It's All On Employment Now

Posted by jeff

Thu Jan 3rd, 2008 10:57 AM

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I like to follow "smart money" a legacy of my first job working for a firm that researched only companies where "smart investors" had taken large stakes. I recently read an interview in Time Magazine and a synopsis of a speech by Sam Zell at the Executives Club of Chicago. The the famous "grave dancer" vulture real estate investor has time and again bought assets (real estate and many others) when most investors were too petrified. Note his recent acquisition of Tribune Inc. - when most think the newspaper business is dead. He has also been prescient in selling before the last call was sounded at asset parties. Zell will go down in history (in my opinion) for hanging his Equity Office Properties Trust on Blackstone Group and others they re-sold many of the assets to (like Harry Macklowe), just before the real estate cycle ended. I think if I were Zell, I'd be licking my lips right now thinking about the bargains I would be picking up if all hell broke loose....his favorite environment, I would guess. But not Mr. Zell, he denied that his sale of Equity Office Properties was a "top marking event" and sounded an optimistic tone about the real estate business referring to the lack of supply and virtual standstill on new construction....at least as it concerns his Equity Residential Properties Trust (NYSE/EQR).

According to a recent article in the Tribune - which he now owns:

"The new year could bring a new reality for landlords and investors, said Carroll of Cohen Financial. The downtown Chicago leasing market faces 6 million square feet of new offices in development that will start coming online in 2009."
But hey, Why talk down your own positions and why bring attention to the fact that you blew out at the top in a bidding war?....you might want to do the same thing again in the future. So while I am a big fan of Sam Zell, I watch what he does more than what he says, publicly. This is because it's easier to understand when assets look priced for perfection than it is to predict the economy....which is why Warren Buffett and Sam Zell don't trade macro bets; they invest in assets they understand well, buy them cheap and sell them dear. It just so happens that this oftentimes correlates well with economic turning points (although many times it doesn't). Zell's bull case for the economy avoiding recession and his apartment owning EQR weathering the storm was largely predicated on the economy sustaining something like full employment. According to the article, "He expressed confidence that as long as the unemloyment rate stays below 5.5%, it was very very unlikely that the subprime contagion would spread". This was based on the idea that fortunately the sub prime mess hit when the economy was strong, not weak. Let's hope the asset implosion doesn't wag the dog.

In a December 3rd speech, Fed Governor Janet Yellen made central reference to unemployment but in my opinion likely understated the risk to the labor market of caution by employers: "To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level. However, for the next few quarters, there are signs that growth may come in somewhat lower than I had previously thought likely. For example, some of the risks that I worried about in my earlier forecast have materialized—the turmoil in financial markets has not subsided as much as I had hoped, and some data on personal consumption have come in weaker than expected. I continue to see the growth risks as skewed to the downside in part because increased perceptions of downside economic risk may induce greater caution by lenders, households, and firms."

So it should be of no surprise to you that all eyes are riveted on Friday's Labor Department Non Farm Payroll Report. Bank lending has been temporarily curtailed by asset losses, the Fed is doing its best to keep a liquidity crisis at bay....and many feel that if we can just get through this extreme indigestion period all will be well again. It comes down to confidence: will employers start to cut back in anticipation of tougher times or will they wait to see how things play out. The early look - an independent survey by payroll processor ADP, which came out this morning - isn't so great. "Private Sector companies in the U.S. added 40,000 jobs in December, according to the ADP employment report released Thursday. It's the weakest growth since 27,000 jobs were added in August." Additionally, exports don't seem to be bailing us out as "Factory employment has fallen for 18 straight months." As Urban Digs has noted, financial service layoffs are still coming, but these firms reportedly reduced employment by 5,000 last month, "The third decline in the past five months."

The other advanced data, Initial Jobless Claims released this morning, read a little better. First time jobless claims fell 21,000, breaking a recent string of increases, but continuing claims kept on rising, hitting the highest level since November 19, 2005.

Hang on till Friday.

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