Being Street Smart Jnue 03/05

by Sy Harding
May 06/05

JOBS & OIL PRICES!

Hiring slowed in the U.S. in May, according to the Labor Department’s monthly employment report released on Friday, which showed only 78,000 new jobs were created in May.

As it almost always does, the report surprised economists. The consensus forecast had been that 200,000 new jobs would be created. While 78,000 still looks like employment growth, it takes 150,000 new jobs each month just to remain even with the number of new would-be workers entering the work force each month.

The weak jobs numbers probably shouldn’t have been a big surprise. The economy, as measured by Gross Domestic Product (GDP), declined quite sharply in the first quarter of the year, and economic numbers since have been indicative of a further economic slowdown. Yet last week the Labor Department reported that worker productivity rose at a revised 2.9% in the first quarter. If corporations are getting more productivity from existing employees, from automation or whatever, and the economy is slowing, it stands to reason that fewer employees would be required.

Other hints that the jobs numbers for May might disappoint, were provided by the Christmas, Gray, and Challenger Inc. Job Cuts Report, released on Thursday. It reported that corporate lay-off announcements surged 42% in May.

Also on Thursday, the Labor Department reported that the number of workers filing new unemployment claims jumped by 25,000 the last week of May.

The weak jobs numbers sent the stock market south, with the Dow closing down almost 1% for the day, giving back its small gains of earlier in the week.

The stock market also had to deal with another problem this week, the recent spike-up of crude oil prices, which spiked up further on Friday.

The background on that is that the stock market was tumbling and at a low for the year in mid-April, partially in reaction to rising crude oil prices, and the fears of rising inflation that created. Crude, which was at $18.60 a barrel in early 2002, had tripled in price to as much as $57 over the three years since.

However, the stock market began to rally from its April low when oil prices began to decline, raising hopes the three-year spike up in energy costs was over. Crude prices subsequently dropped below $50, and as low as $46 a barrel.

But over the last two weeks crude oil prices sneaked back up to $50, and in the last few days spiked up further, to close the week at $55. So, the stock market had that scenario to deal with on Friday, as well as the weak jobs numbers.

Meanwhile, Friday’s weak jobs number did not seem to surprise the gold market, which had been rallying in advance of the numbers. Gold bullion had spiked up more than $5 an ounce on Thursday. The XAU Index of Gold Mining Stocks had been rallying for almost two weeks.

Gold would like the weaker jobs numbers as they add to other recent weak economic numbers that indicate the economy is slowing even faster than had been previously thought. The theory would be that if the economy is slowing more quickly than thought, perhaps the Fed will have to slow down on raising interest rates to ward off the rising inflation. And gold likes rising inflation, since it is traditionally bought as a hedge against rising inflation.

But yet, we had issued a buy signal for gold early the previous week, before anticipation of the jobs numbers had taken center stage in investor thinking. So perhaps other factors were also working in gold’s favor even before the weak jobs numbers. Our gold buy signal the previous week had come from our technical indicators, which indicated that the gold sector, after having come down hard since March, was oversold, and money had begun to flow back in.

The other favorable factors for gold probably included the spike back up in crude oil prices. Gold would look on that as a positive also, since it indicates that inflation remains ‘out of the bottle’, and the Fed may have a tough time getting it back in if the economy is slowing so fast that it can’t handle more interest rate hikes by the Fed. (Raising interest rates is the Federal Reserve’s main weapon in fighting inflation).

Regardless of the reason, unlike the stock market, gold bullion liked the weak jobs numbers, and closed up $3.18 an ounce for the week, adding to the previous week’s gain of $2 an ounce. The XAU Index of Gold Mining Stocks gained another 2% for the week, and is now up 11% in just a couple of weeks.

Bonds, however, did not have such a positive reaction to the weak jobs report, and closed down for the day, although up for the week.

So an interesting week all around, with rising crude oil prices and the weak jobs report providing the catalysts.

Sy Harding

Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.