Expectations vs. Reality

Daily State of the Markets 
Monday Morning – June 7, 2010  

If someone walked up to you on the street and told you that the economy had created a total of 431,000 jobs in the month of May, you couldn’t really be blamed for thinking that this just might be considered good news. However, this is simply not the way the game is played at the corner of Broad and Wall. No, this is a game of expectations versus reality.

If you found yourself wondering why the market would dive more than 300 points when the economy had added a whole bunch of jobs, you simply need to adjust your thinking. The problem on Friday was simple… Analysts had been hyping the job growth data all week and just about everyone, everywhere was expecting not just a good number, but a great one.

The consensus expectations for May’s job growth was in the vicinity of 500,000 (the Reuters consensus was actually for 536K). However, you could find any number of analysts looking for much bigger numbers. Heck, even Goldman Sachs (GS), which is known for getting things right, upped their internal estimate for job growth in May from 500,000 to 600,000 on Thursday afternoon. And with the politicians talking up the prospects for a big employment report, well, the stage was set.

But there is more to this “big miss” than an economic report simply coming in well below expectations. In short, a strong report would have been an indication that things were “just fine, thank you” here in the good ol’ USofA, and that the debt mess in Europe was not yet having an impact on our shores. This was the argument the bulls (and a guy named Buffett) used to help push things higher on Wednesday and Thursday.

Thus, it didn’t take the bears long to argue that if things weren’t exactly peachy keen here at home and that the negative impact of the European debt problems is still on the horizon (along with the potential for a resumption of the downtrend in housing), well, you get the idea.

The other problem in the jobs report was the fact that the census workers did most of the heavy lifting in the numbers. So, with the census accounting for 411K out of the 431K total, there was more than a little disappointment to go around on the jobs front Friday.

Now toss in the report that something called the “birth/death model” inside the jobs report may have juiced the number of jobs gained by a not-so small amount, and word Societe Generale had experienced big losses on their derivatives desk, and you’ve got the recipe for an awful lot of selling.

I know what you’re thinking: Can’t we blame Friday’s dance to the downside on those menacing high-frequency trading programs? After all, they’ve been making things more than a little volatile lately. But sadly, no, outside of the opening plunge, there were very few signs that the high-frequency boys were moving the market down on Friday.

But from a technical standpoint, the bulls can be heard arguing that since the recent lows were not breached, the “basing pattern” argument is still intact. While we’re not taking sides on this one, we will watch the recent lows carefully this week.

Turning to this morning… Stock futures have improved nicely in response to the report that German Factory Orders were up 2.8% in April, which was well above the expectations for a decline of -0.4%. On a year-over-year basis, orders up +29.6% vs. consensus of +25.4%.

On the economic front… There is no economic data to review before the bell. However we will get a report on Consumer Credit at 3:00 pm eastern.

Finally, don’t let success go to your head or defeat into your heart…

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: -2.72%
  • Shanghai: -1.64%
  • Hong Kong: -2.03%
  • Japan: -3.84%
  • France: -0.04%
  • Germany: -0.13%
  • London: -0.36%

   

• Crude Oil Futures: -$0.02 to $71.49
• Gold: -$2.50 to $1215.20
• Dollar: Lower against Yen, Euro, and Pound
• 10-Year Bond Yield: Currently trading higher at 3.34%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +5.4
  • Dow Jones Industrial Average: +42
  • NASDAQ Composite: +10.7  

Wall Street Research Summary

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