NEW$ & VIEW$ (6 Oct. 2011)

Today, everybody in the world agrees: we need more Jobs.

So, Mr. Trichet leaves the ECB with his ego intact. The ECB leaves its benchmark rate unchanged at 1.50%, even though Trichet admits the region is facing “intensified downside risks.”. Nouriel Roubini:

Trichet leaves giving a finger to the markets, thus leaving to Mario (Draghi) the dirty job of doing the right thing at risk of pissing off Germans.

Risk is back as investors sense that the European authorities are showing signs of getting on top of their problems. Talk of bolstering the European Financial Stability Facility has been followed up by moves to force banks to take a bigger hit as part of the restructuring process.

France, which has been reluctant to agree to imposing deeper losses on Greek bondholders, suggested it was shifting its view. Importantly, Angela Merkel is now offering her own Merkel put as Bloomberg reports:

“If a country cannot do it using its own resources and the stability of the euro as a whole is put at risk because the country has difficulties, then there’s the possibility of using the EFSF,” the European Financial Stability Facility, she said. Using the EFSF rescue fund is “always tied to a certain conditionality.”

“Time is running out” to establish if recapitalization is necessary, Merkel told reporters in Brussels. She said she backs recapitalizing European banks “if there is a joint assessment that the banks aren’t adequately capitalized” and finance officials develop “uniform criteria.” Germany is ready to discuss possible bank aid at this month’s EU summit, she said.

Merkel also said that “if needed, there will be an adjustment” in investors’ share of a 159 billion-euro ($212 billion) second aid package for Greece, pending a report by international auditors on Greece’s finances due before a meeting of European finance ministers next month.

The hunt for green shoots is back on. Yesterday’s ISM’s Nonmanufacturing Index — based mostly on service businesses — edged down to 53 in September from 53.3 in August but was hailed as “better than expected”.

It was down nevertheless. However, Production was up and, significantly, New Orders jumped 3.7 to 56.5 and backlog rose 5.0 to 52.5. Also positive was the 2.3 pts drop in Prices.


Also heart lifting was the ADP report: private-sector employers added 91,000 jobs last month, up from 89,000 in. Employment is not tanking, nor is it growing. The increase in jobs in the ADP report was driven by gains in the service sector, which added 90,000 jobs in September. Manufacturers, previously a source of strength, cut 5,000 jobs. That said, the ISM Service survey showed a 2.9 pts drop in employment to 48.7… ISI estimates that this means a 65k decline in non manuf. jobs in September. They expect total employment to rise 75k in September. We’ll know tomorrow, but this remains awfully slow.


Outplacement firm Challenger, Gray & Christmas reported a sharp rise in layoff imageannouncements in September. Employers planned to cut 115,730 workers last month, more than double the August tally and the worst in more than two years.  A third of the planned layoffs came from government employers, including the Army, which cut 50,000 jobs as part of a five-year troop-reduction plan. The other big source of job cuts was the financial sector. Bank of America alone cut 30,000 jobs in September. Wherever they come from, these are real layoffs.


In Europe, German Factory Orders Unexpectedly Fall. Orders, adjusted for seasonal swings and inflation, declined 1.4 percent from July, when they dropped 2.6 percent, the Economy Ministry in Berlin said in a statement today. “Overall the orders dynamic has noticeably lost momentum”, the Ministry said. Why this was unexpected is an economist mystery. Markit reported earlier this week that

Activity rose only very marginally in both France and Germany, signalling that these recoveries, which both commenced in August 2009, have almost ground to a halt.


And just to make sure expectations for October are not too high, Market said:

In a sign that activity may fall further in October, incoming new business in the Eurozone fell for the second month running. Furthermore, the rate of decline accelerated since August to signal the largest drop in demand since July 2009. New orders fell in manufacturing and services at the steepest rates since June 2009 and July 2009 respectively. Manufacturing new orders have now fallen for four successive months, while the decline in services was the first since August 2009. The rates of contraction in new orders in the four largest Eurozone economies were all the fastest since the summer of 2009, although the decline in France was only marginal overall.

Amid all the doom and gloom in recent months, little attention has been placed on earnings. Be warned: Q3 earnings season starts on Oct. 11. Surprises will be analyzed to death but the important part of the earnings releases will be guidance, which was poorish last quarter as this Bespoke Investment charts shows.

On Sept. 21, Fedex said:


The U.S. and global economy grew at a slower rate than we anticipated during the quarter,” said Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer. “While FedEx Ground and FedEx Freight achieved improved operating results despite lower than expected growth, the more rapid decline in demand for FedEx Express services, particularly from Asia, outpaced our ability to reduce operating costs. We have slightly reduced our earnings forecast to reflect current business conditions and are aggressively working to adjust our cost structure to match demand levels.


As an update, this morning, Dutch courier company TNT Express issued a profit warning, saying customers are increasingly sending parcels by road rather than air to cut their costs and demand from Asia is falling. TNT said profits in the Asia Pacific region suffered from continuing weak demand, leading to “sub-optimal capacity utilization in a soft pricing environment.” (TNT Warns on Profit Outlook).


Pension costs will weigh increasingly heavily on profits in coming years:

The bear leaves its marks: Mercer calculates that the top 1500 U.S. companies had a pension shortfall of $512 billion at the end of September, up from $378 billion a month earlier. The combination of a 9% drop in global equities and the relentless drop in long-term bond yields did the damage, driving assets to just 72% of future obligations (79% at end-
August). As Reuters notes, this will be especially painful since many have a fiscal or plan yearend of Sept 30.


Economists, few if any of whom see a recession in 2012, are bashing on ECRI’s definite call that we are going in recession: 

Economists downplay the WLI because of its high correlation with movements in the stock markets that have been volatile lately. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, calculates a correlation coefficient of 90% between the WLI and the S&P 500 stock price index.

“Essentially, so goes the S&P 500, so goes the ECRI,” he says.

The WLI, however, is not the only hammer in ECRI’s toolbox, says Achuthan. (ECRI Explains Its Recession Call) To capture the macro-view, ECRI also puts together a long leading and short-leading index. The long-leading index, which has no exposure to equities, started falling back in December 2010 and is still falling.

In addition, ECRI puts together sector-specific indexes that cover areas including manufacturing, nonfinancial services, housing, credit and exports. These indexes are “overwhelmingly showing recession patterns,” says Achuthan.

In particular, the ECRI indexes are signaling the 3 “Ps” of a contraction: the decline has to be “pronounced, pervasive, and persistent.”

“This is a done deal. We are going into a recession. We’ve been very objective about getting to this point, but last week we announced to our clients that we’re slipping into a recession. This is the first time I’m saying it publicly. A broad range – this is not based on any one indicator – this is based on dozens of indicators for the United States – there is a contagion among those forward looking indicators that we only see at the onset of a business cycle recession.

“A recession is a process, and I think a lot of people don’t understand that; they’re looking for two negative quarters of GDP. But it is a process where sales disappoint, so production falls, employment falls, income falls, and then sales fall. That vicious circle has started. You’re looking at the forward drivers of that, which are different indicators – there’s not one – everything’s imperfect. The Weekly Leading Index .. that is saying unequivocally, this is recession. Long Leading Index, which has a longer lead, is saying recession. Service sector indicators, non-financial services where 5 out of 8 Americans work, plunging. Manufacturing, going into contraction. Exports, collapsing. This is a deadly combination, we are not going to escape this, and it is a new recession.”

This link will bring you to the “US Recession” video from Squawk Box featuring ECRI’s Lakshman Achuthan.

Think about that:  Nearly Half of U.S. Lives in Household Receiving Government Benefit

Families were more dependent on government programs than ever last year.

Nearly half, 48.5%, of the population lived in a household that received some type of government benefit in the first quarter of 2010, according to Census data. Those numbers have risen since the middle of the recession when 44.4% lived households receiving benefits in the third quarter of 2008.

Finally, a really good news: Palin Won’t Run for President


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