THE KING REPORT

Asian bourses got trashed on Friday.  But just before Europe opened (5.5 hours before Jobs Report) another dubious story about ECB bond buying, appeared.  This provoked the desired buying of stocks.

The other provocation for the big rally is a story about the EFSF that appeared just after the NYSE open (probably circulated around Europe before its open) that suggests that Spain will be bailed out.

So traders manically covered shorts and went long stocks, gold and oil in expectation that a bailout of Spain could appear over the weekend.

The bailout appeared late Friday night (early Saturday in Europe); but it was Greece, not Spain.

ECB saves Greece from bankruptcy by securing emergency loans-paper

The European Central Bank (ECB) has saved Greece from bankruptcy for the time being by securing it interim financing in the form of additional emergency loans from the Bank of Greece, German newspaper Die Welt said on Saturday.

The ECB’s Governing Council agreed at its meeting on Thursday to increase the upper limit for the amount of Greek short-term loans the Bank of Greece can accept in exchange for emergency loans, the newspaper said in an advance copy of the article due to appear in its Saturday edition…

The move should enable the Greek government to access up to an extra 4 billion euros of funds…

http://www.reuters.com/article/2012/08/04/ecb-greece-idUSL6E8J3QWL20120804

Merkel’s Coalition Members Signal Acceptance of ECB Bond-Buying The envisaged move to purchase troubled euro states’ government bonds is “a wise middle way” to solve the region’s debt crisis, Elmar Brok, a member of Merkel’s Christian Democratic Union party, told Deutschlandfunk radio today.

Norbert Barthle, CDU budget spokesman, said that German lawmakers will have veto rights over bond purchases by the euro- area’s rescue funds, which would operate in tandem with the ECB under Draghi’s proposal. The temporary fund “was created for a purpose and bond-buying is in the manual,” Barthle said yesterday by phone. With Merkel on vacation for another week and parliament in summer recess, there was no official government reaction to Draghi’s announcement…

[This dubious report was debunked on Saturday.  Stories on page 5]

http://www.bloomberg.com/news/2012-08-03/merkel-s-coalition-members-signal-acceptance-of-ecb-bond-buying.html

EFSF requests bank proposals for loan facilities

The European Financial Stability Facility (EFSF) has contacted members of its banking group for proposals on a series of credit facilities, the euro rescue fund said.  Banks confirmed they had received a request on Friday for a repurchase facility, following earlier requests for uncommitted unsecured and committed secured loans over the last weeks. An EFSF spoksperson said the credit facility would create a short-term liquidity buffer… [Traders assumed this means Spain is about to get a bailout.]

http://www.reuters.com/article/2012/08/03/efsf-bank-loans-idUSL6E8J3LL520120803

Spain inches towards a full EU bailout Spanish Prime Minister Mariano Rajoy inched closer on Friday to asking for an EU bailout for his country, but said he needed first to know what conditions would be attached and what form the rescue would take.

http://www.reuters.com/article/2012/08/03/us-eurozone-spain-bailout-idUSBRE8720UF20120803

We opined that the July Employment Report could be better than expected due to political reasons.  That’s what transpired; so there is no reason for a QE 3.0 announcement at the Sept. 13 FOMC.

Fictitious jobs from the Birth/Death Model soared to 52k.  For July 2011, the number was 5k; in July 2010 it was -38k.   For July 2009 it was -10k.    http://www.bls.gov/web/empsit/cesbd.htm

The fact that the July 2012 B/D Models jobs are double the previous record for July (25k in 2008) illustrates just how risible the July B/D gains are.  http://www.bls.gov/web/empsit/cesbdhst.htm

Here is the history of July B/D jobs since the model went dynamic in 1999:

1999 -6k; 2000 (election year) +11k, 2001 -13k, 2002 -61k, 2003 -83k, 2004 -80k, 2005 -72k, 2006 +21k, 2007 +3k, 2008 (election year) +25k, 2009 -10k, 2010 -38k, 2011 (prelim) +5k

The average B/D Jobs for July is a loss of 22.5k.  Big anomalies occur in election years.

The Washington Post, citing a NFIB report refutes the record B/D jobs in July: Summer slump: Small businesses continued shedding workers in July

The nation’s smallest firms trimmed their staffs ever so slightly over the past few months, losing an average of 0.04 workers per company, according to a report released Thursday by the National Federation of Independent Business. While that’s not quite as big of a hit as the 0.11 workers they reported losing in June, this marks the second consecutive month in the red after six straight of flat or increased employment.http://www.washingtonpost.com/business/on-small-business/summer-slump-small-businesses-continued-shedding-workers-in-july/2012/08/02/gJQAkDCiSX_story.html?wpisrc=nl_headlines

Manufacturing created 25k jobs but 13k jobs were derived from non-furloughed workers.  There is also an ancillary jobs boost in related manufacturing due to the non-furloughed for political reasons workers.

The Household Survey shows a loss of 195 jobs.  31k part time jobs appeared; so full time employment declined about 226k…The Employment/Population Ratio declined 0.2% to 58.4%.  This result is in harmony with Gallup and Rasmussen July employment polling.

We occasionally highlight the reasons for the discrepancies between the Household Survey and the Establishment Survey (CES/ NFP).  The biggest reason is that the Household Survey includes workers that do not actually receive a paycheck and those that aren’t at work for various reasons.  If one worked one hour in the surveyed period, they are considered ‘employed’.  So the Household Survey should show more employment than the Establishment (NFP) Survey.

The BLS: People are classified as employed if they did any work at all as paid employees during the reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm. People are also counted as employed if they were temporarily absent from their jobs because of illness, bad weather, vacation, labor-management disputes, or personal reasons…

The household survey includes agricultural workers, the self-employed, unpaid family workers, and private household workers among the employed. These groups are excluded from the establishment survey.

–The household survey includes people on unpaid leave among the employed. The establishment survey does not.

–The household survey is limited to workers 16 years of age and older. The establishment survey is not limited by age.

–The household survey has no duplication of individuals, because individuals are counted only once, even if they hold more than on job. In the establishment survey, employees working at more than one job and thus appearing on more than one payroll are counted separately for each appearance.

There are more reasons for the discrepancy from the BLS: In the household survey, the reference period is generally the calendar week that contains the 12th day of the month. In the establishment survey, the reference period is the pay period including the 12th, which may or may not correspond directly to the calendar week…

Many seasonally adjusted series are independently adjusted in both the household and establishment surveys… In the household survey, new seasonal factors are used to adjust only the current month’s data. In the establishment survey, however, new seasonal factors are used each month to adjust the three most recent monthly estimates. The prior 2 months are routinely revised to incorporate additional sample reports and recalculated seasonal adjustment factors…http://www.bls.gov/news.release/empsit.tn.htm

Of course, the B/D is a major reason for discrepancies between the two surveys, per the BLS:

Another major source of nonsampling error in the establishment survey is the inability to capture, on a timely basis, employment generated by new firms. To correct for this systematic underestimation of employment growth, an estimation procedure with two components is used to account for business births. The first component excludes employment losses from business deaths from sample-based estimation in order to offset the missing employment gains from business births. This is incorporated into the sample-based estimation procedure by simply not reflecting sample units going out of business, but imputing to them the same employment trend as the other firms in the sample. This procedure accounts for most of the net birth/death employment…

The BLS ignores jobs losses from busted firms and the firms that disappear in the B/D jobs guesstimation. Who on the Street knows this?  It’s all in the footnotes but few analysts take the time to ‘do the work’.  Instead they pontificate without accurate knowledge or they input ‘garbage in’ data into their proprietary models, which generates inaccurate, ‘garbage out’ present conditions and forecasts.

Please note that the BLS assumes that small businesses ALWAYS creates jobs(systemic underestimation of employment growth) even though there is abundant evidence from various sources that there is less small business formation and growth.  This is why the B/D model kept fabricating jobs during the darkest days of the 2008-2009 crisis and during the worst economic recovery on record.

B/D Model jobs growth is the biggest component of NFP ‘growth’ over the past few years.

For the past 12 months, Birth/Death Models jobs are 548k or 30.5% of the 1.794m NFP NSA.  The ‘Leisure & Hospitality’ component of B/D jobs is 234k of the 548k.  These are assumed waitress, busboy and bartender-type jobs that are best guesses.

For the past 12 months ‘Leisure & Hospitality’ is 283k of NFP NSA; Education & Healthcare is 319k.

http://www.bls.gov/news.release/empsit.t17.htm

John Williams notes that the chicanery in the July Employment Report goes beyond B/D job fudging.

The July employment and unemployment numbers published today, August 3rd, were worthless and likely misleading. What has been done in the last couple of decades to the reporting methodologies for monthly labor data, compounded by distortions introduced into the system from the economic collapse of the last five years, has left the heavily-followed employment and unemployment series seriously impaired as to significance, and potentially subject to direct political manipulation…

John reveals that a member of the advisory panel to the BLS under Nixon told him that Tricky Dick suspected that the BLS was rigging the jobs report against him.  So Nixon suggested that each month only one employment number should be released – the lower of either the seasonally or not-seasonally adjusted unemployment rate – “without telling the public which one had been released…”

Mr. Williams asserts that the BLS did similar chicanery with the July Employment Report.

…the BLS just published the July 2012 headline unemployment rate, but it will not tell the public what the appropriate comparative number was for June.

Due to the deliberate, inconsistent reporting of monthly unemployment rates, the official 0.1 percentage point increase in the July headline rate was not necessarily so…it could have been unchanged; or it could have declined. Annual revisions to last year’s data showed a difference of 0.2 percentage point versus initial estimates of month-to-month change in at least one month.

Only the BLS knows what the actual June-to-July change was, and it will not publish a hard number, on a consistent basis, until after the election, along with the December 2012 data to be released in January 2013.  By then, today’s number will have been revised (but not re-reported) five times…

Still, the BLS will not publish the revised, consistent June number—leaving in place instead the now-obsolete unique June calculation of the month before—so as “to avoid confusing data users.” As would have been the case with President Nixon’s proposal, the published numbers here have no meaning in terms of month-to-month comparisons, and extremely few people have any idea that there even is a problem in the reporting… http://www.shadowstats.com/article/no-461-july-employment-and-unemployment?display=pdf

Final July Employment Report notes:

Service sector jobs were 88k more than June due mostly to a 44k gain in Education & Healthcare.

In July 2011, 79k government jobs were lost; this July only 9k government jobs were lost.  Election year politics demand that government jobs cuts are deferred until the next year.  ‘Tis another reason that 2013 could be horrendous – election-year ‘greasing’ defers economic pain to the ensuing year.

http://www.bls.gov/news.release/empsit.b.htm

German politicians concerned about bigger role for ESM

Politicians in Germany’s ruling centre-right coalition have expressed renewed concerns about an increased role for the euro zone’s permanent bailout fund, which is at the centre of a court case after the German parliament approved it in basic form.

German Foreign Minister Guido Westerwelle told Germany’s weekly Focus magazine he was opposed both to broadening the European Stability Mechanism (ESM), the euro zone’s permanent bailout mechanism, and to stepping up purchases of European sovereign bonds. “I can’t imagine the Bundestag lower house of parliament would give a majority to a policy of unlimited joint liability for Germany. As an MP I certainly couldn’t agree to that,” he said in an advance copy of the article due to appear on Sunday…

The German central bank is opposed to fresh ECB bond buying on the grounds that it amounts to monetary financing of governments, contravening European law.  Alexander Dobrindt, the CSU’s General Secretary of the conservative Christian Social Union, was even more critical, accusing Draghi of using the ECB for Italian national interests in the Tagesspiegel newspaper on Saturday…

http://www.reuters.com/article/2012/08/04/us-germany-eurozone-idUSBRE8730IB20120804

Der Spiegel: ‘Vengeance for ECB Bond-Buying Will Be Bitter’

Senior FDP member Rainer Brüderle, who was economy minister prior to Rösler, added that “the ECB should concentrate on its core competency. Fundamentally, it is not the duty of a central bank to participate in state financing.”…Still, the widespread resistance in Germany to ECB action, and to many other euro-crisis proposals that could increase German taxpayer liability, has painted Merkel into a corner. With the opposition in Berlin showing a decreased willingness to rubber stamp her euro-crisis measures and a growing rebellion within the ranks of her own government, her ability to respond to the worsening crisis may become increasingly limited… [Merkel is up for re-election in 2013.]

http://www.spiegel.de/international/europe/german-press-reactions-to-draghi-plan-for-ecb-euro-crisis-involvement-a-848119.html

Greece eyes T-bills to cover funding squeeze: minister

Cash-strapped and behind targets agreed under a 130 billion euro ($160.4 billion) financial rescue package, Athens faces a 3.2 billion euro bond maturity on August 20.

“The situation (with cash reserves) is borderline and will remain so until September when the (EU/IMF/ECB) report will be concluded,” Deputy Finance Minister Christos Staikouras told the paper in an interview. “We are managing cash reserves carefully and exploring several solutions, such as an increase in the issuance of T-bills. We will choose the optimal solution in agreement with our partners,” he said…The troika will meet with Finance Minister Yannis Stournaras on Sunday…

http://www.reuters.com/article/2012/08/04/us-greece-funding-idUSBRE8730JU20120804

Greece’s new pledges will take epic battle to implement [New promises to break, what has changed?]

Greece’s latest fiscal and reform pledges may be enough to convince international lenders weary after years of broken promises to keep Athens hooked to a 130 billion euro lifeline, but the battle to implement it will be epic.http://www.reuters.com/article/2012/08/05/us-greece-pledges-idUSBRE87403A20120805

Greece Faces Further Reviews Before Release of Aid

Envoys representing Greece’s international creditors on Sunday wrapped up an inspection of the country’s progress in meeting the terms of its second bailout and said they would return next month for a final review to determine whether further loans are released and a default is averted.

In separate statements, inspectors and Greek government officials said that significant headway had been achieved in the talks, which focused on €3 billion, or $3.7 billion, for 2012 in budget cuts the government has yet to implement, and another €11.5 billion in budget cuts demanded for 2013 and 2014. The cutbacks — chiefly reductions to state spending, pensions and social benefits — must be implemented in exchange for the release of further installments of rescue funding…

http://www.nytimes.com/2012/08/06/business/global/06iht-troika06.html?_r=1&partner=socialflow&smid=tw-nytimesbusiness

How absurd!  Greece is getting yet another bailout before it complies with the terms of the prior bailout!

The wonderment in all this new bailout news is that Greece was purportedly rescued months ago.  It was in all the papers and stocks rallied robustly on the news.  Does the fact that Greece wasn’t bailed out refute the concept of the omniscient stock market?

Italy plays down prospects it will tap EU rescue funds

Italy does not at the moment need to ask the euro zone’s rescue funds to buy its government bonds in the markets to bring down borrowing costs, Bank of Italy Governor Ignazio Visco and Cabinet Undersecretary Antonio Catricala said on Sunday.  Chances that Rome will have to tap the European Financial Stability Facility (EFSF) or its successor the European Stability Mechanism (ESM) in future will depend largely on Italy’s budget and reform efforts, Visco told Repubblica daily…

http://www.reuters.com/article/2012/08/05/us-italy-crisis-centralbank-idUSBRE87407F20120805

Disagreements within the 17-nation euro area are undermining the future of the European Union, said Italy’s Prime Minister Mario Monti as the stand-off on European Central Bank support for Italian and Spanish debt hardened…

There was no official German reaction to Draghi’s statements, partly because it’s vacation time across Europe.  Spain’s Prime Minister Mariano Rajoy is in his native Galicia, German Chancellor Angela Merkel is walking in the Italian Alps, and French President Francois Hollande is staying at an official vacation residence in the South of France.

Euro-area finance chiefs won’t meet until Sept. 3 to discuss possible Spanish bond buying and the economic situation in Greece, Italian news agency Ansa reported Aug. 3, citing unidentified European officials. European governments would not confirm the meeting. The next meeting of the ECB’s governing council is Sept. 6…http://www.bloomberg.com/news/2012-08-05/monti-warns-germany-that-euro-crisis-threatens-europe-s-future.html

While important Euro leaders are on vacation, dilettantes & interlopers are pontificating and the media is spreading the jabberwocky.  Then traders react to the nonsense – a typical summer rally folly.

We experienced the horror of the 1987 Market Crash, which was the first computer-generated crash.

In 1986 the ‘Super Dot’ order system appeared.  This allowed brokers to execute orders larger than 10,000 shares.  Program traders/ futures & options arbs had been executive trades manually until then.

Salomon, Bankers Trust and others employed $2 brokers in zones on the NYSE floor to execute the orders.  There was ample ‘heads up’ given to professional traders on the Street before a ‘program’ was executed.  We would get several calls from the NYSE floor that ‘Salomon [clerks] were passing out orders to execute a ‘two tick’ or ‘five minute’ program.

Once the orders were placed around the NYSE floor, they would be executed and the brokerage firm would also execute the corresponding futures [usually] or OEX options orders.

But once Super Dot appeared, the world changed.  Now orders could be zipped lightning fast directly to the NYSE specialists’ books.  There was no more lag time to distribute and execute orders.

This operation is what produced the huge 1987 summer rally, in conjunction with rumortrage, which was the daily Street chatter about takeover deals.

But when the program traders decide to dump stocks via Super Dot, the financial system went to the abyss on Monday, October 19, 1987 and collapsed on Tuesday, October 20, 1987.

As bad as the 508-point DJIA decline on Monday, October 19, 1987 appeared, it was far worse because S&P futures and OEX options were trading at the equivalent of about a 750-point DJIA decline.

If this magnitude of decline had been displayed, a full-fledged financial panic would have transpired.

The reason that derivatives were so mispriced compared to stocks was that computers at that time were not efficient enough to keep stock and derivative prices in concert.

Also, and this point has been lost on most people, particularly industry nabobs, most customers, retail and institutional, couldn’t execute sell orders.  In fact, most retail customers couldn’t contact their brokers or mutual fund reps because the telecommunications and orders system failed – erstwhile circuit breakers.

Now we live in a world where everyone and anyone are or can be connected digitally.  Orders are being zipped in nanoseconds around the globe.  Communication & execution circuit breakers are virtually gone.

If another impetus appears that induces fervid selling ala 1987 or even 1989, the geometrically more efficient communications and execution systems of today plus HFT and algo trading will facilitate horror multiples beyond that of 1987.

Today – The deadly dangerous environment has gotten even more treacherous.  Global financial and economic conditions are worsening but bailout fever is proliferating and risk assets are inflating.  We must once again reiterate that the current situation is extremely dangerous and summer rallies on hope & hype amid economic ebbing often become calamities of biblical proportion.

Do not play unless you must!

The Olympics provide compelling entertainment and welcomed diversion.  However, the increasing presence of trivial pursuits masqueraded as athletic competition leads one to worry that future Olympiads will award medals in ‘Rock, Paper, Scissors’, ‘Three-Penny Hockey’ and ‘Matchbook Football’.