"Except for a burst of census hiring that briefly pushed payroll growth above trend during the second quarter of this year, job growth has been perpetually below trend over the past two years. During the post-war period, the civilian labor force has historically grown at about 0.15% each month, which currently implies that normal "trend" job growth should be about 225,000 jobs per month..."
"The labor reports of the past three months cannot possibly be considered to be favorable from a macroeconomic perspective. The reason for this is that these reports were each more than 500,000 jobs short of what should have been expected..."
"Meanwhile, much of the earnings "recovery" we've observed over the past year has been driven by financial companies writing up their assets because the FASB decided in 2009 that it was better to create an opaque monolith out of our entire financial system than to allow the bondholders of banks or other overleveraged financial institutions to lose a penny. A great deal of what represents paper wealth, created out of nothing but a sharpened pencil, will be wiped away in the coming years, because there are not sufficient cash flows behind those asset valuations..."
Market Climate
"As of last week, the Market Climate for stocks remained characterized by unfavorable valuations, mixed market action, and unfavorable economic pressures. The stock market is clearly overbought on a short-term basis. Day-to-day fluctuations continue to be dominated by attention to various widely-followed technical "support" and "resistance" levels. An easing of economic concerns would make us somewhat more constructive in response to periodic improvements in market action, but our latitude for doing so is constrained by valuations. More reasonable valuations, coupled with an easing of economic concerns, would be ideal of course, and would provide us much greater latitude to respond to changes in the quality of market action. Meanwhile, we'll take our market evidence as it comes, and remain focused on individual stock selection and portfolio construction. Both the Strategic Growth Fund and the Strategic International Equity Fund remain fully hedged at present.
In bonds, the Market Climate remained characterized by moderately unfavorable yield levels and favorable yield pressures. Though the market has clearly taken a breath of relief on the basis of narrow surprises (note for example that last week's new unemployment claims report was coupled with upward revisions for the prior two weeks), it's not at all clear that investors understand the typical lags between leading indicators, coincident indicators, and lagging indicators. For our part, the prospect of further economic risk, and therefore the prospect of Fed action on quantitative easing, and in turn, bond price strength and U.S. dollar weakness, is still very much on the table."
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