Friday, February 5, 2010

Snow is Falling!!, Sell Snow!!

Years ago a New Yorker magazine cartoon showed a trader with a phone in each ear looking out the window and yelling, "Snow is falling, sell, sell, sell!"

This is the same urgency one is fed by the likes of CNBC where entertainment is the product, not investing. The markets have fallen a little more than 7% in the past two weeks. That is hardly spirit crushing in a market that rose more than 60% during last year. Or seen another way, a market that is exactly where it was sixteen months ago.....or where it was ten years ago. A year ago, the stock market was where it was thirteen years before. In other words, in the legendary words of Foghorn Leghorn, "Two nothings is nothing! That's mathematics, son! ... Two half nothings is a whole nothing!"

I continue to be of the belief that 2009 was a bear market rally. That view has not been without pain as a too conservative position for clients faded the previous outperformance of portfolios. But our style is risk averse and steady as clients look for long term security more than fleeting short term gains.

The principal caveat that keeps at the forefront of our thinking is the unprecedented employment picture. While in a typical post WWII recession, 24 months after the recession began the economy would be showing +100k monthly gains in employment. This morning the Bureau of Labor Statistics printed a -20k for January.

What particularly keeps me on edge is that in the face of fewer employed, the unemployment rate fell from 10% to 9.7. This fact means yet again the denominator has dropped. The work force continues to contract as longer term unemployed fall of the statistical radar screen and those discouraged and not looking are also not included.

To be sure there is good news in the employment report. The index of aggregate hours worked rose to 33.3hrs per week from 33.2, modest but positive. Backing up to look at the larger demographic picture we find that the number of employed at 129.5 million is exactly where it was in 1999, while the working age population has grown 29 million. 29 million more people competing for the same number of jobs as a decade ago.

Put this in the context of a government policy that held interest rates at zero, injected $2.2 trillion into the economy and incurred deficit fiscal stimulus of 10% of GDP. All that and employment fell nearly 5 million. Mind numbing.

The 2009 Jolt Cola technical rally is about to meet the 2010 technical reality check. The rebound of 50% of the 2007-2009 slide could well see a 50% retrenchment of that rally which would take the dow easily down another 1000 points. At that point the market will have shaken off some of its overvaluation and we would begin to get constructive again.

John Barnyak
Stonehouse Asset Management