April ADP Report and Unemployment
The intra-day action yesterday was interesting. It looked like in the early session we had some technical traders coming in to sell around the resistance zone, but then we had a push higher into the close. There is just not enough volume and conviction at this point for the Bears to take any significant stand. I guess after the first quarter of trying to call the top and getting short, the Bears are now licking their wounds and are not willing to take on too much risk. That means that any sell-off will have to come from the Bulls when they begin to capitulate and lose faith. However, with nowhere else to invest, it is possible that the Bulls are less likely to divest from equities regardless of economic or political news? We saw a very bad jobs report last month, which did little to sway the Bulls. We saw lower top-line revenue and earnings disappointments, which again did not affect the Bulls. So what will be the catalyst? I am not sure and so far the market has pretty much shrugged off any political and economic data, which to me just confirms that a big portion of this rally is driven by Fed monetary intervention. This makes the equity markets the only real alternative for dividends and growth opportunity. The nation has become numb to bad or weak economic and fundamental news. ADP will measure the private sector employment this morning, which will set the tone, but I am not sure it is the catalyst that will bring forth the Bears and capitulate the Bulls. Perhaps we will have to wait for the Labor Report and Unemployment (U3) on Friday.
ADP Private Sector and Unemployment
Before the government’s monthly Labor Report is released, we get a look at the private sector job market from the ADP report. This morning the ADP report showed very weak job growth, with private companies creating only 119,000 new jobs in April. Economists expected the private sector to create 150,000, slightly lower than the 158,000 in March. What added more cold water onto the report was March’s revision, down from 158,000 to 131,000.
Courtesy of wikipedia
Looking into the details we see that every industry and sector in the report reflected slower growth and the small business sector is experiencing even weaker growth. Some economists believe that a big portion of this slowdown is the healthcare (Obamacare) factor coming online with a larger cost impact, which is curtailing hiring.
The ADP was 20% below expectations and, coupled with the negative revisions, quickly put pressure on the pre-market futures, turning them negative. No doubt the ADP report will have economists scrambling to revise their Labor Report expectations this Friday.
Friday’s unemployment (U3) report will certainly have a big impact on the psychology of the market, but we must understand this is derived from a phone survey of 60,000 people in government selected demographics. While the real (unbiased) unemployment rate (U6) is still hovering at 13.8%, the more disappointing view is when we look at the state-by-state unemployment rates (released a few days ago). We see a much different unemployment picture than the government’s U3 unemployment rate, with only six (6) states reporting real unemployment rates below 10%. North Dakota was the best at 6.2% and the worst was Nevada with a real unemployment rate of 19.6%; in fact, in six states the rate actually ROSE.
So I expect MORE changes to the way the government measures economic data, clearly not for better resolution, but rather to mask and distort reality. Yesterday the government, in a surprise bi-partisan agreement, changed the way we measure inflation using the new C-CPI-U. Even the politicians admit this will help reduce the cost to Social Security benefits. Clearly the agenda was used to change the model, rather than to get a more accurate measure of inflation.
Now the GDP model will change, drastically, to expand the nation’s economy enormously. One interesting effect that no one seems to be talking about is how it will significantly lower the debt to GDP ratio. Great, so we can make it seem that our debt is smaller when compared to the GDP. I am VERY concerned that this will also mask the massive deficit and debt, the Keynesians / Socialists have now eliminated critics and economists fear that our debt is growing too fast and too big vs. the GDP. The Keynesians / Socialists have just ended the debate with a change to the model, flick of the wrist, and blessing from the Administration. Amazing, change the facts and you end the argument. You’ve got to love revisionism. If you can’t win, change the rules. I guess this was expected after GDP growth is in the midst of its longest sub-3% annual growth rate since the Great Depression and it is not getting better.
GDP Per Capita (about to get a WHOLE LOT BIGGER)
Courtesy of wikipedia
Here is the bigger problem for investors and economists, while we KNOW the models have changed (whether you agree or not), how are we really able to tell if the economy is improving and by how much?
See my report on Economic Lies
This week market volatility will be driven by government data and economics more than anything else. It would be nice to get back to earnings, fundamentals and the math. Unfortunately, politics continues to drive market psychology and the market.
So far the Fed is winning, stay bullish as long as the Fed can continue to pump money to fund government debt and keep its boot on the throat of interest rates. Its working so far, until it doesn’t. It also has the Bears cowering and has not discouraged or brought forth any trepidation from the Bulls.
Will the Fed be able to dump enough money and push bond rates down even further to discourage any “Sell in May!” – I don’t think the Bears have serious cojones to get short and the Bulls aren’t scared yet.
Support & Resistance
Is this resistance or a straddle strike? Bears are not willing to risk getting short, Bulls are a little concerned that earnings and economics are too weak, but the Fed is going to ram-rod so much new money into the system that we should get a boost higher and breakout! Right? I’m not sure; perhaps the government’s Labor Report (with the new revisions) can paint a rosy enough picture to drive the Bears out and give the Bulls something to hang their hat on.
We saw a solid breakout higher in the tech heavy index and it looks like with Apple’s (AAPL) buy-back, dividend, and now massive bond offering have brought back some confidence to investors (at least for now). However, I am not sure how long that will last – because Apple needs to bring back the heady days of new products and new revenue to continue to drive REAL growth. You can’t hand out a dividend and expect that to be the answer. It’s working for now, but will this rally higher have any legs? It’s driving the index higher and that is good news. I would also watch Google (GOOG) and their new upcoming product (Glass). If it lives up to the hype we could see a boom in the tech sector and this index.
The Dow Jones and SPX are both flirting with a break-out higher. I think the Labor Report on Friday could be the determining factor to see these indices move away from these resistance levels. Even a slightly weak Labor Report (as expected) may not be that bad for the market and we know that bad news is good news, because it means MORE money from the Fed and QE could be ramped up even more.
The broader market is not showing the kind of conviction that the narrow major indices are. There is just not the big revenue flowing into the broader market and this index does not have the advantage of an over-weight like Apple to drive it higher. The treasury bonds are going higher and the yield lower, making equities more attractive.
Tomorrow I will report on the FOMC meeting and the talk of DEFLATION. That’s right, with the new C-CPI-U model we could start seeing deflation and that would further fuel the Fed’s money printing. Of course, anything goes that can justify the Fed to ramping up their battle in the Currency War against Japan.
Japan’s central bank (JCB) has taken the radical action of actually BUYING major indices in their equity markets. Can you imagine if the Fed announced they are going to start buying S&P futures, I mean why not – they are already buying the bulk of our treasuries bonds and it was actually discussed by the Fed during the height of the credit crisis. Japan is doing it and so far we are following in their footsteps.
What would we call that, “Market Welfare”, like social welfare and corporate welfare? We are subsidizing the bond market, why not the stock market? Ok, it sounds absurd, maybe even crazy. However, I put to you that if I said that same thing about the bond market 5 years ago, you would think the Fed buying 80% of our bonds would also be absurd.
Personally, I find it amazing how quickly a nation becomes numb to once radical and absurd ideas. We live in a land of hypocrisy as we point fingers at Venezuela and China, calling them currency manipulators and Communist that nationalize business. Yet when we do it, it’s ok because we justify it in some manner that is acceptable.