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Sunday, April 08, 2007

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"Thats Hot!" 04/08/07

Yes Paris, the economic report was indeed “Hot”.

On Friday, market non-participants (due to the long holiday weekend) were treated to a surprising nonfarm payroll and unemployment report. Most were anticipating soft numbers largely due to the recent soft readings in previous economic data. Surprisingly, nonfarm payrolls came in at a strong 180,000 new jobs (higher than expected) while unemployment inched down to a historic low of 4.4%. Previous month’s jobs gains were also revised higher.

Although many were hoping for soft economic data in this report in order to increase the probability of a future Fed cut, the futures soared higher immediately after the release. How can this be, you may ask…? Well Tevya, very few traders were positioned for the long side ahead of the Holiday weekend and an unknown variable such as the formidable unemployment report. Furthermore, the slow dead-cat bounce that the market has been experiencing over the past couple of weeks has run into significant overhead resistance that has not gone unnoticed by market technicians. This has forced many into defensive positions. Therefore, the market was poised to have a short term pop regardless of what the actual figures came out to be.

The economy is at another tricky juncture. The housing meltdown probably has more to play out. Importantly, the ripple affect from declines in the housing sector has yet to be felt by the consumer. The market which intuitively understands this inevitable outcome continues to hope for a Fed rescue before the housing "soot hits the fan". Unfortunately, the strong jobs report implies wage inflation pressure in the making.

Friday’s 4.4% unemployment rate is exactly what the Fed did not want to see. The Fed believes that this historic level of full employment dramatically increases the risk of wage pressure in the system. This in conjunction with recent deceleration in productivity creates a dangerous brew of implied future inflation. The Fed has now been placed into a situation in which their magic rate cuts can only be delivered AFTER the housing spillover takes hold on the economy. More importantly, the housing problem in combination with implied wage pressure means that the economy is likely to suffer moderate stagflation before the Fed will be willing to act…not pretty.

The market being a discount mechanism is likely to sniff this out and offer some more pain in the not too distant future. The timing of the next leg down is difficult to preciously predict due to the very slow momentum moves that the market has been experiencing over the past several months. However, make no mistake about it, a second and third leg down to lower lows is a large probability (in our humble opinion).

If You Held A Taser to Our Heads:
We continue to believe that the NASDAQ will visit lower lows over the next few months. We have a lose target of NASDAQ 2250 before we are willing to get aggressive with a buy and hold strategy. We would not even be surprised if 2250 is breached in a quick but meaningful way. In the meantime, we are doing plenty of day trades (primarily using ETFs) on both the long and short side. Our stops are tighter than…well use your imagination.

Many readers have been complaining about our very infrequent posts lately. We understand your frustration, but need you to understand the intention of this Trading Blog. Originally, it was set up as an efficient method to communicate with our fee paying clients. Ultimately, we started attracting a steady non fee paying audience. Over the past several months, much of our communication with our clients have been telephone based.

For all the readers that have enjoyed The Kcap Trading Blog that are not fee-paying clients, feel free to call or e-mail us in order to explore a more in-depth relationship. Perhaps in the future we will revert to a more consistent posting schedule (which will likely include a subscription based service). In the meantime… be careful out there!

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