Reaching the Point of Maximum Optimism

Bear Market Twists News to Lure in More InvestorsThis past Friday, the Bureau of Labor Statistics reported 175,000 jobs were added to the U.S. economy in the month of February. (Source: Bureau of Labor Statistics, March 7, 2014.)

The way the media reported it…

“Friday’s jobs market report caught the market by surprise,” was what most media outlets were telling us via their untrained reporters. The expectation was an increase of 149,000 jobs in February (after a dismal December and January jobs market report) and so the usual happened—stocks went up and gold went down on a jobs market report that was only slightly better than what was expected.

The consensus, from what I read, is that the jobs market in the U.S. economy is getting better. Of course, I think of this as hogwash. And as I’ll tell you in a moment, this is the kind of misinformation that is characteristic of what happens in a bear market in stocks, not a bull market.

Within February’s jobs market report, we find:

The long-term unemployed (those who have been out of work for six months or more) accounted for 37% of all the unemployed in the U.S. economy. The longer a person is unemployed—likely because that person has not been re-trained for the jobs market—the less likely it is that person will eventually find work.

Today, once a person becomes unemployed in the U.S. economy, that person remains unemployed for an average of 37 weeks! This number remains staggeringly high. Before the financial crisis, this number was below 15 weeks. (Source: Federal Reserve Bank of St. Louis web site, last accessed March 7, 2014.)

When you have a government that reports an “official” unemployment rate that excludes people who have part-time jobs but want full-time work and those who have given up looking for work, we have misleading information. (But you won’t find politicians or the popular media talking about this.)

From my point of view, the jobs market is going to get worse. Why? Because as earnings growth has stalled for many public companies, they will look to slash their costs to keep profits rolling. The easiest way they can do this is by reducing their labor force.

Look at Best Buy Co., Inc. (NYSE/BBY), for example. The company is on a lay-off spree. It plans to reduce the number of managers and supervisors at the company by 2,000. (Source: New York Post, February 26, 2014.) Unfortunately, the list of companies in the U.S. economy trying to reduce their labor force in order to cut costs is growing longer, especially among the retailers. Almost daily we are hearing how another major company will be closing down stores, thus terminating employees.

But getting back to the stock market…

I believe we are getting close to the point of maximum optimism. This happens when no matter whether the news is bad or ugly it’s just taken as good news and investors rush to buy stocks and stock advisors call for even higher stock prices as the real economic situation is ignored. This is very typical of a bear market as it sucks more investors in, taking any news as a reason to buy stocks. Eventually, the bear just takes the investor’s money. Be very careful, dear investor.