Unfriendly Trends

This morning, the Labor Department announced the latest data on weekly jobless claims. While the initial claims report was in line with expectations, continuing claims were worse than expected, hitting their highest level since February 1983 -- three months after the last major recession ended. However, this development is not necessarily a cause for celebration for those who are looking for evidence that the economy has hit bottom. As it happens, the last time we saw these levels was after the series had declined 18% from a peak of 4.71 million claims in November 1982.

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On Monday, the Treasury Department announced that U.S government borrowing needs for the current quarter are expected to rise to a record 0 billion, following the 0 billion raised last quarter. Washington’s burgeoning demand for borrowed money reflects the costs of financing various government bailouts, including the 0 billion financial rescue plan, as well as a federal budget deficit that has ballooned amid higher outlays and plunging tax receipts. If the following graph of the monthly year-to-date differences between revenues and outlays was a stock chart, I would imagine that a lot of technicians would probably be yelling “sell” right now.

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Of course, if those same technicians looked at things in a slightly different light -- that is, in terms of the government’s unavoidably expansive future borrowing needs and the legal authority the Treasury Department needs to carry out those plans -- they would likely take one look at the chart below and lean heavily in favor of more upside.

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Finally, it is well known that most Wall Street economists and “strategists” failed to anticipate the worst financial crisis since the Great Depression -- and, quite possibly, of all time -- and a global downturn that is looking more and more onerous by the day. In keeping with history, they have also done a pretty poor job providing guidance to investors on how best to structure their portfolios. In fact, based on the following two charts, it appears that these highly-paid forecasters -- who are supposed to have some inkling of what might happen next to stock and bond prices -- have become major trend followers in both markets. Sounds like the set-up for a future whipsaw.

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U.S. share markets ended sharply lower for a second day, dragged down by weakness in heavily-weighted energy shares, which tracked a .25 drop in December crude oil futures, and financials, which were undermined by Wells Fargo’s plans to sell billion in stock to fund its purchase of Wachovia. Disappointing economic data also weighed on prices, while interest rate cuts in the U.K. and Europe were largely ignored.

At the close, the Dow Jones Industrial Average fell 443.48 points, or 4.9%, to 8,695.79. The S&P 500 Index slumped 47.89, or 5%, to 904.88. The Nasdaq Composite Index slid 72.94, or 4.3%, to 1,608.70.

December gold lost $8.40 to $734 in late-session electronic trading, a drop of 1.1%, while the U.S. Dollar index jumped 1.5% higher as European Central Bank President Jean-Claude Trichet noted that the economy in the region “weakened significantly.” Ten-year Treasury bond yields were more-or-less unchanged at 3.7%.

Michael Panzner

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Author, Finance Faculty Member
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