Farrell: That Was The Week That Was

In the early 1970's, a British TV show was imported to the United States ala American Idol and had a brief run on network TV. "That Was the Week That Was", I believe, launched David Frost's career in Britain. He later became one of the early Barbara Walters-type interviewers — without the tears — recently famous again for the movie the "Frost/Nixon" interviews. The show recapped the news of the week in a musical spoof format. It was one of the things that got me interested in the news. It used to be fun to recognize a story made into a semi-musical on Friday nights.

The above is my attempt to lead with an intriguing story line. Worthwhile or not, last week's news needs to be more closely examined for the predictive value some of the stories can give us.

The ISM Manufacturing Indexhas, over the years, proven to be one of the best predictive indicators for overall economic health. Even though there are far more jobs in the service sector as opposed to the manufacturing sector, this index has caught the last four recoveries in a very timely fashion. The 52.9 reading was the eighth sequential increase and the highest since June 2007. If it's the only number you had to go by, this would translate to an annual GDP of 3%, by my calculation. The flaw is that it covers the larger manufacturers that are more likely to be engaged in international trade. Smaller manufacturers are still caught up in the tight credit situation.

The Crisis: 1 Year Later - A CNBC Special Report - See Complete Coverage
The Crisis: 1 Year Later - A CNBC Special Report - See Complete Coverage

The ISM Non-Manufacturing Index at 48.4 was in line with the consensus guess but it was up from 46.4 last month.

It was also an 11-month high. While not as robust as the manufacturing number, the service sector was also not a focus of the stimulus program (e.g. cash for clunkers). Regarding the stimulus, apparently only 20% of the money has been spent. While much more has been allocated, it has not yet actually been spent, so the effect is still to be felt.

My pal Michael Farr, of Farr Miller in Washington, recently advertised for a receptionist and got 450 responses in 36 hours. This illustrates the unemployment situation does not appear to be getting any better. The 233,000 jobs lost last monthis the best reading we have had in quite some time but compared to any other downturn is still disastrous. The U-6 reading, which embraces all part-timers that want to work full-time as well as those that have given up looking for a job (so they're not counted in the regular survey), is at an all-time record of 16.8%. There are over 9 million part-time workers that would like to work full-time. Teenage unemployment at 25.5% is the highest since records started being kept in 1948. I don't think it's a coincidence that this record was hit just after the minimum wage was raised. Average hourly earnings were up 0.3%, which ordinarily might be considered a good reading, but was probably bumped this one time by the aforementioned minimum wage increase. The one semi-bright spot in the report was that temporary jobs declined by only 6,500. This compares with an average monthly loss of 51,000 temporary jobs in the first half of the year. Changes in the temporary job levels often act as a leading indicator for overall employment.

Barron's Magazinefeatured 10 investment gurus in an article over the weekend. Their average guess for earnings for the S&P for this year is $57 and a range of $50-$65. They figure $71 for next year and the range for 2010 is $60-$80. The average year-end target for the S&P 500 is 1056. The average currently stands at 1016, so they are looking for a gain of about 4% by the end of the year. If $71 is correct, the market is now at a 14.3 multiple of those projected earnings. If inflation were to stay low, which is our prediction, a 14 multiple is fair and reasonable, in my opinion.