The June Non-Farm Payrolls report (released on July 2) disappointed investors with the creation of just 83,000 private-sector jobs. On July 6, the non-manufacturing ISM report, which reflects about 90% of the economy, showed that the employment component turned negative after just one month of expansion.

Yet, stocks had their best week in about a year, with the DOW industrials gaining 511.55 points or 5.28% and the S&P 500 posting a gain of 55.38 points or 5.42%.


First, an assessment of the economic outlook from Nouriel Roubini probably reassured investors after Dr. Doom said that while he does expect a slowdown in the second half of the year, he does not expect to see the economy double-dip into a recession.

Second, after the previous week’s 5% decline, stocks were the cheapest relative to expected earnings since the market bottomed back in March of 2009.

Speaking of earnings, analysts upped their estimates for 2010, saying that corporate profits will post 34% gains for the year. You may want to ask how this might happen given that the job market remains weak, but consider the following:

  1. The economy has added 882,000 jobs in the first 6 months of 2010, including 593,000 private sector jobs. But whether a job is private or government, an employed worker will still spend.
  2. Productivity was up a strong 6.1% in Q1 2010 from Q1 2009, which means that companies are producing their goods and services at a reduced per-worker cost, which of course increases their bottom line.

Third, the latest figures on new unemployment claims fell more than expected. With 454,000 new claims, the indication is that around 100,000 private sector jobs are being created. Economists will be paying close attention to this number next week because the BLS survey will be done over the period, giving the most accurate indication regarding what July’s NFP will say.

Lastly, ECB President Trichet upped his assessment of European economic growth on Thursday, and the IMF bumped up its estimate for 2010 global growth to 4.6% from 4.2% on Friday.

Now, if you were bearish going into the week, don’t feel bad. Barton Biggs, who runs multi-billion dollar hedge fund Traxis Partners and who also served as Morgan Stanley’s chief of global strategy for many years, is a known bull who said in early May that he expected to see markets rise by another 10% to 15%. But on July 3, he told Bloomberg that he “sold stocks aggressively” and that he continued to “raise cash.”

I still remain bearish on the market primarily because I don’t see where significant job growth can come from. Big job gains are spurred by new innovation (think cars in the 1920’s and computers in the 1990’s) or by credit bubbles (think real estate in the 2003 to 2007 period), neither of which seem to be imminent. And with no new stimulus, the Fed holding its position (since it can not lower interest rates further and is unlikely to start expanding its balance sheet again, at least at this point), and with taxes rising for everyone come January 1, 2011, I believe that the market will start to price in a more negative outlook before too long.

As far as next week is concerned, the most important data is likely to come from second quarter earnings reports, specifically the guidance going forward. If downward revisions are made to the outlook, the recent pattern of price movement in the S&P will be continued.

If you look at the S&P chart, you’ll notice that since the market peaked on April 26 that a series of lower highs and lower lows has been made. If earnings guidance is weak, expect to see a new low made below the last swing low on July 1.

In this scenario, as is well-established, the dollar will benefit as the market becomes risk averse. Commodities will fall and Treasuries will rise (which means rates will fall below 3% again). Gold could see a pop as investors grow even more nervous about paper currencies.

Of course, should the guidance turn out to be favorable, the markets are likely to be well supported and could rise in a trend. In this scenario, we would see the exact opposite happen to the dollar, commodities, gold and Treasuries.

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