Stocks fall sharply after terrible jobs report

                                                    Even Ronald McDonald needs a job.

    Stocks on Friday fell sharply after the Commerce Departments Non Farm Payrolls report showed employers added 18,000 jobs for the month of August.  This was far below the consensus forecast of economists of 66,000 jobs.

     The August report was hurt by striking Verizon telecommunications workers which removed 45,000 workers from the tally.  The July numbers were also revised down from over 100,000 to 80,000.

     Mohamed El-Erian, chief executive officer at PIMCO in Newport Beach called the employment report "grim and scary," earlier today in an interview on Bloomberg TV.

     In a particularly awful portion of the report, average hourly earnings dropped .1% to 23.09/hr and hours worked dropped 6 minutes to 34.2 hours.  This does not bode well for consumer spending going forward.  The jobless rate remained the same at 9.1%

     Government bickering, uncertainty over the debt ceiling and the downgrade of the US Sovereign debt can be blamed for the poor payroll number.  Consumer and business confidence was crushed after the spectacle in Washington.  

     Stocks dropped more than 200 points on the news on the heels of a more than 100 point drop yesterday.  Gold was up 3%  and treasury bond yields plummeted as traders bought up more recession protection. 

     European shares were slammed as well with the German DAX down almost 4% as of 7:30PST.

STOCKS

     I am watching Annaly Capital Management(NLY) again today as it has been doing relatively well in a bad tape after yesterday's thrashing.  The proposed SEC rule changes would drastically alter their business model by forcing them to reduce their leverage from 600% to who knows what.  Annaly's leverage is the life blood of their business so any reduction would be catastrophic for the dividend and stock price.  People buy Annaly for it's 14% dividend and in this low interest rate era, it would seem like one of the better places to be.  Unfortunately, NLY and MREITs in general are being attacked by the government who is trying raise revenues and looking everywhere they can.  Investors today are bargain hunting perhaps thinking that this regulation is unlikely to be enacted because it would require legislation that would be very hard to pass in this political environment.  NLY is still down .5% as of 9:21 AM PST but is well off this mornings lows at 16.80.  I liquidated my position in NLY today for a small loss.

     AAPL is also outperforming today in a lousy tape.  This reiterates my thesis that AAPL is a defensive play and a quasi safe haven in this market environment.  AAPL is coining money and has 80 dollars of cash on it's balance sheet.  It has an 80% growth rate but is trading at a backward PE of 15!  Incredible.  This stock should be double what it's trading at, but the law of large numbers comes into play here.  Stocks with a higher market cap are perceived to be harder to grow than smaller companies.  People think that it's easier to go from 1 billion market cap to 2 billion market cap than it is to go from 350 billion to 700 billion.  This is probably true, but AAPL is a different case in my opinion.

     IWM is getting crushed today again after yesterdays 2% drop.  IWM is down 3.5% confirming my idea that this rally is probably over for now.   I was contemplating buying RWM yesterday but never did and am now kicking myself for it.  Oh well, there was too much event risk there with the unemployment report. 

     We might trade down to 1120 on the S&P from here.  I feel I have missed my chance to short as we are now in the middle of a trading range between 1120-1230.   I will just sit and observe.

Disclosure:  Long IAU

Market rally continues into the new week

Local weather forecaster Kaj Goldberg is a little excited about Hurricane Irene...   

     The major indexes continued their recent rally into the new week as two major Greek banks merged and consumer spending reached its highest level in 5 months.  At 1:00 pm Pacific Time, the DJIA was up over 250, the S&P 500 was up 33 to 1210 and the technology heavy NASDAQ was up 82 points!

     Small caps stocks were outperforming with the Russell 2000 up over 4.5% to 724.  Gold prices were lower by $30 and the 10 year bond yield rose to 2.27% as people sold gold and bonds and put money to work in stocks.  Oil was up 2% to 87.50.

     Financial stocks rallied as Greece's EFG Eurobank and Alpha bank merged to shore up their finances.  This alleviated fears of a complete meltdown of the Greek banking system.  Banks and insurance companies were the top performing sectors in today's trading.  Insurance companies rose after damage from Hurricane Irene was less than expected. 

     Stocks were also supported by word out of Europe of a radical new plan to recapitalize banks.  The program would be similar to the TARP program implemented in the US during the 2008 credit crunch.

     "The government's of the healthier European banks could inject new capital into the banks, while the most extremely pressured banks could also receive backstops for their debt, (just as happened in the U.S.)," according to John Carney of NetNet blog.

       If true, this could be a game changer in the European debt crisis.

      European shares rallied smartly on the news with the German DAX up 2.5%, the French CAC up 2.4% and the Spanish IBEX up 2.6%.  The British FTSE was closed today for summer bank holiday. 


     Market action today was very positive.  Stocks steadily rose throughout the day and finished on their highs.  This type of action usually bodes well for tomorrow.  Interestingly, small caps are outperforming once again and over the past few days the small cap index has risen over 10%!  I was looking at small caps to lead a sustained rally higher and it looks like we are getting it.  We could rally for the rest of the week until we get unemployment data for August on Friday.  This data will confirm or deny the rally.

     Technicians I follow say that this 1210 level is important because it is where the rally failed a couple weeks back.  We are sitting on that level right now on the S&P.  If we can break through this level convincingly on good volume, the rally should continue.  I'm of the opinion that it will so I'm looking for the SNP to trade up to 1240-1250 in the next week or so.  If the double bottom pattern I outlined last week is confirmed we could even rally up to 1300, but I consider that unlikely in this environment.  Let's see what happens....