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December 06, 2006

Friday's Employment Report: Reaction May Be Telling
by Chris Ciovacco

ADP Report Points To Stronger Than Expected Employment Reading On Friday Morning

"NEW YORK (MarketWatch) -- The dollar rose against other major currencies after a report early Wednesday showed private employers in the United States created 158,000 net new jobs in November. It's the largest gain in the ADP employment index since June's 368,000. Together with an estimated 15,000 government jobs that aren't included in the ADP index, the report suggests non-farm payrolls likely grew by about 170,000 in November. The government's non-farm payroll report will be released Friday morning. Analysts currently expect job growth of about 110,000 in November, according to a survey of economists conducted by MarketWatch. The euro was last down 0.4% at $1.3261, while the dollar was up 0.1% at 115.07 yen"

Wire Report By Wanfeng Zhou, MarketWatch

If you invest in stocks (SPY) or bonds (SHY, TLT, IEF), you may be able to garner some useful information about what is important to both markets this Friday morning ,12/08/2006, when the Employment Situation Report is released at 8:30 AM ET. Based on the ADP report (see above) that was released Wednesday, 12/06/2006, there is a good chance that the month-to-month change for non-farm payrolls on Friday will show that the economy is stronger than expected (at least based on this one number).

Assuming we get a strong number, it will be telling to see how the stock and bond markets react. Both markets have "priced in" a Fed rate cut or multiple cuts in 2007. Therefore in this case, good economic news in the form of a strong job creation number, might be bad news for both stocks and bonds since it would reduce the odds of a rate cut(s) by the Fed in 2007. It is also possible that a stronger than expected employment report will be good for stocks and bad for bonds. Stocks may react positively based on the rationale that the economy is stronger than we expected, therefore corporate profits will be better than we expected in 2007. Using Wednesday's midday market activity as an early read, it appears that a stronger than expected employment report will negative for both stocks and bonds or somewhat neutral. This may be a non-event, but it worth watching.

While one economic number does not make a trend, Friday's market reaction can help you get a better feel for what is important to the stock market as economic data is released in the coming months. For the most part, we know what is important to the bond market, which is that it wants weak economic data and Fed rate cuts in 2007. It is unlikely that Friday's employment number will sway your thinking too much one way or another, but it will influence it in the context of the economic data that we already have. It may also help answer the question, "Are stocks primarily going up because the market is expecting Fed cuts in 2007, or are stocks going up primarily because we are headed for a possible soft landing?"

If you are scoring at home, Bloomberg has the consensus job creation number at 100,000 for the month-to-month change.

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

Copyright © 2006-2008 Chris Ciovacco

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