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The current labor market conditions are probably the weakest factor for a budding economic recovery. The number of workers on nonfarm payrolls peaked in March 2001 at just over 132 million people. Since then, the economy has shed over two million jobs, or about 1.6% of the workforce. The private sector has actually lost 2.7 million workers. While the private sector has been eliminating workers, the government sector has actually added almost 600,000 workers over the same time period. Local governments have been the source for most of governmental job creation, adding 446,000 jobs or about 3.4% growth. State governments have also been active in adding employees, adding 104,000 since March 2001, which is 2.2% higher than two years ago. The Federal government has lagged a bit, increasing its payrolls by 1.4% by adding 20,000 workers.

The job creation by the government sector stalled late last year. Since October 2002, only 31,000 government jobs have been created. During the prior eighteen months, government payrolls increased by 556,000. Hiring at the state level was the first to stall. Since the end of 2001, only 20,000 jobs have been added by state governments. In fact, state government payrolls peaked in November 2002 and have dropped by 9,000 during the past five months. Hiring at the local level stalled in August 2002, although it has kept growing and is currently at its highest level ever. Prior to August 2002, local governments added about 90% of their total number of additional workers over the past two years. Most recently, the Federal government payrolls started declining in January this year. The precarious budget situation at virtually all state and local governments does not bode well for their ability to shoulder the labor market much longer.

The recent survey conducted by the outplacement firm Challenger, Gray & Christmas revealed that this might be starting to happen. During April, the government sector announced almost 58,000 job cuts. This was the highest number of announced layoffs in the government sector since at least the beginning of 2001 and most likely much longer than that. The 58,000 announced government job cuts in April were more than the entire second half of 2002.

The Challenger report also revealed that the West region had the most announced layoffs for the second month in a row. During April, the West region experienced over 56,000 announced layoffs. This was the highest number of job cuts the West has experienced since October 2001.  California is very important economically. Not only does it have the largest economy, but the housing bubble is centered there. If the California job market weakens, it will be difficult for the national economy to gain traction. The employment outlook painted by the report was dim as the overall number of job cuts rose 71% from the previous month to the highest level since November 2002.

One of the big factors in the market is first quarter earnings. While the level of earnings or earnings growth, justify current valuations earnings have been better then what analysts predicted. After earnings have been consistently below expectations, investors have been quick to use the current environment of "good news" to purchase stocks.

Over 80% of the S&P 500 has reported first quarter earnings. Instead of the 8.5% growth that was expected just a month ago, earnings growth was 13.1%. The better than expected earnings was board based with every industry beating estimates. On an earnings weighted basis, financials, consumer cyclicals, and energy companies contributed the most to the faster than expected earnings growth.

Not only have earning been better than expected, but revenues have outpaced analysts' projections as well. Revenue for S&P 500 companies grew at almost 10% in the first quarter, which is the fastest pace since the first quarter of 2001 and 50% better than the 6.4% growth in the fourth quarter. While, some investors snicker and say the growth is based on easy comparisons, the fact of the matter is, companies have grown revenues in light of weak economic conditions.

Perhaps even more important for the bulls, analysts have not significantly lowered earnings estimates for the second, third or fourth quarters. Since the beginning of April, second quarter earnings growth estimates have declined from 7.0% to 6.2%. Analysts still are banking on a second half recovery. Third quarter earnings are expected to grow 12.6%, while analysts are even more bullish over the fourth quarter, expecting growth of 21.1%. These estimates are a tad lighter than the 13.2% and 21.5% respectively at the beginning of April.

Chuck Hill, director of research at First Call, estimates that the weak dollar helped revenue growth by 3%. Hill also estimates that earnings growth was boosted by a similar 3%. Assuming analysts missed the weak dollar, this would have accounted for two-thirds of the outperformance. It is also difficult to determine the true contribution to earning growth from the weak dollar. A far majority of companies hedge a significant portion of their currency exposure. Coca-Cola said it earned $267 million from currency translation, but company states that, "The effective impact of exchange to our Company after considering hedging activities was neutral to operating income in the first quarter of 2003 compare to the first quarter of 2002."

The other major driving force behind the current market rally is a good old fashion short squeeze. While some market participants scoff at bears that blame short squeezes for market rallies, the truth is in the pudding. Part of monitoring market activity, we closely watch how popular short stocks are trading. To facilitate this, I monitor a basket of about 75 stocks that have high short interest. It combines 25 large cap, medium cap and small capitalization stocks that have a large portion of their shares sold short. This "index" has rallied more than 35% since the lows set in March, and more than 17% since mid-April. This is more than twice the gain in the S&P 500 Index and well ahead of the gain in NASDAQ. The table below details some of the most egregious examples.

Ticker Company Name Price Change
from March 11
Short Interest
as % of Float
AMZN Amazon.Com Inc 34% 18%
ACF AmeriCredit Corp 314% 20%
AMR AMR Corp 328% 34%
CPN Calpine Corp 77% 23%
DAL Delta Air Lines Inc 119% 19%
ERES eResearch Technology Inc 26% 62%
EXPE Expedia Inc 94% 21%
JNPR Juniper Networks Inc 49% 15%
NFLX Netflix Inc 52% 50%
OVTI Omnivision Technologies Inc 49% 55%
SLAB Silicon Laboratories Inc 12% 31%
XMSR XM Satellite Radio 166% 48%

For those that chose to short individual stocks, the past couple of months have been very difficult. Knowing the market environment is very important during times such as this. As John Maynard Keynes once said, "Markets can remain irrational longer than you can remain solvent." And any investor that has been active in the market over the past five years can attest to that.

Selected emails will be addressed in Bear's Bear's Chat.

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