U.S. Jobless Rate Soared in January and Payrolls Kept Plunging

IMF Says Advanced Economies Already in Depression

Senate to Vote on $780 Billion (or more) Stimulus Bill

Federal Deficit Could Hit $3 Tril In ’09 On Stimulus, Bank Bailouts

Toyota losses mount; Italy readies auto aid

British Airways books £127-million loss

Weyerhaeuser loss balloons to $1.21-billion

It’s not just the media that has scary stories. Even the U.S. Treasury Department, on it’s own website, has this to say:

Price pressures are receding rapidly. Headline inflation already has collapsed toward zero due in large part to the steep declines in commodity costs. More notably, core inflation also is cooling quickly amid the slump in demand and rising unemployment and remains close to the Federal Reserve’s comfort range for this series. Moreover, the speed at which businesses are cutting headcount and reducing compensation is raising the risk of deflation. Given elevated debt levels, such an outcome would be extremely problematic for the financial sector and real economy.

Those outsized funding needs reflect the dismal outlook for economic growth and Congress and the Administration’s efforts to bolster the economy through policy action. Tax receipts are declining at a brisk pace given the climb in unemployment, reduced wealth and slowing corporate profits. Receipts were down by nearly 10% in the first three months of the new fiscal year and the pace of decline appears to have accelerated in January. Individual nonwithheld tax receipts in the month plunged by almost 15% versus a year ago. Meanwhile, outlays are surging at a breakneck pace as automatic stabilizers (unemployment compensation, food stamps, etc.) kick in and the government puts in place programs to try and stabilize the financial sector.

The deterioration in the budget outlook, combined with expenditures associated with the TARP, potential FDIC guarantees, and expected additional stimulus spending have increased private forecasts for total funding needs of the U.S. government for fiscal year 2009 to approximately $2 trillion. This is likely to stress the existing auction schedule and consequently warrants tangible adjustments to that schedule.

Yikes. If the government is admitting that the budget deficit will be $2 trillion, you know it will probably be $3 trillion by the time all is said and done (which is why I included a link to Investor’s Business Daily above, in their article Federal Deficit Could Hit $3 Tril In ’09 On Stimulus, Bank Bailouts ).

So, let me summarize what you have just read: the economy is in really, really bad shape. In the Bloomberg unemployment link above, “the jobless rate rose to 7.6 percent from 7.2 percent in December, the Labor Department reported yesterday in Washington. Payrolls fell by 598,000, the biggest monthly drop since December 1974.”

The biggest monthly drop since December 1974. That’s big. A $3 trillion budget deficit is also very big. A depression is big, now that even the mainstream media is admitting it. The headlines don’t get much worse than this.

So, here’s one more headline for you: Dow closes Friday up 217 points (up 2.7%). Huh? The world is ending, and the Dow is up? What’s up with that?

Well, first, “up” is a relative term. Yes, a Point & Figure Chart shows a Double Top Breakout on February 6, 2009:

But, the long term downtrend is not even close to being violated, until we get above 9,250.

A more traditional line chart shows a similar story. For the last month I have talked about an “Obama Bump”. It would appear that the markets anticipate the passage of the stimulus bill this week, and that’s why the market is rallying. The November lows are holding, so a continued rally will not surprise any of us.

But, let’s be clear. A rally to 9,000 on the Dow is a bear market rally. It doesn’t change the long term picture. The economy is in horrible shape, and it’s getting worse. A trillion dollars in more government spending will not create any jobs. All it will do is raise interest costs and raise taxes in the future, which simply means jobs switch from the private sector to the government payroll. Since in the long run government is less efficient, that reduces jobs.

So, my game plan is to expect a brief rally in February, followed by a continued march downward in March, no pun intended.

Long term, gold will shine. Last week I talked about an Obama Bump, and I placed my stink bids to increase my holdings on my favourite gold stocks. None of them got filled, since gold stocks were up this week.

That’s fine, I’m not going to chase anything. I’m still largely in cash. The market may rally a few hundred points, and I may miss it. So be it. I don’t want to get caught up in the euphoria that all is well when the pork bill passes. I’ll stay on the sidelines, renew my stink bids, and buy when the time is right.

That’s it for today. Stay the course, and thanks as always for your comments on the Forum.