Political science empirical research teaches us that when U.S. unemployment is rising and job losses occur over many months, the political party in charge of the White House will have a difficult presidential election. (See: The American Voter, by Campbell, Converse, Miller, and Stokes.)

Federal statisticians will release one more jobs report, the September jobs report in October, but to-date the trend is not one of U.S. economic health.

The U.S. Labor Department announced Friday that the U.S. economy lost another 84,000 jobs in August, with the unemployment rising to 6.1% - - a five-year high.

The U.S. economy has now lost 605,000 jobs in 2008 after creating just 1.1 million in 2007. Economist David H. Wang told BloggingStocks Friday the U.S. economy is not growing.

'U.S. economy headed in wrong direction'

"The U.S. economy is in recession. We don't have to wait for two-quarter date to confirm it. These are very bad numbers and the economy is headed in the wrong direction," Wang said. "Electioneering attempts aside, the U.S. economy is, objectively, in bad shape and anyone who fails to see this fails to recognize reality."

Oil declines by $30 from record highs. Other commodity prices moderate. The dollar rallies. The nation records better-than-expected GDP growth in Q2.

All are positive data points that suggest that the U.S. economy, while it's certainly not in the midst of robust growth, has not run totally into a ditch, either.

What do the latest economic data points mean for the Dow Jones Industrial Average, and U.S. stocks, in general, for the next six to nine months? Here's the bullish and bearish cases:

Bullish case: Technical analysts would cite the Dow's close above the 50-day moving average for three consecutive days, the fact that the Dow held support at the 11,000 level, and a series of higher closing highs and higher closing lows in the past two months.

Further, technical analysts would also cite the fact that the Dow has completed the volume-light June-July-August summer season (typically bearish for stocks) during a period of anemic growth (if the U.S. economy isn't already in a recession), without plunging to nerve-wracking lows. True, the Dow fell from about 12,400 in June to 11,000 in July, but technicians would cite the aforementioned positive technicals as an argument that a bottom is in place.

Bearish case: Technical analysts would cite the fact that the Dow, although above the 50-day moving average, nevertheless remains below the 200-day moving average -- the toughest moving average line to break in trading. Also, market 'up days' have lacked sustained buying strength as measured by the MACD Histogram.

Further, and equally important, Dow bears would say that although the Dow has risen from its 11,000 low, the roughly 600-point increase is still well within the range of a correction -- or in this case short-covering -- in a long-term bearish trend. In other words, the Dow's recent rise could be Pyrrhic or false -- a classic example of a 'dead cat bounce.'

Market Analysis: With all due respect to technical analysts and their indicators, the view here argues that investors/ traders should take their cue from the U.S. economy's fundamentals: specifically, corporate profits and job growth. Absent substantial, sustained gains in each, any Dow rally is viewed with skepticism.


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What's your view of the Dow? Is this stock market rally real? Or is it temporary? Let us know what you think.

As each day passes, estimates for how bad Q2 earnings will be grows. According to The Wall Street Journal, "analysts estimate S&P 500 operating earnings -- income excluding one-time items -- fell 11.5% in the second quarter."

While the paper points out that earnings often come in a bit worse than expected, this quarter could be a bit different. Everyone expected the numbers to be bad in sectors including banking, brokerage, insurance, autos, and airlines. But the real question is whether business and consumer spending have been hit harder than predicted.

If spending is down, even companies which are expected to do fairly well such as Apple (NASDAQ: AAPL) and Cisco (NASDAQ: CSCO) could face rough earnings reports as big business and the little consumers defer purchases which they feel they cannot afford. That means that tech earnings, which were expected to be OK, could take a big hit.

If tech falters, what is left? Energy and commodities companies? Perhaps, but that is thin ground on which to build an earnings season.

Douglas A. McIntyre is an editor at 247wallst.com.

If you believe the Dow Jones Industrial Average is a leading indicator of economic conditions six to nine months ahead, Tuesday's Dow activity is not good news.

The Dow officially entered bear market territory when a Tuesday morning decline drove the world's most followed stock market average beyond the level indicating a bear market -- down 20% from the October 9, 2007 high of 14,165.

What exactly is a 'bear market'?

Technical analysts, economists, and others argue that a 10% decline -- called a correction -- is a normal pull-back or pause in a bull market, a market where most stocks are likely to rise.

However, a 20% or greater decline is not healthy. Technical analysts say it indicates investors and traders are not simply taking short-term profits, but are concerned about the prospect for stocks in the quarters ahead -- three to nine months out -- and are exiting the market, in favor (historically) of bonds and cash.

For the above reason, 20% declines are usually interpreted by market advisors and participants as a sign that stocks are likely to be under pressure in the months ahead.

The Index of Leading Economic Indicators increased 0.1% in May, the Conference Board announced Thursday. (pdf)

Economists surveyed by Bloomberg News had expected the May index to remain unchanged in May. The index increased 0.1% in April and was unchanged in March.

The leading index has risen for the past two months, following a steady decline that began in the middle of last year, the board said. However, the number of components that are falling continues to be greater than the number of components that are rising over the past six months.

Perhaps no nation expends more effort toward measuring its economy than the United States.

GDP, consumer prices, industrial production, housing starts, corporate earnings, retail sales, job creation...the financial world receives a continuing stream of information that helps Wall Street set the price for various asset classes, the chief among these being stocks and bonds.

Moreover, most of the key statistics are widely-known, long-standing indicators of economic activity. Others, however, are lesser-known -- but often equally telling -- barometers of the nation's health. One of those involves unemployed workers.

The 13% threshold

The U.S. Labor Department announced that in December 2007, 7.66 million adults were unemployed, a 13.2% increase from December 2006, when 6.70 million adults were out of work.

The significance? In nine previous economic cycles since 1950 with a 13% rise, the annual rise in unemployed adults has signaled a recession every time, The New York Times reported.

A recent study by a trio of accounting professors reached a conclusion that many of us have suspected for a long time: The practice of "earnings management" is commonplace in corporate America.

By looking at economic growth from 1962 through the first quarter of 2004, they calculated the approximate number of companies that likely would have achieved 20 consecutive quarters of earnings growth. Their number? 46.

The actual number of companies that achieved that feat? 587, leading the professors to suggest "prima facie evidence of earnings management."

Worried? According to The New York Times, Professor Douglas Skinner, one of the study's authors "also stressed that earnings manipulation does not have to involve outright fraud. It could involve something as innocuous as postponing spending on research and development in order to avoid reporting a loss in the current quarter."

So is this really a big deal? I would argue that it is. At the very least, earnings management amounts to a waste of time and energy, and tactics like postponing R&D expenses can be harmful to the long-term future of the company.

At worst, the leap from earnings management to outright fraud may not be that big. But until Wall Street can get over its obsession with quarterly earnings numbers, it seems like "earnings management" will be here to stay.

When is a dollar not a dollar? Did you ever hear someone refer to "quality of earnings"? Why do they say that? Is there a such thing as earnings that lack quality? Actually from an investment perspective there is.

I have given this a lot of thought, but most often in terms of real estate. Sometimes properties that are being prepared for sale have a lot of cosmetic improvements made while important maintenance and operational activities are suspended to show increased profit. History has shown us that it is not uncommon for companies to 'dress up' quarterly reports in the same manner. That is why smart real estate investors always want to see expense records for several years. The following was found on Investopedia.com:(http://www.investopedia.com/terms/q/qualityofearnings.asp)

• Quality earnings are the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory.
• Quality of earnings is considered poor during times of high inflation. Also, earnings that are calculated conservatively are considered to have higher quality than those calculated by aggressive accounting policies

The Dow Jones Industrials have lost 437 points in the last week. Last Sunday, after the Dow had lost 262 points, my post at The Informed Observer revealed my thoughts on what would happen next and why.

When I read Amey Stone's interview yesterday afternoon with Joe "Uber Bull" Battipaglia, I thought it might be interesting to offer another perspective. Even though the Dow is tumbling and we could be in for some rough sledding, I am reminded of the advice I gave a friend after September 11: If you can afford not to sell your stocks, the market will probably recover in the long run. Therefore, it is better to avoid the transaction costs and possible taxes of getting out and then getting back in; grit your teeth, and hold on.

Yesterday's official Consumer Price Index (CPI) report triggered investor fears that the Fed was unlikely to take its foot off of the interest rate brake pedal. In my view, this represents a potential first crisis for the new Fed Chair. Here's my view of the balance of economic downsides and upsides facing Ben Bernanke: