Monday, October 08, 2007

Will Fed cut another one after stronger jobs report?

- SP500, NASDAQ ride in-line jobs report, August revisions to new post-2002 highs.
- Jobs report: Okay, so what if the government was off by 93,000?
- Will Fed cut another one after stronger jobs report?
- Still a lot of negativity regarding the market even as indices break higher.
- With the continuing economic re-recovery, time for industrials to resume their move, and small caps are trying to help as well.

Just right jobs report pushes SP500 to a new high.

The market was set up to move higher and looking for a trigger. The in-line jobs report (110K versus 100K expected) and a rather massive revision to August (+89K from -4K) provided the spark to break the indices higher. Well, it provided the spark, but it was not an explosion higher. Part of the powder didn't ignite. SP500 broke to a new all-time high and NASDAQ added a lot to its earlier move to a new post-2002 high. DJ30 was up, but its move was nowhere near its large cap brethren, and after pushing to a new high intraday it faded. Held a gain, but a mere shell of the other indices.

The jobs report was the keynote address, but there was other news pre-market, some good, some not so good. RIMM was up on its results; once again after hours action does not necessarily represent what happens during the full session. RIMM dragged AAPL along with it along with some other big techs. On the flipside, NBR (drilling) guided lower due to a falling North American rig count. MER warned re its Q3 due to heavy write-downs in assets related to the sub-prime issues. Outside the jobs report, life goes on as usual.

Stocks started higher out of the gate. The dollar started higher as well, pushing oil a bit lower and keeping a lid on the energy stocks again. After that higher open the action was up and down through midmorning. Then the market broke from that range and headed nicely higher. Some word that the commercial paper market was improving as a few companies were placing their paper, and the Fed's Kohn had some decent things to say about the prospects of more Fed action.

The upside move paused over lunch, but stocks were back up into the afternoon session. Techs were the dominant leaders but the small caps were up nicely as well. Metals started to move in the afternoon, one of the leadership groups on the last leg that backed off and was lagging on the current attempt. They were still not blowing things away as some late profit taking took back some of their nice gains. As noted, energy was lagging; still set up well, but thus far unable to take up the leadership mantle it had on the market's last leg higher. That left it to the techs, and they did an all around decent job at holding the gains together.

Technically the action was solid . . . for the most part. SP500 broke to a new all-time high, testing the move intraday and then closing with room to spare over the July high, completing the move out of the cup with handle base. NASDAQ did the same, i.e. breaking out from its cup with handle base as well. It already broke to a new high to start the month and quarter, and the Friday break higher was an exclamation point on that move.

Volume was up and actually not bad on NASDAQ. It topped 2 billion share, approaching the levels hit as NASDAQ started its stronger move higher in mid-September. Still below average, however, given the huge volume during the July and August selling that jacked up the average level of trade. NYSE volume was up as well, but it was rather puny, coming in less than the Monday new money for the month trade. Breadth was great at 3:1 NYSE, but that doesn't really make up for the chronic lack of volume on NYSE.

Notably lacking was DJ30 with respect to a move to a new high. As noted above, it put in a decent move but it could not hold above Monday's peak that took it to a new high. SP600 didn't make a new high either, but unlike DJ30, it was running hard toward the old high, posting the best move in the market outside of NASDAQ 100.

Leadership was clearly in the hands of a few tech stocks such as RIMM and AAPL. Techs continue to perform well in general, though the large cap techs are dominating. Once more, however, the small caps were there as well, posting strong moves as the economy continues to look as if it is going to once more resume its growth plane. As we have discussed, the economy was emerging from a mid-cycle slowdown in Q2 and into Q3 when the credit freeze hit. That really hammered the small caps as the fear was the credit issues would stall the economy, and small caps have to have growth, solid growth, to prosper. They are surging back up, leading the market in percentage moves all week, and that is an indication that the economy is emerging, once again, from a pause and has good growth potential ahead of it.

You won't hear much of that kind of talk on the financial stations. For one thing, there is still a lot of pessimism about the US economy in general. The litany of terrors is cited every day: sub-prime, credit, weak dollar, inflation, declining consumer. You even hear how the market is a poor indicator of future economic performance. Don't tell that to the market back in 2000 when it pitched over and the economy collapsed after it. And of course the rally that started off the October 2002 low and the surge that preceded the huge gains in GDP in Q3 2003 was not forecasting the return to prosperity. Throughout US economic history you have market rallies followed months later by surging economic growth. Yet some still pick at the time or two that growth lagged longer than usual, claiming that is the rule rather than the exception. That is fine. As long as there are those out there refusing to acknowledge fact and remain negative, that is good for the market rally as the market moves its best when there is a lot of doubt and worry. This has been a strong move higher, befitting the amount of issues and worries covered each hour of each trading session on the financial stations.


Jobs report shows August report was wrong. That is what is so right about it.

You have to wonder. The government reports a loss of 4K jobs in August when expectations were for a gain in the 140K range. A month later it issues an 'oops' report, noting that jobs were actually up 89K; nothing like a 93K miss. We figured the August number was an outride, i.e. just plain did not reflect reality, and that was the case. It certainly doesn't add to the already crumbling confidence in the government's ability to collect and compile data about the economy or anything else for that matter.

As for the September report, it was basically in line at 110K versus 100K. With the revisions to the prior two months 118K non-farm jobs were added back in. Average hourly earnings rose 0.4% versus the 0.3% gain they have held for months. That put the year over year level at 4.1%, a very solid expansion considering all of the talk we are hearing about how US wages are terrible. Of course that raised comments about 'wage-led' inflation. For once we would like to have an expansion with some wage increases without having to hear about this bogus, unsubstantiated theory.

Even with the upside revision that brought cheers from many commentators, the market did not run higher because the results were strong. No, the numbers were still quite weak, just not the gut-punch level the initial August report of negative growth suggested. The revision suggested no collapse, but the overall numbers were weak. 89K? Even if that was reported in August it still would have been a big letdown versus the 140K expected. No, all the revision did was put the numbers in the 'just right' category for the market given its desire for continued Fed rate cuts.

Will the Fed still be ready to keep cutting them?

Indeed, despite the 'whew' many were letting out Friday and the talk of a strong economy as evidenced by the jobs report, quite frankly it showed nothing of the sort. To backtrack some, recall how some said the August jobs report and the initially reported 4K jobs loss was why the Fed cut rates. If you believe that, then the revision to +89K would prompt you to conclude that the Fed would not cut again and probably be looking for the opportunity to 'take back' that cut. We heard that on Friday from the uninformed or the shallow thinkers.

The Fed did not cut because of the jobs report. Bernanke's writings show he knows jobs are a lagging indicator, and the other more leading indicators simply did not jibe with that jobs report. As we said at the time, the Fed cut rates because it feared that the credit freeze on top of the sub-prime concerns would stall the economy and lead to recession as such contagions had done in the past. Friday FOMC member Kohn confirmed this with his candid comments as to why the Fed cut by 50 BP: the Fed cut in order to offset tight credit and promote growth, noting it was better to respond too rapidly versus too slowly. He noted that with core inflation trending lower (core annual PCE growth at 1.8% last month) the Fed had room to work with.

As we noted at the time, the weak August jobs number was additional cover the Fed could use to cut rates if it wanted to. Kohn's comments confirm this. Given the Fed cut to prevent a further contagion from leading to recession, the fact that jobs 'recovered' is not going to change anything with respect to whether the Fed cuts rates again or not.

Remember, the Fed was saying before the credit freeze hit that the economy would grow below its potential. Bernanke said this to Congress in his son of Humphrey-Hawkins testimony, and several other Fed presidents and governors echoed this position. After the credit crunch hit the Fed had even less reason to believe the economy would improve its growth, i.e. it likely expected growth to slow even more as a result. Thus with the Fed viewing the economy with even less momentum than before, the jobs revisions won't impact its view regarding rate cuts.

Given the Fed's moves ahead of and during the credit crunch and the Kohn comments, it is pretty clear that the Fed, through Kohn (and likely others to come this week) is outlining why the Fed will likely cut at the next meeting here in October. In short, the Fed was worried about sub-trend growth before all of these issues hit, and now that they have hit and the Fed has cut in response, a few more jobs added due to a revision are not going to change its course of action. The only real question is whether the Fed cuts another 50BP or just 25BP. If the leading economic data continues to improve and show a second re-acceleration out of the mid-cycle slowdown, 25BP is likely the number. Much depends upon how the credit issues improve before that meeting, however. If they are not better, the Fed will do what it has to in order to get that market opened up to avoid any chance of a slowdown leading to a recession.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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