Recent economic news was better than not, and I know a lot of you think it was pretty good. The most important sequence of the week was the ISM, which spiked up to 55.4 in July from 50.9 in June, the best spike in years and indicative of an expanding economy as any reading over 50 is expanding. Jobless claims were also the best number in 5.5 years as this was the lowest level of Americans filing new unemployment claims. Then on Friday the jobs number came in a little light at 162,000, which experts believe keeps the recovery moving but puts doubt as to whether the Fed can really taper at their meeting in September.
The needle is moving in the right direction and one has to wonder what takes so long given the stock market comes to new highs just about every week. Here’s what it means. If the stock market can come to new highs and the best we can get overall is middle of the road data (GDP is still below 2%) that means we are still in the early stages of a new secular bull market and we have a long way to go to achieve economic prosperity. In fact, it was 17 years from the bottom in 1932 until the stock market really took off in 1949.
So if the manufacturing number appears better and job growth is consistent, why don’t we feel the difference? It’s still because HALF, 85,000 of the new jobs created last month either come in the hospitality industry or retail stores. These are low paying jobs in retail places like Macys. What do we need? We’d need more manufacturing jobs in health care equipment companies. We need more construction workers and while we have too many houses still as they wade through the foreclosure mess. What we really need are infrastructure jobs. We need local contractors bidding on and getting government contracts to fix those 69,000 bridges. Here’s the sad part. The work is there.
They don’t need to build houses; they need to propel America deeper into the 21st century. How many construction people can you put to work if they started fixing what needs to be fixed? Remember the blackout in NYC and thru the Northeast back in 2003? I remember at the time they said that every power grid in the Northeast was in serious need of repair if not replacing. Think of how many jobs they could create? These are high paying jobs. They put engineers to work, software people to work, construction superintendents and of course all different types of building trades that spend money at the market, cleaners, Macys, you get the idea. There’s no reason why GDP can’t be at 4% just fixing the country.
I’m afraid that some major bridge is going to have to collapse before we wake up. Bridges have collapsed. But what if it were the Brooklyn Bridge? What if it were the San Francisco Bay Bridge? That would get everyone’s attention. Believe me when I tell you I’d never want that to happen. But humans are stubborn and sometimes we only learn from tragedy.
I’m not satisfied with 85,000 jobs out of hospitality because a lot of those are bartenders and waiters as those people work on tips. What risk do these corporations really have? Finally, the thought here is the Fed will start tapering next month. It’s still too soon. Why? Even as the unemployment rate dipped to 7.4% as you can see these are not the right kinds of jobs. The economy isn’t getting stronger in the right places. Once they start fixing what really needs to be fixed and they start hiring the right kinds of people, aborting stimulus will be the wrong thing to do.
China continues to support a trading range type of market and as you’ll see Europe has not given up yet even if it doesn’t confirm new highs in the US. So I don’t suspect China for the drop right here. However, we are at the 4th anniversary to the August 4, 2009 secondary high to the bear market. I don’t know how important that is but if we do get some important new data on the chart this week that is likely the reason.
I’m focusing in on the CAC because it’s the closest to a new high of any of the European charts. There’s something not right about that. Why? Because we want to see the FTSE or DAX lead to the upside. I’ve told clients recently in my Saturday updates where we cover the European charts the CAC had the potential to lead to the upside. My concern is Europe not confirming new highs in the US where the SPX is now over 1700. Why is that a problem? Simply put, Europe led to the upside from December to May and started leading to the downside until June. Now the US broke its leash. If Europe confirms, fine. If they don’t time is running short to time window season which is just around the corner. Until I see at least the FTSE confirm the SPX I’m going to be concerned about Europe lagging which could be a topping process that ushers in a change when we get to September. That’s pretty much the bottom line for me. There is a chain reaction that stretches from Europe to the Shanghai Exchange which affects Australia, the Asian markets, the risk on trade and ultimately the United States.
For now, the VIX continues dropping and for the first time last week we had a degree of euphoria in our markets. We’ve been close before but it seems there has always been some scandal to wipe the real euphoria that prevented markets from topping. What makes a real top? The exact opposite of what we had on June 24. As you remember we had a really bad week, markets tried to rebound, couldn’t and the other shoe dropped. By the end, the feeling was really there that it was going down and not coming back. What we probably need now to get the top is a short but intense shake of the trees and a quick recovery. What will that do? It will finally get whoever is still skeptical about this market in the camp that it can only go one way and that is up.
Once that happens, the trap gets set, the latecomers start chasing the smart money starts taking profits. Then it drops a little, more people think it’s a buy the dip and the smart money come back and short it. That’s when it turns. We are not there yet, but getting close.