Tuesday, April 6, 2010

Not What It Seems

Last Friday the US stock markets were closed for Good Friday. The Labor Department, however, was at work and released the March non-farm payroll statistics and the household survey from which the unemployment rate is devised. The unemployment rate remained at a very high 9.7%. Prior to the release of the information the predictions for the non-farm payroll number ranged from plus 160,000 to plus 300,000. There were outlier predictions of as few as 40,000 to as high as 400,000 net new jobs.

The number came in at plus 162,000.

The media portrayed this as positive despite the fact that half of the 162,000 were government jobs and half of those were temporary census jobs. More importantly for market purposes the number came in at the low end of the range of predictions. So, was it a positive report? Yes, says the crowd-- and to prove it the market went up Monday when trading opened for the first time since the report was released.

But, consider a different point of view. Yes, the report could have been worse but it was, after all, at the low end of the predictions. Traders saw it as a signal that the Federal Reserve will not be raising interest rates soon. In other words, it gave the green light to a loose money policy for another six months at least. That cheap money not only finds its way into the stock market but also into commodities. For instance, crude oil jumped to nearly $90 a barrel yesterday.

Did the market rise on "good news"? I say the market would have rallied harder and with more volume if the jobs number had come in weaker, say under 100,000. If it had been plus 400,000 jobs I believe the market would have sold off. Traders would have factored in sooner interest rate hikes.
The rally yesterday was on weak volume. There's a lack of conviction in the markets. Everyone knows taxes are going up dramatically no later than January 1, 2011. Traders are trying to make what they can before the market corrects as it discounts that dismal future.