Sponsored by the Dr. Stoxx Options Letter

Whether you are a long-term investor or a short-term trader, it is always a good idea to take a step back from the charts and income statements in order to look at what is happening in the broader economy.  Right now, we have a number of interesting and potentially market-moving developments we should all be aware of.  These include but are by no means limited to the following:

1. Friday's Jobs Report.  This Friday before the bell we get the monthly Non-farm Payroll numbers, along with the latest reading of our nation's unemployment rate.  Experts are expecting a fairly robust add of 240,000 new jobs and a hold of the unemployment rate at 5.6%.  Given the weak ADP numbers out this morning, along with a month of truly dismal weather in the Northeast, the experts are probably too optimistic.  But in the end, bad news -- as long as it is not TOO bad -- is good news since it will mean the likely postponement of the rate hike cycle from the Fed.  For example, in the wake of today's weak ADP report, Chicago Fed Bank Chair, Charles Evans, was out saying there should be no hikes until 2016.

2. Exxon Mobile is Cutting Cap-Ex.  Exxon Mobile (XOM) is the largest oil company in the world.  In fact, it is the 3rd largest company in the world, period.  It's market cap is larger than all but the top 24 countries.  So when Exxon Mobile company executives announce, as they did today, that they are cutting back on capital expenditures, that is not a good sign.  Cap-ex spending is typically a marker for how optimistic a company is about its profit potential in the near-term future economy. Cap-ex increases when a company is predicting good times ahead.  So when a company the size of Exxon shrinks the budge by $4 billion this year, and plans no increases for 3 years, that says something loud and clear.  It tells us that, all things being equal, the next three years are not going to be good years for energy investors, for the price of crude, and consequently, for a huge chunk of the U.S. economy.  

3. Big Bank Stress Tests and Coming Regulation.  Last night, at an awards dinner in New York City, Fed Chair Janet Yellen upped the ante on governmental oversight of the big investment banks. Yellen called the big banks "the epicenter of the [2008-09] crisis" and "the locus for much of the excessive risk-taking that led to the crisis."  Yellen went on to outline specific regulatory changes the Fed had taken since the financial crisis (namely, Dodd-Frank).  Yellen also pointed to the Fed's annual stress tests to measure how ready banks are to deal with market downturns. These tests have become an increasingly important measure of risk management. The first round of tests begins later this week.  If stress readings come back negative, we may see a damper put on the recent price momentum of the big 4 banks.  You can read a transcript of the talk here.

4. The Best Word for the Current Economy is "Mixed."  The Fed's "Beige Book" was out today and, as the name implies, it contained a great deal of mixed economic data of modest importance.  "Beige" is an apt color for what was contained in the report.  For example, growth indicators were up for 6 of the 12 Fed districts; which, of course, means that they were down for the other 6.  Predictions for future consumer spending were optimistic in the near-term but less so longer-term.  Residential real estate is struggling, but commercial properties are doing okay.  Exports were hurt by the labor dispute on the West Coast, but East Coast ports were sizzling.  Inflationary markers were up slightly, but wages were down slightly.  Overall, the economy seems rather dull and yet here is the stock market at or near new all-time highs.  This is a disconnect that will, sooner or later, have to repaired.