StockShack Weekly Commentary September 5, 2009

Shack-A-Stories

1. Gold Glitters, Bonds Boom – Gold moved higher this week on strong volume. GLD, the gold EFT, closed at $97.53 up 3.90% on the week. GLD has not seen volume this bullish since the week ending 06.04.09 when gold made its last attempt to surpass the coveted $100 mark (or $1,000 for actual gold bullion).

Many market participants are bullish on gold and GLD. However, the GLD is still trading in a consolidating range that began the week ending 09.26.07 (or 12.17.08 depending on how you chart it). Either way it has been awhile. Until the price of GLD closes outside of the consolidating range to the up or downside it is still just consolidating. It has not closed outside of its consolidation range yet. So there is no change in trend.

The CBOE 30 Year Treasury Yield Index (TYX) ended up this week 1.54%. Market participants are bearish on yields; however, the TYX has been consolidating since the week ending 05.06.09. As noted above, until TYX closes outside of the consolidating range to the up or downside it is still just consolidating. It has not closed outside of its consolidation range yet. So there is no change in trend.

The really interesting thing to note, if that can be said for gold and yields, is that the last time GLD was at the high end of its range ($96.23 at 06.04.09) the TYX was also at the high end of its range ($46.92 at 06.11.09).  

Fast-forward 3 months, it is now September, GLD is again at the high end of its range ($97.53), but TYX is not. It is at the low end of its range ($42.73). Something has changed.  

StockShackSays: We wait until GLD or TYX break out of their respective consolidating range on significant volume.

What has changed? There is no inflation. How do we know there is no inflation? The inflation protected public obligations of US Treasury, or TIPS, have not increased. As inflation expectations increase, TIPS increase. That is not happening. This means TYX (or yields) will remain in its consolidating range or decline. Gold is another story and a bit more complicated as to why it is increasing. Think oil. It traded to $150 last year. Market participants make the markets go round.

2. Non-farm payrolls drop 216,000, Unemployment rate hits 9.7% – The Bureau of Labor Statistics (BLS) released its monthly Employment Situation Summary on Friday. The BLS summary reported employers reduced payrolls (jobs) by an additional 216,000 in August. The report included revisions for June and July. Originally in June the BLS reported a decline of 443,000 payrolls. It was revised to a decline of 463,000. July was a decline of 247,000, revised to a decline of 276,000.

The payroll trend is upward or for less reductions in payroll (less layoffs). The average monthly payroll loss was approximately 700,000 during the 1^st quarter, 450,000 during the 2^nd quarter and, it appears, will be 230,000 when the 3^rd quarter ends September 30^th.

The unemployment rate increased to 9.7%. The unemployment rate trend is also upward. The average unemployment rate was 8.1% during the 1^st quarter, 9.2% during the 2^nd quarter and, it appears will be 9.6% when the 3^rd quarter ends September 30^th.

Since the beginning of the recession in December 2007, the number of unemployed persons has risen by 7.4 million.

You can find the report at http://www.bls.gov/news.release/empsit.nr0.htm.

StockShackSays: “The beatings will continue until morale improves.”

Well it may be better, but it is not good. The trend in unemployment is the most important trend, and it is trending upward. The problem is that the economy has lost 7.4 million jobs and is still losing.

Come on people, let’s be serious! Until the people at the top start earning big bonuses again there will be no hiring. Their bonuses are paid on increasing earnings, and earnings only come from 2 places, higher revenue or lower costs. And WE are all just a line item on the income statement.

For most companies, revenues are down. Some companies’ revenues are down A LOT. If revenues cannot be increased then there is only one other component in the equation. That’s right!  However, revenues are now holding flat or declining marginally. Therefore, companies will not have to decrease payrolls further.

But until CEOs and the like see revenue growth over a few quarters they will not hire in any significant way. That means we are looking at the middle of next year before the BLS starts to report consistent job creation (specifically, BLS job increases of 150,000 or more a month).

Section401Shac(k)

We are backtracking a bit for our Kickoff commentary to our last exchange/transfer. During the first half of the year we held two diversified funds with a 50-50 split in the account; China Fund and Large Cap Growth Fund (US). At the beginning June, we exchanged/transferred both funds into a Money Market Fund.

We have missed the last 5-6% move that started in the second half of July through August. We are okay with this because we believe Market Themes have changed since the beginning of the year from Holy Crap We Are All Gonna Die to Don’t Move I Think We Are Alive (Market Theme commentary to be published soon).

Market participants are now focusing on 2010 not 2009. This means they are or will begin to move money from investments they believed would be profitable in 2009 to investments they believe will be profitable in 2010.

StockShackSays: The Market Themes for 2010 will be different from the Market Themes of 2009. Which stocks or funds will perform best? The market has not clearly indicated to us which ones those will be. Therefore, the risk of owning stocks during the time when market participants are reallocating funds is very high. We are holding money market funds (read cash) until the market has clarified its intensions. Are “guess-timate” is that will be sometime in the 4^th quarter around Turkey Day.

WeeklyStockShackers – Due to a scheduling issue, WeeklyStockShackers will be published tomorrow Sept 6^th.