Remember that great scene from the movie Casablanca where, at the request of the Nazis, the hopelessly corrupt local top cop shuts down Rick’s, claiming “I'm shocked, shocked, to find that gambling is going on here"? As he finishes this statement, the manager of the illegal casino comes out and hands him his winnings for the evening.
Now imagine Wall Street insiders as that cop. They are shocked, shocked, at a rise in jobless claims, having abandoned all common sense or perhaps visiting malls, restaurants, construction sites, and state and local budget meetings these first days of January. Historically, people do not file the last couple of weeks of the year -- they postpone filing – and they are doing it now in the face of a dead economy.
And the Street is happy underneath it all, for the jobless claims number is the equivalent of the casino manager handing them cash. But instead of actor Claude Rains, it is Ben Bernanke, the man who has pledged umpteen times to do whatever it takes in the face of a dead economy. So the market will stay buoyant -- perhaps even up a little -- floating on a sea of liquidity in the face of a weak and eventually deteriorating economy.
The data itself? Seasonally adjusted initial jobless claims rose 35,000 to 445,000 for the week ending January 8. Actual claims rose 33% or 192,000 to 770,000. That is a lot of claims.
In one way the Street does not emulate that corrupt cop – who turns out to be a good guy, something that will not happen with most on the Street. Also, the Street actually believes the U.S. economy is going to turn around this year. This is not going to happen for the following reasons:
- The engines of the economy – employment, credit and accumulated wealth – are all broken. Employment continues to suffer through its sharpest contraction in the work force since the end of World War II. Credit continues to contract, and now banks are proposing a standard of 30% down for a house if they plan to securitize the note. Wealth is off 35% or so between home prices and the stock market.
- The engine for employment is housing -- which is broken and will remain so for at least four more years. Just look at the current late payment/default/foreclosure rates and do the math. Then juxtapose that against inventory. There's no imminent boom in housing, and remember: If single-family starts double and then almost double again, we will only then be back to where we were four years ago.
- U.S. consumers are now deep into what I call the New Frugal. They will buy pounds of high-quality products – Apple (NASDAQ:AAPL) iPads, Ralph Lauren (NYSE:RL), Coach (NYSE:COH) – and forego other items, contracting the numbers of transactions, retailers, retail jobs, and malls. Check it out yourself: Credit card revenues are up, while transactions are flat to down. Fewer items, each more expensive on average, are being purchased.
The bottom line is simple: It is all about housing. No housing rebound, and we slide into a double dip. Any one of those pundits on CNBC who states "animal spirits" and "organic growth" are going to make a dent in unemployment and underemployment is either hyping their own books or dating a producer. Maybe both.
What to do? Short the bottom of consumer spending; take a look at Dollar General (NYSE:DG), which is extremely well-managed and extremely overvalued. Go long the top of consumer spending -- the aforementioned RL and COH -- and if you buy the home builders ... well, there is a bridge in Brooklyn that I can get you a deal on. My great-grandmother walked across that bridge the day it opened in 1883, and when she reached her destination, she cleaned offices.
On Wall Street.