Interesting article from the bullish camp.
Can the market be wrong?
By Mark Hulbert, MarketWatch
Last Update: 12:01 AM ET May 11, 2005
ANNANDALE, Va. (MarketWatch) -- Normally I have little patience for those who rationalize incorrect forecasts by arguing that it was the market that was wrong.
After all, an adviser's job is to forecast where the market is going. It's too easy simply to excuse an incorrect prediction by arguing that the market was irrational.
I am nonetheless inclined to make an exception for some predictions I wrote about at the beginning of April. Though they turned out to be wrong, at least for the stock market's direction during the month of April, the government's jobs report last Friday in some ways vindicates those predictions. (Read related column from early April.)
The forecasts came from Madeline Schnapp, a senior research analyst at TrimTabs Investment Research and editor of two of that firm's newsletters, TrimTabs Personal Income and TrimTabs U.S. Employment Update. On the basis of data TrimTabs had collected from any of a number of sources, she argued at the time that the economy was producing far more jobs than the government had reported during the first three months of the year.
This was one of the main reasons why she was bullish on the stock market.
As fate would have it, of course, the stock market fell during April. The Dow Jones Wilshire 5000 index (DWC: news, chart, profile) shed 2.3% for the month.
But in some ways Schnapp is now enjoying the last laugh.
The government reported last Friday that the economy created 274,000 jobs during April, which is a lot higher than most economists were expecting.
Furthermore, when reporting this better-than-expected number for April, the Labor Department's Bureau of Labor Statistics (BLS) also revised upwards what it had originally reported for the months of February and March, adding an additional 93,000 to the estimate of how many jobs were created in those months.
To which factors does Schnapp attribute the superiority of her forecasts over BLS's? One of the most important is the way in which the government seasonally adjusts the raw data. She points out that "the BLS applies massive seasonal adjustments to its employment data from January through March, which makes it difficult to calculate employment growth accurately."
April is the first month of the calendar year in which BLS applies very little seasonal adjustment, which is why -- in Schnapp's opinion -- the agency finally reported decent job growth.
Another major reason why the government under-reported job growth earlier this year, in Schnapp's opinion: The BLS's estimate is based on surveys of only the largest companies. "Corporations employing less than 1,000 people ... are rarely counted," she points out.
This wouldn't have to cause the BLS's estimates to be biased, if job growth were equally fast at both small and large companies. But that assumption is wrong currently, according to Schnapp's research. "Based on our analysis of income tax withholdings, online job demand, and growth in commercial and industrial loans, we believe most job growth is occurring at small and medium-sized corporations rather than large corporations."
What does this all mean for the investor? For starters, Schnapp recommends that we "ignore the BLS."
In addition, in part because of the encouraging jobs data, Schnapp's firm is very bullish on the stock market right now. In fact, it is recommending that clients be 200% long, which would require that they buy $2 of stocks for each $1 of portfolio net worth.
With as aggressive a bet as that, the firm cannot afford for the market to be wrong again...
