Stocks Turn Lower on Jobs Report

The middle of the week was a day spent underwater as investors weighed a benign employment report from private firm ADP and a lower ISM services number that sent jitters through the market.

While ADP reported that private employers shed 371,000 jobs in July, the ISM services index dropped unexpectedly from 47 in June to 46.4 in July. That prompted more profit-taking than usual around the 10:00 hour as the major indices slipped to their lowest levels of the session soon afterward. Losses were limited, because the prevailing mood is that the worst of the recession is now behind us, and traders are putting much more faith in the efforts of lawmakers on Capitol Hill and in the administration to keep diligently working on getting the US economy back on a positive growth track.

The ADP report foreshadows the "official" government non-farms payroll data due out on Friday prior to the opening bell. It is expected that jobs losses were less severe in July than in previous months, though unemployment continues to be a thorn in the side of the bulls. Positive growth cannot be expected if employers are still cutting payrolls, and even though unemployment is a lagging indicator, investors remain wary that the economy could take another turn for the worse.

What's almost a certainty regarding job losses and foreclosures are government deficits as far as the eye can see. With fewer people employed and/or in self-owned properties, government revenues will not keep pace with the outlays already in municipal, state and federal budgets. Most of the states face deficits for the next two fiscal years, with few exceptions. The problems facing cities of all sizes have yet to brought into serious focus.

However, government budgets and how they pay their bills are a sideshow compared to the rest of the private economy. For better or worse, Americans have been bred to spend every last dollar on goods and services whether they need them or not and the spending, especially by those on public assistance, retirement income or other such pension programs, has been keeping the economy from completely collapsing. Those who are still working have reigned in spending somewhat, while the rich are finding bargains galore as luxury goods have been slashed to fire sale prices in some cases. Cash has been for months and is now king, and will remain so until the labor and housing markets improve.

Retailers are taking it hard, along with commercial developers. There is an overhang of commercial space supply nationwide. Most medium to large cities have aging structures dotting the landscape that are now empty and will remain so until either the market complete caves in and forced bankruptcies are the norm, or the general economy improves to a point at which commercial development makes sense. One such area is currently in apartment building, which has seen growth as more and more Americans are forced out of their homes and into more affordable rental units.

It's still a dicey situation, especially since banks are seeing more foreclosures now than they did during the subprime circus. Foreclosures will continue at a high level until the banks gain some sense of market economic (not likely) or more Americans are on the street or in substandard housing. Today's home buyers believe they're getting bargains when the reality of the situation says they're still overpaying by 10 or as much as 25% in some markets.

Eventually, there will either be another major blow to the economy or things will sort themselves out as in normal recessions. This is hardly a normal recession, however, so betting the farm on improvement over the next 12-18 months is probably foolhardy. Stocks have been appreciating at an accelerated rate, but today's equities more resembles a casino than an orderly market discounting future earnings. There's been a radical downsizing across American enterprises - a trend that is notable, frightening, and seemingly unstoppable. If 2008 was remembered as the year the markets went bust and 2009 a further bottoming out with a rapid recovery, 2010 may well be defined as the year reality struck home. Expect some major bankruptcies in the retail and commercial spaces soon and a rebirth of small business and cottage industries as Americans, ever resourceful, find new ways to skin cats and not only bring home the bacon but make it right in their family rooms.

Dow 9,280.97, -39.22 (0.42%)
Nasdaq 1,993.05, -18.26 (0.91%)
S&P 500 1,002.72, -2.93 (0.29%)
NYSE Composite 6,558.19, -10.95 (0.17%)

In general terms, today's pullback was acceptable and probably healthy. Stocks have been on quite a tear for five months and some give back is expected. This by no means that the current rally has run out of steam. After being on the wrong side of the trade for some time, late-comers will eventually set up a blow-off topping pattern after which stocks will take some serious dips and dives. That's for the fall, however. For now, the rally shows no lack of momentum.

On the day, advancing issues were beaten by decliners, 3722-2727. New highs were recorded by 218 companies, as compared to the 67 new lows. The high-low indicator continues to scream "buy" even though stocks are already overpriced in many categories. But, as market participants are sure to point out, there's always someone who will buy if you're selling. The key is to not be the last guy in line, a condition which is quickly approaching. Better buying opportunities will likely avail themselves in months ahead - either later this year or in 2010.

Volume was a little better than what has been the norm, which may mean nothing at all, or that traders are getting more serious as summer winds down.

NYSE Volume 1,921,048,000
Nasdaq Volume 2,392,697,000

Commodities were mixed, but mostly higher. Oil gained 55 cents, to $71.97. Gold was down by $3.40, to $966.30, while silver, the buy of the year, gained 7 cents, to $14.76.