Morning Note - Markets higher on employment

** 31/03/11 - 8.18am  -  by James Gerrish** 

(Click to View Charts)       S&P/ASX 200  (Australia) -  Dow Jones Industrial Average (US)     -     FTSE 100 (UK) 
 

• The ADP employment number were released last night in the US which showed +201,000 jobs created last month. This is the precursor to the Non-Farm payrolls number which comes out tonight. It actually hasn’t been a great guide in recent months but the market took it as a positive anyway. 
• Consensus is for the creation of about +200,000 jobs most likely made up of a drop in Govt employment and rise in private employment. 

• On the market last night, we saw the DOW JONES finish +71 points or +0.58% higher at 12350. 
• The US dollar was lower, Gold was up slightly but Copper was a big mover down 1.8% on the session. 

• There are still a lot of sceptics about the market out there and I'm surprised at the extent of those actually shorting the market. 
• We've got a situation where the global economy is getting better, not worse. Growth in Emerging Markets is now being supported by growth in the developed economies and we've got talk about a wind back of stimulus – because the economy is getting better.
• Commodities have rallied and I’ve heard a lot of investors calling this a “bubble”. I’ve written a lot about why I don’t think this is a bubble so I won’t rehash that now but a chart from the Eureka report below, tells a pretty interesting story.

• When world industrial production and global commodity prices are so closely linked, it starts to get that much harder to blame the US Fed and QE2 for being responsible for the commodity boom.

Source: Netherlands Bureau for Economic Policy Analysis, CRB
 

• Basically, the chart above shows the high levels of correlation between industrial production and commodity prices – or more simply, global growth which underpins industrial production and commodity prices.

• I think the recent price action tells a lot about sentiment and market perception at the moment. Back when the market was on edge, we saw positive US data being blamed for selling in equities- the perception was an improving economy meant less Fed intervention and the market couldn't possibly justify these prices without the Fed. 
• At the moment, we've got a Fed Board member talking about the wind back of stimulus, and the market rallies - so this says to me that investors are getting more confident about the underlying economy and its ability to ride along without training wheels.
• We're also entering a period where markets are historically positive.
• According to Goldman Sachs, in the last 31 years, the market has been positive in April 27 times - this is a whopping 77% of the time. 
• The average return in April has been +3.00%. 
• In the 24 times the market has rallied in April, we've averaged a return of +4.53%. If this did occur this year, we'd see the market at 5040 by month end. 
• In the 7 times the market has dropped in the last 31 years, the average drop has been -2.25%. 

• My preferred market themes still revolve around Mining Services, Continued US recovery (an eventual uptick in rates), Energy, and scatter the portfolio with some high yielding securities such as the Australian Banks and a blend of Hybrid securities. 

James Gerrish 
(02) 9375 0117