WASHINGTON, October 9, 2014 – After Mr. Market rallied big time Wednesday afternoon, making the Maven’s previous, depressing column look almost foolish, the bears seem to be out in force Thursday, having taken back about half of yesterday’s surprising gains as of 11:00 a.m. EDT.
(UPDATE: As of 11:45 a.m. EDT markets have taken back nearly ¾ of yesterday’s gains.)
Wednesday’s surprise rally—really a big short squeeze—was fed by the Fed, namely the Fed’s dovish minutes, which were released mid-afternoon. To the Maven’s surprise and actual delight, the Fed seemed actually to have a grasp of the monetary and employment situations as they really are and not how Democrats would like voters to perceive them going into the November election cycle.
As we’ve preached here ad nauseam for years, the alleged dropping unemployment rate, supposedly at 5.9% and indicating something near statistical full employment, is purely a Washington-inspired mirage to keep low-information voters fat, happy and stupid just the way the political class prefers them.
In fact, the real unemployment rate, approximated with some accuracy in the Department of Labor’s (DOL’s) U-6 index—which includes the under-employed and the still-unemployed who have dropped off the unemployment comp rolls—is still likely between 10 and 12%.
Further, the workforce participation rate—the percentage of people who are working over the number of people who actually can work—is at an all time low, as seen in the chart below*, sinking to levels not seen since the severe post-Nixon, post-Vietnam recession, circa 1974-1976.
Although the Fed hasn’t specifically referenced U-6 or other figures, its typically Delphic language indicates that they’re well aware that the unemployment numbers being fed to the public are largely being used to shape the political battlefield. Hence, with perhaps some reluctance, the Fed is postponing potentially ruinous interest-rate hawkishness for longer than many had expected, although no date is certain.
The Fed is also worried about the proverbial “sick man of Europe,” which in 2014 is the entire European economy itself. Or the lack thereof. Largely due to Germany’s insistence on austerity—all based on good economic reasoning actually—weaker European economies simply cannot get the juice to recover. That malaise is overwhelming the rest of the Eurozone, creating stagnation and political unrest.
True, the Euro has plunged in recent months with breathtaking speed against the dollar. Around the end of May, it took roughly $US1.37 to buy a single Euro. In four short months or so, that exchange rate dropped over a dime to the current $US1.26 or thereabouts—a colossal drop over that period of time.
The perpetually jawboning but rarely acting ECB president Mario Draghi wants to keep this action going by launching big-time sovereign government bond purchases, à la the U.S. Fed, but Germany is stymieing that effort, not wanting to cave into the profligacy that has brought Italy, Portugal and particularly Greece to their collective fiscal knees.
But zero effective growth in the Eurozone is killing business there, while the plunging Euro is boosting the dollar and thus increasing the price of U.S. exports, threatening to slow those down.
The entire international economy is really like a very complex, sclerotic and slow-moving game of pick-up sticks, where you’re afraid to move even one of those colorful sticks lest the whole pile collapse without warning. And the Fed is worried about this, too.
Bears figure the Eurozone is already into its umpteenth recent recession and will spread it gradually throughout the industrialized world. That’s cosmic, negative stuff and likely what’s caused the selling to resume this morning, in spite of genuinely positive earnings news from Alcoa (AA) and Costco (COST), the former of which was quite unexpected.
Both stocks got a boost this morning from their results. But while Costco has retained its bounce upward, Alcoa has given all of it back and then some, in spite of record aluminum orders from Boeing, and promising new orders from Ford, which is replacing steel with aluminum on many of its 2015 truck models.
But all investors are seeing this morning is that aluminum is a commodity, and in a recession, commodities go down (as they’ve recently been doing) and that’s that. Stupid is as stupid does in this market.
Given the long holiday weekend, it’s also possible that some investors are bailing out of positions they don’t like, not wanting to carry them over a three-day period that includes 100% headline risk and no ability to trade.
Today’s trading tips
Pretty much the same as yesterday, really. Sit tight for the most part. Hedge with short S&P 500 ETF SH when the averages are up. Pick into banks, particularly BAC via its “A” warrants (BAC/WS/A at Schwab, your symbols may vary). Nibble at REITs, which are in a surprising short-term recovery at least for now. Ditto utilities. But don’t take down a lot of any stock. You could get hosed in this kind of market.
That’s about it.
Columbus Day trading schedule
Monday, October 13 is the Federal Columbus Day holiday. Governments and banks will be closed, but for traders, things will be a little weird. Stocks will actually be trading on the 13th, but bonds will not and some mutual funds won’t trade either.
Normal settlement for trades made late this week won’t take place on the 13th. Trades you made yesterday, October 8, will settle Tuesday, October 14. Today’s trades will settle Wednesday, October 15. And trades made Friday, October 10, and Monday October 13, will all settle on Thursday, October 16.
Check with your broker for further details.
*Workforce participation chart originally appeared on ZeroHedge, source unknown. We’ll be glad to give credit to the original source (likely DOL) if we can discover it.