At Arm's Length: 04.02.04 (8:40 am EST)

Now that Friday has finally arrived, we can all sit back and wonder whether the jobs report will be worth all the hype. Anything that receives this much attention is either noteworthy or worthless. It all depends on the number you want.

The much anticipated jobs report have had a wide range of consensus estimates that are all over the board. Each piece of positive job hiring news has been offset by job reductions. Each CEO who claims they are about to hire is usually canceled out by a CEO who says the industry they are in is not forcing them to create new employment opportunities.

There are a number of commonly quoted econo-metric models make little sense to me and probably have forced you to ask yourself a few questions as well. So what do you base the growth of the economy on and your eventual investment in those markets: jobs or profits?

Job creation is slow and not expected to pick up soon. Investors should be well aware of the fact that any sort of "catch-up" effect, if it is pronounced will stop two very fragile parts of the business model. The first of course is corporate profits.

Job creation do not increase the bottom line profit. If a company can convince investors that job growth will also add to profit growth, which is incredibly difficult in this news-sensitive environment, they will find themselves alone in the spotlight. No CEO wants that to happen.

The second effect of a sudden pop in job growth is the fear that this low interest rate environment and accommodative monetary policy will stop. This will certainly have an effect on the bottom line as well. The Fed Chairman has hinted at the fact that job growth will be the signal that the recovery has legs will most assuredly point to an economy that no longer is in need of cheap money.

Cheap money has allowed a good number of jobs to be created in the small business arena. Any increase in interest rates will slow this entrepreneurial growth. Small business creation is part of a shadow economy that is not reflected in current economic numbers. The administration has often pointed to this as the way to grow the economy. By harnessing this spirit, they believe that new job opportunities will grow as well. As rewarding as working for oneself can be, working for someone else is a tad bit more comfortable.

This shadow economy is also filled with workers from industries that either have been eliminated or have been retooled to operate leaner and more productively. The so-called disparaged worker is working to feed their families and pay the bills. No job number currently reported can filter this type of work from the kind of employment that was once known as "making a living".

So the numbers reported today should have no real effect in the markets. This earnings season though will be especially rough as investors try to parse the future (job growth, costs and productivity) into the past (low inventories, cheap money and profits).

Before we get to the numbers, the Dow Industrials were reshuffled before the market opened yesterday. Eastman Kodak, ATT, and International Paper were booted by the Dow Jones company in favor of AIG, Pfizer, and Verizon. It is important to note that this index is price weighted - meaning that each company's presence in the index is adjusted based on share price not capitalization.

Yesterday's trading was listless at best. The Dow closed the day down 15.63 to 10,373.33; the S&P 500 ended trading at 1,132.17, up 5.96; the NASDAQ gained about a percent to close at 2,015.01.

Expect a good day on Wall Street today no matter where the job number falls. With the range so wide, the actual number of 308,000 with a unemployment rate of 5.7%, will not have as big an impact on equities as it will in fixed income. Look for the bond markets to drop significantly.

At Arm's Length: 04.01.04 (8:40 am EST)

I'll avoid the cliché. The first quarter never really got its legs on and as we head into a new earnings period, the ground the markets must travel will prove no easy to navigate than the last. On a day that say the Producer's Price Index rise only modestly (+0.4%, core index with fuel and food excluded, +0.1%); factory orders jumped slightly (+0.3%) but were weaker than expected; durable goods declined if you removed autos from the numbers (+2.5% with, -1.2% without); the Chicago's purchasing managers index or PMI, while still in an expansion, slowed considerably and missed expectations for improved strength (+63.6% expected against the actual +57.6%); and finally, the Fed Chairman sneezed and the markets thought he had a heart attack.

The number posted yesterday were weak. The Dow finished the day at 10,357.70, down 24.00 for the day and that final tally kept the index from finishing Q1 in positive territory (-0.9%). The S&P 500 did end the first quarter in positive territory rising 1.3% for the first quarter with a modest lose in Wednesday's trading closing at 1,126.21. The NASDAQ took a breather as well shedding 6.41 to end the day at 1,994.22, down 0.5% for the first three months of '04.

Initial jobless claims were down 3,000 with a moving four week average remaining unchanged. The ISM number is due out at 10:00am EST.

Treasury Secretary John Snow kept up his sales pitch yesterday telling the markets that the U.S, is still a good place to invest even if the debt is now $6.8 trillion. Movement in the bond markets was negligible as the dollar continued to show weakness. A cut in the ECU's interest rate was expected but did not happen as the rates held steady.

The job's number, now greatly debated for accuracy, will be released tomorrow. Some economists expect an increase of 120,000. Don't be so sure that this number will discount the recent reports on the economy which have showed growth but at a much slower pace that expected.  

At Arm's Length: 03.31.04 (6:30 am EST)

According to the ISM, the definition of supply management is "the identification, acquisition, access, positioning, and management of resources the organization needs or potentially needs in the attainment of its strategic objectives." So why does supply management play such a key role in today's trading, perhaps even more important that the jobs report due out on Friday?

The Institute for Supply Management, a non-profit organization that has been around since 1915, publishes a number of reports on the health of orders in both manufacturing and non-manufacturing. The ISM index shows strength or weakness in such things as the number of orders that are in the pipeline as well as the state of backlog, which can be an excellent indication of how employment will be effected.

The report issued today will concern itself with numbers from February. Traders should be looking for an uptick in the number from last month's reading of 63.6% largely due to continued weakness in the dollar.

The index reflects several different aspects of the business environment from production and new orders to the relative growth in employment that results from increased sales. It also reflects the sate of inventories and the time needed to fill orders.

Last month showed report also indicated an increase in price for the third consecutive month. Last month's number was however mixed, with some industries experiencing significant increases while others were left wondering whether all of the talk of recovery had passed them by. The numbers are based on the monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies. (Last month's full report)

If this number comes in lower than February's, expect the previous two trading sessions, which were light at best, to crumble. One thing in the favor of a number was the continued weakness of the dollar. This helped quite a few of the companies interviewed in January to suggest that the recovery was real. The dollar did not gain any strength during February.

Trading on Tuesday was characterized as a "drift", a sort of listless trading day that worries market watchers. The Dow Industrial Average added 52.07 ending the day at 10,381.70. The NASDAQ broke a psychological barrier of 2000 today with a move of 8.06 points. Advancers outpaced decliners 1837 to 1296 The S&P 500 index of the biggest companies added 4.53 points with the final tally for the day's trading at 1,127.

Other news that will effect trading on Wednesday will be the decisions made by OPEC and their ability to reign in some rogue producers such as Russia. The hard to quantify needs of China has OPEC concerned .

If production is cut, the debate between presidential candidates will begin to focus even more on an energy policy. Calls for decreasing strategic oil reserves, while good in principle, don't really address the real cause for the increases in prices. The normal conversion from winter fuels to summer mixtures coupled with fewer refineries add to the problem. A recent Fire at a BP refinery in Texas also point to the vulnerability of the system.

OPEC ministers decided to cut production by a million barrels a day beginning on April 1st. The price for May delivery on the New York Mercantile Exchange was up 80 cents with a new price of $36.25 a barrel. Futures are expected to climb.

At Arm's Length: 03.30.04 (7:20 am EST)

So was Monday the result of a pep rally? Did all those analyst upgrades and reiteration of the belief that profits will be strong in the upcoming quarter propel the markets yesterday? What can they do for an encore today?

With some sort of Pavlovian response, the markets bounced back yesterday with the only news coming from the brokerages. The belief that companies will have interest rate affected profits, with the S&P 500 quite possibly averaging 20% growth in many soon-to-be-reported bottom lines is being almost completely ignored. With labor at the edge - and the markets looking warily at Friday's jobs report - profits are based on this low interest environment which Robert Forsyth of Barron's called the "monetary equivalent of steroids".

The outlook for the upcoming profits about to be posted are juiced and the GDP growth is unrealistic was completely ignored in trading yesterday.

If it had been, there would have been no way that the Dow could have posted the triple digit gains it ended the day with on Monday. Finishing the day at 10,329.63, the Industrials rose 1.14% adding 116.66 points. The S&P 500 looked upward as well to close at 1,122.47 for a 1.30% with the NASDAQ up 32.55 points on a reaction to numerous upgrades.

Now the question is whether the profits that are anticipated are already in the current market valuations. With volatility increasing with each surge and then pullback, the correction may not be over.

Gold prices have continued up with pre-market futures selling for $421. Oil futures have begun to rise with concern that OPEC will reign in countries who are not following the ceiling for production. Even with the recent fall from near $38 highs, gasoline prices have reacted much the way fixed income does. As the price of futures falls, gasoline prices actually moved inversely and increased. This brings more talk of inflationary pressures despite Mr. Greenspan's assertion that the real inflation rate excludes fuel and food.

A key indicator of that pressure is in the Dow Transports which are still down much further than the Industrials year-to-date. Even though the Transportation average gained 50 points yesterday, the index is off over 4% for the year.

The mid-week ISM number might play a bigger role in determining how much defensiveness was in yesterday's buying spree. Another less important but expected lower report on Consumer Confidence by the Conference Board will be released at 10 am EST this morning.

At Arm's Length: 03.29.04 (Before the Bell)

As March draws to a close, apparently a good many of those who were surveyed by the Michigan Consumer Sentiment Survey posted a positive gain from the previous month.

Perhaps the truest indicator of any job improvement would come from the monthly survey of 51 newspapers across the country with an eye on their help wanted section. This past month's numbers improved somewhat bring us back to, as Ken Goldstein of the Conference Board said, "back to a year ago levels". Pockets of improvement however are not to be confused with a job recovery.

Aside from the formal unveiling of presidential candidate John Kerry's economic plan to create 10 million jobs in his first year in office, the University of Michigan's Consumer Sentiment survey was released. The report showed a slight increase - but not by much - with a final reading of consumer confidence at 95.8 in March, up from 94.4 in February.

This number reflected some of the trends that have been weighing on the markets including the recent terror attacks in Spain, the increase in the cost of gasoline, and the fact that the markets have not been able to sustain last year's rally.

There was a hope that tax refunds would buoy the spirits of those surveyed but that proved not to be the case. Numbers released earlier in the week showed a slight increase in take home pay offset by a slight decrease in spending. As any economist will tell you, an American saving is an economy in trouble.

And that proved to be the end of day undoing of the markets. The Dow Jones Industrial Average reversed some early day gains ending the day off about 6 points. Had it not been for Thursday's false jump of 170 points, the Dow would have closed in negative territory. Thursday's gain was mostly the result of program trading by large institutions. A full 46% of the trades made that day were a result of this activity.

The NASDAQ also posted in first positive week in awhile based on Thursday's finish even as it closed down 7 points to 1960.02. The flat trading week - discounting once again that jagged tooth spike - continued on the big board as well. The Standard & Poor's 500-stock index gave up 1.13 to end the session at 1108.06.

Bonds prices fell with the 10-year Treasury note losing about 3/4 point, the yield, which moves in the opposite direction rose to 3.829%. The fixed income markets expected a better sentiment number and even though the number was relatively unchanged, bonds dropped.

All eyes will be on the Friday job and unemployment report. This is the sole piece of economic news that will follow a week of erratic and anticipatory trading.

Archive of previous weeks. Beta test began on 03.08304.

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