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Wall Street Strategies has been providing independent stock market research since 1991 to individual, retail and institutional clients through a balanced approach to investing and trading. Charles Payne, our founder and chief analyst, is routinely sought after for his stock market, political,... More
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    Jun 5, 2013 2:06 PM

    By Carlos Guillen

    Equity markets are sinking after two major hits from employment and services data showed expectations were running higher than reality.

    Quite alarming this morning was the ADP report, which showed that much fewer than expected jobs were added to the economy and raised serious concern about what to expect this Friday when the government's numbers are delivered. According to ADP, non-farm private sector jobs increased during May by 135,000, worse than economists' average forecast calling for a 157,000 increase, but still making 39 months of nonfarm gains. It should also be noted that non-farm private sector job gains in April were revised lower by 6,000 to 113,000, which serves to show a clear deceleration in the number of jobs being added.

    The data showed that payroll gains were achieved across the board but were predominantly driven by small businesses, which added 58,000 jobs. Large business payrolls increased by 39,000, and medium businesses added 39,000. Not surprisingly, most of the added jobs came from the services sector, which ADP said added 138,000 jobs, but what was surprising was that the goods-producing sector experienced a loss of 3,000 positions, and the prior month was revised lower to a loss of 6,000 from a gain of 6,000. At the moment, economists are predicting that the government numbers to be released this Friday will show that private sector businesses added 159,000 jobs in May and that the unemployment rate likely remained flat at 7.5 percent.

    (click to enlarge)

    Also serving to add to the market's malaise today was that factory orders landed below expectations. According to the U.S. Census Bureau, new orders for manufactured goods during April increased month-over-month by 1.0 percent to $474.0 billion, worse than the Street's consensus estimate calling for a 1.6 percent month-over-month rise. Concurrently, new orders for consumer goods declined by 1.0 percent, after decreasing by 3.5 percent in the prior month, and non-defense capital goods (excluding aircraft) rose by 1.2 percent after increasing by 1.1 percent in the prior month. These orders are considered a proxy for future business investment in items such as computers, engines and communications gear, so its recent upticks do bode well for overall economic growth in the short term. As it stands, it is apparent that the U.S. economy is still slowly improving as the overall trends in economic data are still signaling slow expansion, and with continuing low interest rates, the backdrop for growth is still favorable.

    (click to enlarge)

    ISM services data was somewhat encouraging today, as the result indicated the service industries in the U.S. expanded in May at a bit of a faster pace than forecasted. The ISM services index increased to 53.7 from the 53.1 reached in the prior month, landing above the Street's consensus estimate of 53.5, continuing to indicate expansion. This result comes after Monday's PMI results showed that manufacturing contracted in May for the first month in half a year.

    In all, the data presented today did not serve to excite investors, even if this means no slowing of monetary policy from the Fed, which means that we are actually having a down day on actual negative news for a change.

    Land of the Setting Sun
    By David Urani

    Japanese Prime Minister Abe was elected in December under the premise that since Japan's rising sun was not rising on its own he would forcibly lift it up with a giant government-built crane fueled by massive deficits and a supercharged money printing press. The markets loved the idea at first but that dream is quickly fading.

    We are continuing to keep an eye on Japan, where the selloff in the Nikkei has been staggering. Nikkei futures are currently down another 4.5% today, and in fact they've been plunging for 7 of the last 9 days. As we've noted previously, there has been a wide questioning of how in-control the Bank of Japan is, initially spark by some haywire spiking in government bond yields. After topping out at 16,000 last month the Nikkei has absolutely cratered, down approximately 19% to below 13,000.

    One of the interesting aspects of this for me is that the Nikkei is now getting back to where it was right after Bank of Japan Governor Kuroda announced his extreme new quantitative easing program that initially sparked the latest big rally. As a reminder, it was Kuroda's promise to print approximately $80 billion per month (comparable to our own Fed's QE program despite their economy being a third the size of ours) and double the monetary base over the next two years that had traders flooding into Japanese assets.

    (click to enlarge)

    Well, it's starting to look a bit like Kuroda didn't so much spark a recovery in the Japanese markets as he unleashed a runaway freight train.

    The catalyst for today's plunge was Prime Minister Abe's latest presentation outlining the "third arrow" of his "three arrows" economic plan:

    > Arrow one was to command the Bank of Japan to go pedal to the metal with quantitative easing
    > Arrow two was deficit-fueled government spending on public works
    > And today he unveiled arrow three aimed at private investment reform; it was largely considered to be his most important arrow.

    Arrow three clearly isn't hitting the mark today. The centerpiece seems to be his vision of raising incomes by 3% annually including raising the average income per person by $15,000 in 10 years. The problem is, Abe failed to say exactly how he's going to boost incomes. He also mentioned deregulating the private sector including "strategic economic zones" which essentially would allow private businesses to work in public places like airports; not exactly a cure-all. In addition he said that he would increase energy investments which may include restarting nuclear plants that were shut down after the 2011 tsunami. Not only was he light on detail, but these plans were largely telegraphed beforehand and didn't offer much new ammo for traders.

    And so as quickly as it sprang onto the scene, this Keynesian spending experiment on steroids is losing its luster.


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