Market update 11 6 09 _ Unemployment at 10.2%

Ten Percent

The news of the day is the Unemployment Rate. Today it posted at 10.2%, breaching the psychological 10% threshold, posting higher than the Bloomberg estimate, and hitting a level we haven’t seen since April 1983. This isn’t a terrible shock…we’ve had a number of economists and even a Fed Governor forecast that we’d go north of 10% at some point. What is really disturbing about the number is that despite all of the stimulus that has been pumped into the economy the Unemployment Rate is still on a steep upward trajectory. Scarier still is that this data series doesn’t come close to capturing the true nature of the employment picture. There are a number of “groups” left out of this number. Discouraged workers that have given up looking for a new job aren’t counted in the unemployment rate and full-time workers forced into part-time hours aren’t represented. If you lump these groups in with the total unemployed you get what the NBER calls the Under-Employment figure or their U6 Figure.

The “under-employment” rate takes into account Total Unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percentage of the civilian work force. The “work force” in the US is currently in the neighborhood of 150 million people. The Under-Employment number for October hit 17.5%. That percentage on a work force of 150 million means that over 26 million people are in the U6 category of Under-Employed.

The question then becomes when and how will they get back to work? We need some serious economic growth to re-employ 26 million people on a full time basis. The lack of growth prospects for the economy is what leads many firms to forecast that jobs won’t return to their pre-recession levels until 2013. The combined bursting of a credit bubble and an asset bubble along with an over-leveraged and now under-employed consumer has created a very ugly landscape for growth prospects. This is why the Fed continues to state that they will keep rates low for a long time.

The Fed can keep the short end low…they have a lot of power there. However, the market controls the long end and if investors begin to lose faith they will demand more yield and the curve will steepen. For now the 10-year is settling in to a trading range around the 3.50% level…a much better place than the 3.17% we had a few weeks ago. Treasury prices are up on the day, as are mortgage prices, leading to lower yields than were available earlier in the week. The long end of the market is experiencing a lot of volatility this morning as it gets whip-sawed between up a point an down a point. After the release this morning the 30year jumped up 22/32’s immediately, ten minutes ago it was off a full point, and now it’s rallied back to almost flat on the day…this is volatility with a capital “V”. The short end of the curve where most banks buy (2-yr to 10-yr) is up in price.

Will the consumer show up?

I was watching Game 6 of the World Series the other day…mainly because I couldn’t find anything else to do…and I saw the strangest commercial. I saw a commercial advertising a “layaway” program at a big national retailer. When is the last time you saw a “layaway” program? Much less saw anyone advertising that they have a layaway program? This is a huge sign from one of the largest retailers in the country that times are tough and that they are going to new lengths to accommodate a battered consumer. The same shoppers in prior years didn’t need “layaway” as they could just charge it. The times they are a changin’.

The layaway commercial made me try to recall the last time I heard someone say “I’m going to save up and buy (insert your consumer good here)”. I haven’t heard it in years. Over the last few years nobody has had to “save up” for anything. Easy credit and rising asset prices made saving “unnecessary”. If you wanted it you just charged it or you took equity out of your house to get it. No problem. Our national savings rate as a percentage of disposable income dropped down close to zero right before the bubble burst. Suddenly people “get” the whole savings thing. Increased savings in the US means some pain over the short to mid-term as people square away their balance sheets, reduce their excesses, and readjust to living within their means…but long term it will mean greater stability and less reliance on foreign capital. For reference I’ve attached a graph of Personal Savings as a Percentage of Disposable Income below.

Now-a-days the rules have changed. Maybe we’ll be seeing the return of this powerful phrase as we digest the lessons from our most recent economic troubles. Until then I’m saving up for retirement…if it still exists when I get there.

If you have any questions or if there is anything I can be doing for you just let me know.

Steve Scaramastro, SVP

Vining Sparks, Portfolio Mgmt. Group

800-311-0707