Futures up strongly ahead of the jobs report

Outside of the fact that other traders look at and react to the data, I for one do not know why so much emphasis is placed on the monthly jobs report. The numbers are continually tweaked, have a significant standard error in any one monthly estimate, and are largely marked-to-model (i.e. fantasy). In fact, the BLS reports that more than 1.2 million jobs out of 4 million (not seasonally adjusted) were created in newly started businesses in the last year.

This assumption seems far-fetched given the state of the slow-growth economy and lack of available credit.

In any event, the Street is looking for a net creation of about 100 thousand jobs. Your guess is as good as mine as to the market's reaction. Ahead of the announcement, the futures are indicating a strong stock market opening.

The Treasury to sell floating rate notes? Floating Rates?

I guess the details of this plan remain in the works, but you have to wonder about the timing of such an action. This MarketWatch article explains that more that $660 billion in treasury paper is maturing in the next four years. The potential sale of floating rate treasury notes is obviously a plan to spark demand, enticing those bond investors that want the safety (?) of the treasury note but are worried about rising rates in the future. However, with treasuries rates across the curve at or near-all time lows, you have to be concerned about future funding costs.

Probably the most pertinent quote from the article.....
    John Lonski, chief economist at Moody’s Capital, said floating-rate notes would be attractive to
    investors who are worried that bond yields will spike in coming years as the Fed tries to exit its
    ultra-low-interest-rate policy.

   The decision to sell floating-rate notes is a “tacit admission by the U.S. Treasury that the current
   less-than 2% 10-year Treasury yield stands a high probability of not becoming a lasting feature of
   the U.S. credit market,” Lonski said.

Mid-Day Traders Edge 8/2/12- Risk Off is Back

With nearly half the trading complete, the market is pulling back on heavy volume. This follows the ECB's announcement that they will work with the Euro nations to support their bond markets. That said, the bottom line is that the ECB failed to announce any "substantial" support (i.e. no quantitative easing).

In my opinion, the chances that the ECB would enact a large QE program was the last leg of the stool holding up the market- as lackluster second quarter earnings, uncertainty towards the world economic outlook, and no action out of Fed leaves nothing but air under the latest market advance.

As I write, volume on the SPY is on track to post somewhere in the range of 230 million to 250 million shares. The last time you saw that kind of volume was on May 17 and 18 of this year, noting that this volume level also corresponds with my short-term price outlook of around $129.

You can also see the confidence- or lack there of- in intra-day trading.

You will see that the market retraced the opening down draft, fully closing the gap. Once completed, heavy volume came in towards the downside, pushing the SPY down more than 1 percentage point versus yesterday's close. I would suspect this is institutional money coming out the market. Without some clarity to Europe's woes, action by the Fed (which by the way I think will not occur until money supply and/or the market contracts in conjunction with a decline in employment levels), or an improved earnings outlook, it is likely that institutions will continue to lighten their equity holdings.

Lastly and just as a note, the yields on the ten and five year treasuries are falling. In conjunction the dollar (as shown in the performance of the UUP), is rising. The risk-off trade is back.

Update- No action from the ECB, futures slide, Are your shorts on?

An excerpt from the Bloomberg article, more at the link

U.S. Stock Futures Fall After Comments by ECB’s Draghi

By Rita Nazareth - Aug 2, 2012 9:18 AM ET

U.S. stock futures declined, indicating the Standard & Poor’s 500 Index will drop a fourth day, as the European Central Bank Mario Draghi failed to reassure investors on immediate efforts to bolster the economy.
Knight Capital Group Inc. (KCG) plunged 56 percent after saying losses from yesterday’s trading breakdown are $440 million, more than some analysts had estimated, and it is exploring strategic and financial alternatives. Abercrombie & Fitch Co. (ANF) tumbled 15 percent after the teen retailer cut its profit forecast. First Solar Inc. (FSLR), the biggest maker of thin-film panels, soared 17 percent after an 81 percent jump in earnings.
S&P 500 futures expiring in September fell 0.7 percent to 1,360.90 at 9:14 a.m. New York time. Dow Jones Industrial Average futures slid 77 points, or 0.6 percent, to 12,846. The number of shares changing hands in Stoxx Europe 600 Index’s companies was 6.8 percent lower than the 30-day average at this time of day, according to data compiled by Bloomberg.
“Traders and investors who expected immediate action are, and should be, disappointed,” Carl Weinberg, founder and chief economist of High Frequency Economics, wrote in a note today. “Clearly, the action plan is still lacking details.”
European Central Bank President Mario Draghi signaled the bank will join forces with governments to buy sovereign bonds in sufficient quantities to remove all doubts about the future of the euro. Any ECB bond purchases will be conducted in a way to soothe investors’ concerns about seniority, Draghi told said at a press conference today, after keeping the benchmark interest rate on hold at 0.75 percent. Details of the bond purchase plan will be fleshed out in coming weeks, he said.

As I stated in other posts, watch for SPY to close that gap around $129. Are your shorts on?

Annotated FOMC Statement

Confirming my opinion, the FOMC made no change to monetary policy. The FOMC did graciously provide  what investors should watch, going forward, to gauge any future policy actions. Here is the annotated press release.

Press Release

Release Date: August 1, 2012

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. (High unemployment is on our minds but the rate of change remains positive, painfully slow but still positive. We cannot move yet, sorry.) Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed.(The economy continues to improve but still at a painfully slow rate) Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.(Our measure of inflation is not a problem, so you can ignore it)

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.(No change in policy yet)

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.(We will maintain the current operation twist policy and angency-debt reinvestment program, don't expect any changes to this until one or more of the measures we talked about above change considerably)

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.

 Interestingly, the precious metal stocks are acting positively following the FOMC statement. See the Phily Gold/Silver Index and the Marketvectors Gold Miner ETF (ticker GDX) intra-day chart seen below.

In contrast, both gold and silver sold off on the Fed statement. The intra-day charts for the GLD and the SLV are found below.

Late Morning Links 8-1-12

The ESM granted a banking license to buy Italian and Spanish Bonds?
       Rumor

From natural resources to currency wars... the race to bottom with continue

Garbage freight is in decline, a bad economic omen?

A new name for higher inflation, nominal GDP targeting.

Is Ms. Mayer in over her head at Yahoo, I hope not, as the portfolios I manage have a small position in YHOO, albeit as a play on its investments and the position represents gains of past holdings.


The Euro as special drawing rights

This should be a positive for commodity prices, especially coal. The slowdown in investment has typically been a positive for commodity prices and commodity producers, as lower investment has marked the bottom of many cycles.

Small talk tips for those who hate small talk 

Wow, can't make the hurdle just lower the hurdle. This is a bad omen for the education system in the United States.

It is ISM day-

Another negative print on the ISM.....

MANUFACTURING AT A GLANCE JULY 2012
Index	Series Index Jul	Series Index Jun	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI	49.8	49.7	+0.1	Contracting	Slower	2
New Orders	48.0	47.8	+0.2	Contracting	Slower	2
Production	51.3	51.0	+0.3	Growing	Faster	38
Employment	52.0	56.6	-4.6	Growing	Slower	34
Supplier Deliveries	48.7	48.9	-0.2	Faster	Faster	6
Inventories	49.0	44.0	+5.0	Contracting	Slower	4
Customers' Inventories	49.5	48.5	+1.0	Too Low	Slower	8
Prices	39.5	37.0	+2.5	Decreasing	Slower	3
Backlog of Orders	43.0	44.5	-1.5	Contracting	Faster	4
Exports	46.5	47.5	-1.0	Contracting	Faster	2
Imports	50.5	53.5	-3.0	Growing	Slower	8
OVERALL ECONOMY				Growing	Faster	38
Manufacturing Sector				Contracting	Slower	2

... and it is likely to stay that way. Although the PMI was essentially flat, as slightly higher new orders and production measures offset declines in employment, other and more forward looking measures look weak. The inventories measures suggests a contraction in inventories (which is a positive). However, the decline is slowing, and inventories may increase in future periods without slower production rates and/or an increase in new orders. Ominously, the order backlogs declined again to 43, suggesting a slow down in future production absent of a bump in new orders. As the latter is concerned, the customer inventories index ticked up to 49.5. This measure typically runs inverse to new orders and suggests weak new order prints in future periods. In addition, the exports figure declined once again, obviously showing the weakness in the world economy.