The investor elephant in the room just put on some weight

Today saw the release of March private payroll data from the nation’s largest processor of payroll checks, ADP.  Unemployment “unexpectedly” increased by 23,000 jobs in March vs. an expected 50,000 jobs added by a swath of economists.

Analysis: Folks this is not good news.  Not only did the economy not add jobs last month, it shed quite a few jobs.  Economists are clearly clueless right now as to the reality that your average Joe and Jane are confronting out there as their estimates were off by a shocking 73,000!  The investor elephant in the room, the U.S. unemployment rate, just put on quite a lot of weight.

There is clearly a disconnect between investors and the actual economic reality right now.  The market keeps creeping up, but there doesn’t seem to be data to support such a creep.  This makes me very nervous.  Remember my post where I said that market gains are usually many years in the making, but big selloffs often can happen over the course of 2-5 big market meltdown days.  Panic usually trumps euphoria and by a wide margin.

I am personally still sitting in cash waiting for the market to catch up to the economic reality on the ground.  Today the first quarter of 2010 closes and so in the next several weeks the first quarter earnings season is going to be gearing up.  I would expect that companies will be doing ok, but not great.  After all, consumer spending has been tepid.  That means that revenues are likely to be up only slightly for most U.S. firms.  But profits can also be added to a firm’s bottom line if they have found ways to reduce expenses.  However, that was what 2008 and 2009 was all about: trimming the fat.  At this point U.S. companies can scarcely be expected to be more lean.

Earnings/profits are usually compared on a “year over year” basis.  That means this first quarter is going to be compared to the very weak first quarter of last year.  So there might be some “pop.”  But I would hope that investors are smart enough to look at the sequential data, too.  That is, the first quarter’s profit figures compared with the fourth quarter of 2009’s numbers.  I am guessing that this earnings season will prove to be limp.  It’s my opinion that the U.S. financial markets have baked in to their valuations of U.S. businesses an outstanding earnings season.  But the economic data don’t support that kind of wow.  That means I am anticipating a declining stock market over the next 6 weeks.  A decline of any magnitude would indicate a buying opportunity.

Importance grade: 10; the U.S. unemployment rate is the global economic statistic of greatest importance right now.  That private payrolls continue to decline is not a sign of health.  It’s kind of like when a baby is sick and you gradually introduce food into its diet.  If it can’t hold down strained peas then you know that the baby isn’t healthy.  Right now there are strained peas all over the floor of the U.S. economy.

Jason