Update 7:30 a.m.:

The Dow was up 89 points in the first three minutes of trading, but the market immediately died down once those big trading accounts loaded up for the day.  There has been no follow-through as yet, and the Dow is now higher by 45 points.  The high opening, which was strictly based on that suspect jobless claims number, was obviously an unrealistic reaction.  But this is more evidence this is just a traders market.  In a normal market with real investors being active, rallies should hold and draw in followers.  But this isn't happening.  The market got its expected bounce once September hit, but volumes are no better than during the long summer months. 

Bond prices remain lower.  The 2-year is .54%, the 5-year 1.51%, and the 10-year is lower by 15/32s to yield 2.71%.  The 30-year bond is down one point to yield 3.79%.  The results of the Treasury's 30-year auction will be released at 10:00 a.m.  For at least two solid months, the bond market went straight up in price.  Speculative traders kept trying to sell the market, thinking that the advance was excessive, but the market kept blowing through all normal stopping levels.  For the past week or so, very nimble speculative traders have had some success in shorting the market.  This pattern seems to be encouraging more selling into any rally.  We'll soon see if this is a trend or a trap being set for those short sellers. 

Morning Comment:

Stock futures were up very slightly (17 points) ahead of the Weekly Jobless Claims number.  But futures have popped higher after claims fell from 478k to 451k vs. the expected 470k.  One week does not a trend make, but it’s a step.  There are some question marks surrounding this number, specifically, the BLS had to estimate the number from seven states due to the lack of reporting on time.  California was one of the non-reporters.  You can expect a big revision next week.  Also, there are some seasonal factors at play.  But, the headline number is all that counts to stock traders.  Dow futures are now higher by 62 points.  This over-reaction to a weekly number isn’t surprising.  This is the only number of even moderate importance we’ve had this week. 

The July Trade Balance number has also been released, and the trade deficit shrank much more sharply than expected.  There were a number of reasons for this, but the net effect is that this might be a positive for 3^rd quarter GDP.  This number is not a market mover.

Bond prices are lower on the news.  The 2-year is .53%, the 5-year 1.49%, and the 10-year is down 11/32s to yield 2.70%.  The 30-year is down 28/32s to yield 3.78%.  The Treasury will auction more 30-year bonds today.  Dealers are worried about demand, but the auction is still likely to go well. 

Consumers are still in the paydown mode.  Consumer Credit fell by $3.6 billion in August.  The decline would have been more severe had it not been for a jump in auto loans.  Looking specifically at credit card debt, which makes up the bulk of the number, we see that credit card debt is down 15% in the past one year.  This is of course negative for the economy short-term, but it’s very positive long-term for consumers.  Guess it’s time for the government to come up with some gimmick, ala cash-for-clunkers or home tax credit, to encourage consumers to borrow more. 

There are no other economic reports this week.  The first post Labor Day week is usually more active than this week has been.  In fact, the volume and pace of activity has been virtually the same as the experience during the dull summer months.  Maybe this is because individuals no longer seem to care about stocks – they’ve been pulling money out every single week since early May, and the SEC is shining the light on high-frequency trading.  The SEC investigation is ongoing with the resolution still months away, but I wonder if some of these big trading accounts are curtailing some of their questionable activities. 

I’ll be back with updates.

Dwight Johnston