Overview and Observation;
Investors persist in their blind "belief" in the equivocation from Washington of an economic recovery. The equity markets as well as the continuing messages from various Federal Reserve regional Presidents seem to indicate that quantitative easing through the purchase of Treasury instruments will be ending soon. The basis for that "termination" is the belief as well, that the labor situation is improving and that the need for continued low rates through "easing" is becoming unnecessary. That could not be further from the truth. As I have been "explaining" rather vigorously, the prospect of a "jobless recovery" is in fact, a frivolous ploy intended to placate the public into "spending" rather than "saving for the rainy day" that I personally expect is forthcoming. Not all consumers believe that rhetoric from Washington and are in fact withholding their spending plans to a great extent as evidenced by "consumer spending" data.
Once again, for the blind or oblivious, you cannot consistently lose over 330,000 jobs a week against a monthly gain of fewer than 200,000 "questionable" jobs created without some negative impact on the economy and ultimately the markets. Also the fact that employers are unwilling to hire full time staff and the increase in jobs to a great extent is the hiring of part time workers. The government change from a 40-hour week to a 30-hour week basis is going to impact the job market even further in my opinion.
That will translate to further contraction in consumer spending as well as lead to a growing skepticism and ultimately a stock market "meltdown." One respected analyst is anticipating a "1987 type market crash" where the Dow lost over 22.6% in just three days, Thursday, Oct. 15, Friday the 16th, and finally Monday the 19th. I was around then and witnessed the "tears" from the Ph.Ds. in the board rooms where the margin department professionals had to come out of the back rooms to liquidate positions because the salesmen were frozen in panic.
The markets are in "loftier" heights after the recent rally promulgated on the rhetoric from Washington. While I don’t expect the selloff to compare to the magnitude of 1987, I do expect a 2008-09 style selloff once the investing public has had a chance to look more closely at the "real unemployment and underemployment" situation in the U.S.
Europe is in the throes of recession and the austerity programs developed by central banks are drawing extreme criticism and protests from the public. I do not see it improving any time soon since some of the Eurozone countries have no way to service their outstanding debt burden and the prospect of additional "lending" is tantamount to "throwing money down a well" in my opinion. Now for some actual information…
The September Treasury bond (CBOT:ZBU13) closed Friday at 134 15/32nds, up 6/32nds as money "made the trip" from equities to the safety of the U.S. treasury market. The yield on the 30-year bond fell 2 basis points to 3.629% while the yield on the ten year fell 1.5 basis points to 2.577%. The market did not have much in the way of economic data this past week on which to base movement other than the "anticipation" of what the U.S. Federal Reserve may do in the future. Wholesale inventories declined by 0.2% in June, less than the economist forecasts of a 0.4% gain. While we will have to "wait and see" what the Fed will say next, we expect the "easing" program to continue in the face of what we see as a flat to declining labor situation. Hold bond calls.
The Dow Jones Industrial Average closed Friday at 15,425.51, down 72.81 and for the week lost 1.49%. The S&P 500 (CME:SPU13) closed at 1,691.42, down 6.06 and for the week lost 1.07%. The tech heavy Nasdaq closed Friday at 3,660.11, down 9.02 and lost 0.8% for the week. In the S&P 500 utilities led the losses while consumer cyclicals also declined by 0.25% for the day. Basic materials were 1.58% higher after gaining 3% on Thursday tied to the better than expected economic data from China, the largest user of industrial materials and metals.