Thursday’s Employment Report was a downer for US equities. Too many people had been hooked into the belief that the unemployment situation in the US, and Europe as well, was on the mend. The data shows otherwise.

With final hour selling going into the long holiday weekend, Thursday’s session was particularly nasty. The S&P 500 (896.42 -26.91 -2.91%), the DJIA (8,280.74 -223.32 -2.63%), and the NASDAQ (1,796.52 -49.20 -2.67%) were all down substantially.

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July 2, 2009




Maybe, maybe not—this is all I can say since bulls have repeatedly demonstrated their “energizer bunny” quality. Maybe over the weekend investors will forget about the sting of today’s drop as no doubt the powers that be will roll-out their spokesmen to cheer everyone up.

-NYSE down 177.3 (2.9%) to 5,776.76.

-DJIA down 223.3 (2.6%) to 8,281.

-S&P 500 down 26.8 (2.9%) to 896.54.

Thus far today, the belly of the Treasury curve has been the big winner. The Long Bond has been the relative loser of the day.

The 2 year/5 year /30 year spread is 45 basis points. It began the day at 36 basis points.

Wednesday was another day like Monday where the Bulls got off to a quick start and then tired during the run, but still managed to close ahead. Thursday, the final one in the US market, ahead of Independence Day, is going to be focused on the earlier reported National Employment Report.

At the close of Wednesday’s session, the S&P 500 (923.33 +4.01 +0.44%), the DJIA (8,504.06 +57.06 +0.68%), and the NASDAQ (1,845.72 +10.68 +0.58%) were stronger, but with Biotechs and Banks both down ($BTK -1.4% $BKX -0.7%) and Goldminers and Hospitals leading the way up ($XAU +3.8% $RXH +2.8%), it was clear there was no rally underway.

As I mentioned yesterday, the ADP numbers were not good.

Now it’s one thing to see something happen and quite another to do something about it. One of the reasons we like to be in cash is we get to wait for the market to do something silly so we can bet against it. Yesterday was a gift as the Dow climbed all the way to 8,577 at 10:30 and we gave it a few minutes for the Crude Inventories, which were a disappointment for the oil bulls and our first Trade Alert of the day went out to members at 10:35 saying: "[[OIH]] $95 puts are a good deal at $1.58." These trades don’t happen in a vacuum - we had been watching OIH all week and decided it was a safer short than USO, which also sold off nicely but the OIH was no slouch with the $95 puts finishing the day at $2.30 (up 45%).

Summary

1. Most instruments trading within tight ranges established over the past 8 weeks on the daily charts awaiting clarification on the world economy.

Prices of Treasury coupon securities are posting minimal changes in overnight trading as participants await the monthly labor report.

The consensus anticipates that employers shed 365K jobs in June. The month of May was originally reported at -345K. Economists at UBS believe that we have entered that part of the economic cycle at which the revisions to prior months will reflect the turn in the economy. Consequently, they expect that last month’s figure will be revised to something slightly less onerous.

• PPIP managers to be named. The Treasury is expected to name as many as nine fund managers for its Public-Private Investment Program (PPIP) from the more than 100 applications it received. The list, which could be announced as soon as today, will likely include Pimco, BlackRock (BLK), billionaire investor Wilbur Ross and private investor Angelo Gordon & Co.
• Boeing in supply chain talks. Boeing (BA) is reportedly in negotiations to buy the operations of one of its main suppliers, a Vought Aircraft facility that makes some parts of the much-delayed 787 Dreamliner. This would be a major shake-up of its supply chain and likely the first step toward an anticipated second production site for the aircraft. Vought is owned by private-equity firm Carlyle Group, and terms of the possible deal are still unknown.
• China urges dollar stability. China reiterated its call for a stable dollar and for the need to diversify the international monetary system. The largest holder of foreign currency reserves, China has reportedly asked to debate proposals for a new global reserve currency at next week's G-8 summit, though some officials deny the claims.
• Auto sales fall. U.S. auto sales fell 28% in June. Though the decline, the narrowest in nine months, indicated increased stability, automakers said it's too soon to point to a turnaround. Here's the breakdown:
  -Ford (F): -10.9% to 148,153 units vs. consensus of -17%. Market share +3% from a year ago. June inventories totalled 343K, or 60-days supply. 'Tightly controlled' inventory level leaves it room to increase Q3 production to 485K vehicles.
  -General Motors: -33.6% to 176,571 units. Chevrolet sales -33.3% to 106,712 vehicles, and Cadillac -40.9% to 8,473.
  -Chrysler: -42% to 68,297 units. Market share up 1% vs. last year. Fleet sales down 95% from a year ago.
  -Honda (HMC): -29.5% to 100,420; company sees 'signs of strength' in light truck segments.
  -Toyota (TM): -34.6% to 131,654 units. Toyota division sales were down 36.3%; Lexus sales fell a milder 20%.
  -Nissan (NSANY): -23.1% to 58,298. Company saw "better traffic and an increase in the quality of customers during May and June."
  -Daimler (DAI) Mercedes-Benz: -26.5% to 16,271.
• Lear goes bankrupt. As expected, auto-seat maker Lear (LEA) filed for Chapter 11 bankruptcy, the eighth major auto-part supplier to do so since 2005. The company obtained $500M in bankruptcy financing, and its restructuring plan is supported by key lenders and bondholders.
• GMAC becomes a corporation. GMAC converted to a corporation from a limited liability company, a move that could allow it to sell shares to the public, though it wasn't clear when or if GMAC might choose to do so.
• SEC employee warned about Madoff in '04. A lawyer working for the SEC warned about irregularities at Madoff's financial management firm as early as 2004, sending emails to her supervisors that information provided during a review didn't add up and suggesting additional investigation. Several of the questions she raised turned out to be directly related to the fraud Madoff was running. At the time, however, the SEC was under pressure to investigate the mutual fund industry and told the lawyer to focus on a different probe.
• Strong Rio sale eases debt. Rio Tinto (RTP) saw strong demand for the U.K. part of its $15.2B rights offer, while results for its Australian offer are not yet available but are likely to be similar. Chinalco (ACH) took up its full entitlement and will remain Rio's largest shareholder. The sale will help ease Rio's heavy debt burden, but analysts say the company still needs to sell non-core assets to bring its debt down further.
• LogMeIn's IPO win. Software company LogMeIn (LOGM) marked another successful initial public offering for the tech sector, closing at $20.02 after initially pricing at $16. LogMeIn specializes in remote-access software, allowing users to log in and control any internet-connected device regardless of where it's located.
• Firing announcements fall... According to Challenger's job-cut report, firing announcements fell 33% in June to 74,393, the fifth month in a row of job cuts declines and the lowest level since March 2008. Announcements were down 9% Y/Y, the first year-on-year decline since Feb. 2008. Job cuts in Q2 were down 45% from Q1.
• ...and employment improves from Q1 (.pdf). ADP private sector employment fell -473K in June vs. -485K in May (revised from 532K). Employment improved notably over Q1, but will likely "decline for at least several more months, although perhaps not as rapidly as during the last six months."
• Manufacturing contracts. The ISM Manufacturing Index came in at 44.8 in June vs. 45 consensus, its 17th consecutive month of contraction. Petroleum & Coal Products and Printing & Related Support Activities reported growth. Apparel, Leather & Allied Products, and Furniture led the laggards.
• Construction spending drops (.pdf). Construction spending was down 0.9% in May M/M vs. -0.5% consensus and -11.6% from the year prior period. The decline followed two straight monthly increases. For the first five months of the year, construction spending was down 11.7% Y/Y.
• Home sales inch up. May's Pending Home Sales were +0.1% from April to 90.7. Prior sales were revised to +7.1% from +6.7%. It's the fourth straight monthly gain; the last time that happened was in 2004. The National Association of Realtors continues to push for relaxing appraisal rules.

Today's Markets

• In Asia, Nikkei -0.6% to 9,876. Hang Seng -1.1% to 18,178. Shanghai +1.7% to 3,060. BSE +0.1% to 14,658.
• In Europe at midday, London -0.85%. Paris -1.2%. Frankfurt -1.7%.
• U.S. futures: Dow -0.7%. S&P -0.7%. Nasdaq -0.6%. Crude -2.1% to $67.84. Gold -0.85% to $933.30.

Thursday's Economic Calendar

• 7:45 ECB Announcement
  8:30 Non-farm payrolls
  8:30 Jobless Claims
  10:00 Factory Orders
  10:30 EIA Natural Gas Inventory
  4:30 PM Fed Balance Sheet
  4:30 PM Money Supply

Seeking Alpha editor Eli Hoffmann contributed to this post.

Although it's only Thursday and the Fourth of July is still two days away, there is potential for an early set of fireworks today. While this afternoon's ECB meeting may be somewhat less interesting than usual, tomorrow's US holiday has pushed the release of non-farm payroll data forward to today.

And you don't need to be an elephant to recall what happened at the release of the last payroll report; a better-than-expected headline generated carnage in fixed income markets, though as the chart of front Dec eurodollars shows, many contracts have subsequently retraced virtually all of their post-payroll losses.

Despite the weakish US mortgage applications, ADP jobs and ISM numbers, it looks like your friendly fund manager is front running the perma-bull, expected 2nd half recovery green shoots story. He also went piling into stocks at the off yesterday running the Dow up 133 points. Food stocks were the big winners with Kraft (KFT) up 5% and General Mills (GIS) raising its 2010 guidance. However stocks failed to maintain their upward momentum and pared their gains in low volume trading, following decidedly downbeat comments from GM (GMGMQ.PK) (government motors) about creditor payments, weakness in financials and disappointing auto sales. Add to this too, the Governator I.O.U of California declaring a state of “fiscal emergency” put the pressure on.

Note that the technical types are pointing to a potential head and shoulders topping pattern on the S&P 500 and stress that a close below 880 would complete this and pave the way for a move to the low 800s

Overall, the currency market moved a little lower compared to the dollar during the overnight, as both crude oil and the S&P futures lost ground since the Thursday session began. Today, the European session is expected to be lighter but not without a lot of shoveling, as the major currencies position themselves ahead of a very busy U.S. economic release calendar. At 8:30am EDT, the financial market expects the infamous NFP release, and at the same time, Mr. Trichet’s press conference. Both releases are known to create strong volatility in the fx market, so most likely, the market may make some unpredictable moves at that time.

The Euro (Eur/Usd) lost around 40 pips during the Asian session, practically moving in-line with the other major pairs. The euro is expected to move on a somehow weaker momentum during the first part of the day, but then increase gradually as the market heads into the U.S. open. The next major resistance area for the euro is around 1.4200, the place close to where the pair topped on Wednesday.

Prices of treasury coupon securities registered bifurcated results today, with price gains in the front end and little change or outright losses elsewhere on the curve. The curve steepening that resulted stems from the supply and duration which shall strike the market next week. Supply trumps all other factors, and traders are now busy anticipating that fiscal onslaught. (Larry Kudlow, who I generally dislike and who was a shill for the Bush Administration, does have a great description when he refers to the profligacy of the current Administration as “fiscal nymphomania”.)

Some weakness in the entrails of the ISM report as well as the Yellen statement provided a fundamental backdrop for the trade.

4:17 PM, Jul 1, 2009 --

• NYSE up 48.9 (0.8%) to 5,954.01.
• DJIA up 57.1 (0.7%) to 8,504.
• S&P 500 up 4 (0.4%) to 923.33.
• Nasdaq up 10.7 (0.6%) to 1,846.

GLOBAL SENTIMENT