Jobs Breakdown, China Can’t Stop Buying, Merrill Lynch Spills the Beans, the Next Booming Sector, and More!

by Addison Wiggin & Ian Mathias

  • Markets rally on jobs data… reasons why you shouldn’t get lathered up yourself
  • Dollar rebounds… Hancock on how the U.S. will be forced to drive it right back down
  • What’s buoying the loonie… and the potential trigger for another gold spike
  • Merrill Lynch comes clean… $20 billion disappears in a week… why “financial stocks” are headed for the crapper…
  • “Freeze ARM rates!” begs the FDIC… Mish on how its plea would cost us all
  • Stock prices and oil consumption in China soar to record highs


U.S. markets got weak-kneed after Friday’s jobs report and ended the week on a high.
The Dow shot to an intraday high of 14,124 before settling in at 14,066, a gain of 0.6%. The S&P 500 rose about 1%, to a record high of its own — 1,557.

The Nasdaq climbed 1.7%, to 2,784 — its highest level since Jan. 31, 2001.

Our trouble is… the jobs report is suspicious.
If you suffered through the BLS official site, for example, you’d find they allow themselves huge margins of error – plus or minus over 400,000 jobs for their less popular household employment survey. It’ll cost you $27 to learn the establishment survey’s margin…. our sources claim its as high as +/- 129,000 jobs. In other words, unless the BLS reported a gain or loss of than 129k , you’re in an area that statisticians call insignificant “noise.”

“September jobs data cannot be believed,”
alerts our government stats watchdog John Williams, helping us to unpack the Labor Department’s methods:

“The Bureau of Labor Statistics can bring in the monthly payroll gain anywhere it wants to. And the Administration knows that a number in a certain range — that can be dismissed as statistical ‘noise’ or revised away the next month — will move the markets as effectively as a Federal Reserve policy action.

“Accordingly, when I suggested last month that the 4,000 jobs loss reported for August was designed to help push the Fed into its easing, one indeed has to wonder what is going on in the background, when August revised to an 89,000 jobs gain in the September report. One might read the current September 110,000 jobs ‘gain’ as a sign the Fed can hold steady at the next meeting, rather than taking action that would tumble the U.S. dollar further.

“Then, again, if the numbers are honest, which I do not believe, these speculations are just over random statistical noise. The reported numbers continue to run counter to better-quality employment indicators such as new claims for unemployment and the collapsing help-wanted advertising index

Dollar traders bought what the BLS was selling.
The dollar gained a cent back to $1.40 against the euro and another cent against the pound to $2.03. And the yen is back at 117.

Nevertheless, “The American dollar should continue heading south,” opines Free Market Investor’s Christopher Hancock:

“Most analysts forecast future rate cuts… maybe so, maybe not. We really don’t care. We have no idea in what direction interest rates are heading. But we do know this.

“The United States needs more domestic spending. And it needs it now. Every U.S. congressman represents some type of dilapidated infrastructure in his or her district. This shouldn’t be a hard bill to push through Washington. Consequently, the U.S. Treasury must dig a little deeper. More U.S. debt will hit the market. Our government will ask foreign banks to soak it up. Foreign buyers should require a higher rate of return for holding U.S. greenbacks. Interest rates would rise while the race to sell U.S. assets to foreign hands keeps flowing south like the mighty Mississippi.”

Mr. Hancock is well positioned outside the dollar with investments in Hong Kong, Brazil, Chile, China, and more… a truly diverse portfolio. Learn more here.

The Canadian dollar is holding steady at $1.00 even.

“The Canadian economy is strong,” reports our currency counselor Chuck Butler. “The jobless rate fell to 5.9% and the economy added a more-than-forecast 51,100 jobs in September. This news has traders believing the Bank of Canada (BOC) will refrain from following the Fed and cutting rates… I just don’t see how the BOC can even consider cutting rates with gold over $700 and oil over $80, and jobs being created at a stronger rate than forecast!” We don’t either.

Over the weekend, gold prices overcame a recent spate of selling.
Gold rallied as high as $743, and currently trades at $733.

“Gold is trading as if there is a lot of money waiting on the sidelines to buy the dips,” comments’s James Turk. “We saw evidence of that this week. Every time gold was beaten down into the $720s, it quickly bounced back.

“If these buyers on the sidelines become impatient, they may cause gold to begin another multiweek advance. Thus, another streak beginning soon is entirely possible. Regardless whether $800 is hit this year or next, all the evidence suggests that $800 will indeed be reached.”

Last week, the FDIC publicly begged mortgage lenders to freeze ARM interest rates.
“Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it,” said Federal Deposit Insurance Corp. Chairman Sheila Bair. Bair and company believe that freezing interest rates would ease the pain of the 1.3 million subprime ARMs due to be reset by 2009.

“The proposal to cap the rate of ARMs,” opines The Survival Report’s Mish Shedlock, “is no different than long-failed Russian central planners’ attempts to fix prices, President Nixon’s foolish wage and price control mandates and the Fed’s irrational insistence that it can ‘control’ prices.

“If ARM rates are ‘frozen’ at a point where the market does not think rates should be, there simply will be no more ARMs offered. Furthermore, to cover the cost of existing ARMs, prices would rise on new fixed-rate mortgages. Oddly enough, price fixing ARMs would not even help the person most at risk, because that person cannot afford the teaser rate, let alone the cost of a current ARM rate.

“Thus, price fixing ARMs is a surefire guaranteed way to cause a continued weakness in home prices, if not an actual out-and-out crash.”

For its part, Merrill Lynch capped off last week’s “coming clean” party by announcing that their subprime exposure will cost them at least $5.5 billion this quarter.

Add Merrill’s woes to similar disclosures from Citigroup, UBS and Deutsche Bank last week, and poof… just like that… over $15 billion vanished in less than a week. Oh, excuse us, was “written down.” CNN estimates this morning that at least $20 billion has been wiped out in this quarter alone.

We await JPMorgan Chase’s quarterly results and suspect there’s more pain to come.

What will $20 billion in losses do to financial stocks?
Nothing good. But the following chart suggests they were due for a correction anyway:

The chart shows the top 10 sectors of the S&P 500. The three arrows represent “bubbles” in energy in 1980, technology in 2000 and financials today.

“You can see how financials have come to represent a sizable piece of the S&P 500,” writes our managing editor Chris Mayer. “Today, they make up over 21% of the whole. Financials have enjoyed a long stretch of prosperity. If the past is any guide, you want to avoid the dominant sector.

“The energy sector — even after taking a much larger part of the pie — is far from danger levels. As recently as July 2004, energy was sitting there at only 6% and change. It has expanded since by a sizable margin. Yet even today, it’s less than 10% of the S&P 500 — far from bubble levels.

“If avoiding the fattest sectors proved helpful, then perhaps giving the skinny sectors a good look might be a good idea. In that vein, note the squeezing of basic materials so tightly it barely registers on the chart.

“What is the basic materials sector? It includes mining companies such as Freeport-McMoRan Copper & Gold and BHP Billiton. It’s all the companies that do the dirty work and bring up metals like copper, nickel and zinc. It’s all the stuff that we need to build pipelines and power grids and more.

This morning, halfway around the world, the Shanghai index shot up 2.5%
— to yet another record high.
After taking last week off for “National Day,” Chinese traders resumed buying their own stocks like they mean it.

The Shanghai index is up 113% in 2007.
Its strong performance has influenced an entire generation of young Chinese. Here, courtesy of the National Post, young men train, in formation, at a mutual fund boot camp.

The Chinese prepare to march on capital

A small bit of China’s surge could be attributed to its latest foray into U.S. markets… China Minsheng Banking Corp. bought a 10% stake in UCBH — a $10 billion bank based in California.
The stake cost Minsheng only $317 million and, all things considered, isn’t a huge deal. Still… another brick in the wall, so to speak.

Chinese oil consumption is on a tear, as well… imports of the gooey stuff rose 18% in the first eight months of 2007.
China bought a whopping 110 million tons of oil during that period, and thus became the world’s second largest consumer of oil.

For what it’s worth, we note Warren Buffett is still selling his stake in PetroChina.

“Since we shouldn’t have believed the dismal August jobs numbers because they were wrong by an error of negative 93,000,” asks a reader, echoing our own wonder, given John Williams’ point above, “then why is the Street now so ecstatic to believe the September numbers, which are optimistic only by a count of 10,000?

“In scientific measurement circles, when the measurement value itself is smaller than the normal variances (corrections) in the measurement technique, we say that the measurement (signal) is lost in the noise level. In other words, the measurement is meaningless and nothing can be concluded from it.

“Apparently, that logic seems to be lost on the multitrillion-dollar investment community, which seems to need to react and respond to every newsbite that comes along, no matter how flawed. Scary!”

The 5 responds:

Addison Wiggin
The 5 Min. Forecast


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