Is The Jobs Picture An Oasis Or Is It Just A Mirage?

For the first time in months, initial jobless claims came in below 400,000, a welcome sign to an economy hanging by a thread. Initial claims for the week ending July 23 came in at 398,000, below 400,000 for the first time since early April. Economists were expecting 415,000 in initial jobless claims. The prior week was revised up to 422,000 from 418,000. Continuing claims came in at 3.703 million, versus estimates of 3.668 million. It is encouraging that the four-week average fell 8,500 to 413,750, also the lowest since April. Despite the drop in claims, jobless numbers are still stubbornly high: they are currently near 400,000 and are going nowhere fast. Joshua Shapiro, chief U.S. economist of MFR Inc. said of the decline, [It] "is clearly good news, we would prefer to see further data before concluding that the earlier downtrend in claims is being re-established." As Congress continues to fight over the debt ceiling, and spending cuts, many employers have said that the fighting in Congress is hurting consumer confidence, as well as employer's ability to plan long-term. Without long-term planning, businesses can not make hiring decisions, thus leading to continued long-term structural problems with employment. The deadline to get a deal done on the debt ceiling is August 2. Today is July 28, which means we have just 6 days to get a deal done, voted on, and sent to President Obama for signature. This is a lot to ask a Congress that can not agree on anything. The Federal Reserve has done all it can to try to help the bleak employment picture, but nothing has really worked. Lowering interest rates. Quantitative easing. For all that the Fed has done, we have seen a massive move higher in equities, commodities, and a sharply lower U.S. dollar. Over the past two years, we have seen a rally in the equity markets unlike anything seen since the 1930's. Corporate profitability has become disconnected from unemployment, which currently stands at 9.2%. If you look at the U-6 rate, which accounts for all underemployed and people who have fallen off the unemployment line, it's closer to 16%. Almost one fifth of this country is either underemployed or unemployed. I would not exactly call this an oasis. We get the July jobs report on August 5, which will give us another picture as to how the employment picture is being painted in this country. In June, just 18,000 jobs were created, well short of what anyone expected. May and April were revised down a net 44,000 jobs as well, further adding fuel to the fire that the employment picture is atrocious. If July is as bad as June, the fleeting optimism in the equity markets will evaporate as fast as a glass of water in the Mohave desert. We are all gasping for water here. Give us some life blood before we evaporate into nothing. ACTION ITEMS:

Bullish:
Traders who believe that the economy will get better might want to consider the following trades:

• Consider names like LinkedIn LNKD and Monster Worldwide MWW, which should move higher as the employment picture gets better and more people are confident searching for jobs.

Bearish:
Traders who believe that the economy will remain bleak may consider alternate positions:

• Even if corporate profits aren't being effected by the unemployment rate, the jobs situation suggests that there are still serious deflationary forces at work in the economy. If this persists, it is going to become a major drag on growth for the foreseeable future. This will hurt stocks, particularly banking stocks such as Citigroup C, Bank of America BAC, Wells Fargo WFC, and J.P. Morgan JPM.

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