Thursday, September 6, 2007

S&P up 6; Dow Up 57; Gold Up $13.90 to $704.60

Ebbing and flowing was the order of the day on the street with an upside bias on relief back to school sales weren't abysmal. Sales actually looked pretty good relative to expectations, though I find it funny that a same store sales gain of just over 3% during back to school season at Wal Mart would be reason to celebrate -- how far down we've come from the artificially bloated glory days of a few years ago when one could easily get a no doc loan and cash back at the closing table to then fritter away at places like Wal Mart, or wherever.

The street today was marking time ahead of tomorrow's employment data. The consensus forecast is for around 100,000 jobs created in August. ADP's report earlier in the week showed jobs creation at only the 38,000, but don't forget, ADP does not factor hiring by the government. A variety of reports note that government hiring was robust last month and if counted would have boosted the ADP figures by another 30,000 to 40,000.

If we do get a number closer to 100k, it will only serve to muddy the waters in the on going Fed rate debate. A weak number could be greeted with enthusiasm as it will be interpreted as another signal the Fed will cut as expected. Fed funds futures are still pricing in a 100% chance of a quarter point cut by September 18, and about a 60% chance that we could get 50 bps.

Given the situation that's developed in the commercial paper market and the growing likelihood of recession, rate cuts will happen. When is the question. It seems to me, the Fed would surely prefer to cut the fed funds rate only when it absolutely has to and not for the convenience of Wall Street's bulls who want us to forget that the Dow and Nasdaq are still sporting decent year to date gains.

There's no doubt another ^$#%-storm is in the making. The Fed injected $31 bln in liquidity into the banking system today, and the European Cental Bank injected over $50 bln as spreads remain very wide between things like fed funds to Libor, fed funds to 3-month treasurys, etc.

One of the factors that boosted Wall Street a bit was speculation that if the employment numbers are a total miss tomorrow, or worse than ADP, that the Fed would cut tomorrow. I won't hold my breath.

Gold continues to attract heavy investment demand as a safe haven and hedge against a weakening dollar. It managed to rise above $700 for the first time in over a year. Break-out potential has been noted for the last 3-weeks in the "market outlook" section to the right. The Streettracks ETF added about 14 tons of gold today alone!

Crude oil continued its surge, getting above $76. Barring another massive selloff that would lead funds to dump everything, $80 is still the near term upside target with the high 60's remaining the lower band of support. And perhaps, since OPEC has done nothing on the production front, we can go even higher in the fall unless the economy takes a marked turn for the worse.

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