Reports Are Fueling Pessimism - TheStreet

The debate over whether the economy will suffer a "double dip" intensified today following the release of more troubling data, most notably the April unemployment report. Meanwhile, the stock market provided a sample of what such a pattern might look like.

The market's first dip came at the open. Before trading began, the government reported that 43,000 nonfarm payrolls were added in April, but that was below the expectations for an increase of 60,000. Additionally, March payrolls were revised to a loss of 21,000 jobs from an increase of 58,000 previously.

Most troubling, the unemployment rate rose to 6% from 5.7% in March, well above the consensus estimate and the highest level since August 1994.

Stock proxies were lower but apparently stabilizing when they suffered dip No. 2 after the 10 a.m. EDT release of the Institute for Supply Management's nonmanufacturing index. The ISM's survey of the services sector fell to 55.3 in April vs. 57.3 in March and weaker than the consensus estimate of a drop to 57. Also, the prices-paid index rose to 59.5 in April vs. 53 in March.

There were some hopeful signs within both reports. Average hourly earnings rose just 0.1%, putting annual growth at 3.4%, the lowest since 1996; that may not be good news for workers, but does mean there are limited inflationary pressures within the labor sector. As with the ISM's manufacturing survey

Wednesday, today's services index was above 50, indicating expansion in that sector. Elsewhere, the Economic Cycle Research Institute reported its weekly leading economic index rose to 122.2 for the week ended April 26, its highest level in over a month.

But unlike the reaction to some of the week's other data, traders were focusing on the headlines of today's reports, most notably the jump in the unemployment rate.

Of late, the

Dow Jones Industrial Average

was down 1.16% to 9974.31, the

S&P 500

was down 1.24% to 1071.16, and the

Nasdaq Composite

was off 2.21% to 1608.49.

Major averages had come off their earlier lows, but traders were troubled that the Comp had fallen below Monday's intraday low of 1640.97 and that the Philadelphia Stock Exchange Semiconductor Index had breached its Feb. 22 intraday low of 500.57; the SOX was lately down 4.69% to 480.39.

These technical breakdowns seemed to confirm the message of the skeptics

late Thursday: the snapback rally Tuesday and Wednesday (the Comp's dip notwithstanding) had run its course.

Outside equities, the price of the benchmark 10-year Treasury note was up 12/32 to 98 23/32, with its yield falling to 5.04%. Treasuries were benefiting from the weak data but were restrained by ongoing concerns about the government's budget deficit.

In currencies, the dollar traded at a two-month low vs. the yen and a six-month low vs. the euro in intraday activity. Like stocks, the greenback was hit by the weaker-than-expected jobs data. Weakness in the U.S. currency was contributing to the fall in equities, and vice versa.

The dollar also was hurt by lingering concerns about comments from Treasury Secretary Paul O'Neill earlier this week. O'Neill testified before Congress on Wednesday and did not explicitly reiterate the government's long-standing "strong-dollar" policy -- at least not staunchly enough to mollify jittery foreign exchange traders.

As is often the case, weakness in the dollar and U.S. stocks was benefiting gold and related shares. The price of gold was recently up 0.97% to $311.60 while the Philadelphia Stock Exchange Gold & Silver Index was up 2.5%.

Of course, it's still fairly early in the session, and traders might wish to cover profitable short positions on stocks and the dollar, or book gains in gold and related shares, before the weekend. At this point, that looks to be about the best the bulls can hope for amid yet another troubling session for the optimists.

Rear-Guard Action

Yesterday I reported on the picks and pans of two money managers and have since received some updates from both.

Brett Gallagher, who oversees about $4 billion as head of U.S. equities at Julius Baer Asset Management, said

Calpine's

(CPN)

reported loss yesterday hadn't changed his view of the company.

The results were "pretty much in line" with what the company had forecast, and "I still like the story, though it is not without risks," he commented. "The company appears to be doing all it can to ensure liquidity is ample, and they have appropriately scaled back on capex."

While the latter cost Calpine in terms of turbine cancellation penalties, Gallagher noted those expenses are not recurring and that the company still has more capacity coming on line this year and next.

"What we are waiting for are more normalized power prices," the fund manager and

longtime Calpine bull continued. "I think the company's actions get them through this period of low demand/pricing and gives them awesome leverage to the turn."

Finally, the fund manager noted that "short interest in this name is quite high" and said he believes short-sellers will be squeezed if Calpine can regain and hold a share price above $12. But returning to that level anytime soon seems wishful thinking; Calpine shares were recently down 3.6% to $9.88.

Separately, Brad Ruderman of RCM Partners, a Los Angeles-based hedge fund, said he sold his short-lived stake in

Dynegy

(DYN)

, another troubled energy provider.

RCM has taken a new long position in

AOL Time Warner

(AOL)

, which Ruderman said is "a very ugly-looking stock where not enough credit is being given for what is right at the company," most notably its cable division. (Ruderman is still bullish in several cable operators, as reported yesterday.)

Finally, the hedge fund manager said he's maintaining the shorts mentioned here and will add in selected restaurant names, although he didn't specify which ones.

He also reiterated concerns about housing stocks, but they continue to defy the skeptics.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.