Weak Nov. Jobs Report Fuels Further Stimulus Hopes

• Weak monthly jobs “good” for the market (but worrying for the economy)
• Divergence b/w stocks and economy continues to widen
• Keep an eye on the ETF EEM vs the (weakening) USD

It’s risk-on folks…. in spades.

Another day another record…. it’s “buy buy buy”

Energy, banks, small caps, technology and consumer staples all adding to recent strong gains.

But more about the risk-on trade in a moment…. when I share fund flows into emerging markets.

First up, we received the eagerly awaited November monthly jobs report first thing today. 

In short – it was far worse than expected. 

The U.S. economy added only 245,000 jobs in November — well below the 500,000 that many economists expected. 

Nov 2020 Total Non-Farm Payrolls – Slowly Recovering

From mine, this was a concerning report and reflects the severe lock-downs imposed by the government. 

For example, if this is the pace we’re on, it will take the next 4 years to get back to where we were pre-pandemic. 

Is this what’s expected?

To that end – I think December’s monthly jobs number will actually show a loss (not a gain) given the draconian measures across the US (not that some politicians could care). 

We will find out early January. 

In terms of the November jobs added – the transport sector led the way with 145K added.

The other strong additions were in the “gig” economy – adding 32K temporary jobs. 

However, retail was the biggest drag – down 32K jobs – as foot traffic continues to suffer – down 52% YoY for the Thanksgiving (shopping) weekend. 

Now if we compare the total employment situation today compared with February… there are 4M fewer people in the overall workforce. 

However, there are also 9.8M fewer jobs available.  

As I was saying a few months ago – many of these jobs may never return. 

In that sense, even if we had an effective vaccine to widely disseminate “tomorrow” (where still a long way from that) — there’s massive structural damage done to the economy that a vaccine cannot fix. 

Source: tracktherecovery.org

For example, I read today that 28-31% of small businesses in NJ alone are either out of business permanently; or going out of business. From “The Hill” – Nov. 29 

A third of small businesses in New Jersey have closed down in 2020, according to a report from The Star-Ledger newspaper.

“It’s really bad…  and without federal dollars coming into New Jersey, the Main Street stores and other establishments are not gonna make it through the winter.” said Eileen Kean, the state director of the National Federation of Independent Business.

Harvard-based data project TrackTheRecovery.org estimated that 31 percent of businesses have closed down so far as of Nov. 9.

This number is just above the national average estimated by the website.

 The New Jersey Business & Industry Association reported similar numbers, estimating 28 percent of businesses had closed down by October.

A short personal story:

I have a 65-year old friend in San Francisco who had a skin-care salon. She has a small mortgage (below $150K) and is no longer receiving government aid. Her business (like other salons) have been ordered to shut-down – meaning she is now unable to generate income. As a result, she cannot afford to pay San Francisco’s exorbitant property tax (where there’s no relief)… and barely manages to put food on the table.

My friend has lost her business and her only source of income; will not likely get another job given her age; and will most likely lose her house. Sadly, she can thank the State government. 

For those in Australia – imagine you are 65 and still had to pay $15K+ per year in property taxes in addition to your council rates, insurances, water and other utility bills. That’s the dire situation in the US for many retirees. 

As I’ve suggested in posts several months ago – you would think the government could at least consider innovative (temporary) relief solutions like (but not limited to);

(a) covering all business costs for small business (rent, utilities, property tax) whilst forced lock-downs are in play; or
(b) forgoing personal property tax where people are forced out of work; or possibly
(c) waiving / reducing property tax for those say over 65 who are simply unable to work

But we see none of this. 

In fact some counties in California (like Marin) have elected to increase property taxes by the “allowable 2% pa” during the pandemic. That’s how out of touch they are. 

Now extrapolate this small business / self-employed situation (along with what see in New Jersey) to millions of small businesses across the nation.

To me this illustrates the massive divergence between the stock market (hitting record highs day after day) and the situation facing the real economy (entirely as a result of policy makers)

As an aside, I also read there are 54M or 15% of the population facing food insecurity. 

Feeding America, the largest hunger-relief organization in the United States, estimates that 17 million people in the country could become food insecure because of the pandemic, bringing the total to more than 54 million people in the country, including 18 million children. Before COVID-19, food insecurity was at its lowest since the Great Recession, but it still impacted 37 million people.

Now as various State governments continue to lock-down business (especially states like CA, NY and IL) – how will these people survive?

As I say, I think the structural problems are deep. 

Hundreds of thousands of small businesses will disappear and will not come back. And many jobs won’t return. 

Congress will need to act fast and with urgency. 

Trust me, most people are not dining at the $600 per head “French Laundry” restaurant during lockdown or getting their hair done in fancy salons. 

From mine, I don’t see how the US government can go forward in 2021 without massive fiscal deficits – where the Fed will be needed to fund this spending. 

And that’s “king dollar” negative…. 

US Dollar Bearish… 

The market has been quick to connect the ‘dollar dots’ given the plight of the US economy. 

Currency traders know that massive fiscal deficits are coming down the pike in early 2021… and the Fed has little choice but to help enable. 

I have been US dollar bearish for many months (i.e. from when our trend shifted in June)… both technically and fundamentally. 

Take a look at the weekly chart from 2015: 

US Dollar Index 2015 to 2020 – Weekly Trend

Here we see the 14% decline in the Dollar Index from the March highs. It may not sound like much – but this is a huge move in currency speak. 

And this decline has been responsible for:

• huge rallies in risk currencies like the Euro and Aussie Dollar
• reflation in commodities (oil, copper etc)
• rallies in precious metals (gold and silver); and
• strength in equities

And I might suggest has also been a contributor to the speculative bubble we see in Bitcoin (as some view it as a alternative to gold)

Now there’s one strong trend I have been watching in recent weeks… it’s the inflows into Emerging Markets with dollar weakness. 

For example, last week saw over $2.6B of funds flow into EMs. 

In green, we see how EM’s have picked up investment dollars from the week of Nov 11th (i.e., when news of the vaccine(s) broke – just after the election) 

Below is the ETF EEM: 

EEM ETF – Dec 04 2020

The rally in Emerging Markets from April has been ‘straight up’ with very little pause. 

We did see a few weeks where the trend stalled – as it tested the January high – however took off again the past couple of months. 

Technically I am looking for some profit taking / resistance in the current zone. For example, the RSI (lower window) suggests we are now in overbought territory. 

But remember – we can remain overbought for several weeks. This does not mean that the index is likely to reverse immediately. 

However, this is a high risk zone to establish any new long positions. You are chasing late momentum here. 

My personal preference would be to establish a long position closer to the previous major high (i.e. the top of our structure or nearer to the 35-week EMA)

For example, we are 15% above the 35-week EMA. That’s dangerously high. 

As a rough rule of thumb – buying within 2-3% of the 35-week EMA generally offers a greater probability of longer-term success.

It’s not a guarantee (nothing in trading is) – however it will improve your odds of success. 

The weaker than expected monthly jobs report is likely to increase the odds of a larger relief bill. 

I think this is why the market rallied strongly again today… it knows more (free) money is coming. 

That said, the divergence between the stock market and the real economy is only increasing. They are two very different stories. 

For example, the stock market is primarily concerned with two things: 

(a) the cost of money (i.e. bond prices and interest rates); and
(b) it’s availability (i.e. liquidity)

And today – there is ample liquidity from the Fed with rates at record lows.  

That’s a green light.  

And put together with the prospect of a widely available vaccine at some point in 2021 – it puts as “floor” under the market. 

To be clear, over the longer-term, it will also want to see a strengthening economy (along with earnings) – but in the short-run – it’s not too concerned about the deep structural problems the economy faces. 

Regards,
Adrian Tout