U.S. Unemployment 15.8%; Grade Inflation on Bank Stress Test

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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While the headline number for the Employment Report this morning said that there was an unemployment rate of 8.9%, a more realistic number is 15.8%. The latter number includes discouraged workers and workers who can only find part-time work. Since the recession began in December 2007, the U.S. government admits to losses of 5.7 million jobs or 4.7% of the work force. This is the largest decline since the 1957-58 recession (please note that 1958 was one of the top 10 best years for the U.S. stock market in the 20th century and that the unemployment rate almost always peaks after a recession has ended). Yesterday, the long awaited and heavily leaked government stress test for banks was finally released. As one expert said the "apparent frankness" of the report should be a relief to the markets. 'Apparent' was the operative word in his remark, since this report has little to do with reality and is merely a feel good public relations ploy.

There was nothing good in today's unemployment report. There were 539,000 job losses overall and 611,000 losses in the private sector (the more important number that is never put in the headline). Lot's of part-time hiring of U.S. census workers (for 2010) by the federal government helped make the number look better. Even though there have been many recent announcements of state governments laying off workers because of budget difficulties, the report said state and local governments increased employment by 6,000. Other than government, only the health care sector added jobs (as is has every month since the recession began). There were massive job losses everywhere else. Job losses for February and March were increased by 66,000. Expect today's 539,000 number to be higher in the future as well, but no one will be paying attention when the worse number comes out - and the government is well aware of that.

To no one's surprise the Stress Test for U.S. banks showed they needed more capital, but not too much more capital that anyone should worry about it. The total given was $75 billion, not really that much considering these are the biggest financial institutions in the country. Bank America accounted for the largest chunk of this, with a need to raise $34 billion. Its government forced takeover of Merrill Lynch is what pushed it into a big capital deficit. Wells Fargo and GMAC were next on the list, with a need to raise $13.7 billion and $11.5 billion respectively. Citigroup only needs $5.5 billion. What happens if the banks can't raise the capital in the open markets? The U.S. government will provide it to them through TARP. All in all, you shouldn't pay much attention to this report . It was meant to be reassure the public and investing community that everything was actually fine with the financial system. And as long as the government is willing to continue to keep an unlimited supply of bailout money available, things with the banks will indeed be OK.

The stock market had a rather sharp sell off yesterday because it was too overextended on the upside. Some more selling will be needed to help relieve the pressure. This should be taking place in the near future. There is money to be made by buying into stocks which have had big gains followed by sharp drops and then trading out shortly thereafter. Watch for these opportunities. While a bigger sell off seems to be awaiting us in the summer, 2009 might turn out to be a decent year in the market. The best year for U.S. stocks in the last 100 was 1933, just off the bottom of the Great Depression. Other than a glimmer of hope that things would get better, the economic state of the U.S. was disastrous. Almost everyone avoided the stock market and missed the best money making opportunity of a life time.

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Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.