Well here we are in mid-May 2012 and both the economic picture and the stock market picture are eerily the same as 2011 and 2010. In all three years economic data was strong to start the year, the market did well and late in April they hit their highs for the year, ending it with a bottom in the fall.

One of my favorite quotes on history is from Mark Twain who said that history doesn’t repeat itself but it does rhyme. While you can only know if we hit the top in April this year by looking back from the end of the year, or at least late in the year this year so far is uncannily similar to the two preceding it. Of course, in addition to the economic numbers losing momentum you still have the same European problems as the last two years.

We are a little underweight in stocks and we are tilted toward the conservative side in most of our picks so that is standing us in good stead right now. We’ll see how it goes.

Last month the DOL reported that the economy added 227,000 in Feb.

Today, economists on average expected DOL to report 177,000 jobs. It reported just 120,000, only 70% of what was expected and only 53% of February’s number.

Actually, it is possible that the economy actually created zero net new jobs last month. The way DOL calculates the number is by what large employers tell it. In addition, because small and medium businesses actually create ALL the net new jobs in America and small businesses don’t report to DOL like large companies do, the DOL estimates each month how many jobs small businesses created.

DOL does this by virtue of the infamous birth-death model (birth and death of jobs, not people). Many have complained that this model does a poor job and that they suspect it of often over-estimating new jobs.

Question: of the 120,000 new jobs reported as created last month, how many came from the birth-death estimate? Answer – 200,000, more than the whole total of new jobs reported!

Last, let me say a word about the unemployment rate, which reportedly fell from 8.2% to 8.1%. Yeah!!

Unfortunately, the only reason the rate dropped was that 522,000 people dropped out of the labor force last month and were thus not counted as unemployed. They either retired or went back to school, took a volunteer job, went on welfare, went homeless, moved in with Mom and Dad, etc. So, the true unemployment rate did not drop, in fact, just the opposite.

The better rate than the unemployment rate is the employment rate, that is the percentage of people who are working. That went LOWER last month to 58.4%. That means that only 58% of the US population has a job. In Dec 2007 it was 64%.

So far 2012 rhymes with 2011. In the 1Q of 2011 economic news seemed to be getting better but spring came and the economy started to disappoint again, you had the Japanese disaster and stocks sold off quite a bit through the fall.

In 2012, 1Q reports were good, stocks went up, times were good. But come April news began to disappoint again.

What is going on?

In 2011 economists erred by giving too much credence to reported growth by giving too little attention to the portion of reported growth that was actually just inventory building. Inventory building works like this – when times are lean companies make less and they let inventory get low because they expect future demand to be lower. When things seem to be picking up they have to produce widgets not only for the people buying them but also to rebuild their inventory levels back to normal. People buying is real demand while inventory building is not. Manufacturing more widgets to put more on your own shelf is not real demand. Much of early 2011 growth was actually inventory building and what’s more, people knew it at the time.

This year people overestimated economic growth because the US had an exceptionally warm 1Q. Builders started building earlier than normal, customers went out shopping earlier than normal, etc. Then came April and people did not need to buy because many had already done their spring shopping. So, sales dropped. Make sense?

The other big issue on which people are confused is the unemployment report, a report that I have complained about in many of my missives. My next post will address that specifically but suffice it to say here that unemployment looked artificially good last quarter and now the last two reports have been rather poor.

Tomorrow brings the national ISM manufacturing index report. If that is weak, and it almost certainly will be and if the jobs report Friday is below exectations which has been the trend the last few weeks we will most likely see economists lower their economic growth forecasts for the current quarter. That would be good for bonds and not so good for stocks.

For the week other investments of note were:
Gold +2%
Oil +2.7%
Bonds (corporate high quality) +0.2%
Natural gas was up almost 10% Thursday but finished the week up 6%

Economic output (GDP) for the U.S. in the 1Q was reported today at 2.2%, which was lower than expected. However, real demand was better than expected so really the report was OK. Inflation came in around 2%.

Growth of just over 2% is OK in our current relatively slow growth world as people recover from the financial excesses of the 80s, 90s and early 2000s. Of course, the federal government continues to ramp up its debt by huge amounts.

Because this is a fairly slow growth world, the stocks of fast-growing companies have attracted most of the investment money so far this year and have far outpaced slower, more conservative companies. So, growth-oriented mutual funds have done better than those investing using a value strategy.

The next month or so should mainly be dominated by news out of Europe (so what else is new?). Of course war between Israel and Iran would be a big deal if that comes about. U.S. economic news is likely to be slow and steady.

I don’t see a large risk of significant declines (15% – 20%) in either the stock market or bond market right now. Setbacks of 5%-10% happen sometime in most years and are not easy to predict so I wouldn’t let that impact your investing this quarter.

European markets have gone in lock step with the U.S. (or is it vice versa) the last two weeks. But, Europe went down more and has not recovered as much. Economic news there has been much worse than the U.S. It is hard to make sense of that performance other than to say that world markets are very connected.

Emerging markets have performed more in line with Europe. Over the last two months the U.S. stock market performance is much better than either Europe or emerging markets. I think that will continue to be the case, though the best emerging market funds have kept up the U.S. market.

Today, gold, oil and bonds were all up. The dollar was lower, as was natural gas, giving back some of the gains from earlier in the week.

On the first point, if Sarkozy loses the runoff and he certainly has an uphill battle his opponent is a member of the Socialist Party and will not likely be nearly as willing to go along with Germany’s line of thinking on European financial measures. That introduces uncertainty into the European crisis which the markets dislike.

The Netherlands joins the list of countries at odds over austerity measures, the others being Greece, Italy, Ireland and Spain. Adding France to that list would isolate the Germans among the major Eurozone members.

While the US stock markets opened up lower, they recovered throughout the day and finished down much less than the European markets, keeping the US reputation as the best western stock market in which to invest today. That is a big plus. However, technically it completes the dreaded head and shoulder pattern that predicts lower prices by another 3% – 4%.

Gold was down 0.29%, oil -0.89% and bonds were generally slightly lower.

Tomorrow, Spain auctions some long-term bonds to refinance current debt and add to it because of their deficit. People are worried to see how that goes and that was probably the main reason for today’s action. As the Spanish auction goes tomorrow, the markets will also likely go. We should know early in the day.

As you can see, Europe is still calling the shots. I will write on that in more detail later.