Friday, September 5, 2003
Issue Contents:
| 08:53 | Good Morning... |
| 08:56 | Headlines and Reaction |
| 09:11 | Random Thoughts |
| 09:25 | Today's Strategy... |
| 10:28 | [SPU3, 15M] Intraday Setup |
| 10:45 | [SPU3, 15M] Intraday Update |
...Paul's Intraday List will not be posted this morning. I'm having trouble with email.
The last of the data has come out this week on the U.S. Economic Calendar.
Let's see. What do we have this morning?
First on deck is the headline at WSJ: Payrolls Drop by 93,000 Jobs As Jobless Rate Declines a Bit.
WASHINGTON -- Employers cut jobs for a seventh consecutive month in August, continuing a trend of payroll sluggishness in the face of a brightening economic outlook.
Nonfarm business payrolls declined by 93,000 last month, the Labor Department said Friday. The cut, the steepest in five months, brought the total of job losses since the start of the year to 431,000. Still, the unemployment rate fell a tenth of a percentage point to 6.1%.
The sharp decline in payrolls was a surprise. Economists surveyed by Dow Jones Newswires and CNBC had forecast a gain of 12,000 jobs and for the unemployment rate to remain steady at 6.2%.
The numbers highlighted the peculiarity of the current economic recovery. The economy grew a solid 3.1% in the second quarter, and forecasters are betting the rate for the third quarter will be at least 5%.
Market focuses on the loss of jobs, while puzzled by the improvement in productivity. As we said yesterday, in the old days it was called "belt-tightening". Remember the 1980s?
Dow futures move down to test yesterday's low...
...while Treasury bond and note futures jam up, as expected. As discussed yesterday, the upside was going to be the "obvious" surprise.
A few weeks ago, I wrote a little something about my thoughts on the situation in Iraq. After a reader wrote a scathing reply to my column, I re-wrote it in Grade 8 English, so that my words could not be miscontrued.
While it might not be my job to comment on the political landscape, the fact is that this is a relevant when it comes to the capital markets. If we take a quick look at today's headlines, we can see why.
From Newsday: Bush to Ask Congress for Another $60B to $70B for Iraq.
Washington - With the costs of Iraqi reconstruction spiraling but foreign aid barely a trickle, the White House is expected to ask Congress for as much as an additional $60 billion to $70 billion to support the increasingly embattled mission there, congressional sources said yesterday.
Republicans who control Congress expected swift approval, and Democrats said they, too, believed the request would pass - but not before they used the opportunity to press the Bush administration to be more aggressive in seeking international military partners in Iraq.
Yet news of the request, roughly double what some in Congress had anticipated, marked the second time this week that the Bush administration was forced to acknowledge, albeit tacitly, that the job of rebuilding was proving tougher than they had anticipated.
Not only has resistance within Iraq been greater than expected, adding to U.S. expenses, but original plans to use Iraqi oil revenues to offset the cost have so far been fruitless. Sabotage to oil pipelines has damaged infrastructure already in worse than expected condition.
After weeks of resisting a larger role for the United Nations in Iraq, the Bush administration began seeking support this week for a UN resolution that would encourage more countries to contribute troops and money.
That effort, however, already has run into resistance from two key allies that opposed the war, France and Germany, whose leaders said yesterday that the resolution doesn't go far enough to give the UN a meaningful role in creating a new Iraqi government.
U.S. officials have said they would like at least 20,000 more foreign troops to add to the 22,000 already helping the 140,000 U.S. forces with peacekeeping, border control and other missions.
Beyond fresh coalition troops, the United States also hopes to enlist financial support for the reconstruction, even though so far it's not clear what kind of political or military control - or perhaps more importantly, business opportunities in Iraq - the United States would be willing to offer to its allies in exchange.
For now, the United States is bearing the costs of reconstruction largely alone, a prospect that, at $3.9 billion a month, makes even some Republican supporters of the war increasingly uncomfortable. Bush told CNBC yesterday that he had not yet decided on a top figure for his spending request.
Any new request, though, would only worsen recent projections that next year's federal budget deficit will reach a record. That issue, which Democratic presidential candidates would be sure to highlight, also concerns Republicans.
"A lot of them [Republicans] wish they would have known it would cost this much before, and it comes as a surprise, and the deficit is growing, so anything that adds to it will cause some distress, but ultimately, they'll agree to it. There's no other choice," said one Republican congressional aide.
Congressional sources said they expected the bulk of the money to go to pay for military operations, upwards of $50 billion next year, with the rest for rebuilding key Iraqi infrastructure.
Let's face it. These are meaningful numbers because as the government goes into the red to support efforts, pressure is going to mount on interest rates on the upside. On the political front, there will be questions about allocation and use of funds. After the big blackout, the estimate was that it would cost $50B to update the power grid for the nation. Which one would you pick? Which one will the voters pick in 2004?
Obviously, the move to some sort of Plan B is in the works as we speak. And they are starting to fill up the airwaves.
From Washington Post: Letting Iraq Save Itself
The most interesting plan I've heard for this political transition comes from Ghassan Salame, a Lebanese political scientist who was senior political adviser to the U.N.'s chief in Iraq, Sergio Vieira de Mello, and who narrowly escaped when Vieira de Mello was killed by a truck bomb on Aug. 19.
Salame said in an interview yesterday that France, Russia and other members of the Security Council will probably support a new U.N. resolution calling for a multinational force in Iraq under U.S. command. This U.N.-sponsored force will help stabilize Iraq, but Salame argues there must also be a rapid devolution of political power to the Iraqis. He wants to replace U.S. civil administrator Paul Bremer not with a U.N. substitute but with Iraqi sovereignty.
Security will remain the crucial issue in Iraq, and the addition of U.N. troops to handle routine peacekeeping will allow the U.S. military to concentrate on the harder task of fighting the Iraqi terrorist resistance. But foreign troops won't put this shattered nation back together. That's the importance of Salame's plan, which he stressed is personal rather than a U.N. proposal.
Salame's basic argument is that Iraqis have to take more responsibility for their country, and the only way to achieve this goal is to give them the political power they have been demanding. To that end, Salame proposes that three steps be taken immediately:
• First, a provisional government should be created. The easiest way to do this would be to merge the existing Governing Council and cabinet. The two 25-member interim bodies are duplicative, with the heads of key political factions sitting on the council and their deputies typically serving as ministers. The merged body would be reduced to 20 to 25 people, and the United Nations would then recognize it as Iraq's legitimate government.
"The present political situation is not tenable," says Salame. Instead of "creeping" gradually toward eventual Iraqi control, America and its allies should agree to "go straight to the Iraqis."
• Second, Iraq should quickly regain control of its national budget, so that the provisional government is forced to make hard decisions about where to spend limited money.
Rather than give Iraqis this power of the purse, the United Nations is currently planning to replace its cumbersome "oil for food" program with a jury-rigged "development fund." Bremer would sign checks, in consultation with a monitoring group drawn from international organizations such as the World Bank.
But if Iraqis controlled the budget, they would have to negotiate the compromises that are the essence of politics. Instead of blithely calling for 1,500 new schools, as the interim Governing Council recently did, the new provisional government would have to set priorities.
• Third, a constitutional conference should begin work now on a document that will provide a democratic political structure for the new Iraq. Its membership should include the 25 members of the constitutional committee already named, plus another 100 or so members to be selected by the provisional government. The goal would be to have a new constitution ready for a nationwide referendum in January, with elections to follow in March or April.
Salame, whom I first met more than 20 years ago in Beirut in the last, convulsive stages of the Lebanese civil war, says he is worried that in its efforts to stabilize Iraq, the United States is turning back the clock by transferring power to tribal and religious leaders.
"It's a Lebanization of Iraq, and I regret that," he says. "The country is becoming less secular, and reverting to its old cleavages." He hopes the new constitution will not mirror Lebanon's religious spoils system but will create something more modern and stable.
Bush swallowed his pride this week and admitted that the United States doesn't have the resources, financial or military, to go it alone in Iraq. He was acceding to pressure from his uniformed military, and also to reality. Hoping for the best simply wasn't a strategy.
As Salame notes, long-term U.S. administration of Iraq would require perhaps 10,000 civilians -- an unimaginable financial and military burden. So in that sense, Bush may not have an alternative to the kind of devolution Salame suggests.
What makes Salame's proposals compelling is that they are quick and clean, and they place responsibility where it has always belonged, with the Iraqi people themselves. To those who wonder if the United States can risk moving so fast, Salame would probably answer: Can it risk moving more slowly?
I personally think there is a more diabolical plan that is coming together in the background...more later.
No change in the analysis for the major market indices.
For aggressive traders on the short side, the alert for sell stops on a swing trade basis can be hiked up to go off on break of yesterday's low.
There are no buy setups on the daily charts of the major stock indices.
Take a look at the 15M ES. This is the bounce to the top of the gap left from the gap down open. And below, note that yesterday's low is also the two day low and the low of the chop zone.
There should be a lot of sell stops in the ES 1021ish area, so it this can UPfill and/or fails on the test of the upper end of the trading range, then we know where is it targetting on the downside.
In fact, the 15M ES/SP chart is one place to enter a potential swing trade intraday. You can see why we can enter a sell stop in here. It's the first bounce after the break of a big congestion area. Might be the beginning of a downtrend. The strategy would be to stalk the upswing/bounce with a trailing sell stop placed just under the green bars on the 15M chart - up to 4 bars or so. If the bounce fails, and S&P reverses to the downside, the sell stop is filled.
As of 10:34AM ET, the sell stop is at ES 102525/SP 102520.
Sell stop on the 15M ES/SP has been triggered. The initial stop loss should be set at 102750 if you intend to use this entry as a potential overnight hold. The first downside target is yesterday's low and then the two day low, both around 1022.
Remember, this is an attempt to enter a potential breakout to the downside.