Markets closed down on Wall Street: DJI -1.39% SP500 -1.7% Nasdaq -1.66% Gold +0.11%

The markets were up down big because:

• Initial Jobless Claims hit a 9-month high. Claims came in at 500,000 and hope for a good back-to-school season went back to school. Is unemployment about to spike? >
• The Philly Fed Business Outlook Report had it’s first negative reading since July 2009. New orders, shipments, and employee workweek all fell into the shitter. At least India is still booming >
• Retailers Sears Holdings (SHLD) and GameStop (GME) continued yesterdays pessimism about the US consumer. The two larger outlets disappointed on earnings and outlook. Is the US consumer busting at the seams? >

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When Wall Street analysts get “growth” on the brain, they simply can’t control themselves. Hopefully today’s earnings announcement from top home improvement retailer Lowe’s (NYSE: LOW) will realign analyst expectations with reality.

In my humble opinion, topline revenue growth at Lowe’s was a positive sign given homebuilding has fallen off a cliff. Revenue grew 4% to $14.36 billion while same-store sales were up 1.6%. However, the Koolaid crowd was expecting Lowe’s to rake in revenues of $14.52 billion.

Well, let’s put down the sugary drinks and 5-hour Energy: Lowe’s expects its revenue grow 4% for the year, or $49.11 billion. If housing or unemployment gets worse, expect that number to adjust accordingly.

Disclosure: No positions.

JetBlue (Nasdaq: JBLU) flight attendant Steven Slater is a bad ass. After Slater was treated like crap by some idiot who thought they had the right to be a jerk because they paid a few bucks for a plane ticket, Slater made a Hollywood exit from the plane after putting the passenger in place, apologizing to the other passengers, grabbing two beers, then sliding down the emergency chute like the Dude in The Big Lebowski.

Shortly thereafter, Slater became a pop culture hit. The insta-legend virally spread across the Internet and suddenly hordes of people started poking Slater on Facebook. Apparently, millions of service professionals could relate to the infamous bad attitude of American consumers.

Leave it to the completely uncreative people in the mainstream media to hyperventilate and offer Slater his own reality TV show. The show will allegedly focus on disgruntled workers quitting their jobs in entertaining ways. Seriously? Are these people living on another planet where unemployment data is not regulary on the front page of the newspaper?

If the media turns Slater into a hero during one of the worst recessions in a century, they may actually succeed in irresponsibly convincing people (fortunate enough to have a job) to catalyze a personal tragedy. As we know, the general public is not known for thinking too far ahead of their actions. A few examples include taking out unaffordable mortgages, running up credit card debt, and watching 101 Dalmatians then adopting dogs which are extremely hard to domesticate (only to return them in flocks). [Feel free to add some more examples in the Comment section below.]

Assuming Slater’s new show hits the airwaves, we’re screwed. The Labor Department is already reporting five unemployed persons competing for every one job opening.

I applaud workers who demand respect, but how about putting this show idea in the queue for when the economy is roaring and job opportunities are plentiful? Let’s not make this the Black Swan that kicks the unemployment rate into another dimension. If we do, then we’ll need a real hero to save us.

Are you depressed about all the headlines focusing on unemployment and the jobless recovery? To some people that story may as well be unfolding on another planet.

Indian super power car manufacturer Tata Motors Ltd. (TTM) just announced “sales at Jaguar and Land Rover jumped 81% last quarter. Dispatches from factories of the two vehicle brands climbed 59% during the quarter to 57,153 units.”

That is quite the recovery considering Jaguar and Land Rover vehicles faced a stunning lack of demand just after Tata Motors bought the two luxury brands for $2.3 billion from Ford Motor Co. in 2008. This is another piece of evidence that the world is not going to Hades on one big Boeing Dreamliner.

We’ve spent a lot of time covering the transition to Two-Class America. However, it’s worth keeping an eye on the Tale of Two Recoveries across the globe.

This is a 60 minute chart of the SPY. The circled area beneath the line is what I call the “bear trap” zone. The shaded area within the circle is representative of all the market action that took place below the 1,040 level on the S&P futures. 1,040, if you’ll remember, was the neckline of the much ballyhooed “head and shoulders” that technicians could not stop talking about. 1,040 was both the line in the sand area that stopped the flash crash and the area that supported the market on the January-February market pull in. To many technicians, this was a key area; however, when prices failed to stay below we got a nice bounce-back higher in the market.

Since making lows on July 1st, the market has consistently been making both higher highs and higher lows, while forging a new trendline higher (represented by the white, rising diagonal line on the chart above).  So far today, this trendline provided the support necessary to stop the market’s drop, and at the moment we are basing right on top of what can be a pivotal indicator between Bull and Bear (breaking the trendline does not guarantee selling to the downside, it might just be an indicator that we need more time before moving higher).  This afternoon I will be watching to see whether the market can give itself a little cushion above this line, or whether the pressure builds and selling ensues through this area.

Update:

The S&P held this trendline test today and carved out a comfortable cushion for the weekend.  As selling pressure subsided and volume waned midday, the market proceeded to retake the 200-day moving average, at which point an aggressive rally ensued.  Once again, the evaporation of volume signaled the all clear to buy stocks (see my thoughts about the lack of volume).  It as if this market’s sellers are worn out.

Have a great weekend everyone!

Today the Bureau of Labor Statistics released their newest set of data for the unemployment rate and related statistics in the US. Understanding the unemployment rate is crucial to a sound understanding of our economy.

Who Does the Government Consider “Unemployed”?

According to the government’s definition, the “unemployed” are people without jobs who are actively seeking work. It is important to note these people are seeking work because there are also unemployed people who are not looking for a new job for whatever reason.

The government has a hierarchy of unemployment categories:

U1 unemployment: Those who have been out of work for 15 weeks or more;

U2 unemployment: Those who have lost jobs or have only been able to find temporary positions;

U3 unemployment: Those without jobs that are available for work and actively seeking it. This is the official definition of unemployment — the one we read in the headlines;

U4 unemployment: U3 + “discouraged workers,” or those who have looked for jobs but feel they cannot find employment because of economic conditions;

U5 unemployment: U4 + “marginally attached workers,”  or those who would like to find jobs but have not looked recently;

U6 unemployment: U5 + part-time workers who cannot find full-time jobs for economic reasons. This is the widest definition of unemployment and gives the most accurate picture of the total number of under-employed people.

Who Counts the Unemployed People?

The first Friday of every month, the Bureau of Labor Statistics (AKA, the “BLS” in Wall Street talk) delivers a new report on the state of unemployment. The report is a constitution of labor statistics that covers the status of the labor force, employment, unemployment, persons not in the labor force, hours of work, earnings, and other demographic and labor force characteristics.

The information also takes into account all adjustments in unemployment by population change, seasonality, and renewed claims for benefits.

How is Unemployment Measured?

The unemployment rate is created from data collected in the Current Population Survey (CPS). This is a monthly survey of over 60,000 households (usually around 110,000 people) and is then weighted according to the demographics of the households.

Surveyors then determine the rate of employment by asking a series of questions on whether citizens have a job or not, whether they want a job and are available to work, and what they have done to look for work in the preceding 4 weeks.

People counted as unemployed are:

• Not Self-Employed;
• 16 Years of Age Or Older;
• Without a job;
• Currently available for work; and,
• Have actively looked for work in the prior four weeks.

Moreover, unpaid workers putting in 15 hours or more of work in a family-owned enterprise (such as farmers) are considered part of the employed.

After these people are counted, the unemployment number is then taken as a percentage of the overall labor force. The “labor force” is defined as the number of people who are actively working jobs plus the number of people who are available for work.

Interestingly, the government drops people out of the “labor force” category for a variety of reasons including returning to school or when a person simply decides to stop looking for a job (i.e., they are unavailable for work). This adds a tricky component to the unemployment equation because U3 headline unemployment can actually go down even if the number of unemployed persons rises. This occurs when the “labor force” shrinks as previously included person are no longer considered “jobless” to be included in the final unemployment numbers.

Should We Trust The Numbers?

Before praising the BLS for stunning accuracy of America’s labor force, remember: the unemployment rate is known as a lagging indicator. This means the numbers are based on a previous period of time rather than the present. Therefore, things will have changed in the economy by the time the unemployment data is released.

The problem with lagging indicators is that they always look good at the beginning of a recession and bad in the middle of a recovery. Thus, unemployment numbers are not a direct representative of the health of the economy, but very close estimates. They are a very prominent indicator of the economy’s health because employment stimulates economic activity.

What are Seasonal Adjustments?

The BLS uses a statistic called Seasonal Adjustments to calculate and smooth out the numbers for the unemployment rate in the face of economic fluctuations. As new jobs become available for different seasons of the year, the BLS also places additional seasonally-adjusted statistics into their original figures to come up with a number that more accurately represents the state of employment in relative terms.

For example, jobs often come and go in the summer as well as during and around holidays. So, the BLS uses this additional statistic to assess the impact of seasonal fluctuations and the workforce. These seasonal adjustments allow the BLS to analyze the cyclical and underlying trends of unemployment without constraint of seasonal data.
However, seasonally adjusted information is used only for comparing month to month trends. The data used to calculate annual average estimates are taken from the data series which has not been seasonally adjusted.

What About Unemployment Insurance Benefits?

The BLS is not affiliated with any unemployment insurance programs. Those are conducted by the Employment and Training Administration (a division of the Department of Labor). These numbers are delivered in categories of either initial claims for workers beginning a period of unemployment or continued claims if the unemployed are then receiving benefits.

While some people think that the unemployment numbers are taken from the number of claims filed, this is a false notion. When benefits expire, some people still remain jobless and are still counted as unemployed.

While not directly related to the national unemployment rate, unemployment insurance numbers give better estimates for local and state numbers of unemployment. Numbers regarding unemployment insurance are released every week here. Also, Wall Street analysts and investors use initial claims data as a leading indicator of how the BLS unemployment data may change.

What is the Birth-Death Adjustment?

One of the more questionable aspects of BLS numbers is the Birth-Death Adjustment. The B-D Adjustment (as Wall Streeters call it) is an artificial adjustment regarding the number of employers who have recently formed new businesses, but who have not yet been added to the Unemployment Insurance tax files. Since new businesses form every month, failure to include these businesses within the model would overestimate the number of unemployed, so the BLS uses the the Birth-Death Adjustment model to estimate this part of the population. The BLS takes the number of non-farm payroll employees, adds the Birth-Death Adjustment, and then seasonally adjusts the numbers.

As many small firms continually find themselves opening for business and closing, the BLS finds a way for the two statistics to offset each other: a business birth accounts for a business death. However, firms that die usually do not report that they have gone out of business; instead, they no longer report anything.  Follow-ups with unrespondent businesses are then made to determine whether a company still remains in business.

Unfortunately, the Birth-Death Adjustment also fails to offer accurate numbers in the booms and busts of the business cycle. The Birth-Death Adjustment will catch more job creation in the beginning of the cycle, but at the end of the cycle underestimates the number of job losses in the economy. This skews the model and inflates the numbers.

Conclusion

Unemployment numbers are important gauges of economic health. In order for us to improve foresight as investors, we must keep an eye on these very useful tools.

The classic battle between bulls and bears on Wall Street continues:

Lagging Macro Economic Data vs. Positive U.S. Earnings Reports;

Technical Analysis vs. Fundamental Value;

Greed vs. Fear; and, Confidence vs. Caution.

Lately, the bear argument for a collapse has not been manifesting in reality as the Dow Jones Industrial Average (DJIA) is up nearly 1,000 points and S&P 500 is up 100 points from the recent bottom. Has Robert Prechter gone certifiably insane with his Dow 1,000 prediction? I personally invite Robert Prechter to read my recent recap on 3 Dow bellwether earnings reports highlighting improvement and recovery, not Armageddon or doom-and-gloom.

Big names like Pimco’s Bill Gross, fund manager Jeremy Grantham, and Schwab’s Chief Investment Strategist Liz Ann Sonders are all sharing interest in stocks again. They aren’t calling for another huge boom in prosperity, but they are selectively picking names in the current market.  As the tides are turning, I believe there are 4 compelling catalysts that could awaken the idle animal spirits on Wall Street:

4) The Re-emergence of an Iconic American Auto Company: General Motors

On Tuesday, General Motors Co. said July sales from its four core brands – Chevrolet, Buick, Cadillac & GMC — leaped 25% from July of 2009. That makes the 10th straight month of year-over-year gains.

GM’s sales of crossovers jumped 41% and combined sales of full-size pickup trucks rose 22%. If you are still unsure the U.S. economy is recovering after such a strong report, let’s examine a list of companies that have all successfully paid back the taxpayer ‘bailout funds’ (a.k.a. Troubled Asset Relief Program, or TARP) once needed to survive the financial crisis of the Great Recession:

American Express (AXP) – Repaid $3.389 Billion in preferred stock purchased by TARP

Bank of America (BAC) - Repaid $45 Billion in preferred stock purchased by TARP

Bank of New York Mellon Corp (BK) – Repaid $2-$3 Billion in preferred stock purchased by TARP

BB&T (BBT) – Repaid $3.1 Billion in preferred stock purchased by TARP

Capital One Financial (COF) – Repaid $3.555 Billion in preferred stock purchased by TARP

Citigroup (C) – Repaid $45 Billion in preferred stock purchased by TARP

Discover Financial (DFS) – Repaid $1.23 Billion in preferred stock purchased by TARP

Goldman Sachs (GS) -Repaid $10 Billion in preferred stock purchased by TARP

J.P. Morgan (JPM) – Repaid $25 Billion in preferred stock purchased by TARP

Morgan Stanley (MS) – Repaid $10 Billion in preferred stock purchased by TARP

PNC Financial (PNC) -  Repaid $7.579 Billion in preferred stock purchased by TARP

State Street Corp (STT) – Repaid $2-$3 Billion in preferred stock purchased by TARP

U.S. Bancorp (USB) – Repaid $6.6 Billion in preferred stock purchased by TARP

Wells Fargo (WFC) – Repaid $25 Billion in preferred stock purchased by TARP

The Total Repayment by the 14 companies listed above = ~$190 Billion Dollars

Meanwhile, General Motors repaid its total loan portion with interest to U.S. & Canadian governments as of April 21, 2010 with only $2.1 billion in preferred stock and 61% common equity shares outstanding (source: USA Today).

Founded in 1908, General Motors and the American auto industry became the foundation for driving the industrial engine into the future. GM is now in 140 countries across the globe. This month, GM plans to file its IPO registration during the week of August 16th.

GM represents a diversified automotive company with a variety of brands. Even with latest buzz surrounding the electric Vault in 2011, other GM brands are creating a splash. Have you seen the new Chevrolet Equinox? They are commanding a price premium in the market due to demand for the new crossover. The new Chevrolet Camaro is beginning to pop up on roads alongside its long-time competitor, the Ford (F) Mustang.

The U.S. government has made it clear their intention is not to own and operate GM, but to provide help during a time of financial crisis. Over 60% of GM is currently owned by the U.S. taxpayer, but the IPO will put GM back on its own feet as the government sells its stake in the company back to, none other than, the public. The temporary TARP relief to the 244,500 employee-driven organization was a vital necessity to preserve GM and dodge failure. Down the road it will be viewed as a success when we peer at our rear-view mirrors in a few years.

If you are looking for an iconic American brand that experienced a similar GM path, look no further than Sears Holdings (SHLD) and its masterful comeback from bankruptcy in 2003 with an IPO indicative of the 2003-2007 bull market (a rise from $13 per share to over $190 per share over the course of 4 years). Some may call it irrational exuberance, others may call it the awakening of the animal spirits. Remember, Sears is a brand name known since 1886, GM since 1908. Both of their places in American history are unforgettable.

3) Cheap Debt … Again

No one is surprised the U.S. is a debt money system. The real question is how well the U.S. can manage its debt.

At this moment in time during the business cycle, debt is simply cheap. Moreover, debt is being re-financed at extraordinarily low rates. In fact, companies are borrowing tons of cash to invest in the future growth of their company as more executives warm up to the word ‘recovery.’ For example, at the end of July, both McDonald’s (MCD) and Advanced Micro Devices (AMD) sold $750 million and $ $800 million, respectively, worth of debt securities (source: Bloomberg News)

Just last week, I spoke with an anonymous financial advisor at Morgan Stanley (MS) who said he is “buying stock on margin.” Why? Not only because he wants to take part in the rising return of a company like Ford (F) delivering over 20% stock returns in July, but because margin interest (debt) is just too cheap to ignore.

Those who can afford debt — financial citizens who save for a rainy day and do not overextend themselves by ATM-ing their home, car, and any other assets — rightfully deserve to take advantage of cheap debt. They can start putting that money back to work in the U.S. financial system and reaping a return while competitors are vulnerable.

The resurgence of cheap debt and more capital moving back into the system can only lead to better times ahead: jobs, income, the ability to pay a mortgage, and the ability to consume!

2) Justice Served to Crony Capitalists

According to the Department of Justice, in the first half of the 1990-2000 decade, over 3,600 bankers and fraudulent contributors to the late 1980′s savings & loan crisis were prosecuted and penalized with jail time (source: Financial Times). Since the 2008 Great Recession, only a handful of cronies and crooks have been penalized. However, the FBI is handling 2,100 open cases pertaining to securities fraud during the financial crisis. As we discussed on Yahoo TechTicker on June 25th 2010, if these cases start making headlines with handcuffs there will be renewed optimism to invest in markets without financial terrorists.

1) Job Creation May Surprise Sooner Than Bears Think

On July 27th, Derek Thompson of the Atlantic called attention to a very interesting chart in one of his articles. Thompson noticed that corporate profits were up and I say they could act as kindling for new hiring.

As you can see in the chart above, corporate profits broke above the steady unemployment line at the start of Q4 2009. So far during 2nd quarter 2010 earnings season, over 70% of companies are beating earnings estimates. Thus, it is safe to assume the corporate profit (blue) line is continuing to rise and deviate away from the corporate jobs (red) line.

For example, a Dow Industrial component such as Caterpillar (CAT) delivered a 31% increase in revenue growth year-over-year, while a software tech giant like Oracle (ORCL) delivered a 40% increase in revenue growth year-over-year. Looking deeper, for Q2 2010, Caterpillar generated $10.4 billion dollars and Oracle brought home $9.51 billion dollars.

Moreover, there is roughly $1.8 trillion dollars in corporate cash sitting on the sidelines. A lot of this cash could quickly move into the economy as executives get more clarity after the November elections.

Using history as a benchmark for U.S. business cycle activity, it’s fair to say the U.S. economy operates in a domino effect-type manner. Bottom-line and top-line growth usually lead to an increase in capital expenditures such as new employee hiring. More new-hires equals more consumers with disposable income.

The most evident small-scale examples, which are still better than cost-cutting and layoffs announcements of late 2008 and early 2009, are the SEC announcing 800 new positions available as a result of the financial regulatory legislation. Chrysler announcing on July 30th they will add 900 jobs to a Sterling Heights, MI manufacturing plant. A Japanese auto-parts supplier announcing the construction of a new plant in Tennessee to manufacture seat components for Nissan vehicles beginning in mid-2011, eventually employing up to 224 workers. These numbers are small, but we have to start somewhere.

Confidence is a temporary cure, yet can spark animalistic appetites for fat equity returns. As the S&P continues to ‘remain in a range,’ all eyes are moving toward the approaching S&P 1144 battle line. Which animal are you: a bull or bear?

Disclosure: Ford (F) was a Wall St Cheat Sheet Premium Watch List ‘Buy’ Selection on July 9th at $10.85 per share.

Earnings Estimates (High/Mean/Low): $0.21 / $0.193 / $0.17

99 Cents Only Stores (NYSE: NDN) announced last Friday that it will release financial results for its fiscal first quarter ended June 26 shortly after the market closes on Wednesday, August 4.  The conference call is scheduled to follow at about 4:30 PM EST.

NDN operates 276 “extreme value” retail stores, over 200 of which are located in California.  The company opened 9 new locations in fiscal ’10, but also closed 13.  Their report should give us a nice glimpse into the American consumer, as dollar stores have thriven during these times of high unemployment and abysmal consumer sentiment.  As such, NDN saw YoY earnings growth of 600% from ’08-’09 and 210% from ’09-’10.  However, current forecasts of 17% EPS growth from ’10-’11 may be an indication that the $1.2 billion company is hitting a ceiling in terms of expansion.

As you can see below, NDN possesses a very constructive chart.  Since hitting lows of $5.37 in July ’08, shares have put together a two year streak of higher highs and higher lows, hitting a 52-week high of $18.10 in early April. NDN has beaten estimates seven quarters in a row, and a beat on Wednesday will have investors watching to see if they can break through that mark, indicating the potential for yet another leg higher in its multi-year uptrend.

Disclosure: No holdings in NDN.

Convicted felons and former captains of industry Jeff Skilling and Conrad Black caught a break Thursday: The Supreme Court ruled to limit the reach of a federal fraud law that prosecutors used to convict both men. The decision doesn’t set them free but does send their case back to the lower courts and opens the possibility of retrial.

“This is the worst possible time for this case to come up,” says Damien Hoffman, co-founder of Wall Street Cheat Sheet. The conviction of Skilling, Black, Enron Chairman Ken Lay, and former WorldCom CEO Bernie Ebbers helped fuel the last bull market in the mid-2000s says Derek Hoffman, Damien’s brother and business partner. “When they were put behind bars there was a turn in investor sentiment.”

What we need to fuel another bull market, the Hoffman brothers contend, is a new round of perp walks and convictions for those responsible for the crash of 2008. “So long as investors think another Dick Fuld or Bernie Madoff is lurking on the next corner, gold, guns and canned soup will seem the safer bet,” they write in a recent article.

Here’s a few of the names the Hoffman Brothers think belong behind bars

- Joseph Cassano — the former head of AIG’s financial products unit. Under his watch the company amassed massive amounts of risk that lead to the biggest bailout in U.S. history. There’s very little chance of Cassano facing time, however; Federal prosecutors recently dropped their investigation against him.

- Dick Fuld — Lehman Brothers CEO who watched his house of cards come tumbling down, bringing the global financial system to the edge of the collapse.

- Angelo Mozilo — The Countrywide CEO helped fuel the subprime madness. His company’s lack of due diligence is a prime reason for the foreclosure problem. Mozilo also co-founded IndyMac, the large California bank that was seized by the FDIC in July 2008.

- Stanley O’Neal — the former Merrill Lynch CEO pushed the firm to aggressively market and trade CDOs. O’Neal left with the firm on the brink of collapse before Bank of America purchased it. For all his good work, O’Neal was fired but left with a golden parachute and options valued at $161.5 million at the time.

- Fabrice “Fabulous Fab” Tourre — the banker at the center of the SEC’s criminal fraud complaint against Goldman Sachs. “People need to know the Goldman’s of the world don’t have politicians in their pockets and that the American markets are a safe place to put your money,” says Damien.

The Hoffman Brothers also note that during the S&L scandal of the 1980s over 1,000 people went to jail. To date only two Bear Stearns hedge fund managers have even gone on trial. Both were acquitted. Meanwhile, Skilling is serving a 24-year sentence in Colorado. For now…

(Click here to read the original article with more details.)