How can both stock market and unemployment rate keep going up? It doesn't make sense to me at least...

Last month the national unemployment average rose to 9.8%. It’s actually at 17% if you count distressed and underemployed workers. Not only is unemployment data weak, it’s getting worse. Former Fed Chairman Alan Greenspan said unemployment would hit at least 10% before turning back.

Even with this well-known data, the market is going up. The S&P 500 is sporting a mostly gentle uptrend from March to October. The market thinks we’re recovering. Bernanke and company have said as much. However, given that, we have the toughest job market in a generation, to me it seems a little premature to declare recovery – at least a strong one.

I’m not alone in my assessment. CNNMoney.com’s Editor At Large Paul LaMonica recently said, “Repeat after us. There is no strong recovery without job growth. There is no strong recovery without job growth. Why does Wall Street not get that?”

A good question. Why is the market going up while jobs are going down?

It makes even less sense when you consider the nature of unemployment. It goes back to demand. When companies experience demand for their products and services, they will seek to meet that demand. If meeting that demand requires more labor, they will hire. If companies hire, then unemployment goes down. People return to Starbucks to order their Double Skinny Lattes.

But that’s not what is happening. Instead, companies are cutting jobs. Why does the market go up while this is happening?

To this humble market observer, it seems that most of the buying pressure is coming from earnings. Quarterly profits have been good, often better than expected, primarily driven from falling operating expenses. Operating expenses are falling because many large companies are cutting jobs. There are other factors, but job cuts are definitely helping the bottom line.

In recent days, Sun Microsystems (JAVA), The New York Times (NYT), Dell (DELL), St. Jude Medical (STJ) all shed jobs to stabilize their businesses. And these companies aren’t even banks. We just crossed the 100 barrier for failed banks in the US this year. I’m not sure where all those employees have gone, but they aren’t helping keep unemployment rolls under 10%.

Despite the slumping jobs market and rising stock market, I am often reminded of economist John Maynard Keynes’ aphorism. “The market can stay irrational longer than you can solvent.” This may be one of those times.

The Implications of Insider Trading in Hedge Fund Land

The arrest of hedge fund millionaire, Raj Rajaratnam, on charges that he and his $7 billion Galleon Group hedge fund profited from illegal insider trading will no doubt feed suspicion in some corners about the way hedge funds generate fat profits. But for anyone to assume that all hedge fund managers owe their success to getting information on the sly is unfair and wrong. The overwhelming majority of hedge funds are only as good as the quality of the research performed by their analysts and traders.

And the truth is the vast majority of hedge funds are rather ordinary. If the majority of hedge funds managers were so crafty, not so many funds would have gone bust last year–or lost bundles of money for their wealthy investors. The true standouts in the industry are a real minority. Anyone can put together an offering statement, call themselves a hedge fund manager and go out and raise money. That’s one reason why wealthy people and pension funds who throw money blindly at hedge funds without doing adequate due diligence are being plain foolish.

Still, the charges against Mr. Rajaratnam and five co-defendants are disturbing. Hubris and greed are powerful motivators. And some hedge funds will stretch, even break the rules to get an edge–even if it’s to book just another $20 million for a fund with nearly $7 billion in assets. Indeed, it’s worth noting that this isn’t the first time Galleon has been accused of skirting the rules to get an edge.

In 2005, Galleon paid an $800,000 fine to the SEC to settle a civil investigation into allegations it improperly profited from shorting 17 stocks. The SEC alleged the hedge fund violated securities rules by using shares obtained in a secondary offering to cover, or close out, a pre-existing short position on a stock. Regulators claimed that impermissible strategy called “collapsing the box” essentially was a risk-less one and generated $1 million in trading profits for Galleon. Maybe the 2005 settlement put Galleon on a watch-list for prosecutors. It appears from the criminal complaint prosecutors began focusing on Galleon and its co-founder in 2006.

In addition, Galleon always has had something of a cowboy culture. Years ago, the fund recruited a former Bank of America (BAC) technology analyst who was fined and suspended by securities regulators because he allegedly issued misleading bullish research reports on stocks he was simultaneously advising hedge funds to sell short.

However, what may be most troubling about this latest case brought by federal authorities in New York is that one of the people allegedly providing illegal tips on leveraged buyouts and other deals was an analyst with Moody’s Investors Services (MCO), the credit rating agency. The alleged tipster got $10,000 for his work.

The allegation about the Moody’s analyst raises serious questions about safeguarding the flow of information from credit rating agencies to traders on Wall Street. We’ve already seen evidence in a civil lawsuit against UBS (UBS) that suggests some at Moody’s may have discussed potential rating changes on CDOs with some Wall Street banks.

Insider trading is a problem that has been around as long as people have traded stocks. And it’s almost impossible to stamp-out insider trading, given the premium someone will put on getting inside information. But aggressive law enforcement, like the kind done in this case, should serve as a deterrent–hopefully.