June 08, 2008 Options Success Market Commentary

Market Commentary is provided by Cashflowheaven.com's Options Success Newsletter.

The biggest economic report this past week was the Non-Farm Payrolls for May released on Friday. The report showed the economy lost 49,000 jobs, which was actually less than the -60,000 loss analysts expected. The component that grabbed the headline was the spike in unemployment to 5.5%. The +0.5% spike in unemployment was the biggest single month jump in 22 years and continued a string of job losses stretching five consecutive months.

But as big as the employment numbers are they are not nearly as urgent as the sky-rocketing price at the pump. Oil prices declined to $121.61 on Wednesday night but then rebounded to $128 on Thursday. The net gain was a record $5.50 on Thursday. That was the largest single day dollar gain on record but it was nothing compared to Friday. On Friday crude prices added to that Thursday spike with another gain of $10.75 to close at $138.50---another record high and the largest single day price gain in the history of the Nymex!

Between rising unemployment and rocketing fuel prices this market is in trouble. The markets dropped like a rock Friday signaling the latest rush for the exits--but this hasn't been a one-day thing. There have been an increasing number of big down days as the market tries to rally back to the SPY 144 level. This is a sign that overhead resistance is strong.

The Fed is telling banks to secure capital---a powerful warning that interest rates could soon move higher. Chairman Bernanke has voiced concerns over inflation but has also raised unemployment estimates and lowered the GDP forecast for the rest of the year. The Beige Book next week will provide insights into the current thinking by the Fed but we already have some clues.

Thursday morning, the European Central Bank indicated that they may be raising rates and this will place additional pressure on the Fed to raise rates themselves. Which means the biggest report for the coming week will be the Consumer Price Index because it will tell us just how bad inflation is becoming. You know that oil prices are seriously jacking up consumer prices. The Fed takes out direct food and energy prices as too volatile to track monthly but the indirect costs for transportation and raw materials has got to be pushing inflation higher.

The problem is the Fed is facing the worst of all scenarios---Oil prices are out of control, the tax rebate stimulus has been consumed by the increase in the price of gasoline, unemployment is rising and the economy is bordering on a recession. This is the return of stagflation in its purest form--no growth and soaring inflation.

The Fed has to raise rates if the CPI shows an inflation spike but raising rates will smack the economy even further. They can't move in either direction on rates without escalating either inflation or recession so for now the Fed may be stuck in neutral. In fact this past week James Bullard, President of the St. Louis Fed, said the Fed could remain neutral for the rest of the year. However, he also said the dominant policy concern was rapidly changing from the credit crisis to pressing inflationary concerns--keep a close eye on that CPI report this week.

Market Commentary is provided by Cashflowheaven.com.