This Week in Barrons – 05_10_09: Before we start let me begin today by wishing all the Mom’s out there - a very Happy Mothers Day! Being a mom is ‘by far’ the toughest job out there – it only starts with 24/7/365. My hat’s off and my sincerest thanks to all of you!
On Friday the official release of the Jobs Report told us that 539,000 people were let go in April, and the unemployment rate rose to 8.9%. This brought out everyone telling us that: 1) the RATE of job cuts is slowing, 2) the economy is bottoming, 3) because unemployment is a lagging indicator and this means that the economy is in recovery mode, and the ‘topper’ 4) the unemployment rate inching a bit higher is a good thing as more people realize the recovery is taking place and are now actively seeking work. Honestly – NONE of these people should work on Wall Street – but they all do.
Let’s really examine the report:
- 13.7 million people are unemployed, a level not seen since 1948.
- Capacity utilization at our nations manufacturing plants fell to 69.3%, a level not seen since they started measuring it in 1967.
- Included in the jobs number was 66,000 people hired by Uncle Sam for the sole purpose of taking the 2010 consensus, which is only a temporary job. So adding 66,000 to 539,000 – we’re once again above 600,000.
- The hours worked fell to 33.2, the single lowest measurement on record.
- The rate of temporary employment, which employers use to "test the waters" fell, meaning they don't even want to hire someone even knowing they are only going to be around for a while.
- The unemployment rate rose to the 1983 level of 8.9%.
Now let’s further examine this number. Remember in weeks past – we talked about the unemployment number being only a small piece of the total unemployment number. The government reports the U3 figure – however looking at some other figures – U6 (for example) is the measure that includes people who are working part-time but want full-time work, as well as the "marginally attached" (i.e. people not actively looking, because there are no jobs in their area, but want and are available for a job and have looked for work sometime in the recent past.) When you measure unemployment like that the unemployment rate is 15.8% - and in over 25 states, it's actually over 20%.
There is even a “Birth/Death" component of the unemployment number = U3. That is to say – to Uncle Sam - for every company that lets employees go, some of those employees will go out, open a business and hire people. With absolutely NO proof of any of that actually happening, Uncle Sam takes a guess at what that number is, and in this release it added 226,000 NEW jobs due to that ‘guess.’ So 539,000 jobs lost – add the amount of temporary census takers of 66,00 and then add 226,000 due to the “Birth/Death” component – you’re suddenly over 800,000 jobs lost. Therefore in my world – the jobs number didn’t show me anything – really – other than a deteriorating economy.
So what about the "stress tests" that Wall Street found to be so comforting? Honestly – how can our banking system be "solid" when 10 of 19 need billions more to survive? OK – but what about the future projections – what about the trillions in toxic sludge that is "still there" – and what about ‘Mark to Fantasy’? Recent Real Estate actions show sales going at roughly 60 cents on the dollar – but the banks have marked it ‘dollar to dollar’ – humm – that’s going to be a problem. The FED has made it clear that they will hand select whom they will put on life support for eternity, while letting little guys roll over so the can be "absorbed". Remember – we’ve done EVERYTHING the FED has asked – over 12 Trillion in bail-out funds → basically our entire GDP → and is that unemployment report the recovery?
Will history repeat itself? Back in 1920 – BEFORE the ‘Great Depression” and following World War I, the war excesses in credit and debt had come back to bite us hard. Unemployment was soaring, production was crashing and the people were broke. Like Obama today, Warren J. Harding started his Presidency in the face of a massive economic collapse. Yet Warren didn't open the floodgates – he was quite brilliant – he basically told the people: "Folks, we're screwed. We lived like drunken sailors from too much credit and too much debt. We face horrid inflation, job losses and tough times. We're going to have to buckle down, tough it out, and pay for the mistakes of the past. It won't be pleasant, and you're all going to have to sacrifice. We have to man up to the problems, face them down, charge them off and start fresh. We don't need any wild new concepts, no untried policies. What we need to do is take our medicine and work through it." Warren let bloated businesses fail. He cut back social program spending and infrastructure spending. He reigned in credit, and stood on principles of living within your means. Well guess what – in less than a single year, the economy had flushed itself, the free market rewarded the strong, and disbanded the weak and after a brief period of pain, the economy was on the road to recovery. In fact, it was one of the shortest lived economic downturns of it's type ever seen. Of course that isn’t being talked about because when President’s like Jackson or Harding actually do the ‘right thing’ it becomes an abomination to the banks, and the banks do any and all things they can to keep you in the dark about how things really work.
The market has put on one of the most impressive shows it's had in 70 years. Nine (9) weeks of almost straight up has caused everyone to breath a little easier, and feel a little better. People are beginning to believe the hype that the FED has got it right and soon we'll all be okay again. Their 401k’s are going up instead of down. And honestly - $12Trillion in stimulus and non-stop propaganda does indeed have that effect. We’ve amassed massive gains – and even when the market "guru's" said that the run was over 3 weeks ago and we would be testing the bottom again – we disagreed, suggesting that the market would continue higher. Not because of earnings (they stink), or economic improvement, we based our belief on the market’s goal of taking as much money as possible from the largest amount of people at any one time. So, when everyone was shouting to retest the lows, and many went short – the most probable action was for the market to soar even higher, confounding and confusing the masses, and rewarding the few.
Right now the "call" is becoming much harder, because once all the naysayers were proven wrong, they had to scramble and get in at all cost. Then they had to change their tune from "this is a bear market bounce" to "this is a raging bull market!" Frankly I have two problems trying to decipher if we are going higher in the short term or not. The long term is easy, once all this fallacy implodes we will see a DOW of 4500. Honestly – we are so overdue for a smack-down that puts the fear of God in all the late arrivals, that it keeps me in a state of nervousness. All throughout history bear market bounces have been punctuated with major sharp reversals that keep people in fear of buying stock, then the market confounds them by quickly recovering and moving higher.
We’ve had a pause but no smack-down. Granted, sometimes a pause is all you get as wave after wave of people try to catch up move their money out of CD's and savings accounts into the market, creating overwhelming demand. But even so, 9 weeks without a scary sell off is very significant to me. There has to be one brewing and we can only guess at this point – but I can advise you that the ‘smack-down’ will be buyable. I would continue to "lean long" but don't bet the ranch. If we were to get a sharp sudden downdraft of 400 or 500 points I would probably be a major buyer, because I then believe it would reverse and rush back up. But without that happening, each day higher is simply stretching the rubber band.
Please celebrate Mother’s Day - show Mom how much you love her. They're great people and deserve a day of rest and praise.