Morning Note: Must Read!

The highly-anticipated May employment report was just released, and it has to be the biggest miss vs economists’ expectations on record. 

The consensus estimate, which jibed with weekly and continuing jobless claims reported throughout the month, was a loss of 7.7 million jobs. What we got was a gain of 2.5 million. That’s awesome! But, per below, it’s a total head-scratcher. 

If, after double-checking the numbers, this one stands, clearly the economy is doing far better than what’s been meeting the eye (and the data). Nevertheless, one could argue that stocks — having retraced 3/4ths of the Feb/Mar selloff — have been discounting 3% unemployment, as opposed to the 13% reported this morning, which under any other narrative would have stocks dropping like rocks.

To get a feel for the historical context of a 13.3% unemployment rate, take a look:   click to enlarge…

Allianz Chief Economic Adviser and Bloomberg Analyst Mohamad El-Erian is glad he’s not me this morning 😎:

“I’m really glad I’m not managing other peoples’ money, because if I’m managing other peoples’ money I would be completely torn. Torn between buying into the growth hypothesis and buying into the Fed moral hazard trade, versus the reality of fundamentals and the reality of valuations.”

Well, I’m personally very glad that I am managing other peoples’ money, because — having been at it for 35 years — I understand how — over the long run — critical it is to resist what El-Erian calls the “moral hazard trade”, and to have the discipline to invest along with “the reality of fundamentals and the reality of valuations”, especially when the price action of stocks strays widely from those marks. 

Hanging with the crowd at extreme moments such as the one we’re presently experiencing is incredibly risky, as, if/when a reality that conflicts with whatever narrative the crowd is chasing hits home, it’s every man/woman for themselves.

Still thinking about that employment report. Not only is it at odds with virtually all of the data to this point, the survey week for the numbers ended in mid-May, when hardly any businesses had reopened. Hmm????

Here’s Economist John Hussman’s take:

“Let’s see:

1) $349bn in payroll protection (payable whether employees are working or not, as long as they are kept on payroll).

2) Median personal income ~$34k/yr

3) 24 wks of PPP ~ $15,700

4) $349bn/$15,700 ~22 million jobs paid w/PPP

Job “shocker” isn’t recovery, it’s PPP.”

Makes sense, in that we know the economy remains in dire straits, and we know the directives of the PPP, but it conflicts with the claims numbers, etc., for the month.

Clients, in case you’re wondering, yes, our non-correlated-to-stocks positions (save for ag commodities and the dollar), as well as our put hedges, are getting creamed this morning. The rest of the allocation, however, is doing just fine. Seven of our positions are actually outperforming the broader market. 

All in, as I type, our 100%-to-core allocated portfolios are capturing roughly 65% of the move in the S&P 500 this morning, with of course significantly less risk… Although the day is still very young…

Oh, and no, we’re not the least bit inclined to go rushing into the crowd right here…


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