Good day… A quiet trading day to start the week off yesterday. As I turn on the computers this morning the dollar index is trading right at the level it was yesterday morning. The currencies were up a bit through most of Monday’s trading day, but the dollar came back in Asian trading leaving us right about back where we started.

The only data released yesterday was the index of US leading indicators which rose slightly in June for a third consecutive month. The numbers gave a bit of hope for all of the bulls, with many exclaiming that the US economy has turned a corner and the recession has ended. I am not so sure, as rising unemployment and continued weakness in the housing market will likely hold any recovery back.

Aaron Stevenson sent me a story he read on CNNMoney.com yesterday which highlighted the labor problems here in the US. The article states that more than 650,000 Americans will have used up all of their unemployment benefits by September, and the Labor Department is expecting the problem to accelerate. “In the next few weeks, the victims of the mass layoffs that happened six months ago – when the pace of layoffs was at its zenith – will start running out of their basic benefits. A total of 4.4 million people are expected to face this fate – or 65% of the entire filing population. And while they may have up to another year of unemployment insurance benefits – thanks to the confusing patchwork of extensions that were enacted last summer – they will soon be unaccounted for in government unemployment reports.”

As Chuck has continually pointed out, the Labor Department doesn’t track anyone who has been unemployed more than 26 weeks, and has no plans to adjust the way the report claims (even though they know they are under-reporting the actual unemployment rate!). As a result, the weekly jobs data will probably start showing declines in continuing filers later this year. But these declines won’t be because of an improved job market, but instead will be because many of these filers will be falling off the Labor Department’s radar.

Even the director of the White House’s National Economic Council, Mr. Lawrence Summers, isn’t feeling so rosy about the prospects for recovery. “I don’t feel there’s a basis for predicting that income growth is going to resume in the near term,” Summers said in an interview yesterday. So while the US economy may not be sinking any more, Summers doesn’t believe the economy will be able to quickly pull itself back up from the deepest recession in a half a century. “The pace of growth next year I think is very much in doubt, and difficult to predict, and will depend crucially on our effectiveness in implementing the programs that have been legislated and the kind of confidence that’s provided by what Congress is able to do in crucial areas like health care and financial regulation and energy,” Summers said.

The focus today will shift to Federal Reserve Chairman Ben S. Bernanke who will be giving his semiannual monetary policy testimony to Congress today. The markets are looking for Bernanke to map out an ‘exit strategy’ for the loose money policies which have been enacted over the past few years. Bernanke gave a sneak preview of his testimony in an opinion piece which he wrote for the Wall Street Journal yesterday. “When the economic outlook requires us to do so,” the central bank will employ a series of tools to tighten policy, Bernanke said in the piece. He outlined five different ways the central bank will be able to prevent the record reserves that banks have accumulated from causing money supply and inflation to surge.

I don’t doubt that Bernanke and the Fed have the means to pull liquidity out of the system. What I question is if they will have the cojones to use these methods when the time is right. In order to stem inflation, the Fed will be required to start tightening policy just as the economy is starting to recover. If they tighten too early, they could squash the recovery, and if they wait too long, inflation could spiral out of control. History has shown that the FOMC is typically late in their move to tighten.

And the likelihood of an anemic recovery heightens the risk that the Fed will be late in reacting. The recovery will be weak compared with historic recoveries from recession. I just can’t imagine Bernanke stepping up and pushing rates higher in the face of a weak economic recovery. But we will see what he has to say to congress today. His testimony could be good for the dollar, if he is able to convince the markets that he and his compatriots will step up to the plate and keep inflation at bay. Again, I just don’t believe he has the fortitude to time his move correctly.

Chuck sent me a note after reading a great piece by the Mogambo Monday.. The Mogambo doesn’t think Bernanke will be able to rein in inflation, and believes investors should protect themselves by purchasing gold:

“And if you don’t think that gold will shoot up when inflation starts roaring like that, then you are obviously new at this investing business and you haven’t had time to look at what happened to the price of gold when it was $35 an ounce in 1970 and over $800 an ounce by 1980 when the inflation (from the vast expansions of the money supply needed to simultaneously finance the War on Poverty and the War in Vietnam) was rising along this same parabolic ride.”

I love how you always know exactly where the Mogambo stands on things! I can’t argue with his logic and agree that gold is a good hedge against rising inflation which I’m sure we will see on the other side of this recession/depression. Every investor should have a portion of their overall investment portfolio dedicated to precious metals, and our unallocated metal select accounts are one of the most efficient ways I know of to hold gold.

Speaking of the precious metal, gold held above $950 an ounce overnight, and seems to be on a fairly sharp upward path. Gold has gained just over $45 in the past two weeks and looks set to test resistance levels around $960. If it can push through these levels, the next resistance would be around $985. And just think what the price will do once we start seeing signs of inflation creeping back into the global economy.

So the dollar will likely move up today as long as Bernanke can ‘deliver the goods’ in his testimony to congress. But if the dollar does rally, I would take advantage and look at the move as an opportunity to purchase currencies at better levels. Some of the largest, and smartest investors are looking to do the same, and share our believe that Bernanke will be unable to turn the liquidity pump off in a timely fashion. PIMCO, the manager of the world’s biggest bond fund, said it is looking to buy the Brazilian real as the dollar slumps and growth in emerging economies outpaces that of developed nations. According to a report published by PIMCO, investors should buy emerging market currencies to protect themselves against the risk that US policy makers will allow the dollar to slide should they lack the skill to “drain the system of emergency liquidity at the appropriate time.” The report goes on to say “In light of an expected long-run erosion in the value of the US dollar, Pimco will look to take positions in select emerging market currencies that we believe have the most compelling appreciation potential.”

Want to take a position in the emerging markets without the risk? Why not look at our new BRIC MarketSafe CD. It combines Brazil, India, Russia, and China into a 3 year CD which is protected against any downside risk. I think we came up with a real winner on our newest MarketSafe!

Currencies today 7/21/09: A$ .8132, kiwi .6548, C$ .9040, euro 1.4217, sterling 1.641, Swiss .9362, rand 7.8703, krone 6.2998, SEK 7.685, forint 191.68, zloty 2.9982, koruna 18.1561, yen 94.20, sing 1.4419, HKD 7.750, INR 48.4337, China 6.8305, pesos 13.2694, BRL 1.8987, dollar index 78.923, Oil $64.16, 10-year 3.61%, Silver $13.555, and Gold… $947.85

That’s it for today… It is food day here today, as we celebrate everyone with July birthdays. The crew is coming in with food galore; Krispy Kremes, Cake, and every imaginable form of dip n chips. It is going to be a real challenge for me to stick to my diet today (but I guess I can have a free day every once in a while right!?!?) Hope everyone has a Terrific Tuesday, mine is sure shaping up to be one!

Source: US Leading Indicators Push Higher

There’s no question that the U.S. job market is tough across the board right now. But not all pain is created equal: There are regions of the country – and sectors of the U.S. economy – that haven’t been hit quite as hard as others.

Indeed, some regions – and some sectors – that are proving quite resilient.

So, if you’re in the market for a job, it might be a good idea to target those areas and sectors that have demonstrated flexibility over several decades and are best able adapt to 21st century trends.

For job-seekers, it all comes down to this: You have to know what’s hot – and what’s not.

The three graphs below – based on data from the Federal Reserve Bank of St. Louis – show the number of people working in the 12 different sectors of the U.S. economy since 1939. The shaded areas represent periods of recession.

Virtually all of the sectors have grown consistently over the past 70 years. The one noticeable exception is manufacturing, which peaked in the late 1970s and has been in decline ever since.

Government jobs and jobs in education and healthcare – referred to as “Eds & Meds” in economic parlance – have provided the most consistent growth, even in the current recession, which has also been the most severe in the time period studied. However, the biggest supplier of jobs continues to be the trade, transportation and utilities sector.

In the current recession – which began in December 2007 – job losses were severe in the commercial and resident real estate business, but more recently have shown signs of stabilizing. Employment in construction decreased by 59,000 in May, compared with an average monthly job loss of 117,000 in the industry for the previous six months, according to the U.S. Labor Department.

Job losses in professional and business services also moderated in May. The industry shed 51,000 jobs, compared with an average loss of 136,000 jobs per month in the prior six months.

Employment in the leisure-and-hospitality and government sectors was about flat, but the manufacturing sector continued to deteriorate— with employment falling by 156,000 for the month.

But the healthcare sector continued to display resilience, increasing by 24,000 jobs. That makes sense: Long term, as the U.S. population continues to “gray,” the healthcare sector figures to keep adding workers in order to keep pace.

Job Growth in the ‘Clean Energy Economy’

While healthcare and education, along with the government, continue to be the most consistent employers of the American public, increased environmental awareness and more government incentives have made the clean energy sector a viable option for steady employment.

In fact, from 1998 to 2007, the number of jobs in the “clean energy economy,” grew nearly two and a half times faster than the overall job market, according to a recent study by the Pew Center on the States.

Jobs in the clean energy economy grew at a rate of 9.1% during that time, compared to a rate of 3.7% for traditional jobs. By 2007, more than 68,200 clean energy businesses across the United States accounted for about 770,000 jobs.

The clean energy economy includes jobs in clean energy, energy efficiency, environmentally friendly production, conservation and pollution mitigation, and training and support.

The report found that 65% of jobs in the clean energy economy are in the category of conservation and pollution mitigation. However, jobs in the categories of clean energy, energy efficiency, and environmentally friendly production are growing at the fastest rate.

California has more jobs in the clean-energy economy – more than 125,000 – than any other state, and that number has grown at an average annual rate of 0.9% between 1998 and 2007. Other states in the Pacific Northwest – Oregon and Washington – also have large and growing clean energy industries. Florida, Texas, Tennessee, and Colorado are also notable for their large and growing clean energy industries.

The St. Louis Fed report notes that venture capital was a driving force behind clean energy before the global financial crisis struck. In 2008, investors directed $5.9 billion, or 15% of all global venture capital investments, into the clean energy economy, a 48% increase over 2007. Between 1998 and the end of 2008, a total of about $12.6 billion in venture capital money had been directed into the clean-energy economy.
Of course, venture capital investment has declined considerably since the collapse of the global economy. The Pew Center study found that during the first three months of 2009, investment in clean energy was down 48% compared to a year earlier. However, the report also found that investment in clean energy still outpaced such investment elsewhere. During the same time period, total venture capital investment decreased by 61%, and that trend is expected to continue.

“Analysts suspect that the green industry will weather the downturn better than other market segments, both because of stimulus and because the drivers for growth are still there,” Kil Huh, Project Director for the Pew Center on the States and a principal author of the study, told Social Funds.com. “Consumers continue to call for a viable alternative to traditional energy sources.”

Furthermore, increased government investment should help compensate for the dearth of venture capital. The American Recovery and Reinvestment Act of 2009 (ARRA) provides $85 billion in spending for energy and transportation, and includes $21 billion in tax incentives for renewable energy, as well as more than $30 billion for spending on a variety of clean energy programs.

Additionally, 29 states and the District of Columbia have established renewable portfolio standards, Social Funds reported. And 19 states have established Energy Efficiency Resource Standards that encourage a continual increase in energy savings on the part of utilities.

While venture capital was abundant in the years leading up to the financial crisis, government funding was absent. Huh believes this new wave of political support will continue to carry the industry until private sector investment rebounds.

“The growth happened with a lack of sustained government support, and we suspect that recent government actions will help job growth in the green economy significantly,” Huh said. “Federal proposals for a market-based system for climate control will help shape consumer demand. The legislation would move the entire industry in that direction of clean energy. The green energy economy seems poised for continued growth.”

Location, Location, Location

Just as some sectors have fared better than others, the financial crisis has had an unequal impact on various metro areas across the country. Parts of the country that had overly inflated property markets suffered greatly from the collapse of the housing market. Similarly, local economies in the Midwest were devastated by bankruptcies in the American auto industry.

On the other hand, metro areas with high concentrations of government jobs or jobs in health and education have been much better off.

The Brookings Institution’s MetroMonitor examined such economic indicators as employment, unemployment, wages, output, home prices and foreclosures throughout the first quarter of 2009.

“Economic pain is widespread in Midwestern metro areas that depend heavily on the auto industry and its supply chain,” the report said. “Most metro areas in Michigan and Ohio have experienced employment and output declines exceeding national averages. Several, including Dayton, Detroit, and Youngstown, began losing jobs two to three years earlier than the U.S. economy as a whole.”

These areas are likely to continue to struggle as both General Motors Corp. (OTC: GMGMQ) and Chrysler LLC engage in lengthy restructuring processes.

Additionally, large portions of the South and West – including such states as Florida, Arizona, Nevada and California – continue to suffer the fallout from the housing collapse.

However, the effects of the financial crisis have been far more muted in other parts of the country.

“Job losses have been more modest, and housing prices have risen slightly, in many Northeastern metro areas that have less auto-oriented manufacturing sectors (e.g., aerospace in Hartford [Connecticut], photonics in Rochester [Upstate New York], plastics in Scranton [Eastern Pennsylvania]),” according to the MetroMonitor. “Parts of the Southwest and Deep South—including metro areas in New Mexico, Texas, Oklahoma, Arkansas, and Louisiana—have performed relatively well, experiencing less severe job losses, relatively large wage gains, and modest home price increases.”

The report attributes buoyancy in the Southwest – particularly Texas – to a strong specialization in energy. It also points out that large amounts of hurricane recovery funding for the Gulf Coast and smaller increases in housing prices in the earlier part of the decade could also be factors in that region’s resilience.

Predictably, city centers with large educational and medical labor forces performed better than the broader job market. Metro areas with specializations in education and healthcare saw employment drop by an average of 2% from the fourth quarter of 2007 through the first quarter of 2009. That compares to a national employment decline of 3.7% over that same period.

Metro areas with a specialization in government/military employment – such as Washington D.C., El Paso, Texas, and Honolulu Hawaii – saw average job losses of 1.3%.

Some of the areas that were most susceptible to the housing collapse were also hit by a decline in tourism, as metro areas specializing in entertainment and recreation – such as Orlando, FL and Las Vegas, NV – experienced a 4% average drop in employment.

Source: Where to Find Jobs in a Jobless Recovery ]]> http://www.contrarianprofits.com/articles/where-to-find-jobs-in-a-jobless-recovery/18473/feed 0 http://www.contrarianprofits.com/articles/green-shoots-optimism-the-biggest-bait-and-switch-in-history/18442 http://www.contrarianprofits.com/articles/green-shoots-optimism-the-biggest-bait-and-switch-in-history/18442#comments Mon, 29 Jun 2009 13:00:05 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=18442 All this week, we’ve been sounding the alarm of the so-called economic “green shoots.” These have now been exposed as being pure propaganda designed to lure investors back into stocks and to allow banks to recapitalize through share issuances at artificially elevated prices.

Bond investors are no doubt breathing a sigh of relief. Now that investors are waking up to the fact that a recovery is not “around the corner” after all, the yield on 10-year T-Notes is dropping and bond prices are rising again.

As long as investors have an appetite for low-yielding Treasurys (10-year Notes were yielding 3.53% yesterday), the government will have a tough time pushing its “green shoots” fairytale.

We challenge even the best paid of President Obama’s economic…

Given that more than $800 billion of federal money has been earmarked for U.S. “stimulus” projects, one would actually expect that the frightening job losses of the past six months would quickly reverse, and that the U.S. economy would soon start creating the 3 million jobs that U.S. President Barack Obama has promised.

Unfortunately, that has not been the case.

That’s not to say that the outlook is for a Great Depression, an economic reversal in which a country’s output plummets by 25% or more from its peak level. While the current U.S. recession may well be the “worst since the Great Depression,” it’s becoming clear that the peak-to-trough output decline will be something like 5% – worse than the recessions of 1973-75 and 1980-82, both of which saw output declines of about 3.5%, but not all that much worse.

After all, the money supply has not been allowed to collapse as it did during the 1930s and there has been no repetition of the infamous Smoot-Hawley Tariff Act, though the “Buy America” provisions in the original stimulus outline and the corresponding “Buy China” provisions inChina’s corresponding package indicate that “Smoot-Hawleyism” still lurks just beneath the surface.

However, the following four factors make it almost certain that the U.S. economy will be slow:

• Record-low interest rates make it impossible for the U.S. central bank to use rate cuts to jump-start growth.
• The huge U.S. budget deficit will force the federal government to continue its heavy borrowing – potentially “crowding out” private-sector players seeking loans to finance their own growth.
• The growing size and influence of the U.S. public sector.
• And an over-growth of government regulation.

Let’s consider each one.

First and foremost, the U.S. Federal Reserve has loosened money supply inordinately over the last year, with short-term interest rates at 0.00% and money supply growth at 15% per annum. Thus, there is no Fed loosening available to spur employment.

Interest-rate-sensitive sectors – especially housing and construction – are likely to remain depressed for years. These sectors are major employers of low-skilled and semi-skilled labor, which will not be picking up their normal slack.

A second adverse factor is the exceptionally large federal budget deficit - expected to reach $1.85 trillion, or 13% of the U.S. economy, in this year alone, according to the nonpartisan Congressional Budget Office(CBO). That deficit will stretch several years into the future, thanks to the stimulus package and various bailouts initiatives.

In the short term, these rescue-oriented provisions have helped U.S. employment, not the least by allowing federal and state governments to do some hiring. But in the longer term, the federal borrowing they have caused will restrict the private sector’s access to the capital markets. That will hinder small businesses in particular. Indeed, the private sector will find it difficult to fund capital expansion, and again the result is likely to be a dearth of hiring.

A third adverse factor is the expansion of the public sector itself. To some extent, it does not matter how budget deficits are financed; the important consideration is the transfer of resources from the private sector – allocated by the automatic optimization of the so-called “price mechanism” – into the public sector, where no such considerations apply.

It’s not just a question of government itself; it’s now clear, for example, that Chrysler LLC and General Motors Corp. (OTC: GMGMQ) are to be controlled by the government – with subsidies – at our expense.

When General Motors announces, as the company did Wednesday, that it will build automobiles on the basis of an assumed oil price of $100-$120 per barrel, one sees at once a politically motivated strategy; GM will cease making the large cars that in the past have been its principal source of profit. If oil prices average $50 or less, as is perfectly possible in a long period of sluggish global growth, General Motors will be a mess – and will need to be bailed out by us again.

The late William F. Buckley Jr. once claimed that 500 names chosen at random from the Boston telephone book could do a better job of running the country than Congress; I wouldn’t mind betting that such a random selection would also make a better job of running General Motors than the government.

Related to the growth in government is the growth in regulation. For example, President Obama’s “cap-and-trade” plan to address global warming will impose a new tranche of costs on the U.S. economy, without any great offsetting spurs to employment. In areas such as energy production and heavy industry, employment will be depressed by the additional cost burdens those areas bring, as well as by the simple difficulty of complying with the new regulations.

To see where a larger state sector and more regulation can lead, one need only look at the European Union (EU). Whereas U.S. unemployment was below 5% for much of the last decade, the lowest rate reached since 2000 was 8.8% in the EU. What’s more is that certain areas of the EU have much worse records than this.

In Spain, for example, unemployment was close to 20% for much of the 1980s and 1990s, and has now soared once again to no less than 18.2%.  The EU is not ensconced in a Great Depression and Spain remains a relatively wealthy country; nevertheless, the rigidities in the European system are such that unemployment remains persistently high, with adverse social effect, such as the rioting in the Paris banlieus.

The European Commission (EC) recognized this problem as early as the 1980s, and has been gradually pushing Europe towards the more open U.S. labor market, with only moderate success.

Because of over-loose money, excessive budget deficits, growing government and impending regulation, it is thus unlikely that the U.S. economy and its job market will bounce back as quickly as it has in the past.

The investment “takeaway” from this is obvious, I fear: A substantial part of one’s money should be invested in the free-market economies of East Asia, where regulation and taxation are lower, so even though a recession has also hit, recovery is likely to be much more robust.

Source:  The Four Key Reasons the U.S. Economy is Facing a ‘Jobless Recovery’

“How to earn 367% off American Retail’s “Seven-Ten Split.”

“Biggest jump in wholesale food prices in more than a year!”

– Associated Press, commenting on the Labor Department’s latest wholesale prices report

I know that Justice and I have gone on for some length now on the recent rise in agricultural prices. And I now am about to delve into that same topic – again.

By now, you are probably wondering if you have accidentally subscribed to the Farm Report. But hey – it beats another column on car companies, eh?

(Oh wait, here’s an item on cars after all. I was just perusing Chrysler’s list of doomed dealerships. No wonder they are going under: In my area, there are some 25 or 30 outfits on the list that are all within an hour’s drive of each other. Many are mere miles apart, and a few could probably throw rocks at each other on slow days. With that sort of insane saturation, sooner or later, something was bound to bust!)

And Now, Back to the Farm Report…

I have two reports on my desk right now with almost completely contradictory messages. I am talking a real “seven-ten split” here (a technical term I filched from the local bowling league).

The first lauds the fact that there was almost no drop in consumer prices in April. The Labor Department thinks that this is just peachy because it means that we are not locked in a hideous deflationary spiral.

Apparently this has been a real fear in some quarters of Washington, as over the past 12 months, consumer prices have fallen a whopping 0.7%, the largest such drop since late 1956-early 1957.

Be Careful What You Wish For

The same report also brags that there was not but so much inflation to be found either. Core prices (which exclude most everything you use on a daily basis, particularly food and gasoline) actually did rise 0.3% in April. And while this was the biggest such spike since last July, the bean counters reassure us that 40% of that rise resulted from a huge spike in the Fed’s tax on tobacco.

So far as Washington is concerned, “it’s the best of all possible worlds.”

You know, those guys in Washington really ought to re-read Voltaire’s Candide before putting out such jolly statements. By the end, the kind professor who coins that Pollyannic phrase suffers through bankruptcy, the Spanish Inquisition, the Lisbon earthquake, and syphilis.

The Dangerous Gap

Because the other report on my desk has the latest wholesale figures, and they are a tad disturbing for all sorts of reasons.

In April, we saw a 0.3% increase in overall wholesale costs. This gain was roughly three times higher than expected. Annualize this and you get a wholesale inflation rate of 3.6%. That’s more than enough to completely neutralize the 3.7% drop we’ve seen over the past 12 months.

What’s more, the actual extent of this rise has been disguised by certain internal disparities. Over that same stretch, wholesale crude oil fell 0.1%. (You could be forgiven for somehow missing this, as the refined gasoline sold to retailers actually went up 2.7%.)

The New Luxury Food: Eggs

It’s that old “non-core devil,” food, that is really soaring. Overall it went up 1.5% in April. If you annualize that, you get an 18% rate of climb. But wait – eggs alone went up some 44%. And that’s not annualized. That’s just the jump for April, making for the largest such increase in the past 17 years.

Oh, and just to dot the “I,” as it were, pharmaceuticals went up at an annualized rate of 12.6%, just as swine flu began sweeping through the nation. (What lovely people in that biz. Ah well, this is, after all a capitalist nation, and they certainly have the right to charge what the market will bear.)

The Worst of All Possible Choices

Going forward, those businesses must do one of three things. They must either lower costs further (not gonna happen), raise their prices (not gonna happen), or admit that they lost their shirts come the next round of quarterly reports (and unless something changes, that is sooo gonna happen).

A few companies that you particularly ought to keep an eye on: Sears (SHLD:NASDAQ) is particularly vulnerable to increases in cotton, wool and synthetic fabric costs, and also Safeway (SWY:NYSE), which will have to start posting “apologies” signs on the egg bins again.

You would be in good company in these positions. The former is already being played short in WaveStrength Options Weekly to the tune of 37% gains as I sit to write, with gains over 118% anticipated in the near future and a final target of 367% lurking just out over the horizon. The latter, I believe is being shorted by my cellmate, Chris DeHaemer.

Source: Costs Up, Sales Down – A Formula for Retail Disaster

In the face of gloom-and-doom predictions, rapidly rising unemployment, and an imploding economy, the market’s strong rally clearly anticipates a recovery in late 2009.

Is this just a bunch of bull?

While everyone seems focused on the economy hemmoraging red ink from the gash in the real-estate market, the broken bones of consumer demand and the unconscious state of banking and credit markets, only the stock market, and yours truly, seems to realize that the patient is being effectively triaged.

No, I haven’t lost my senses; I’ve simply regained a sense of optimism. I never drank the poisoned Kool-Aid of markets past and am on record calling in February 2008 for investors to not only “sell everything,” but to “short everything, buy short-dated Treasuries and hold cash, not cash equivalents.” And just because I was right then doesn’t mean that I’m right now; however, like back then, the traffic lights are flashing.

This time, however, they’re green, and not bright red.

There’s no doubt in my mind that the economy has farther to fall. Unemployment will hit double digits. Yesterday, the Labor Department announced that 5.6 million Americans are out of work, and that doesn’t count those who’ve given up looking for work. On top of that it was reported that based on fourth-quarter numbers, gross domestic product (GDP) actually shrank at an annualized rate of 6.3%.

So, what are rallying markets telling us?

First of all, the U.S. Treasury Department may not actually have to spend the approximately $13 trillion in rescue programs teed-up to drive the economy. If investor perception that the U.S. Federal Reserve and Treasury plans might actually work, whatever the details end up being, then traders and risk takers will lead the investing crowd by getting in early before the herd follows suit.

That is exactly what we’re seeing now.

Second, by some estimates, there is more than $9 trillion of cash sitting on the sidelines. I haven’t heard a single market commentator – or so-called expert – illuminate the new market reality, which is that there are far fewer shares available to buyers than anyone realizes.

Since the Tech Wreck of 2000, we haven’t seen any significant issuance of corporate equity. Since late 2007, for instance, the initial public offering (IPO) pipeline flow has been virtually at a standstill.

What hasn’t been at a standstill since 2002 are leveraged buyouts. Low interest rates drove the leveraged buyout (LBO) business, which now goes by the more genteel name of private equity. Giant and once-thriving private equity shops such as KKR & Co. LLP, TPG Capital, Cerberus Capital Management LP, The Blackstone Group LP (BX), The Carlyle Group LP, Bain & Co. Inc., and a host of other multi-billion-dollar buying machines took hundreds of public companies private by purchasing their outstanding stock with leveraged debt.

What will happen to most of these debt-laden “private” companies is another story, but the word “bankruptcy” will be featured prominently in the epitaph-like final chapter of most of their stories. The point, however, is that there are fewer companies and fewer shares for equity buyers to purchase. Add into the equation a share-drop in share prices to levels not seen in decades, and “Presto:” When institutional money and eventually retail buying comes back into the market, those trillions of dollars will be chasing fewer shares at low, low prices. It doesn’t take a Wall Street rocket scientist to figure out that robust demand for cheap assets will fuel a rapid run-up in prices.

As the perception that this dead-cat bounce or bear-market rally has real legs takes hold, more committed buyers will come out of the woodwork, not wanting to miss the opportunity to average down or pick up top-notch household names at bargain-basement prices. [For additional insights on the recent run-up in U.S. stock prices, please click here to check out a news-analysis story that appears elsewhere in today’s issue of Money Morning.]

Increasingly positive market breadth and momentum technicals aside, what’s fueling my optimism is that we’re finally seeing a real effort to constitute meaningful regulatory reforms. Recent statements from President Barack Obama and Treasury Secretary Timothy F. Geithner echo my clarion calls for regulation of derivatives, market-moving hedge funds and run-amok private equity firms. This week, Geithner said he was pushing “not modest repairs at the margin, but new rules of the game.”

In addition to reigning in freewheeling leveraged wrecking machines, I see unequivocal echoes of my calls for a systemic regulator to monitor all players with the potential to single-handedly corrupt the markets, tightened and more universal accounting standards and a systemic watchdog to monitor threats to markets and the general economic health of the country.

Equally encouraging are statements that signal interest in adopting the “Spanish model” of requiring banks to set aside more capital in good times to cushion their equity and support regulatory reserve and capital ratios in bad times. Also, in a wink and a nod to stemming the moral-hazard implication of charging all banks the same Federal Deposit Insurance Corp. (FDIC) deposit insurance premiums, smaller and better run banks may not have to pony up premiums on an equal basis with insanely large and egregious and incompetently run money center universal banks.

The upcoming G20 meeting on April 2 will spotlight whether America will take charge in orchestrating a better international regulatory order by demonstrating its commitment to meaningful wholesale changes in it own feeble domestic regulatory apparatus. Clearly, President Obama had Treasury Secretary Geithner float several trial balloons this week, and clearly in the face of terrible economic data, the markets found a reason for increasing confidence.

It’s just not possible to say enough about what effects appropriate, protective, and dynamic regulations can do for investor confidence in banks, markets and the safety of committed investment capital.

Unfortunately, as far as the economy, unemployment, embattled homeowners, businesses and devastated investors are concerned, the pain may not be over. On the other hand, if the tide of investor perception flows towards the potential for a safer investing climate and roots itself in anticipation of a stampeding bull run, all boats may rise with the tide a lot sooner than the gloom-and-doomers would have us believe.

I’m looking to the future.

Are you?

Source: Stock Markets Move Past Gloom and Doom in Anticipation of the U.S. Economy’s Recovery

The rate of housing starts jumped 22% from January to February, with work beginning on an annual rate of 583,000 homes, the Commerce Department reported. Construction on multi-unit houses surged 82%.

The study also showed that housing starts fell 24.6% in the West compared with January 2009, but they gained in the Northeast (88.6%), Midwest (58.5%) and south (30.2%).

Compared with February 2008, housing starts are down 47.3%.

“That is an encouraging sign for the U.S. economy. It is good signal of what is to come,” Matt Esteve, foreign exchange trader at Tempus Consulting in Washington, told Reuters. “With the rally in equities we hopefully have seen a bottom for the economy here.”

Analysts are optimistic about the stats because housing starts signals some healing in the housing market, which is vital to the overall financial recovery.

More new houses being built means that the banks are returning to lending, consumer spending is returning, and that construction companies are buying more supplies and they hiring more workers.

Increased business spending and people on payroll are vital for consumer demand to return as well, but it will be a while before that happens.

Producer Prices Flat

Also today, the Labor Department reported that producer prices rose 0.1% from January to February, less than expected and much lower than the 0.8% rise from December to January.

“There’s just a huge amount of slack now in the U.S. economy and the global economy” that’s keeping prices down, Scott Brown, chief economist at Raymond James & Associates Inc., told Bloomberg. “That’s going to hang around for some time.”

But producer prices are just one of three main stat lines that measure inflation. Another, the price of imports, fell 0.2% in February, the Labor Department reported last week.

Statistics on the last, consumer prices, will be released tomorrow morning.

Source: Housing Starts Rebound, Producer Prices Slide in February

With the U.S. unemployment rate jumping to its highest level  in a quarter century in February, it’s become abundantly clear that that the U.S. recession is much deeper than President Barack Obama anticipated, meaning it’s likely that additional measures will be undertaken to arrest the slide and restart growth.

Many experts are now calling for the Obama administration to focus on the fundamentals – fundamental economics, that is. They want him to drop some of its ancillary pet projects – such as healthcare reform – and are telling President Obama to focus all his time and the government’s resources on three things:

• Arresting the economy’s slide.
• Hastening its subsequent rebound.
• And fixing the U.S. banking system.

A focus on anything else is just a diversion and is a waste of time – especially because  there are questions about just how bad the economy actually is, says John Ryding, chief economist for RDQ Economics LLC in New York.

The Obama administration “should be focused on stabilization [of financial firms] and stimulus – and that should not only be ‘Job One,’ that should be the only job right now,” Ryding told Bloomberg Television. “The question is: Is it (a) recession or is it something worse than (a) recession” – like a depression?”

There’s definitely a cause for concern: The U.S. unemployment rate jumped to a higher-than-expected 8.1% percent in February, as employers reduced payrolls by 651,000, the U.S. Labor Department said Friday. Job losses have exceeded 600,000 for each of the last three straight months – something that hasn’t happened since the government started collecting jobless data all the way back in 1939.

As if that weren’t bad enough, consider this: Unemployment has already reached the average rate the White House had projected for the entire year, Bloomberg News reported.

Economists and other experts were already calling for the recession to last longer than had been expected; some are even calling for four more years of pain: a longer recession, followed by slow recovery that could have the malaise afflicting Americans until 2013. [For a related report on these revised views that appears elsewhere in today’s issue of Money Morning, please click here].

Experts don’t want the already dire situation to get even worse. But now there’s a growing concern that the Obama administration may be trying to do too much, and focus on too much – when the economy and its related ills should be – as Ryding said – “Job One.”

Market Matters

Just imagine what President Obama’s approval ratings would be if the country weren’t mired in the worst recession since the Great Depression?

With unemployment soaring to its worst level since 1983 and the U.S. Federal Reserve having declared that every sector of the economy is in the doldrums, President Obama moved into the 2nd month of his presidency with 41% of the American people believing that the country “is generally headed in the right direction.”  By comparison, 26% of those surveyed in January (and 12% in November before the election) expressed similar sentiment.

Though the economic data reveals more “challenges” ahead and the markets continue to move to much lower levels, two-thirds of Americans feel “hopeful” about Obama’s leadership.  In a small way, these results may be more telling than any earnings or economic report.  Consumer and business confidence will prove keys in moving the country back in the right direction.  Perhaps, these poll results indicate that such “optimism” may be returning to the American mindset (though ever so slowly)?

Although the administration’s $787 billion stimulus plan is designed to save or create a total of 3.5 million jobs, the American economy has already shed 4.4 million jobs since the recession “officially” began in December 2007. And experts say that more declines are coming.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. (DB) in New York, is one such expert. In a research note to clients, LaVorgna says he now sees the U.S. jobless rate reaching the 10% level by the end of this year. And he’s now abandoned his expectation that growth will emerge in the second half.

“Without any engines of growth, the labor market and the economy are likely to remain depressed for some time,” LaVorgna wrote.
Plunging domestic and overseas demand is inducing such firms as Sears Holdings Corp. (SHLD) and General Motors Corp. (GM) are stepping up their job cuts.

U.S. stocks posted their biggest weekly decline in three months last week after American International Group Inc. (AIG) reported a $61.7 billion loss – the biggest in history – and iconic billionaire investor Warren Buffett said the economy is in a “shambles.”

The Standard & Poor’s 500 Stock Index slumped 7% last week, meaning that broad index has plunged 20% since President Obama took office on Jan. 20. The Dow Jones Industrial Average tumbled below 7,000 and never looked back, hitting levels not seen since May 1997.  Other major indexes followed, with the Nasdaq Composite Index plummeting to a six-year low.

The Obama Administration and the Federal Reserve have rolled out two more measures designed to stabilize the credit markets and provide some much needed relief for struggling borrowers. The Term Asset-Backed  Securities Loan Facility is a $200 billion program that will stimulate lending activity for small businesses and consumers.  The $75 billion “Making Home Affordable” program is supposed  to assist 9 million homeowners with financial hardships to avoid foreclosure by modifying terms of their mortgages.

How long until Citigroup Inc. (C) is listed as a penny stock on the Pink Sheets?  With nationalization talks becoming more prevalent, the one-time banking giant fell below $1 a share last week and its market cap plunged to $5.4 billion (from $270 billion just two years ago).  Speaking of penny stocks, American  International Group Inc. (AIG) posted a $60+ billion quarterly loss, the largest in history, and stands prepared to accept another $30 billion in government funds.

US Bancorp (USB) and Wells Fargo & Co. (WFC) each took measures to shore up their financial positions as both cut their respective dividends by about 85% to a nominal nickel a share. Meanwhile, Wells’ management announced an additional $2 billion in expenditure reductions and claimed that the financial institution experienced “strong operating results” in early 2009.  The news outside of financials was not much better.  Computer shipments are projected to decrease by almost 12% in 2009, the worst level of activity ever reported.  Auto sales in February plummeted again and no one escaped the negativity: GM (-53%), Ford Motor Co. (F) (-48%), Toyota Motor Corp. (ADR: TM) (-40%).  GM also seemed to move a few steps closer to bankruptcy reorganization (and penny stock status).

Volatile oil prices settled above $45 a barrel as traders weighed the dire economic picture against inventory reports that showed an unexpected decline in crude supplies.  Prospects for a new stimulus plan from China brought short-lived optimism, though ultimately the pessimists won out as news about Citi and GM ruled the day.

Economically Speaking

With many countries mired in a global recession, China proclaimed that its $585 billion stimulus plan should produce about 8% annual growth for the world’s third largest economy.  Outsiders had hoped that China’s premier would announce a more robust package, but instead the government has adopted a “wait-and-see” attitude before determining if any further measures are needed.

Both the European Central Bank (1.5%) and the Bank of England (0.5%) reduced their key lending rates by 50 basis points, dropping those benchmarks to their lowest levels in their respective histories.

The Federal Reserve’s Beige Book reported that the prospects for recovery continue to look bleak for the short-term with any “pickup not expected before late 2009 or early 2010.”  Meanwhile, Fed Chairman Ben S. Bernanke confirmed that the recession is worsening as the labor market weakens; he also appeared to support the Obama administration’s stimulus package as the best hope to revive the domestic economy.

This week’s economic calendar is highlighted by the February retail sales report and some analysts are “cautiously” optimistic (which is really saying something in this environment).  The January report depicted the first monthly increase in seven months and the best showing for retailers in over a year.  After a dismal holiday season, perhaps folks are simply antsy to partake in the “Great American Pastime” of shopping again.

Remember, gift cards purchased for the holidays are still being redeemed and may have contributed to some additional activity last month.

And with equities facing their lowest valuations in 12 years, some investors may be becoming just as antsy to jump off the sidelines and take advantage of bargain-basement prices. Could this be the week?  Unfortunately, up to this point, there’s been far more talk than action.

Weekly Economic Calendar

Source: As the Economy Worsens, Experts Call for Obama to Focus on the Fundamentals

The market was also supported by China’s optimism that its domestic economy was recovering and official promises of more swift stimulus action when required. China is the world’s second-largest oil consumer.

U.S. crude was up 98 cents at $44.57 a barrel by 1205 GMT after rising as high as $44.76, while London Brent crude advanced 56 cents to $44.20 a barrel.

Brent has lost its rare premium to U.S. crude because of a decline in U.S. inventories. High U.S. stocks, particularly at the Cushing oil hub, had been keeping the American marker at a discount to Brent.

Markets will be watching for the February U.S. non-farm payrolls data due later in the session, which will probably show unemployment surging to a 25-year high in the world’s top oil consumer.

“Today, traders will turn their attention to the non-farm payroll report which in case of a negative surprise may pose an obstacle to further gains,” said Marius Paun, commodities analyst at ODL Securities.

UNEMPLOYMENT

Friday’s key non-farm payrolls report is expected to show the economy shed 648,000 jobs in February, while the unemployment rate is expected to rise to a 25-year high of 7.9 percent, according to a Reuters poll.

The U.S. dollar weakened before the Labor Department’s release of the payrolls report at 1330 GMT. Weakness in the U.S. currency can boost investor demand for oil and other commodities.

Asian stocks slid following losses on Wall Street due to a warning from General Motors it could go bankrupt and uncertainty about the fate of the banking sector. European stocks made early losses.

Top Chinese officials said on Friday substantial fiscal and monetary stimulus was breathing life back into the world’s third-biggest economy hit by crumbling exports, suggesting Beijing saw no need to boost the existing investment plan of nearly $600 billion.

Oil has traded in a band from around $33 to $50 since mid-December, pressured by slumping demand due to the economic downturn. Expectations OPEC might cut production again when it meets on March 15 have added support.

OPEC has agreed to cut production by 4.2 million barrels per day since September, and a Reuters survey found that members have met 81 percent of their output reductions as of last month.

Angola, which holds the presidency of the 12-member group, will not advocate further production cuts when the group meets, oil sources said, but Venezuela, Algeria and Libya have raised the possibility of a further cut.

“We expect the cartel to put through a modest cut when it gets together and judging by how well the market is holding up, participants seem to be expecting the same,” said MF Global.

March 6 (Reuters)

These stocks act as an early warning for what is to come and you don’t need the data from the U.S. Labor Department to give you the figures or warning.

This from the Team:

During most recessions, the auto sector has traditionally taken it on the chin. This week, we found out some interesting news that gives us some new insight into the changing buying habits of American consumers, and perhaps, new insight on investing.

AutoZone (NYSE: AZO) reported increased sales and profits as customers lined up to fix old vehicles instead of purchasing new ones. It’s a logical and expected result of consumers saving more and splurging less.

Another lesser-known indicator, this time on jobs and joblessness, are the numbers coming from payroll heavy Automatic Data Processing (Nasdaq: ADP). From the ADP Employer Service gauge we know that 697,000 jobs were cut from payrolls in February.

What these data streams tell us is that we can find investment information outside sources like the U.S. Labor Department and industry sales figures. And for astute investors, these “canaries” can give us fair warning before the official data is released.

For example, if we find out how severely some of the biggest online advertisers are cutting back, wouldn’t that information be important to know before online advertising juggernaut Google (Nasdaq: GOOG) reported it’s numbers? I would think so.

So keep your eyes and ears peeled and maybe you’ll stumble across the Holy Grail for today’s market… The sign we’ve hit bottom.

Source: AutoZone and ADP, Non-traditional Indicators