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Bearish Goldman economic report, job cuts sober up Wall Street

Posted on 06 October 2010 with 1 comment from readers

Wall Street awoke today to the news that US companies unexpectedly cut 39,000 jobs last month after a 10,000 gain in August. The ADP data was the backdrop to a landmark economic report from Goldman Sachs saying the outlook for the US economy ranged from ‘fairly bad’ to ‘very bad’ with a 25-30 per cent chance of recession.

Yesterday stocks powered higher for no particular reason apart from a marginally better service sector index. Goldman chief US economist Jan Hatzius emailed clients with two main scenarios for the US economy: 1.5-2 per cent growth to mid-2011 or a return to outright recession.

Double dip forecast

The Wall Street giant has upped its odds on a double dip recession from 15-20 per cent at the start of the year to 25-30 per cent. Hatzius said $1 trillion of asset purchases by the Fed would add ‘a few tenths of one per cent to GDP growth’.

This supports the widespread concern that Fed T-bond purchases are not delivering the promised growth. And without that growth the US economy will remains trapped in recession or near recession, and not enjoy a recovery in any meaningful sense of the word.

US stock futures turned negative after the ADP job shocker. Wall Street analysts have already begun cutting their profit forecasts. Profits are what drives share prices, so lower profits mean lower equity markets.

Estimates for S&P 500 profit totals for 2011 fell as low as $95.17 last month from an August high of $96.16 and that was the first quarterly reduction since the three months ended June 2009, according to Bloomberg.

Higher volatility

Higher volatility in stock prices, like the ups and downs of the past two days, likely also signal a market reversal is in the offing. Besides the stock market rally over the past month has only been a function of the devaluation of the US dollar in that time, another market phenomenon usually seen before a correction.

Arguments that the yield gap between bonds and stocks will support higher equity prices are particularly specious because they assume that bond yields can be held at current levels for a long time. By any other measure stocks are not cheap and still look to be in a correction from recent overvaluation.

October is the traditional month for rocky stock markets and this time looks no different. Gold and silver hit new record highs and bonds picked up as the roller coaster ride continued today.

Posted on 06 October 2010 Categories: Bond Markets, Global Economics, US Dollar, US Stocks

1 Comment posted by readers:

Comment by obewon - 07 October 2010

“Yesterday stocks powered higher for no particular reason . . .”

umm, no, there was a very “valid” reason why stocks powered their way up, and it was carefully orchestrated. Any investor who follows the US FED announcements about the days when they are conducting POMO actions knows that on those 2 days (usually, twice each week), the market will power much higher, preceded and followed by “down” days.

So I waited until the first POMO day this week, then used that opportunity to short the US financial sector after stocks went up over 2%. I’m happy with my trade.

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