Hold Your Rally Horses, As Positive Economic Data Will Prove Irrelevant

by: Markos Kaminis

The market was quick to rally on news of sharply lower weekly jobless claims Thursday, but we suggest investors hold their rally horses. While this short-term driver of enthusiasm could create similar short-term profits for portfolios, over the longer run, we expect this latest week's data will prove an anomaly, with claims to run at a higher rate once again. Furthermore, American economic growth is at great risk to be outright undermined by the impact of Europe. Thus, the apparent and celebrated nascent trend in jobless claims would fail on future developments unaccounted for in the day's trading.

The Labor Department reported that Weekly Jobless Claims improved by 19,000 over the revised prior week count of 385K (from 381K), to reach 366K in the December 10 period. This was the lowest weekly count of jobless claims since May of 2008, and so the Dow Jones Industrials (SPDR Dow Jones Industrials - NYSEArca: DIA) were up. The four-week moving average for claims also improved nicely, dropping by 6,500, to 387,750. The moving average is a better measure of trend for obvious reasons, but we still think it will prove irrelevant.

While such a change would be worth celebrating if sustained, we do not suspect it will be. First, let me remind you that this is December, the holiday season, and executive offices remain occupied by human beings last I checked. Those humans are supposed to still have hearts, as far as I know, and so you would expect a seasonal lull around this time of year. Now, these data are seasonally adjusted, so it should smooth such good tidings out of its trend line. However, we suggest that in dynamic times like these at the extremes of historical trends, such adjustments may prove inadequate.

This report’s key figure captures the number of Americans filing claims for unemployment benefits for the first time since losing a job. It would seem to take a special sort of callousness to send familiar folks to the unemployment line around this time of year. Layoffs should likewise be put off, if not for the holiday spirit, then for the sake of personal safety, with the disgruntled notorious for vengeful response.

Closer inspection of the Jobless Claims Report offers little reason for celebration. The number of Americans continuing to receive state unemployment benefits rose by 4,000, and remained at 2.9% in the latest period reported for this data point (week of December 3). In case you missed it before adding shares to your portfolio, the number of Americans receiving benefits of some sort, thus including the unemployment extensions that may soon end for many Americans, rose by an enormous 874,670, to 7.5 million in the period reported for this data point (November 26). I think that point alone should sour your solace.

Needless to say, or perhaps serving as an important reminder, experts at investment banks and rating agencies have been reassessing the risks to banks associated with their global exposure (read European) and other interrelations. This led Standard & Poor’s, a subsidiary of McGraw-Hill (NYSE: MHP), to downgrade the credit ratings of some of the largest banks in the nation (37 in total), and also many regional banks (31), over the last several weeks. Some of the largest banks downgraded included the likes of Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM), Barclays (NYSE: BCS), HSBC Holdings (NYSE: HBC), Royal Bank of Scotland (NYSE: RBS), UBS AG (NYSE: UBS) and more. Of the latest regional cuts, we found PNC Bank (NYSE: PNC), U.S. Bancorp (NYSE: USB), Northern Trust (Nasdaq: NTRS), BB&T (NYSE: BBT) and Commerce Bancshares (Nasdaq: CBSH).

With Europe failing to come to terms with the idea of forming a more perfect fiscal union, it increasingly appears it will either fall apart or push the limits of the securities markets before acting. Thus, these risks to American banks are tangible and so the risk to the American economy, which exports a good deal of its goods and services to Europe, is significant. Given its already vulnerable state, I expect this will most certainly drive the American economy into its next recession. Thus, and in conclusion, we suggest investors sober up, as this latest bit of employment data should either prove an anomaly or be made irrelevant by future economic developments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.