"Economic improvements" prove irrational exuberance

Overview and Observation:

On Friday the U.S. Labor Department reported 74,000 jobs "created" against analyst expectations for a gain of more than 200,000 jobs. The unemployment rate declined to 6.7% but was probably a result of the sharp reduction in employment participation to 62.8, the lowest rate in 35 years. People are leaving the work force and no longer looking for employment. That includes recent graduates and older workers. Overall some 347,000 Americans were no longer seeking employment in December. Many others have taken jobs that pay less than the job they lost and have become a statistic called "underemployed." On Thursday the first time unemployed number declined probably because of weather keeping them at home. We see the poor labor situation persisting and once again for the pundits "an unemployed consumer does not consume and the manufacturers of those unconsumed products are next to lay off people." Our admonition to investors to "micro-manage" their investments still applies. Now for some actual information to hopefully guide our readers through the "pitfalls" of a "stalled" U.S. economy and an "irrational exuberance" in their risk asset portfolios.

Interest Rates:

The 30-year Treasury Bond (CBOT:ZBH14) closed Friday at 130 21/32nds, up 1 and 10/32nds as the U.S. Labor Department reported that only 74,000 jobs were created in December, a disappointment since analyst expectations called for a number exceeding 200,000. This was the least number of jobs created since 2011 and the drop in the unemployment rate to 6.7% was viewed as irrelevant against the number of workers that left the labor force. Short covering in bonds the main feature on Friday as expectations of further tapering appears sidelined for now because of the disappointing jobs data. We view the economic condition of the U.S. as "sluggish" and the employment participation rate at 62.8, the lowest in 35 years will continue to be reflected in consumer spending. The bond rally may have been overdone, but we would buy on any decline early in the week. We remain negative on the U.S. economy.

Stock Indexes:

The Dow Jones industrial (CBOT:DJH14) average closed at 16,437.10, down 7.71 and posting a weekly loss of 0.2%, its second in a row so far this year. The S&P 500 (CME:SPH14) closed at 1,842.37, up 4.24 and was up 0.6% for the week. The Nasdaq closed at 4,174.66, up 18.47 points and was up 1% for the week, its first weekly gain this year. The decline in the unemployment rate from 7% to 6.7% was more reflective of people dropping out of the labor force than any improvement in the labor picture. The decline of over 347,000 Americans no longer seeking employment in December could create additional consternation to investors anticipating an economic improvement overall. We continue to persist in our admonition to holders of large equity positions to implement hedging strategies before a sharp "correction" similar to 2008 presents itself. Earnings report season is fast approaching and could see some "surprises" in the "wings."

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