We have heard conflicting views of whether unemployment is a "leading" or "lagging" economic indicator.  We will let you be the judge, here are the facts.







ANALYSIS:

First of all, we need to remove the so-called 1987 crash from the equation.  Although there are some short-term similarities we are soon going to find out how different our current situation is.



Next, we need to see the clear inverse relationship between unemployment and the cash position of the companies where investment money was heading.  We have a term called "convenience spending", where employers will hire in times of plenty in order to leverage time.  However, in tight spending environments they will do the work themselves instead of risking lost profits.  The 1929 graph is clear and although the DJIA stabilized at a significantly lower level, unemployment was on the mend before we entered WW II in the summer of 1942.  Our 12 year chart proves this ending in the summer of 1941.

In 1929, month over month, the 37% drop in the DJIA was met by a rapid "V" shaped rally that bounced over 20% in a four month period before dropping again.



Next, we can easily see the results of a promised $800 Billion plus, being pumped into the system.  People will act and plan very differently based upon getting a healthy loan; including some not so good decisions, (ie. lavish corporate meeting at tax payers expense).  It is our opinion that government lead stimulus has only delayed the inevitable, extending the first trip down and lengthening the rally.




Only time will tell but current unemployment predictions would lead us to believe that the DJIA has some catching up to do... going down; and as the path would suggest it will be rather steep.

DECEMBER/JANUARY UNEMPLOYMENT UPDATE

With unemployment stabilizing and the markets flattening we need to take a look at what it will take for us to get back to a reasonable unemployment number.  Throughout the 1970's the DJIA was basically flat around 900.  Then 15 months before the peak of unemployment, repairs were being made in the private sector and a bull market began in the DOW.

If you can ignore the the 1987 bubble, the overall trend doubled the DJIA to 1800 before we fell below 6% unemployment.  You can see that we in fact did experience a rise in unemployment at the same time that the market was trending higher.  However, this bull market was not catalyzed by a rebound from an overly emotional major sell off.  It is rather smooth and trustworthy.

Remember that jagged lines indicate a trend that is out of control and not trust worthy.  Unemployment is a much smoother trend line, because the decision to hire or fire is much more deliberate compared to exchanging money in the markets.  Ultimately, the trend of unemployment will show the markets true colors.

Let's take a peak at the small bear market that began in 2000.

Our circle points out a time when the market was gaining unemployment was stabilizing (but not dropping) and the market corrected itself.  Despite efforts by many to force rallies, unemployment will give you a much clearer picture than the markets for true trends.  If we are to follow suit  with the 1980's unemployment turn around we would need to see the DJIA reach 18000 before we saw 6% unemployment again.  This seems far fetched since at its height it reach just over 14000 based on massively over levered, extremely risky trades.

So what is next?  Our research shows that when the trend of unemployment is stable going from October to December, 49% of the time the number will remain the same by the following March.  Unfortunately, the REAL unemployment rate, called the U-6, which has only been measured since the 1990's increased from 17.2% to 17.3% and over 660,000 people reported that they have given up and removed themselves from the workforce.  This would make us believe that the trend is actually going up and thus our research suggests that 91% of the time unemployment will be higher by the following March.

Our conclusion, whether we are in the next bull market or not, the market must correct.  If it corrects enough to test 6500 on the DOW thus proving a bear market rally we will readjust our 9000 number and reconsider the point at which we can expect a more positive unemployment rate.

TODAY - 05 JAN 2010 - UNEMPLOYMENT RATE RELEASED

In one word, "confusing".  Apparently, even though we showed jobs -20,000, a number indicating additional job losses, the "household survey" showed a positive increase which caused the rate to fall to 9.7%.  However, what most other media sources will gloss over is a very important phrase used several times in the Dept. of Labor's report, "benchmark revisions".  If you recalculate without benchmark revisions the rate should have increased to 10.6%.  This seems like a classic book cooking technique.  If the government is going to revise these numbers then they should adjust all previous numbers so that we can see "real" trending.