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September 1, 2006

Payroll Party

Today's payroll figures sparked another round of buying... concentrated in consumer shares... on the premise that the Fed has everything under control. Major indices were pushed higher by about a half percent, while consumer shares, lead by J.C. Penney, Wal-Mart, and Target, were juiced for nearly 2%. I suppose the line of thinking is that if people still have their jobs, the consumer party is still on, but how much faith can one put in government numbers these days? All the headlines I am reading pertain to major companies scheduling major layoffs. Intel and Ford are two companies that said as much this week. Also, the largest industry driving employment over the last half decade, construction, certainly is not adding to payrollsÂ… just the opposite. On top of everything, our national savings rate has recently gone negative, meaning consumption is being fueled by borrowing. With the housing ATM drying up, a major source of cash available for such conspicuous consumption is disappearing. Consumer spending will weaken, jobs or no jobs.

In any case, mass mentality tends to carry an aversion to bad news, so as long as our government can keep the smoke screen pumping smoke, the markets will be rough going for bears. Eventually, enough data will seep through to eliminate the option of denial. I expect this disillusionment to occur rapidly and for its effects to impact equities just as rapidly. Exactly when psychology shifts is the magic question for bears.

Disclosure: Short INTC; Long WMT, INTC Puts


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