Well, yesterday was fun!
As we expected, the massive pre-market pump job failed once again to push our breakout levels and that led to 6 of our 7 day trades coming out winners in Member Chat. We're still waiting on the 7th, our MOS puts that were meant to be a weekend hold anyway so not really a day-trade but it was lots of fun after sitting mainly on the sidelines this week waiting for a good opportunity to jump in. Our plan from the morning post to buy out our DIA putters worked perfectly as well and we even went bullish on the DIA's into yesterday's stick save so we're not even going to complain about that nonsense today!
It will take more than a stick to save the markets today if the jobs report is a disappointment. GS, BCS and JPM have all lowered their loss predictions from around 370,000 lost jobs to 250-275,000 job losses and DB has gone completely off the wall with a prediction of just 150,000 losses! As the US is gearing up for the 2010 census and as no one understands the mystical "seasonal adjustment" game and as GS pulls all the strings in government, we are hard-pressed to dismiss this seemingly ridiculous prediction. What do the big 3 market manipuluators have to gain by raising expectations so high just ahead of the actual numbers? Perhaps they have already finished their selling and have now fipped negative, looking to initiate a massive sell-off as jobs disappoint? Or, perhaps, they are brilliant analysts who are well ahead of a number that will, finally, give us our long-awaited break out.
If the figures do surprise, it won't be in a statistically significant way. A payroll decline of 450,000, which would mortify Wall Street, would mean a 0.3% decline in total payrolls. A market-friendlier decline of 150,000, on the other hand, would represent a 0.1% decline. Percentage-wise, the difference is a crapshoot. At some point, jobs data should improve meaningfully. The four-week moving average of new jobless claims is down 10% from late June. That translates into about 200,000 fewer job cuts a month, estimates High Frequency Economics economist Ian Shepherdson. "The risk of a substantial upward surprise on payrolls over the next few months has risen," Deutsche Bank economist Joseph LaVorgna wrote recently.
China lost a little faith this morning as the Hang Seng fell right to the 2.5% rule (down 523 points) and the Shanghai went them a little better, dropping 2.9% despite Goldman's bullish assurances. I would urge readers to check out this morning's post "Is China's Growth an Accounting Miracle?" for some perspective on the subject. Property companies led the declines on persistent fears that China may tighten lending policies, especially in the property sector, to prevent asset bubbles. "While property developers themselves have raised money and probably have loans from banks sitting in their deposits, it's still going to be very negative if the central bank tightens significantly in the sense that end users can't buy flats," said Main First Securities sales trader Andrew Sullivan.
"The smart move is to take profits now," because carrying positions over the weekend and before U.S. payrolls data is too risky, said Yukio Takahashi, market analyst at Mizuho Securities. "Players won't make any big moves until they see how Wall Street reacts to the unemployment figures." Gee, more pressure on us! No pressure on CIC, China's Sovereign Wealth fund who are up 50% in 2009 with assets now totalling $300Bn. Why can't the US do this? Crash the economy, start a Sovereign Wealth Fund that uses government money to buy the crushed assets of ordinary investors at the very bottom, then initiate a massive stimulus package that artificially boosts the markets and makes that fund a fortune? Oh, that's right – we did do that, and our Soverign Fund is called Goldman Sachs!
Europe is trading with some caution ahead of the US jobs report (8:20). Russia continues to cut rates to 10.75%, sending the Ruble even lower as 10.75% is not enough reward for the risk of holding Russian currency. Inflation in Russia is 8.1% so, unlike the US, at least Russian savers can stay ahead of the game. Greece has been warned by the IMF that they must reduce their deficit, which is around 6% of their GDP. It's a good thing the IMF hasn't seen our books, as our deficit of $2Tn is 15% of GDP!
8:30 Update: Well Kudos to GS, who were off by just 3,000 jobs as the Non-Farm Payroll came in at -247,000 for July. That's a rate of "only" 2,964,000 jobs lost in a year if, of course, you ignore the fact that we've already lost 3,787,000 jobs in the first 7 NFP reports of 2009. Still, this is the lowest number of job losses since November of 2008, when we "only" lost 240,000 jobs. For the historians out there, we haven't had a job gain since Jan of 2008, when we added a whopping 18,000 jobs in this nation. We're not expecting the market to keep this in perspective though, it's a good number and it will be extrapolated out to a massive victory this weekend. Heck, Obama was already taking credit last night (notice he says "job losses cut in half" so GS is not the only one who gets an early peak at the report!).
Obviously, we're going to get a retest of our breakout levels: Dow 9,297, S&P 1,000, Nas 2,107, NYSE 6,438, Russell 562 and SOX 308 and we'll be paying special attention to the Russell, which tested the 33% line (off the top) at 574 on Tuesday. We would consider a breakout over that level to be an extremely bullish sign for our indexes. Our tip-off to get bearish at yesterday's open was the failure of the QQQQs to break 40 so that will be our bull/bear signal for the day. If we don't fail our levels on profit taking into the weekend, we may have to finish this day slightly bullish as we could get strong follow-through from Asia on a snap-back on Monday. That makes FXI $41 calls at $2 a good momentum play this morning, playing for the China bounce and out if the Dow can't hold 9,250.
Not breaking our levels on this tremendously good jobs news would be a huge disappointment but it's holding them that's key. We may get a nice pop as technical traders come off the sidelines but we'll still be looking for short opportunities this morning, probably buying out our DIA putters yet again. It's all about how we finish and, sadly, you never know that until the bell rings with all these crazy last-minute programs. What will be our key indicator this morning is volume. If we break out but the volume stays low – then it's more likely the volume will come in to the downside later. As Mr. Takahashi said above: "The smart move is to take profits now!"