Weekly Market Commentary 2-7-2011
Some things in life really count and should be counted,
some things in life really count and can't be counted
There are two sets of data that I want to bring to your attention in this very brief blog (as it is Super Bowl Sunday). I have a Super Bowl diet allocation of 3,500 calories that I'm about to consume, and as I’ll explain, this is a number that doesn't count.
Data Point 1
Unemployment dropped to a mind altering 9% this week. Most Wall Street economists, including myself, were not expecting this type of drop.
2011 United States Unemployment Forecasts
Phillips & Co.
Of Course, we need to place a lot of value in the unemployment rate. With 70% of our nearly 15 trillion dollar GDP driven by consumption; jobs and wages matter.
Unfortunately, for a Government that we allow to spend over 3.5 trillion dollars of our hard earned money a year, they can’t' seem to count when it really counts. If this 9% unemployment rate were accurate it would mean that we added 1,765,000 jobs in the last 15 months from its peak of 10.1% in October. That is 117,666 jobs per month
We know the numbers simply don’t add up. What has actually happened is an increase number of willing (I use this term loosely) and able American workers are simply giving up and running out of benefits. According to Bill McBride, author of Calculated Risk, “The Labor Force Participation Rate declined to 64.2% in January. This is the lowest level since the early '80s. (This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.)”
Let's not take the headline number too seriously until we can get a key performance indicator that actually counts. And by the way, if I couldn't accurately count the most critical number in my business, I would run a serious risk of becoming a statistic also.
Data Point 2
The 1.9 Trillion dollars worth of cash recorded on the balance sheets of many U.S. companies at the end of Q3, 2010 is what really counts.
What corporate CEO's and Boards will do with the cash really matters, but can't necessarily be counted on. It seems a natural conclusion for many companies will be to use a part of this cash to buy more growth in the form of M&A activity. In fact, we are seeing a lift in activity with an estimated $124 Billion in global deals already being announced this year. This is the greatest number to date since 2000. While corporate balance sheets are sitting on 7.3 trillion dollars of debt or over 52% of their total financial assets, the dollars may be used to pay down debt. These are some of the highest debt levels reported since 1998 with an exception in 2008. (The Deal)
The difference between buying companies and paying down debt speaks volumes about what corporate CEO's are thinking about the economic future. One implies optimism and a willingness to risk for growth, while the other suggests a continued feeling of concern and reluctance to live with a balance sheet that can implode with another economic hiccup.
Hope and Fear can't really be counted but perhaps by watching what happens to all of this cash it can help us count the uncountable.
With an incalculable amount of this cash sitting overseas from foreign profits, we predict companies won't bring this back "onshore" to pay the current 39% corporate tax rate. Why onshore it when they can count it as earnings, pay off debt with it in any country they like, and deploy it for cheaper labor and manufacturing?
Let's hope our partners in business (the U.S. Government) can start to learn how to count what can be counted and how to appreciate what can’t always be counted.
Tim Phillips, CEO