What the Unemployment Number is Not Telling You

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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No Soup Lines….yet

Not only does the jobs report released last Friday give us a real dose of reality, it also puts an emphasis on the importance of November’s vote to get rid of the socialists that continue to do nothing to help those that are unemployed beyond keeping them on the Government dole through unemployment benefits.   Let’s look at the numbers.

The jobs report showed a loss of 131,000 jobs this past month. Some of that loss is to be expected due to the laying off of census worker jobs that were temporary and never should have been counted in the first place.  Then the Department of Labor went back to June’s numbers and said that those numbers were not quite right.  They stated that June’s unemployment number was actually an additional 100,000 loss in jobs. 

The private sector jobs are the most important.  We couldn’t care less how many jobs the Government is creating.  When we start relying on the Government to create jobs we have a real problem.   There were only 71,000 private sector jobs created which was much less than expected.   The irony is that, in a sense, some of those jobs are government created as well.  Barron’s reported, over the weekend, that the bulk of those jobs “reflect the fact that the auto makers didn’t shut down as they usually do in July to change models.” 

I guess the auto industry, a large majority of whom the government controls, is too busy building those $41,000 electric cars that go 40 miles on a single charge.    So, are those really private sector jobs when the Government owns so much of the auto industry?  

There are a few charts that I would love to share with you if I could get them to load. One chart shows the drop off in employment this go around.  It is the steepest drop since the 30’s.  Then there is the chart that shows private sector jobs revealing an even steeper drop.   Said in another way, this is the worst job situation that we have had since the days of soup lines and the great depression.

So, what is the solution?  I am sure that we will see Ben Bernanke dig in his magic bag of tricks and pull out some more stimuli.  Sorry to be so pessimistic… I don’t know that it matters nor does it fix the problem.   Small Businesses and corporations are not hiring because they don’t trust the White House and this march towards a socialistic state.  If the Obama administration and the rest of the politicians would start supporting capitalism, companies would begin to find that sense of confidence.      What are the chances of that happening?

The reality is that we should be creating 300,000 plus jobs each month.  Said in another way, we need to be creating that many jobs just to start a real recovery.

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Job Picture – Not a Pretty Picture

I feel like I have been writing about the jobs problem now for a long time.  I keep coming back to the same question.   What are the politicians doing to solve the unemployment problem in America?  I always come up with the same answer – very little. 

To be at this stage of a so-called recovery and to have pumped into the economy 100’s of billions of dollars, we shouldn’t have jobs numbers like we received last Friday. 

All of those jobs that Joe Biden said were going to be created before last month’s job report are now quickly going away as quickly as they were created.  This past month the government gave the pink slip to 225,000 census workers.  What we are the most concerned about is private sector jobs.  How many people are being hired by small business or corporate America?  There is where you want to see your strength.

Unfortunately, only 83,000 jobs were added.  I guess that is a positive.  However, were they really added?  You also have to look at the mystical estimate the Government throws in there of how many jobs they estimate are being created each month. Yes, they are at it again with their government accounting of jobs that were made up out of thin air.  It is the birth/death ratio or the jobs that the Government said were created or lost in a given month that the jobs report missed.

For this month – Poof! 147,000 jobs were added.  I wish that I could add $1,000,000 to my bank account due to a bank error that I assumed happen and be able to spend it.  I know – each month I get on my soapbox about these numbers.  It is just ridiculous. 

Remove the government estimates and you have a net loss of -67,000 jobs.  So where do you think the bulk of those estimated jobs were created?  54% of those jobs were said to be added in the Leisure and Hospitality industry.  Of course, that makes sense to me.  The tourist business is booming on the Gulf coast and the American Consumer has a ton of money to spend traveling. 

How about the unemployment rate?  It went down.  Isn’t that a good thing?  It would be good if it went down for the right reasons.  Unfortunately, 625,000 people feel out of the system and are not being counted. The unemployment rate will remain pretty useless data sense it doesn’t count everyone.

I wrote a blog about the possibilities of a double dip recession this morning.  I just don’t see how we are going to avoid it.  The question is going to be how bad and low will the stock market go?  Sorry to paint the best picture.  However, the vast majority of the media doesn’t get that we have a problem. I just want you to see the other side.

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An Absent Consumer is not a Good Economic Recovery Sign

Economists debate whether or not we are going to fall into the dreaded “double dip” recession.  This occurs when you go through a recession, start a period of recovery, and then fall back into a recession again. 

Let’s look at the basics.  You have a Government that has spent 100’s of billions of dollars to stimulate the economy and yet we have very little to show for it and we still have a large unemployment problem.  Oh pardon the mistake –the politicians have a lot to show for it as they have been able to use our tax money to pay back favors. 

The realization is two fold.  First government spending isn’t going to be the solution to our economic problems.  If you want companies to start hiring, then build confidence back that the Obama Administration and the rest of the politicians are not going to destroy this country by turning us completely into a socialistic country.  You do that by passing legislation and using resources to help the small business owner.  Unfortunately, the opposite is happening.

Second, we are going to be hard pressed to recover without the participation of the consumer.  The consumer is not confident and for good reasons. 

• We are well into this so called recovery and the unemployment problem is bad as it possibly could be.  That will continue to keep consumers in a less than confident state of mind. 
• Confidence in spending money is also tied to the stock market.  If the stock market has begun a bear market, consumer confidence will fall off the cliff. 

Then there is the foreclosure crisis, the state of emergency in the Gulf, and the list goes on.   There isn’t much to be confident about in this environment.  So, it shouldn’t be a big surprise that Friday’s consumer spending fell off the cliff (comparatively speaking) when you look at how the above have performed recently. 

So, it really surprises me when economists are so bubbly about things.  The Wall Street Journal had this to say in their weekend edition.

“The surprisingly poor sales cast fresh doubt in consumer spending that had allowed economists to raise their forecasts for US growth this year despite a moribund housing market, a dismal job market, and tepid business investment.”

So economists really thought that the consumer facing the prospects of losing their home and their job or the consumer who is not employed or underemployed gave economists enough confidence to raise forecasts?  

The bottom line is that we are going to be extremely lucky to escape a double dip recession.  I think that the question on economists’ mind shouldn’t be whether we face it but how deep this one is going to be.

The probabilities are high that the decline that started in April in the stock market will start to resume again in short order.

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Are We Past the Problem of Unemployment?

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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No Worries – It is just a “Correction”

All of the analysts are out this morning describing last week as nothing more than the normal correction that we have been expected.  “Don’t panic – this is no big deal.”  “It is great to be normal again.”  To be fair, everyone who is bearish is calling for this bear market rally to be over and done.  So, who is right?  Corrections are normal.  The fact that we haven’t seen a correction is not normal.  So, welcome back to normal stock market activity.  At the same time, the charts are potentially showing a change of character in the market that would also support the bearish case. 

Every time the market changes direction, you have to look at the catalyst.  Unfortunately for the bullish case, the catalyst is Washington intervention and finger pointing.  Washington wants to assert control (continued move towards socialism) and wants to point the finger.  There were two news items beyond not so hot earning reports that had a negative effect on the markets.

First issue – On Thursday, President Barack Obama proposed new rules designed to restrict the size and activities of the U.S.’s biggest banks, the latest in a series of administration moves to curb Wall Street.

If you think back to last year, they forced all of the investment companies like Goldman Sachs and JP Morgan to be banks so that the Government could give them aid and help protect them from failing.  Well there is a price that comes along with that protection and it is called control.  Basically President Obama wants to tell banks how big they can be and tell them whether or not they can participate in what is called proprietary trading. 

Healthcare was only one of the ingredients of socialism.  Nationalization of the banking system is the other.  So, we just continue to follow their game plan.   Last year they took some major steps in gaining control over the banking system.   They performed an unnecessary stress test on the banking system last year in order to tell us (which was not necessary) the banks that were healthy and unhealthy.  They also announced a list of problems that might force the government to step and take over.

Well one of those problems is unemployment.  The government said that banks might have difficulty in an environment where we had a 10% unemployment rate.  Guess what our unemployment rate is today?  Yes, technically we are starting to meet the criteria as stated by Washington that would require them to assert control.  It makes you wonder if President Obama’s announcement last week was a reenergized effort towards nationalization of the banking system.  

As you might imagine, Wall Street wasn’t too happy with the President’s plan to assert control.  You can look at the stock market and the moment he stated that he no banks should be allowed to run proprietary trading systems and that he wanted to limit the size of banks, the market fell apart. 

This also gives the politicians during an election year the ability to point the finger at those big old bad banks that gave mortgages to people that couldn’t afford them.  Those bad banks are the problem and the Obama administration and Congress are going to correct the problem. 

Second issue – Members of Congress came out and declared that they would not vote for reappointment of Fed Chairman Ben Bernanke for another term.  This is the ultimate in finger pointing.  It is real convenient to blame him for the financial crisis and take the spotlight off of their part (the largest part of the blame) in the financial crisis.   Not reappointing him would be a grand mistake. These politicians are too interested in their own survival to realize the problems they will create in the markets by not reappointing him. 

This is the risk that we run into with the markets. You create problems when Government wants to fix things, assign blame, and start over regulating industry.  They don’t regulate when they need to and when they regulate they do it too much.

Politicians should practice preventative medicine to prevent the crisis from happening and never should be allowed to fix anything after it is broken.  You just have to look back to the Great Depression to see they same type of effect when they passed the Smoot-Hawley Act which many historians state made the Great Depression much worse.  

Once again, we come to the same conclusion.  These politicians seem to continue to be the problem.

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Unemployment Continues to be THE Problem

Out of the long list of risks and challenges facing the economy, the stock market, and investors, employment still remains near the top of the list. There were rumors all over Wall Street that the unemployment numbers would be positive for December.   With a big surprise and another sign that things are not getting better, 85,000 jobs were lost in December according to the “Government Accounting.” 

Yes, and the Government added around 59,000 fictitious jobs to the mix.  The Department of Labor’s unemployment rate, which includes much more of the workforce than the Government accounting, is creeping up closer to 18%.  I also like to follow Shadow Stats which has the most complete tracking.  They are looking at around 22%. 

However, there were was some bright news.  The Government went back and revised up 15,000 jobs from a -11,000 to a +4,000 jobs.  The talking heads on CNBC kept up the talk of recovery by pointing to the positive job numbers in November,  The funny thing is that they looked past the fact that Government revised DOWNWARD the job losses for October from 111,000 to 127,000 which sort of wipes out that positive job gain. 

The interesting little piece of data comes in this next unemployment report when they adjust the birth/date formula.  Remember that this is the formula that allows the government to add fictitious job growth to the overall number.  January is the month where they revise that number.  Over the past 5 Januarys, the loss of jobs reported by the birth/death ratio has resulted in an average lob loss of 276,000 jobs.  Given that job losses have not stopped along with the addition of the birth/death revision for January, that has the makings of a horrible number.

Incidentally, in the decade that has just ended, we created less than 500,000 jobs.  In the previous 4 decades, the economy generated at least 18 million jobs. 

Still there is no game plan for job creation other than the minimal impact from the stimulus package.  At some point the effects of this problem manifest itself in the stock market.  Until then, this market probably marches higher.  However, the biggest risk that awaits investors is the day reality of Main Street and the greed of Wall Street meet.  The problem is knowing when that will happen.  If and when it does, the level of risk should be through the roof.

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Fire!

Unemployment is mysteriously reporting only a loss of -11,000.  Poof, just like that we transition from 100,000 and 200,000 plus jobs losses each month to just 11,000 without even a transition.  The unemployment rate has come down from 10.2% to 10%.  So what do these numbers really tell us about the economy?

Really nothing…

The unemployment rate has fallen in November two-thirds of the time over the course of the last 15 years.  Most of it has to do with temporary hires for holiday shopping and nothing permanent.  Regarding the job loss reporting, can you really trust government agenda filled accounting?  If you look closer at the numbers you see a different picture.  It is about all of the other people not accounted for in the report. Clusterstock.com had this chart of the day which I think is telling.

The number of those unemployed for at least 27 weeks rose by 463,000 people to 5.9 million.

There were 861,000 in November who were considered discouraged workers.  These are workers who believe that there are no jobs available for them.  This was up over the prior year. 

People working part time for economic reasons stood at 9.2 million. 

If you look past the 10% unemployment number and look at a closer number of those unemployed in this country from the Department of Labor, the number stands at 17.2%.  Finally www.shadowstats.com has the unemployment problem in this country at 21.8%.

Then you have the number of jobs that the Government has estimated to have been created.

Thus far the Government estimates over the past three years that 2.875 million jobs have been created.  Out of that number 31% of those jobs came from the Leisure and Hospitality area – how much leisure and hospitality has been occurring in the last 3 years that requires all of those jobs?  If I were going to make up (did I just write that), I mean, estimate numbers I would add them elsewhere to legitimize the process. 

I was talking with someone last night about the pain this country is going through.  The economic numbers just don’t reflect the reality of what is occurring.  The biggest concern is the result of all of this Government manipulation.  There are dangerous imbalances that exist.  Unfortunately, the band aid approach can only work for so wrong.   Imbalances will work themselves at some point.  For investors, it will be much like being in a capacity packed room and someone yells fire.  You will not be able to get out of the room fast enough.  Thus, if you are invested heavily in the stock market today, I would at least sit closer to the exit door or better yet consider calling it an early evening.

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The Ultimate Bubble of Hope

We have had all types of bubbles in the history of the investment markets.  According to Jeremy Grantham, there have been 28 different types of bubbles from gold to art to real estate to stocks and even tulips.  Yes, there was an enormous tulip mania.  Bubbles are created out of a mania.  Manias are created from the notion that a great money making opportunity exists.  For example, we saw the stock market bubble that was created in the 90s due to the notion that these internet stocks were the next great thing.  These companies didn’t have any substance.  People were investing into the belief that an idea was going to be successful. 

Investors are doing the same thing today. We have an economy that has had economic growth based for the most part on one time stimulus.  We have a stock market that acts as if all of the bad news is behind us when, in reality, we have had a government that has been propping up the system. 

The underlying fundamentals are just not there for this economy.  There are serious imbalances.  However, the government wants you to believe that they are solving the problem.  The unemployment problem is on top of the list of the greatest problems we face.  This government has done nothing to fix this glaring problem minus the creation of some government stimulus jobs.  What is President Obama’s solution to the latest bad news in unemployment?  He announced Friday that he was going to create a job “summit” in December to figure out what to do.

First of all, he needs to be addressing the problems yesterday and not waiting until December to form a “study” group.  The reality is that while this bubble of hope is being created and the market is acting as if the government has everything in control, Americans are losing jobs, the foreclosure crisis is getting worse, and the landscape of our country continues to change drastically. You have states and municipalities facing bankruptcy.  The commercial real estate market is in trouble and could represent the next shoe to drop. 

In a bubble environment, reality becomes a real show stopper.  Remember just 4 years or so when people were flipping homes and acting as if home prices would never go down?  Well reality hit and you know the rest of the story.  I think that we are on the verge of seeing the same thing today with this artificially stimulated economy.  Wall Street is acting as if this is a normal cycle and the worst is behind us.  The government is arrogant enough to think that they can be this irresponsible, get away with it, and fix the economy when, in reality, that is the farthest from the truth. 

Then there is all of the mania surrounding gold.  This is all based on the assumption that we are going to get wide spread inflation when we are really facing a deflationary recession.  Don’t be fooled in thinking the price of gold cannot be cut in half.

Confidence is a fragile element that is the glue that holds everything together.  We went through a serious crisis of confidence last year.  We got some of that confidence back.  The problem is that this confidence is like the house built on sand.  Reality has a funny way of showing up.  

If the stock market were facing reality and not investing in “hope,” this market would not be anywhere near the levels that we are experiencing now.  Of course, you can make the argument that the stock market can go up with all of these imbalances present.  I would argue that we are facing serious and large imbalances.  This is not your ordinary situation.

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Financial Crisis Alive and Well

Every Friday, all across the country, bankers hold their breath.  This is the day that the FDIC chooses to show up and take over banks that are on the verge of failure.  This past Friday, FDIC employees were especially busy when they showed up at 9 different banks.   The banks had combined assets of 19.4 billion dollars. 

On Sunday one of the largest bankruptcies in corporate history occurred.  CIT who lends money to hundreds of thousands small to medium business filed for bankruptcy protection.  This could have some pretty large ripple effects.

The problem is the lack of capital to those lenders and banks who focus on the small business owner.  The Obama and Bush Administrations failed miserably in taking care of  the heartbeat of America, the small business owner.   Take that capital they are dealing out like candy and give it to those banks that service the small business owner.  Further, if you want to solve the unemployment problem in this country, help the small and medium sized businesses.  Of course, that would be the promotion of capitalism which is something none of the politicians seem to understand.

The Obama Administration stated that they might infuse money to small banks if they will agree to lend to small businesses.  The Obama Administration needs to get a backbone.  If they are going to give money to the big banks,  put stipulations on the money and stop requesting what they want the banks to do in return of receiving the bail-out money.  They are dealing all of this money out to the big banks and at the same time wanting these big banks to stop abusing credit card customers and start lending it.   Here is an idea – STOP GIVING MONEY WITHOUT STIPULATIONS!!  Go ahead and give money to the small banks without stipulations and they still will not lend it out.  It is all about survival.

You got to love bank nationalization and the march to socialism.

Levels to Watch

Let’s take a look at the price levels on the S&P 500 because some damage was done last week.   We have broken through some pretty significant price levels.  However, the BIG ones are in front of us.  The range to watch on the S&P 500 is 989 to 918.  It will be interesting to see what happens around those levels.  Yes, this is a wide range.  However, it does give you a good range in which to monitor risk if you are heavily invested in stocks.   Remember, the question is always,  “Is the rise in the stock market from March a new bull market or just a bear market rally?”  The answer to that question is crucial to the future of your invested money.

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Unemployment Starting to Look a Lot Like the 30’s

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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The Main Question Might Be Getting Answered

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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Unemployment Reports Better than Expected – Are we in the clear?

 

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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The Bear Market has to be over…Right?

Those of you who have been reading my analysis are probably wondering when I am going to throw in the towel and just admit that the bear market is over and start talking about buying stocks again.  Well, I hate to disappoint you.  It is not going to happen yet.  Let’s take a much bigger picture look at what is occurring.  First, we are in a financial crisis produced by the bear market and those don’t just go away without a strong fight. 

Second, how could a 40% plus rise in stocks not mean the bear market is over?  Well, let’s take a look at history for that answer.  In 1929, a bear market started as a result of a credit/debt crisis.  There are many similarities between that period and today.  The big difference is the type of debt crisis.  The bear market eventually bottomed in 1932 after an 86% decline.  The first “crisis” decline in 1929 saw the market drop -44%.  Following that -44% decline, the stock market went up 46% over the next 147 days.  If you compare that to today, we are going through a similar experience.  The crisis of last year resulted in a -48% decline.  Thus far we are a little over a 40% increase in the stock market over 137 days.   This is not in any way unprecedented.  The problem for stock market investors in 1929 was what followed the 46% increase.  Following that incredible stock market rally was an -82% loss over the next 3 years. 

Third, the market has been rising over the past two weeks as a result of earnings season reports.  Over 70% of the companies of the S&P 500 have reported better than expected profits.  However, a closer look would reveal that the vast majority of these “profits” were due to cost cutting and not real growth.  These are clearly not sustainable. 

Fourth, Wall Street is beating the drum that the recession is just about over.  The index of leading indicators came out last week “and is rising at a rate that has accurately indicated the end of every other recession since the index began being compiled in 1959” (Dallas Morning News).  Is that really valid when we are dealing with the worst recession since 1929 when no leading indicator index was even around? It is important to compare apples to apples.  Wall Street has a history of claiming the recession over prematurely many times before.

Finally, unemployment is a major crisis and there is nothing in the works to fix it.  Of course, you can always get a job working an Obama induced construction job. 

Let’s not get to ahead of ourselves.  I was premature to write that the stock market rally was nearing the end.  Obviously it still has more to go.  I don’t think that I am wrong to suggest the bear market is over.

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Corporate Insiders Are Very Bearish

Forget about what the Government, Wall Street, or the economists say about the probabilities for the stock market and the economy.  Instead, look at what the people in the day to day trenches are doing with their money.  A key indicator is the actions of the corporate insiders and whether they are buying or selling their company stock.  Think about it for a moment.  If the corporate insiders, the individuals who are seeing the actual numbers and projections for the future, are selling their company stock, then there is obviously something that concerns them. 

According to Wall Street, this is intended to be the buying opportunity of a lifetime.  If so, then why would you sell?  Let’s take a look at the latest statistics that show whether corporate insiders are positive or negative about the future.

In the last few weeks, corporate insiders sold over $335 million in stock versus the buying of only $12 million  (www.financialarmageddon.com).  This begs another question. Is it more concerning that insiders are selling or that insiders are just not buying?

The reality is that the economy is not in good shape and the fundamentals do not suggest that we are remotely close to being out of the woods.  Let’s take a look at a few other variables.

Unemployment

I wrote last Friday about the huge discrepancy in the unemployment report that the Government gives and the unemployment problem that is really facing America.  However, the numbers get even more distorted when you consider other variables.  The temporary workers distort those numbers.  This is the classification of workers who are jumping from temp job to temp job just to make ends meet.  They will count as employed.  The latest shadowstats.com repoprt shows the unemployment number around 20.5%.  That is a far cry from the reported 9.4% unemployment and suggests that a huge headwind faces this economy.

Interest rates

The Government is going to have a tough time getting this economy jump-started if interest rates continue to increase.  This is going to be a key risk factor for the stock market.  This week the Government will be holding another significant bond auction in order to raise money to fund our enormous spending appetite and deficits.  Buyers are demanding higher rates of interest for the bonds thus increasing the interest rates of the government bond markets.  Interest rates were up again last week.  Of course, this affects the interest rates of the consumer markets.  The last thing that a debt crisis needs is rising interest rates.

Price Levels

Let’s not forget the price levels that we watch to determine if the market is making headway and still a good investment or if the risk level has become too high.  The price level of 943 is a huge price level that the S&P 500 has had a tough time getting over.  The longer that the S&P 500 stays below that price level, the larger the chance that the bear market declines will return.  Thus far, this has been a real challenge for the market.

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