Sense on Cents

***Meredith Whitney is indicating that despite the fact that banks raised $805 billion in capital in 2008 and had $125 billion injected via the TARP, the banking system will need to raise more capital in 2009. This is a clear signal that losses have not yet been recognized along with the likelihood that new losses are being incurred. A regional investment bank, Friedman Billings, believes the banking system needs $1.2 trillion in FRESH capital.

***It’s purely my speculation, but I would be willing to bet funds from “How Bernie ‘Madoff’ with $50 Billion” may have actually been directed to other hedge funds. If that is, in fact, the case the Ponzi scheme that started at Madoff may in turn spread. The fact that so many funds “put up the gates” which prevented investors from withdrawing funds is a very telling indication that this may have occurred. Some funds may have very legitimately utilized that approach and some may have not.

The widely anticipated employment report was released this morning at 8:30AM. Let’s dive right into the numbers and then decipher them:

Unemployment Rate: increased from 6.7% to 7.2% versus a consensus estimate increase to 7%. One must understand, though, that the actual unemployment rate ONLY tracks people out of work who are looking for work. If we were to incorporate discouraged workers, those out of work who have given up looking, then one of every ten workers in our country are currently unemployed. With a total workforce of approximately 175 million people and projections that the unemployment rate will move up another 1-3%, our economy is likely to lose another 3 million jobs!!

Non-Farm Payroll: (for those who do not traditionally track these stats, the NFP tracks the actual number of jobs gained or lost in the economy): for the month of December 2008, the economy lost 524k jobs versus consensus estimate of 525k. One may think the soothsayers had it right with their estimated call. However, both October’s and November’s NFP numbers were revised downward by 103k and 51k respectively. Thus, over the last three months of 2008 the U.S economy lost a total of 1.431 million jobs!!!

For all of 2008 the economy lost a total of 2.6 million jobs. That is the greatest number of jobs lost since 1945.

The average numbers of hours worked fell by .2%. With more workers being laid off one may think the remaining workers may have actually had to work longer hours. Not the case. What this number indicates is that employers are looking to curtail expenses. With less hours worked, wage earners will have less income thus less consumption. Given the way that money flows through our economy, less consumption ultimately means a likely increase in closing of retail shops, an increase in commercial vacancies, further depression of commercial property values, an increase in chargeoffs for banks holding loans on those properties, and thus an increase in banks “hoarding cash” against those expected writeoffs. All of this is the exact reverse of the “originate to distribute model.”

There were marginal increases in employment in three sectors: government, healthcare, and education.

Market reactions to these numbers have been generally muted. Most sectors of both the equity and bond markets were initially flat, indicating that these numbers may have been priced in to the market. The equity markets then moved down 1-2%. As the treadmill continues and we are running in place currently, I ask myself from a risk reward scenario whether I see positives to allocate capital to the market. Do I believe we will see a quick and positive impact to the economy from the government stimulus? Will the injected capital jumpstart businesses? Will consumers spend?

Virtually every Wall Street wizard is indicating that people should be adding to equity exposure at this time. I view that as “talking one’s position,” meaning those individuals earn fees by having more money under management. My answers range from an outright “No” in regard to the consumers to a definite maybe for a few select companies (those focused on infrastructure, such as Caterpillar). In summary, I see no reason to change any of my thoughts or calls on the markets that I made in my piece, “Time, Why You Punish Me.” I recommend people stay on the sidelines and continue to work at managing their own finances, primarily by getting expenses down.

Any questions, thoughts, criticisms, or concerns, please do not hesitate to write.

LD

This entry was posted on Friday, January 9th, 2009 at 10:04 AM and is filed under Bailout, Economy, Meredith Whitney, TARP, Unemployment, Wall Street. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.