Sense on Cents

Unemployment hits 10.2% and every self-respecting economist knows it is heading higher.

Does anybody want to ask Tim Geithner if he wants to review the rigor and integrity of the Bank Stress Tests conducted last Spring? What were the assumptions used for the Unemployment Rate? For those who care to review the premises of the long ago but now forgotten Bank Stress tests, I submit from the FDIC, FAQs-Supervisory Capital Assessment Program. In regard to the assumptions used for unemployment:

2009 Base Case 8.4%
2009 Adverse Case 8.9%

2010 Base Case 8.8%
2010 Adverse Case 10.3%

Garbage in, garbage out. We are now within .1% of the more adverse unemployment case for NEXT year. Not that it might matter given the fact that the liquidity experiment undertaken by the Fed and Treasury is bubbling up in asset valuations while neglecting Main Street’s economic plight. That said, I would once again question as I did last April, “Bank Stress Tests: Major Sham??”

What are the implications for sham transactions? Subsequent misallocation of funds in order to cover and disguise the initial sham. I am not stating that government officials are stealing, although I’m not stating that they’re not. I am stating that there is little doubt that future funds continue to get redirected into organizations (banks, Freddie, Fannie) and programs the health of which were not accurately represented to the American public.

Now, let’s collectively navigate the economic landscape. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

On Thursday, Initial Jobless Claims were reported to have surprisingly declined by 20k and the market rallied by more than 2%. With that report, clearly we are making progress on the employment front, no?

Tell that to the 17.5% of the American population factored into the underemployment rate. For all details on the extremely adverse (no pun intended) jobs situation, please review my “Unemployment Report: November 6, 2009.”

Washington had better quickly figure out how to redirect the excessive liquidity currently being pumped into the financial system. Wall Street loves that liquidity, but Main Street needs that liquidity.

Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:

U.S. DOLLAR

$/Yen: 89.92 versus 89.99, -.01%
Euro/Dollar: 1.4846 versus 1.4717, +0.9%
U.S. Dollar Index: 75.75 versus 76.39, -.84%

Commentary: the U.S. Dollar Index retreated once again this week on the heels of the Fed announcement regarding keeping rates low for an extended period. The greenback continues to act as the cheapest source of funding for speculators, investors, and other market participants looking to put cash to work.

I continue to reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.

Although Fed officials play up the lack of inflation as a positive and an overriding reason for its easy money policy, they provide no commentary on deflationary pressures at work in large segments of the economy. I firmly believe these deflationary pressures are the Fed’s gravest concerns and they hope the weak dollar creates hints of inflation to offset these deflationary pressures. Can rising asset valuations support underlying economic fundamentals which provide little to no pricing power for many companies?

COMMODITIES

Oil: $77.67/barrel versus $80.3, -3.3%
Gold: $1097.8/oz. versus $1045.7, +5.0%
DJ-UBS Commodity Index: 131.419 versus 131.862, -.3%

Commentary: Interesting price action in the commodity sector overall relative to equities. While the equity markets rebounded this week, commodities in general, and oil specifically, gave ground. Gold had a fabulous performance highlighted by a major multi-billion purchase of the shiny yellow stuff by India’s central bank from the IMF. Think India is concerned about the long term viability of the greenback? I do.

The  Baltic Dry Index remains in the range of the last few weeks with no appreciable move.

Summary/Conclusion

The gap between the markets and economy grows ever wider. Please join me tomorrow night as I discuss this gap and how people should look to invest during these extremely challenging times. I am very excited about tomorrow evening’s show as No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Keith Fitz-Gerald. Mr. Fitz-Gerald is one of the foremost experts in the markets today on investing in the Asian markets. You will not want to miss this show.

Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.

Thoughts, comments, questions always appreciated.

Have a great day and weekend.

LD

This entry was posted on Saturday, November 7th, 2009 at 8:39 AM and is filed under bond market, commodities, currencies, General, markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.