ASIAN SHARES CLOSED “MIXED”; EUROPEAN SHARES ARE SHARPLY LOWER:
And it is the latter circumstance we want to focus upon this morning, for at 7am EST, the Bank of England (BOE) raised their overnight lending rate from 4.50% to 4.75%...the first move in 12-months, and the first hike in 24-months. This has “surprised” the European markets to say the least with shares trading off on the news. The UK’s FTSE is down nearly -1.0%, while German DAX and French CAC are lower on average by -0.6% - while the S&P futures are trading lower in sympathy. Also, on the interest rate front, the European Central Bank has raised their main refinancing rate from 2.75% to 2.75%...this move was widely expected.
In the BOE post-meeting communiqué, they noted that “firm growth and expectations that inflation would stay above its 2.0% stated target” lay behind its surprise quarter point interest rate hike. We can only wonder whether the FOMC meeting on Tuesday will provide a “like surprise” given the o/ n fed funds futures are indicating only a 34% probability of doing so.
OUR TRADING STANCE: Yesterday our comments summed up our position rather well we think: from the mid- May S&P 500 high, we have seen prices “range trade” in a relatively narrow range between 1219 and 1290, with that range compressed even further from mid-June from 1224 to 1280. Thus, we should look upon a breakout of either the “topside zone” of 1280-1290 as a major breakout, with a test and perhaps a breakout to new highs. Conversely, a break of the 1219-1224 range would provide for a downside breakout, which would target the 1160-1180 zone that marks a normal -10% correction.
In fact, yesterday we saw the S&P 500 climb past 1280 resistance into “the zone” as we have now come to call it – trading as high a 1283.40 before falling off to close back below the minor breakout level at 1278.55. We find this somewhat “bearish” given a 1280 breakout was seen by many to mean a sharp move higher. It did move higher, but the weakness should be cause for concern, for “the zone” is proving itself rather stiff resistance. We remain of the opinion that current levels offer an attractive risk/reward profile to scaling into an aggressive short position; and we are sticking with it. Hence, we are sitting tight with our Global ETF Portfolio, and adding General Motors (GM) and Dress Barn (DBRN) short in the PTP Portfolio.
TODAY’S ISM SERVICES REPORT: The consensus for this July figure is 56.8 from June’s 57.0 reading; however, the trend in this figure is lower in past months. This much is clear when we look at the 2006 January-through-June average of 59.6, which is below the 2005 average of 60.1. Hence, the trend is from the upper left towards the lower right and we would not be surprised to see it fall further towards perhaps 56.0 or below. But we really don’t care about a point here or there – we simply care what the trend is and whether it is above or below the 50.0 level.
The nearer to 50.0 it becomes, the more likely a recession is looming…which would be terribly bullish for bonds – especially so given the technical condition of the bond market near resistance.
TOMORROW’S US EMPLOYMENT REPORT: Once again, our least favorite trading day of the month comes upon us – the day the Labor Dept. releases non-farm payroll, average hourly earnings and the unemployment rate. As our longterm clients know – this is generally our time to rant and rave about why the report is the most absolutely worthless piece of information provided to the markets. The variances from the consensus are large, and at times are larger than the absolute number itself. Moreover, the figure is revised and revised and revised once again to where it looks nothing like the original number first released.
However, be that as it may, we must for the benefit of our clients try and ‘guesstimate” this figure, and provide our commentary. First, yesterday’s ADP Employment report was nothing short of “abysmal”, showing +99 thousand new jobs created. This is rather new number to be sure, but one that is getting quite
a bit of press given that in the past there has been some correlation to the non-farm payroll number. Thus, the ADP report suggests non-farm jobs increased by +114 thousand versus the prevailing consensus of +144 thousand.
However, take this estimate with a grain of salt; last month’s ADP was upwards of +400 thousand, and non-farm jobs came in +121 thousand. In any case, we would expect to see non-farm payroll somewhere below +100 thousand given the recent trend towards lower numbers and the recent softening in the economy per retail.
