ON THE FOUNDATION OF GREEN SHOOTS

HOPE SPRINGS ETERNAL

Long-time former editor of Barron's, Alan Abelson, has always had a way with words.  This weekend he does it even better than usual, talking about the current  ebullience in the stock markets, in a piece entitled "A Surge in Botanists":

"...not only are things getting worse more slowly, but equally as important in the remarkable revival of euphoria is that investors en masse, taking a leaf from Federal Reserve Chairman Ben Bernanke, have become budding botanists, able to espy green shoots of recovery in virtually every compost pile..."

He then goes on to add,

"PERHAPS THE MOST ELOQUENT expression of how delusional Wall Street has become was its response to Friday's report on what happened to employment -- or, more importantly, unemployment -- in April. Payrolls shriveled by 539,000, less than the 550,000 to 600,000 guesstimates of the seers as well as March's initial tally of 633,000. That was enough for the choristers to start humming Happy Days Are Here Again.

A slightly more careful look suggests rather emphatically that they're not. The unemployment rate extended its doleful rise, hitting 8.9%, the highest level since 1983. The jobless ranks have swollen by 5.7 million since the recession got underway in December 2007, and there are now 13.7 million people out of work.

Moreover, our favorite measure of unemployment -- favorite because we think it a truer gauge -- is the Bureau of Labor Statistics' U-6, which includes the likes of workers laboring part-time because they can't land full-time jobs, rose to a fresh peak of 15.8%. That means 24.7 million people are effectively unemployed. It's a figure that doesn't get too much notice -- maybe it's just too depressing -- but it should.

For that matter, bad as it is, 539,000 doesn't do justice to the severity of the payroll shrinkage. For one thing, it was puffed up by the 72,000 federal census takers signed on by Uncle Sam. And for another, it includes 226,000 supposed jobs, or 60,000 properly adjusted, courtesy of what David Rosenberg calls the Alice-in-Wonderland birth/death model. Ex this pair of extraordinary items, he points out, the headline number would approach 670,000.

In one of his valedictory scribblings (David's leaving Merrill Lynch and returning to the glories of his native Canada and money management), he also notes that private-sector employment sank by 611,000 in April, and did so across a wide swath. "The data," he contends, "just don't square with the conventional wisdom permeating the investment landscape."

And then finishes it off with this bit on another way to look at "green shoots" going forward:

"Looking ahead, David scoffs at the idea that the "jobs data are about to get better because the markets have enjoyed a nice two-month rally." Among the reasons he's skeptical: the still record-low workweek, at 33.2 hours; the 66,000 downward revision to the back data (which, he avers, tends to feed on itself); the 63,000 slide in temp-agency employment; and the high levels of both initial and continuing jobless claims.

All of which, he believes, foreshadow a further 550,000 payroll plunge when the May data roll out early next month.

To David, as to us, the present buoyant mood on the Street is obviously more the result of rose-colored glasses than of green shoots."

One must always try to be an optimist, but not forget to also be a bit of a pragmatist, and not over-shoot on green shoots.

* Image source.

Comments

[Alex Tolley]

The glass is always half-full for Abelson. In this case however, I have to agree with the bearish sentiment. The market has rallied nearly 2000 points from it's low, but the question is, what is fair value? So far it looks as if there is little assumption of reduced earnings. This seems strange given the reduction in outstanding credit and the failure of huge M0 injections to reinflate it, plus the continuing impact of falling house prices, bankruptcies and recessionary unemployment. Is there any chance the rally is just the M0 being diverted to securities rather than credit? I'd love to see some analysis of money flow to get a handle on this.