Still Can't Find the Bottom

This post is a lesson in why you shouldn't watch CNBC, other than for pure entertainment value.

I've already commented on the Friday rally the network fueled on February 22, when it leaked a supposed bailout of Ambac that never materialized. Today, they demonstrated that while the market has advanced down the sentiment curve to Fear, CNBC remains firmly entrenched in Denial.

On this morning's "Squawk Box" segment (which features anchor Becky Quick, who last week had to ask someone to explain a flight to quality), the headline banner read something like, "Are We Near the Bottom?" (meaning for stocks). My first thought was, "Are you kidding me?? We just pierced the bear threshold. Traders are saying sentiment is bleak. Economists are talking ten-year recession, and at least the worst and longest downturn since 1990. The worst for housing is still to come, and liquidity's drying up again. Again, are you kidding me?"

Then, they brought in an "expert" to "enlighten" us. I don't recall the firm the guy was with, but he cited last Friday's jobs report as a sign we're near the bottom.

Oh. Okay. That clears it right up, then.

Are you KIDDING ME?? Friday's payroll report showed a loss of 63,000 jobs in February, after we lost 22,000 in January (and December's originally reported gain of 82,000 was halved). So the trend is down for jobs, as it has been for nearly two years.

And this is a sign stocks have hit bottom?

Here was this "expert's" rationale: "Jobs are the ultimate lagging indicator."

Oh. Okay.

Wait - sorry, but I'm a skeptic when it comes to this stuff. So I decided to look at the numbers myself.

In March 2000, job growth peaked at about a 450,000 monthly gain. Over the next three months, the monthly pace declined to a loss of 50,000 jobs for June. Payrolls bounced around for the rest of the year and into early 2001, rising as high as 200,000+, but hitting zero or below three times, and averaging just south of 100,000 a month.

Then the bottom fell out, and we shed about 300,000 jobs in April 2001. Job growth was negative from March 2001 through May 2002, bottoming out at a loss of a little more than 300,000 in October 2001, just after 9/11.

An important point needs to be made here: even in the last, relatively mild and brief recession, job growth didn't just go negative for two months. It lasted more than a year, and even if you discount the impact of 9/11, negative job growth lasted six months. So if jobs are a lagging indicator, the fact that we haven't hit bottom yet on job losses means we have no idea whether we're near a bottom in stocks.

Now, we need to turn our attention to this "lagging indicator" concept. If jobs are indeed a lagging indicator relative to stock market performance, then, given the data above, stocks should have peaked prior to the peak in job creation in March 2000, and bottomed out prior to the trough in job creation in October 2001. Did they?

Nope, and nope. The S&P 500 peaked in July 2000, a few months after the peak in job growth, and hit bottom about a year after the trough. After that, the S&P rebounded a bit, but dropped back to within 25 points of the low about six months later. So jobs were a leading indicator of stocks, by about four months for the peak, and a year to a year and a half for the bottom.

What about this cycle? Job creation peaked in June 2005 at more than 350,000, then nearly hit that level again three months later. The trend slowed deliberately after that, until the bottom fell out, beginning four months ago. Meanwhile, stocks peaked ... four months ago. Not in 2005. So this time, jobs led stocks on the upside by about two years.

And on the downside? Well, it's too soon to tell. If this cycle's like the last one - and clearly it's not, for a variety of reasons including the fact that the upside lag between jobs and stocks is so much longer this time - then the bottom in stocks should come about 12-18 months after the bottom in jobs. And, again if this is like last cycle, the bottom in jobs should be about about a year out, and I'm being generous by discounting for the 9/11 effect.

Let's see, that puts the bottom in stocks about two years out. Haven't I read that prediction somewhere before? Oh yeah - here!

*****

Quote of the day: "We lost $8.6 billion last year ... But in parallel we raised $12.8 billion in under two months, or more than the losses we suffered. That is why today I can say that we will not need additional funds. These problems are behind us. We will not return to the market." - Merrill Lynch CEO John Thain

(Why is this the quote of the day? I just wanted to quote it for posterity, so I can reference it next time Merrill seeks a capital infusion.)