After yesterday's RM column detailed my ease of opening a new trading account, today's market action has shown again why people do so. The extraordinary differential between estimates for May job losses of more than 8 million and the actual figure as reported by the BLS' Establishment Survey of 2.5 million jobs gained, was sure to be a market mover. So that's a lesson to those who used apps such as Webull (the one I mentioned in my column), Robinhood, and others to trade on the short side of this rally. Do not go on the other side of a rolling steamroller. They don't move fast, but they will flatten you.
My firm exited yesterday's trading with only one short position, a covered call on a very small portion of a long-term equity position. Meanwhile, the market exited yesterday at an all-time high valuation based on the ratio of the Wilshire 5000 market cap to the value of the U.S. stock market (a corollary to the so-called Buffett Indicator) and the green eyeshade boys will be required to tell if today we break through to an all-time high on a more commonly used measure of valuation, the forward P/E on the S&P 500. For sure that measure, now above 22x, sits at an 18-year high, if not an all-time high. Stocks were already near the high end of historic valuation ranges and today stock prices are rising. Doesn't that make them even more expensive? Of course. I don't buy overvalued assets in any class. Never have. Of course, I, as everyone else does, occasionally get the "E" wrong in the P/E. Calculation errors aside, I never will put my or my firm's assets in overvalued assets just for the hope of flipping them to someone else.
The mental leap between not overpaying and actually playing a decline in values is a challenging one to execute. To bet against this market, one is effectively betting against the Fed and its incremental $3 trillion of balance sheet expansion in the past three months. To watch the New York Fed's balance sheet rise from $4 trillion to $7 trillion has been just astounding, and once again this has provided an artificial wealth effect.
But is this money-printing helping the real economy? The following passage from today's BLS report would indicate that, as so many of us have been saying, the Fed and U.S. Treasury's money-printing has produced financial recovery, not real economic benefit for those who need it most. They have been helped by government transfer payments, but the history of the 20th Century shows that only employment can build true wealth.
"However, there was also a large number of workers who were classified as employed but absent from work. As was the case in March and April, household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified... If the workers who were recorded as employed but absent from work due to "other reasons" (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded."
If you can get through all the "howevers" you can see a clear sampling error in the calculation of the BLS' numbers and an actual admission that those methods are flawed. The market is pricing itself based on misleading figures.
Now it is time to make the leap from avoiding overvalued assets to actually investing in plays that will benefit from a reversion to fair levels of valuation. If you haven't learned from today's market action that the macro can outweigh the micro, you have not been paying attention. There won't be another economic report of this gravity until July 2nd (the next employment report) so, beginning today, I will be setting up stock-specific short plays for the inevitable reversion to mean in that release. My Webull account is showing a $15 gain today, and my boy Chad just told me that it is time to be aggressive! I will reveal my short plays in my RM column next Thursday and Friday.