Beyond the Headline Data

by Michael Panzner, Financial Armageddon. January 7, 2010

Economists cheered today’s report from the U.S. Department of Labor, which showed that weekly initial and continuing jobless claims continue to work their way lower from the peaks hit in March and June of 2009, respectively. But for some reason, the “experts” keep ignoring the ongoing surge in emergency employment claims, which climbed above 5 million to a new record. In fact, despite all the attention being paid to the headline data, the real story is that the ranks of the long-term unemployed keep going up.

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In its most recent update on the services sector, the Institute for Supply Management reported that its index of non-manufacturing businesses, which comprise almost 90 percent of the economy, bounced back above the 50 level indicating expansion (if only just barely). But again, the headline number doesn’t tell the whole story. As far as hiring goes, things aren’t really improving (they are simply less negative than they were), a trend that’s been in effect since the spring of 2008.

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(Source: http://econompicdata.blogspot.com)

On Tuesday, the National Association of Realtors reported a much worse-than-expected drop in its pending home sales index, which tracks the number of home resales under contract. But was it really a surprise? As we saw with the Cash-for-Clunkers program, another government-sponsored effort to kick-start a troubled sector of the economy (i.e., cars), once the free money ran out, sales quickly faded. And even though Washington has extended (in modified form) and expanded the home buyer tax credit program, there’s little chance that it will revive a sector where the gap between supply and demand remains formidable.

Switching attentions to the stock market, there are more than a few developments that suggest the end is near as far as ever-rising stock prices is concerned. For example, as the following chart of the technology-laden Nasdaq-100 index reveals, 14-week RSI (a well known measure of momentum) has now reached levels that have in the past been the precursor to a short-term pause or correction, at best, or a major sell-off, at worst.

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The degree of complacency among investment advisors and individual investors has also reached contrarian extremes. Even though there has been lots of talk about “money on the sidelines” and the “lack of public participation,” the low level of bearishness among those polled by Investors Intelligence and the American Association of Individual Investors suggests the time has arrived, as the old saying goes, when there is nobody left to buy.

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(Source: The Elliott Wave Financial Forecast Short Term Update, http://www.elliottwave.com)

Otherwise, for those who plan on sticking with stocks despite the various warning signs, including the fact that the market is not exactly cheap (based on, for example, the valuation methodology made famous by Yale University economics professor Robert Shiller), here’s an asset reallocation play that might be worth thinking about.

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Stocks ended mixed-to-higher, as strength in financials and retailers only partly offset weakness in technology shares. Banks were aided by a Pollyannaish report on the commercial real estate sector from Morgan Stanley, while positive fourth-quarter profit outlooks from Sears Holdings (+12%) and Bed Bath & Beyond (+6.9%) boosted the stores sector.

At the close, the Dow Jones Industrial Average rose 33.18, or 0.3%, to 10,606.86. The S&P 500 Index climbed 4.55, or 0.4%, to 1,141.69. The Nasdaq Composite Index slipped 1.04, or 0.1%, to 2,300.05.

February gold futures fell $2.80 to $1,133.70/oz., while the U.S. Dollar index gained 0.7%. Ten-year Treasury yields were relatively flat at 3.82%, while February WTI crude oil futures shed $0.52 to $82.66/bbl.

Michael Panzner

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