulders, flags and pennants, triangles (symmetrical, ascending, or descending. The discipline, in disfavor during the 1980s, expanded in the 1990s as thousands of neophytes took to the internet to trade stocks.” -The (Mis)Behavior of Markets (pg 8)


McCullough calls The Misbehavior of Markets the “bible for understanding fractal math and non-linearity” in financial markets. It’s definitely worth checking out.

Cartoon of the Day: Eating Crow

Cartoon of the Day: Eating Crow - Brexit cartoon 01.05.2016


"Oh have the Brexit Bears been wrong," writes Hedgeye CEO Keith McCullough. The FTSE hit yet another post-Brexit high today after the U.K.'s Services Purchasing Managers' Index (PMI) for December accelerated to 56.2 versus 55.2 in November. We still like the Pound on the long side, especially against the Euro.



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Why Are Kohl's Shares Down -20% Today? It's On The Road To Extinction

Why Are Kohl's Shares Down -20% Today? It's On The Road To Extinction - kohls image dodo2

What do the Dodo bird and department store Kohl's have in common? One word: Extinction. Hedgeye Retail analyst Brian McGough has been warning that Kohl's is on the "road to extinction" for some time now. Even after the -20% decline, McGough is sticking with his short call.

ICYMI: What to Watch Ahead of Tomorrow’s Jobs Report


If we see a positive Jobs Report tomorrow, we think Gold and the 10-year Treasury get smoked.”

–Hedgeye CEO Keith McCullough

Get ready. It’s Jobs Day tomorrow.

And we think most investors are missing a critical opportunity ahead of Friday’s labor market check-up.


The Federal government’s Non-Farm Payroll report, as the jobs report is called, will give us an update on the number of jobs added for the month of December. Since February 2015, the year-over-year growth (or rate of change) in jobs has been slowing, from that peak of 2.58% to the November reading of 1.58% (see the brief video above for more).


It’s one of the few U.S. economic indicators that’s still slowing.


But this could change. Especially as we head deeper into 2017 and jobs growth “compares” get easier. This means last year’s absolute jobs number, over which tomorrow’s December reading will be compared to calculate year-over-year growth, is a lot lower. So, essentially, labor market growth isn’t as hard to come by, particularly heading into the first and second quarter of 2017.


Sell Gold (GLD) and Long-Term Treasury Bonds (TLT) ahead of the report. These are classic slower economic growth macro exposures. In other words, they could get crushed tomorrow if tomorrow’s jobs report is better than expected.

Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble

Takeaway: An easy money Fed encouraged investors to blindly buy stocks. Passive index funds benefited. Active funds lost. That may be changing.

by Mike O'RourkeJonesTrading


Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - blindfolded man


We started highlighting the trend towards “Blind Buying” back in 2013 and over the course of 2016, the trend reached new heights. In general, we are referencing behavior in which individual stock analysis plays little or no role in the investment process. In short, equities are purchased for exposure to the asset class as opposed to purchasing a company’s shares based upon the individual growth and value prospects of its business.


While the strategies come in many forms – asset allocation, automated, correlation driven, factor driven, social media driven – none has been more influential than the shift away from active investing towards passive investing. That has become one of the key themes of the market over the past year.


Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - orourke callout 1 5


It was three decades ago when the seminal research by Brinson, Hood and Beebower was published indicating that asset allocation is the overwhelming determinant of returns in comparison to market timing and stock selection. Over the past three decades, this point has been debated countless times. 


Subsequent research has noted that the high correlation reported is the result of “aggregate market movement,” i.e. they are all invested in stocks. This is often referred to as the "rising tide lifts all boats" argument.

The 9-Year Bull Market: Active vs. Passive Funds

Regardless, there are numerous arguments and examples of passive funds outperforming active funds. One can understand how those arguments have reached a fever pitch as we head into the ninth year of a bull market, a bull market that has been fostered by unconventional accommodative policy.


This is a policy that has included 9+ years of one or more major central banks always buying assets and concurrent zero or near zero interest rate policies. In such an environment, it becomes very easy to outsource the decision making and let the market (and the central banks) do all of the work.


It is a one size fits all approach. The leading rationalization behind riding the rising tide has been the fact that equities are “relatively” inexpensive in comparison to Treasuries (which are very expensive), even after the bond market selloff over the past 6 months.


Interestingly, that Fed Model relationship moved dramatically during the Treasury selloff and equities are now the most expensive they have been versus Treasuries since 2010 (chart below), which is the year earnings began to recover.


Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - fed model


Considering both stocks and bonds are very expensive, comparing them to one another is a dangerous proposition. A more realistic approach is to measure how expensive stocks and bonds are together - relative to history. One can add the S&P 500 earnings yield and the 10 year Treasury yield, essentially inverting the Fed Model.


One can go one step further and multiply the S&P 500 earnings yield by 60% and the Treasury yield by 40% to create the theoretical historic valuation for a 60% equity/40% fixed income portfolio mix (chart below). The readings for both metrics over the past year, especially the past 6 months, rank in the most expensive percentile of readings dating back to 1962.

Why do active managers exist?

They exist so investors can differentiate their returns. In different environments, different stocks, industries, sectors and assets perform better than others. When the two main assets reach their most expensive levels in 56 years, one can understand why investors are not looking to differentiate.


Furthermore, the static monetary policy environment that is almost a decade old has accentuated and elongated this trend. When policy is static, investors don’t need to worry about how policy will influence their holdings and “one size fits all” appears to work.


When monetary and fiscal policy change and the static environment comes to an end, investors will once again need to look to differentiate. Apparently, this is not happening overnight, but as each gradual shift occurs, the gradual pressure will grow into an unsustainable weight.


Since inflation has been rising for over a year and it’s on pace to continue, now is not the time to argue that low inflation justifies a higher multiple. Many will be caught off guard because it has been way too easy to “set it and forget it” in recent years.

Bottom Line

The psychology associated with simply being invested in the “market” has become so pervasive that it is reminiscent of the 2005-2006 housing bubble arguments that “US Home prices have never declined year over year” - until they did. One size fits all makes sure you are wearing something, but it may not be the right thing.


Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - 60 40 model


Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble - disclaimer


This is a Hedgeye Guest Contributor research note written by Michael O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.

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