Chris Lau - Seeking Alpha

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Wednesday, February 04, 2009

Don't ... Be ... Fooled ...

Over the past three days, the market has been trading unconvincingly on the upside. This is in contrast to late-December, when most positive momentum was attributable to low volumes (people were on vacation) and "Obamarama" (TARP and other massive relief programs).

There is only one similarity to positive trading in the past few days to the positive late-December trading: both appear to be bullish "head fakes."

Why is that said?

Unemployment.

Let's take a step back and look at non-manufacturing activity. The Institute for Supply Management said its non-manufacturing index came in at 42.9 in January compared with 40.1 in December. This activity feeds into employment requirements in the economy. It shrank.

It is not known how many more fake rallies the markets will encounter in the near-term. What the investor will certainly encounter are headline stories and claims for what the "market bottom" will be. While a bottom by definition can never be predicted, it may only be revealed in 20/20 hindsight.

How Does the Investor Avoid the Head-Fake?

From this Reuter's article:
"To me the key is really the employment report. We have to have at least three months of increases in non-farm payrolls to be able to say that we have the economy bottoming."
- Sung Won Sohn, professor of economics at California State University in Camarillo, California.

Some Job Cut Headlines (Feb 1st - 4th)
Pennsylvania State - 3000 jobs
Panasonic - 15000 jobs (worldwide)
Hudson Bay - 1000 jobs (Canada)
Macy's - 7000 jobs
Glaxo - 6000 jobs (worldwide)
PNC Financial Services Group Inc - 5,800 jobs

Nightly Business Report reported the real unemployment rate - U6 - that which includes people who stopped looking for work - at 13.5% as of December 2008 (compared to 8.5% in January 1998 when U6 started getting tracked). Again, the number is not the only thing that is important. It is the direction that it is/has heading, and right now unemployment is growing.
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