The Dow closed at another new high and posted gains all five days for the first time since September 2011.
The biggest economic news on Friday was the Nonfarm Payroll report for February. The headline number showed a gain of +236,000 jobs compared to estimates for a gain of +160,000. This was a major surprise and the Dow spiked +88 points at the open but that spike was short lived once the details bubbled to the surface.
The headline number for January was revised lower by -38,000 to +119,000. That makes January the lowest number of job gains since June 2012. However, December was revised higher by +23,000 to 219,000. That raises the monthly average for the last six months to +187,000 jobs. It would take more than five-years of job gains at that rate to make any significant impact on the 12 million people currently unemployed and the 150,000 new workers entering the workforce every month.
The unemployment rate declined to 7.7% because of a drop in the labor force participation rate (LFPR) not because of a surge in hiring. The labor force declined by -130,000 and the participation rate declined -0.01% to 63.5%. That is the lowest LFPR since 1981. If the LFPR was at the same level as it was at the end of the recession in January 2009 (65.6%) the unemployment rate today would be 11.4% not 7.7%. Unemployment for blacks is 13.8%, Hispanics 9.7%, teenagers 23.4% and black teenagers 37.8%. The U6 unemployment rate is 14.4%. That is everyone out of work who would take a job and those working part time because they can't find a full time job.
Those not in the labor force rose by +296,000 to 89.304 million. Millions of workers have been deemed to have dropped out of the workforce because they have been unemployed for more than two years. Are they out of the workforce or just unemployed? The government says they dropped out because politicians have changed the calculations over the years to make the numbers look better.
Since the recession the employment age population has increased by more than 12 million. However, there are 3 million fewer people working today than four years ago. There is something wrong with this picture when the official employment report does not accurately reflect those numbers.
The most telling number was the increase in the number of people employed part time because they can't find a full time job. That number rose by +446,000 to 7.988 million or 10.1%, up from 9.6% in January. There are fewer people working full time today than in February 2012. This is Obamacare at work. Under the Affordable Care Act anyone working at least 30 hours is considered full time and companies have to pay medical benefits. As a result full time workers are declining and part time workers rising as employers adjust their workforce.
Gallup Part Time Workers Chart
This means the number of people forced to work two jobs to make ends meet is rising and is now at the highest level since the recession. Basically people are being forced to work more for less money and no benefits.
Here is the kicker. These people are being counted TWICE in the monthly Nonfarm Payrolls number because they have TWO jobs. The BLS data is wrong when you consider the bigger picture.
Multiple Job Holder Chart
Since the recession the number of people in poverty has risen by +31% to 49.7 million and the number of people on food stamps has risen 80% to 47.7 million.
Analysts were praising the stronger than expected jobs report but that is just one metric in an overall picture that is growing progressively weaker.
The recent sequestration that went into effect on March 1st will impact employment. A study called the "Economic Impact of the Budget Control Act of 2011 on DOD and Non-DOD Agencies" claimed there were 2.14 million jobs at risk from the forced spending cuts. The study claims 48,059 jobs in healthcare, 98,953 in construction, 473,250 in manufacturing and 617,449 federal jobs were at risk. Obviously not all of those jobs will be lost but there will be job losses. Moody's believes the job gains over the next couple of quarters will decline to average only +135,000 as a result of sequestration. I believe that is optimistic.
I am glad to see a better than expected jobs report but we need about 20-30 more in the +250,000 range or higher to make any real difference in the outlook. Remember, one month does not make a trend.
The economic calendar for next week is lacking any major reports. The retail sales for February could be a speed bump but I doubt it. The Teflon market has been shaking off any weak economic headlines. The PPI and CPI will be scrutinized for their inflation component but other than food and energy there is no inflation and the government does not count food and energy.
The big event, especially after the better than expected jobs report, is the FOMC meeting the following week.
Within minutes of the payroll announcement the debate began on how much longer the Fed would continue the QE program given the stronger jobs numbers. I believe if you read my comments above you understand the economy is only slightly improving despite the better than expected headline number. The Fed is not going to change its QE position in the near future. Bernanke, Yellen and Bullard have said this in speeches over the last two weeks. Regardless of the Fed claims the analysts are going to continue to debate the end of QE until after the FOMC meeting. As we saw two weeks ago this debate can significantly impact the market. Hopefully the recent claims by Bernanke, Yellen and Bullard will be enough to lessen the impact on the market until after the FOMC meeting.
On Friday North Korea cancelled the nonaggression pact between the North and South that officially ended the Korean War in 1953. Kim Jong Un told his troops to "prepare for war." The cancellation of the armistice agreement means the countries are back in a state of war. There are reports North Korea has suddenly begin to camouflage both military and civilian trucks and facilities. The Korean Central News Agency released the country's official statement saying
"Now that the U.S. is set to light a fuse for nuclear war, the revolutionary armed forces of the DPRK will exercise the right to a preemptive nuclear attack to destroy the stronghold of the aggressors and to defend the supreme interests of the country." North korean general, Kang Pyo Yong, said the country had "placed its long-range nuclear tipped missiles on standby." (That is total BS since all military analysts agree they don't have any nuclear missiles, but they are working on them.)
Nobody actually expects North Korea to nuke something but there is a good possibility they will attack something with conventional weapons in order to stress their preparedness. The entire gambit is thought to be a play to get bigger concessions in the next rounds of disarmament talks. However, the new leader may be impressed with himself and trying to flex his muscles to demand more respect. That means we could see a military incident at any time. North Korea did not need to cancel the armistice to attack the South. In 2010 they torpedoed the South Korean ship Cheonan killing 46. Eight months later they shelled South Korea's Yeonpyeong island killing 4 and last year they launched missiles over South Korean territory.
On Thursday the UN Security Council unanimously voted for new sanctions because of the latest nuclear weapon test. The new sanctions require UN member states to stop any North Korean ship or plane suspected of carrying supplies for weapons programs. We could wake up on Monday to an entirely new headline roiling the market.
I would bet that the vast majority of investors did not even see or hear any news on Italy last week. They dropped off the radar and off the investor wall of worry. Fitch cut its rating on Italy on Friday morning from A- to BBB+ saying the inconclusive election could lead to further problems. In the election former Prime Minister Silvio Berlusconi ended up with a blocking minority in the Senate but he will have to manage his minority from jail. On Friday a Milan court sentenced him to one-year in jail on wire-tap charges. He is currently appealing another conviction on tax fraud and the 76 year-old is also defending himself in another case for sex with an under aged prostitute. I believe the various headlines surrounding all the Italian candidates have pushed the election results well out of the investor news cycle.
In stock news the Fed said late Thursday that 17 of 18 large banks had passed the 2013 stress tests. The tests included things like a 50% drop in stock price and the associated impact on the bank's capital base. Also included was an increase in unemployment to 12%, a -5% decline in GDP growth and a -20% drop in real estate prices. The Fed said the combined losses from the top 18 banks would be $462 billion across the nine quarters of the stress test scenario. Tier 1 capital across all the banks would decline from 11.1% to 7.7% by the fourth quarter of 2014. They must stay above the 5% mandated level in the Dodd Frank Act.
Under the stress scenario Citigroup (Nyse:C) would see its tier 1 capital fall from 12.7% to 8.3% according to the test results. Bank of America would see capital decline from 11.41% to 6.8%. JP Morgan would decline from 10.4% to 6.3%. Wells Fargo would decline from 9.9% to 7.0%. Goldman Sachs would decline to 5.8% according to the Fed. Ally Bank would decline to 1.5% and they were the only bank to fail the stress test.
Goldman Sachs disagreed with the Fed on the test saying they believed their tier 1 capital would only decline to 8.6% compared to the Fed's 5.8% estimate. The Fed said if a bank came in with a higher estimate than the Fed then they were at risk of failure for being too optimistic. Analysts said the Fed would push back on those banks and try to force them to be more conservative. Goldman was expected to have asked for approval of a $5 billion buyback. JP Morgan was expected to ask for a $15 billion buyback and a dividend increase. The Fed will release its approvals for the various capital plans next week. Goldman shares were the biggest loser with a -$3.64 drop on the expectations for denial of their capital plans. Investors should be thrilled with Goldman's performance over the last three months so a $3 decline is nothing.
Goldman Sachs Chart
Pandora (P) spiked +18% to $13.79 after reporting earnings that rose +54%. The company posted a 4 cent loss compared to estimates for a 5 cent loss. They ended the quarter with an 8.5% share of the total U.S. radio audience and 70% of Internet radio listeners or 67 million people. News that Apple delayed its Internet radio product until later in the year also helped push Pandora higher.
Dell (DELL) spiked to $14.51 on Wednesday, well over the $13.65 LBO price, on news several other players were investigating the acquisition. Carl Icahn asked Dell to scrap the LBO plans and use its borrowing capability to fund a $9 dividend to shareholders. He argued that if Dell could function as a private company and be profitable after incurring billions in debt for the LBO then it could also be profitable as a public company and use the debt to fund the dividend.
The board is not likely to consider Icahn's plan. The board has watched Dell's fortunes decline as PC sales decline. They may not believe the company has a strong future and taking on billions in debt just to fund a dividend would be really dumb in a declining industry.
Secondly, if the LBO plan blows up there is a good chance Michael Dell would leave the company. He does not like being the CEO of a distressed public company and he definitely will not want to continue as CEO if someone else becomes a majority shareholder. That means a failure of the LBO means risk to shareholders if Dell leaves the company. If Dell remained a public company after incurring a large debt then the leverage on the stock price would increase volatility.
On Friday there were rumors Lenovo and Hewlett Packard were looking at Dell's books during the two-week "go shop" period set out in the LBO agreement. Dell has until March 22nd to shop for a better offer. Lenovo greatly expanded its reach into the PC business when it bought IBM's PC division two years ago. Lenovo is surging right now with smartphones, tablets, PCs and servers. Hewlett Packard may be looking at Dell with a breakup in mind. They could buy Dell and split it up into pieces and sell off the parts keeping only those divisions that would help Hewlett Packard. A Hewlett Packard acquisition could present antitrust concerns.
Blackstone (BX) has also been rumored to be examining the books. Analysts are now predicting the buyout price could rise to $14.90-$15.00. Jefferies believes the odds of a higher bid are greater than 50%.
Analysts claim there has not yet been a rotation out of bonds and into equities but the yield on the ten-year treasury is telling a different story. On Monday when the Dow appeared destined to make a new historic high the selling in bonds began to increase. The Dow closed at 14,125 on Monday with the old high at 14,164. After the actual high was set on Tuesday the selling in treasuries accelerated. A +20 point move in four-days is a major move in treasuries. Yields closed on Friday at 2.056% and a new ten-month high.
Every day the Dow closes at another new high it is going to draw more money out of bonds/treasuries. We are close to real breakout on treasury yields, which means the so called "Great Rotation" may be getting closer. However, the Fed does not want this bond selling to occur so they will keep the QE purchases flowing at the current $4 billion a day. Can the Fed halt the flow of cash out of bonds? The real question is do they want to slow down that cash drain since it is flowing into the equity markets and creating the wealth effect Bernanke wants? My guess is the Fed will want to see equities continue to rise because of the boost to consumer sentiment.
Just to clarify the fallacy of the Great Rotation please consider this. When bond investors get "out" of the bond market where does that money go? If they sell their bonds they get X amount of money and they can invest it somewhere else like equities. However, those bonds did not go away. They still exist. They just transferred to a different investor. The same amount of money is still invested in bonds. Nothing changed but the address to send the interest payments. The key here is that maybe there is one less bond investor and he put money into equities. The bond that was sold may have gone to a new investor or to an investor simply adding to his existing bond portfolio. When you hear about the Great Rotation keep those thoughts in mind. The actual impact to equities is far less than the dollar amount of bonds sold but that trend towards equities is important.
Ten Year Yield Chart - 30 Min
Ten Year Yield Chart - Daily
The dollar rose to a six month high after the jobs data and on ECB news. The euro fell to a three month low after the ECB said the eurozone economy may shrink -0.5% and more than the -0.3% previously expected. They also reduced their inflation forecast. Multiple ECB policy makers were in favor of cutting rates at the last meeting.
The dollar and the U.S. equity markets typically move opposite each other but they are currently showing the least divergence since 2008. With the eurozone economy declining the dollar is now the cleanest shirt in the dirty clothes hamper. The U.S. GDP for Q4 was revised up to a miniscule +0.13% growth but apparently that still beats the eurozone. The CFTC said the net shorts in the euro rose from 9,394 contracts to 26,116 over the last week. The yen declined after Haruhiko Kuroda, the new pick for BOJ governor, told lawmakers the current scale of BOJ asset purchases (QE) was insufficient to achieve the desired inflation rate of 2%. Fire up those presses!
Dollar Index Chart - Daily
The market seemed to gain momentum as the week progressed with all the major indexes except for the Nasdaq 100 closing at new highs on Friday. These gains came despite the dollar also closing at a new six month high. Bullishness is breaking out all over but it has a long way to go. The AAII Investor Sentiment Survey showed bullish level rose only +2.7% to 31.1% and well below the 41.79% level seen just two weeks ago. Strangely, bearish sentiment also rose +1.9% to 38.5%. The neutral responses declined -4.6% to 30.4%. With both bullishness and bearishness rising the investing public is definitely conflicted.
The Dow extended its streak of positive Fridays to 10 weeks. In fact more than 50% of the gains in 2013 have come on Fridays. That is unusual since Fridays are typically profit taking days ahead of the weekend. This was also the first time since September 2011 that the Dow posted gains every day in a week.
Last week was the first time in 13 weeks that all 10 S&P sectors posted gains. The S&P has gained +4% since the dip after the Italian elections. The U.S. markets are trading at historic highs while the rest of the world is lagging. Bloomberg said the 45 largest markets are an average of -27% below their peaks. That kind of out performance attracts money from around the world so U.S. equities are not rising on the strength of U.S. investors alone.
Unfortunately volume on the U.S. markets remains low at an average of 6.2 billion shares for the last three days. There is little conviction and investors are only buying because they have to or they will get left behind. Despite the low volume the 10-day advance/decline line for the S&P reached its highest level in 2013 on Friday. Typically when the A/D line reaches extremes there is a change in direction. In 2013 that change in direction has been minimal and brief.
Morgan Stanley's David Darst has been bearish for months but his tone is changing. On Friday he listed several points for investors to consider before becoming too bearish. I added a couple of my own.
The Russell 2000 small caps and Dow Transports are making new highs.
The U.S. is not yet in recession.
The Fed is buying $1 trillion a year in treasuries.
There is no bullish euphoria to the equity rally.
Valuations are reasonable at 13 times earnings.
Bond spreads are widening indicating rotation into equities.
ISM Manufacturing and Services both surprised to the upside.
Jobless claims were the lowest in seven weeks.
Nonfarm Payrolls are rising.
Another analyst gave his reasoning for why the markets continue to rise. "As long as the music is playing you have to dance." That was originally coined by Chuck Prince, CEO of Citigroup in 2007. He was right to some extent. As long as the market continues to go up the fund managers have to keep buying. They can't afford to be waiting on the sidelines in expectation of a correction while the markets rally another 5-10%. Like musical chairs we never know when the music will stop. Until it does managers have to continue playing the game.
So far this is the fifth longest bull market since 1928. It has lasted 48 months and it is exceedingly rare for one to last more than four years without a bear market interruption. The four longer bull markets and their durations were 1994, 64 months, 1982, 61 months, 2002, 60 months and 1942, 49 months.
Another point to ponder is that bear markets and corrections never come when they are expected. If everyone is waiting for a correction it will never arrive. Corrections come when news appears. Investors are always looking for an event to take profits. They don't realize this but that is the way the investor mindset works. When markets are overvalued they will find an excuse to take profits. Or more appropriately an excuse will find them.
Bank of America technical analyst Mary Ann Bartels sent a note to clients late last week claiming there was a strong sell signal in the market that has not existed in more than three years. She said the cash balances in margin accounts has fallen to three year lows. Margin debt on NYSE stocks has risen to levels not seen since April 2010. Cash balances went negative in January due to excessive margin buying. This generated a tactical sell signal. With limited cash and heavily margined accounts there is no room for error. The slightest dip in the market can force margin call selling.
Today we have no excuse for profit taking. There is no bullish euphoria. There has not been a climax spike. Market momentum is steady and reserved. Economics are mediocre but improving and the U.S. market is a beacon for global investors.
Markets making new highs tend to continue making new highs until a pivotal event appears. Who knows at this point what that event will be? The economics next week are low key and the Fed does not meet until the following week. About the only thing on the global horizon is the threat of North Korea doing something stupid. Maybe I should say doing something else stupid since they continually amaze in that area.
The S&P has become the index to watch. The historic high close at 1564 is only 14 points away and the S&P is the last major index to target its historic high. I am excluding the Nasdaq 100 and the Internet bubble high on the Nasdaq Composite. The Composite is at 12 year highs and that is good enough for me.
On the way to 1564 the S&P has to cross the 1550 level, which is major resistance. Several times over the last 12 years the S&P has done battle with the 1550 level. It started in March of 2000 with the intraday high at 1553. In July 2007 the intraday high was 1555. In October 2007 the high close at 1564 was made but quickly lost. There have only been eight closes over 1550 ever. Friday's close was 1551.18.
The S&P is still facing a triple top at the 1550 level and we could bounce around here for several days until that threat disappears. It would require a close over 1564 and then continued daily gains like we saw when the Dow made a new high last Tuesday. Support is now 1540.
S&P Chart - Monthly
S&P Chart - Daily
S&P Chart - 60 Min
The Dow gained +307 points for the week. It closed at the high for the week at 14,397 and +233 points over the prior historic high close at 14,164. It was a good week for the Dow and it is showing no signs of fading. The Dow is in blue sky territory and support is well below at 14,000.
Dow Chart - Daily
Dow Chart - Monthly
The Nasdaq Composite broke above congestive resistance on Friday to close at 3243. That is a 12 year high. The next uptrend resistance level is about 3265, which happens to be both long and short term resistance. However, as long as the Dow and S&P continue to blaze a trail that long term resistance may fade. If Apple were to suddenly find a bid it could be the motive force to power the Nasdaq to higher highs.
Last year Apple announced its capital distribution plans on March 19th. An unexpected announcement this week could be powerful with the stock severely oversold.
Nasdaq Chart - Short Term Daily
Nasdaq Chart - Long Term Daily
The small cap Russell 2000 has broken out to a new historic high with a +3% gain for the week. There is no short term resistance other than simply being overextended so watch for sudden reversals.
Russell 2000 Chart - Daily
The Dow Transports closed at a new high on Friday BUT it was a lower high than the intraday levels earlier in the week. The transports look tired and I would watch them for the first indications of a weakening of the market in general. The transports led us higher back in January so look for them to lead on the downside when the rally begins to fade.
The combination of the transports and the Russell 2000 could be the ideal indicator for the next decline.
Dow Transports Chart - Daily
The trend is your friend until it ends. I don't see the end from here but it seldom telegraphs the approaching cliff. There are no material economic reports this week to push us off that cliff and no material Fed speak. Just rest assured there is an event in our future that will eventually become the excuse for profit taking.
I would use any dip as a buying opportunity ahead of Q1 earnings. After Q1 earnings I expect to become increasingly bearish. The odds of us being able to buy stocks cheaper at some point in 2013 is about 100%. Those long term buying opportunities normally come in late summer.
Unless North Korea declares war on somebody this week we should continue to see the market creep higher. I don't expect it to be continuous because markets don't go up forever. Expect some volatility to appear and be ready to profit from it.
Daylight Savings Time arrives this weekend. Spring forward an hour on Sunday morning.
The Fed is in control. Don't fight the Fed. Resistance is futile.
Enter passively and exit aggressively!
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"Women and cats will do as they please, and men and dogs should relax and get used to the idea."
Robert A. Heinlein
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