If there was any good news in today's Chicago PMI, it is that the headline number beat expectations of 51.0, rising from November's 50.4, to 51.6, leaving the two months of sub 50 prints in September and October in the past, or so the ISM institute would like us to believe. Because a casual glance at the data reveals that things are actually getting worse, with the Employment index plunging from 55.2 to 45.9, the lowest print in three years, while the all critical Capital Equipment buying policy plunged to a new 28 month low. So much for that CapEx spending. In fact the only indicator that posted an increase in today's release was the New Orders index which jumped to 54.0 while Order Backlogs, Supplier Deliveries, and Prices Paid all dropped. And for those hoping that in Q4 that inventory glut will finally clear itself, we have news: it won't -the Inventory index posted yet another jump, from 47.1 to 49.8. And while the data was ugly, perhaps the saddest, or funniest blurb, came from one of the respondents, which probably captures business sentiment in America with absolute precision: "We are on a hiring freeze in Q4, waiting to assess the outcome of the fiscal cliff deliberations. We are also planning cutbacks due to increased healthcare costs and Obamacare related expenses." Nuf said.
We could say that news is actually relevant or matters in this "market" but we would be lying, just as we would be lying if we said that this market has not become so utterly predictable, with yesterday's late day market surge - on yet another ridiculous catalyst - visible from so far away, it was almost painful to watch it take place in real time. Sure enough, futures are now sliding back, and giving back much of yesterday's gains - but don't worry, in a day full of even more meetings and flashing red headlines, at least some combination of carefully phrased MSM words will set off today's algo-driven buying frenzy, guaranteeing yet another "retail investor" decides they have had it with this farcical "free market" casino for ever.
More exiting than Christmas!
As DB's Jim Reid summarizes, "it is fair to say that newsflow over the next 72 hours will be fairly thin before we head into a tense final few business days of the year." It is also fair to say, that the usual tricks of the new normal trade, such as the EUR and risk ramp as Europe walks in around 3 am, precisely what happened once again overnight to lift futures "off the lows", will continue working until it doesn't. In the meantime, the market is still convinced that some compromise will appear miraculously in the 2 trading sessions remaining until the end of the year, and a recession will be avoided even as talks now appear set to continue as far down as late March when the debt ceiling expiration, not cliff, will become the primary driving power for a resolution. That said, expect to start hearing rumors of a US downgrade by a major rating agency as soon as today: because the agenda is known all too well.
The recent release of the ISM Manufacturing index continues to point to signs of a slowing economy. This (49.5) reading, which is what is reported by the bulk of the mainstream media, is fairly meaningless. Remember, economic change happens at the margins. Since the PMI is more of a "sentiment" index (it is a diffusion index that measures positive versus negative sentiment on various areas from employment to production to inventories) it is a better used as a gauge about what businesses will likely do in the future based on their current assessment of conditions. The importance of the change in sentiment is lost on most economists who have never actually owned a business. However, it is clear that the fiscal cliff, the recent storm, and the continuing Eurozone saga are continuing to erode business sentiment. This erosion in sentiment in turn affects economically sensitive actions such as production, employment and investment.
So much for the 3rd Recovery (or is that 4th?) in the current depression: following the Chicago PMI which posted a solid beat on horrendous internals, today's Manufacturing ISM came in just as expected, at least by those skeptical of all the sugar high economic data the US population was spoon fed in the past few weeks. At 49.5, the headline PMI print was the lowest since July 2009, the biggest miss to expectations of 51.4 in 5 months, and down from 51.7. Also, as most know, as sub-50 print indicates a contraction in the manufacturing space, usually a precursor to overall recession. Particular data points of note: Employment down from 52.1 to 48.4; New Orders slide from 54.2 to 50.3, and in the worst news for GDP Exports declined, Imports rose and Inventories plunged - which was to be expected after a huge inventory build up in Q3 pushed GDP much higher in the period. Expect even more downward GDP recessions on today's ugly data. Finally, while the bulls would love to blame the collapse on Sandy, it was not mentioned anywhere in the release and the ISM's Holcome said just one respondent even mentioned Sandy in the release, which means the manufacturing reality will only get worse as the full impact of Sandy is internalized.
Just like yesterday's atrocious second Q3 GDP revision needed at least 1 minutes of work (so about 60 seconds more than most algos are willing to put into it) before the true gist of the economic data ugliness could be truly captured, so the true story in today's Chicago PMI - usually a critical advance indicator to the Manufacturing ISM (except lately of course: under central planning any historical correlations make no sense) - only appeared into view following a more than cursory glance. Sure enough, while the headline number printed above 50 for the first time since August, 50.4 to be specific, on expectations of a 50.5 increase, up from 49.9, the bulk of this was driven by the most counterintuitive driver: i.e. Prices Paid, which directly correlates with collapsing profit margins, printing at a 16 month high - inverse deflation is everywhere these days it seems, while the all critical New Orders plunging to the lowest since June 2009 or 45.3 from 50.6, and finally inventories declining from 49.6 to 47.1: which makes sense after as disclosed yesterday it was inventory accumulation in Q3 that accounted for 36% of US economic "growth." What good news there was was in Production, Backlogs and Employment: the same Employment we have been told to ignore in all other data series due to the impact of Sandy.
Romney's apparent victory in the first Presidential debate was the worst outcome for U.S. stocks, for it gave false hope to a Republican sweeping into the White House. A more gradual acceptance of the November result would give the market a better chance to absorb the news with minimal impact. We are presented with a similar scenario with Washington’s addressing the fiscal cliff. Optimistic comments about resolving the crisis has spawned gains in equities that are sustainable while losses resulting from downbeat remarks have offered profitable short term buying opportunities. While much of this price action the past few days has benefitted from typical calendar money flows that will disappear in the middle of next week, some of the positive sentiment arises from the overwhelming belief that both sides can consummate a deal on the budget ahead of the December 31 deadline. The longer investors anticipate such a compromise, the more violently shares will tumble upon recognition that assuaging the crisis with a comprehensive solution will take extra innings.
There was some confusion as to why yesterday various Eurozone consumer confidence indices posted a surprising jump and beat expectations virtually across the board: turns out Europeans had an advance warning of today's horrendous economic data among which we learned that Eurozone October unemployment just hit a record 11.7%, up 0.1% from September (we are trying to get data if the Eurozone is gaming its unemployment number the way the US does by collapsing its labor participation rate), with Italy unemployment surging to 11.1% from 10.8%, on expectations of a 10.9% print, French consumer spending in October was down 0.2%, compared to an unchanged reading in September, but far more troubling was that German retail sales imploded at a rate of 2.8%, the biggest monthly collapse in 4 years, and worse than even the most bearish forecast. Do we hear "Sandy's fault."
Reasons to be bullish.
Many economists are suggesting that the second estimate of Q3 GDP, which showed an initial estimate of 2.0% annualized growth, will be revised sharply upward to 2.8%. The problem is that the surge in demand isn't materializing at the manufacturing level. The month-over-month data has begun to show signs of deterioration as of late which doesn't support the idea of a sharp rebound in economic activity in recent months. The headwinds to economic growth are gaining strength as the tailwinds from stimulus related support programs fade. This has been witnessed not only in the manufacturing reports, such as the CFNAI and Dallas Fed Region surveys where forward expectations were sharply reduced, but also in many of the corporate earnings and guidance's this quarter.
Gold edged down on a Monday as speculators took their profits as prices rallied on thin volumes on Friday to their highest in a month on technical buying. A strong fall in the greenback triggered rapid gains in commodities and options-related buying on Friday. Tonight US Congress will meet to attempt to devise a plan to avert the US fiscal cliff which will throw the US into a spiral of tax hikes and budgetary cuts that will lead the US economy deeper into a recession this January. Another short term ‘resolution’ will almost certainly be achieved which will allow the US to keep spending like a broke drunken sailor and which will again store up far greater fiscal and monetary problems. The scale of these deep rooted structural challenges is so great that they are likely to affect the US sooner rather than later. Global investment demand for gold remains robust with the amount in exchange-traded products backed by the metal rising 0.1% to 2,606.3 metric tons.
The S&P 500 achieved its anticipated 4-5% bounce off the recent 7-10% pullback, most of it accomplished in a very light holiday trading week. Much of the gains were attributed to overly effusive optimism over the prospects of resolving the fiscal cliff. Ironically, with Washington abandoned the past ten days for Thanksgiving, we have not heard anything substantive on the negotiations since Senator Reid and Speaker Boehner spoke jointly on the White House Lawn on November 16. The returns in equities that resulted from this perceived positive outlook has likely run its course as the blue chip index has regained the levels from the morning after the Election. Certainly, the mundane increases in open interest for the futures and the outperformance by the blue chips versus smaller capitalization names on a beta adjusted basis hint at such vacuous motivation for the upward move.
Another week begins which means all eyes turn to Europe which is getting increasingly problematic once more, even if the central banks have lulled all capital markets into total submission, and a state of complete decoupling with the underlying fundamentals. The primary event last night without doubt was Catalonia's definitive vote for independence. While some have spun this as a loss for firebrand Artur Mas, who lost 12 seats since the 2010 election to a total of 50, and who recently made an independence referendum as his primary election mission, the reality is that his loss has only occurred as as result of his shift from a more moderate platform. The reality is that his loss is the gain of ERC, which gained the seats Mas lost, with 21, compared to 10 previously, and is now the second biggest Catalan power. The only difference between Mas' CiU and the ERC is that the latter is not interested in a referendum, and demand outright independence for Catalonia as soon as possible, coupled with a reduction in austerity and a write off of the Catalan debt. As such while there will be some serious horse trading in the coming days and week, it is idiotic to attempt to spin last night's result as anything less than a slap in the face of European "cohesion." And Catalonia is merely the beginning. Recall: "The European Disunion: The Richest Increasingly Want To Fragment From The Poorest" - it is coming to an insolvent European country near you.
While top-down macro headlines, anchoring-biased surveys, and election-oriented government-aided statistics suggest a world of unicorns and teddy bears where everyone and their pet rabbit 'Dave' should be buying stocks with both hand and feet for the 'upside' when the fiscal cliff is 'solved' and 'Bernanke has got your back'; why-oh-why is every rally faded? In Size? Perhaps this is the answer? Goldman Sachs Analysts Index (GSAI) - a quantified bottom-up look at firm-by-firm views of the current and expected economic reality aggregated across all of the company's analysts - is bad and getting worse in a hurry. The main index slumped to 32.9 in October from 44.1 in September, with all sub-components falling 'suggesting depressed business activity from the bottom-up'. Perhaps worse, the employment index remains weak and price indices suggest a deflationary future. This index of real economic activity is its lowest since the 2008-9 recession and sends a considerably more pessimistic message than many of the business 'surveys' from the Philly Fed or Chicago PMI. Perhaps it is this reality on the ground that is stalling the wealth-building stock-levitation that is so economically required by our central planners - as it seems the broad improvement in September was transient.