Wayne Wile: US Jobs Data Beginning to Buckle?

The one thing the Federal Reserve keeps pointing to as its justification for normalizing interest rates is the improvement in the jobs market and especially the declining unemployment rate. Readers will be familiar with the fact that I am sceptical of the data. But leaving that issue aside, it looks like the data may be heading down.

Weekly initial jobless claims are starting to rise. The last three weekly reports show a 9.1% surge in jobless claims. Here is today’s:

Released On 3/31/2016 8:30:00 AM For wk3/26, 2016

Prior Consensus Consensus Range Actual
New Claims – Level 265 K 266 K 260 K to 275 K 276 K
4-week Moving Average – Level 259.75 K 263.25 K
New Claims – Change 6 K 11 K

This data is important because it is used to adjust the calculation of the monthly employment report. The March report will be released tomorrow. In the past, when the trend of lower initial jobless claims has reversed, it has been a good leading indicator of a slowing economy and job market.

There is more. Challenger, Gray & Christmas, Inc. the Chicago-based global “outplacement and career transitioning firm” (they fire people for big companies) also reported today a significant jump in layoffs for the first quarter of this year. In Q1, employers announced 184,920 job cuts, up 31.8% from Q1 of 2015, the worst start to a year since 2009. The trend seems to be accelerating as Q1 2016 cuts were up 75.9% from Q4 2015 when ‘only’ 105,079 layoffs were announced.

The bad news is not confined to the oil industry. The Challenger, Gray & Christmas report says that “announcements have increased significantly” in retail and computers. Tomorrow’s much watched monthly employment report could turn out to be a big negative surprise.

Wayne Wile, Business Sales and Inventories Predict a Big Flush

You may remember, dear reader, that I have called a bear market for equities. How am I doing so far? Well, the S&P 500 is up 13% from its February 11th intra-day low (1812). That sure doesn’t look good, does it? But I’m still convinced I’m right. I haven’t shorted the market yet, and won’t until the S&Ps break that February low. So this rally hasn’t hurt me, it’s just annoying to have to wait.

Maybe Wall Street still has inventory to unload, as David Stockman says.

The signs of an impending flush are now everywhere. The March 15 release of business sales for January, for example, showed another down month. The critical inventory-to-sales ratio for the entire economy is now at 1.40—–a ratio last recorded in May 2009.

Here’s the chart from Zero Hedge:

Business Inventories

Once upon a time, when I was a young lad, investors used to watch the real economy, not the latest Fed head jabbering on CNBC. One of the things we paid keen attention to was the inventory-to-sales ratio because we knew that’s where recessions came from, and recessions were not good for the stock market.

When sales slow down, inventories build up. The build in inventories actually continues to boost GDP because the supply chain hasn’t got the message yet. When they do, they stop producing as much, inventories fall faster than sales and the GDP falls, giving us an official recession…ALWAYS after the fact. Those who watch GDP, like most economists, totally miss the boat. They never call the recession before it starts because they follow their models and not the real economy. Only highly intelligent and educated people can be this stupid, as I am fond of saying.

Business sales as reported on March 15 were down by 5.1% from their July 2014 peak. Declines of this magnitude have occurred only twice since 1992 and both times they signalled a recession.

Here is the chart of total business sales for all levels of the economy. Is this hard to understand?

FRED

The shaded areas mark recessions.

If you haven’t sold your stocks yet, the gods of the markets are giving you another chance, just an eyelash below the all-time highs. Accept the gift, dear reader, accept the gift.

Wayne Wile, No Recession? Explain this.

The US Fed and all the conventional economists say the chance of a US recession is in single digits. Then why is foreign trade imploding?

Newly-released data shows Chinese exports fell 25.4 percent during the month of February compared to a year ago while Chinese imports fell 13.8 percent compared to a year ago.  For Chinese exports, that was the worst decline that we have seen since 2009 while Chinese imports have now fallen for 16 months in a row on a year-over-year basis. 

China accounts for more global trade than any other nation (including the United States), so this is a major red flag.  Anyone saying the global economy is in “good shape” is clearly not paying attention.

China Exports

What does this have to do with a US recession, you might ask? The US is China’s largest export market. Exports to the US fell 23.1% year-over-year in February compared to -9.9% in January. Does this tell you something about the health of the US consumer? I think so. Anyone here own Walmart?

I don’t know how anyone can dismiss the importance of these numbers.  As you can see above, this is not just a one month aberration.  Chinese trade numbers have been declining for months and that decline appears to be accelerating. Donald Trump will tell you that China is manipulating its currency to increase its exports and take American jobs. Really? They don’t seem to be doing a very good job of it.

Wayne Wile, The Earnings GAAP

Readers will be familiar with my view that we are now in an earnings recession—year-over-year S&P500 earnings are now down three quarters in a row and I’m confident we are headed for more.

But there is a second earnings issue besides the slope of the trend that bothers me just as much. The accounting profession has something called GAAP—Generally Accepted Accounting Principles–which set the standards for how earnings are calculated. GAAP has rules about recognizing revenue, what is expensed, depreciation, tax reporting and so on. The result is a final number that can be compared against the past and against other companies.

At the end of every boom (like now), these standards are increasingly ignored in favor of reporting non-GAAP earnings. What are non-GAAP earnings? The short answer is just about anything you want. Or as one accountant friend puts it, “earnings without the bad stuff”. And at the end of every bust, companies get religion and go back to GAAP to try to win back the confidence of investors. But in the meantime, Wall Street analysts go along with non-GAAP reporting because it makes everyone feel good.

What bad stuff gets left out? Well, stock based compensation for one; it should be expensed as compensation but often is not. Or inventory write-offs and plant closings which seem to happen every year but are slipped out of the earnings calculation as so-called non-recurring items.

How bad is it? The gap between GAAP and non-GAAP has never been wider. Total non-GAAP EPS for the S&P500 are expected to hit $118 for 2015. At an S&P of 1940, $118 implies a P/E multiple of 16.5x.

Now look at GAAP earnings. Using standardized I/B/E/S GAAP earnings (Institutional Brokers’ Estimate System) which excludes pro-forma write offs, add backs, non-recurring items and countless other misleading numbers, you get total S&P500 earnings for 2015 of just $91.5 rather than $118, the lowest S&P500 GAAP earnings per share since 2010. This results in a GAAP P/E above 21, the highest since the financial crisis.

GAAP

So what is going on here? The growing decline in earnings is being hidden from you. The blue bars tell the tale. At some point, the overstatement of earnings will become clear. It will not be a good day for shareholders.