Today's Market Observation  11.05.2009  Mon  Tue  Wed  Thu  Fri  Panzner Archive

Not as Good as Some Believe

BY MICHAEL PANZNER | november 5, 2009

The Labor Department today reported that nonfarm productivity rose 9.5% in the third quarter, the fastest pace in six years. Boosted by lower than expected labor costs, the bigger-than-expected jump was widely hailed as positive by economists and stock traders. Huh? In a debt-challenged, consumer-dependent economy like ours, where a growing number of Americans are struggling to get by, the fact that businesses continue to benefit from squeezing wages and cutting jobs would seem to be the recipe for social unrest and revolution, not a return to economic good fortune.

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(Source: http://econompicdata.blogspot.com)

Speaking of things that aren’t necessarily as good as some believe, the reaction in fixed-income markets to continued money printing in the U.S. and elsewhere suggests that not everyone is happy about being “rescued.” While nominal bond yields remain relatively low in most developed countries, the spreads between long and short-term rates continue to work their way higher, suggesting investors are increasingly worried about a rising tide of supply, the threat of inflation, or both.

To be sure, inflation has not really been a problem up until now. Despite all the money that has been pumped into the system by way of monetary and fiscal stimulus, there are few signs of broad increases in the prices of goods and services. One reason is because the velocity of money -- the rate at which it changes hands -- has fallen sharply amid widespread hoarding of cash, especially by banks. However, with velocity nearing levels that have served as support in the past, as well as the fact that its year-over-year trend is signaling a potential reversal, that could be a sign of trouble ahead.

As far as share markets are concerned, there are any number of issues that give cause for concern. In addition to the fact that we’ve seen lackluster volume on rallies, assorted momentum divergences, excessive speculation in low quality shares, and relentless insider selling, two other indicators also suggest the risk is to the downside.

The first relates to the fact that advance decline line appears to be breaking beneath a trend line that has been in place since the March 9th lows, confirming a similar breakdown that occurred in the S&P 500 and other U.S. indices last week.

In addition, the percentage of stocks that are trading above their 200-day moving averages has also hit an overbought extreme. That figure is now around the same high levels it hit in early 2004, after which the market began a choppy, six-month correction that left prices 8% lower than where they started.

And finally, while it has not proved to be much of an economic threat -- yet -- it’s worth keeping in mind that the number of reported swine flu cases around the world continues to surge.

Stocks ended sharply higher, aided by short-covering, technical buying, positive Q3 results from Cisco, and economic data that beat economists’ estimates.

At the close, the Dow Jones Industrial Average jumped 203.82 points, or 2.1%, to 10,005.96. The S&P 500 Index rallied 20.13, or 1.9%, to 1,066.63. The Nasdaq Composite Index surged 49.80, or 2.4%, to 2,105.32.

December gold futures rose $2.00 to $1,089.30/oz., while the U.S. Dollar index ended more-or-less unchanged. Ten-year Treasury yields were also flat at 3.52%, while December WTI crude oil futures dropped $0.78 to $79.62/bbl.

Michael Panzner
Author, When Giants Fall and Financial Armageddon

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