Good News Is Bad News On Wall Street and At the DNC

[Annie]

Maybe not for the DNC, they can scream, "It's not enough..."

http://news.yahoo.com/s/ap/20060211...iGGZgBv24cA;_ylu=X3oDMTA3MXN1bHE0BHNlYwN0bWE-

Employment, Pay Raises Might Hurt Stocks

By ELLEN SIMON, AP Business WriterSat Feb 11, 12:30 PM ET

In the good-news-can-be-bad-news world of Wall Street, recent data showing growth in employment and wages have worried some investors. Their fear: More jobs and higher wages could spark inflation and prompt the Federal Reserve to continue its march of short-term interest rate hikes.

But the strong employment and pay numbers have become a source of contention on the Street. Some economists and strategists believe the employment and pay picture is less inflationary than the data would suggest.

One of their arguments is that employment figures have more to do with unseasonably warm weather than economic strength, since more construction workers are on the job now than they would be during a colder winter.

Among the data at issue is January's unemployment figure, which sank to 4.7 percent, its lowest level since July 2001. The four-week average of jobless claims on Thursday fell to its lowest level in six years, according to the Labor Department. Then, there are employees' average hourly earnings, which trailed inflation for most workers last year, but rose to $16.41 in January, up 3.3 percent from a year ago.

These were some of the reasons Prudential Equity Group chief investment officer Edward Keon mentioned Monday when he dropped his recommendation that investors keep 100 percent of their portfolios in equities. He now recommends investors keep 55 percent of their portfolios in equities.

The January employment report "began to rattle the cozy consensus that has been expecting just one or two more rate hikes from the Federal Reserve in 2006," Bank of America strategist Thomas McManus wrote, saying the drop in the unemployment rate and indications of wage pressure were "particularly troubling."

The "potentially negative impact" of surprise rate hikes spurred by the data "cannot be overlooked," he wrote.

Others on the Street are looking at the data, then switching to The Weather Channel.

UBS economist Maury N. Harris wrote before Thursday's release of unemployment claims, "Mild weather probably continued to hold down claims." The bank's economic note had a graph with a fever chart showing the temperature's deviation from normal between January 2004 and January 2006.

"Some of the conditions that have ripened the growth outlook at the start of 2006 are unlikely to last into spring," wrote Citigroup's U.S. economist Steven Wieting. "Abnormally warm weather boosted construction activity in December. ... Judging by a 46,000 gain in construction employment in January, the winter 2006 will go down as an unusually early and strong period for building activity."

But increased inventories of residential housing could mean slower construction come spring, Wieting wrote.

Merrill Lynch North American economist David Rosenberg called jobs figures "weather distorted."

"As for the employment report, I think there's a danger of overreacting over the message from it because this was the third warmest January in the past 112 years," Rosenberg wrote.

Ian Shepherdson, chief U.S. economist at High Frequency Economics said he had "lingering suspicions that something is not quite right with the sudden plunge in (unemployment) claims over the past month or so." But Thursday's numbers convinced him the data "looks to be the real deal."

If claims stay this low, the labor market could "become almost as tight as at the peak of the '90s boom," he wrote.

The signs of higher wages, which you'd expect to see in a tight labor market, are already popping up in the data. But Merrill's Rosenberg said they don't bear scrutiny.

"For those claiming that we have a humdinger of a tight labor market ... and this is reflected in the average hourly earnings data — think again," he wrote. He pinned most of the increase to jobs in information technology, where average hourly earnings went from a 2.5 percent increase a year ago to 6.1 percent now. Wages in the financial sector also jumped.

For every industry seeing wage acceleration, such as education, health and construction, another industry is seeing wages fall, as is the case in manufacturing, leisure, hospitality, transportation and utilities, he wrote.

The unseasonable increase in construction jobs is skewing pay statistics, too, he argued, pointing out that construction pay is 17 percent above the average for all industries.

"The wage data reflected the mix of jobs last month," he said. It "was not due to individuals demanding higher pay for what they were doing."

 

[Toro]

Income is at its lowest percentage of GDP ever, I believe.

Since the 1960s, net margins have averaged between 3 and 6%. Today they are above 6%. (They spiked up to 12% in the mid-60s before falling back down again).

Earnings of the S&P 500 have grown at about 15% the past three years, 2.5x the average rate for the past 100 years.

Wages and the non-farm payrolls have been growing slower than in virtually any other recovery.

Wage growth has lagged productivity growth the past five years.

The consumer has buttressed his spending by extracting equity from his home. The consumer is 70% of the economy.

Prices are being kept down by China.

Rising wages is fine for the economy. About time, I say. So what if margins come down? Corporate America is sitting on $600 billion in cash and has the lowest debt to assets ratio in at least 30 years. They can goose earnings by increasing their leverage.

Excess monetary creation has funnelled into the asset markets, not into the prices of goods and services.

Bernanke is a dove, not a hawk. He won't, nor should he, jack up interest rates if wages start to rise.