Market Commentary

Perhaps the $64,000 question will there be an European Contagion
May 10, 2010

Perhaps the $64,000 question will there be an European Contagion similar to the Panic of 2008?  By definition sovereign debt issues are considerably more debilitating than corporate issues.  As stated Friday I believe growth in the American economy has the potential to prevent the contagion from spreading.

Speaking of growth April’s employment report was considerably stronger than expected despite a misleadingly large rise in the unemployment rate that itself contained some elements of strength.  Over all nonfarm payrolls rose 290K for the best showing in just over four years and the previous two months were revised up by a total of 121K.  Nonfarm payrolls have now increased four consecutive months and five out of the last six.

Private payrolls rose by 231K in April versus the consensus estimate of a 100K increase, the largest gain since March 2006.  The prior month was gain was also revised higher thus three month average gain in private payrolls is 156K.  As inferred above government hiring contributed less to the April total than many had thought.

The unemployment rate printed a four month high of 9.9% up from 9.7% from March.  I must write March’s actual rise was 9.749% and the April rate was 9.863%.  The deterioration was concentrated in the 20-24 year old segment and 55 plus workers.  The rate for prime 25-54 cohort eased a tenth to an 8.7% rate.

Also the overall increase in the headline rate mainly reflected a jump in participation rate as a strong 550K rise in household survey was simply outweighed by an 805K increase in labor force suggesting workers are more optimistic about finding a job and therefore are reentering the work force.

I will write I was disappointed with a flat reading in average hourly earnings but increases in the overall and factory workweek were encouraging.

Amongst industry sectors factory jobs rose by 44K, the biggest gain in almost 12 years and construction hiring was positive for a second straight month.  Temporary workers also rose.

As stated above I think this was a surprisingly upbeat report, indicating a healthier labor market. 

Are these gains sustainable? I think yes as companies loathe hiring extra workers given nervousness in the economy and global markets.

Speaking of nervousness, stocks were extremely volatile again Friday over contagion fears.  There were rumors that European banks were hesitant to trade with one another.  Bond spreads were all over the place suggesting great fear and perhaps liquidity concerns.

Late Friday afternoon there was a rumor that the G-7 would make available a line of credit of $750 billion to any bank that may need it, as many as 1000 banks at 1% for one year.  The question is where will this money come from?  The IMF could raise it the credit markets or the Central Banks can extend it but this would be inflationary.  However that is not the issue at the moment.  The issue at hand is the calming of the financial markets.

In my view volatility was amplified by questions surrounding the integrity of America’s trading infrastructure given Thursday’s much publicized issues. Moreover many were/are scared of having open positions over the weekend given the potential fluidity of the events remembering fall 2008 when it appeared the financial landscape changed dramatically each weekend for about six weeks.

What will occur this week?  The economic calendar is moderate.  Trade gap, inventory levels, capacity utilization/industrial production, sentiment survey and retail sales are released.

Last night the foreign markets rocked as the EU unveiled an unprecedented loan package worth almost $1 trillion to stop a sovereign debt crisis.  The ECB also stated it will buy government and private debt.  London was up 5.21%, Paris up 8.92% and Frankfurt up 4.93%.  Japan was up 1.60%and Hang Sang up 2.54%. 

Can I suggest the financial landscape did change radically over the weekend?

The immediate liquidity issues have been solved.  The issue now is solvency.  Can the European social democracy curtail spending?

The Dow should open sharply higher perhaps as much as 300 points.  Based upon casual an observation, the last time I remember the markets opening higher this sharply was following the 1987 stock market crash.  I was in the industry for a about 18 months at that time. The 10-year is off 1 11/32 to yield 3.59%.