Rosenberg Explains Why Yesterday's ISM Was Likely Wrong, To Be Revised

Tyler Durden's picture

Yesterday, the market surged on an ISM number that was so stretched, and so out of out leftfield, it was higher than the top expectation by the economist panel. The government once again outdid itself in boosting numbers with the hope of surging stocks. It succeeded. Now the question is whether the imminent ISM downward revision have a comparable adverse market effect. And revised it will be: David Rosenberg explains why.


1.Most of the regional reports were very poor in August. Either they collectively all wrong or the ISM is.

2.The share of respondents saying the experienced "growth" was 61%, the exact same as a year ago when the ISM was sitting at 52.8.

3. The ISM gain was led by employment (58.6 to 60.4 - best since December 1983) in the same month that ADP manufacturing fell 6,000 (second decline in a row - it was -11k in July when ISM employment was 58.6, so clearly the latter is proving to be, at least for now, an unreliable labour market barometer). Production also ticked up to 59.9 from 57.0 and inventories rose to 51.4 from 50.2. These are all coincident indicators, as an aside (but an important aside).

4. According to the ISM, 76% of the manufacturers surveyed said that their customer inventory levels were either “too high” or “about right". At the turn of the year, just ahead of the big inventory swing that bolstered the GDP data, this metric was sitting at 60%. As a result, it would be folly to assume that the inventory and production categories will contribute to further ISM increases in the near- and intermediate-term. Norbert Ore, who presides over the ISM survey, had this to say about inventories: “If the inventory build isn't voluntary then we have a huge issue on our hands.”

5. Meanwhile, the more forward-looking components dropped, though were hardly a disaster. But orders slipped for the third month in a row, to 53.1 from 53.5 in July, 58.5 in June and 65.7 in both April and May. That is still a sharp squeeze in the growth rate of capital goods-related order books. At 53.1, ISM orders index is down to levels last seen in June 2009 (but when they were rising in “green shooty” fashion).

6.Backlogs were down as well, to 51.5 from 54.5 in July, 57.0 in June and 59.5 in May (and peaked in February at 61.0). At 51.5, order backlogs stand at their low-water mark of the year.

7. Supplier deliveries (measure of production bottlenecks) eased for the fifth month in a row — to 56.6 from 58.3 in July and well off the March peak of 64.9.

8. Looking at five decades worth of data, the share of the time in which we see orders, backlogs and vendor deliveries all decline in tandem, and the headline ISM index rise, is the grand total of 1%. No wonder equities rallied so much — we just witnessed a 1-in-100 event! Bring your camera.

9. Export orders dipped to 55.5 from 56.5 — the lowest they have been since last December. If the overseas economy is rocking and rolling, then why onearth would this component be declining? Not only that, but it looks as though yet again, a good part of the inventory boost we still seem to be getting is being filled by imports — that sub-index jumped four points in August and does not bode well for the trade deficit, which subtracted 3.4 percentage points from headline GDP growth in Q2.

In a nutshell, ISM did smash consensus expectations in August but the composition left much to be desired. The coincident indicators firmed but the categories that actually lead manufacturing activity softened across the board.

As we said at the outset, the ISM index was at complete odds with the regional surveys. Philadelphia, New York, Milwaukee, Richmond and Kansas City were all down. Dallas and Cincinnati were up. In the past, when we had a 5-to-2 ratio to the downside, the share of the time ISM managed to eke out an advance was 4%.

It would be wise to lean against the market's initial dramatic reaction to this data. The ISM orders/inventories ratio is a decent leading indicator and it sank to 1.033x from 1.065 in July. 1.278x in Julne and 1.441x in May. The hidden nugget in today's report is that this ratio has decline to levels not seen since February 2009. And the last time it fell this fast to this type of level was in the September to December 2007 period (1.03x from 1.30x) when once again, there was tremendous confusion and intense debate over whether it was a recession/soft patch in the economy and the bear market/corrective phase in equities.

Suffice it to say that in the past 30 years, with eleven observations, ISM dropped to 47x in the three months after such a decline in the orders/inventory ratio to such a low level as is the case today. That is the average, the median, and the mode. The highest ISM reading three months hence was 51.9, so if past is prescient, today's data was likely a huge headfake.

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Bartanist's picture

Actually, it seems more logical that the ISM number was a "cover" for boosting stock price and not the reason stock prices increased.

topshelfstuff's picture

YES, I'll second that. Bartanist got it Exactly right on the very first post.
Perhaps/Likely most here see these things, expect them, more easily.
I had posted something similar yesterday. In fact I had use, just as an example, a rise in the DOW  of about 250 points, as the pre-ordained move given out to "The Gang" in advance. Needing a Hook to hang your Hat on, the ISM Number served as the Hook.

[ Incidentally, I noticed this begin in force on March 10, 2009, C's Pandit unusual comment about the results of the first 2 months of the QTR being Positive. The DOW's 200-300 point gain attributed to that. It worked so well, and 2 days later BAC's Lewis repeated the exact same script, just replaced Bank of America for Citi, and another couple hundred DOW points had the "Cover" needed. You know O slipped up, and accidentally leaked this move was afoot. The Media hasn't brought it up since, of course, but if you don't remember it just google [ Obama March 3 Buy stocks ], and how the Headlines and articles were a bit shocked and mentioned that this was the first time they had heard a Pres act as a stock analyst ]
I could go on and on, but what's the point. We have moved far beyond the Blatant, "in your face", rip-off and rake-in moves. The free-for-all, no holds barred, outright thefts that had escalated as we moved towards the election day of 2008, and end of the 8-year term of office of an administration, did not end, as some had thought. The only thing that has changed is the loading up of massive $Capital injections to the "5-Families" in The Godfather speak. The oddity for me is in knowing that the rest of the world is more aware of this than our own People.
This may be kind of funny, and true, maybe some of you experienced the same. Several years ago when it became obvious that Fundamentals became totally of no use, even TA couldn't be trusted as it had been, a small group of fellow investors I have communicated with for years, began to make our trades in what we dubbed "Follow The Crooks" type of tradng.
This may be unrelated, but I'll stick it in. I've noticed that slamming, smearing, anything negative, about China based stocks, have apparently received the OK, the Seal of Approval. This is a topic I should write about in more detail.

Rasna's picture

Agree Bart,

The line in the sand until the midterms is 1050/10000 for the S&P/Dow... We'ver seen the Fed/Treasury step in countless times during the past year to create phantom rallies. 

The government once again outdid itself in boosting numbers with the hope of surging stocks. It succeeded. Now the question is whether the imminent ISM downward revision have a comparable adverse market effect.

The market has "flash memory"... When the numbers are revised there will be marginal change because the "next" better numbers will have captured its interest.

Ripped Chunk's picture

Agreed, prop it up until November.

Vote all the assholes out anyway. All of them at every level. Then do it again next general election and the next after that and so on.  And letter writing campaigns that scare the shit out of the newbies.

LeBalance's picture

Please define how to elect a non-asshole, when the choices (all of them) are assholes?

Attitude_Check's picture

Realistically you can't.  But you can cause enough rotation in composition,that it limits the amount of fraud possible since it takes time to build your "crew" for the SS Graft.  The second thing this can do is to "scare" them enough to at least try to hide the graft (thus making it smaller in general) since most all politicians are power-hungry sycophants.  Finally on a longer term it may over time punish bad behavior enough that a collective shift in political culture occurs (although that is probably a generational timeline).

Of course we all "just give up"  that will turn out SOOOO much better.

rosiescenario's picture

...and it was just a coincidence that the party in Jackson Hole had ended...

clagr's picture

in summary, rise doesn't pass the smell test. Put the shorts back on.

Ned Zeppelin's picture

Good luck with those shorts in this environment. When fundamentals don't matter, and behind the scenes interventions are the market-makers, I don't know how you can trade - gamble yes, trade, not so much.

Rasna's picture


The thing that we have to remember is the Fed/Treasury control or influence a lot of these numbers and also control the markets with their interventions, so until something comes along to change that control it's business as usual...

The short side is the best bet, but it can be a frustrating and, at times, unprofitable... To be short the trader HAS to take the Long View.

Bearster's picture

The people who bring us these lies masquerading as data are the same people who some are calling to use force to regulate HFT and other "undesirable" market participants.

Robslob's picture

Mutual Fund Wednesday?

Iam Rich's picture

Rise did not follow the ISM but preceded the ISM and was over by the ISM

rosiescenario's picture mean someone at the PPT didn't get the email?

Jason T's picture

the stock markets are so rigged its gotton beyond ridiculous.  I forecast retail withdrawals for the next 52 weeks in a row.  Who wants to be involved in this parasitic market run by 6 large banks that collectively own the Fed which gets to print money for free?

Cognitive Dissonance's picture

Suffice it to say that in the past 30 years, with eleven observations, ISM dropped to 47x in the three months after such a decline in the orders/inventory ratio to such a low level as is the case today. That is the average, the median, and the mode. The highest ISM reading three months hence was 51.9, so if past is prescient, today's data was likely a huge headfake.

That's pretty much all everything in the markets are these days. Head fakes. And pumps and squeezes and wishful thinking and bandwagon jumping and so on. And yet the market remains elevated despite the "obvious" worsening data. So the "obvious" question is why?

If we're to assume that the markets were more "pure" 20 or 30 years ago, meaning there was less overt manipulation, at least of the governmental variety, and out of that era came the well accepted pearl of wisdom "Market's don't move, they're moved" then what do we say about today's markets?

Can you say "National Security Directives"?

SheepDog-One's picture

C.D. exactly, economic martial law, and most people have no clue about it!

Ripped Chunk's picture

economic martial law

Excellent terminology. I will run with that.

Astute Investor's picture

Makes you wonder why the so-called capitalists are so afraid of true capitalism.....

LeBalance's picture

because they have to work and are uncertain of the outcome.


American Dreams's picture

Defense of the dollar and defense of the stock market would seem to go hand in hand within this thrid world war.  Crashes are neutralized, currencies are manipulated and we should all just buy into the fact that we have the most powerful entities in this conflict, The Federal Reserve and the IMF.  So all is well, go USA and BUY BUY BUY



Commander Cody's picture

And why wouldn't we all follow the criminals to wealth and prosperity?  Can we fight the Fed?  The TBTF banks?  The Treasury?  The US military-industrial complex?  Large multi-national corporations?  So many questions, so little time.  Party on!

American Dreams's picture

Thank you Dave!  Your data mining is always appreciated, as I stated yesterday right after the number was announced that we should have been seeing a number in the low 50's but your ability to put color to canvas is much ahead of and a great improvement on my frustrated rants. 


know your enemy

traderjoe's picture

And of course, the enemy has unlimited money behind them and every reason to try to keep the illusion(s) going for as long as possible. 

On a SA basis the China PMI was in-line. The EU periphery PMI's showed great economic distress. Harrisburg, PA defaulted on a bond (expected, but that the first muni default to break the dam going forward). Anyone buying stocks now is whistling past the graveyard of the bank failures, sovereign defaults, and financial destruction to come. 


Pumpanddump's picture

Who cares about revisions?  Buy Buy Buy

ghostfaceinvestah's picture

I don't think the govt publishes the ISM number.

Nonetheless, it was so far out of whack that it lost a lot of credibility yesterday, so it might as well be published by the Ministry of Truth aka US Govt.

Gimp's picture

Lies, lies and more damn lies.

Who cares anymore about the truth, at least we got to pump it up, pump it up. Just play their rigged game and enjoy.

Vampyroteuthis infernalis's picture

"Lies, damn lies and then there are statistics." -Mark Twain

No need to guess where this number resides.

Turd Ferguson's picture

I know I'm getting way out into the conspiracy "weeds"...but I've been waiting for the Fed/Treas/BLS to begin to really manipulate the data. Of course, John Williams has done fine work for years in printing actual, non-adjusted government statistics. What I'm talking about is outright manipulation.

I'm now so confident that the Fed and the Treas manipulate our "markets" on a daily basis so as to create the necessary illusion of wealth and prosperity, why should I not expect that agency bureaucrats, under extreme pressure, can not be coerced to fudge their reports?

Ben Graham Redux's picture

I agree with the folks who believe yesterday was a "gamed" market day.  The ISM number made no sense and the volume was very weak for a 3% day.  In fact, I'd argue that yesterday was set up by the Fed in conjunction with the BOJ and the ECB as the yen got crushed after it was running higher the night before - opposite but same situation with the euro.

The problem here is that whoever is gaming these moves keeps going back to the same well.  People have figured it out which is why short interest is falling and put/call ratios are steady.  With the amount of firepower expended yesterday, 3% was the best they could do?

With money leaving every week and short sellers unwilling to put their necks out, this becomes a waiting game - a siege, if you will.  Each week the defenders use up a little more ammunition and supplies while desertion (mutual fund redemptions) remains high.  It's just a matter of time...

rosiescenario's picture

...very nicely put...and keep in mind that the New Era currency shall be ammo, "calibrated" in a variety of denominations...

tom's picture

Rosie's dissection is right on.

But Tyler: "Government ... boosting numbers"? This is the ISM you're talking about. It's a simple survey, subject to misreporting and sampling error. I really have a hard time understanding why you get your shorts so twisted over it. A market-misleading report is a gift horse, add to your positions and be happy.

traderjoe's picture

As a general comment attached tangentially to yours, I wonder how much GM not shutting down for the summer impacted this ISM (to boost it on a seasonal basis). As I roughly understand it, the point of conspiracies is to involve as few people as possible. Therefore, outright manipulating a non-Gov number would be too risky. It would be far easier to massage the inputs - like having all the parts and auto supply chain happy on a seasonally adjusted basis. Who knows. 

And of course, with the Gov numbers, you can just manipulate the calculations - like the B/D model, geometric weightings of the CPI, etc. 

If you read up on the Birth/Death model, it will show the mockery of the BLS NFP numbers. Part one is they ignore all of the job losses that might have resulted from businesses closing, i.e. when they contact a business and there is no response they ignore the impact that would have resulted from the business shutting down. This "number" is never published or revealed. Only the annual benchmark revision (last one was an extra 800k losses for the year) corrects for the B/D model. 

The second part of the B/D model is the more familiar adjustment to jobs published on their website. Of course, these numbers are non-seasonal, making it impossible to subtract them directly from the headline number. Another way to muddy the waters. Of course, they ramped up the 2010 effects of part 2 (monthly adjustments are running higher than 2009), even after the model was discredited in 2009. BTW, this coming month is a favorable one for the B/D model (a higher adjustment then the previous month) - might mean that the NFP doesn't dramatically disappoint. Just sayin'.

dukeland's picture

"Norbert Ore, who presides over the ISM survey, had this to say about inventories: “If the inventory build isn't voluntary then we have a huge issue on our hands.”"

Did'nt the INTC preannouncement and CSCO results last month almost confirmed that that channel stuffing is prevalent. Now we need ISM to pre-announce its data was wrong!

nevadan's picture

Assuming a bad NFP number tomorrow it seems reasonable that the market needs to be higher to defend ES 1040.  Just building a moat for defense of the castle.

traderjoe's picture

See my comment above. The B/D model impact is bigger this month that last. You can compare 2009 to 2010 here: Expect 2010 to be slightly higher than the 2009 number for each month. 

With the economy flatting, slightly declining, the B/D model should have a larger proportional impact on the reported results, IMHO. Unfortunately, I think this means the number won't significantly disappoint. 

Something Wicked This Way Comes's picture

You can't keep stealing little Jimmy's lunch money forever. It doesn't take a rocket scientist to figure out that every number is manipulated. GDP is a fraud, the CPI and PPI are manipulated for max upside effect...the prob is that we all know this and are frustrated. The other little Jimmys' are going to figure this out.

I can't short or put this market because the herd hasn't figured it out yet. Like all things life, timing is everything. That big ol debt pile is a complete game stopper and sooner or later it's gonna be game over until that unwieldy mess gets addressed...the rest of this shit is just shit.

tempo's picture

About 25% of the ISM is related to Treasury rates which are now in bubble territory.  Also only 15% of GDP is mfg and ISM is a mfg index.  Its a false positive and shorts will come in big time at 1085 to 1090 if we get there.

Ripped Chunk's picture

I sure could use a vacation from this bullshit three ring circus sideshow of freaks

Time to bring it down again.
Don't just call me pessimist.
Try and read between the lines.

I can't imagine why you wouldn't
Welcome any change, my friend.

I wanna see it all come down.

RichardENixon's picture

What's an old geezer like you doing quoting Tool. I thought I was the world's oldest Tool fan, and I know you're older than I am, Ripped.

bmwmc's picture

When Intel reported strong earnings and upbeat forecast the market went shit for the sky high.  I believe it soared 200+.  Then a month later Intel downgraded its forecast.  No -200 give back.  You'll see the same fuck job when ISM is revised. 

bmwmc's picture

On a positive note Jimmy Choo's is going to IPO...Bitchez!

Johnny Yuma's picture

Yesterday's action was typical for a summer trading session in front of a 3 day weekend. The day's move occurred in the first 2 hours and went to sleep afterward.The ES ran straight back up into another 50% retracement zone and has traded somewhat sideways since. I've observed this sprint into the next measured move many times. If we break past 1093, it's most likely a straight shot to 1109.75 +/-... Major resistance there with it being half way back from April's high to July's low plus the 200 DMA is right above that level at around 1112's.


The daily news is merely a catalyst to get the market to move into it's next measured move. I've seen it time and time again and yesterday was no different. The level we're at today 1082 - 1093's are far more important than yesterday's rally to 1082 as it will decide our direction for the next trend.

unionbroker's picture

 simple math you muliply the regional negatives together and you get a positive

Something Wicked This Way Comes's picture

You can't make money without volatility. Period. Thus you must create volatility even if its based on nothing. It's like those two starving buzzards in the tree that say fuck it, I'm starving...let's go kill something.

Invisible Hand's picture

The pattern I see is that the initial number is always distorted high (i.e. revisions are always down).  That, to me, indicates purposeful mis-information.  If it was sampling error or incomplete data, you would think that about half the time, these numbers would be revised up.

Anyway, they then revise the number down before the next number in the series and then proclaim that the newest data point is an increase from the (conveniently) downward revised value (burying the original overstated number down the memory hole).

Are economic statistics starting to feel like something out of "1984" to anyone?

D-Falt's picture

In film-making, the projector works based on the principle of persistance of image.  They keep firing up the images faster than our retinae can finish chemically processing them.  The USG is doing a similar thing with these roided-up numbers.  They just gin the next fake number out faster than we can get around to comparing it to the real world conditions.  You just see the movie.  The won that ends with all the traders screaming "Buy! Buy! Buy!"....