Payrolls Ugly, Gold Ugly, Equities Ugly, Cash Beautiful

Friday, July 02, 2010

No jobsPayroll data in line with estimates, still dour

Payroll data showed a loss of 125,000 jobs in June and a downtick in the unemployment rate to 9.5%. The private sector only hired 83,000 people last month and May was revised from the already dismal 41,000 private sector hires to just 33,000. This data is far from encouraging, there is just not much more to say than that.

Gold falls aggressively as risk aversion trade only works in Treasuries

Gold cracked hard yesterday falling $44 and closing below $1,200 an ounce. I was stopped out very early in the day around breakeven on my position. I started suspecting trouble when the equity markets crumbled and gold failed to lift. I was using gold as a risk aversion hedge but the correlation changed and I am out of the way to let the situation play out how it may for now.

The risk aversion trade I expected in gold was only seen in long-dated Treasuries with 30-year futures up 3.2% in just two weeks. The short end of the curve is stagnant as we see a flattening of the yield curve, interpreted by many as an indication of an impending so-called double dip. PIMCO believes "the shrinking difference between short- and long-term Treasury yields has been 'the worst kind' because it is driven by a pessimistic economic outlook" (Businessweek)

As equity markets can't find buyers values are emerging

Crossing Wall Street had some excellent analysis out yesterday highlighting book values of Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). Goldman is trading at $130.71 currently with book value at $128.33 while Morgan trades 15% below book value. Also interesting: "Thanks to an ugly day in the markets, the yield on the 10-year Treasury stands at 2.899%. The indicated yield for the Dow is 2.97%." Great stuff, Eddy!

Yet with the contracting piggy banker spread, banks will find it tougher to print money as they have done for months with one of the steepest yield curves in history. The rate of change in earnings will slow and that justifies at least some of the selling we have seen lately along with the regulatory overhang.

Let me be clear though, I'm not jumping on the bearish bandwagon right now. At some point very soon I think we will see a very steep short-covering rally to reclaim the $1,050 level. But, I just haven't stepped in yet. With algorithms dominating the tape and seemingly exacerbating all directional trends, I think it will be okay to chase it a bit once it gets started. For now, I am with Barry Ritholtz, sitting on the sidelines until the 3C's emerge.

Disclosure: No relevant positions.
blog comments powered by Disqus