jobs report review - rosenberg feb 5 2010

8/14/2019 Jobs report Review - Rosenberg Feb 5 2010

1/12


2/12

February 5, 2010 LUNCH WITH DAVE

The Household survey did show a nice rebound of 541k in January and almosthalf the gains were in full-time positions. Not only that, but the number of folksworking part-time for economic reasons plummeted 849k, or by nearly 10% talk about an eye-popper.

The working-age populationin the U.S. plunged 92k inJanuary; such a decline hasoccurred but five times since1951Be that as it may, keep in mind that the January rebound in Household

employment fell short of recouping the entire 589k plunge in December and the job count here is still 1.5 million lower today than it was in July. After fourmonths of decline, the labour market (officially defined) rose 111k (well short of offsetting the 661k plunge in December) and together with the rebound inHousehold employment, all the job market ratios improved:

The jobless rate down to 9.7% from 10.0%; The employment ratio up, to 58.4% from 58.2%; And even the broad U6 measure of the unemployment rate slipped to a five-

month low of 16.5% from 18.3%.

The working-age population plunged 92k in January and such a decline hasoccurred but five times since 1951 and they most happen in January, so we couldwell be spending an inordinate amount of time analyzing a report that is rife withbad sampling. For example, we also found that despite the great headline in theHousehold survey, adult-male employment (aged 25 years and over) actually fell75k and has declined now for 18 months in a row. Moreover, the adult-maleunemployment rate yet again was at 10% in January, a level it has either been ator breached for six straight months in unprecedented string dating back to 1947.

Meanwhile adult-women employment over the age of 20 posted a 529,000 jobboom. In the battle of the sexes, Venus clearly took January. Moreover, look at

Chart 1, male employment (aged 25 to 54 years old) plunged 114k in January andis back to levels last seen in June 1996. Almost 10% of what was once consideredthe breadwinner part of the workforce has been extinguished during thisrecession. How can anyone realistically be excited about recovery prospectsknowing this?

CHART 1: ADULT MALE EMPLOYMENT BACK TOLEVELS LAST SEEN IN JUNE 1996

United States: Employed: Men 25-54 Years Old (millions)

098765432109876

55

54

53

52

51

50

49

Source: Haver Analytics, Gluskin Sheff

Page 2 of 12


3/12


Taking a big picture viewpoint, the U.S. labour market remains fundamentallyweak. Despite the clarion calls for recovery from the legions of Wall Streeteconomists and strategists, the reality is that labour market gaps remain verywide; here we are more than two years after the recession officially started and theranks of the long-term unemployed continue to swell. The average duration of unemployment rose to a record 30.2 weeks from 29.1 weeks in December; andfor the first time ever, we have more than 6.3 million Americans (up from 6.1million in December) who have been looking for a job with no luck for at least sixmonths. That is an unprecedented 41.2% share of the pool of unemployment.

While there will be manyeconomists touting todaysU.S. employment report assome inflection point, thereality is that the level ofemployment today, at 129.5million, is the exact samelevel it was in 1999

While there will be many economists touting todays report as some inflectionpoint, and it could well be argued that we are entering some sort of healing phasein the jobs market just by mere virtue of inertia, the reality is that the level of employment today, at 129.5 million, is the exact same level it was in 1999. And,during this 11-year span of Japanese-like labour market stagnation, the working-age population has risen 29 million. Contemplate that for a moment; fully 29million people competing for the same number of jobs that existed more than adecade ago. That sounds like pretty deflationary stuff from our standpoint.

Not only that, but consideration must be taken that in 2009, we had a zeropolicy rate, a $2.2 trillion Fed balance sheet and an epic 10% deficit-to-GDPratio. You could not have asked for more government stimulus. Yetemployment tumbled nearly 5 million in 2009.

Here we are in 2010, and what we have on our hands is a situation where theouter limits of deficit finance have already been probed, and the Fed has pledgedto start shrinking its balance sheet and withdraw its critical support for themortgage market. Yet the deleveraging in the household sector is ongoing and itnow looks as though the economies in Asia and Europe are going be slowing down,not speeding up, in coming quarters. And of course, heightened concerns oversovereign credit quality suggest that risk premia globally are set to rise after a yearin which we had the calm before the storm. Heightened risk premia meansuncertainty, volatility and in turn a very clouded economic outlook that transcendstodays data release, which has already consumed too much of my time.

A TECHNICALLY-DRIVEN MARKET

Yesterdays sharp and broadly based decline in the equity markets was theworst session since April 20 of last year. The S&P 500 is now down 7.6% fromthe mid-January peak and the Asia-Pacific market is just 40 basis points shy of seeing a 10% correction after having its worst session in 10 weeks; emerging

market equity funds lost $1.6 billion in net redemptions in the past week, thelargest outflow in nearly six months. Financials were clobbered 4.2% and ledthe decline, though basic materials werent too far behind. Volume swelled asall the major averages fell off not a good sign for the bulls.

Page 3 of 12


4/12


5/12


Again, countertrend rallies in the U.S. dollar are not generally associated withupward movement in the commodity complex, so expect to see further near-term declines in the resource space. Although the chart of gold against the euroand many other currencies still looks quite constructive.

We are currently seeing acountertrend rally in the U.S.dollar all of a sudden, theUSD looks like the one-eyedman in the land of the blindMoreover, talking about policy discord. Yesterday, New York Fed President

Dudley expressed concern over how weak the recovery is likely to be and thatthe odds of a double-dip recession are not zero, and dissenting voter Hoenig from Kansas City continuing to express his view that rates are not going to staywhere they are indefinitely (even though theyve been at zero in Japan for wellover a decade).

On the global data docket, we see that German industrial production fell 2.6%MoM in December, more than wiping out the 0.7% gain the month before and ahuge disappointment to the consensus forecasting community that had penned ina 0.6% advance. To be sure, if President Obama gets his wish of doubling exportsin the next five years, he is going to need a little help from his friend otherwiseknown as the greenback. For the time being, there are other countries in theworld, notably in Europe (the Euro is now at an eight-month low) and in Japan, thatprobably need a good dose of currency depreciation even more.

The Sterling is also getting pounded in the aftermath of comments out of theBank of England to the effect that more quantitative easing will be forthcoming should the outlook warrant it. There is even less pressure now for a Yuanrevaluation seeing as Chinas current account surplus has collapsed 35% in thepast year. The Indian rupee is succumbing to huge capital outflows. And so long as the commodity complex is in correction mode, rest assured that the likes of the Loonie, Kiwi and Aussie will be trading defensively as well.

All of a sudden, the USD looks like the one-eyed man in the land of the blind.With that in mind, have a look at the article on the tough choices facing Euroland policymakers default or bailout? on page B1 of the NYT ( Fraying Atthe Edges: The Economic Weakness of Some Members May Test the Eurozone ).

CANADIAN JOBS DATA UPSIDE SURPRISE ON THE HEADLINE BUTDETAILS NOT THAT GREAT

Canadian employment data is like a yoyo massively outperforming expectations in November (+72,200), then massively disappointing in December(-28,300) and now again massively surpassing expectations today in the Januaryreport (+43,000). Consensus estimates were at +20,000.

The money market will undoubtedly continue to price in Bank of Canadatightening in the summer and beyond until the Bank begins to provide moreclarity in its press statements.

Page 5 of 12


6/12


The jobless rate did dip in December, to 8.3% from 8.4%, but we have alreadyascertained that it would take a move down to 7.5% to prompt the BoC intoaction. At the pace the unemployment rate has been declining in the past sixmonths we wont see that critical point (7.5%) until we are into the winter-spring of 2011.

Canadian employment datais like a yoyo massivelyoutperforming expectationsin November, then massivelydisappointing in Decemberand now again massivelysurpassing expectations inthe January

Moreover, this is a case where the headline was a lot stronger than the details:

December was revised to -28,000 from -2,600 initially, so taking the revisioninto account, the headline was actually fractionally below expected.

Manufacturing payrolls were down 15,700 (that would be akin to a 160,000plunge in the U.S.A.).

The once-hot construction industry lost 400 jobs and this was the seconddecline in the past three months. This is the sector the BoC is relying on tooffset losses in export-oriented sectors.

All the gains were in part-time. Full-time employment edged up 1,400 but thatoffset less than 5% of the 29,400 slump in December.

Those working part-time because of business conditions and actually want afull-time jobs surged 34,600, which was the largest increase in seven months.

While the official unemployment rate did edge down, the more inclusive R8measure (similar to the U6 statistic in the U.S.) rose to 12.3% from 11.1%.Now, this statistic is not seasonally adjusted; however, keep in mind that inJanuary 2009, when most folks thought the world was coming to an end, thisbroad measure of labour market slack was sitting at 11.0%.

You look at the industry breakdown and what you also see is a low quality jobs performance public administration +11,000, accommodation/foodservices +14,100 and business, building and support services +34,400. Theother 85% of the Canadian employment pie shed 16,500 jobs last month. Inother words, this was one lopsided report.

Hours worked did edge up 0.2% MoM, but that was due to a spike in services,which is very difficult to measure hours worked fell 0.2% in the goods-producing sector, the second decline in the past three months.

While average hourly earnings did rise 0.7% MoM this is a notoriously volatilemetric and the YoY trend, as BoC Governor Carney went out of his way to pointout in his speech yesterday, is slowing down markedly from 4.8% a year ago,to 2.4% at the end of 2009, to 1.8% now. This is the weakest trend in 6 years.

Page 6 of 12


7/12


CHART 2: THE TREND IN WAGES IS SLOWING DOWN DRAMATICALLY

Canada: Average Hourly Wage Rate(year-over-year percent change)

098765432109

5

4

3

2

1


INCOME THEME INTACT

Some pundits view the large-scale inflows into bond and income funds as somesort of bubble, but actually it is a deliberate move on the part of the generalinvesting public to reallocate their asset mix towards fixed-income securities,which only command a 7% share of the asset pie. Once again, Ma and Pa Kettlewere net sellers of U.S. equity mutual funds to the tune of $370 million, whilecontributing a further $7.5 billion into bond funds (after an $8 billion net inflowthe week before) in the final week of January. To reiterate, this is a secular shiftin behaviour.

UNBELIEVABLE PRODUCTIVITY DATA

U.S. productivity growth came in at a startling 6.2% annual rate in Q4, and thisfollowed a 7.2% spurt in Q3 and a 6.9% runup in Q2. At no point in the past fivedecades has productivity risen so sharply over a three-quarter period up at a6.7% annual rate. And, look at the pattern since the third quarter of 2008:-0.1%; +0.8%; +0.3%; and then all of a sudden +6.9%; +7.2%; and +6.2%.Somehow, with no capital deepening during the 2002-07 expansion and noinnovation to speak of (sorry, but iPhones dont cut it), we are seeing aproductivity burst that is almost without precedent.

Page 7 of 12


8/12


Despite the loss of 452,000 jobs in the final quarter of the year, output in thenonfarm business sector exploded at a 7.2% annual rate. This is indeed theHoudini recovery. And with the downward revisions to employment, theseproductivity numbers are likely to show double-digit gains and make a mockeryof the advances we saw during the tech revolution of the 1990s. Catch my drift GDP growth is dramatically overstated and by perhaps as much as threepercentage points.

But there were deflation thumbprints all over yesterdays quarterly productivityreport. Real compensation per hour sagged a 1.9% annual rate. Unit labour costsas a result, and this is a key fundamental driver of the inflation process, fell 4.4%at an annual rate and are flat or down now in each of the past four quarters.

Even if we believe that productivity gains are being overstated by mis-measuredGDP data, unit labor costs are still contracting. On a year-over-year basis, unitlabour costs are -2.8% and only five times since 1948 has the trend been thisweak. This is about deflation, not inflation.

CHART 3: THIS IS ABOUT DEFLATION, NOT INFLATION

United States: Nonfarm Business Sector Unit Labour Cost(year-over-year percent change)

0505050505050

16

12

8

4

0

-4

Shaded region represent periods of U.S. recession


If demand growth is really being seen as organic or sustainable by the businesssector, then someone has to explain why it is that in the allegedly best quarter

for the economy in six years, the corporate price deflator failed to rise in Q4. Itwas a goose-egg 0.0% and the year-over-year trend is a mere 0.7%, which isless than half the pace of a year ago (+1.6%) when practically everyone thoughtthe world was coming to an end. At least the last time we saw a GDP print like5.7% we had some modicum of pricing power the business deflator was up atnearly a 2% annual rate. Not zero.

Page 8 of 12


9/12


CHART 4: NO CORPORATE PRICING POWER

United States: Nonfarm Business Sector Implicit Price Deflator(year-over-year percent change)

0505050505050

16

12

8

4

0

-4

Shaded region represent periods of U.S. recession


We went into the databank, and back to 1947 we have seen plenty of timeswhen output growth rose at over a 7% annual rate in any given quarter over60 times in fact. But never before has happened in the context of declining employment normally such growth in output is met by a 650,000 quarterlyincrease in employment, not a decline in excess of 400,000 As we said, its theHoudini rabbit-out-of-the-hat recovery.

EMPLOYMENT CONDITIONS STILL SLUGGISH

Initial jobless claims in the U.S. bucked the consensus and rose for the fourthtime in five weeks to 480k for the January 30 th week, from 472k the priorweek. The smoothed four-week moving average also rose for the third straightweek, which is not a good sign at all to 469k, which is still consistent with net

job loss even with the addition of the census workers (who, by the way, will onlybe working two days a week and as such will only show up in part-timeemployment). The backlog of existing claims, which includes all the folks onemergency and extended benefits, rose 53k during the week of January 16, andattests to the view that even as the pace of firings has subsided, hiring trendsremain extremely soft.

To put 480k in jobless claims into proper perspective, it is 80k higher than the

level prevailing in the aftermath of 9/11; and just about in line with the peakposted in the 2001 recession. And this is with zero policy rates, a $2.2 trillionFed balance sheet and a 10.5% fiscal deficit-to-GDP ratio. The vagaries of apost-bubble credit collapse.

Page 9 of 12


10/12


Page 10 of 12

MIXED NEWS ON THE RETAIL FRONT

Estimates on January chain store sales are all over the map. The ShopperTraksurvey that covered the last week of January showed a 4.5% YoY slide, while atthe same time, RetailMetrics says that sales for the entire month were up 3.3%from a year ago. The International Council of Shopping Centers (ICSC) pollshows a 3.0% increase but again, this is off an ultra-depressed base of a yearago when the trend was close to -5.0%.

NOT EVERYTHING IS BEARISH

For example, the outlook for business spending has improved. No disputing thatone and in fact, we saw U.S. factory orders come in at +1.0% MoM in December,which was double the consensus estimates. There is more to the manufacturing data than just the orders and inventories we also get shipments, which is realdemand (orders can always be cancelled although they can be a good leading

indicator for future production). We did a screen on all three variables thenear-term and intermediate trend in shipments and orders as well as theinventory-to-sales ratio (the lower the better), and saw some interesting divergences. Below is a list of the sectors that screened the best and the worst:

Best Primary metals Turbines/engines/power transmission Computers/electronic products Automotive Paper products Basic chemicals

Worst Commercial aircraft Farm machinery Construction machinery Industrial machinery Appliances


11/12


Gluskin Sheff at a GlanceGluskin Sheff + Associates Inc. is one of Canadas pre-eminent wealth management firms.Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to theprudent stewardship of our clients wealth through the delivery of strong, risk-adjustedinvestment returns together with the highest level of personalized client service. OVERVIEW As of December 31, 2009, the Firmmanaged assets of $5.3billion.

Gluskin Sheff became a publicly tradedcorporation on the Toronto Stock Exchange (symbol: GS) in May 2006 andremains 65% owned by its seniormanagement and employees. We havepublic company accountability andgovernance with a private company commitment to innovation and service.

Our investment interests are directly aligned with those of our clients, asGluskin Sheffs management andemployees are collectively the largestclient of the Firms investment portfolios.

We offer a diverse platform of investmentstrategies (Canadian and U.S. equities, Alternative and Fixed Income) andinvestment styles (Value, Growth andIncome).1 The minimum investment required toestablish a client relationship with theFirm is $3million for Canadian investors and $5million for U.S. & Internationalinvestors.

PERFORMANCE$1million invested in our Canadian ValuePortfolio in 1991(its inception date) would have grown to$15.5million2 onSeptember 30, 2009 versus$9.7 millionfor the S&P/TSX Total Return Index

over the same period.$1million usd invested in our U.S.Equity Portfolio in 1986(its inceptiondate) would have grown to$11.2millionusd 2 on September 30, 2009 versus$8.7 million usd for the S&P 500 TotalReturn Index over the same period.

INVESTMENT STRATEGY & TEAM We have strong and stable portfoliomanagement, research and client serviceteams. Aside from recent additions, ourPortfolio Managers have been with theFirm for a minimum of ten years and wehave attracted best in class talent at all

levels. Our performance results are thoseof the team in place.

We have a strong history of insightfulbottom-up security selection based onfundamental analysis.

For long equities, we look for companies with a history of long-term growth andstability, a proven track record,shareholder-minded management and ashare price below our estimate of intrinsic

value. We look for the opposite inequities that we sell short.

For corporate bonds, we look for issuers with a margin of safety for the paymentof interest and principal, and yields whichare attractive relative to the assessedcredit risks involved.

We assemble concentrated portfolios our top ten holdings typically representbetween 25% to 45% of a portfolio. In this

way, clients benefit from the ideas in which we have the highest conviction.

Our success has often been linked to ourlong history of investing in under-followed and under-appreciated smalland mid cap companies both in Canadaand the U.S.PORTFOLIO CONSTRUCTION

In terms of asset mix and portfolioconstruction, we offer a unique marriagebetween our bottom-up security-specificfundamental analysis and our top-downmacroeconomic view.

Page 11 of 12

Our investment interests are directly aligned with those of our clients, as GluskinShe ff s management and employees are collectively the largest client of the Firms investment portfolios.

$1 million invested in ourCanadian Value Portfolio

in 1991 (its inceptiondate) would have grown to

$15.5 million 2 on

September 30, 2009versus $9.7 million for the

S&P/TSX Total ReturnIndex over the sameperiod.

For further information, please contact questions@gluskinshe ff .com

Notes:Unless otherwise noted, all values are in Canadian dollars.1. Not all investment strategies are available to non-Canadian investors. Please contact Gluskin Sheff for information specific to your situation.2. Returns are based on the composite of segregated Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses.


12/12


IMPORTANT DISCLOSURES

Copyright 2010 Gluskin Sheff + Associates Inc. (Gluskin Sheff). All rights

reserved. This report is prepared for the use of Gluskin Sheff clients andsubscribers to this report and may not be redistributed, retransmitted ordisclosed, in whole or in part, or in any form or manner, without the expresswritten consent of Gluskin Sheff. Gluskin Sheff reports are distributedsimultaneously to internal and client websites and other portals by GluskinSheff and are not publicly available materials. Any unauthorized use ordisclosure is prohibited.

Gluskin Sheff may own, buy, or sell, on behalf of its clients, securities of issuers that may be discussed in or impacted by this report. As a result,readers should be aware that Gluskin Sheff may have a conflict of interestthat could affect the objectivity of this report. This report should not beregarded by recipients as a substitute for the exercise of their own judgmentand readers are encouraged to seek independent, third-party research onany companies covered in or impacted by this report.

Individuals identified as economists do not function as research analystsunder U.S. law and reports prepared by them are not research reports underapplicable U.S. rules and regulations. Macroeconomic analysis isconsidered investment research for purposes of distribution in the U.K.under the rules of the Financial Services Authority.

Neither the information nor any opinion expressed constitutes an offer or aninvitation to make an offer, to buy or sell any securities or other financialinstrument or any derivative related to such securities or instruments (e.g.,options, futures, warrants, and contracts for differences). This report is notintended to provide personal investment advice and it does not take intoaccount the specific investment objectives, financial situation and theparticular needs of any specific person. Investors should seek financialadvice regarding the appropriateness of investing in financial instrumentsand implementing investment strategies discussed or recommended in thisreport and should understand that statements regarding future prospectsmay not be realized. Any decision to purchase or subscribe for securities inany offering must be based solely on existing public information on suchsecurity or the information in the prospectus or other offering documentissued in connection with such offering, and not on this report.

Securities and other financial instruments discussed in this report, orrecommended by Gluskin Sheff, are not insured by the Federal DepositInsurance Corporation and are not deposits or other obligations of anyinsured depository institution. Investments in general and, derivatives, inparticular, involve numerous risks, including, among others, market risk,counterparty default risk and liquidity risk. No security, financial instrumentor derivative is suitable for all investors. In some cases, securities andother financial instruments may be difficult to value or sell and reliableinformation about the value or r isks related to the security or financialinstrument may be difficult to obtain. Investors should note that incomefrom such securities and other financial instruments, if any, may fluctuateand that price or value of such securities and instruments may rise or fall

and, in some cases, investors may lose their entire principal investment.

Past performance is not necessarily a guide to future performance. Levelsand basis for taxation may change.

Foreign currency rates of exchange may adversely affect the value, price orincome of any security or financial instrument mentioned in this report.Investors in such securities and instruments effectively assume currencyrisk.

Materials prepared by Gluskin Sheff research personnel are based on publicinformation. Facts and views presented in this material have not beenreviewed by, and may not reflect information known to, professionals inother business areas of Gluskin Sheff. To the extent this report discussesany legal proceeding or issues, it has not been prepared as nor is itintended to express any legal conclusion, opinion or advice. Investorsshould consult their own legal advisers as to issues of law relating to thesubject matter of this report. Gluskin Sheff research personnels knowledgeof legal proceedings in which any Gluskin Sheff entity and/or its directors,officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based onpublic information. Facts and views presented in this material that relate toany such proceedings have not been reviewed by, discussed with, and maynot reflect information known to, professionals in other business areas of Gluskin Sheff in connection with the legal proceedings or matters relevantto such proceedings.

Any information relating to the tax status of financial instruments discussedherein is not intended to provide tax advice or to be used by anyone toprovide tax advice. Investors are urged to seek tax advice based on theirparticular circumstances from an independent tax professional.

The information herein (other than disclosure information relating to GluskinSheff and its affiliates) was obtained from various sources and GluskinSheff does not guarantee its accuracy. This report may contain links tothird-party websites. Gluskin Sheff is not responsible for the content of anythird-party website or any linked content contained in a third-party website.Content contained on such third-party websites is not part of this report andis not incorporated by reference into this report. The inclusion of a link inthis report does not imply any endorsement by or any affiliation with GluskinSheff.

All opinions, projections and estimates constitute the judgment of theauthor as of the date of the report and are subject to change without notice.Prices also are subject to change without notice. Gluskin Sheff is under noobligation to update this report and readers should therefore assume thatGluskin Sheff will not update any fact, circumstance or opinion contained inthis report.

Neither Gluskin Sheff nor any director, officer or employee of Gluskin Sheff accepts any liability whatsoever for any direct, indirect or consequentialdamages or losses arising from any use of this report or its contents.

Page 12 of 12

jobs report review - rosenberg feb 5 2010

Documents