Markets exhibit irrational exuberance to jobs data

Overview and Observation;

"The blind leading the blind." The distortion created by the three week U.S. government shutdown was evident in the U.S. jobs data on Friday. While the "jobs created" number was sharply higher than the analyst estimates of around 120,000, the number reported was 204,000 which set markets "on fire" and created what former Fed Chairman Greenspan described as "irrational exuberance" in many of the markets we follow. A CNS News report more clearly describes the U.S. unemployment picture.

"(CNSNews.com) – The "real" unemployment rate rose from 13.6% in September to 13.8% in October, according to figures released today by the Bureau of Labor Statistics (BLS).

Though the national unemployment rate is 7.3%, the "real" unemployment rate is a broader measure of the number of people in the United States, 16 and older, currently looking for jobs.

Known as the U-6 unemployment rate, this "real" unemployment figure, seasonally adjusted, includes the unemployed "plus all persons marginally attached to the labor force, plus total employed part time for economic reasons …."

The U-6 rate captures the fuller picture of people who are willing and able to work, but cannot find a job.”

It has become abundantly clear to me that the numbers issued to the public are "limited" and being "created" with the use of "mirrors" and the true picture I see is that of a declining not accelerating U.S. economy. Once again, the term "jobless recovery" is, in my opinion, a "ruse" perpetrated on the public. Another point of contention is the "jobs created" number where most of those jobs are in retail, hotels, restaurants and other "holiday preparation" positions. Once those positions are filled, I look for a sharp decrease in jobs "created" and a return to a "stagnant" labor situation. Now for some actual information to help my clients…

Interest Rates:

The December U.S. Treasury 30-year bond (CBOT:ZBZ13) closed Friday at 131 22/32nds, down 2 full points after the U.S. jobs report showed a gain of 204,000 jobs. Of course, as explained in the overview that number is, in my opinion, irrelevant. While the unemployment rate ticked up to 7.3%, the "real" rate based on the information in the overview is probably closer to 15%. The U.S. labor force declined to 62.8%, down from 63.2%. The psychology of the jobs data led to belief that now, with this "good labor news," the Federal Reserve might "taper" their bond purchase program earlier than expected, possibly as soon as December. We doubt very much that the U.S. Federal Reserve will be "fooled into submission" when they are no doubt in touch with the reality that the jobs data is not a true indication of the situation. The preliminary reading for November of the University of Michigan/Thomson Reuters index was 72, down from a final October reading of 73.2. Employment in the residential construction was up to a seasonally adjusted 4,800 jobs in October down from the 5,000 jobs gain in September and lower than the increase of nearly 13,000 at the beginning of the year. The Fed had indicated that no rate change was planned until the jobless rate reached 6.5% or lower and even with the positively construed jobs data Friday, I doubt very much that the Fed was "impressed." I now look for a rally in bonds early in the week tied to shortcovering and the reality that the jobs data was not impressive and did not fool "everyone."

Stock Indices:

On Friday "euphoria" set in like the "Black Plague" as the U.S. jobs data provided the impetus for what former Fed Chairman Greenspan once coined "irrational exuberance." After Thursdays sharp decline in equities, Friday’s market action completely wiped out the loss and posted a gain for the week in the Dow and S&P. The Dow Jones industrials closed at 15,761.80, up 167.80 and for the week gained .09%. The S&P 500 (CME:SPZ13) closed at 1,770.61, up 23.46 and for the week was up 0.5%. The tech heavy Nasdaq closed at 3,919.23, up 61.90 and for the week was down 0.1%. A combination of earnings reports and economic data provided the impetus for the market action. We continue to view the equity markets as in a transitional phase with dramatic moves either way tied to the immediacy of the information provided on almost a daily basis. We implore holders of large equity positions to investigate various strategies for hedging market risk.

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