Jamie Dimon is our favorite banker. His bank, JP Morgan-Chase, is one of three banks that come out big winners from the financial crisis. The other two are Toronto Dominion (TD Bank in the U.S.) and Wells Fargo. (Bank of America made most of the right moves and was forced into the Merrill Lynch merger and the jury is still out whether they should be added to the list.)

If you want to hear the world's top banking talking fast and not hiding under a grey flannel suit, fire up this interview with CNBC:





In the interests of full disclosure, the Harris family owns modest amunts of JP Morgan stock, some of which was bought in March, 2009.

America's unemployment rate dropped from 9.8% to 9.4%.

The Bureau of Labor Statistics released its employment report for December. America's seasonally adjusted unemployment rate dropped from 9.8% to 9.4% in December. Is this proof that the household survey is inherently unreliable or that this is a reversal of trend?

Neither!

The unemployment rate has been following a slow downward trend since the fall of 2009. Now looking at the seasonally unadjusted data, we also see it has been falling for five straight months relative to the same month last year (SPLY in postalese.) This trend has been masked by the seasonal adjustment process (see the previous post.)

No doubt analysts will be disappointed by the small increase in jobs (103,000) reported by the establishment survey. Do not give it too much weight. These data will be revised, perhaps drastically in February, leading also to substantial revisions to the GDP series. This will cause the whole history of the recovery to be rewritten.

The good news is that the establishment data may become a more useful real time cyclical indicator. The BLS announced, "Effective with the release of January 2011 data on February 4, 2011, the establishment survey will begin estimating net business birth/death adjustment factors on a quarterly basis, replacing the current practice of estimating the factors annually. This will allow the establishment survey to incorporate information from the Quarterly Census of Employment and Wages into the birth/death adjustment factors as soon as it becomes available and thereby improve the factors. Additional information on this change is available at www.bls.gov/ces/ces_quarterly_birthdeath.pdf."

And that is very good news. Tracking the next cycle with the jobs data will be more accurate.

On a sour note, the BLS will update the household estimates with new population data in February. Historically the gnomes resident in the Postal Square Building have not been time series friendly in their population updates.

Maybe America's Employment Malaise Is Not as Bad As It Seems

Tomorrow we get to see the December employment data.  It may well show that things are not as gloomy as we have been seeing.    Certainly America's 9.8% unemployment in November was depressing and in that vein, I wrote "A quick survey of the numbers demonstrates that the national economy is mired in a malaise worse than in any previous postwar U.S. recession."

Wall Street has grasped at any number of straws in the wind to convince itself that things are looking up.  Unemployment claims are down, manufacturing purchasing mangers are saying things are up.  Can the stock market's upbeat tea reading be right?  Yes, it can.  

Whatever tomorrow's data show, the employment scene may not be as bad as it now looks.  I am mostly looking at the household survey data.  The last two recessions demonstrate that the establishment data is an unreliable real time guide to cyclical trends.   The survey is badly biased during downturns and perhaps recoveries.  It misestimates the cyclical impact of births and deaths of firms on employment.  

Why might the data paint an overly gloomy picture?  I have come to believe that the seasonal adjustment overcompensates during cyclical swings.  Consider these data:  while the seasonally adjusted unemployment rate is 9.8%, the unadjusted rate for November is 9.3%.  Not surprising.  Retailers hire going into the Christmas season. On a seasonal adjusted basis, retail employment was down from October (establishment data); yet that same survey shows retail employment was up over November, 2009.  Curious.  Moreover, the national seasonally unadjusted unemployment rate (household survey) is down from a year ago for four straight months.

The seasonal adjustment process averages data over thirty years.  It is a blunt instrument for dealing with the massive impact household deleveraging is having on retail sales, the structure of the retail sector, and thus seasonal retail employment.  Indirectly, this affects the estimate of the seasonally adjusted national unemployment rate as well.

Before you break out the champagne,  note my favorite long term cyclical indicator, the employment rate peaked in April.

While I am backtracking on what I said about the national employment picture a little, I stand by my two conclusions on our long term prognosis and Wichita's prospects:

"The fundamental dislocations that led to the recession of 2007 to 2009 have not been addressed." and

"We have three significant strengths on which [to buck the national] trend...: exports, energy and entrepreneurship."

Future of Investment Banks & Bonuses

On December 17th, 2010, the Financial Times asks: As regulators and politicians seek to tighten their grip on bonuses and leverage, what does the future hold for investment banks after the financial crisis? and how do food and clothing companies, as well as governments, react to rocketing input prices? 

In the chair, analysis editor Frederick Studemann debates the issues with FT colleagues Megan Murphy, investment banking correspondent, Martin Sandbu from the leader writing team and consumer industries editor Louise Lucas.

The video runs 16 minutes and 28 seconds.

Kraft: 3.6% Yield + Plus Emerging Market Synergy

Kraft will be absorbing its acquisition of Cadbury. Should you buy the stock?

It yields 3.64% and sells about 13 times 2011 estimated earnings according to
Barron's Dimitra DeFotis. Is the stock undervalued or is the market discounting lousy prospects? Cadbury certainly offers opportunities for synergy. Kraft is strong in countries Cabury is not and vice versa. With the emerging market econnomies providing the world's economic growth, this is important. Hanging over that rosy scenario is the question of whether Kraft can digest iCadbury's sweets. Managements in more than one industry have gotten indigestion from such major mergers.


Still DeFotis explains that mixing Kraft cheese with Cadbury chocolate should sweeten investor returns in this video.

The "Scarbus" 380: Rolls Royce Engine Explodes Forcing a Quantas Jet to Land In Singapore

Quantas Grounds its A380s

Airbus touts the A380 as the plane of the future. In this News Corp. video you can see the first Qantas airbus A380 touch down in Sydney, October 2008:

Quantas is quite proud of its safety record. What other major airline can brag of never having lost a jetplane? Keen on keeping that reputation, Quantas grounded its A380s after the emergency landing of its "scrabus" flight QF32.

According to News.Com.Au "Qantas made it clear it will keep its six superjumbos grounded indefinitely and has rearranged flight schedules using substitute aircraft.

"'The specific checks mandated by the directive were already being carried out by Qantas in conjunction with Rolls-Royce,' it said.

"'Qantas's A380 aircraft will not return to service until there is complete certainty that the fleet can operate safely.'"

Thus the planes of the future is having problems in the present.

News on Airbus's big one, the A380, first. Singapore Airlines found oil leaking from its Rolls Royce engines (courtesy of News Australia):

And yet more on SKYNews:

The Fallout for RollsRoyce:

In the Financial Times, Pilita Clark, its Aerospace Correspondent, reports "Rolls-Royce is preparing to cannibalise several half-built A380 superjumbos on production lines to obtain more than a dozen new engines to help its stricken airline customers such as Qantas.

"The engine maker has taken the rare step of negotiating with Airbus, the A380’s manufacturer, about raiding engines from three or four superjumbos due to be delivered next year from its Toulouse and Hamburg assembly plants, according to people familiar with the situation."

In an FT video, Pilita Clark, explains how the spotlight will now fall on Rolls-Royce, the maker of the engine.

The Future of Natural Gas

Oil prices make headlines; Solar and wind power are sexy, yet natural gas is the real news.

While U.S. oil production has been declining since the 1970s and the peak of world oil production is continually predicted, natural gas looks like the rabbit we are pulling out of the hat.  And the future is paved with shale.

It took companies like Mitchell Energy twenty years to figure out how to extract natural gas from the Barnett shale formation in Texas.  The technology having been mastered, we now realize that there is an abundance of gas in shale formations around the country and the globe.

Interestingly enough the home of the Whiskey Rebellion and the first U.S. oil rig, Pennsylvania, is home to one of the biggest.  The Marcellus shale formation in western Pennsylvania, west Virginia and western New York has been estimated as having natural gas equivalent to the nation's energy needs for twenty years.

Chevron's 4.3 billion Shale Bet

As iStockAnalyst put it, [C]onsider this number: 4.3 billion.That is what Chevron offered to pay for Atlas Energy.  As Bill Wince of Chesapeake Energy points out the big integrated oil companies are used to dealing with huge fields and negotiating with governments. Unlike America, in many countries the state not the landowner owns the mineral rights.   The independents can field an army of land men who track down tittles and negotiate drilling rights.  The Chevrons of the world have decided if they do not have a distinctive competence, they can always buy it. 


Platts tells us, "Chevron's first deal in a US gas shale play dovetails nicely with the
company's plans to increase its proportion of gas production from 31% of total
output currently to 41% in the next seven years," according to Atlas' Indian joint venture partner, Reliance Industries, CEO John Watson who spoke at a Bank of America
Merrill Lynch's Global Energy Conference.

This is Not the Last Big Buy

Platts further reported, "Watson said he expects Chevron's Marcellus Shale production to grow from Atlas' 63,300 Mcf/d to more than 500,000 Mcf/d in the next decade and that, combined with the play's proximity to premium markets in the northeastern US made it fit into Chevron's plans.


"The cost per well in the Marcellus Shale are about half that in other
major shale plays such as the Louisiana's Haynesville and Texas' Eagle Ford
because vertical drilling distances in Appalachia are about half those in
rival plays.


"Atlas wasn't the first shale producer Chevron looked at and it probably
won't be the last, Watson said."

Heard on the Street: IEA's Energy Outlook Forecast 11/9/2010 5:42:06 PM
Forecasting the next quarter is perilous.  Forecasting the next 26 years is both easier and riskier.  Few will remember your forecast after the twenty six years pass and the fundamentals assert themselves over the long run.  Still, you have no idea where in the crazy commodity cycle you will be nor what the value of a dollar will be.

The International Energy Agency's 26-year forecast for the energy industry

The Wall Street Journal's Heard on the Street columnist, Liam Denning, talks to the Journal's Lee Hawkins:




Lee Hawkins and Liam Denning also discuss Chevron's "We Agree" Campaign.

Business Jets and Elections

Molly Mullins reports on a talk by Michael Scheeringa of Signature Flight Support, which operates 103 fixed base operations around the world. At the today’s Wichita Aero Club meeting, Scheeringa reassured her that “It’s a very resilient industry.”  She blogs, "The good news is that the market has begun to recover, although recovery has been muted.


"But Fortune 200 companies are flying as much today as they did in 2008, he said. It’s the small business owners who are not using business aviation as much."

That sounds like good news, but we need to see the orders before we know the rebound is truely here. Wichita needs a business jet revival.

Furthermore, she relates his judgement that "The political climate has caused uncertainty in the tax structure of smaller businesses. And that leads to uncertainty about income and generates a lack of confidence." Moreover, "That lack of confidence impacts the business aviation industry in Wichita and elsewhere."

Which brings us to the mid-term elections. The pundits are predicting big Republican gains, perhaps recapturing the House, picking up a half dozen Senate seats, and assorted governorships and state ledgislative seats. The latter is especially important given the redistricting that follows the decinimal census.

The economy hit bottom in June, 2009, but the unemployment rate is actually above where it was at the trough. Economic growth ahs resumed, but Americans are still mired in misery.

Comes November 2nd, the President will be blamed.

But is it just?

President Obama campaigned on the need to fix the economy. That created expectations among the voters. Not surprisingly, the voters wanted those expectations to be met.

What happened?

The nation's economic problems were essentially long term in nature (huge and chronic trade imbalances, lack of domestic saving, misallocated resources from the credit boom.) Yet the President focused on short term solutions: fiscal stimulus. Worse, he delegated the job of designing the solution to Congress.

Then, with the economy being far from fixed, the President switched his priority to changing the health care system and its financing. Reallocating resources for a sector equivalent to 17% of the whole economy (four times the size of the auto industry) predictably set off a debilitating dog fight between the winners and the losers. To make matters worse, the President delegated the design to Congress.  Will Rodgers once predicted that "no one's wallet is safe when congress is in session."

If voters are angry with the President's economic policies, their anger is understandable.

After they express that anger on November 2nd, the President should address the source of that anger and ask the American people for a second chance. He should warn them that our problems are long term and there are no quick fixes. We must realistically face America's secular economic decline before it is too late and put forth the painful policies that will reverse our strategic decline. The tea party activists who are focusing on the size of the federal deficits have unwittingly brought to fore a very real problem. The U.S. can only use deficits to attack weakness of demand if the dollar remains the world's reserve currency. And the more it uses the deficits to stimulate the economy the closer we are to losing the dollar's reserve status. When foreigners stop taking our dollars, our options close and we start looking more like Greece and Spain.

Moreover, without significant policy changes there is a very real threat in the medium term. The perceived erosion of the rule of law (think of the treatment of GM's bondholders), the costs of the healthcare system reengineering, and the prospect of tax hikes if the Bush tax cuts expire have eerily recreated the conditions of 1936. These set the stage for the Roosevelt recession of 1937. We avoided the financial collapse that trasformed the recession of 1929 into the Great Depression. Now we have recreated the conditions for the 1937 recession, a recession whose severity was exceeded only by the contractions of 1929-33 and 1920.

President Obama should take advantage of his party's upcoming defeat to embark on a new program of economic leadership.

Economic Update: Wichita and the World

1) The world economy is eighteen months into an economic recovery. The U.S. economy lagged six months behind. Employment lagged another six months behind that and Wichita lagged yet further behind.  The most recent news is mixed.  the Commerce Department reported Housing starts were up.  Alan Rappeport writes in the Financial Times that "That was stronger than economists expected and marked the third month running that starts increased."  The Fed reported that September industrial production was down.  Rapeport tells us that "US industrial production fell for the first time in more than a year last month."

2) The U.S. unemployment rate is still at 9.5% reflecting the enormous dislocations caused during the bubble years of 2004-7. The administration's two top economists Larry Summers have retreated to academia.  CNN interviewed Peter Diamond the new Nobel Laureate who seems to see it differently.  He told CNN’s Fareed Zakaria GPS: "The central focus of the problems in the economy right now is not that the labor market is working badly but the demand for labor is way down. ... I view the US economy as extraordinarily adaptive . . . I expect the economy to adapt this time as well."

3) Wichita and Kansas are seeing signs of recovery. Wichita's August unemployment rate at 8.2% is down a percentage point from a year ago. (August is the worst month each year.) For four straight months we have seen an improvement over the year before. A new state study shows job openings up and up relative to the number out of work. The Kansas Department of Labor reported, "There are more job vacancies in Kansas this year than last year, according to the 2010 Job Vacancy Survey. The survey, completed by employers during the second quarter of 2010, found there were an estimated 32,091 job vacancies statewide. This represents a 24.5 percent increase in vacancies from 2009." World trade is vital for Kansas and the world economy is pulling up the Kansas economy.

4) As for the aviation industry, it is a three legged stool: commercial, military, and general aviation. Commercial aviation is reviving. The lessors are back. The other two legs are weak.  Most countries are cutting military spending around the world. General aviation (business jets and private planes) is still in a big slump.

5) The business aviation industry has its big show in Atlanta while we speak. In connection with that, Honeywell's new forecast shows a 10% increase over the next decade, but tough slogging over the next two years. For 2010, Honeywell Aerospace estimates deliveries of 675-700 new business jets, down 16-17 percent from 849 in 2009 mainly due to continued global economic weakness as well as overarching concerns about government debt, austerity programs, export growth, financing costs, and general availability. Rob Wilson, President, Business and General Aviation, Honeywell Aerospace said "The industry should begin another period of expansion by 2012"  Molly Mullins reports on Hawker's new business jet, the 200 and on Cessna's new version of the Citation, the Citation X.

6) Hawker-Beechcraft's two lines of business are military and business jets: not a pretty picture. Kansas has put together a package to keep it from moving to Louisiana, but the union has now rejected the firm's proposed labor contract. This cloud remains over our economic horizon.