A not-so-funny thing happened on the way to the stock market Friday that mystified many an investor. Maybe you, too. In the face of an early morning positive disclosure of a surprisingly strong October employment report, namely the creation of 151,000 jobs, more than double the general expectation, the market acted like it had been hit by a bulldozer. Stocks should have soared on that kind of news — a credible sign that the jobs market was finally rebounding. Instead, they snored as the Dow, frequently in negative territory, rose a mere 9 points on the day, What alarmed some market watchers was that the jobs news came on the heels of happy tidings for Wall Street earlier in the week that drove up the Dow nearly 220 points on Thursday. So the market was clearly set to run higher on the jobs news. Those earlier stock-boosting tidings: — Strong G.O.P. gains in the mid-term elections, a repudiation of Obama’s policies, which, in turn, flashed a signal that maybe one of the elephant herd now has a legitimate shot at relocating to the White House in 2012. — A $600 billion economic-boosting QE2 (quantative easing) package from the Federal Reserve. So why a disappointing Friday? Aside from Thursday’s big gain which trumped the employment news, add some doubts about the potency of both the jobs report and QE2. Peter Morici, a professor of economics at the University of Maryland, doesn’t mince any words as he raises questions about both. “We’re not over the hump,” he says. “We’re on a plateau. Yes, we’re creating jobs, but not enough to materially improve the economy.” As for QE2, Morici doesn’t give it a passing grade, “It won’t lower interest rates or fire up the depressed housing market,” he says. “Maybe we’ll see a temporary benefit, say a 5% rise in stock prices.” As for economic growth, here again, a bum grade from our professor. He sees mediocre 2.6% GDP growth in the current quarter, and less, 2.4%, for all of 2011. At best, he says, “we’ll slog along at a mediocre pace.” In a commentary to clients Friday, David Rosenberg, the well-regarded chief economist and strategist at Gluskin Scheff & Associates, a leading Canadian wealth management firm, raised a number of questions about the overall vigor of the jobs report, noting it was not universally strong. For example, he notes the Household Survey in the report (which includes agricultural employees and self employed) showed a decline of 330,000 jobs. This survey, he also points out, served up evidence that the problem of excess labor supply has not gone away. Moreover, a barometer that many labor experts regard as the most accurate indicator of the health of the jobs market turned in a poor showing. That is the employment-to-population rate — the share of the population that is working — which fell to 58.3 from 58.5%, a 10-month low. Further, he observes, many industries still reported job declines last month, including manufacturing, commercial and residential construction, transportation, information, financial and government. As for QE2, Rosenberg says we may have well seen the last of QE. Why? Because in 2011, he notes, there will be three new voting Federal Reserve bank presidents who vocally oppose more easing initiatives, Relating his thinking to the market, Rosenberg says it’s difficult to see how equities can rally on the Fed move alone, or on the election results for that matter, seeing as both a G.O.P. victory in the House and QE2 had been widely discounted in recent months. Madeline Schnapp, economics skipper at West Coast liquidity tracker TrimTabs Research, partially owned by Goldman Sachs, also raises some questions about QE2. It may stimulate economic activity short term, she says, but it has negative long-term consequences, notably higher inflation and higher interest rates. She also cites a couple of other economic risks, namely the threat of higher taxes from expiring tax cuts and the end-of-the-month expiration of extended and emergency unemployment benefits affecting 6.2 million current enrollees. Without an extension, she points out, by the time all those enrollees fall off the unemployment insurance bandwagon, it may yank $59-$60 billion out of the unemployed pocketbooks, a potentially big negative on consumption. Given his admitted “shellacking” in the recent elections, President Obama has made it clear he’s open to a negotiating process with the Republicans. Could that open the door to more getting done in Washington? Schnapp has her doubts, noting the problem is you have a new ball game in the House next year with a decidedly left group of Democrats sitting across from a new crop of decidedly right Republicans. “Seems like a recipe of gridlock to me,” she says. I hear similar talk from Hong Kong trader Selwyn Ortz who attributes at least part of Friday’s listless market showing to what he believes is “common sense recognition that it will be gridlock and more gridlock in Washington over the next two years, with little if anything of a concrete nature getting done to create more jobs and invigorate the economy.” That means, Ortz believes, that headway in remedying the two biggest economic headaches — jobs and housing — will likely be disappointing. That’s also the thinking of Mideast trader Caise Hassan, who manages family money and is up 110% this year. A HuffPost reader in Amman, Jordan, Chicago-born Hassan tells me: “I don’t hear any great ideas from the Republicans. Maybe they’ll push big tax breaks for companies and lighten up on their criticism of Bernanke’s money printing. But what’s really needed,” he says, “is something that can benefit poor and middle America and neither party is providing that.” As far as the economic recovery goes, Hassan is somewhat skeptical, noting “I see no catalysts for job growth, no legislative catalysts and not enough being done to stimulate growth and demand.” Further, he sees mediocre economic progress for the U.S. in 2011, observing “every time it takes two steps forward, it seems to take one step back,” His view of Congress’ progress over the next two years: “I don’t think it will achieve anything.” Still, he thinks the stock market is likely is likely to trend higher over the next few months, reflecting good relative strength, solid earnings growth, an overvalued bond market, very low interest rates, the advent of QE2 and strengthening global markets. It’s worth noting that Hassan, in conversations I’ve had with him in recent months, shows he’s a brainy guy when it comes to the investment arena. He has made a number of excellent calls on the direction of the market, as well as on some solid specific investment recommendations. Chief among his current favorites are selected stocks and some commodities, which both recently climbed to a two-year high following the QE2 announcement. On the equities side, Hassan favors Joy Global, Apple, Amazon and Sina Corp., a Chinese internet company. In commodities, he likes cocoa, sugar and rice. He says he would avoid gold and silver for the next few months, believing that both are currently overbought. Interestingly, he’s short oil, currently a strong performing commodity that he notes usually declines at the end of the year. What do you think? E-mail me at Dandordan@aol.com .
