So, we get a day off tomorrow, which makes the work week shorter and the weekend longer. It’s weird, I know, but I like that notion – a longer weekend. It’s just as well with this week in the market. A fella could feel a bit seasick if he hadn’t been on this ride before. Up and down and all around we go …
So, yesterday, I pointed out what the breathless media has yet to seriously talk about and that is that unemployment in 49 major metropolitan areas is at or near the Fed’s full employment level. The other important piece to this under-reported news is that along with this low unemployment comes competition for employees, which is producing a rise in wages, a rise to the tune of 2% this past year and a projection of up to 3% per year in the next two years.
Given that most folks in America live in major metropolitan areas, the extrapolation here is that unemployment is steadily improving across America. Given this, if true (and it seems to be), I suggested the Fed would be watching inflation, since some 70% of inflation derives from rising wages. I also pointed directly to the information in the Fed’s Beige Book, the preeminent source of data for the Fed, which said exactly this – unemployment was on the decline and wages were on the rise in specific regions across the US.
So, then, how is it that Janet Yellen can get the breathless all abuzz with the following seemingly contradictory statement.
- Yellen said the decision on tightening would hinge on the strength of the labor market and how quickly inflation is headed towards the Fed’s 2% goal. She noted wage gains to this point have remained muted, suggesting plenty of slack in the labor market.
Here is why she can make the statement – the Fed is a cautious animal and the Fed is wary of causing a market freak out.
- “I’m not surprised by the Fed’s assertion that we are not doing well,” said Frank Gamrat, an economist at the Allegheny Institute for Public Policy in Castle Shannon. “I would tend to think there is still too much uncertainty over health care reform, minimum wage hike proposals and other regulations.”
Uncertainty breeds caution, and rightfully so. Have you seen the market this week?
- … this market is more than a little nutty right now. There is little memory from one day to the next. There is a ton of volatility. And as such, trying to maneuver is difficult to say the least.
Nevertheless, facts are facts and when we are planning our trading/investment strategies, we need to stick with the facts because when it really matters, the market will get over the freak outs and look to the fundamentals.
- Initial claims for state unemployment benefits ticked up 2,000 to a seasonally adjusted 304,000 for the week ended April 12, the Labor Department said on Thursday. They stayed close to a 6-1/2 year low touched the prior week.
Yes, economic conditions are fundamental to the market’s vision, and unemployment is a key component of the fundamentals, but the market has fundamentals as well, and, arguably (the pure technicians will debate this) the most important of these is earnings – are companies making money and, of utmost importance, are they valued fairly?
- We don’t think it will be a lasting upward trend. What we definitely need to see is earnings growth to stabilize the valuations.
The above statement is correct. In order for this market to push onward and upward, this earnings season has to come in as the past five years of earnings have come in – in line with historical norms.
Oh, and one more thing … I had a discussion with my lovely wife recently about the high price of gas here on the Central Coast of California. Currently, regular gas is running about $4.47 per gallon. We discussed how gas prices could be so high with current global inventories rising and China’s economy slowing and the US using less gas than it has in 30 years. As well we touched upon Libya and Iran beginning to add even more oil to the kitty.
- Despite worries about the Russia-Ukraine tension, crude for next month’s delivery slipped 0.1% as data from the government showed a 10 million barrel jump in inventories that was more than four times higher than expected.
I suggested the speculative disconnect could not hold much longer and that even with peak driving season beginning next month (Memorial weekend) it is likely prices will drop. If this “prediction” comes true, the fundamentals related to the US consumer, nay global consumer, and spending will improve, along with unemployment, which will add to the overall brightening picture for the market. As always, we will see …
Trade in the day; Invest in your life …
