The Three E's: The Economy, The Election, And The Increasingly Uncertain Europe

 

by Dr Joe Duarte
October 8, 2012

The Jobs Report Solved Little For The Markets And For Those Without Jobs

Here we go again. The election, the economy and Europe are revving up as major catalysts of social and market behavior with the potential consequences and their long term effects accross the board beginning to pile up.

The economy and the election are connected. The stock market is not remotely connected to either of them at this time. If it was, it too would be stumbling along instead of being within reach of the 2007-1008 highs.

Indeed, stocks have been pushed higher by the overwhelming tendency for prices to rise in response to easy money. The problem is that easy money can't do all the work. And with politicians digging in, instead of giving in, the best that any market can hope for is that the Fed's QE 3 and the coordinated central bank money printing activities throughout the world, just keep things from caving in all at once.

Don't get us wrong. Easy money is a great motivator for stock prices to rise. But, as last week's action showed, it's not as automatic as it once was.

Friday's employment report is a perfect example. We had the new jobs number pegged at 57,000. It came in at twice that much, and the employment rate fell below 8%. So what happened? Few in the market bought into it. Jack Welch came out immediately and suggested that the number was being "manipulated" by the White House. And he wasn't alone. It surely seemed fishy that one day after President Obama got demolished in the first presidential debate, the employment numbers would look rosy.

Inside, the report, it was more of the same statistical maneuvering. The employment rate fell because fewer people are looking for work and because the number of part time workers rose significantly. That's not new. That's been the dynamic for months. When people give up, the ratio looks better. When people take any job that they can find, the ratio also gets better. Anyone who follows this stuff knows that. The problem is that the public doesn't always get the nuance. Still, with surveys and polls showing that fewer believe the media, it's hard to gauge whether anyone outside of the investor class could figure that out.

Here is where the data becomes interesting. The goverment calculates six different ratios of unemployment rate. The most popular employment rate, the one that was calculated at 7.8% for September is U-3, the "official" rate. The labor deparment defines U-3 as follows: "Total unemployed, as a percent of the civilian labor force (official unemployment rate).

Yet, the complete, and more accurate rate is U-6, which BLS defines as the ratio of "Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force" tells a different tale.

U-6 counts those who want to work and can't find work, or those who can only find part time work, plus anyone who can only find some kind of work, part of the time. It is these last three groups, the people who can't find anything more than subpar work, at best, that makes the difference.

U-6 is currently 14.7%. It was at 15.7% in September of 2011 and it was 15% in July of 2012. Statistically speaking, this isn't much of an improvement. The Labor Department adds the following footnote to their "U" series: "Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Updated population controls are introduced annually with the release of January data."

One of the things that we've been doing lately is asking people if they know anyone who has found a job. The answer, in our clearly unscientific survey of maybe 10 or so people in the last week has been one. When we asked what kind of job, the person, who was speaking about her husband, told us that he is a sound man for a part time classic rock music cover band that plays small clubs on the weekends. She says that it's just something he does because the band guys are his friends. Sometimes they pay him. Sometimes they don't.

Then she told me that at one point, her husband was so well thought off in the music business that he had been asked to do tour sound for Eric Clapton. Now, he can't get a paying job. She told us that she is looking to get out her current nursing gig to do something else as her job is too demanding on her other roles, wife and mother. She can't, though, until her husband can find meaningful work.

She and her husband, along with others like her are part of the 582,000 people who got part time jobs in September, or are affected by the current economy. They are the ones that U-3 ignores but that are taking the brunt of the current economy, where CEOs of large corporations are "waiting out" the Obama administration according to Bob Woodward.

Everyone else that we've asked the question has said that they don't know anyone who has gotten a job lately. Some of those same people, many of them health care professionals, nurses, X-ray technologists, etc. have told us that they themselves have more than one job or they couldn't keep up their standard of living.

Most interesting of all, though, is the fact that at least as of last week, before the presidential debate, many of them were still willing to vote for Mr. Obama. They told us that they didn't like Mr. Romney. We'll see if the debate changed any of their minds.

Somewhere in the middle of all those numbers is the truth. It's clear, that the employment situation may have bottomed out, but is not improving beyond that. That's why when we drive by our Starbucks indicator shops, the number of people at the drive-thru window is variable. Some days it's terrific, as it was last Friday after the employment report was released. Other days, as we saw on at least two occasions last week, there was no one there.

In contrast, most members of Congress have done just fine during the last few years. According to The Washington Post: "Most members weathered the financial crisis better than the average American, who saw median household net worth drop 39 percent from 2007 to 2010. The median estimated wealth of members of the current Congress rose 5 percent during the same period, according to their reported assets and liabilities. The wealthiest one-third of Congress gained 14 percent."

And the proverbial wealth, has been spread evenly between the parties. According to The Post: "The estimated wealth of Republicans was 44 percent higher than Democrats in 2004, but that disparity has virtually disappeared." Is there any conflict on interest? According to The Post: "The Post also found that some congressional financial interests intersected with public actions taken by legislators: 73 lawmakers sponsored or co-sponsored legislation that could have benefitted businesses or industries in which either they or their families were involved or invested."

The biggest intangible now, is whether the Eurozone will split up. And if it does, how fast will it come about, and to what degree? Who will remain in the union? Will Germany still lead it? And will there be consequences?

After all, there are bailouts that are in progress, and austerity programs have been put in place. Meanwhile, little else seems to be happening. For one thing, the ECB's money printing program is still relatively unclear, unlike the Fed's which is well under way and has kept the markets from collapsing, if little else.

Even more troubling is the fact that the governments have still to fund the so called "bazooka," the $650 billion fund also known as the European Stability Mechanism. In other words, for some time, markets have been rallying on words, not deeds. That can't go on forever.

The S & P 500 (SPX) had a very mushy response to Friday's employment report. Simply stated, there was too much doubt about the veracity of the numbers. The index failed to keep its early day gains, and had resistance at 1460. The 9/14 high at 1470 was the last big up day that ended on a good note. That was in response to the Fed's QE 3 confirmation.



Chart Courtesy of StockCharts.com


The small stocks in the Russell 2000 index (RUT) didn't even come close to reaching their recent highs after the employment report. That's a significant development, as it shows that the risk takers on Wall Street are starting to pull their horns back.



Chart Courtesy of StockCharts.com


Of more concern is the chart that shows the relationship between bond prices (red line) and commodities (black line). Falling bond prices mean rising interest rates. And the U.S. Ten Year Note yield (TNX) ended last week at 1.73%. The recent high on yields came on 9/14 at 1.86%. This was also the day in which the stock market made its most recent high.



Chart Courtesy of StockCharts.com


The market's breadth, as measured by the Nasdaq Advance Decline line (NAAD), is still troubling. The line, despite last week's attempt to improve, ended Friday's trading with another lower high. The pattern of lower highs and lower lows is very troubling.

The Nasdaq Hi-lo line (NAHL), in contrast to the A-D line, continues to move higher. This shows that money is still moving into the market. The down side seems to be that the money moving into the market is moving into fewer stocks. That could be a problem.



Chart Courtesy of StockCharts.com


Conclusion

We seem to be at a significant decision point. Events, such as the election and Europe are once again weighing on the markets. The economy is much too uncertain to be accurately gauged at this point. That's because of the external events that are in play.

The Federal Reserve is printing money like crazy. Yet, the effect is muted. What seems to be happening is that the markets, and perhaps the economy are just moving sideways.

This can go on for some time. But it won't go on forever. It's starting to look as if the market is now willing to wait until after the November election to make its move.

Trading Plan Review

Important: Please Read. We have set up a special situation trade in our bond timing section. Please visit the page for more details. The trade should be put in place before the market closes on Thursday, as it is related to the employment report.

Our trading plan remains well structured for this market. We have raise cash but still have open long positions. These are the strongest of our trades since they have survived the recent swings in the market. This is a good place to be for now. We also have a position in the Short S & P 500 ETF as a hedge.

We will continue to manage each position individually regardless of the overall market trend.

Our energy portfolio is back in cash. Our health care portfolio is long.

We are in cash in the gold market but have added a potential long entry. We are in a special situation trade in bonds right now. Visit our bond timing page for details.



Stock of The Day

Apple Inc. (Nasdaq: AAPL) Is In Descent Mode

by Dr Joe Duarte

Shares of Apple Inc. (Nasdaq: AAPL) are being aggressively sold. That's an interesting development for this market.



Chart Courtesy of StockCharts.com


Apple has led the Nasdaq higher. It is not just heavily weigthed in the Nasdaq 100 and Nasdaq Composite indexes, it has been a bellwether for the technology sector, having grabbed market share from other phone manufacturers and becoming the trend setter for the industry.

But a lot of good news has been priced in. And we've heard a lot of bragging from people about the stock over the last couple of months. When you add the Google Map debacle to the story, and now the Foxconn factory worker incidents in China, you have to wonder if Apple shares haven't seen their best levels for a long time.

It's hard to tell at this point if this is the top, or just another pause on the way to another round of new highs. What's important is that for now, the stock is getting sold very steadily.

Steady selling is momentum selling. And momentum selling, like momentum buying can go on for a long time.

How low can it go? Well, the Friday close was 652.59. The 200-day moving average is at 573. That's a good place to watch for now.


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