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Archive for the ‘Unemployment’ Category

This should be an interesting week in the markets.  We have the end of the quarter which typically produces some volatility for the market.  We also have the very important unemployment report that will be due out on Friday.  The unemployment indicator has become one of most important monthly indicators.  Although employment is considered a lagging indicator (an indicator that is one of the last to recover), its continued weakness might be signaling a bigger problem.  In his weekly newsletter John Mauldin wrote about the unemployment situation from another perspective.  To sign up for John’s free newsletter go to www.frontlinethoughts.com

He wrote that it takes the creation of 15 million jobs just to get us back to normal employment around 5%.  He makes that estimate by assuming the monthly job destruction will soon becoming to an end.  I think that he estimates another 500,000 jobs will be lost.  He writes, “that means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month.  As an Average!!”   

Then he states these statistics:

“If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.”

I equate the destruction in employment much like a perfect storm.  The damage has been so great that it will take a long time to recover.  Both the Bush and the Obama Administrations allowed the unemployment situation to get this bad without doing anything about it.  In fact, I still don’t see anything in the works to fix this problem.  The stimulus bill will create mostly government based jobs.  However, I don’t think it will create enough to even put a dent in these numbers.

So, do you think that the market already expects the unemployment situation to remain this ugly?  Of course, there is the notion of a job-less recovery (which that has never made sense).  However, I think that this situation goes well beyond a typical unemployment problem.  Can the market continue to remain positive in the midst of so many people being affected by lack of employment?  I personally think that we see this problem manifest slowly and at some point the markets feel the impact. 

I know that this is far from positive but it is important to see all sides so that you can make prudent decisions with retirement dollars.

Levels to Watch on the S&P 500

From time to time, I like to point out important price levels on the S&P 500. 

Above 1080 – Positive

Between 1080 and 1043 – Neutral

Below 1041-Negative

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Back in March of this year when the stock market found a bottom, I posed a question that I felt would be “the” question for investors. Is this a bear market rally or is this the beginning of a bull market?

I have felt all along that this is nothing more than a bear market rally. A bear market rally is a pause in the bear market where the stock market goes up for a period of time.  Think of it as the bear resting and gathering energy for the next big decline. 

Of course, if it is a new bull market, then the March low of this year was the worst that it will get. 

I believe that we might be getting close to finding out.  Many of the indicators are stating that the moment of truth is here.  If this were a healthy normal market, we would at least see some type of market decline in the course of a new bull market.   I think that we might have already started that process.  If this is a bear market rally, then this decline will morph into something serious.  This should be a big test. 

For this stock market to change from a bear to a bull, the important level for the S&P 500 to reach would be 1121.  The S&P 500 would have to surpass that level and stay above that level.  If that were to occur, the evidence would support a major change for the stock market trend.

The unemployment numbers came out again this past Friday and showed more disturbing news for the economy.  Remember, if they cannot fix unemployment, this economy is going to have a tough time getting going again.  Unfortunately, Obama’s answer to more jobs is Government jobs through the stimulus program.  That is not the type of solution that will solve this problem.   

According to the Government’s “version” of the unemployment report, we lost 216,000 jobs. Of course, that was after they “added” back in 118,000 jobs that they created out of thin air.  As a review, each month the Government “estimates” the number of jobs created each month that they “feel” the Department of Labor misses.  It is such a farce. 

The number of those jobless as well as the overall unemployment rate is much higher than reported.  It is an absolute joke that they continue to report this garbage. 

I wanted to give you a link to an article about Robert Prechter.  He is a well regarded market analyst that has called major tops and bottoms of the market.  He uses a discipline called the Elliot Wave Theory. According to Elliot Wave, we have again hit a major top and it is about to get ugly.  Who knows if this is right or not?  I do know that he has a very strong track record and warrants some attention. 

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The recession is declared to be over or over soon states many media outlets on Friday.  Unemployment was not as bad as expected and it appears that we are starting to lose less jobs. All of that is good news and it took the media and Wall Street no time at all to react positively. 

 

I really do regret taking the opposing view on this one.  I would like for it to be true.  There are just a few problems.  We have 14.462 million people unemployed.  The number is likely higher. This is the estimate from the Department of Labor.  Where are these people going to get jobs?  Unless you are ready to pick up a shovel and get on the Obama job creation bus, you might just be out of luck.  Once again, the Obama administration does not have a plan in place to fix the job situation. 

 

Looking back to 1948 (as far back as records take us), there has never been as big of a spike in the number of those unemployed.  The closest spike that you can find was between 1979 and 1982.  In 43 months, the unemployment numbers jumped 106% to a high of 12.051 million people. Today, in just 33 months the unemployment numbers jumped 125% to 14.462 million.  The following is a chart from www.freelunch.com that illustrates this dramatic rise.

I think that the monthly unemployment numbers could continue to look better.  However, that doesn’t mean that companies are hiring. I think that it means that companies have cut as far as they can cut.  Those lay-offs might start to slow.  Until there is a solution to the problem that over 14 million people are facing, we will continue to have this crisis. 

 

Regarding the market…the 1929 comparison that I wrote about still tracks very closely.  I would still suggest that there is extreme risk on the table.  As long as we stay below 1020 on the S&P 500, that will remain the case.

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If you are bullish on the market (positive), then you had to like the fact that we fell into a dangerous area (around 896 on the S&P 500) and then rebounded.  We ended the week on not such a hot note. However, we ended above the danger zone.  So, what are we looking at this week?  If you have not read last week’s price alert, please do so before going on.

The price levels of 894 to 895 are KEY.  If you are bullish on the market, you want the market to stay above those levels.  At the end of this past week, we were 16 points ahead of those levels.  We have a very big economic report on Friday with the unemployment number.  If I had to map out a course for the market, it would look like the following:

On Monday and Tuesday, we could see fireworks to the upside or the downside.  I don’t think these two quarter ending days will be mild.  Following the fireworks, we probably will have a few days of calm leading up to the unemployment report.  Friday, anything can happen depending on those numbers.  It comes down to the birth/death ratio, which is the number of jobs that the Government “estimates” we created during the month.  If you have read any of my past alerts, you will see how the Government manipulates the numbers.

For the past 7 years, the Government has estimated a big number in April, then a lesser amount in May, then a lesser amount in June, and then a small amount or even negative amount in July.  If the trend of a negative job number from the Government stays intact, this jobs number could be ugly.  If so, I think that we have topped in June and are heading down to test the March lows.  So, stay tuned…this should get interesting.

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Yesterday, I showed a strong comparison between the 1929 bear market and the 2007 bear market.  Today, I want to show you an interesting look at unemployment.  I have written about the actual unemployment rate versus the “stated” unemployment rate.  Back in 1929, the unemployment rate was a pure rate and not one that has been manipulated by the government.  During the Great Depression, the rate rose as high as 25%. 

Martin Weiss had an excellent article on his website that explores the actual unemployment rate.  This is the updated information.  The actual unemployment rate according to their sources is 19.8%

Check out this chart, courtesy of www.moneyandmarkets.com (excellent web-site message below):

 

 

 

 

That is very problematic.  As I have written and discussed with Mike Larson on the program April 7, 2009, (audio clip), there has been very little medicine to solve this problem.  Thus, as this problem grows, it is going to be tougher and tougher to get out of this mess.

OK, let’s talk price levels of the S&P 500.  Yesterday was not a very impressive day for the bulls.  However, these last few days of decline for the stock market hasn’t really told us anything.  The S&P 500 finished yesterday, April 7, at 815.  We are still monitoring the price levels of 800 and let’s say 845.    If the market closes tomorrow below 800, that would be a negative.  A market close above 845 is a positive.  

For my reference to the above chart:

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“New Signs Emerge That the Worst is Over”

“Investors hope that the worst is behind us”

Give one good bear market rally and all of the problems in the world are fixed.  This morning highlights the risk that plagues this economy and the stock market.   Hope is what you have when you pull the handle on the slot machine.  You hope to hit the jackpot.  Investing in hope is dangerous.  Going with the opinions of Wall Street and politicians are even dangerous. 

The headlines are there to lead people to believe that the risk is gone and now you don’t have to think about it.  This morning’s unemployment numbers put an explanation point behind the problem in America.

Even most analysts believe that we are looking at these horrible numbers for the entire year.  We are losing in excess of 600,000 jobs a month right now.  This morning it was announced that we lost 663,000 jobs this past month.  There are an estimated 13.2 million people out of work (at least that the Government will acknowledge). The unemployment is sitting at 8.5%.  The real unemployment is around 15% when you add everybody in that is not being counted.

One service that tracks these economic numbers attempts to get the real number.  The last estimate I saw was an unemployment rate close to 19%.

The following is an excerpt from a letter I wrote to my clients yesterday:

I think that we will all agree that unemployment is the biggest problem that faces the economy.  In normal times, an employment rate that rises to 7 or 8% creates a recession.  Today the employment rate could go north of 10% (using the Government’s inaccurate data). 

 

So when unemployment starts to improve and the rate drops all the way down to 7 or 8%, does the economy really get any better? 

 

If the plan to fix the unemployment problem consists, for the most part, of a bunch of construction jobs, where the bulk of which don’t start until next year, what is going to fix the unemployment problem? Further, of those construction jobs that have to be filled, how many will really go to Americans when there are countless numbers of  illegal aliens ready to take them?  Remember, they are not checking government ID’s on these jobs.

This is the problem that is not being addressed.  I suggest it is the problem that will further plague this market and economy. 

The unemployment numbers were worse than the headline would suggest.  January’s unemployment was revised, adding another 100,000 plus people to the unemployment ranks.  Then you have the Government’s “estimated” job growth. This is my favorite.  Each month they apply a ratio called the birth/death ratio to the unemployment numbers. 

This number “estimates” the number of jobs created that the Department of Labor can’t get data for.  They are assuming these are created by small businesses.  This month they added 141,000 jobs to the total number.  So before that “estimated” number was added, the actual job loss was close to 800,000 jobs. You add in the downward revisions for January and you are getting close to 1,000,000 jobs. 

The Government “estimated” that 41,000 jobs were added in the Leisure sector.  Yes, that is realistic since so many people have a lot of money to spend on leisure activities. I can see where that sector would be booming.

There is no doubt about it.  Risk is still real in this economy and market.  Approach your investments cautiously.

 

 

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Tomorrow the federal regulators will be announcing the changes to an accounting rule called “mark to market.”  In a nutshell, this accounting rule is one of the main reasons that banks have accumulated massive losses so fast.  The regulators want to take some pressure off of the banks by changing how banks have to go about reporting losses.  In the short-term, it would provide some relief.  However, like everything else, it does not solve the long-term problem.  It simply pushes it out into the future.  Depending on what is said, the market might really like these changes. 

 Don’t forget the unemployment problem.  We always get a preview of what the unemployment numbers will be through the ADP report.  This is another look at unemployment and gives us a good idea of what Friday’s job numbers will look like.

ADP reported a horrific job loss of 742,000 jobs.  This does not bode too well for the job numbers on Friday.  My thoughts the entire time have been that this will be the worst one thus far.  If it is not, you can thank the Government’s funny accounting system.  I wouldn’t put it past them to devise some inaccurate numbers.  Anytime they can take advantage of dressing up the numbers to look better, they have done so.

So, the next two days should be interesting.  Yesterday was a further continuation of the stock market rally.  However, you always need to watch the volume of trading that occurs.  If the market goes up and the volume is strong, that is a great sign.  The market going up on weak volume shows very little conviction from buyers.  That is what we saw today.  So now we will wait to see what Thursday brings. 

We are still watching the price levels of 800 and 825 on the S&P 500.

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