A Major Disagreement?

Daily State of the Markets Friday Morning – August 6, 2010 Good morning. The nice thing about an early August session where most investors spent the day simply biding their time in front of this morning's jobs report, is it gave us plenty of time to ponder the big picture. For me, it was a call from a long-time friend and a pretty decent market watcher that drew my attention to what appears to be a fairly important disagreement between Ms. Market and Mr. Bond. Generally speaking, there is usually a message provided by the stock and bond markets. And as I've mentioned a time or thirteen over the years, I tend to side with the bond market on matters involving the economy because bond investors have less to worry about. But with the current message coming from these two markets appearing to be diametrically opposed, I find myself inclined to listen to both sides of the discussion. With the stock market up +10.1% from its early July lows - lows that were put in due to fear that the economy was going to soon dip back into recession - one can easily argue that stocks are looking forward to better days ahead and that the risk of recession appears to be off the table. And as we've reported several times recently, there have even been a handful of economic reports from both sides of the Atlantic that have actually come in above expectations. So, with the tone of the market having clearly improved, it would appear that stocks may be able to move up - as long as things don't fall off of a cliff, of course. However, the bond market appears to be painting an entirely different picture as the yield on the 10-year finished Thursday just a hair more than two basis points from its lowest level of the year. What is interesting here is that the low of the year also happens to be the lowest yield seen since the funeral for the banking industry was called off in March of 2009. So, this is kind of a big deal in the bond pits. The argument can be made that Mr. Bond seems to be suggesting that the economy is not exactly in great shape at the present time and isn't likely to improve much in the near-term. This, again, is just about the polar opposite of the "message" from the stock market. However, in light of the fact that the all-important jobs report is just about to be released and that this number is likely to drive both markets today, I have just one more quick thought to offer. There is a chance that the bond market just might be focusing more on inflation or, more accurately, the lack thereof, at the present time and the lack of potential for price appreciation in the economy is the reason for the low yields. So, while we've got to turn our attention to the number du jour, this issue remains something to ponder going forward. Turning to this morning... All eyes are on the Jobs report, so let's get to it. The Labor Department reported that Nonfarm Payrolls, which is arguably the most important gauge of the state of the economy at the present time, fell in the month of July by 131,000. This was below the consensus estimates for a decrease of 76,000. In addition, June payrolls were revised lower to -221K from -125K. June Private Payrolls revised lower to +31K from +83K. Next up, the nation’s Unemployment Rate fell 0.1% to 9.5%, which was below expectations for a reading of 9.6 and in line with June’s level of 9.5%. Finally, the private sector (aka the household survey) showed gains of 71,000 jobs, which was below the estimates for 89,000K. Stock futures have plunged on the news and as one might expected, bond yields have also moved to a new low for the year. Thus, at least for the moment, it appears that the bond market has it right. Finally, best of luck on this Friday and be sure to enjoy the weekend! Pre-Game Indicators Here are the important indicators we review each morning before the opening bell... Major Foreign Markets: Australia: +0.03% Shanghai: +1.44% Hong Kong: +0.59% Japan: -0.12% France: -0.73% Germany: +0.31% London: +0.60% Crude Oil Futures: - $0.96 to $81.11 Gold: + $1.20 to $1200.50 Dollar: lower against Yen, higher vs. Euro and Pound 10-Year Bond Yield: Currently trading lower at 2.86% Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -8.40 Dow Jones Industrial Average: -76 NASDAQ Composite: -19.90 Wall Street Research Summary Upgrades: PF Chang's (PFCB) - Argus Research McDonald's (MCD) - Estimates increased at Cowen Alliant Techsystems (ATK) - Credit Suisse Hyatt Hotels (H) - FBR Capital Downgrades: Career Education (CECO) - BMO Capital Blue Nile (NILE) - Goldman Viacom (VIA.B) - Janney Capital Autodesk (ADSK) - Jefferies Transocean (RIG) - JPMorgan Genzyme (GENZ) - Piper Jaffray Hewitt Associates (HEW) - RW Baird Tenaris (TS) - UBS American Eagle (AEO) - Wells Fargo Aeropostale (ARO) - Wells Fargo Yesterday's Earnings After the Bell Company Symbol EPS Reuters Estimate Activision Blizzard ATVI $0.06 $0.05 CF Industries Holdings CF $1.54* $3.16 EOG Resources EOG $0.18 $0.24 Harman International HAR $0.30 $0.31 Kraft Foods KFT $0.60 $0.52 Microchip MCHP $0.55 $0.51 PerkinElmer PKI $0.38 $0.33 Public Storage PSA $0.26 $0.21 Southwestern Energy SWN $0.35 $0.36 Earnings Before The Bell Company Symbol EPS Reuters Estimate AES Corp AES $0.23 $0.22 American International Group AIG $1.14 $0.98 Progress Energy PGN $0.63 $0.62 Pepco Holdings POM $0.34 $0.19 Warner Chilcott WCRX $0.95 $0.81 * Report includes items that make comparisons to the consensus estimate questionable Long positions in stocks mentioned: RIG For more "top stock" portfolios and research, visit TopStockPortfolios.com The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.com and may not actually come to pass. 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Disclosure: Long RIG