Thursday, July 5, 2007

Oil or Jobs: Which Will Turn Markets?

Trading on Wall Street was less than dramatic today with a split decision among the majors, though there was little left to the imagination over on the oil futures pits.

Light crude for August delivery rose as high as $72.35/barrel before falling back to close up 40 cents at $71.81. The price was the highest of 2007 and close to the all-time high of $72.17 in April of 2006.

Dow 13,565.84 -11.46; NASDAQ 2,656.65 +11.70; S&P 500 1,525.40 +0.53; NYSE Composite 10,026.24 -6.37

Internally, the market displayed the nature of the day's trade. Decliners led advancers marginally, by a 10-9 margin, though new highs still held sway over new lows, 423-139.

This leaves the end of the week as an open question. Despite ample inventories, oil still remains a threat to take down the entire economy. Tomorrow, the June jobs report is due out at 8:30 am - prior to the market's opening - setting the stage for potential calm or calamity.

Judging by the tenor of today's trade, oil continues to be the elephant in the middle of the room, coloring all investment decisions. By now, it's apparent to most wizened investors that the big oil companies are operating under the guise of an illegal, price-fixing cartel, and that the government is in no case about to lift even a finger to curtail their activities. In fact, the Supreme Court ruled last week that producers and retailers could fix prices without penalty, in effect overturning a key provision of the Sherman Anti-Trust act. The court essentially gave a green light to oil companies and any other group of manufacturers to dictate prices at the retail level. It's a tremendous boon to corporate interests, and a severe blow to consumer protection.

As though the oil combine weren't enough about which to worry, tomorrow's jobs report may be a bombshell which sets off a major selling session. If the consensus is correct, it will be uninspiring to either side, but if the report shows less than 120,000 new jobs, investor reaction may be extremely negative. Recent economic reports have been less than favorable, and this would be another nail in the US fiscal coffin.

On the other hand, if there's a significant surprise in the aforementioned report along the lines of 150,000 new jobs, it would serve as a significant buy sign. The probability of an upside to the jobs report is low, however, at roughly 20%. In other words, don't bet on it. Coupled with the continuation of the oil rally, the jobs report has about a 40% chance that it will miss the already low bar. The other 40% probability is that the new jobs created will come in at a level of 120-135,000. The chance of oil selling off is practically nil.

Despite what occurs on Friday, any move may be short-lived, as second quarter earnings reports are now on the horizon and will serve as drivers for the indices through the first week of August. That jobs reports, though, may set some tone and give an indication of where the US economy and, to an uneven extent, the stock markets, are headed.

In related commodity news, gold lost $4.80 to end the day at $650.60; silver was off another 11 cents to $12.58. The metals are sinking under their own weight.

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