Stocks have received great press so far this year, all 30 days of it.  Amazing.  Everywhere we turn, we see reports about the “melt up,” as Wall Street and the media attempt to coerce bystanders back in the waters.  Muddy waters, we might add.  Stocks are allegedly undervalued, yet Tobin’s Q says precisely the opposite.  Initial unemployment claims are falling, but continuing claims are rising,   and quite rapidly at that.  For every positive aspect cited, we see at least one highly significant negative.  Okay, okay, we admit it.  The Dow’s 3.6% rise so far in January is pretty good.  However, we’d also like to note that gold bullion has soared 11.3% in the same span.  If stocks are in a melt up, what can we say about gold?  In our Year Ahead issue headline for 2011, we claimed “Gold may just go parabolic.”  We were not too far from wrong as bullion surged by more than 27% in less than eight months.  

It’s comical to see just how intent the media is to pander to any bull case, in the effort to outdo Job of biblical fame.  Just give us a name, or two, or better yet four.  Thus, even a bear who believe stocks will collapse 35% in 2012 can be persuaded to provide ammunition for struggling investors who need a fix (see http://yhoo.it/w40hOL).  We believe there are significant odds for the situation in Europe to achieve a flashpoint in only six to seven weeks.  We see very small odds for positive news, with a best case likely to be a further stall as debt continues to build.  See the slideshow at http://bit.ly/xIZ7OW  for a primer.  And by the way, that should be very good news for gold.  
 

Traditionally, February is quite the lackluster month, up just over 51% of the time all the way back to 1900, a kind of a “they threw a party but no one came” type of month.  Fact is, the party starts much earlier, after the typical autumn bottom.  By the time we get to November, the party heats up a lot.  Novembers are up close to 62% of the time, Decembers are up over 73% of the time and Januarys are up nearly 64% of the time.  Thus, February is excused as a time in which the revelers need to catch their breath and take a nap before the fun can resume.  

We expect no different from this year’s second month.  February in election years going back to 1952 has not been particularly volatile, no matter what the chart appears to suggest, but given where we are coming from, if volatility returns, we expect downside volatility.  Since 1981, February has been the third worst performing month for the S&P 500 with total returns (including dividends) of 0.21%.  Not much to crow about.  At best, looks to be a time out.  At worst, it is now time for a correction.    

There have been a few incredibly interesting revelations over the few weeks, one of which was about the correlation of laughter at Federal Open Market committee) FOMC meetings to the housing peak, a circumstance aided and abetted by the FRB Chairman’s open embrace of all derivative products.  To show how truly demented our leadership was, at one point Treasure Secretary Timothy Geithner turned to Alan Greenspan (the soon-to-be retired Chairman of the FRB and said, "I’d like the record to show that I think you’re pretty terrific, too.  [Laughter]  And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative."  [Laughter]  Yes, the transcripts noted laughter in the room.  We thank The Daily Stag Hunt (http://bit.ly/yZtxiQ) for giving us this amusing but depressingly insightful perspective about how poorly our country's economy was (and presently still is) mismanaged by those at the FOMC.  Was it pure coincidence that the frequency of laughter at FOMC meetings rose in tandem with the housing market and peaked at the same time as the Case-Shiller Home Price Index?  We think not.  It was a matter of hubris and foolish confidence in the ability of the system to leverage itself to levels never seen before in history.  Visit the link if only to view the amazing chart showing how the monthly average of laughter went from 16.5 in 2000 to 43.8 in 2006 with a monthly high of 65 in October.  As we see with the vast majority of participants in every financial decision making arena, the common wisdom is almost never wisdom at all, but precisely the opposite.  This was another case of the power of Groupthink.  Groupthink dominated the FOMC meetings and Sir Alan, as we pointed out so often, was completely wrong about the potential negative effects of derivatives.  While minutes of the FOMC meetings are made available three weeks later, the full transcripts are kept secret for five full years for some arcane and unfathomable reason.  Thus, we can never know within a reasonable period of time if the FOMC actually knows what it is doing.  We are not laughing.

In recent months, the headlines have been quick to point out that weekly initial unemployment claims have been dropping, noting the cheerful possibility of a nascent turnaround in the economy.  Per usual, all you get to see is only a piece of the puzzle and a sound bite designed to please because bad news really doesn’t sell well at all.  We have not presented our own charts in a while but today seems appropriate if only to provide a slightly different perspective.  Thus, instead of highlighting initial claims versus continuing claims, we highlight continuing claims versus continuing claims.  We heartily admit that initial claims are falling and of course, are cheering the decline but the current level of continuing claims remains higher than any back to a very brief surge that occurred in the late summer of 2005.  As well, continuing claims are once again rising and now represent over four million souls still on the dole.  Despite the decline in initial weekly claims, the number of those remaining on the unemployment rolls has increased by 941,386 since October 1st.  That’s a 30% increase and is clearly not a good sign for those touting a recovery in the economy. 

ABOUT ALAN M. NEWMAN

Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.

The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation.  Broad samples of our work can be viewed at http://www.cross-currents.net/. 

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