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Posts Tagged ‘Government’

The jobs number came out on Friday and the market loved it. The Saturday Edition of the Wall Street Journal proclaimed:

Jobs Data Provide Hope

I have always been a little gun-shy about the word “hope” given its link to our commander-in-chief. I honestly think that the markets are a joke sometimes. The market celebrated that 67,000 private-sector jobs were added last month. Of course, the total number of jobs for the month of August showed a loss of 54,000 jobs. Then there is my favorite number of all – the birth/death ratio.

This is the number of jobs that they “estimate” were created or were lost. I wonder what the jobs number looks like if you take out the 115,000 jobs that were created out of thin air? That is how many jobs they added back into the total. Now it wouldn’t be any fun if we didn’t look at how many jobs the Government estimated were created in the leisure and hospitality sector. After all, Americans have so much money to spend on these types of things. These companies must be hiring like crazy. (Please note the sarcasm.)

This past month 23,000 jobs were added to the leisure and hospitality sector. Thus far this year, the birth/death formula has added 421,000 jobs to the numbers. Of those, 78% were in the leisure and hospitality sector. I seriously cannot make this stuff up.

Are you starting to see what a joke Government accounting is? Let’s switch over to what Barron’s wrote this weekend about the jobs numbers and you will see a much more dire situation. From the article:

• All of the employment gains were part-time—full-time employment, according to the Household Survey, plunged 254,000.

• Those working part-time did so pretty much because they had no choice, and their numbers surged by 331,000—the biggest increase in six months.

• Of the 67,000 rise in private-sector jobs, 10,000 reflected returning construction workers who had been on strike.

• The 27,000 shrinkage in manufacturing slots and flat total goods-producing employment are hardly evidence of a vibrant economy.

I don’t need to tell you that this is a serious problem that isn’t getting the attention of the truth. It is just a bunch of politicians crunching numbers to create the fantasy and illusion that serves them best.

Needless to say, risk is very high in the markets. This is especially the case as we enter into the Bear’s favorite month of September.

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There is no question that seeing a positive sign in front of the employment numbers is an encouraging sign.  It has been a very long time since that has occurred.  On Friday of last week, the Department of Labor announced that 166,000 jobs were created last month.  As always, let’s drill down into the numbers and look at the real story.  In order to get on the road to strong economic recovery, we need to start seeing a creation of 250,000 to 300,000 jobs each month.  In fact, we need to see those numbers for a very long time just to get the millions of unemployed workers back into the workforce.

Of the 166,000 jobs created last month, 48,000 were temporary hires by the government in order to take care of the census.  Then there is my favorite government accounting methodology which is the birth/death ratio where the Government “estimates” the number of people who were hired and were not counted in the employment survey.  It is always dangerous to give politicians the license to estimate.  They “estimated” 81,000 jobs were created.  This leaves us with roughly 37,000 that were full time hires.  Temporary hiring is better than nothing at all.  Although any positive number is a welcome sight, this is not a solution to the longer term problem. 

There are a few other items worth noting.  I have written in weeks past that I felt we are in a strong deflationary environment.  Deflation, as you might recall, is an economic phenomenon that causes prices of almost everything to decrease.  Along with deflation, we do have some undesirable inflationary pressures.  Most people are not aware that the cost of oil is now $86.34 a barrel (as I write).  It continues to slowly creep up.  Of course, this ends up being reflected at the gas pump.  The other thing worth noting is the rise in interest rates.  Rising interest rates in a debt-plagued environment is not a good thing, especially when we still have an ongoing foreclosure crisis were people desperately need to refinance at lower interest rates. 

It has often been noted that 4% on the 10 year treasury bond yield is a level that you want to stay below because of its effects on mortgage rates.  As of this morning, we are dangerously close to hitting that level.  The current level is 3.98% as interest rates are soaring upwards this morning.  Yet, all of these issues face the stock market and it looks like no one will be satisfied until the Dow can hit 11,000.  So, once we arrive at that level (19 points away) do we break out the party hats?  We would only if it is sustainable.  The market would need super human powers to sustain these levels with these headwinds.

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How does the market keep going up when we are racking up all of this debt?  How can the market be positive with a shaky future of trillions upon trillions of dollars of debt?  Well the key word has always been in the future.  That big debt problem has always been looked upon as a problem that our kids are going to have to contend with.  

As long as the Government continues to finance the deficits, everything will be OK.  What if we are getting to a point where financing debt becomes the problem?  Well, I see it becoming a problem in 2 phases.  The first phase has to do with our potential lenders.  In the past, other countries have been willing to lend to us.  Today, they are demanding higher interest rates for loaning the US money.   The second problem occurs when even higher interest rates do not even matter.  A serious loss of confidence has occurred.  We just cannot get enough money borrowed to cover the problem.
 
I think that last week we saw phase 1 occur for the first time.  Last week, we had 3 big treasury offerings.  The demand to buy our treasury bonds was very weak.  As a result, we started to see interest rates climb.  Rising interest rates in a debt-filled world is problematic.  For one thing, this has an indirect effect on mortgage costs.  In order to lessen the severity of the foreclosure crisis which has a direct effect on whether or not the real estate markets ever bottom, interest rates need to stay down and not rise.
 
One other interesting development is that investors are being paid more for holding treasuries than in corporate bonds.  You see this in the interest rate swaps market.  This signals that investors feel more confident and that they are taking less risk by holding corporate bonds rather than those of the Government.
 
One of the downsides of this healthcare bill passing is the publicizing of the additional financial burden this is going to create in the future.  This brings the reality of our trillions of dollars of debt to the fore-front.  Don’t for a minute believe that this will cut the deficit.  The CBO’s analysis is performed using government accounting and “estimates.”   When has the Government ever gotten an estimate correct?   Then you have Greece showing us what our future more than likely looks like.  All of that gives investors a reality check and makes them think twice before loaning more to the government.   
 
Watch the interest rate on the 10 year treasury bond.  Below 4% we are fine.  Above 4% creates a dicey environment.  As I write, we are dangerously close that level. 
Incidentally, the Government has to raise 1.6 trillion dollars to cover the short-falls for the year.  That is on top of the 2 trillion that needs to be refinanced this year.  
 
On a Lighter Note…
How about this for a vote of confidence for the politicians?  Since 1897, a year after the Dow Jones started, 90% of gains came on days when Congress was out of session.  This body of research also looked at how investments would have performed while investing in the days that Congress was in session and out of session – The out of session investments strategy had investment returns 100 times greater than when Congress was in session.
 
 

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It was announced Friday morning that 190,000 jobs were lost, which is higher than economists predicted.   That is significant for one reason.  At this stage in the game, we should NOT be seeing this amount of jobs being lost.  Companies get to the point where they stop laying people off because they have already cut to the bone.  Unfortunately, they are continuing to lay off people.  Of course, we always need to look at how many jobs the government “estimates” that were “created” and “missed” by the Department of Labor.  The government added 86,000 jobs back into the equation.   

The bigger story is the unemployment rate.  The new unemployment rate is 10.2%.  Now, that rate is extremely suspicious given government accounting and a loss of 190,000 jobs.  Also consider that the government went back and “revised” last month’s job losses stating that the original estimate of 263,000 jobs that were lost last month was now really only 219,000.  It is highly unusual that we would get such a jump in the unemployment rate considering how manipulated the number is in the first place.  Once again, it is tough to trust government accounting.  A “stated” unemployment report that shows the rate over the psychological level of 10% sure could be a good excuse for government run healthcare.  After all, all of those people out of a job can end up creating an enormous amount of people scrambling for healthcare coverage.  

The highest rate dating back to 1948 occurred November and December 1982 with a rate of 10.8%.  Many on Wall Street are looking at the unemployment situation in the 80’s, noting that it wasn’t long until the unemployment rate started to improve once it eclipsed 10%, and that a massive new bull market started about the same time. Thus, they are making the comparison between the 80’s and today and feeling very bullish. Well, before we break out those Dow 10,000 party hats again, let’s look at a few major differences.

First, the federal funds rate which is the benchmark set for interest rates was at 9.2%. The Fed had the ability to greatly reduce interest rates to spur demand which in turn positively effects unemployment.  Today, the federal funds rates sits at 0.12% with nowhere to go but up.  Second, the unemployment rate bottomed out in September 1973 and didn’t top out at 10.8% until December 1982.  It took a little over 9 years to gradually increase.

Our low for the unemployment rate was 4.4%, which occurred December 2006.  Fast forward almost 3 years and it has gone from 4.4% to 10.2%.  Further it was at 5% back in April 2008.  The speed at which things have deteriorated presents a much tougher challenge what was faced in the 70’s and 80’s.   

Then there is the 3.5% growth rate of the economy that was released a few weeks ago.  John Williams, founder of shawdowstats.com, states that 92% of the 3.5% growth came from one-time stimulants.  He also notes that “every recession in the last four decades has had at least one positive quarter to quarter growth reading, only to be followed by a renewed downturn.” (from Barrons)

On the front page an argument could be made for a recovery that has started. However, it is what the numbers are not telling that brings up continued concern.

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Unemployment numbers came out last Friday and they paint a very concerning situation.   The unemployment rate is 9.8% and the economy lost another 263,000 jobs.  That is 22 months in a row of job losses.  I looked back at historical data that I have that goes back to 1939 and cannot find a string of job losses this bad.  You would have to go back to the Great Depression. Fortunately, unemployment is not as bad thus far.  Here is what it looked like in the 30’s.

 

Now take a look at the latest from Shadowstats.  It shows a comparison between what the Government reports, the Department of Labor (which is higher and more accurate), and then their data which includes everyone effected by unemployment.  As you can see, Shadowstats is close to 22% unemployed.  That is a far cry from what the Government is reporting. 

Now we also always like to see how many jobs the Government “estimated.”  Every month, the Government estimates jobs created or lost that they feel that the Department of Labor misses.  Yes, this is purely a bogus number.  This last month it was actually on the low side. They added 34,000 jobs into the total.   In 9 months, they have created 1,063,000 jobs out of thin air.  Now do you know why you can’t trust Government reporting?

In 2008, they created 904,000 jobs out of thin air.

In 2007, they created 883,000 jobs out of thin air.

Dating back to early 2000, I cannot find a year where they have been so aggressive.  The problem is that we continue to lose 250,000 jobs a month with no job creation in sight.  We aren’t even stopping the bleeding much less creating jobs.  They have let this problem get way out of control and now the problem is going to be tough to eliminate.  Let’s all hope that the graphs don’t end up looking like the one in the 1930’s.

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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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In 2006, I was writing to my clients in my private client letter about what I felt was occurring in the financial markets.  I described what I felt was coming as a Category 5 hurricane.  I think that I even named it Hurricane Greenspan at the time.  Although he is a distant memory, he had a lot to do with the problems that we are facing today.

It feels like we were hit with a category 5 hurricane last year.  Unfortunately, I think that another one is brewing and might even be getting very close to shore.

Every Friday it seems another bank fails.  Last Friday we saw a sizable bank fail.  The Failure of Colonial Bank marks the 6th largest bank failure in U.S History.  It is a bank of $25 billion and 346 branches in 5 states.  Besides the troubling nature of this story and the fact that the Government cannot bail all of them out, the FDIC insurance pot takes another big hit.  It looks like the 13 billion dollar fund will lose another $2.8 billion because of this bank failure. That insurance fund designed to protect you and me is quickly dwindling.

Another hurricane indication would be the Government’s sale of Government Bonds. The Treasury Department sells bonds to raise money for Government spending.  It is the way the Government borrows money.  Last week the Treasury Department sold 75 billion dollars in bonds.  Do you really think that China and other countries are lining up to lend us money?  No, you would be correct.

So, who is buying these treasury securities and lending money to the United States?  Ok, if you have high blood pressure or a weak heart, please stop reading.

Our own Federal Reserve Board is buying many of those securities and lending money to the US. For a great expose on this, read this article.  I don’t need to tell you how desperate that is and how much trouble we are in considering that is occurring.

I hate to say it but this is going to end badly.  All of this is going on at the same time we are facing an unemployment crisis and a whole list of problems in this country.  Once again, I advise you to watch your risk and don’t fall for the notion that this is just a normal cycle.  In other words, don’t drink the kool-aid.

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