Friday, August 6, 2010

Morning Update/ Market Thread 8/6

Good Morning,

Equities are sharply lower this morning on the release of the Employment Report, headline number unchanged 9.5%, and -131,000 jobs. Bonds have broken out to the upside, the dollar broke down sharply, oil is down, and gold is up strongly. Below is a 5 minute chart of the DOW’s reaction on the left and S&P on the right:

Here you can see that the TNX (ten year Treasuries) has broken below support to a new lower yield on the daily chart:

Here /ZB (long bond futures) have also broken higher on the 15 minute chart:

The report, of course, was heavily massaged with the Employment Population Ratio falling to mask the headline percentages. Huge revisions to prior months are once again in play, overall a horrid report with obvious gamesmanship – another blow to confidence in government in two respects, one in their ability to create real jobs, and the second in their ability to outright lie and manipulate.

Here is the entire release:

Employment July

Here is how they are keeping the headline percentage down:
The civilian labor force participation rate (64.6 percent) and the employment-population ratio (58.4 percent) were essentially unchanged in July; however, these measures have declined by 0.6 percentage point and 0.4 point, respectively, since April.

So, while the population is growing, now 311 million in the U.S., both the participation rate and population ratio are declining! How much is that? Well, .6% is equal to 1.866 million people!!! That’s just since April!

And that makes any job creation whatsoever a flat out lie.

Here’s Econoday’s spin:
The July jobs report disappointed and weakness was largely in the government sector – and it was not all just temporary Census workers being laid off. But there were a few bright spots, including gains in wages, the workweek, and earnings. Overall payroll jobs in July declined 131,000 after falling a revised 221,000 in June and after a 432,000 boost in May. The decline in July was worse than the market forecast for a 125,000 decline. The May and June revisions were net down 97,000.

Turning to the household survey, the unemployment rate was unchanged at 9.5 percent in July.

For detail in the payroll numbers, the big weakness in July came from a 202,000 drop in government jobs, following a 252,000 fall the month before. Of the July government plunge, 143,000 came from a drop in Census Bureau payrolls.

Private nonfarm employment, which discounts the effects of hiring and firing temporary Census workers, accelerated moderately to a 71,000 increase, following a 31,000 gain in June. The latest number came in below the consensus expectation for a 100,000 boost in private payrolls. Improvement was evenly divided between the goods-producing and services-providing sectors. Good-producing rose 33,000 with manufacturing up 36,000, mining up 7,000, and construction down 11,000. Services-providing jobs rose 38,000 with strength led by trade & transportation, up 25,000.

There were some notable positives. Average hourly earnings improved to up 0.2 percent, following no change in June and matching the market projection for a 0.2 percent gain. The average workweek for all workers rose to 34.2 hours from 34.1 hours in June. Analysts had called for 34.1 hours.

On the news, equity futures dipped and Treasury rates eased. Although the headline payroll number disappointed, the private sector detail was not so negative. Now, it appears that the government sector in terms of employment is a drag on the economy which should not be a surprise given revenue shortfalls for state and local governments.

Nice work… 97,000 jobs revised out in May and June? How many will be revised out in July?

Government job losses is exactly what you expect for wave C as the psychology has shifted. The private workforce has already been decimated but the government was adding during wave A and B in order to stimulate. Now pressured by deficits they are no longer able to and must cut. Welcome to wave C, the wave that will ultimately produce real and meaningful change.

Despite the numbers game, unadjusted U-6 still rose to 16.8%:

As expected, the July Birth/ Death model adjustment was small and not a factor in this report. It was, however, slightly additive versus last year’s July report which was slightly subtractive:

Bottom line is that there is no real job creation in the United States – on the contrary, jobs are still being lost at an alarming rate. This is due to debt saturation – once debt saturation is reached, adding more debt to the system creates lower employment, a relationship completely not understood by the vast majority of economists and academics. This situation will not improve until debt levels decline significantly or there is an underlying fundamental change to the system that includes a method for clearing out current debt and derivatives. And if we wish to prevent it from happening again, then we need transparent procedures to ensure that debt saturation is not reached again.

The market is nothing but a manipulated coiled spring. All the bad economic data has so far failed to break it down with the dollar sliding in the background. Same thing happened in 1987 prior to the crash, same thing happened with the recent flash crash and the Euro sliding in the background. The fact that the dollar fell sharply on this report while bonds rose sharply is telling me that we may be encountering a loss of confidence… in the bond market money is fleeing to safety and we would expect deleveraging to bring the dollar up, however, if confidence is waning in our government and our dollar, then it is possible that people will view commodities (food, energy, precious metals) as a safer place than holding dollars. That would be the very worst outcome which we would know is happening if we see the velocity of money begin to rise sharply along with prices.

Yesterday I produced this chart showing the recent correlation between food commodities, as shown by RJA, and the dollar. I note that wheat hit $868 yesterday and has now pulled back some, but is absolutely parabolic. RJA versus the dollar below:

As I type, I see equities have now returned to the range of the past few days. If they were to break out and run significantly higher with the dollar sliding hard, then the loss of confidence play may be on. I don’t expect that, but I am aware of the potential. What I do expect is that we fail to break out of the rising wedge and equities decline sharply.

We will know that the next leg down is truly underway when the bottom of the rising wedge is decisively broken. As you can see on the 30 minute SPX chart above, that line is now approximately 1110. Should we break higher in equities against this horrid employment and economic backdrop, it would be extremely dangerous for our nation as well as for those gambling in this market. For now we are still in the range and we need to give it time to play out and watch what happens while remaining open to all the possible outcomes. I believe we are most likely making a turn lower here and now, but getting ahead of the action is simply not smart with the amount of control being exercised over the markets at this time. Again, watch the trendlines…