Was the October Jobs Report Really as Weak as it Appeared?

Seasonally Adjusted Non-Farm Jobs Change 2013-Present:  Comparison between Griz Method/Simple YoY and BLS Monthly Reports

Source Data:  BLS

Total Nonfarm 2016-11. xlsx

Tot Empl Chng, Seas Adj 2016-11

The October jobs report showed a top line non-farm employment gain of a weak 161k.  But how real is that number.  It certainly refutes my call of well over 200k to be reported.  I hope everyone is expecting huge job reports for October, November and December  Or does it?  Let's look closer.

First the September upward revision to the seasonally adjusted data was huge, from 156k to 191k, and the August 2nd revision up was 9k.  What this means is the September number is up 44k from what was originally reported, since you need to sum the two latest revisions, 9k+35k=44k   Looked at another way the October report showed 144.747MM jobs in September, and the latest report shows 144.791MM jobs for a difference of 44k.   So if we assume October eventually gets a big revision treatment getting the gain closer to 200k as recent trends suggest, that means 200k+44k in revisions gets very close to the 250k+ gain I predicted.  Certainly a 44k upward revision for September was huge and unexpected.

But let's dig even deeper.  Let's actually look at the revisions to the non-adjusted data set.  What we find is the August jobs total was actually adjusted DOWN 3k, while September was adjusted up a whopping 86k.  So if we take the originally reported seasonally adjusted number of 156k and add 86k, that totals 242k.  Which again lines up with my general call of very large months coming.

What does this mean for the future?  My data indicates about 288k jobs are still banked--that haven't shown up in the official seasonally adjusted reports.  However, there is a bit of a wild card.  What is unknown is how real the October number was.  If it is fairly accurate, it indicates hiring in October was very weak at only about a 186k monthly pace, down from about a 205k average the last few months.  So either the October data is foreshadowing very bad things to come, which the weekly unemployment reports are not confirming, or we can expect big numbers to come.  I expect a huge revision upward for October, and possibly a big September revision as well.  November could come in anywhere from 160k to 300k.  But the general theme will be big trailing month revisions and very good chance of a surprising November report.

I hope everyone is expecting huge job reports for October, November and December

Seasonally Adjusted Non-Farm Jobs Change 2013-Present:  Comparison between Griz Method/Simple YoY and BLS Monthly Reports

Source Data:  BLS

Total Nonfarm 2016-10. xlsx

For awhile now I've been showing how wild the monthly BLS seasonally adjusted jobs reports are.  I've said the timing of bad reports has done a great job of holding down interest rates, and the inevitable makeup reports have done an equally good job of pumping up stocks.  The latest cases occurred this summer and fall, with good reports pumping stocks, and then bad reports tabling rate hikes until December after the election.  How convenient!

The chart above shows the official monthly job gain was very low the last two months.  So it is apparent make up reports are on the way just by looking at it.   However, some math and deeper analysis confirms this.

First some basics.  The Griz method/YOY method of seasonal adjustment, moving averages, and moving averages from the seasonally adjusted data set all point to annual job gains pace of 2.4 million or 200k/month.

I decided to look at the BLS seasonally adjusted data set a bit closer to see if there was a way to predict coming reports a little better.  So what I decided to do a 12 month summation of the reported monthly gains.  This really does the same thing as a 12 month moving average, but it provides a table that provided additional insight into how this mathematically works.  What I found is that each month, is that the sum of the most recent 12 month gains lines up relatively closely with they YoY change from the nonadjusted data set.  Makes sense.  However, the summation can vary up to +/-5% from the YoY number.  5% error is about 120k on 2.4 million, large but not so large that it is always obvious without specifically looking.  It could mean BLS reports 190k monthly gains instead of 200k.  What is also glaring is this 5% error is far less than the wild variations that take the reports into the low to mid 100k range and near 300k some months, when it is pretty clear the numbers have really been in the 200k-240k range.

So What is Coming  

Using the table of 12 month summations shown below it becomes somewhat trivial to predict the coming months reports assuming recent hiring trends remain basically intact.  At this point based on weekly jobless claims that seems to be the case.

Table of 12 Month Job Gain Summations using BLS Monthly Reported Seasonally Adjusted Gains (In 1000s of jobs)  

Data Source:  BLS

Total non farm, adj 2016-10.xlsx

Looking at the table we can see the 12 month summation for October 2016 is 2.152 million which includes 0 gains for October which hasn't been reported yet.  So if we assume the real trend is around 2.4 million like it has been for the last 5 months, that means BLS needs to report a 291k gain to get the numbers to line up exactly with reality/the Griz method/make the long term averages right.  If we factor in potential skewing and other random factors from the BLS, the likely range for October is 250k-300k.  Far above expectations with August and September reported around 160k.

Then if we apply a 291k gain for October, the expected reported gain for November should the trend hold is about 287k.  Including 287k for November then predicts a 271k reported gain for December should the trend hold.

My calculations show that currently about 300k jobs are "banked" due to under reporting in early 2016.  Analysis going into 2015 shows when this "banked" number is close to 300k, a huge report is in store.  These huge reports quickly eat into the bank.  A 300k report would reduce the bank by 80k-100k.  History also shows that as the bank comes down the likelihood of a huge report the next month drops.  So it is really hard to know whether the December report will end up being really big, but it is very likely both the October and November reports will be in the 250k-290k range.

My investment plans are to short treasuries with ETFs and with futures.  I also expect that this will trigger a massive stock correction or even crash to end 2016 and/or start 2017 when rate hikes become apparent and actually are implemented no later than December.  A November rate hike is not out of the question, but I don't think the Fed will do anything to spook markets ahead of the election.

BLS Lies to US Again, 204K Jobs Added in August

Seasonally Adjusted Non-Farm Jobs Change 2013-Present:  Comparison between Griz Method/Simple YoY and BLS Monthly Reports

Source Data:  BLS

Total Nonfarm 2016-9. xlsx

Seasonally Adjusted Non-Farm Jobs Change 2013-Present with 2016 Projections:  Comparison between Griz Method/Simple YoY and BLS Monthly Reports and my projections from June 2016 for monthly gains using the Griz Method and my expectations for the BLS reports.

Source Data:  BLS

Total Nonfarm 2016-6. xlsx

I thought there was a good chance the BLS would sandbag the August job gain number to ensure no September rate hike.  September/October is a historically terrible time for the stock market and a September rate hike certainly wouldn't help that situation.  However, I certainly wasn't expecting the number to be an anemic 151k.  But it just goes to show how hard it is to predict the magnitude and timing of a lie.

So here is some simple math to show what the real seasonal adjusted job gain was for August.  You can look at several of my earlier posts to see YoY non adjusted employment totals that show the annual employment pattern has matched for the last several years justifying simple YoY comparison.
([Aug 2106]-[Aug 2015])/12 = Seasonal Adjusted Gain for Aug 2016
Insert data from BLS not seasonally adjusted data set in thousands
(144424-141973) = 2451 thousand or 2.45 million more jobs in Aug 2016 than Aug 2015.   Divide that by 12
2451/12= 204.25 thousand monthly rate of gain

Again we see massive volatility and variability in the BLS seasonally adjusted number which is intended to remove variability.  But if we look at the data created with the Griz/YoY Method the resulting data is a smooth transition with little volatility.  If we compare my predictions from early June vs. the actual not seasonally adjusted jobs total/Griz Method job gains you get the following comparison.

	Griz Projected	Actual	Error %
June	200	207	-3.30%
July	200	202	-1.07%
August	195	204	-4.53%
Total	595	613.25	-2.98%

Notice my bearish/very conservative estimate for jobs gains made in early June have varied only 4.5% at worst from the actual reported total for the month.  And the worst error is in August, if the recent pattern repeats, August was overestimated and will be adjusted downwards in the coming 2 months.  Still the total error over 3 months is less than 3% in magnitude and will likely improve as adjustments come in.  3% error on a 3 month projection which constituted the absolute low bound is pretty good.  If a high, low and average of the range was predicted for each month you can see that the average would have almost no error from the actual reported data.  

So here is my question?   Why does the BLS monthly report swing so wildly?  Very conveniently it seems to have no guaranteed no stock market killing rate hikes until post election in December or possibly just 2 business days ahead of the election in the first week of November not leaving the markets enough time to crash and potentially derail Democrats chances in the election, given they are running on the strength of the economy.  A crashing stock and bond market doesn't exactly instill confidence in voters.

Also note:  An actual 151k monthly job gain rate is pretty ugly.  Indeed early in the year similar reports did a great job of capping stock market gains and pushed bonds up.  However, today this report is pushing up risky stocks and has treasury rates heading higher, signs of a strengthening economy/market, not one of weakness indicated greatly slowing employment gains.

Prediction:

My data shows about 244k jobs are now "banked" since January 2016 that will be used to over report monthly gains in the next few months.  The reality is job gains are about 200k/month so that means for September, October, November and December the average reported monthly gain is likely to be about  261k-265k.  If they decide to actually spread it out into January or even February, the average "reported" monthly gain for the next 9 months will be about 240k.

BAN Copay Coupons for Drugs NOW!!!

Copay coupons like the ones Mylan offers for EpiPens allows drug companies to use consumers as tools to push insurance companies and therefore consumers to overpay for drugs.  The copay coupon means an insured consumer often pays less "out of pocket" for the more expensive drug.

In the case of EpiPen which sell for $600, in some cases more, the consumer with an insurance plan that only requires copays for drugs or a consumer that has already met a deductible pays zero out of pocket if they have a copay coupon dumping a $500 bill on the insurance company.  Instead of purchasing the $144 generic available at Walmart.
Walmart/GoodRx Adrenaclick $144.62
Lifehacker--Adrenaclick
Of course while consumers think they are tricking the insurance company, we are really tricking themselves since the insurance company just passes the extra cost back to us in higher premiums.

When Massachusetts dropped the ban on copay coupons they were warned that it would cost Massachusetts consumers $100s of millions or even billions in higher drug costs and insurance premiums.  By the looks of how fast drug costs and insurance premiums are rising, those estimates may be low.  Of course that only covers one small state.  Imagine how much this costs when the entire country is included since Massachusetts is only 2% of the population.
http://www.prnewswire.com/news-releases/repealing-brand-drug-copay-coupons-ban-increases-costs-by-750-million-for-massachusetts-employers-unions-and-state-employee-health-programs-159043445.html

http://www.usatoday.com/story/news/politics/2016/06/08/drug-co-pay-assistance-programs-facing-increasing-state-federal-scrutiny/85547788/

I intend to create a list of drugs where the copay coupon has created severe artificial imbalances in the free market.  Inflating prices while giving unfairly large market share to the most expensive options.  If anyone knows of examples leave a comment.

OPEC has some Major Problems if they cap production, US and Canadian Producers will eat their lunch

US crude oil is clearly rising again and this doesn't bode well for any move by OPEC, Russia, et.al. to cap or cut production.  It is pretty clear now that the situation for North American producers has drastically changed.  Any price support, especially any surge close to WTI $50 will result in rapid US and Canadian production increases.  It is also pretty clear that while most--including me--expected a major decline in US production towards a level well below 9MM BPD, it is now clear that 9MM BPD is the floor and US production is rising again along with working oil rig counts.  

There is a clear surge in unaccounted for oil dating back to June.  A surge in unaccounted for oil, especially a sustained one is a leading indicator that US production is rising, even though the official production number continued to show decline.  However, the official production number showed a huge 100k BPD increase last week.

US Production and Unaccounted for Oil

Data Source:  EIA

psw01 2016-8-17

Not only is US production rising, but it appears Canadian production is surging as well with US imports from Canada surging over 3.3MM BPD last week.  Comparing to last year, Canadian imports surged well over 3.3MM BPD in late 2015 and early 2016 in the face of  oil in the low $40s and $30s.  I expect more of the same this fall and winter.

Canadian Crude Exports to the US

Data Source:  EIA

psw08 2016-4-27

Those betting on a sustained rally in prices today are in for a surprise as we are heading into fall maintenance refinery maintenance season with a corresponding huge slump in demand just as US and Canadian output is surging.  That can't be good for prices.

Glowing June and July BLS Non-Farm Job Reports are Totally Bogus, More to Come

Seasonally Adjusted Non-Farm Jobs Change 2013-Present:  Comparison between Griz Method/Simple YoY and BLS Monthly Reports

Source Data:  BLS

Total Nonfarm 2016-8. xlsx

Seasonally Adjusted Non-Farm Jobs Change 2013-Present with 2016 Projections:  Comparison between Griz Method/Simple YoY and BLS Monthly Reports and my projections from June 2016 for monthly gains using the Griz Method and my expectations for the BLS reports.

Source Data:  BLS

Total Nonfarm 2016-8. xlsx

Even though I knew this months great jobs report "surprise" was coming, it still amazes me to watch this unfold right in front of my eyes.  In early June I correctly predicted huge "surprises" to come in the monthly jobs reports.  I Hope Everyone is Expecting Huge Gains in the Non-Farms Job Report in July, August and September  just as I did in November, 2015.    Huge October Jobs Report Coming  I also found it interesting that the experts didn't see this coming, although I've seen at least one quoted saying the real job gain number is 150k-200k per month.  Well it looks like the truth hides in plain sight.

I've shown the most recent BLS reported monthly job gains along with the gains calculated with my methods with the chart of what I predicted in June was coming.  It is really scary just how close my projections have been for both the BLS report and my estimates of what the Griz method would show in coming months.  It is clear to see I projected that gains would follow the lower trend line as shown in the lower chart, which has now been confirmed by 2 months of reports as shown in the upper chart.  I expect this will continue to year end.

I also projected that huge reports were in store, although I thought it was possible the really big numbers would be delayed to later in the year.  What is clear is I saw the big numbers coming.

It is also clear US stocks have broken out to the upside since the June report and are getting another bullish push today.  While the very bearish reports early this year helped inflate US treasuries which are getting knocked down since June with only the Brexit scare driving them up.  Treasuries are getting hit again today and I expect they will continue to get driven down as rate hike talk gets serious again driven by month after month of great job reports.

I also find it quite "convenient" that now that Hillary is pushing a story of how great things are, that the jobs numbers suddenly went from miserable to start the year, to totally amazing the last 2 months.  That when my analysis clearly shows job growth rates are in decline and have been for most of a year.  My analysis shows the early part of the year was much stronger than the last few months, yet the BLS seasonal adjustment is showing that the last 2 months have been the strongest of the year, rivaling the fastest growth we have seen in 2 years.

Continuing unemployment claims do NOT support holding off rate hikes

US Continuing Unemployment Claims 2005 to Present and YoY

Data Source:  US Department of Labor

 Unemployment weekly 2015-4-9.xlsx

The most recent BLS jobs report for May 2016 implied that US employment is totally in the tank providing cover for the Fed to continue to hold off on interest rate hikes.  However, continuing unemployment claims along with the BLS own nonadjusted data does not indicate the jobs market is as bad as the May 38k gain implies.

http://griztrading.blogspot.com/2016/06/38k-new-jobs-is-totally-bogus.html

http://griztrading.blogspot.com/2016/06/i-hope-everyone-is-expecting-huge-gains.html

I find it very suspicious that conditions now justify a funds rate below 1% helping to hold the US 10 year treasury below 10% while in the 2007 timeframe the economy was clearly grinding to a halt but the funds rate was in the 3-5% range helping to hold the 10 year treasury in the 5-6% range.  It is pretty clear that low treasury rates and low interest on margin debt are keeping investors in very expensive risky stock assets at this point since treasuries do not offer an attractive return.  

How is it that with continuing claims at a lower absolute level than around 2007 with a larger working aged population that these low rates can be justified?  Moral of this story is they can't.  I expect we'll see a major spike in rates post election.

Summer Demand Has Yet to Dent Gasoline Inventory, Will It?

US Gasoline Inventory, YoY

Data Source:  EIA

psw01 2016-1-13

US gasoline inventories are 10% over the same time last year or about 22.3MM bbl over last years storage level.  It is no wonder gasoline crack spreads are about $10 lower than this time last year.  The fact that inventory levels appear to be flattening and even surged last week is a warning that gasoline demand may not be nearly as high this summer as many expected early on.  It has become my feeling that many stockpiled gasoline at lower prices this late winter and spring which could have lasting affects on early summer demand.  If refiners have been running at higher rates with the expectation of huge demand based on the huge spring demand they could be in real trouble if they don't slow down soon as crack spreads are already poor and could get a lot worse this fall when demand lags if they continue to carry this inventory.  I'm betting they will be running at much lower utilization levels than expected for this time of year putting heavy pressure on crude demand.

http://griztrading.blogspot.com/2016/05/major-us-refinery-slowdown-on-way.html

Rather than seeing a large surge in summer gasoline demand we could actually see much softer demand as we did in 2014, if gasoline was indeed stockpiled this spring as the unexplained exceptionally high gasoline demand suggests.

US Gasoline Supplied, YoY

Data Source:  EIA

psw01 2016-4-27

I'm shorting crude oil with the expectation that the power is in the hands of the refiners with high inventories on both sides of their process and really unlimited supplies yet worldwide.  I find it likely they will slowdown which will support gasoline somewhat, but will crush crude.  They could easily manage to create gasoline draws and crude builds.  The situation with gasoline and distillates implies refiners could slow as much as 10% to draw refined inventories within historical seasonal norms.  That would be 1.5MM bbl day which would create 7MM+ bbl/day excess crude.  So we could be looking at 3.5MM-7MM barrel builds in crude this summer.

Time to Short Distillates/Heating Oil

Distillate Inventory,YoY

Data Source:  EIA

psw01 2016-4-27

Given rapidly rising heating oil prices over the last several weeks does anyone see a problem?  It looks like distillates and heating oil by proxy (/HO) is ready for a good downturn as we are headed into the time of year when distillate inventories build due to lack of demand.  One can easily see in the chart below that distillate demand sags from June through September.  Distillates supplied averages about 3.8 MM bbl/day from June to September.  This is well below the April/May average which was about 4.1MM bbl/day.  Given a 10% drop in demand producing rapidly rising inventories it looks like distillate prices should fall.  High gasoline demand over the summer can also force refiners to continue to produce at higher rates than they like, storing the excess distillates rather than slowing down.

Distillate Inventory,YoY

Data Source:  EIA

psw01 2016-4-27

In fact in the last week the ratio of gasoline:distillate produced dropped to about 2.02 from 2.1.  This is worrisome for distillates since the pace of production actually accelerated relative to gasoline.  Decades ago US refiners could push the gasoline to distillate produced ratio to 2.35 over the summer limiting excess distillate production, but most refiners are no longer equipped to do that.  So it looks like we are potentially in for a distillate glut that will make last years fall/winter glut look like childs play.

I'll be emphasizing shorting /HO into early October.   Currently short /HO futures.

Crude + Petroleum Products Inventory Set to Make New Record Highs, Crude Bulls Lookout

Total Crude + Petroleum Inventory

Data Source:  EIA

psw01 2016-1-13.xlsx

Total crude + Petroleum Products popped 3.2 million barrels last week and is only 2.5 millions barrels below the record high of 1.371 billions barrels set the week of April 29, 2016.  The chart clearly shows summer into fall has a history of inventory builds, with huge builds continuing through the winter and spring of 2015/2016.   A pattern similar to 2015, just slightly weaker is set to repeat.  I expect total inventory to build to at least 1.4 billion barrels and possibly as high as 1.42 billion barrels.  This can be seen by using the 2015 inventory level normalized to 2016 through June 3 as a projection line.

In the past inventory levels would fall late in the year.  Studying the data it appears this was typically driven by drops in crude inventory driven by reduced imports from Saudi Arabia.  It appears the Saudis were propping up the markets during weak demand times.  However, it is clear that in 2014 and 2015 they did not do this.  I expect that to remain the case in 2016 as Canadian oil sands producers have shown a drive to rapidly expand production even in the face of very low prices this past winter.  Canadian imports shot above 3MM bbl per day to around 3.4MM bbl/day in January.   That compared to a peak of about 2.8MM bbl/day in January 2014, which implies about a 20% YoY increase.  A conservative projection puts Canadian imports at about 3.5MM bbl/day by July/August and 4MM bbl/day by January 2017 is not out of the question.  The Saudis will not want to give up this market share.  Indeed I fully expect many producers will get excited about dumping crude and refined products in the US now that crude is over $50 and Canadian imports are rising.  With no OPEC agreement to cap production, producers will be forced to compete, driving down prices severely again, before there can be any serious talk of cooperation again.

One of the big problems that has been created this year for OPEC cooperation is the high prices have now given high cost producers in North America a great chance to expand and improve their hedges into spring of 2017.  Unlike this past year I expect they will put in a solid floor around $45 so they do not lose money should prices drop into the $30s as they did last year.  Most producers were seriously hurt because their collars didn't protect them below the $40 to $46 range.

I'm short oil and heating oil in my various accounts with DWTI and sold Calls on USO at $11.50 $12, and $12.50 in every available week out to January 2017.  I'll continue to add to those covered calls with weekly profits and as options expire, possibly into February 2017.  At this point I expect to remain generally short oil, buying a few of the dips at key support levels until February 2017.

I Hope Everyone is Expecting Huge Gains in the Non-Farms Job Report in July, August and September

Seasonally Adjusted Non-Farm Jobs Change 2013-Present:  Comparison between Griz Method/Simple YoY and BLS Monthly Reports

Source Data:  BLS

Total Nonfarm 2016-6. xlsx

I hope everyone is expecting huge non-farm jobs gains the next 2-3 months.  The chart above clearly shows jobs gains have been understated the last 3 months.  History shows when this happens in the following months huge gains are reported bringing the moving average into balance.

The Griz Seasonal Adjustment uses a simple YoY monthly comparison since employment totals have been in a consistent uptrend for years which can be seen in the charts in these earlier posts.
http://griztrading.blogspot.com/2015/11/i-hope-everyone-is-expecting-big-job.html
http://griztrading.blogspot.com/2015/11/2015-us-employment-trend-almost.html

The Griz Method clearly shows a downtrend in the growth rate of employment, but not a downtrend in total employment which would be indicated by negative job changes/monthly seasonally adjusted job losses.  However, it is also clear the BLS seasonally adjusted gain/loss varies wildly.  The intent of seasonal adjustment is to smooth out variability caused by seasonal trends such as mass end of year retirements and layoffs, end of school year, etc.  It is curious that the monthly BLS reported job gain/loss still varies wildly even when a simple YoY provides quite smooth data as shown when moving averages are added.  One can see that the 2 month moving average for the Griz Method Data (blue dotted line) tracks the actual reported data quite closely.  However, the 2 month average on the BLS monthly report (dotted orange line) varies wildly.  But the much slower 12 month moving average on the BLS monthly report (orange dashed line) merges quite closely with the dotted blue line created with the Griz Method reported data.  The fact that the long term moving average on the BLS data set aligns with the faster moving average created using data from the Griz Method proves the validity of the Griz Method/Simple YoY comparison.

So is the BLS really this incompetent that monthly reports are published which are essentially meaningless on a consistent basis?  And/or does this allow for manipulation of the numbers in attempt to create desired affects in the markets, Fed actions and possibly even elections.  If my prediction proves true, and I firmly believe it will, it is highly suspicious that ultra weak data is reported as the Fed is getting serious about rate hikes which have been proven in the last couple of years to seriously correct stock markets.  What adds to the suspicion is the jobs reports in the several months just ahead of the election when the campaigning between parties is in full swing look to be extremely strong make up reports for several months of extremely weak data.  Does anyone believe a June rate hike and another say in September wouldn't have had a serious negative affect on markets just as they did in January and that negative reaction would NOT have been a very negative factor for the incumbent Democrats.

What makes this so very scary is that the over-reports hide the true trend as can be seen in the Oct. 2015 to Dec. 2015 time period.  While more recent data has clearly proven that hiring rates were continuing to slow, 3 months of strong monthly BLS reports were clearly sending the opposite message.  In fact stocks rallied exceptionally strongly in November 2015 partially driven by strong jobs reports, only to have those buyers of stocks get heavily punished in January 2016 after a December 2015 rate hike and a "surprisingly" weak jobs report to open the month of January.

To me this looks like a clear attempt to get markets to heavily correct or stall this summer so that they can rally strongly in the fall on strong jobs reports creating a perfect story for the Democrats to brag about how great the economy is, when the truth may end up being 180 degrees opposite.  I won't be surprised with gains in the next few months topping 250k/month and possibly very close to 300k/month in 1 or 2 months.

Update:  Accumulated error over the last 5 months is -343k jobs, meaning if the real jobs gain is around 200k, then the BLS reported number can be exaggerated up to about 250k/month for the next 7 months just to balance it out, or up to 270k/month for 5 months.  How would that look for July, August, September, October and November just ahead of the election?

For giggles, I added a prediction of what the jobs numbers reports will look like into year end.

Goods Producing Jobs Tanking

All Goods Producing Jobs, YoY, non-seasonally adjusted

Source:  BLS

goods producing 2016-6.xlsx

If you wonder why the US economy is so stagnant the chart above explains it all.  Without producing the goods you consume, the underpinning of your economy is weak.  When times get tough the first things that are cut from personal and corporate budgets are services.  For individuals it is less dining out and fewer retail purchases.  For businesses it means fewer contracted services.  Even individuals will do more tasks themselves they'd hire done when times are better.

The chart above shows goods producing employment crossing below the previous years levels in January 2007, about 20 months before the stock market and entire economy nose dived.  It now looks like goods producing jobs are poised to cut below 2015 levels.  Manufacturing jobs are already well below 2015 levels as are mining, logging and oil & gas.

We can't continue to buy most of our manufactured goods from China, India and elsewhere, our oil from Saudi Arabia and Canada and our logs from Canada and expect our economy to be robust.

38k New Jobs is Totally Bogus

Monthly NonFarm Job Gains (YoY)

Source: BLS 

Total non farm 2016-6

The official seasonally adjusted job gains for May 2016 is 38k.  Really?  Look at the chart above created using the non-adjusted data set and comparing the YoY total employment by the month.  It looks more like the actual gain was 197k.  That said the chart clearly indicates the pace of hiring has slowed drastically since last year.  In fact the data indicates the pace of hiring has slowed from 2.3% annual growth to 1.66% this past month.  The data also shows this slowing pace is a trend that has been in place for 14 months.

If you want to see how the charts look when a legitimate 38k monthly gain occurs look at the chart below.  You can see that when this happened in 2008, the 2008 and 2007 total employment lines were nearly on top of each other opposed to 2015/2016 which have a wide gap.  You can also see that the 2008 line eventually crossed below the 2007 line.

Comparison to an especially strong hiring in early 2015 makes this data look a bit weaker than it is as well.  January to May of 2015 featured a 2.15-2.29% growth rate in employment.  What is clear is the growth rate has clearly fallen below 2%.  The question really is, how the Fed can continue to justify holding rates near zero with almost 2% employment gains and housing prices shooting up 6%/year. 

http://griztrading.blogspot.com/2016/05/is-housing-bubble-20-forming.html  With comparable employment gains in 2005/2006 the Fed held the funds rate around 3-5.25% compared to about 0.5% now.  Even with jobs gains in serious decline and nearing a 0.5% pace in January 2008 the Fed still held rates at almost 4%.  The funny thing is Bush gets the blame for the economy blowing up, but Obama gets credit for an improving economy and markets while enjoying a totally unprecedented 6-7 year run of near zero funds rates. 

Year Over Year Non Adjusted Total Employment Comparison

Source: BLS

Total non farm 2016-6

US Corporate Income Tax Paid Down 10% YTD

US Corporate Income Tax Paid by Month:  Green indicates monthly payments up year of year (YoY).  Orange indicates payments are down YoY.

I'm starting to see bandwagon jumping analysts starting to talk about expecting another surge in stocks.  Certainly one is possible, since markets can stay irrational for very long periods.  But if this is to be based on corporate earnings there are few signs they are improving, in fact most recent indications are that corporate earnings are generally falling.  Months ago that point was discussed widely, but recently that discussion has fallen off.

The chart above shows US corporate income tax paid, this can be used as a macro measure of US corporate profits.  It clearly shows a long term downward trend in earnings with taxes paid down 10% Fiscal YTD implying a significant 10% drop in earnings YoY.  So far there are no signs this is turning around with more recent months showing a downtrend solidifying as the down months string together.  This is beginning to look a lot like the pattern we saw in late 2007/early 2008.

As in 2007/2008 manufacturing is slowing, most indicators including manufacturing employment are clearly showing this.  However, construction and construction employment is holding up well, even though growth in construction has slowed.

The strong construction sector could continue to hold up the economy and markets overall, however the trend of falling corporate earnings is a huge headwind for stocks.  Any downward blip in construction is likely to have dire consequences for the economy and markets.  To be fair construction employment continues to grow about 4% YoY, down from about 5-6% growth in 2015, so the bell on construction's demise isn't ringing yet, and interest rates are still low enough to hold off a serious downturn.  But as rates creep up, so do the risks.  Worse, stock indexes are again near highs, with overall earnings still clearly well off levels when previous highs were made, and with slower growth rates for the economy and profits, so any move up from here will be built on a weak foundation.

What is most clear is most indexes and commodity prices are now running into very heavy technical resistance with the fundamentals lacking to push them over the top.

Is Housing Bubble 2.0 Forming?

Home Price Index  Source: fhfa.gov 

HPI_PO_monthly_hist

Are we in a housing bubble again?  I say yes a small one, but we are there.  Certainly another bubble is being blown.

The first thing that triggered my interest was that the House Price Index broke the previous peak set in the summer of 2007 and has continued to make new highs every since.  Also the March 2016 increase in the index was 6.1%.  Big red flag when inflation is supposedly under 2% justifying ultra low interest rates.  I've been seeing large home price rate increases for awhile, so today I decided to dig in deeper.  Let's look a  little closer at what the chart above shows.

The blue multi-decade home price trend line created from data going back to 1980 seems to show home prices are right where they should be or only slightly high.  This is a 3.7% annual growth rate.  However we must remember we are in a deflationary period and even now supposedly inflation is only 2%.  Indeed wages certainly haven't been rising 3.7% annually and certainly not since 2008/2009.

From the red 2.5% trend line starting in 2008 we can see house prices are up over 2.5% annually since the end of 2008.  While after multiple years of declining wages and deflation elsewhere, even now wages and overall inflation is only around 2.0% annually.

If we reference current home prices to the 3% annual housing inflation rate that occurred from 1991 to 1998 and that trend line was touched during the recent housing bottom, or a housing inflation rate trend line of 2% starting from the housing bottom,which actually exceeds overall inflation over the same period it is easy to see home prices are very inflated and continue to rocket higher.  Since the data is reported with a 3 month lag I projected where the index is likely to be now and will be at the seasonal summer peak.  It appears by midsummer home prices will be 15% over the long term 3% trend line starting in 1991 that was touched  again in 2011 after the bubble popped.  I guess one can argue there is little to worry about since it is only about 4% over the much longer trend line, but remember we are in a deflationary stage, wages are terrible and few have any savings to speak of.  And we are likely nearing or at the top of the current economic cycle.  Of course the current condition is not near as bad as it was in May 2006 when home prices were over 40% above the green 3% trend line.

But what is most alarming is the current growth rate in home prices.  The orange trend lines show the current growth rate matches the excessive growth rate from 1998 to 2002, that became even more excessive until mid 2006.  This is really alarming knowing the current Fed funds rate is still below 1% and 30 year mortgage rates are under 4%.  During the creation of the last bubble mortgage rates were well above 5%, even in the 6-7% range.  Given the current home price growth rate, ultra low rates, unwillingness of the Fed to even raise rates 0.25% at a time, and projections of maybe only a total of 0.5% in rate hikes this year, it is very likely the Fed is already on the verge of losing control of housing prices.  Given the terrible wage inflation, it could be argued the Fed has already lost control.   How can anyone afford to buy housing in a 5.5% annual growth environment when wages are only rising about 2% annually and have only risen 1-1.5% annually over the last 5 year period when home prices have spiked 5.5% annually.  Wages are about 4 years behind home prices.

In conclusion I'd say Housing Bubble 2.0 is here, we are quite possibly nowhere near the top given the Fed reluctance to raise rates and central banks everywhere continuing to push QE in some form.  But more than likely in the next 2-3 years home prices will again be pulled down to the long term 3% trend line or below meaning home prices are currently over inflated by 15-25%.  How much bigger this bubble blows is yet to be determined,   But along with slowing manufacturing, falling corporate earnings, and NYSE margin debt at or near record levels, and other issues, add this to the list of indicators that things may not be as rosy as they seem, not that many really feel things are very rosy right now.

No Signs of Shale Turnaround Yet

Data Source:  RRC of Texas

EIA Monthly Crude Prod.xlsx

Some are beginning to wonder if shale producers will soon bring on more rigs and increase production with WTI near $50.  They're not.  http://griztrading.blogspot.com/2016/03/wti-above-60-will-drive-rig-increase.html  And well completion rates in Texas and North Dakota support this theory.

The first thing one would expect producers to do to take advantage of rising prices is increase the frack/well completion rate.  This would show up before an increase in drilling rigs as reported by Baker Hughes.  The data clearly shows sudden surges in monthly frack count without a surge in rigs, even a falling rig count.  Sudden spikes in completions can be seen in April and July 2015 with rig counts falling or flat.

Currently Texas oil well completions remain flat through April.   In fact from March to April the completion count fell in the face of rising prices and a typically strong summer price season just ahead.  More troubling is the outsized number of re-completions that occurred in April.  171 of 873 total completions were re-completions compared to 70 re-completions per month in other recent months.  Even 2015 averaged less than 100 re-completions per month even though total completions were at a 50% higher rate.

Canadian Oil Sands Production Slowdown due to Wildfire Still Bullish for Crude

US Supply/Demand Balance:  Calculated from (US Production + Net imports)/Petroleum Supplied psw01 2016-5-18

So many like to believe crude oil prices are completely driven by a Wall Street conspiracy to push prices up.  Of course that completely ignores a 2 year long crash.  Even now many point to a conspiracy based on high inventories.  But really matters is what direction that inventory is trending and where it is likely to trend in the near future.  Of course the here and now will outweigh the future especially given the turmoil in production due to the low prices, wars and the Canadian wild fires that have completely shutdown oil sands production twice in May.

The above chart clearly shows that we are currently in a deficit condition.  This deficit condition is likely to continue for weeks or months with high summer demand for gasoline and other fuels and low supply from Canada.  Even imports could be affected for weeks since the weak Canadian imports in May led to a surge in unloading tankers.  This means that ready supply of crude is no longer sitting offshore.  It may be back in 8-12 weeks as those tankers get reloaded.

This Deficit/Supply indicator above is confirmed by US total inventories of crude + refined products which has flat lined and may have started a decline.  See the chart below.

US Crude + Refined Inventory YoY Comparison  (psw01 2016-1-13)

My earlier blog post prior to the Fort McMurray fire built a bearish case based on strong Canadian imports.  That post included a graph showing how last summers flattening US inventory was completely created by a Canadian slowdown.  Now we have Canadian Summer Oil Slowdown 2.0.  We must wait and see when oil sands comes back before getting excited about shorting oil.
http://griztrading.blogspot.com/2016/04/canadian-imports-up-us-crude.html
And we still have declining US production and falling rig counts projected until we hit WTI $60.
http://griztrading.blogspot.com/2016/03/wti-above-60-will-drive-rig-increase.html

The moral of the story is now is not yet the time to short oil.  The situation with Canadian supply must be sorted out before we know exactly when we will fall into sustained surplus again.  Most were talking a return to balance in Q3 or Q4 before the Fort McMurray wild fire.  Now with a major unexpected slowdown in oil sands production, much support for crude is present.

Real Severity of US Federal Debt

All US Federal Debt vs Publicly Held Debt:  All US debt includes promises to pay within the US government, i.e. take from Social Security Fund to pay something else, while publicly held debt is all debt sold in the form of Treasuries.

While many downplay the severity of the US federal debt and its growth the last 7 years, usually by using a ratio comparing it to GDP, that masks a scary truth.  The amount of publicly held debt has absolutely exploded relative to all debt.  This means the real debt overhang of publicly held treasuries is at a severe record level by any and every measure.  Many point out how that the Fed holds a record amount of this debt, alluding that it isn't a big problem since the big change in the last seven years is held by the Fed and as long as they don't unwind their balance sheet it isn't problem.  However, the Fed only holds $2.5 trillion of the $8 trillion in the additional public debt issued since the end of fiscal 2008.  The chart clearly shows the scary growth in publicly held debt, and removing the $2.5T in Fed holdings does little to alter the picture.

Another way our federal government likes to mislead the public is with how the deficit is reported.  The official deficit ignores debt/interest payments and includes other accounting tricks.  Many like to show how the deficits were low and in some cases were surpluses in 1998-2001.  But what is clear is debt in one form or another actually rose every year.  Even in the years when publicly held debt was actually falling, total obligations were still rising.  Then the dot com bubble exploded, taking tax revenues along with it and all forms of debt exploded.

More recently 2014 and 2015 have been held up as great years since deficits fell to under $500 billion.  Still much higher levels than when we were fighting wars in the Middle East, but this is supposedly a win since it is much less than the $1-$2 trillion deficits in earlier years.  But what really is magical is the $439 billion deficit in 2015.   Even the all debt and publicly held debt change seems to confirm a low deficit for 2015.  But when we see the reporting for early 2016, it appears the low deficit in 2015 is an accounting trick, since the change in all debt has already exploded by over $1 trillion which is matched by a $720 billion explosion in publicly held debt.  A quick check has indicated this type of publicly held debt surge early in the year is not typical, and has not happened in any other recent year.  In other words it looks like some 2015 obligations have been pushed into 2016.

US Federal Spending Out of Control

US Federal Receipts and Outlays in $Billions
Logarithmic scale

employment tracker.xlsx

Many don't seem to realize exactly how out of control federal spending is.  Attempting to say it's not because it isn't that high relative to GDP, etc.  However, what the above chart clearly shows is that once government learns to spend at a new level, it suddenly becomes the new norm.  So the massive spending required to fight wars in Iraq and Afghanistan became a new norm far exceeding levels prior to 2000, but worse that gave way to another new norm when spending grew again after the 2008 crash.  Now that the economy is slightly better, that has given way to rising spending again as 2015 showed a rise from years of flat spending, and 2016 will exceed 2015.

So now that tax revenues are back in line with previous economic peaks in 1999/2000 and 2007, federal spending still far exceeds comparable levels during those time periods and is in fact rapidly diverging from revenues at a time when the economy looks to be peaking.

US Manufacturing is not doing well #3

Manufacturing 2016-2.xlsx

Manufacturing employment levels in 2016 remain below 2015 levels.  Though not in a dramatic fashion.   However the trend does not seem to be an optimistic one.  When you like at inventory levels and the overall projected growth rate, it is very will possible that production employment levels remain at or near April levels over the next several months which would be a significant divergence.  It seems that once growth rates go negative they stay there and tend to accelerate.  The plot shows just how dramatic the situation was between 2006 and 2007.

YoY US Construction Employment Comparison

The early 2016 weather did not skew construction employment.  The huge surge in construction hiring in late 2014 and early 2015 is making construction employment appear weak.  Looking at the above graph you can see that in late 2014 and early 2015 the gap over the previous year became quite wide.  Much wider than the 2012 to 2013 gap.  Now construction employment growth rates are slowing relative to 2015.

In fact for the February to April period construction employment grew at 2.8%, inline with the early 2015 growth rate.  What the data does show is a weak growth rate in March 2015 when employment only grew at a 1.5/% annual rate for the month compared to average 2% annual growth rate for March in the last 4 years.  The March dip is visually noticeable in the 2015 curve vs all other years.

Looks like the BLS is cooking the monthly job gains numbers again.

Total non farm YoY employment comparison  Source:   BLS

Total non farm 2016-5.xlsx

Ever wonder why the markets whipsaw and in the end don't react the way you would expect based on the monthly jobs report.  Maybe it is because the BLS seasonally adjusted employment gains number is being cooked.

If you look at the chart above it is easy to see that the 2016 employment trend is very comparable to 2015.  But it is impossible to tell whether 160k to 250k jobs were added to the 143 million total just by looking.

When April 2015 is compared to April 2016 you find there or 2.658 million more people employed.  This comes out to a monthly rate of 221.5k jobs added.  But the BLS said only 160k jobs were added.  The table below shows the difference between the BLS seasonal employment adjustment and my own using a simply YoY comparison.  I've done the comparison using averaging together several years of employment data or several months and typically come up with the same discrepancy quite frequently.  In fact if we simply average the last 4 months of employment and compare it to the same period in 2015 a 2.684 million jobs increase is found or a monthly rate of 224k, very comparable to the earlier seasonal adjustment method.

Seasonally adjusted job gains in 1000s
	BLS	Griz	Difference
January	168	220	52
February	233	221	-12
March	208	232	24
April	160	221	61
Total	769	894	125

So it looks like in the last four months the BLS has built up a 125k job cushion that can and will be added in a coming month.  Will it be added in a month with a big real drop making it look better than it really is?  This has happened before.  It sure is convenient that now that the Fed is getting serious about interest rate hikes employment growth has suddenly fallen off the cliff.  In fact in October through December of 2015 the BLS was reporting 295k, 280k and 270k jobs added in each month respectively.  Pretty dramatic shift from averaging 280k new jobs/month at the end of the year to only 190k/month so far in 2016.  The Griz method for seasonally adjusting the data only showed a 230k rate at the end of the year.

Job creation is certainly slowing, it is down to about a 1.9% annual rate or 220k/month growth rate from 2.3% annually or about 260k/month in late 2014 and early 2015.  But the extreme gyrations BLS has been reporting in monthly since early 2015 seem strangely timed.  Just when it looks like markets are ready to tank the monthly report suddenly gets better, but as soon as the Fed wants to raise rates job gains tank.

But it is my belief many professional big money traders actually load their models with the raw data and do their own adjusting as I do.  This drives the markets oftentimes in opposite directions than most expect.  In fact today treasury rates stayed solid as did stocks in the face of a "terrible" jobs report, as the media immediately reports a June rate hike is off the table.  Don't be surprised to see the dollar strengthen and rates rise much faster than most will expect in the coming weeks/months.  The underlying data is telling a different story than you are hearing in the press.

Gilead Sciences Strength is Underestimated

Most seem to be valuing Gilead Sciences (GILD) stock solely based on fears over competition over its Hepatitis C drugs Harvoni and Sovaldi.  Gilead has been forced to cut prices and therefore profits to compete with the new drug offers which are generally inferior to Harvoni.  In fact after a year it has been proven that Abbvie has not been able to take significant market share.  Now that Merck has entered the market it looks like they are hurting Abbvie, but the future is likely to show Gilead will remain largely untouched in terms of total scrips, even though prices will be lower.

Merck will soon learn the same lesson that Abbvie learned, that cutting prices is futile.  Therefore, they won't cut prices further.  They need to pay back R&D somehow, while Gilead has already made billions, so can go as low or lower than any competition.  Therefore after taking what appears to be a 15% price cut this quarter, it is likely further cuts are not in store so Harvoni/Sovaldi revenue should grow some from here.

But more importantly most are ignoring the other half of Gilead revenue, which has been growing at almost 38%/year.  Not to mention Gilead's large cash pile and great cash flow that allows them to make any acquisition they'd like.  But let's focus on the details of the non Harvoni/Sovaldi revenue. 

The data clearly shows non Harvoni/Sovaldi sales growing at a rapid pace.  But more importantly for the near future there is a clear pattern of weak Q1 sales growth and even QoQ contraction in Q1 2015 and 2016.  After the latest report this contraction has been interpreted as the beginning of the end caused by lower Harvoni/Sovaldi sales prices.  But what is coming in the next quarters is huge sales gains that appear to be completely unexpected by most analysts who seem to be projecting declining sales forever.

It appears to me the recent dip to about $90 has created a strong buy opportunity.  GILD is carrying a PE of about 7, pays a 2.4% dividend that has been raised twice since the dividend was initiated just over a year ago.  While the company has also approved buying back another $12B in stock or about 10% of float at current prices.

With the right acquisition this stock will explode as bringing the multiple up to sector norms would double the price.  I'm also going to go out on a limb and predict that Gilead blows out revenue and earnings the remainder of the year.  Gilead projects $30-$31B in sales, and many analysts have lowered there estimates.  It looks to me like Gilead will be in the $33-$35B range.