False Market Profits On A False Jobs Report Prophet

by: Markos Kaminis

Stocks rallied Friday on a perceived strong employment report. However, I found the good news to be suspect, and wrote about it in a detailed analysis at Seeking Alpha, which exposed the real unemployment rate closer to 18% than the 7.7% reported by the government. And what's really interesting is that the truer figure actually deteriorated in February, versus the improvement reported in the government's number. So, therefore, the rally in stocks was based on a false prophet in the jobs data. With all that being justly noted, I still see stocks going higher from here, because sometimes the market will follow a well-speaking leader for the sake of hope.

Index ETFs Ran on Friday

Index ETF

Friday's Gains





PowerShares QQQ (NASDAQ:QQQ)


iShares Russell 2000 (NYSEARCA:IWM)


The day was clearly driven by the Department of Labor's monthly Employment Situation Report for February. On the surface, the report showed improvement all around. Nonfarm Payrolls increased by 236,000 on net in February, far better than the consensus projection of economists for 171K, according to Bloomberg's survey. Private nonfarm payrolls (excluding public sector job creation) grew by 246K, again much better than the 195K consensus view. The Unemployment Rate was likewise better than expected, with the rate improving to 7.7%, from 7.9%, better than the economists' consensus forecast for a lesser improvement to 7.8%.

But as I indicated in my detailed analysis of the jobs report, the U-6 Underemployment Rate is still 14.3%, though that was better than January's 14.4%. However, I took a closer inspection of the data, and applied a blast from the past labor participation rate from 2006 to the civilian population, and found that some 7.1 million Americans may simply have fallen off the government's radar screen when their unemployment benefits ran out. After all, even today, long-term unemployment accounts for 40+% of total unemployment.

Where do these people go after they fall off the radar, welfare? Many apply for food stamps, and may remain on the radar, assuming the government has its act together; I doubt it. I think they're simply unaccounted for, and definitely so when they're not collecting any benefits. Those same Americans aren't spending money like they used to, and they represent a burden on the economy's back. If you account for them, you get an unemployment rate at 11.8% and an underemployment rate of 18.0% - just see my report.

The stock buying celebration is likely to continue, given my data is not generally accepted to be truth. Some of that might be for good reason. After all, those high labor participation rates of the past may have been built on false premise. All those jobs that existed in the inflated real estate sector in construction and in mortgage brokerage probably should not have been there in the first place. You know Bank of America's (NYSE:BAC) acquired subsidiary, Countrywide, and the mortgage businesses at IndyMac and Washington Mutual shouldn't have been so big. BofA, Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and J.P. Morgan Chase (NYSE:JPM) are still paying for them today. But maybe those folks would have found other work. After all, the employment rate was well under 5% for a very long time before the 2005 real estate surge. There's also some validity in the demographic argument, with baby boomers retiring at a fast rate today. Even so, I expect the real unemployment rate is still significantly higher than the figure reported by the government.

Despite the false profit booked on Friday, I expect stocks to continue higher. Capital flows are just too massive to stop today, coming out of safe havens including money market funds, treasuries and precious metals. I authored a second piece at Seeking Alpha Friday which anticipated selling momentum would continue for gold, silver and relative ETFs. I'm speaking of names like the SPDR Gold Shares Trust (NYSEARCA:GLD), the iShares Silver Trust (NYSEARCA:SLV) and the Market Vectors Gold Miners (NYSEARCA:GDX). However, my thesis was disrupted by a Goldman Sachs (NYSE:GS) call indicating gold could find strength over the next three months on a technical basis. I expect the factor behind the support Friday will fade and fall away, and the safe haven securities will find lower bottoms as a result.

From a broader perspective, recent economic data flow has exhibited some recession like symptoms. However, the market is looking ahead, as is appropriate for it, and it is anticipating better days. Only time will tell if the latest day's profits were based on false prophets or not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.