May 6, 2011
“The hardest thing in the world to understand is the income tax.”-Albert Einstein
Equity markets are getting a strong bid this morning after a much better than expected increase in nonfarm payrolls, which rose by 244k vs. expectations of 185k. Private payrolls were the driver, rising by 268K, while government payrolls declined again by 24K. Companies such as Norfolk Southern and McDonald’s (which hired 50K new employees last month) contributed to the rise. The unemployment rate rose during the month from 8.8% to 9.0% as more job seekers reentered the market. The household survey showed a decline in employment by 190K as the share of the population in the labor force fell to 58.4% from 58.5% last month.
Commodities took a nasty correction yesterday after Jean Claude Trichet commented that they would be leaving rates unchanged this week after raising them last month. The decision caught the markets off-guard, leading to a significant decline in the Euro and commodities and a surge in the dollar from its lowest level ever. Oil fell by over $12 (see chart below). There has been concern for a number of weeks that commodity prices, especially oil and silver, had moved well past their fundamentals.
Speaking of the dollar, it has now lost 50% of its value since 1985. Typically a weaker currency helps exports, yet America still runs the world’s largest trade deficit. “And America’s creditors are having to cope with the unappealing combination of holding low-yielding Treasury bonds in a depreciating currency” said Forbes magazine.
Sounding a lot like his anti-regulation predecessor, Ben Bernanke commented on the implementation of Dodd-Frank by saying “No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit. Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”
Reuters reported that Goldman Sachs is aggressively lobbying against implantation of the Volcker Rule, which restricts proprietary trading. The company is reportedly meeting with members of Congress, regulators, and the White House, all occurring during a time when their Chairman is being investigated for perjury related to his testimony in front of a Senate investigatory committee.
I don’t know how President Obama’s presidency will be viewed by future historians, but in my view there are two important accomplishments to date. The first is obviously finally finding and terminating Public Enemy #1. The second, a bit more obscure, is the Justice Department’s inquiry into the BCS and college football’s bizarre way of determining a champion. If Justice is successful in forcing the NCAA to adopt a playoff format, one of the great injustices in sports will finally be rectified.
The Wall Street Journal is reporting that the cost advantage of outsourcing to emerging economies is waning. While modest to date, American companies may begin moving more jobs back to domestic markets as rapid wage increases in China and currency movements (see dollar comments above) make it more economical to produce domestically. This would be a welcome outgrowth of 25 years of a declining dollar.
APAC markets were weak last night in reaction to the weak commodity markets. The Nikkei and Kospi both fell 1.5%, ASX 0.2%, Hang Seng 0.4%, and Shanghai 0.3%.
The Lakers are in Dallas this weekend, hoping to avoid an end to their season.
Have a great weekend and Happy Mother’s Day.