Jobless Friday – US, Japan and Europe Add More Stimulus

March 5, 2010

983

Wheee – more free money!

The money train left the station just ahead of the US market close yesterday when the House passed a $15Bn Jobs Bill although it remains to be seen if Jim Bunning will pass it. China doesn't need Bunning's permission to hand out free money and they will be "allocating 63.2 Billion Yuan" to fight high housing prices by SUBSIDIZING low-cost housing. Come to think of it – I object to that! Someone in China needs a lesson in some basic economics…

The big boost this morning came from Japan, where bonds hit the highest level of the year after the Nikkei newspaper said the central bank at its March 16 meeting may discuss additional monetary easing steps. It doesn't matter whether this report is true or not as it already did it's job and shot the Nikkei up 223 points for the day, erasing two week's worth of losses in a single session. It's hard for the BOJ to get easier than our own Fed but Chicago Fed President Charles Evans said yesterday he needs evidence of “highly sustainable” growth before supporting tighter monetary policy, while James Bullard of the St. Louis Fed said the central bank should remain “accommodative” – these are, of course, the Fed's code words for MORE FREE MONEY!

Of course, our Futures are up 1% from yesterday's low and the commodity markets LOVE IT and oil is back at $80.65 with copper back at $3.40 despite "weak" demand in China, where stockpiles of copper are now at 7-year highs and even Goldman Sachs has withdrawn their buy recommendation on coppper because of concern that economic recovery in developed markets isn’t on “solid footing.” “About 60 percent of China's copper is used in the power industry, and our sales to wire-and-cable users reflected that demand is rather weak,” Chairman Wei Jianghong said, while attending the National People’s Congress.

“The demand is not very strong in the first place,” Jiangxi Copper Chairman Li said in Beijing while at the congress. “But a lot of people have long positions in the market, so I think in the first half of this year, copper prices will be good.” Copper stockpiles in China jumped to 149,478 tons for the week ended Feb. 26, 28 percent more than the week ended Feb. 12, according to the Shanghai Futures Exchange. Demand from China for global supplies may weaken because prices on the Shanghai Futures Exchange are now close to those in London, discouraging arbitrage trading, Goldman Sachs analysts said in a Feb. 24 report, when copper was 10% lower than it is today.

Disclosure: We're short copper at $3.40, short gold at $1,140, short FCX at $80 and short oil at $80 so wish us luck! They say "you can't fight the Fed" but how do you fight the combined will of the G20 as their Central Banks coordinate these little stimulus boosts that routinely punish anyone who might be so bold as to short the markets? I'm not a perma-bear, we were long off the dip to 9,900 and our Feb 6th Buy List had 42 bullish trade ideas (all doing very, very well thank you) and our brand new $100K Virtual Portfolio was initiated on Feb 24th, with the Dow at 10,300 – also bullish (but well-hedged). So this is not about me having sour grapes – this is about me seeing SERIOUS, MAJOR issues that are being ignored by the market and the media and I AM CONCERNED!

PSW has hundreds of members and I chat with them during the day and when I see people getting too bullish on what I believe to be a shakey market foundation, I do tend to go into Chicken Little Mode and point out more of the underlying problems than usual. Also, taking short bets on runaway commodities makes for a very nice downside hedge to a generally bullish (long-term) virtual portfolio. The key is to try to maintain balance and we find it wiser to play our resistance lines (and 10,400 is a big one) for a pullback until proven otherwise. Sadly, a low volume rally, like the one we've had so far this week, proves nothing at all…

8:30 Update: Non-Farm Payrolls were down just 36,000 in February with a 124,000 drop in Construction and Goods Producing jobs being offset by 42,000 Service jobs and 47,000 Temporary jobs. Net government hiring was actually down 18,000 as layoffs at the post office offset expected census hiring (see yesterday's post). These are GOOD numbers but now the question is: Will good numbers be bad for the market? We are running a hyped-up market based on projections of non-stop stimulus and low interest rates. Low unemployment or (gasp) actual hiring may mean it's finally time for the Fed to tighten so we'll see if the dollar punches out to new highs today with the Euro poised to test $1.35 and the Pound looking to test the $1.50 line. 90 Yen is a given so more good news for the Nikkei regardless. If the EU currencies can hold, then commodities can stay in rally mode.

The bulls have no excuses now – massive stimulus and an easing of job losses should give us a nice pop but we also had a nice pop on Dec 4th, when the NFP showed a surprising gain in November's jobs numbers and we spiked up from 10,366 all the way to 10,550 but finished the day back at 10,388 and were back at 10,200 on the 8th. AFTER that we did well so I will be waiting until next week to see what sticks but that may be it for our bearish betting until we drop below our bounce levels again (Dow 10,300, S&P 1,105, Nasdaq 2,225, NYSE 7,100 and Russell 625).

You can see from the chart that we are FAR from recovered. That entire block of job losses needs to invert and THEN we need to add 4 years of normalized job growth that never happened just to catch up to where the market prices projected we'd be by the end of 2008. As a fundamentalist, I'll be working this weekend to check our levels and revalue a potentially greater upside if this REALLY is a turning point but my underlying global fundamental concerns haven't changed just because 47,000 temps were hired in January but I am a little more willing to allow for a move back to Dow 10,700 – especially if we can get Greece resolved over the weekend.

One thing that always disturbs me in these NFP reports is what they DON'T count:

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers increased from 8.3 to 8.8 million in February. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.
About 2.5 million persons were marginally attached to the labor force in February, an increase of 476,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
Among the marginally attached, there were 1.2 million discouraged workers in February, up by 473,000 from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.

Europe is very excited about our NFP report and markets there are up about 1% but it's going to be all about Greece this weekend with a referendum in Iceland as a side show. Iceland voters are very likely to defeat a measure to repay UK and Netherland banks for bailing out depositors in the failed Icelandic Internet Bank so I don't think I'd be going long on the Euro or the Pound over the weekend and I will be sticking with my shorts although we can hedge the upside by grabbing the DIA $106 calls for about .75 as a momentum trade above the 10,500 mark.

Keep in mind that a momentum trade is a trade where we are very happy to take nickel and dime profits as 10% is PLENTY to make on a day trade and we can always reload the next time we cross over the line. That will allow us to keep our downside bets and give the market a chance to calm down. Keep in mind we've already had quite a run leading up to this report and there may be some disappointment that we can't get a proper rally going. If you have no downside plays, I still like USO Apr $38 puts at .88 and TZA Apr $7.50 calls could be a fun way to play a Russell pullback at .90. Consumer Credit comes out at 3pm today and could provide reason for a late sell-off if contraction is more than the $5Bn anticipated.