Fridays’ Unemployment Surprise
Aug 10, 2009
Posted by Jody Eisenman | Filed under Uncategorized
The unemployment rate has been rising steadily for the past year and a half. In February 2008, it stood at 4.8%, according to the Bureau of Labor Statistics. By January of 2009 it was 7.6%, and it continued to rise every month through June, where it “peaked” at 9.5%. It was widely expected for the rate to rise for July, and even President Obama stated that he thought the rate could hit 10%. So, it was a positive surprise that the rate actually declined to 9.4%. On that news, the DJIA rose over 100 points on Friday, extending the powerful rally. Although measuring the unemployment rate is not an exact science, the average rate for the past 60 years has been in the 5-6% range, so any way you slice it, the number still remains high. However, if this decline is (hopefully) the start of a trend, then this could be taken as a very positive sign that the recession is easing.
The S & P is now up about 50% of the March lows, which is a rally of perhaps unprecedented proportions for such a short period of time. In addition, as I have stated previously, the credit markets continue to be extremely strong. To give you an idea, 2 year A rated corporate bonds now have an average yield of approximately 2.61%. Last month, this number was 3.22%. Late last year, this number was 10! Essentially, investors have realized that bonds other than treasuries are very attractive compared to treasuries, whose yield is still anemic. Right now, 2 year treasuries yield around one and quarter percent. I do think this rally is probably pretty extended, and there will invariably be a pullback. However, as with the decline, the markets tend to move to extreme positions, way beyond equilibrium. I’m a strong proponent of the fact that markets are almost always overbought or oversold, and don’t seem to conform to exact positions of what’s “fairly valued”. One sign of this is that stocks that had been getting absolutely clobbered due to excess debt issues have rallied strongly recently. For example, C and MGM are 2 companies in different industries that had severe stock price declines. C was in the 40s in late 2007; MGM actually hit 100. They both went into low single digits earlier this year. Now, these stocks have rallied over 50% in the last month. Investors now believe that default is not in the cards, at least for the near term. The trend is still up, but I would take a more cautious approach for now.
