Market Analysis

Bonds and stocks both opened relatively flat with a slight positive bias for bonds and a slight negative bias for stocks. In this morning’s economic news, August Factory Orders report were down .5% vs expectations for a decline of .4%, however, July’s Orders were revised higher to an increase of .5% vs initial reports of an increase of .1%. The slightly worse than expected decline is from a higher base result from July. As with most economic data this could be viewed as not as bad as was expected or it could be viewed as worse than expected because it provides further evidence of an economy that had momentum slowing down. In separate news, the National Association of Realtors reporting that Pending Home Sales for August were up 4.3% vs an expected increase of 1%. July’s Pending Home Sales increase was revised downward from 5.2% growth to 4.5% growth.

Both bond and stock markets appear fixated on the potential for Federal Reserve quantitative easing, while on “main street” it is growing more obvious that the Federal Reserve buying more Treasury bonds is not a solution to the employment problem. On the front page of today’s NY Times was an article that is being carried also by many local papers like the Austin American Statesman that details that the Federal Reserve strategy of keeping rates at abnormally low levels is causing companies like Microsoft, who already have significant cash reserves, to tap into the debt markets to raise additional cash at very low interest rates even though they are not investing the cash in creating more jobs. According to the NY Times, American corporations (the NY Times does not specify where the cut off is on size of company, but one assumes they are referring to publicly traded companies) are now sitting on cash reserves of $1.6 trillion, which at 6.2% of assets is the highest level of cash reserves since 1964 when corporations held 6.4% of their total assets in cash. In the meantime, small businesses who actually might have plans to immediately hire people rather than store the cash away, continue to find it very difficult to borrow money. This all has relevance because if global investors really do conclude that further Federal Reserve easing will do little to stimulate the economy, the easing could actually backfire, causing problems for both bonds and stocks as global investors begin to worry about the ineffectiveness of the American government’s unprecedented stimulus measures to impact employment growth and begin to question whether or not, on a national level, America can deal with our budget imbalances. The unease that could be created by having another “silver” bullet produce no results could create unexpected volatility. Going back to the NY Times article, one can ask why, if the market believes rates are going to go lower, are companies like Microsoft, Johnson & Johnson, PepsiCo and IBM borrowing now, given that they do not to have any short term need for the money? Why aren’t they waiting to borrow at lower rates?

Below is a recap of this week’s economic calendar:

Monday, October 4, 2010

• August Factory Orders – down .5% vs expectations for a .4% decrease. July Orders revised upward to a .5% increase from a .1% increase.
• August Pending Home Sales – up 4.3% vs expectations for a 1% increase. July Pending Home Sales revised downward to 4.5% growth from initial reports of 5.2% growth.

Tuesday, October 5, 2010

• September Institute of Supply Management (ISM) Services Sector Index – expected 51.8 reading vs 51.5 reading in August.

Wednesday, October 6, 2010

• ADP Private Sector Employment Change Report – expected up 18,000 from down 10,000 in August

Thursday, October 7, 2010

• Initial Jobless Claims week ended 10/2/10 – expected up 2,000 to 455,000 vs 453,000 claims the prior week.
• Continuing Jobless Claims week ended 9/25 – expected down 7,000 to 4.450 million from 4.457 million the prior week
• August Consumer Credit – expected down $3.0 billion vs down $3.6 billion in July

Friday, October 8, 2010

• September US Non Farm Payroll Report – no change expected in US Payrolls overall with a 70,000 increase projected for Private Sector Payrolls and a 70,000 decrease projected for Public Sector Payrolls. Unemployment is expected to tick up to 9.7% from 9.6%. Hourly earnings are expected to be up .1% and the average work week is expected to be unchanged at 34.2 hrs.
• August Wholesale Inventories – expected increase of .4% down vs July increase of 1.3%