Trader’s Narrative

Today’s Labor Department data for June’s non-farm payrolls was -467,000. That surprised many since consensus was -350,000. That should put the kibosh on any ‘green shoots’ talk for now. Especially since the losses were not only deep but across the board for every industry.

This brings us to total cumulative job losses of 9 million in this recession (so far!). That’s much more than the historical average in previous cycles.

Not surprisingly, the stock market took a nose dive on the news but you could argue that it has been acting the way it has for the past two months, meandering with no real direction.

This chart compares the most recent recession’s job losses to the previous cycle as well as the over all post World War II average:

Source: Chart of the Day

As the chart clearly shows, this is much more than a run of the mill recession. We’re seeing about 3 times more job losses than in the past. Had this been a ‘normal’ cycle, we would have seen a trough in April 2009.

And even more troubling, we’re seeing signs of wage deflation. Average weekly earnings fell 0.3% in June. On an annual basis, that’s equivalent to about -1.6% compared to +1.8% last year (and +5.2% in 2007).

Here’s another chart showing more granular data for past recessions:

Source: Calculated Risk

The only post World War II recession which had deeper job losses was in 1948. But we are fast approaching that record. On the plus side, the recovery back then was just as sharp.

The above is a short clip from the full video, available free here.

For more information, check out the implied deflation in the TIPS spread and the message of Dr. Copper.

A recent article shows the chart to the left which demonstrates the correlation between crude oil prices and the size of the passive long-only institutional investor.

This is a topic that I’ve been harping on ever since last year, as a barrel went for $135: What is really going on with the price of crude oil?

It also confirms the previous chart showing the stampede of hedge funds and other large speculators to the long side of oil. Back then I couldn’t prove what was going on but the inflation adjusted price of oil certainly looked like a bubble.

There wouldn’t be a problem of course if these powerful market participants were taking both or either sides in legitimate speculation or hedging. But there is a problem for everyone, including these same institutions, when they pile into only one side, continuously going long the crude oil futures.

According to the article:

Passive investors increased their crude-oil holdings to the equivalent of more than 600 million barrels in June, up more than 30% from the end of last year…

So what is going on? How can these behemoth institutional players treat the crude oil market like their very own ponzi scheme? Last year the effects on the world economy were devastating. Wealthy economies stalled into a recession and poor economies were thrown into chaos as staple food prices soared.

Isn’t there a regulation to prevent the manipulative “walking up” of prices in commodities? Yes, yes there is. Or more accurately there was.

Matt Taibbi’s scorching article on Goldman Sachs (GS) in the most recent edition of Rolling Stone magazine explains. There was a 1936 government regulation which had successfully stopped this type of shenanigan. In effect it did not allow large speculators to lean on any commodity market and crowd out real producers and consumers. Until 1991. That’s when Goldman Sachs’ (GS) commodities subsidiary, J. Aron, request an exemption based on the flimsiest justification.

Amazingly enough it got it. And over the years the CFTC handed out 14 other similar exemptions. Goldman and its ilk were busy with a few other schemes and it wasn’t for a while that they started to really take advantage of the loophole they had gained. What followed was nothing short of astonishing. For example:

Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent.

What makes this even more astonishing is that last year’s oil spike (or bubble) happened when the world was awash in oil supply and faced a drastically reduced oil demand!

…according to the US Energy Information Administration,the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million.

By the summer of 2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined.

This whole bear market has been a massive lesson in the validity and value of smart government regulations. As Ritholtz counts off in his book “Bailout Nation”, over a number of years and even decades, the threads of regulation where one by one removed. As the regulatory framework deteriorated in tatters, things started to go wrong.

Of course, as you may recall, that explanation was not the one offered when we were in the thick of things last year. The old and tired theory of “Peak Oil” was on everyone’s lips and many actually believed it.

The problem with that is, in the market when something is obvious to everyone, it is obviously false. And as I’ve said before many times, while no one disputes that the supply of oil is finite, it is a non sequitur to posit that as this resource is exhausted, the price of oil will spike.

If you believe otherwise, then get into your time machine, go back to the 1800’s and corner the whale blubber market.

Here’s an interesting way to measure the general mood of the public towards the stock market: look at the frequency and trend of searching for related keywords. For example, “bull market” or “bear market”. Although not everyone knows that nomenclature. How about “stock market crash”? Everyone knows what that means.

Thanks to a new service from Google (GOOG) called Google Trends we can look at the popularity of various searches over time and even across different geographic areas. Persevering readers might remember that we first looked at this new measure of sentiment back in January 2008: Hunting For Sentiment Data.

Since then we’ve continued to collect data for this so here’s an updated chart comparing that Google Trend to the S&P 500 Index (SPX):

There was a massive spike which corresponds to October 5th 2008 as the stock market was barreling down head first. There was a smaller spike which corresponds to the March 2009 low.

Other than that I can’t see a clear relationship between the two. Perhaps we need more data or perhaps the keyword isn’t the right one. I’m sure one of you out there who is more statistically inclined can take the data and hash something out. If you’re interested, drop me a note and I’ll forward you the spreadsheet.

In any case, looking at the most recent data not very many people are concerned about a stock market crash. The recent numbers shows the kind of apathy last seen August 17th, 2008 and December 23rd, 2007.

In a strange twist of events, the most notorious file sharing website, The Pirate Bay, is being bought out by a small public company, Global Gaming Factory for about $7.8 US million.

According to the spokesperson for TPB, Peter Sunde, GGF approached the owners of TPB a few months ago and negotiations finalized recently with the transaction expected to be completed by August 2009.

It will be interesting to see how this will effect the ongoing attempts by the RIAA/MPAA to eliminate sites like the Pirate Bay. Obviously, as a public company, they will be an easy target. But according to the unofficial sources, the Pirate Bay is going to decentralize their technological structure even more so that a separate company is handling the trackers and another the torrent listings.

Source: AktieTorget

It remains to be seen if this is a way for the Pirate Bay to continue its swashbuckling ways or if this means a change in their business model. In any case, if you’re brave enough, you can now own a part of this ongoing saga.

The shares of GGF jumped after the announcement but looking at the long term chart (above) there is a massive amount of overhead resistance.