Everyone knows that gold prices are volatile and traditionally, gold has been a safe haven of sorts for traders who fear the stock market and are looking for hard, non-correlated assets.  It’s important to note that Gold doesn’t always move opposite the stock market and even when markets are tumbling, gold is not always there to save the day. 

In fact, the longer term correlation between the S&P 500 and Gold is actually more positive, with periods of major decoupling like what we have seen since January.

The value of gold has been skewed both ways s in the past several years and despite its recent selloff is still up over 100% from the 2007 lows (the S&P is up 146%).  Gold prices were fueled to the upside by the devaluation of currencies around the world combined with stockpiling of gold bullion by those same central banks.

We must not forget that gold is a commodity in limited supply and is treasured by many as a thing of beauty and status.  It has some industrial applications, but not nearly as much as Palladium, Platinum, Silver and others. 

There is also a substantial amount of people who believe we should go back to a gold standard, which in my opinion would be nice, but next to impossible give the sheer amounts of currency in circulation among the G7 countries alone.

Gold’s recent slide can also be at least partially attributed to India and a tax increase they imposed earlier in the year; that said, gold imports are likely to rise in India in 2013 according to a Wall Street Journal report.  India, along with China are the top two consumers of global gold.

Historically, early summer is NOT a good time for gold, with August-December being the “normal rally season.”

SPY (black) vs. GLD (orange)

Direction

I think gold has been the subject of profit taking, weak economics around the world, seasonal depression and global commodity devaluation.  Even with all the global QE, prices (for the most part) have been coming down or rising moderately.  While I believe that inflationary pressures will surface eventually, they remain at bay currently.

The stock market is near what I believe will be its peak for the year and gold has given back almost 19% YTD.  Given the negative seasonal impact, I think gold got a one two punch and perhaps a third with the increased potential for a Fed QE retraction sooner than later.

Taking all that into consideration, I think gold will rally into December and will regain strength as a hedging tool once traders come off their equity high.  China and India will still increase consumption as we move into the latter half of the year and despite taxes and weak economies will still buy tons of gold.

I see the yellow gold back around $1,500 an ounce, up from its current level of $1,389; a gain of about 8%

Where do you see it?

a)      $1,500+

b)      Current level $1,389 up to $1,500

c)       Current level $1,389 down to $1,200

d)      $1,200 or less

e)      Other (please describe)

The Big Ben Statement

In today’s Bernanke briefing on the Hill, his big statement was–

"A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.”

Stocks went up upon publication of this comment, then drifted. 

The benchmark 10-year U.S. Treasury rate shot up 10 basis points to above 2% during the morning briefing.  Tapering the Fed’s quantitative easing (QE) each month would send long-term bond yields higher.

The Federal Open Market Committee (FOMC) minutes from the April 30-May 1 meeting were released in the afternoon.  They pointed out several future directions. 

• A "number" of central bank officials could taper bond purchases as soon as the next FOMC meeting in June. 
• A "couple" of Fed officials said the Fed might have to ease more if inflation fell further.
• One Fed official wanted to stop bond purchases immediately. 
• One Fed official wanted to increase the size of the program.

At this point, stocks turned noticeably lower.

Big Ben’s Ten Key Points:

(1) Unemployment is still too high.  8 million people are working part-time that would prefer full employment.  Slack prevents young people from getting skills. 

(2) The U.S. economy is held back by headwinds.  Some headwinds have dissipated from QE.  QE increased consumer confidence and spending. Auto and housing sales are up, as is home construction and prices. The housing market improvement supports real estate, brokerage, and home furnishings industries.

(3) QE has offset deflationary pressures.  Inflation is at or below the Fed’s 2% target rate.  Financial conditions in Europe have improved somewhat.  Credit conditions have eased in the U.S.

(4) Federal fiscal policy is restrictive.  The Fed expects Federal budget tightness to exert a drag amounting to -1.5% of GDP in 2013.  Total U.S. government employment has come down by -800,000 jobs recently. In the first quarter, GDP was up +2.5%, as private demand offset the drag from government spending. 

(5) Bernanke feels current monetary policy cannot fully offset the coming GDP budget loss.  Budget cuts need to be more gradual in the near term, and more substantial in the long term. Bernanke spoke about the benefits from a "grand bargain" budget deal. He believes it would inspire confidence in markets and households, which would help strengthen the economy and take some of the burden off the Fed. It also would make it easier for the central bank to exit.

(6) QE is addressing a short-run cyclical GDP gap.  Long-run GDP growth underpinnings are not the Fed’s job. 

(7) Low rates could undermine financial stability.   QE’s most significant cost comes from a reach for yield. Bernanke said the Fed is working to address this through increased monitoring of institutions, and implementation of existing bank reforms. He added, significantly, that low GDP growth has serious financial instability concerns too.

(8) The Fed is buying at a flow rate in QE3.  This is different from earlier QE1 and QE2 programs. 

(9) The Fed will maintain highly accommodative policy as long as needed. The Fed could increase or reduce its MBS and Treasury bond buying policy going forward. 

(10) Sustainable labor market improvement needs to be seen. Recalibration will take in new labor market information as it comes in. QE will continue until improvement in the labor market is nearer its ‘Way Station’ at a 6.5% threshold rate. 

How Investors View Big Ben

One influential commentator said Bernanke's testimony and earlier comments from NY Fed President William Dudley "appear consistent with our expectation that tapering could start by the September FOMC meeting."

Another said the Fed is trying to keep stock markets from “pricing in a complete elimination of QE at the first sign of cutback.”

Warren Buffet said it would be the "shot heard round the world" when QE comes to an end. There are various scenarios of how it could happen. The next few Fed meetings are: June 18-19, July 30-31 and September 17-18. 

A Real Time Insight Debate

Taking all of this in, what do you think?

When Ben Bernanke pulls away the punchbowl and brings an end to QE, what will be the consequences for the stock market?

1. No effect
2. Stocks will tank
3. Stocks will rise
4. Stocks will range-trade

In fact, the year-to-date return for the market through May 20 is the best start to the year since at least 1990 (yes, even outpacing anything seen in the late 1990's):

(Note that in each of the other 4 years the S&P finished much higher by the end of the year.)

Perhaps even more remarkable is that the rally has been virtually uninterrupted in 2013. Since January 1, the index has finished in the green 16 weeks compared to just 4 in the red. And the worst "pullback" we've seen so far this year was the April 11-18 stretch when the market slid -3.8% peak-to-trough. And the index quickly regained those losses by the end of the month.

It's worth noting, however, that the last 3 years had strong starts too, only to see meaningful slowdowns by mid-year:

So when do you think we will finally see a pullback in the market?

Let's define a pullback as at least a 5% decline from the market's highs (which would currently be around the 1590 level on the S&P 500).

We will see a pullback...

A. Soon. Within a few weeks.
B. Over the summer... and for the 4th time in a row.
C. Not till the fall/winter. Momentum is too strong right now.
D. In 2014 (or later!)

Chime in below. And please give some reasoning behind your answer.

And we get to hear a lot of dialog among all the economist participants, both voting and non, about their views of the economy and Fed policies in frequent speeches every month. I started keeping track of the messages from the growing hawkish wing in the summer of 2011.

Now the hawkish ranks have grown to at least six in the last few quarters: Fisher, Plosser, Lacker, Kocherlakota, Bullard, and George. These folks are increasingly concerned about the size of the Fed's balance sheet and its distorting effects on the bond and equity markets.

This month, 10-year Treasury yields did an about-face back up to nearly 2% (from their drop to 1.6% in March and April) a couple of days after the last FOMC meeting adjourned on May 1.

And though everyone seemed to get really excited after the WSJ Hilsenrath article on May 10 which seemed to be "the leak" about upcoming reductions to QE3 bond buying, Bloomberg published an excellent piece on the "taper" topic on May 1.

Today, with fresh FOMC minutes due tomorrow afternoon and Bernanke testifying about the outlook for the economy before the Joint Economic Committee of Congress in the morning, our own Sheraz Mian has come out with his bold prediction that the Fed will announce some kind of change to the QE3 bond buying policy at the June 18-19 meeting.

His logic is simple and consistent with what he has been saying for months now: the Fed is buying all the Treasury new issuance and it must start paring back -- especially since the deficit is lower and the US actually needs to slow the pace of debt sales (Sheraz says the CBO projects the deficit this year will be $200 billion lower than their estimates of 3 months ago).

And here's the real meat of Sheraz's piece: if the Fed doesn't begin to taper soon, the current schedule of bond buying will in effect be like increasing QE to keep rates artificially low.

So, will the Fed make policy changes that begin "the taper" at the June meeting, or will they only "telegraph" what could be coming and wait until September for actual reductions in bond buying?

Regardless of June or September, what impact will this beginning of the end for QE have on the housing market and it's related stocks? Tracey pointed out to me this morning that Home Depot (HD) is now about 80% above its 2005-06 housing bubble highs!

And the iShares Home Construction Index ETF (ITB), with a P/E of 285, is up over 200% since the 2011 lows.

Finally, are any policy moves affected by the fact that Bernanke could be "outa here" next year and therefore he needs to start clearing a path for the exit strategy of his grand design?

So what is more realistic finish to the year for the S&P 500? 

Put your answer for the closing price for the S&P 500 on December 31, 2013 in the comments section below. And be sure to add some color commentary as to why you  think your prediction will be right. Meaning why so bullish, bearish or neutralish...is that a word? 

This should be a lively conversation. I look forward to it!

Maybe you have not been paying attention to the newest market darling, but Elon Musk now has his own trade.  Many, many investors did not believe in the South African and shorted shares of his auto maker Tesla (TSLA) and his solar panel company Solar City (SCTY).

Both have been the subject of short squeezes ... but you have to give some credit to Goldman Sachs (GS).

It’s hard to imagine that Goldman - who ran the equity end of the TSLA secondary and co ran the convertible deal - wasn't influenced by a certain someone to also extend some financing to Solar City.  Seems a $500M financing deal from the influential investment bank is causing shares of SCTY squeeze higher by 27%.

Now we have a name for this phenomenon.  It’s the Elon Musk Trade.  I guess you look for companies that he is a major part of and buy them!  Maybe you throw Goldman Sachs in the mix too.  

So the question is, are you for or against the Elon Musk Trade?  For purposes of clarity, that means going long TSLA, SCTY and GS -- or would you rather short the Musk?  Either way, tell me how it all smells to you!

Keeping it light on Friday, I wanted to get all of your input regarding two of the perhaps the most popular companies trading today.

I have been a fan of Google for a very long time and use just about every opportunity I can to reiterate my love for Google (HERE’s an old clip from Fox in 2012, my comments are towards the end, but cut off) and my doubts with Apple.

In January of this year, I wrote a fun little piece here in Real Time Insight about the possibility of Google overtaking Apple as king of the market-cap jungle.

Back then, Google was trading around $700 per share, with Apple around $550.

With Google close to $1,000 per share and Apple struggling to stay about $400, my earlier thesis is looking a little more realistic.

Which do you want to buy?

Google is constantly evolving and has multiple manufacturers like Samsung and HTC releasing cutting edge android phones that run the #1 selling platform in the world, Android (Samsung just released the S4).    Google goggles, updated mapping technology, a new mobile operating system upgrade and more are cutting edge developments are coming through the pipeline.

What has Apple done lately?  The iPhone and its software have been slightly improved, but nothing earth shattering.  They gave us a smaller version of the iPad (yippie) and most of their product lineup has remained relatively unchanged for a while other than minor tweaks.  Oh, I almost forgot that they did take out a loan to pay a dividend…

While Apple is only trading at 11 times forward earnings, I believe that they are still priced as a game changer.  The problem is that I don’t see that happening in the near future unless they roll out a time machine.  I feel like they are going to become the Microsoft of the decade (it happened before) and their stock is going to stagnate at best, but most likely move lower. 

Google trades at double the multiple (22), but I believe that the company is not only innovating everyday and wrapping themselves around multiple streams of income, but is on the precipice of becoming the world’s most powerful mobile social platform, aggregating all the social feeds and delivering a clean user interface that both consumers and advertisers will be content with.  I am still a buyer of their stock.

Tell us your thoughts:

a.       Buy Google, Sell Apple

b.      Buy Apple, Sell Google

c.       Buy them Both

d.      Sell them both

e.      Other (please explain)

It appears that the aggressive expansionary measures taken by the Abe government, including “unlimited” easing in order to weaken the currency, make exports competitive and pull Japan out of its deflationary spiral, are delivering results. Japanese exports and consumer spending accelerated during the quarter, though businesses still seemed a bit reluctant to spend. Exports benefited immensely from a weaker yen—down ~18% year-to-date against the dollar.

Japanese stocks are up about 45% this year in anticipation of stronger economic growth. And while the ETF tracking the broader equity market iShares MSCI Japan Index Fund (EWJ) is up 24% year-to-date, the two currency hedged ETFs--WisdomTree Japan Hedged Equity Fund (DXJ) and MSCI Japan Hedged Equity Fund Fundamentals (DBJP), which provide exposure to Japanese stocks without any exposure to the currency are up more than 40% during the same period. (DXJ vs. DBJP: Which is the Better Hedged Japan ETF?)

So, while it appears that the worst for the Japanese economy is now over, long lasting results will depend on how policymakers address the underlying structural problems, that have been affecting the economy for decades. The government will have to introduce significant fiscal and structural reforms to maintain the growth momentum.

Do you think that Japan is now on path to economic recovery after more than two decades of stagnation?

Of course, you have to put this in its historical context. The 10-year Treasury yield is still ridiculously low compared to its long-run median of 6.6%.

And we have seen sudden rises in the 10-year before that looked like yields would start "reverting towards their mean", only to see the trend quickly reverse (see October 2011 and March 2012 in the first chart above).

This could very well end up being just another head fake, with the 10-year staying within the same range of 1.4% and 2.4% that it has since August 2011.

Ben Bernanke and the Fed certainly don't want to see yields move higher. The central bank continues to buy $45 billion in Treasury bonds as part of QE3.

But what do you think is causing the sudden rise in the 10-year?

Could it be a "risk on" move by investors as they rotate out of bonds and into stocks? Are inflation concerns starting to finally creep into the market? Or is it just more noise within a range for the 10-year?

Chime in below.

But 2013 has been the icing on the cake. The S&P 500 is up 16.6% year to date. The Russell 2000, which is the small caps, is up 16.7%.

This rally has lifted all boats. Big winners can be found in every sector. You didn't have to pick the "right" industry to cash in.

For instance, small cap trucking company Saia (SAIA), which operates 147 terminals in 34 states, has seen its stock double in 2013 after five years of not doing much at all.

You know it's the mother of all rallies when even the airlines stocks (the airlines!) are up big. Shares of Alaska Air Group (ALK), for example, are up 50% this year.

In some of the hotter, "glamour" stocks, the returns have been equally as large. Shares of Lumber Liquidators (LL), a Zacks Rank #1 (Strong Buy), have jumped 67% this year after four years of not doing all that much.

Some investors are starting to question this rally based on 5-year charts like that of Lumber Liquidators and Saia, where the stock has really shot up in the past few months after years of "normal" gains. How much longer can this rally go on?

Many investors put stops in place to cash in their gains. Some sell when they have a 20% or 25% winner. But if you did that in this rally, you would have sold a long time ago and missed out on some massive stock moves.

The S&P 500 has hit new highs 9 out of the last 10 sessions but nothing goes up forever.

With many investors sitting on huge gains, the question many are now asking is:

When do you sell?

Or do you?

However, every company in the space hasn’t been so lucky, as a few have seen decidedly lackluster reports. One bellwether that has definitely fallen into this category is Bank of America (BAC).

The company barely met sales estimates for the past quarter, but missed earnings by three cents a share, with profits of just 20 cents per share. Immediately following the report, shares fell about 5%, though the company has easily rebounded and is back at 52 week highs once more.

Yet while shares of BAC may have been able to shrug off the weak earnings report in relatively short order, questions remain for the company in the near term. Other corners of the financial world are starting to take leadership in the space, while the earnings estimate picture isn’t exactly favorable at this point in time.

Still, BAC has proven to be quite resilient as of late and there are some positive trends appearing in key corners of the bank’s operations. These include strong mortgage originations, setting aside less for bad loans, and better news from their Merrill Lynch division.

In other words, BAC’s outlook is quite mixed and the company could go either way in the near term. But what do you think, are you a buyer or seller of BAC at these levels?

Reasons to Buy:

• The Banks-Major Regional industry is quite strong from a Zacks Industry Rank perspective. Currently, the space is in the top third of all industries, suggesting that it is in good company.
• Earnings growth (year-over-year) for the full year period is quite impressive (triple digits), so there is definitely reason to believe that BAC is back on track.
• Despite this projected earnings growth, the PEG is still quite good coming in below 0.9. This is extremely favorable when compared to the broad industry which has a PEG of 1.27.

Reasons to Sell:

• Year-over-year sales growth is expected to be more or less flat. It may be hard to grow earnings at a tremendous pace without some more top line growth.
• The earnings estimate picture isn’t exactly favorable, either in the short or long term. For the current year, in the past 30 days, 12 estimates have gone down while only 2 have gone up.
• The stock has a Zacks Rank #3 (Hold) in a top industry. This means that there are other, higher ranked options in the same space that could be better choices such as JPM or FITB.

So what do you think; will BAC continue to rebound, or is the company approaching a top given some of the headwinds on the horizon?

Let us know in the comments below!

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Each month, the U.S. Commerce Department mails questionnaires to a sample of 5,000 firms selected from its larger Monthly Retail Trade Survey (MARTS). Firms responding to MARTS account for approximately 65% of total national sales.

With a rising stock market as its major tailwind in April, the latest retail sales report showed U.S. consumer spending did not soften as much as forecasters had expected.

On Monday morning, the Commerce Department reported an overall seasonally adjusted +0.1% rise in April retail sales.  But U.S. retail spending actually climbed +0.7% in April when gasoline at the pump is excluded. Forecasters were looking for a -0.6% decline in retail sales.

From a year ago to April, retail sales have risen +3.7% annually. 

• The internet continues to be the overwhelming growth leader.  Non-store retailers (aka the internet) were up +15.4% annually. 
•  Cyclical activity was also strong.  Auto sales were up +8.8% annually.

​Sales at gas stations sank -4.7% to mark the biggest decline in more than five years. 

• Consumers evidently used some gas savings to boost spending on electronics, clothes and hobby items, among other things.
• They also increased spending at bars, restaurants and internet shopping sites.
• Aside from gas, the only categories to see a decline in spending were groceries, liquor and personal-care stores.

In March, a decline in retail sales was revised down to -0.5% from -0.4%. In February, an increase in retail sales was revised up a tick to +1.1%. 

The RTI question I have for you today is this one? 

Can positive feedback loops from the U.S. stock market continue to overcome headwinds of federal budget sequestration, personal tax increases, and a weak international economy?

Psychology is a large part of investing; understanding how the masses are “thinking” is essential to determining a thesis for a stock. As we see time and time again it’s often manias and panics with little or no fundamental basis or even a complete disconnect from fundamentals which have spawned some of the largest volatility in stocks and other assets.

An example might be how an explosion in the Middle East might trigger panic selling in an unrelated tech stock or back in the 1990’s when anything with a dot-com at the end of its name was bought regardless of their business health or growth.  

Then there is the macro sentiment that many use to determine just how the market reacts to news and data. 

Today we are in a bit of a odd sentiment in my opinion.  Stocks have rallied 15% YTD and are up almost 30% since their lows right around this time last year, yet earnings growth is less than 3% and revenue growth is a negative 1%.  In addition to the fact there isn’t any fantastically positive data to justify gains; stocks seem to brush off most of the poor economic data sets.

I think it’s at least safe to say that market’s are in a “positive” state of mind (let me know if you disagree).

The point here is not to argue whether the market is fairly priced, cheap or overbought; I’m just curious as to where you all think we are in the cycle using the chart below (credit to its original creator who I am unable to identify).

To put your opinion in perspective, let’s use a one year time frame or so, because this data can be extrapolated to trends within a day’s time or over a 20 year period.

Given the state of things, the data I am observing and the opinions of investors that I encounter, I think are right around the “Thrill” area of the curve, closely approaching Euphoria.

Where do you all see the market right now? 

Explain your answers if you want, but if you just want to spit out a level, that’s fine as well!

Happy Friday!

This is in stark contrast to many other names in the technology world, such as Apple (AAPL), Microsoft (MSFT) or even the broad technology sector (XLK) in the same time frame, as all of these options have paled in comparison to Google’s return as of late. Thanks to this, many are now looking to GOOG as the leader of the technology world and the best hope for growth among the tech giants.

However, it is worth noting that GOOG could be facing some headwinds in the near future. Some analysts are worried that search revenue could be in trouble—as more consumers just buy on Amazon (AMZN) instead of searching for a product on Google—and that other avenues haven’t really paid off yet for the company.

After all, the company is trading at a somewhat lofty forward PE of 22, which seems a bit high for a nearly $300 billion company that already has a stranglehold on its only real market. Analysts are also mixed on the prospects in the near term, as the stock has a Zacks Rank #3 (Hold) with EPS growth of just 2% predicted for this quarter.

Change on the horizon?

Clearly if GOOG is going to continue to surge it will need to find new ways to grow beyond desktop search and android phone adoption. One such way that many are banking on is via Google Glass.

Google glass is basically a wearable computing device that one utilizes like glasses. It will run on an android operating system and allow users to access a number of Google applications, take videos and pictures, and run third-party apps as well.

Although the product is still in development, many analysts and journalists have already developed strong opinions about the product, its likely sales figures, and the widespread adoption of the device.

On the high side, some are terming Glass as a gamechanging product that could sell as many as 6.6 million units a year in 2016. Meanwhile, others are much less optimistic, declaring that ‘nobody likes Google Glass’ and that the sales estimates will fall well short of estimates.

Bottom Line

Personally, I am more apt to believe in the high side estimates and that Google Glass will be a key part of many consumers’ technology lives, and a major part of Google’s growth going forward. The possible uses for the product are limitless, with potential applications in industries like the military,  health care, and education just to name a few.

Still, many remain deeply skeptical of the product, predicting that its adoption will be slowed by people not wanting to look ‘stupid’ wearing them (kind of like how some view those who use Bluetooth headsets). Or that Glass will basically be a ‘Segway’ redux; a technological innovation billed as the next big thing that only has found its way into niche markets.

But what do you think? Is Google Glass going to be a transformative product and a key aspect of GOOG’s lineup, or a Segway-like flop?

And, does this product change how you feel about Google’s stock going forward?

Let us know in the comments below!

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The U.S. Department of Labor reported before the open on Thursday that the number of people who applied for regular state unemployment-insurance benefits ticked down 4,000 to 323,000 in the week ending May 4, hitting a fresh low.

A new, low level.  The lowest since January 2008.

Investor expectations for initial unemployment claims for regular state unemployment-insurance benefits had risen slightly this week to 335,000.  Last week, the actual claims number came in at 324,000; the previous lowest level since January 2008. Forecasters believed the new claims report would reflect softer, more recent labor-market driven data.

Other fresh claims data was also supportive:

·         The four-week average of new jobless claims fell 6,250 to 336,750, hitting the lowest level since November 2007, near the start of the recession.

·         Continuing claims for jobless benefits dropped 27,000 to a seasonally adjusted 3.01 million in the week ended April 27, reaching the lowest level since May 2008.

·         The four-week average of these claims from people already receiving benefits fell 24,500 to 3.03 million, the lowest since June 2008.

This is clearly good news for U.S. stocks.  The relationship between the level of unemployment claims and the level of stocks is very clearly drawn.  That means the markets have more fundamental support for their ongoing rise.

What do you think?  Will markets close at a fresh high today and for this week?

19% of the survey respondents said that they have 'eased somewhat' lending standards for large and middle-market firms, while about 81% said that standards remained unchanged. The number was slightly more positive for small firms, with 23% of the respondents reporting easing of standards.  Many banks cited “increased competition” for business loans as the main reason for easing their standards.

However mortgage lending standards to individual borrowers remained more or less unchanged, while the demand for prime mortgages continued to pick up.  A few banks reported having eased their standards on prime residential mortgages but the standards for nontraditional mortgages were little changed.

 “Modest net fraction of banks were more likely to approve an application with a FICO score of 720 and a 20% down payment… but modest to moderate net fractions of banks indicated that they were currently less likely to approve such loan applications with a FICO score of 620, depending on the down payment”.

Light tending standards have been hurting the recovery since many prospective borrowers can not take advantage of low interest rates. At the end of 2012, banks had lent out less than 70% of their deposits (a multi-decade low), down from 93% just before the financial crisis.

While it is true that loose lending standards were partly responsible for the financial crisis, many banks still remain reluctant to lend to creditworthy borrowers (but with less than stellar credit).

Do you think that banks’ unwillingness to lend more remains a headwind to economic recovery? 

Here's a chart of the EuroStoxx 600...

And I'll spare you a boring chart of the bond yields; suffice to say that the Italian 10-year fell below 4% and Spain's is hovering just above there.

Could these barometers of risk appetite be signaling that the worst is over for Europe? Or is this just a global liquidity event, especially after Japanese investors have been loosed upon the world to buy every other financial asset they can?

When you look at the following graph of Eurozone composite PMI and GDP, it's hard to get excited about an economic recovery any time soon.

And the bond market picture makes sense -- especially if the continent is staring down into the spiral of deflation.

The ECB finally capitulated last week and lowered short-term rates again in an effort to stem the slow-down. But it may be far too little, too late. What strong central bank action has accomplished in Europe with the ESM and OMT is that it helped stabilize the banks and provide the ultimate currency -- confidence.

But getting the economy to turn around while austerity is all the rage could be a completely different challenge. Here's what Chris Williamson, Chief Economist at Markit had to say in late April after the PMI data was released...

"Although the PMI was unchanged in April, the survey is signaling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify further in coming months rather than ease.

The renewed decline in Germany will also raise fears that the region's largest growth engine has moved into reverse, thereby acting as a drag on the region at the same time as particularly steep downturns persist in France, Italy and Spain.

Policymakers will at least be relieved to see inflationary pressures cooling, which could further open the door to renewed policy stimulus."

The question is, will the ECB "evolve" their single mandate for price stability and embark on a full QE monetary stimulus plan to save their economy? And will they do it soon enough?

Also, why do you think European stocks have been so attractive to investors lately?

However, stocks leapt over 1600 with gusto. Even bad news is good news because it means QE will keep flowing which is feather in the investors cap. So it's hard to say what will bring down stocks...and when?

Now let's see what you guys think about when stocks will correct: 

1) The current level around 1620 is all she wrote with correction soon on the way. 

2) Make it up to 1650 before next correction. 

3) Make it up to 1700 before next correction. 

4) 1750 before next correction

5) Other

Take your pick and then be sure to explain why you think this is the case. 

After all, we have seen a number of strong domestic data points lately including:

• Consumer spending for March that was up 3.5% yoy.
• Home supplies remain at robust levels while housing prices are increasing, leaving many feeling more confident about their financial position.
• While not really a data point, stocks are at all-time highs, so at least on this metric one aspect of the economy is definitely at pre-recession levels.

However, every data point hasn’t been rosy over the past couple of weeks as we have seen some weakness in a few key areas. These include the following releases:

• Factory orders for March came in below the consensus with a -4.0% m/m change.
• ISM manufacturing finished at 50.7 for April, a miss compared to the 51.0 expectation.
• International markets: Europe remains weak on a number of levels, while China has seen its manufacturing sector slowdown as well.

So clearly, even with the strong jobs report, we could be facing a continuation of the ‘muddle through’ economy in the near term. But recent figures have definitely been promising, especially on the consumer front, and could suggest a breakout from here…

But what do you think?

Is the economy going to pick up steam, or is this jobs report the last of the good news before a summer slowdown?

Let us know in the comments below!

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Perhaps the bigger news and the true motivator for both the markets and for confidence were the revisions, which added an additional 124,000 jobs in March and February than previously reported.

The number of new jobs created in March was revised up to 138,000 from 88,000 and February's figure was revised up to 332,000 from 268,000. With the new data, the number of jobs created in February was the highest since November 2005 for any month if you back out temporary Census bureau hiring.

One bit of data that I tend to focus in on in particular is the Labor Force Participation Rate, which remained steady over the last couple months.  A dropping participation rate can skew the data and lower the unemployment rate artificially as workers are leaving the workforce.  But the fact that it has remained relatively stable helps with assuring that jobs are actually being created and unemployment is on the decline.

Also in the data, we saw that the average workweek fell two ticks in April to 34.4 hours. Longer workweeks are usually a sign of a strong economy and it is important to note that workweek length remains near a pre-recession high.  But are workweek lengths high because companies are trying to squeeze every last drop of productivity from workers?   Or maybe workers themselves are working harder to keep their jobs?

As a realist, I can't help but speculate the positive and the negative.  When I look back at the last 3 years, May has been the high point of the Jobs number and the stock market and I can’t help but look at those data and think that history could be repeating itself.

Over the last three years, you should know that overall manufacturing PMI has been decreasing on average and that services PMI tends to peak right around the same time as the employment numbers in May and then drop off.

There are a plethora of additional factors, including market valuation and earnings growth, that seem to be playing out just as they have at least in the past 2, if not 3 years that point to this being the top of the market and the employment strength for the year.

What Do You Think Happens to Employment and the Stock Market After May?

1. Employment peaks with the stock market and both begin to move lower.

2. Employment flat with the stock market flat

3. Employment flat and market continues higher

4. Employment continues to improve and markets move higher

5. Employment continues to improve, but markets selloff because the Fed is more likely to back away

6. Other

**Please briefly explain your thesis.

I believe this is the peak in employment growth for the year (at least until October). I believe that the coming months will be must less robust in terms of employment growth with several misses; this will drive most richly valued stocks lower (the broad market). It seems to me that too many data are pointing to slowdown and yet valuations are richer than they have been in the last three years. I this it will be increasingly difficult for traders to justify these levels, especially with negative revenue growth.

Meanwhile, the 4-week moving average declined by 16,000 to 342,250. That is just a little bit above the low for 2013, as you can see in this chart from Calculated Risk Blog:

This follows Wednesday's disappointing report from ADP that showed the economy added just +119K private-sector jobs in April.

So what's your guess for tomorrow's Employment Situation Report from the Bureau of Labor Statistics?

The consensus range is between 135K and 155K jobs added. Do you think the report will come in above, below or within this range? Post your response below.

It still indicated expansion, however.

The ISM for Manufacturing Index has cooled off since January and February, when it hit a 12-month high of 54.2. But the index also had a similar decline last fall before rebounding.

Some of the sub indexes weren't that great. The Employment Index fell to 50.2% from 54.2% last month.

But, in a small sliver of good news, the New Orders Index actually moved higher to 52.3% from 51.4%.

This was the second month in a row that the ISM for Manufacturing weakened instead of strengthening. It's never good to see it slip back towards 50.

Is this just a normal soft patch?

Or is this a warning sign of rough times ahead this summer?

Softness in job growth is now apparent. That being said, adding +119K jobs is in line with a muddle through +2% real GDP growth pace.

What about the market’s expectations?  Consensus forecasted +150K job adds from APD this morning. The same forecasters expect the Federal government to report a gain of +135K jobs on Friday. In the face of the miss, major stock indexes were down this morning before the open. 

Service-providing jobs increased by +113,000, the weakest pace of growth in seven months. Goods-producing employment rose by +6,000 jobs in April, its slowest pace of growth in seven months.

In the press release from ADP, Mark Zandi, chief economist of Moody’s Analytics, was given this quote,

“Job growth appears to be slowing in response to very significant fiscal headwinds. Tax increases and government spending cuts are beginning to hit the job market. Job growth has slowed across all industries and most significantly among companies that employ between 20 and 499 workers.”

I do not agree with Mark Zandi’s statement.

Globally exposed industry groups are being hurt the worst.

Look at the evidence:  In goods production, manufacturers showed job losses. They are globally exposed. In services, the globally exposed sector is trade, transport, and utilities. This industry’s April monthly job add number was relatively weak.

Domestically, construction firm employment bounced back, the finance sector continued to plod along, and profession/business services added a decent amount of jobs.

Here is the data ADP provided…

Total ADP U.S. Nonfarm Private Employment: +119,000

By Company Size:

Small businesses: +50,000 1-50 employees

Medium businesses: +26,000 50-499 employees

Large businesses: +43,000 500-999 employees and 1,000+ employees

By Sector:

+113,000  Service providing

+6,000  Goods producing

Industry Snapshot:

+29,000 Trade/transportation/utilities

+20,000 Professional/business services

+15,000 Construction

+7,000 Financial activities

-10,000 Manufacturing

What was your take on this key report?

Please go ahead and join the debate on Real Time Insight today.

Historically—the market has delivered better performance during November to April and then underperformed during May to October months.  This pattern can be partly explained by higher investment flows during winter months and lower trading volumes during summer (resulting in higher volatility). And then it becomes self-fulfilling to some extent.

This strategy has worked well during the past three years. Is this year going to be different? Aggressive easing moves by the central banks have made most other assets unattractive; so will investors continue to pour money into stocks during summer?

Please share your trading strategy for the summer months:

1)    Sell  in May and stay in cash through November

2)    Take profits on some of the winners and reduce net long position

3)    Increase exposure to low-volatility/defensive  stocks

4)    Continue to buy stocks—they will go higher

5)    Other-please explain

How is this the fuel leading us back to the highs today?

Take your pick of the following:

1) Muddle Through Economy + reasonably valued stocks = going higher

2) Recent economic report softness is wrong and the economy is indeed growing faster. 

3) The Fed has rigged this game by making it unattractive to hold cash or bonds. So stocks are the natural winner. 

4) All the bulls will look foolish as the economy continues to soften with lower stock prices on the way. 

5) Other...please explain. 

Place your vote with explanatory details in the comments section below.