U.S. stock index futures were pointing to a lower opening
on Friday morning. Global markets were mixed overnight with Europe bouncing
but Asia falling following the decline in the U.S. on Thursday. The S & P
500 fell below the 1100 area on Thursday but remained in an up trend.
Today's Economic Calendar:
- No major economics reports scheduled for release.
- Options will expire at the close.
News For Thought
Federal Reserve and Treasury under Congressional pressure Thursday was
a rough day on Capital Hill for the Treasury and the Federal Reserve. According
to The Wall Street Journal: "Political frustration over the rescue of Wall Street
and high unemployment erupted in the House Thursday, with one committee threatening
to impose tighter scrutiny on the Federal Reserve and another trading verbal
insults with Treasury Secretary Timothy Geithner. The House Financial Services
Committee voted, 43-26, to approve a measure sponsored by Texas Republican Ron
Paul, vociferously opposed by the Fed, that would direct the congressional Government
Accountability Office to expand its audits of the Fed to include decisions about
interest rates and lending to individual banks. The Fed says the provision threatens
its ability to make monetary policy without political interference."
Small business turns against health care reform bill in Senate. According
to The Wall Street Journal: "Chances of business supporting the Obama administration's
health overhaul are fading fast, after Senate Majority Leader Harry Reid's bill
took a liberal turn. The Obama administration has courted small businesses from
the start, and at times executives have shown favor toward Democratic plans such
as the bill passed by the Senate Finance Committee last month." There is rising
uncertainty as to where things are going. As the Journal points out: "Several
industry groups are banding together to ask Congress to scrap the current bills
and start from scratch on a health overhaul. They are stepping up television
advertising against Democrats' proposals. The problem for employers is they may
lack the power to kill the bill, which is why some are hedging their bets by
negotiating on provisions they think they still have a chance of changing."
Government data fails in accounting for jobs lost during recession. According
to The Reuters: "The U.S. government is having a tough time guesstimating how
many small businesses failed in this recession, casting doubt on the reliability
of vital data on employment and economic growth. The formula the U.S. Labor Department
designed to help it deliver timely, thorough monthly employment reports broke
down in the heat of the financial crisis, miscounting the number of jobs by an
estimated 824,000 in the year through March." In fact "The most likely culprit
is the so-called "birth-death" model, which the Labor Department uses to estimate
how many companies were created or destroyed. That model appears to have misjudged
how many companies went out of business during the recession, meaning the labor
market was even weaker than initially thought when President Barack Obama took
office in January. More recent figures may still be underestimating job losses
now, but it will be many months before the Labor Department is certain."
Japan official slips into deflation. U.S. policy makers should study this
item carefully. According to Stratfor.com: "Deputy Prime Minister Naoto Kan stated
that Japan has slipped into deflation, AP reported Nov. 20. Kan said the government
will work closely with the Bank of Japan to avoid jeopardizing recent tentative
improvements in economic activity. Finance Minister Hirohisa Fujii said addressing
deflation is a very important point in running the economy, but fiscal policies
in principle lack the capacity to fix the economy. He said public spending has
propping-up effects, but in the words of economist John Maynard Keynes, improving
the economy has to come from the private sector."
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The real unemployment rate is about twice what the reported
10.2%, making the prospects of a quick recovery even more daunting for the
American economy.
According to a report on CNBC.com: "According to the government's broadest measure
of unemployment, some 17.5 percent are either without a job entirely or underemployed.
The so-called U-6 number is at the highest rate since becoming an official labor
statistic in 1994." And while this sounds like inside baseball, it's an important
distinction, as "The number dwarfs the statistic most people pay attention to—the
U-3 rate—which most recently showed unemployment at 10.2 percent for October,
the highest it has been since June 1983."
What's the difference between the two numbers? U-6 is a more complete measure,
as it counts workers that are out of work and looking for work, as does u-3,
but also counts "Discouraged workers who have quit trying to find a job, as well
as those working part-time but looking for full-time work or who are otherwise
underemployed." In other words, it counts everyone who is in need of full time
work, thus providing a more complete picture of the situation.
Indeed what is emerging, based on this data, is an even bleeker outlook for a
recovery, an "L" shaped recovery where "an extended period as small businesses
struggle to grow and consequently rehire the workers that have been furloughed."
So why is this time different? For one thing, Wall Street's troubles have fully
extended onto Main Street. When the Glass Steagall Act was repealed, it allowed
commercial banks to act as investment banks. That allowed consumer banks to take
on higher risks, especially in real estate speculation. Many of these banks "hedged" their
souped up real estate portfolios with derivatives. When the derivatives imploded,
at the same time as the real estate bubble burst, Main Street and Wall Street
were essentially in the same boat. In prior recessions, consumer banks, in many
cases were able to withstand recessions better than investment banks due to the
separtation of functions imparted by the Glass Steagall Act.
When the real estate bubble burst, the damage was greater than other times because
of this connection between investment banks and commercial banks. As a result,
as CNBC correctly points out: "more workers are becoming discouraged as real
estate—the focal point for the expansion in the earlier part of the decade—has
collapsed and taken millions of directly related and ancillary jobs with it." This
has lead to a higher level of joblessness, while "Many workers believe those
jobs aren't coming back, and have thus quit looking and added themselves to the
broader unemployment count." In fact, as many as 40% of the jobs in the U.S.
were directly, or indirectly related to real estate before the bubble burst,
as lawyers, clerks, appraisers, contruction, and materials jobs have been lost.
As economists point out, if full employment is 4%, it would be hard enough to
get back to that number from 10%, the more widely quoted unemployment rate. But
when you frame the problem in the context of a 17% unemployment, things are clearly
different and the hill to climb becomes higher.
Conclusion
When Americans begin to understand the real situation, it could have wide political
implications, which is why Congress is starting to turn up the heat on the Treasury
and the Federal Reserve.
And the nature of the discomfort in the population, and the disconnect of Washington
with how many Americans view the current situation is staggering.
According to Rasmussen Reports.com: "The latest Rasmussen Reports national telephone
survey shows that 62% believe tax cuts are a better way to create jobs and fight
unemployment. Only 21% believe that additional stimulus spending is a more effective
tool."
And while some in the White House and in Congress are considering a second stimulus
package, another Rasmussen poll suggests that the American people see things
differently. According to the poll results: "Given a different choice today,
51% believe canceling the rest of the stimulus money would create more jobs while
32% say spending the money would be the better approach to job creation. These
findings are consistent with earlier polling. Most Americans say that, generally
speaking, increased government spending is bad for the economy. Earlier this
year, before the unemployment rate had reached its current highs, 45% wanted
to cancel the rest of the stimulus spending while just 36% disagreed."
There is clearly a significantly widening difference of opinion with regard to
the current economic situation in the U.S. Economic data, both private and government
issued, suggests that a mild, albeit jobless recovery is unfolding. Yet, with
nearly 20% of the population looking for work, the feeble improvement is meaningless
to one fifth of the population.
It's clear that some in Congress, where a midterm election looms in twelve months,
are starting to hear the message from the public, which is fairly clear: "fix
this now!"
The problem is that this is a structural problem that took a decade to develop
as the bursting of the Internet bubble and 9/11 led to massive liquidity in the
system. This liquidity fueled a real estate bubble which encompassed both the
investment banking and commercial banking sector.
It also dragged in a large amount of the population, the so called "investor
nation" proclaimed by Larry Kudlow, whose 401-k plans were their only retirement
option.
So now you have no work, no prospects of getting work that is meaningful, and
a severely depleted retirement fund, as the bills pile up and the grace period
for the mortgage and the Washington band-aids are set to expire.
We hate to sound so negative as the Christmas season nears. But, it's clear to
us, that more trouble may lie ahead, and that an "L" shaped recovery would be
a lot better than what is possible out there.
Know when to sell and how to make money when the market falls. Get a detailed
trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Shares of Goldman
Sachs (NYSE: GS) are starting to act in a very worrisome
manner.
Chart Courtesy of StockCharts.com
Goldman Sachs is starting to lose sponsorship from shareholders.
To be sure, the stock is still well above its March 2009
lows. But it has now fallen below its 50-day moving average.
That means that the intermediate term trend has turned
lower.
The company is making lots of money, but it is facing some headwinds. For one
thing, the economy is not growing at such a rapid clip that mergers and acquisitions
are happening at a blistering pace.
Yes, that business has improved this year. And so has Goldman's trading and management
business. But now the company, although it paid back its TARP money, is facing
a public relations problem with the prospect of paying out huge bonuses to employees
at a time when the employment rate in the nation is 10 to 17% depending on which
measure you use.
If you think of Goldman as a market bellwether, which we do, this recent weakness
in the shares, and the fact that the stock is not recovering, is a bad sign,
both for the stock and for the market.
We are neither recommeding the sale or the purchase of GS. The purpose of this
article is to educate subscribers as to the presence of an interesting trend
in the market. Dr. Duarte does not own or short shares of GS. |
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Technical
Look at the Market |
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S & P 500 Falls Below 1100
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The S & P
500 fell below 1100 on 11-19. The index remained above
its 20 and 50 day moving averages, which is fairly reassing
if you're hanging on to the bullish premise here.
But as we've noted for a few days, things haven't been all that great for the
overall markeet. There was a lack of performance in the small stocks. And overall
market breadth was less than what it usually takes to move prices signficantly
higher. That means that money is moving into large stocks, which are seen as
less risky bets.
For now, though, volatility is the most likely outcome.
Sector and individual stock selection is the most important aspect of trading
this market.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
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