This Week in Barrons – 10-5-2014:
Please … Please … Please… (Mr. James Brown)
Dear Ms. Yellen:
Can you ‘Please, Please, Please’ give me a real number? On Friday you announced that the ‘official’ unemployment rate (the U3) had reached 5.9%, and that 248k people found jobs in the month of September. Wall Street celebrated and gained almost 200 DOW points. But inside the report I find that 230K of the jobs (92%) went to people between the ages of 55 and 69, and those jobs were mostly part-time. The report shows the labor pool continuing to get smaller – as 92.6 million people are currently NOT working. And lastly, the report says that we have added ZERO manufacturing jobs since July. So most of the jobs being added are low-wage service jobs – is that correct? So what does 5.9% really mean?
Ms. Yellen, I realize that there are 6 official measures of unemployment with U3 being the only one that is broadcast. The others are:
- U1 = Unemployed 14 weeks or longer (2.9%),
- U2 = Recent job losers and completed temp work (3.1%),
- U3 = Official Unemployment Rate (does not include discouraged, marginal, part-time or those that have fallen off the roles) (5.9%),
- U4 = U3 + discouraged workers (6.6%),
- U5 = U4 + marginal workers (7.4%), and
- U6 = U5 + part-time workers (12.1%).
When I talk to other economists, the ‘broadest’ measure of unemployment is considered to be the U6 because it includes short-term, discouraged, marginally-attached, and those individuals forced to work part-time because they cannot find full-time employment. Up until 1994 the government reported the U6 rate as the official unemployment rate. Then in 1994 the government modified the U6 ‘discouraged worker’ definition in order to remove those individuals who were unemployed for MORE than one year. This allowed the U6 rate to come down from 15.3% to a more palatable 11.8%, but ‘obviously’ it did nothing for those people actually unemployed for over 1 year other than to tell them that they were no longer being counted.
Ms. Yellen, the other issue with any of these rates, is WHO is considered unemployed – meaning how do we count the total available workforce? This is important because if I use the pre-financial crisis workforce numbers – then the U3 is closer to 10% than the 5.9% reported on Friday. And if I use the pre-1994 calculation, then the U3 unemployment rate remains about 10%, and the U6 rate is closer to 23%. Therefore, I think we have to conclude that the U.S. has NOT reduced unemployment by any significant measure since the height of the financial crisis. It’s been a truly JOBLESS recovery – is that correct?
I mean (Ms. Yellen) if the REAL unemployment rate had fallen below 6%:
- Why would you need to continue to extend emergency unemployment benefits?
- Why wouldn’t you have raised interest rates by now - as you ORIGINALLY said you would?
- And why would you continue to voice concern about significant labor problems in this country?
A nice gentlemen (MW) passed me the graph below: the red line is U3 (government) unemployment = 5.9%. The gray line is U6, the (pre-Obama) broad representation of the level of unemployment = 12.1%. And many experts feel that the blue line is our actual level of unemployment = 23.2%.
With over 50% of our country living paycheck to paycheck, and with over 92 million people out of work – Ms. Yellon, can we ‘Please…Please…Please’ get some real numbers? I guess I could always quote your mentor – Lord Maynard Keynes – and say: “In the end we are all dead – so who cares?”
It’s a full-fledged battle between: BTFD and STFR
- - You can sense a trend change: from BTFD (Buy The F-g Dip) to STFR (Sell The F-g Rally).
- Factory orders fell by 10.2% - the largest fall ever recorded. For all the talk about a manufacturing renaissance in the U.S., it certainly isn't supported by data coming from big factory orders.
- All across Europe the manufacturing indexes have missed estimates, showing that 90% of Europe is right on the edge of a depression.
- Warren Buffet (on CNBC) stated that FED policy has inflated all assets, and is concerned that 1970’s type inflation is a real possible outcome. Following Warren, Alan Greenspan (also on CNBC) said that he agreed with Buffet’s assessment 100%.
- Over the past 2 weeks, the S&P from intra-day highs, to intra-day lows has seen a 4.6% fall. That’s just about all that the FED has allowed over the past 3 years.
- The Ben Bernanke (speaking at a conference in Chicago) said that he tried to refinance his mortgage and was turned down. And then he said: “I think that lenders may have gone a little bit too far on mortgage credit conditions."
- QE is ending this month. Lest we forget, when QE1, Q2 and ‘Operation Twist’ each ended – the market fell.
- The Russell 2,000 index of small-cap stocks (RUT) is the weakest index, and often leads the other indices by 2-weeks. The 1,080 level on the RUT is key support. Over the last year, this is the 4th time that the 1,080 level has been tested. The previous 3 times this level has held, and the RUT has bounced higher between 7 to 15%. Each time key support levels are tested they become less and less likely to hold.
- Bonds had a monster move this week of over 2 points. This is a ‘flight to safety’ signal. I’m looking for an additional 3-point move by the end of October.
- In General: China’s economy is slowing, and is at a standoff with ‘pro-democracy’ protestors. ISIS is cutting off more heads. Natural gas supplies in the Ukraine are tightening. Europe and Japan are on the brink of imploding. U.S. housing is dead, jobs are a disaster, and ‘insiders’ are selling their own stock in droves. In the past two weeks triple digit reversals have become commonplace. And – Ebola is spreading. This usually spells a ‘trend change.’
Lastly, Gold dropped below $1,200 per ounce this week, but physical demand for the metal couldn’t be higher. In September, the government sold: 58,000 gold eagles, 14,500 one-ounce 24K gold buffaloes, 4,140,000 silver eagles, and 2,700 platinum eagles. The only product that didn't see a sales increase of over 100% over August was the gold buffalo – that increased only 81%. How is physical demand for gold ‘off the charts’ yet prices continuing to fall?
The world produces about 2,200 tons of gold per year. China, India and Russia consume that quantity themselves. Until the physical supply is gone, it appears that the price trajectory will remain in tact. After all, no ponzi scheme runs forever. The good news is, gold and silver have never been worth $0 – which is something I cannot say about most major currencies in the world.
When a market experiences the gyrations that this market is – it’s signaling a trend change. The trend has been for the market to go up; therefore, the BTFD philosophy will die a slow death with some traders. But over the past month, I’ve seen more and more of the STFR rally-cry creeping into trader’s behavior.
I feel that the market is going to trade sideways for this coming week. The FED will not be willing to let it roll over before the mid-term elections, but I don’t believe that we can generate the volume and buying pressure to make new highs. I believe the current danger is to the downside, because there are more reasons to go lower, than to go higher. With that in mind, I’m becoming a little more defensive during the month of October.
If we take a look at the various markets and sectors:
- This past week we had $8.3 B of outflows from US Equities, and another 1.2 B of outflows out of Sector funds.
- We had $6.5 B of inflows into bond funds – a flight to safety.
- And we saw highly increased volume to the downside.
- Most of the indexes have pierced their 89-day extended moving average, but the Russell 2000 index (RUT) has virtually been decimated and poised to drop much further.
- The RUT is often 2 weeks ahead of the S&P.
- The Nasdaq 100 Index (NDX) took out its 55-period moving average. The last time it did this was in April.
- The Bond market exploded 2 points higher this week – panic buying. I’m looking for an additional 3 points of upside.
- If you’re looking to play the downside of this market – think: TZA, SDS and FAZ.
- Downside moves erase upside gains in 1/5th the time as selling begets more selling.
My current list of potential candidates is as follows; on the radar are the indexes RUT, SPX, and NDX which I will look to sell CALL CS on Rallies. As far as individual names, I still see opportunities in the stocks CBI, CME, CBOE, MON, UA, PRU, STJ, ABT, WYNN, IYT, TRV, FDX, UTX, MYL and TEX. I like the biotech sector as well with names such as VRTX, AMGN, and REGN and although I said I would avoid it, IBB is starting to look interesting. I continue to sell 1+ standard deviation PCS’s (Put Credit Spreads) and CCS’s (Call Credit Spreads) on the NDX, SPX and RUT – because selling those are somewhat agnostic to market direction. If the weekly market direction is ‘UP’ – I sell more Call Credit Spreads, if it’s ‘DOWN’ – I sell more Put Credit Spreads.
My current short-term ‘Larger-Cap’ holds are:
- FEYE (Cyber-Sec) – in @ $28.76 – (currently $28.29),
- KO (Beverage) – in @ $41.17 – (currently $43.10),
- LNG (Energy) – in @ $57.40 – (currently $77.30), and
My short-tem ‘Small-Caps’ holds are:
- DEPO – in @ $15.19 – (currently $15.35),
- EIGI – in @ 16.81 – (currently $16.81),
- IG – in @ $7.27 – (currently $9.29),
- INSY – in @ $35.14 – (currently $42.28),
- LEJU – in @ $14.01 – (currently $14.07),
- MLBY – in @ $57.02 – (currently $57.70),
- RARE – in @ $56.60 – (currently $57.28),
- VDSI (Cyber-Sec) – in @ $14.17 – (currently $20.21).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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