April 6, 2010 Morgan Stanley Strategy Forum $SPY $USO

The labor market is showing signs of gradual healing. Friday's report showed payrolls rising 162,000 in March, with net upward revisions of 62,000 to Jan/Feb. Census related hiring totaled a less-than-anticipated 48,000, sothe ex-census increase in jobs totaled 176,000, versus our forecast of +150,000.The report also provided more support for the notion that the unemployment rate has peaked for this cycle. In fact, the household survey showed another month of very strong employment growth (+264,000).From a broader perspective, a pickup in employment growth is inevitable given that the economy's output has started to expand. History tells us that a rapid rise in productivity is fairly typical during the early stages of economic recovery, but this surge in productivity cannot be sustained indefinitely. Additional labor will be needed to sustain the rise in output.


 
Looking for lower inventories in 2H10. Crude oil prices have rallied quite strongly over the last 3-4 weeks despite inventory builds. But inventories for the next few months should remain relatively flat, and we do not expect balances to improve — i.e., inventories to draw — until 2H10.Oil prices have broken out of their recent range and moved up to their highest levels since October 2008. This increase has come despite global inventories increasing. So fundamentally, the balance has actually softened a bit, while prices have continued to move higher. It appears that crude is trading very much in line with what's happening on the equity front.




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