Blog Posts by Jeff Macke

On Thursday night President Obama will deliver his long-awaited jobs speech. It says a lot about the state of the U.S. economy that an address to a joint session of Congress is getting so much attention. The bitter truth is there should be no drama about the executive branch's jobs policy, particularly in this environment. President Obama came into office with the unemployment rate at 7.8%, and nearly three years later, it's worse.

For economist Michelle Girard of RBS Securities, the President unveiling his pointlessly secretive jobs growth scheme is a precursor to economic growth, regardless of whether or not the plan is dead on arrival. "What we need to do is reduce uncertainty," Girard preached as I all but waved my hands over my head in joyous agreement.

Even a plan unlikely pass into law will allow corporations to knowingly chart their courses. Corporations will be able to decide whether or not to repatriate the roughly $2 trillion of overseas cash with some knowledge of what it will cost them to do so. Small businesses --the real drivers of American employment-- will know the cost of hiring that incremental employee. Companies don't build plants when they don't know the price of staffing them. This needs to change.

Sadly, Obama's address is apt to be a glorified stump speech. In the likely event that nothing fresh is said on Thursday, optimism may remain a scarce commodity, but at least the road to the 2012 election will be clear: The Republicans will obstruct, Obama's Democratic base will start mulling 3rd party candidates, and America will remain on a road to nowhere. The Street is already betting on this scenario, which is the best explanation for why stocks remain dead money.

Traditionally the first trading day after Labor Day is when the grown-ups return from summer vacation and tell the stock market where to go. Judging by Tuesday's price action, the adults don't have any idea where stocks are heading.

After futures dropped so low this morning that the NYSE invoked the mysterious Rule 48, stocks settled into their familiar range; dipping under 1,150 on the S&P500 before stabilizing and hanging out in negative territory all day. It was in the final minutes of trade today that a significant bounce took the market well off the morning lows and cut losses in half. The DJIA fell 0.90% to 11,139, the S&P 500 fell 0.74% to 1,165, and the Nasdaq fell 0.26% to 2,474. Aaron Task from Yahoo's Daily Ticker joined Breakout to discuss the day and more importantly the week ahead.

For those keeping track at home, since the S&P500 definitively broke below 1,250 at the beginning of August, it has traversed the area from about 1,220 at the highs, to 1,120 at the lows on five occasions. While there's something to be said for a market where nobody stays wrong for very long, if you like a market trend it may be time to focus on preparing your Halloween costume. Even traders are getting frustrated trying to figure this out.

Yet, as always is the case with the stock market, there is hope. In this case it revolves around the idea that two events scheduled for this week could snap us out of the range-bound malaise.

When markets start opening 2% or even 3% higher or lower than where they closed the night before - what traders call "gapping"- the overwhelming temptation is to move to cash and bundle up until the craziness subsides. But playing it safe isn't all it's cracked up to be, according to Steve Wood, the Chief Market Strategist of Russell Investments.

You're "overpaying to stick your head in the sand and ride it out," Wood says. Citing low absolute dividend yields and Treasury yields below any reasonable rate of inflation, he thinks the cost of peace of mind is far too high. This is precisely the type of environment in which to put risk on your books. It's an investment thesis that puts a new spin on the somewhat debunked trading cliche: "Don't fight the Fed." Rates are low precisely because the Fed wants investors to seek out riskier investments and Wood suggests individuals take it to heart.

To be clear, by "risk" Wood doesn't mean trading. Traders "need asbestos gloves on a good day," the strategist says. He's steering clear of financial stocks but getting long names in health care, consumer discretionary, and consumer staples. He believes these are sectors that can survive a lagging economy.

Companies exposed to Emerging Markets can withstand slowing growth from overseas because, Wood notes, it's only falling "from a fantastic rate of growth to very, very good." With stocks off around 15% from their highs of just a few months back, it's easy to make the case that some earnings rate deceleration is being priced into the tape.

As the market struggles to come off the morning lows, Rod Smyth, Chief Investment Strategist at Riverfront Investment Group is not losing sight of the fact that US stocks are cheap, specifically "25% cheap to their long-term values." The emphasis there is on long-term. Even a relative optimist like Smyth believes the markets could face a bumpy ride as investors come to terms with the new economic reality.

Smyth thinks Europe is going into recession and the US is entering a period of stagnant growth, regardless of how we label it. But he notes that if earnings come in as analysts expect, we've got $100 of earnings in the S&P500, making stocks cheap at 1,100, 1,150 or even 1,200 on the S&P. The rub is that the estimates are likely too high.

"It's all about earnings," Smyth says. "I think we're going to have a couple of earnings seasons where analysts forecasts are going to be disappointing." Recessions bring with them weak earnings, after all the accounting and productivity dust settles.

Rest easy, bulls, there will come a point at which earnings guide-downs are priced into the markets. We're just not there yet. Smyth is in the popular camp where long-term investors are holding cash and picking away at Blue Chips as markets drift lower. "In many of the great companies you're getting dividends higher than you can get in cash or US Treasuries," he says, echoing the mantra of the long-term investor.

Smyth also suggests taking a shot at what were once called Emerging Market nations. He specifically mentions Brazil which, as noted last week, seems to have a somewhat "flexible" stance towards interest rates. I gently suggested that Brazil's lack of rate stability could signal economic unrest.  But Smyth wouldn't have it, and particularly objected to my use of the label "Banana Republic."

U.S. Investors woke to heavy selling led by European markets as questions surrounding the very existence of the European Union rose yet again. The fate of the noble EU experiment could effectively be decided as soon as this week when the German Constitutional Court votes to determine if it's constitutional for the ECB to buy the debt of foreign nations. If Germany refuses to participate in an expansion of the ECB's balance sheet, none of the other nations have the wherewithal to chip into the kitty, if you will. Given that the German economy is even closer to an official recession than the U.S., it seems a long-shot that German citizens will opt to send more money abroad.

I asked Rod Smyth, Chief Investment Strategist at Riverfront Investment Group to help piece together exactly what's going on in Europe. Suffice it say, it's not great. The German Constitutional Court's "vote could not be coming at a worse time," noted Smyth. "What you need in Europe is exactly what the Federal Reserve did in 2008; you need a lot of money to secure a lot of bonds."

Whatever you think of the Fed's TARP program, it wasn't much of a problem getting it enacted. There's one US central bank - the Federal Reserve- whose power is recognized by 50 states. The ECB represents 17 different countries bound only by a series of treaties. Seceding from the European Union is a decision Germany can and will make, should their citizenry balk at picking up even more of the ECB's tab.

Distressingly weak August jobs data makes action from the Federal Reserve a sure thing sooner rather than later in the view of Michelle Girard, Senior Economist at RBS. "The table had sort of been set for Fed action," she notes, today's jobs number "just accelerates it."

Girard thinks the most likely course of Fed action is a process of buying and selling Treasury Securities in what's being called "Operation Twist." As she explains it, the Fed "would liquidate some of their shorter term holdings, maybe out to three years in maturity, and then buy in the longer end, hoping to bring long-term rates down." The move wouldn't put more money in the system, making it an "easier sell for Ben Bernanke" to those in favor of no more stimulus.

On the downside, long-term rates are negligible and that fact has resulted in literally zero job creation. Operation Twist is pointless and misguided.

Since Operation Twist solves a problem we don't have, the question is what the Fed can do to create jobs independently from the Federal government. The Fed can take obvious action to bring down long-term rates, crank up the figurative printing press so often discussed, but none of the conventional tools have worked thus far. Lending money to the U.S. via Treasuries already costs money versus inflation, corporations have plenty of cash, and inflation is largely under control. If this doesn't sound familiar you haven't studied the fate of Japan over the last 20-years.

The American economy added zero jobs in August. Unemployment remains at 9.1%. The data can be explained in any number of ways involving striking Verizon (VZ) workers, Minnesota government shutdowns, and decreasing Federal payrolls. This is all well and good, but regardless of how you couch it, today's jobs number was terrible.

Aaron Task from Yahoo!'s Daily Ticker joined me to help make sense of this extremely volatile report and grasp for ideas about what it means for the future. Warning: The outlook isn't great.

"In the Spring we had three months in a row of non-farm payroll growth above 200k," Task offered. Since then the data has gone skidding down a steep road towards zero growth, where the economy is now. And quite possibly, job losses are next.

As if it weren't rough enough here, Task points to Europe as another source of dread. "All the data from around the world are heading down," he notes. Eventually that's going to become just too much for a shaky stock market to handle.

Which leads to what I'm watching. I would love to be bullish. I'm long stocks; not a ton of stocks, but long nonetheless. It's not in my economic interest to have markets weak, so there's no hidden agenda in my outlook. It's my professional goal to earn and keep my money. To that point, I already know the economy is weak. I've called this a recession for over a month, and I take no pleasure in the fact that my glum view seems to be correct. The only question now is how the markets react to the ongoing stream of bad news.

The business model of the pawn shop dates back over 3,000 years and remains largely unchanged: A customer in need of some cash gets a loan from a merchant, using a personal possession as collateral. The pawn shop holds the property for a predetermined amount of time, charging interest on the loan. If the customer can pay his debt before the deadline, he gets his property back. If not, it's the pawn shop's to resell.

While the basic transaction is much the same as it was in ancient China, the reputation of the pawn shop industry has fluctuated wildly. Pawn shops have often been portrayed and viewed as vaguely threatening stores located in seedy parts of town, where only desperate customers would dare venture to.

Today, the modern pawn industry has become something else entirely. Many of these shops, which also operate like small banks, are publicly traded companies and are becoming cultural phenomena. The embodiment of the new era of the pawn shop is Rick Harrison, star of History Channel's monster hit Pawn Stars and author of the book "License to Pawn". Harrison, who runs the Gold & Silver Pawn Shop in Las Vegas, Nevada recently sat down with Breakout to discuss the economy, misconceptions about his business, and the endless number of curios he comes across when dealing with the 3,000 to 4,000 customers coming through his shop every single day.

Harrison immediately addressed the lingering perception of pawn shops preying on the down-and-out, or especially in Las Vegas, desperate gamblers down to their last chips. Despite the tough times, nearly 80% customers reclaim their goods; meaning a pawn shop transaction is more like a bridge loan for the roughly 25 million Americans without a traditional bank account, rather than a legitimized loan sharking operation.

Which isn't to say the pawn shop business is impervious to the economy. Most assume the stores do better in a weak economy; but they don't. Harrison explains that it's the nature of buying and selling that changes based on economic conditions.

"When times are good, I'm buying less stuff and I'm selling more stuff. When times are bad, I'm buying at lot of stuff but it isn't moving like it used to," says Harrison. Reflecting the building slump in Vegas, there's a glut of construction-related goods coming into his shop, but very little demand from buyers. As any student of economics will tell you, too much supply and little demand means lower prices. "At this point, we have just stopped taking construction tools altogether. That's how bad construction is in Las Vegas," says Harrison.