Having been significantly wrong on the direction of the equity markets for the past three months, this morning's report from the Bureau of Labor Statistics showing a net gain of 113,000 jobs during the month of December vindicated the concerns I had for a widespread disappointment in expectations. With most news outlets reporting consensus expectations around 150,000 to 175,000, today's numbers clearly throw cold water on the notion that jobs are coming back at a rapid pace. That said, job creation was up relative to November, so it's clear that hiring is improving, albeit at an insufficient rate to meaningfully impact the overall employment picture. Given the ratcheting up of expectations ahead of the numbers, I expected the equity markets to sell off fairly dramatically if a disappointing number materialized. However, pre-market equity futures are currently trading slightly higher despite the less-than-expected jobs data. This is part and parcel of what we've seen in these markets for the past several months as economic data, whether it be positive or negative, appears to have no meaningful impact on market direction. Again, this makes me highly skeptical for the longevity of such a rally and, as this morning's data proves, the underlying fundamentals of the U.S. economy are simply not robust enough to warrant the equity valuations that are currently built into market places.
Those looking for a silver lining in this report will likely point to the reduction in the unemployment rate from 9.8% to 9.4%. To be sure, this is an encouraging development. However, there are so many subjective elements comprising the reported rate that a fair bit of caution is warranted. One particularly insightful component of the unemployment rate is that of discouraged workers. These constitute individuals who are able to work but have become so disenfranchised with their employment prospects that they have simply stopped pursuing a position. Since they are no longer looking for work, they are not considered part of the national labor pool, which, by definition, lowers the unemployment rate assuming all other things are equal. With discouraged workers rising 389,000 compared to December 2009, this is highly suggestive of an unemployment rate whose decline was more attributable to a reduction in the available pool of workers rather than an improvement in overall employment. Consider the large swathe of Americans whose unemployment benefits ran out at the end of 2010. I suspect a majority of these individuals will fall into the discouraged category, which will likely keep a lid on the unemployment rate for some time. Clearly, though, this will prove to be a statistical anomaly rather that a meaningful improvement in economic performance.
For the rest of today's session, I want to see if equity's pre-market indifference towards these numbers holds up. Recent history suggests that we'll end the session higher, but at some point the economic fundamentals and corresponding equity valuations have to reconcile themselves. Unfortunately, this suggests a lower bias in share prices. Of course, when this reconciliation will occur is the question I simply don't have an answer to at this point. In addition to share prices, I'll be watching gold. I pulled my short position yesterday, as I mentioned I would, and am now looking to add bullion exposure. However, the early trade in gold this morning saw the yellow metal break below its 50-day moving average and test the recent lows around $1,355/troy oz. But with the release of the BLS data, the morning's losses were largely erased and gold is now trading either side of unchanged. My read is that the early negative trade expected a more robust employment number that would suggest a reduction in monetary stimulus programs could be in the offing, thereby supporting the U.S. Dollar and making the yellow metal less viable as an alternative currency. Unfortunately for gold bears, this didn't materialize and the market appears primed to continue its bull run in uninterrupted fashion. Today's close will be quite interesting.
Until later.....
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