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Review of Employment Report and Markets 11/7/08

Posted by Larry Doyle on November 7, 2008 4:50 PM |

The highly anticipated October employment report came in as follows:

unemployment rate 6.5% up from 6.1%
non-farm payrolls -240k jobs vs consensus estimate of -200k
September revision a loss of 284k jobs from initial estimate of 159k!
Labor costs +3.5% year over year

Jobs were lost in virtually every sector: manufacturing, construction, and especially the service sector, which had been the sector that provided job strength over the last few years.

In summary, there is nothing to like about this report and it is likely to get worse. Estimates on unemployment rate range from 7% to 9% by the middle of 2009.

Read more here on how the “Economy Sheds Jobs.”

Goldman Sachs, which had the most accurate call on the employment report, is now calling for a -3.5% GDP for 4th qtr 2008 and a -2% for 1st qtr 2009.

Also: The market expects a .50 cut in the Fed Funds rate in December to an overall rate of .5%.

This call leads us to wonder whether we are going to move into a Japanese-style economy from the 1990s in which lending rates were literally 0 but savings were still very significant and borrowing anemic. Banks did not fully recognize losses. Inflation was not an issue given that borrowing needs were non-existent. This scenario is not the case here in the United States since our deficit borrowing will be enormous!!

Equity markets are expected to open flat to slightly higher this morning. Actually those markets opened up app 1% and got as high as 2.5% but have come back down to +1% after the GM earnings. (11:30 am).

Bonds are lower with rates up by app 8-10 basis points.

Commodities are mixed with early call on gold up 2-3% but copper is lower … again … oil also looks like it will open slightly lower but moved higher in sync with the overall market.

The auto situation continues to receive a lot of focus. The “cash burn” rate for Ford and GM is between 2-3bln a month.

The Big 3 are asking for 50bln in capital to address health care costs and liquidity … expect them to get it from Uncle Sam with Uncle Sam taking warrants in the companies … all that said, indications are that the auto companies will have layoffs and cost cuts wherever possible. Ford posted earnings of -$1.31 per share vs expectations of -.93. GM posted earnings (how is it that they are called earnings when in fact they are losses?!) of -$7.35 per share vs expectations of -$3.94. This GM situation is truly dire.

Read more here how “Ford Plans More Cuts.”

All the focus on bank lending really needs to focus on the ability of the banks and brokers to “sell” those loans (mortgages, auto loans, credit card loans, et al) to investors through the “securitization” process.

Investors are very cautious and have little appetite at current rates to buy these loans. Given that lack of demand, banks are not willing to lend. Ultimately rates for these products need to move higher to attract investors.

The idea that Freddie and Fannie will be the buyer of last resort for these mortgages is a movie that we have seen before and it has a very bad ending.

Read more here on how “JP Morgan’s Illiquid Assets Rise.”

Speaking of Fannie: Expect a RECORD loss when they post 3rd qtr earnings.
Another situation that bears watching is AIG … they are trying to sell divisions to repay Uncle Sam but are meeting with little demand currently or buyers are very cautious as they can’t get financing for the purchase.

With all of the government intervention currently and more intervention expected, it is not a stretch to say that as taxpayers we are all investors in the biggest multi-strategy hedge fund in the world. Problem is, I think that our “investment” may in many circumstances be like that roach motel. We can get it, but just how the heck do we get out …??

Last but not least … Warren Buffett purchased preferred stakes in Goldman Sachs at 125 with a 10% dividend and warrants to purchase more at 115 … Goldman closed yesterday at app 81 … yes down 35% from Buffett’s purchase … Buffett did the same trade with General Electric when GE was at 22.25 … GE closed yesterday at 18.3 … yes down app 20% … Warren is smart but he has the luxury of time and excess cash … those investments were made in late September.

I caution you from focusing too much on the day-to-day swings in the markets and continue to assess the trends in the economy. Bounces are temporary. Markets correct by price and time.

Granted we have had app a 40% correction in price, but we will likely now suffer from either more price corrections or a market that at best “treads water” thus a time correction.

We hope you had a Happy Friday!!

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