The Poor Job Numbers: You Can’t
Say I Didn’t Warn You

Today, we’ll hear and read stories about how the May job numbers are worse than expected, that the U.S. economy is starting to show signs of weakness, and that we’ll never get the economy going. Well, my readers can’t say I didn’t warn them. In fact, I’ve been warning of greater problems: the U.S. falling back into recession.

The Labor Department reported this morning that the U.S. added only 54,000 new jobs in May—well below the 150,000 jobs expected by economists and the 244,000 jobs created in April. If you add people who have given up looking for work (who are not included in the calculations), we likely lost jobs in May. The new “official” unemployment rate is 9.1%.

Here’s what is going on…

President Obama has surrounded himself with some very smart economic people. And Fed Chief Ben Bernanke is a very smart fellow himself. I truly believe they are trying their best and, like any administration, the Obama people decided to take the route of less pain for Americans.

Let me explain.

When the credit crisis hit, when the 25-year bull market in stocks ended in October of 2007, the government and Fed really had two choices.

The first choice (which is what I would have done) is to let the excesses of the financial system wash themselves out. Let the weak go bankrupt. Let boom be followed by bust. Let the natural forces of the economic expansion and contraction do their thing. Don’t help Wall Street, as their greed is what really caused the crisis. This choice, the first choice, was the hard, painful choice.

The second choice, what I call the easy choice, was to save the weak, save Wall Street and the economy, balloon the national debt to record limits, and flood the system with easy money. And this is the choice the government and the Fed took. The same choice the Japanese authorities took when the Japan real estate bubble burst in 1991.

Unfortunately, in my opinion, in taking the second, easier route, all we’ve done is prolong the inevitable pain, while creating other bubbles. The stock market is in a bubble, chances of inflation are great, and we are in a debt bubble. The price action of gold is telling us that trouble lies ahead for the U.S. currency. The Fed is limited in its actions, as interest rates cannot go below zero and the Fed’s balance sheet has been stretched. The government can’t spend itself out of the next recession, as it has become apparent that spending itself out of the first one didn’t work.

Let me leave you with a question to ponder this weekend: once it becomes evident that the U.S. is falling back into recession, and corporate profits start to suffer, what do you think will happen to the stock market? Will my prediction that we will eventually test the March 2009 stock market lows really be out of line?

Michael’s Personal Notes:

A prediction…

You may have heard yesterday that Groupon Inc., the online daily coupon company, has filed an IPO to raise about $750 million.

I believe that the Groupon offering will follow the same route as those of social media companies LinkedIn Corporation (NYSE/LNKD) and China’s Renren Inc. (NYSE/RENN). Demand for the stocks was so great on the initial listing, the share prices more than doubled the first day. Subsequently, the shares of both tanked.

In the case of LinkedIn, the shares more than doubled during the first day of trading to $95.00 before falling to their current price of $78.00. Renren came out of the gate at $14.00 and shot up to $24.00. Today, the shares are down to $13.00.

For Groupon, I expect the same. Its share price will skyrocket the first day of trading and then subsequently fall. Sure, social media is hot, but the numbers are terrible. Groupon posted revenue of $645 million in the first quarter of this year. On that revenue, the company lost $103 million.

Unfortunately for most retail investors, they will not be able to get their hands on any Groupon shares unless they buy them on the first day of trading at market prices. In typical Wall Street fashion, this will likely be a bought deal. Goldman Sachs, Morgan Stanley, and Credit Suisse will be the ones making the money again. These brokers will cut a check to Groupon for the shares, then sell those shares at higher prices to clients and directly on the market…leaving most of us thinking again that we are in the wrong business.

Where the Market Stands; Where it’s Headed:

Hello, month of June, you’ve surely arrived in style!

It’s been an exciting first two days of trading, with the Dow Jones Industrial Average down 321 points in the first two days of June.

Should we throw in the towel? Is the bear market rally dead? If I were a betting man, I would say no. The rally in stocks is not over. I read somewhere yesterday that the month of June is the worst month of the year for stocks (I thought it was October). There’s also an old adage about stocks, “Sell in May, come back in September,” as the summer trading days are usually weak.

Sure, it’s tired, it’s weak, it’s old, and the risks outweigh the limited upside rewards…but there is more life to this bear market rally. After all, if the economy starts to tank again, like it looks like it will, isn’t the Fed going to drop money from helicopters?

What He Said:

“The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of bringing interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would wreak havoc with the banking system.