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Five Things You Need to Know: Bonus: It's Not What You Think; It Ain't Over; A Tale of Two Risk Profiles; Does This Look Like Containment to You?; Is There a Spin Doctor in the House?


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Bonus: It's Not What You Think

This morning the Labor Department released final figures for fourth quarter productivity and unit labor costs. Here's a typical headline:

  • First, let's get to the bottom of what exactly this release is all about.
  • It's a "final" count from the Labor Department of Worker Productivity and Unit Labor Costs.
  • The first release for fourth quarter Productivity and Unit Labor Costs is always an "estimate."
  • The preliminary report, which was out on February 7, was backwards, at least compared to the final count.
  • On February 7 the Labor Department reported that 4Q Productivity checked in at 3%, which made it seem like slackers getting busy all of a sudden.
  • Well, relax and go sit back down on the couch. Worker productivity actually came in at 1.6%. Most economists heading into the February 7 preliminary release expected 2%.
  • Meanwhile, the same preliminary report on February 7 "guesstimated" that unit labor costs for the fourth quarter rose 1.7%, while the actual number - the "soaring" figure garnering headline attention this morning - is a whopping 6.6%.
  • Man! That deserves a big WOW, right?
  • Well, don't peel off your "Workin' for the Man" shirt just yet. The explanation for the "soaring" unit labor costs can be summed up in two words - Goldman Sachs... and a picture, ripped from the headlines:
  • It wasn't ALL Goldman Sachs bonuses contributing to "soaring" wages, but the net effect on Unit Labor Costs was almost entirely due to one-time payments to high income workers.
  • What's the bottom line then?
  • The view expressed in most of this morning's headlines on the report, that these "soaring wages" will cause concern on the Fed about "inflationary pressures," is simply wrong. This is a one-time event.
  • Also, as we noted last week, the Fed no longer cares about employment and inflation anyway.

2. It Ain't Over

Among the indicators we watch to evaluate market risk are so-called "bullish percent" indicators. We've recently seen a dramatic shift in control of the market and a sharp increase in risk. Does the spike this morning mean the coast is clear? Hardly.

  • The bullish percent indicators for equities have now ALL changed to negative, and stack up as follows:
    - The NYSE Bullish Percent is negative, in a column of Os and has crossed from above 70% to below 70%, currently at 64.41%. This means supply is in control of NYSE equities.
    - The S&P 500 Bullish Percent is negative, in a column of Os, and has fallen from 80% to currently 70.2%. This means supply is in control of S&P 500 stocks.
    - The Nasdaq-100 Bullish Percent is negative, in a column of Os, and has fallen from 76% to currently 61%. This means supply is in control of NDX stocks.
    - The Nasdaq Composite Bullish Percent is negative, in a column of Os, and has fallen from 62% to 54.5%. This means supply is in control of Nasdaq Composite stocks.
  • The bottom line is these indicators now show supply in control across the board.
  • This means pops such as the kind we are seeing this morning are repositioning opportunities; a chance to let go of stocks that are not long-term, core holdings and raise cash for opportunities when these indicators show the present high-risk conditions have changed.
  • Simply put, supply is now in control of equities and we should expect surprises to occur to the downside.
  • In other words, it ain't over.

3. A Tale of Two Risk Profiles

According to the Wall Street Journal, some big investors are beginning to send out "all clear" signs for subprime bargain hunting.

  • The article cites recent moves such as Citigroup's deal last week to shore up ACC Capital Holdings and Bear Stearns' recent takeover of subprime lender Encore Credit Corp.
  • As well, the article says a recent research report by Sanford C. Bernstein concluded that even if the subprime sector worsens, Bear Stearns and Lehman Brothers would suffer no more than a 4% to 5% reduction in earnings, while Merrill, Goldman Sachs and Morgan Stanley would see even smaller hits.
  • Over in the Financial Times this morning, however, the spin is decidedly less bullish.
  • "Subprime mortgage meltdown intensifies," screams the headline.
  • Is that too bearish? Well, consider the newspaper's source: Michael Geoghegan, chief executive of embattled HSBC.
  • Geoghegan said he expected it to take two to three years to fix the problems in its own subprime portfolio.
  • "This is not trailer park lending," Mr Geoghegan said. "This is Main Street America," Geoghegan reportedly said.

4. Does This Look Like Containment to You?

First they said there was no national real estate problem, only isolated speculative excesses in a few contained regions. Now they say that the national problems in subprime lending - the result of a national excess in lending standards to maintain the nationwide speculative excesses in housing - are contained and isolated to the subprime segment, a relatively small percentage of overall mortgage lending. But does this look isolated to you?

  • Yesterday the Institute for Supply Management reported that its index of nonmanufacturing business activity fell to 54.3 in February.
  • Nine industries reported a contraction in business activity in February, including Arts, Entertainment & Recreation; Construction; Retail Trade; Finance & Insurance; and Wholesale Trade.
  • According to an article in the Wall Street Journal, Brian Bethune, U.S. economist for consulting firm Global Insight, said a large part of the decline was attributed to the financial-services industry, which fell to 49.5 due to the the recent pullback in subprime lending.
  • As well, according to a story on Reuters this morning, Barclays has a line of credit with embattled subprime lender New Century Financial (NEW).
  • But wait! According to the Times Online (UK), there's more. The credit line with NEW is $1 billion. That's billion with a b.
  • But Barclays is just the largest UK creditor to NEW.
  • Morgan Stanley and UBS have credit lines to the company of $3 billion and $2 billion respectively, according to filings with the US Securities and Exchange Commission.
  • And Goldman Sachs recently renewed lines of credit to NEW.
  • We're not even going to get into the "containment" issues raised by the fact General Motors (America's largest auto company) may be forced to take a $1 billion charge for bad mortgage loans.

5. Is There a Spin Doctor in the House?

According to a brief in the Palm Beach Post forwarded to me by Minyan Scott, it turns out we may not be the only ones who think the efforts of state and national Realtors Groups to spin the housing market as bottoming are unrealistic.

  • Do you know who else finds the spin by local and national Realtors Groups unrealistic? Realtors!
  • According to the Palm Beach Post, Thomas Lawler, president of Lawler Economic & Housing Consulting, said in a letter to clients that a growing number of Realtors in Florida are frustrated with state and national Realtors groups' efforts to 'spin' the market as one that is strengthening and where home prices are stabilizing.
  • "Many (though probably not yet most) Realtors are frustrated by customers who continue to list their homes at price levels that are 'unrealistic,' and as a result, sales volumes - and thus commissions - continue to remain depressed," he wrote.
  • We're not sure exactly what this means, but it can't be good when the people whose business you're supposed to spin as positive think the positive spin is overdone.
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