Being Street Smart 10/7/6

BEING STREET SMART
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Sy Harding

WILL THE REAL ECONOMY PLEASE STAND UP? October 5, 2007.

You’d think that with computerization, automated data collection systems, and hundreds of thousands more analysts and government statisticians churning out data, that we’d have a much better handle on the direction of the economy at all times than we had 25 years ago. But that is not the case. If anything there is more confusion and uncertainty, with much of it created by the very economic reports that are supposed to reveal the economy’s condition.

Or maybe it only seems that way. In the ‘old days’, 25 years ago, the only computers were main-frames in the offices of institutions. The institutions individually collected and analyzed the data and came to their own conclusions. Stockbrokers advised their customers accordingly. Mutual funds interpreted the data and managed their funds accordingly. There was no financial media beyond magazines like Forbes and Business Week. If there was uncertainty, or debates going on among the experts, for the most part it was taking place out of view of investors and the public.

These days we have the data, in fact a lot more than existed 25 years ago, readily available on the internet and reported instantly throughout the day on financial TV shows. Those financial shows then fill the rest of the day with endless analysis about what each piece of economic data means. Additionally, investors receive the differing opinions of hundreds of Wall Street managers and corporate executives, directly on TV, opinions that used to be filtered through analyst’s conference calls.

I’m not so sure the availability of all that data and conflicting opinions is helpful. Investors certainly don’t seem to have it any easier, in spite of all the hours spent these days in front of a computer terminal or a TV.

I am sure the development of additional methods of measuring the same segment of the economy has actually added to the confusion, rather than providing a clearer picture.

Take this week’s reports on the employment situation.

Reports from other areas of the economy have been very consistently negative lately (declining factory orders, declining durable goods orders, declining service-sector orders, continuing deterioration in the housing industry and among banks, etc.). So analysts were looking to this week’s employment reports to either confirm the economy is slowing, or indicate that the economy is stronger than other reports have been indicating.

So, first the ADP employment report came out on Wednesday. It showed only 58,000 new jobs were created in the private sector in September, the third straight month of disappointing job growth. That compared to an average of 95,000 private sector jobs per month earlier this year, and more than 200,000 monthly in early 2006 when the economy was still booming. Separately, the Hudson Employment Index fell from 99.2 to 97.1 in September, its lowest level since the index was launched in 2003. And on Thursday it was reported that unemployment claims jumped by an unexpected 15,000 claims the last week of September.

Those reports had analysts worried that the Labor Department’s jobs report, due out Friday morning, would also be a disappointment. It was a reasonable thought.

Yet on Friday the Labor Department reported that, although the unemployment rate rose from 4.6% to 4.7% in September, there were 110,000 new jobs created, somewhat more than the 100,000 that economists had forecast.

So which report should we believe? Perhaps none of them. Jobs reports, more than any other economic numbers, are almost always wrong and have to be revised later. For instance, the Labor Department report last month showed there was a loss of 4,000 jobs in August. But in Friday’s report the August number was revised from a loss of 4,000 jobs to a gain of 89,000.

Also of interest, the monthly jobs numbers have the record for creating more triple-digit one-day moves by the market in one direction or the other than any other set of economic numbers. But just as often the initial knee-jerk reaction is reversed within a day or so. For instance, last month’s report that 4,000 jobs had been lost sent the Dow tumbling 250 points that Friday. It was back to the upside Monday, and within four days had gained 311 points, the jobs numbers long forgotten as other economic reports became the focus.

I suspect that Friday’s better than expected jobs numbers will be forgotten just as quickly, especially with 3rd quarter earnings reports due to begin next week, following what has been a fairly ugly ‘earnings warning period’ the last few weeks.

Even as the market was focused on the jobs numbers, more such warnings were released on Friday. Among them, Merrill Lynch warned it will take a humongous $5.5 billion dollar write-down against 3rd quarter earnings, due to losses related to sub-prime mortgages and “loans to highly indebted companies”. Washington Mutual, one of the nation’s largest banks, added its sad tale to the list of major banks warning of huge losses lately. It was reported that Federal prosecutors have launched a criminal investigation into the operation of the two Bear Stearns hedge funds that collapsed this summer. Alcoa warned it will take $845 million in charges against earnings in its 3rd quarter earnings report. And that was just in one day.

Perhaps investors should not have been quite as focused on the jobs numbers.



Sy Harding is president of Asset Management Research Corp., publishes the Street Smart Report newsletter, and a free daily Internet blog at www.SyHardingblog.com. He also authored the 1999 book Riding The Bear – How To Prosper In the Coming Bear Market.