Markets to Slightly Higher - Mixed Results in Nonfarm Payrolls Reports, Choppy Session Ahead

February 5, 2010 – The futures are indicating an extension of yesterday’s selloff this morning on the heels of a mixed, to poor set of job data from the Labor Department this morning.

On the economic front, the Nonfarm Payrolls report showed 20,000 jobs were lost in January, while the unemployment rate declined to 9.7% and the under-employment rate declined to below 17%. 8.4 million jobs have been lost since the start of the recession (more than expected), according to the report. Temporary workers, manufacturing and government groups (9,000 of the govt. jobs were census workers) all increased. But the construction sector continues to lag. The data is definitely mixed, and still disappointing. The job gains really were in the temporary sector, and ‘real’ jobs continue to decline. Pundits are looking at the decline in the unemployment rate as a bit of a ‘fluke’. The futures were initially down on the numbers.

The U.S. Treasury is set to sell $77 billion in bills next week, while it expects to hit to the debt ceiling by the end of February (currently at $12.4 trillion). The Senate has approved an increase to $14.3 trillion, while the House hasn’t acted yet.

Meanwhile, the dollar has substantially strengthened against the euro lately, with the euro trading down to $1.3683. Adding to weakness in the euro this morning is a much worse than expected industrial production report in Germany (see below). However, the fact that the dollar is stronger against the euro, and several of its other peers, should not, in our opinion, be perceived as a fundamental vote of confidence in the dollar, it is rather a result of pressures in peer currency countries which traders are reacting to. We think the debt outlook in the U.S. remains a mess and will ultimately take its toll on the greenback.

That being said, one would think gold would be behaving better. But it has sold off considerably lately, down $3.80 this morning to $1,059.20. The SPDR Gold Shares (NYSE:GLD) are down again in pre-market activity this morning to $103.69. We think this is an attractive range to begin accumulating, and believe the outlook for gold long-term remains strong based totally on the fact that the government’s spending and stimulus is going to continue to ramp in 2010. Our primary rationale for gold investment is that it is a good hedge against the dollar, and it is also still a growth story.

Oil prices are down $0.12 this morning to $73.02. Traders are recalibrating on renewed concerns that the U.S. is nowhere near being out of the woods with respect to economic recovery and that demand, at least in the West, will remain in check. Although we don’t think traders are sufficiently factoring in increasing demand in China, and the surging auto market there – which is speeding past the U.S. market in terms of the world’s largest.

In international markets, in Germany, industrial production was down 2.6% in December, compared with a 0.7% increase in November. Expectations were for a 0.6% increase in December. In China, passenger car sales were up 84% in January.

In terms of what we expect in today’s session, look for another choppy market as the Street tries to break the nonfarm payrolls report down. The initial response was negative, but as we get closer to the open, it appears traders are taking the ‘glass half full’ approach, focusing on the positives in the report. We continue to think the overall trend for the broader markets will be lower, and are looking for tests, respectively at:

·         DJIA – we are looking for a test of 9,700

·         Nasdaq – we are looking for a test of 2,045

·         S&P 500 – we are looking for a test of 1,036

We are also continuing to evaluate individual stocks that we would like to own at lower prices, within the context of selling puts into weakness as a means of collecting premium – basically getting paid to take on the commitment to purchase said stocks at a lower price. For example, ast week, we waded into a short-put position on A-Power (Nasdaq:APWR) into weakness and would be inclined to add to that short position on further weakness. The key with this and any other strategy is to build a position, and not spending all available cash on the first go. Consult your brokers to learn more about short-put strategies as a means of establishing long positions.