The news moving markets today centers around fears about renewed economic weakness and continued credit market deterioration. I have included a number of stories below offering a good cross-section of the situation.

Meanwhile, traditional technical analysis helps tone down the noise and offers a pure indication of who is in control: the buyers or the sellers.  To that end, the chart below of the NYSE composite (60 min. bar chart) will help put this week’s trading into prospective.  As you can see, the market is in a well defined downtrend. This week’s rally was simply a move to the top of the channel helping to alleviate a serious oversold condition. The index will need to break above the down trend line and the 20 day moving average, both around the 6905-6910 area, before this selloff can be declared over.  We remain bearish and will look to book profits on the short side as the market nears the bottom of the channel.  

Banks’ Overnight Deposits With ECB Increase to Record

June 3 (Bloomberg) — Overnight deposits with the European Central Bank rose to a record yesterday as the sovereign debt crisis made banks wary of lending to each other.

Banks lodged 320.4 billion euros ($394 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros the previous day, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999. Deposits have exceeded 300 billion euros for the past five days.

Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking industry. The ECB said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.

Read More…

Goldman Sachs weighs in on economic woes…

Nonfarm labor productivity grew a downward-revised 2.8% (annualized) in the first quarter, below the first release of 3.6% and a bit less than expected, as output was revised down and hours worked were revised up. However, with compensation per hour also revised down, unit labor costs still fell 1.3%, only a bit less quickly than the first release of 1.6%. On a year-on-year basis, unit labor costs are still down 4.2%, the most rapid pace of decline in the history of the series (since 1947) except for the 2009Q4 drop of 5.1%. Thus, labor cost trends remain a strongly disinflationary force.

Next up, Briefing offers a good explanation of the employment numbers announces today…

Employment Report a Major Disappointment

The latest payrolls data confirmed the stagnate labor market that was implied from yesterday’s weak ADP report and the lackluster jobless figures over the past four weeks. Nonfarm payrolls increased by 431,000 in May, a disappointment from the 500,000 increase expected.

The details of the payroll numbers were even worse. The consensus estimate expected government hires would increase by roughly 275,000: temporary Census hiring would push up employment by approximately 300,000 while other government employment would decline by 25,000. This leaves the more stable private payroll growth at 225,000 for the month. However, government hires exceeded expectations by 115,000. The private sector produced only 41,000 jobs in May, 184,000 less than the consensus estimate.

Further, out of the 41,000 new hires, 31,000 new jobs were deemed temporary. If consumer demand suddenly decelerates, these hires will lose their jobs quickly. The only good take away from the payrolls data was that manufacturing payrolls increased by 29,000, its fifth consecutive monthly increase. The data confirm that the expansion in the manufacturing sector has not been impeded. The unemployment rate ticked back down to 9.7% in May after temporarily increasing to 9.9%, and it beat the median estimate of 9.8%.

However, like the payrolls data, the details of the move were a major disappointment. Economists were expecting that the move down in unemployment would be due to healthy gains in private payrolls. Unfortunately, the number of people employed actually declined by 35,000 in May. The reason for the drop in the unemployment rate was due to workers again leaving the labor market in droves. The labor forced declined by 322,000 for the month, its first monthly decline since December 2009. If the labor force remained at April’s level, the unemployment rate would have remained at 9.9%. On a positive note, personal incomes looked stronger in May. Average hourly earnings increased 0.3%, well above the consensus estimate of 0.1% growth. Weekly hours increased from 34.1 to 34.2. In all, average weekly earnings climbed an impressive 0.6%.

Tags: ECB, employment report, euro, europe, Goldman Sachs, NFP, Nonfarm payrolls, NYSE, NYSE Comp., productivity

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The equity and commodity markets get rocked as Sovereign debt woes resurface.

The burning question: Will the dramatic widening of credit spreads in Sovereign debt, beginning to resemble the CDS collapse of 2008 in the private sector, lead to a revisit of a 2008 type credit crisis and all the fallout associated with it?…

Greece, Portugal woes intensify – WSJ The Wall Street Journal reports the cost of insuring the debt of euro-zone members with large budget deficits against default rose Thursday, dashing hopes that the European Commission’s qualified endorsement of Greece’s budget plan would calm investor fears. Greece, Portugal and Spain were in focus, with their five-year sovereign credit default spreads moving sharply wider. Greece’s five-year sovereign credit default swap spreads were recently at 4.14%, compared with Wednesday’s closing level of 3.97%, according to to CMA DataVision. Portugal’s five-year sovereign CDS spreads were at 2.09 basis points—their widest level ever—after closing Wednesday at 1.96%. Spain’s sovereign CDS spreads widened to 0.12 percentage point to 1.64%. The moves followed news Wednesday that the European Commission had put Greece under more pressure to cut its deficit; that the Portuguese government sold only EUR 300 million of treasury bills at an auction, compared with an indicative offer of EUR 500 millon; and that the Spanish government had raised its budget deficit forecasts for 2010 through 2012. Spanish and Portuguese stock markets fell sharply for the second consecutive day, with banks leading decliners on sovereign debt worries.

…The jury is still out on the above question but market participants are voting today.  As usual, voting like this is detrimental to long term investment decision making.  I would suggest all take a step back relax and reassess after the smoke of today’s battlefield clears. In the meantime, tomorrow’s employment report may shed some light on the absurdity or validity of  today’s flight into the US$. I stress the word, may, because government released employment numbers are notoriously manipulated.  For those who wish to debate this manipulation issue and wish to cast aspersions about conspiracy theorists please view the following story…

Explaining The Government’s 1.8 Million Job Overestimation In Pictures

Last October the BLS announced it would revise historical payrolls lower by 824,000 on February 5 (this Friday’s NFP release). While this number will not impact the actual January NFP report (a loss of nearly one million jobs in a month would probably even take out the persistent SPY algo that has been hugging the bid for the past 10 months), it will be prorated across all months in the 2008-2009 reporting period. The reason for this adjustment has to do with a huge glitch in the birth-death model, which is exactly the same problem that the rating agencies faced when housing prices plummeted: the birth/death model assumes, in the long-run, jobs are created, not destroyed. Any period of excess volatility in the stock market therefore translates into major prior downward revisions to already disclosed payrolls. And while we know what the current revision will be, the scarier prospect is that the next historical adjustment, due out in early 2011, will be even larger, at least 990,000. This means that the government has overrepresented running payroll data by over 1.8 million jobs over the past 20 months. Read More…

Today, world equity markets suffer, the “risk” trade is reduced and scared investors run into treasuries and the US$.  Meanwhile, the underlying fundamentals of the US$ continue to deteriorate….

Zerohedge: It’s Official: Congress Passes Debt Ceiling 231-195; All Republicans, 20 Democrats Vote Against Raise.  Congress Democrats have just signed off on the US hitting 100% debt/GDP.  About 140% if one adds GSE liabilities which also should be on the budget.

Initial Claims 480K vs 455K consensus, prior revised to 472K from 470K

Continuing Claims rise to 4.602 mln from 4.600 mln

NY Fed’s Dudley says “nothing is on automatic pilot” when asked about ending MBS purchases in March, according to AP – Reuters (The expected end of Q.E. in March has been a major factor in the strong US$ theory since Dec.. Now we see, at the 1st sign of trouble, S&P500 down 3%+ today, the Fed begins to backtrack – surprise, surprise.)

Tags: CDS, commodities, credit markets, credit spreads, employment report, equity markets, Fed, Greece, initial jobless claims, sovereign debt

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Stock Market Investing: Market action continues to revolve around the fallout from Friday’s employment data. Equity markets consolidate and precious metals take a breather. Yes, I wrote ‘take a breather’. Allow me to state unequivocally, we believe a dubious government supplied employment number lacks the power to end a Gold and Silver generational bull market. If you feel otherwise, please do us all a favor and sell your precious metals holdings. In fact, if you would like to borrow and sell short that would be even better.

All healthy bull markets experience shakeouts. Often, these shakeouts can be violent, but they tend to be short lived. These shakeouts result in the expelling of weak holders and suckering in of short sellers. These same players will again be buyers at higher prices.

Investment Strategy: Maintain previous positions and look to add on weakness where appropriate.

TrimTab’s explains Friday’s employment numbers:

TrimTabs employment analysis, which uses real-time daily income tax deposits from all U.S. taxpayers to compute employment growth, estimated that the U.S. economy shed 255,000 jobs in November. This past month’s results were an improvement of only 10.2% from the 284,000 jobs lost in October.

Meanwhile, the Bureau of Labor Statistics (BLS) reported that the U.S. economy lost an astonishingly better than expected 11,000 jobs in November. In addition, the BLS revised their September and October results down a whopping 203,000 jobs, resulting in a 45% improvement over their preliminary results.

Something is not right in Kansas! Either the BLS results are wrong, our results are in error, or the truth lies somewhere in the middle.

We believe the BLS is grossly underestimating current job losses due to their flawed survey methodology. Those flaws include rigid seasonal adjustments, a mysterious birth/death adjustment, and the fact that only 40% to 60% of the BLS survey is complete by the time of the first release and subject to revision.

Seasonal adjustments are particularly problematic around the holiday season due to the large number of temporary holiday-related jobs added to payrolls in October and November which then disappear in January. In the past two months, the BLS seasonal adjustments subtracted 2.4 million jobs from the results. In January, when the seasonal adjustments are the largest of the year, the BLS will add anywhere from 2.0 to 2.3 million jobs. In our opinion, trying to glean monthly job losses numbering in the tens of thousands or even in the hundreds of thousands are lost in the enormous size of the seasonal adjustments.

In November, the BLS revised their September and October job losses down a surprising 44.5%, or 203,000 jobs. In the twelve months ending in October, the BLS revised their job loss estimates up or down by a staggering 679,000 jobs, or 13.0%. Until this past month, these revisions brought the BLS’ revised estimates to within a couple percent of TrimTabs’ original estimates. The large divergence between the two results begs the question of what is causing the difference. While we don’t have an answer today, we will be poring over the data in an attempt to answer that question.

Tags: employment report, gold, investment strategy, precious metals, silver, stock market investing

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The economic news continues to be terrible. The knee jerk reaction; sell off the equity markets run into U.S. treasuries. This type of action would only make sense to the person who ran directly from his cabin into the galley on the Titanic and felt he had gained safety. Furthermore, this fatuous trade into T-bonds has place a brainless bid into the U.S.$.

Allow me to be extremely clear, the worse the economic numbers are the more stimulus will be needed leading to an even bigger debt burden. This is ultimately not good for T-bond prices. However, when T-bond prices ultimately collapse is not easy to foresee because of Fed intervention. On the other hand, for the U.S.$ the picture is vivid. Negative economic news means further Fed intervention which strengthens the case for an even weaker U.S.$….

ECONX Employment Report Weakens Significantly
The employment report came in worse than expected in September. The consensus expected the labor situation to improve and projected payrolls to decline by only 175,000. Instead of an improvement, payrolls fell 263,000 — worse than even the ADP employment report projected.

The unemployment rate declined 0.1 percentage points to 9.8%, exactly what the consensus was expecting. However, the unemployment rate is very misleading. The civilian labor force declined 571,000 in September compared to an increase in the labor force of 73,000 in August. If the labor force held steady in September, the unemployment rate would have increased to 10.2%! …

Total private weekly hours worked declined 0.1 hours to 33.0, below the consensus expectation of 33.1. Further, hourly pay only increased 0.1%, also below consensus expectations. The drop in hours worked and the lack of a strong increase in pay pushed weekly earnings down 0.2% and will lead to lower consumption from people that have maintained their jobs over the last month…

Looking at the payrolls a little more closely, there is no sign of an improvement in employment in the near future. Government payrolls declined 53,000 as state and local government budget cuts forced out workers. Construction and manufacturing employment declined by a combined 115,000. Service-providing firms shed 147,000 jobs as retail trade lost 39,000 jobs, business and professional service lost 8,000 jobs, and leisure and hospitality employment declined 9,000. Only the education and health service sector posted positive employment gains, but the increase was extremely small with only 3,000 new jobs.

…So, after a week of hawkish comments from various Fed governors what do we hear in the wake of these negative economic numbers? Don’t forget, the G20 meeting is now a distant memory….

Fed’s Pianalto says pace of Fed pullback depends on how econ conditions unfold - DJ

DJ reports the pace at which the Federal Reserve will withdraw its support from the economy when the time is right depends on how economic conditions evolve, said Sandra Pianalto, President of the Federal Reserve Bank of Cleveland.

Responding to audience questions after delivering prepared remarks at the Down Town Association in New York, Pianalto reiterated her view that the Fed’s current accommodative policy is appropriate, and said that at this point it is difficult to determine just how fast the Fed will eventually remove its easy policy. “It’s going to rely on how economic conditions unfold,” she said. “We’ll continue to monitor how economic conditions unfold and then act appropriately.” Pianalto reiterated comments from her prepared remarks that she anticipates a gradual recovery and bumps along the road. She said she hopes “they’re just bumps and not shocks,” because “another shock could be very detrimental.”

Fed’s Rosengren says Fed will stay until clear econ can keep improving without help - DJ
Rosengren says expects to see positive growth in Q3, Q4

…All of the above thoughts lead us to the obvious question: what is next for the equity markets? Is the sell off on the negative news a beginning of an October rout or simply another normal retracement? Well, we will of course need to monitor the uptrend and see if support holds. However, for now I will simply comment that the credit markets are not confirming the weakness in equities as of yet. Mike Johnson form M.S. Howells says it best when he wrote this morning….

….Credit sell-off confirmation is nearly non-existent. TARP-Supported Preferred Equity Index (TSPEI) was only down 0.05% on Thursday with KEY, JPM, HBAN, GS, BK, C, and USB preferred equity members all posting gains. Given the low after tax cost of debt financing and the minuscule returns available to executives hoarding cash, we expect to see an increase in the number of executives announcing new debt-financed equity buybacks this earnings season.

Tags: credit markets, employment report, Fed, pianalto, rosengren, T-bonds, US$

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