April 13, 2014
Nasdaq, Biotech and the Market
The recent declines in the market have come despite positive reports in employment and manufacturing in the past few weeks. Nasdaq market is off about 7% from its high on March 6th and some biotech indexes have lost 8% in the past few weeks. A bellwether in the tech industry is Apple whose stock is down about 9% since the beginning of the year, and 4% in the past few weeks.
The larger market, the SP500, has declined about 4% in the past six trading days, prompting the inevitable “the sky is falling” comments on CNBC. The decline has not even reached the 5% level of what is considered a normal intermediate correction and already the sky is falling. It sells advertising. The broader market is at about the same level as mid-January. Ho-hum news like that does not sell advertising.
Both the tech-heavy Nasdaq and the smaller sub-sector of biotech are attractive to momentum investors who ride a wave of sentiment till the wave appears to be turning back out to sea. In the broader market, expectations for earnings growth are focused on the second half of the year, not this quarter whose results are expected to be rather lackluster. The 7-1/2% rise in February and early March might have been a bit frothy.
The aluminum company Alcoa kicks off each earnings season. Because aluminum in used in so many products Alcoa has become a canary in the coal mine, signalling strength or weakness in the global economy. On Tuesday, Alcoa reported slightly less revenues than forecast but way overshot profit expectations. This helped stabilize a market that had lost 2.3% in the past two trading days.
On Thursday, the banking giant JPMorgan announced quarterly profit and revenues that were more than 8% below expectations. Revenues from mortgages dropped a whopping 68% from last year, while interest income from consumer loans and banking fell 25%. Investors had been expecting declines but not this severe. JPMorgan’s stock has lost 5% in the past week, giving it a yield of 2.8% but it may need to come down a bit more to entice wary investors. Johnson and Johnson, which actually makes tangible things that people need, want and buy every week, pays a yield of 2.7%. Given the choice and assuming a bit of caution, what would you do?
The banking sector makes up about a sixth of the market value of the SP500, competing with the technology sector for first place (Bloomberg) The technology sector has enriched our lives immensely in the past two decades and deserves to have a significant portion of market value. The financial sector – not so much. They are like that one in the family that everyone wishes would just settle down and act responsibly.
Jolts and New Unemployment Claims
February’s Job Openings report (JOLTS) recorded a milestone, passing the 4 million mark and – finally, after six years – surpassing the number of job openings at the start of the recession. The number of Quits shows that there still is not much confidence among employees that they can find a better job if they leave their current employment.
New unemployment claims dropped to 300,000 this week; the steadier 4 week average is at 316,000. As a percent of the workforce, the number of new claims for unemployment is near historic lows, surpassed only by the tech and housing bubbles.
A 1986 study of Current Population Survey (CPS) data by the Bureau of Labor Statistics (BLS) found that “well over half of employed Americans work the standard [40 hour] schedule.” The median hours worked by full time employees changed little at just a bit over 40 hours. The average hours worked by full time employees was 42.5. The study noted that between 1973 and 1985 the number of full time workers who worked 35 to 39 hours actually declined.
A paper published in 2000 by a BLS economist noted that the Current Population Survey (CPS) that the Census Bureau conducts is the more reliable data when compared to the average work week hours that the BLS publishes each month as part of their Establishment Survey of businesses. The Establishment survey is taken from employment records but does not properly capture the data on people who work more than one job. In that survey, a person working two part time jobs at 20 hours each is treated as though they were two people working two part time jobs. The CPS treats that person as one person working 40 hours a week. Writing in 2000, the author noted that the work week had changed little from 1964 – 1999.
Fast forward to 2013 and the BLS reports that full time workers work an average of 42.5 hours, the same as the 1986 study. More than 68% of workers reported working 40 or more hours a week.
The House recently passed H.R.2575, titled the “Save American Workers Act of 2014” – I’ll bet the people who write the titles for these bills love their jobs. I always envision several twenty-somethings sitting in a conference room with pizza and some poetic lubricant and having a “Name That Bill” contest. I digress. This bill defines a full time employee as one who works on average 40 hours a week, not the 30 hours currently defined under the Affordable Care Act.
When I first started doing research on this I was biased toward a compromise of 35 hours as the definition of a full time employee. My gut instinct was that fewer full time employees work a 40 hour week than they did 30 years ago. The data from the BLS doesn’t support my gut instinct.
A monthly survey of small businesses by NFIB reported an upswing in confidence in March after a fairly severe decline in February. That’s the good news. The bad news is that optimism among small business owners can not seem to break the 95 index since 2007. According to the U.S. Small Business Administration 2/3rds of new jobs come from small businesses. “Since 1990, as big business eliminated 4 million jobs, small businesses added 8 million new jobs.”
This is the first full year that all the provisions of the ACA, aka Obamacare, take effect. Millions of small businesses around the country who provide health insurance for their employees are getting their annual business health insurance renewal packages. For twelve years, my small business has provided health care for employees. When I received the renewal package a few weeks ago, I was disappointed to find several changes that made comparisons with last year’s costs a bit more difficult. As an aside, this health insurance carrier has always been the most competitive among five prominent health insurance carriers in the state.
Making the comparison difficult was a change in age banding. What’s that, you ask? In my state, business health plans were age banded in 5 year increments; e.g. a 50 year old and a 54 year old would pay the same rate for a particular policy. Now the age banding is in one year increments. If I compared the cost for a 45 year old employee last year with the rate for a 46 year old employee this year, the rate increase was a modest 5%. Not bad. But if I compare a 48 year old employee’s rate last year with a 49 year old employee this year, costs have risen 11%. The provider for my company no longer offers the same high deductible ($3000) plan we had, offering a choice between an even higher deductible ($4500) plan or one with a much lower deductible ($1200). Again, this makes the comparison more difficult. Changes like this make cost planning more difficult and are less likely to encourage small businesses to bother offering health coverage to their employees.
Out of curiosity, I took a look at 2002 prices. The company long ago abandoned the no deductible plan we had in 2002 simply because it became unaffordable – this was while George Bush was President. A plan similar to the HMO plan we had in 2002 – $20 copay, $50 specialist, $0 routine physical, no deductible, $2000 Max OOP – now costs 270% what it did 12 years ago, an annual increase of more than 8%. An HMO plan as generous as the one we had in 2002 is no longer available, so a more accurate comparison is that health insurance has tripled in twelve years. It is no wonder that many small businesses either offer no health insurance or cap benefits at a certain amount that reduces the affordability and availability of insurance for many employees.
Until the unemployment rate decreases further, employees and job applicants are unlikely to exert much pressure for benefits from small business employers, a far different scenario than the heady days of the mid-2000s when unemployment was low and employers had to bargain to get decent employees. There is no one single powerful voice for many small businesses, other than the NFIB, which makes it unlikely that Congress or state representatives will get their collective heads out of their butts and address the myriad regulatory and cost burdens that are far more onerous on small business owners. Because of that we can expect incremental employment gains.
Betraying the lack of long term confidence in the economy and in response to employment burdens, employers increasingly turn to temporary workers, who make up less than 2% of the work force.
As an economy recovers from recession, it is normal for job gains to be distributed unevenly so that the increase in temporary workers is far above their share of the workforce. Employers are understandably cautious and don’t want to make long term commitments. Gains in temporary employment as a percent of total job gains should decline below 10%, indicating a stabilizing work force.
For the past two decades of recoveries and relatively healthy growth the average percentage is 7.4% (adjusted for census employment). The percentage finally fell below this average in early 2012, rose back above it for a few months then stayed under the average till January 2013. Since February of last year, that percentage has been rising again, crossing above the 10% mark in January, an inexorable evaporation of confidence.
For the past year, repair and maintenance employment has flatlined at 1999 levels, indicating a lack of investment in commercial property and production equipment.
Specialty trade contractors in the construction industries are at 1998 levels despite an increase in population of 40 million.
While not alarming these trends indicate an underlying malaise in the workforce that will continue to hamper solid growth. Those ambitious and earnest folks in Washington, eager to make a difference and advance their political careers, continue to create more fixes which make the problem worse. Imagine a car out of gas. People out here on Main St. are pushing while the politicians keep hopping in the car to figure out what’s wrong, making the car that much more difficult to push. At this rate, it is going to be slow going.