April 9th, 2010

MWM Recap for Investors Insights

Week of: April 9, 2010

Here’s the news of the week – and how we see it:

Government numbers are consistently and conveniently massaged.  In order to keep the employment rate at a constant level and prevent it from declining, 150,000 new jobs have to be added each month.  The March Employment report put the NFP (non farm payroll) at over 162,000. The street had forecast 200,000-400,000. How did the Bureau of Labor Statistics (BLS) get these numbers?  This is vital. Birth/Death modeling added 81,000 jobs, even while the ADP National Employment Report counted 112,000 jobs lost from small businesses.  The BLS ignores this fact in favor of “models” which massage the numbers higher – literally by category.  For instance – in the Household Survey, we find 290,000 jobs added for men over the age of 20.  At the same time women over the age of 20 lost 42,000 jobs.  It appears the BLS statisticians aren’t even trying that hard to fabricate the numbers … add to this category … take away from that one.  Reality is an inconvenient truth for government statisticians and that reality can be ignored for quite some time.  Revisions are always allowable in the future, once no one is paying attention to the newly released numbers.  Wall Street analysts generally take the BLS stats as a firm foundation for growth projections and economic modeling.  No wonder sentiment is on the rise.

Sentiment is getting dangerously optimistic, as the investment community crowds to one side of the boat.
As we observe, the volatility index is speaking the mind of the market. “All systems go, bullishness and positive sentiment full steam ahead.” This gives us pause. Volatility Index (VIX) levels have dropped from 80 to 16. This is not cautious optimism.  In fact, caution is nowhere to be found.  This is enthusiasm betting on a perfect world.  Pundits and market analysts alike are competing to see who has the highest market projection.  It is our judgment that this optimism fails to factor in the present risks in the global economy.  Further compression of the VIX to 12 would set up a perfect double dip in the market.

There were significant technical moves in the Bond and Metals markets this week.
Those awaiting the crossing of the Rubicon by the 30-year treasury yield need not wait any longer.  The 65-week moving average passed the 80-week moving average, confirming the break above 4.75 as a strong move higher.  Final confirmations at 5.25 and 5.5% will set the course for higher treasury yields for the next two to three decades.

Gold has consolidated above the $1100 level, and is now breaking out of a head-and-shoulders bottom formation.  Consistent with our expectations of a 20-40% move in gold this year, the technical aspects are strongly supporting the fundamentals of the Gold and Silver markets.  Further consolidation may occur, but the longer the market moves sideways below the old highs of 1220, the stronger the follow through and greater the likelihood will be of  the price moving to 1350, 1500, or even 1650 this year.