RF's Financial News

RF's Financial News

Sunday, June 6, 2010

This week in Barrons - 6-6-2010

This Week in Barrons – 6-6-10:

Jobs – Jobs – Jobs … What Jobs?
Remember all the analysts telling us how great the jobs report was going to be – well on Friday we added 430,000 jobs – BUT:
- Not so fast - Uncle Sam admitted that 411K of the 430K were Census workers. Those are Part time jobs that will go away starting in June and will be completely gone in September. That leaves 19k jobs created.
- Not so fast - 31K of those jobs came from "Temporary Services".
- And not so fast (it even gets better) – 215,000 jobs were ‘fictionally’ created with the ‘birth/deal’ model – these are the unemployed that decide to start their own business – they’re really fictional jobs – and year after year when the government ‘must’ do their "estimat” we find out that these ‘birth/death’ jobs never exist – last year they REMOVED a million jobs off the ledger.

So why did the market fall 323 DOW points on Friday – because we LOST 227,000 JOBS! And – if those census workers are going away over the next 4 months – that means we’ll at least be LOSING 103,000 jobs each month due those Census worker hires – just at the start!

BUT Wait a second – it gets better … (thanks to thank Jacob H for this tidbit):
- President Obama last week signed an order halting work on 33 exploratory wells in the deepwater Gulf of Mexico. This means that roughly 33 floating drilling rigs – typically leased for hundreds of thousands of dollars per day – will be idled for six months or longer. These 33 gulf wells were inspected immediately after the Deepwater Horizon blowout (per Interior Secretary Ken Salazar); and in those inspections, “only minor problems were found on a couple of rigs”. But ‘shut em all down’ became the political thing to do – so follow me on this one.
- At $250,000 to $500,000 per day, per rig – this results in roughly $8,250,000 to $16,500,000 per day in costs for idle rigs – and secondarily this also impacts supply boats – 2 boats per rig with day rates of $15,000/day per boat - $30,000/day for 33 rigs – nearly $1 million/day – not counting other impacts to other supplies and related support services (i.e. welders, divers, caterers, transportation, etc.)
- JOBS – each drilling platform averages 90 to 140 employees at any one time (2 shifts per day), and 180 to 280 for 2 2-week shifts. Each exploration job supports 4 other jobs; therefore, 800 to 1400 jobs per idle rig platform a reasonable total of 50,000 JOBS are going to be lost. Wages for those jobs average $1,804/weekly; potential for lost wages is between $165 to $330 million/month for all 33 platforms.
- Secondarily - many offshore workers live in Louisiana. The state is going to see a decrease in income taxes and sales taxes that would normally be paid by those employees.

So, despite TRILLIONS of dollars in stimulus, all the programs designed to spur spending, all the FASB mis-regulations – the U.S. economy cannot produce JOBS. With no JOBS, and with millions on "emergency extended benefits", foreclosures soaring, bankruptcies soaring, commercial real estate crashing - people around the globe are finally getting the view that the U.S. may be a pseudo-safe haven – but it’s the best of a very bad lot.
- 08:20 AM May 26 saw 133,459 U.S. bankruptcy petitions, the second-highest daily level since 2005 and a 10% rise from the year before.
- During the months of March and April stock funds experienced steady inflows - in the week ending May 26, U.S.-focused funds saw outflows of $13.4B (and $3.9B from international funds), the biggest outflows since March 11, 2009

Now what’s important here is the timing. The week ending May 26 saw the market put in it's lowest reading in over a year – now where was the market on April 23rd (one month earlier) – it stood at 11,200. So the market sucked in the amateurs (who were completely brainwashed into thinking – get in or miss the party) – and when the market was convinced that it had pulled in enough suckers, it rolled over and crashed – and people SOLD. Now – the previous largest outflow was March of 2009 – and what happened in March of 2009 – the market hit lows not seen since the 90’s. So doing the math – the masses bought at the highs of ’07 (DOW 14,000) – held thru the plunge ‘08, and into ’09 – and then - when they couldn't take it any more they sold enmasse and stampeded for the exits. Remember when we said – when the amateurs rejoin the market (when Cramer was screaming ‘buy-buy-buy’) – it’s really time to sell – because the majority of people are now going to ‘buy high and sell low’. Because as we wrote in February of 2009 – “the one thing that the market usually does, almost better than anyone and anything, is punish the maximum amount of people.” At the time we suggested to people to take $5,000 – buy 1,000 shares of FAS @ 2.64 per share (it went to $40 per share) – and we ask that you take the remaining funds and purchase Apple (APPL), Google (GOOG), IBM and the DIA’s. Google’s stock doubled, Apple’s went from 84 to 270 – you get the picture.

I bring all of this up for one reason – to show you that the market is designed to take your money, unless of course you know the game and know how to play it. Our economy is crumbling, Europe's a disaster, China's having growing pains, and the entire world is deleveraging (trying it's best not to spiral into the toilet) while paying down debt. Frankly we are IN a depression right now, but all the social programs, the welfare, the food stamps have softened it: the 99+ weeks of unemployment, etc. But I still believe it gets worse – and if you base your investing on what you hear out of the major media - I'm afraid you're going to pay a very dear price.

Now – you can bet going forward – we’re going to hear about WAR more often. These are desperate times in a lot of countries, and if war will keep our/their economies afloat – then war is what we will get. That's probably going to be Iran, if not Iran and North Korea at the same time. Please be prepared.

The Market:
I previously said we were going to see DOW 9,000 this summer – and after Friday’s 300-point plunge we are in the 9000's already. But I am confident we have a lot more downside to come. It won't come smoothly, as the FED will instruct it's member banks to manipulate the market with all it's got, but it certainly will come. Reading the above - it looks like I made myself out to be some form of market genius (and that’s not the case). A few weeks back we shorted the market and went long the VXX – and felt pretty good in covering - taking gains on both – in fear of a snap back rally – where we would reload our ‘short positions’. Well that snapback rally was so herky-jerky, we never got a chance to reload the short wagon. Oh well, we'll have more shots at it for sure going forward, and short side gains come much faster than long side gains.

But what next? I can make the case for a very nasty Monday, and an all out sell fest, or a "bounce" of some magnitude. If we don't get ANY bad news out of Europe this weekend and things are relatively calm, "they" will try and rescue the market early this week from the plunge. We're only 70 points away from DOW 10K, and "they" will use that level as some form of psychological platform to keep the masses content. But that said, ANY more bad news, whether it be a statement out of Hungary about possible default, or some form of contagion to another country and we could easily shed several hundred more points quickly. So, being cautious here makes a whole lot of sense.

In my opinion, the path of least resistance is going to be "down" for a while, then as earnings start coming out, they'll use them as "more proof" that the economy is great (like they used JOBS - which was proven wrong) and we'll get some wicked bounces. If you are a long-term investor, I'd be awfully cautious, and for you short term traders, enjoy the volatility!

Let’s assess where we are – mostly in metals:

- GG at $43, IAG at $17, SLW at $18, SSRI at $20, GDXJ at $27, GLD at $115.86, NG at $6.64 and PHYS at $11.65

If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.

Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.

R.F. Culbertson

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