Farrell: Something For Everyone

Harry Truman would have hated last Friday's employment report. He always wanted a one-armed economist, so you couldn't get away with saying "well, on the one hand. . . but then, on the other hand. . ." Friday's report had stuff for the bulls and the bears, and the market at the end of the day didn't know what to think.

The bullish side of the report was the decline in jobs at -345,000, which was a lot better than the consensus of -525,000. There was a small increase in average hourly earnings, which are now up 3.1% for the year. Service-type jobs, which account for about 80% of all jobs, shed half the number of jobs that were lost in the prior month. There was even outright hiring in some areas of the service sector, with jobs in department stores rising by 4500, and also in bars and restaurants, which showed a gain of 8900 jobs. It is tough to keep Americans out of stores and bars. Temporary employment had been dropping 73,000 a month, and this past month saw a decline of only 7000. Temporary employment is a good leading indicator, as companies will more readily hire temps if business looks better than take on the responsibility of a full-time worker. It takes a while into a recovery before full-time employment picks up. Lastly, the prior months were revised to the good as well.

But, say the bears, a loss of 345,000 jobs is still greater than any monthly loss in the last three recessions. The broader measure of employment called U-6, which includes discouraged workers no longer looking and part-timers who want full-time, rose to 16.4% from 15.8%. The unemployment rate rose to a chilling 9.4% as more people re-entered the work force. There is a school of thought that, as/if times get better, the number of people re-entering the work force will keep the unemployment rate high. It's kind of like the shadow inventory in the housing market: People who pulled their homes from the market will put them back for sale if they think the market is improving. Also, the work week shortened to a record low 33.1 hours, and the duration of those unemployed increased to 14.9 weeks from 12.5 weeks in May. So, take your pick.

In other news, Intel said they saw growth in their business in the second half of the year. Mike Ward, Soleil's premier auto analyst, reported an increase in used-vehicle prices, which has historically been a good leading indicator for economic growth in 3 to 6 months time. The Fed Funds Implied Probability Index (FFIP), which traders play around with and which measures the market's guess as to when the Fed will raise rates, rose from odds of a September rate increase at 16% last Thursday to 35% on Friday, after the employment report. My partner, Lyle Gramley, a former Fed governor, doubts there is any increase in the foreseeable future. He cited the Taylor Rule, which calculates that, with things as they are, the Fed Funds rate should be -5%! With unemployment high and capacity utilization so low, it is hard to imagine an increase in the rate anytime soon. But such was the market thought process last Friday.

Allegedly, many money managers are underweight the market, and, with the end of the quarter rapidly approaching, will be compelled to invest to try to show something by the end of June. So every downtick will be viewed as an opportunity to get some money to work. But on the other hand (so sorry, Mr. Truman), if a correction started and lasted more than two days, the need to nail down some profits might take priority and the selling could accelerate. Both are probably partly right (how's that for a decisive opinion!), and I'll stay with my belief that historical patterns tend to repeat and a 40% rally from the bottom will correct itself by at least one-third of the advance. As they say, time will tell.

There were some moving tributes over the weekend commemorating the June 6th D-day invasion. What is largely forgotten is the Battle of Midway also celebrated its anniversary last week. It was fought June 4- June 7, 1942 and was the first turning point of World War II, and maybe THE turning point. Get "Incredible Victory" by Walter Lord for an amazing read. Amazon has it for sale; I checked.