Markets to Open Lower - Nonfarm Payroll Report in Line - Still Bad

April 3, 2009 –  The futures initially reacted positively, moving higher this morning after the nonfarm payroll payrolls came in down 663,000 in line with expectations, with the unemployment rate at 8.5%. Total number unemployed is up to 13.2 million, the most since the survey began in 1940. Average hourly earnings rose 0.42%. Manufacturing had its sixteenth consecutive month of losses in the sector.

For the complete nonfarm payroll report click here:

Expectations for this morning’s nonfarm payrolls report were downbeat at best, which, and when taken in the context of this week’s previous dismal employment reports (ADP and weekly jobless claims) it makes it all the more remarkable that stocks have rallied and continue to show strength. The rationale of looking past further erosion in the US labor force, at a worse than expected pace, is that job losses are a lagging indicator and typically markets rally well ahead of recovery in the labor market.

We don’t buy this rationale in the current situation. Amongst other things, consumers, which are losing more jobs each week, are simultaneously straddled with record credit debt, rising credit rates, zero or negative personal savings and no reason to be confident that things are turning around. We expect self preservation to drive personal savings back closer to the 1980s levels, around 8% or so, in the near term, and if this sustains for any longer period of time, it would represent a vacuum of about $1 trillion in annualized GDP that gets zapped from the economy.

Against that scenario, which we think is a likely, and necessary one (in order to unwind all of this overdone consumer infrastructure), it hardly stands to reason that more consumers losing more jobs is going to do anything other than result in less consumer spending, less corporate revenue, cash flow and profits and further recalibrations downward in terms of expectations on Wall Street.

The euro is lower against the dollar this morning at $1.3444 after the European Central Bank cut interest rates and world leaders at the G-20 pledged another $1.1 trillion in new lending.  Gold is down $3.60 to $905.30. We have started accumulating the SPDR Gold Shares (NYSE:GLD) based on our expectations that the dollar is going to weaken significantly in the second half this year and into 2010.

Oil prices have recently moved above the $53 level on broader market optimism, the same optimism which has been driving stocks recently. At present, they are $52.19, down about $0.45.

On the corporate front,

·         Advanced Automotive Sector – Mitsubishi Motors said it is increasing production of its planned electric vehicle (the I MiEV) in 2010 from 4,000 to 5,000 units after orders for the first 2,000 were filled so quickly.

·         Software – Research in Motion (Nasdaq:RIMM) is moving higher this morning after blowing away targets on strong demand for BlackBerry phones, and upward guidance for the next quarter. In international markets, German import prices fell 6.4% in February. Indonesia’s central bank cut its key interest rate by 25 basis points to 7.5%.

Wit, Wisdom, Fools and Folly

Dr. Robert Eisenbeis, of Cumberland Advisors, on Bloomberg this morning said, regarding the leverage at the FDIC’s effect on the price of assets, that the price will get bid up, shifting more risk to the equity investor in the package from the taxpayer. Trying to figure out what the CDOs are worth will be a big challenge. He said the recent FASB changes have made things more murky. It will make comparing across institutions more difficult. Regarding the FDIC, and whether it is taking on too much risk, he said it is in the guarantee it is offering on the debt to be issued. Asked whether we are on the way to a start of getting the bad assets off the banks, he said it comes down to loss-sharing. How we do it is less important, and we should be worried about getting those bad assets off the books. He said it is a “hopeful start.”

Channel Check

The SIA reported that February chip sales fell 30.4% to $14.2 billion in February, compared to the prior year. On a month-month basis, sales were down 7.6% from $15.3 billion in January.