Market Commentary Week ending February 6, 2014
Overview and Observation: "Happy days are here again?" Don’t bet on it. The "good news" of a lower unemployment rate from 6.7 to 6.6% was offset, but ignored, by the jobs "created" figure of only 113,000. That was against analyst expectations of 180,000 or higher number. The "euphoria" generated by the "positive spin" emanating from Washington fails to address the "under-employed" and those that have left the work force giving up looking for work. Another serious factor is the failure of the U.S. Senate to extend jobless benefits to those out of work for over 1 to 2 years. That failure could mean a growing "credit default", loss of homes and cars for these people who through no fault of their own, have failed to find meaningful work. A worker who once earned $75,000 or more as an example, who takes a job for $35,000 or so is considered "employed" by the Bureau of Labor, but that worker is "underemployed" and included with the unemployed could mean an actual rate of over 15%, not the 6.6% "cheered" by investors. We continue to view the U.S. economy as "stagnant" and fully expect a "contraction" rather than an "expansion" going forward.
Now for some actual information……..
Interest Rates: March U.S. Treasury 30-year bonds(CBOT:US.C) closed at 133-06, up 5/32nds trading as high as 134-02 after the jobs data report showing only 113,000 new jobs while analyst expectations were for 180,000. That disappointment, however, was mitigated by the jobless rate ticking down from 6.7% to 6.6%. The market decided to interpret the reduction in the rate as a positive for the labor front and ignored the jobs data. A revision to the December report to 75,000 from 74,000 was also construed as a positive. Bonds sold off as equities, after an initial selloff rallied and money made the "usual trip" from the relative safety of Treasuries back to equities. One analyst stated that "another weak jobs report points to what may well be a fundamental flaw in the U.S. Economy: employment growth isn’t keeping up with overall growth".
We tend to agree but we go one step further to reiterate, "an unemployed consumer does not consume and the producers of those products are next to lay off workers".
For now bonds should remain range bound.
Stock Indices: The Dow Jones Industrials closed Friday at 15,794.08(CBOT:DJH14), up 165.55 points or 1.1% and 0.6% for the week thanks to the two day rally. The dismal jobs created number of 113,000 against expectations for an increase of 180,000 to 200,000 was mostly overlooked in favor of the reduced unemployment rate of 6.6% from 6.7%. An uptick in the labor force participation rate was also viewed as a positive and heavy short covering and renewed buying interest ensued. The S&P 500 closed at 1,797.02, up 23.59 points or 1.3% and for the week gained 0.8%. The tech heavy Nasdaq closed at 4,125.86, up 68.74 points or 1.7% and for the week managed a gain of 0.5%. We believe investors and analysts are viewing the U.S. labor condition through "rose colored glasses" and the U.S. economy with "irrational exuberance".