Stunning Jobs Report, A Worrisome Dow Indicator, More Bad News for Subprime and the Greenback, and More!

by Addison Wiggin & Ian Mathias

  • Bear Stearns hedge fund collapse now a federal case
  • Subprime foreclosure rate worst since 2000… Why even worse is yet to come
  • The amazing reappearing jobs… The 5 searches for credibility in the latest BLS employment report
  • Vietnam and Qatar ditch the greenback… $30 billion in U.S. investments off to China
  • Dow soars, but key indicator that forecast 2001 downturn is flashing red
  • What credit crunch? The mega-deal that didn’t fall through

When bubble euphoria reigns, everybody’s giddy. Nobody asks questions. Then the punch runs out, the cops roll in… and start hauling people to the drunk tank. Happens time and again.

Federal prosecutors have begun a criminal investigation of Bear Stearns and its two troubled funds.
Apparently, losing $1.6 billion, the future business of thousands of investors and going down in history as the poster child for reckless abandon during the credit binge wasn’t punishment enough.

Moody’s, which did its part by giving these funds AAA ratings, released a report that might have better served as a forecast… last year.

Subprime mortgages, says Moody’s, are going into delinquency at a faster rate this year than at any time since 2000.
More than 5% of all such mortgages written in 2007 are already at least 60 days late on payments. Foreclosures are at record highs.

2.9 million ARMs are currently held by Americans… up to 90% of them could see their rates reset higher by the end of 2008.

Since housing has been the leading driver of the economy since stocks tanked in 2000,
you might think impending resets would portend a slowdown in the economy. The Fed was certainly spooked enough to cut rates by 50 points when they last met. But then, you forget the government has a magic wand…

The Bureau of Labor Statistics (BLS) released their “jobs report” this morning. We’re not too big on conspiracy theories, but this report is so fantastic that we’re not sure what to believe.

Jobs, says the BLS, grew at a very strong 110,000 last month — 10,000 higher than economists predicted.
And way higher than last month’s 4,000 loss. OK, fair enough. Markets are expected to rally on the news.

But here’s where we can’t help but start scratching our collective head: In this report, the BLS revised August’s negative 4,000 jobs up to a gain of 89,000 jobs. We’re not kidding.

You may recall our coverage of the jobs report
last month. The market was expecting 100,000 new jobs… but got a loss of 4,000. The surprise put markets in the hurt locker and essentially sealed the deal on the Fed’s rate cut. This morning, the Labor Department said, “Oops,” and revised those numbers.

The now infamous “Armageddon on Wall Street”

Hmmn, let’s see. Cramer was screaming Armageddon on Wall Street. The jobs report comes out and justifies a Fed rate cut. Markets recover. Then the loss gets revised away one month later. Hmmnn…

What’s more, the sector that the Labor Department forgot to mention? Government jobs! In its revision, the BLS added 57,000 government jobs in August, up from the originally reported loss of 28,000. Hmmmmnnn…

The BLS “revised” July jobs up 25,000, too. Still, unemployment rose a tenth of a percent, to 4.7%.

Even if we give the government its props and assume the bureaucrats are doing their best (sic), who is to say they won’t revise up or down again next month? These numbers are so fishy they lose all credibility in our book.

Yet futures indicate record highs in both the Dow and S&P 500 today.
So it goes.

The dollar halted its recent correction on the news.
As we write, the dollar is back up to $1.40 against the euro — and rising. It’s up against the yen and the pound too… at 116 and $2.03, respectively.

The dollar index is climbing — the dollar is even on its way back up. We may see 79 by the end of the day. See what a good revision to the jobs report can do?

Vietnam and Qatar didn’t seem to care what numbers the BLS “revised” or not…
both countries announced revealing news this morning.

Vietnamese officials say they won’t buy dollars anymore, in an attempt to hold down their currency. Inflation is currently growing at almost 9% there. And trying to hedge with the falling dollar is only making it worse.

And the prime minister of Qatar let slip that the Qatar Investment Authority, the country’s $50 billion sovereign wealth fund (SWF), is now less than 40% invested in dollar assets. Two years ago, they were up to their ears in dollar assets — 99% invested. They’ve moved $30 billion into China, Japan and “emerging Asia.”

“Will the last country to exit the dollar please turn out the lights?” kindly asks The Desidooru Saloon’s Dave Gonigam

Gold is holding up well in light of the BLS report and the resurgent stock market.
The yellow metal has been hovering in the $725-735 range most of the week. Today, it trades around $730.

The rising costs of food and energy prices probably represent “longer-lived trends, rather than transitory blips,”
said Dallas Fed chief Richard Fisher yesterday. If by some unbelievable possibility that were to be true, “Arguments made for excluding food and energy prices” from core inflation “would be on shaky ground.” Incredible…

Congratulations, Mr. Fisher… you’ve officially stated the obvious.

“When the transports begin to lag the industrials,”
writes Brian McAuley this morning, following data and trends that won’t be revised anytime soon, “it is a significant event.”

“When both the industrials and the transports are climbing to higher highs, it tells us that both the industrial side of the economy and the transportation side of the economy remain healthy. But when one of them starts to fall behind, it’s a signal: Not everyone agrees the future is full of blue skies and sunshine.”

The transports right now are lagging the industrials in a big way.

“We have the same market conditions today as in late 1999,” Brian explains, “right before the tech bust — albeit on a smaller scale. The yield curve has been inverted for over a year. And since the high in July, the transports have failed to follow the industrials to a new high. This is what you tend to see at the beginning of a downturn.”

Following these trends is proving to be far more useful than relying on “revisable” government reports. Brian, for example, bought a put on the transports in last month’s Survival Report. “We now have short positions,” he says “in the weakest areas of the market — the financials, the transports and a home improvement retailer. These areas are leading the market to the downside.

“We can expect more opportunities like these in the months ahead if the market continues to roll over.” Don’t miss out… click here for more.

Both the European Central Bank and the Bank of England chose to leave their benchmark rates unchanged yesterday.
The ECB remains at 4%, and the BoE at 5.75%. Until the next shoe drops, we’d be surprised to see much action from the eurozone.

And despite all the credit turmoil and total fallout within the financial sector — the
biggest banking deal in history will most likely conclude today.

The Royal Bank of Scotland, Santander, and Fortis will most likely finalize their $101 billion purchase of ABN Amro today. The group plans to split the Dutch bank into parts managed by each of the three buyers, thus making it not only the most expensive bank deal ever, but probably the most complicated postacquisition carving as well.

RBS estimated that task alone could take up to three years.

Normally, we’d share a bit of reader love here at the end of The 5.
But truth be told, we received so much e-mail from you regarding our two reader responses on Wednesday
that we’ve been forced to move this “swastika discussion” over to the blog. We’ve posted most of the responses there for your enrichment, entertainment… and enragement.

Have a nice weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. As if food poisoning for Extreme weren’t bad enough yesterday,
Internet gremlins robbed The 5 of its charts and images. If you’d like to see a nice close-up of the Canadian marijuana harvest or a host of evidence that the U.S. is “decoupling” from the global economy and ceasing to be the world’s “economic engine,” take a look here.


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