This week we take a look at what value really means, and I offer a few thoughts on the recent employment numbers. They may not be what you think.
I am taking a little R&R this weekend, and have asked my friend Lynn Carpenter who is the editor of the Fleet Street Letter and The Optionist to give us her thoughts on value investing. It is a wise and witty essay, and I commend it to you.
But first, let me make some brief comments on the recent employment numbers. The market went crazy on Friday as the Bureau of Labor Statistics told us 308,000 new jobs were created, far beyond the expectations of even the most wild-eyed optimists. As an aside I should note the futures market went crazy about 90 minutes before the announcement of the official figures, as S&P futures were up big and fast before anyone supposedly saw the numbers. Now, the Fed, the White House and various relevant agencies saw the report the evening before, as well as the guys at the BLS. I am sure no traders got to see an early "hint." It must have been some optimistic traders starting a trend and then someone wondering what they knew and then some program trading kicking in, with the momentum guys all jumping on the bandwagon. These things can happen. It is just that they don't usually happen 90 minutes before a BLS announcement, many of which have been quite disappointing in recent months.
Even so, inquiring minds would like to see a print of the tape and know who was buying and why. If it was innocent, it was a gutsy call. But that doesn't tell us anything about the underlying employment numbers.
Employment Games and Other Silly Statistics
I remember seeing the BLS report headlines flash across my screen and thinking, "Finally, some good news. About time." Ever the optimist, I should have waited a few hours. Bill King sent this note out to his readers:
"We have never seen such a grossly misinterpreted Employment Report in our 30 years in this biz...
"...About release of the report, we immediately noticed some huge red flags. How could non-farm payrolls explode 308k when a) the unemployment rate increased to 5.7%; b) wage growth was less than expected at 0.1%; c) the "employed population ratio" actually FELL to 62.1% from 62.2%; d) the "employment participation rate" was unchanged at 65.9%; e) total employment was unchanged at 138.3m and most importantly f) the average workweek fell 0.1 to 33.7, which is near a 40-year low (33.5)!
"When dissecting the numbers we learned that NSA (non-seasonally adjusted) service job wages fell 8 cents and they accounted for 230k of the 308k job growth. Leisure & hospitality wages NSA fell 4 cents; and NSA avg hours worked fell 0.3. Something is obviously wrong. Healthcare contributed 36k jobs, leisure & hospitality 28k, retail 47k, government created 31k and the phantom jobs estimated to be created by small business was 153k! This is now known as the business birth/death rate. Apparently a large number of workers entered the workforce in order to force the unemployed rate higher, but still something seemed incredibly wrong."
Lacy Hunt of Van Hoisington Management tells us what the "wrongness" is (as did several others on Monday, after digging through the data over the weekend. Of the 308,000 jobs created, 296,000 are temporary or part-time jobs! "In March, the number of persons who worked part time for economic reasons increased to 4.7 million, about the same level as in January. These individuals indicated that they would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs."
Wages and hours fell slightly, which is not consistent with out-sized job growth. Certain figures in the statistics just don't add up. Again from Bill King: "In the Employment report there is this illumination in Table A-7: 'NOTE: Detail shown in this table will not necessarily add to totals because of the independent seasonal adjustment of the various series. Beginning in January 2004, data reflect revised population controls used in the household survey.' So we checked to see why the caveat. 'More unemployed' increased 182k; but in the table, men age 20+ saw unemployment increase 182k. Women age 20+ had a 142k increase in unemployment. That totals 346k more unemployed by real math, but not BLS seasonally adjusted math. http://www.bls.gov/news.release/empsit.t07.htm
But on the bright side, the usually reliable TrimTab looks at the same figures and think BLS doesn't know how to add. Applying a year-over-year methodology, TrimTab says non-farm employment actually increased by 519,000 employees, representing an improvement of 211,000 jobs over BLS data.
The January and February employment numbers were also revised upwards by a total of nearly 90,000 jobs. The job gains came primarily in the construction sector, which added 71,000 jobs reflecting strong demand for new housing, and the retail service sectors. March marked the first month since August of 2000 that there were no job losses in the manufacturing sector.
So, who's right? The optimists or the pessimists? If you are looking for the monthly BLS survey to tell you, I think you are wasting your debating time. The numbers are estimated, based upon a "survey," seasonal adjustments and a host of guessing games. Again, these are estimates which will inevitably be adjusted as real numbers begin to show up a lot later. The staff at the BLS does yeoman work, and I believe they sincerely do their best, but latest month reports are subject to fluctuations due to assumptions. We all know the old line about what assumptions can do.
Remember, we are looking at very small percentages in estimating the employment rate and the number of jobs created. There are 147,000,000 some odd workers in the US. 308,000 jobs is 0.2% of total jobs. Lately, the normal move is less than 1/10 of 1%. Do you really think they are anywhere near that accurate on a most recent month basis?
The value of the report is to see the trends over longer periods of time. The trends are clearly getting better than last year. Should we get excited (or distraught) over any one month's report? Probably not. Leave that nonsense for the politicians.
But the trends also show job growth weakness as compared to previous recoveries. This recent report suggests a new trend may be starting, one which is consistent with the weakness in job growth. Remember when I wrote a month or so ago that there were large numbers coming to the end of their welfare checks starting in the first quarter? There was a significant increase in the number of people looking for work in this most recent report. Coincidence? I think not. Evidently they decided it was better to get part-time or temporary jobs than remain without any income. I personally know that lack of money can clarify your priorities. That may be the lesson to take from this report and one which bears watching, to see if there is a new trend being started here: part-time and temporary work on the rise. Such is not the stuff of legendary recoveries, nor contented voters.
Also, I suspect, but have no statistical proof (although reasonable anecdotal evidence exists), that many companies are hiring "temporary" workers because such workers do not come with health and other benefits, nor do they bring a rise in unemployment insurance if they leave.
The bond market went into full retreat on these numbers, thinking the Fed will soon be able to raise rates. This data does nothing to suggest the Fed is going to feel free to move any time soon. Indeed, I exchanged a few emails with Greg Weldon on that note, and he wrote back:
"THE source of strength ... Part-Time for Economic Reasons ... Up Huge, enough to suggest Full-Time jobs contracted, and a thought FULLY supported by the disinflationary Earnings and Aggregate Hours figures...Let alone the new HIGH in Number Wanting a Job ... and rise in Unemployed More than 27 Weeks ...AND ... DROP in Employment/Population Ratio. Hardly enough to 'budge' the Fed."
There are some monthly statistics from government sources that I think are reliable and meaningful. I would pay attention and adjust investment and trading strategies based upon them. But trading or investing based upon the most recent household employment survey? I leave that to those with more seasonally adjusted intuition. Or to those who get early hints.
Again, trends in the statistic can give us some clues, but monthly numbers are there to be gamed by the fast and nimble. If you are not in that crowd, I suggest you not play the game.
