Another Reality: It’ll Be Slow Going

Daily State of the Markets 
Thursday Morning – February 4, 2010  

Good morning. As we opined on Wednesday, the reality that punitive legislation might be tough to actually accomplish helped stocks recover from a two week, -6.6% slide with a two-day celebratory pop of 260 Dow points. However, another reality may have hit traders smack between the eyes on Wednesday as reports showed that the economic recovery will likely be a long, slow slog from here.

There were other factors at work on Wednesday such as new concerns about sovereign debt, skepticism over the recent bounce, and my personal favorite; a rebound in the dollar. However, most of the attention was given to a couple of economic reports that, while containing positive aspects, highlighted the fact that the economy is not exactly sprinting ahead at the present time.

With the President’s healthcare plan on the backburner, the attention in Washington and on Wall Street has turned to the job market. Although we’ve got the Big Kahuna of economic reports (the Commerce Department’s monthly Nonfarm Payroll data) on Friday, the ADP report on private sector employment provided more hopeful signs that the jobs market is on the mend.

The bad news is ADP reported that corporate America lost another 22,000 jobs in January. But the good news is (1) the consensus guesstimate was for a larger loss of 30,000 jobs and (2) the December job loss total was revised lower by 23K.

The other report that had everyone talking yesterday was the ISM (Institute for Supply Management) Non-Manufacturing Index. In English, this report is designed to provide a look at the state of the services sector. Although the index came in a smidge below the consensus expectation (50.5 vs. 51.0), the simple fact of the matter is that readings over 50 are indicative of expansion. But in keeping with today’s theme, the January reading of 50.5 was only modestly higher than December’s 50.1. It was also positive that the new orders and employment components continued to move in the right direction.

Looking across the pond, the sovereign debt issue refuses to go away. No sooner had the European Commission decided to get behind Greece’s plan to reduce their deficit than new worries cropped up regarding some other PIGI’S; namely Spain and Portugal. The key here is to recognize that when traders in the U.S. are feeling upbeat, this situation can be brushed aside. However, should the bears begin to growl again anytime soon, you can bet your bottom dollar that sovereign debt worries will return to the top of the worry board.

Finally, what would a morning market missive be without a mention of the U.S. dollar? In case you don’t already know where I’m going with this, stocks were back to following the dollar around (inversely, of course) like a little puppy dog yesterday. So, with the greenback near its recent highs, traders on the long side might want to keep an eye on the exits should the buck break out to the upside again.

Turning to this morning, stocks are looking to continue yesterday’s pullback despite strong earnings out of Cisco (CSCO) in response to concerns about sovereign debt. In addition, we’ve got some economic data to sift through and a steady stream of same-store sales comps for January from the nation’s retailers.

On the economic front, the government reported Nonfarm Productivity in the fourth quarter increased by +6.2%, which was a bit below the consensus for +6.5% and Q3’s rise of +8.1%. On the inflation front, Unit Labor Costs were reported to have fallen -1.5% versus the prior reading of -2.5%.

Next up, the Labor Department reported that initial claims for unemployment insurance for the week ending January 30th increased by 8,000 to 480K, which was above the expectations for a reading of 455K. Last week’s revised total was 472K (from 470K). Continuing Claims for unemployment for the week ending January 23rd were in line with consensus at 4.602M vs. expectations for 4.581M and last week’s revised total of 4.600M (from 4.602M).

Running through the rest of the pre-game indicators, the overseas markets were lower across the board. Crude futures are down $0.60 to $76.38. On the interest rate front, we’ve got the yield on the 10-yr trading higher at 3.66%. Next, gold is moving down by $7.30 and the dollar is higher against the Yen, Euro and the Pound. Finally, with about 45 minutes before the bell, stock futures in the U.S. are pointing to a lower open. The Dow futures are currently off by about 70 points; the S&P’s are down about 8 points, while the NASDAQ looks to be about 11 points below fair value at the moment.

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

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