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The ISM Fallacy

Tyler Durden's picture


Yesterday's "blowout" ISM reading of 55.7 (on 53 in consensus) was enough to lead to a big market rally, at least temporarily. Yet, just like CfC and the overall Q3 GDP took early credit for massive stimulus payments (whose cost will be felt more gradually over the next decade), it appears the same principle of "borrowing from the future" is applicable to the ISM reading as well. And if David Rosenberg is correct, and the ISM, along with all other stimulus indicators, holds the seeds of its own destruction inside of it, look for this to be an ISM top, potentially until such time as the next stimulus is invoked.

From his morning piece:

ISM is following a very similar pattern as it did in the aborted 2002 recovery year, again led by a brief spurt of automotive-related growth. What caught our eye in the report was the decline in the new orders–to-inventories ratio — to its lowest level since February (1.25x from 1.43x in September and 1.89x in August). This ratio tends to lead ISM by 3-to-6 months (and recall that it peaked three months ahead of the June 2002 peak in the ISM) and seeing as it peaked in August, it would not surprise us to start seeing the headline index roll over heading into year-end.


From our research, the S&P 500 was already effectively pricing in a 59.0 level in the ISM index, so it will be interesting to see if this data-based rally is any more sustained than what we saw coming out of the better-than-expected GDP report last week. This market still has plenty of “growth” priced in.

In case it is lost Rosie, for one, is not buying the ISM growth argument:

With all deference to the ISM index, the regional surveys have, for the most part, not validated the strong message from the national figure:
1. Boston’s Purchasing Managers’ Index (PMI) fell to 44.9 from 47.5
2. Chicago’s PMI rose to 54.2 from 46.1
3. New York’s PMI index sagged to 60.8 from 72.9
4. Cincinnati’s PMI edged up to 44.6 from 44
5. Milwaukee’s PMI fell to 50 from 58
6. Richmond Fed index down to 7 from 14
7. Kansas City Fed production index slipped to 6 from 16
8. Texas manufacturing index worsened to -14.3 from -6.4
9. The Southeast Michigan business activity index slid to 51.3 from 62.5.
So, seven regions were down; two were up; and somehow the national index ran up 3.1 points to 55.7. Right.

And lastly, some concerns about this mythical inventory restocking, which just happens to be Mr. Liesman's favorite strawman, which however seems set on never occurring.

While the ISM index did suggest that the era of destocking is over, the chart below is the reason why we are sceptical about the inventory cycle. The level of inventories across manufacturing, wholesale and retail relative to aggregate sales is still uncomfortably high, at 1.40x. A steady-state figure consistent with vigorous economic expansion is closer to 1.30x; and note that the last cycle really only took on a sustained head of steam once the I/S ratio broke down towards 1.35x.


And as for Buffett's "bet on America" and growing inventories, by buying Burlington Northern, one wonders just how much of a risky bet this is when one considers that the source of the financing likely will come from taxpayer subsidized Citi and BofA. The government is now playing some pretty serious shell games, using an iconic and not-disinterested figurehead (what is Buffett's downside if the market tanks again?) to channel optimism (not the first time Buffett has done so), while providing virtually free, taxpayer provided  funding. It does, however, beg the question of why the BNI board took all of 15 minutes to hit Mr. Buffett's bid. We will provide details of the BNI transaction as we get them.


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Tue, 11/03/2009 - 11:48 | Link to Comment Problem Is
Problem Is's picture

Broke Ass Arnold strikes again...

Hey Maria Shriver... ask the Kennedy's to bailout California... won't you?

Tue, 11/03/2009 - 11:44 | Link to Comment Green Sharts
Green Sharts's picture

The source of financing for Berkshire's purchase of BNI "likely will come from taxpayer subsidized Citi and BofA"?  Where do you come up with that, particularly when you conclude with this:  "We will provide details of the BNI transaction as we get them."

Tue, 11/03/2009 - 12:25 | Link to Comment Anonymous
Tue, 11/03/2009 - 12:38 | Link to Comment reading
reading's picture

He's financing the cash part (half of it is what he said this am).

Tue, 11/03/2009 - 12:39 | Link to Comment Green Sharts
Green Sharts's picture

Just listened to the interview of Buffett on CNBS this morning (warning, the gushing of Kernan and Quick might make you a little nauseous) and there is financing coming from some banks, which weren't named.  Buffett said the cash portion of the deal paid to BNI shareholders would be about $8 billion from Berkshire and another $8 billion borrowed from banks to be repaid in 3 annual installments, presumably from BNI cash flow although he didn't say that.

So there could be some financing coming from "taxpayer subsidized Citi and B of A."

Tue, 11/03/2009 - 11:49 | Link to Comment mberry8870
mberry8870's picture

I view this as a very bad sign. I deeply admire Buffet but he is just wrong here.

Tue, 11/03/2009 - 11:54 | Link to Comment Green Sharts
Green Sharts's picture

Buffett has bought 20% of Burlington's outstanding shares in the last couple of years in the open market, presumably because he likes the company and management.  Now he's merely a figurehead, and the government initiated the deal by offering him nearly zero cost financing?  That is truly black helicopter stuff.

There are some details out on the transaction.  40% of the price for 80% of the shares that Berkshire doesn't already own will be paid for with an exchange of Berkshire stock.  The class B shares will split 50 for 1 (which would take them from around 3300 to 66 per share to accomodate BNI shareholders who want Berkshire stock in an exchange).  Part of the other 60% of the purchase price will be paid for with cash already on Berkshire's balance sheet.  The balance will be borrowed, I suspect with new 5 to 10 year bonds issued by Berkshire.

Tue, 11/03/2009 - 12:02 | Link to Comment SDRII
SDRII's picture

Berkshire stock premium is being used to dilute the purchase premium -- despite the massive cash horde. Smart to use the overvalued currency but his comments on CNBC were pure entertainment. "that the insurance business (and utility) aren't really affected by the ongoing recession" is not the least bit ironic. He doesn't think his equity is being supported in things like AXP, M&T etc..Self delusion is running high everywhere. Spengler over at ATimes has a good segway into how that delusion stretches to the foreign policy arena...Even JJ over at across the curve is saying the "blogger meeting at treasury" (was ZH present or intivted) was somber at best

The idiot twins of American idealism



Tue, 11/03/2009 - 12:02 | Link to Comment RozzertheDropsky
RozzertheDropsky's picture

Hey, I wonder if Barbara Ehrenreich's new book tells us anything about what's going on with our persistent straw-grasping re: this "recovery." "Bright Side," she calls it, about this annoying American habit of dealing with downer news with feel-good nostrums. The GDP figures are a mirage, turns out so are the ISM nos., and the Fed covers its eyes and pretends that all those toxic trillions are really good as gold. No one wants to face it: we just don't have the infrastructure of an economy that can be restored to Bubble levels. It cannot happen, and trying to borrow our way there is the worst idea imaginable. Face it, for once: we're in a weird kind of Depression.

Tue, 11/03/2009 - 16:07 | Link to Comment Anonymous
Tue, 11/03/2009 - 12:03 | Link to Comment AN0NYM0US
AN0NYM0US's picture

"It does, however, beg the question of why the BNI board took all of 15 minutes to hit Mr. Buffett's bid."


its Goldman


they were the advisors to BNSF -

Tue, 11/03/2009 - 12:04 | Link to Comment Green Sharts
Green Sharts's picture

Another possibility is that Berkshire won't have to issue new bonds if Buffett raised cash in Q3 in anticipation of a deal by selling stock and bond holdings during Q3 as the market rallied.  His Q3 activity won't be public until the 13-F filing by November 15 which will show changes in equity holdings and Berkshire's Q3 10-Q which will show changes in total bond holdings.

For many Berkshire equity holdings in which they hold more than a 5% stake (Coca-Cola, Wells Fargo, American Express, Moody's, U.S. Bancorp), any selling would already have been disclosed.  Moody's is the only one of those Buffett has been reducing, and his sales have been relatively small versus the number of shares owned.  Buffett couldn't dump that position on the market without crushing the stock.

Tue, 11/03/2009 - 12:06 | Link to Comment Anonymous
Tue, 11/03/2009 - 12:54 | Link to Comment AN0NYM0US
AN0NYM0US's picture


Tue, 11/03/2009 - 12:14 | Link to Comment Bob the Horse
Bob the Horse's picture

Maybe he bought it because it can generate $8 a share and he will get a great return on it?

Also, Rosenberg is just plain wrong on the inventory cycle.  I could explain why but I cna;t be bothered.

Such is the force of my logic.


Tue, 11/03/2009 - 12:41 | Link to Comment reading
reading's picture

Bob, that's akin to saying "I'd tell you but I'd have to kill you."


With powerful comments such as these you will earn yourself a new name and it only requires adding one word and an 's to your current one.

Tue, 11/03/2009 - 13:14 | Link to Comment RozzertheDropsky
RozzertheDropsky's picture

Thus demonstrating the high price of arrogance on a site with so many IQs shifted so far to the right of the bell curve.

Tue, 11/03/2009 - 12:16 | Link to Comment SDRII
SDRII's picture

Buffet is a propoganda piece - reminds me of the WFC dividend raise into the short ban. it is curious how he pops up everytime the market begins to wilt. Also curious how Yellow comes out talking down recovery and the transports wilted into a up market and today wa la. How do you pay 15 plus off a peak number unless you have plans to impose a J7J style reduction to make it work. Of course one salivates at seeing the M&A accretion dilution analysis from GS and their "assumptions" about ROI/ROE and exits etc...Hilarious

Tue, 11/03/2009 - 12:31 | Link to Comment Anonymous
Tue, 11/03/2009 - 13:20 | Link to Comment Anonymous
Tue, 11/03/2009 - 14:03 | Link to Comment SDRII
SDRII's picture

"paralyze" yourself from making constructive decisions? This is a bit like saying there was a housing bubble but I traded it only to find your cash in the bank is gone into CRE/Resi graveyard. As an aside since bernanke unleashed his sword in August-07 - gold up 67%, short dxy gets you another 5% and short Berkshire gets you another 28%. That there is investing for the long term.

man up, feelings/senitment got nothing to do with insolvency - do you work for bernanke


As for Buffet being smart nobody is questioning the guy plays the game well. But nobody outperforms over the long term - isn't that the theory? Unless of course you have informational advantage. The headline I am buying america is pretty ironic - isn;t he already leveraged long best thing Buffet did was hire Sokal


Tue, 11/03/2009 - 14:17 | Link to Comment Anonymous
Wed, 11/04/2009 - 08:11 | Link to Comment blindfaith
blindfaith's picture

hum...seems to me it does not hurt to be WELL CONNECTED either.  After all if a dummy like Dan Quail can become filthy rich off tax payers via Chrysler bailout, why can't Buffett be more rich because he can spell patoto, ops sorry patatoe, never mind.  Frat bros are in charge from top to bottom.

Tue, 11/03/2009 - 13:58 | Link to Comment Racer
Racer's picture

Reminds me of the when they had some big shots buy during the Great Crash ..


curious why Buffett did that today of all days just when markets on key support levels.. and Dax and FTSE tanking and pulling the US futures down with them

I see Market watch has kept that as the main headline all day... no doubt to encourage the sheeople to believe all is well

Tue, 11/03/2009 - 14:54 | Link to Comment chunkylover42
chunkylover42's picture

.pdf version of the full report?

Tue, 11/03/2009 - 17:11 | Link to Comment IE
IE's picture

To me, this seems like a very very bearish move by Warren.  Seems to me that Buffett is basically trading a huge chunk of valueless/toxic/bubble junk financial stock for real infrastructure assets with significant tangible value.  How is this different than trading fiat paper for precious metal?

Plus, he gets to look like a hero by pretending he's "betting on recovery", and for giving the transports a temporary "me too" water buffalo stampede boost. 

Tue, 11/03/2009 - 17:24 | Link to Comment Green Sharts
Green Sharts's picture

Berkshire Hathaway is a valueless/toxic/bubble junk financial stock?  Could you please expand on that, if you actually know anything about Berkshire?

Tue, 11/03/2009 - 19:16 | Link to Comment IE
IE's picture

I'm sorry if you don't like my characterization of BH, given their massive holdings of financials ... but I'm not going to argue opinions about the makeup of BH holdings, which is public information.  

In my opinion:  BH is 40-50% TARP-tastic, so when Warren "dilutes" much of that bankrupt zombie crap with 44B in real assets swapped for BH stock ... then in my opinion what he's effectively done is taken a giant toxic dump on the previous BNI shareholders. 

Some people might say he's bullish on recovery, but I read it as him reducing the risk (being bearish) on his current holdings.  You say tomato, I say to-mah-to.

Tue, 11/03/2009 - 19:02 | Link to Comment Anonymous
Tue, 11/03/2009 - 20:04 | Link to Comment Anonymous
Tue, 11/03/2009 - 23:35 | Link to Comment Anonymous
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