Is Bad News Really Good News for the Market…or is Something Else at Work?

by the Curmudgeon and Victor Sperandeo  



"Fear Reigns as Investors Flee Stocks."  That was the eye catching lead business story in Tuesday's USA Today. Andrew Brooks, vice president and head of U.S. equity trading at Baltimore-based T. Rowe Price said, "We're getting slapped around here a little bit.  The world is a little nervous."


Well that nervousness didn't last long! The U.S. market rallied strongly on Thursday in anticipation of healthy job growth numbers to be announced the next day.  Astonishingly, the rally continued and picked up steam Friday after the job numbers for January and December badly missed Wall Street analyst estimates. 


Does that imply that the market likes bad economic news which might deter the Fed from tapering their monthly debt monetization/money printing? 


Fed Policy Benefits the Markets but not the Real Economy:

Do you think the Fed's QE has helped the economy or the markets?  A recently published mathematical analysis study by Jing Cynthia Wu and Fan Dora Zia concludes that the positive impact of the Fed’s QE policy is so slight as to be insignificant. The multi-trillion dollar expansion in the Fed’s balance sheet has only lowered the unemployment rate by little more than two-tenths of one percent, raised the industrial production index by 2 percent, and brought about a mere 34,000 housing starts. 

"Our estimates imply that the efforts by the Federal Reserve to stimulate the economy since July 2009 succeeded in making the unemployment rate in May 2013 0.23% lower than it otherwise would have been."  And how much has the stock market soared during that same time period with below trend economic growth?

Is there something sinister at work that causes the market to rise strongly on very bad economic numbers?  Let's objectively examine this question.

Recent Economic Reports - Dismal and Disappointing:

The weight of recent economic evidence is overwhelmingly BEARISH for the stock market, at least to a rational person:

·         Only 74,000 jobs were created in December vs the 196,000 analysts had expected.

·         New home sales were down 7% in December.

·         New home starts plunged 9.8% in December while permits for future starts fell 3.0%.

·         Existing home sales in the 4th quarter were down 27.9% from the same quarter of 2012.  Pending home sales fell 8.7% in December.

·         Mortgage applications continued their sharp decline, ending December at the lowest level in 13 years.

·         Auto sales slowed significantly in December, in spite of the return of rebates and zero per-cent financing to entice buyers.

·         Durable Goods Orders plunged 4.3% in December, significantly worse than the consensus forecast of a 1.8% increase.  Previously reported numbers for November were revised downward.

·         Factory Orders (AKA manufactured goods) fell 1.5% in December- the largest fall since July, weighed down by a plunge in bookings for transportation equipment.

Pundits blamed the bad economic reports on the cold weather in December. They said the numbers would bounce back in January.  Well, they haven't!   It's been more of the same:

·         U.S. car sales continued to slow significantly in January.

·         The national ISM Manufacturing Index surprised by plunging from 56.5 in December to just 51.3 in January, much worse than the consensus forecast that it would remain basically flat at 56.0. Within the report, the new orders sub-index, plunged a big 13.2, from 64.4 in December to 51.2 in January.

·         The U.S. trade deficit climbed 12% in December to a seasonally adjusted $38.7 billion from a slightly revised $34.6 billion in November, the Commerce Department said Thursday.  Economists surveyed by MarketWatch had forecast a deficit of $36 billion for the final month of 2013. The higher-than-expected increase has spurred a number of economists to predict that fourth-quarter U.S. growth will be lowered later in the month when the government updates its preliminary report.

·         U.S. non-farm Productivity was up 3.2% in the fourth quarter, not quite as strong as the consensus forecast of 3.4%.

·         The Challenger, Gray, & Christmas layoff report showed announced layoffs soared from 31,000 in December to 45,000 in January, mostly due to job cuts by retailers who experienced weak holiday sales.

·         Congressional Budget Office (CBO) released a study over the Affordable Care Act (ACA or ObamaCare) that argues the law will encourage 2.5 million full-time workers to drop out of the workforce between the years 2017-2024.

·         The Labor Department reported that non-farm payroll numbers for January were horrible with only 113,000 jobs added. That was well below Wall Street’s expectation of 185,000 new jobs.  Worse, the December numbers were revised up by only 1,000 to 74,000 --far less than the consensus for a much larger revision.  The pace of job growth over the past three months has slowed to 154,000. That’s down from an average 194,000 monthly jobs added throughout 2013. 

·         Wages are not keeping up with inflation.  Average hourly wages in January rose only 5 cents to $24.21 and the average workweek was flat at 34.4 hours.  In the past 12 months, hourly wages have risen 1.9%. The NY Times reports "Wages are stuck, and barely rose at all in 2013. They were up 1.9% last year or a mere 0.4% after accounting for inflation. Not only was that increase even smaller than the one recorded in 2012, it was half the normal rate of wage gains in the two decades before the last recession."

·         Wage stagnation helps explain why many people feel apprehensive even though the economy grew at a robust pace in the second half of 2013, corporate profits rose, the stock market boomed and the housing market continued to gain ground. The issue cuts across the American work force. In fact, white-collar workers did a bit worse than blue-collar workers last year in terms of wage growth.

Weekend FT headline: Jobs data deal blow to recovery hope in US:


"The US economy added a meagre 113,000 jobs in January, denting hopes the recovery is accelerating and posing a challenge to Janet Yellen in her first weeks as Federal Reserve chairwoman."

The data were not weak enough to prompt widespread fears of a new slowdown – the unemployment rate fell from 6.7 to 6.6 per cent – but they raise the stakes for other numbers between now and the Fed’s next policy meeting in March.


“The January performance was a huge disappointment since we can no longer dismiss December’s poor numbers as an aberration,” said Doug Handler, chief US economist at IHS Global Insight. Weak numbers in December were widely blamed on freezing weather but there was little sign of a similar effect in January.


Other Voices on the Bad Economic Reports:


“We are starting the year on a softer note,” Mark Hamrick,'s Washington bureau chief, said. “We are about half way through the first quarter and it remains to be seen whether weather continues to be quite so severe and whether there’s something that is more ominous happening in the economy that isn’t just weather."


Justin Lahart, Wall Street Journal: “A confusing jobs picture is making a muddle of the Federal Reserve’s communication efforts. The U.S. added just 113,000 jobs last month, the Labor Department reported Friday, falling well short of expectations. Worse, the weakness makes it much harder to treat December’s disappointing report as a one-time event. It appears that the job market really has slowed. That doesn’t mean it is a sure thing. The Labor Department also reported that the unemployment rate, which is based on a separate survey of households, fell to 6.6% from 6.7% in December, marking its lowest level since October 2008.”


Dennis Slothower of Alpine Capital: "Simply put, the labor market is far too weak. Even though the claims data have been showing signs of improvements in labor conditions this year and a clear decline in layoff trends, it has not translated into employers hiring more workers. The labor market is stuck in the mud."


Harm Bandholz, chief economist, UNI Credit: “On the one hand the ongoing decline in the unemployment rate – which is now only 0.1 percentage points above the threshold in the Fed’s forward guidance – means that an adjustment of the forward guidance is becoming more urgent. On the other hand the second lackluster payroll gain in a row at least questions whether the Fed will continue to moderate its asset purchases at its upcoming meeting.”


Tyler Durden of Zero Hedge:  "So what really happened in January? For the real answer we have to go to the BLS' non-seasonally adjusted data series. It is here that we find that in January, some 2.870 million real, actual jobs were lost, not gained. Putting this further in perspective, the number of NSA jobs losses in January 2014 was greater than in January of 2013, 2012, 2011 and tied that of 2010."

John Williams of Shadow Stats: "Spurious Revisions Used to Spike Payroll Employment Levels. Renewed Concurrent Seasonal Adjustments and New Population Controls Make Comparisons of Monthly Unemployment Detail Meaningless."

CURMUDGEON's Comment & Analysis:

After Monday's big selloff (over a 2% decline in all the major stock market indices), the market's focus was on the slowing U.S. economy, renewed concerns about a hard landing in China, the potential effect of the Fed’s tapering on the economy, emerging market turmoil, etc.  The dismal January (and December) BLS jobs report did not alleviate any of those situations.  In addition, wages are not increasing, which will surely dampen consumer spending (~70% of GDP).

 So how could the market rally sharply on Thursday (in anticipation of a strong jobs report) and then again on Friday (after the job/wage report was a colossal disappointment)? Most money managers expect new Fed Chair Janet Yellen to remain favorable to ultra-easy monetary policy, which supports both bond and stock markets.  Is something else going on?

We believe there is an invisible hand at work that props up the stock market on any bad news. While we have no proof, our theory is that the Fed is backstopping the market by instructing or suggesting its dealer banks buy stocks and/or stock index futures whenever the short term trend is down and the shorts seem to have the upper hand.  The Fed does NOT want sell stops to be triggered or hedge funds to increase their short positions.  That would likely cause a severe market decline, considering how much leverage there is today (especially when average daily volume is much lower than it was in 2007).  Such a stock market decline would shatter consumer confidence and might cause another liquidity crisis where lending freezes up. 

We think there is a HUGE difference between 1) a Plunge Protection Team that is tasked with preventing an October 1987 style CRASH and 2) having the Fed instruct its dealer banks to go long stocks on each piece of bad or disappointing economic numbers or announcements. 

Sadly, the world of free markets has ended.  We believe it's been replaced by Fed debt monetization and a secret system of collusion that neither the press, the regulators (e.g. SEC and CFTC) or Congress has dared to investigate.

Sperandeo's Closing Comments:

It seems that despite 47 years of experience, I no longer know about economics and markets? The distortions in market action today seem to defy reality and logic.  At first glance, it appears the Fed (or some other entity) has manipulated the market to stop the bad news from causing a panic selloff.

While we have no proof of this, the question must be asked:  Why is it that blatant bad news is cause to aggressively bid up stocks?  Historically -for 120 years- when bad news came out buyers would bid below the market to "accumulate" a position.  Therefore, when stocks don't go down it would be seen as bullish.  However, never before was bad news a reason to bid up stocks.  No one can explain this except for market manipulation -most likely by the Fed. 

We now have two samples of very bad news -the QE taper and last Friday's jobs numbers -with the stock market rallying very strongly after each announcement. If the QE taper is really good news then why did stocks rally non-stop when the Fed announced QE?   The market went up on both events??? You can't have it both ways! This is a colossal puzzle, unless we conclude it's due to market manipulation.


Till next time........................


The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1979) to profit in the ever changing and arcane world of markets, economies and government policies.  As President and CEO of Alpha Financial Technologies LLC, Sperandeo overseas the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Copyright © 2014 by The Curmudgeon and Marc Sexton. All rights reserved.

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