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