Today's Market Observation  07.02.2009  Mon  Tue  Wed  Thu  Fri  Panzner Archive

Less Than Meets the Eye

BY MICHAEL PANZNER | july 2, 2009

According to the Labor Department, nonfarm payrolls fell a greater-than-expected 467,000 in June, while the unemployment rate rose to 9.5%, the worst reading since August 1983. As usual, the jobs number was bolstered by a sizeable birth/death adjustment (i.e., 185,000), which included another inexplicable gain (of 31,000 jobs) in the still-imploding construction industry. Based on official tallies (which many analysts believe are overstated to begin with), the U.S. economy has lost more than 5.5 million jobs during the past year alone.

Today’s data reinforces the belief among cynics (like myself) that the so-called “stress tests” the U.S. government used to size up the financial position of the country’s largest banks -- which incorporated certain assumptions about the economic outlook for 2009 and 2010 -- were never really intended to provide an accurate assessment of the health of our financial system. No surprise there, I guess.

Most people realize that our nation’s finances are in bad shape. That said, it is hard to get a handle on just how much of a mess we are in with all of the rhetoric, obfuscation, and spin coming out of Washington nowadays. Still, one look at the following chart of receipts, outlays, and borrowing, and even a monkey can get some sense what is going on: government spending is surging, tax and other revenues are collapsing, and public sector borrowing has taken off like a rocket. In sum, not a pretty picture.

One reason why the real estate market has not yet recovered, according to some commentators, is because credit is no longer as cheap or available as it was. Yet as the following graph illustrates, mortgage rates are not far off multi-decade lows; they are also beneath the levels that helped stoke the boom after the last recession. And while it is true that lenders are becoming stingier when it comes to granting new loans, data from the Mortgage Bankers Association (MBA) indicates that applications for mortgages have gone into a nosedive. In other words, demand is pretty soft, too.

Market-watchers have noted the popularity of exchange-traded funds and have wondered about the influence they are having on the overall market. Interestingly, recent volume patterns indicate that the most popular ETFs are less active than they were. It is hard to say why. Perhaps the proliferation of sector, commodity, and other ETFs is drawing attention and resources away from the long-time favorites. Or, as some have speculated, maybe there is more “noise trading” (e.g., statistical arbitrage) taking place in ordinary shares these days. Then again, it could mean that hedge funds and individual investors, who have, in the past at least, been active players in exchange-traded funds, are scaling back. Whatever the reasons, it is a trend worth watching.

And finally, for those who believe that technicals rather than fundamentals are all you can really count on when it comes to identifying market turning points, the timing of the recent downturn in prices and the textbook head-and-shoulders pattern that appears to be taking shape in the S&P 500 suggests the recent bear market correction may well have reached its end.

Stocks ended the pre-holiday session sharply lower, hurt by weakness in financial, consumer discretionary, and energy stocks after today’s disappointing jobs data dashed hopes that the U.S. economy was on the mend.

At the close, the Dow Jones Industrial Average fell 223.32, or 2.6%, to 8280.74. The S&P 500 Index lost 26.91, or 2.9%, to 896.42. The Nasdaq Composite Index shed 49.20, or 2.7%, to 1,796.52.

August gold futures slipped 10.40 to $930.40/oz., while the U.S. Dollar index rose 0.8%. Ten-year Treasury yields eased 4 basis points to 3.50% and August WTI crude oil futures slumped $3.04, or 4.3%, to $66.27/bbl.

Michael Panzner
Author, When Giants Fall and Financial Armageddon

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