Friday Worries Arrive Ahead of Schedule

Good Evening: Investors decided today not to wait until Friday to begin worrying about large scale job losses in the nonfarm payrolls report. This morning’s data points from both ADP and Challenger, Gray, and Christmas indicated the U.S. might have displaced as many as 700,000 workers in December. There was other negative news as well, and while stocks, bonds, the dollar, and commodities all gave ground today, we’ll probably have to wait to see how the markets react to Friday’s employment report before deciding whether bad news will once again start to matter in the calculation of asset prices.

Though our markets have been successfully digesting negative economic news for a while now, the equity rally off the November lows (between 22% and 38%, depending upon the index) left stocks vulnerable to a pullback. Overseas markets, themselves in line for a bout of profit taking, were lower after a shocking disclosure from Satyam in India (see below). Showing that lying to investors knows no borders, the CEO of this former market darling disclosed, in Madoff-like fashion, that he’s been hiding company losses for years. Indian stocks were clubbed for a 7% loss, and the story set the tone for the entire day around the world.

With global markets already on the defensive, the Challenger job loss survey and ADP report indicated Friday’s job loss data could be worse than had been previously expected. The Challenger numbers were actually lower than those posted in November, but the holiday-impacted totals jumped almost 3 fold from the same month last year. ADP then came out with their survey, one pointing to a decline in payrolls of almost 700,000 in December. ADP has been inaccurate with their job loss estimates for months, so they decided to change their methodology just in time for the release of this report. Their attempts, while noble in spirit, leave me wondering why anyone can take seriously any survey results where a previously faulty model has now been tinkered with.

Investors weren’t in a mood to question ADP’s revamped methodology, however, and the major averages opened some 1% to 2% lower in New York. After a bounce that halved the opening losses by lunchtime, the averages headed lower for most of the rest of the session. A small pop in the final hour of trading nudged stocks back off their lows, but the final tally saw the indexes losing anywhere from 2.75% (Dow) to 4% (Dow Transports). The KBW bank index was down more than 5%, and tech stocks also took it in the teeth when Intel announced it would fall short when they report their Q4 earnings. Treasury prices finished lower after a less than stellar 3 year note auction, though the damage in equity land prevented Treasury yields from rising more than a few basis points (see below). Chatter about Trillion dollar deficits looming in the years ahead probably also hurt the backdrop for bond prices (see Merrill piece below). The dollar index declined 0.7% in the wake of the weak jobs picture, and commodities simply crumbled (see below). Oil dropped 12%, and while the ag sector held in fairly well, the metals were under pressure all day. Some will claim a rebalancing in various commodity indexes hurt prices today, but count me as skeptical on that score. No matter which culprit you blame, the CRB index lost nearly 4% today.

One day’s price action does not a correction make, but it should not come as a surprise that many investors wanted to take profits after a six week run to the upside. In fact, the size of today’s downdraft actually smacks more of a counter trend move than it does of a new trend starting. After ignoring weak economic data for quite a while now, it is indeed worth noting that market participants could not mount any serious rally attempts in the face of today’s bad news flow. But whether today’s action is actually a healthy pullback or a resumption of last fall’s cycle of disbelief is unknowable right now. For what it’s worth, I didn’t spy a widening of credit spreads to match today’s weakness in stocks. Again, though, one day’s trading doesn’t mean very much. Further clues may or may not be evident after tomorrow’s jobless claims report, either. We will probably have to wait for not only Friday’s jobs numbers, but also for the reaction to them in various markets before getting any real hint that the stock market rally since November is at risk. Keeping in mind that investors are building in very poor expectations on the jobs front, and remembering that stocks managed to rally in December after a horrible November report, Friday shapes up as a very interesting day for our capital markets.

— Jack McHugh

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Collateral damage feared from Satyam disclosure

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