Traders sold the news again as hopes for a big jobs gain faded with job growth stuck in neutral.

Market Statistics

The markets sold off again for the third jobs Friday in a row when the headline number failed to please with gains or losses. I know that sounds crazy but the +80,000 headline number was neutral. Jobs gains have now averaged +75,000 for the last three months and that is too slow to generate any hope for a rebounding economy and too high for the Fed to take action with a new round of QE. Call it the muddle through market with the economy too slow to generate excitement but not slow enough to get help from the Fed. Investors were disappointed.

After the ADP payroll numbers on Thursday surprised to the upside with an estimate of +176,000 jobs compared to the consensus estimate of +133,000 jobs the analyst community was quickly upgrading their Nonfarm Payroll assessments. Goldman raised their estimates to +125,000 compared to consensus estimates for a gain of +90,000.

Unfortunately all those who raised their estimates ended up being wrong. The headline number for the Nonfarm Payrolls was +80,000 and below the prior consensus at +90,000. The May numbers were revised up from 69,000 to 77,000 but the April numbers were revised down from 77,000 to 68,000 so the net revisions were a net loss of -1,000 jobs. That puts the average monthly job gain for Q2 at +75,000 and only half the +150,000 jobs needed to keep up with new workers joining the job market each month.

The official unemployment rate was unchanged at 8.2% or 12.8 million. However, the U-6 unemployment, which consists of everyone currently unemployed or underemployed (forced to work part time while looking for full time job) rose to 14.9% or 23.258 million with only 58.6% of the job age population employed. The labor force grew by 156,000 but less than the May increase of 642,000 due to graduations.

This was a sell the news report since it pleased nobody and suggested the economy was stuck in a rut. Employers are holding off on hiring until they know what the future is going to bring. They are facing the fiscal cliff and the potential for additional gridlock in Congress as the economy falls back into recession. Small businesses are now forced to cut employees to less than 50 to avoid being bankrupted by the health care mandate. They were looking for the Supreme Court to save them by ruling it unconstitutional and that did not happen. Some analysts believe this will mean even weaker hiring in the months ahead with the possibility of net job losses instead of gains.

Nonfarm Payroll Chart

The calendar next week begins the shift to earnings as the headline events. Dow component Alcoa kicks off the earnings season on Monday but their earnings are more symbolic rather than a real view of the economy. The real earnings events for next week are the JPM and WFC earnings on Friday. JP Morgan will be the most important report for the week as they disclose their actual losses on the whale trade.

The only real economic event of note will be the FOMC minutes on Wednesday. Those minutes will be scrutinized for signs of willingness to add further stimulus as the economy weakens. That will be the sole focus of analysts. The debate is growing on whether additional stimulus would be positive or negative for the economy. The law of diminishing returns is in full bloom and the Fed would have to pull a nuclear weapon out of its arsenal to really accomplish any market movement. Interest rates are already so low that pushing them lower would not have any material impact. That means the Fed would have to resort to some other type of stimulus in order to jump start the economy and analysts don't think the Fed has any of those weapons left in their arsenal.

Economic Calendar

Earnings warnings captured the headlines after July 4th and 19% of the S&P have now warned for Q2. S&P now forecasts Q2 earnings to decline by -1.01% making this the worst quarter for earnings since Q3-2009. Since the earnings cycle has not actually started yet we could see those estimates decline even further.

Acme Packet (APKT) fell -15% to a two-year low after warnings that Q2 results would be lower than expected. Acme's major customers include Verizon, Sprint and AT&T and slowing orders suggests those carriers are also experiencing problems. Acme said earnings were now expected to be in the 12-13 cent range. Analysts were expecting 18 cents. Margins are expected to fall to 79% from 84%. APKT was a short play in the Premier Investor Newsletter so readers there should be very happy with the warning.

Acme Packet Chart

Informatica (INFA) shares fell -28% after warning that earnings would be in the range of 27-28 cents compared to analyst estimates of 37 cents. Revenue would be about $30 million light at $188 million. The company blamed the "changing macroeconomic environment, especially in Europe." The warning crushed the tech sector with specific damage to enterprise stocks like Citrix Systems (CTXS) Red Hat (RHT) Microstrategy (MSTR), Teradata (TDC), VMWare (VMW) and (CRM).

Informatica Chart

Seagate Technology (STX) warned that revenue would be in the range of $4.5 billion compared to prior guidance for "at least $5 billion." The company expects shipments of 66 million units for the quarter. This will still be a record quarter for Seagate despite a decline in margins and revenues from prior expectations. Seagate said there were two problems. One was a supplier quality issue that affected one of the enterprise products and reduced shipments by 1.5 million units. They said it was a temporary issue that has been resolved and they are now shipping the new units to customers.

The second issue was related to slowing market share growth. Seagate said they reduced shipments due to faster than expected rebound by the industry from the supply chain disruption. That was the floods that knocked out numerous parts suppliers in 2011. Apparently Western Digital recovered faster than Seagate expected and that cost Seagate some share growth.

Seagate did say they were expecting business to be flat for the next quarter and they were approaching it conservatively.

I believe Seagate is the premier supplier to the enterprise community and any weakness is a buying opportunity. Others must have thought the same way because the stock rallied back from a sharp drop at the open to close down only -13 cents despite the warning. Western Digital (WDC) closed up +34 cents on the day.

Seagate Chart

Navistar (NAV) lost -15% after it said it will face additional costs to introduce an engine that will comply with U.S. emissions standards. Navistar had been trying to implement new technology but could not get it past the emissions requirements. The company said it was going to adopt the same technology currently in use by other manufacturers and there would be some additional costs. Navistar has already invested $600 million to develop new EGR heavy truck engines that failed to meet emission standards. On June 12th an appeals court threw out a prior ruling that allowed Navistar to continue selling the noncompliant engines and pay a fine of up to $2,000 per engine until a compliant engine could be completed.

The engine troubles and associated decline in stock price suggested the company could be a takeover target. Carl Icahn increased his stake to 11.9% in June and hedge fund manager Mark Rachesky said he had accumulated a 13.6% position. Navistar adopted a poison pill strategy to deter hostile bids. Market cap has declined from $6 billion to $2 billion and the brand has a good reputation making them a potential target.

Navistar said in February it was expecting to earn up to $5.75 per share in 2012. That declined to $5.25 in March. In June they lowered estimates again to a range of zero to $2.00. This week they said "it would be best to allow the EPA process to conclude before commenting further on financial forecasts." Shares are at a three-year low.

Navistar Chart

While Q2 earnings in the tech sector are not expected to be terrible the downgrades are coming fast and furious. The biggest driver is not the earnings misses for Q2 but the expected lowered guidance for the rest of the year.

For instance BMO Capital markets cut estimates on IBM blaming macroeconomic headwinds and foreign exchange problems. Foreign exchange is expected to reduce earnings by -3% and revenue is expected to come in below estimates due to the problems in Europe. BMO said higher than expected margins and lower than expected tax rates would probably keep IBM from missing too badly but they did not expect any further gains in the stock price. BMO also downgraded other enterprise companies including EMC, VMW, STX, WDC, ELX and QLGC to name a few. IBM shares declined -$4 on the news.

IBM Chart

Since most companies don't have the underlying strength of IBM the rest of the tech sector could be hurt worse by the current economic decline. It will be interesting to see how tech stocks react once earnings begin in earnest.

Best Buy (BBY) announced it was cutting 2,400 jobs in an effort to trim costs. Six hundred of those will be Geek Squad members and 1,800 will be in store employees. The Geek Squad was thought to be bullet proof since no other retailer offers that type of service. The 2,400 cuts only amount to 1.4% of the total staff of 167,000 employees. Best Buy is fighting the growing trend of "show-rooming" that is hitting all electronics retailers. Customers go into Best Buy and compare all the models on display then go home and buy it cheaper online. The acting CEO, Mike Mikan, said "there are no sacred cows" as the company reviews its cost structure.

Best Buy Chart

The commodity sector was crushed again by the euro/dollar moves. I warned last weekend that the EU summit plan to make another plan would eventually fail as previous plan agreements had also failed. The spike in the euro to 126.21 on Friday after the EU summit was sold hard all week to dip under 122.00 on Friday. This was a new two year low. The euro was collapsing on the reality the plan might fail to materialize and it was helped by the ECB cutting rates 25 basis points to 0.75% and a record low.

Borrowing rates for Spain rose dramatically to 6.96% on the ten year after dropping dramatically the prior Friday on hopes for a solution. Italy's equivalent rate rose to 6.01% compared to Germany's 10-year at 1.37%. The agreement hopes have fractured as reality returned only a week after the summit.

Analysts believe Spain and Italy will eventually be forced to ask for major bailouts and the EFSF and ESM are too small to handle a major country. The ESM fund will have a 500 billion euro value when it is funded but they have already committed 180 billion to Greece, Ireland and Portugal. Spain has asked for 100 billion for its banks and Cyprus is going to ask for 10 billion. Large EU countries are opposed to raising the limits and smaller countries are complaining loudly about the cost of the bailouts.

The smaller countries are seeing blowbacks from their citizens about some of the points in the new plan. The new plan is supposed to be presented in October for ratification by February. Apparently several countries are expressing doubts about ratification and that is scuttling the entire plan before it is even presented to the EU leaders for approval.

Getting 17 independent countries to agree to anything is next to impossible. Getting them to agree to pay tens of billions in debt incurred by other countries is an even larger task. Getting them to pay it when those countries are protesting the terms of the original deal is a seemingly insurmountable problem.

I said last week the optimism over this plan would evaporate and it took less than a week for the euro to hit a new two-year low and Spain's debt rates to return to 7%. This problem is far from over and there could still be a Lehman event in the EU in our future.

Euro Chart

Dollar Index Chart

The dollar index spiked nearly two full points since the 81.43 low last Friday. That kind of move in extremely rare and it is even more surprising that it gained more than half a point on Friday in spite of the mediocre payroll report.

Gold fell back below $1600 and could easily retest support at $1550. Crude prices imploded again with more than a -$3 drop on the weak payroll numbers and the soaring dollar. Weak job growth means weak oil demand and inventories are a decade highs today.

The importance of economic optimism, or in this case pessimism, is clear this week since even a threat by Iran to close the Strait of Hormuz, three days of missile testing and disclosure of plans to attack 43 U.S. bases in the Middle East failed to boost prices. Investors are taking no chances and reducing exposure to commodities that decline when global economic activity declines.

WTI Crude Oil Chart

The Dow declined -193 at its lows on Friday. This was a typical sell the news event and there was plenty of news to sell with the nonfarm payrolls simply the biggest local headline. Alcoa may be the first Dow component to report earnings for this cycle but the real earnings don't start until the following week.

That means we have another week where the majority of the news could be earnings warnings. The economic calendar is devoid of anything material other than the FOMC minutes. More than 55% of the primary dealers in the bond market expect the Fed to implement QE3 at the meeting that begins on July 31st. The minutes to the June meeting could give us clues as to the building consensus for further action.

To recap, there may be more earnings warnings. The economic headlines will be lacking any major reports. The FOMC minutes will be the highest profile event followed by JP Morgan's earnings on Friday. The following week will be the turning point for the market. If analysts have slashed earnings too far and companies begin surprising with their numbers we could get a summer rally. If companies begin reporting a long line of earnings misses then we could be headed lower.

As in every earnings cycle the market tends to turn the week after option expiration. That expiration occurs on July 20th this month. That means the last week of July could see the market pick a direction and that direction is not likely to be higher. Depending on the FOMC minutes the directional move in the markets could begin the day after the Fed announcement on August 1st. If there are signs of QE3 in the minutes next week then hope could return to the markets ahead of the July 31st meeting.

If the market is going to climb this growing wall of worry it will need some strong shoes, lots of rope and a backpack full of lunches. This wall is turning into a formidable obstacle. The things working against us are the European debt crisis, falling euro, economic uncertainty, declining earnings and political theater.

The S&P punched through critical resistance at 1360 on Monday and spent three days in breakout territory. That breakout ended on Friday when the S&P declined -13 points to close just over initial support at 1350. Interim support is 1325 and then 1310. The 100-day average at 1360 is back in play as resistance after seeing the S&P trade above that level most of the week.

This remains a headline driven market rather than a fundamental or technical market. Every major move is driven by some headline and it is likely to remain that way next week.

Volume was very light on Friday at 4.9 billion shares and declining volume was 4.03 billion shares. The light volume made the selloff on the jobs numbers more dramatic.

S&P Chart - Daily

The Dow spiked over resistance at 12,900 on Tuesday in very light volume and actually held it into the close on Thursday. The Dow was poised for a climax spike on good job news but it was not to be. The decline after the report was nearly vertical losing -193 points to hit 12,703 but bargain hunters appeared and kept it from moving lower. A bout of short covering at the close pushed it back over support at 12,750.

Alcoa is not expected to beat the street on Monday and could easily post a decent earnings miss due to the low aluminum prices, which are at two-year lows after a -20% decline since March. Falling demand in Europe and Asia has depressed prices. Consensus estimates have been cut from 15 cents to 5 cents over the last week. That compares to 32 cents in the year ago quarter. Fortunately Alcoa is only a $9 stock so it would take a major move in the stock to impact the Dow. It is not likely to be a material drag on the Dow but it could be a drag on sentiment.

JPM on Friday could be a bigger factor. Since Monday JP Morgan has declined -$2.50 to $33.91 on persistent rumors that the whale trade loss is much larger than the $2 billion claimed by Jamie Dimon. The banks are also declining on the disclosures in the Living Wills required by the Dodd-Frank regulations. Lastly the prospect of low interest rates for years to come is also weighing on earnings expectations.

The current range on the Dow is 12,450 to 12,950 and I would be surprised if we did not gravitate towards the center of that range.

Dow Chart

The Nasdaq has been following the retracement roadmap perfectly. The first rebound from the lows stopped at 50%, dipped back to 25% and then surged to the Fib level at 61.8% before halting its run on Thursday.

Apple (AAPL) was up +22 points for the week and that held the Nasdaq to a positive +2 point gain for the week. If you count the prior Friday, Apple was up +37 points and that includes the -10 point drop from Thursday's high at $614. Thank you Apple for keeping the tech sector positive.

That was not the case on Friday with the top 20 Nasdaq gainers table full of symbols most traders would not recognize. The 20th gainer only advanced +.48 cents to give you some idea how lopsided the market was on Friday.

Nasdaq volume was only 1.3 billion shares and 1.04 billion was declining volume. Only 269 million shares belonged to advancers.

Nasdaq Top Gainers

The Nasdaq range is 2828 to 2978 or 150 points. That is a huge range to trade and gives us clear targets for directional trades.

Nasdaq Chart

Nasdaq 100 Chart

The Russell performance is confusing. The Russell 2000 posted better than a 1% gain for the week and was the best performing of the major indexes. Since small caps are the most risky in times of market instability and economic weakness it makes me wonder why the small cap index did so well last week.

I have to chalk it up to aggressive short covering or the asset allocation move I explained in last Tuesday's newsletter. Somebody was buying small caps and on decent volume. The decline on Friday proved they were human with a limited budget. Small caps were on sale and there were no takers.

Russell Chart

I am suspecting further market weakness next week. I am not looking for a straight drop but a choppy market as we await the FOMC minutes and the JPM earnings. Personally I think the bad news is already priced into JPM so I am looking for a rebound once it is official. I suspect they lost more than they initially claimed but I also expect they sold enough other assets to make up for the loss and they will post a decent profit.

I would refrain from loading up on longs until after option expiration. That does not mean you should not play longs just use smaller positions and exit early.

Longer term I still expect serious problems in Europe. The 19th EU summit last week ended with a new plan to make a plan. That plan has already crumbled. Some EU countries are balking at the terms and sentiment is fracturing. EU officials are now cautioning against expecting any quick action on the plan when the finance ministers meet on Monday to sort through the points and disagreements that arose out of the summit. The time frame is already slipping and they are still a long way from the October.

Finnish Finance Minister Jutta Urpilainen said she would consider dropping Finland out of the eurozone. Finland is AAA rated and it would still be painful. However, Finland will not commit to remain in the euro at all costs. "Collective responsibility for other countries debt, economics and risks; this is not what we should be prepared for. We want to solve the crisis but not on any terms." The Netherlands is also balking at progress at any cost.

The ESM bailout mechanism was supposed to be ready and operating on Monday July 9th. Germany, a strong backer of the ESM has not yet ratified it and the ESM details are under constitutional review. I seriously doubt it will be in operation next week.

Angela Merkel's support in Germany is slipping. They view her as weakening her positions and her ruling coalition is breaking down. The CSU, a coalition partner, has threatened to break up the coalition if she gives up any more ground in the EU plan. Separately the head of the German Central Bank has also warned Merkel it will drop support for her and the plan if she allows any further changes.

Merkel is now the lone voice of reason in the eurozone meetings after Sarkozy left office and the socialist Hollande became president of France. He has attempted to weaken her demands at every turn and has refused to vote on positions unless she caves in to his demands. He is trying to build a coalition of socialist countries inside the eurozone and that coalition will prevent any hardliners from forcing austerity or spending cuts on the group. The possibility of a fiscal union or a banking union is quickly evaporating.

This means more problems ahead for the eurozone and we could be just weeks away from the next big event that crashes the markets. There is a rising movement in Italy that wants to force an exit from the euro and a default on debts to give Italy a chance to start over. If this train of thought expands to other countries the entire euro project could crumble.

The ECB cut rates to 0.75% and a record low plus they cut the overnight deposit rate to zero to incentivize banks to put money to work elsewhere rather than parking it at the ECB. That pretty much exhausts the options the ECB has to deal with the slowing economy. The only thing left is QE or another LTRO program. Germany is dead set against those options saying they are putting too much risk on the ECB. That means the ECB has no bullets left in its gun. Nouriel Roubini, known as Dr Doom, told Germany's Handelsblatt on Friday he would "give the euro another three to six months at most then Italy and Spain lose access to capital markets" and disaster becomes inevitable.

China cut rates for the second time in weeks on Thursday in an effort to prevent a hard landing after economic data worsened. Vice premier Wang Qishan said China would be "lucky" if it was able to reach its annual export trade target of +10% growth. That wishful thinking target of 10% is far below the more than 20% growth in 2011 and prior. That is different from the +8% GDP growth, which is also questionable this year. The sudden spurt of rate cuts suggests China's internal problems are worse than they appear. China also cut the bank lending reserve ratio for the third time since November. China's trade data and Q2 GDP will be released next week and could be another disappointment. A Reuters survey of economists expects the GDP to be 7.6% and the lowest growth since the crisis rebound in 2009. Recent reports show job losses are growing and are expected to get worse in Q3. The decline in consumption in the eurozone is forcing a shutdown of manufacturing in China and there is no sign of that EU demand returning in the near future.

In the short term the U.S. markets will be focused on earnings but keep in mind that the eurozone problems are still festering and will return to haunt us in the months ahead. The Fed may chose to counter that problem at the July 31st meeting with QE3 and that would put a floor under the market at least temporarily. Until then the path of least resistance should be down.

Enter passively, exit aggressively!

Jim Brown

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"90% of the game is half mental."
Yogi Berra