Friday's non-farm payroll report was a disaster but you probably already knew that by now. I'm going to keep this commentary as brief and concise as possible. Markets are very nervous right now. They're facing geopolitical risk with North Korea and Israel. There is sovereign debt risk in Europe with Greece and now Hungary. Spain and Portugal are looming in the shadows. There is recession risk with Europe already on the verge of recession. China is slamming on the brakes to cool their economy and the most recent data says it's working. Investors worry China will go too far. The U.S. jobs growth data on Friday suggests our recovery is on very fragile footing. The lack of real job growth will keep consumers nervous and hoarding cash. That has a negative impact on retailers and the rest of the economy. Slow sales mean business will hesitate to hire new workers and the whole thing turns into a vicious cycle.

I want to touch on the geopolitical issues for a moment. An ambassador for North Korea said the situation on the Korean peninsula is "grave" and that war could breakout at any moment. These comments may be due to news that South Korea was having some success in convincing Japan and China, North Korea's biggest and best ally, into considering financial sanctions against North Korea. Meanwhile Israel's blockade of ships headed for the Gaza strip has turned into a firestorm of controversy when IDF soldiers killed nine people in self defense. Enemies of Israel will certainly use this to their advantage and tempers in the area just got a lot hotter.

Europe appears to be headed for its own banking crisis similar to what happened in the U.S. back in 2008. European banks are hesitant to trust their neighbors and more and more banks are storing cash with the European Central Bank (ECB) instead of lending it to other banks. The amount of money in the ECB's overnight depository surged to 320.4 billion euros, which is the highest in history. The last five days have seen overnight deposits spike past 300 billion euros. Europe is already poised for recession with strict austerity measures cutting into growth and a major bank failure or a widespread recapitalization of the banks would do serious harm to the economy and consumer sentiment.

Speaking of sentiment, news that the country of Hungary is facing a Greek-like debt problem pushed investor sentiment into the tank on Friday morning. The country's new prime minister said that Hungary's economy is in terrible shape and they could be facing a possible debt default. This wouldn't be the first time. Two years ago Hungary borrowed $24 billion to avoid a default. While Hungary isn't that big of a country it is just another signal that the EU is facing serious and widespread challenges. Hungary does not use the euro currency but the euro still plunged to a new four-year low on Friday at $1.1956. Many expect that the euro could be facing parity with the dollar over the next several months.

Chart of the U.S. dollar ETF (UUP):

The euro weakness has pushed the dollar significantly higher. Friday saw the dollar breakout from a two-week consolidation. This is normally very negative for commodities and commodities are already suffering from fears the global economy is slowing down. The CRB commodity index has technically turned very bearish with a "death cross" of the 50-dma crossing under the 200-dma. On a positive note gold and natural gas seem to be exceptions to this commodity weakness.

The big story on Friday was the U.S. non-farm payrolls (jobs) report. Investors were expecting big gains. The estimates had been rising each week from 480,000 new jobs to 503K, then 513K. There were several whispers numbers of 600K, 700K, 800K new jobs. Positive comments from the White House this past week only added to the fever. We knew that temporary census jobs would be the majority of gains but analysts were still looking for 150,000+ new jobs from the private sector. Imagine their surprise when the jobs report came out and the total was only 411,000 while private sector jobs sank to 41,000. That's a big drop from April's 218,000.

The unemployment rate fell from 9.9% to 9.7% thanks to 325,000 discouraged workers unable to find jobs, giving up their search. Thus the unemployment rate decline due to a smaller workforce. What is really distressing is that the number of unemployed for six months or longer hit a new record. As you know we need 125,000+ new jobs every month just to breakeven. If our economy only produced 41,000 new jobs we're not making any progress. Suddenly the fears of a double-dip recession in the U.S. just got a lot more realistic.

I am very concerned that the disappointing jobs number on Friday could have been the catalyst that sparks another new leg down for stocks. The S&P 500 index has failed twice in the last two weeks near the 1100 area. If we break the 1050 level again I would expect the next stop to be 1,000 and that may not hold. The 1,000 level is just psychological support. We'd probably end up with a drop toward the 950 level. Now it probably won't happen all at once but you already know how fast this market can move.

I have been warning readers that we're not in a very friendly environment to launch new long-term bullish positions. I would be very cautious going forward. The situations in N.Korea and Israel could simmer for months and the economic struggles in Europe could last years. For now the path of least resistance is down.

Chart of the S&P 500 Index:


Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in late 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. Estimates were in the 3 to 5 million foreclosures over the next three years but a White House advisor was quoted with estimates in the six to ten million range over the next three years. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown