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Today’s Unemployment Rate

March 6, 2009 – 2:21 pm


The big economic statistic of the week was today’s unemployment rate for February. The expectation was for a poor jobs report and an unemployment rate to exceed 8%. What we got was exactly what was expected. The market breathed a sigh of relief in the morning but it’s Friday and the day is early. Expect unemployment to reach about 10% nationwide before it starts to improve. It will continue to rise even when we see evidence that the recession is waning. There is no evidence of that yet, but it will end despite what many think. The Depression word should not be part of the discussion. Could we go into a depression? Yes, but the probability is slim. 

There was a plethora of economic statistics released this week and I don’t want to go over all of it, but it is prudent and enlightening to touch on a few data points. First, the ISM (Institute of Supply Management) report for February rose to 35.8% from January’s reading of 34%, a very slight improvement which may or may not be statistically important but any reading higher month over month is good though any reading below 50% is a shrinking economy. Construction spending fell 3.3% when expectations were for a fall of 1.6%. This report was for January. January factory orders were down 1.9%, much better than the expectation of a fall of 3.5%. Finally, retail sales in February rose. All these are backward looking numbers but they certainly paint a picture of a falling economy with hints of stabilization. The recent bad news is a direct result of the liquidity crunch that froze all economic activity in October and November before it started to loosen. Liquidity is still tight. We are far from being out of the woods but we can see the end of the forest as we slog our way forward. 

If we look for any sign or spark of hope, it is in the news that seems to becoming less Draconian. Less bad news means we are still falling in economic activity, but the pace of the fall is slowing. A recent news article spoke to announcement of layoffs in February that appeared to be less in number than in January, but that was after a 14 year high in layoff announcements in the first month of the year. The consumer seems to be spending a bit more. Housing and refinancing is still very weak, but there are small signs of improvement in California where sales of existing homes was flat last month but rose the month before and inventory actually fell. However, new home construction is in the basement and digging a deeper hole. Foreclosures are increasing, but there is a plan released by the White House to help. It will take time to see any impact but frankly, foreclosures will continue to rise. In past loan work outs we have seen half of them return to the foreclosure process. I think much of this effort is wasted. Affordability is very good and interest rates low. Buyers are starting to come back but very slowly. 

The market has fallen 25% since the first of the year. That 25% can be directly contributed to the lack of clarity and focus of the stimulus package. Despite the President’s smooth speeches, the constant drum beat of the evils of our system and actual policies that have been announced and passed have been just as toxic to the stock market as toxic mortgages are to the banks. 

The hope the market had for the ‘stimulus’ plan of $800 billion disappeared as the details showed it to be a multi year ‘spending’ package packed with pork barrel spending. The public and the market see it for what it is not for what politicians try to spin it to be. 

For our clients we have turned very defensive with high cash levels, larger short positions and equities that are anti or out of the market. We have a few long positions in the stock accounts but only in those companies that have a clear growth of earnings path and at the same time are extremely underpriced when compared to price to book, price to earnings and price to sales. In the mutual fund program we have very high cash levels, two bond funds, a double short mutual fund and very few long funds. These efforts have enabled us to far outperform the market though we still have loss value this year. 

There will be a turn but we will wait for the bottom to show itself before moving into the market in any significant way.

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