The market rose nicely on the final session before the long weekend, giving the summer rally a good ending. However, volume was quite low so not much should be read from today’s actions. The biggest economic report for the day provided a mixed picture of the job market. The headline jobless rate rose to 9.7% from 9.4% while 9.5% was the number widely expected. It looks like the worst jobless rate in the current recession should be around 10%, in-line with what the Fed Chairman Bernanke has predicted a few months before. The non-farm payrolls report, meanwhile, showed a drop of 216K positions, slightly better than 230K consensus. It was also the fewest monthly layoffs in a year. Despite today’s rally, stocks were still lower for the week and we will see more volatile activities in the weeks ahead as we are finishing the quiet summer season.

The market rose modestly on Thursday with most of the gain coming from the last hour of the trading in anticipation of tomorrow’s all-important non-farm payrolls report. The consensus on the Street is 230K job losses for the month of August and the jobless rate would also inch higher. But unless we get a much better number than that, we may see-sell-on-the-news activities again tomorrow morning. With one more trading session left before the summer season ends, activities will pick up significantly starting from next week. I was recently reviewing some essays written by Warren Buffett in his early days. In one piece he expressed his view towards long-term return of the stock market, which is something like long-term growth in GDP plus long-term inflation. Long-term GDP growth is normally considered to be around 3% while long-term inflation (which by the way is quite different now compared to two decades ago) is expected to be around 2%. I think in most part his thoughts were right at his time. After all, you cannot expect a stock market to move too differently from its economy for the long run. But as time goes by, a few more elements probably should be added to the equation. First is the globalization. By the end of this year, it is estimated that 50% of the S&P 500 revenue would come from their non-US operations. The trend obviously is still for the number to go up. Therefore global economy growth rate will be a more appropriate number than the domestic GDP. Right now the World Bank is forecasting an average of 5% growth in world economy (most contribution will come from emerging economies, especially the so-called “BRIC” countries). Second is inflation. Similar to the growth rate, an international inflation figure would probably be more appropriate here as multinational firms have distinctive pricing policies in their various regional operations. In that case, we should probably use an inflation figure of 3% in today’s world. Then we should probably also add on those intangibles, things like synergies and economy of scale. Earnings are usually growing faster than sales because of those intangibles, which are rather difficult to quantify. So I may use a rough figure of 2%. If we add all the pieces together, then we should expect a long-term earnings growth of 10% in the US companies.  

Most economic reports for the session came in-line or slightly better than expectations. The many chain retailers reported their sales report for the back-to-school season. In most cases, they came better than expected. The initial jobless claims, meanwhile, came in at 570K. The August ISM Services Index was 48.4, slightly above the consensus. Some on the Street had expected for a reading above 50.  

 Most major sectors finished the session higher led by transportation and basic materials. The CRB commodity index declined 0.3%. The US dollar was higher against most major currencies. Treasuries dropped with the yields rising. The three-month US LIBOR dropped 1 bps to 32 bps. The VIX index was off 2 points. The market breath was positive on both NYSE and Nasdaq. The volume was neutral compared to the previous session.

The market declined modestly on this Wednesday. It was also the fourth straight drop for the Dow after it touched the highest level for the year last week. One interesting spot for the session is the price movement of gold, which gained more than 2% in today’s trading. There are a few reasons behind gold’s movement. The most popular one is almost always the weak dollar. But considering the fact that the dollar was moving higher yesterday when gold was also higher, one has to wonder how much link still exists between the two. The second most logical reason is expectation for future inflation. But we should point out that if inflation is concern, then treasury market should be the first place to see reactions. Treasuries rose in both today and yesterday’s trading while gold also rose, so little can be explained by this reason either. Then the next possible explanation is fund flow, which I believe is the real reason behind gold’s movement recently. It is estimated that as much as $1 trillion is currently employed directly or indirectly in the commodity area, particularly in crude oil. Is it possible that some funds move money out from the “Black Gold” and into real gold? Plus, we should always keep it in mind that the Chinese government may use a portion of its $2 trillion + foreign reserve to build positions in gold. And that may be an interesting theme going on.

 Most economic reports for the session came worse than expected. The ADP Employment report indicated that 298K private jobs were lost in August. Economists were looking for a number close to 250K. Factory orders for July climbed 1.3%, the sharpest increase since June 2008. But that was also below expectation and excluding transportation, it actually fell slightly. The FOMC minutes showed that some members disagreed about how strong the recovery would be for 2010.

 Most major sectors finished the session lower led by consumer cyclical and industrial. The CRB commodity index rose 0.3%. The US dollar was lower against most major currencies. Treasuries rose with the yields falling. The three-month US LIBOR was unchanged. The VIX index was little changed. The market breath was negative on both NYSE and Nasdaq. The volume was lighter compared to the previous session.

The market fell sharply on the first session of the new month. By close, all three major indexes were off by around 2%. September is traditionally the worst month for stocks and it seems history will repeat itself this time. Volatility, meanwhile, spiked up. We have mentioned previously that we are going to see those 2%+ movement sessions more often in September and October. But the fact that it happened in the first session of the month still caught us a little off guard. Moreover, the day’s economic news came mostly better than expected. The ISM Manufacturing Index for August came in at 52.9 and new orders jumped almost 10% to 64.9, suggesting better readings still lie ahead. Pending home sales for July climbed 3.2% and the index is now at its highest level since June 2007. Both ISM and pending home sales numbers were better than expected. However, traders simply used the news to book profits. Commodity prices also saw sharp sell-offs and the US dollar once again became safe-haven. For those that experienced events during last September, some caution is certainly warranted given that the market has risen over 50% entering into this September.

All 10 major sectors finished the session lower led by financial and industrial. The CRB commodity index dropped 1.9%. The US dollar was higher against most major currencies. Treasuries rose with the yields falling. The three-month US LIBOR dropped 2 bps to 33bps. The VIX index rose 3 points. The market breath was negative on both NYSE and Nasdaq. The volume was heavier compared to the previous session.

 
The market finished the final session of the month modestly lower. But it still gained for the month of August, extending the monthly winning streak to six. Can the market make it seven or even eight? Given that we are going to enter two of the most volatile months in history, odds are not that great. Most of today’s weakness was once again related to China. Overnight the Shanghai Composite Index tumbled 7% and brought its 3-week decline to almost 25%. As we argued before, the Chinese stock market is quite different from that in the US. For now, a weak Chinese market is not a threat to the US market but if commodity prices see sharp decline, then we need to be careful. Crude price did drop almost 4% in today’s trading but it still was within the trading range. The economic news for the session came better than expected. The Chicago PMI is now back to 50, a level consistent with modest growth in GDP. We are going to get national ISM index tomorrow and non-farm payroll report on Friday. If both reports beat expectations, then the market could move to new grounds entering into September.
  
For the week ending on Aug 28, most major trends remained intact. However, it is worth noting that despite the Dow Industrial hit a new high on a weekly basis, the Dow Transportation and the Dow Utilities failed to follow suit. For many students of the Dow Theory, such discrepancy may lead to short-term pullbacks. Sectorwise, commercial banks were outperforming the broad market while many commodity groups were underperforming.

All 10 major sectors finished the session lower led by energy and basic materials. The CRB commodity index dropped 1.6%. The US dollar was mixed against most major currencies. Treasuries rose with the yields falling. The three-month US LIBOR was unchanged. The VIX index rose more than 1 point. The market breath was negative on both NYSE and Nasdaq. The volume was on the light side.