The Relentless Pursuit of Meaningless Metrics
Here's the latest Stock World Weekly, "The Relentless Pursuit of Meaningless Metrics."
We ended last week’s newsletter, “Entering the Debt Dimension,” generally bearish and skeptical of the current rally due to a preponderance of bad news in the global economy, including the continuing European debt crisis and growing brinksmanship between Greece and the rest of the eurozone. However, Lee Adler’s analysis of the Dollar suggested further downside for the Dollar, which tends to be good for stocks. (Lee Adler, The Mighty Ben)
In spite of weakness and troubles throughout the global economy, the US economy is showing positive signs. On Monday, the Dallas Fed Manufacturing Survey business activity Index for January came in at 15.3, a huge leap over December’s reading of minus 0.3 and surpassing consensus expectations for a reading of 1.0. The production index also rose sharply, climbing from minus 1.3 to 5.8. Wednesday saw unexpectedly strong auto sales, as sales rose 11% in January year-over-year. On Thursday, Initial Jobless Claims came in at 367,000 for the week ending January 28, beating consensus expectations of 370,000. It was also 10,000 lower than the previous week’s revised number of 377,000.
The real capper was the unexpectedly strong numbers in Friday’s Non-Farm Payroll Report. The report showed a gain of 243,000 jobs in January, surpassing December’s revised reading of 203,000 and beating consensus expectations of 135,000. The survey also showed the average workweek increasing from 34.4 to 34.5 hours. Private payrolls increased by 257,000. Friday’s ISM Non-Manufacturing (Service) Index showed strong growth in employment and new orders.
Nevertheless, Friday’s positive employment report didn’t come without controversy. Tyler Durden of Zero Hedge pointed out that at the same time the new employment numbers were being touted, the number of people participating in the workforce dropped by 1.2 million in a single month, lowering the civilian workforce participation rate to a 30-year low of 63.7%.
Lee Adler of the Wall Street Examiner blamed “seasonal fudging” on overstating the case and concluded, “7.4 million fewer people have full time jobs today than was the case four years ago. Those 7 million jobs were the fake jobs spawned by the housing and credit bubbles. Those jobs were vaporized when the bubble economy collapsed. They are NEVER coming back...” (Deconstructing The "Massive Beat" in Employment Data)
Charles Biderman of TrimTabs pointed out the discrepancy between the good news and the number of actual jobs in the economy. “The BLS each month reports two data series, but only one jobs number is reported by the media. Actual jobs outstanding, not seasonally adjusted, are down 2.9 million over the past two months. It is only after seasonal adjustments – made at the sole discretion of the Bureau of Labor Statistics economists that 2.9 million less jobs gets translated into 446,000 new seasonally adjusted jobs for January and December.” (Is BLS Data Skewed?)
Rather than questioning the report, Paul R. La Monica argued that the jobs situation is improving enough to avoid additional easing. “If the job market keeps improving, there is absolutely no need for the Fed to launch another massive program to buy long-term bonds, a so-called third round of quantitative easing that is already being dubbed QE3.” (Kiss QE3 hopes goodbye. And good riddance!)
That's a big IF. The higher employment numbers may be neither real or a trend. With layers of data, adjustments and errors, and a constant threat (or promise) of supernatural intervention by the Fed, the picture is obscured. The metrics we examine may be meaningless - making the prediction business even more challenging. As with a scientific study, reading the conclusion is not enough, you have to not only read, but understand, the method and results sections.
With the Dow and Nasdaq above the 10% levels, the S&P and Russell above the 5% levels, and the NYSE comfortably above the “must hold” level, it’s easy to make a technical case for being bullish. On Friday Phil thought about drinking the Kool-Aid,
“This may be my last bearish post before drinking the technical Kool-Aid this weekend. We've already selected five trades for Members that will make 200-500% if the market keeps moving forward. There are still plenty of stocks to add to the Buy List, if this rally has legs. Our hedges allow us to make good returns, as long as the current levels hold.
There's the rub though – are the current levels sustainable? The nice thing about consolidations like the one we've been having is that they firm up a floor and give us an obvious exit point on the way down. We can move some sideline cash into play – as long as we hold 12,500 on the Dow, 1,300 on the S&P, and 2,800 on the Nasdaq – pretty simple strategy, right?”
Jabob wrote in Members’ Chat, “Phil, being bearish was wrong. Oh well, you can’t be expected to be always right, your market direction accuracy is better than most and was almost perfect until now...”
“It's always going to be wrong eventually. We play a range until the range breaks. At the top of our range, we are most bearish. At the bottom of our range, we are most bullish. That works wonderfully until it doesn't. Then, as we are doing in the $25KP, we take your losses and reset our range and start again...
12,876 was the high of last April. I suggest going back and reading those posts as we were "wrong" then too to stay bearish above 12,749, but I wanted to wait a couple of weeks before redrawing the Big Chart as the Dollar seemed ridiculously low at 73. As it turned out, we were richly rewarded for our bearishness at the time. But this time MIGHT be different, because the Dollar is almost 10% higher now and we're still way up so we have to respect this move more so than we did last April. However, I won't feel good about it until we hold up despite the Dollar coming back a bit more than 79.25.”
Regarding the Dollar, another Yentervention by the BOJ would strengthen it. Japan is struggling in the aftermath of last year’s massive and continuing disaster at Fukushima, a debt-to-GDP ratio of over 220%, and a currency that is so strong it is crushing exports. Toshiba reported a 72% drop in quarterly profits, while Honda cut profit expectations by 25%, specifically citing problems caused by natural disasters and the strong Yen. JFE Holdings, Japan’s second largest steelmaker, predicted its first-ever annual net loss.
Japan’s Finance Minister Jun Azumi suggested increased speculative moves in the market are contributing to the Yen’s strength. As Bloomberg reported, “Jun Azumi escalated his warnings against strengthening in the yen toward a postwar high, and signaled that the Federal Reserve is partly to blame for its recent advance... Against the ‘backdrop’ of the Fed’s plan to keep interest rates exceptionally low until 2014, ‘short-term speculative buying’ has increased, contributing to the yen’s gain.” Azumi indicated that he is ready to take decisive steps if necessary.
Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management, noted “Yen-selling is still in the cards, but it’s becoming harder for Japan to do it because of external pressure.” He also worried that speculative trading could accelerate gains in the Yen if investors concluded the BOJ would not intervene. (Japan Escalates Warnings on Yen’s Advance as Sharp’s Earnings Collapse)
“The Treasury market panic continued this week, with yields heading for new lows, thanks partly to a return of central banks to the table at a modest level, but mostly due to a ratcheting up of public buying. Bond fund inflows hit a record last week. It’s sheer panic. Bedlam.
“The panic atmosphere has been helped along by reduced supply. Once last Tuesday’s big settlement (but less than originally forecast) was out of the way, the market just idled as the paper was digested.
“Supply settling next week will be extremely low, in fact, there should be a minor paydown. Then the mid month settlement will be well below the norm for note and bond settlements. Considering that the Fed usually settles a big wad of its forward MBS purchases at mid month, the skids will be greased and supply will be reduced. There will be more than enough cash to go around.
“That will be a recipe for more buying of those ‘fortress balance sheet equities’ (cough, cough), so the slow motion meltup will be spurred on, probably for most of February.
Over the weekend, Zero Hedge reported on the situation unfolding, or not unfolding, in Greece. Citing Reuters: 'The possibility of a sovereign default by Greece cannot be ruled out, Jean-Claude Juncker, head of the Eurogroup of finance ministers from the single currency zone, said in a German magazine on Saturday.’ Translation: A Greek default on that €14.5 billion bond maturity D-day of March 20, is now inevitable...Jean-Claude Juncker was quoted as saying Greece could no longer expect solidarity from other euro zone members if it cannot implement reforms it has agreed to.” (Juncker Warns Of Greek Default As Europe's Patience With Greece Runs Out). For more timely info on Greece, keep checking Zero Hedge.
Looking forward to the new week, we find Phil becoming reluctantly a little more bullish, while waiting to see if next week’s action confirms the current rally.
For several trade ideas presented in this week's newsletter, click here.
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