1. Job Losses Continue at Elevated Levels: The jobs report from the Labor Department will throw some cold water on the nascent bulls out there. 467,000 jobs were lost and the unemployment rate edged up to 9.5%. Employment Situation SummaryThe expectation was for a 325,000 decline. The unemployment rate is at its highest level in 26 years (1983). Many who believed a large stimulus was critical will nonetheless view the 787 billion stimulus bill crafted by the Democrats as more of a spending bill rather than a stimulus bill that creates jobs. There is certainly no evidence that the Democrat's spending bill has improved the jobs situation or the economy. That point was driven home to me when I looked at Tennessee's unemployment rate and the kinds of expenditures that have been made to date with the "stimulus" money. I would seriously doubt that a single job was created with the 500+ million spent to date. Okay, maybe that was an exaggeration, there could have been one or two government workers who were able to keep their jobs.
It would not be surprising to me for the DJIA to work its way below 8000 in the coming days as a reaction to this jobs report.
2. Another Fairly Positive Forecast for 2nd Half GDP: I read a report last night from the Wachovia Economics Group that forecasted real GDP growth of 2.9% in the 3rd quarter and 2.1% in the 4th quarter of 2009, with the quarter forecasts for 2010 running at 2, 3, 2.8, 3.2.wachovia.com.pdf
3. Some More Pessimistic Estimates for 2nd Half U.S. GDP: I mentioned in a prior post that both J P Morgan and Barclays had upbeat forecasts for the 3rd and 4th quarter GDP. IS GDP About to Accelerate in the 3rd and 4th Quarters?
There is a group of economists who are far more pessimistic. I have mentioned David Rosenberg several times in this blog. Evening Notes 6 1 2009 S & P Closes Above 200 Day Moving Average I heard him on Fast Money this week say that maybe the U.S will have a small gain in the 3rd quarter GDP before turning down again, weighted down by unemployment and the unwillingness of consumers to spend. CNBC.com (video) He expects a correction within the next six months, but then he was surprised by the rally off the March lows, calling for S & P 500 at 600 by October. He also said some gibberish that a recovery is priced into the recent market rally, as the DJIA recovered to February 1998 levels. Barrons, always willing to give Rosenberg an outlet, touts his claim to a 2.5% 10 year treasury by year end. Barrons
I read a similar dour GDP forecast from Value Line last night. VL was forecasting "at best" a small gain in GDP of less than 1% for the 3rd quarter and no more than 1 to 2% for the 4th quarter. For 2010, VL estimates GDP of barely above 2%. This forecast was contained in the Selection and Opinion section from June 26, 2009.
If these forecasts prove accurate the market will be in for some tough times ahead. Finding any kind of positive and sustainable traction to the upside will be difficult with job losses increasing and GDP growing at an anemic rate.
4. WIP and BWX: Both of these ETFs contain foreign bonds. Both pay negligible dividends. Both did not pay a monthly dividend in July. I own them primarily as a play against the U.S. dollar, with no consideration given to the meager income thrown off by them to justify their inclusion in my portfolio. In the event BWX crosses 56 on the upside, I intend to pare it again, as a means to manage the currency risks inherent in a U.S. investor holding securities priced in foreign currencies. (See Item # 1: Afternoon Comments 6 5 09/Dollar Mounting a Rally/Bonds in a Funk; /Pared BWX) There was a report yesterday that China was requesting a debate on a new global reserve currency at next week's Group of Eight meeting. Reuters The mere talk of such a discussion pressured the dollar yesterday. FXE, the currency ETF for the Euro, gained $1.11 yesterday or .79%. The Swiss Franc currency ETF gained $.98.
The jobs report today may cause the dollar to rally, sort of a reflex "safe haven" reaction to this kind of news. Without even looking, I expected the Japanese Yen to be rising this morning, another safe haven play now, and it was up some. FXY is the symbol for the Japanese currency ETF. BWX has a large weight in Japanese bonds which is probably offsetting some of the decline due today to the fall in the Euro and other currencies against the dollar.
5. Trading Rules in a Long Term Secular Bear Market and the Unstable Vix Pattern: I currently characterize the existing stock market to be in a long term secular bear market, with no clear and convincing proof yet of the formation of a long term secular bull market. In addition, the market is still in a cyclical bear pattern within that long term trend, as defined by my VIX Asset Allocation Model that I use as a guide for stock allocation. The cyclical bear pattern is defined simply to mean an Unstable Vix Pattern. Vix Asset Allocation Model Explained Simply With as Few Words as Possible Since those characterizations require a cautious set of trading rules, I will have to wait until I receive more cash flow from dividends and interest before making any stock investment unless I sell an existing position. I suspect that no investments will be made prior to 7/15 in my taxable account, since I spent my remaining cash flow buying 50 shares of SEA yesterday. I do have funds in the Roth after selling Abbott. I am more inclined to use those funds now to buy another bond or an electric utility.
One characteristic of the Unstable Vix Pattern is that the investor must become a trader to make money. Buy and Hold is a strategy for the Stable Vix Pattern. Those are generalities. For an investor with strong hands, a long term perspective and a lot of patience, the bear will present the opportunity to buy at prices which will look good many years down the road. It is doing the height of a truly awful bear market that the intrepid investors with nerves of steel and an ability to hold forever if need be will make serious money. So I do not stop buying common stocks altogether during the bear pattern, but simply follow a different set of trading rules.
In an email yesterday, I referred to myself as a cautious tortoise, and that is a fair characterization under the current circumstances. So, maybe this would be a good time to catch up on some reading.
The kind of data released today will most likely have the most impact on my willingness to hold long term, fixed coupon corporate bonds. I am a bit on edge with these securities, with maturities in the distant future, due to my concerns about inflation. Anyone who lived through the 1970s will always be looking for that bogeyman around the corner. High rates of inflation will just devour long term fixed rate coupon bonds. The jobs data alleviates those concerns for the near future only, thus postponing the day further that I will need to start paring those positions. A position like EHL, with a maturity in 2032 with a 7.6% fixed coupon is an example of that type of security. I bought 100 shares at $22.75 last Fall. Notable News 10 22 2008 & END OF DAY TRADES (IR, INTC, TE AND EHL) It is now selling at over the $25 par value just after going ex interest. If I saw an inflation problem in the near future, I would have to make a decision on what to do with that security soon. For now, I can postpone that decision for another day. This is not the only example, of course, and I have discussed in this blog numerous buys of long term corporate bonds with fixed coupon similarly situated, some selling at close to par value now.
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