It would take a lot of lipstick to turn the Jobs Report from Friday into anything but a pig but analysts tried to spin it from every angle. If it looks like a pig, walks like a pig and smells like a pig it is probably a pig. That oinking noise coming out of the Labor Dept on Friday did not prevent the bulls from buying the dip and running the Nasdaq back into positive territory before the morning coffee had turned cold.
There were a couple economic reports on Friday but only one mattered. The August employment report showed a drop of -93,000 jobs and it was broad based and far worse than expected. The consensus estimates had been around +10,000 with bearish whisper numbers as low as -50,000. Nobody expected the disaster we received. The unemployment survey showed the rate dropped to 6.1% from 6.2% and the administration (Elaine Chao) kept pounding the table that the administration's jobs program was working. Excuse me? When questioned about how the economy could lose -93,000 jobs with the continuing unemployment claims rising and result in a lower rate she was unable to answer. Actually the unemployment rate is a different survey than the jobs number. Unemployment is determined by phone calls to individual households asking if they have job. The job loss number is done by surveying businesses on recent hiring and firing action. The calling list for households last month must have covered Beverley Hills.
Job losses were spread across all major sectors including services, manufacturing, civilian and government. Only the construction, education, health care and hospitality sectors showed slight gains in jobs. This was the 7th consecutive month of job losses and the biggest drop since the -151,000 in March. Manufacturing lost -44,000 jobs and the workweek remained at 40.1 hours. Normally a leading indicator of an increase in jobs is a growth in the hours worked. It has been flat to down since March except for a slight bounce in June that was quickly retraced. Workers are finding it harder to get work with 22% of unemployed workers jobless for more than six months and 12% unemployed for more than a year. Temp workers did rise by +7,000 in August and this could be vacation hires or employers testing the water as signs of a recovery grow. Monster.com said they had 24 million resumes online and they were seeing an increase in hiring in the consulting, customer service, healthcare, food services and real estate sectors. Food service was up +38% and real estate +36%. Manufacturing was down -18% on Monster. An analyst speculated that layoffs in high tech, financial management, brokerages and small business management were probably not going to be strong future consumers with new jobs in the food service arena. The tone of the conversation was that we were seeing a trend into any area hiring and not necessarily that it was their chosen field.
One of the remaining economic reports was the Future Inflation Gauge which rose +1.7% in August to 117.6 and the highest level since March. It was the sharpest jump in a year. Suddenly the Bernanke comments from Thursday seem at risk. They will not be cutting rates again if the FIG continues to move up sharply. This was the second monthly increase but a real recovery will produce inflation pressures so it was not a real surprise. It is not close to any critical levels but simply an indicator of the rising trend. The second report was the Composite Leading Indicators which rose to 123.4 in July from 122.1 in June. I don't know why they call it leading indicators when they are just now reporting July numbers but this was the fourth consecutive monthly rise for the global economy. The recovery appears to be spreading with the Euro Zone up +2.1 and NAFTA +7.7. It also appears the U.S. at +7.8 is behind only Mexico at +9.1.
JPM joined the rapid growth club on Friday with an upgrade to their GDP estimates for the 3Q to +5.0% to +5.25%. GS also changed their estimates by lowering their Q1 outlook. They feel the recovery will slow in the 4Q and not pick up again until late 2004. All bets are for a strong Q3 and Merrill Lynch said on Friday that earnings estimates for the 3Q were up +4% in August. The gain was probably related to the job losses as that is the primary cost reduction tool. The very high productivity we saw reported this week is a poison pill for labor because higher productivity means less need for more workers. The +4% earnings growth in August is a very strong gain and so far we have not had any real warnings although the season is young. Merrill also said after the 3Q market momentum could slow because the easy money has been made. Tech stocks are selling for an average PE of 66 and twice the S&P PE of 33. Both are very high historically and when this happened last in Nov-2002 it was followed by six months of flat to down markets. We are also reaching that period in the market where valuation downgrades are accelerating. Last week we saw several that included blue chips MMM and WMT as well as some tech stocks like BEAS.
The markets took a well deserved breather on Friday after the Jobs Report reminded the bulls that the recovery game is not over until the whistle blows. With the Jobless Claims expected to be higher next week the bloom may be fading. In fact it should not be fading just maturing. We have known for months that jobs were dropping and while a negative jobs number should not have been a surprise it was the severity that really fired up the sellers. While the bulls bought the dip early, especially in techs, they could not hold the party line any longer. It was not because the economy or the market had changed but simply a case of a buyer boycott. The bulls ran out of investors willing to buy the top. Not the top in the market, but the top for this cycle. Once normal profit taking eases we can take another run at it.
The problems for next week will be earnings warnings with IBM already a leading candidate. With CSCO, DELL and INTC already saying positive things about the quarter we would not expect many tech warnings but the PC sector is not a strong profit center for IBM. They are also dependent on a currency hedge for overseas sales. They received a major bump in the 2Q from currency translation profits. The dollar has reversed and is causing a drain for Q3. ODP has already warned for Q3 because of that weaker dollar. That could hurt IBM and other multinationals. Another problem will be the continuing valuation downgrades. With many tech stocks up +50% or more this year and some up +100% from last year there is the potential for analysts to book downgrades so they can say they recommended them at $XX and downgraded at $YY. It is all about bragging rights when trying to attract new clients.
This is not a very strong week economically and the biggest focus will probably be the 9/11 anniversary. We could see some market weakness prior to Thursday as traders book profits in case of an anniversary attack. I am surprised we have not seen a raised terror alert but that could come next week. Economic reports for the week include the Kansas Fed Survey and Consumer Credit on Monday, Richmond Fed and Wholesale Trade on Tuesday. Wednesday is almost a blank with only the Mortgage Applications Survey. Thursday, the anniversary of 9/11, has Jobless Claims, Import/Export Prices and International Trade. Friday is the strongest day of the week with PPI and Michigan Sentiment for September.
For the week the Dow managed to crack 9600 but was unable to hold it. This is the upper end of resistance from the January uptrend bearish wedge. The wedge has already been violated on the downside twice but recovered after only a short dip. The current support is around 9450 with congestion all the way to 9000. As long as it stays above 9000 the rally is intact. This does not appear to be a problem after the performance the index managed this week. 9475 is the 50% retracement level from the all time high to the October lows. Now trading over that level it could be tough to break on the downside. The next target for the bulls has got to be 10000 and next week will be pivotal in that quest. If we do trade below 9450 then old resistance levels could come back into play and this late in the quarter we could languish there for some time.
Dow Chart - Daily
Dow Chart - Monthly
The Nasdaq spurted off to touch a new range on Wednesday and never looked back. It touched a new high at 1880 and just below monthly resistance. The Nasdaq held 1850 on Friday and traded in positive territory despite the Jobs Report and the seven day string of positive closes but in the end the profit taking held it to a loss. This is actually a positive. Support held and the string is broken. It is poised start a new run next week if the bulls can attract some new money.
While we are well below any retracement levels the monthly Bollinger Bands are suggesting that 1930 could be serious resistance. Several other analysts are suggesting 2000 is the ultimate goal and one that mutual funds have set as their exit point. With the strength of the techs and the weakness in the blue chips it is possible the Nasdaq could approach 2000 about the same time the Dow hits 10,000. That would be a major profit taking event. It still will be regardless of which hits their target level first only the combination of the two would make it even worse.
Nasdaq Chart - 30 min
Nasdaq Chart - Monthly
The S&P came to a dead stop just below 1030 but that is a major improvement over the 1010 resistance level we had seen for two months. The S&P has support in the 1000 range and that should give us plenty of room to wander next week. I posted potential targets for the S&P on Thursday night and in the interest of continuity I am posting them again below. Most analysts agree that 1140 is the likely cooling off point.
S&P Chart - 60 min
S&P Chart - Monthly
Even if you never read the header of this commentary you should take notice of a couple items. The daily average of new 52-week highs was nearly 1000 for the week while the average new lows was only 20. This is astronomical sentiment numbers. Also, The Dow dropped -120 points at the low for the day on Friday but the VIX closed only a few ticks away from the 52-week closing low at 19.23. Despite the Jobs Report and the profit taking the bullishness is still growing and reaching extreme levels. Check out the Editors Plays today for important changes to the VIX by the CBOE. Would you believe futures and options are going to be offered on the new VIX? No kidding.
I mentioned earlier that I was surprised we had not seen any hikes in the Terrorist Alert level and recent events make that more of a possibility next week. The FBI announced late Friday that it is looking for four terrorist suspects who according to the release are still trying to organize some more "aerial suicide attacks" against the United States. Whether these men are real threats or not this follows a similar pattern of the prior 9/11 anniversaries and major events like the NY New Years Eve party. First warn about individuals, then quote specific and credible intelligence, then raise the alert level until the date passes. Not that I think the government would manage our expectations and reactions to their alerts but stranger things have happened. Keep your eyes open for this scenario and see if it comes to pass.
If this becomes a bigger news item over the weekend the markets are likely to resist any urge to move higher until after the 11th. This could also prompt some profit taking in advance just in case something happens. Next week could either go into hibernation while waiting or move down on profit taking but I would be surprised to see any new highs before Friday. But, I have been surprised a lot lately. Keep those stops in place and it would not hurt to own a few out of the money index puts as well.
Enter Very Passively, Exit Very Aggressively!