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Market Wrap

Jobs Surprise

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WE 05-06


WE 04-29


WE 04-22





+  34.80


+ 77.37



+  45.70


-  10.54


+ 24.04

S&P 100


+    5.46


+    1.34


+   3.64

S&P 500


+  14.50


+    4.73


+   9.29





+  26.22


+ 90.52



+  11.17


-    3.70


+   6.66



+  17.14


-  10.15


+   8.78





-  13.61


+ 60.27















Jobs Surprise

Surprise, surprise, surprise! The jobs numbers for April came in at +274,000 and blew past estimates of +175K with ease. This was a major miss by those analysts who read their tealeaves and predicted weak numbers. Not only was the April number a blowout but February and March were also revised higher. The markets rallied back to their highs for the week on the news but could not hold those highs.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

Confusion reigned on Wall Street on Friday. The blowout Jobs report caught everybody off guard and the excessive good news sent stocks sharply higher at the open but resistance held and fear of the Fed came back to haunt traders. February jobs were revised up +57K to 300,000 and March was revised up +36K to 146,000. This good news was matched by the household survey showing a gain of +598,000 jobs. This job explosion sent the bulls into a buying frenzy on thoughts that the economy was much stronger than previously thought. This bounce was almost immediately capped by fears that the Fed would accelerate their rate hikes given the strong jobs. The Fed funds futures had been showing a strong possibility of a Fed pass at the September meeting. After Friday's jobs numbers those futures jumped to a 33% chance of a 50-point hike by that same September meeting.

The jobs components were positive with the Manufacturing workweek rising to 40.5 hours, the overall average rising to 33.9 hours and the average hourly earnings rising +0.3% to $16. The 33.9 number is the highest level since 2002. The unemployment rate held steady at 5.2% due to a large influx of 605,000 new workers into the labor pool. Service businesses created the most jobs with the manufacturing sector still weak.

With the April job gains of +274K, February upward revision of +57K and March revision of +36K that represents a net gain of 367,000 jobs over prior assumptions. Add in the 598K from the household survey and you have nearly one million new jobs to factor into the economic picture. The worries about the Q1 soft patch appear on the surface to have been severely overdone. Analysts spent countless hours and wasted plenty of digital ink documenting their projections only to have the Jobs numbers turn the conclusions upside down. Weak economies don't produce jobs of this magnitude.

Unfortunately a very large portion of Friday's job gains were the result of a Bureau of Labor Statistics paper adjustment. Jeffrey Saut of Raymond James reported that the BLS birth/death adjustment added +257,000 of the reported 274,000 new jobs. Without that adjustment Friday's market action and economic outlook would have been very different. This particular adjustment attempts to estimate how the birth of new companies and death of old ones have impacted the workforce. This massive "adjustment" to the jobs number was overlooked by almost everyone but the bottom line was a massive improvement in economic sentiment thanks to a government adjustment, not verifiable new jobs. That will not be reflected in the weekend news reports and I doubt it will be mentioned ever again. That leaves us with the official number showing a very surprising gain and that is what investors will be using to make their decisions.

Unfortunately the Fed's measured pace may be in jeopardy since the measured pace of job growth has taken on the appearance of a race rather than a pace. With the next Fed meeting nearly two months away on June 28th it will give analysts plenty of time to stress over the next chapter in this saga.

The positive jobs surprise whether real or artificial went a long way towards improving investor sentiment. Ned Davis Research said pessimism going into last week was at an 11 year high and similar to that seen in 1994. For those with a short memory the Fed raised rates six times in 1994 ending with the rate at 6%. This hike cycle capped the equity markets with the Dow trading in a 500 point range all year and a total gain for the year of just over +100 points. However, once the Fed rested the markets exploded from Dow 3800 in Jan-1995 to nearly 12000 in Jan-2000.

Rate Hike Graph 1994-1995

Dow Chart 1994 - Weekly

Dow Chart 1994-2005 - Monthly

I wanted to refresh everyone's memory of that bull market because that is exactly what bulls want to see happen when the Fed rests again. So far the Fed has hiked 25 points at each of its last eight meetings beginning in June 2004. The Fed rate was at a decade's low level of only 1.00% when they began. Given the similarity of market action, economics and stated Fed policy it now appears they will continue to hike for at least four of the five remaining meetings this year. If the jobs data continues to show strong gains it is conceivable at least one of those hikes could be 50 points. From various Fed speeches we have heard that the Fed would consider something in the 4.0%-4.5% range as optimal and that would put us around that level as 2005 ends.

This sets up 2006 as a theoretical springboard except for a one major difference. Remember Y2K? The Y2K problem and the advent of the Internet for consumers spawned a technology boom that will not likely be repeated in our lifetimes. Without that catalyst the markets can still rally but they are going to have to do it on normal market moving facts. Earnings and growth rates. We have seen the earnings for Q1 and it appears we are going to end up somewhere in the +12.3% range for earnings growth. Very few large companies are left to report with Dell and Cisco the exception in the coming week. What we have seen from those companies that have already announced was better than expected earnings but weak guidance after Q2. The technology spending picture continues to be cloudy and the tech bulls will be watching Dell and Cisco for comments that suggest this weak demand is improving. The markets want to go higher but there is still little justification for a summer rally. Markets normally anticipate six months ahead so any bets placed now are counting on a stronger economy and stronger profits in Q4 of this year. So far that projection is still cloudy with a bias to minimal growth in earnings. Should we see a change in guidance to the high side I believe we would see a very strong market later this year.

The major indexes only closed with a +5 point gain on Friday despite the supposedly good news. Fear of the Fed coupled with fear of the summer doldrums kept most investors on the sidelines. Volume was very light on Friday almost dropping to holiday levels with only 3.5B shares across all markets. Hardly a confidence-building rally. The A/D line was dead even at 3569:3543. Without the takeover rumor in Honeywell the Dow would have closed at -7 for the day. A rumor hit the floor that UTX was going to make a bid for Dow component HON and the race was on. HON started from its support low just over $35 and soared all the way to $37.71 before the excitement cooled. CNBC reported several times that there was very heavy options activity in the May/June calls and that just fed the fire. When the smoke cleared there were about 113,000 May options and 56,000 June options traded. Average daily volume is around 2,000. Although CNBC reported that call volume was 5:1 over puts that is not how the day ended. Put volume beat call volume better than 2:1 at 118,500:51,500. This rumor has been around the block numerous times at about six month intervals. Both UTX and HON declined to comment and UTX went so far as to say they are not interested in aviation assets. That put an end to the bounce and HON finished -$1 off its highs. Had the market been open a few minutes longer it may have retraced its gains completely.

The Dow was also helped by a new order for Boeing 787 Dreamliners. Northwest Airlines placed an order for up to 68 planes and BA finished up $1.27. Boeing and Honeywell were the only two Dow components gaining over a buck for the day. The Dow struggled to retest 10400 despite the supposedly good Jobs news and the lonely tick to 10400 was sold immediately. For three days this has been strong resistance and shows a real lack of confidence from the buyers. Stronger resistance exists at 10500-10550 but there appears to be a lack of buying volume sufficient enough to push us higher.

The volume is light because the fund inflows are light. For the last two weeks inflows have barely broken $800 million with only $400 million going into U.S. equity funds in the prior week. The U.S. funds are living on a very strict allowance and there is little cash to throw at the market. The headline jobs number could seduce some retail traders to put a check in the mail next week. However, I would expect funds to be reluctant to simply spend what they receive. With summer ahead they may feel more like building up their cash reserves instead of living dangerously at 100% invested. Should fickle investors start drawing out money for the spring home buying season or vacation expenses then any stock bought next week could just as quickly get sold.

Tech funds have not the beneficiary of that meager cash inflow. Techs have now seen 16 consecutive weeks of outflows and it would take some strong comments from Dell/Cisco next week to reverse that flow. Summers are just not tech friendly and tech investors have been moving to safety. Despite the outflows the Nasdaq hit 1890 early last Friday and has been moving steadily upward ever since. The prior resistance at 1960 was broken for three days but the Nasdaq can't seem to get over 1970. I believe traders are looking at that +75 point rebound and stronger overhead resistance from 1980 to 2020 and finding it difficult to buy tech stocks. If the 1890 dip was the low for this year then buying 1960 would be the wise thing to do. Unfortunately we all know that yearly lows are seldom made in May but in the months that follow.

Nasdaq Convergence Chart - 2005 Daily

SOX Chart - Daily

Crude Oil Chart - Daily

This was a good week for the markets. They were due for a rebound given the very pessimistic sentiment we saw last week. I told you on Tuesday we were due for a bounce and that came to pass as expected. Now it is decision time again. I believe we could see a minor jobs bounce on Mon/Tue if Ma and Pa investor believe the jobs story in the weekend newspaper. Any bounce from our current levels will run into very stiff resistance at 10500, 2000, 1190 and fear of that resistance will likely keep us from reaching it. My bias has switched from Tuesday's neutral back to bearish and I would look to short any Monday/Tuesday bounce to resistance. I believe the economy is picking up again but that will only make the Fed bolder about its coming hikes. Good economic news is bad news for the market until fall. Despite the artificial jobs blowout you may have noticed that Jobless Claims have risen for the last two weeks. This tells me that real employment is still weak. We also have oil refusing to drop and hold below $50. Every day that passes we get closer to draw downs in inventory levels as the gasoline season draws near. Once oil finds a bottom and returns to the highs the feeding frenzy will begin again and we could easily see $70 oil by year-end. If the economy really is picking up speed then oil consumption will only grow faster. Once oil begins its climb it will provide more negative sentiment for equities. I am still a buyer of oil stocks with any dip below $50 but I am avoiding other sectors until we see what summer brings. Definitely enter passively and take profits quickly.


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